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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|(Mark one)                                  |   |  |                                                                                         
|------------------------------------------- | - |  | ----------------------------------------------------------------------------------------
|                                            | ý |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2001
|                                            | o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to
.

Commission File No. 000-20698

LOGO

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

|MASSACHUSETTS(State or Other Jurisdiction of
Incorporation or Organization) |  | 04-2184792(I.R.S. Employer
Identification No.)
|--------------------------------------------------------------------------- |  | ----------------------------------------------

250 FIRST AVENUE, NEEDHAM, MASSACHUSETTS 02494(Address of Principal Executive Offices) (Zip Code)

Registrant's
telephone number, including area code:(781) 449-4100

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

Securities
registered pursuant to Section 12(g) of the Act:

Common Stock
(title of class)

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 ý        No o

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

As
of January 31, 2002, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately
$48.0 million, based on the closing price of $5.68 on such date of the Company's common stock on the Nasdaq National Market.

As
of January 31, 2002, 12,206,889 shares of common stock, $.01 par value per share, were outstanding.

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BROOKTROUT, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2001

TABLE OF CONTENTS

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | Business                                                                              |  | 1   
|Item 2.  |  | Properties                                                                            |  | 10  
|Item 3.  |  | Legal Proceedings                                                                     |  | 11  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 11  
|PART II 
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 11  
|Item 6.  |  | Selected Financial Data                                                               |  | 12  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|         |  | Critical Accounting Policies                                                          |  | 14  
|         |  | Years Ended December 31, 2001 and 2000                                                |  | 15  
|         |  | Years Ended December 31, 2000 and 1999                                                |  | 17  
|         |  | Liquidity and Capital Resources                                                       |  | 18  
|         |  | Recent Accounting Pronouncements                                                      |  | 19  
|         |  | Risk Factors                                                                          |  | 19  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 26  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 27  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 51  
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 51  
|Item 11. |  | Executive Compensation                                                                |  | 52  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 52  
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 52  
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 53  
|         |  | Signatures                                                                            |  | 54  
|         |  | Schedule IX                                                                           |  | 55  
|         |  | Exhibit Index                                                                         |  | 56  

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 9, 2002 are incorporated into
Part III of this Form 10-K. A copy of the Proxy Statement can be obtained at no cost by calling the Company's Investor Relations department at
(781) 449-4100.

PART I

This Annual Report on Form 10-K contains certain statements that are "forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission. The words "believes," "expects," "anticipates," "intends," "estimates," "assumes," "will,"
"should" and other expressions that are predictions of or indications of future events and trends and that do not relate to historical matters identify forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially
from those indicated by such forward-looking statements, including those detailed under the heading "Risk Factors" on page 19 below. The Company undertakes no obligation to publicly update or revise
any forward-looking statement, whether as a result of new information, future events or otherwise.

Item 1. Business

(a) General Development of Business

Brooktrout, Inc. (the "Company" or "Brooktrout") is a Massachusetts corporation founded in 1984. During 1999, the Company changed its name from Brooktrout
Technology, Inc. to Brooktrout, Inc. The
Company develops, manufactures and sells communications hardware and software products that enable the development of communications applications and systems in five targeted markets, including
enhanced services platforms, wireless infrastructure, voice over packet gateways and switches, unified communications, and contact centers. The Company's strategy is to collaborate with its partners
on new ideas and to invest in the success of their businesses in order to help them expand into new markets, accelerate the delivery of their applications and services, and deliver quality products
and services.

The
evolution of the world's telecommunications systems has created important market opportunities for the Company. One opportunity involves core technologies and platforms that are
primarily used in business premise products such as fax, Local Area Network ("LAN") fax, and voice mailToday's Network. Another opportunitythe New
Networkis the result of the global investments that are being made to expand the capabilities of today's communication networks. These New Network opportunities enable data,
voice and fax information to be distributed using packet-based data networks, such as the Internet, for portions of the transmission and also to be distributed using the traditional circuit-switched
telephone network.

Effective
electronic communication over the New Network is dependent upon network infrastructure technology that weaves together the many disparate systems and applications that already
exist, with the new and emerging technologies that are resulting from the proliferation of the New Network. The Company's approach to technology development is market and customer driven. It is from
that perspective that the Company positions itself as a true partner in creating innovative solutions for the new global communications network. The Company focuses its energies on understanding its
partners' requirements better than any other vendor in the industry.

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Acquisitions
have also complemented the Company's overall business strategy. On June 30, 1997, the Company acquired Netaccess, Inc., a leading worldwide supplier of Primary
Rate ISDN interface products and multiport modems for remote access and computer telephony systems. On December 17, 1998, the Company acquired the assets and assumed certain liabilities of the
Computer Telephony Products ("CTP") business of Lucent Technologies, Inc. ("Lucent"). The CTP business provides technologies for the voice processing industry and manufactures hardware and
software components that connect PCs and LANs with telephone networks. These acquisitions helped establish Brooktrout as a single-source provider able to offer customers a complete line of voice, data
and fax products.

Prior
to February 8, 2001, the Company was organized and reported the results of its operations in three operating segments, Brooktrout Technology, Inc. ("Brooktrout
Technology"), Brooktrout Software, Inc. ("Brooktrout Software"), and Interspeed, Inc. ("Interspeed"). On February 8, 2001, the Company's Board of Directors adopted formal plans to
discontinue its Brooktrout Software and Interspeed segments. Accordingly, the Company has accounted for these businesses as discontinued operations. See notes 1(d) and 2 to the consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.

Except
where indicated, the information presented in this Annual Report on Form 10-K pertains to Brooktrout's continuing operations.

(b) Financial Information about Segments

Financial information concerning the Company's segments is summarized in note 13 to the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.

(c) Description of Business



TRxStream Seriesproducts are media processing boards used in open-systems to provide
voice, fax and other media processing functions and connection to circuit and Internet Protocol ("IP") networks. These products include circuit boards, firmware, device drivers and application
programming interfaces ("APIs"). The products are used by system developers and system integrators to create telecommunications systems, including enhanced services platforms, wireless infrastructure
elements, voice over packet gateways and switches, unified communications systems and contact center systems. Products in the series include:



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Netaccess®Seriesproducts are network interface and data processing boards
used in open-systems to provide circuit and IP network interfaces, circuit-network call control and data processing capabilities. These products include circuit boards, firmware, drivers
and APIs. The products are used by system developers and system integrators to create telecommunications systems, including call processing systems, wireless infrastructure elements and signaling
gateways. Products in the series include:



TR114 Seriesare intelligent fax and voice boards. The TR114 provides up to 16 intelligent fax and voice channels, with full
fax and voice processing on each. The TR114 also has extended support for Internet faxing, both for T.37-compatible store-and-forward and T.38 real-time
transmissions. Applications supported by the TR114 include network faxing, broadcast fax service, fax-on-demand and interactive voice response.

TruFax® Seriesis a line of intelligent fax boards for small to medium-sized businesses and departmental workgroups. TruFax
offers reliable 14.4Kbps fax transmission speeds and up to two channels per board at an economical price point for low volume fax traffic. The TruFax Series supports a variety of computer-based fax
applications, including network fax, fax broadcast, unified messaging and business process automation.

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TRNIC Seriesof network interface boards provide a seamless, easy path to connect TR114 fax and voice systems to digital
telephone lines. The TRNIC Series transmits call progress signals and fax and voice data over the PEB or MVIP telephony bus for processing by TR114 boards.

RealBLOCs ATSIis a PCI-based analog interface board. The board's modular design supports any combination of
analog trunk and station interfaces from eight to 24 ports, in four port increments, on a single card. Applications supported include contact centers and call routing.

Vantage Seriesare flexible, robust platforms for creating voice-processing applications. Densities from four to 32 ports per
board are supported. Applications supported include voice messaging, unified communications, digital recording, integrated contact centers, interactive voice response, and call routing.

DST-16provides direct digital connections to Private Branch Exchange ("PBX") station ports. The DST-16 supports
up to 16 ports per board and is compatible with many of the popular PBXs and Automatic Call Distributors ("ACDs"). Combined with a Vantage Series voice resource card, the DST-16 provides a
complete digital PBX integration solution for call recording applications.

Prelude Seriesis a family of low-cost, entry-level voice processing platforms. The Prelude Series includes the
Duet (two port) and Quartet (four port) analog half-size boards that enable developers to build affordable voice messaging and digital recording systems while maintaining full voice
processing functionality.

RTNI Seriesare ISA-bus boards that provide telephony network interfaces for many applications. The RTNI Series
is ideal for both voice and fax applications and supports analog trunk, analog station and digital network connections. Applications supported include voice messaging, unified communications, digital
recording, interactive voice response and call routing.

RDSP Seriesare affordable, reliable platforms for voice applications. Models in this series range from two to 24 ports per
board. The RDSP Series is targeted for developing messaging, unified communications, digital recording, interactive voice response and call routing applications.

Ensemble Seriesis an integrated PC and Brooktrout board solution offering users a low-cost, expandable
industrial platform to develop and host communications applications. Tested and supported by Brooktrout, these platforms provide high-performance message processing capabilities that are
easily customizable for any developer's needs. Applications supported include voice messaging, unified messaging and interactive voice response.

RealCT® Directis an application development environment that provides the interface between an operating system and
Brooktrout hardware. RealCT Direct provides developers with direct access to any device in a computer telephony environment, enabling quick development of applications and direct control over all
devices in the system. Developers can create powerful, robust applications, including voice messaging, unified communications, digital recording, interactive voice response and call routing.

RealComm 100is an application development environment that provides media management, network abstraction and a
high-level programming interface. RealComm 100 is based on the industry standard (ECTF S.100 revision 2) and enables developers to build innovative, converged communications
solutions that support multiple technologies and configurations. Applications supported include contact centers, interactive voice response, call routing and unified communications.

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Enhanced Services Platforms

Enhanced services platforms are systems that provide value-added services beyond basic connectivity for service providers. Examples of enhanced services include
features such as caller ID, network voice mail, pre-paid calling cards, forwarding and follow-me services, screening, never-busy fax and three-way
calling, as well as newer features such as credit card processing, barge-in voice technology, and talking call waiting. In each case, these services are increasingly available over all
standard carrier platforms: the public circuit-switched telephone network, the IP network, and the various wireless systems used around the world. Brooktrout's hardware is suitable for carrier-class
customers regardless of whether the installation is on an application-specific platform, as an enhanced peripheral in a central office switch, or as part of the softswitch architecture delivering
media processing for enhanced services. For developers of these platforms, Brooktrout provides a wide-range of network interface, call control and media processing products. The Company's
TR1000, TR2001, TR2020, NS300 and NS700 products are used in the enhanced services platforms market.

Wireless Infrastructure

Wireless infrastructure products are those that provide connectivity, and relay voice and data, between the various elements of the mobile voice ("2.0G") and
mobile voice/data ("2.5G" and "3.0G") networks. The Company's hardware can be used inside many different nodes in the 2.0G voice and the 2.5G network infrastructure, including the base station
controller, the serving node, the mobile switching center, the home and visitor location registers and the short message service centers. Brooktrout's Netaccess products offer support for ISDN and
SS7, as well as support for the standard 2.5G and 3.0G protocols. A wide-variety of protocol support, fast on-board processing, coupled with our carrier-grade reliability and
support of all the popular operating systems, positions us well in the global wireless infrastructure market. The Company's NS300, NS700 and TR1000 products are used in the wireless infrastructure
market.

Voice over Packet Gateways and Switching

In the new public network, voice over packet ("VoP") gateways are systems that mediate network traffic between circuit-switched and packet-switched networks.
Traffic is primarily voice but can also include data or fax. VoP gateways are also referred to by other terms including voice over IP ("VoIP") gateways, media gateways, softswitch media gateways, and
voice over broadband gateways. The Company's gateway systems customers develop equipment for use by local and long-distance telephone companies who then provide their subscribers with
basic telephone service, as well as advanced voice,
fax and messaging features. In some cases, Brooktrout also sells directly to service providers who choose to develop their own infrastructure equipment. Brooktrout's products support connection to the
circuit-switched network, voice and fax transcoding and Real-Time Transport Protocol ("RTP") packetization, as well as support for integrated real-time quality of service
("QoS") monitoring of voice quality, a significant requirement in IP networks. In addition, Brooktrout's development environment provides interfaces or "hooks" for use with all standard IP call
control protocols, which include H.323, MGCP, MEGACO/H.248 and SIP. The Company's TR2020, TR2001, NS300 and NS700 products are used in voice over packet gateways and switching market.

Unified Communications

Unified communications solutions help organizations enable employees to communicate with each other, as well as exchange information up and down their supply and
demand chain. For developers of these solutions, Brooktrout offers open, scalable platforms for embedded messaging, voice messaging and network faxing. Brooktrout's scalable hardware platforms offer
analog and digital interfaces from

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two to 60 ports per board, approvals in over 30 countries and are compatible with more than 50 of the leading independent software vendor ("ISV") messaging applications. Brooktrout's
multi-port voice messaging modules can be easily integrated into a single board computer and embedded inside a PBX. By coupling Brooktrout's voice technology with its industry leading fax
capabilities, Brooktrout offers an ideal platform for developing voice and unified communication solutions, from small four to eight port systems to systems requiring multiple T1 or E1 spans. The
Company's Vantage Series, RDSP Series, Ensemble Series, RealCT Direct, TR1100, TR114, TR1034 and TruFax products are used in the unified communications market.

Contact Centers

Corporations use contact centers to enable cost-effective customer service or communication between employees and customers. Brooktrout's enabling
platforms are used for services such as call routing, call monitoring, call recording, and interactive voice response. For partners creating solutions to record voice communications, Brooktrout
delivers important capabilities such as recording quality and compression, as well as the ability to accurately detect voice and silence. Interactive voice response applications are being expanded
with speech recognition technology to support customer self-service. The Company's Vantage Series, RealBLOCs ATSI, RealCT Direct, TR1100, TR2020 and RealComm 100 products are used in the
contact center market.



Manufacturing

The Company's manufacturing operations consist primarily of final assembly and testing of components, subsystems and systems. The Company tests its products at
various stages in the manufacturing process. Prior to shipment, each product undergoes a final load and/or functional test either by the Company's subcontractors or by the Company at its own
facilities.

The
Company uses independent manufacturers to perform printed circuit board assembly and testing. The Company believes it has good relationships with its subcontractors and has generally
experienced timely delivery of products and satisfactory quality with respect to products manufactured by subcontractors. The Company's Needham, Massachusetts facility has achieved ISO 9002
certification and the Company's Salem, New Hampshire facility has achieved ISO 9001 certification.

Sales and Distribution

The Company sells its products to system vendors, service providers, original equipment manufacturers ("OEMs"), and value-added resellers ("VARs"), both
domestically and internationally through a direct sales force and a two-tiered distribution system. The two-tiered distribution arrangement is with Tech Data Corporation, a
leading networking supplier, and Ingram Micro, a leading wholesale distributor of computer technology products and services.

The
Company has established international sales offices in Belgium, the United Kingdom, and Germany. The Company's international sales efforts are initiated from corporate headquarters
in the United States and internationally located sales and support offices.

Most
countries require technical approvals from their telecommunications regulatory agencies for products that operate in conjunction with the local telephone system. Obtaining these
approvals is generally a prerequisite for sales in a given jurisdiction. Obtaining the requisite approvals may require from two months to a year or more depending on the product and the jurisdiction.
The Company, its distributors or its customers have received product approvals from agencies in Australia, Canada, France, Germany, Hong Kong, Korea, Italy, Japan, Malaysia, the Netherlands, New
Zealand, Singapore, Sweden, Switzerland, Mexico, Ireland, Norway, Denmark, India, Czech Republic, the United

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Kingdom, Austria, Belgium, Finland, Greece, Luxembourg, Portugal, Spain, the European Union, China, Thailand, Argentina, Israel, South Korea, Russia, South Africa, Morocco, Iceland and the United
States.

