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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

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

|(Mark one)                                  |   |  |                                                                                         
|------------------------------------------- | - |  | ----------------------------------------------------------------------------------------
|                                            | ý |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2003
|                                            | o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to
.

Commission File No. 000-20698

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

|MASSACHUSETTS(State or Other Jurisdiction of
Incorporation or Organization) |  | 04-2814792(I.R.S. Employer
Identification No.)
|--------------------------------------------------------------------------- |  | ----------------------------------------------

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

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

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

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

Common Stock
(title of class)

Preferred Stock Purchase Rights
(title of class)


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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes ý No o

On June 30, 2003 (the last business day of the registrant's most recently completed second fiscal quarter), the aggregate market value of the voting and
non-voting common equity held by nonaffiliates of the registrant was approximately $84.5 million, based on the last reported sale price of $7.88 of the registrant's common stock on
the Nasdaq National Market.

As
of January 31, 2004, 12,756,536 shares of common stock, $.01 par value per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 5, 2004 will be incorporated into
Part III, Items 10, 11, 12, 13 and 14, of this Form 10-K. A copy of the Proxy Statement will be available at no cost from our Investor Relations department at
(781) 449-4100.



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BROOKTROUT, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS



|         |  |                                                                                                              |  | Page
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|PART I  
|Item 1.  |  | Business                                                                                                     |  | 1   
|Item 2.  |  | Properties                                                                                                   |  | 10  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 11  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 11  
|PART II 
|Item 5.  |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 11  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 12  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 13  
|         |  | Overview                                                                                                     |  | 13  
|         |  | Application of Critical Accounting Policies                                                                  |  | 13  
|         |  | Discontinued Operations                                                                                      |  | 15  
|         |  | Results of Operations                                                                                        |  | 16  
|         |  | Liquidity and Capital Resources                                                                              |  | 20  
|         |  | Recent Accounting Pronouncements                                                                             |  | 22  
|         |  | Factors That May Affect Future Results                                                                       |  | 22  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 31  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 31  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 55  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 55  
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 56  
|Item 11. |  | Executive Compensation                                                                                       |  | 56  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 56  
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 56  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 56  
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                             |  | 57  
|         |  | Signatures                                                                                                   |  | 60  
|         |  | Exhibit Index                                                                                                |  | 61  

"Brooktrout,"
"Brooktrout Technology," "Netaccess," "RealBLOCs," "RealCT," "TruFax" and "TRxStream" are our registered trademarks, and "New Network," "NS301," "NS700," "Partner Access
Network Program," "TR2020," "TR1034," "TR1000," "TR114," and "Vantage" are our trademarks. This report also includes trademarks, service marks and trade names of other companies.

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PART I

Item 1. Business

Overview

We develop software and hardware platforms that original equipment manufacturers, or OEMs, developers and corporate information technology managers build into
their communications systems. Customers incorporate our products into applications, systems and services that allow voice, fax and data to be distributed over both Internet protocol, or IP,
packet-based networks, which we refer to as the New Network, and the traditional circuit-switched telephone network. We supply products for media processing, network interface, call control and signal
processing, including protocols that allow Internet and traditional telephony systems to communicate. Our strategy is to partner with our customers and collaborate closely with them to accelerate
their delivery of new applications and services, help increase their existing business, and expand into new markets.

In
the 1980s, we delivered technology capable of digitally recording, storing and playing back voice messages using a computer connected to the telephone. In the 1990s, we introduced
multi-channel fax boards, we combined fax and voice processing on a single board, and we provided fax application development tools under UNIX and Microsoft Windows NT. We received U.S. patents on
fax-on-demand document retrieval and the use of direct inward dialing telephone service with fax message systems. Since 2000, we have introduced new, open systems products in
support of market growth areas such as automatic speech recognition, unified communications and packetized voice, and we received a U.S. patent for voice detection in audio signals to aid in speech
recognition applications.

The
evolution of the world's communications systems has created important market opportunities for us. One opportunity involves core technologies and platforms that are primarily used in
Today's Networkbusiness premise products such as local area network fax and voice mail. The second opportunity is what we refer to as the New Networkthe convergence of the
traditional telephone network and the Internet. New Network opportunities enable voice, fax and data information to be distributed using IP-based packet networks, such as the Internet, for
portions of the transmission or to be distributed using the traditional circuit-switched telephone network. Effective electronic communication over the New Network is dependent upon network
infrastructure technology that weaves together the many disparate systems and applications that already exist with the new and emerging technologies. We develop the core technology that hooks the
telephone network to the data network in two key markets: voice and speech, and fax. Network interfaces, call control and signal processing are critical to the proper functioning of any communications
system. These capabilities span our entire product line and are the intelligence by which telephone calls are established, managed and terminated.

We
were incorporated in Massachusetts in 1984 and we changed our name from Brooktrout Technology, Inc. to Brooktrout, Inc. in 1999. Prior to February 8, 2001, we
were organized and reported the results of our operations in three operating segments, Brooktrout Technology, Brooktrout Software, and Interspeed. On February 8, 2001, our Board of Directors
adopted formal plans to discontinue our Brooktrout Software and Interspeed segments. We have accounted for these businesses as discontinued operations. See Note 2 to the consolidated financial
statements included elsewhere in this report. Except where indicated, the information presented in this report pertains to our continuing operations.

We
maintain a website with the addresswww.brooktrout.com/investor. We are not including the information contained on our website as a
part of, or incorporating it by reference into, this report. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file them with the SEC.

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Principal Markets and Products



Our
products provide enabling technology in two key marketsvoice and speech, and fax.



Speech technology is rapidly emerging as the user interface of choice for advanced communications applications. Interactive speech applications allow users to
instantly access information and conduct transactions from any landline or wireless phone, or other handheld device. Speech technology is lowering costs, improving customer satisfaction, and driving
the development of applications that deliver innovative value-added services to a growing number of mobile customers. Today's end users demand speech systems that are accurate, fast and easy to use.
Choosing the right speech platform can make a difference in the performance and scalability of speech applications.

Our
voice processing products support a wide range of capabilities, from simple 2-channel, or port, voice messaging boards, to large scale, high-density media
servers. Our advanced echo cancellation and voice-activity detection technology improve the performance, cost, and scalability of speech recognition systems. Our voice product offerings include
products that operate in the traditional telephone network, products that operate in the packet-based network, and products that operate in both such networks.

As
a provider of open systems enabling technology, our products are only one component of an overall solution. We rely on the strength of our partners to ensure that together we provide
quality voice and speech solutions. We continue to work closely with the leading providers of speech technology and development tools to ensure interoperability and optimal performance so that
applications developed using our products can be developed with ease and deployed with confidence.

Voice
eXtensible Markup Language, or VoiceXML, and Speech Application Language Tags, or SALT, are emerging software standards intended to address the unique user-interface
requirements of interactive, speech-enabled applications. These two programming languages are the speech equivalent of HyperText Markup Language, or HTML, which is the authoring software language used
on the Internet's World Wide Web. As extensions of standard Web technology, they leverage the existing Web infrastructure, applications, skilled developers and tools, greatly simplifying the
development and deployment of speech-enabled applications. Brooktrout is actively involved in supporting current and emerging industry standards. Our speech boards support our partners' VoiceXML and
SALT browsers, transparently handling media and telephony signaling tasks in these environments.



Messaging systems are growing in scope and sophistication as companies exploit the collaborative nature of messaging to aid employee communication and
productivity. Brooktrout keeps pace with the continuing advancement of communications needs by investing in fax technology to help build the next generation of messaging and communication systems.

We
are the worldwide market leader of intelligent fax boards. The market for fax technology is growing due to continued e-mail usage and the desire to connect faxes with
e-mail. We offer open, scalable platforms that easily integrate with e-mail, enterprise resource planning, customer relationship management, and document management and imaging
applications to independent software vendors and fax application system developers.

We
provide technology for systems of all sizes, from small one-port systems to multiple T1 and E1 spans. Our boards provide a wide range of processing capabilities for
network and production fax applications such as purchase orders, invoices, loan applications and approvals, and financial reports.

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They
are built into products to enable desktop fax users to send and receive documents securely and confidentially, as well as to access faxes over the Internet.



TR1000 Media Resource Platformis a standards-based, board-level voice and fax processing platform designed to
support speech, interactive voice response, or IVR, messaging, and conferencing and fax applications. Ranging from two to 60 channels per board, the performance and flexibility of this
feature-rich media platform allows systems to scale in density and functionality to meet the current and evolving needs of advanced enterprise and service provider applications. The TR1000
platform integrates digital signal processors, or DSPs, embedded microprocessors, analog, basic rate interface, or BRI, T1/E1 interfaces, primary rate interfaces, or PRI, and software within a common
hardware and software architecture, and is specifically designed to support multiple, scalable services and a seamless migration path within the entire product family. Applications supported by the
TR1000 platform include pre-paid/debit calling card systems, announcement systems, conferencing, media servers, speech solutions, and unified messaging and communications.

TR2020 PCI Platformis an open systems platform for voice over packet applications. This board performs a number of key functions
including voice compression, as well as fax and data relay. The TR2020 platform includes on-board packetization, T1/E1 telephony interfaces, echo cancellation, approvable Network Equipment
Building Standards, or NEBS, compliance and a growing list of U.S. and international telephony approvals. Applications supported by the TR2020 include voice over IP gateways,
wireless-to-IP gateways, voice over cable, Internet call waiting, click to talk, audio/web conferencing, IP-private branch exchange and IP-enabled call
centers.

RealBLOCs DR-A Advanced Call Recording Platformis an open systems platform that is scaleable and feature-optimized to deliver
accuracy and clarity for call recording applications. The RealBLOCs DR-A platform can be used to build call recording platforms from eight ports to over 264 ports per system. The RealBLOCs
DR-A platform is comprised of a peripheral component interconnect, or PCI, baseboard with analog passive tap interfaces and a plug-in digital signal processor module with call
recording firmware. Applications supported include call logging and quality monitoring.

Vantage PCI Voice Processing Platformis a flexible and robust platform, providing developers and system integrators with a single-board
solution for low- to mid-density analog communications applications. The Vantage PCI platform incorporates voice processing algorithms that implement essential features such as
audio compression, playback control, touchtone detection and generation, and call progress monitoring. Applications supported by the Vantage PCI platform include voice messaging, unified messaging,
automated attendant, digital recording, interactive voice response, and telemarketing.

RDSP Voice Processing Platformis a robust platform for computer telephony applications. The RDSP platform, which ranges from two to 24
ports per board features voice processing algorithms that implement essential features such as audio compression, playback control, touchtone detection and generation, and call progress monitoring,
which are needed in high-quality telephony applications. Applications supported include messaging, digital recording, interactive voice response, and outbound telemarketing.



TR1034 V.34 Fax Platformis our latest generation intelligent fax board, offering enterprise customers a line of
33.6Kbps fax boards with high-performance fax capabilities. The TR1034 platform is a single slot fax card that supports the V.34 standard, delivering fast 33.6Kbps fax transmission speeds,

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with
two to 30 fax channels per board, and features analog, BRI or T1/E1 interfaces. For customers, this delivers significant transmission cost savings, increased service capacity, and full
interoperability with the growing installed base of V.34 fax machines. Applications supported include network, broadcast and production fax, fax on demand, business process automation, and customer
relationship management.

TR114 PCI V.17 Fax Platformis designed specifically for network fax server applications. The TR114 PCI platform has a library of
communication techniques that identify and adapt to the various implementations of real-world fax machines and line conditions that provides high compatibility, high connectivity rates and
high overall transmission speeds. The TR114 PCI platform ranges in density from one to four channels on a single board, and up to 24 channels per chassis. The TR114 PCI boards are also certified to
support the Microsoft shared fax capabilities of Microsoft Windows Server 2003. Applications supported include LAN/network fax, broadcast fax, production fax, and unified messaging.

TruFax Platformoffers small- to medium-sized businesses and departmental workgroups dependable fax capabilities at an economical price
for low volume fax traffic. Unlike Class 1 and Class 2 fax modems, TruFax's advanced fax algorithms and dedicated fax processing components deliver the performance that enterprise fax
applications require. The TruFax intelligent fax boards are also certified to support the Microsoft shared fax capabilities of Microsoft Windows Server 2003. Applications supported include network and
low-volume broadcast and production fax.



NS301 Platformis an open systems platform for carrier grade network interface and packet processing applications.
The NS301 is available in compactPCI, or cPCI, with either dual, quad or octal T1/E1 network interfaces with optional Ethernet and up to 256 HDLC controllers on board. The NS301 provides support for
call control, packet processing and signal processing as well as on-board packet manipulation through our unique packet relay feature. This carrier
grade hardware platform speeds system development and reduces time to market by providing a flexible and low-level application programming interface, or API, and growing list of U.S. and
international telephony approvals. Applications supported include call processing systems, wireless infrastructure elements, wireless data network elements, signaling gateways and monitoring and
surveillance systems.

NS700 Platformprovides one of the industry's most robust SS7 feature sets. The PCI board offers four E1 or T1 interfaces, whereas the
cPCI board offers eight T1 or E1 interface ports. Each has a high-performance on-board processor to off-load the host from lower layer requirements. It allows
developers to leverage the capabilities of the SS7 network and develop carrier-grade applications for SS7 circuit-switched call control, SS7/IP convergence, GSM MAP SMS, CDMA IS-41, and
INAP Intelligent Network devices. Applications supported include calling card platforms, welcome roamer, short message service centers, and personal numbering.

RealBLOCs ATSI Platformis a series of analog trunk and station interface cards. These boards are offered in varying density combinations
with up to 24 ports on a single board to allow for cost-effective installations of communication systems. An onboard H.100 interface offers the flexibility to interoperate with other
boards to create comprehensive and scalable solutions. Applications supported include call routing, call logging, call monitoring, private communications exchange, quality management, and unified
communications solutions.



Bfvis a fax and voice application programming interface that provides developers with a complete C language
library of telephony, fax, and voice function calls, as well as fax utilities, sample applications, and debugging tools.

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TDAPIis a powerful C language API with an extensive range of protocol modules or "building blocks". TDAPI provides developers with
low-level access to the hardware configuration, switching and call control services offered by our NS700 PCI and cPCI network interface boards.

RealCT Directoffers developers direct, low-level control of telephony and voice processing functions to create
full-featured computer telephony applications that minimize code space, execute faster and implement only the needed subset of the driver's capabilities.



The
market for communications products is generally characterized by rapid technological change, changes in customer requirements, frequent new product introductions and enhancements,
and emerging industry standards. We focus significant resources on improving our products in response to changes in operating systems, application software, computer and telephony hardware, networking
software, programming tools, and computer language technology. We also direct significant resources to the development of new products and next generation versions of our current products. As
technologies continue to evolve, there has also been a growing shift in the communications market to focus on the software component of our product offerings. While we have delivered both hardware and
software as part of our product line since our company began, we are beginning to emphasize the value of our software for our customers and partners. Our research and development expenses totaled
$18.5 million, or 25% of total revenue, in 2003, $20.7 million, or 28% of total revenue, in 2002, and $21.5 million, or 27% of total revenue, in 2001. We believe significant
investments in product development are required to remain competitive. As a consequence, we intend to continue to invest a significant dollar amount on product development.



Our
hardware products are covered by a limited warranty against defects in materials and workmanship. In 2000, we extended the warranty on our generally available network interface and
signal processing hardware products to five years from the date of purchase from us. Products purchased on or after January 1, 2000 are covered under this new warranty. Many of our competitors
have shorter warranties. We have also provided, from time to time, shorter warranties for certain products and to certain customers, as well as extended warranties to certain customers under
contractual agreements or for additional consideration.



At
December 31, 2003, our backlog of firm orders was $4.1 million, compared with $3.1 million at December 31, 2002. All of the backlog is expected to be
shipped before the end of 2004. We regard all orders as firm orders. Because of the possibility of customer changes in delivery schedules or of cancellation of orders, our backlog as of any particular
date may not be indicative of actual sales for any particular future period. The period of time between placement of an order and delivery of the product varies from one day for certain TRxStream
Series products to nine months for certain OEM systems products.

