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                                                                      Exhibit 13

1999 Brooktrout, Inc. Annual Report

Your Hook into the New Network


1999 Achievements
Sales and earnings grew to the highest levels in the Company's history.
Expanded support for a wide range of operating systems including support for the
LynxOS, QNX Neutrino, and Linux operating systems.
Initiated new partnerships with Motorola, Lotus, and Panasonic to offer
customers joint messaging solutions that incorporate Brooktrout products.
Continued to expand sales and distribution activities into the global markets of
Latin America, Asia, Europe, and Canada.
Introduced RealComm(TM) 100, an open standards-based platform to help developers
speed time-to-market and protect their software investment.
Strengthened the position of Brooktrout Software in the e-Business marketplace
as a major provider of specialized software and services that enable companies
to merge traditional telephone commerce systems with the Web.
Announced a Stock Repurchase Plan for up to one million shared of Brooktrout's
outstanding common stock.
Completed an initial public offering of Brooktrout's Interspeed subsidiary,
receiving approximately $20 million in cash. Brooktrout owns 57% of the shares
of Interspeed as of December 31st, 1999.




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Shareholder Letter:


Dear fellow shareholder:
It was an exciting year for Brooktrout in 1999. We firmly established a
leadership position as a true partner in creating innovative solutions for the
New Network. We achieved record sales and the highest earnings in the Company's
history and successfully completed an initial public offering for our Interspeed
operation that delivered a substantial investment return for shareholders.

Financially, it was a year for the record books. Brooktrout's core revenues grew
by approximately 35 percent in 1999 to $135.7 million compared with $100.8
million in 1998. Net income from core activity was approximately $13.7 million
or $1.18 per share. This compares with pro forma net income from core activity
of $10.3 million or $0.90 per share in 1998. Brooktrout's core activity excludes
the results from its investment in Interspeed and other investment activity.

During the year, we broadened our customer base significantly due, in part, to
the December 1998 acquisition of the Computer Telephony Products business of
Lucent Technologies Inc., with 26 customers at the million dollar level in 1999,
nearly double the 14 customers at that level in 1998. Also in 1999, there were
218 customers that did more than $100,000 in business with Brooktrout, an 80
percent increase over the 121 customers at that level in 1998.

A STRATEGIC VIEW OF THE MARKETPLACE
As the communications market has evolved in the past year, it has become clear
to us that Brooktrout is very well positioned to address two opportunities with
different dynamics. The first area, what we're calling Today's Network, consists
of current technologies such as products for fax, LAN fax, and voice mail. It
remains a significant business, and we anticipate it will remain so for the near
future. In the second area, which we call the New Network, we believe there are
several exciting growth opportunities. This business consists of the products we
supply for today's most promising, in our view, new communication technologies:
IP telephony, voice-over-DSL, wireless, unified messaging, and e-Business. Our
revenues in this New Network category grew by more than 80 percent in 1999,
while revenues in the Today's Network category grew by 15 percent. The New
Network is an exciting opportunity for Brooktrout since most of the Company's
major product introductions over the past two years have been aimed at these new
types of applications. We feel this focus has given Brooktrout a strong position
in this new marketplace.

BECOMING A ONE-STOP COMMUNICATIONS PROVIDER
The Company's largest business, Brooktrout Technology, develops and manufactures
component-level circuit boards and software that enable our customers to build
products with any combination of voice messaging, data access, fax, and IP
telephony capabilities. Among the new products released in 1999 was a higher
density version of the TR2001(TM) IP telephony platform that can now support as
many as 60 channels in a single PCI slot. The TR2001 enables developers to
create reliable, scalable, service provider-level IP telephony gateways and
applications for the New Network. Also, Brooktrout extended its high-density
Netaccess intelligent WAN Access products to support the LynxOS and QNX Neutrino
operating systems, making the products available to a broader segment of
developers' of carrier-grade and high density network infrastructure equipment.
The Company also announced support for the Linux operating system on the
TR114(TM) Series intelligent fax and voice boards. By providing continuing
support for a variety of operating systems, Brooktrout is committed to
addressing developers needs to be able to choose the best operating system for
their application requirements. In December, Brooktrout Technology introduced
RealComm(TM) 100, an open standards-based platform that allows developers to
build next-generation communications solutions. The RealComm 100 communications
server helps developers reduce time to market and provides them with protection
of their software investment.


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In addition to new product releases, Brooktrout also established new
partnerships. We became a Gold Partner of the Motorola Computer Group.
Brooktrout and Motorola are now working together to provide solutions to
customers working on applications for the New Network. In the intelligent fax
area, Brooktrout TruFax(R) and TR114 Series intelligent fax boards were selected
by Lotus for bundling with Lotus Fax for Domino R4.0. These bundles enable Lotus
Notes users to send and receive faxes directly from their desktops or send faxes
from within any Microsoft Windows application as easily as sending and receiving
e-mail.

FORGING AN IMPORTANT E-BUSINESS OPPORTUNITY
During 1999, Brooktrout Software has become a very focused business with what we
believe to be a bright future in the area of voice-enabling Web applications.
The basis of Brooktrout Software is the Company's award-winning Show N Tel(TM)
graphical user interface software and application development tools for creating
interactive voice messaging and call management systems. Using Show N Tel and
ActiveCall(TM) software, Brooktrout Software customers can standardize and
consolidate their Web catalog and e-Business activities with their existing
800-number phone-ordering system and bring it all together into a single
integrated call center. Using the same software tools to build and maintain both
commerce systems offers Brooktrout Software customers great cost advantages and
much faster time-to-market.

COMPLETING A SUCCESSFUL PUBLIC OFFERING
A major 1999 event and a milestone for Brooktrout occurred in the Fall with the
initial public offering of our Interspeed subsidiary. Interspeed develops
high-speed data access equipment based on DSL or digital subscriber line
technology. The Interspeed business was developed from within Brooktrout over
the past three years, and marks the first time the Company has spun off part of
its business through an IPO. Brooktrout sold 1.5 million shares in that
offering, generating a pretax gain of $16.1 million, net of offering related
costs, in the third quarter of 1999, and in the fourth quarter, another $3.8
million through an additional sale of 425,000 shares, pursuant to the
underwriters' over allotment option; totaling $19.9 million. In addition,
Brooktrout now holds 6.1 million shares of Interspeed's common stock (NASD:
ISPD), representing approximately 57 percent of the outstanding shares of
Interspeed as of December 31, 1999.

MILLION-SHARE STOCK REPURCHASE PLAN
On October 1, 1999, we announced a Stock Repurchase Plan under which the Company
is authorized to repurchase up to one million shares of its common stock in the
open market or in private transactions over a 12 month period. Brooktrout plans
to use the repurchased shares for general corporate purposes including the
Company's stock option plans, employee stock purchase plans and other stock
benefit plans. As of December 31, Brooktrout had repurchased approximately
250,000 shares under the plan for an aggregate purchase price of $3.4 million.
Overall, we are pleased with the company's performance and progress in each of
our businesses during 1999. As we begin the new millennium, we believe
Brooktrout is well positioned to support Today's Network as well as the
rapid-growth business areas of the New Network. We offer leading technologies
for voice messaging systems, voice-over-IP, voice-over-DSL, high-speed net
access, wireless and mobile switching, and unique solutions for unified
messaging and voice-enabled web commerce. Financially, we are stronger than ever
and we have never been better equipped to shape our own destiny.



Sincerely,


Eric Giler
President


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Welcome to the New Network

Years from now when we look back on the turn of the century, we will be even
more amazed at the pace of change. Technology is driving change at such an
extraordinary pace that in just a few years, the 1980s and the 1990s will seem
quaint.
     The world of electronic communications is setting the pace. Networks are
expanding far beyond the walls of any organization. As companies connect to
customers, suppliers, employees, and each other, everyone wins. If Today's
Network reflects the communication technologies of the recent past, then the
changes we're just beginning to experience represent a New Network for a new
century, and a future about to explode with opportunity.
     In the next few years, we expect to see the convergence of voice and data,
of telephones and computers. The New Network will set us free from the desktop
and bring the Internet to wireless devices in our homes, offices, schools,
stores, virtually anywhere we choose.
     For Brooktrout, the opportunities created by this New Network are exciting.
Our technologies are already enabling corporate customers, communication
companies, and service providers to create new applications in many of the
hottest business areas including: wireless communications, unified messaging,
Internet telephony, voice-over-DSL, and defining the very infrastructure of the
New Network itself.


Net Infrastructure

The first task for builders of the New Network is to develop its infrastructure,
weaving together the many disparate systems and applications that already exist
with the new and emerging technologies that will define the future. The
challenge for the enterprise and the systems developer is to bridge those gaps
as smoothly and efficiently as possible. What results is a new communications
paradigm, a New Network that brings together data, voice, wireless, and the
Internet. A New Network that is seamless and user-driven.
     Companies today have significant investments in hardware, software, and
systems. For most, the move to the technologies of a New Network needs to be
evolutionary. They need reliable systems and equipment that will provide a path
for upgrading their network infrastructure on their own terms, products that
will help them route voice traffic over less expensive Internet lines or allow
them to create user-friendly unified messaging as they need it. This convergence
of communications holds the promise of new applications for business and
consumers at home, in the office, on the road, and around the globe.


At the Threshold of the New Network

Today, Brooktrout is a world leader in enabling technology for the New Network
and a full-line supplier providing equipment for voice, fax, data, and IP
telephony. We are at the crossroads of this New Network, building the links that
connect these communications platforms. Our circuit boards make it possible for
corporations, Internet service providers, and telecommunications companies to
communicate effortlessly between standard, circuit-switched telephone networks
and the new generation of packet-switched digital IP networks that carry
wireless and Internet traffic.


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Brooktrout is enabling high-growth applications

Brooktrout voice boards enable growing companies like World Telecom Labs to make
voice-over-IP technology a reality, driving down the cost of telephone service
to anywhere in the world. Brooktrout helps Nortel offer Internet Call Waiting to
notify single-line subscribers of incoming phone calls with a pop-up screen,
while they surf the Internet. Brooktrout mobile switching equipment is fueling
the growth in wireless communications, providing the key link between the
satellite signal and the land-based connection. Brooktrout fax boards have
helped make NetMoves Corp. a leader in Internet fax and document delivery,
allowing companies to leverage existing network and Internet connections in
order to deliver email-to-fax, Web-to-fax, PC-to-fax, and broadcast fax.
     In short, the Internet is changing everything, and fast. Many households in
North America are already online. The time they spend on the Internet is
increasing. Connection speeds are faster and access costs are lower. New
applications are exploding faster than anyone could have forecast and with them,
a whole new marketplace thirsty for innovation. The first major challenge of the
new century is to meet that growth with an infrastructure that can expand right
along with it. Brooktrout technologies are helping build that infrastructure for
today and tomorrow.