The
Company ordinarily sells its products on the basis of purchase orders received from customers. From time to time, the Company has entered into agreements with certain of its
customers, which agreements establish terms and conditions for sales. These agreements generally do not establish any long-term fixed purchase or supply commitments for either party.

Service Providers and Original Equipment Manufacturers (OEMs)

Service providers of enhanced telecommunications services develop, or purchase from developers, large, complex systems incorporating the Company's products that
deliver electronic communications applications. These systems typically have long development cycles and result in periodic deployments of large systems. OEMs design, manufacture and market
electronic communications systems that incorporate the Company's products. OEMs generally have long product design and development processes that precede the release of products. Making sales
to both of these types of customers can be a complex and time-consuming process that is often focused on technical requirements.

Value-Added Resellers (VARs)

VARs typically purchase the Company's products for resale to an end-user enterprise customer together with application software developed by the VAR
or purchased from an ISV. The Company has established a network of resellers, including many that are designated Brooktrout Authorized Resellers. The Company employs direct sales people and
manufacturers' representatives to recruit, train and assist VARs. The Company also uses a two-tiered distribution system for some of its fax, voice and network interface products,
utilizing national distributors who then sell to VARs. In the two-tiered distribution system, the Company does not recognize revenue until the products are sold to the
end-user.

Brooktrout's Partner Connection Program

The Company has created the Partner Connection Program to assist its partners with their marketing initiatives. The Partner Connection Program is global in scope
and covers the entire Brooktrout product line. This program is designed to help the Company's partners get the most out of their relationship with Brooktrout, whether they develop to Brooktrout
platforms or sell Brooktrout products. As a Partner Connection member, companies have access to a variety of co-marketing activities and a wealth of technical and marketing expertise,
which are all designed to help them grow their business.



The Company backs its products with responsive, engineering level support. Many of the Company's technical support staff members hold bachelor's degrees in
electrical engineering or computer science. Staff members place the highest priority on providing timely, accurate information, as well as advice on how to take advantage of the Company's
sophisticated product line. The Company's technical support personnel have been a source of product improvements and new features and functions resulting from their close working relationships with
customers. The Company's technical support activities represent an integral element of its marketing strategy.

Brooktrout's
hardware products are covered by a warranty against defects in materials and workmanship. In March 2000, the Company increased the warranty on its generally available
network interface and signal processing hardware products to five years from the date of purchase from the Company. The Company extended its warranty for competitive purposes, as certain of the
Company's competitors had recently shortened their warranties and begun charging for additional warranty

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coverage. Products purchased on or after January 1, 2000 are covered under this new warranty. For hardware products purchased before January 1, 2000, the warranty generally extends for
periods of twelve to thirty-six months from the date of purchase. Brooktrout has also provided, from time to time, extended warranties to certain customers under contractual agreements or
for additional consideration.



The
market for electronic communications products is generally characterized by rapid technological change, changes in customer requirements, frequent new product introductions and
enhancements, and emerging industry standards. The Company focuses significant resources on improving its products in response to changes in operating systems, application software, computer and
telephony hardware, networking software, programming tools and computer language technology. The Company also directs significant resources at the development of new products and next generation
versions of its current products. During the years ended December 31, 2001, 2000, and 1999, the Company spent approximately 27%, 17%, and 15% of total revenue, respectively, on research and
development. Research and development expenses have been charged to operations as incurred. The Company believes significant investments in product development are required to remain competitive. As a
consequence, the Company intends to continue to invest a significant dollar amount on product development.

In
2000, the Company acquired rights to certain in-process technology that, upon completion, was intended to result in a single cPCI circuit board that would provide an
STS-1 interface that would be capable of handling 28 T1 links (672 voice channels) and echo cancellation. The Company recorded a one-time charge of $2,550,000 for the purchased
research and development rights in the STS-1 project, which has not yet reached technological feasibility, has no alternative future use, and for which
successful development is uncertain. During 2001, the Company ceased development of the product for which this technology was originally intended. Expenses associated with this project, through the
date the Company ceased development, were not a significant portion of the Company's overall research and development expenses in either 2001 or 2000.



The
Company believes that it has a readily available supply of raw materials for all of its significant products from various sources. The Company does not anticipate any difficulties
obtaining the raw materials essential to the business.



Patents
are important to Brooktrout's business; no particular patent, or related group of patents, is so important, however, that its loss would significantly affect the Company's
operations as a whole. From time to time, Brooktrout seeks patent protection for inventions and developments made by its personnel that are incorporated into its products or that otherwise fall within
Brooktrout's fields of interest.

The
Company has also acquired licenses under certain third-party patents covering aspects of voice processing and voice transcoding technology, and licenses from third parties for some
of the software used in certain of its voice and fax products. The Company pays royalties under these licenses with respect to its sales of certain products. The licenses generally extend for the life
of the patent in question (in the case of patents) or in perpetuity (in the case of software), and are subject to termination only in the event of a breach. Royalties constitute a percentage of sales
of particular products or product elements, or a fixed amount per unit of hardware or software distributed, and do not generally account for a material part of the Company's cost of product sold.

The
Company's software and firmware are protected by copyright laws. Because on-board and downloadable firmware represent an important element of the value of the Company's
hardware

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products, the Company believes that it obtains significant protection for its proprietary interest in its hardware products, as well as its software products, from copyright laws. Certain design
features, including ASICs (application specific integrated circuits), software and firmware, receive some protection under trade secret laws. Each employee of the Company has executed a proprietary
information agreement designed to protect the trade secrets of the Company, inventions created in the course of employment with the Company and other proprietary information of the Company. There can
be no assurance, however, that copyright and trade secret protection will be sufficient to prevent competitors from developing software and other technology similar to the software and other
technology upon which the Company relies for a significant portion of its revenue. In addition, the
Company has periodically received, and may receive in the future, communications from third parties asserting patent rights with respect to certain of the Company's products and features.

Where
appropriate, the Company also uses trademarks and applies for registered trademarks.



There
are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on the Company's working capital.



In
2001, 2000, and 1999, sales to Lucent, previously one of the Company's largest customers, accounted for 8%, 22%, and 14%, respectively, of the Company's total revenue. The Company
sells its products to a number of separate business units within Lucent. In 2001, sales to Lucent have predominantly been of the TRxStream Series product line for use in New Network applications. A
second customer, Captaris/RightFax, represented 12%, 7%, and 8% of the Company's total revenue during the fiscal years 2001, 2000, and 1999, respectively.



At
December 31, 2001, the Company's backlog of firm orders was approximately $5,560,000 compared with approximately $6,866,000 at December 31, 2000. All of the backlog is
expected to be shipped before the end of 2002. The Company regards all orders as firm orders. Because of the possibility of customer changes in delivery schedules or of cancellation of orders, the
Company's backlog as of any particular date may not be indicative of actual sales for any particular future period. The period of time between placement of an order and delivery of the product varies
from one day for certain TRxStream Series products to seven months for certain OEM systems products.



The
Company is in direct competition with companies offering similar products or products responsive to similar applications. In addition, there is always the potential for new entrants
into the Company's markets by other companies, including the Company's customers and suppliers. The Company believes that the principal competitive factors affecting the market for the Company's
products include product functionality and features, product quality, performance and price, ease of product integration, and
quality of customer support services. The relative importance of each of these factors depends upon the specific customer environment. Although the Company believes that its products currently compete
favorably with respect to such factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors.

Many
of the Company's current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater
name recognition and larger customer bases than the Company. Though the Company's addressable market in the overall telecommunications market is characterized by several large competitors, the rest of
the market is fairly fragmented and many of the Company's current and potential competitors are smaller companies. These smaller companies generally have significantly less financial, technical,
product

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development and marketing resources, lesser name recognition and smaller customer bases, but these smaller companies also have an ability to respond more quickly to changes in the market or
technology. The Company's present or future competitors may be able to develop products comparable or superior to those developed by the Company, adapt more quickly than the Company to new
technologies, evolving industry trends or customer requirements, or devote greater resources to the development, promotion and licensing of their products than the Company. Accordingly, there can be
no assurance that competition will not intensify or that the Company will be able to compete effectively in its market.

The
Company has faced, and expects that it will to continue to face, increasing pricing pressures from its current competitors and new market entrants. The Company's competitors may
engage in pricing practices that cause the Company to reduce the selling prices of its products. To offset declining selling prices, the Company believes that it must successfully develop and
introduce, on a timely basis, new products or products that incorporate new features that can be sold at gross margins comparable to those of existing products. To the extent that such new products
are not developed in a timely manner, do not achieve customer acceptance, or do not generate comparable gross margins, the Company's profitability may decline.



Complying
with federal, state, and local environmental protection regulations will not significantly affect the Company's capital spending, earnings, or competitive position.



As
of December 31, 2001, the Company had 349 full-time employees, of which 130 were engaged in engineering and product development, 117 in sales, marketing and
technical support, 62 in
administration, and 40 in manufacturing. None of the Company's employees are represented by a labor union and the Company believes its relations with its employees are good.

(d) Financial Information about Geographic Areas

International sales accounted for approximately 20%, 16%, and 23% of total revenue in 2001, 2000, and1999, respectively.

Item 2. Properties

The Company leases facilities in Needham, Massachusetts, in Salem, New Hampshire, and in Los Gatos, California. In Needham, Massachusetts, the Company leases
three facilities: a 31,000 square foot manufacturing facility; a 38,000 square foot facility that accommodates engineering, sales and marketing; and a 22,000 square foot office that houses corporate
headquarters. Two of the Needham, Massachusetts facilities are leased until 2006, and one until 2005. In Los Gatos, California, the Company leases an office of approximately 33,000 square feet for
engineering, sales, marketing and administration. This lease expires in 2006. In Salem, New Hampshire, a 26,000 square foot leased facility is used for engineering, manufacturing, sales, marketing and
administrative operations. This lease expires in 2003.

The
Company also maintains operating leases and office space for sales and support functions in Florida, Georgia, Illinois, Belgium, Germany and the United Kingdom.

The
Company believes that its present facilities are adequate for its current needs and that suitable additional space will be available as needed.

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Item 3. Legal Proceedings

In October 2000, several shareholder class action complaints were filed in the United States District Court for the District of Massachusetts (the "Court")
by certain shareholders of Interspeed and of the Company. Certain of the complaints named, among others, the Company and certain of its current directors and certain current and former officers as
defendants. The lawsuits were filed after Interspeed's October 6, 2000 announcement that it would be restating its unaudited financial results for certain prior quarters of its fiscal year
2000. The complaints included allegations that the Company or
certain of its officers and directors participated in and approved the issuance of the financial statements of Interspeed, that defendants are "controlling persons" of Interspeed, and that the
defendants made false or misleading statements regarding the Company's own consolidated financial results. Following settlement discussions among the parties, (i) complaints filed by
shareholders of the Company were voluntarily dismissed in April 2001 and (ii) the Court entered final approval of the settlement of the litigation brought by shareholders of Interspeed
in July 2001. The dismissal and settlement of these actions did not have a material adverse effect on the Company's financial position or results of operations.

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

Not applicable.

PART II

Item 5. Market For Registrant's Common Equity and Related Stockholder Matters

The Company's common stock is quoted on the Nasdaq National Market under the symbol "BRKT." The following table shows the high and low sales prices per share of
the common stock, as reported on the Nasdaq National Market, for the periods indicated:

|             |  | 2001 |       |  |   | 2000
|------------ |  | ---- | ----- |  | - | ----
|
|
|March 31     |  | $    | 11.00 |  | $ | 6.00
|June 30      |  | $    | 7.75  |  | $ | 5.00
|September 30 |  | $    | 8.00  |  | $ | 3.10
|December 31  |  | $    | 6.84  |  | $ | 2.72

The
Company has never paid cash dividends on its common stock. The Company presently does not anticipate paying any cash dividends in the foreseeable future. On March 15, 2002,
there were 465 holders of record of the Company's common stock and the closing price of the common stock on the Nasdaq National Market was $6.69 per share.

Transfer Agent

EquiServe
Trust Company, N.A.
c/o EquiServe, Inc.
P.O. Box 9187
Canton, MA 02021
Shareholder Inquiries: 816-843-4299
www.equiserve.com

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Item 6. Selected Financial Data(in thousands, except per share data)

The selected financial data presented below under the caption Statements of Operations Data with respect to the years ended December 31, 2001, 2000, 1999,
1998, 1997 and under the caption Balance Sheet Data at December 31, 2001, 2000, 1999, 1998, 1997 are derived from the consolidated financial statements of the Company and its subsidiaries,
which financial statements have been audited by Deloitte & Touche LLP, independent certified public accountants. The following selected consolidated financial data should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on
Form 10-K.

| |                                           | Years Ended December 31,                
| | ----------------------------------------- | ----------------------------------------
|
| | Revenue                                   |                                         
| | Costs and expenses:                       |                                         
| |                                           | Cost of product sold                    
| |                                           | Research and development                
| |                                           | In-process research and development (1) 
| |                                           | Selling, general and administrative     
| |                                           |                                         
| |                                           |                                         
| |                                           |                                         
| | Operating income (loss)                   |                                         
| | Other income (expense):                   |                                         
| |                                           | Net gain (loss) on investments (2)      
| |                                           | Equity in loss of affiliates (3)        
| |                                           | Interest income, net and other          
| |                                           |                                         
| |                                           |                                         
| |                                           |                                         
| | Income (loss) before income tax provision |                                         
| | Income tax provision (benefit)            |                                         
| |                                           |                                         
| | Income (loss) from continuing operations  |                                         
| |                                           |                                         
| | Diluted income (loss) per common share:   |                                         
| |                                           | Income (loss) from continuing operations
| |                                           | Shares for diluted                      

|                   |                                | December 31,
|------------------ | ------------------------------ | ------------
|
|Balance Sheet Data |                                |             
|                   | Cash and marketable securities |             
|                   | Working capital                |             
|                   | Total assets                   |             
|                   | Long-term debt                 |             
|                   | Stockholders' equity           |             

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

Results of Operations

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This Annual Report on Form 10-K contains certain statements that are "forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission. The words "believes," "expects," "anticipates," "intends," "estimates," "assumes," "will,"
"should" and other expressions that are predictions of or indications of future events and trends and that do not relate to historical matters, identify forward-looking statements. You should not rely
on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of Brooktrout, Inc. (the "Company" or
"Brooktrout"), which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on information, plans, and estimates at the date of this document and the Company undertakes no obligation to update any
forward-looking statement, whether as a result of new information, future events or otherwise.

The
future operating results and performance trends of the Company may be affected by a number of factors, including, without limitation, risks related to the following: (i) the
economic slowdown in the telecommunications sector; (ii) market growth, market acceptance of the Company's products and product demand; (iii) rapid changes in technology and the
evolution of the telecommunications hardware and software market; and (iv) the impact of competition. In addition to the foregoing, the Company's actual future results could differ materially
from those projected in the forward-looking statements as a result of the risk factors set forth herein and in the Company's various filings with the Securities and Exchange Commission and of changes
in general economic conditions and changes in the assumptions used in making such forward-looking statements.

Introduction

Brooktrout develops, manufactures and sells communications hardware and software products that enable the development of communications applications and systems
in five targeted markets, including enhanced services platforms, wireless infrastructure, voice over packet gateways and switches, unified communications, and contact centers. The Company's strategy
is to collaborate with its partners on new ideas and to invest in the success of their businesses in order to help them expand into new markets, accelerate the delivery of their applications and
services, and deliver quality products and services. The Company sells its products to system vendors, service providers, enterprise customers, original equipment manufacturers ("OEMs"), and
value-added resellers ("VARs"), both domestically and internationally, through a direct sales force and a two-tiered distribution system.

The
evolution of the world's telecommunications systems has created important market opportunities for the Company. One opportunity involves core technologies and platforms that are
primarily used in business premise products such as fax, LAN fax, and voice mailToday's Network. Another opportunitythe New Networkis the result of
the global investments that are being made to expand the capabilities of today's communications networks. These new capabilities allow data, voice

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and fax information to be distributed using packet-based data networks, such as the Internet, for portions of the transmission and also allow such information to be distributed using the traditional
circuit-switched telephone network.