Manufacturing and Quality

Our manufacturing operations consist primarily of final assembly and testing of components, subsystems and systems. We test our products at various stages in the
manufacturing process. Prior to shipment, each product undergoes a final load and/or functional test either by our subcontractors or by us at our own facilities.

We
believe that we have a readily available supply of raw materials for all of our significant products from a number of sources. We do not anticipate any difficulties in obtaining the
raw materials

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that
will be required for our manufacturing activities in 2004. We use independent manufacturers to perform printed circuit board assembly and testing. We believe that we generally have good
relationships with our subcontractors and have generally experienced timely delivery of products and satisfactory quality with respect to products manufactured by our subcontractors. Our Needham,
Massachusetts, Los Gatos, California and Salem, New Hampshire facilities have achieved ISO 9001:2000 certification.

Distribution, Sales, Marketing and Support

We sell our products to system vendors, service providers, OEMs, and value-added resellers, or VARs, both domestically and internationally through a direct sales
force and a two-tiered distribution system. The two-tiered distribution arrangement is with Tech Data Corporation, a networking supplier, and Ingram Micro, a wholesale
distributor of computer technology products and services.

We
have established international sales offices in Belgium, Japan and the United Kingdom. International sales accounted for approximately 22% of our total revenue in both 2003 and 2002,
and 20% of our total revenue in 2001.

Most
countries require technical approvals from their communications regulatory agencies for products that operate in conjunction with the local telephone system. Obtaining these
approvals is generally a prerequisite for sales in a given jurisdiction. Obtaining the requisite approvals may require from two months to a year or more depending on the product and the jurisdiction.
Our products have received approvals from agencies in more than 25 countries.

We
ordinarily sell our products on the basis of purchase orders received from customers. From time to time, we have entered into contracts with certain of our customers, which agreements
set forth the terms and conditions for sales. These agreements generally do not establish any long-term fixed purchase or supply commitments for either party.



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



VARs
typically purchase our products for resale to an end-user enterprise customer together with application software developed by the VAR or purchased from an independent
software vendor. We have established a network of authorized resellers. We employ direct sales people to recruit, train and assist VARs. We also use a two-tiered distribution system for
some of our fax, voice and network interface products, utilizing national distributors who then sell to VARs. In the two-tiered distribution system, we do not recognize revenue until the
products are sold by the distributor.



Sales
to Captaris, Inc. represented 19% of our total revenue in 2003, 15% of our total revenue in 2002, and 12% of our total revenue in 2001. No other customers represented more than 10%
of our total revenue in 2003 and 2002.

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Our
Partner Access Network Program was established to provide technical, marketing and business benefits to help our customers and partners quickly develop new applications and services,
expand into new markets and, ultimately, grow their businesses. The program includes financial assistance for the porting of approved applications, access to lab facilities worldwide, sales leads,
technical training and support, and co-op funded marketing support.



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

Patents, Licenses and Trademarks

We depend on our ability to develop and maintain the proprietary aspects of our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark laws.

From
time to time, we seek patent protection for inventions and developments made by our personnel that are incorporated into our products or that otherwise fall within our fields of
interest. For example, in 2001, we were awarded a U.S. patent for voice detection in audio signals, which aids in speech recognition applications. While patents are an important means by which we seek
to protect our intellectual property, no particular patent, or related group of patents, is so important that its loss would significantly affect our operations.

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

We
seek to protect our software, firmware, documentation and other written materials under copyright laws. Because on-board and downloadable firmware represents an important
element of the value of our hardware products, we believe that we obtain significant protection for our proprietary interest in our hardware products, as well as our software products, from copyright
laws. Certain design features, including application-specific integrated circuits, software and firmware, receive some protection under trade secret laws. We generally require that each of our
employees executes a proprietary information agreement designed to protect our trade secrets, inventions created in the course of employment with us and other Brooktrout proprietary information. There
can be no assurance, however, that patent, copyright and trade secret protection will be sufficient to prevent competitors from developing software and other technology similar to the software and
other technology upon which we rely for a significant portion of our revenue. In addition, we have periodically received, and may receive in the future, communications from third parties asserting
patent rights with respect to certain of our products and features.

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Competition

The market for telecommunications equipment is highly competitive. In addition to current competitors, there is always the potential for new entrants into our
markets by other companies, including our customers and suppliers. We believe that the principal competitive factors affecting the market for our products include product functionality and features,
product quality, performance and price, ease of product integration, and quality of customer support services. In addition, many of our customers, including the large OEMs on whom we focus a
significant portion of our sales and marketing efforts, have the technical and financial ability to design and produce components replicating or improving on the functionality of most of our products.
These customers often consider in-house development of technologies and products as an alternative to doing business with us. The relative importance of each of these factors depends upon
the specific customer environment. Although we believe that our products currently compete favorably with respect to such factors, there can be no assurance that we can maintain our competitive
position against current and potential competitors.

Many
of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name
recognition and larger customer bases than we do. Though our addressable market in the overall telecommunications market is characterized by several large competitors, the rest of the market is fairly
fragmented and many of our current and potential competitors are smaller companies. These smaller companies generally have significantly less financial, technical, product development and marketing
resources, lesser name recognition and smaller customer bases, but these smaller companies may also have an ability to
respond more quickly to changes in the market or technology. Our present or future competitors may be able to develop products comparable or superior to those developed by us, adapt more quickly to
new technologies, evolving industry trends or customer requirements, or devote greater resources to the development, promotion and licensing of their products than we can. Accordingly, there can be no
assurance that competition will not intensify or that we will be able to compete effectively in our market.

We
have faced, and we expect that we will continue to face, increasing pricing pressures from our current competitors and new market entrants. Our competitors may engage in pricing
practices that cause us to reduce the selling prices of our products. To offset declining selling prices, we believe that we must successfully develop and introduce, on a timely basis, new products or
products that incorporate new features that can be sold at gross profits comparable to those of existing products. To the extent that such new products are not developed in a timely manner, do not
achieve customer acceptance, or do not generate comparable gross profits, our profitability may decline.

Employees

As of December 31, 2003, we had 317 full-time employees, of whom 122 were engaged in engineering and product development, 108 in sales,
marketing and technical support, 49 in administration, and 38 in manufacturing. None of our employees are represented by a labor union and we believe our relationships with our employees are good.

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Executive Officers

Our executive officers as of March 1, 2004 were as follows:

|Name                 |  | Age |  | Position                                                      
|-------------------- |  | --- |  | --------------------------------------------------------------
|Eric R. Giler        |  | 48  |  | President and Director                                        
|David W. Duehren     |  | 46  |  | Vice President of Research and Development, Clerk and Director
|Robert C. Leahy      |  | 51  |  | Vice President of Finance and Operations, and Treasurer       
|Heather J. Magliozzi |  | 41  |  | Vice President of Corporate Marketing                         
|Ronald J. Bleakney   |  | 59  |  | Senior Vice President of Worldwide Sales                      
|R. Andrew O'Brien    |  | 45  |  | Vice President of Market and Business Development             
|John W. Ison         |  | 48  |  | Vice President of Product Management                          
|Steven J. Bielagus   |  | 52  |  | Vice President of Engineering                                 
|Jonathan J. Sirota   |  | 62  |  | Vice President                                                

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

David
W. Duehren is a founder and has been Vice President of Research and Development and a director since our inception in 1984. Mr. Duehren is the former chairman of the
Telecommunications Industry Association Committee TR29.1, the subcommittee responsible for Group 3 fax enhancements, and also contributes to worldwide International Telecommunications
UnionTelephony (ITU-T) and Internet Engineering Task Force (IETF) standards. Mr. Duehren is also a member of the Institute of Electrical Electronic Engineers (IEEE).
Mr. Duehren received a Bachelor of Science degree and Master of Science degree in Electrical Engineering from the Massachusetts Institute of Technology.

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

Heather
J. Magliozzi has been Vice President of Corporate Marketing since January 2004. Ms. Magliozzi was Vice President of Marketing from November 2002 to
January 2004,Vice President of Corporate Communications from August 1998 to November 2002, Director of Marketing from April 1996 to July 1998, and Marketing
Communications Manager from August 1994 to April 1996. Ms. Magliozzi was a Marketing Manager for NEC Technologies from January 1985 to July 1994.
Ms. Magliozzi received a Bachelor of Arts degree in English and Communications from Boston College.

Ronald
J. Bleakney has been Senior Vice President of Worldwide Sales since November 2002. Mr. Bleakney directed the North American sales and marketing operations for Surf
Communication Solutions, Inc., a provider of software-based access solutions, from August 1999 through June 2002.

9

---

From
April 1990 through June 1999, Mr. Bleakney held the positions of Vice President of Sales and Marketing, and Senior Vice President of Sales at NMS Communications Corporation,
a provider of communications products and services. Mr. Bleakney received both a B.S.B.A. and a Master of Business Administration degree from Boston College.

R.
Andrew O'Brien has been Vice President of Market and Business Development since January 2004 and prior to this time was Vice President of Business Development since
November 2002. From January 2001 to November 2002, Mr. O'Brien was Vice President and General Manager of our New
Public Networks Group. Mr. O'Brien was Vice President of Business Development from July 1998 to January 2001, Vice President of Marketing and Business Development from
July 1993 to June 1998, and Director of Marketing and Business Development from January 1993 to June 1993. Mr. O'Brien was a consultant with McKinsey &
Company, Inc. from September 1986 to January 1993. Mr. O'Brien received a Bachelor of Arts degree from Yale University and a Master of Business Administration degree from
the Harvard Business School.

John
W. Ison has been Vice President of Product Management since November 2002. From January 2001 to November 2002, Mr. Ison was Vice President and General
Manager of our Enterprise Markets Group. Mr. Ison was Vice President and General Manager of our Voice Technology Division from April 1999 to January 2001. Prior to joining us,
Mr. Ison was Vice President of Marketing at Live Picture, Inc., a provider of solutions for delivering images over the Internet, and President and CEO at Newfire, Inc., a provider
of web-based software solutions. Mr. Ison received a Bachelor of Science and a Master of Science in Management from the Massachusetts Institute of Technology and a Master of Science
in Engineering from Dartmouth College.

Steven
J. Bielagus has been Vice President of Engineering since March 2003. From March 2001 through February 2003, Mr. Bielagus was Vice President of
Engineering at Sockeye Networks, Inc., a provider of Internet route optimization products and services. From July 1999 through January 2002, Mr. Bielagus was Senior Vice
President Engineering and Operations at IronBridge Networks, Inc. a provider of Internet protocol routers. From August 1998 to June 1999, Mr. Bielagus was Vice President of
Engineering at the Pen Computing Group of A.T. Cross Company, which develops pen-based products that facilitate electronic communications. Mr. Bielagus received a Bachelor of
Science Degree in Electrical Engineering from the Massachusetts Institute of Technology.

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

No
executive officer is related by blood, marriage or adoption to any other executive officer or director.

Item 2. Properties

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

10

---

marketing
and administrative operations. This lease expires in 2006. In addition, we have guaranteed the lease payments associated with certain leases for office facilities occupied by former
subsidiaries.

We
also maintain operating leases and office space for sales and support functions in Florida, Georgia, Illinois, North Carolina, Texas, Canada, Belgium, Japan and the United Kingdom.

We
believe that our present facilities are adequate for our current needs and that suitable additional space will be available as needed.

Item 3. Legal Proceedings

None.

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

Not applicable.

PART II

Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

2003



2002Quarter Ended

Quarter EndedHigh

Low

High

LowMarch 31

$
5.90

$
4.73

March 31

$
6.95

$
4.91June 30

$
8.17

$
4.61

June 30

$
6.75

$
4.30September 30

$
7.91

$
6.67

September 30

$
5.75

$
4.10December 31

$
15.95

$
7.10

December 31

$
5.90

$
3.61


We
have never paid cash dividends on our common stock. We do not anticipate paying cash dividends in the foreseeable future. On March 1, 2004, there were 445 holders of record of
our common stock and the last reported sale price of the common stock on the Nasdaq National Market was $20.15 per share.

Information
regarding our equity compensation plans is included in Notes 1 and 11 of our consolidated financial statements.

11

---



Item 6. Selected Financial Data

The selected financial data presented below is derived from our consolidated financial statements. These financial statements exclude the results of certain
businesses that were disposed of and have been accounted for as discontinued operations. See Note 2 to the consolidated financial statements. The following selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included
elsewhere in this report.

|                              |                                           | Years ended December 31,                
|----------------------------- | ----------------------------------------- | ----------------------------------------
|
|
|Statements of Operations Data |                                           |                                         
|                              | Revenue                                   |                                         
|                              | Costs and expenses:                       |                                         
|                              |                                           | Cost of product sold                    
|                              |                                           | Research and development                
|                              |                                           | In-process research and development (1) 
|                              |                                           | Selling, general and administrative     
|                              |                                           |                                         
|                              |                                           |                                         
|                              |                                           |                                         
|                              | Operating income (loss)                   |                                         
|                              | Other income (expense):                   |                                         
|                              |                                           | Net gain (loss) on investments (2)      
|                              |                                           | Equity in loss of affiliates (3)        
|                              |                                           | Interest income, net and other          
|                              |                                           |                                         
|                              |                                           |                                         
|                              |                                           |                                         
|                              | Income (loss) before income tax provision |                                         
|                              | Income tax provision (benefit)            |                                         
|                              |                                           |                                         
|                              | Income (loss) from continuing operations  |                                         
|                              |                                           |                                         
|                              | Diluted income (loss) per common share:   |                                         
|                              |                                           | Income (loss) from continuing operations
|                              |                                           | Shares for diluted                      
|Balance Sheet Data            |                                           |                                         
|                              | Cash and marketable debt securities       |                                         
|                              | Working capital                           |                                         
|                              | Total assets                              |                                         
|                              | Long-term debt                            |                                         
|                              | Stockholders' equity                      |                                         

---

12

---

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

The following discussion should be read in conjunction with the consolidated financial statements and related notes in Item 8 of this
report. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including those set forth below under "Factors That May Affect Future
Results."

Overview

We develop software and hardware platforms that original equipment manufacturers, or OEMs, developers and corporate information technology managers build into
their communications systems. Customers incorporate our products into applications, systems and services that allow voice, fax and data to be distributed over both Internet protocol, or IP,
packet-based networks, which we refer to as the New Network, and the traditional circuit-switched telephone network. We supply products for media processing, network interface, call control and signal
processing, including protocols that allow Internet and traditional telephony systems to communicate.

We
measure our operating success using both financial and market metrics. The financial metrics include revenue, gross profit, operating expenses, and income from continuing operations,
as well as working capital and cash provided by operating activities. Other key metrics include the total number of enterprise and service provider customers, customers whose purchases exceed
$100,000, and the portion of our revenue that is generated by the sales of products for applications in the New Network. Our long-term business model stresses our commitment to
establishing and maintaining close customer relationships and to continuing to develop innovative products.

The
most significant trend that has impacted our business has been the unfavorable economic conditions affecting the communications sector. This had resulted in a decrease in our revenue
from 2000 to 2001 and from 2001 to 2002. Furthermore, we experienced revenue decreases for the first two quarters of 2003 when compared to the corresponding quarters of 2002. Sales of products,
particularly for applications in the New Network, to OEMs for use by large service providers have declined most significantly over these periods. In response to the revenue decreases, we
implemented expense control programs to reduce operating expenses, while at the same time, we have continued to invest in developing products that we believe our customers will need when the economy
further improves. We are seeing signs that the economic conditions in our industry may be improving since revenue for the third and fourth quarter of 2003 exceeded the revenue in the corresponding
periods of 2002, and we expect the revenue for each quarter of 2004 to exceed the revenue for each quarter of 2003.

Despite
these economic conditions, we have been able to increase our cash and marketable debt securities balances from $38 million at December 31, 2001 to
$56 million at December 31, 2003. This was accomplished primarily through income tax refunds, operating expense reductions, inventory reductions, and the sale of a business segment. If
economic conditions do not continue to improve or if they weaken again, we may experience adverse effects on our business, operating results, and cash and marketable debt securities balances.

