**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 
|                                              | **ý** |   | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|---------------------------------------------------|------------|--------|-----------------------------------------------------------------------------------------------|
|                                              |       |   |                                                                                          |
| **For the quarterly period ended March 31, 2003** |
|                                              |       |   |                                                                                          |
| **OR**                                            |
|                                              |       |   |                                                                                          |
|                                              | **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                  to                   .**

 

**Commission FileNo. 000-20698**

 

**BROOKTROUT, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **MASSACHUSETTS**                                                                 |   | **04-2814792**                       |
|-----------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation  or Organization)                   |   | (I.R.S. Employer Identification No.) |
|                                                                              |   |                                 |
| **250 FIRST AVENUE, NEEDHAM,  MASSACHUSETTS 02494**                               |
| (Address of Principal Executive Offices) (Zip  Code)                              |
|                                                                              |   |                                 |
| Registrant’s telephone number, including area  code: **(781) 449-4100** |

 

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý        No o

 

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

 

As of April 30, 2003,12,540,421 shares of common stock, $.01 par value per share, wereoutstanding.

 

 

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**BROOKTROUT, INC.**

**FORM 10-Q FOR THE QUARTER ENDEDMARCH 31, 2003**

 

**TABLE OF CONTENTS**

 
| **PART I  FINANCIAL INFORMATION** |                                                                                                                               |   |
|----------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                   |                                                                                                                               |   |
| Item  1.                               | Condensed  Consolidated Financial Statements                                                                                       | 1      |   |
|                                   | Unaudited  Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31,  2002                                       | 1      |   |
|                                   | Unaudited  Condensed Consolidated Statements of Operations for the Three Months Ended   March 31, 2003 and March 31, 2002          | 2      |   |
|                                   | Unaudited  Condensed Consolidated Statements of Comprehensive Loss for the Three Months  Ended   March 31, 2003 and March 31, 2002 | 3      |   |
|                                   | Unaudited Condensed Consolidated Statements  of Cash Flows for the Three Months Ended   March 31, 2003 and March 31, 2002          | 4      |   |
|                                   | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                    | 5      |   |
| Item  2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        | 9      |   |
|                                   | Overview                                                                                                                           | 9      |   |
|                                   | Application  of Critical Accounting Policies                                                                                       | 9      |   |
|                                   | Discontinued Operations                                                                                                            | 10     |   |
|                                   | Results of Operations                                                                                                              | 11     |   |
|                                   | Liquidity and Capital  Resources                                                                                                   | 13     |   |
|                                   | Recent Accounting  Pronouncements                                                                                                  | 14     |   |
|                                   | Factors That May  Affect Future Results                                                                                            | 15     |   |
| Item  3.                               | Quantitative  and Qualitative Disclosures about Market Risk                                                                        | 19     |   |
| Item 4.                                | Controls and Procedures                                                                                                            | 19     |   |
|                                   |                                                                                                                               |   |   |
| **PART II  OTHER INFORMATION**    |                                                                                                                               |   |
|                                   |                                                                                                                               |   |
| Item 6.                                | Exhibits  and Reports on Form 8-K                                                                                                  | 20     |   |
|                                   | Signatures                                                                                                                         | 21     |   |
|                                   | Certifications                                                                                                                     | 22     |   |
|                                   | Exhibit Index                                                                                                                      | 24     |   |
|                                        |                                                                                                                                    |        |  |  |  |

 

”BROOKTROUT,” the “NEW NETWORK,” and the“PARTNER ACCESS NETWORK PROGRAM” are trademarks or registered trademarks ofBrooktrout, Inc.

 

ii

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**PART I  FINANCIAL INFORMATION**

 

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

 

**BROOKTROUT, INC.****UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS***(in thousands, except share and per sharedata)*
|                                                                                                                                       |   | **March 31,********2003** |   | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|------------------------|--------|
| **Assets**                                                                                                                                 |   |                      |   |                   |   |
| Current assets:                                                                                                                            |   |                      |   |                   |   |
| Cash and cash  equivalents                                                                                                                 |   | $                         | 22,083 |                   | $      | 23,685 |   |
| Marketable debt  securities                                                                                                                |   | 23,851                    |   | 18,103                 |   |
| Accounts receivable  (less allowances for doubtful accounts and sales returns of $1,687 at March  31, 2003 and $1,679at December 31, 2002) |   | 7,740                     |   | 8,853                  |   |
| Inventory                                                                                                                                  |   | 6,163                     |   | 6,797                  |   |
| Income tax  receivable                                                                                                                     |   | 188                       |   | 6,236                  |   |
| Deferred tax assets                                                                                                                        |   | 4,661                     |   | 3,856                  |   |
| Prepaid expenses                                                                                                                           |   | 1,014                     |   | 1,137                  |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Total current assets                                                                                                                       |   | 65,700                    |   | 68,667                 |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Equipment and  furniture, less accumulated depreciation and amortization                                                                   |   | 2,975                     |   | 3,404                  |   |
| Deferred tax assets                                                                                                                        |   | 9,341                     |   | 9,341                  |   |
| Intangible assets,  less accumulated amortization                                                                                          |   | 7,029                     |   | 7,412                  |   |
| Other assets                                                                                                                               |   | 1,346                     |   | 1,511                  |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Total assets                                                                                                                               |   | $                         | 86,391 |                   | $      | 90,335 |   |
|                                                                                                                                       |   |                      |   |                   |   |
| **Liabilities and Stockholders’  Equity**                                                                                             |   |                      |   |                   |   |
| Current liabilities:                                                                                                                       |   |                      |   |                   |   |
| Accounts payable                                                                                                                           |   | $                         | 3,782  |                   | $      | 5,715 |   |
| Accrued expenses                                                                                                                           |   | 5,226                     |   | 5,104                  |   |
| Accrued compensation  and commissions                                                                                                      |   | 1,602                     |   | 2,141                  |   |
| Accrued warranty  costs                                                                                                                    |   | 1,086                     |   | 1,060                  |   |
| Customer deposits                                                                                                                          |   | 892                       |   | 883                    |   |
| Net liabilities  related to discontinued operations                                                                                        |   | 98                        |   | 125                    |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Total current  liabilities                                                                                                                 |   | 12,686                    |   | 15,028                 |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Deferred rent                                                                                                                              |   | 196                       |   | 209                    |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Total liabilities                                                                                                                          |   | 12,882                    |   | 15,237                 |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Commitments and  contingencies (Note 9)                                                                                                    |   |                      |   |                   |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Stockholders’  equity:                                                                                                                |   |                      |   |                   |   |
| Preferred stock,  $1.00 par value; authorized 100,000 shares; issued and outstanding, none                                                 |   | —                    |   | —                 |   |
| Common stock, $0.01  par value; authorized 40,000,000 shares; issued 12,540,421 at March 31, 2003  and 12,532,810at December 31, 2002      |   | 125                       |   | 125                    |   |
| Additional paid-in  capital                                                                                                                |   | 64,197                    |   | 64,170                 |   |
| Accumulated other  comprehensive loss                                                                                                      |   | (17                       | )      | (64                    | )      |
| Notes receivable —  officers                                                                                                          |   | (11,760                   | )      | (11,760                | )      |
| Retained earnings                                                                                                                          |   | 24,724                    |   | 26,387                 |   |
| Treasury stock,  255,384 shares, at cost                                                                                                   |   | (3,760                    | )      | (3,760                 | )      |
|                                                                                                                                       |   |                      |   |                   |   |
| Total stockholders’  equity                                                                                                           |   | 73,509                    |   | 75,098                 |   |
|                                                                                                                                       |   |                      |   |                   |   |
| Total liabilities  and stockholders’ equity                                                                                           |   | $                         | 86,391 |                   | $      | 90,335 |   |

 

See notes to condensed consolidated financialstatements.

