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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

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

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended: December 31, 2002

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
|- | ----------------------------------------------------------------------------------------------------------

For the transition period from
 to

Commission File Number 0-22871

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OMTOOL, LTD.(Exact Name of Registrant as Specified in Its Charter)

Delaware

02-0447481(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer Identification Number)8A Industrial Way, Salem, NH

03079(Address of Principal Executive Offices)

(Zip Code)


Registrant's telephone number, including area code:(603) 898-8900

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

Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value(Title of Class)

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

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

Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of
1934).    Yes    o    No    ý

The
aggregate market value of the voting stock held by non-affiliates of the Registrant, as of June 28, 2002, was approximately $7.6 million (based upon the
split-adjusted closing price of the Registrant's $.01 par value common stock on June 28, 2002 of $5.88 per share).

The
number of shares outstanding of the Registrant's common stock as of March 7, 2003 was 1,744,542.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended
December 31, 2002. Portions of such proxy statement are incorporated by reference into Part III of this report.

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PART I

Except for the historical information contained herein, this Report contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding, among other items: the Company's growth strategies; anticipated trends in the Company's
business; the Company's ability to expand its product and service offerings; and the Company's ability to satisfy working capital requirements. These forward-looking statements are based largely on
the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking
statements as a result of a number of factors including, but not limited to, those factors described in "Certain Factors Affecting Future Operating Results."

Item 1. Business

Omtool, Ltd. ("Omtool" or the "Company") is a leading provider of e-mail and facsimile ("fax") based messaging software that enables secure,
confirmed document exchange between businesses. Omtool's products, licensed on a combination server/seat or server only basis, provide users with an extensive, flexible feature set for transmitting
and receiving electronic documents that enables users to improve management of their messaging activities. Included in the Company's products is a suite of utility and control functions that are
designed to maintain document integrity. Omtool's products enable the integration of business processes that include the exchange of electronic documents such as legal contracts, financial
transactions, medical records and purchase order processing. Omtool's products minimize risks by preserving the security of high value documents while facilitating increased productivity, reducing
costs and fulfilling emerging business requirements. Omtool's premier application, Genidocs, integrates with existing e-mail systems and provides multiple options for content
and attachment encryption, authentication, audit trail and delivery confirmation, and digital signatures. Genifax, Omtool's enterprise fax software, offers a scalable, server-based
feature set, and shares a common Windows server-based architecture with the Genidocs product line. AccuRoute, Omtool's proprietary document routing and distribution software integrates
with certain digital scanning and multifunctional devices and allows digitized paper documents to be distributed. Omtool's enhanced messaging products, Genidocs and Genifax, coupled with AccuRoute,
have been integrated with digital scanning and multifunction devices thus enabling paper documents to be securely delivered, electronically.

Omtool's
software products can be deployed on heterogeneous, multi-platform networks and digital scanning and multifunctional devices and can be integrated with both desktop and
enterprise software
applications such as e-mail and groupware systems. To address the needs of large enterprises, Omtool's products are modular and scaleable; servers, clients and communication capacity can
be implemented and added over time as needed to keep pace with demand. Omtool intends to maintain a leadership position in its traditional market, secure electronic document exchange, while continuing
to develop and expand into the secure confirmed e-mail market by targeting specific vertical markets where regulations and or business practices require both confidentiality and timely
electronic delivery of critical documents and communications.

The
Company's server products are optimized for the Windows server operating systems, with client applications that run with various versions of Microsoft Windows. In addition, Omtool
has integrated its electronic document exchange capabilities with Microsoft Exchange, Lotus Notes, and Novell GroupWise, offering users the ability to initiate and control electronic document exchange
and track transactions from within their existing e-mail client application, eliminating the need for and expense of deploying and managing proprietary applications to corporate desktops.
Through this integration with existing messaging infrastructure, Omtool's Genifax and Fax Sr. products have enabled thousands of customers worldwide to send, receive and manage faxes
directly from the

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desktop. In addition, the Genidocs solution, leveraging the same ease of use model and integration with e-mail, is designed to enable the integration of encryption, authentication, audit
trail, digital signatures and confirmed e-mail into business workflows.

Omtool
was incorporated in New Hampshire in March 1991 and was reincorporated in Delaware in January 1996. The Company's principal executive offices are located at 8A
Industrial Way, Salem, New Hampshire 03079 and its telephone number is (603) 898-8900. The Company's Internet address is www.omtool.com. The Company makes available free of charge through its web
site its annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after it electronically files such materials with the Securities and Exchange Commission.