Application of Critical Accounting Policies

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. We make estimates and assumptions in the preparation of the consolidated financial statements that
affect the reported amounts of assets and liabilities, revenue and expenses, and the related disclosures of contingent assets and liabilities. These estimates form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical

13

---

experience
and on various other assumptions that we believe are reasonable under the circumstances. However, actual results may differ from these estimates under different assumptions or conditions.

The
following critical accounting policies require the use of significant judgment and estimates in the preparation of the consolidated financial statements. This listing is not a
comprehensive list of all of our significant accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 to the consolidated
financial statements in Item 8 of this report.



Revenue
from product sales is recognized upon shipment to the customer (which constitutes delivery), provided that persuasive evidence of an arrangement exists, the fee is fixed or
determinable, and collection is reasonably assured. In determining when to recognize revenue we often are required to exercise judgment. To the extent that one or more of these criteria are not met,
which has occurred from time to time, revenue is deferred until such time as all four conditions are satisfied. We record a provision for estimated sales returns and allowances on product sales in the
same period as the related revenue is recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. Actual results could differ from these
estimates and could therefore impact our results of operations and cash flows.



Accounts
receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for doubtful accounts is based primarily on a specific
analysis of accounts in the receivable portfolio and a general reserve based on the aging of receivables. While management believes the allowance to be adequate, if the financial condition of our
customers were to change or deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required and could materially impact our financial position and
results of operations.



We
evaluate our inventories for estimated excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of anticipated future demand.
In addition, we assess the impact of changing technology on our inventory. We provide reserves for inventories that are considered excess or obsolete. If future demand or market conditions are
different than our projections, additional inventory reserves may be required and would be reflected in cost of sales in the period in which the revision is made. If future demand or market conditions
are more favorable and products for which reserves have been provided become more marketable and are sold, our gross profit could improve. These actions could impact both our results of operations and
our cash flows.



We
review our intangible assets for impairment periodically and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The evaluation of the
recoverability of our intangible assets includes assumptions regarding estimated future undiscounted cash flows associated with these assets and other factors. If these estimates or assumptions change
in the future, we may be required to record impairment charges for these assets. Such an impairment charge would impact the results of operations, but would not directly impact our cash flows. All of
our remaining net intangible assets are being amortized, with original useful lives of approximately five to ten years.

14

---



We
assess the carrying value of our deferred tax assets to determine if it is more likely than not that we will be able to generate sufficient future taxable income of the appropriate
type in each tax jurisdiction in which we operate in order to realize these assets. This assessment requires us to make estimates and assumptions about our future profitability. Prior to 2002, our
assessment indicated that it was more likely than not that we would be able to realize our deferred asset and therefore we did not record any valuation allowances. In 2002, we reduced the deferred tax
asset to its estimated realizable value by recording a valuation allowance. In determining the carrying value of the deferred tax assets as of December 31, 2003, we are assuming profitability
in the future and that it is more likely than not that we will be able to realize these net deferred assets. This assumption is based in part upon our history of profitability and our profitability
for the year ended December 31, 2003. If current economic conditions weaken or future results of operations are less than expected, future assessments may result in a determination that all or
a portion of the remaining deferred tax assets are not realizable. As a result, we may need to establish additional valuation allowances for all or a portion of the deferred tax assets, which may have
a material adverse effect on our results of operations.



We
accrue for warranty costs based on historical trends in product return rates and the expected material and labor costs to provide warranty services. If we were to experience an
increase in warranty claims compared with our historical experience, or if costs of servicing warranty claims were greater than the expectation on which the accrual had been based, our gross profits
could be adversely affected. See Note 8 to the consolidated financial statements in Item 8 of this report for activity in our reserves for estimated warranty costs.

Discontinued Operations

Prior to February 8, 2001, we were organized and reported the results of our operations in three operating segments, Brooktrout Technology, Brooktrout
Software, and Interspeed. On February 8, 2001, our board of directors adopted formal plans to discontinue our Brooktrout Software and Interspeed segments. We have accounted for these businesses
as discontinued operations. These businesses were substantially disposed of prior to December 31, 2001, and adjustments recorded in 2002 primarily reflect additional proceeds and changes in
estimates to the amounts recorded related to gains or losses on disposal. For the years ended December 31, 2002 and 2001, we recorded total gains from discontinued operations of
$0.2 million and $7.0 million, respectively, while in 2003, there were no gains or losses from discontinued operations. See Note 2 to the consolidated financial statements in Item
8 of this report.

15

---

Results of Operations

The following discussion focuses on our results from continuing operations. The table below sets forth certain consolidated statements of operations data as a
percentage of total revenue for the periods presented.

Years ended December 31,2003

2002

2001Domestic revenue

78
%
78
%
80
%International revenue

22

22

20Total revenue

100

100

100Cost of product sold

35

45

46Gross profit

65

55

54Operating expenses:Research and development

25

28

27Selling, general and administrative

40

39

39Total operating expenses

65

67

66Operating loss



(12
)
(12
)Other income (expense), netNet gain (loss) on investments

1



(6
)Equity in loss of affiliates





(6
)Interest income, net and other

1

1

1Total other income (expense), net

2

1

(11
)Income (loss) before income taxes

2

(11
)
(23
)Income tax provision (benefit)

1

(4
)
(10
)Income (loss) from continuing operations

1
%
(7
)%
(13
)%




The following table presents our domestic and international revenue:

Years ended December 31,2003

2002

2001(dollars in thousands)Domestic revenue

$
58,427

78
%
$
57,106

78
%
$
63,421

80
%International revenue, principally export


16,229

22


16,385

22


16,353

20Total revenue

$
74,656

100
%
$
73,491

100
%
$
79,774

100
%




Revenue in 2003 was $74.7 million compared to $73.5 million in 2002, an increase of approximately 2%. While our 2003 sales to domestic
OEMs and service providers decreased, particularly in the first two quarters, we experienced an increase in sales to our VARs and enterprise customers in the last two quarters of 2003. Many of
our customers resumed spending on communications equipment, which had slowed in both 2001 and 2002. In comparison to 2002, international revenue declined by $0.2 million. The decrease was the
result of reduced sales to Pacific Rim and European customers, partially offset by favorable foreign currency exchange rates that increased revenue in 2003 by approximately $0.7 million. During
2003, revenue from the sales of

16

---

products
for applications in the New Network accounted for approximately 35% of total revenue, as compared to 36% of total revenue for 2002.

Revenue
from Captaris, Inc. accounted for 19% of total revenue in 2003 compared to 15% in 2002. We expect that revenue from Captaris will continue to be greater than 10% of total revenue
for 2004. In 2003, approximately 90 of our customers each purchased over $100,000 of products, in aggregate representing 87% of total 2003 revenue. In 2002, approximately 90 of our customers each
purchased over $100,000 of products, in aggregate representing approximately 86% of total 2002 revenue. Total customers in 2003 decreased to approximately 700 from over 900 in 2002.



Revenue in 2002 was $73.5 million compared to $79.8 million in 2001, a decrease of approximately 8%. The decrease in revenue was primarily
attributed to purchases of $5.4 million from one of our service provider customers in the first quarter of 2001. Purchases from this customer were not significant during the remainder of 2001
and throughout 2002. From 2001 to 2002, revenue from enterprise customers remained consistent while revenue from service provider customers declined. During 2002, sales of products for applications in
the New Network accounted for approximately 36% of total
revenue, as compared to 41% of total revenue for 2001. In 2002, domestic revenue decreased slightly while international revenue remained constant, at approximately $16.4 million per year,
representing an increase from 20% of total revenue in 2001 to 22% of total revenue in 2002.

Revenue
from Captaris accounted for 15% of total revenue in 2002 compared to 12% in 2001. In 2002, approximately 90 of our customers each purchased over $100,000 of products, in
aggregate representing 86% of total 2002 revenue. In 2001, approximately 100 of our customers each purchased over $100,000 of products, in aggregate representing approximately 86% of total 2001
revenue. Total customers in 2002 decreased to over 900 from over 1,000 in 2001.



The following table presents cost of product sold and gross profit information:

Years ended December 31,2003

2002

2001(dollars in thousands)Cost of product sold

$
26,380

$
33,121

$
36,399Gross profit

$
48,276

$
40,370

$
43,375Gross profit percentage


65
%

55
%

54
%




The decrease in cost of product sold from 2002 to 2003 was the result of a decrease in inventory obsolescence expense, changes in product mix, and direct material
cost reductions from manufacturing subcontractors. Our inventory obsolescence expense decreased by $3.0 million in 2003, primarily due to reduced reserve requirements for service provider
product inventory. Our change in product mix to higher margin products contributed to a significant improvement in the gross profit percentage in 2003 compared to 2002.



The decrease in cost of product sold from 2001 to 2002 was primarily the result of a $1.4 million decrease in inventory obsolescence expense, combined with
direct material cost reductions achieved from using new manufacturing subcontractors. The decrease in inventory obsolescence expense is primarily due to lower charges for obsolete service provider
product inventory in 2002. These factors contributed to a slight improvement in gross profit in 2002 compared to 2001.

17

---





The following table presents our operating expenses:

Years ended December 31,2003

2002

2001(dollars in thousands)Research and development

$
18,492

$
20,658

$
21,517Selling, general and administrative


29,883


28,909


31,318Total operating expenses

$
48,375

$
49,567

$
52,835




Research and development expense represented 25% of revenue in 2003, compared with 28% of revenue in 2002. The $2.2 million decrease in 2003 was primarily
the result of reduced consulting and contract labor expenses, decreased spending on new product prototypes and decreased depreciation expense. Our continuing development efforts are focused on
hardware and software for media processing products (voice, fax and data), network interface products, call control products and signal processing products.



Research and development expense represented 28% of revenue in 2002, compared with 27% of revenue in 2001. The $0.9 million decrease was primarily the
result of reduced consulting, contract labor, and depreciation expense, offset partially by increases in spending on new product prototypes and equipment purchases.



Selling, general and administrative expense represented 40% of total revenue in 2003, compared with 39% of total revenue in 2002. The $1.0 million increase
in selling, general and administrative expense from 2002 to 2003 was primarily due to increases in professional fees, sales and use taxes, and marketing expenses associated with the Partner Access
Network Program. These expense increases were partially offset by reduced compensation expense due to a decrease in our employee count and by lower depreciation expense.



The $2.4 million decrease in selling, general and administrative expense from 2001 to 2002 was primarily due to a decrease in bad debt expense as a result
of recoveries of previously written off accounts receivable balances, along with reduced spending for variable incentive compensation, travel and entertainment, and depreciation. These expense
decreases were partially offset by increases in marketing expenses associated with the Partner Access Network Program.

18

---



The following table presents our other income (expense), net:

Years ended December 31,2003

2002

2001(dollars in thousands)Net gain (loss) on investments

$
499

$


$
(4,923
)Equity in loss of affiliates








(4,710
)Interest income, net and other


820


995


1,108Total other income (expense), net

$
1,319

$
995

$
(8,525
)




During 2003, we had a gain on the sale of an investment of $0.5 million from the sale of 0.1 million shares of Network Engines, Inc. common
stock acquired from the exercise of stock purchase warrants. During 2002, we had no gains or losses on investments. During 2001, we had a loss on investments of $4.9 million. Of this total
expense, $3.9 million was due to a permanent reduction of the carrying value of the Sonexis, Inc. preferred stock as a result of a decrease in the appraised value of these shares. We
received this preferred stock, along with cash, as consideration for the sale of Brooktrout Software in April 2001. In addition, we realized a loss of approximately $1.0 million related
to the sale of an equity investment in a privately held technology company that had been accounted for using the cost method.



We recorded equity in loss of affiliates of $4.7 million in 2001 related to net losses of our equity investees, Pelago Networks, Inc. and Telchemy,
Incorporated. As of December 31, 2001, the investment in Pelago had been written down to zero, and since we had no further funding commitment, we ceased recording our share of Pelago's losses.
Our interest in Pelago was further reduced below 20% following an equity financing by Pelago during 2002. We did not recognize additional losses in 2003 or 2002 related to Telchemy since we disposed
of our equity interest in that business on December 31, 2001. See Note 4 to the consolidated financial statements included in Item 8 of this report. We recorded no equity in losses of
affiliates during 2003 and 2002.



The sequential decrease in interest income, net and other from 2001 to 2003 was the result of a decline in short-term interest rates, which offset the
favorable impact of steadily increasing cash and marketable debt securities balances.



The following table presents our income tax provision (benefit) and effective tax rate:

Years ended December 31,2003

2002

2001(dollars in thousands)Income tax provision (benefit)

$
665

$
(3,184
)
$
(7,627
)Effective tax rate


54
%

(39
)%

(42
)%


19

---



In 2003, we recorded an income tax provision as a result of our reporting a pre-tax profit for the year. The higher effective tax rate in 2003 was
impacted both by a disproportionate effect of permanent differences as compared to pre-tax profit and a limitation on the availability of our research and development tax credit, which
resulted from our incurring a significantly lower level of qualified research and development expenses during 2003 as compared to prior years. Also in 2002, we established a valuation allowance in the
amount of $1.9 million relating to anticipated
capital losses on long-term investments that are not expected to be realizable. In 2003, we increased the valuation allowance by $.03 million.



In both 2002 and 2001, we recorded an income tax benefit, along with an income tax receivable, because we could carry back losses before income taxes for 2002 and
2001 to 1999 and 1998, years in which we were profitable. The reduction in the income tax benefit rate in 2002 relative to 2001 resulted from our recording of a valuation allowance related to
long-term investments in 2002.

Liquidity and Capital Resources



Cash
flows from operating activities were $10.9 million in 2003. This primarily resulted from tax refunds of $6.3 million and reductions in inventory, both of which were
partially offset by an increase in accounts receivable. Both the reductions in inventory and the increase in accounts receivable were attributable to our increased sales activity. Cash flows from
operating activities were $4.2 million in 2002. This primarily resulted from income tax refunds of $4.4 million and reductions in inventory, both of which were partially offset by a
decrease in current liabilities. Cash flows from operating activities were $11.3 million in 2001. This primarily resulted from reductions in inventory, accounts receivable and net liabilities
of discontinued operations.

Cash
used in investing activities was $10.7 million in 2003. This primarily resulted from net purchases of marketable debt securities of $9.8 million and our deposit for
technology to be acquired of $0.9 million. Cash used in investing activities was $3.3 million in 2002. This primarily resulted from net purchases of marketable debt securities of
$2.4 million. Cash used in investing activities was $12.7 million in 2001. This primarily resulted from net purchases of marketable debt securities of $13.2 million and purchases
of investments of $3.1 million, both of which were partially offset by the $4.9 million of proceeds from the sale of Brooktrout Software to Sonexis in April 2001.

Cash
from financing activities was $4.2 million in 2003. This was primarily attributable to proceeds from the sale of common stock under our employee stock option plans and our
employee stock purchase plan, as well as the repayment of officer notes receivable. From time to time, the Company receives shares of its common stock as payment for the exercise price of stock
options which are then added to our treasury share balance. Cash from financing activities was $0.3 million and $0.5 million in 2002 and 2001, respectively, all of which was attributable
to proceeds from the sale of common stock under our employee stock purchase plan.

20

---



The
following table presents our future contractual obligations and commercial commitments as of December 31, 2003:

Total

2004

2005

2006

2007

2008

Thereafter(dollars in thousands)Operating leases

$
6,602

$
2,993

$
2,081

$
801

$
226

$
226

$
275


We
have operating lease commitments for our primary office and manufacturing facilities that expire between 2005 and 2006. In addition, we lease office space for sales and support
functions that expire beyond 2006. Certain lease agreements require us to pay all of the building's taxes, insurance and maintenance costs.

We
purchased $0.5 million of capital equipment in 2003, $0.8 million in 2002, and $1.1 million in 2001. We currently have no material commitments for additional
capital expenditures. In 2003, we made a $0.9 million deposit for technology to be acquired in 2003, and contingent upon satisfactory performance by the seller and our final acceptance, we will
be obligated to purchase an additional $0.5 million of purchased hardware and software assets and engineering services of $1.2 million in 2004. We have certain inventory purchase
commitments that are part of our ordinary course of business in which the product delivery dates range from one month to five months into the future. We do not expect these short-term
commitments to have a material impact on our financial results.