 

1

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**BROOKTROUT, INC.****UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS***(in thousands, except per share data)*
|                                                                                    |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                    |   | **2003**                         |   | **2002** |   |
| Revenue                                                                                 |   | $                                | 15,534 |   | $ | 18,422 |   |
|                                                                                    |   |                             |   |   |   |
| Costs and expenses:                                                                     |   |                             |   |   |   |
| Cost of product sold                                                                    |   | 6,330                            |   | 8,798 |   |
| Research and  development                                                               |   | 4,586                            |   | 5,619 |   |
| Selling, general and  administrative                                                    |   | 7,269                            |   | 7,481 |   |
|                                                                                    |   |                             |   |   |   |
| Total costs and  expenses                                                               |   | 18,185                           |   | 21,898 |   |
|                                                                                    |   |                             |   |   |   |
| Operating loss                                                                          |   | (2,651                           | )      | (3,476 | ) |
|                                                                                    |   |                             |   |   |   |
| Other income, net                                                                       |   | 200                              |   | 221 |   |
|                                                                                    |   |                             |   |   |   |
| Loss before income  taxes                                                               |   | (2,451                           | )      | (3,255 | ) |
|                                                                                    |   |                             |   |   |   |
| Income tax (benefit)                                                                    |   | (788                             | )      | (1,367 | ) |
|                                                                                    |   |                             |   |   |   |
| Loss from continuing  operations                                                        |   | (1,663                           | )      | (1,888 | ) |
|                                                                                    |   |                             |   |   |   |
| Gain on disposal of  discontinued operations, net of income tax benefit of $785 in 2002 |   | —                           |   | 80 |   |
|                                                                                    |   |                             |   |   |   |
| Net loss                                                                                |   | $                                | (1,663 | ) | $ | (1,808 | ) |
|                                                                                    |   |                             |   |   |   |
| Loss per common  share:                                                                 |   |                             |   |   |   |
| Loss from continuing  operations, basic and diluted                                     |   | $                                | (0.14  | ) | $ | (0.15 | ) |
| Net loss, basic and  diluted                                                            |   | $                                | (0.14  | ) | $ | (0.15 | ) |
| Weighted average  shares outstanding, basic and diluted                                 |   | 12,282                           |   | 12,207 |   |

 

See notes to condensed consolidated financialstatements.

 

2

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**BROOKTROUT, INC.****UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF COMPREHENSIVE LOSS***(in thousands)*
|                                                                              |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                              |   | **2003**                         |   | **2002** |   |
| Net loss                                                                          |   | $                                | (1,663 | ) | $ | (1,808 | ) |
| Unrealized gains  (losses) on marketable debt securities, net of applicable taxes |   | 47                               |   | (16 | ) |
| Comprehensive loss                                                                |   | $                                | (1,616 | ) | $ | (1,824 | ) |

 

See notes to condensed consolidated financialstatements.

 

3

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**BROOKTROUT, INC.****UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS***(in thousands)*
|                                                                             |   | **Three Months Ended March 31,** |   |
|----------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                             |   | **2003**                         |   | **2002** |   |
| **Cash  flows from operating activities:**                                       |   |                             |   |   |   |
| Net loss                                                                         |   | $                                | (1,663 | ) | $ | (1,808 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                             |   |   |   |
| Loss on disposal of  discontinued operations                                     |   | —                           |   | 705 |   |
| Depreciation and  amortization                                                   |   | 895                              |   | 1,114 |   |
| Amortization of  acquired and licensed software                                  |   | 165                              |   | 476 |   |
| Deferred income  taxes                                                           |   | —                           |   | 326 |   |
| Inventory  obsolescence expense                                                  |   | 362                              |   | 825 |   |
| Increase (decrease)  in cash from changes in:                                    |   |                             |   |   |   |
| Accounts receivable                                                              |   | 1,102                            |   | (950 | ) |
| Inventory                                                                        |   | 272                              |   | 1,709 |   |
| Prepaid expenses and  other assets                                               |   | 5,375                            |   | 989 |   |
| Current liabilities                                                              |   | (2,370                           | )      | 137 |   |
|                                                                             |   |                             |   |   |   |
| Cash flows from  operating activities                                            |   | 4,138                            |   | 3,523 |   |
|                                                                             |   |                             |   |   |   |
| **Cash  flows from investing activities:**                                       |   |                             |   |   |   |
| Expenditures for  equipment and furniture                                        |   | (83                              | )      | (152 | ) |
| Sales and maturities  of marketable debt securities                              |   | 3,669                            |   | 6,315 |   |
| Purchases of  marketable debt securities                                         |   | (9,351                           | )      | (2,842 | ) |
|                                                                             |   |                             |   |   |   |
| Cash flows from  investing activities                                            |   | (5,765                           | )      | 3,321 |   |
|                                                                             |   |                             |   |   |   |
| **Cash  flows from financing activities:**                                       |   |                             |   |   |   |
| Proceeds from the  sale of common stock                                          |   | 25                               |   | 7 |   |
|                                                                             |   |                             |   |   |   |
| Cash flows from  financing activities                                            |   | 25                               |   | 7 |   |
|                                                                             |   |                             |   |   |   |
| Increase (decrease)  in cash and cash equivalents                                |   | (1,602                           | )      | 6,851 |   |
| Cash and cash  equivalents, beginning of period                                  |   | 23,685                           |   | 22,425 |   |
|                                                                             |   |                             |   |   |   |
| Cash and cash  equivalents, end of period                                        |   | $                                | 22,083 |   | $ | 29,276 |   |

 

See notes to condensed consolidated financialstatements.

 

4

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**BROOKTROUT, INC.****NOTESTO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Description of Business andSummary of Significant Accounting Policies and Practices**

 

***(a) Description ofBusiness***

 

Brooktrout, Inc. (the “Company” or“Brooktrout”) develops, manufactures and sells hardware and software productsthat enable the development of communications systems and services. The Companysells its products to system vendors, service providers, enterprise customers,original equipment manufacturers, and value-added resellers, both domesticallyand internationally, through a direct sales force and a two-tiered distributionsystem. Prior to February 8, 2001, the Company was organized and reportedthe results of its operations in the following three business segments:Brooktrout Technology, Inc. (“Brooktrout Technology”), BrooktroutSoftware, Inc. (“Brooktrout Software”), and Interspeed, Inc.(“Interspeed”). These segments were differentiated based upon the productsprovided to the marketplace, the customers served, and the distributionchannels utilized. Two of these segments have been discontinued and areclassified as discontinued operations for the periods presented in thesecondensed consolidated financial statements. For further discussion ofdiscontinued operations, please see our Annual Report on Form 10-K for the yearended December 31, 2002.  Following thediscontinuance of the Brooktrout Software and Interspeed segments, the Company’soperations consist of one reportable segment, Brooktrout Technology.Disclosures included herein pertain to the Company’s continuing operationsunless noted otherwise.

 

***(b) Use ofEstimates***

 

Accounting policies, methods and estimates arean integral part of the condensed consolidated financial statements and arebased upon management’s current judgments. These policies, methods, andestimates affect the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expenses during the reporting periods.The judgments made by management are based on knowledge and experience withregard to past and current events and assumptions about future events that arebelieved to be reasonable under the circumstances. The Company’s managementevaluates these estimates and assumptions and adjusts them if expectationsconcerning events, including future events, affecting them differ markedly frommanagement’s current judgments.

 

***(c) Basis ofPresentation and Principles of Consolidation***

 

The accompanying unaudited condensedconsolidated financial statements have been prepared by the Company pursuant tothe rules and regulations of the Securities and Exchange Commissionregarding interim financial reporting. These unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2002.

 

The accompanying unaudited condensedconsolidated financial statements have been prepared on the same basis as theaudited consolidated financial statements and include all adjustments,consisting only of normal recurring adjustments, necessary for a fairpresentation of the interim periods presented. The condensed consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries. All significant intercompany balances and transactions have beeneliminated in consolidation. The operating results for the interim periodspresented are not necessarily indicative of the results that could be expectedfor the full year.

 

***(d) RevenueRecognition***

 

Revenue from product sales is recognized uponshipment to the customer (which constitutes delivery), provided that persuasiveevidence of an arrangement exists, the fee is fixed or determinable, andcollection is reasonably assured. To the extent that one or more of theseconditions are not met, which has occurred from time to time, revenue is deferreduntil such time as all four criteria are met. Revenue from sales to certaindistributors is recognized on a “sell-through” basis, that is, when thedistributors report to the Company that resale of the product to the ultimatecustomer of the distributor in question has occurred. If the Company receives apayment from a customer prior to meeting all of the revenue recognitioncriteria, the payment is recorded as a customer deposit or deferred revenue.The Company records a provision for estimated sales returns and allowances onproduct sales in the same period as the related revenue is recorded. Theseestimates are based on historical sales returns, analysis of credit memo dataand other known factors.

 

***(e) Warranties***

 

The Company provides warranties on its products for periods of up to five years.Provisions are made at the time revenue is recognized for the cost offulfilling these commitments. Actual costs of fulfilling these warrantyobligations have been within amounts estimated and provided.  At March 31, 2003 and December 31, 2002, theCompany recorded a warranty obligation of $1.1 million.

 

***(f) Concentrationof Credit Risk***

 

The Company sells its products to variouscustomers in the high technology industry. The Company generally requires nocollateral. To reduce credit risk, the Company performs credit evaluations ofits customers. The Company maintains allowances for doubtful accounts forestimated losses resulting from its customers’ inability to make requiredpayments. At March 31, 2003 and December 31, 2002, 13% and 23%, respectively,of the Company’s accounts receivable were from one customer, and 9% and 13%,respectively, were from a different customer.