Industry Background

To remain competitive in today's marketplace, companies must focus on improving electronic communications both within and beyond their organizations. Growth in
electronic communication is being driven by productivity and efficiency demands, the information sharing requirements of dispersed organizations, the emergence of the virtual enterprise incorporating
suppliers, customers and other business partners and the general globalization of markets. Enterprises have responded to the need for improved communications through a combination of telephony, fax,
e-mail and groupware solutions. Currently fax and e-mail are the electronic messaging standard for the movement of information.

The
Company believes that significant opportunities exist in the high volume application market for faxing from data-centric applications, situations where facsimile
technology is used in the context of legal requirements and mission critical business processes where fax is the standard for electronic
document exchange. While a significant amount of all documents originate in electronic form, most often they are faxed after being printed. Paper is still a primary medium for exchange, collaboration
and final delivery. The Company, recognizing the prevalence of hardcopy, has through strategic partnerships, product enhancements and new product development, created software-based connectors for the
Genidocs and Genifax product lines that enable users to integrate paper documents into the Omtool-controlled electronic document delivery scheme. These products enable both the efficient, secure and
controlled electronic delivery and electronic archival that makes hardcopy content available across the enterprise for easy reuse and redistribution.

As
business-to-business transactions continue to migrate to the Internet, and issues of privacy and confidentiality become the subject of governmental regulation
and overall concern for security, businesses may increasingly seek a secure Internet-based electronic document exchange as an alternative solution to paper-based document communications methods.
Existing e-mail systems do not adequately address the issues that are critical to insuring privacy and confidentiality in the electronic exchange of documents and
business-to-business communications, such as content encryption, authentication, and notification of delivery, non-repudiation and digital signatures. Such
solutions must enable businesses to extend and enhance their existing enterprise and web-based technology to provide the reliable and secure document exchange and tracking required for
business-to-business Internet communication and document delivery. In addition, these solutions must be user-friendly and cost-effective to install,
manage and use. Omtool has developed an enhanced, secure enterprise document exchange solution designed specifically to meet the needs of businesses for secure electronic document exchange.

The Omtool Solution

Business documents are typically exchanged in one of three ways: by e-mail, fax or paper. Omtool's enterprise software brings these channels together
so that users can control, manage and confirm the secure delivery of every important document leaving the officewithout changing existing work habits.

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Omtool adds the functionality and security missing from existing messaging, multifunction, enterprise resource planning ("ERP") and document management systems. Omtool's security features help
companies meet an ever-increasing number of government mandates and best practice policies that require the protection of confidential business and personal information that is transmitted
electronically. Omtool's enterprise software cost-effectively adds accountability and improved security for electronic document transactions.

Omtool's
products, licensed on a combination server/seat or server only basis, provide users with an extensive, flexible feature set for transmitting and receiving electronic documents
and provide users with the ability to improve the management of their communications. Corporate customers deploy the Company's products as a key component of business process systems. Examples of
deployment of the Company's product include: legal document exchange, financial transactions, medical records, insurance claims, purchase order processing and sales quoting.

Omtool's
fax-based client/server software platform can be configured to automatically process data-streams from back-office manufacturing and other
applications for automatic electronic exchange, thus providing a potential cost-savings in terms of materials and manpower.

The
Genifax Legal Edition software ("Genifax LE") integrates with document management application systems that law firms rely on to manage high-volume
document-based information. Similarly, fax is a mission critical delivery channel for most law firms. Therefore, technology-based work management and document delivery systems must be intuitive and
non-obtrusive, fitting seamlessly into users' daily work routines. The Company believes that its Genifax LE provides such a solution.

Genidocs,
the Company's secure document delivery application, integrates with existing e-mail infrastructures, requires no proprietary software on the desktop and provides a
multifaceted approach to securing document exchange that combines encryption with authentication, a time-stamped audit trail and digital signatures. The system can be configured for ad
hoc-type communications in which each transmission is encrypted, delivered and processed individually. The sender selects specific packaging and delivery options and the recipient follows
steps to validate his or her identity and acquire the key to decrypt the secure document attachment. The system can also be configured to handle frequent two-way communications between two
(or more) business partners so that the entire process of encrypting, sending, receiving and decrypting the document contents is automatically managed by the Genidocs software server components
installed at both locations. This virtual private network ("VPN")-like configuration makes the process of securing the document contents transparent to users.

The
Genidocs product is configured to be sold in two standard configurationsa basic product that adds document packaging capabilities to a standard messaging system
(specifically server-based PDF conversion, with a desktop conversion option incorporated into the Genidocs Legal Edition ("Genidocs LE")), and an advanced version that adds secure document delivery
features.

Billions
of hardcopy documents are created and exchanged annually. As business transactions become ever more electronic, the Company believes that paper documents will increasingly be
required to be integrated digitally into the electronic workflow of today's business.