Voice-over-DSL:

Jetstream Communication
Voice-over-DSL is the newest of the new communications technologies. Pioneered
by Brooktrout customer Jetstream Communications, voice-over-DSL is a combination
of high-speed data and Internet access with as many as 16 digital phone lines.
Jetstream Communications is the leading provider of voice-over-DSL equipment to
local carriers. The company's JetPowered(TM) voice-over-broadband solution is
rapidly becoming the standard for integrated voice and data service delivery to
the small business and high-end residential communications markets. With the
addition of the Jetstream CPX-1000 multi-service platform, both voice and data
services may be simultaneously carried on the customer's existing copper
telephone lines. With revenue currently dwarfing that for data services,
voice-over-broadband is the killer application for service providers looking to
add value to the small and medium-enterprise community.


Unified Messaging

In just a few years, electronic messaging has evolved to become a critical tool.
It has helped small firms and large corporations to increase productivity, bring
improvements to customer service, supplier relations, marketing, and just about
every facet of business. In that time, messaging has grown to include e-mail,
voice mail, fax, even pagers and a new generation of subscriber services all
travelling across company networks, the Internet, wireless systems, or standard
phone lines. Electronic messaging gives us the flexibility to communicate with
the timeliness of the telephone and the accuracy of print.
     But this rapid growth of messaging has brought with it a virtual maze of
different and competing systems. Voice mail travelling on the phone network,
e-mail on the Internet, faxes on separate phone lines. The challenge of the New
Network is to consolidate the many different message types and provide every
user with a single, easy-to-use mailbox that can handle all of it. This is
unified messaging, the convergence of voice mail, fax, and e-mail into one
compatible system.


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A single point of communications

The business opportunities are unlimited for companies providing unified
messaging solutions to their customers or for Internet service providers
offering unified messaging services to their subscribers. Travelling employees
can check for voice mail, e-mail, and important faxes all with a single phone
call or from the browser on their laptop. Text readers and voice recognition are
even enabling users to have their e-mail or faxes read to them by phone or
forwarded to a local fax number. The bottom line is greater productivity and the
market is rapidly embracing unified messaging.
     At Brooktrout, we build the equipment to bring it all together: voice
boards to handle voice input from standard telephone lines, multi-port fax
boards to manage and convert fax traffic, remote access boards and IP telephony
equipment for network and Internet traffic. Brooktrout customers include
corporations upgrading the enterprise, equipment manufacturers that integrate
system components and provide total solutions, and service providers that offer
direct access to individual and business clients.


Enabling high-growth applications

Brooktrout fax, voice, and universal port boards are helping scores of companies
like Lucent and Mitel build some of the most innovative universal messaging
products on the market. The Unified Messenger from Lucent supports users on the
road or in the office, allowing them to receive, forward, and store voice
messages just as they do e-mail. Mitel's OnePoint Messenger lets users access
their inbox by using a Web browser and Microsoft Outlook to log in from any
location with Web access. Unified messaging is an application ideally suited to
the New Network and Brooktrout technologies are helping to make it happen.


Unified Messaging:
Inter-Tel
For the average user, all this talk about convergence doesn't mean much if you
still need to make four different phone calls just to check your messages. Now,
a whole new type of application has emerged to make sending and receiving
messages much simpler, and Brooktrout is helping make it possible. Unified
messaging, being pioneered by such companies as Inter-Tel, simplifies
communications by enabling users to check one inbox for e-mail, fax, and voice
messages. The system even lets users organize fax and voice mail messages in the
same folders they organize e-mail. Inter-Tel is using Brooktrout boards to
integrate fax and voice processing with its AXXESS and AXXENT systems and its
AXXESSORY Talk Central unified messaging solution. With AXXESSORY Talk Central,
users can hear voice mail messages over any multimedia computer and read faxes
and e-mail on the PC screen.


E-Business Solutions

E-Business is an exciting transformation of the consumer and business
marketplace. Online shopping, travel reservations, finding a new job, selling at
auction, choosing a movie, even buying books are simple marketplace tasks that
have all been redefined almost overnight. E-Business is not so much a new
category of business as it is a completely different way of seeing the
relationship between buyers, sellers, manufacturers, marketers, and
distributors.


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     As e-Business models emerge, they bring a new set of rules. Businesses are
discovering the efficiencies of using the Internet to reinvent every aspect of
their operations and they are reshaping their companies to take advantage of
these opportunities. Customers, on the other hand, are streaming online in
ever-increasing numbers, connecting at constantly faster speeds, and spending
more and more time online. We believe the potential for continued growth of
one-to-one e-Business is tremendous.


Technology to enhance the customer relationship

Success in this New Network environment lies in a company's ability to change
not just its methods, but its character. A successful e-Business is
customer-focused and service-driven. It creates a relationship with customers
from the first contact and builds on that relationship at every click, using the
latest technology to keep pace with and outperform the competition. For
Brooktrout, an opportunity lies in the growth of voice-enabling Web
applications. That is the convergence of the Internet and the telephone - the
merger of online sales convenience and personalized voice service. Brooktrout
provides the software tools and voice technology to help companies and Internet
providers combine real-time voice traffic with an online Web session to
strengthen the connection between buyer and seller. Effective customer service
is critical to building a strong e-Business relationship and the telephone
offers the easiest, fastest way to connect buyer and seller. A consumer shopping
online for software or a summer suit can simply click on-screen to make a live
voice connection with a sales agent. The agent views the order and can answer
whatever questions the buyer might have. Our customers feel that this has
resulted in a higher percentage of successful sales and increased customer
satisfaction.


Brooktrout is enabling high-growth applications

Brooktrout's expertise is enabling major companies to provide unique solutions
for linking interactive voice response to the Internet. With the press of a
button on a Web page, Nortel's Internet Voice Button, lets customers visiting a
business Web site call the business to place an order, request service or ask
for more information. Tapestry Integration Specialist, Inc. uses Brooktrout
Software's application development environment to provide their customers with
speech-enabled e-Business solutions. Brooktrout is also helping service
organizations such as Universal Pensions combine voice and computer access to
large databases, enabling employees from thousands of different 401(k)
retirement plans to check their accounts and make changes daily by phone or on
the Web. We anticipate e-Business is an exciting growth area for Brooktrout, now
and in the future.


Voice-enabled Web:

Healtheon/WebMD
Healtheon/WebMD is one of the most innovative success stories on the Internet.
Its mission is challenging, to say the least - use the Internet to bring
together doctors, patients, hospitals, insurers, drug companies, and help them
exchange information and conduct business by cutting through the maze of
healthcare paperwork. Healtheon operates an Internet-based platform that manages
distributed applications and data for clients in the healthcare community. These
applications integrate with an insurer's database, a drug company's intranet, or
any user's private system, giving members a single, integrated, easily
accessible healthcare resource. Using Brooktrout's Show N Tel(TM) software,
Healtheon worked with value-added reseller ATI to develop an open enrollment
system that allows doctors or clinics to enroll in Healtheon services on the Web
or by phone, with the data then fully integrated with the Web site.


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Brooktrout, Inc.
Selected Consolidated Financial Data
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                                       ------------------------
STATEMENT OF INCOME DATA                                    1999       1998      1997      1996     1995
                                                          --------   --------   -------  -------  -------
<S>                                                       <C>        <C>        <C>      <C>      <C>
Revenue ................................................  $140,745   $100,851   $72,192  $58,827  $38,673
 Costs and expenses:
   Cost of product sold ................................    54,517     40,884    32,381   26,059   17,759
   Research and development ............................    28,753     22,106    13,627    7,175    4,822
   In-process research and development(1) ..............        --      9,786     3,746       --       --
   Selling, general and administrative .................    46,275     29,868    19,970   13,666    9,144
   Non-cash compensation (2) ...........................     2,730         34        --       --       --
   Merger related charges ..............................        --         --        --    1,236       --
                                                          --------   --------   -------  -------  -------
 Income (loss) from operations .........................     8,470     (1,827)    2,468   10,691    6,948
 Other income:
   Interest income, net ................................       878      1,890     1,677    1,282      960
   Net gain on investment activity (3) .................    21,738         --        --       --       --
                                                          --------   --------   -------  -------  -------
      Total other income ...............................    22,616      1,890     1,677    1,282      960
                                                          --------   --------   -------  -------  -------
Income before income tax provision (benefit) ...........    31,086         63     4,145   11,973    7,908
Income tax provision (benefit) .........................    13,287       (270)    1,494    5,108    2,705
Minority interest in loss of subsidiary (3).............    (1,355)        --        --       --       --
                                                          --------   --------   -------  -------  -------
   Net income ..........................................  $ 19,154   $    333   $ 2,651  $ 6,865  $ 5,203
                                                          ========   ========   =======  =======  =======
Basic income per common share:
  Net income ...........................................  $   1.76   $   0.03   $  0.25  $  0.69  $  0.54
  Shares for basic .....................................    10,882     10,784    10,702    9,947    9,661
Diluted income per common share:
  Net income ...........................................  $   1.65   $   0.03   $  0.23  $  0.63  $  0.52
  Shares for diluted ...................................    11,582     11,483    11,300   10,901   10,077

                                                                            DECEMBER 31,
                                                                            ------------
                                                            1999       1998      1997     1996     1995
                                                          --------   --------   -------  -------  -------
BALANCE SHEET DATA
Cash and marketable securities .........................  $ 50,033   $ 12,355   $36,378  $39,714  $22,154
Working capital ........................................    65,131     21,225    41,741   43,408   24,823
Total assets ...........................................   115,435     73,209    65,415   58,366   34,581
Long-term debt, less current portion ...................        --         --        --       --       --
Stockholders' equity ...................................  $ 77,383   $ 50,129   $50,444  $47,592  $26,445


---------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1998 and 1997, the Company recorded charges of $9.8 million and $3.7
million, respectively, representing the portion of the purchase price allocated
to in-process research and development efforts related to the acquisitions of
the Computer Telephony Products business of Lucent Technologies Inc. and
Netaccess, Inc., respectively.