 

5

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***(g) Inventory***

 

Inventory is carried at the lower of cost ormarket. Cost is determined using the first-in, first-out method. The Companyreduces the value of its inventory for estimated obsolescence or unmarketableinventory equal to the difference between the cost of inventory and the estimatedrealizable value based upon assumptions about future demand and marketconditions.

 

***(h) Income Taxes***

 

Deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable to thedifferences between the carrying value of existing assets and liabilities andtheir respective tax bases and for operating loss and credit carry forwards.These assets and liabilities are measured using the enacted tax rates and lawsthat are expected to be in effect at the time the differences are expected toreverse. The Company believes that it is more likely than not that futureoperations will generate sufficient taxable income to realize the majority ofthe deferred tax assets. Valuation allowances are provided to the extent thatrecoverability of tax assets is unlikely.

 

***(i) Stock-BasedCompensation***

 

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

 

Under the intrinsic value method, compensationassociated with stock awards to employees is determined as the difference, ifany, between the current fair value of the underlying common stock on the datecompensation is measured and the price an employee must pay to exercise theaward. The measurement date for employee awards is generally the date of grant.Under the fair value method, compensation associated with stock awards tonon-employees is determined based on the estimated fair value of the awarditself, measured using either current market data or an established optionpricing model. The measurement date for non-employee awards is generally thedate that performance of certain services is complete.

 

Had the Company used the fair value method tomeasure compensation related to stock awards to employees, reported loss fromcontinuing operations and loss per share would have been as follows: 
|                                            |   | **Three Months Ended March 31,**             |   |
|-------------------------------------------------|--------|----------------------------------------------|--------|
|                                            |   | **2003**                                     |   | **2002** |   |
|                                            |   | ***(in thousands, except per share  data)*** |   |
| Loss from continuing  operations, as reported   |   | $                                            | (1,663 | ) | $ | (1,888 | ) |
| Stock based  compensation recorded              |   | —                                       |   | — |   |
| Pro forma stock  based compensation, net of tax |   | (934                                         | )      | (886 | ) |
|                                            |   |                                         |   |   |   |
| Loss from continuing  operations, pro forma     |   | $                                            | (2,597 | ) | $ | (2,774 | ) |
|                                            |   |                                         |   |   |   |
| Basic and diluted  loss per common share        |   | $                                            | (0.21  | ) | $ | (0.23 | ) |

 

Forpurposes of determining the disclosure required by Statement of FinancialAccounting Standards (“SFAS”) No. 123, the fair value of options on theirgrant date is measured using the Black/Scholes option-pricing model. Keyassumptions used to apply this pricing model were as follows: 

 
|                                     |   | **Three Months Ended March 31,** |   |
|------------------------------------------|--------|----------------------------------|--------|
|                                     |   | **2003**                         |   | **2002** |   |
| Risk-free interest  rate                 |   | 2.5                              | %      | 4.3 | % |
| Expected life of  option grants (years)  |   | 4.3                              |   | 4.4 |   |
| Expected volatility  of underlying stock |   | 43                               | %      | 52 | % |

 

The estimated weighted average fair value ofoption grants made during the three months ended March 31, 2003 and 2002 was$1.98 and $2.69, respectively, per option.

 

***(j) Earnings PerShare***

 

Basic earnings per common share is computedusing the weighted average number of common shares outstanding during eachperiod. Diluted earnings per common share is calculated by dividing the netloss by the sum of the weighted average number of common shares outstanding andall additional common shares that would have been outstanding if potentiallydilutive securities had been issued, using the treasury method.

 

Stock options to purchase 3,526,687 shares and3,050,125 shares were excluded from the computation of diluted earnings pershare in the three months ended March 31, 2003 and 2002, respectively.  These options were excluded from thecalculation as to include them would have been antidilutive.

 

6

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***(k) Reclassifications***

 

Certain amounts in the 2002 condensedconsolidated financial statements have been reclassified to conform to the 2003presentation.

 

***(l) RecentAccounting Pronouncements***

 

The Company has adopted SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.”  This pronouncement is effective for exit ordisposal activities that are initiated after December 31, 2002, andrequires these costs to be recognized when the liability is incurred and not atproject initiation. The adoption of SFAS No. 146 has not had an impact onthe Company’s operations or financial position since there has been no exit ordisposal activities in the periods presented.

 

**2. Marketable Debt Securities**

 

The Company has classified all of its marketabledebt securities as available-for-sale. There were no material realized orunrealized gains recognized during the three months ended March 31, 2003 andthe year ended December 31, 2002. As of both March 31, 2003 and December 31, 2002, the remaining maturitiesof debt securities range from one month to approximately two years.

 

Marketable debt securities consisted of thefollowing: 

 
|                             |   | **Amortized Cost**   |   | **Market Value** |   |
|----------------------------------|--------|----------------------|--------|------------------|--------|
|                             |   | ***(in thousands)*** |   |
| March   31, 2003:           |   |                 |   |             |   |
| U.S. government notes and bonds  |   | $                    | 9,008  |             | $      | 9,034 |   |
| Corporate debt securities        |   | 14,757               |   | 14,817           |   |
|                             |   |                 |   |             |   |
| Total                            |   | $                    | 23,765 |             | $      | 23,851 |   |
|                             |   |                 |   |             |   |
| December 31, 2002:               |   |                 |   |             |   |
| U.S.  government notes and bonds |   | $                    | 7,520  |             | $      | 7,532 |   |
| Corporate debt securities        |   | 10,644               |   | 10,571           |   |
|                             |   |                 |   |             |   |
| Total                            |   | $                    | 18,164 |             | $      | 18,103 |   |

 

**3. Inventory**

 

The components of inventory, net of reserves,consisted of the following:

 
|            |   | **March 31, 2003**   |   | **December 31, 2002** |   |
|-----------------|--------|----------------------|--------|-----------------------|--------|
|            |   | ***(in thousands)*** |   |
| Raw materials   |   | $                    | 1,263  |                  | $      | 1,076 |   |
| Work in process |   | 674                  |   | 740                   |   |
| Finished goods  |   | 4,226                |   | 4,981                 |   |
|            |   |                 |   |                  |   |
| Total           |   | $                    | 6,163  |                  | $      | 6,797 |   |

 

**4. Intangible Assets**

 

Intangible assets consisted of the following:

 
|                            |   | **March 31, 2003**   |   | **December 31, 2002** |   |
|---------------------------------|--------|----------------------|--------|-----------------------|--------|
|                            |   | ***(in thousands)*** |   |
| Acquired technology             |   | $                    | 12,038 |                  | $      | 12,038 |   |
| Customer base                   |   | 1,264                |   | 1,264                 |   |
| In-place workforce              |   | 972                  |   | 972                   |   |
| Trademarks                      |   | 301                  |   | 301                   |   |
|                            |   |                 |   |                  |   |
| Total intangible  assets        |   | 14,575               |   | 14,575                |   |
| Less: accumulated  amortization |   | (7,546               | )      | (7,163                | )      |
|                            |   |                 |   |                  |   |
| Intangible assets,  net         |   | $                    | 7,029  |                  | $      | 7,412 |   |

 

Intangibleasset amortization expense was $0.4 million for both the three months endedMarch 31, 2003 and 2002.

 

7

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**5****. Accrued Warranty Costs**

 

The Company’s accrued warranty cost liabilitywas $1.1 million and $0.8 million as of March 31, 2003 and 2002,respectively. The following is a rollforward of the accrued warranty costs:

 
|                             |   | **Three months ended March 31,** |   |
|----------------------------------|--------|----------------------------------|--------|
|                             |   | **2003**                         |   | **2002** |   |
|                             |   | ***(in thousands)***             |   |
| Balance, beginning of the period |   | $                                | 1,060  |   | $ | 789 |   |
| Provisions for claims            |   | 61                               |   | 30 |   |
| Costs incurred                   |   | (35                              | )      | (19 | ) |
|                             |   |                             |   |   |   |
| Balance, end of period           |   | $                                | 1,086  |   | $ | 800 |   |

 

**6. Bank Line of Credit**

 

As ofMarch 31, 2003, the Company has a line of credit under which it can borrow upto $5.0 million, subject to compliance with certain covenants. Any amountsborrowed under the line of credit bear interest at the lender’s prime rate. Theline of credit is secured by a pledge of substantially all of the assets of theCompany. As of March 31, 2003, letters of credit issued against the Company’sexisting line totaled $1.0 million, representing the collateral requiredfor certain lease obligations. Other than the issuance of letters of credit andusing the credit line to secure immaterial foreign currency forward contracts,there have been no borrowings under the line during the past three years. Theline of credit expires on June 30, 2003. The Company anticipates that theline of credit will be renewed on substantially the same terms as the existingline of credit.

