** **

**SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D.C.20549**

 

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**FORM 10-Q**

** **

** **

** **

| **(Mark One)**                                        |   |                                                                                                 |
|-------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|
|                                                  |   |                                                                                                 |
| **ý**                                            |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**   |
|                                                  |   |                                                                                                 |
| **For the quarterly period ended September 30, 2002** |
|                                                  |
| **OR**                                                |
|                                                  |   |                                                                                                 |
| **o**                                                 |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |
|                                                       |        |                                                                                                      |  |  |

** **

**For the transition periodfrom        to        **

 

**Commission File No. 000-20698**

 

| **BROOKTROUT, INC.**                                                                   |
|---------------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                                      |
|                                                                                        |   |   |
| **Massachusetts**                                                                           |   | **04-2814792** |
| (State or other jurisdiction  of incorporation or organization)                             |   | (I.R.S. employer  identification number) |
|                                                                                        |   |   |
| **250 First Avenue  Needham, Massachusetts**                                                |   | **02494-2814** |
| (Address of principal executive offices)                                                    |   | (Zip code) |
|                                                                                        |   |   |
| Registrant’s telephone number, including area code:**  (781) 449-4100** |

 

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Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

 

Asof October 15, 2002, 12,244,217 shares of common stock, $.01 par value pershare, were outstanding.

 

 

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**BROOKTROUT, INC.FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002**

 

**TABLE OF CONTENTS**

 
| PART I             | FINANCIAL  INFORMATION                                                                                                                              | 3      |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|               |                                                                                                                                                |   |
|  Item 1. | Condensed Consolidated Financial  Statements                                                                                                        | 3      |
|               |                                                                                                                                                |   |
|               | Unaudited  Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31,  2001                                               | 3      |
|               |                                                                                                                                                |   |
|               | Unaudited  Condensed Consolidated Statements of Operations for the Three and Nine Months  Ended September 30, 2002 and September 30, 2001           | 4      |
|               |                                                                                                                                                |   |
|               | Unaudited  Condensed Consolidated Statements of Comprehensive Income for the Three and  Nine Months Ended September 30, 2002 and September 30, 2001 | 5      |
|               |                                                                                                                                                |   |
|               | Unaudited Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2002 and September 30, 2001                     | 6      |
|               |                                                                                                                                                |   |
|               | Notes to Unaudited Condensed  Consolidated Financial Statements                                                                                     | 7      |
|               |                                                                                                                                                |   |
|  Item 2. | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                         | 12     |
|               |                                                                                                                                                |   |
|               | Overview                                                                                                                                            | 12     |
|               |                                                                                                                                                |   |
|               | Application of Critical Accounting Policies                                                                                                         | 12     |
|               |                                                                                                                                                |   |
|               | Results of Operations                                                                                                                               | 13     |
|               |                                                                                                                                                |   |
|               | Three Months  Ended September 30, 2002 and 2001                                                                                                     | 13     |
|               |                                                                                                                                                |   |
|               | Nine Months  Ended September 30, 2002 and 2001                                                                                                      | 14     |
|               |                                                                                                                                                |   |
|               | Liquidity and Capital  Resources                                                                                                                    | 15     |
|               |                                                                                                                                                |   |
|               | Factors That May Affect Future Results                                                                                                              | 16     |
|               |                                                                                                                                                |   |
|  Item 3. | Quantitative and Qualitative  Disclosures about Market Risk                                                                                         | 21     |
|               |                                                                                                                                                |   |
|  Item 4. | Controls and Procedures                                                                                                                             | 21     |
|               |                                                                                                                                                |   |
| PART II       | OTHER INFORMATION                                                                                                                                   | 22     |
|               |                                                                                                                                                |   |
|  Item 6. | Exhibits and Reports  on Form 8-K                                                                                                         | 22     |
|               |                                                                                                                                                |   |
| Signatures         |                                                                                                                                                | 23     |
|               |                                                                                                                                                |   |
| Certifications     |                                                                                                                                                | 24     |
|               |                                                                                                                                                |   |
| Exhibit Index      |                                                                                                                                                | 26     |
|                    |                                                                                                                                                     |        |  |

 

“BROOKTROUT”and the “NEW NETWORK” are trademarks or registered trademarks of Brooktrout,Inc.

 

2

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**PART I****.    FINANCIALINFORMATION**

 

**Item 1****.**  **CondensedConsolidated Financial Statements**

** **

**Brooktrout, Inc.Unaudited Condensed Consolidated Balance Sheets*(in thousands, except share and per sharedata)***

 
|                                                                                                                                    |   | **September  30,  2002** |   | **December  31,********2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------------|--------|
| ASSETS                                                                                                                                  |   |                     |   |                          |   |
| Current assets:                                                                                                                         |   |                     |   |                          |   |
| Cash and cash equivalents                                                                                                               |   | $                        | 33,315 |                          | $      | 26,218 |   |
| Marketable debt securities                                                                                                              |   | 8,933                    |   | 11,907                        |   |
| Accounts receivable (less  allowances of $1,770 in 2002 and $2,074 in 2001)                                                             |   | 8,191                    |   | 8,870                         |   |
| Inventory                                                                                                                               |   | 7,027                    |   | 11,954                        |   |
| Income tax receivable                                                                                                                   |   | 5,049                    |   | 4,635                         |   |
| Deferred tax assets                                                                                                                     |   | 8,200                    |   | 9,168                         |   |
| Prepaid expenses                                                                                                                        |   | 847                      |   | 1,022                         |   |
| Total current assets                                                                                                                    |   | 71,562                   |   | 73,774                        |   |
|                                                                                                                                    |   |                     |   |                          |   |
| Equipment and furniture,  less accumulated depreciation and amortization                                                                |   | 3,575                    |   | 5,136                         |   |
| Deferred tax assets                                                                                                                     |   | 6,746                    |   | 6,981                         |   |
| Intangible assets, less  accumulated amortization                                                                                       |   | 7,795                    |   | 8,944                         |   |
| Investment                                                                                                                              |   | —                   |   | 1,451                         |   |
| Other assets                                                                                                                            |   | 1,675                    |   | 2,601                         |   |
| Total assets                                                                                                                            |   | $                        | 91,353 |                          | $      | 98,887 |   |
|                                                                                                                                    |   |                     |   |                          |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                               |   |                     |   |                          |   |
|                                                                                                                                    |   |                     |   |                          |   |
| Current liabilities:                                                                                                                    |   |                     |   |                          |   |
| Accounts payable                                                                                                                        |   | $                        | 4,931  |                          | $      | 6,436 |   |
| Accrued expenses                                                                                                                        |   | 6,603                    |   | 7,303                         |   |
| Accrued compensation and  commissions                                                                                                   |   | 2,348                    |   | 2,858                         |   |
| Customer deposits                                                                                                                       |   | 692                      |   | 697                           |   |
| Accrued warranty costs                                                                                                                  |   | 469                      |   | 789                           |   |
| Net liabilities related to  discontinued operations                                                                                     |   | 155                      |   | 990                           |   |
| Total current liabilities                                                                                                               |   | 15,198                   |   | 19,073                        |   |
|                                                                                                                                    |   |                     |   |                          |   |
| Deferred rent                                                                                                                           |   | 201                      |   | 242                           |   |
| Total liabilities                                                                                                                       |   | 15,399                   |   | 19,315                        |   |
|                                                                                                                                    |   |                     |   |                          |   |
| Stockholders’ equity:                                                                                                              |   |                     |   |                          |   |
| Preferred stock, $1.00 par  value; authorized, 100,000 shares; issued and outstanding, none                                             |   | —                   |   | —                        |   |
| Common stock, $0.01 par  value; authorized, 40,000,000 shares; issued and outstanding 12,499,601  shares in 2002 and 12,462,242 in 2001 |   | 125                      |   | 125                           |   |
| Additional paid-in capital                                                                                                              |   | 64,021                   |   | 63,841                        |   |
| Notes receivable —  officers                                                                                                       |   | (11,760                  | )      | (11,760                       | )      |
| Accumulated other  comprehensive loss                                                                                                   |   | (48                      | )      | (52                           | )      |
| Retained earnings                                                                                                                       |   | 27,376                   |   | 31,178                        |   |
| Treasury stock, 255,384  shares in 2002 and 2001, at cost                                                                               |   | (3,760                   | )      | (3,760                        | )      |
| Total stockholders’ equity                                                                                                         |   | 75,954                   |   | 79,572                        |   |
| Total liabilities and  stockholders’ equity                                                                                        |   | $                        | 91,353 |                          | $      | 98,887 |   |

 

See notes to unaudited condensed consolidated financial statements.