Prior
to February 8, 2001, the Company was organized and reported the results of its operations in three operating segments, Brooktrout Technology, Inc. ("Brooktrout
Technology"), Brooktrout Software, Inc. ("Brooktrout Software"), and Interspeed, Inc. ("Interspeed"). On February 8, 2001, the Company's Board of Directors adopted formal plans to
discontinue its Brooktrout Software and Interspeed segments. Accordingly, the Company has accounted for these businesses as discontinued operations. See notes 1(d) and 2 to the consolidated financial
statements.

The
following discussion focuses on the Company's results from continuing operations; the historical information presented has been revised to conform to the reclassified consolidated
financial statement presentation.

Critical Accounting Policies

Accounting policies, methods and estimates are an integral part of the consolidated financial statements and are based upon management's current judgments. These
judgments are based on knowledge and experience with regard to past and current events and assumptions about future events that are believed to be reasonable under the circumstances. On an
on-going basis, the Company's management evaluates its estimates and assumptions and adjusts them if expectations concerning events, including future events, affecting them differ markedly
from management's current judgments. Management believes that the following are certain critical accounting policies that particularly affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.

The
Company's revenue recognition policy requires that revenue be recognized at the time of shipment if there is persuasive evidence that an arrangement exists, the price is fixed or
determinable, delivery has occurred, and collection is considered probable. The Company recognizes revenue from sales to two-tiered distributors of the Company's products when the
distributor has sold the products to their customers. The Company records a provision for estimated sales returns and allowances on product sales in the same period as the related revenue is recorded.
These estimates are based on historical sales returns, analysis of credit memo data and other known factors. Actual results could differ from these estimates.

The
Company's concentration of credit risk policy requires management to make estimates concerning the realizable value of accounts receivable assets. The current and future economic
environment affects these estimates. The Company maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial condition of Brooktrout's customers were to deteriorate, additional allowances may be required.

The
Company's inventory valuation policy requires management to make estimates concerning the realizable value of inventory. The current and future economic environment affects these
estimates. The Company reduces the value of its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

The
Company reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Any evaluation of intangible
assets would include assumptions regarding estimated 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 could be required to record impairment charges for these assets.

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The
Company has investments accounted for under the cost method and regularly reviews the financial condition of the investee to determine if there is potential impairment of the
carrying value. Future adverse changes in market conditions or poor operating results of underlying investments could result in an inability to recover the carrying value of the investments, thereby
requiring an impairment charge in the future.

The
carrying value of the Company's deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on
estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record valuation allowances against its deferred tax assets, resulting in
additional income tax expense in the Company's consolidated statement of operations. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for valuation
allowances quarterly.

The
Company recorded estimates for expenses associated with the sale of Brooktrout Software, along with the expenses related to Interspeed, as liabilities associated with discontinued
operations. These estimates are based on certain judgments by management about the likelihood and amount expected to be paid. If actual results differ from these estimates, an adjustment to the
amounts recorded as liabilities could be required in future periods.

Years Ended December 31, 2001 and 2000(in thousands, except share and per share data)

Revenue during the year ended December 31, 2001 decreased by approximately 44% to $79,774, down from $141,748 for the year ended December 31, 2000.
The decline in revenue resulted primarily from the overall economic slowdown in the United States and international economies and, in particular, the softening in the telecommunications market. The
slowdown the Company is experiencing extends across all product lines and markets, though sales of products for applications in the New Network, specifically those sold to OEMs for use by large
service providers, have declined most significantly. During the year ended December 31, 2001, sales of products for applications in the New Network accounted for approximately 41% of total
revenue, as compared to 60% of total revenue for the same period in 2000.

Revenue
from one customer accounted for approximately 12% of total revenue in the current year compared to 7% from this same customer in the prior year. The Company expects that revenue
from this customer will continue to be greater than 10% of total revenue for the foreseeable future. A different customer represented 22% of sales during the year ended December 31, 2000;
however, revenue from this customer represented approximately 8% of total revenue for the year ended December 31, 2001. For the foreseeable future, the Company expects that revenue from this
customer will continue to be significantly less than that of prior years.

Cost
of product sold was $36,399, or 46% of revenue, for the year ended December 31, 2001, compared to $52,925, or 37% of revenue, for the year ended December 31, 2000.
Gross margin for the year ended December 31, 2001 was 54% compared with 63% for the year ended December 31, 2000. The lower gross margin in 2001 was primarily due to the decrease in
revenue, increased inventory obsolescence expense, and fixed manufacturing expenses. Inventory obsolescence increased in 2001 to $5,363 compared to $1,455 in 2000. This increase in inventory
obsolescence was, in part, a result of an industry-wide shift from ISA to PCI and cPCI technology. The value of ISA inventory was reduced to its net realizable value. In addition, the
inventory obsolescence expense was increased due to the decline in sales volume across all of the Company's product lines. The Company's manufacturing facilities, which are primarily fixed expenses,
represented a larger percentage of cost of product sold in 2001 in comparison to 2000. The Company expects that the gross margin will be approximately 51% to 53% for the next several quarters.

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Research
and development expense was $21,517, or 27% of revenue, for the year ended December 31, 2001, compared with $23,508, or 17% of revenue, for the year ended
December 31, 2000. The dollar decrease, as compared to the same period in the prior year, is primarily attributable to decreased spending on consulting and contract labor, employee recruiting
expense and to a lesser extent, expendable materials and supplies. The Company's continuing development efforts are focused on hardware and software that make up its network interface products, media
processing products, messaging products and IP telephony products. The Company intends to continue to commit significant
resources to product development and would expect that research and development expense in 2002 will be slightly higher than in 2001.

During
2000, the Company recorded an in-process research and development charge of $2,550 for the purchase of rights to certain in-process technology that, upon
completion, was intended to result in a single cPCI circuit board that would provide an STS-1 interface. At the time of the purchase the STS-1 project had not yet reached
technological feasibility and successful development of this technology was uncertain. On the acquisition date the technology acquired had no alternative future use. During 2001, the Company ceased
development of the product for which this technology was originally intended. Expenses associated with this project, through the date the Company ceased development, were not a significant portion of
the Company's overall research and development expenses in either 2001 or 2000.

Selling,
general and administrative expense was $31,318, or 39% of revenue, for the year ended December 31, 2001, compared with $39,921, or 28% of revenue, for the year ended
December 31, 2000. The decline in dollar expense is primarily the result of reduced spending for variable incentive compensation, consulting and contract labor, employee recruiting expenses,
travel and entertainment expenses, advertising and promotion expenses, and expendable materials and supplies. The Company expects that selling, general and administrative expense in 2002 may increase
marginally compared to 2001.

During
the year ended December 31, 2001, the Company had a pretax loss on investments of $4,923. Of this total expense, $3,914 was due to a permanent reduction of the carrying
value of Sonexis, Inc. preferred stock as a result of a decrease in the appraised value of these shares. The Company received this preferred stock, along with cash, as consideration for the
sale of Brooktrout Software in April 2001. In addition, the Company realized a loss of approximately $1,000 related to the sale of an equity investment in a privately held technology company
that had been accounted for using the cost method.

Equity
in loss of affiliates increased to $4,710 in 2001 from $3,298 in 2000. This increase is due to increased net losses of its equity investees, Pelago Networks, Inc.
("Pelago") and Telchemy, Incorporated ("Telchemy"). As of December 31, 2001, the investment in Pelago has been written down to zero and since the Company has no further funding commitment it
has ceased recording its equity in Pelago's losses. The Company will not recognize additional losses related to Telchemy as the Company disposed of its equity interest on December 31, 2001.

Interest
income, net and other was $1,108 for the year ended December 31, 2001, as compared with $2,081 for the same period in 2000. The decrease in interest income, net and other
was the result of a significant decline in short-term interest rates, which offset the favorable impact that increased marketable securities balances had on interest income.

The
Company's effective tax benefit rate for continuing operations was 42% for the year ended December 31, 2001, compared to the effective tax expense rate 40% for the year ended
December 31, 2000. The increase in the effective tax benefit rate in 2001, compared to the effective tax expense rate
in 2000 was principally due to the research and development tax credit, which caused an increase in the effective benefit rate in 2001 but caused a decrease in the effective expense rate in 2000.

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Years Ended December 31, 2000 and 1999(in thousands, except share and per share data)

Revenue during the year ended December 31, 2000 increased by approximately 11% to $141,748, up from $128,036 for the year ended December 31, 1999.
The majority of the growth was generated by sales of products for the New Network, including TRxStream Series products and switching and access products. In 2000, the products sold for application in
the New Network accounted for approximately 60% of total revenue as compared to 45% of total revenue for the same period in 1999. Revenue from one customer was approximately 22% of revenue in the year
ended December 31, 2000 compared to 14% in the prior year.

Cost
of product sold was $52,925, or 37% of revenue, for the year ended December 31, 2000, compared to $48,262, or 38% of revenue, for the year ended December 31, 1999. The
gross profit percentage was approximately 63% and 62% for the years ended December 31, 2000 and 1999, respectively. The increase in the gross profit percentage was directly attributable to the
increase in sales of TRxStream Series products for the New Network, which have higher profit margins, and the decrease in sales of voice mail systems for Today's Network, which have lower profit
margins.

Research
and development expense was $23,508 or 17% of revenue, compared with $19,236 or 15% of revenue, for the years ended December 31, 2000 and 1999, respectively. The dollar
increase is primarily attributable to increases in staffing related expenses. The Company's continuing development efforts are focused on its switching and access products that allow customers to
create the infrastructure to support the New Network; messaging products that allow integration of voice, fax and e-mail into one location; and IP telephony products.

On
September 29, 2000, the Company acquired rights to certain in-process technology that, upon completion, is intended to result in a single cPCI circuit board that
will provide an STS-1 interface that is capable of handling 28 T1 links (672 voice channels) and echo cancellation. The Company recorded a one-time charge of $2,550 for the
purchased research and development rights in the STS-1 project. At the time of the purchase the STS-1 project had not yet reached technological feasibility and successful
development of this technology was uncertain. On the acquisition date the technology acquired had no alternative future use.

Selling,
general and administrative expense was $39,921 or 28% of revenue, compared with $36,882 or 29% of revenue, for the years ended December 31, 2000 and 1999, respectively.
The expense increase is
related primarily to staffing increases along with expenses related to the Company's partner marketing program.

For
the year ended December 31, 2000, other expense was $1,217 compared to other income of $22,383 for the year ended December 31, 1999. This change was primarily related
to the net gain on investment activity of $21,738 in 1999, as a result of the sale of 1,925,000 shares of common stock of Interspeed by the Company in connection with Interspeed's initial public
offering and a gain in 1999 of $2,500 from the sale of marketable securities. During 2000, the Company recognized equity in loss of affiliates of $3,298 related to its investments in Pelago and
Telchemy. In addition, interest and other income was $2,081 compared with $645 for the same period in 1999, reflecting higher cash balances available for investment as a result of the sale by the
Company of Interspeed's common stock.

The
Company's effective tax rate on continuing operations was 40% for the year ended December 31, 2000. The effective rate is greater than the 38% effective rate in 1999 and is
due primarily to an increase in the Company's effective state tax rate.

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Liquidity and Capital Resources(in thousands, except share and per share data)

For the year ended December 31, 2001, the Company funded its operations principally through cash provided by operating activities. Cash provided by
operating activities for the year ended December 31, 2001 was $11,346 and was generated by reductions in accounts receivable and inventory, partially offset by reductions in current
liabilities, and by tax refunds received during the year. Cash used in investing activities for the year ended December 31, 2001 was $8,916. The cash received for the sale of Brooktrout
Software of $4,927 was offset by net purchases of marketable securities totaling $9,383. In addition, the Company invested $3,050 to purchase 3,050,000 preferred shares of Pelago. The Company has no
further commitments or plans to make additional investments in Pelago. Working capital increased to $54,701 at December 31, 2001 from $52,344 at December 31, 2000, primarily due to
decreases in current liabilities and increases in cash and marketable securities, partially offset by reductions in accounts receivables and inventory.

In
2001, the Company renewed its working capital line of credit. Under the renewed line of credit, the Company may borrow up to $5,000 on a secured basis, subject to compliance with
certain covenants. Any amounts borrowed under the line of credit bear interest at the lender's prime rate. As of December 31, 2001, outstanding letters of credit issued against the Company's
existing line totaled $1,000 representing the collateral required for certain lease obligations. There have been no borrowings under the line during the past three years.

The
Company believes that the current economic conditions will continue into 2002 and as a result, expects to have a loss from continuing operations for the year ended
December 31, 2002. During 2001, the Company had an operating loss of $9,460 but was able to increase its cash and marketable securities balances by $12,138, of which $4,927 was from the sale of
Brooktrout Software. The Company believes available cash resources will support its operations and capital needs for at least the next twelve months, and if the current economic climate worsens beyond
the next twelve months, the Company may need to utilize funds available under the line of credit.

During
2001, 2000, and 1999, the Company purchased approximately $1,100, $4,900, and $3,500 respectively, in equipment. The Company currently has no material commitments for additional
capital expenditures.

During
2000, Pelago completed an equity financing transaction in which the Company and outside investors purchased Pelago Series A Preferred Stock. The Company invested
approximately $2,500 in this financing and was no longer the controlling shareholder of Pelago. In addition the Company invested $1,000 in Telchemy and $1,000 in another privately held company.

During
1999, Interspeed sold 2,000,000 shares of its common stock in an initial public offering. Due to the sale of these shares of stock by Interspeed, the Company recorded additional
paid-in capital of approximately $7,000, net of deferred tax, reflecting the increase in its investment in Interspeed in compliance with SAB No. 51. In the offering, the Company
sold 1,925,000 shares of Interspeed common stock that it owned. This transaction resulted in a pre-tax gain of $19,900, net of offering related costs in 1999. These transactions generated
approximately $42,200 of cash in 1999.

On
October 1, 1999, the Company's Board of Directors approved the purchase of up to 1,000,000 shares of the Company's common stock for a twelve-month period. Through
December 31, 1999, the Company repurchased approximately 247,000 shares for an aggregate cash purchase price of approximately $3,447. The Company's repurchase authorization under this program
expired on September 30, 2000.

The
pricing of the Company's products and costs of its goods are generally determined by current market conditions, as well as value to the customer. Market conditions can be impacted by
inflation; however, the Company believes that inflation has not had a significant effect on its operations to date.

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The
Company has operating lease commitments for its office and manufacturing facilities expiring through 2006. Certain lease agreements require the Company to pay all of the building's
taxes, insurance and maintenance costs.

Recent Accounting Pronouncements

In June of 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business combination. For purchase method business combinations completed before July 1, 2001, any reclassifications
between intangible assets and goodwill resulting from the implementation of SFAS No. 141 will take place as of the date that SFAS No. 142 is initially applied in its entirety. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent
to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but
will rather be tested at least annually
for impairment. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. SFAS No.142 is effective for fiscal years
beginning after December 15, 2001, with early adoption permitted for companies with fiscal years beginning after March 15, 2001 if their first quarter financial statements have not
previously been issued. The Company has evaluated the provisions of SFAS No. 141 and SFAS No. 142 and has determined that adoption of these standards will have no material effect on its
consolidated financial statements.

In
August of 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has evaluated the provisions of SFAS No. 144 and has determined
that adoption of the standard will have no material effect on its consolidated financial statements.

Risk Factors

The Company is exposed to general economic conditions, and the slowdown in some sectors of the telecommunications industry in particular.