 

**7.Income Taxes**

 

TheCompany’s tax provision in 2003 is based on the estimated effective tax ratefor the full year.  The Company’seffective tax benefit rate on continuing operations was 32% for the threemonths ended March 31, 2003 and 42% for the three months ended March 31, 2002.  The reduction in the income tax benefit rate for the three months endedMarch 31, 2003 was primarily due to a limitation of, and correspondingreduction in, the research and development tax credit that the Company canutilize in 2003. During the three months ended March 31,2003, the Company received federal income tax refunds totaling$6.0 million related to the carryback of 2002 net operating losses and taxcredits.

 

**8. Segment Information**

 

Prior to its February 8, 2001 decision todiscontinue its Brooktrout Software and Interspeed segments, the Company wasorganized and reported the results of its operations in the following threebusiness segments: Brooktrout Technology, Brooktrout Software and Interspeed.As a result of its decision to discontinue Brooktrout Software and Interspeed,the Company’s continuing operations represent one reportable segment.

 

*Product Sales*—BrooktroutTechnology’s products are sold for applications in the New Network and forapplications in Today’s Network. Today’s Network involves core technologies andplatforms that are primarily used in business premise products such as fax, LANfax, and voice mail. The New Network applications expand the capabilities ofcommunications networks to allow data, voice and fax information to bedistributed using packet-based data networks, such as the Internet, forportions of the transmission and also allow information to be distributed usingthe traditional circuit-switched telephone network. For the three months endedMarch 31, 2003, sales of products for use in the New Network accounted forapproximately 39% of total revenue as compared to 33% of total revenue for thethree months ended March 31, 2002.

 

*Major Customers*—One customeraccounted for approximately 14% of revenue for both the three months endedMarch 31, 2003 and 2002.

 

*International Sales*—International sales,principally exports from the United States, accounted for approximately 27% and21% of revenue for the three months ended March 31, 2003 and 2002,respectively.

 

**9. Commitments and Contingencies**

 

*Litigation*—From time to time,the Company is a party to legal actions that arise in the normal course ofbusiness. The Company, taking into account advice of counsel, does not believethe eventual outcome of any such pending matters will have a material effect onthe Company’s consolidated financial condition or results of operations.

 

8

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*The following discussionshould be read in conjunction with the condensed consolidated financialstatements and related notes appearing elsewhere in this quarterly report andin our Annual Report on Form 10-K for the year ended December 31, 2002. Thediscussion contains forward-looking statements that involve known and unknownrisks and uncertainties, including those set forth below under “Factors ThatMay Affect Future Results.”*

 

**Overview**

 

We develop hardware and software platforms thatoriginal equipment manufacturers, or OEMs, developers and corporate informationtechnology managers build into their communications systems. Customersincorporate our products into applications, systems and services that allowvoice, fax and data to be distributed over both Internet protocol, or IP,packet-based networks, which we refer to as the New Network, and thetraditional circuit-based telephone network. We supply products for mediaprocessing, network interface, call control and signal processing, includingprotocols that allow Internet and traditional telephony systems to communicate.

 

We measure our operating success using bothfinancial and market metrics. The financial metrics include revenue, grossmargin, operating expenses, income from continuing operations and cash providedby operating activities. Other key metrics include the total number ofenterprise and service provider customers, customers whose purchases exceed$100,000, and the portion of our revenue that is generated by the sales ofproducts for applications in the New Network. Our long-term business model stressesour commitment to establishing and maintaining close customer relationships andto continuing to develop innovative products.

 

The most significant trend that has impacted ourbusiness has been the unfavorable economic conditions affecting most technologysectors and the communications sector in particular. This has resulted in adecrease in our revenue in the first quarter of 2003 and for the fiscal years2002 and 2001, compared to prior periods. Sales of products, particularly forapplications in the New Network, to OEMs for use by large serviceproviders have declined most significantly. In response to the revenuedecreases, we implemented expense control programs to reduce operatingexpenses, while at the same time, we have continued to invest in developingproducts that we believe our customers will need when the economy improves.

 

Despite these difficult economic conditions, wehave been able to increase our cash and marketable debt securities balances to$45.9 million at March 31, 2003 from $26.0 million at December 31, 2000.This was accomplished primarily through operating expense reductions, the saleof a business segment and income tax refunds. If current adverse economicconditions continue for an extended period of time or worsen, we may experienceadverse effects on our business, operating results, and cash and marketabledebt securities.

 

**Application of Critical Accounting Policies**

 

Management’s discussion and analysis offinancial condition and results of operations is based upon our condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of Americaapplicable to interim financial information. We make estimates and assumptionsin the preparation of the condensed consolidated financial statements thataffect the reported amounts of assets and liabilities, revenue and expenses,and the related disclosures of contingent assets and liabilities. Theseestimates form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Webase our estimates and judgments on historical experience and on various otherassumptions that we believe are reasonable under the circumstances. However,actual results may differ from these estimates under different assumptions orconditions

 

The following critical accounting policiesrequire the use of significant judgment and estimates in the preparation of thecondensed consolidated financial statements. This listing is not acomprehensive list of all of our significant accounting policies. For furtherinformation regarding the application of these and other accounting policies,see Note 1 to the condensed consolidated financial statements in Item 1 ofthis report.

 

Revenue Recognition

 

Revenue from product sales is recognized uponshipment to the customer (which constitutes delivery), provided that persuasiveevidence of an arrangement exists, the fee is fixed or determinable, andcollection is reasonably assured. In determining when to recognize revenue weoften are required to exercise judgment. To the extent that one or more ofthese criteria are not met, which has occurred from time to time, revenue isdeferred until such time as all four conditions are satisfied. We record aprovision for estimated sales returns and allowances on product sales in thesame period as the related revenue is recorded. These estimates are based onhistorical sales returns, analysis of credit memo data and other known factors.Actual results could differ from these estimates and could therefore impact ourresults of operations and cash flows.

 

Allowances for Doubtful Accounts

 

Accounts receivable are reduced by an allowancefor amounts that may become uncollectible in the future. The estimatedallowance for doubtful amounts is based primarily on a specific analysis ofaccounts in the receivable portfolio and a general reserve based on the agingof receivables. While management believes the allowance to be adequate, if thefinancial condition of our customers were to deteriorate, resulting inimpairment of their ability to make payments, additional allowances may berequired and could materially impact our financial position and results ofoperations.

 

9

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Inventory Allowances

 

We evaluate our ending inventories for estimatedexcess quantities and obsolescence. This evaluation includes analyses of saleslevels by product and projections of future demand. In addition, we assess theimpact of changing technology on our inventory-on-hand. We provide reserves forinventories that are considered excess or obsolete. If future demand or marketconditions are less favorable than our projections, additional inventoryreserves may be required and would be reflected in cost of sales in the periodin which the revision is made. These actions could impact both our results ofoperations and our cash flows.

 

Intangible Assets

 

We review our intangible assets for impairmentperiodically and whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. The evaluation of the fair value of ourintangible assets includes assumptions regarding estimated future undiscountedcash flows associated with these assets and other factors. If these estimatesor assumptions change in the future, we may be required to record impairmentcharges for these assets. Such an impairment charge would impact the results ofoperations, but would not directly impact our cash flows.

 

Deferred Tax Assets

 

We assess the carrying value of our deferred taxassets to determine if it is more likely than not that we will be able togenerate sufficient future taxable income in certain tax jurisdictions in orderto realize these assets. When necessary, we have reduced the deferred tax assetto its estimated realizable value by recording a valuation allowance. Thisassessment requires us to make estimates and assumptions about our futureprofitability. In determining the carrying value of the deferred tax assets asof March 31, 2003, we are assuming profitability in the future and that it ismore likely than not that we will be able to realize these assets. Thisassumption is based in part upon our history of profitability. If currenteconomic conditions deteriorate or future results of operations are less thanexpected, future assessments may result in a determination that all or aportion of the remaining deferred tax assets are not realizable. As a result,we may need to establish additional valuation allowances for all or a portionof the deferred tax assets, which may have a material adverse effect on ourresults of operations.

 

Accrued Warranty Costs

 

We accrue for warranty costs based on historicaltrends in product return rates and the expected material and labor costs toprovide warranty services. If we were to experience an increase in warrantyclaims compared with our historical experience, or if costs of servicingwarranty claims were greater than the expectation on which the accrual had beenbased, our gross margins could be adversely affected.