 

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**Brooktrout, Inc.Unaudited Condensed Consolidated Statements ofOperations*****(in thousands, exceptper share data)***

 
|                                                       |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                       |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Revenue                                                    |   | $                                      | 18,510 |                                  | $      | 17,213 |   | $ | 55,730 |   | $ | 62,120 |   |
|                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Costs and expenses:                                        |   |                                   |   |                                  |   |   |   |   |   |
| Cost of product sold                                       |   | 8,223                                  |   | 8,268                                 |   | 25,753 |   | 27,912 |   |
| Research and development                                   |   | 4,576                                  |   | 5,171                                 |   | 15,703 |   | 16,365 |   |
| Selling, general and  administrative                       |   | 6,937                                  |   | 7,661                                 |   | 21,952 |   | 25,135 |   |
| Total costs and expenses                                   |   | 19,736                                 |   | 21,100                                |   | 63,408 |   | 69,412 |   |
|                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Operating loss                                             |   | (1,226                                 | )      | (3,887                                | )      | (7,678 | ) | (7,292 | ) |
|                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Other income (expense):                                    |   |                                   |   |                                  |   |   |   |   |   |
| Equity in loss of  affiliates                              |   | —                                 |   | (3,081                                | )      | — |   | (4,478 | ) |
| Interest income, net and  other                            |   | 175                                    |   | 312                                   |   | 765 |   | 928 |   |
| Total other income  (expense)                              |   | 175                                    |   | (2,769                                | )      | 765 |   | (3,550 | ) |
| Loss before income taxes                                   |   | (1,051                                 | )      | (6,656                                | )      | (6,913 | ) | (10,842 | ) |
| Income tax benefit                                         |   | (422                                   | )      | (1,468                                | )      | (2,884 | ) | (2,489 | ) |
| Loss from continuing  operations                           |   | (629                                   | )      | (5,188                                | )      | (4,029 | ) | (8,353 | ) |
|                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Discontinued operations:                                   |   |                                   |   |                                  |   |   |   |   |   |
| Gain on disposal of  discontinued operations, net of taxes |   | 147                                    |   | —                                |   | 227 |   | 6,073 |   |
| Net loss                                                   |   | $                                      | (482   | )                                     | $      | (5,188 | ) | $ | (3,802 | ) | $ | (2,280 | ) |
|                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Loss per common share:                                     |   |                                   |   |                                  |   |   |   |   |   |
| Loss from continuing  operations, basic and diluted        |   | $                                      | (0.05  | )                                     | $      | (0.43 | ) | $ | (0.33 | ) | $ | (0.69 | ) |
| Net loss, basic and  diluted                               |   | $                                      | (0.04  | )                                     | $      | (0.43 | ) | $ | (0.31 | ) | $ | (0.19 | ) |
|                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Shares for basic and  diluted                              |   | 12,244                                 |   | 12,171                                |   | 12,220 |   | 12,143 |   |

 

See notes to unaudited condensed consolidated financial statements.

 

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**Brooktrout, Inc.Unaudited Condensed Consolidated Statements of ComprehensiveIncome*****(in thousands)***

 

 
|                                                                              |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                              |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Net loss                                                                          |   | $                                      | (482   | )                                     | $      | (5,188 | ) | $ | (3,802 | ) | $ | (2,280 | ) |
| Other comprehensive  income:                                                      |   |                                   |   |                                  |   |   |   |   |   |
| Unrealized gains (losses)  on marketable debt securities, net of applicable taxes |   | 8                                      |   | (1                                    | )      | 4 |   | (89 | ) |
| Foreign currency  translation adjustments                                         |   | —                                 |   | 245                                   |   | — |   | 130 |   |
| Other comprehensive income                                                        |   | 8                                      |   | 244                                   |   | 4 |   | 41 |   |
| Comprehensive loss                                                                |   | $                                      | (474   | )                                     | $      | (4,944 | ) | $ | (3,798 | ) | $ | (2,239 | ) |

 

See notes to unaudited condensed consolidated financial statements.

 

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**Brooktrout, Inc.Unaudited Condensed Consolidated Statements of Cash Flows*****(in thousands)***

 
|                                                                         |   | **Nine  Months Ended September 30,** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                         |   | **2002**                             |   | **2001** |   |
| **Cash flows from operating activities:**                                    |   |                                 |   |   |   |
| Net loss                                                                     |   | $                                    | (3,802 | ) | $ | (2,280 | ) |
| Adjustments to reconcile  net loss to cash provided by operating activities: |   |                                 |   |   |   |
| Loss (gain) on disposal of  discontinued operations                          |   | 469                                  |   | (11,090 | ) |
| Depreciation and  amortization                                               |   | 3,191                                |   | 3,929 |   |
| Amortization of acquired  software                                           |   | 876                                  |   | 280 |   |
| Equity in loss of  affiliates                                                |   | —                               |   | 4,478 |   |
| Deferred income taxes                                                        |   | 682                                  |   | 4,093 |   |
| Tax refund received                                                          |   | 4,393                                |   | — |   |
| Increase (decrease) in  cash from changes in:                                |   |                                 |   |   |   |
| Accounts receivable                                                          |   | 679                                  |   | 13,394 |   |
| Inventory                                                                    |   | 4,927                                |   | 3,912 |   |
| Prepaid expenses, income  tax receivable and other assets                    |   | (4,169                               | )      | (1,056 | ) |
| Current and other  liabilities                                               |   | (2,832                               | )      | (8,693 | ) |
| Cash provided by operating  activities                                       |   | 4,414                                |   | 6,967 |   |
|                                                                         |   |                                 |   |   |   |
| **Cash flows from investing activities:**                                    |   |                                 |   |   |   |
| Purchases of investments                                                     |   | —                               |   | (1,525 | ) |
| Proceeds from the sale of  a business segment                                |   | —                               |   | 4,927 |   |
| Expenditures for equipment  and furniture                                    |   | (481                                 | )      | (940 | ) |
| Acquired software                                                            |   | —                               |   | (444 | ) |
| Sales and maturities of  marketable securities                               |   | 12,762                               |   | 1,994 |   |
| Purchases of marketable  securities                                          |   | (9,778                               | )      | (6,475 | ) |
| Cash provided by (used in)  investing activities                             |   | 2,503                                |   | (2,463 | ) |
|                                                                         |   |                                 |   |   |   |
| **Cash flows from financing activities:**                                    |   |                                 |   |   |   |
| Proceeds from the sale of  common stock                                      |   | 180                                  |   | 294 |   |
| Cash provided by financing  activities                                       |   | 180                                  |   | 294 |   |
| Increase in cash and cash  equivalents                                       |   | 7,097                                |   | 4,798 |   |
| Cash and cash equivalents,  beginning of period                              |   | 26,218                               |   | 23,294 |   |
| Cash and cash equivalents,  end of period                                    |   | $                                    | 33,315 |   | $ | 28,092 |   |

 

See notes to unaudited condensed consolidated financial statements.

 

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**Brooktrout, Inc.Notes to Unaudited Condensed Consolidated FinancialStatements*****(in thousands, exceptshare and per share data)***

** **

**1. Description of Business and Summary of SignificantAccounting Policies and Practices**

*** ***

***(a) Description of Business***

 

Brooktrout, Inc. (the“Company” or “Brooktrout”) develops, manufactures and sells hardware andsoftware products that enable the development of communications applicationsand systems in five targeted markets, including enhanced services platforms,wireless infrastructure, voice over packet gateways and switches, unifiedcommunications, and contact centers. The Company sells its products to systemvendors, service providers, enterprise customers, original equipmentmanufacturers (“OEMs”), and value-added resellers (“VARs”), both domesticallyand internationally,through a direct sales force and a two-tiered distribution system. Prior toFebruary 8, 2001, the Company was organized and reported the results ofits operations in the following three business segments: BrooktroutTechnology, Inc. (“Brooktrout Technology”), Brooktrout Software, Inc.(“Brooktrout Software”), and Interspeed, Inc. (“Interspeed”). Thesesegments were differentiated based upon the products provided to the marketplace,the customers served, and the distribution channels utilized. Two of thesesegments have been discontinued and are classified as discontinued operationsfor the periods presented in these condensed consolidated financial statements.(See Note 2). Following the discontinuance of the Brooktrout Software andInterspeed segments, the Company’s operations consist of one reportablesegment, Brooktrout Technology. Disclosures included herein pertain to the Company’s continuing operationsunless noted otherwise.

 

***(b) Use of Estimates***

 

Accountingpolicies, methods and estimates are an integral part of the condensedconsolidated financial statements and are based upon management’s currentjudgments. These policies, methods, and estimates affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting periods. The judgments made by management arebased on knowledge and experience with regard to past and current events andassumptions about future events that are believed to be reasonable under thecircumstances. On an on-going basis, the Company’s management evaluates itsestimates and assumptions and adjusts them if expectations concerning events,including future events, affecting them differ markedly from management’scurrent judgments.

 

***(c) Principles of Consolidation***

 

The accompanying unauditedcondensed consolidated financial statements have been prepared by the Companypursuant to the rules and regulations of the Securities and ExchangeCommission regarding interim financial reporting. These unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements included in the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2001.