We
had no long-term debt as of December 31, 2003 or March 9, 2004.



The
following table presents our cash and liquidity position as of December 31, 2003, 2002, and 2001:

Years ended December 31,2003

2002

2001(dollars in thousands)Cash and cash equivalents

$
28,081

$
23,685

$
22,425Marketable debt securities


27,869


18,103


15,700Total

$
55,950

$
41,788

$
38,125Working capital

$
62,485

$
53,639

$
54,701Quick ratio


4.6


3.4


2.5Maximum available line of credit

$
5,000

$
5,000

$
5,000


Cash,
cash equivalents and marketable debt securities increased to $56.0 million as of December 31, 2003 from $41.8 million as of December 31, 2002, primarily
due to a $6.3 million tax refund, net cash flows from other operating and investing activities of $3.7 million, and cash proceeds from employee stock transactions of $4.2 million
in 2003. Working capital increased by $8.8 million from December 31, 2002 to December 31, 2003. This increase in working capital was the result of the 34% increase in cash, cash
equivalents, and marketable debt securities, partially offset by decreases in income taxes receivable and inventory. Our quick ratio improved from 2.4 at December 31, 2001 to 4.5 at
December 31, 2003, due primarily to a 47% increase in cash, cash equivalents, and marketable debt securities while current liabilities decreased modestly. Quick ratio is calculated as current
assets minus inventory, income tax receivable and deferred tax assets divided by current liabilities, and is an indicator of a company's ability to meet short-term financial obligations.

We
have a $5.0 million working capital line of credit available from a commercial bank. Any borrowings would bear interest at the lender's prime rate. The line of credit is
secured by a pledge of

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substantially
all of our assets. Availability of funds under this line of credit is subject to compliance with certain financial covenants relating to our quick ratio, minimum tangible net worth, and
other standard reporting requirements. As of December 31, 2003, letters of credit issued against the existing line totaled $1.0 million, representing the collateral required for certain
lease obligations. Other than the issuance of letters of credit and the use of the credit line to secure immaterial foreign currency forward contracts, there have been no borrowings under the line
during the past three years. The line of credit expires on July 29, 2005.

In
October 2003, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our common stock from time to time on the open market or in privately negotiated
transactions. This
program will be funded by our existing and future cash and marketable debt securities balances. As of March 9, 2004, we had not repurchased any shares under the plan.

We
believe that our cash and cash equivalents and marketable debt securities are likely to meet our needs for the foreseeable future. Though we do not expect to make any major capital
expenditures in 2004, we are always looking for opportunities to expand the business, which could include acquisitions or organic expansion into new markets. If we find that our cash and cash
equivalents, marketable debt securities and funds available from our bank line of credit are not sufficient, we may choose to utilize or to seek other sources of financing. If we were to seek future
equity financings, the terms may be dilutive to our stockholders and may contain restrictive covenants, which could limit our ability to pursue certain courses of action. It is possible that, should
the need arise, we will not be able to obtain additional financing, or that the financing made available to us will not be on acceptable terms.

The
pricing of our products and the costs of our goods can be significantly affected by current market conditions. Market conditions can be impacted by inflation; however, we believe
that inflation has not had a significant effect on our operations to date.

Recent Accounting Pronouncements

In December 2003, the staff of the SEC issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which superceded SAB 101, Revenue
Recognition in Financial Statements. SAB 104 rescinded accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging
Issues Task Force ("EITF") 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinded the SEC's Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers ("FAQ") issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While
the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of
SAB 104 has not had a material impact on the Company's operations or financial position.

Factors That May Affect Future Results

The risks and uncertainties described below are those that we currently believe may materially affect us. The trading price of our common stock could decline due
to any of these factors. You should also refer to the other information in this report, including the consolidated financial statements and related notes. The risks and uncertainties described below
are those that we currently believe may materially
affect us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.

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Risks Related to Our Business

Downturns in the economy generally, and in sectors of the telecommunications industry in particular, make it difficult to anticipate or expand sales.

As a result of the uncertain economic conditions that have affected most technology sectors and the telecommunications sector in particular, over the past few
years, many of our customers have aggressively sought to increase efficiency in their supply chains and reduce their inventory levels. Additionally, the slowdown in the telecommunications industry and
the resulting decrease in spending by companies in our target markets have reduced the rate of growth of data traffic and the use of the Internet, which are driving the convergence of data and
telephony that we expect will give rise to demand for New Network applications. The economic downturn adversely affected our business and operating results for the year ended December 31, 2003,
and even more so for the years ended December 31, 2002 and 2001. While we believe the economic condition may be improving somewhat, if current economic conditions do not improve as expected or
if they worsen, we may experience additional adverse effects on our revenue, net income and cash flow. For example, if the rate at which our customers order product decreases, it becomes more likely
that our current inventories would be exposed to technological obsolescence, which would require us to reduce the value of those inventories on our balance sheet.

If we fail to compete successfully in the highly competitive telecommunications market, our revenue and profitability will suffer.

The market for telecommunications equipment is highly competitive. If we are unable to differentiate our products from existing and future offerings of our
competitors, and thereby effectively compete in the market for telecommunications equipment, our operating results could be materially adversely affected. Many of our current and potential competitors
have significantly greater selling and marketing, technical, manufacturing, financial, and other resources. We expect our current competitors to continue to improve the design and performance of their
existing products and to introduce new products and enhancements with improved price and performance characteristics. Our product sales may be threatened by new technologies, products or market
trends, and we may have to reduce the prices of our products to stay competitive. In addition, new competitors may emerge in the markets we serve. An acquisition of, or by, one of our competitors may
result in a substantially strengthened
competitor with greater financial, engineering, manufacturing, marketing, and customer service and support resources than we have. If our current or future competitors enter into strategic
relationships with leading manufacturers covering products similar to those sold or being developed by us, our ability to sell products to those manufacturers may be adversely affected.

Capitalizing
on our technology will require a continued high level of investment in research and development, marketing, and customer service and support. We may be unable, or otherwise
fail, to allocate sufficient resources to achieve the technological advances necessary to compete successfully with existing competitors or new entrants.

Internal development efforts by our customers may adversely affect demand for our products.

Many of our customers, including the large OEMs on which we focus a significant portion of our sales and marketing efforts, have the technical and
financial ability to design and produce components replicating or improving on the functionality of most of our products. These customers often consider in-house development of
technologies and products as an alternative to doing business with us. We cannot assure you that our existing or potential customers will do business with us, rather than attempting to develop similar
technology and products internally or obtaining technology or products through acquisitions. We cannot be certain that we will be able to find customers to replace the revenue lost as a result of
customers developing technologies or products in-house. Any such

23

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occurrence
could have a material adverse effect on our business, financial condition or operating results.

If we fail to develop and sell new or enhanced products for the telecommunications hardware and software market, we will not be able to compete
effectively.

The telecommunications hardware and software market is characterized by:



Our
future success depends in large part on our ability to offer products that address the sophisticated and varied needs of our current and prospective customers and to respond to
technological advances and evolving industry standards on a timely and cost-effective basis.

The
timely development of new or enhanced products is a complex and uncertain process. We intend to continue to invest significantly in product and technology development. We may
experience design, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction or commercialization of any new and enhanced products. We may also not be
able to incorporate new technologies on a cost-effective or timely basis, which may result in unexpected expenses. We may not anticipate technological or market trends accurately or manage
long development cycles successfully. We may be required to collaborate with third parties to develop products and may not be able to do so on a timely and cost-effective basis, if at all.

The
introduction of new or enhanced products also requires that we manage the transition from older products so as to minimize the disruption to customers and ensure that adequate
supplies of new products can be delivered to meet anticipated customer demand. If we are unable to develop new products or enhancements on a timely and cost-effective basis, or if the new
products or enhancements that we introduce fail to achieve market acceptance, our ability to grow our business would be harmed and competitors could achieve greater market share.

Our revenue could decline significantly if we lose a major customer or if a major customer cancels, reduces or delays an order.

One customer accounted for 19% of our revenue in the year ended December 31, 2003 and for 15% of our revenue in the year ended December 31, 2002.
The loss of this or any other major customer or the cancellation, reduction or delay of significant orders from such customers, even if only temporary, could significantly reduce our revenue and cash
flow and could harm our reputation in the industry.

Our dependence on sole and single source suppliers and independent manufacturers could result in increased costs or delays in the manufacture and
delivery of our products.

Although we generally use standard parts and components for our products, some key components are purchased from sole or single source vendors for which
alternative sources are not currently available or are difficult to obtain. Our inability to obtain sufficient quantities of these components may

24

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result
in future delays or reductions in product shipments that could cause us to lose sales, incur additional costs and suffer harm to our reputation. We currently purchase proprietary components
from a number of suppliers for which there are no direct substitutes.

These
components could be replaced with alternatives from other suppliers, but that might require redesign of our products. If such a redesign were required, we would incur considerable
delay and expenses. We currently enter into purchase orders with our suppliers for materials based on forecasts of need, but have no guaranteed supply arrangements with these suppliers.

In
addition, we currently use independent manufacturers to manufacture printed circuit boards, chassis and subassemblies in accordance with our design and specification. Our reliance on
independent manufacturers involves a number of risks, including the potential for inadequate capacity of, unavailability of, or interruptions in access to, process technologies, and reduced control
over delivery schedules, manufacturing yields and costs. If our manufacturers are unable or unwilling to continue manufacturing our components in required quantities or to our quality expectations, we
will have to transfer manufacturing to acceptable alternative manufacturers that we have identified, which could result in significant delays in shipment of products to customers. Moreover, the
manufacture of these components is extremely complex, and our reliance on the suppliers of these components exposes us to potential production difficulties and quality variations, which could
negatively affect the cost and timely delivery of our products. We currently enter into purchase orders with independent manufacturers of materials based on forecasts of need, but have no guaranteed
capacity arrangements with these
manufacturers. Any significant interruption in the supply, or degradation in the quality, of any component could cause us to lose sales, incur additional costs and suffer harm to our reputation.

Defects in our products or problems arising from the use of our products may seriously harm our business and reputation.

Products as complex as ours may contain known and undetected errors, bugs, or other performance problems. Defects are frequently found during the period
immediately following introduction and initial implementation of new products or enhancements to existing products. Although it is our objective to resolve all bugs that we believe would be considered
serious by our customers before implementation, our products may not be bug-free. We also provide warranties against defects in materials and workmanship on our hardware products for five
years. Errors, bugs or performance problems, however, could result in lost revenue or customer relationships and could be detrimental to our business and reputation generally. In addition, our
customers generally use our products together with their own products and products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem.
These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer
relations problems.

Changes to regulations affecting the telecommunications or Internet industries could reduce demand for our products or increase our costs.

Laws and regulations governing telecommunications, electronic commerce and the Internet are emerging, but remain largely unsettled, even in the areas where there
has been some legislative action. Regulation may focus on, among other things, assessing access or settlement charges, or imposing tariffs or regulations based on the characteristics and quality of
products, either of which could restrict our business or increase our cost of doing business. Any changes to existing laws or the adoption of new regulations by federal or state regulatory authorities
or any legal challenges to existing laws or regulations relating to the telecommunications industry could materially adversely affect the market for our products. Moreover, our value-added resellers
or other customers may require, or we may otherwise deem it necessary or advisable, for us to alter our products to address actual or anticipated

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changes
in the regulatory environment. Our inability to alter our products or address any regulatory changes could have a material adverse effect on our business, financial condition or operating
results.

Limitations on our ability to adequately protect our proprietary rights may prevent us from retaining our competitive advantage and negatively affect
our future operating results.

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

Intellectual property claims against us can be costly and negatively affect our business.

In the telecommunications business, there is frequent litigation based on allegations of patent infringement. As the number of entrants in our market increases
and the functionality of our products is enhanced and overlaps with the products of other companies, we may become subject to claims of infringement or misappropriation of the intellectual property
rights of others. As a result, from time to time, third parties may claim exclusive patent or other intellectual property rights to technologies that we use. Although we believe that we do not face
material liability related to infringement of the intellectual property of others, any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined
adversely to us, could have a material adverse effect on our business, financial condition or operating results. Any claims, with or without merit, could be time-consuming, result in
costly litigation, divert the efforts of our engineering and management personnel, cause delays in product shipments or require us to enter into royalty or licensing agreements, any of which could
have a material adverse effect upon our operating results. In any legal action claiming patent infringement commenced against us, we cannot assure you that we would prevail in such litigation given
the complex technical issues and inherent uncertainties in patent litigation. In the event a claim against us was successful, and we could not obtain a license on acceptable terms or license a
substitute technology or redesign to avoid infringement, we may be unable to market our affected products. This could have a material adverse effect on our business, financial condition and operating
results.

Certain of our products depend upon the continued availability of licensed technology from third parties.

We currently license and will continue to license certain technology integral to certain of our products from third parties. For example, we have obtained
licenses from third parties for software for certain of our voice and fax products. While we believe that much of this technology is available from multiple sources, any difficulties in acquiring
third-party technology licenses, or integrating the related

26

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third-party
technology into our products, could result in delays in product development or upgrades until equivalent technology can be identified, licensed and integrated.

We
may require new licenses in the future as our business grows and technology evolves. We cannot assure you that these licenses will continue to be available to us on commercially
reasonable terms, if at all, which could have a material adverse effect on our business, financial condition and operating results.

If we are unable to attract or retain key personnel, we may be unable to operate our business successfully.

Our success depends in large part upon the continued contributions of our key management, sales, marketing, and engineering personnel, many of whom perform
important functions and would be difficult to replace. If we lose one or more members of our senior management team our business and operating results would be harmed. We do not have employment
contracts with our key personnel. There has been significant competition in our industry for qualified personnel, and, at times, we have experienced difficulty in recruiting qualified personnel. We
may not be able to attract and retain the necessary personnel to accomplish our business objectives, and we may experience constraints that will adversely affect our ability to satisfy customer demand
in a timely fashion or to support our customers and operations. Our inability to hire qualified personnel on a timely basis, or to retain our key personnel, could materially adversely affect our
business, financial condition and operating results.

We are subject to environmental and occupational health and safety regulations that can increase the costs of operations or limit our activities.

We are subject to environmental and occupational health and safety regulations relating to matters such as reductions in the use of harmful substances,
comprehensive risk management in manufacturing activities and final products, the use of lead-free soldering, and the recycling of products and packaging materials. On February 13,
2003 the European Parliament and the Counsel of the
European Union published directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment. These
directives will generally require electronics producers after August 2005 to bear the cost of collection, treatment, recovery and safe disposal of past and future products from
end-users and to ensure after June 2006 that new electrical and electronic equipment does not contain specified hazardous substances. While the cost of these directives to us cannot
be determined before regulations are adopted in individual member states of the European Union, it may be substantial and may divert resources, which could detract from our ability to develop new
products. We may not be able to comply in all cases with applicable environmental and other regulations, and if we do not, we may incur remediation costs or we may not be able to offer our products
for sale in certain countries, which could adversely affect our results.

Our products typically have long sales cycles, causing us to expend significant resources before recognizing revenue.

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

In
addition, the rapidly emerging and evolving nature of the markets in which we and our customers compete may cause prospective customers to delay their purchase decisions as they
evaluate new technologies and develop and implement new systems. During the period in which our customers are evaluating whether to place an order with us, we often incur substantial sales and
marketing expenses, without any assurance of future orders or their timing. Even after a customer places an

27

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order,
the timing of the development, introduction and implementation of the customer's product or service using our product is controlled by, and can vary significantly with the needs of the
customer. In some circumstances, the customer will not require the product for several months. This continuing uncertainty can complicate our planning processes and reduce the predictability of our
earnings and cash flows.

Our business and operating results could be adversely affected by downturns in economic conditions in countries outside the United States and other
risks associated with international operations.