 

**Discontinued Operations**

 

Prior to February 8, 2001, we wereorganized and reported the results of our operations in three operatingsegments, Brooktrout Technology, Brooktrout Software, and Interspeed. OnFebruary 8, 2001, our board of directors adopted formal plans todiscontinue our Brooktrout Software and Interspeed segments. We have accountedfor these businesses as discontinued operations.  These businesses were substantially disposed of prior to December31, 2001, and adjustments recorded in 2002 primarily reflect additionalproceeds and changes in estimates to the amounts recorded related to gains orlosses on disposal.  There are nooperating activities related to discontinued operations included in ourcondensed consolidated financial statements in either 2002 or 2003.

 

10

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**Results of Operations**

 

The following discussion focuses on our resultsfrom continuing operations for the three months ended March 31, 2003 and 2002.The table below sets forth certain condensed consolidated statements ofoperations data as a percentage of total revenue for the periods presented.

 
|                                 |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------|--------|------------------------------------|--------|
|                                 |   | **2003**                           |   | **2002** |   |
| Domestic revenue                     |   | 73                                 | %      | 79 | % |
| International  revenue               |   | 27                                 |   | 21 |   |
| Total revenue                        |   | 100                                |   | 100 |   |
| Cost of product sold                 |   | 41                                 |   | 48 |   |
| Gross margin                         |   | 59                                 |   | 52 |   |
| Operating expenses:                  |   |                               |   |   |   |
| Research and  development            |   | 29                                 |   | 30 |   |
| Selling, general and  administrative |   | 47                                 |   | 41 |   |
| Total operating  expenses            |   | 76                                 |   | 71 |   |
| Operating loss                       |   | (17                                | )      | (19 | ) |
| Other income, net                    |   | 1                                  |   | 1 |   |
| Loss before income  taxes            |   | (16                                | )      | (18 | ) |
| Income tax (benefit)                 |   | (5                                 | )      | (8 | ) |
| Loss from continuing  operations     |   | (11                                | )%     | (10 | )% |

 

***Revenue***

 

The following table presents our domestic andinternational revenue:

 
|                                       |   | **Three Months Ended March 31,** |   |
|--------------------------------------------|--------|----------------------------------|--------|
|                                       |   | **2003**                         |   | **2002** |   |
|                                       |   | ***(dollars in thousands)***     |   |
| Domestic revenue                           |   | $                                | 11,282 |   | 73 | % | $ | 14,512 |   | 79 | % |
| International  revenue, principally export |   | 4,252                            |   | 27 |   | 3,910 |   | 21 |   |
|                                       |   |                             |   |   |   |   |   |   |   |
| Total revenue                              |   | $                                | 15,534 |   | 100 | % | $ | 18,422 |   | 100 | % |

 

*Three Months Ended March 31, 2003 and 2002*

 

Revenuefor the three months ended March 31, 2003 decreased by $2.9 million compared tothe three months ended March 31, 2002. Sales to domestic original equipment manufacturers and enterprise customersdecreased primarily due to recent world events and the continued unfavorableeconomic conditions in the communications marketplace.  International revenue increased by $0.3million, primarily as a result of favorable foreign currency exchange rates.  For the three months ended March 31, 2003,international revenue represented 27% of total revenue compared to 21% of totalrevenue for the three months ended March 31, 2002.

 

Revenuefrom sales of products for applications in the New Network was similar for thethree months ended March 31, 2003 and 2002. However, due to the decrease in total revenue, New Network revenue wasapproximately 39% of total revenue for the three months ended March 31, 2003,as compared to 33% of total revenue in the three months ended March 31, 2002.

 

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***Cost of ProductSold and Gross Margin***

 

The following table presents cost of productsold and gross margin information:

 
|                 |   | **Three Months Ended March 31,** |   |
|----------------------|--------|----------------------------------|--------|
|                 |   | **2003**                         |   | **2002** |   |
|                 |   | ***(dollars in thousands)***     |   |
| Cost of product sold |   | $                                | 6,330  |   | $ | 8,798 |   |
| Gross profit         |   | $                                | 9,204  |   | $ | 9,624 |   |
| Gross margin         |   | 59                               | %      | 52 | % |

 

*Three Months Ended March 31, 2003and 2002*

 

The decrease in cost of product sold from thethree months ended March 31, 2002 to the corresponding period in 2003 wasprimarily the result of direct material cost reductions achieved from using newmanufacturing subcontractors, combined with decreased product sales.  In addition, inventory obsolescence expensedecreased by $0.4 million, primarily due to lower levels of excess serviceprovider product inventory in the three months ended March 31, 2003. Thesefactors contributed to a significant improvement in gross margin percentages,along with a $0.4 million decrease in gross profit dollars, in the firstquarter of 2003 compared to the first quarter of 2002.

 

***Operating Expenses***

 

The following table presents our operatingexpenses:

 
|                                 |   | **Three Months Ended March 31,** |   |
|--------------------------------------|--------|----------------------------------|--------|
|                                 |   | **2003**                         |   | **2002** |   |
|                                 |   | ***(in thousands)***             |   |
| Research and  development            |   | $                                | 4,586  |   | $ | 5,619 |   |
| Selling, general and  administrative |   | 7,269                            |   | 7,481 |   |
|                                 |   |                             |   |   |   |
| Total operating  expenses            |   | $                                | 11,855 |   | $ | 13,100 |   |

 

Research and development expense

 

*Three Months Ended March 31, 2003and 2002*

 

Research and development expense represented 29%of total revenue in the three months ended March 31, 2003, compared with 30% oftotal revenue in the corresponding period in 2002. The $1.0 million decrease in2003 was primarily the result of reduced consulting, contract labor, variableincentive compensation, and depreciation expenses, combined with decreasedspending on new product prototypes.  Ourcontinuing development efforts are focused on hardware and software for mediaprocessing products (voice, fax and data), network interface products, callcontrol products and signal processing products.

 

Selling, general and administrative expense

 

*Three Months Ended March 31, 2003and 2002*

 

The slight decrease in selling, general andadministrative expense from the three months ended March 31, 2002 to thecorresponding period of 2003 was primarily due to a decrease in bad debtexpense as a result of improved collectability of accounts receivable, alongwith depreciation and reduced spending for variable incentive compensation.These expense decreases were partially offset by increases in employee healthinsurance premiums, as well as marketing expenses associated with the PartnerAccess Network Program.

 

***Other income, net***

 

*Three Months Ended March 31, 2003and 2002*

 

The decrease in other income, net, from $221,000in the three months ended March 31, 2002 to $200,000 in the correspondingperiod in 2003 was the result of a decline in short-term interest rates, whichoffset the favorable impact of increased cash and marketable debt securitiesbalances.

 

12

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***Income tax(benefit)***

 

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

 
|                 |   | **Three Months Ended March 31,** |   |
|----------------------|--------|----------------------------------|--------|
|                 |   | **2003**                         |   | **2002** |   |
|                 |   | ***(dollars in thousands)***     |   |
| Income tax (benefit) |   | $                                | (788   | ) | $ | (1,367 | ) |
| Effective tax rate   |   | (32                              | )%     | (42 | )% |
|                      |        |                                  |        |  |  |  |  |

 

*Three Months Ended March 31, 2003and 2002*

 

The reduction in the income tax benefit rate forthe three months ended March 31, 2003 was primarily due to a limitation of, andcorresponding reduction in, the research and development tax credit that we canutilize in 2003.

 

**Liquidity and Capital Resources**

 

Cash flows for the three months ended March 31,2003 and 2002

 

Net cash from operating activities was$4.1 million in the three months ended March 31, 2003. This increaseprimarily resulted from tax refunds of $6.0 million and reductions inaccounts receivable that were offset by changes in other components of workingcapital. Net cash from operating activities was $3.5 million in threemonths ended March 31, 2002. This primarily resulted from income tax refunds of$3.7 million and reductions in inventory, offset by a slight increase inaccounts receivable.

 

Net cash used in investingactivities was $5.8 million in the three months ended March 31, 2003. Thisprimarily resulted from net purchases of marketable debt securities of$5.7 million. Net cash from investing activities was $3.3 million inthe three months ended March 31, 2002. This primarily resulted from net salesof marketable debt securities of $3.5 million.

 

Net cashfrom financing activities was $25,000 and $7,000 in the three months endedMarch 31, 2003 and 2002, respectively, all attributable to proceeds from thesale of common stock.