 

The accompanying unauditedcondensed consolidated financial statements have been prepared on the samebasis as the audited consolidated financial statements and include alladjustments, consisting only of normal recurring adjustments, necessary for afair presentation of the interim periods presented. The condensedconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries. All significant intercompany balances andtransactions have been eliminated in consolidation. The operating resultsfor the interim periods presented are not necessarily indicative of the resultsthat could be expected for the full year.

 

***(d) Revenue Recognition***

 

Revenue from product salesis generally recognized upon shipment to the customer (which constitutesdelivery), provided that persuasive evidence of an arrangement exists, the feeis fixed or determinable, and collection is reasonably assured.  To the extent that one or more of theseconditions is not met, which has occurred from time to time, revenue isdeferred until such time as all four conditions are satisfied.  Revenue from sales to distributors isrecognized on a “sell-through” basis, that is, when the distributors report tothe Company that resale of the product to the ultimate customer of thedistributor in question has occurred. If the Company receives a payment from a customer prior to meeting allof the above revenue recognition criteria, the payment is recorded as acustomer deposit or deferred revenue. The Company generally records a provision for estimated sales returnsand allowances on product sales in the same period as the related revenue isrecorded.  These estimates are based onhistorical sales returns, analysis of credit memo data and other knownfactors.  The Company provides forestimated costs of warranty repairs at the time revenue is recognized.

 

7

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***(e) Concentration of Credit Risk***

 

The Company sells itsproducts to various customers in the high technology industry. The Companygenerally requires no collateral; however, to reduce credit risk, the Companyperforms ongoing credit evaluations of its customers. The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments. At September 30, 2002 andDecember 31, 2001, 12% and 13%, respectively, of the Company’s net accountsreceivable were from one customer.

 

***(f) Inventory***

 

Inventory is carried at thelower of cost or market. Cost is determined using the first-in, first-outmethod for all inventories. The Company reduces the value of its inventory forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions.

 

***(g) Intangible Assets***

 

Intangible assets includeacquired technology, customer base, and trademarks associated with purchasedbusiness combinations.  Acquired technology is being amortized on astraight-line basis over ten years, while all other intangibles are beingamortized over periods of three to five years.  Accumulated amortizationat September 30, 2002 and December 31, 2001 was $7,031 and $5,882,respectively.  Intangible assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable.

 

***(h) Income Taxes***

 

Deferred tax assets andliabilities are recognized for the estimated future tax consequencesattributable to operating loss carry forwards, along with the differencesbetween the financial statement carrying value of existing assets andliabilities and their respective tax bases. These assets and liabilities aremeasured using the enacted tax rates and laws that are expected to be in effectat the time the differences are expected to reverse.  The Company believesthat it is more likely than not that future operations will generate sufficienttaxable income to realize the deferred tax assets.

 

***(i) Earnings Per Share***

 

Basic earnings per commonshare is computed using the weighted average number of common sharesoutstanding during each period. Diluted earnings per common share is calculatedby dividing net income by the sum of the weighted average number of commonshares outstanding and all additional common shares that would have beenoutstanding if potentially dilutive securities had been issued, using thetreasury method.

 

Potential common shares areantidilutive for the three and nine months ended September 30, 2002 andSeptember 30, 2001 and are therefore excluded from the calculation.  Stockoptions to purchase 3,531,200 and 2,323,183 shares were not included in the computationof diluted earnings per share in 2002 and 2001, respectively.

 

***(j) Reclassifications***

 

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

 

8

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***(k) Recent Accounting Pronouncements***

 

TheCompany has adopted Statement of Financial Accounting Standards (“SFAS”) No.141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets.” These pronouncements provide guidance on how to account for theacquisition of businesses and intangible assets, including goodwill, whicharise from such activities. SFAS No. 141 affirms that only one method ofaccounting may be applied to a business combination, the purchase method. SFASNo. 141 also provides guidance on the allocation of purchase price to theassets acquired. SFAS No. 142 provides that goodwill and intangible assets withindefinite useful lives resulting from business combinations can no longer beamortized to expense, but rather requires an annual assessment of impairmentand, if necessary, adjustments to the carrying value of goodwill.  Theadoption of SFAS Nos. 141 and 142 did not have a material effect on theCompany’s consolidated financial statements.  As of January 1, 2002, theCompany had no intangible assets with indefinite useful lives.

 

The Company has adopted SFASNo. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets.” SFASNo. 144 establishes a single accounting model for impairment or disposal oflong-lived assets, including discontinued operations.  The adoption of SFAS No. 144 did not have a material effect onthe Company’s consolidated financial statements and had no effect on theaccounting applied to the discontinued businesses described in Note 2.  The Company will continue to account for andpresent discontinued operations relative to these businesses in accordance withAccounting Principles Board (“APB”) 30.

 

InApril 2002, the Financial Accounting Standard Board (“FASB”) issued SFASNo. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendmentof FASB Statement No. 13 and Technical Corrections.” SFAS No. 145updates, clarifies and simplifies certain accounting pronouncements.  The Company will adopt SFAS No. 145 onJanuary 1, 2003.  The Company doesnot expect that the adoption of SFAS No. 145 will have a material impacton the Company’s operations or financial position.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This pronouncement is effectivefor exit or disposal activities that are initiated after December 31, 2002, andrequires these costs to be recognized when the liability is incurred and not atproject initiation.  The Company isreviewing the provisions of SFAS No. 146, but does not expect that it will havea material impact on Company’s the financial statements.

** **

**2.  Discontinued Operations**

 

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

 

*Brooktrout Software, Inc.—*On March 12, 2002, the Company andSonexis, Inc. (“Sonexis”) reached an agreement resolving various post-closingadjustments and indemnification claims of both parties that had been assertedin connection with the sale of Brooktrout Software. As part of this agreement,the Company agreed to exchange the Sonexis shares, received by the Company aspartial consideration for the sale of Brooktrout Software, for an immediate andfinal resolution and release of substantially all claims related to the sale ofBrooktrout Software.  The Sonexis shares had been classified in theCompany’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 discontinuedoperations in the first quarter of 2002 of $943.  This pre-tax non-cashcharge was substantially offset by an income tax benefit of $915.  Theincome tax benefit related primarily to net deferred tax liabilities, which areno longer required due to the final settlement of the transaction.

 

Asof September 30, 2002, the Company has determined that it has no remainingliabilities related to Brooktrout Software. For the three months ended September 30, 2002, the Company recognized apre-tax gain from discontinued operations of $86 to reduce “Net liabilitiesrelated to discontinued operations,” with respect to Brooktrout Software, tozero.

 

*Interspeed, Inc.—* In January 2001, the Board of Directors ofInterspeed announced that it was curtailing operations and liquidating theremaining assets for the benefit of creditors.  The Company is a creditorof Interspeed.  The Company received net proceeds from the Interspeedcreditors’ trust of $118 and $364 during the three and nine months ended September30, 2002, respectively.  These proceeds resulted in an after tax net gainfrom discontinued operations of $91 and $199 for the three and nine monthsended September 30, 2002, respectively.  As of September 30, 2002,“Net liabilities related to discontinued operations” consists of $155 ofanticipated remaining expenses associated with the discontinuance of theInterspeed business.

 

9

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Detailsof the gain on disposal, and basic and diluted per share amounts for discontinuedoperations are as follows:

 
|                                                                                                                                                                                                                                  |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                                                                                                                  |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Gain on disposal of  discontinued operations:                                                                                                                                                                                         |   |                                   |   |                                  |   |   |   |   |   |
| Brooktrout Software, net  of income tax expense of  $30 in the three months ended September 30,  2002, and income tax (benefit) expense of ($885) and $5,017 in the nine  months ended September 30, 2002 and 2001, respectively |   | $                                      | 56     |                                  | $      | — |   | $ | 28 |   | $ | 6,073 |   |
| Interspeed, net of income  tax expense of $59 in the three months ended September 30, 2002, and income  tax expense of $189 in the nine months ended September 30, 2002                                                               |   | 91                                     |   | —                                |   | 199 |   | — |   |
| Total gain on disposal of  discontinued operations                                                                                                                                                                                    |   | $                                      | 147    |                                  | $      | — |   | $ | 227 |   | $ | 6,073 |   |
|                                                                                                                                                                                                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Gain on disposal per  common share:                                                                                                                                                                                                   |   |                                   |   |                                  |   |   |   |   |   |
| Basic and diluted                                                                                                                                                                                                                     |   | $                                      | 0.01   |                                  | $      | — |   | $ | 0.02 |   | $ | 0.50 |   |

 

**3.  Inventory**

 

Inventory consisted of thefollowing at September 30, 2002 and December 31, 2001: 

 
|            |   | **September  30,  2002** |   | **December 31,  2001** |   |
|-----------------|--------|--------------------------|--------|-----------------------------|--------|
| Raw materials   |   | $                        | 1,331  |                        | $      | 3,763 |   |
| Work in process |   | 1,034                    |   | 621                         |   |
| Finished goods  |   | 4,662                    |   | 7,570                       |   |
| Total           |   | $                        | 7,027  |                        | $      | 11,954 |   |