Sales of our products to customers outside the United States accounted for 22% of our revenue in the year ended December 31, 2003. We anticipate that
international sales will continue to account for a
significant portion of our revenue. Because of our dependence upon international sales, we are subject to a number of risks, including:



In
addition, most countries require technical approvals from their telecommunications regulatory agencies for products that operate in conjunction with the local telephone system.
Obtaining these approvals is generally a prerequisite for sales in a given jurisdiction. Obtaining requisite approvals takes from two months to a year or more depending on the product and the
jurisdiction. These or other factors may limit our ability to sell our products in other countries, which could have a material adverse effect on our business, financial condition and operating
results.

We may seek to expand through acquisitions of complementary businesses, and we may not be able to successfully integrate acquired companies.

We may seek to acquire strategic complementary companies in the future. In addition to the difficulties we may face in identifying and consummating acquisitions,
we will also be required to integrate and consolidate any acquired businesses or assets with our existing operations. Managing an acquired business entails numerous operational and financial risks,
including difficulties in integrating disparate administrative, accounting and finance, and information systems, difficulties in assimilating acquired operations and new personnel, diversion of
management's attention from other business concerns, and potential loss of key employees or customers of any acquired operations. Accordingly, we may be unable to successfully identify, consummate and
integrate future acquisitions or operate acquired businesses profitably. If we are unable to integrate an acquired company successfully, our future growth may suffer, and our results of operations
could be harmed.

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Risks Related to Our Common Stock

Our operating results could fluctuate significantly and cause our stock price to be volatile, which may cause the value of your investment to decline.

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



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

The market price of our common stock may be volatile, which could lead to losses for individual investors.

Stock markets in general, and the market for technology stocks, including our common stock, in particular, have experienced extreme price and volume fluctuations
that often have been unrelated, or disproportionate, to the operating performance of those companies. The market for our common stock

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has
been and is likely to continue to be volatile. Many factors could cause the trading price of our common stock to fluctuate substantially, including the following:



In
the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company.
Many technology companies have been subject to this type of litigation. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management's
attention and resources.

Our corporate documents may prevent a change in control or management that stockholders consider desirable.

Our charter and by-laws contain provisions that might enable our management to resist a takeover of our company. In addition, our board of directors
has adopted a shareholder rights plan. These provisions and our shareholder rights plan could have the effect of delaying, deferring, or preventing a change in control of Brooktrout or a change in our
management that stockholders consider favorable or beneficial. They could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other
corporate actions. They also could limit the price that investors may be willing to pay in the future for shares of our common stock.

We may need additional financing in the future, and any additional financing may result in restrictions on our operations or substantial dilution to our
stockholders.

We may need to raise additional funds in the future, for example, to develop new technologies, support our expansion, respond to competitive pressures, acquire
complementary businesses or respond to unanticipated situations. We may decide to raise additional funds through public or private financings, strategic relationships or other arrangements. Our
ability to obtain debt or equity funding will depend on a number of factors, including market conditions, our operating performance and investor interest. Additional funding may not be available to us
on acceptable terms or at all. If adequate funds are not available, we may be required to revise our business plan to reduce expenditures, including curtailing our growth strategies, foregoing
acquisitions or reducing our product development efforts. If we succeed in raising additional funds through the issuance of equity or convertible securities, the issuance could result in substantial
dilution to existing stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these new securities would have rights, preferences and privileges senior to
those of the holders of our common stock. The terms of these securities, as well as any borrowings under our bank line of credit agreement, could impose restrictions on our operations.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We invest cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less on the date
of purchase. These securities consist of U.S. government notes and bonds, commercial paper, and certificates of deposit. We invest in marketable debt securities that consist of notes and bonds of
various Federal agencies, as well as corporate commercial paper, with maturities greater than 90 days on the date of purchase. If we were to experience a 1% increase in the effective interest
rate, the effect on the carrying value of marketable debt securities would be a decrease of $213,000. Our securities are considered available-for-sale for accounting purposes
and any unrealized gain or loss is deferred as a component of other comprehensive income (loss). In addition, our working capital line of credit provides for borrowings that bear interest at a
variable rate equal to the lender's prime rate. As of December 31, 2003, we did not have any borrowings outstanding under this line of credit and we were not exposed to market risk. Other than
the issuance of letters of credit and using the credit line to secure immaterial foreign currency forward contracts, there have been no borrowings under the line during the past three years. The line
of credit expires on July 29, 2005. We anticipate that the line of credit will be renewed on substantially the same terms as the existing line of credit. We believe that the effects, if any, of
possible near-term changes in interest rates on our financial position, results of operations and cash flows will not be material.

We
generally conduct business denominated in U.S. dollars. We do, however, operate facilities overseas and we therefore also conduct some business in other currencies. The impact of
changes in currency rates on our consolidated results of operations has not been significant in any period presented. Substantially all of our revenue is denominated in U.S. dollars, as are the
significant majority of our expenses. We manage our exposure to foreign currency market risks through regular operating and financing activities, and through the use of foreign currency forward
exchange contracts. As of December 31, 2003, a 10% appreciation or depreciation in foreign currency exchange rates from the prevailing market rates would have had an immaterial impact on our
financial position, results of operations and cash flows, due to the relatively immaterial number of transactions occurring in currencies other than the U.S. dollar.

Item 8. Financial Statements and Supplementary Data

|Independent Auditors' Report                                                                                |  | 32
|----------------------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                   |  | 33
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001                  |  | 34
|Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001 |  | 35
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001        |  | 36
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                  |  | 37
|Notes to Consolidated Financial Statements                                                                  |  | 38

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INDEPENDENT AUDITORS' REPORT

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

We
have audited the accompanying consolidated balance sheets of Brooktrout, Inc. (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements
of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brooktrout, Inc. as of
December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.

/s/
Deloitte & Touche LLP
Boston, Massachusetts
March 8, 2004

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

|                                                       |                                                                                                                  | December 31,                               |      
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -----
|
|Assets                                                 |                                                                                                                  |                                            |      
|Current assets:                                        |                                                                                                                  |                                            |      
|                                                       | Cash and cash equivalents                                                                                        |                                            | $    
|                                                       | Marketable debt securities                                                                                       |                                            |      
|                                                       | Accounts receivable (less allowances for doubtful accounts and sales returns of $843 in 2003 and $1,679 in 2002) |                                            |      
|                                                       | Inventory                                                                                                        |                                            |      
|                                                       | Income tax receivable                                                                                            |                                            |      
|                                                       | Deferred tax assets                                                                                              |                                            |      
|                                                       | Prepaid expenses and other current assets                                                                        |                                            |      
|                                                       |                                                                                                                  |                                            |      
|                                                       |                                                                                                                  | Total current assets                       |      
|Equipment and furniture, less accumulated depreciation |                                                                                                                  |                                            | 2,245
|Deferred tax assets                                    |                                                                                                                  |                                            | 9,413
|Intangible assets, less accumulated amortization       |                                                                                                                  |                                            | 5,909
|Other assets, less accumulated amortization            |                                                                                                                  |                                            | 1,748
|                                                       |                                                                                                                  |                                            |      
|                                                       |                                                                                                                  | Total assets                               |      
|                                                       |                                                                                                                  |                                            |      
|Liabilities and Stockholders' Equity                   |                                                                                                                  |                                            |      
|Current liabilities:                                   |                                                                                                                  |                                            |      
|                                                       | Accounts payable                                                                                                 |                                            | $    
|                                                       | Accrued expenses                                                                                                 |                                            |      
|                                                       | Accrued compensation and commissions                                                                             |                                            |      
|                                                       | Accrued warranty costs                                                                                           |                                            |      
|                                                       | Customer deposits                                                                                                |                                            |      
|                                                       | Liabilities related to discontinued operations                                                                   |                                            |      
|                                                       |                                                                                                                  |                                            |      
|                                                       |                                                                                                                  | Total current liabilities                  |      
|Deferred rent                                          |                                                                                                                  |                                            | 146  
|                                                       |                                                                                                                  |                                            |      
|                                                       |                                                                                                                  | Total liabilities                          |      
|Commitments and contingencies (Note 14)                |                                                                                                                  |                                            |      
|Stockholders' equity:                                  |                                                                                                                  |                                            |      
|                                                       | Preferred stock, $1.00 par value; authorized 100,000 shares; issued and outstanding, none                        |                                            |      
|                                                       | Common stock, $0.01 par value; authorized 40,000,000 shares; issued 12,937,019 in 2003 and 12,532,810 in 2002    |                                            |      
|                                                       | Additional paid-in capital                                                                                       |                                            |      
|                                                       | Accumulated other comprehensive loss                                                                             |                                            |      
|                                                       | Notes receivable  officers                                                                                      |                                            |      
|                                                       | Retained earnings                                                                                                |                                            |      
|                                                       | Treasury stock, 260,386 shares in 2003 and 255,384 shares in 2002, at cost                                       |                                            |      
|                                                       |                                                                                                                  |                                            |      
|                                                       |                                                                                                                  | Total stockholders' equity                 |      
|                                                       |                                                                                                                  |                                            |      
|                                                       |                                                                                                                  | Total liabilities and stockholders' equity |      
|                                                       |                                                                                                                  |                                            |      

See
notes to consolidated financial statements.

33

---

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

|                                             |                                                                                                                       | Years ended December 31,          |       
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------
|
|Revenue                                      |                                                                                                                       | $                                 | 74,656
|Costs and expenses:                          |                                                                                                                       |                                   |       
|                                             | Cost of product sold                                                                                                  |                                   |       
|                                             | Research and development                                                                                              |                                   |       
|                                             | Selling, general and administrative                                                                                   |                                   |       
|                                             |                                                                                                                       |                                   |       
|                                             |                                                                                                                       | Total costs and expenses          |       
|                                             |                                                                                                                       |                                   |       
|Operating loss                               |                                                                                                                       |                                   | (99   
|Other income (expense), net:                 |                                                                                                                       |                                   |       
|                                             | Net gain (loss) on investments                                                                                        |                                   |       
|                                             | Equity in loss of affiliates                                                                                          |                                   |       
|                                             | Interest income, net and other                                                                                        |                                   |       
|                                             |                                                                                                                       |                                   |       
|                                             |                                                                                                                       | Total other income (expense), net |       
|                                             |                                                                                                                       |                                   |       
|Income (loss) before income taxes            |                                                                                                                       |                                   | 1,220 
|Income tax provision (benefit)               |                                                                                                                       |                                   | 665   
|                                             |                                                                                                                       |                                   |       
|Income (loss) from continuing operations     |                                                                                                                       |                                   | 555   
|Discontinued operations:                     |                                                                                                                       |                                   |       
|                                             | Gain on disposal of discontinued operations, net of income tax (benefit) expense of ($696) in 2002 and $4,049 in 2001 |                                   |       
|                                             |                                                                                                                       |                                   |       
|Total gain from discontinued operations      |                                                                                                                       |                                   |      
|                                             |                                                                                                                       |                                   |       
|Net income (loss)                            |                                                                                                                       | $                                 | 555   
|                                             |                                                                                                                       |                                   |       
|Income (loss) per common share:              |                                                                                                                       |                                   |       
|                                             | Income (loss) from continuing operations, basic and diluted                                                           |                                   | $     
|                                             | Net income (loss), basic and diluted                                                                                  |                                   | $     
|Weighted average shares outstanding, basic   |                                                                                                                       |                                   | 12,353
|Weighted average shares outstanding, diluted |                                                                                                                       |                                   | 12,882

See
notes to consolidated financial statements.

34

---

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

|                                   |                                                                                  | Years ended December 31,                |    
|---------------------------------- | -------------------------------------------------------------------------------- | --------------------------------------- | ---
|
|Net income (loss)                  |                                                                                  | $                                       | 555
|Other comprehensive income (loss): |                                                                                  |                                         |    
|                                   | Unrealized gains (losses) on marketable debt securities, net of applicable taxes |                                         |    
|                                   | Foreign currency translation adjustments                                         |                                         |    
|                                   |                                                                                  |                                         |    
|                                   |                                                                                  | Total other comprehensive income (loss) |    
|                                   |                                                                                  |                                         |    
|Comprehensive income (loss)        |                                                                                  | $                                       | 574
|                                   |                                                                                  |                                         |    

See
notes to consolidated financial statements.

35

---

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

|                                                          |  | Common Stock |  | Treasury Stock |     |  |         |  |   | Accumulated
Other
Comprehensive
Income (Loss) |   |   |        |  |  
|--------------------------------------------------------- |  | ------------ |  | -------------- | --- |  | ------- |  | - | --------------------------------------------- | - | - | ------ |  | -
|
|
|January 1, 2001                                           |  | 12,366,927   |  | $              | 124 |  | 255,384 |  | $ | (3,760                                        | ) | $ | 63,348 |  | $
|Exercise of stock options                                 |  | 95,315       |  |                | 1   |  |        |  |   |                                              |   |   | 493    |  |  
|Unrealized loss on marketable debt securities, net of tax |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Currency translation adjustment                           |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Net loss                                                  |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|                                                          |  |              |  |                |     |  |         |  |   |                                               |   |   |        |  |  
|December 31, 2001                                         |  | 12,462,242   |  |                | 125 |  | 255,384 |  |   | (3,760                                        | ) |   | 63,841 |  |  
|Exercise of stock options                                 |  | 70,568       |  |                |    |  |        |  |   |                                              |   |   | 329    |  |  
|Unrealized loss on marketable debt securities, net of tax |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Net loss                                                  |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|                                                          |  |              |  |                |     |  |         |  |   |                                               |   |   |        |  |  
|December 31, 2002                                         |  | 12,532,810   |  |                | 125 |  | 255,384 |  |   | (3,760                                        | ) |   | 64,170 |  |  
|Exercise of stock options                                 |  | 404,209      |  |                | 4   |  |        |  |   |                                              |   |   | 2,318  |  |  
|Unrealized loss on marketable debt securities, net of tax |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Currency translation adjustment                           |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Repayment of officer notes receivable                     |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|Common stock received for exercise of stock options       |  |             |  |                |    |  | 5,002   |  |   | (37                                           | ) |   |       |  |  
|Tax benefit from stock option activity                    |  |             |  |                |    |  |        |  |   |                                              |   |   | 1,782  |  |  
|Net income                                                |  |             |  |                |    |  |        |  |   |                                              |   |   |       |  |  
|                                                          |  |              |  |                |     |  |         |  |   |                                               |   |   |        |  |  
|December 31, 2003                                         |  | 12,937,019   |  | $              | 129 |  | 260,386 |  | $ | (3,797                                        | ) | $ | 68,270 |  | $
|                                                          |  |              |  |                |     |  |         |  |   |                                               |   |   |        |  |  

See notes to consolidated financial statements.