 

Contractual Obligations and Capital Expenditures

 

The following table presents our future contractualobligations and commercial commitments as of March 31, 2003:

 
|             |   | **Total**            |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
|------------------|--------|----------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|
|             |   | ***(in thousands)*** |   |
| Operating leases |   | $                    | 8,017  |     | $      | 1,937    |   | $        | 2,802  |     | $      | 1,933    |   | $              | 697    |   | $ | 202 |   | $ | 446 |   |
|                  |        |                      |        |          |        |          |        |          |        |          |        |          |        |                |        |  |  |  |  |  |  |  |

 

We haveoperating lease commitments for our primary office and manufacturing facilitiesthat expire between 2003 and 2006. In addition, we lease office space for salesand support functions that expire beyond 2006. Certain lease agreements requireus to pay all of the building’s taxes, insurance and maintenance costs.

 

We purchased $83,000 of capital equipmentin the three months ended March 31, 2003, and $152,000 of capital equipment inthe three months ended March 31, 2002. We currently have no materialcommitments for additional capital expenditures, but we do have certaininventory purchase commitments that are part of our ordinary course ofbusiness. Our purchasing arrangements with vendors typically allow forcancellations without significant adverse financial implications.

 

We had no long-term debt as of March 31, 2003 orMay 12, 2003.

 

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Cash and Cash Requirements

 
|                        |   | **March 31,********2003**    |   | **December 31, 2002** |   |
|-----------------------------|--------|------------------------------|--------|-----------------------|--------|
|                        |   | ***(dollars in thousands)*** |   |
| Cash and cash  equivalents  |   | $                            | 22,083 |                  | $      | 23,685 |   |
| Marketable debt  securities |   | 23,851                       |   | 18,103                |   |
| Total                       |   | $                            | 45,934 |                  | $      | 41,788 |   |
|                        |   |                         |   |                  |   |
| Working capital             |   | $                            | 53,014 |                  | $      | 53,639 |   |
| Quick ratio                 |   | 4.23                         |   | 3.37                  |   |
| Available line of  credit   |   | $                            | 5,000  |                  | $      | 5,000 |   |

 

Cash, cash equivalents and marketable debtsecurities increased to $45.9 million as of March 31, 2003 from$41.8 million as of December 31, 2002, primarily due to a $6.0million tax refund, offset by a net cash outflow from operations of $1.9million in the first three months of 2003. Working capital decreased by$0.6 million from December 31, 2002 to March 31, 2003. This decrease wasthe result of decreases in accounts payable and accrued expenses due to reducedinventory purchases and lower operating expenses, offset by a decrease inincome tax receivable. Our quick ratio improved from 3.37 at December 31, 2002to 4.23 at March 31, 2003, due primarily to a reduction of current liabilitiesby 16%, from $15.0 million as of December 31, 2002 to$12.7 million as of March 31, 2003, while we increased cash and marketabledebt securities balances.

 

We have a$5.0 million working capital line of credit available from a commercialbank. Availability of funds under this line of credit is subject to compliancewith certain covenants, and borrowings bear interest at the lender’s primerate. The line of credit is secured by a pledge of substantially all of ourassets.  As of March 31, 2003,letters of credit issued against the existing line totaled $1.0 million,representing the collateral required for certain lease obligations. Other thanthe issuance of letters of credit and using the credit line to secureimmaterial foreign currency forward contracts, there have been no borrowingsunder the line during the past three years. The line of credit expires onJune 30, 2003. We anticipate that the line of credit will be renewed onsubstantially the same terms as the existing line of credit.

 

We believe that our cash, cash equivalents andmarketable debt securities are likely to meet our needs for the foreseeablefuture.  Though we do not expect to makeany major capital expenditures in 2003, we are always looking for opportunitiesto expand the business, which could include acquisitions or organic expansioninto new markets.  If we find that ourcash, marketable debt securities and funds available from our bank line ofcredit are not sufficient, we may choose to utilize or to seek other sources offinancing. If we were to seek future equity financings, the terms may bedilutive to our stockholders and may contain restrictive covenants, which couldlimit our ability to pursue certain courses of action. It is possible that,should the need arise, we will not be able to obtain additional financing, orthat the financing made available to us will not be on acceptable terms.

 

The pricing of our products and the costs of ourgoods can be significantly affected by current market conditions. Marketconditions can be impacted by inflation; however, we believe that inflation hasnot had a significant effect on our operations to date.

 

**Recent Accounting Pronouncements**

 

We have adopted Statement of FinancialAccounting Standards (“SFAS”) No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.”  Thispronouncement is effective for exit or disposal activities that are initiatedafter December 31, 2002, and requires these costs to be recognized whenthe liability is incurred and not at project initiation. The adoption of SFASNo. 146 has not had an impact on our operations or financial positionsince there have been no exit or disposal activities in the periods presented.

 

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**Factors That May Affect Future Results**

 

The trading price of our common stock coulddecline due to any of these factors, in which case you could lose all or partof your investment. You should also refer to the other information in thisreport, including the condensed consolidated financial statements and relatednotes. The risks and uncertainties described below are those that we currentlybelieve may materially affect us. Additional risks and uncertainties that weare unaware of, or that we currently deem immaterial, also may become importantfactors that affect us. 

**Risks Related to Our Business**

 

***Downturns in theeconomy generally, and in sectors of the telecommunications industry inparticular, make it difficult to anticipate or expand sales.***

 

As a result of the unfavorable economicconditions affecting most technology sectors and the telecommunications sectorin particular, many of our customers are seeking aggressively to increaseefficiency in their supply chains and reduce their inventory levels.Additionally, the slowdown in the telecommunications industry and the resultingdecrease in spending by companies in our target markets have reduced the rate ofgrowth of data traffic and the use of the Internet, which are driving theconvergence of data and telephony that we expect will give rise to demand forNew Network applications. The economic downturn has adversely affected ourbusiness and operating results, including a reduction in revenue of $2.9million for the three months ended March 31, 2003, or 16%, compared to thethree months ended March 31, 2002, and $11.5 million, or 43%, compared to thethree months ended March 31, 2001. If current economic conditions continue foran extended period of time or worsen, we may experience additional adverseeffects on our revenue, net income and cash flow. For example, as the rate atwhich our customers order products decreases, it becomes more likely that ourcurrent inventories will be exposed to technological obsolescence, which wouldrequire us to reduce the value of those inventories on our balance sheet.

 

***If we fail tocompete successfully in the highly competitive telecommunications market, ourrevenue and profitability will suffer.***

 

The market for telecommunications equipment ishighly competitive. If we are unable to differentiate our products fromexisting and future offerings of our competitors, and thereby effectivelycompete in the market for telecommunications equipment, our operating resultscould be materially adversely affected. Many of our current and potentialcompetitors have significantly greater selling and marketing, technical,manufacturing, financial, and other resources. We expect our current competitorsto continue to improve the design and performance of their existing productsand to introduce new products and enhancements with improved price andperformance characteristics. Our product sales may be threatened by newtechnologies, products or market trends, and we may have to reduce the pricesof our products to stay competitive. In addition, new competitors may emerge inthe markets we serve. An acquisition of, or by, one of our competitors mayresult in a substantially strengthened competitor with greater financial,engineering, manufacturing, marketing, and customer service and supportresources than we have. If our current or future competitors enter intostrategic relationships with leading manufacturers covering products similar tothose sold or being developed by us, our ability to sell products to thosemanufacturers may be adversely affected.

 

Capitalizing on our technology will require acontinued high level of investment in research and development, marketing, andcustomer service and support. We may be unable, or otherwise fail, to allocatesufficient resources to achieve the technological advances necessary to competesuccessfully with existing competitors or new entrants.

 

***Internaldevelopment efforts by our customers may adversely affect demand for ourproducts.***

 

Many of our customers, including the largeoriginal equipment manufacturers on which we focus a significant portion of oursales and marketing efforts, have the technical and financial ability to designand produce components replicating or improving on the functionality of most ofour products. These customers often consider in-house development oftechnologies and products as an alternative to doing business with us. Wecannot assure you that our existing or potential customers will do businesswith us, rather than attempting to develop similar technology and productsinternally or obtaining technology or products through acquisitions. We cannotbe certain that we will be able to find customers to replace the revenue lost asa result of customers developing technologies or products in-house. Any suchoccurrence could have a material adverse effect on our business, financialcondition or operating results.

 

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

 

The telecommunications hardware and softwaremarket is characterized by:

 

•                  rapid technologicaladvances;

 

•                  evolving industrystandards;

 

•                  changes in customerrequirements;

 

•                  frequent new productintroductions;

 

•                  declining prices;

 

15

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•                  intense competition;and

 

•                  evolving offerings bytelecommunications service providers.