(2) In 1999, the Company recorded a charge of $2.7 million reflecting non-cash
compensation expenses as a result of stock option grants by Interspeed, Inc.

(3) Net gain on investment activity represents the gains of $19.9 million, net
of offering related costs, on the sale of 1.925 million shares of Interspeed,
Inc. by the Company associated with Interspeed's initial public offering, a gain
of $2.5 million from the sale of marketable securities, and a loss of $655,
representing the book value of a separate investment that was written off in the
third quarter of 1999.


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<PAGE>   9

MANAGEMENT'S DISCUSSION & 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 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 "believe," "expect," "anticipate," "intend," "estimate,"
and other expressions, which are predictions of or indicate future events and
trends and which 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"), 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 Annual
Report 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, the following:
(i) the Company's ability to respond to rapidly developing changes in its
marketplace; (ii) the Company's ability to develop and market quality,
innovative products; (iii) the Company's ability to protect its proprietary
intellectual property; and (iv) the Company's ability to retain relationships
with its major customers, including Lucent Technologies Inc. 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 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

     The Company supplies electronic communications products to system vendors,
service providers, and value added resellers, or VARs, developing applications
for the new global communications network. During 1999, the Company reorganized
its lines of business and changed its name from Brooktrout Technology, Inc. to
Brooktrout, Inc. The Company is organized and reports the results of its
operations in the following three business segments: Brooktrout Technology,
Brooktrout Software, Inc. ("Brooktrout Software") and Interspeed, Inc.
("Interspeed"). These segments are differentiated based upon the products and
services provided to the marketplace, the customers served, and the distribution
channels. Brooktrout Technology provides enabling technologies for customers to
deliver voice, fax and data solutions for the electronic communications market.
Brooktrout Software provides specialized e-Business software and services that
enable companies to merge traditional telephone commerce systems with web-based
commerce systems. Interspeed develops single system, high-speed Internet access
solutions for telephone companies and Internet Service Providers.


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Interspeed, Inc.

     On September 24, 1999, Interspeed sold 2 million shares of its common stock
in an initial public offering (the "Offering") at a price of $12 per share
pursuant to a registration statement on Form S-1 (333-81071), as amended, under
the Securities Act of 1933, as amended. In the Offering, the Company sold an
additional 1.5 million shares of Interspeed common stock that it owned. Due to
the sale of the 2 million shares of stock by Interspeed, the Company recorded
additional paid-in capital of approximately $7.0 million, net of deferred tax,
reflecting the increase in its investment in Interspeed resulting from the
receipt by Interspeed of proceeds from the Offering of $21 million. In October,
the Company sold an additional 425,000 shares of common stock of Interspeed at a
price of $12 per share pursuant to the underwriters' over allotment option.
After these transactions, the Company owns approximately 6.1 million shares of
Interspeed's outstanding common stock, or approximately 57% of Interspeed's
common shares outstanding as of December 31, 1999. The Company realized a gain
of $19.9 million, net of offering related expenses, on these stock sales.


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Computer Telephony Products business of Lucent Technologies Inc.

     On December 17, 1998, the Company acquired the assets and assumed certain
liabilities of the Computer Telephony Products ("CTP") business of Lucent
Technologies Inc. CTP provides technologies for the voice processing industry
and manufactures hardware and software components that connect PCs and LANs with
telephone networks. The purchase price was $29.4 million, paid in cash, plus
$1.1 million of transaction costs, and the Company assumed certain liabilities
aggregating $1.9 million.

     The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of the CTP business have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using an independent appraisal. The fair value of the assets acquired and
liabilities assumed exceeded the purchase price resulting in a pro rata
reduction in identified non-current assets purchased.

     The valuation of the intangible assets acquired was based on management's
estimates of the after tax net cash flows and gives explicit consideration to
the SEC's views on purchased in- process technology as set forth in its
September 9, 1998 letter to the American Institute of Certified Public
Accountants. Specifically, the valuation gave consideration to the following:
(i) a fair market value premise was employed; (ii) comprehensive due diligence
concerning all potential intangible assets including trademarks/tradenames,
patents, copyrights, non-compete agreements, assembled workforce and customer
relationships and sales channels; (iii) the value of core technology was
explicitly addressed, with a view toward ensuring the relative allocations to
core technology and in-process technology were consistent with the relative
contributions of each to the final product; and (iv) the allocation to
in-process technology was based on a calculation that considered only the
efforts completed as of the transaction date, and only the cash flow associated
with said completed efforts for one generation of the products currently
in-process.

     The Company recorded a one-time charge of $9.8 million ($5.9 million, net
of tax benefits) in the fourth quarter of 1998 for the purchased research and
development for seven projects that had not yet reached technological
feasibility, had no alternative future use, and for which successful development
was uncertain.

     The seven projects include High Density (digital signal processor and
software technology), Digital Recording (software and hardware), DSPM and DSP
Fax (software and hardware), Asynchronous Software, PBX Integration, and VRS-32
boards. At the time of acquisition, estimated costs to complete the seven
projects were approximately $6.9 million. The majority of these projects have
been completed and several of the products that were developed started to be
shipped to customers in 1999.


Netaccess, Inc.

     On June 30, 1997, the Company acquired the assets and assumed certain
liabilities of Netaccess, Inc. ("Netaccess"), a worldwide supplier of Primary
Rate ISDN network interface products and multiport modem products for open,
standards-based remote access and computer telephony systems. The purchase price
was $9.9 million, paid in cash, and the Company assumed certain liabilities
aggregating $2.0 million.


                                                                              11
<PAGE>   12

     The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of Netaccess have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using an independent appraisal.

     The Company recorded a charge of $3.7 million ($2.3 million, net of tax
benefits) in 1997 representing the estimated value of Netaccess' research and
development efforts in-process. Such efforts had not yet reached technological
feasibility and did not possess alternative uses.


                                                                              12
<PAGE>   13


YEARS ENDED DECEMBER 31, 1999 AND 1998

     Revenue during the year ended December 31, 1999 increased by approximately
39%, to $140.7 million, up from $100.9 million in 1998. The majority of this
growth was from the Company's Brooktrout Technology subsidiary and was primarily
attributable to an increase in voice technology products driven by the
acquisition of CTP. The voice technology products generated revenue of
approximately $36 million in 1999. In addition, Primary Rate ISDN telephone
network interface product revenue increased. These increases in revenue were
partially offset by a decline in voice mail systems sold. The Company's
Interspeed subsidiary also contributed to the increased revenue in 1999.

     Cost of product sold was $54.5 million, or 39% of revenue, in 1999,
compared to $40.9 million, or 41% of revenue, in 1998. Gross profit percentage
was 61% for 1999 as compared to 59% for 1998. The increase in gross profit
percentage was primarily generated by Brooktrout Technology and was the result
of the increase in voice technology products sold and the corresponding profit
that was generated from these higher margin products. These higher margin
products replaced the margin lost on the decline in the lower margin voice mail
systems sold.

     Research and development expense was $28.8 million, or 20% of revenue, in
1999, compared with $22.1 million, or 22% of revenue, in 1998. This increase
primarily is attributable to the inclusion of CTP and the related development
efforts on the voice technology products combined with the development of the
digital subscriber line ("DSL") products of Interspeed. The Company intends to
continue to commit significant resources to product development. The Company's
continuing development efforts are focused on the computer telephony software
development tools, the next generation of Primary Rate ISDN telephone network
interface products, the TR Series product family, as well as the Brooktrout Open
Systems Telephony Architecture ("BOSTon").

     Selling, general and administrative expense was $46.3 million in 1999,
compared with $29.9 million in 1998. This higher expense level resulted from the
inclusion of CTP in Brooktrout Technology together with increased staffing,
promotional activities and travel related expenses. In addition, there was an
increase in selling, general and administrative expense at Interspeed and
Brooktrout Software due to increased staffing and marketing initiatives. As a
percentage of revenue, selling, general and administrative expense was 33% of
revenue for 1999 and 30% of revenue for 1998.

     The Company recorded a charge of $2.7 million in 1999 representing non-cash
compensation expense as a result of stock options granted to employees of
Interspeed.

     The Company recorded a net gain on investment activity of $21.7 million in
1999, representing gains of $19.9 million, net of offering related costs, on the
sale of 1.925 million shares of common stock of Interspeed by the Company
associated with Interspeed's initial public offering, a gain of $2.5 million
from the sale of marketable securities, and a loss of $655,000 representing the
book value of a separate investment that was written off during the year.

     On December 17, 1998, the Company recorded a charge of $9.8 million,
representing the portion of the purchase price of the acquisition of CTP
allocated to in-process research and development efforts as of the date of
acquisition.

     Interest and other income was $.9 million in 1999, compared with $1.9
million in 1998. This decrease is due to less cash available for investment.


                                                                              13
<PAGE>   14

     The Company's effective tax rate was 43% in 1999. The effective tax rate is
greater than the statutory tax rates due to the non-deductible compensation
charge of $2.7 million related to stock option grants at Interspeed along with
the non-deductible Interspeed operating losses from September 24, 1999 to
December 31, 1999. The Company recorded a tax benefit of $270,000 for the year
ended December 31, 1998.

     Minority interest in loss of subsidiary was $1.4 million for the year ended
December 31, 1999, which represents the minority shareholders' portion of the
losses of Interspeed from September 24, 1999, the date of Interspeed's Offering,
until December 31, 1999.


                                                                              14
<PAGE>   15



YEARS ENDED DECEMBER 31, 1998 AND 1997

     Revenue during the year ended December 31, 1998 increased by approximately
40%, to $100.9 million, up from $72.2 million in 1997. This growth was
principally attributable to increased shipments of TR Series products and to the
inclusion of sales of Primary Rate ISDN telephone network interface products
acquired through the acquisition of Netaccess on June 30, 1997. Increased sales
from the TR Series products reflected the growth in the local area network/fax
market segment served by the Company.