 

**4.  Equipment and Furniture**

 

Equipment and furnitureconsisted of the following at September 30, 2002 and December 31, 2001: 

 
|                                                                           |   | **September  30,  2002** |   | **December  31,  2001** |   |
|--------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| Computer equipment                                                             |   | $                        | 8,095  |                    | $      | 7,987 |   |
| Furniture and office  equipment                                                |   | 9,187                    |   | 8,805                   |   |
| Total equipment and  furniture                                                 |   | 17,282                   |   | 16,792                  |   |
| Less accumulated  depreciation and amortization                                |   | (13,707                  | )      | (11,656                 | )      |
| Total equipment and  furniture, less accumulated depreciation and amortization |   | $                        | 3,575  |                    | $      | 5,136 |   |

** **

**5.  Bank Line of Credit**

 

The Company has a line ofcredit under which it can borrow up to $5,000, subject to compliance withcertain covenants. Any amounts borrowed under the line of credit bear interestat the lender’s prime rate. The line of credit is secured by a pledge ofsubstantially all of the assets of the Company.  As of September 30, 2002, letters of credit issued against theCompany’s existing line totaled $1,000, representing the collateral requiredfor certain lease obligations. Other than the issuance of letters of credit,there have been no borrowings under the line during the past three years. The line of credit expires on June 30, 2003.

 

10

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**6.  Income Taxes**

 

The Company’s tax provisionin 2002 is based on the estimated effective tax rate for the full year. TheCompany’s effective tax benefit rate on continuing operations was 42% for thenine months ended September 30, 2002.  The Company received a tax refundof $4,393 during the nine months ended September 30, 2002.

** **

**7.  Investment**

 

The Company is a shareholderof Pelago Networks, Inc. (“Pelago”). The Company previously accounted for its ownership interest in Pelagounder the equity method of accounting.  The Company’s investment in Pelagowas written down to zero as of December 31, 2001 as the Company recognizedits share of Pelago’s losses.  The Company has no further fundingcommitment and has ceased recording its share of Pelago’s losses.  In thethree months ended March 31, 2002, Pelago closed on an additional round ofequity financing of its Series B preferred shares in which the Company didnot participate.  As a result of this financing, the Company’s ownershippercentage was reduced below 20%.  TheCompany does not exercise significant influence over Pelago and now accountsfor this investment on the cost method basis.

 

The reduction in the valueof the investment in 2002 was due to the preferred equity securities thatconstituted the Company’s investment in Sonexis being exchanged with Sonexis aspart of the settlement discussed in Note 2.

** **

**8.  Segment Reporting**

 

Prior to itsFebruary 8, 2001 decision to discontinue its Brooktrout Software andInterspeed segments, the Company was organized and reported the results of itsoperations in the following three business segments: Brooktrout Technology,Brooktrout Software and Interspeed. As a result of its decision to discontinueBrooktrout Software and Interspeed, the Company’s continuing operationsrepresent one reportable segment. The remaining segment, Brooktrout Technology,provides enabling technologies that allow customers to deliver voice, fax anddata solutions for the electronic communications market (See Note 2).

 

*Product Sales*—Brooktrout Technology’s products are sold for applications in the NewNetwork and for applications in Today’s Network. Today’s Network involves coretechnologies and platforms that are primarily used in business premise productssuch as fax, LAN fax, and voice mail. The New Network applications expand thecapabilities of communications networks to allow data, voice and faxinformation to be distributed using packet-based data networks, such as theInternet, for portions of the transmission and also allow information to bedistributed using the traditional circuit-switched telephone network. For thethree months ended September 30, 2002, sales of products for use in the NewNetwork accounted for approximately 38% of total revenue as compared to 36% oftotal revenue in the three months ended September 30, 2001.  For the ninemonths ended September 30, 2002, sales of products for use in the New Networkaccounted for approximately 36% of total revenue as compared to 42% of totalrevenue for the nine months ended September 30, 2001.

* *

*Major Customers—*One customer accounted for approximately 13% and 16% of revenue for thethree months ended September 30, 2002 and 2001, respectively. The same customeraccounted for approximately 14% and 12% of revenue for the nine months endedSeptember 30, 2002 and 2001, respectively.

 

*International Sales—*International sales, principally exports fromthe United States, accounted for approximately 26% and 23% of revenue for thethree months ended September 30, 2002 and 2001, respectively, and approximately22% and 21% of revenue for the nine months ended September 30, 2002 and 2001,respectively.

 

**9.  Contingencies**

 

*Litigation*—From time to time, the Company is a party to legal actions that arisein the ordinary course of business.  The Company, taking into accountadvice of counsel, does not believe the eventual outcome of these matters willhave a material effect on the Company’s consolidated financial condition orresults of operations.

 

11

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**Item 2.****  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

* *

*Thefollowing discussion of the financial condition and results of operations ofBrooktrout, Inc. (the “Company” or “Brooktrout”) should be read in conjunctionwith the condensed consolidated financial statements and related notesappearing elsewhere in this quarterly report and in the annual report on Form10-K of the Company for the year ended December 31, 2001.  The discussion contains forward-lookingstatements that involve known and unknown risks and uncertainties, includingthose set forth below under “Factors That May Affect Future Results.”*

 

**Overview**

*(in thousands)*

* *

*Continuing Operations*

 

Brooktrout develops,manufactures and sells hardware and software products that enable thedevelopment of communications applications and systems in five targetedmarkets, including enhanced services platforms, wireless infrastructure, voiceover packet gateways and switches, unified communications, and contact centers.The Company’s strategy is to collaborate with its partners on new ideas and toinvest in the success of their businesses in order to help them expand into newmarkets, accelerate the delivery of their applications and services, anddeliver quality products and services. The Company sells its products to systemvendors, service providers, enterprise customers, original equipmentmanufacturers (“OEMs”), and value-added resellers (“VARs”), both domesticallyand internationally, through a direct sales force and a two-tiered distributionsystem.

 

The evolution of the world’stelecommunications systems has created important market opportunities for theCompany. One opportunity—Today’s Network—involves core technologies andplatforms that are primarily used in business premise products such as fax, LANfax, and voice mail. Another opportunity—the New Network—is the result of theglobal investments that are being made to expand the capabilities of today’scommunications networks. These new capabilities allow data, voice and faxinformation to be distributed using packet-based data networks, such as theInternet, for portions of the transmission and also allow such information tobe distributed using the traditional circuit-switched telephone network.

 

Unless otherwise indicated,the following discussion relates to the Company’s results from continuingoperations.

 

# *Discontinued Operations*

 

Prior to February 8,2001, the Company was organized and reported the results of its operations inthree operating segments, Brooktrout Technology, Inc. (“BrooktroutTechnology”), Brooktrout Software, Inc. (“Brooktrout Software”), andInterspeed, Inc. (“Interspeed”). On February 8, 2001, the Company’sBoard of Directors adopted formal plans to discontinue its Brooktrout Softwareand Interspeed segments. The Company has accounted for these businesses asdiscontinued operations in accordance with APB 30. 

 

On March 12, 2002, theCompany and Sonexis, Inc. (“Sonexis”) reached an agreement resolving variouspost-closing adjustments and indemnification claims of both parties that hadbeen asserted in connection with the sale of Brooktrout Software. As part ofthis agreement, the Company agreed to exchange the Sonexis shares, received bythe Company as partial consideration for the sale of Brooktrout Software, foran immediate and final resolution and release of substantially all claimsrelated to the sale of Brooktrout Software.  The Sonexis shares had beenclassified in the Company’s financial statements as a cost basis investment atDecember 31, 2001.  The effect of this settlement was a pre-tax non-cashcharge to discontinued operations in the first quarter of 2002 of $943. This pre-tax non-cash charge was substantially offset by an income tax benefitof $915.  The income tax benefit related primarily to net deferred taxliabilities, which are no longer required due to the final settlement of thetransaction.

 

Asof September 30, 2002, the Company has determined that it has no remainingliabilities related to Brooktrout Software. For the three months ended September 30, 2002, the Company recognized apre-tax gain from discontinued operations of $86 to reduce “Net liabilitiesrelated to discontinued operations,” with respect to Brooktrout Software, tozero.

 

In January 2001, the Boardof Directors of Interspeed announced that it was curtailing operations andliquidating the remaining assets for the benefit of creditors.  TheCompany is a creditor of Interspeed.  The Company received net proceedsfrom the Interspeed creditors’ trust of $118 and $364 during the three and ninemonths ended September 30, 2002, respectively.  These proceeds resulted inan after tax net gain from discontinued operations of $91 and $199 for thethree and nine months ended September 30, 2002, respectively.  As ofSeptember 30, 2002, “Net liabilities related to discontinued operations”consists of $155 of anticipated remaining expenses associated with thediscontinuance of the Interspeed business.