The
Company has developed a digital "on-ramp" that facilitate the effective re-integration of hardcopy into the digitally formatted office, managed archives for
re-use and into the Omtool-controlled electronic document delivery and management systemsGenidocs and Genifax. The product, AccuRoute, features a desktop application that
moves distribution functionality typically found on the front panel of the hallway photocopier/multifunction device to the desktop that works within the context of the user's daily routine.

Omtool
architects its products to be modular and scaleable. Servers, clients and communication capabilities can be implemented and added over time.

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Strategy

The Company's objective is to maintain its position as a leading provider of client/server facsimile software solutions and to become a leading provider of secure
business-to-business electronic document exchange solutions. Omtool intends to take advantage of its customer base and leverage its knowledge of communication and enterprise
solutions to become a leading provider of secure business-to-business electronic document exchange solutions by implementing the following business strategy:

Continue to Enhance Existing Products.The Company intends to continue to add features to improve its products and to further
penetrate their markets.

Maintain Technology Leadership in the Enterprise Market.The Company intends to continue to invest in fax messaging
technology by further developing its existing Windows 2000 based architecture, the platform of the Genifax software. This investment in fax messaging technology is intended to enable customers to
deploy computerized faxing as part of broad-based, high value enterprise document exchange solutions.

Leverage Installed Base of Customers.The Company believes that opportunities exist to expand the user-base of
its products and expand software applications at the Company's existing customer installations. The Company intends to pursue these opportunities by leveraging both its solution/reseller channel and
expanding its direct sales force. In addition, the Company believes that its ability to maintain a high level of customer satisfaction among its install base is of critical importance in marketing its
current and future products to new customers as well as to the Company's installed base.

Focus on Vertical Market Opportunities.The Company believes that opportunity exists for its electronic document delivery
solutions in specific vertical markets. The Company has achieved success in the legal market, and based on initial investigation and reaction to its secure electronic document delivery products, the
company intends to focus both development and marketing efforts on the health care market.

The
Company believes that pending government regulations regarding privacy will force healthcare organizations to re-examine existing methods of delivering patient-related
information. Today, healthcare organizations use e-mail and fax to communicate patient information between providers of healthcare services, payor organizations and private corporations.
With the formalization of the Health Insurance Portability and Accountability Act ("HIPAA") regulations for document portability and privacy, both
e-mail and fax must undergo significant change to insure that confidential patient information remains confidential to achieve and maintain HIPPA compliance. Omtool's products provide a
fully-capable fax and e-mail solution that is designed to comply with HIPAA regulations. The solutions combine both procedural changes to physical workflow and technological changes. The
healthcare market represents a major opportunity for Omtool's products and will be a vertical market focus.

Build Direct Sales Organization and Leverage Distribution Channels.The Company believes that success in the market requires
it to build strong relationships with its customer base. The Company also believes that this type of relationship requires it to expand its sales team that focuses on account management. Additionally,
the Company intends to leverage its existing distribution channels where appropriate to broaden its reach to the target vertical markets and further penetrate its installed base. The Company is
currently evaluating its North American and international distribution network with the goal of developing close business partner relationships that will augment its direct sales efforts and provide
market strength in various geographic regions.

Maintain International Sales Presence.The Company intends to maintain its international presence (primarily in Europe) in
order to address its target markets outside of North America and to serve customers that operate on a multi-national basis. In 2000, 2001 and 2002, approximately 14%, 10% and

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14%, respectively, of the Company's total revenues were derived from sales outside of North America (primarily in Europe). In 2003, the Company plans to maintain its current level of investment in
sales and marketing efforts directed towards international markets.

Leadership in the Windows 2000 Environment.Windows 2000 has become the dominant server operating system in the enterprise
environment for messaging-based applications. The Company intends to continue its focus on near-term research and development, marketing and sales efforts to take advantage of Windows 2000
functionality and that offered in future Microsoft operating systems.

Continue to Pursue Strategic Relationships.The Company has, over the past year, and will continue in the future, to form
strategic relationships with leading providers of products and services that are complementary to the Company's offerings. The Company believes that these relationships will provide both a valuable
source of sales leads and believes that these relationships will be beneficial in exposing its products to new markets and prospective customers.

The
Company has strategic alliances with companies such as Xerox, Inc. and Hewlett Packard, Inc., providers of digital scanning multifunction devices that, when combined
with the Company's software products, enable users to easily integrate hardcopy documents into the electronic workflow. The Company believes that these strategic alliances will expose it to additional
opportunities in the corporate, legal and healthcare markets. In addition, the Company maintains strategic relationships with Verisign, the leading provider of security infrastructure, as well as
Avaya and Siemens, providers of PC-based unified messaging systems that include voice mail systems and computer-telephony integration
solutions. Other strategic alliances include iManage and Hummingbird, providers of information and collaboration management software for enterprises.