36

---

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

|                                                 |                                                                                     | Years ended December 31,                                      |        
|------------------------------------------------ | ----------------------------------------------------------------------------------- | ------------------------------------------------------------- | -------
|
|Cash flows from operating activities:            |                                                                                     |                                                               |        
|                                                 | Net income (loss)                                                                   |                                                               | $      
|                                                 | Adjustments to reconcile net income (loss) to cash flows from operating activities: |                                                               |        
|                                                 |                                                                                     | Loss (gain) on disposal of discontinued operations before tax |        
|                                                 |                                                                                     | Deferred income taxes                                         |        
|                                                 |                                                                                     | Provision for doubtful accounts and sales returns             |        
|                                                 |                                                                                     | Depreciation and amortization                                 |        
|                                                 |                                                                                     | Amortization of acquired and licensed software                |        
|                                                 |                                                                                     | Inventory obsolescence expense                                |        
|                                                 |                                                                                     | Gain on sale of investment                                    |        
|                                                 |                                                                                     | Tax benefit from stock option activity                        |        
|                                                 |                                                                                     | Equity in loss of affiliates                                  |        
|                                                 |                                                                                     | Net loss on investments                                       |        
|                                                 |                                                                                     | Loss on disposal of equipment and furniture                   |        
|                                                 | Increase (decrease) in cash from changes in:                                        |                                                               |        
|                                                 |                                                                                     | Accounts receivable                                           |        
|                                                 |                                                                                     | Inventory                                                     |        
|                                                 |                                                                                     | Prepaid expenses and other assets                             |        
|                                                 |                                                                                     | Current and other liabilities                                 |        
|                                                 |                                                                                     |                                                               |        
|Cash flows from operating activities             |                                                                                     |                                                               | 10,911 
|Cash flows from investing activities:            |                                                                                     |                                                               |        
|                                                 | Sales and maturities of marketable debt securities                                  |                                                               |        
|                                                 | Purchases of marketable debt securities                                             |                                                               |        
|                                                 | Expenditures for equipment and furniture                                            |                                                               |        
|                                                 | Deposit for technology to be acquired                                               |                                                               |        
|                                                 | Other investing                                                                     |                                                               |        
|                                                 | Proceeds from the sale of an investment                                             |                                                               |        
|                                                 | Proceeds from the sale of a business segment                                        |                                                               |        
|                                                 | Purchases of investments                                                            |                                                               |        
|                                                 |                                                                                     |                                                               |        
|Cash flows from investing activities             |                                                                                     |                                                               | (10,715
|Cash flows from financing activities:            |                                                                                     |                                                               |        
|                                                 | Exercises of stock options, net of treasury stock acquired                          |                                                               |        
|                                                 | Proceeds from payment of officer notes receivable                                   |                                                               |        
|                                                 |                                                                                     |                                                               |        
|Cash flows from financing activities             |                                                                                     |                                                               | 4,200  
|                                                 |                                                                                     |                                                               |        
|Increase (decrease) in cash and cash equivalents |                                                                                     |                                                               | 4,396  
|Cash and cash equivalents, beginning of year     |                                                                                     |                                                               | 23,685 
|                                                 |                                                                                     |                                                               |        
|Cash and cash equivalents, end of year           |                                                                                     | $                                                             | 28,081 
|                                                 |                                                                                     |                                                               |        
|Supplemental schedule of cash flow information:  |                                                                                     |                                                               |        
|                                                 | Tax refunds received, net of payments                                               |                                                               | $      
|                                                 |                                                                                     |                                                               |        
|Non-cash activities:                             |                                                                                     |                                                               |        
|                                                 | Common stock received for exercise of stock options                                 |                                                               | $      
|                                                 |                                                                                     |                                                               |        

See
notes to consolidated financial statements.

37

---



BROOKTROUT, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(a) Description of Business

Brooktrout, Inc. (the "Company" or "Brooktrout") develops, manufactures and sells software and hardware products that enable the development of
communications systems and services. The Company sells its products to system vendors, service providers, enterprise customers, original equipment manufacturers, and value-added resellers, both
domestically and internationally, through a direct sales force and a two-tiered distribution system. Prior to February 8, 2001, the Company was organized and reported the results of
its operations in the following three business segments: Brooktrout Technology, Inc. ("Brooktrout Technology"), Brooktrout Software, Inc. ("Brooktrout Software"), and
Interspeed, Inc. ("Interspeed"). These segments were differentiated based upon the products provided to the marketplace, the customers served, and the distribution channels utilized. Two of
these segments have been discontinued and are classified as discontinued operations for the periods presented in these consolidated financial statements. See Note 2. Following the
discontinuance of the Brooktrout Software and Interspeed segments, the Company's operations consist of one reportable segment, Brooktrout Technology. Disclosures included herein pertain to the
Company's continuing operations unless noted otherwise.

(b) Use of Estimates

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

(c) Principles of Consolidation

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

(d) Cash and Cash Equivalents

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

(e) Marketable Debt Securities

The Company has classified all of its marketable debt securities as available-for-sale. Because these securities are available for
immediate sale, they have been classified as current assets in the accompanying consolidated balance sheets. There were no material realized or unrealized gains during the years ended
December 31, 2003, 2002, and 2001. As of both December 31, 2003 and 2002, the remaining maturities of debt securities ranged from one month to approximately two years.

38

---

Marketable
debt securities at December 31, 2003 and 2002 consisted of U.S. government notes and bonds, certificates of deposit, and corporate debt securities. The Company
classifies its marketable debt securities as available-for-sale and records them at fair value. Unrealized gains and losses, net of related taxes, are excluded from earnings
and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification basis.

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

(f) Revenue Recognition

Revenue from product sales is recognized upon shipment to the customer (which constitutes delivery), provided that persuasive evidence of an arrangement exists,
the fee is fixed or determinable, and collection is reasonably assured. To the extent that one or more of these conditions are not met, which has occurred from time to time, revenue is deferred until
such time as all four criteria are met. Revenue from sales to certain distributors is recognized on a "sell-through" basis, that is, when the distributors report to the Company that resale
of the product to the ultimate customer of the distributor has occurred. If the Company receives a payment from a customer prior to meeting all of the revenue recognition criteria, the payment is
recorded as a customer deposit or deferred revenue. The Company records a provision for estimated sales returns and allowances on product sales in the same period as the related revenue is recorded.
These estimates are based on historical sales returns, analysis of credit memo data and other known factors.

In
December 2003, the Staff of the SEC issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which superceded SAB 101, Revenue Recognition in Financial
Statements. SAB 104 rescinded accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force ("EITF")
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinded the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions
and Answers ("FAQ") issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has
changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 has not had a
material impact on the Company's operations or financial position.

(g) Warranties

The Company provides warranties on its products for periods of up to five years. Provisions are made at the time revenue is recognized for the cost of fulfilling
these commitments. Actual costs of fulfilling these warranty obligations have been within amounts estimated and provided.

(h) Concentration of Credit Risk

The Company sells its products to various customers in the high technology industry. The Company generally requires no collateral. To reduce credit risk, the
Company performs credit evaluations of its customers. The Company maintains allowances for doubtful accounts for estimated

39

---

losses
resulting from its customers' inability to make required payments. At December 31, 2003 and 2002, 22% and 23%, respectively, of the Company's accounts receivable were from one customer.
As of these same dates, 11% and 13% of the Company's accounts receivable, respectively, were from a second customer.

The
Company has one customer that generates more than 10% of total revenue. This customer accounted for approximately 19%, 15%, and 12% of revenue for the years ended December 31,
2003, 2002, and 2001, respectively.

(i) Inventory

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

(j) Equipment and Furniture

Equipment and furniture is recorded at cost. Depreciation and amortization expense is provided using the straight-line method over the estimated
useful lives of the related assets, which is generally three to five years.

(k) Intangible Assets and Other Assets

Intangible assets consist of acquired technology, customer base, trademarks, in-place workforce, and goodwill associated with purchased business
combinations. As of December 31, 2003, all of these intangible assets had been fully amortized except for acquired technology, which continues to be amortized on a straight-line
basis over five to ten years.

Other
assets consist of purchased and licensed software, a deposit for technology to be acquired, and other deposits. As of December 31, 2003, purchased and licensed software is
being amortized to cost of product sold based on the greater of (i) the straight line basis over three to four years or (ii) the ratio of current gross revenue to total current and
expected future revenues for these products.

(l) Impairment

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Long-lived assets, other than goodwill, are evaluated using the anticipated cash flows to be generated by the assets over their useful life. Goodwill, if any, would be evaluated using the
estimated fair value of the group in which goodwill resides relative to the carrying value of the group. The Company has not incurred any impairment charges in the years ended December 31,
2003, 2002, and 2001.

(m) Research and Development Costs

Research and development costs are expensed as incurred.

(n) Income Taxes

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

40

---

differences
are expected to reverse. The Company believes that it is more likely than not that future operations will generate sufficient taxable income to realize the majority of the deferred tax
assets. Valuation allowances are provided to the extent that recoverability of tax assets is unlikely.

(o) Fair Value of Financial Instruments

Financial instruments held or used by the Company consist of cash equivalents, marketable debt securities, accounts receivable, accounts payable, accrued expenses
and letters of credit issued under the Company's line of credit. See Note 9. Marketable debt securities are carried at fair value. Management believes that the carrying value approximates the
fair value for all other financial instruments due to their short-term nature.

(p) Stock-Based Compensation

The Company uses the intrinsic value method to measure compensation expense associated with the grants of stock options or awards to employees. The Company
accounts for stock options and awards to non-employees using the fair value method.

Under
the intrinsic value method, compensation associated with stock awards to employees is determined as the excess, if any, of the current fair value of the underlying common stock on
the date compensation is measured over the price an employee must pay to exercise the award. The measurement date for employee awards is generally the date of grant. Under the fair value method,
compensation associated with stock awards to non-employees is determined based on the estimated fair value of the award itself, measured using either current market data or an established
option pricing model. The measurement date for non-employee awards is generally the date that performance of certain services is complete.

Had
the Company used the fair value method to measure compensation related to stock awards to employees, reported income (loss) from continuing operations and loss per share would have
been as follows:

Years ended December 31,2003

2002

2001(in thousands, except per share data)Income (loss) from continuing operations, as reported

$
555

$
(5,018
)
$
(10,358
)Stock-based compensation recorded








Pro forma stock-based compensation, net of tax


(6,629
)

(6,422
)

(6,791
)Loss from continuing operations, pro forma

$
(6,074
)
$
(11,440
)
$
(17,149
)Loss per common share, basic and diluted

$
(0.49
)
$
(0.94
)
$
(1.41
)


For
purposes of determining the disclosures provided above, the fair value of options on their grant date is measured using the Black-Scholes option-pricing model. Key
assumptions used to apply this pricing model were as follows:

Years ended December 31,2003

2002

2001Risk-free interest rate

3.6
%
4.3
%
4.8
%Expected life of option grants (years)

5.8

4.3

4.4Expected volatility of underlying stock

85
%
65
%
95
%


41

---

The
estimated weighted average fair value of option grants made during 2003, 2002, and 2001, was $6.13, $2.67, and $4.05, respectively, per option.

From
time to time, the Company receives shares of its common stock as payment for the exercise price of stock options which are then added to our treasury share balance.

(q) Earnings Per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding during each period. Diluted earnings per common share
is calculated by dividing the net income (loss) by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially
dilutive securities had been issued, using the treasury method, if such shares have a dilutive effect. For the year ended December 31, 2003, the weighted average shares used for computing
diluted earnings per share included 529,000 shares that represent the additional potentially dilutive common shares that would have been outstanding if exercised as of that date using the treasury
method.

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

Years ended December 31,2003

2002

2001Weighted average shares for basic

12,353,000

12,226,000

12,150,000Dilutive effect of stock options

529,000



Weighted average shares for diluted

12,882,000

12,226,000

12,150,000


Stock
options to purchase 1,837,132 shares were excluded from the computation of diluted earnings per share in the year ended December 31, 2003 because of their
anti-dilutive effect. Stock options to purchase 3,545,893 shares and 3,036,067 shares were excluded from the computation of diluted earnings per share in 2002, and 2001, respectively.

(r) Foreign Currency Translation

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

(s) Reclassifications

Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 presentation.

42

---



2. Discontinued Operations

On February 8, 2001, the Company's Board of Directors adopted formal plans to discontinue its Brooktrout Software and Interspeed segments.

Brooktrout SoftwareOn April 16, 2001, the Company sold Brooktrout Software to Sonexis, Inc. ("Sonexis"),
formerly known as eYak, Inc., for approximately $4.9 million in cash and 3,374,054 shares of Sonexis preferred stock (the "Sonexis Shares"), which represented approximately
6 percent of Sonexis's aggregate outstanding shares at the date of the transaction. The Sonexis Shares were independently valued at $5.4 million ($1.59 per share) and were classified as
a cost basis, long-term investment. The sale of Brooktrout Software resulted in a net gain on disposal of discontinued operations of $7.0 million, net of taxes, during the year
ended December 31, 2001. This net gain included the reversal of accruals for estimated costs charged in 2000, which will no longer be incurred as a direct result of the sale.

On
March 12, 2002, the Company and Sonexis reached an agreement resolving various post-closing adjustments and indemnification claims of both parties that had been
asserted in connection with the sale of Brooktrout Software. As part of this agreement, the Company agreed to exchange the Sonexis Shares, received by the Company as partial consideration for the sale
of Brooktrout Software, for an immediate and final resolution and release of substantially all claims related to the sale of Brooktrout Software. The Sonexis Shares had been classified in the
Company's financial statements as a cost basis investment at December 31, 2001. The effect of this settlement was a pre-tax non-cash charge to discontinued operations of
$1.5 million related to the exchange of Sonexis Shares, offset by a pre-tax gain of $0.6 million to reduce net liabilities related to discontinued operations to zero. This
net pre-tax non-cash charge was offset by an income tax benefit of $0.9 million. The income tax benefit related primarily to net deferred tax liabilities, which are no
longer required due to the final settlement of the transaction. As of December 31, 2003, the Company has no remaining liabilities related to Brooktrout Software.

Interspeed.Prior to September 24, 1999, the Company owned 100% of Interspeed. On September 24, 1999, Interspeed
sold 2,000,000 shares of its common stock in an initial public offering at
a price of $12.00 per share pursuant to a registration statement on Form S-1, as amended, under the Securities Act of 1933, as amended (the "Offering"). In conjunction with the
Offering, the Company sold 1,925,000 shares of Interspeed common stock that it owned. As of December 31, 1999, the Company owned approximately 57% of the Interspeed common shares outstanding
and included Interspeed as one of its consolidated subsidiaries. As a result of the Board of Director's formal adoption of plans to discontinue the Interspeed segment, the 2000 loss from discontinued
operations included the Company's share of operating losses up to the amount of the investment in Interspeed, and the Company's commitment under a $2.5 million line of credit.

In
January 2001, the Board of Directors of Interspeed announced that it was curtailing operations and liquidating the remaining assets for the benefit of creditors. The Company is
a creditor of Interspeed. The Company received net proceeds from the Interspeed creditors' trust of $0.4 million during the year ended December 31, 2002. These proceeds resulted in an
after tax net gain from discontinued operations of $0.2 million for the year ended December 31, 2002. As of December 31, 2002 and December 31, 2003, net liabilities related
to discontinued operations consisted of $0.1 million of anticipated remaining expenses associated with the discontinuance of the Interspeed business.

43

---

Summarized
financial information for discontinued segments is as follows:

Years ended December 31,2003

2002

2001(in thousands)Gain on disposal of discontinued operations:Brooktrout Software, net of income taxes

$


$
28

$
7,041Interspeed, net of income taxes





199


Gain on disposal of discontinued operations

$


$
227

$
7,041


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

Years ended December 31,2003

2002

2001Gain on disposal of discontinued operations per common share:Basic and diluted

$


$
0.02

$
0.58


3. Marketable Debt Securities

Marketable debt securities consisted of the following:

Amortized Cost

Market Value(in thousands)December 31, 2003:U.S. government notes and bonds

$
13,789

$
13,809Corporate debt securities and foreign investments


14,042


14,060Total

$
27,831

$
27,869December 31, 2002:U.S. government notes and bonds

$
7,520

$
7,532Corporate debt securities and foreign investments


10,644


10,571Total

$
18,164

$
18,103


At
December 31, 2003, the market value of marketable debt securities included approximately $0.05 million of unrealized gains offset, in part, by $0.01 million of
unrealized losses. At December 31, 2002, the market value of marketable debt securities included approximately $0.12 million of unrealized losses offset, in part, by $0.06 million
of unrealized gains.

Interest
income, net and other includes interest income, gains and losses resulting from foreign currency transactions which are denominated in a currency other than the entity's
functional currency, interest expense, and realized gains and losses on marketable debt securities.

44

---

4. Investments

Pelago

In 2001, the Company's Board of Directors authorized, and the Company participated in, an equity financing in Pelago, purchasing a total of 3,050,000
Series B preferred shares for $3.1 million. The Company's percentage ownership did not change as a result of this transaction. During 2001, the Company recognized equity in the losses of
Pelago of $3.9 million. As of December 31, 2001, the Company's investment in Pelago had been written down to zero and the Company had no further funding commitments to Pelago. As of
December 31, 2003, Pelago has ceased operations.