 

**Applicationof Critical Accounting Policies**

 

Accounting policies, methodsand estimates are an integral part of the consolidated financial statements andare based upon management’s current judgments. These judgments are based onknowledge and experience with regard to past and current events and assumptionsabout future events that are believed to be reasonable under the circumstances.On an on-going basis, the Company’s management evaluates its estimates andassumptions and adjusts them if expectations concerning events, includingfuture events,

 

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affecting them differ markedly frommanagement’s current judgments. Management believes that the following arecertain critical accounting policies that particularly affect its moresignificant judgments and estimates used in the preparation of its condensedconsolidated financial statements.

 

Revenue from product salesis generally recognized upon shipment to the customer (which constitutesdelivery), provided that persuasive evidence of an arrangement exists, the feeis fixed or determinable, and collection is reasonably assured.  To the extent that one or more of theseconditions is not met, which has occurred from time to time, revenue isdeferred until such time as all four conditions are satisfied.  Revenue from sales to distributors isrecognized on a “sell-through” basis, that is, when the distributors report tothe Company that resale of the product to the ultimate customer of thedistributor in question has occurred. If the Company receives a payment from a customer prior to meeting allof the above revenue recognition criteria, the payment is recorded as acustomer deposit or deferred revenue. The Company generally records a provision for estimated sales returnsand allowances on product sales in the same period as the related revenue isrecorded.  These estimates are based onhistorical sales returns, analysis of credit memo data and other knownfactors.  The Company provides forestimated costs of warranty repairs at the time revenue is recognized.  Actual results could differ from theseestimates.

 

As the Company adheres toits concentration of credit risk policy, management makes estimates concerningthe realizable value of accounts receivable. The current and future economicenvironment affects these estimates. The Company maintains allowances fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. If the financial condition of Brooktrout’scustomers were to deteriorate, additional allowances would likely be required.

 

As the Company adheres toits inventory valuation policy, management makes estimates concerning therealizable value of inventory. The current and future economic environmentaffects these estimates. The Company reduces the value of its inventory for estimatedobsolescence or unmarketable inventory equal to the difference between the costof inventory and the estimated market value, based upon assumptions aboutfuture demand and market conditions. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required.

 

The Company reviews itsintangible assets for impairment whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Any evaluation of intangibleassets would include assumptions regarding estimated future cash flows andother factors to determine the fair value of the respective assets. If theseestimates or their related assumptions change in the future, the Company couldbe required to record impairment charges for these assets.

 

The carrying value of theCompany’s deferred tax assets assumes that the Company will be able to generatesufficient future taxable income in certain tax jurisdictions, based onestimates and assumptions. If these estimates and related assumptions change inthe future, the Company may be required to record valuation allowances againstits deferred tax assets, resulting in additional income tax expense in theCompany’s consolidated statement of operations. Management evaluates therealizability of the deferred tax assets and assesses the need for valuationallowances quarterly.

 

The Company recordedestimates for expenses associated with Brooktrout Software, along with theexpenses related to Interspeed, as liabilities associated with discontinuedoperations. (See Note 2 to condensed consolidated financial statements). Theseestimates are based on certain judgments by management about the likelihood offuture events and any amounts expected to be paid. If actual results differfrom these estimates, an adjustment to the amounts recorded as liabilitiescould be required in future periods.

 

**Results ofOperations**

** **

**Three Months Ended****September 30, 2002 and 2001**

*(in thousands)*

 

Revenue for the three monthsended September 30, 2002 increased by approximately 8% to $18,510, compared to$17,213 for the three months ended September 30, 2001. The increase in revenueresulted primarily from sales of products for fax messaging and wirelessapplications. For the three months ended September 30, 2002, sales of productsfor applications in the New Network accounted for approximately 38% of totalrevenue, as compared to 36% of total revenue for the three months endedSeptember 30, 2001.

 

Revenue from one customeraccounted for approximately 13% of total revenue for the three months endedSeptember 30, 2002, compared to 16% from this same customer for the threemonths ended September 30, 2001. The Company expects that revenue from thiscustomer will be greater than 10% of total revenue for the year ending December31, 2002.

 

Cost of product sold was$8,223, or 44% of revenue, for the three months ended September 30, 2002,compared to $8,268, or 48% of revenue, for the three months ended September 30,2001. Gross margin for the three months ended September 30, 2002 was 56%compared with 52% for the three months ended September 30, 2001. The highergross margin in 2002 was primarily due to an

 

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increase in higher margin products soldcoupled with a reduction in the manufacturing costs for certain productsthrough utilization of alternative manufacturing sources.  The Companyexpects that the gross margin for the three months ending December 31, 2002will increase slightly compared to the gross margin for the three months endedSeptember 30, 2002.

 

Research and developmentexpense was $4,576, or 25% of revenue, for the three months ended September 30,2002, compared with $5,171, or 30% of revenue, for the three months endedSeptember 30, 2001.  The decline in this expense is primarily the resultof reduced spending for consulting, contract labor and variable incentivecompensation. The Company’s continuing development efforts are focused onhardware and software that make up its network interface products, mediaprocessing products, messaging products and IP telephony products. The Companyintends to continue to commit significant resources to product development andexpects that research and development expense in 2002 will be similar to the 2001spending.

 

Selling, general andadministrative expense was $6,937, or 37% of revenue, for the three monthsended September 30, 2002, compared with $7,661, or 45% of revenue, for thethree months ended September 30, 2001. The decline in this expense is primarilydue to a decrease in bad debt expense as a result of improved collectability ofaccounts receivable, along with reduced spending for variable incentivecompensation, advertising and promotions. Included in selling, general andadministrative expense for the three months ended September 30, 2002 is anexpense of approximately $350, representing amounts incurred in connection withresolution of a dispute with a customer. The Company expects that selling, general and administrative expense in2002 will be slightly less than the 2001 spending.

 

There was no equity in lossof affiliates for the three months ended September 30, 2002, as compared to$3,081 of equity in loss of affiliates from both Pelago Networks, Inc.(“Pelago”) and Telchemy, Incorporated (“Telchemy”) for the three months endedSeptember 30, 2001. The Company’s investment in Pelago was written down to zeroas of December 31, 2001, and since the Company has no further fundingcommitment, it has ceased recording its share of Pelago’s losses.  (See Note 7 to condensed consolidatedfinancial statements).

 

Interestincome, net and other was $175 for the three months ended September 30, 2002,as compared with $312 for the three months ended September 30, 2001. Thedecrease in interest income, net and other was the result of a decline inshort-term interest rates, which offset the favorable impact that increasedcash and marketable debt securities balances had on interest income.

 

The effective tax benefitrate was 40% for the three months ended September 30, 2002. The income taxreceivable asset that has been recorded will be realized by carrying back theloss before income taxes for the three months ended September 30, 2002 to prioryears in which the company was profitable. For the three months ended September 30, 2001, the effective tax benefitrate was 22%. This tax rate for the third quarter of 2001 was the result oftreating equity in loss of affiliates expense as a non-deductible item in theincome tax provision calculation. Excluding the impact of equity in loss ofaffiliates, the effective tax benefit rate would have been 41% for the threemonths ended September 30, 2001.  TheCompany continually evaluates the recoverability of its deferred tax assets byreference to a number of factors, including historical levels of taxableincome, projected taxable income, additional sources of potential taxableincome sufficient to absorb the deferred tax assets, and tax planningstrategies.  To date, the Company hasconcluded that it is more likely than not that its deferred tax assets will berecovered.

 

**Nine Months Ended****September 30, 2002 and 2001***(inthousands)*

 

Revenue for the nine monthsended September 30, 2002 decreased by approximately 10% to $55,730, compared to$62,120 for the nine months ended September 30, 2001. The decline in revenueresulted primarily from the overall economic slowdown in the United States andinternational economies and, in particular, the softening in thetelecommunications market. The slowdown the Company is experiencing extendsacross most product lines and markets.  Sales of products for applicationsin the New Network, specifically those sold to OEMs for use by largeservice providers, have declined most significantly for the nine months endedSeptember 30, 2002, even though New Network sales increased slightly during thethree months ended September 30, 2002. For the nine months ended September 30,2002, sales of products for applications in the New Network accounted forapproximately 36% of total revenue, as compared to 42% of total revenue for thenine months ended September 30, 2001.

 

Revenue from one customeraccounted for approximately 14% of total revenue for the nine months endedSeptember 30, 2002, compared to 12% from this same customer for the nine monthsended September 30, 2001.

 

Cost of product sold was$25,753, or 46% of revenue, for the nine months ended September 30, 2002,compared to $27,912, or 45% of revenue, for the nine months ended September 30,2001. Gross margin for the nine months ended September 30, 2002 was 54%compared with 55% for the nine months ended September 30, 2001. The lower grossmargin for the nine months ended September 30, 2002 was primarily due toincreased charges for inventory obsolescence and warranty expense.