     Cost of product sold was $40.9 million, or 41% of revenue in 1998, compared
to $32.4 million, or 45% of revenue, in 1997. Gross profit percentage was 59%
for 1998 and 55% for 1997. The increase in gross profit percentage was the
result of the increased volume of TR Series and Primary Rate ISDN telephone
network interface products sold as a proportion of total sales. In addition, the
TR Series product family benefited from cost reduction efforts initiated by the
Company.

     Research and development expense was $22.1 million, or 22% of revenue, in
1998, compared with $13.6 million, or 19% of revenue, in 1997. The increase
reflected the Company's development efforts for Interspeed, the next generation
of Netaccess products, and for continued development of the TR Series product
family, BOSTon Architecture, OEM systems development as well as computer
telephony software development tools.

     Selling, general and administrative expense was $29.9 million in 1998,
compared with $20.0 million in 1997. This higher expense level resulted from
increased staffing, promotional activities and depreciation. As a percentage of
revenue, selling, general and administrative expense was 30% of revenue for 1998
and 28% of revenue for 1997.

     On December 17, 1998, the Company recorded a charge of $9.8 million,
representing the portion of the purchase price of the acquisition of CTP
allocated to in-process research and development efforts as of the date of
acquisition.

     On June 30, 1997, the Company recorded a charge of $3.7 million,
representing the portion of the purchase price of Netaccess allocated to
in-process research and development efforts as of the date of acquisition.

     Interest and other income was $1.9 million in 1998, compared with $1.7
million in 1997, reflecting higher cash balances available for investment prior
to the purchase of CTP.

     The Company recorded a tax benefit of $270,000 for the year ended December
31, 1998 due to a permanent difference associated with the Company's foreign
sales corporation and a change in the rate at which its deferred taxes are
expected to reverse, offset by a permanent difference associated with travel and
entertainment expense. For the year ended December 31, 1997 income tax expense
was $1,494,000, an effective tax rate of 36%.


                                                                              15
<PAGE>   16


LIQUIDITY AND CAPITAL RESOURCES

     On September 24, 1999, Interspeed sold 2 million shares of its common stock
in the Offering at a price of $12 per share pursuant to a registration statement
on Form S-1 (333-81071), as amended, under the Securities Act of 1933, as
amended. In the Offering, the Company sold 1.5 million shares of Interspeed
common stock it owned. In October , the Company sold an additional 425,000
shares of common stock of Interspeed at a price of $12 per share pursuant to the
underwriters' over allotment option. After this transaction, the Company owns
approximately 6.1 million shares of Interspeed's outstanding common stock or
approximately 57% of the shares outstanding as of December 31, 1999. These
transactions generated $42.2 million of cash in 1999.

     On October 1, 1999, the Company's Board of Directors approved the purchase
of up to one million shares of the Company's common stock for the twelve month
period ending September 30, 2000. Through December 31, 1999, the Company had
repurchased a total of 247,582 shares for a total cash purchase of $3.4 million.

     In August 1999, the Company renewed its working capital line of credit.
Under the renewed line of credit the Company may borrow up to $10 million on an
unsecured basis, all of which may be used for issuance of letters of credit,
subject to compliance with certain covenants. The line of credit will expire in
July 2000 and at that time any outstanding balances would be payable in full.
Any amounts borrowed under this line of credit would be subject to interest at
the lender's prime rate. At December 31, 1999 there were no commitments
outstanding on letters of credit; no borrowings have been made during the three
years presented in this Annual Report.

     The Company's working capital increased from $21.2 million at December 31,
1998 to $65.1 million at December 31, 1999. The increase was attributable
primarily to higher cash balances due to the proceeds from the sale of
Interspeed common stock by both Interspeed and the Company. Interspeed's cash
balance at December 31, 1999 was $14.6 million and is solely available for use
by Interspeed. In 1999, cash used in operating activities was $3.5 million
compared to cash provided by operating activities of $10.4 million in 1998. The
primary reasons that cash was used in operating activities in 1999 were because
of changes in the Company's current assets and current liabilities and, to a
lesser extent, increased cash requirements to fund Interspeed's operations prior
to the Offering.

     During 1999, 1998 and 1997, the Company purchased approximately $3,5
million, $3,8 million, and $2,7 million, respectively, in equipment. The Company
currently has no material commitments for additional capital expenditures.

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

     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
(see Note 7 to the Consolidated Financial Statements).

     The Company anticipates that cash flows from operations, together with
current cash and marketable securities balances and funds available under the
Company's line of credit, will be sufficient to meet the Company's working
capital and capital equipment expenditure requirements for the foreseeable
future.


                                                                              16
<PAGE>   17



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. These
securities consist of U.S. government notes and bonds, commercial paper, and
certificates of deposit. The company invests in marketable securities which
consist of notes and bonds of various Federal agencies with maturities greater
than 90 days. If the Company were to experience a 1% increase in the effective
interest rate, the effect on the marketable securities carrying value would be a
decrease of $36,000. 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. In addition, the Company's working
capital line of credit agreement provides for borrowings which bear interest at
a variable rate equal to the lender's prime rate. As of December 31, 1999, the
Company did not have any borrowings outstanding under the credit agreement. 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 should not be material.

     The Company denominates substantially all sales in U.S. dollars and has
limited expenses denominated in foreign currencies, generally from its limited
operations in Belgium and the United Kingdom. Consequently, the Company has
limited exposure to fluctuations in foreign currencies. The Company, to date,
has not attempted to hedge this limited foreign currency exposure. The Company
does not enter into financial instrument transactions for trading or other
speculative purposes.


                                                                              17
<PAGE>   18



RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the financial statements of
the Company. The Company expects to adopt this accounting standard for the
fiscal year commencing January 1, 2001, as required.


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

     None


                                                                              18
<PAGE>   19



YEAR 2000 READINESS DISCLOSURE

     The statements in the following section include Year 2000 readiness
disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act. This section contains certain statements that are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended.
The Company's Year 2000 compliance, and the eventual effects of the Year 2000 on
the Company may be materially different than currently projected. This may be
due to, among other things, the failure of key third parties with whom the
Company has a significant business relationship to address Year 2000 issues.

     The Year 2000 issue relates to a complex group of potential problems
arising from the ways in which computer software can handle dates. Many older
systems use a two digit date format which may create ambiguities in passing into
a new century. The Year 2000 is a special case in the Gregorian calendar which
can create problems with certain leap-year calculation routines. In addition,
various contemporary computer operating systems, including systems on which many
of the Company's and its suppliers' products are dependent, employ binary dating
conventions which cannot currently manage dates falling after certain times
after the year 2000 (e.g., the year 2038 in the case of most 32-bit Windows
software.)

     The Company implemented a Year 2000 Plan to address the Company's Year 2000
issues. The Company's Year 2000 Plan focused on each of the Company's internal
systems, the Company's products, and third parties with which the Company has a
significant business relationship. However, no assurance can be given that such
third parties successfully addressed their Year 2000 issues.

     The Company's Year 2000 Plan relating to its internal systems consisted of
three phases - assessment, testing and implementation. The Company completed the
implementation phase, the last phase of its Year 2000 Plan, during the fourth
quarter of 1999. The Company believes that all material systems are compliant
for the Year 2000. To date, the Company has not experienced any Year 2000
issues.

     The Company has gathered, tested and produced information about the
Company's products impacted by the Year 2000 transition. Although the Company
believes that most of its products are in (through maintenance releases or
patches) Year 2000 compliance, the Company has determined that certain of its
older products are not and will not be compliant. However, with respect to these
older products, customers generally will have upgrade paths available to move to
the Company's newer compliant products, which generally will require some change
in the operating environment. The Company has taken steps to inform such
affected users of this issue.

     All organizations dealing with the Year 2000 must address the effect this
issue had and may continue to have on their significant business relationships
with key third parties. The Company's significant business relationships which
may be adversely impacted by the Year 2000 issue include certain contractual
relationships with key suppliers of components for the Company's products,
service providers for the Company's internal systems and major customers for the
Company's products (including one such customer which accounted for more than
10% of the Company's revenue in 1999). The Company continues to work with key
third parties to understand their ability to continue providing services,
products and demand for the Company's products through the Year 2000. If any
significant Year 2000 problems are identified with key third parties,
contingency plans will be developed. The Company is unaware of any Year 2000
problems that may have affected its significant suppliers.


                                                                              19
<PAGE>   20

     To date, costs associated with achieving Year 2000 readiness were $750,000
and the Company does not anticipate incurring any additional significant costs.

     The Company anticipates that substantial litigation may be brought against
vendors of all component products of systems that are unable to properly manage
data related to the Year 2000. The Company has not received any threats of such
litigation against it, but no assurance can be given that such litigation may
not be threatened or brought in the future. The Company's agreements with
customers typically contain provisions designed to limit the Company's liability
for such claims. It is possible, however, that these measures will not provide
protection from liability claims, as a result of existing or future federal,
state or local laws or ordinances or unfavorable judicial decisions.
Furthermore, the failure of the Company or the Company's key suppliers and/or
customers to be Year 2000 compliant or address Year 2000 issues may also result
in litigation being brought against the Company in addition to making it more
difficult and/or costly for the Company to manufacture and sell its products.
Any such claims, with or without merit, or the failure of the Company, its
suppliers or customers to be Year 2000 compliant could result in a material
adverse affect on the Company's business, financial condition and results of
operations, including increased warranty costs, customer satisfaction issues and
potential lawsuits.


EURO ISSUE

Some of the countries in which the Company sells its products are Member States
of the Economic and Monetary Union (EMU). Beginning January 1, 1999 Member
States of the EMU were able to begin trading in either their local currencies or
the euro, the official currency of EMU participating Member States. Parties are
free to choose the unit they prefer in contractual relationships during the
transitional period, beginning January 1999 and ending June 2002. The new
accounting system that the Company implemented can be upgraded to support the
euro and process transactions in either a country's local currency or the euro.
The Company does not anticipate a large demand from its customers to transact in
euros, so this upgrade is not planned for implementation until the second
quarter of 2000.


                                                                              20
<PAGE>   21


                                           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 as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. 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 the Company and its
subsidiaries at December 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.