Sonexis

As part of the proceeds from the sale of Brooktrout Software to Sonexis in April 2001, the Company received 3,374,054 preferred shares in Sonexis. At the
time of the sale, the shares were independently valued at $5.4 million, or $1.59 per share. Subsequently, as a result of the Company's review of the financial position of Sonexis, these shares
were revalued at $1.5 million as of December 31, 2001, or $0.43 per share. The Company considered this decline in fair value to be other than temporary, and accordingly, recognized a
charge of $3.9 million reported as loss on investments in the consolidated statement of operations for the year ended December 31, 2001. During 2002, as a result of the settlement
described in Note 2, the Company's investment in Sonexis was reduced to zero.

Telchemy

During 2001, the Company sold, for nominal consideration, its equity interest in Telchemy, Incorporated ("Telchemy"), an investment previously accounted for under
the equity method. Prior to the Company's sale of its interest in Telchemy, this investment had been written down to zero through the recognition of the Company's share of Telchemy's net losses. In
2001, equity in the losses of Telchemy totaled $0.8 million.

Network Engines

On July 21, 2003, the Company completed the sale of approximately 135,000 shares of Network Engines, Inc. ("NEI") common stock at prices ranging
from $3.70 to $3.75 per share (net of commissions). The Company had acquired these shares in early July 2003 through the exercise of a warrant with NEI at a price of $0.0733 per share. The gain
on the sale of this investment was $0.5 million and the net proceeds are being invested in accordance with the Company's cash management guidelines.

Other

The Company sold a cost method investment during 2001, resulting in a realized loss of $1.0 million, reported as loss on investments on the consolidated
statement of operations.

45

---

5. Inventory

The components of inventory, net of reserves, are as follows:

December 31,2003

2002(in thousands)Raw materials

$
569

$
1,076Work in process


373


740Finished goods


3,523


4,981Total

$
4,465

$
6,797


The
following is a rollforward of reserves provided for inventory obsolescence:

Years ended December 31,2003

2002

2001(in thousands)Balance, beginning of year

$
3,909

$
6,591

$
4,832Provisions


992


3,976


5,363Write offs


(522
)

(6,658
)

(3,604
)Balance, end of year

$
4,379

$
3,909

$
6,591


6. Equipment and Furniture

Equipment and furniture consisted of the following:

December 31,2003

2002(in thousands)Computer equipment

$
8,444

$
8,197Furniture and office equipment


9,710


9,449Total equipment and furniture


18,154


17,646Less: accumulated depreciation and amortization


(15,909
)

(14,242
)Equipment and furniture, net

$
2,245

$
3,404


Depreciation
expense was $1.7 million, $2.6 million, and $3.4 million for the years ended December 31, 2003, 2002, and 2001, respectively.

46

---

7. Intangible Assets and Other Assets

Intangible assets consisted of the following:

December 31,2003

2002(in thousands)Acquired technology

$
12,038

$
12,038Customer base


1,264


1,264In-place workforce


972


972Trademarks


301


301Total intangible assets


14,575


14,575Less: accumulated amortization


(8,666
)

(7,163
)Intangible assets, net of amortization

$
5,909

$
7,412


Intangible
asset amortization expense was $1.5 million, $1.5 million, and $2.0 million for the years ended December 31, 2003, 2002, and 2001, respectively.
Included in intangible assets are amounts allocated to in-place workforce, which SFAS No. 142 requires be reclassified to goodwill; such assets were fully amortized prior to
January 1, 2002, and as a result, no adjustments or reclassifications were recorded. All intangibles carried on the balance sheet are being amortized.

Amortization
expense associated with these intangible assets for years ending December 31 is anticipated to be as follows:

Year Ending December 31,

Amortization Expense(in thousands)2004

$
1,2162005


1,2162006


1,2162007


1,2162008


1,045


Other
assets consisted of the following:

December 31,2003

2002(in thousands)Purchased and licensed software and deposit for technology to be acquired

$
3,300

$
2,400Deposits


308


279Total other assets


3,608


2,679Less: accumulated amortization of purchased and licensed software


(1,860
)

(1,168
)Other assets, net

$
1,748

$
1,511


Other
asset amortization expense was $0.7 million, $1.0 million, and $0.5 million for the years ended December 31, 2003, 2002, and 2001, respectively.

47

---

Total
estimated amortization expense associated with these other assets for years ending December 31 is anticipated to be as follows:

Year Ending December 31,

Amortization Expense(in thousands)2004

$
6492005


3412006


3002007


150


8. Valuation and Qualifying Accounts

Allowances for doubtful accounts and sales returns:

The following is a rollforward of allowances provided for doubtful accounts and sales returns:

Years ended December 31,2003

2002

2001(in thousands)Balance, beginning of year

$
1,679

$
2,074

$
2,647Provisions


(525
)

(41
)

401Write offs and payments to customers


(466
)

(382
)

(914
)Recoveries and other


155


28


(60
)Balance, end of year

$
843

$
1,679

$
2,074


Accrued warranty costs:

The following is a rollforward of accrued warranty costs:

Years ended December 31,2003

2002

2001(in thousands)Balance, beginning of the year

$
1,060

$
789

$
1,499Provisions for claims


217


520


(216
)Claims incurred


(139
)

(249
)

(494
)Balance, end of year

$
1,138

$
1,060

$
789


9. Line of Credit

As of December 31, 2003, the Company has a $5.0 million working capital line of credit available from a commercial bank. Any borrowings would bear
interest at the lender's prime rate. The line of credit is secured by a pledge of substantially all of our assets. Availability of funds under this line of credit is subject to compliance with certain
financial covenants relating to its quick ratio, minimum tangible net worth, and other standard reporting requirements. As of December 31, 2003, letters of credit issued against the existing
line totaled $1.0 million, representing the collateral required for certain lease obligations. Other than the issuance of letters of credit and using the credit line to secure immaterial
foreign currency forward contracts, there have been no borrowings under the line during the past four years. The line of credit expires on July 29, 2005.

48

---



10. Income Taxes

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

Years ended December 31,2003

2002

2001(in thousands)Federalcurrent

$


$
(5,461
)
$
(3,524
)Statecurrent


56


53


113Foreigncurrent


38


28


84Federaldeferred


(984
)

661


(2,888
)Statedeferred


(83
)

(390
)

(1,412
)Foreigndeferred


(171
)




Tax benefit from stock option activity


1,782





Increase in valuation allowance


27


1,925


Total tax provision (benefit)

$
665

$
(3,184
)
$
(7,627
)


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

Years ended December 31,2003

2002

2001Statutory tax rate

34
%
(35
)%
(35
)%State taxes, net of federal benefit

6

(3
)
(5
)Research and development credits



(8
)
(3
)Valuation allowance

2

23

All other

12

(16
)
1Effective tax rate

54
%
(39
)%
(42
)%


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

December 31,2003

2002(in thousands)Current deferred tax assets:Reserves and accruals not currently deductible for tax purposes

$
3,515

$
3,856Federal and state tax credits


315


Total current deferred tax assets

$
3,830

$
3,856Long-term deferred tax assets:Purchased research and development, capitalized for tax, expensed for book

$
3,951

$
4,307Tax benefit from state net operating losses and credits


1,354


1,854Intangible assets, different amortization methods


1,248


1,307Investments, capital loss carryforwards


1,975


2,165Equipment and furniture, different depreciation methods


1,191


898Federal tax credits


273


663Tax benefit from federal net operating loss carryforward


1,373


Other





72Gross long-term deferred tax assets


11,365


11,266Less: Valuation allowance


(1,952
)

(1,925
)Net long-term deferred tax assets

$
9,413

$
9,341


49

---

A
valuation allowance was recorded against the Company's deferred tax assets from capital loss carryforwards. Deferred tax assets associated with the majority of state
net operating losses will expire between 2006 and 2013.

11. Stockholders' Equity

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

The
1999 Plan was adopted and amended by the Board of Directors on December 8, 1999, and was further amended on October 9, 2001. The 1999 Plan has not been approved by
stockholders. Stock options may be issued under the 1999 Plan for a maximum of 1,300,000 shares of common stock of the Company. The 1999 Plan allows for granting of non-qualified options
to employees who are not officers or directors.

The
following table summarizes information about the Company's equity compensation plans:

|                                                       |       | Number of shares to
be issued upon exercise
of outstanding options,
warrants and rights |           | Weighted average
exercise price of
outstanding options,
warrants and rights |       | Number of shares
remaining available for
future issuance under
equity compensation plans
|------------------------------------------------------ | ----- | --------------------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------
|Equity compensation plans approved by stockholders     |       | 2,999,620                                                                               |           | $                                                                           | 9.67  |                                                                                         
|Equity compensation plans not approved by stockholders |       | 905,297                                                                                 |           | $                                                                           | 14.48 |                                                                                         
|                                                       |       |                                                                                         |           |                                                                             |       |                                                                                         
|                                                       | Total |                                                                                         | 3,904,917 |                                                                             | $     | 10.79                                                                                   
|                                                       |       |                                                                                         |           |                                                                             |       |                                                                                         

50

---

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

|                                 |                       | Number of Shares |           | Weighted Average
Exercise Price
|-------------------------------- | --------------------- | ---------------- | --------- | -------------------------------
|Outstanding at January 1, 2001   |                       | 2,302,920        |           | $                              
|                                 | Granted               |                  | 1,290,811 |                                
|                                 | Exercised             |                  | (19,450   | )                              
|                                 | Expired and forfeited |                  | (538,214  | )                              
|                                 |                       |                  |           |                                
|Outstanding at December 31, 2001 |                       | 3,036,067        |           |                                
|                                 | Granted               |                  | 637,845   |                                
|                                 | Exercised             |                  | (2,829    | )                              
|                                 | Expired and forfeited |                  | (125,190  | )                              
|                                 |                       |                  |           |                                
|Outstanding at December 31, 2002 |                       | 3,545,893        |           |                                
|                                 | Granted               |                  | 912,375   |                                
|                                 | Exercised             |                  | (357,222  | )                              
|                                 | Expired and forfeited |                  | (196,129  | )                              
|                                 |                       |                  |           |                                
|Outstanding at December 31, 2003 |                       | 3,904,917        |           | $                              
|                                 |                       |                  |           |                                

The
following table sets forth information regarding stock options outstanding at December 31, 2003:

|Range of
Exercise
Prices |  | Number of
Shares Outstanding |  | Weighted
Average
Exercise
Price |       | Weighted
Average
Remaining
Life (years) |      | Number
Currently
Exercisable |           | Weighted
Average
Exercise
Price for
Currently
Exercisable
|------------------------ |  | ---------------------------- |  | ------------------------------- | ----- | --------------------------------------- | ---- | ---------------------------- | --------- | ---------------------------------------------------------
|$  3.15  $  3.15        |  | 259,016                      |  | $                               | 3.15  |                                         | 7.77 |                              | 126,031   |                                                          
|3.52     4.50           |  | 415,362                      |  |                                 | 4.47  |                                         | 8.42 |                              | 186,430   |                                                          
|4.56     6.70           |  | 444,117                      |  |                                 | 5.78  |                                         | 7.59 |                              | 205,638   |                                                          
|6.73     6.94           |  | 449,228                      |  |                                 | 6.93  |                                         | 7.06 |                              | 320,225   |                                                          
|6.95     7.19           |  | 451,812                      |  |                                 | 7.19  |                                         | 9.54 |                              | 112,375   |                                                          
|7.33   11.81            |  | 532,403                      |  |                                 | 9.64  |                                         | 7.24 |                              | 288,422   |                                                          
|11.88   14.94           |  | 460,337                      |  |                                 | 13.93 |                                         | 6.43 |                              | 309,184   |                                                          
|15.04   20.25           |  | 228,553                      |  |                                 | 17.10 |                                         | 5.79 |                              | 175,596   |                                                          
|20.63   20.63           |  | 441,887                      |  |                                 | 20.63 |                                         | 6.47 |                              | 415,651   |                                                          
|21.00   24.75           |  | 115,177                      |  |                                 | 22.39 |                                         | 4.83 |                              | 98,478    |                                                          
|25.13   44.63           |  | 107,025                      |  |                                 | 31.58 |                                         | 5.73 |                              | 92,651    |                                                          
|                         |  |                              |  |                                 |       |                                         |      |                              |           |                                                          
|$  3.15  $44.63         |  | 3,904,917                    |  | $                               | 10.79 |                                         | 7.31 |                              | 2,330,681 |                                                          
|                         |  |                              |  |                                 |       |                                         |      |                              |           |                                                          

At
December 31, 2003, 2002, and 2001, options to purchase 2,330,681, 1,961,549, and 1,214,353 shares, respectively, were exercisable. At December 31, 2003,
2002, and 2001, the weighted average exercise prices for exercisable shares were $12.71, $12.77 and $14.25, respectively.

Stock Purchase PlanThe Company's Second Amended and Restated 1992 Stock Purchase Plan (the "Purchase Plan") provides for
sales to participating employees of up to an aggregate of 687,500 shares of common stock, at prices that are not less than 85% of the fair market value on the beginning or ending date of the six month
offering period, whichever is lower. Shares of common stock totaling 395,652 have been issued to employees under the Purchase Plan through December 31, 2003. The

51

---

Company
has issued 46,987, 67,739, and 75,865 shares of common stock in connection with the Purchase Plan in the years ended December 31, 2003, 2002, and 2001, respectively.

The
estimated weighted average fair value per share of grants made under the Purchase Plan during 2003, 2002, and 2001, was $1.75, $1.52, and $2.43, respectively, computed using the
assumptions described in Note 1(p), with an expected life of 6 months for the option feature present in the Purchase Plan.

Brooktrout Shareholder Rights PlanThe Company's board of directors adopted a Shareholder Rights Plan in September 1998
and declared a dividend of one Preferred Stock Purchase Right ("Right") for each outstanding share of common stock. Each such Right entitles the registered holder to purchase from the Company one
ten-thousandth of a share of Series A junior participating cumulative preferred stock at a purchase price of $79.00 in cash. Initially, the Rights are not exercisable and will be
attached to all certificates representing outstanding shares of common stock. The Rights will separate from the common stock as of the date (the "Distribution Date") that is the earliest of
(i) ten calendar days following the date of a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person"), has acquired beneficial ownership of 15% or
more of the outstanding shares of common stock; (ii) ten business days (or such later day as the board may determine) following the commencement of a tender or exchange offer that would result
in a person or group becoming the beneficial owner of 15% or more of the outstanding shares of common stock, or (iii) a determination by the board that a person or group has become an Adverse
Person (as such term is defined in the Shareholder Rights Plan). The Distribution Date may be deferred in circumstances determined by the board and the Shareholder Rights Plan may be amended by the
board from time to time, under certain circumstances. The Rights will expire upon the close of business on September 9, 2008, unless earlier redeemed or exchanged.

The
Rights are intended to protect the Company's stockholders in the event of an unfair or coercive offer to acquire the Company and to provide the board with adequate time to evaluate
unsolicited offers. The Rights may have anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the
offer on a substantial number of Rights being acquired. The Rights, however, should not affect any prospective offeror willing to make an offer at a fair price as determined by the board. The Rights
should not interfere with any merger or other business combination approved by the board.

Reserved SharesThe Company has reserved 5,318,419 shares of common stock for issuance upon the exercise of stock options and
the purchase of stock under the Purchase Plan.

Notes ReceivableOfficersOn March 3, 2000, the Board of Directors approved a program under which executive
officers of the Company financed the exercise price of stock options totaling $11.8 million in exchange for non-recourse promissory notes. The notes do not bear interest and become
due and payable in full no later than the expiration of the options, which range from 2004 to 2009. Automatic repayment is required upon the sale of the common stock that is the subject of a note or
within 90 days following the termination of the executive officer's employment with the Company. During 2003, $1.9 million of these notes were repaid.

Stock RepurchaseOn October 16, 2003, the Company's Board of Directors authorized the repurchase of up to 1,000,000
shares of the Company's common stock from time to time on the open market or in privately negotiated transactions. Under the program, shares may be repurchased prior to October 15, 2004 and in
such amounts as market conditions warrant, and subject to regulatory and other considerations. The Company plans to use the repurchased shares for general corporate purposes

52

---

including
the Company's stock option plans, employee stock purchase plan and other stock benefit plans. As of March 9, 2004, the Company has not repurchased any shares under the plan.