 

Research and developmentexpense was $15,703, or 28% of revenue, for the nine months ended September 30,2002, compared with $16,365, or 26% of revenue, for the nine months endedSeptember 30, 2001.  A decrease inspending for consulting, contract labor and variable incentive compensation waspartially offset by an increase in expenses associated with new product designand testing.

 

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Selling, general andadministrative expense was $21,952, or 39% of revenue, for the nine monthsended September 30, 2002, compared with $25,135, or 40% of revenue, for thenine months ended September 30, 2001. The decline in dollars spent is primarilythe result of reduced spending for variable incentive compensation, consultingand contract labor, advertising and promotion expenses, travel andentertainment expenses, employee recruiting expenses, and expendable materialsand supplies.  Included in selling,general and administrative expense for the nine months ended September 30, 2002is an expense of approximately $350, representing amounts incurred inconnection with resolution of a dispute with a customer.

 

There was no equity in lossof affiliates for the nine months ended September 30, 2002, as compared to$4,478 of equity in loss of affiliates from both Pelago and Telchemy for thenine months ended September 30, 2001. The Company’s investment in Pelago was written down to zero as ofDecember 31, 2001, and since the Company has no further funding commitment, ithas ceased recording its share of Pelago’s losses.  (See Note 7 to condensed consolidated financial statements).

 

Interest income, net andother was $765 for the nine months ended September 30, 2002, as compared with$928 for the nine months ended September 30, 2001. The decrease in interestincome, net and other was the result of a decline in short-term interest rates,which offset the favorable impact that increased cash and marketable securitiesbalances had on interest income.

 

The effective tax benefitrate was 42% for the nine months ended September 30, 2002.  The income tax receivable asset that hasbeen recorded will be realized by carrying back the loss before income taxesfor the nine months ended September 30, 2002 to prior years in which thecompany was profitable.   For the ninemonths ended September 30, 2001, the effective tax benefit rate was 23%. Thistax rate for the nine months ended September 30, 2001 was the result oftreating equity in loss of affiliates expense as a non-deductible item in theincome tax provision calculation. Excluding the impact of equity in loss ofaffiliates, the effective tax benefit rate would have been 39% for the ninemonths ended September 30, 2001.   TheCompany continually evaluates the recoverability of its deferred tax assets byreference to a number of factors, including historical levels of taxableincome, projected taxable income, additional sources of potential taxableincome sufficient to absorb the deferred tax assets, and tax planningstrategies.  To date, the Company hasconcluded that it is more likely than not that its deferred tax assets will berecovered.

 

**Liquidityand Capital Resources**

*(in thousands)*

 

For the ninemonths ended September 30, 2002, the Company funded its operations principallythrough cash provided by operating activities. Cash provided by operatingactivities for the nine months ended September 30, 2002 was $4,414 and wasgenerated primarily from tax refunds received of $4,393.  Cash provided byinvesting activities for the nine months ended September 30, 2002 was $2,503and consisted of the maturity of marketable debt securities, offset bypurchases of marketable debt securities and capital equipment.  Working capital increased to $56,364at September 30, 2002 from $54,701 at December 31, 2001.  The primary reasons for the increase are thetax refunds received in 2002 which increased cash, along with reductions inaccounts payable and accrued expenses due to reduced inventory purchases andlower operating expenses.

 

The Company has a line ofcredit under which it can borrow up to $5,000, subject to compliance withcertain covenants. Any amounts borrowed under the line of credit bear interestat the lender’s prime rate. The line of credit is secured by a pledge ofsubstantially all of the assets of the Company.  As of September 30, 2002, letters of credit issued against theCompany’s existing line totaled $1,000, representing the collateral requiredfor certain lease obligations. Other than the issuance of letters of credit,there have been no borrowings under the line during the past three years. The line of credit expires on June 30, 2003.

 

Cash, cashequivalents and marketable debt securities were $42,248 at September 30, 2002and $38,125 at December 31, 2001. Brooktrout expects that its cash, cash equivalents and marketable debtsecurities, together with cash from operations, will be sufficient to financeits operations and capital expenditures for at least the next 12 months.  If the current economic climate worsens beyondthe Company’s current expectations, or if the Company’s cash requirementsotherwise vary from its expectations, the Company may need to utilize fundsavailable under its bank line of credit or to seek other sources offinancing.  The terms of any futureequity financings may be dilutive to the Company’s stockholders and the termsof any future debt financings may contain restrictive covenants, which couldlimit the Company’s ability to pursue certain courses of action.  It ispossible that, should the need arise, the Company will not be able to obtainadditional financing, or that the financing made available to the Company willnot be on acceptable terms.

 

For the nine months ended September 30, 2002, the Company purchasedapproximately $481 in equipment. The Company currently has no materialcommitments for additional capital expenditures.

 

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The pricing of the Company’s products and the costs of its goods aregenerally determined by current market conditions, as well as value to thecustomer. Market conditions can be impacted by inflation; however, the Companybelieves that inflation has not had a significant effect on its operations todate.

 

TheCompany has operating lease commitments for its office and manufacturingfacilities expiring through 2006. Certain lease agreements require the Companyto pay all of the building’s taxes, insurance and maintenance costs.

 

**FactorsThat May Affect Future Results**

* *

*Any person evaluating an investment inBrooktrout’s common stock should carefully consider the factors described belowbefore making an investment decision. The trading price of Brooktrout’s common stock could decline due to anyof these factors, in which case the investor could lose all or part of itsinvestment.  Any such person should alsorefer to the other information in this quarterly report, including thecondensed consolidated financial statements and related notes.  The risks and uncertainties described beloware those that management currently believes may materially affect the Company.  Additional risks and uncertainties thatmanagement is unaware of or that management currently deems immaterial also maybecome important factors that affect the Company.*

 

***The Company is exposed to general economicconditions, and the slowdown in some sectors of the telecommunications industryin particular.***

 

As a result of theunfavorable economic conditions affecting most technology sectors and thetelecommunications sector in particular, many of our customers are aggressivelyincreasing efficiency in their supply chains and reducing inventory levels.Additionally, we expect the growth of data traffic and the use of the Internetwill continue to have a significant impact on traditional voice networks, whichis driving the convergence of data and telephony and giving rise to the demandfor New Network applications. We cannot be sure what the rate of suchconvergence will be due to the slowdown in the communications industry and theresulting decrease in spending by our customers. The economic downturn hasadversely impacted the Company’s business and operating results, including areduction in revenue of $6,390,000 for the nine months ended September 30,2002, or 10%, compared to the nine months ended September 30, 2001, and$53,447,000, or 49%, compared to the nine months ended September 30, 2000. Ifcurrent economic conditions continue for an extended period of time or worsen,the Company may experience additional adverse effects on its business,operating results, and financial condition. For example, as the rate at whichthe Company’s customers order products decreases, the more likely it is thatcurrent inventories will be exposed to technological obsolescence, thusrequiring the Company to reduce the value of that inventory on the balancesheet.

 

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

 

The Company’s operatingresults are likely to fluctuate in the future due to a variety of factors, manyof which are outside of its control. If the Company’s operating results do notmeet the expectations of securities analysts, the trading price of theCompany’s common stock could significantly decline. This may cause the value ofyour investment in the Company to decline. In addition, the value of yourinvestment could be impacted by investor perception of the Company’s industryor its prospects generally, independent of the operating performance of theCompany. Some of the factors that could affect the Company’s operating resultsor impact the market price of the common stock include:

 

•                  the Company’s ability to cope with difficultconditions in the economy in general, and the telecommunications market inparticular;

•                  the Company’s ability to formulate andimplement effective strategies to respond to changing market requirements andconditions;

•                  cancellation or rescheduling of orders forthe Company’s products;

•                  the Company’s ability to collect accountsreceivable from customers that have been adversely impacted by the difficulteconomic conditions;

•                  the Company’s ability to develop,manufacture, market and support its products and product enhancements;

•                  the timing and number of orders for theCompany’s products, which have historically been weighted more heavily towardthe last month of each quarter and the second and fourth quarters of each year;

•                  the Company typically experiences lowerrevenue in the third quarter, due to customer summer vacation schedules,particularly in Europe, and to a lesser extent, the first quarter of each year;

•                  the Company’s ability to hire, train andretain key management, sales, marketing and engineering personnel;

•                  announcements or technological innovations bythe Company’s competitors or in competing technologies;

•                  the Company’s ability to obtain sufficientsupplies of sole or limited source components for the Company’s products;

•                  a decrease in the average selling prices ofthe Company’s products;

 

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•                  changes in costs of components that theCompany includes in its products;

•                  the mix of products that the Company sellsand the mix of distribution channels through which they are sold; and

•                  a decrease in the demand for the Company’scommon stock.