Current Products and Services

Genidocs

The Genidocs product line is a client/server messaging application that enables users throughout an enterprise to deliver documents via the Internet to external
parties with comprehensive security and tracking functionality. It offers the security features and functionality that are provided through traditional, paper-based document communications with the
speed, efficiency and cost advantages of electronic, Internet-based communications. The Genidocs product integrates with the e-mail application and digital paper-scanning devices that are
most commonly used within an enterprise.

The
Genidocs system implements a modular, component-based architecture that works within an enterprise's existing security infrastructure. The Genidocs product provides a multifaceted
approach to securing document exchange that combines encryption with authentication, a time-stamped audit trail and digital signatures. The system can be configured for ad
hoc-type communications in which each transmission is encrypted, delivered and processed individually. The Genidocs product also provides an enterprise solution for creating and
distributing documents in Adobe's PDF format.

Genidocs
LE software is designed specifically for law firms. It provides a cost-effective, user-friendly means to effectively package, securely deliver and manage
electronic delivery of high-value, confidential or time-sensitive documents. The Genidocs LE software expands the core functionality of the Genidocs product with features
specific to the legal market. The Genidocs LE's software confirmed and secure electronic document delivery capabilities integrate readily with existing e-mail, document management and time
and billing systems to provide:



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Genifax

Omtool's Genifax software is multi-tiered client/server software for automating and integrating fax communication throughout the enterprise. As a component of an
enterprise software system, the Genifax software is designed to be deployed on heterogeneous, multi-platform networks and to integrate with desktop and enterprise software applications. The Genifax
software has been designed for high availability and high use incorporating features and capabilities essential for these criteria. These features include:



This
feature has specific utility to the legal, healthcare and financial services markets as well as other markets where automated verification and security is required. An administrator
may also take advantage of password/security features native to the Windows 2000 operating system to provide needed protections.

Genifax
LE software which was introduced in 2002 is an enterprise fax server, based on the Genifax architecture with features and integrations developed specifically for the legal market
and builds on Omtool's success and reputation in the legal market. In addition to a cost recovery component that enables law firms to track each delivery transaction and export the data to popular
time and billing systems, Genifax LE software includes client software that integrates with existing document management systems ("DMS") enabling users to queue and send documents as faxes from within
the DMS application. Similar integration with popular office applications allows users to queue and send a document as a fax from the application that it was created simply by "printing" the document
using the Genifax LE software printer driver. These features set Genifax LE software apart in the fax market by delivering critical e-document delivery and control features to the legal
desktop in the context of existing work-flows and habits.

AccuRoute

Omtool's AccuRoute software enables users to deliver a hardcopy document from certain digital scanning and multifunctional devices to multiple recipients via
multiple channels simultaneously in a method that is as simple as using a photocopier. The multiple channels consist of fax, e-mail or a document management system. The AccuRoute software
enables the creation of an intelligent cover

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page on the desktop that encodes the document routing information (the recipient list with corresponding delivery channels, as well as the printing and document management information). The AccuRoute
software cover sheet is printed, added to the paper document and scanned at the network-connected device.

With
this simple scan, AccuRoute software allows users to send hardcopy documents to multiple recipients via multiple delivery channels: standard e-mail, fax or secure
e-mail. In addition, the sender can also specify that the document be automatically printed on any network connected printer or
archived to a Xerox DocuShare document repository (iManage, DOCS Open and WORLDOX are also supported) with a complete profile.

Once
a document is scanned, the AccuRoute software is designed to route the documents to Omtool's Genidocs software's secure e-mail repository and/or its Genifax software's
secure fax repository. These repositories then manage the final, secure delivery of the document.

AccuRoute
Legal Edition software allows the user to track and bill for each scan to delivery function to the core AccuRoute software. Cost recovery for scan-to delivery is
critically important functionality for the legal market and is a core capability of all Omtool Legal Edition products.

Fax Sr.

Fax Sr., Omtool's legacy network fax product is a client/server software solution for automating and integrating fax communication throughout an enterprise. As an
integrated component of an enterprise software system, the Fax Sr. product is designed to be deployed on heterogeneous, multi-platform networks and to integrate with desktop and enterprise software
applications. The Fax Sr. product is licensed typically on a shrink-wrap basis, primarily on the Windows NT and 2000 server operating systems.