12. Retirement Plans

The Company has a 401(k) retirement plan available to qualified employees. Employees may contribute up to 18% of their salary to the plan, subject to certain
regulatory limitations. The Company makes discretionary contributions to the plan equal to the lesser of 25% of either the participant's contribution or 6% of a participant's salary. The Company
contributed $0.3 million to this plan in each of the years ended December 31, 2003, 2002, and 2001.

13. Segment Reporting

Prior to its February 8, 2001 decision to discontinue its Brooktrout Software and Interspeed segments, the Company was organized and reported the results
of its operations in the following three business segments: Brooktrout Technology, Brooktrout Software and Interspeed. As a result of its decision to discontinue Brooktrout Software and Interspeed,
the Company's continuing operations represent one reportable segment. See Note 2.

Product SalesBrooktrout's products are sold for applications in the New Network and for applications in Today's Network.
Today's Network involves core technologies and platforms that are primarily used in business premise products such as fax, LAN fax, and voice mail. The New Network applications expand the capabilities
of communications networks to allow data, voice and fax information to be distributed using packet-based data networks, such as the Internet, for portions of the transmission and also allow
information to be distributed using the traditional circuit-switched telephone network. The Company does not maintain separate financial information related to its New Network and Today's Network
products.

Major CustomersOne customer accounted for approximately 19%, 15%, and 12% of revenue for the years ended December 31,
2003, 2002, and 2001, respectively.

International SalesInternational sales, principally exports from the United States, accounted for approximately 22%, 22%, and
20% of revenue for the years ended December 31, 2003, 2002, and 2001, respectively.

14. Commitments and Contingencies

LitigationFrom time to time, the Company is a party to legal and other actions, which may include allegations of patent
infringement made against us and/or our customers, that arise in the normal course of business. The Company, taking into account advice of counsel, does not currently believe the eventual outcome of
any such pending or potential matters, including matters in which we may have an obligation on behalf of our customers, will have a material effect on the Company's consolidated financial condition or
results of operations.

Operating LeasesThe Company has various operating lease commitments for office and manufacturing facilities expiring through
October 2006. Some of the leases contain renewal options ranging from three to ten years. The Company has guaranteed the lease payments associated with certain leases for office facilities that
former subsidiaries occupied. The Company's maximum liability under these guarantees aggregates $0.4 million. Sub-lease income reduces the net rent expense of these facilities.

53

---

Rent
expense for operating leases was $2.8 million, $2.7 million, and $2.4 million for each of the years ended December 31, 2003, 2002, and 2001,
respectively.

Minimum Lease Payments Under Non-Cancelable Operating Leases

Years Ending December 31,

(in thousands)2004

$
2,9932005


2,0812006


8012007


2262008


226Thereafter


275Total

$
6,602


15. Selected Quarterly Financial Data (Unaudited)

|                                         |                                | 2003 Quarter Ended |        | 2002 Quarter Ended |  
|---------------------------------------- | ------------------------------ | ------------------ | ------ | ------------------ | -
|
|
|Revenue                                  |                                | $                  | 15,534 |                    | $
|Gross profit                             |                                |                    | 9,204  |                    |  
|(Loss) income from continuing operations |                                |                    | (1,663 | )                  |  
|Net (loss) income                        |                                |                    | (1,663 | )                  |  
|(Loss) income per common share:          |                                |                    |        |                    |  
|                                         | Continuing operations, basic   |                    | $      | (0.14              | )
|                                         | Continuing operations, diluted |                    | $      | (0.14              | )
|                                         | Net (loss) income, basic       |                    | $      | (0.14              | )
|                                         | Net (loss) income, diluted     |                    | $      | (0.14              | )

54

---

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

(a)   Evaluation
of disclosure controls and procedures.

Our
management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2003. Based on this evaluation, our
chief executive officer and chief financial officer concluded that, as of December 31, 2003, our disclosure controls and procedures were (1) designed to ensure that material information
relating to our company, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

(b)   Changes
in internal controls.

No
change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

55

---



PART III

Item 10. Directors and Executive Officers of the Registrant

The information appearing under the captions "Proposal One: Election of Two Class III Directors," "Information about Continuing Directors," "Information
about Corporate Governance," "Board and CommitteesAudit Committee," "Code of Business Conduct and Ethics," and "Section 16(a) Beneficial Ownership Reporting Compliance" in our
definitive Proxy Statement for our 2004 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year,
is incorporated into this report by reference.

Information
regarding our executive officers is set forth in Part I above and is incorporated herein by reference.

Item 11. Executive Compensation

Information in response to this Item will appear under the captions "Information about Executive Officers" and "Compensation of Directors" in our definitive Proxy
Statement for our 2004 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year, and is
incorporated into this report by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information in response to this Item appears in Note 11 of the notes to consolidated financial statements in Item 8 of this report and will also appear
under the captions "Equity Compensation Plan Information" and "Information about Stock Ownership" in our definitive Proxy Statement for our 2004 Annual Meeting of Stockholders, to be filed with the
SEC pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year, and is incorporated into this report by reference.

Item 13. Certain Relationships and Related Transactions

Information in response to this Item will appear under the caption "Related-Party Transactions" in our definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders, to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year, and is incorporated into this report by reference.

Item 14. Principal Accountant Fees and Services

Information in response to this Item will appear under the caption "Independent Public Accountants" in our definitive Proxy Statement for our 2004 Annual Meeting
of Stockholders, to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year, and is incorporated into this report by reference.

56

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PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a,
d)





| |  | Independent Auditors' Report                                                                               
| |  | -----------------------------------------------------------------------------------------------------------
| |  | Consolidated Balance Sheets at December 31, 2003 and 2002                                                  
| |  | Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001                 
| |  | Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001
| |  | Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001       
| |  | Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                 
| |  | Notes to Consolidated Financial Statements                                                                 



Schedules
are omitted because they are either not required or the required information is provided in the consolidated financial statements or notes thereto.



Exhibits
filed herewith or incorporated herein by reference are set forth in Item 15(c) below.

On
October 16, 2003, we filed a current report on Form 8-K, dated October 16, 2003, filing under Item 5 our press release announcing the authorization of
a stock repurchase program and furnishing under Item 12 our press release announcing financial results for the quarter ended September 30, 2003.

On
February 17, 2004, we filed a current report on Form 8-K, dated February 17, 2004, furnishing under Item 12 our press release announcing financial
results for the quarter and year ended December 31, 2003.

|Exhibit
No. |  | Title                                                                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Asset Purchase Agreement by and among BTGP, Inc. and Brooktrout Technology Europe Limited dated December 17, 1998 is hereby incorporated by reference from Exhibit 2.1 to Current Report on Form 8-K filed with the SEC on
December 29, 1998 (File No. 000-20698).
|2.2         |  | Asset Purchase Agreement by and among BTINH Operating Company, Inc. and Netaccess, Inc. dated June 30, 1997 is hereby incorporated by reference from Exhibit 2.1 to Current Report on Form 8-K filed with the SEC on July 14, 1997 (File No.
000-20698).          
|3.1         |  | Restated Articles of Organization of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 filed with the SEC on March 31, 1993 (File No.
000-20698).                  
|            |  |                                                                                                                                                                                                                                                                   

57

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|3.2   |  | Articles of Amendment to the Restated Articles of Organization of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998 filed with the SEC on March 30, 1999
(File No. 000-20698).                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.3   |  | Articles of Amendment to the Restated Articles of Organization of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the SEC on March 30, 2000
(File No. 000-20698).                                                                                                                                     
|3.4   |  | Articles of Amendment to the Restated Articles of Organization of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.3 to Amendment No. 2 to the quarterly report on Form 10-Q/A for the fiscal quarter ended June 30, 2000 filed with
the SEC on November 17, 2000 (File No. 000-20698).                                                                                                       
|3.5   |  | Amended and Restated By-laws of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.4 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the SEC on March 25, 2002 (File No. 000-20698).                                                                                                                                                                       
|4.1   |  | Shareholder Rights Agreement, dated as of September 9, 1998, between Brooktrout, Inc. and State Street Bank and Trust Company, as Rights Agent is hereby incorporated by reference from Exhibit 4.1 to Registration Statement on Form 8-A filed with the
SEC on September 14, 1998 (File No. 000-20698).                                                                                                          
|4.2   |  | Amendment No. 1 to Shareholder Rights Agreement, dated as of March 1, 2002, between Brooktrout, Inc., State Street Bank and Trust Company, as Rights Agent, and EquiServe Trust Company, N.A. as successor Rights Agent, is hereby incorporated by
reference from Exhibit 4.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the SEC on March 25, 2002 (File No. 000-20698).
|10.1  |  | Lease between Brooktrout, Inc. and Trustees of Needham 152 Second Avenue Trust dated April 7, 1997 is hereby incorporated by reference from Exhibit 10.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the SEC
on March 30, 1998 (File No. 000-20698).                                                                                                                 
|10.2  |  | Assignment and Assumption of Lease between Brooktrout, Inc. and Lucent Technologies Inc. dated December 17, 1998 is hereby incorporated by reference from Exhibit 10.3 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as filed
with the SEC on March 30, 1999 (File No. 000-20698).                                                                                                   
|10.3  |  | Lease between Brooktrout, Inc. and Pacific Gateway Properties, Inc., dated August 15, 1995, as amended is hereby incorporated by reference from Exhibit 10.4 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as filed with the
SEC on March 30, 1999 (File No. 000-20698).                                                                                                             
|*10.4 |  | Brooktrout, Inc. Amended and Restated 1992 Stock Incentive Plan is hereby incorporated by reference from Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the SEC on March 25, 2002 (File No.
000-20698).                                                                                                                                                        
|*10.5 |  | Brooktrout, Inc. Second Amended and Restated 1992 Stock Purchase Plan, dated January 1, 2001, as amended May 10, 2001 and May 14, 2003, is hereby incorporated by reference from Exhibit 99 to Registration Statement on Form S-8 filed with the SEC on
December 10, 2003 (File No. 333-111066).                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                   

58

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|*10.6 |  | Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-8 filed with the SEC on June 30, 2000 (File No. 333-40644).                        
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.7 |  | First Amendment to Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.2 to Registration Statement on Form S-8 filed with the SEC on June 30, 2000 (File No. 333-40644).     
|*10.8 |  | Second Amendment to Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.6 to Registration Statement on Form S-8 filed with the SEC on December 28, 2001 (File No. 333-76074).
|*10.9 |  | Brooktrout, Inc. 2001 Stock Option and Incentive Plan is hereby incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-8 filed with the SEC on December 28, 2001 (File No. 333-76074).         
|14    |  | Code of Business Conduct and Ethics is filed herewith.                                                                                                                                                                 
|21    |  | List of Subsidiaries of Brooktrout, Inc. is filed herewith.                                                                                                                                                            
|23    |  | Independent Auditors' Consent of Deloitte & Touche LLP is filed herewith.                                                                                                                                              
|31.1  |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 is filed herewith.                                          
|31.2  |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 is filed herewith.                                          
|32.1  |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 is filed herewith.         
|32.2  |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 is filed herewith.         

---

59

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, as of March 9, 2004.

| |  | BROOKTROUT, INC.
| |  | ----------------
| |  | By:             

Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons, on behalf of
the registrant and in the capacities and indicated, as of March 9, 2004.

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

60

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EXHIBIT INDEX

|Exhibit No. |  | Title                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Asset Purchase Agreement by and among BTGP, Inc. and Brooktrout Technology Europe Limited dated December 17, 1998 is hereby incorporated by reference from Exhibit 2.1 to Current Report on Form 8-K filed with the SEC on December 29, 1998 (File No.
000-20698).                                                                                                                                                
|2.2         |  | Asset Purchase Agreement by and among BTINH Operating Company, Inc. and Netaccess, Inc. dated June 30, 1997 is hereby incorporated by reference from Exhibit 2.1 to Current Report on Form 8-K filed with the SEC on July 14, 1997 (File No.
000-20698).                                                                                                                                                          
|3.1         |  | Restated Articles of Organization of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 filed with the SEC on March 31, 1993 (File No.
000-20698).                                                                                                                                                                  
|3.2         |  | Articles of Amendment to the Restated Articles of Organization of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998 filed with the SEC on March 30, 1999
(File No. 000-20698).                                                                                                                                     
|3.3         |  | Articles of Amendment to the Restated Articles of Organization of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the SEC on March 30, 2000
(File No. 000-20698).                                                                                                                                     
|3.4         |  | Articles of Amendment to the Restated Articles of Organization of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.3 to Amendment No. 2 to the quarterly report on Form 10-Q/A for the fiscal quarter ended June 30, 2000 filed with
the SEC on November 17, 2000 (File No. 000-20698).                                                                                                       
|3.5         |  | Amended and Restated By-laws of Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.4 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the SEC on March 25, 2002 (File No. 000-20698).                                                                                                                                                                       
|4.1         |  | Shareholder Rights Agreement, dated as of September 9, 1998, between Brooktrout, Inc. and State Street Bank and Trust Company, as Rights Agent is hereby incorporated by reference from Exhibit 4.1 to Registration Statement on Form 8-A filed with the
SEC on September 14, 1998 (File No. 000-20698).                                                                                                          
|4.2         |  | Amendment No. 1 to Shareholder Rights Agreement, dated as of March 1, 2002, between Brooktrout, Inc., State Street Bank and Trust Company, as Rights Agent, and EquiServe Trust Company, N.A. as successor Rights Agent, is hereby incorporated by
reference from Exhibit 4.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the SEC on March 25, 2002 (File No. 000-20698).
|10.1        |  | Lease between Brooktrout, Inc. and Trustees of Needham 152 Second Avenue Trust dated April 7, 1997 is hereby incorporated by reference from Exhibit 10.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the SEC
on March 30, 1998 (File No. 000-20698).                                                                                                                 
|10.2        |  | Assignment and Assumption of Lease between Brooktrout, Inc. and Lucent Technologies Inc. dated December 17, 1998 is hereby incorporated by reference from Exhibit 10.3 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as filed
with the SEC on March 30, 1999 (File No. 000-20698).                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                   

61

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|10.3  |  | Lease between Brooktrout, Inc. and Pacific Gateway Properties, Inc., dated August 15, 1995, as amended is hereby incorporated by reference from Exhibit 10.4 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as filed with the
SEC on March 30, 1999 (File No. 000-20698).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.4 |  | Brooktrout, Inc. Amended and Restated 1992 Stock Incentive Plan is hereby incorporated by reference from Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the SEC on March 25, 2002 (File No.
000-20698).                                           
|*10.5 |  | Brooktrout, Inc. Second Amended and Restated 1992 Stock Purchase Plan, dated January 1, 2001, as amended May 10, 2001 and May 14, 2003, is hereby incorporated by reference from Exhibit 99 to Registration Statement on Form S-8 filed with the SEC on
December 10, 2003 (File No. 333-111066).     
|*10.6 |  | Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-8 filed with the SEC on June 30, 2000 (File No. 333-40644).                                                                                                      
|*10.7 |  | First Amendment to Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.2 to Registration Statement on Form S-8 filed with the SEC on June 30, 2000 (File No. 333-40644).                                                                                   
|*10.8 |  | Second Amendment to Brooktrout, Inc. 1999 Stock Incentive Plan is hereby incorporated by reference from Exhibit 4.6 to Registration Statement on Form S-8 filed with the SEC on December 28, 2001 (File No. 333-76074).                                                                              
|*10.9 |  | Brooktrout, Inc. 2001 Stock Option and Incentive Plan is hereby incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-8 filed with the SEC on December 28, 2001 (File No. 333-76074).                                                                                       
|14    |  | Code of Business Conduct and Ethics is filed herewith.                                                                                                                                                                                                                                               
|21    |  | List of Subsidiaries of Brooktrout, Inc. is filed herewith.                                                                                                                                                                                                                                          
|23    |  | Independent Auditors' Consent of Deloitte & Touche LLP is filed herewith.                                                                                                                                                                                                                            
|31.1  |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 is filed herewith.                                                                                                                        
|31.2  |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 is filed herewith.                                                                                                                        
|32.1  |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 is filed herewith.                                                                                       
|32.2  |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 is filed herewith.                                                                                       

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