 

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

 

***The Company has historically derived a significantportion of its revenue from a small number of customers.***

 

The Company’s failure to generate as much revenue as expected from whathas historically been a relatively small number of customers or the failure ofthese customers to purchase the Company’s products could seriously harm theCompany’s business. One customer accounted for more than 10% of the Company’srevenue for both the year ended December 31, 2001 and the nine months endedSeptember 30, 2002. The loss of any one of the Company’s major customers or thedelay of significant orders from such customers, even if only temporary, has orcould reduce or delay the Company’s revenue, could harm the Company’sreputation in the industry and could reduce the Company’s ability to accuratelypredict cash flow, and, as a consequence, could seriously harm the Company’sbusiness, financial condition and results of operations.

 

***The telecommunications markets arehighly competitive, and the Company may not be able to compete successfullyagainst new entrants or established companies with greater resources.***

 

The market for telecommunications equipment is highly competitive. Ifthe Company is unable to differentiate its products from existing and futureofferings of its competitors, and thereby effectively compete in the market fortelecommunications equipment, the Company’s results of operations could bematerially adversely affected. Many of the Company’s current and potentialcompetitors have significantly greater selling and marketing, technical,manufacturing, financial, and other resources. Moreover, the Company’scompetitors may have greater access to components necessary to manufacturetheir products. The strength and capabilities of the Company’s competitors maybe increased as a result of the trend toward consolidation in thetelecommunications market. Capitalizing on and maintaining the Company’stechnological advantage will require a continued high level of investment inresearch and development, marketing, and customer service and support. Due to therapidly evolving markets in which the Company competes, additional competitorswith significant market presence and financial resources may enter thosemarkets, thereby further intensifying competition. The Company may not allocatesufficient resources to achieve the technological advances necessary to competesuccessfully with existing competitors or new entrants.

 

***Internal development efforts by theCompany’s customers may adversely affect demand for its products.***

 

Many of theCompany’s customers, including the large OEMs on which the Company focusesa significant portion of its sales and marketing efforts, have the technicaland financial ability to design and produce components replicating or improvingon the functionality of most of the Company’s products. These customers oftenconsider in-house development of technologies and products as an alternative todoing business with the Company. The Company cannot assure you that itsexisting customers or potential customers will do business with the Company,rather than attempting to develop similar technology and products internally orobtaining them through acquisition. The Company cannot be certain that it willbe able to find customers to replace the revenue lost as a result of customersdeveloping technologies or products in-house. Any such occurrence could have amaterial adverse effect on the Company’s business, financial condition orresults of operations.

 

***Unless the Company is able to keep pace with the evolution of thetelecommunications hardware and software market, the Company’s business may beadversely impacted.***

 

The telecommunicationshardware and software market is characterized by:

 

•       rapid technological advances;

•       evolving industry standards;

•       changes in customer requirements;

•       frequent new product introductions;

•       declining prices;

•       intense competition; and

•       evolving offerings by telecommunicationsservice providers.

 

The Company believes thatits future success will depend, in part, on its ability to offer products thataddress the sophisticated and varied needs of its current and prospectivecustomers and to respond to technological advances and evolving industrystandards on a timely and cost-effective basis. The Company intends to continueto invest significantly in product and

 

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technology development. The development ofnew or enhanced products is a complex and uncertain process. The Company mayexperience design, manufacturing, marketing and other difficulties that coulddelay or prevent its development, introduction or marketing of new products andenhancements. The Company may also not be able to incorporate new technologieson a cost-effective or timely basis. This may result in unexpected expenses.Additionally, the Company may need to reduce its prices to remain competitive,which could affect its profitability. The introduction of new or enhancedproducts also requires that the Company manage the transition from olderproducts so as to minimize the disruption to customers and ensure that adequatesupplies of new products can be delivered to meet anticipated customer demand.The Company’s inability to develop, on a timely basis, new products orenhancements to existing products, or the failure of such new products orenhancements to achieve market acceptance, could have a material adverse effecton the Company’s business, financial condition and results of operations.

 

***The Company’s dependence on sole and singlesource suppliers and independent manufacturers exposes it to supply interruptionsthat could result in product delivery delays.***

 

Although the Companygenerally uses standard parts and components for its products, some keycomponents are purchased from sole or single source vendors for whichalternative sources are not currently available or are difficult to obtain. TheCompany’s inability to obtain sufficient quantities of these components mayresult in future delays or reductions in product shipments that couldmaterially adversely affect its business, financial condition and results ofoperations. The Company currently purchases proprietary components from anumber of suppliers for which there are no direct substitutes. These componentscould be replaced with alternatives from other suppliers, but that couldinvolve redesign of the Company’s products. If such redesign was required, theCompany would incur considerable delay and expenses. The Company currentlyenters into purchase orders with its suppliers for materials based on forecastsof need, but has no guaranteed supply arrangements with these suppliers.

 

In addition, the Companycurrently uses a number of independent manufacturers to manufacture printedcircuit boards, chassis and subassemblies in accordance with the Company’sdesign and specification. The Company’s reliance on independent manufacturersinvolves a number of risks, including the potential for inadequate capacity of,unavailability of, or interruptions in access to, process technologies, andreduced control over delivery schedules, manufacturing yields and costs. If theCompany’s manufacturers are unable or unwilling to continue manufacturing itscomponents in required quantities or to the Company’s quality expectations, theCompany will have to transfer manufacturing to acceptable alternativemanufacturers that it has identified, which could result in significant delaysin shipment of products to customers. Moreover, the manufacture of thesecomponents is extremely complex, and the Company’s reliance on the suppliers ofthese components exposes it to potential production difficulties and qualityvariations, which could negatively impact the cost and timely delivery of itsproducts. The Company currently enters into purchase orders with independentmanufacturers of materials based on forecasts of need, but has no guaranteedarrangements with these manufacturers. Any significant interruption in thesupply, or degradation in the quality, of any component would have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

 

***Defects in the Company’s products orproblems arising from the use of its products may seriously harm its businessand reputation.***

 

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

 

***Changes to regulations affecting thetelecommunications or Internet industries could reduce demand for the Company’sproducts or increase its costs.***

 

Laws and regulationsgoverning telecommunications, electronic commerce and the Internet areemerging, but remain largely unsettled, even in the areas where there has beensome legislative action. Regulation may focus on, among other things, assessingaccess or settlement charges, or imposing tariffs or regulations based on thecharacteristics and quality of products, either of which could restrict theCompany’s business or increase its cost of doing business. Any changes toexisting laws or the adoption of new regulations by federal or state regulatoryauthorities or any legal challenges to existing laws or regulations relating tothe telecommunications industry could materially adversely affect the marketfor the Company’s products. Moreover, the Company’s VARs or other customers mayrequire, or the Company may otherwise deem it necessary or advisable, that theCompany alter its

 

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products to address actual or anticipatedchanges in the regulatory environment. The Company’s inability to alter itsproducts or address any regulatory changes could have a material adverse effecton its business, financial condition or results of operations.

 

***Provisions in the Company’s corporatecharter may discourage takeover attempts and, thus, depress the market price ofthe common stock.***

 

Provisions in the Company’sCharter may have the effect of delaying or preventing a change of control orchanges in the Company’s management or Board of Directors. These provisionsinclude:

 

•                  the right of the Board of Directors, withoutstockholder approval, to issue shares of preferred stock and to establish thevoting rights, preferences, and other terms thereof;

•                  the right of the Board of Directors to electa director to fill a vacancy created by the expansion of the Board ofDirectors;

•                  the ability of the Board of Directors toalter the Company’s by-laws without prior stockholder approval;

•                  the election of three classes of directors toeach serve three-year staggered terms;

•                  the elimination of stockholder voting byconsent;

•                  the removal of directors only for cause;

•                  the vesting of exclusive authority in theBoard of Directors (except as otherwise required by law) to call specialmeetings of stockholders; and

•                  certain advance notice requirements forstockholder proposals and nominations for election to the Board of Directors.

 

In addition, the Board ofDirectors adopted a Shareholder Rights Plan in September 1998.  Theseprovisions discourage potential takeover attempts and the ability ofstockholders to change management and the Board of Directors. Theseanti-takeover measures could adversely affect the market price of the Company’scommon stock. In addition, even if you desired to participate in a tenderoffer, change of control or takeover attempt of the Company that the Company’smanagement and Board of Directors opposed, these provisions may prevent youfrom doing so.