LegalFax

LegalFax, Omtool's legacy network fax product, is a client/server software solution, based on the Fax Sr. product that was developed specifically to enable law
firms to automate and integrate fax communications and cost recovery systems. The LegalFax product is licensed typically on a shrink-wrap basis, primarily on the Windows 95/98 and Windows
NT operating systems. The LegalFax product supports Microsoft Exchange, Novell GroupWise, and Lotus Notes, and allows users to fax using native transport protocol. Additionally, the LegalFax product
is fully-integrated with document management systems such as iManage and Hummingbird DOCS Open, as well as with time and billing systems such as Equitrac, Elite and CMS Open.

Discontinued Products

On January 4, 2000, the Company sold certain business assets consisting of intellectual property, goodwill, customer lists, customer contracts, equipment
and other assets related to the Company's software products and third party hardware products for facsimile and other communication applications for the IBM AS/400 product line to International
Presence PLC.

Effective
on March 31, 2000, the Company discontinued the sale and support of the U-Page, Fax Sr. Express, Fax Sr. Sun Solaris, Fax Sr. VMS and Fax Sr. Unix products;.
the Company determined that the market opportunity for these products was significantly lower than that for the Genidocs and Genifax products.

Hardware

The Company resells certain hardware products, including intelligent fax boards and fax modems, to its customers. Hardware sales are undertaken as a convenience
to the Company's customers, and

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hardware is neither bundled with the Company's software products nor required to be purchased from the Company. Omtool primarily resells intelligent fax boards from third party vendors.

Customer Service

To aid in the successful deployment of the Company's products by its customers, the Company's customer service organization provides technical support. For an
additional fee at the time of the initial licensing of the Company's products, the Company provides support services to its customers for a typical period of 12 months, including telephone
support, software support comprised of maintenance releases, minor feature enhancement releases, technical bulletins and replacement of damaged media. Support services may be renewed at the customer's
discretion on an annual basis. The Company currently provides annual support services based on a percentage of its product license fee. Additional services are provided on an as needed basis by the
Company including certification, training, consulting services and professional services.

Sales and Marketing

The Company targets large and mid-sized corporations, business and healthcare organizations, law firms and government entities as the primary markets
for its complete electronic document delivery product line. In order to address the legal vertical market, the Company has enhanced its core products with features that address workflow needs and
integrates with products that are specific to the legal vertical market. The Company has also invested in marketing programs and product branding targeted to the legal market. In addition, the Company
believes that opportunity exists in the healthcare vertical for the Genifax and Genidocs product lines. The Company believes that pending government regulations regarding confidentiality and
portability of patient records may indicate a shift toward electronic delivery methods for patient records that are consistent with the capabilities of the Company's products.

To
address the broad range of its sales opportunities, the Company relies on the coordinated efforts of its sales organization, key executives and marketing department. The Company also
offers its product lines through indirect sales channels such as resellers, systems integrators and value added distributors and strategic partners. The Company has increased its efforts to establish
a strong reseller channel by dedicating sales resources specifically to finding, qualifying and managing channel partners. The Company plans to add and maintain channel partners in geographic
locations where Omtool's direct sales force does not have adequate presence.

Outside
of North America, the Company primarily utilizes independent distributors to promote, license and support its products. The Company expects to continue to market its products
through independent distributors in strategic international markets. In 2000, 2001 and 2002, sales outside of North America (primarily Europe) represented approximately 14%, 10% and 14%, respectively,
of total revenues.

In
support of its sales organization, the Company conducts comprehensive marketing programs intended to promote and create awareness of the Company's products and position the Company in
the enterprise, client/server facsimile and electronic document exchange software markets. These efforts may include product advertising, public relations, trade show participation, educational
seminars, direct mail and telemarketing campaigns and participation in industry programs and forums.

Customers

As of December 31, 2002, the Company had more than 7,000 customers worldwide. The Company's customer base reflects the cross-industry applicability of the
Company's products and services.

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No
single customer accounted for 10% or more of total revenues in 2000, 2001 or 2002.

Research and Development

The Company continues to invest in research and development. The Company believes its future success depends in large part on its ability to continue to enhance
the Genifax, Genidocs and AccuRoute product lines. Omtool deploys its engineers in product teams that focus on the concurrent development of a range of product enhancements that leverage its products'
modular product architecture. Omtool's product development efforts are focused on new products, the exploration of
emerging technologies and the continued enhancement of existing products. The Company also continually reviews opportunities to form alliances with third-party vendors of complementary technologies
and products to enhance the functionality of its product families. In the future, the Company may, based on timing and cost considerations, continue to explore opportunities to license or acquire
technologies or products from third-parties.

The
Company expects to continue to seek to hire additional skilled development engineers. Such engineers are likely to be in short supply, and the Company's business, financial condition
and results of operations could be adversely affected if it encounters delays in hiring or fails to retain the required skilled engineers. The Company's research and development expense for 2000, 2001
and 2002 was approximately $3.8 million, $3.2 million and $2.8 million, respectively. Since its inception, the Company has not capitalized any software development costs. The
Company plans to continue to make significant investments in research and development, primarily through the hiring of additional skilled engineers and independent contractors.