Deloitte & Touche LLP
Boston, Massachusetts
February 3, 2000


                                                                              21
<PAGE>   22


                                BROOKTROUT, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                 ------------------
                                                                    1999      1998
                                                                 --------   -------

<S>                                                              <C>        <C>
ASSETS
Current assets:
   Cash and equivalents .......................................  $ 48,541   $ 8,518
   Marketable securities ......................................     1,492     3,837
   Accounts receivable (less allowance for doubtful accounts of
    $2,466 in 1999 and $2,313 in 1998) ........................    22,232    15,837
Inventory .....................................................    14,202    10,668
Deferred tax assets ...........................................     5,121     3,853
Prepaid expenses ..............................................     1,975     1,242
                                                                 --------   -------
      Total current assets ....................................    93,563    43,955
                                                                 --------   -------
Equipment and furniture:
   Computer equipment .........................................     9,785     8,602
   Furniture and office equipment .............................     8,628     6,336
                                                                 --------   -------
   Total equipment and furniture ..............................    18,413    14,938
   Less accumulated depreciation and amortization .............    (9,694)   (5,973)
                                                                 --------   -------
   Total equipment and furniture -- net .......................     8,719     8,965
Deferred tax assets ...........................................        --     4,719
Acquired technology and other intangible assets ...............    12,973    14,746
Investments and other assets ..................................       180       824
                                                                 --------   -------
        Total assets ..........................................  $115,435   $73,209
                                                                 ========   =======

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
   Accounts payable and other accruals ........................  $ 18,158   $15,777
   Accrued compensation and commissions .......................     5,573     4,529
   Customer deposits ..........................................       661       614
   Accrued warranty costs .....................................     1,304     1,314
   Accrued taxes ..............................................     2,736       496
                                                                 --------   -------
      Total current liabilities ...............................    28,432    22,730
                                                                 --------   -------
Deferred rent .................................................       469       350
Deferred tax liabilities ......................................       479        --
Minority interest .............................................     8,672        --
Commitments and contingencies (Note 8)
Stockholders' equity:
   Preferred stock, $1.00 par value; authorized 100,000 shares;
      issued and outstanding, none ............................        --        --
   Common stock, $.01 par value; authorized 25,000,000
      shares; issued and outstanding, 11,004,019 in 1999 and
      10,828,362 in 1998 ......................................       110       108
   Additional paid-in capital .................................    42,991    32,528
   Accumulated other comprehensive income (loss) ..............      (117)   (1,199)
   Retained earnings ..........................................    37,846    18,692
   Treasury stock, 247,582 shares in 1999 .....................    (3,447)       --
                                                                 --------   -------
   Total stockholders' equity .................................    77,383    50,129
                                                                 --------   -------
           Total liabilities and stockholders' equity .........  $115,435   $73,209
                                                                 ========   =======
</TABLE>


                 See notes to consolidated financial statements.


                                                                              22
<PAGE>   23



                                BROOKTROUT, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                      -----------------------------
                                                        1999       1998       1997
                                                      --------   --------    ------

<S>                                                   <C>        <C>        <C>
Revenue ............................................  $140,745   $100,851   $72,192
Cost and expenses:
  Cost of product sold .............................    54,517     40,884    32,381
  Research and development .........................    28,753     22,106    13,627
  In-process research and development ..............        --      9,786     3,746
  Selling, general and  administrative .............    46,275     29,868    19,970
  Non-cash compensation ............................     2,730         34        --
                                                      --------   --------   -------
       Total cost and expenses .....................   132,275    102,678    69,724
                                                      --------   --------   -------
 Income (loss) from operations .....................     8,470     (1,827)    2,468
Other income:
  Interest income, net .............................       878      1,890     1,677
  Net gain on investment activity (See Note 1 and 2)    21,738         --        --
                                                      --------   --------   -------
       Total other income ..........................    22,616      1,890     1,677
                                                      --------   --------   -------
Income before income tax provision (benefit) .......    31,086         63     4,145
Income tax provision (benefit) .....................    13,287       (270)    1,494
Minority interest in loss of subsidiary ............    (1,355)        --        --
                                                      --------   --------   -------
Net income .........................................  $ 19,154   $    333   $ 2,651
                                                      ========   ========   =======
Income per common share:
   Basic ...........................................  $   1.76   $   0.03   $  0.25
                                                      ========   ========   =======
   Shares for basic ................................    10,882     10,784    10,702
                                                      ========   ========   =======
   Diluted .........................................  $   1.65   $   0.03   $  0.23
                                                      ========   ========   =======
   Shares for diluted ..............................    11,582     11,483    11,300
                                                      ========   ========   =======
</TABLE>




                 See notes to consolidated financial statements.


                                                                              23
<PAGE>   24


                                BROOKTROUT, INC.
             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                 (IN THOUSANDS)


                                                        YEARS ENDED DECEMBER 31,
                                                      --------------------------
                                                       1999      1998      1997
                                                      -------   -------   ------

Net income .........................................  $19,154   $   333   $2,651


  Unrealized gains (losses) on marketable securities    1,885    (1,885)       8
  Foreign currency translation adjustment ..........      (68)      (49)      --
                                                      -------   -------   ------

Comprehensive income (loss) before income tax
  provision (benefit) ..............................   20,971    (1,601)   2,659

Income tax provision (benefit) related to items of
  comprehensive income .............................      735      (735)       3
                                                      -------   -------   ------

Comprehensive income (loss) ........................  $20,236   $  (866)  $2,656
                                                      =======   =======   ======




                 See notes to consolidated financial statements.


                                                                              24
<PAGE>   25



                                BROOKTROUT, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>

                                                                                               ACCUMULATED
                                                                                                  OTHER
                                             COMMON  STOCK      TREASURY STOCK    ADDITIONAL  COMPREHENSIVE
                                          -------------------  -----------------    PAID-IN       INCOME     RETAINED
                                            SHARES    AMOUNT    SHARES   AMOUNT     CAPITAL       (LOSS)     EARNINGS    TOTAL
                                          ----------  -------  -------   -------  ----------  -------------  ---------  -------
<S>                                       <C>            <C>             <C>         <C>                <C>    <C>      <C>
January 1, 1997.......................... 10,683,352     $107       --   $    --     $31,785            ($8)   $15,708  $47,592
  Issuance of common stock for cash......     57,843       --       --        --         193             --         --      193
  Unrealized gains on marketable
   securities, net of tax................         --       --       --        --          --              8         --        8
  Net income.............................         --       --                             --             --      2,651    2,651
                                          ----------  -------  -------   -------  ----------  -------------  ---------  -------
December 31, 1997........................ 10,741,195      107       --        --      31,978             --     18,359   50,444
  Issuance of common stock for cash......     87,167        1       --        --         443             --         --      444
  Tax benefit of stock options...........         --       --       --        --         107             --         --      107
  Unrealized losses on marketable
   securities, net of tax................         --       --       --        --          --         (1,150)        --   (1,150)
  Currency translation adjustment........         --       --       --        --          --            (49)        --      (49)
  Net income.............................         --       --       --        --          --             --        333      333
                                          ----------  -------  -------   -------  ----------  -------------  ---------  -------
December 31, 1998........................ 10,828,362      108       --        --      32,528         (1,199)    18,692   50,129
  Issuance of common stock for cash......    175,657        2       --        --       1,273             --         --    1,275
  Impact of Interspeed stock option
    exercises............................         --       --       --        --       2,136             --         --    2,136
  Increase resulting from sale of stock
   by Interspeed.........................         --       --       --        --       6,980             --         --    6,980
  Purchase of treasury stock.............         --       --  247,582   $(3,447)         --             --         --   (3,447)
  Tax benefit of stock options...........         --       --       --        --          74             --         --       74
  Unrealized gains on marketable
   securities, net of tax................         --       --       --        --          --          1,150         --    1,150
  Currency translation adjustment........         --       --       --        --          --            (68)        --      (68)
  Net income.............................         --       --       --        --          --             --     19,154   19,154
                                          ----------  -------  -------   -------  ----------  -------------  ---------  -------
December 31, 1999.......................  11,004,019     $110  247,582   $(3,447)    $42,991          ($117)   $37,846  $77,383
                                          ==========  =======  =======   =======  ==========  =============  =========  =======
</TABLE>

                 See notes to consolidated financial statements.


                                                                              25
<PAGE>   26



                                BROOKTROUT, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                           ------------------------------
                                                             1999       1998       1997
                                                           --------   --------   --------
<S>                                                        <C>        <C>        <C>
Cash flows from operating activities:
Net income ..............................................  $ 19,154   $    333   $  2,651

Adjustments to reconcile net income to cash
   provided by operating activities:
   Gain on Brooktrout's sale of Interspeed stock ........   (19,252)        --         --
   Gain on sale of investment ...........................    (2,486)        --         --
   Non-cash compensation expense ........................     2,730         --         --
   Minority interest ....................................    (1,355)        --         --
   Depreciation and amortization ........................     5,494      2,852      1,815
   Purchased research and development ...................        --      9,786      3,746
   Amortization of (premium) discount on
      marketable securities .............................        --        (47)       (44)
   Deferred income taxes ................................      (625)    (4,742)    (2,369)
   Increase (decrease) in cash from (net of acquisition):
      Accounts receivable ...............................    (6,395)    (2,208)     1,083
      Inventory .........................................    (3,534)      (250)       957
      Other prepaid expenses ............................      (733)      (419)       346
      Accounts payable and other accruals ...............     3,446      5,098      1,368
                                                           --------   --------   --------
         Cash (used in) provided by operating
          activities ....................................    (3,556)    10,403      9,553
Cash flows from investing activities:
   Expenditures for equipment and furniture .............    (3,475)    (3,797)    (2,717)
   Acquisition of subsidiary (net of
     cash acquired) .....................................        --    (29,400)    (9,909)
   Investment and other assets ..........................       (79)       107       (508)
   Brooktrout's sale of Interspeed stock, net of
      related expenses ..................................    21,483         --         --
   Purchases of marketable securities ...................    (1,492)   (13,695)    (8,754)
   Sales of marketable securities .......................     8,208     16,433      9,320
                                                           --------   --------   --------
         Cash provided by (used for)
          investing activities ..........................    24,645    (30,352)   (12,568)
Cash flows from financing activities:
   Proceeds from the sale of common stock ...............     1,275        444        193
   Tax benefit of stock options .........................        74        107         --
   Proceeds from exercise of Interspeed options .........       217         --         --
   Purchase of treasury stock ...........................    (3,447)        --         --
   Proceeds from Interspeed's sale of stock,
      net of offering expenses ..........................    20,815         --         --
                                                           --------   --------   --------
         Cash provided by financing activities ..........    18,934        551        193
                                                           --------   --------   --------
Increase (decrease) in cash and equivalents .............    40,023    (19,398)    (2,822)
  Cash and equivalents, beginning of year ...............     8,518     27,916     30,738
                                                           --------   --------   --------
Cash and equivalents, end of year .......................  $ 48,541   $  8,518   $ 27,916
                                                           ========   ========   ========
</TABLE>


                 See notes to consolidated financial statements.