 

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

 

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

 

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

 

***Our revenue coulddecline significantly if we lose a major customer or if a major customercancels, reduces or delays an order.***

 

One customer accounted for 14% of our revenue ineach of three months ended March 31, 2003 and 2002. The loss of this or any othermajor customer or the cancellation, reduction or delay of significant ordersfrom such customers, even if only temporary, could significantly reduce ourrevenue and cash flow and could harm our reputation in the industry.

 

***Our dependence onsole and single source suppliers and independent manufacturers could result inincreased costs or delays in the manufacture and delivery of our products.***

 

Although we generally use standard parts andcomponents for our products, some key components are purchased from sole orsingle source vendors for which alternative sources are not currently availableor are difficult to obtain. Our inability to obtain sufficient quantities ofthese components may result in future delays or reductions in product shipmentsthat could cause us to lose sales, incur additional costs and suffer harm toour reputation. We currently purchase proprietary components from a number ofsuppliers for which there are no direct substitutes. These components could bereplaced with alternatives from other suppliers, but that might requireredesign of our products. If such a redesign were required, we would incurconsiderable delay and expenses. We currently enter into purchase orders withour suppliers for materials based on forecasts of need, but have no guaranteedsupply arrangements with these suppliers.

 

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

 

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

 

Products as complex as ours may contain knownand undetected errors, bugs, or other performance problems. Defects arefrequently found during the period immediately following introduction andinitial implementation of new products or enhancements to existing products.Although we attempt to resolve all bugs that we believe would be consideredserious by our customers before implementation, our products may not bebug-free. We also provide warranties against defects in materials andworkmanship on our hardware products for five years. Errors, bugs orperformance problems, however, could result in lost revenue or customerrelationships and could be detrimental to our business and reputationgenerally. In addition, our customers generally use our products together withtheir own products and products from other vendors. As a result, when problemsoccur, it may be difficult to identify the source of the problem. Theseproblems may cause us to incur significant warranty and repair costs, divertthe attention of our engineering personnel from our product development effortsand cause significant customer relations problems.

 

***Changes toregulations affecting the telecommunications or Internet industries couldreduce demand for our products or increase our costs.***

 

Laws and regulations governing telecommunications,electronic commerce and the Internet are emerging, but remain largelyunsettled, even in the areas where there has been some legislative action.Regulation may focus on, among other things, assessing access or settlementcharges, or imposing tariffs or regulations based on the characteristics andquality of products, either of which could restrict our business or increaseour cost of doing business. Any changes to existing laws or the adoption of newregulations by federal or state regulatory authorities or any legal challengesto existing laws or regulations relating to the telecommunications industrycould materially adversely affect the market for our products. Moreover, ourvalue-added resellers or other customers may require, or we may otherwise deemit necessary or advisable, for us to alter our products to address actual oranticipated changes in the regulatory environment. Our inability to alter ourproducts or address any regulatory changes could have a material adverse effecton our business, financial condition or operating results.

 

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***Limitations on ourability to adequately protect our proprietary rights may prevent us fromretaining our competitive advantage and negatively affect our future operatingresults.***

 

Our success and ability to compete aredependent, in part, upon our proprietary technology. Taken as a whole, webelieve our intellectual property rights are significant and any failure toadequately protect the unauthorized use of our proprietary rights could resultin our competitors offering similar products, potentially resulting in loss ofa competitive advantage and decreased revenue. We rely upon a combination ofpatents, trademark law, trade secret protections, copyright law andconfidentiality agreements with consultants and third parties to protect ourproprietary rights. Notwithstanding our efforts, third parties may infringe ormisappropriate our proprietary rights. In addition, we generally require eachof our employees to execute a proprietary information agreement designed toprotect our trade secrets, our inventions created in the course of employmentwith us and other proprietary information of our company. Moreover, effectivepatent, trademark, copyright or trade secret protections may not be availablein every country in which we operate or intend to operate to the same extent asthe laws of the United States. Also, it may be possible for unauthorized thirdparties to copy or reverse engineer aspects of our products, develop similartechnology independently or otherwise obtain and use information that we regardas proprietary. Furthermore, detecting unauthorized use of our proprietaryrights is difficult. Litigation may be necessary in the future to enforce ourproprietary rights. Such litigation could result in the expenditure ofsignificant financial and managerial resources and could have a materialadverse effect on our future operating results.

 

***Intellectualproperty claims against us can be costly and negatively affect our business.***

 

In the telecommunications business, there isfrequent litigation based on allegations of patent infringement. As the numberof entrants in our market increases and the functionality of our products isenhanced and overlaps with the products of other companies, we may becomesubject to claims of infringement or misappropriation of the intellectualproperty rights of others. As a result, from time to time, third parties mayclaim exclusive patent or other intellectual property rights to technologiesthat we use. Although we believe that we do not face material liability relatedto infringement of the intellectual property of others, any claims assertingthat our products infringe or may infringe proprietary rights of third parties,if determined adversely to us, could have a material adverse effect on ourbusiness, financial condition or operating results. Any claims, with or withoutmerit, could be time-consuming, result in costly litigation, divert the effortsof our engineering and management personnel, cause delays in product shipmentsor require us to enter into royalty or licensing agreements, any of which couldhave a material adverse effect upon our operating results. If any legal actionclaiming patent infringement is commenced against us, we cannot assure you thatwe would prevail in such litigation given the complex technical issues andinherent uncertainties in patent litigation. In the event a claim against uswas successful, and we could not obtain a license on acceptable terms orlicense a substitute technology or redesign to avoid infringement, we may beunable to market our affected products. This could have a material adverseeffect on our business, financial condition and operating results.

 

***Certain of ourproducts depend upon the continued availability of licensed technology fromthird parties.***

 

We currently license and will continue tolicense certain technology integral to certain of our products from thirdparties. For example, we have obtained licenses from third parties for softwarefor certain of our voice and fax products. While we believe that much of thistechnology is available from multiple sources, any difficulties in acquiringthird-party technology licenses, or integrating the related third-partytechnology into our products, could result in delays in product development orupgrades until equivalent technology can be identified, licensed andintegrated.

 

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

 

***If we are unable toattract or retain key personnel, we may be unable to operate our businesssuccessfully.***

 

Our success depends in large part upon thecontinued contributions of our key management, sales, marketing, andengineering personnel, many of whom perform important functions and would bedifficult to replace. If we lose one or more members of our senior managementteam our business and operating results would be harmed. We do not haveemployment contracts with our key personnel. There has been significantcompetition in our industry for qualified personnel, and, at times, we haveexperienced difficulty in recruiting qualified personnel. We may not be able toattract and retain the necessary personnel to accomplish our businessobjectives, and we may experience constraints that will adversely affect ourability to satisfy customer demand in a timely fashion or to support ourcustomers and operations. Our inability to hire qualified personnel on a timelybasis, or to retain our key personnel, could materially adversely affect ourbusiness, financial condition and operating results.

 

***Our productstypically have long sales cycles, causing us to expend significant resourcesbefore recognizing revenue.***

 

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

 

In addition, the rapidly emerging and evolving natureof the markets in which we and our customers compete may cause prospectivecustomers to delay their purchase decisions as they evaluate new technologiesand develop and implement new systems. During the period in which our customersare evaluating whether to place an order with us, we often incur substantialsales and marketing expenses, without any assurance of future orders or theirtiming. Even after a customer places an order, the timing of the development,introduction and implementation of the customer’s product or service using ourproduct is controlled by, and can vary significantly with the needs of, thecustomer. In some circumstances, the customer will not require the product forseveral months. This continuing uncertainty can complicate our planningprocesses and reduce the predictability of our earnings and cash flows.

 

17

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***Our business andoperating results could be adversely affected by downturns in economicconditions in countries outside the United States and other risks associatedwith international operations.***

 

Sales of our products to customers outside theUnited States accounted for 27% of our revenue in the three months ended March31, 2003. We anticipate that international sales will continue to account for asignificant portion of our revenue. Because of our dependence uponinternational sales, we are subject to a number of risks, including volatilityin currency exchange rates, political and economic instability in othercountries, the imposition of trade and tariff regulations by foreigngovernments, difficulties in accounts receivable collections, extended paymentterms beyond those customarily offered in the United States, potentiallyadverse tax consequences, 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 ourability to sell our products in other countries, which could have a materialadverse effect on our business, financial condition and operating results.