As a result of recent unfavorable economic conditions affecting most technology sectors and the telecommunications sector in particular, many of our customers are
aggressively increasing efficiency in their supply chains and reducing inventory levels. Additionally, we expect the growth of data traffic and the use of the Internet will continue to have a
significant impact on traditional voice networks, which is driving the convergence of data and telephony and giving rise to the demand for New Network applications. We cannot be sure what the rate of
such convergence will be due to the slowdown in the communications industry and the resulting decrease in spending by our customers. The current economic conditions have adversely impacted the
Company's business and operating results, including a reduction in revenue of $62,000,000 in 2001, or 44% compared to the prior year. If current economic conditions continue for an extended period of
time or worsen, or if a wider economic slowdown occurs, the Company may experience additional adverse effects on its business, operating results, and financial condition. Specifically, as the rate at
which the Company's customers order its products decreases, the more likely it is that current inventories will be exposed to technological obsolescence, thus requiring the Company to reduce the value
of that inventory on the balance sheet.

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The Company's operating results are likely to fluctuate significantly and cause the Company's stock price to be volatile, which could cause the value of
your investment to decline.

The Company's operating results are likely to fluctuate in the future due to a variety of factors, many of which are outside of its control. If the Company's
operating results do not meet the expectations of securities analysts, the trading price of the Company's common stock could significantly decline. This may cause the value of your investment in the
Company to decline. In addition, the value of your investment could be impacted by investor perception of the Company's industry or its prospects generally, independent of the operating performance of
the Company. Some of the factors that could affect the Company's operating results or impact the market price of the common stock include:



Due
to these and other factors, revenue, expenses and results of operations could vary significantly in the future, and period-to-period comparisons should not be
relied upon as indications of future performance.

The Company has historically derived a significant portion of its revenue from a small number of customers.

The Company's failure to generate as much revenue as expected from what has historically been a relatively small number of customers or the failure of these
customers to purchase the Company's products could seriously harm the Company's business. For the year ended December 31, 2001, one customer accounted for approximately 12% of the Company's
revenue. A different customer accounted for 22% of revenue for the year ended December 31, 2000; however, this customer represented less than 10% of revenue in the year ended
December 31, 2001 and is expected to remain less than 10% of total revenue for the foreseeable future. The loss of any one of the Company's major customers or the delay of significant orders
from such customers, even if only temporary, has or could reduce or delay the Company's revenue, could harm the Company's reputation in the industry and could reduce the

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Company's ability to accurately predict cash flow, and, as a consequence, could seriously harm the Company's business, financial condition and results of operations.

Present
and future customers may also terminate their purchasing arrangements with the Company, significantly reduce or delay their orders or seek to renegotiate their agreements on
terms less favorable to the Company. Furthermore, in any future negotiations, the Company may be subject to the perceived or actual leverage the customers may have, given their relative size and
importance to the Company. Any termination, change, reduction or delay in orders could seriously harm the Company's
business, financial condition and results of operations. Accordingly, unless and until the Company can diversify and expand its customer base, the Company's future success will significantly depend
upon the timing and size of future purchases by the Company's largest customers and the financial and operational success of these customers.

The telecommunications markets are highly competitive, and the Company may not be able to compete successfully against new entrants and established
companies with greater resources.

The market for telecommunications equipment is highly competitive. If the Company is unable to differentiate its products from existing and future offerings of
its competitors, and thereby effectively compete in the market for telecommunications equipment, the Company's results of operations could be materially adversely affected. Many of the Company's
current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial, and other resources. Moreover, the Company's competitors may have greater
access to components necessary to manufacture their products. The strength and capabilities of the Company's competitors may be increased as a result of the trend toward consolidation in the
telecommunications market. Capitalizing on and maintaining the Company's technological advantage will require a continued high level of investment in research and development, marketing and customer
service and support. Due to the rapidly evolving markets in which the Company competes, additional competitors with significant market presence and financial resources may enter those markets, thereby
further intensifying competition. The Company may not allocate sufficient resources to achieve the technological advances necessary to compete successfully with existing competitors or new entrants.

Internal development efforts by the Company's customers may adversely affect demand for its products.

Many of the Company's customers, including the large OEMs on which the Company focuses a significant portion of its sales and marketing efforts, have the
technical and financial ability to design and produce components replicating or improving on the functionality of most of the Company's products. These customers often consider in-house
development of technologies and products as an alternative to doing business with the Company. The Company cannot assure you that its existing customers or potential customers will do business with
the Company, rather than attempting to develop similar technology and products internally or obtaining them through acquisition. The Company cannot be certain that it will be able to find customers to
replace the revenue lost as a result of customers developing technologies or products in-house. Any such occurrence could have a material adverse effect on the Company's business,
financial condition or results of operations.

Unless the Company is able to keep pace with the evolution of the telecommunications hardware and software market, the Company's business may be
adversely impacted.

The telecommunications hardware and software market is characterized by:



21

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The
Company believes that its future success will depend, in part, on its ability to offer products that address the sophisticated and varied needs of its current and prospective
customers and to respond to technological advances and evolving industry standards on a timely and cost-effective basis. The Company intends to continue to invest significantly in product
and technology development. The development of new or enhanced products is a complex and uncertain process. The Company may experience design, manufacturing, marketing and other difficulties that
could delay or prevent its development, introduction or marketing of new products and enhancements. The Company may also not be able to incorporate new technologies on a cost-effective or
timely basis. This may result in unexpected expenses. The introduction of new or enhanced products also requires that the Company manage the transition from older products so as to minimize the
disruption to customers and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. The Company's inability to develop on a timely basis new products or
enhancements to existing products, or the failure of such new products or enhancements to achieve market acceptance, could have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company's dependence on sole and single source suppliers and independent manufacturers exposes it to supply interruptions that could result in
product delivery delays.

Although the Company generally uses standard parts and components for its products, some key components are purchased from sole or single source vendors for which
alternative sources are not currently available or are difficult to obtain. The Company's inability to obtain sufficient quantities of
these components may result in future delays or reductions in product shipments that could materially adversely affect its business, financial condition and results of operations. The Company
currently purchases proprietary components from a number of suppliers for which there are no direct substitutes. These components could be replaced with alternatives from other suppliers, but that
could involve redesign of the Company's products. If such redesign was required, the Company would incur considerable delay and expenses. The Company currently enters into purchase orders with its
suppliers for materials based on forecasts of need, but has no guaranteed supply arrangements with these suppliers.

In
addition, the Company currently uses a number of independent manufacturers to manufacture printed circuit boards, chassis and subassemblies in accordance with the Company's design and
specification. The Company's reliance on independent manufacturers involves a number of risks, including the potential for inadequate capacity of, unavailability of, or interruptions in access to,
process technologies, and reduced control over delivery schedules, manufacturing yields and costs. If the Company's manufacturers are unable or unwilling to continue manufacturing its components in
required quantities or to the Company's quality expectations, the Company will have to transfer manufacturing to acceptable alternative manufacturers that it has identified, which could result in
significant delays in shipment of products to customers. Moreover, the manufacture of these components is extremely complex, and the Company's reliance on the suppliers of these components exposes it
to potential production difficulties and quality variations, which could negatively impact the cost and timely delivery of its products. The Company currently enters into purchase orders with
independent manufacturers of materials based on forecasts of need, but has no guaranteed arrangements with these manufacturers. Any significant interruption in the supply, or degradation in the
quality, of any component would have a material adverse effect on the Company's business, financial condition and results of operations.

22

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Defects in the Company's products or problems arising from the use of its products may seriously harm its business and reputation.

Products as complex as the Company's may contain known and undetected errors, bugs or performance problems. Defects are frequently found during the period
immediately following introduction and initial implementation of new products or enhancements to existing products. Although the Company attempts to resolve all bugs that it believes would be
considered serious by its customers before implementation, the Company's products may not be bug-free. The Company also provides warranties against defects in materials and workmanship on
its hardware products for five years. However, errors, bugs or performance problems could result in lost revenue or customer relationships and could be detrimental to the Company's business and
reputation generally. In addition, the Company's customers generally use its products together with their own products and products from other vendors. As a result, when problems occur, it may be
difficult to identify the source of the problem. These problems may cause the Company to incur significant warranty and repair costs, divert the attention of its engineering personnel from the
Company's product development efforts and cause significant customer relations problems. To date, defects in the Company's products or those of other vendors' products with which its products are used
by its customers have not had a material adverse effect on its business.
However, the Company cannot be certain that product defects will not materially adversely affect the Company's business in the future.

Changes to regulations affecting the telecommunications or Internet industries could reduce demand for the Company's products or increase its costs.

Laws and regulations governing telecommunications, electronic commerce and the Internet are beginning to emerge, but remain largely unsettled, even in the areas
where there has been some legislative action. Regulation may focus on, among other things, assessing access or settlement charges, or imposing tariffs or regulations based on the characteristics and
quality of products, either of which could restrict the Company's business or increase its cost of doing business. Any changes to existing laws or the adoption of new regulations by federal or state
regulatory authorities or any legal challenges to existing laws or regulations relating to the telecommunications industry could materially adversely affect the market for the Company's products.
Moreover, the Company's VARs or other customers may require, or the Company may otherwise deem it necessary or advisable, that the Company alter its products to address actual or anticipated changes
in the regulatory environment. The Company's inability to alter its products or address any regulatory changes could have a material adverse effect on its business, financial condition or results of
operations.

Provisions in the Company's corporate charter may discourage takeover attempts and, thus, depress the market price of the common stock.

Provisions in the Company's Charter may have the effect of delaying or preventing a change of control or changes in the Company's management or Board of
Directors. These provisions include:



23

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These
provisions discourage potential takeover attempts and the ability of stockholders to change management and the Board of Directors. These anti-takeover measures could
adversely affect the market price of the Company's common stock. In addition, even if you desired to participate in a tender offer, change of control or takeover attempt of the Company that the
Company's management and Board of Directors opposed, these provisions may prevent you from doing so.

Limitations on the Company's ability to adequately protect its proprietary rights may prevent it from retaining its competitive advantage and negatively
impact its future operating results.

The Company's success and its ability to compete are dependent, in part, upon its proprietary technology. Taken as a whole, the Company believes its intellectual
property rights are significant and any failure to adequately protect the unauthorized use of its proprietary rights could result in the Company's competitors offering similar products, potentially
resulting in loss of a competitive advantage and decreased revenue. The Company relies upon a combination of patents, trademark law, trade secret protections, copyright law and confidentiality
agreements with consultants and third parties to protect its proprietary rights. Notwithstanding its efforts, third parties may infringe or misappropriate the Company's proprietary rights. In
addition, each employee of the Company has executed a proprietary information agreement designed to protect the trade secrets of the Company, inventions created in the course of employment with the
Company and other proprietary information of the Company. Moreover, effective patent, trademark, copyright or trade secret protections may not be available in every country in which the Company
operates or intends to operate to the same extent as the laws of the United States. Also, it may be possible for unauthorized third parties to copy or reverse engineer aspects of the Company's
products, develop similar technology independently or otherwise obtain and use information that the Company regards as proprietary. Furthermore, detecting unauthorized use of the Company's proprietary
rights is difficult. Litigation may be necessary in the future to enforce the Company's proprietary rights. Such litigation could result in the expenditure of significant financial and managerial
resources and could have a material adverse effect on the Company's future operating results.

Intellectual property claims against the Company can be costly and negatively impact the Company's business.

In the telecommunications business, there is frequent litigation based on allegations of patent infringement. As the number of entrants in the Company's market
increases and the functionality of its products is enhanced and overlaps with the products of other companies, the Company may become subject to claims of infringement or misappropriation of the
intellectual property rights of others. As a result, from time to time, third parties may claim exclusive patent or other intellectual property rights to technologies that the Company uses. Although
the Company believes that it does not face material liability related to infringement of the intellectual property of others, any claims asserting that the Company's products infringe or may infringe
proprietary rights of third parties, if determined adversely to the Company, could have a material adverse effect on its business, financial condition or results of operations. Any claims, with or
without merit, could be time-consuming, result in costly litigation, divert the efforts of the Company's engineering and management personnel, cause delays in product shipments or require
the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect upon the Company's operating results. If any legal action claiming patent infringement is
commenced against it, the Company cannot assure you that it would prevail in such litigation given the complex technical issues and inherent uncertainties in patent litigation. In addition, the
Company may be required to obtain a license or royalty agreement under the intellectual property rights of those parties claiming the infringement. In the event a claim against the Company was

24

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successful, and it could not obtain a license on acceptable terms or license a substitute technology or redesign to avoid infringement, the Company may be unable to market its affected products. This
could have a material adverse effect on the Company's business, financial condition and results of operations.

Certain of the Company's products depend upon the continued availability of licensed technology from third parties.

The Company currently licenses and will continue to license certain technology integral to certain of its products from third parties. For example, the Company
has obtained licenses from third parties for software for certain of its voice and fax products. While the Company believes that much of this technology is available from multiple sources, any
difficulties in acquiring third-party technology licenses, or integrating the related third-party technology into its products, could result in delays in product development or upgrade until
equivalent technology can be identified, licensed and integrated.

The
Company may require new licenses in the future as its business grows and technology evolves. The Company cannot assure you that these licenses will continue to be available to it on
commercially reasonable terms, if at all, which could have a material adverse effect on the Company's business, financial condition and results of operations.

If the Company is unable to attract or retain key personnel, it may be unable to successfully operate its business.

The Company's success depends in large part upon the continued contributions of its key management, sales and marketing, and engineering personnel, many of who
perform important functions and would be difficult to replace. The Company does not have employment contracts with its key personnel. There has been intense competition in the Company's industry for
qualified personnel, and, at times, the Company has experienced difficulty in recruiting qualified personnel. The Company may not be able to attract and retain the necessary personnel to accomplish
its business objectives, and it may experience constraints that will adversely affect its ability to satisfy customer demand in a timely fashion or to support its customers and operations. The
Company's inability to hire qualified personnel on a timely basis, or to retain its key personnel, could materially adversely affect the Company's business, financial condition and results of
operations.

The Company's products typically have long sales cycles, causing the Company to expend significant resources before recognizing revenue.

The length of the Company's sales cycle typically ranges from six to eighteen months and varies substantially from customer to customer. Prospective customers
generally must commit significant resources to test and evaluate the Company's products and integrate them into larger systems. This evaluation period is often prolonged due to delays associated with
approval processes that typically accompany the design and testing of new communications equipment by the Company's customers.

In
addition, the rapidly emerging and evolving nature of the markets in which the Company and its customers compete may cause prospective customers to delay their purchase decisions as
they evaluate new technologies and develop and implement new systems. During the period in which the Company's customers are evaluating whether to place an order with the Company, it often incurs
substantial sales and marketing expenses, without any assurance of future orders or their timing. Even after a customer places an order with the Company and its product is expected to be utilized in a
product or service offering being developed by our customer, the timing of the development, introduction and implementation of those products is controlled by, and can vary significantly with the
needs of, the Company's customers. In some circumstances, the customer will not require the product for several months. This complicates the Company's planning processes and reduces the predictability
of the Company's earnings.

25

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The Company derives a significant portion of its revenue from international sales; international business operations entail additional risks.

Risks arising from the Company's international business include currency fluctuation, political instability in other countries, the imposition of trade and tariff
regulations by foreign governments, and the difficulties in managing operations across disparate geographic areas. In addition, most countries require technical approvals from their telecommunications
regulatory agencies for products that operate in conjunction with the telephone system. Obtaining these approvals is generally a prerequisite for sales in a given jurisdiction. Obtaining requisite
approvals may require from two months to a year or more depending on the product and the jurisdiction. These or other factors may limit the Company's ability to sell its products in other countries,
which could have a material adverse effect on the Company's business, financial condition and results of operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk(in thousands)

The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less on
the date of purchase. These securities consist of U.S. government notes and bonds, commercial paper, and certificates of deposit. The Company invests in marketable securities that consist of notes and
bonds of various Federal agencies, as well as corporate commercial paper, with maturities greater than 90 days on the date of purchase. If the Company were to experience a 1% increase in the
effective interest rate, the effect on the carrying value of marketable securities would be a decrease of $110. The Company's securities are considered available-for-sale for
accounting purposes and any unrealized gain or loss is deferred as a component of other comprehensive income (loss). In addition, the Company's working capital line of credit agreement provides for
borrowings that bear interest at a variable rate equal to the lender's prime rate. As of December 31, 2001, the Company did not have any borrowings outstanding under the credit agreement and
was not exposed to market risk. The Company believes that the effects, if any, of possible near-term changes in interest rates on the Company's financial position, results of operations
and cash flows would not be material.