                                                                              26
<PAGE>   27



                                BROOKTROUT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Business - During 1999, Brooktrout, Inc. (the "Company") reorganized its
lines of business and changed its name from Brooktrout Technology, Inc. to
Brooktrout, Inc. The Company supplies electronic communications products to
system vendors, service providers, and value added resellers, or VARs,
developing applications for the new global communications network. The Company
is organized and reports the results of its operations in the following three
business segments: Brooktrout Technology, Brooktrout Software, Inc. ("Brooktrout
Software"), and Interspeed, Inc. ("Interspeed"). These segments are
differentiated based upon the products and services provided to the marketplace,
the customers served, and the distribution channels.


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


     Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries, and
Interspeed, its majority-owned subsidiary. As of December 31, 1999, the Company
owned approximately 57% of the outstanding common stock of Interspeed due to
Interspeed's initial public offering (the "Offering") on September 24, 1999. For
the year ended December 31, 1998, the consolidated results of operations reflect
Interspeed as a wholly-owned subsidiary of the Company. All significant
intercompany balances and transactions have been eliminated.


     Revenue Recognition -- Revenue from product or software sales is recognized
upon the shipment or delivery of product. Revenue from maintenance and support
contracts is deferred and recognized ratably over the service period.
Maintenance and support revenue included with an initial license fee is
unbundled and recognized ratably over the service period.


     Concentration of Credit Risk -- The Company sells its products to various
customers in several industries. The Company generally requires no collateral;
however, to reduce credit risk the Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. At
December 31, 1999 and 1998, 10% and 19%, respectively, of the Company's accounts
receivable were from one customer (see Note 10).


                                                                              27
<PAGE>   28


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     Inventory -- Inventory is carried at the lower of cost (first-in, first-out
basis) or market and consisted of the following:

                                                          DECEMBER 31,
                                               --------------------------------
                                                   1999                 1998
                                               -----------          -----------
     Raw materials...........................  $ 7,254,000          $ 3,277,000
     Work in process.........................    1,658,000            2,164,000
     Finished goods..........................    5,290,000            5,227,000
                                               ===========          ===========
              Total..........................  $14,202,000          $10,668,000
                                               ===========          ===========


     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).


     Software Development Costs -- Certain software development costs are
capitalized following attainment of technological feasibility. No such costs
were incurred in 1999, 1998, or 1997.


     Research and Development Costs -- Research and development costs, other
than software development costs, are expensed as incurred.


     Intangible Assets - Intangible assets include acquired technology, customer
base, trademarks, and in-place workforce and are stated at acquisition cost.
Acquired technology is being amortized on a straight line basis over 5 to 10
years while all other intangibles are being amortized over periods of 3 to 5
years. Total accumulated amortization at December 31, 1999 and 1998 was
$1,940,000 and $157,000, respectively.


     Warranty Costs -- Estimated costs of warranty repairs are provided at the
time of sale of the related product.


     Income Taxes -- Deferred tax assets and liabilities are recorded to
recognize temporary differences between the book and tax bases of the Company's
assets and liabilities. These assets and liabilities are measured using the
enacted rates and laws that will be in effect when the differences are expected
to reverse.




                                                                              28
<PAGE>   29



                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     Investments -- The Company had an investment in the common stock of a
company operating in the computer telephony industry. The investment represented
less than 20% of the voting interest. Because the common stock of this company
was not readily marketable, the investment was carried at cost and periodically
assessed for potential impairment in value. During 1999, the Company concluded
that its investment had been fully impaired and therefore the investment was
reduced to $0. The Company's investment aggregated $655,000 at December 31,
1998.


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

     Supplemental disclosure of cash flow information:

                                                   YEARS ENDED DECEMBER 31,
                                             -----------------------------------
                                                 1999        1998        1997
                                             -----------  ----------  ----------
     Cash paid for interest................  $     8,000  $    3,000  $   11,000
     Cash paid for income taxes............   12,603,000   3,992,000   2,401,000


     Marketable Securities -- Marketable securities are classified as
available-for-sale and are carried at fair market value using current market
quotes. Unrealized gains or losses are included in comprehensive income (loss).

     Marketable securities at December 31, 1999 consist of U.S. government notes
and bonds, commercial paper, and certificates of deposit. Gross unrealized
losses related to the equity securities were $1.9 million at December 31, 1998.
During the year ended December 31, 1999, the Company realized a gain on the sale
of securities of $2.5 million. During the years ended December 31, 1998 and
1997, there were no significant realized gains or losses from sales of these
securities.


     Income per Share - Basic income per share is computed using the weighted
average number of common shares outstanding during each year. Diluted income per
share reflects the effect of the Company's outstanding options (using the
treasury stock method), except where such options would be antidilutive.



                                                                              29
<PAGE>   30


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



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

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                                --------------------------------------
                                                   1999          1998          1997
                                                ----------    ----------    ----------

<S>                                             <C>           <C>           <C>
Weighted average shares for basic               10,882,000    10,784,000    10,702,000
Dilutive effect of stock options                   700,000       699,000       598,000
                                                ----------    ----------    ----------
Weighted average shares for diluted             11,582,000    11,483,000    11,300,000
                                                ==========    ==========    ==========
</TABLE>





     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 4). Marketable securities are carried at fair value date. Management
estimates that carrying value approximates fair value for all other financial
instruments.


     Stock-Based Compensation -- Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic value method of
Accounting Principles Board Opinion No. 25.


     Staff Accounting Bulletin No. 51 - The Company has adopted a Staff
Accounting Bulletin No. 51 ("SAB 51") policy to record gains as a result of
equity transactions by its subsidiaries in the Consolidated Statement of Income,
except for any transactions which must be credited directly to equity in
accordance with the provisions of SAB 51. During 1999, the Company recorded
additional paid-in capital of approximately $7.0 million, net of deferred tax,
as a result of subsidiary equity transactions.


RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the financial statements of
the Company. The Company expects to adopt this accounting standard for the
fiscal year commencing January 1, 2001, as required.


                                                                              30
<PAGE>   31


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


2. INTERSPEED, INC.

On September 24, 1999, Interspeed sold 2 million shares of its common stock in
an initial public offering at a price of $12 per share pursuant to a
registration statement on Form S-1 (333-81071), as amended, under the Securities
Act of 1933, as amended. In the Offering, the Company sold 1.5 million shares of
Interspeed common stock that it owned. Due to the sale of the 2 million shares
of stock by Interspeed, the Company recorded additional paid-in capital of
approximately $7.0 million, net of deferred tax, reflecting the increase in its
investment in Interspeed. In October, the Company sold an additional 425,000
shares of Interspeed common stock at a price of $12 per share pursuant to the
underwriters' over allotment option. After these transactions, the Company owns
approximately 6.1 million 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 $19.9 million, net of offering
related costs.


3. ACQUISITIONS

Computer Telephony Products business of Lucent Technologies Inc.

     On December 17, 1998, the Company acquired the assets and assumed certain
liabilities of the Computer Telephony Products ("CTP") business of Lucent
Technologies Inc. CTP provides technologies for the voice processing industry
and manufactures hardware and software components that connect PCs and LANs with
telephone networks. The purchase price was $29.4 million, paid in cash, plus
$1.1 million of transaction costs, and the Company assumed certain liabilities
aggregating $1.9 million.

     The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of the CTP business have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using an independent appraisal. The fair value of the assets acquired and
liabilities assumed exceeded the purchase price resulting in a pro rata
reduction in identified non-current assets purchased. This has been reflected in
the amounts presented in the table below. The following is a summary of the
purchase price allocation.


                                                                              31
<PAGE>   32


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)




     Cash paid                                        $29,400,000
     Transaction costs                                  1,148,000
                                                      -----------

     Total purchase price                             $30,548,000
                                                      ===========


     Allocated to tangible assets acquired             $7,915,000

     Allocated to liabilities assumed                  (1,863,000)

       Purchased research and development               9,786,000
       Existing technology                             12,157,000
       Customer base                                    1,276,000
       Trademark                                          304,000
       In-place workforce                                 973,000
                                                      -----------

     Total                                            $30,548,000
                                                      ===========


     The Company recorded a one-time charge of $9.8 million in the fourth
quarter of 1998 for purchased in-process technology related to seven development
projects that had not reached technological feasibility, had no alternative
future use, and for which successful development was uncertain.


Netaccess, Inc.

     On June 30, 1997, the Company acquired the assets and assumed certain
liabilities of Netaccess, Inc. ("Netaccess"), a worldwide supplier of Primary
Rate ISDN network interface products and multiport modem products for open,
standards-based remote access and computer telephony systems. The purchase price
was $9.9 million, paid in cash, and the Company agreed to assume certain
liabilities aggregating $2.0 million.

     The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of Netaccess have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using an independent appraisal.

     The Company has recorded a charge of $3.7 million ($2.3 million, net of tax
benefits) in 1997 representing the estimated value of Netaccess' research and
development efforts in-process. Such efforts had not yet reached technological
feasibility and did not possess alternative uses.


                                                                              32
<PAGE>   33



                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     The following table represents pro forma information as if the acquisitions
described had taken place at the beginning of each respective period.

                                          YEARS ENDED DECEMBER 31,
                                          1998 (1)        1997 (2)
                                       ------------     ------------

     Revenue                           $130,068,000     $108,106,000

     Net income                        $  4,438,000     $  5,417,000

     Basic income per share            $       0.41     $       0.51

     Diluted income per share          $       0.39     $       0.48



     (1) Pro forma reflects the acquisition of CTP as if the acquisition had
     taken place at the beginning of the period.

     (2) Pro forma reflects the acquisitions of CTP and Netaccess as if both
     acquisitions had taken place at the beginning of the period.