 

***We may seek toexpand through acquisitions of complementary businesses, and we may not be ableto successfully integrate acquired companies.***

 

We may seek to acquire complementary companiesin the future. In addition to the difficulties we may face in identifying andconsummating acquisitions, we will also be required to integrate andconsolidate any acquired businesses or assets with our existing operations. Managingan acquired business entails numerous operational and financial risks,including difficulties in integrating disparate administrative, accounting andfinance, and information systems, difficulties in assimilating acquiredoperations and new personnel, diversion of management’s attention from otherbusiness concerns, and potential loss of key employees or customers of anyacquired operations. Accordingly, we may be unable to successfully identify,consummate and integrate future acquisitions or operate acquired businessesprofitably. Our success will depend, to a significant extent, on the ability ofour executive officers and other members of senior management to respond tothese challenges effectively. If we are unable to integrate successfully an acquiredcompany, our future growth may suffer, and our results of operations could beharmed.

 

**Risks Related to Our FinancialResults**

 

***Our operatingresults are likely to fluctuate significantly and cause our stock price to bevolatile, which could cause the value of your investment to decline.***

 

Our operating results are likely to fluctuate inthe future due to a variety of factors, many of which are outside of ourcontrol. If our operating results do not meet the expectations of securitiesanalysts, the trading price of our common stock could significantly decline.This may cause the value of your investment in our company to decline. Inaddition, the value of your investment could be affected by investor perceptionof our industry or our prospects generally, independent of our operatingperformance. Some of the factors that could affect our operating results or themarket price of our common stock include:

 

•                  our ability to copewith difficult conditions in the economy in general, and the telecommunicationsmarket in particular;

 

•                  our ability toformulate and implement effective strategies to respond to changing marketrequirements and conditions;

 

•                  cancellation orrescheduling of orders for our products;

 

•                  our ability to collectaccounts receivable from customers that have been adversely affected by thedifficult economic conditions;

 

•                  our ability todevelop, manufacture, market and support our products and product enhancements;

 

•                  the timing and numberof orders for our products, which have historically been weighted more heavilytoward the last month of each quarter and the second and fourth quarters ofeach year;

 

•                  we typicallyexperience lower revenue in the third quarter, due to customer summer vacationschedules, particularly in Europe, and to a lesser extent, the first quarter ofeach year;

 

•                  our ability to hire,train and retain key management, sales, marketing and engineering personnel;

 

•                  announcements ortechnological innovations by our competitors or in competing technologies;

 

•                  our ability to obtainsufficient supplies of sole or limited source components for our products;

 

•                  a decrease in theaverage selling prices of our products;

 

•                  changes in costs ofcomponents that we include in our products;

 

•                  the mix of productsthat we sell and the mix of distribution channels through which they are sold;and

 

•                  a decrease in thedemand for our common stock.

 

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

 

***The market price ofour common stock is volatile, which could lead to losses for individualinvestors.***

 

Stock markets in general, and the market fortechnology stocks, including our common stock, in particular, have experiencedextreme price and volume fluctuations that often have been unrelated, ordisproportionate, to the operating performance of those companies. The marketfor our common stock has been and is likely to continue to be volatile. Manyfactors could cause the trading price of our common stock to fluctuatesubstantially, including the following:

 

•                  future announcementsconcerning our business, technology, acquisitions, strategic partnerships,management, customers or competitors;

 

•                  introduction of newproducts or changes in product pricing policies by us, our competitors or ourcustomers;

 

•                  changes in earningsestimates by securities analysts or announcements of results of operations thatare not aligned with the expectations of analysts and investors;

 

•                  changes in marketvaluations of similar companies;

 

•                  reduced spending fortelecommunications hardware and software;

 

•                  the economic andcompetitive conditions in the telecommunications sectors in which our customersoperate; and

 

•                  general economicconditions and stock market trends.

 

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

 

***Our corporatedocuments may prevent a change in control or management that stockholdersconsider desirable.***

 

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

 

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

 

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

**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

 

Our exposure to market risk from changes ininterest rates and currency exchange rates has not changed materially from ourexposure at year-end 2002.

 

**Item 4. Controls and Procedures**

 

(a)     Evaluation of disclosure controls andprocedures.

 

Based on their evaluation of our disclosurecontrols and procedures (as defined in Rules 13a-14(c) and 15d-14(c) underthe Securities Exchange Act of 1934) as of a date within 90 days of thefiling date of this quarterly report, our chief executive officer and chieffinancial officer have

 

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concluded that our disclosure controls and proceduresare designed to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC and are operating in an effective manner.

 

(b)         Changes in internal controls.

 

There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their most recent evaluation.

 

**PART II OTHER INFORMATION**

 

**Item 6. Exhibits and Reports on Form 8-K**

 

(a)          Exhibits

 
| 3.1    |   | Restated Articles of Organization of Brooktrout,  Inc. are hereby incorporated by reference from Exhibit 3.1 to Annual Report  on Form 10-K for the fiscal year ended December 31, 1999 filed with the SEC  on March 30, 2000 (File No. 000-20698).                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                            |
| 3.2    |   | Articles of Amendment to the Restated Articles of  Organization of Brooktrout, Inc. are hereby incorporated by reference from  Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended December  31, 1999 filed with the SEC on March 30, 2000 (File No. 000-20698).                                |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 3.3    |   | Articles of Amendment to the Restated Articles of  Organization of Brooktrout, Inc. are hereby incorporated by reference from  Exhibit 3.3 to Amendment No. 2 to the quarterly report on Form 10-Q/A for the  fiscal quarter ended June 30, 2000 filed with the SEC on November 17, 2000  (File No. 000-20698). |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 3.4    |   | Amended and Restated By-laws of Brooktrout, Inc. are  hereby incorporated by reference from Exhibit 3.4 to Annual Report on Form  10-K for the fiscal year ended December 31, 2001 filed with the SEC on March  25, 2002 (File No. 000-20698).                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 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

 

On April 16, 2003, we filed acurrent report on Form 8-K, dated April 16, 2003, furnishing under Item 12 ourpress release announcing financial results for the quarter ended March 31,2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report  to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                     | **BROOKTROUT, INC.** |
|--------------------------|---------------------------|
|                     |                      |   |
|  Date: May 12, 2003 | By:                       | /s/  ERIC R. GILER |
|                     |                      | Eric  R. Giler*President  (Principal Executive Officer)* |
|                     |                      |   |
|                     |                      |   |
|  Date: May 12, 2003 | 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 reviewed this quarterly report on  Form 10-Q of the Company for the quarter ended March 31, 2003;                                                                                                                                                                                                                                                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 4.     | The registrant’s other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | designed such disclosure controls and procedures to ensure  that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to  the filing date of this quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                 | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 5.     | The registrant’s other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of registrant’s board of directors:                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 6.     | The registrant’s other certifying officer and I have  indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 

 
|  Date: May 12, 2003 | By:    | /s/  ERIC R. GILER                                  |
|--------------------------|--------|----------------------------------------------------------|
|                     |   | Eric  R. Giler*President  (Principal Executive Officer)* |

 

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

 
| 1.     | I have reviewed this quarterly report on  Form 10-Q of the Company for the quarter ended March 31, 2003;                                                                                                                                                                                                                                                                                 |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with respect  to the period covered by this quarterly report;                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 4.     | The registrant’s other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to  the filing date of this quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                 | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 5.     | The registrant’s other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of registrant’s board of directors:                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 6.     | The registrant’s other certifying officer and I have  indicated in this quarterly report whether or not there were significant changes  in internal controls or in other factors that could significantly affect  internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses. |

 

 
|  Date: May 12, 2003 | By:    | /s/  ROBERT C. LEAHY                                                                                |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------|
|                     |   | Robert  C. Leahy*Vice President of Finance and Operations  (Principal Financial and Accounting Officer)* |

 

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**EXHIBIT INDEX**

 
| 3.1    |   | Restated Articles of  Organization of Brooktrout, Inc. are hereby incorporated by reference from  Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended December  31, 1999 filed with the SEC on March 30, 2000 (File No. 000-20698).

                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 3.2    |   | Articles of Amendment to  the Restated Articles of Organization of Brooktrout, Inc. are hereby  incorporated by reference from Exhibit 3.2 to Annual Report on Form 10-K for  the fiscal year ended December 31, 1999 filed with the SEC on March 30, 2000  (File No. 000-20698).

                                |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 3.3    |   | Articles of Amendment to  the Restated Articles of Organization of Brooktrout, Inc. are hereby  incorporated by reference from Exhibit 3.3 to Amendment No. 2 to the  quarterly report on Form 10-Q/A for the fiscal quarter ended June 30, 2000  filed with the SEC on November 17, 2000 (File No. 000-20698).

  |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 3.4    |   | Amended and Restated  By-laws of Brooktrout, Inc. are hereby incorporated by reference from Exhibit  3.4 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001  filed with the SEC on March 25, 2002 (File No. 000-20698).

                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 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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