The
Company also invests in the equity securities of privately held technology companies considered in the start-up or development stages. These investments are inherently
risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. The Company's exposure is limited to the carrying value at
December 31, 2001, which is $1,451 in the Company's consolidated balance sheet. See note 2.

In
2001, the Company recorded a limited amount of sales and incurred expenses of its sales and support offices in Belgium and the United Kingdom in foreign currencies. In 2002, the
Company expects that sales denominated in foreign currencies will increase while operating expenses in foreign currencies will not. As a result of this change, the Company's exposure to market risks
related to foreign currencies will increase. The Company expects to manage exposure to these market risks through regular operating and financing activities, and when deemed appropriate, through the
use of foreign currency forward exchange contracts. The fair value of foreign currency forward exchange
contracts is sensitive to changes in foreign currency exchange rates. The fair value of foreign currency forward exchange contracts was zero as of December 31, 2001. As of December 31,
2001 and 2000, a 10% appreciation or depreciation in foreign currency exchange rates from the prevailing market rates would be immaterial, and consistent with the nature of the economic hedge of such
foreign currency exchange contracts, such gains or losses would be offset by corresponding decreases or increases, respectively, of the underlying asset or liability. Though foreign currency forward
exchange contracts are considered derivative financial instruments, the Company strictly uses them as risk management tools, and not for speculative or trading purposes.

26

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Item 8. Financial Statements and Supplementary Data

|Consolidated Financial Statements:                                                                          |  |   
|----------------------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance Sheets at December 31, 2001 and 2000                                                   |  | 28
|Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999                  |  | 29
|Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2001, 2000 and 1999 |  | 30
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999        |  | 31
|Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999                  |  | 32
|Notes to Consolidated Financial Statements                                                                  |  | 33
|Independent Auditors' Report                                                                                |  | 50

27

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

|                                                                        |                                                                                                                                | December 31,                               |      
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | -----
|
|Assets                                                                  |                                                                                                                               
|Current assets:                                                         |                                                                                                                                |                                            |      
|                                                                        | Cash and cash equivalents                                                                                                      |                                            | $    
|                                                                        | Marketable securities                                                                                                          |                                            |      
|                                                                        | Accounts receivable (less allowances of $2,074 in 2001 and $2,647 in 2000)                                                     |                                            |      
|                                                                        | Inventory                                                                                                                      |                                            |      
|                                                                        | Income tax receivable                                                                                                          |                                            |      
|                                                                        | Deferred tax assets                                                                                                            |                                            |      
|                                                                        | Prepaid expenses                                                                                                               |                                            |      
|                                                                        |                                                                                                                                |                                            |      
|                                                                        |                                                                                                                                | Total current assets                       |      
|                                                                        |                                                                                                                                |                                            |      
|Equipment and furniture, less accumulated depreciation and amortization |                                                                                                                                |                                            | 5,136
|Deferred tax assets                                                     |                                                                                                                                |                                            | 6,981
|Intangible assets, less accumulated amortization                        |                                                                                                                                |                                            | 8,944
|Investments                                                             |                                                                                                                                |                                            | 1,451
|Other assets                                                            |                                                                                                                                |                                            | 2,601
|                                                                        |                                                                                                                                |                                            |      
|                                                                        |                                                                                                                                | Total assets                               |      
|                                                                        |                                                                                                                                |                                            |      
|Liabilities and Stockholders' Equity                                    |                                                                                                                               
|Current liabilities:                                                    |                                                                                                                                |                                            |      
|                                                                        | Accounts payable and other accruals                                                                                            |                                            | $    
|                                                                        | Accrued compensation and commissions                                                                                           |                                            |      
|                                                                        | Customer deposits                                                                                                              |                                            |      
|                                                                        | Accrued warranty costs                                                                                                         |                                            |      
|                                                                        | Net liabilities related to discontinued operations                                                                             |                                            |      
|                                                                        |                                                                                                                                |                                            |      
|                                                                        |                                                                                                                                | Total current liabilities                  |      
|Deferred rent                                                           |                                                                                                                                |                                            | 242  
|Commitments and contingencies (note 14)                                 |                                                                                                                                |                                            |      
|Stockholders' equity:                                                   |                                                                                                                                |                                            |      
|                                                                        | Preferred stock, $1.00 par value; authorized 100,000 shares; issued and outstanding, none                                      |                                            |      
|                                                                        | Common stock, $0.01 par value; authorized 40,000,000 shares; issued and outstanding, 12,462,242 in 2001 and 12,366,927 in 2000 |                                            |      
|                                                                        | Additional paid-in capital                                                                                                     |                                            |      
|                                                                        | Accumulated other comprehensive (loss)                                                                                         |                                            |      
|                                                                        | Notes receivable  officers                                                                                                    |                                            |      
|                                                                        | Retained earnings                                                                                                              |                                            |      
|                                                                        | Treasury stock, 255,384 shares in 2001 and 2000, at cost                                                                       |                                            |      
|                                                                        |                                                                                                                                |                                            |      
|                                                                        |                                                                                                                                | Total stockholders' equity                 |      
|                                                                        |                                                                                                                                |                                            |      
|                                                                        |                                                                                                                                | Total liabilities and stockholders' equity |      
|                                                                        |                                                                                                                                |                                            |      

See
accompanying notes to consolidated financial statements.

28

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BROOKTROUT, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)

|                                               |                                                                                                                                   | Years Ended December 31,     |        
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | -------
|
|Revenue                                        |                                                                                                                                   | $                            | 79,774 
|Costs and expenses:                            |                                                                                                                                   |                              |        
|                                               | Cost of product sold                                                                                                              |                              |        
|                                               | Research and development                                                                                                          |                              |        
|                                               | In-process research and development                                                                                               |                              |        
|                                               | Selling, general and administrative                                                                                               |                              |        
|                                               |                                                                                                                                   |                              |        
|                                               |                                                                                                                                   | Total costs and expenses     |        
|                                               |                                                                                                                                   |                              |        
|Operating income (loss)                        |                                                                                                                                   |                              | (9,460 
|Other income (expense):                        |                                                                                                                                   |                              |        
|                                               | Net gain (loss) on investments                                                                                                    |                              |        
|                                               | Equity in loss of affiliates                                                                                                      |                              |        
|                                               | Interest income, net and other                                                                                                    |                              |        
|                                               |                                                                                                                                   |                              |        
|                                               |                                                                                                                                   | Total other income (expense) |        
|                                               |                                                                                                                                   |                              |        
|Income (loss) before income taxes              |                                                                                                                                   |                              | (17,985
|Income tax provision (benefit)                 |                                                                                                                                   |                              | (7,627 
|                                               |                                                                                                                                   |                              |        
|Income (loss) from continuing operations       |                                                                                                                                   |                              | (10,358
|Discontinued operations:                       |                                                                                                                                   |                              |        
|                                               | Loss from discontinued operations, net of income tax benefit of $4,285 in 2000, and $4,413 in 1999                                |                              |        
|                                               | Gain on disposal of discontinued operations, net of income tax expense of $4,049 in 2001 and income tax benefit of $7,400 in 2000 |                              |        
|                                               |                                                                                                                                   |                              |        
|Total gain (loss) from discontinued operations |                                                                                                                                   |                              | 7,041  
|                                               |                                                                                                                                   |                              |        
|Net income (loss)                              |                                                                                                                                   | $                            | (3,317 
|                                               |                                                                                                                                   |                              |        
|Income (loss) per common share:                |                                                                                                                                   |                              |        
|                                               | Continuing operations, basic                                                                                                      |                              | $      
|                                               | Continuing operations, diluted                                                                                                    |                              | $      
|                                               | Net income (loss), basic                                                                                                          |                              | $      
|                                               | Net income (loss), diluted                                                                                                        |                              | $      
|                                               | Shares for basic                                                                                                                  |                              |        
|                                               | Shares for diluted                                                                                                                |                              |        

See
accompanying notes to consolidated financial statements.

29

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BROOKTROUT, INC.  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(in thousands)

|                                                                        |  | Years Ended December 31, |       
|----------------------------------------------------------------------- |  | ------------------------ | ------
|
|Net income (loss)                                                       |  | $                        | (3,317
|Unrealized gains (losses) on marketable securities                      |  |                          | (7    
|Foreign currency translation adjustment                                 |  |                          | 140   
|                                                                        |  |                          |       
|Comprehensive income (loss) before income tax provision (benefit)       |  |                          | (3,184
|Income tax provision (benefit) related to items of comprehensive income |  |                          | (3    
|                                                                        |  |                          |       
|Comprehensive income (loss)                                             |  | $                        | (3,181
|                                                                        |  |                          |       

See
accompanying notes to consolidated financial statements.

30

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BROOKTROUT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(in thousands, except share data)

|                                                      |  | Common Stock |  | Treasury Stock |     |  |         |  |   | Accumulated
Other
Comprehensive
Income (Loss) |   |   |        |  |  
|----------------------------------------------------- |  | ------------ |  | -------------- | --- |  | ------- |  | - | --------------------------------------------- | - | - | ------ |  | -
|
|
|January 1, 1999                                       |  | 10,828,362   |  | $              | 108 |  |        |  | $ |                                              |   | $ | 32,528 |  | $
|Issuance of common stock for cash                     |  | 175,657      |  |                | 2   |  |        |  |   |                                              |   |   | 1,273  |  |  
|Impact of Interspeed stock option exercises           |  |             |  |                |    |  |        |  |   |                                              |   |   | 2,136  |  |  
|Increase resulting from sale of stock by Interspeed   |  |             |  |                |    |  |        |  |   |                                              |   |   | 6,980  |  |  
|Purchase of treasury stock                            |  |             |  |                |    |  | 247,582 |  |   | (3,447                                        | ) |   |       |  |  
|Tax benefit of stock options                          |  |             |  |                |    |  |        |  |   |                                              |   |   | 74     |  |  
|Unrealized gains on marketable securities, net of tax |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Currency translation adjustment                       |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Net income                                            |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|                                                      |  |              |  |                |     |  |         |  |   |                                               |   |   |        |  |  
|December 31, 1999                                     |  | 11,004,019   |  |                | 110 |  | 247,582 |  |   | (3,447                                        | ) |   | 42,991 |  |  
|Issuance of common stock for cash                     |  | 1,362,908    |  |                | 14  |  |        |  |   |                                              |   |   | 16,899 |  |  
|Impact of Interspeed stock option exercises           |  |             |  |                |    |  |        |  |   |                                              |   |   | 1,580  |  |  
|Notes receivable  officers                           |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Purchase of treasury stock                            |  |             |  |                |    |  | 7,802   |  |   | (313                                          | ) |   |       |  |  
|Tax benefit of stock options                          |  |             |  |                |    |  |        |  |   |                                              |   |   | 1,878  |  |  
|Unrealized gains on marketable securities, net of tax |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Currency translation adjustment                       |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Net loss                                              |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|                                                      |  |              |  |                |     |  |         |  |   |                                               |   |   |        |  |  
|December 31, 2000                                     |  | 12,366,927   |  |                | 124 |  | 255,384 |  |   | (3,760                                        | ) |   | 63,348 |  |  
|Issuance of common stock for cash                     |  | 95,315       |  |                | 1   |  |        |  |   |                                              |   |   | 493    |  |  
|Unrealized loss on marketable securities, net of tax  |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Currency translation adjustment                       |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Net loss                                              |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|                                                      |  |              |  |                |     |  |         |  |   |                                               |   |   |        |  |  
|December 31, 2001                                     |  | 12,462,242   |  | $              | 125 |  | 255,384 |  | $ | (3,760                                        | ) | $ | 63,841 |  | $
|                                                      |  |              |  |                |     |  |         |  |   |                                               |   |   |        |  |  

See accompanying notes to consolidated financial statements.

31

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BROOKTROUT, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

|                                                 |                                                                                      | Years Ended December 31, |                                                   
|------------------------------------------------ | ------------------------------------------------------------------------------------ | ------------------------ | --------------------------------------------------
|
|Cash flows from operating activities:            |                                                                                      |                          |                                                   
|                                                 | Net income (loss)                                                                    |                          | $                                                 
|                                                 | Adjustments to reconcile net income (loss) to cash provided by operating activities: |                          |                                                   
|                                                 |                                                                                      |                          | (Gain) loss on disposal of discontinued operations
|                                                 |                                                                                      |                          | Depreciation and amortization                     
|                                                 |                                                                                      |                          | Loss on disposal of equipment and furniture       
|                                                 |                                                                                      |                          | Equity in loss of affiliates                      
|                                                 |                                                                                      |                          | Tax benefit of stock options                      
|                                                 |                                                                                      |                          | Deferred income taxes                             
|                                                 |                                                                                      |                          | Minority interest                                 
|                                                 |                                                                                      |                          | Non-cash compensation expense                     
|                                                 |                                                                                      |                          | Net (gain) loss on investments                    
|                                                 | Increase (decrease) in cash from changes in:                                         |                          |                                                   
|                                                 |                                                                                      |                          | Accounts receivable                               
|                                                 |                                                                                      |                          | Inventory                                         
|                                                 |                                                                                      |                          | Prepaid expenses and other current assets         
|                                                 |                                                                                      |                          | Current liabilities                               
|                                                 |                                                                                      |                          | Other working capital                             
|                                                 |                                                                                      |                          |                                                   
|Cash provided by (used in) operating activities  |                                                                                      |                          | 11,346                                            
|Cash flows from investing activities:            |                                                                                      |                          |                                                   
|                                                 | Expenditures for equipment and furniture                                             |                          |                                                   
|                                                 | Acquired software and other investing                                                |                          |                                                   
|                                                 | Proceeds from the sale of a business segment                                         |                          |                                                   
|                                                 | Sales and maturities of marketable securities                                        |                          |                                                   
|                                                 | Purchases of marketable securities                                                   |                          |                                                   
|                                                 | Purchases of investments                                                             |                          |                                                   
|                                                 | Brooktrout's sale of Interspeed stock, net of related expenses                       |                          |                                                   
|                                                 |                                                                                      |                          |                                                   
|Cash provided by (used in) investing activities  |                                                                                      |                          | (8,916                                            
|Cash flows from financing activities:            |                                                                                      |                          |                                                   
|                                                 | Proceeds from the sale of common stock                                               |                          |                                                   
|                                                 | Proceeds from exercise of Interspeed options                                         |                          |                                                   
|                                                 | Purchase of treasury stock                                                           |                          |                                                   
|                                                 | Proceeds from Interspeed's sale of stock, net of offering expenses                   |                          |                                                   
|                                                 |                                                                                      |                          |                                                   
|Cash provided by financing activities            |                                                                                      |                          | 494                                               
|                                                 |                                                                                      |                          |                                                   
|Increase (decrease) in cash and cash equivalents |                                                                                      |                          | 2,924                                             
|Cash and cash equivalents, beginning of year     |                                                                                      |                          | 23,294                                            
|                                                 |                                                                                      |                          |                                                   
|Cash and cash equivalents, end of year           |                                                                                      | $                        | 26,218                                            
|                                                 |                                                                                      |                          |                                                   

See
accompanying notes to consolidated financial statements.

32

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BROOKTROUT, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share data)

1. Description of Business and Summary of Significant Accounting Policies and Practices

(a) Description of Business

Brooktrout, Inc. (the "Company" or "Brooktrout") develops, manufactures and sells communications hardware and software products that enable the development
of communications applications and systems in five targeted markets, including enhanced services platforms, wireless infrastructure, voice over packet gateways and switches, unified communications,
and contact centers. The Company sells its products to system vendors, service providers, enterprise customers, original equipment manufacturers ("OEMs"), and value-added resellers ("VARs"), both
domestically and internationally, through a direct sales force and a two-tiered distribution system. Prior to February 8, 2001, the Company was organized and reported the results of
its operations in the following three business segments: Brooktrout Technology, Inc. ("Brooktrout Technology"), Brooktrout Software, Inc. ("Brooktrout Software"), and
Interspeed, Inc. ("Interspeed"). These segments were differentiated based upon the products provided to the marketplace, the customers served, and the distribution channels utilized. Two of
these segments have been discontinued and are classified as discontinued operations for the years presented in these consolidated financial statements (see note 2). As a result of the
discontinuance of the Brooktrout Software and Interspeed segments, the Company's operations consist of one reportable segment, Brooktrout Technology.