Competition

In the intensely competitive and rapidly changing business-to-business secure document exchange market, the Company competes directly with
Authentica, Sigaba, Tumbleweed, and Zixit and a number of other providers. There are also other categories of technology solution that overlap and compete in certain ways with aspects of the Company's
products. These include:



The
Company expects the competition in the business-to-business secure document exchange market to increase over time.

In
the scan-to-deliver market where the AccuRoute software competes, the Company is likely to see competitive products being offered by hardware vendors such as
Canon, Ricoh, Lexmark and others. In most cases these products are the result of partnerships with U.S.-based software companies. The
Company also expects competition in this market segment to mature and become increasingly intense over time.

The
market for client/server computer-based facsimile solutions is also competitive, although this market is more established and mature than the markets in which the Genidocs and
AccuRoute products compete. The Company believes its ability to compete successfully in the fax market depends upon a number of factors both within and beyond its control, including product
performance; reliability

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and features; ease of use; product scalability; quality of support services; price/performance; timeliness of enhancements and new product releases by the Company and its competitors. Given these
factors, the Company believes that in order to be successful, it must sharpen its focus and deliver products on one of the most prolific system platforms, Windows 2000/2003, with features that appeal
to the broadest segment of the market.

The
Company competes directly with a large number of vendors of facsimile products, including providers of facsimile software products for client/server networks such as RightFAX (a
subsidiary of Captaris), Fenestrae, TopCall International and Biscom. The Company also competes with providers offering a range of alternative facsimile solutions including outsourcing network
facsimile solutions, such as Easylink Services; operating systems containing facsimile and document e-mail features; low-end fax modem products; providers of desktop fax
software; single-platform facsimile software products; and customized proprietary software solutions. In addition, providers of operating systems or business software applications may bundle
competitive facsimile solutions as part of their broader product offerings.

Many
of Omtool's competitors and potential competitors have longer operating histories and greater financial, technical, sales, marketing and other resources, as well as greater name
recognition and market acceptance of their products and technologies than the Company. In addition, there are relatively low barriers to entry in the markets in which the Company operates and intends
to operate, and new competition may arise either from expansion by established companies or from new emerging companies or from resellers of the Company's products. There can be no assurance that
current or potential competitors of Omtool will not develop products comparable or superior in terms of price and performance features to those developed by the Company, adapt more quickly than the
Company to new or emerging technologies and changes in market opportunities or customer requirements, establish alliances with industry leaders, or take advantage of acquisition opportunities more
readily than the Company. In addition, no assurance can be given that the Company will not be required to make substantial additional investments in connection with its research, development,
engineering, marketing, sales and customer service efforts in order to meet any competitive threat, or that the Company will be able to compete successfully in the future. Increased competition will
result in reductions in market share, pressure for price reductions and related reductions in gross margins, any of which could materially and adversely affect the Company's ability to achieve its
financial and business goals. There can be no assurance that in the future the Company will be able to successfully compete against current and future competitors.

Proprietary Rights

The Company regards its software as a trade secret and attempts to protect it with a combination of copyright and trade secret laws, and employee nondisclosure
and assignment of invention agreements. The Company has one U.S. patent, four pending U.S. patent applications, three pending foreign patent applications, four U.S. trademark applications and three
foreign trademark applications. The Company to date has not registered any copyrights. The Company generally licenses its products under "shrink-wrap" licenses (i.e., licenses included as
part of the product packaging). Shrink-wrap licenses are not negotiated with or signed by individual licensees, and purport to take effect upon the opening of the product package. Certain
provisions of such licenses, including provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed program, may be unenforceable under the laws of many
jurisdictions. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and although the Company is unable to determine the extent to which piracy of its products exists,
such piracy can be expected to be a persistent problem, particularly in international markets. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States. There can be no assurance that

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these protections will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies.

There
has been substantial litigation in the software industry involving intellectual property rights. There can be no assurance that claims of infringement of intellectual property
rights will not be asserted against the Company and, if asserted, would not have a material adverse effect on the Company's business, financial condition and results of operations. In addition,
inasmuch as the Company licenses certain components of its products from third-parties, its exposure to copyright and other infringement actions may increase because the Company must rely on such
third-parties for information as to the origin and ownership of such licensed components. In the future, litigation may be necessary to enforce and protect trade secrets, copyrights and other
intellectual property rights of the Company. The Company may also be subject to litigation to defend against claimed infringement of the rights of others or to determine the scope and validity of the
intellectual property rights of others. Any such litigation could be costly and divert management's attention, either of which could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in such litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third-parties or prevent the Company from selling its products, any one of which would have a material adverse effect on the Company's business, financial condition and
results of operations.