 

***Limitations on the Company’s ability toadequately protect its proprietary rights may prevent it from retaining itscompetitive advantage and negatively impact its future operating results.***

 

The Company’ssuccess and its ability to compete are dependent, in part, upon its proprietarytechnology. Taken as a whole, the Company believes its intellectual propertyrights are significant and any failure to adequately protect the unauthorizeduse of its proprietary rights could result in the Company’s competitorsoffering similar products, potentially resulting in loss of a competitiveadvantage and decreased revenue. The Company relies upon a combination ofpatents, trademark law, trade secret protections, copyright law andconfidentiality agreements with consultants and third parties to protect itsproprietary rights. Notwithstanding its efforts, third parties may infringe ormisappropriate the Company’s proprietary rights. In addition, each employee ofthe Company has executed a proprietary information agreement designed toprotect the trade secrets of the Company, inventions created in the course of employmentwith the Company and other proprietary information of the Company. Moreover,effective patent, trademark, copyright or trade secret protections may not beavailable in every country in which the Company operates or intends to operateto the same extent as the laws of the United States. Also, it may be possiblefor unauthorized third parties to copy or reverse engineer aspects of theCompany’s products, develop similar technology independently or otherwiseobtain and use information that the Company regards as proprietary.Furthermore, detecting unauthorized use of the Company’s proprietary rights isdifficult. Litigation may be necessary in the future to enforce the Company’sproprietary rights. Such litigation could result in the expenditure of significantfinancial and managerial resources and could have a material adverse effect onthe Company’s future operating results.

 

***Intellectual property claims againstthe Company can be costly and negatively impact the Company’s business.***

 

In the telecommunicationsbusiness, there is frequent litigation based on allegations of patentinfringement. As the number of entrants in the Company’s market increases and the functionality ofits products is enhanced and overlaps with the products of other companies, theCompany may become subject to claims of infringement or misappropriation of theintellectual property rights of others. As a result, from time to time, thirdparties may claim exclusive patent or other intellectual property rights totechnologies that the Company uses. Although the Company believes that it doesnot face material liability related to infringement of the intellectualproperty of others, any claims asserting that the Company’s products infringeor may infringe proprietary rights of third parties, if determined adversely tothe Company, could have a material adverse effect on its business, financialcondition or results of operations. Any claims, with or without merit, could betime-consuming, result in costly litigation, divert the efforts of theCompany’s engineering and management personnel, cause delays in productshipments or require the Company to enter into royalty or licensing agreements,any of which could have a material adverse effect upon the Company’s operatingresults. If any legal action claiming patent infringement is commenced againstit, the Company cannot assure you that it would prevail in such litigationgiven the complex technical issues and inherent uncertainties in patentlitigation. In the event a claim against the Company was successful, and itcould not obtain a license on acceptable terms or license a substitutetechnology or redesign to avoid infringement, the Company may be

 

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unable to market its affected products. Thiscould have a material adverse effect on the Company’s business, financialcondition and results of operations.

 

***Certain of the Company’s products dependupon the continued availability of licensed technology from third parties.***

 

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

 

The Company may require newlicenses in the future as its business grows and technology evolves. TheCompany cannot assure you that these licenses will continue to be available toit on commercially reasonable terms, if at all, which could have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

 

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

 

The Company’s successdepends in large part upon the continued contributions of its key management,sales, marketing, and engineering personnel, many of who perform importantfunctions and would be difficult to replace. The Company does not haveemployment contracts with its key personnel. There has been significantcompetition in the Company’s industry for qualified personnel, and, at times,the Company has experienced difficulty in recruiting qualified personnel. TheCompany may not be able to attract and retain the necessary personnel toaccomplish its business objectives, and it may experience constraints that willadversely affect its ability to satisfy customer demand in a timely fashion orto support its customers and operations. The Company’s inability to hirequalified personnel on a timely basis, or to retain its key personnel, couldmaterially adversely affect the Company’s business, financial condition andresults of operations.

 

***The Company’s products typically have longsales cycles, causing the Company to expend significant resources beforerecognizing revenue.***

 

The length of the Company’ssales cycle typically ranges from six to eighteen months and variessubstantially from customer to customer. Prospective customers generally mustcommit significant resources to test and evaluate the Company’s products andintegrate them into larger systems. This evaluation period is often prolongeddue to delays associated with approval processes that typically accompany thedesign and testing of new communications equipment by the Company’s customers.

 

In addition, the rapidlyemerging and evolving nature of the markets in which the Company and itscustomers compete may cause prospective customers to delay their purchasedecisions as they evaluate new technologies and develop and implement newsystems. During the period in which the Company’s customers are evaluatingwhether to place an order with the Company, the Company often incurssubstantial sales and marketing expenses, without any assurance of futureorders or their timing. Even after a customer places an order with the Companyand its product is expected to be utilized in a product or service offeringbeing developed by the customer, the timing of the development, introductionand implementation of those products is controlled by, and can varysignificantly with the needs of, the Company’s customers. In somecircumstances, the customer will not require the product for several months.This complicates the Company’s planning processes and reduces thepredictability of the Company’s earnings.

 

***The Company derives a significant portionof its revenue from international sales; international business operationsentail additional risks.***

 

Risks arising from theCompany’s international business include currency fluctuation, politicalinstability in other countries, the imposition of trade and tariff regulationsby foreign governments, and the difficulties in managing operations acrossdisparate geographic areas. In addition, most countries require technicalapprovals from their telecommunications regulatory agencies for products thatoperate in conjunction with the local telephone system. Obtaining theseapprovals is generally a prerequisite for sales in a given jurisdiction.Obtaining requisite approvals takes from two months to a year or more dependingon the product and the jurisdiction. These or other factors may limit theCompany’s ability to sell its products in other countries, which could have amaterial adverse effect on the Company’s business, financial condition andresults of operations.

 

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**Item 3.****  Quantitative and Qualitative Disclosures about Market Risk**

 

The Company’s exposure tomarket risk from changes in interest rates and currency exchange rates has notchanged materially from its exposure at year-end 2001. The Company’s marketrisk associated with investments in equity securities of privately heldtechnology companies was reduced in 2002 since the investment in the preferredequity securities that constituted the Company’s investment in Sonexis wasexchanged with Sonexis as part of the settlement discussed in Note 2 to thecondensed consolidated financial statements.

** **

**Item4.****  Controls and Procedures**

 

(a)           Evaluation of disclosure controls andprocedures.

 

Based on their evaluation of the Company’s disclosure controls andprocedures (as defined in Rules 13a-14(c) and 15d-14(c) under the SecuritiesExchange Act of 1934) as of a date within 90 days of the filing date of this quarterlyreport, the Company’s chief executive officer and chief financial officer haveconcluded that the Company’s disclosure controls and procedures are designed toensure that information required to be disclosed by the Company in the reportsthat it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission and are operating in aneffective manner.

 

(b)           Changes in internal controls.

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect these controls subsequent tothe date of their most recent evaluation.

 

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**PART II.****  OTHERINFORMATION**

 

 
| **Item 6.****Exhibits and Reports  on Form 8-K** |
|-----------------------------------------------------------------|
|                                                            |
|                                                            | (a) | Exhibits |
|                                                            |   |   |
|                                                            |   |   | 99.1         Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of  2002. |
|                                                            |   |   |   |
|                                                            |   |   | 99.2         Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act  of 2002. |
|                                                            |   |   |   |
|                                                            | (b) | Reports  on Form 8-K |
|                                                            |   | None. |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                     | BROOKTROUT, INC. |                                           |
|--------------------------|-----------------------|------------------------------------------------|
|                     |                  |                                           |   |
| Date:  November 14, 2002 | By:                   | /s/ ERIC R. GILER                              |
|                     |                  | Eric R. Giler                                  |
|                     |                  | *President*                                    |
|                     |                  | *(Principal Executive Officer)*                |
|                     |                  |                                           |
| Date:  November 14, 2002 | By:                   | /s/ ROBERT C. LEAHY                            |
|                     |                  | Robert C. Leahy                                |
|                     |                  | *Vice President of Finance and Operations*     |
|                     |                  | *(Principal Financial and Accounting Officer)* |
|                          |                       |                                                |  |

 

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**CERTIFICATIONS**

 

I, Eric R.Giler, President of Brooktrout, Inc. (the “Company”), certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of the Company for the quarter endedSeptember 30, 2002;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)             designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)            evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors:

 

a)             all significant deficiencies in thedesign or operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)            any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifyingofficer and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 14, 2002 | By:    | /s/ ERIC R. GILER               |
|--------------------------|--------|---------------------------------|
|                     |   | Eric R. Giler                   |
|                     |   | *President*                     |
|                     |   | *(Principal Executive Officer)* |

 

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I, Robert C.Leahy, Vice President of Finance and Operations of Brooktrout, Inc. (the“Company”), certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of the Company for the quarter endedSeptember 30, 2002;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.            Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.            The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)            designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)           evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)            presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.            The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors:

 

a)            all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)           any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.            The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 14, 2002 | By:    | /s/ ROBERT C. LEAHY                            |
|--------------------------|--------|------------------------------------------------|
|                     |   | Robert C. Leahy                                |
|                     |   | *Vice President of Finance and Operations*     |
|                     |   | *(Principal Financial and Accounting Officer)* |

 

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**EXHIBITINDEX**

 

 
| 99.1   |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                             |
| 99.2   |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |

 

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