(b) Use of Estimates

Accounting policies, methods and estimates are an integral part of the consolidated financial statements and are based upon management's current judgments. These
policies, methods, and estimates 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 revenue and expenses during the reporting periods. The judgments made by management are based on knowledge and experience with regard to past and current events and assumptions about future
events that are believed to be reasonable under the circumstances. On an on-going basis, the Company's management evaluates its estimates and assumptions and adjusts them if expectations
concerning events, including future events, affecting them differ markedly from management's current judgments.

(c) Principles of Consolidation

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

(d) Discontinued Operations

The consolidated statement of operations for the year ended December 31, 1999 has been reclassified to separately report the results of discontinued
operations and the results of continuing operations. Disclosures included herein pertain to the Company's continuing operations unless noted otherwise.

(e) Cash and Cash Equivalents

Cash equivalents include highly liquid securities with remaining maturities of three months or less at the time of purchase.

33

---

(f) Marketable Securities

Marketable securities at December 31, 2001 consist of U.S. government notes and bonds, and corporate debt securities. The Company classifies its debt and
equity securities as available-for-sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115. Available-for-sale
securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are
reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a
specific identification basis.

A
decline in the market value of an available-for-sale security below cost, which is deemed to be other than temporary, would result in a reduction in carrying
amount to fair value. The impairment would be charged to earnings and a new cost basis for the security would be established. There have been no impairments of
available-for-sale securities recorded in the statements of operations for any of the periods presented. Dividend and interest income are recognized when earned.

(g) Revenue Recognition

Revenue from product sales is recognized upon shipment provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has
occurred, and collection is considered probable. The Company records a provision for estimated sales returns and allowances on product sales in the same period as the related revenue is recorded.
These estimates are based on historical sales returns, analysis of credit memo data and other known factors. The Company provides for estimated costs of warranty repairs at the time of sale of the
related product. Revenue from sales to distributors is recognized on a "sell-through" basis, that is, when the distributor reports to the Company that resale of the product has occurred.

(h) Concentration of Credit Risk

The Company sells its products to various customers in the high technology industry. The Company generally requires no collateral; however, to reduce credit risk,
the Company performs ongoing credit evaluations of its customers. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments. At December 31, 2001 and 2000, 13% and 9%, respectively, of the Company's accounts receivable were from one customer. A different customer accounted for 37% of the Company's
accounts receivable at December 31, 2000 (see note 13).

(i) Inventory

Inventory is carried at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. The
Company reduces the value of its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions.

(j) Equipment and Furniture

Purchased equipment and furniture is recorded at cost. Depreciation and amortization is provided using the straight-line method over the estimated
useful lives of the related assets (three or five years).

34

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(k) Investments

Investments consist of equity securities of other high technology companies. Investments in which the Company owns between 20% and 50% of the outstanding voting
stock or has the ability to otherwise exercise significant influence, are accounted for under the equity method. Investments in privately held companies, in which the Company owns less than 20% of the
outstanding voting stock and cannot otherwise exercise significant influence, are accounted for under the cost method. Investments accounted for under the cost method are recorded at cost and the
Company regularly reviews the financial condition of the investee to determine if there has been an impairment of the carrying value. In 2001, the Company recognized an impairment of one of its
investments (see note 5).

The
Company has incorporated the guidance from Securities and Exchange Commission Staff Accounting Bulletin No. 51 ("SAB 51"). In accordance with SAB 51, the Company records gains
as a result of equity transactions by its subsidiaries in the consolidated statements of operations, unless any such transactions are required to be credited directly to equity.

(l) Intangible Assets

Intangible assets include acquired technology, customer base, trademarks, in-place workforce, and goodwill associated with purchased business
combinations. Acquired technology is being amortized on a straight-line basis over five to 10 years, while all other intangibles are being amortized over periods of three to five
years. In 2001, the Company revised the useful life of its in-place workforce intangible
asset from five to three years, resulting in additional amortization expense of $310. Accumulated amortization at December 31, 2001 and 2000 was $5,882 and $3,727, respectively.

Intangible
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

(m) Research and Development Costs

Research and development costs are expensed as incurred. The Company incurred no software development costs that qualified for capitalization in any of the
periods presented.

(n) Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. These assets and liabilities are measured using the enacted rates and laws that are
expected to be in effect when the differences reverse.

(o) Fair Value of Financial Instruments

Financial instruments held or used by the Company consist of cash, marketable securities, accounts receivable, accounts payable and letters of credit issued under
the Company's line of credit (see note 8). Marketable securities are carried at fair value. Management believes that carrying value approximates fair value for all other financial instruments.

35

---

(p) Derivative Instruments and Hedging Activity

The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, to account and report
activity associated with derivative instruments and hedging. The Company has a limited amount of sales to customers, and expenses of its sales and support offices in Belgium and the United Kingdom, in
foreign currencies. The Company uses forward foreign currency contracts to manage and reduce currency risk associated with these transactions.
Forward foreign currency contracts are not used for speculative or trading purposes. The fair value of these instruments is classified as other current assets or other current liabilities as
appropriate. Gains and losses on the changes in the fair values of these instruments are classified as other income (expense) in the consolidated statements of operations. The value of such
derivatives was zero at December 31, 2001.

(q) Stock-Based Compensation

The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, in accounting for stock option awards granted to employees. The Company accounts for stock options and awards to non-employees in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," and EITF 96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."

(r) Earnings Per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding during each year. Diluted earnings per common share is
calculated by dividing net income by the sum of the weighted average number of common shares outstanding, plus all additional common shares that would have been outstanding if potentially dilutive
securities had been issued using the treasury method.

For
the years ended December 31, 2001 and 2000, the Company is utilizing income (loss) from continuing operations as the "control number" for purposes of determining whether
potential common shares are dilutive for all per share calculations in accordance with SFAS 128. As a result, net loss per share in 2000 includes dilutive potential common shares in the
calculation, and net loss per share in 2001 excludes potential common shares in the calculation.

A
reconciliation of weighted average shares used for the basic and diluted computations is as follows:

|                                    |  | Years Ended December 31,
|----------------------------------- |  | ------------------------
|
|Weighted average shares for basic   |  | 12,150,000              
|Dilutive effect of stock options    |  |                        
|                                    |  |                         
|Weighted average shares for diluted |  | 12,150,000              
|                                    |  |                         

Stock
options to purchase 3,036,067 shares, 1,445,920 shares and 2,359,440 were not included in the computation of diluted earnings per share in 2001, 2000, 1999, respectively. These
options are excluded from the calculation as to include them would have been antidilutive.

36

---

(s) Foreign Currency Translation

Gains and losses resulting from foreign currency transactions, which are denominated in a currency other than the entity's functional currency, are included in
the consolidated statements of operations as interest income, net and other. Gains and losses related to foreign currency transactions have not been material. Balance sheet accounts of the Company's
foreign operations are translated from foreign currencies into U.S. dollars at period-end exchange rates while income and expenses are translated at average exchange rates during the
period with any gains or losses recorded as a component of accumulated other comprehensive loss in stockholders' equity.

(t) Reclassifications

Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform to the 2001 presentation.

(u) Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business combination. For purchase method business combinations completed before July 1, 2001, any reclassifications
between intangible assets and goodwill resulting from the implementation of SFAS No. 141 will take place as of the date that SFAS No. 142 is initially applied in its entirety. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent
to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but
will rather be tested at least annually for impairment. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. SFAS
No.142 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted for companies with fiscal years beginning after March 15, 2001 if their first
quarter financial statements have not previously been issued. The Company has evaluated the provisions of SFAS No. 141 and SFAS No. 142 and has determined that adoption of these
standards will have no material effect on its consolidated financial statements.

In
August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the
disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has evaluated the provisions of SFAS No. 144 and has
determined that adoption of the standard will have no material effect on its consolidated financial statements.

37

---

2. Discontinued Operations

On February 8, 2001 (the "measurement date"), the Company's Board of Directors adopted formal plans to discontinue its Brooktrout Software and Interspeed
segments. Accordingly, the accompanying 1999 consolidated statement of operations has been reclassified to present these segments as discontinued operations.

At
the time the formal plans were adopted, the Company estimated the cost to discontinue these businesses and accounted for these costs in the financial statements for the year ended
December 31, 2000 in accordance with APB Opinion No. 30 and Emerging Issues Task Force No. 95-18.

Brooktrout Software, Inc.The Company's original plan of disposition was to cease new product development, satisfy
customer commitments and contractual obligations, and wind down operations. The estimated net loss on disposal included the write-off of certain tangible assets, employee severance costs,
and recognition of other disposal costs totaling $2,900, and also included estimated operating losses from the measurement date to the anticipated disposal date of $1,686 (net of applicable income
taxes of $1,766). The Company expected to complete the plan of disposal within 12 months of the measurement date.

On
April 16, 2001, the Company sold Brooktrout Software to Sonexis, Inc. ("Sonexis"), formerly known as eYak, Inc., for approximately $4,927 in cash and 3,374,054
shares of Sonexis preferred stock (the "Sonexis Shares"), which represented approximately 6 percent of Sonexis's aggregate outstanding shares at the date of the transaction. The Sonexis Shares
were independently valued at $5,364 ($1.59 per share) and have been classified as a cost basis, long-term investment. The sale resulted in a net gain, which included a gain of $5,391 net
of taxes relating to the excess of the consideration over the book value of Brooktrout Software's net assets, and a gain net of taxes of $1,650 for the reversal of accruals for estimated costs charged
in 2000, which will no longer be incurred as a direct result of the sale. The sale of Brooktrout Software resulted in a net gain on disposal of discontinued operations during the 12 months
ended December 31, 2001 of $7,041, net of taxes.

At
December 31, 2000, assets of Brooktrout Software consisted of accounts receivable, inventory, and equipment and furniture totaling approximately $2,494; and liabilities
totaling $6,863, including the estimated operating losses to the anticipated disposal date and other anticipated disposal costs. The net liabilities related to Brooktrout Software as of
December 31, 2000 have been classified as part of "Net liabilities related to discontinued operations" on the consolidated balance sheets. As of December 31, 2001, "Net liabilities
related to discontinued operations" consisted of $744 for accruals of expenses related to the sale of Brooktrout Software.

As
a result of the Company's policy to regularly review the financial condition of companies in which it maintains cost method investments, the Sonexis Shares were revalued at $1,451 as
of December 31, 2001, or $0.43 per share. The Company considers this decline in fair value to be other than temporary in nature, and accordingly, the Company has recognized a charge of $3,914
in the statement of operations for the year ended December 31, 2001. See note 5.



On March 12, 2002, the Company and Sonexis reached an agreement resolving various post-closing adjustments and indemnification claims of both
parties that had been asserted in connection with the
sale of Brooktrout Software. As part of this agreement, the Company has agreed to exchange the Sonexis Shares for an immediate and final resolution and release of substantially all claims related to

38

---

the sale. The Company believes that the after-tax effect of this will be a one-time non-cash charge to discontinued operations of no greater than $500 in the first quarter of 2002.

Interspeed, Inc.In January 2001, the Board of Directors of Interspeed announced that it was curtailing
operations and liquidating the remaining assets for the benefit of creditors. The 2000 loss from discontinued operations includes the Company's share of operating losses up to the amount of its
investment, and its commitment under a $2,500 line of credit.

The
estimated net loss on disposal included amounts the Company expected to incur for legal costs and rent payments related to the Interspeed facility lease, net of a tax benefit of
$5,633. Liabilities totaling $1,655, including the remaining commitment of approximately $800 under the line of credit as of December 31, 2000, have been classified as part of "Net liabilities
related to discontinued operations" on the consolidated balance sheets. As of December 31, 2001, "Net liabilities related to discontinued operations" consists of $246 of expenses associated
with the Interspeed business.



|                                                  |                                          | Years Ended December 31, |      
|------------------------------------------------- | ---------------------------------------- | ------------------------ | -----
|
|Revenue:                                          |                                          |                          |      
|                                                  | Brooktrout Software                      |                          | $    
|                                                  | Interspeed                               |                          |      
|                                                  |                                          |                          |      
|Total revenue                                     |                                          | $                        |     
|                                                  |                                          |                          |      
|Loss from discontinued operations:                |                                          |                          |      
|                                                  | Brooktrout Software, net of income taxes |                          | $    
|                                                  | Interspeed, net of income taxes          |                          |      
|                                                  |                                          |                          |      
|Total loss from discontinued operations           |                                          | $                        |     
|                                                  |                                          |                          |      
|Gain on disposal of discontinued operations:      |                                          |                          |      
|                                                  | Brooktrout Software, net of income taxes |                          | $    
|                                                  | Interspeed, net of income taxes          |                          |      
|                                                  |                                          |                          |      
|Total gain on disposal of discontinued operations |                                          | $                        | 7,041
|                                                  |                                          |                          |      

Basic
and diluted per share amounts for discontinued operations are as follows:

|                                                                             |         | Years Ended December 31, |  
|---------------------------------------------------------------------------- | ------- | ------------------------ | -
|
|Discontinued operations: Loss from discontinued operations
per common share: |         |                          |  
|                                                                             | Basic   |                          | $
|                                                                             | Diluted |                          | $
|Gain on disposal per common share:                                           |         |                          |  
|                                                                             | Basic   |                          | $
|                                                                             | Diluted |                          | $

39

---

The
following is a summary of selected assets and liabilities related to discontinued operations that are included in the Company's consolidated balance sheets. The balances have been
aggregated and reported as "Net liabilities related to discontinued operations."

December 31,2001

2000Accounts receivable, net

$


$
1,050Inventory





930Total assets





2,494Total liabilities


990


8,518Net assets (liabilities)


(990
)

(6,024
)


On
September 24, 1999, Interspeed sold 2,000,000 shares of its common stock in an initial public offering at a price of $12.00 per share pursuant to a registration statement on
Form S-1, as amended, under the Securities Act of 1933, as amended (the "Offering"). In the Offering, the Company sold 1,500,000 shares of Interspeed common stock that it owned. Due
to the sale of the 2,000,000 shares of stock by Interspeed, the Company recorded additional paid-in capital of approximately $7,000, net of deferred tax, reflecting the increase in its
investment in Interspeed, in accordance with SAB 51. In October 1999, the Company sold an additional 425,000 shares of Interspeed common stock at a price of $12.00 per share pursuant to the
underwriters' over allotment option. After these transactions, the Company owned approximately 6,100,000 shares of Interspeed's outstanding common stock, or approximately 57% of the common shares
outstanding as of December 31, 1999. These transactions resulted in a pre-tax gain of $19,900, net of offering related costs, in 1999. For the years ended
December 31, 1999, and 2000, the Company recorded the results of Interspeed's operations using the consolidation method of accounting. The Company's percentage ownership of Interspeed was
approximately 57% as of December 31, 2000.

4. Marketable Securities

At December 31, 2001, marketable securities consist of $4,763 in U.S. government notes and bonds, and $7,144 of corporate bonds. Management of the Company
has classified all of these securities as available-for-sale. There were no material realized or unrealized gains recognized during the year ended December 31, 2001.
During the year ended December 31, 1999, the Company realized a gain on the sale of available-for-sale securities of $2,500.

5. Investments

Investments consist of equity securities of high technology companies accounted for under both the equity method of accounting and the cost method of accounting.
At December 31, 2001, the Company has one investment accounted for under the equity method, Pelago Networks, Inc. ("Pelago"), and one investment accounted for using the cost method,
Sonexis.