4. BANK LINE OF CREDIT

     The Company has a line of credit with a bank. The Company may borrow up to
$10,000,000 on an unsecured basis, all of which may be used for issuance of
letters of credit, subject to compliance with certain covenants. At December 31,
1999, there were no commitments outstanding on letters of credit; no borrowings
have been made during any period presented. Any amounts borrowed under the line
of credit would be subject to interest at the lender's prime rate. The line is
subject to annual renewal and expires in July 2000.


                                                                              33
<PAGE>   34


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



5. INCOME TAXES

     The provision (benefit) for income taxes is approximately as follows:

                                               YEARS ENDED DECEMBER 31,
                                     -------------------------------------------
                                         1999           1998            1997
                                     ------------   ------------    ------------
Federal--current ................    $11,210,000    $ 3,456,000     $ 3,092,000
State--current ..................      2,482,000        857,000         771,000
Foreign--current ................        146,000         53,000            --
Federal--deferred ...............       (487,000)    (4,312,000)     (1,886,000)
State--deferred .................       (138,000)      (431,000)       (483,000)
Tax benefit of disqualifying
  dispositions of stock options..         74,000        107,000            --
                                     -----------    -----------     -----------
Provision (benefit) .............    $13,287,000    ($  270,000)    $ 1,494,000
                                     ===========    ===========     ===========


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

                                                       YEARS ENDED DECEMBER 31,
                                                     ---------------------------
                                                       1999      1998       1997
                                                     ------    -------    ------
 Statutory tax rate...............................      35%       35%       34%
 State taxes, net of federal benefit..............       6         4         6
 Losses from subsidiary, not tax deductible.......       2        --        --
 Non-deductible non-cash compensation.............       3
 Foreign sales corporation........................      (2)     (400)       (4)
 Meals and entertainment..........................       1       152        --
 Research and development credits.................      (2)     (220)       --
                                                     ------    -------    ------
 Effective tax rate                                     43%     (429)%      36%
                                                     ======    =======    ======


                                                                              34
<PAGE>   35


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     The tax effects of significant items comprising the Company's net deferred
tax position as of December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                            1999           1998
                                                         ----------     ----------
<S>                                                      <C>            <C>
Deferred Taxes:
  Current:
     Reserves and accruals not currently deductible
        for tax purposes ............................    $4,773,000     $3,505,000
      Purchased research and development, capitalized
        for tax but expensed for book ...............       348,000        348,000
                                                         ----------     ----------
  Current tax assets ................................    $5,121,000     $3,853,000
                                                         ==========     ==========

  Long-term assets:
      Purchased research and development, capitalized
        for tax but expensed for book ...............    $4,371,000     $4,719,000
  Long-term liabilities:
      Unrealized gain on Interspeed
        investment ..................................     4,850,000             --
                                                         ----------     ----------
Net long-term tax (liabilities) assets ..............    $ (479,000)    $4,719,000
                                                         ==========     ==========
</TABLE>



6. STOCKHOLDERS' EQUITY

     Brooktrout Inc. Stock Option Plans -- The Company has four stock option
plans in place providing for the grant of options to purchase up to 4,364,000
shares of common stock: the 1984 Stock Incentive Plan (the "1984 Plan"), the
1991 Executive Stock Incentive Plan (the "Executive Plan"), the 1992 Stock
Incentive Plan (the "1992 Plan") and the 1999 Stock Incentive Plan (the "1999
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; in
some instances, vesting can accelerate 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 from these
plans.


                                                                              35
<PAGE>   36


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     The following is a summary of stock option activity under all Brooktrout,
Inc. plans:

                                                               WEIGHTED AVERAGE
                                           NUMBER OF SHARES     EXERCISE PRICE
                                           -------------------------------------
     Outstanding at January 1, 1997               1,509,363         $11.61
         Granted                                    478,875         $11.80
         Exercised                                  (40,249)        $ 0.82
         Expired                                    (19,851)        $17.07
                                                  ---------

     Outstanding at December 31, 1997             1,928,138         $11.92
         Granted                                    637,625         $14.14
         Exercised                                  (53,959)        $ 3.46
         Expired                                    (20,500)        $11.11
                                                  ---------

     Outstanding at December 31, 1998             2,491,304         $12.68
                                                  ---------

         Granted                                    916,925         $13.66
         Exercised                                 (126,737)        $ 4.89
         Expired                                   (222,052)        $18.02
                                                  ---------

     Outstanding at December 31, 1999             3,059,440         $12.92
                                                  =========


                                                                              36
<PAGE>   37


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


         The following table sets forth information regarding Brooktrout, Inc.
options outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                                                                              WEIGHTED
                                                                                               AVERAGE
                                                 WEIGHTED        WEIGHTED                     EXERCISE
         RANGE OF                                AVERAGE         AVERAGE       NUMBER         PRICE FOR
         EXERCISE               NUMBER OF        EXERCISE       REMAINING     CURRENTLY       CURRENTLY
          PRICES                 SHARES           PRICE        LIFE (YEARS)  EXERCISABLE     EXERCISABLE

<S>                              <C>              <C>              <C>         <C>              <C>
      $ 0.20 - $ 6.11            114,017          $ 2.85           2.48        114,017          $ 2.85
               $ 6.33            545,807          $ 6.33           4.27        545,807          $ 6.33
      $ 6.56 - $10.63            375,285          $ 9.29           6.98        258,819          $ 9.48
      $10.63 - $11.81            489,281          $11.37           9.18        126,421          $11.39
      $11.88 - $14.19            291,875          $12.82           8.54         82,131          $12.86
      $14.31 - $14.56            327,700          $14.56           8.96         64,490          $14.56
      $14.75 - $17.50            335,975          $16.20           9.50          9,941          $15.95
      $17.83 - $22.00            124,125          $18.60           8.25         32,606          $18.48
               $22.50            412,500          $22.50           6.47        412,500          $22.50
      $23.50 - $31.50             42,875          $27.23           6.78         29,075          $26.86
      ---------------          ---------          ------           ----      ---------          ------
      $ 0.20 - $31.50          3,059,440          $12.21           7.30      1,675,807          $12.92
      ===============          =========          ======           ====      =========          ======
</TABLE>



     At December 31, 1998 and 1997 options to purchase 1,381,237 and 1,164,233
shares, respectively, were exercisable.

     Brooktrout Inc. Stock Purchase Plan -- The Company's 1992 Employee Stock
Purchase Plan (the "Purchase Plan") provides for sales to participating
employees of up to 212,500 shares of common stock, at prices not less than 85%
of fair market value on the beginning or ending date of the six month offering
period provided for purchase, whichever is lower. Through December 31, 1999,
common stock shares totaling 154,707 had been issued to employees under the
Purchase Plan.



                                                                              37
<PAGE>   38


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     Pro Forma Disclosure -- 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 fair value method
to measure compensation, reported net income and earnings per share would have
been as follows:

                                               1999          1998         1997
                                           -----------   ------------   --------


Net income (loss)                          $11,223,000   $(2,249,000)   $855,000

Basic income (loss) per common share       $      1.03   $     (0.21)   $   0.08

Diluted income (loss) per common share     $       .97   $     (0.21)   $   0.08



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

                                             1999           1998          1997
                                          ---------      ---------     ---------
Risk-free interest rate                      6.2%           4.5%          5.2%
Expected life of option grants            5.0 years      5.0 years     5.0 years
Expected volatility of underlying stock   76% - 89%         73%           82%



     The estimated weighted average fair value of option grants made during
1999, 1998 and 1997 was $9.03, $8.91, and $8.29, respectively, per option. The
estimated weighted average fair value of grants made under the Purchase Plan
during 1999, 1998, and 1997 was $4.54, $3.46, and $3.64, respectively, computed
using the assumptions described above with an expected life of 6 months for the
option feature present in the Purchase Plan awards.


     Reserved Shares -- The Company has reserved 3,346,233 shares of common
stock for issuance upon the exercise of stock options and purchase of stock
under the Purchase Plan.


     Treasury Stock -- Under a stock repurchase program announced in October
1999, the Company is authorized to purchase up to 1 million shares from time to
time on the open market or pursuant to negotiated transactions. The
authorization expires in September 2000. The Company purchased 247,582 shares of
common stock in 1999 at an aggregate cost of $3.4 million.


                                                                              38
<PAGE>   39



                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     Subsidiary Stock Option Plans -- The Company has subsidiary stock plans in
place at Interspeed, Brooktrout Software, and Beacon Networks, Inc. providing
for the grant of options to employees of that subsidiary. None of these options
are convertible into or can be settled in Company stock. Prior to the Offering,
Interspeed granted options at exercise prices below fair market values. The
difference between the exercise price and the fair market value was recorded as
compensation expense, totaling $2.7 million, for the options that vested during
1999. The following table demonstrates the dilutive effect of these plans on the
Company's ownership interest in each subsidiary assuming all options outstanding
at December 31, 1999 in each category were exercised:

                             Maximum
                           Dilution to        Weighted
     Outstanding            Company's          Average        Maximum
       Options             Interest in        Exercise       Available
at December 31, 1999      Interspeed (1)        Price         Options
--------------------      --------------      --------       ---------

      1,776,706                 8%              $4.55        3,000,868



(1) Assuming exercise of all outstanding options.

     Interspeed's options generally vest over a period of 5 years and at
December 31, 1999, 189,681 of the options were exercisable.

     At December 31, 1999, no options had been granted under the Brooktrout
Software plan and the Beacon Networks, Inc. plan. During 1999, the Company
terminated a different subsidiary stock plan that had been in place in 1998.


7. LEASE COMMITMENTS

     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 $2,374,000, $2,106,000,
and $1,547,000 for each of the years ended December 31, 1999, 1998 and 1997,
respectively.

     Minimum Lease Payments Under Non-Cancelable Operating Leases

        YEARS ENDING DECEMBER 31,
        -------------------------
                  2000..........................................     $2,277,000
                  2001..........................................      1,513,000
                  2002..........................................      1,408,000
                  2003..........................................      1,212,000
                  2004..........................................        661,000
                  Thereafter....................................      1,052,000
                                                                     -----------
                           Total................................     $8,123,000
                                                                     ===========


                                                                              39
<PAGE>   40


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


8. CONTINGENCIES

     The Company is a party to a number of legal actions which arise 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


9. 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. The
Company matches contributions equal to $.25 per dollar contributed up to a
maximum of 6% of a participant's salary. The Company contributed $314,000,
$209,000 and $121,000 to this plan in 1999, 1998 and 1997, respectively.