Employees

As of December 31, 2002, the Company employed 89 persons. The Company is not subject to any collective bargaining agreements, has never experienced a work
stoppage and considers its relations with its employees to be good.

Item 2. Properties

The Company's executive offices are located at 8A Industrial Way, Salem, New Hampshire in a leased facility consisting of approximately 30,000 square feet, of
which the Company occupies 25,500 square feet and 4,500 square feet of which the Company has subleased to a third party. The lease was due to expire on December 31, 2002, but the Company chose
to exercise an option to extend the lease for an additional three years. The new date of expiration is December 31, 2005. The Company believes that such facilities are adequate for its present
operations. The Company also leases facilities and offices for sales and development in Oregon on a month to month basis. Additionally, the Company leases facilities for sales, customer service, and
support, in London, England, expiring in May 2005.

Item 3. Legal Proceedings

On October 5, 1999, a purported securities class action complaint was filed in the United States District Court for the District of New Hampshire (the
"Court") against the Company and certain officers and directors of the Company. The lawsuit (the "Class Action") alleged, among other things, that the Company, during the purported class period of
August 8, 1997 through October 6, 1998, made misrepresentations and omissions to the investing public regarding its financial results and its accounting practices in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of the Securities Act of 1933. The defendants moved to dismiss the complaint in its entirety. The Court
denied in part and granted in part defendants' motion, dismissing plaintiffs' claim under Section 12(a)(2) of the Securities Act of 1933, but permitting all other claims to go forward.

11

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As of March 31, 2001, the parties reached an agreement-in-principle to settle the Class Action. On June 28, 2001, the parties filed a definitive
settlement agreement with the Court. On July 6, 2001, the Court preliminarily approved the proposed terms of the definitive settlement agreement. On October 23, 2001, the Court ordered
final approval of the settlement, and final judgment has entered and become effective, resulting in full dismissal of the Class Action litigation against all defendants. The terms of the
$6 million settlement included a contribution by the Company's directors' and officers' liability insurance carriers of $4.3 million, and a contribution by the Company of
$1.7 million. The Company accrued its portion of the settlement as of December 31, 2000.

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

On December 27, 2002, the Company filed a definitive proxy statement requesting the vote of the securities holders of the Company to approve an amendment
to the Amended and Restated Certificate of Incorporation of the Company to effect a reverse stock split whereby each outstanding 2, 3, 4, 5, 6, 7, 8, 9 or 10 shares would be combined, converted and
changed into one share of Common Stock, with the effectiveness of one of such amendments and the abandonment of the other amendments, or the abandonment of all amendments as permitted under
Section 242(c) of the Delaware General Corporation Law, to be determined by the Board of Directors.

On
January 14, 2003, Omtool's Board of Directors voted a one-for-seven stock split of the Company's Common Stock effective January 15, 2003 pursuant
to a special meeting of stockholders that was held on the same day approving an amendment to the Company's Amended and Restated Certificate of Incorporation of the Company to effect a reverse stock
split. At the special meeting of the stockholders, stockholders approved the reverse stock split with 6,201,147 votes for, 788,894 votes against and no votes withheld. There were no abstentions or
broker non-votes.

PART II

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

From August 8, 1997, the date of the Company's initial public offering of common stock, until November 19, 2002, the Company's common stock was
traded on The Nasdaq National Stock Market under the symbol OMTL. Since November 26, 2002 the Company's Common Stock has been trading on the Nasdaq SmallCap Market. On January 14, 2003
Omtool's Board of Directors voted a one-for-seven stock split of the Company's Common Stock effective January 15, 2003 pursuant to a special meeting of stockholders that
was held on the same day approving an amendment to the Company's Amended and Restated Certificate of Incorporation. Prior to August 8, 1997, there was no public market for the Company's common
stock. The following table sets forth for the periods indicated the high and low bid prices for the common stock as reported by The Nasdaq Stock Market based on a split-adjusted actual sales price.

Stock PriceHigh

LowQuarter ended:2001March 31, 2001

$
15.75

$
5.25June 30, 2001

$
8.54

$
4.76September 30, 2001

$
11.69

$
4.97December 31, 2001

$
9.10

$
4.76


12

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2002March 31, 2002

$
7.84

$
5.25June 30, 2002

$
10.01

$
5.25September 30, 2002

$
6.58

$
1.40December 31, 2002

$
3.15

$
1.26


On
March 7, 2003, the closing price for the common stock was $1.81 per share. As of March 7, 2003, there were approximately 93 stockholders of record. The Company believes that shares of
the Company's common stock held in bank, money management, institution and brokerage house "nominee" names may account for at least an estimated 1,019 additional beneficial holders.