During the first quarter of 2000, the Company owned 100% of Pelago and accounted for its investment under the consolidation method. As a result of the subsequent
issuance of Pelago shares in an equity financing on June 29, 2000, the Company's ownership percentage in Pelago was reduced to 28%. In 2001, the Company's Board of Directors authorized and the
Company participated in an equity

40

---

financing in Pelago, purchasing a total of 3,050,000 Series B preferred shares for $3,050. The Company's percentage ownership did not change as a result of these transactions.

The
Company's investment in Pelago has been written down to zero as of December 31, 2001 as the Company has recognized its share of Pelago's losses. The Company has no further
funding commitments to Pelago and, accordingly, has ceased recognizing the losses of Pelago. In 2001 the Company recognized equity in the losses of Pelago of $3,869.

Summarized
unaudited financial information of Pelago is as follows.

December 31,2001

2000Income statement information:Revenue

$


$
Gross profit





Net loss


(17,491
)

(8,124
)Financial position information:Current assets

$
2,903

$
6,922Non current assets


4,035


3,665Current liabilities


2,927


1,880Non current liabilities


2,764





Subsequent
to December 31, 2001, Pelago closed on an additional round of equity financing of its Series B preferred shares. As a result of this financing, in which the
Company did not participate, the Company's ownership percentage will decrease from 28% to 15%.

During
2001, the Company sold, for nominal consideration, its equity interest in Telchemy, Incorporated ("Telchemy"), an investment also previously accounted for under the equity method.
Prior to the Company's sale of its interest in Telchemy, this investment had been written down to zero through the recognition of the Company's share of Telchemy's losses. In 2001 the Company
recognized equity in the losses of Telchemy of $841.



As part of the proceeds from the sale of Brooktrout Software, the Company received 3,374,054 preferred shares in Sonexis, Inc. (the "Sonexis Shares"). At
the time of the sale, the Company had the Sonexis Shares independently valued at $5,364 or $1.59 per share. Subsequently, as a result of the Company's policy to regularly review the financial
condition of companies in which it maintains cost method investments, the Sonexis Shares were revalued at $1,451 as of December 31, 2001, or $0.43 per share. The Company considers this decline
in fair value to be other than temporary in nature, and accordingly, the Company has recognized a charge of $3,914 in the statement of operations for the year ended December 31, 2001. See
note 2.

The
Company sold a second cost method investment during 2001, resulting in a realized loss of $1,009.

41

---



6. Inventory

Inventory is summarized as follows:

December 31,2001

2000Raw materials

$
3,763

$
3,008Work in process


621


1,576Finished goods


7,570


15,025Total

$
11,954

$
19,609


7. Equipment and Furniture

Equipment and furniture is summarized as follows:

December 31,2001

2000Computer equipment

$
7,987

$
9,172Furniture and office equipment


8,805


8,933Total equipment and furniture


16,792


18,105Less accumulated depreciation and amortization


(11,656
)

(10,531
)Total equipment and furniture, net

$
5,136

$
7,574


8. Bank Line of Credit

In 2001, the Company renewed its working capital line of credit. Under the renewed line of credit, the Company may borrow up to $5,000 on a secured basis, subject
to compliance with certain covenants. Any amounts borrowed under the line of credit bear interest at the lender's prime rate. The line is subject to annual renewal and expires on June 30, 2002.
As of December 31, 2001, outstanding letters of credit issued against the Company's existing line totaled $1,000 representing the collateral required for certain lease obligations. There have
been no borrowings under the line during the past three years.

42

---

9. Income Taxes

The provision (benefit) for income taxes on continuing operations is as follows:

|                                                           |  | Years Ended December 31, |       
|---------------------------------------------------------- |  | ------------------------ | ------
|
|Federalcurrent                                            |  | $                        | (3,524
|Statecurrent                                              |  |                          | 113   
|Foreigncurrent                                            |  |                          | 84    
|Federaldeferred                                           |  |                          | (2,888
|Statedeferred                                             |  |                          | (1,412
|Foreigndeferred                                           |  |                          |      
|Tax benefit of disqualifying dispositions of stock options |  |                          |      
|                                                           |  |                          |       
|Total                                                      |  | $                        | (7,627
|                                                           |  |                          |       

A
reconciliation of the statutory federal rate to the effective tax rate on continuing operations is as follows:

|                                                 |  | Years Ended December 31,
|------------------------------------------------ |  | ------------------------
|
|Statutory tax rate                               |  | (35)%                   
|State taxes, net of federal benefit              |  | (5)                     
|Research and development credits                 |  | (3)                     
|Equity in loss of affiliates, not tax deductible |  |                        
|Foreign sales corporation                        |  |                        
|All other                                        |  | 1                       
|                                                 |  |                         
|Effective tax rate                               |  | (42)%                   
|                                                 |  |                         

43

---

The
tax effects of significant items comprising the Company's net deferred tax position as of December 31, 2001 and 2000 are as follows:

|                         |                                                                               | December 31,
|------------------------ | ----------------------------------------------------------------------------- | ------------
|
|Deferred Taxes:          |                                                                               |             
|Current:                 |                                                                               |             
|                         | Reserves and accruals not currently deductible for tax purposes               |             
|                         | Investments, tax basis in excess of book basis                                |             
|                         | Tax benefit from state net operating losses                                   |             
|                         | Other                                                                         |             
|                         | Loss on disposal of a business segment                                        |             
|                         |                                                                               |             
|Current tax assets       |                                                                               | $           
|                         |                                                                               |             
|Long-term assets:        |                                                                               |             
|                         | Purchased research and development, capitalized for tax but expensed for book |             
|                         | Intangible assets, amortization methods                                       |             
|                         | Equipment and furniture, depreciation methods                                 |             
|                         | Other                                                                         |             
|                         |                                                                               |             
|Net long-term tax assets |                                                                               | $           
|                         |                                                                               |             

The
Company believes that it is more likely than not that future operations will generate sufficient taxable income to realize the deferred tax assets. The majority of the deferred tax
assets associated with state net operating losses will expire in 2006. Current year federal income tax net operating losses have been carried back two years, resulting in a refund of $4,635 that the
Company expects to receive in 2002. The Company paid cash for income taxes of $455, $8,255, and $12,603 in 2001, 2000, and 1999, respectively.

10. Stockholders' Equity

Stock Option PlansThe Company has five stock option plans, which provide for the grant of options to
purchase up to 7,714,000 shares of common stock: the 1984 Stock Incentive Plan (the "1984 Plan"), the 1991 Executive Stock Incentive Plan (the "Executive Plan"), the Amended and Restated 1992 Stock
Incentive Plan (the "1992 Plan"), the 1999 Stock Incentive Plan, as amended (the "1999 Plan"), and the 2001 Stock Option and Incentive Plan (the "2001 Plan"). No further options are being granted
under the 1984 Plan and the Executive Plan. Exercise prices are at fair value at the date of grant, in the case of incentive stock options, or at the discretion of the Board of Directors in the case
of nonqualified options. Options generally vest over five years for grants prior to June 2000 and over four years for grants made after June 2000. In some instances, vesting accelerates
upon the completion of certain defined milestones set by the Compensation Committee at the date of grant. There have been no option grants at exercise prices different from fair value at the date of
grant under these plans.

44

---

The
following is a summary of stock option activity under all option plans:

|                                 |           | Number of Shares |            | Weighted Average
Exercise Price
|-------------------------------- | --------- | ---------------- | ---------- | -------------------------------
|Outstanding at January 1, 1999   |           | 2,491,304        |            | $                              
|                                 | Granted   |                  | 916,925    |                                
|                                 | Exercised |                  | (126,737   | )                              
|                                 | Expired   |                  | (222,052   | )                              
|                                 |           |                  |            |                                
|Outstanding at December 31, 1999 |           | 3,059,440        |            |                                
|                                 | Granted   |                  | 1,009,425  |                                
|                                 | Exercised |                  | (1,312,254 | )                              
|                                 | Expired   |                  | (453,691   | )                              
|                                 |           |                  |            |                                
|Outstanding at December 31, 2000 |           | 2,302,920        |            |                                
|                                 | Granted   |                  | 1,290,811  |                                
|                                 | Exercised |                  | (19,450    | )                              
|                                 | Expired   |                  | (538,214   | )                              
|                                 |           |                  |            |                                
|Outstanding at December 31, 2001 |           | 3,036,067        |            | $                              
|                                 |           |                  |            |                                

The
following table sets forth information regarding options outstanding at December 31, 2001:

|Range of
Exercise
Prices |  | Number of
Shares |  | Weighted
Average
Exercise
Price |       | Weighted
Average
Remaining
Life (years) |      | Number
Currently
Exercisable |           | Weighted
Average
Exercise
Price for
Currently
Exercisable
|------------------------ |  | ---------------- |  | ------------------------------- | ----- | --------------------------------------- | ---- | ---------------------------- | --------- | ---------------------------------------------------------
|$  3.15  $  3.15        |  | 380,536          |  | $                               | 3.15  |                                         | 9.77 |                              | 23,699    |                                                          
|3.52     6.70           |  | 383,326          |  |                                 | 5.88  |                                         | 6.49 |                              | 177,052   |                                                          
|6.73     6.94           |  | 528,146          |  |                                 | 6.92  |                                         | 8.89 |                              | 140,443   |                                                          
|6.95   11.81            |  | 384,467          |  |                                 | 10.26 |                                         | 7.56 |                              | 220,730   |                                                          
|11.88   14.94           |  | 354,220          |  |                                 | 13.94 |                                         | 7.07 |                              | 176,811   |                                                          
|15.13   20.25           |  | 228,273          |  |                                 | 17.32 |                                         | 7.39 |                              | 112,237   |                                                          
|20.63   20.63           |  | 522,702          |  |                                 | 20.63 |                                         | 8.47 |                              | 229,680   |                                                          
|21.00   44.63           |  | 254,397          |  |                                 | 27.61 |                                         | 7.42 |                              | 133,701   |                                                          
|                         |  |                  |  |                                 |       |                                         |      |                              |           |                                                          
|$  3.15  $44.63         |  | 3,036,067        |  | $                               | 12.44 |                                         | 8.01 |                              | 1,214,353 |                                                          
|                         |  |                  |  |                                 |       |                                         |      |                              |           |                                                          

At
December 31, 2000 and 1999, options to purchase 779,397 and 1,675,807 shares, respectively, were exercisable.

As
described in note 1, the Company uses the intrinsic value method to measure compensation expense associated with grants of stock options or awards to employees. Had the Company
used the

45

---

fair value method to measure compensation, reported net income (loss) and earnings per share would have been as follows:

Years Ended December 31,2001

2000

1999Income (loss) from continuing operations

$
(17,149
)
$
7,145

$
23,779Basic income (loss) per common share


(1.41
)

0.60


2.19Diluted income (loss) per common share


(1.41
)

0.56


2.05


For
purposes of determining the disclosure required by SFAS No. 123, the fair value of options on their grant date is measured using the Black/Scholes option-pricing model. Key
assumptions used to apply this pricing model were as follows:

Years Ended December 31,2001

2000

1999Risk-free interest rate

4.8
%
4.9
%
6.2
%Expected life of option grants (years)

4.4

4.7

5.0Expected volatility of underlying stock

95
%
121
%
76
%


The
estimated weighted average fair value of option grants made during 2001, 2000, and 1999 was $4.05, $17.80, and $9.03, respectively, per option.

Stock Purchase PlanThe Company's Second Amended and Restated 1992 Stock Purchase Plan (the "Purchase Plan") provides for
sales to participating employees of up to an aggregate of 487,500 shares of common stock, at prices that are not less than 85% of the fair market value on the beginning or ending date of the six month
offering period, whichever is lower. Shares of common stock totaling 280,927 had been issued to employees under the Purchase Plan through December 31, 2001. The Company has issued 75,866,
50,354, and 48,838 shares of common stock in connection with the Purchase Plan in 2001, 2000, and 1999, respectively.

The
estimated weighted average fair value per share of grants made under the Purchase Plan during 2001, 2000, and 1999, was $2.39, $5.55, and $4.54, respectively, computed using the
assumptions described above, with an expected life of 6 months for the option feature present in the Purchase Plan.

Reserved SharesThe Company has reserved 5,593,196 shares of common stock for issuance upon the exercise of stock options and
the purchase of stock under the Purchase Plan.

Notes ReceivableOfficersOn March 3, 2000, the Board of Directors approved a program under which executive
officers of the Company financed the exercise price of stock options totaling $11,836 in exchange for non-recourse promissory notes. The notes do not bear interest, become due and payable
in full no later than the expiration of the remaining term of the option, and provide for automatic
repayment upon the sale of the common stock that is the subject of a note or within 90 days following the termination of the executive officer's employment with the Company.

Treasury StockOn October 1, 1999, the Company's Board of Directors approved the purchase of up to 1,000,000 shares of
the Company's common stock for a twelve-month period. Through December 31, 1999, the Company repurchased approximately 248,000 shares for an aggregate cash purchase price of approximately
$3,447. The Company's repurchase authorization under this program expired on September 30, 2000.

46

---

11. Purchase of In-Process Research and Development

During 2000, the Company recorded an in-process research and development charge of $2,550 for the purchase of rights to certain in-process
technology that, upon completion, was intended to result in a single cPCI circuit board that would provide an STS-1 interface. At the time of the purchase the STS-1 project had
not yet reached technological feasibility and successful development of this technology was uncertain. At the acquisition date the technology acquired had no alternative future use. During 2001, the
Company ceased development of the product for which this technology was originally intended. Expenses associated with this project, through the date the Company ceased development, were not a
significant portion of the Company's overall research and development expenses in either 2001 or 2000.

12. Retirement Plans

The Company has a 401(k) retirement plan available to qualified employees. Employees are allowed to contribute up to 18% of their salary to the plan, subject to
current regulatory maximums. The Company makes discretionary contributions to the plan equal to the lesser of (i) 25% of the participant's contribution or (ii) 25% of 6% of a
participant's salary. The Company contributed $277, $346, and $314 to this plan in 2001, 2000, and 1999, respectively.

13. Segment Reporting

Prior to its February 8, 2001 decision to discontinue its Brooktrout Software and Interspeed segments, the Company was organized and reported the results
of its operations in the following three business segments: Brooktrout Technology, Brooktrout Software and Interspeed. As a result of its decision to discontinue Brooktrout Software and Interspeed,
the Company's continuing operations represent one reportable segment. The remaining segment, Brooktrout Technology, provides enabling technologies
that allow customers to deliver voice, fax and data solutions for the electronic communications market. See note 2.

Product SalesBrooktrout Technology's products are sold for applications in the New Network and for applications
in Today's Network. Today's Network involves core technologies and platforms that are primarily used in business premise products such as fax, LAN fax, and voice mail. The New Network involves
applications that allow data, voice and fax information to be distributed using packet-based data networks, such as the Internet, for portions of the transmission and also allows information to be
distributed using the traditional circuit-switched telephone network. The Company began tracking sales information by these two categories in 2000. For the year ended December 31, 2001, sales
of products for use in the New Network accounted for approximately 41% of total revenue as compared to 60% of total revenue in the prior year.

Major CustomersOne customer accounted for approximately 12%, 7%, and 8% of revenue for the years ended December 31,
2001, 2000, and 1999, respectively. A different customer accounted for 22% and 14% of revenue for the years ended December 31, 2000, and 1999, respectively; this customer represented
approximately 8% of revenue for the year ended December 31, 2001.

International SalesInternational sales, principally exports from the United States, accounted for approximately 20%, 16%, and
23% of revenue for the years ended December 31, 2001, 2000, and 1999, respectively.