10. SEGMENT REPORTING

     Segment Reporting -- The Company is organized and reports the results of
its operations in the following three business segments: Brooktrout Technology,
Brooktrout Software and Interspeed. These segments are differentiated based upon
the products and services provided to the marketplace, the customers served, and
the distribution channels. Brooktrout Technology provides enabling technologies
for customers to deliver voice, fax and data solutions for the electronic
communications market. Brooktrout Software provides specialized e-Business
software and services that enable companies to connect traditional telephone
commerce systems with web-based commerce systems. Interspeed develops single
system, high-speed Internet access solutions for telephone companies and
Internet Service Providers. The Company evaluates performance and allocates
resources based on revenue, gross margin and income or loss from operations. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1).


                                        1999            1998          1997
                                    ------------    ------------   -----------

REVENUE:

Brooktrout Technology               $128,045,000    $ 94,959,000   $67,558,000
Brooktrout Software                    7,634,000       5,828,000     4,634,000
Interspeed                             5,066,000          64,000            --
                                    ------------    ------------   -----------
Consolidated revenue                $140,745,000    $100,851,000   $72,192,000
                                    ============    ============   ===========


GROSS MARGIN:

Brooktrout Technology               $ 79,792,000    $ 56,932,000   $37,339,000
Brooktrout Software                    4,468,000       3,007,000     2,472,000
Interspeed                             1,968,000          28,000            --
                                    ------------    ------------   -----------
Consolidated gross margin           $ 86,228,000    $ 59,967,000   $39,811,000
                                    ============    ============   ===========




                                                                              40
<PAGE>   41


                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                           1999              1998              1997
                                      -------------      ------------      ------------

<S>                                   <C>                <C>               <C>
INCOME (LOSS) FROM OPERATIONS: (1)

Brooktrout Technology                 $ 23,822,000       $ 7,151,000       $ 5,155,000
Brooktrout Software                     (3,726,000)       (3,759,000)         (924,000)
Interspeed (2)                         (11,626,000)       (5,219,000)       (1,763,000)
                                      ------------       -----------       -----------

Consolidated income (loss) from
  operations                             8,470,000        (1,827,000)        2,468,000

Interest income, net                       878,000         1,890,000         1,677,000

Net gain on investment activity         21,738,000                --                --
                                      ------------       -----------       -----------

Consolidated income before
  income tax provision (benefit)      $ 31,086,000       $    63,000       $ 4,145,000
                                      ============       ===========       ===========


DEPRECIATION AND AMORTIZATION
  EXPENSE:

Brooktrout Technology                 $  4,596,000       $ 2,149,000       $ 1,476,000
Brooktrout Software                        484,000           488,000           247,000
Interspeed                                 414,000           215,000            92,000
                                      ------------       -----------       -----------

Consolidated depreciation and
  amortization expense                $  5,494,000       $ 2,852,000       $ 1,815,000
                                      ============       ===========       ===========


ASSETS:

Brooktrout Technology                 $ 90,106,000       $70,063,000       $64,043,000
Brooktrout Software                      2,376,000         1,141,000           936,000
Interspeed                              22,953,000         1,270,000           436,000
                                      ------------       -----------       -----------
Consolidated assets                   $115,435,000       $72,474,000       $65,415,000
                                      ============       ===========       ===========


--------------------------------------------------------------------------------------
</TABLE>
(1) Amounts previously reported in 1998 and 1997 have been revised to reflect an
allocation of certain marketing and administrative expenses to the segments.
Prior segment disclosure reflected the expenses in Brooktrout Technology.

(2) Included in the Interspeed loss from operations in 1999 is a charge of $2,7
million reflecting non-cash compensation expenses as a result of stock option
grants.


                                                                              41
<PAGE>   42



                                BROOKTROUT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



     Major Customer -- One customer accounted for 12%, 22%, and 30% of net
revenue for the years ended December 31, 1999, 1998 and 1997, respectively.


     International Sales -- International sales, principally exports from the
United States, accounted for approximately 23%, 20%, and 19% of revenue for the
years ended December 31, 1999, 1998 and 1997, respectively.


11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                               FIRST            SECOND             THIRD            FOURTH
                                              QUARTER           QUARTER           QUARTER           QUARTER
                                            -----------      ------------       -----------      ------------
<S>                                         <C>              <C>                <C>              <C>
1999
Revenue ..............................      $32,218,000       $33,791,000       $34,406,000       $40,330,000
Gross profit .........................       19,261,000        20,578,000        21,560,000        24,829,000
Income (loss) from operations ........        2,321,000           671,000         2,145,000         3,333,000
Net income (loss) ....................        1,584,000          (109,000)       10,664,000         7,015,000
Basic income (loss) per common
  share ..............................      $      0.15       $     (0.01)      $      0.97       $      0.64
Diluted income (loss) per common
  share ..............................      $      0.14       $     (0.01)      $      0.91       $      0.61

1998
Revenue ..............................      $24,176,000       $26,104,000       $25,246,000       $25,325,000
Gross profit .........................       14,191,000        15,189,000        14,742,000        15,845,000
Income (loss) from operations ........        2,269,000         2,588,000         2,320,000        (9,004,000)
Net income (loss) ....................        1,713,000         1,988,000         1,764,000        (5,132,000)
Basic income (loss) per common
  share ..............................      $      0.16       $      0.18       $      0.16       $     (0.47)
Diluted income (loss) per common
  share ..............................      $      0.15       $      0.17       $      0.15       $     (0.47)

</TABLE>


                                                                              42
<PAGE>   43


DIRECTORS & EXECUTIVE OFFICERS

DIRECTORS

Eric R. Giler
President
Brooktrout, Inc.

David W. Duehren
Vice President of Research & Development
Brooktrout, Inc.

Patrick T. Hynes
Vice President of Advanced Product Engineering
Brooktrout, Inc.

Robert G. Barrett
General Partner
Battery Ventures, Inc.

W. Brooke Tunstall
President
Brooke Tunstall Associates

David L. Chapman
President
NorthPoint Software Ventures, Inc.

EXECUTIVE OFFICERS

Eric R. Giler
President
Brooktrout, Inc.

David W. Duehren
Vice President of Research and Development
Brooktrout, Inc.

Patrick T. Hynes
Vice President of Advanced Product Engineering
Brooktrout, Inc.

Robert C. Leahy
Vice President of Finance and Operations, and Treasurer
Brooktrout, Inc.

R. Andrew O'Brien
Vice President of Business Development
Brooktrout, Inc.



                                                                              43
<PAGE>   44



DIRECTORS & EXECUTIVE OFFICERS (CONTINUED.)

Jonathan J. Sirota
General Manager, Data Technology Division
Vice President, Brooktrout, Inc.

Michael Donoghue
General Manager, IP/Fax Technology Division
Vice President, Brooktrout, Inc.

John Ison
General Manager, Voice Technology Division
Vice President, Brooktrout, Inc.

Heather Magliozzi
Vice President of Corporate Communications, Brooktrout, Inc.

John M. Faiman
Senior Vice President of Worldwide Sales, Brooktrout Technology

Mark Flanagan
President, Brooktrout Software, Inc.
Vice President, Brooktrout, Inc.

Stephen A. Ide
President, Interspeed, Inc.

Jean Dubois
President, Beacon Networks, Inc.



                                                                              44
<PAGE>   45


Stock Price Information - NASDAQ National Market System ("BRKT")

<TABLE>
<CAPTION>
                                      1999                                                 1998

<S>                         <C>       <C>      <C>     <C>                       <C>        <C>      <C>
QUARTER ENDED               HIGH      LOW      CLOSE   QUARTER ENDED             HIGH       LOW      CLOSE

March 31                    $17.00    $10.25   $10.50  March 31                  $18.88     $11.50    $18.88

June 30                     $20.38    $10.19   $16.06  June 30                   $21.50     $12.94    $13.88

September 30                $19.00    $13.38   $13.88  September 30              $18.38     $ 9.75    $13.59

December 31                 $19.00    $11.69   $18.56  December 31               $17.88     $10.75    $17.13
</TABLE>




GENERAL COUNSEL
Goodwin, Procter & Hoar LLP
Boston, MA

INDEPENDENT AUDITORS
Deloitte & Touche LLP
Boston, MA

SHAREHOLDER INFORMATION

     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 8, 2000, there were 432 holders of record of the Company's
common stock and the closing price of the common stock on the NASDAQ National
Market System was $48.00 per share.

TRANSFER AGENT
State Street Bank & Trust Company
c/o EquiServe, Limited Partnership
P.O. Box 8040
Boston, MA  02266-8040
781-575-3400
www.equiserve.com

INFORMATION REQUESTS
A COPY OF THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN
REQUEST TO THE COMPANY.

PLEASE ADDRESS REQUESTS TO:
Investor Relations
Robert C. Leahy
Vice President of Finance and Operations, and Treasurer
Brooktrout, Inc.
410 First Avenue
Needham, MA  02494-2722

ANNUAL MEETING
Thursday, May 11, 2000 at 9:30 a.m.
Fleet National Bank
1 Federal Street
Boston, MA  02109


                                                                              45
<PAGE>   46

OFFICES


CORPORATE HEADQUARTERS

Brooktrout, Inc.
410 First Avenue
Needham, MA  02494-2722
info@brooktroutinc.com
www.brooktroutinc.com
Phone 781-449-4100
Fax 781-449-3171


SUBSIDIARIES

Brooktrout Technology, Inc.
410 First Avenue
Needham, MA  02494-2722
info@brooktrout.com
www.brooktrout.com
Phone 781-449-4100
Fax 781-449-3171

Brooktrout Software, Inc.
333 Turnpike Road
Southborough, MA  01772
info@brooksoft.com
www.brooksoft.com
Phone 508-229-7777
Fax 508-229-8777

Interspeed, Inc.
39 High Street
North Andover, MA  01845
info@interspeed.com
www.interspeed.com
Phone 978-688-6164
Fax 978-688-4798

Beacon Networks, Inc.
260 Cedar Hill Street
Marlborough, MA.  01752
www.beaconnetworks.com
Phone 508-480-3600
Fax  508-485-7635



                                                                              46