47

---

14. Commitments and Contingencies

LitigationIn October 2000, several shareholder class action complaints were filed in the
United States District Court for the District of Massachusetts (the "Court") by certain shareholders of Interspeed and of the Company. Certain of the complaints named, among others, the Company and
certain of its current directors and certain current and former officers as defendants. The lawsuits were filed after Interspeed's October 6, 2000 announcement that it would be restating its
unaudited financial results for certain prior quarters of its fiscal year 2000. The complaints included allegations that the Company or certain of its officers and directors participated in and
approved the issuance of the financial statements of Interspeed, that defendants are "controlling persons" of Interspeed, and that the defendants made false or misleading statements regarding the
Company's own consolidated financial results. Following settlement discussions among the parties, (i) complaints filed by shareholders of the Company were voluntarily dismissed in
April 2001 and (ii) the Court entered final approval of the settlement of the litigation brought by shareholders of Interspeed in July 2001. The dismissal and settlement of these
actions did not have a material adverse effect on the Company's financial position or results of operations.

The
Company is a party to a number of legal actions that have arisen in the normal course of business. The Company, taking into account advice of counsel, does not believe the eventual
outcome of these matters will have a material effect on the Company's consolidated financial condition or results of operations.

Operating LeasesThe Company has various operating lease commitments for office and manufacturing facilities expiring through
October 2006. Some of the leases contain renewal options ranging from 3 to 10 years.

Rent
expense under all operating leases aggregated $2,426, $2,058, and $1,585 for each of the years ended December 31, 2001, 2000, and 1999, respectively.



Years Ending December 31,2002

$
2,6202003


2,5772004


2,4932005


1,8502006


673Thereafter


578Total

$
10,791


48

---

15. Selected Quarterly Financial Data (Unaudited)

The following information has been reclassified to exclude the results of Brooktrout Software and Interspeed, both discontinued in February 2001 (see
note 2).

|                                         |                                | Fiscal 2001 Quarter Ended |        | Fiscal 2000 Quarter Ended |   |        |      
|---------------------------------------- | ------------------------------ | ------------------------- | ------ | ------------------------- | - | ------ | -----
|
|Revenue                                  |                                | $                         | 27,063 |                           | $ | 17,844 |      
|Gross profit                             |                                |                           | 15,868 |                           |   | 9,395  |      
|Income (loss) from continuing operations |                                |                           | (430   | )                         |   | (2,735 | )    
|Net income (loss)                        |                                |                           | 1,220  |                           |   | 1,688  |      
|Income (loss) per common share:          |                                |                           |        |                           |   |        |      
|                                         | Continuing operations, basic   |                           | $      | (0.04                     | ) | $      | (0.23
|                                         | Continuing operations, diluted |                           |        | (0.04                     | ) |        | (0.23
|Net income (loss), basic                 |                                |                           | 0.10   |                           |   | 0.14   |      
|Net income (loss), diluted               |                                |                           | 0.10   |                           |   | 0.14   |      

49

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholders of Brooktrout, Inc.:

We
have audited the accompanying consolidated balance sheets of Brooktrout, Inc. and its subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed at Item 14(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Brooktrout, Inc. and its subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth therein.

/s/
Deloitte & Touche LLP
Boston, Massachusetts
February 6, 2002

50

---



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

Directors. The information appearing under the caption "Information Regarding Directors" in the Company's definitive Proxy Statement for its 2002 Annual Meeting
of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year, is incorporated into this
report by reference.

The
executive officers of the Company as of March 15, 2002 are as follows:

|Name                 |  | Age |  | Position                                                      
|-------------------- |  | --- |  | --------------------------------------------------------------
|Eric R. Giler        |  | 46  |  | President and Director                                        
|David W. Duehren     |  | 44  |  | Vice President of Research and Development, Clerk and Director
|Robert C. Leahy      |  | 49  |  | Vice President of Finance and Operations, and Treasurer       
|Heather J. Magliozzi |  | 39  |  | Vice President of Corporate Communications                    
|Jonathan J. Sirota   |  | 60  |  | Vice President                                                
|John W. Ison         |  | 46  |  | Vice President and General Manager, Enterprise Markets Group  
|R. Andrew O'Brien    |  | 43  |  | Vice President and General Manager, New Public Networks Group 

Eric
R. Giler is a Company founder and has been President and a Director of Brooktrout since the Company's inception in 1984. Prior to founding the Company, Mr. Giler worked
primarily in the area of technical marketing and sales as a product manager with Teradyne, Inc. and as an applications engineering manager for Intec Corp. Mr. Giler is the former
Chairman of the Massachusetts Telecommunications Council and a current board member. He received a Bachelor of Science degree from Carnegie-Mellon University and a Master of Business Administration
degree from the Harvard Business School. Mr. Giler serves on the board of Netegrity, Inc. Mr. Giler also is a director of various privately held high technology corporations.

David
W. Duehren is a Company founder and has been Vice President of Research and Development and a Director of Brooktrout since the Company's inception in 1984. Mr. Duehren is
the former chairman of the Telecommunications Industry Association Committee TR29.1, the subcommittee responsible for Group 3 fax enhancements, and also contributes to worldwide International
Telecommunications UnionTelephony (ITU-T) and Internet Engineering Task Force (IETF) standards. Mr. Duehren is also a member of the Institute of Electrical Electronic
Engineers (IEEE). Mr. Duehren
received a Bachelor of Science degree and Master of Science degree in Electrical Engineering from the Massachusetts Institute of Technology.

Robert
C. Leahy has been Vice President of Finance and Operations and Treasurer of Brooktrout since March 1988. Prior to joining Brooktrout, Mr. Leahy held the position of
corporate controller and treasurer for Cambridge Robotics. Mr. Leahy is an active member in the Financial Executive Institute. Mr. Leahy received a Bachelor of Science degree in
accounting and a Master of Business Administration degree from Bentley College.

51

---

Heather
J. Magliozzi has been Vice President of Corporate Communications of Brooktrout since August 1998. Ms. Magliozzi was Director of Marketing from April 1996 to
July 1998 and was Marketing Communications Manager from August 1994 to April 1996. Prior to joining Brooktrout, Ms. Magliozzi was a Marketing Manager for NEC Technologies
from January 1985 to July 1994. Ms. Magliozzi received a Bachelor of Arts degree in English and Communications from Boston College.

Jonathan
J. Sirota has been a Vice President of Brooktrout since January 1994. Mr. Sirota was General Manager of the Data Technology Division of Brooktrout from
September 1998 to January 2001. Mr. Sirota was Vice President of Engineering from January 1994 to August 1998. Prior to joining Brooktrout, Mr. Sirota was
Senior Vice President of Engineering and Operations for ERGO Computing, Inc. from March 1989 to January 1994. Mr. Sirota received a Bachelor of Science degree in Electrical
Engineering from Rensselaer Polytechnic Institute and a Master of Science degree in Electrical Engineering from Massachusetts Institute of Technology.

John
W. Ison has been Vice President and General Manager of the Enterprise Markets Group since January 2001. Mr. Ison was Vice President and General Manager of the Voice
Technology Division of Brooktrout from April 1999 to January 2001. Prior to joining Brooktrout, Mr. Ison was Vice President of Marketing at Live Picture, Inc. and President
and CEO at Newfire, Inc. Mr. Ison received a Bachelor of Science and a Master of Science in Management from the Massachusetts Institute of Technology and a Master of Science in
Engineering from Dartmouth College.

R.
Andrew O'Brien has been Vice President and General Manager of the New Public Networks Group since January 2001. Mr. O'Brien was Vice President of Business Development of
Brooktrout from July 1998 to January 2001 and Vice President of Marketing and Business Development from July 1993 to June 1998. Mr. O'Brien was Director of Marketing
and Business Development from January 1993 to June 1993. Prior to joining Brooktrout, Mr. O'Brien was a consultant with McKinsey & Company, Inc. from
September 1986 to January 1993. Mr. O'Brien received a Bachelor of Arts degree from Yale University and a Master of Business Administration degree from the Harvard Business
School.

Item 11.    Executive Compensation

Information in response to this Item appears under the caption "Executive Compensation" in the Company's definitive Proxy Statement for its 2002 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year, and is incorporated into
this report by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

Information in response to this Item appears under the caption "Ownership of Equity Securities" in the Company's definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year, and is
incorporated into this report by reference.

Item 13.    Certain Relationships and Related Transactions

Information in response to this Item appears under the caption "Certain Relationships" in the Company's definitive Proxy Statement for its 2002 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year, and is incorporated into
this report by reference.

52

---

PART IV

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

(a,
d)



| |  | Consolidated Balance Sheets at December 31, 2001 and 2000                                                  
| |  | -----------------------------------------------------------------------------------------------------------
| |  | Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999                 
| |  | Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2001, 2000 and 1999
| |  | Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999       
| |  | Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999                 
| |  | Notes to Consolidated Financial Statements                                                                 
| |  | Independent Auditors' Report                                                                               



| |                                               | Page No.
| | --------------------------------------------- | --------
| | Schedule IX Valuation and Qualifying Accounts |         

Schedules
not listed above are omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto.



| |  | Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below.
| |  | ----------------------------------------------------------------------------------------------

53

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the dates indicated.

|Signatures                              |  | Title                                                                                                |  | Date          
|--------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --------------
|                                        |  |                                                                                                      |  |               
|/s/ERIC R. GILEREric R. Giler           |  | President and Director (Principal Executive Officer)                                                 |  | March 22, 2002
|/s/ROBERT C. LEAHYRobert C. Leahy       |  | Vice President of Finance and Operations, and Treasurer (Principal Financial and Accounting Officer) |  | March 22, 2002
|/s/DAVID W. DUEHRENDavid W. Duehren     |  | Vice President, Clerk and Director                                                                   |  | March 22, 2002
|/s/ROBERT G. BARRETTRobert G. Barrett   |  | Director                                                                                             |  | March 22, 2002
|/s/DAVID L. CHAPMANDavid L. Chapman     |  | Director                                                                                             |  | March 22, 2002
|/s/W. BROOKE TUNSTALLW. Brooke Tunstall |  | Director                                                                                             |  | March 22, 2002

54

---



SCHEDULE IX

BROOKTROUT, INC.        VALUATION AND QUALIFYING ACCOUNTS(in thousands)

|                                        |  | BALANCE
AT
BEGINNING
OF YEAR |       | CHARGED
(CREDITED)
TO
COST AND
EXPENSES |   | DEDUCTIONS |   | OTHER |        | BALANCE
AT END
OF YEAR
|--------------------------------------- |  | ---------------------------- | ----- | --------------------------------------- | - | ---------- | - | ----- | ------ | ----------------------
|ACCOUNTS RECEIVABLE ALLOWANCE ACCOUNTS: |  |                              |       |                                         |   |            |   |       |        |                       
|For the year ended December 31, 1999    |  | $                            | 2,313 |                                         | $ | 824        |   | $     | (671   | )                     
|For the year ended December 31, 2000    |  |                              | 2,466 |                                         |   | 435        |   |       | (201   | )                     
|For the year ended December 31, 2001    |  |                              | 2,647 |                                         |   | 401        |   |       | (914   | )                     
|ALLOWANCE FOR OBSOLETE INVENTORY:       |  |                              |       |                                         |   |            |   |       |        |                       
|For the year ended December 31, 1999    |  |                              | 4,473 |                                         |   | 1,171      |   |       | (962   | )                     
|For the year ended December 31, 2000    |  |                              | 4,682 |                                         |   | 1,455      |   |       | (1,305 | )                     
|For the year ended December 31, 2001    |  |                              | 4,832 |                                         |   | 5,363      |   |       | (3,604 | )                     
|ACCRUED WARRANTY COSTS:                 |  |                              |       |                                         |   |            |   |       |        |                       
|For the year ended December 31, 1999    |  |                              | 1,314 |                                         |   | 519        |   |       | (529   | )                     
|For the year ended December 31, 2000    |  |                              | 1,304 |                                         |   | 659        |   |       | (406   | )                     
|For the year ended December 31, 2001    |  |                              | 1,499 |                                         |   | (216       | ) |       | (494   | )                     

55

---



EXHIBIT INDEX

|Exhibit
No. |  | Title                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Asset Purchase Agreement by and among BTGP, Inc. and Brooktrout Technology Europe Limited dated December 17, 1998 is hereby incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission ("SEC") on December 29, 1998 (File No. 000-20698).                   
|2.2         |  | Asset Purchase Agreement by and among BTINH Operating Company, Inc. and Netaccess, Inc. dated June 30, 1997 is hereby incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on July 14, 1997 (File No.
000-20698).                                                                    
|2.3         |  | Agreement and Plan of Merger among eYak, Inc., Sonexis Technologies, Inc., Brooktrout Software, Inc., Brooktrout Business Trust and Brooktrout, Inc. dated as of April 9, 2001 is hereby incorporated by reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on April 25, 2001 (File No. 000-20698).
|3.1         |  | Restated Articles of Organization of the Company are hereby incorporated by reference from Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the SEC on March 30, 2000 (File No.
000-20698).                                                                                 
|3.2         |  | Articles of Amendment to the Restated Articles of Organization of the Company are hereby incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the SEC on
March 30, 2000 (File No. 000-20698).                                                    
|3.3         |  | Articles of Amendment to the Restated Articles of Organization of the Company are hereby incorporated by reference from Exhibit 3.3 to Amendment No. 2 to the Company's quarterly report on Form 10-Q/A for the fiscal quarter ended June 30, 2000, as
filed with the SEC on November 17, 2000 (File No. 000-20698).                      
|3.4         |  | Amended and Restated By-laws of the Company are filed herewith.                                                                                                                                                                                                                                                                           
|4.1         |  | Shareholder Rights Agreement, dated as of September 9, 1998, between Brooktrout Technology, Inc. and State Street Bank and Trust Company, as Rights Agent is hereby incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on
Form 8-A filed with the SEC on September 14, 1998 (File No. 000-20698).         
|4.2         |  | Amendment No. 1 to Shareholder Rights Agreement, dated as of March 1, 2002, between Brooktrout, Inc., State Street Bank and Trust Company, as Rights Agent, and EquiServe Trust Company, N.A. as successor Rights Agent, is filed
herewith.                                                                                               
|10.1        |  | Lease between the Company and Trustees of Needham 152 Second Avenue Trust dated April 7, 1997 is hereby incorporated by reference from Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed
with the SEC on March 30, 1998 (File No. 000-20698).                                
|10.2        |  | Lease between the Company and NAM Partners, L.P. dated December 28, 1998 is hereby incorporated by reference from Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as filed with the SEC on
March 30, 1999 (File No. 000-20698).                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                           

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|10.3  |  | Assignment and Assumption of Lease between the Company and Lucent Technologies Inc. dated December 17, 1998 is hereby incorporated by reference from Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
as filed with the SEC on March 30, 1999 (File No. 000-20698).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.4  |  | Lease between the Company and Pacific Gateway Properties, Inc., dated August 15, 1995, as amended is hereby incorporated by reference from Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as filed
with the SEC on March 30, 1999 (File No. 000-20698).          
|10.5  |  | Brooktrout, Inc. Amended and Restated 1992 Stock Incentive Plan is filed herewith.                                                                                                                                                                                                                                      
|10.6  |  | Brooktrout, Inc. Second Amended and Restated 1992 Stock Purchase Plan is hereby incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed with the SEC on December 28, 2001 (File No. 333-76074).                                                                            
|10.7  |  | First Amendment to Brooktrout, Inc. Second Amended and Restated 1992 Stock Purchase Plan is hereby incorporated by reference from Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed with the SEC on December 28, 2001 (File No.
333-76074).                                                         
|10.8  |  | Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the SEC on June 30, 2000 (File No. 333-40644).                                                                                                           
|10.9  |  | First Amendment to Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed with the SEC on June 30, 2000 (File No. 333-40644).                                                                                        
|10.10 |  | Second Amendment to Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.6 to the Company's Registration Statement on Form S-8 filed with the SEC on December 28, 2001 (File No. 333-76074).                                                                                   
|10.11 |  | Brooktrout, Inc. 2001 Stock Option and Incentive Plan is hereby incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the SEC on December 28, 2001 (File No. 333-76074).                                                                                            
|21    |  | List of Subsidiaries of the Company is filed herewith.                                                                                                                                                                                                                                                                  
|23    |  | Independent Auditors' Consent is filed herewith.                                                                                                                                                                                                                                                                        

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