The
Company has not paid any cash dividends on its capital stock and does not anticipate paying cash dividends in the foreseeable future. The Company intends to retain any earnings or
other cash resources to finance future growth of its business. Any future determinations to pay cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon
the Company's results of operations, financial condition and other factors deemed relevant by the Board of Directors.

On
January 14, 2003, Omtool's Board of Directors voted a one-for-seven stock split of the Company's Common Stock effective January 15, 2003 pursuant
to a special meeting of stockholders that was held on the same day approving an amendment to the Company's Amended and Restated Certificate of Incorporation of the Company to effect a reverse stock
split whereby each outstanding (7) shares would be combined, converted and changed into one share of Common Stock. All references in the Consolidated Financial Statements referring to shares,
share prices, per share amounts and stock plans have been adjusted retroactively for the one-for-seven stock split. Additional information is presented in Footnote 6(d) of
Notes to the Consolidated Financial Statements.

13

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Item 6. Selected Consolidated Financial Data

The statements of consolidated operations data set forth below for each of the fiscal years ended December 31, 2000 and 2001 and the balance sheet data as
of December 31, 2001 have been derived from the Company's consolidated financial statements, which statements have been audited by Arthur Andersen LLP, independent public accountants, and are
included herein. The statements of consolidated operations data set forth below for the fiscal year ended December 31, 2002 and the balance sheet data as of December 31, 2002 have been
derived from the Company's consolidated financial statements, which statements have been audited by PricewaterhouseCoopers LLP, independent accountants, and are included herein. The statements of
consolidated operations data for the fiscal years ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998, 1999 and 2000 are derived from the Company's
financial statements, which statements have been audited by Arthur Andersen LLP and are not included herein. The selected financial data set forth below should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K.

|                                                          |                                              | Year Ended December 31,  |      
|--------------------------------------------------------- | -------------------------------------------- | ------------------------ | -----
|
|
|Statement of Consolidated Operations Data:                |                                              |                          |      
|Revenues:                                                 |                                              |                          |      
|                                                          | Software license                             |                          | $    
|                                                          | Hardware                                     |                          |      
|                                                          | Service and other                            |                          |      
|                                                          |                                              |                          |      
|                                                          |                                              | Total revenues           |      
|                                                          |                                              |                          |      
|Cost of revenues:                                         |                                              |                          |      
|                                                          | Software license                             |                          |      
|                                                          | Hardware                                     |                          |      
|                                                          | Service and other                            |                          |      
|                                                          |                                              |                          |      
|                                                          |                                              | Total cost of revenues   |      
|                                                          |                                              |                          |      
|                                                          |                                              | Gross profit             |      
|                                                          |                                              |                          |      
|Operating expenses:                                       |                                              |                          |      
|                                                          | Sales and marketing                          |                          |      
|                                                          | Research and development                     |                          |      
|                                                          | General and administrative                   |                          |      
|                                                          | Restructuring costs and asset write-off      |                          |      
|                                                          | Settlement costs                             |                          |      
|                                                          | (Income) loss on sale of AS/400 product line |                          |      
|                                                          |                                              |                          |      
|                                                          |                                              | Total operating expenses |      
|                                                          |                                              |                          |      
|Income (loss) from operations                             |                                              |                          | 750  
|Interest and other income, net                            |                                              |                          | 754  
|                                                          |                                              |                          |      
|Income (loss) before provision (benefit) for income taxes |                                              |                          | 1,504
|Provision (benefit) for income taxes                      |                                              |                          | 406  
|                                                          |                                              |                          |      
|Net income (loss)                                         |                                              | $                        | 1,098
|                                                          |                                              |                          |      
|Net income (loss) per share                               |                                              |                          |      
|                                                          |                                              | Basic                    |      
|                                                          |                                              |                          |      
|                                                          |                                              | Diluted                  |      
|                                                          |                                              |                          |      
|Weighted average number of common shares outstanding      |                                              |                          |      
|                                                          |                                              | Basic                    |      
|                                                          |                                              |                          |      
|                                                          |                                              | Diluted                  |      
|                                                          |                                              |                          |      

|                                                  |  | December 31,
|------------------------------------------------- |  | ------------
|
|
|Consolidated Balance Sheet Data:                  |  |             
|Cash, cash equivalents and short-term investments |  | $           
|Working capital                                   |  |             
|Total assets                                      |  |             
|Total stockholders' equity                        |  |             

14

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

Except for the historical information contained herein, this Report contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding, among other items: the Company's growth strategies; anticipated trends in the Company's
business; the Company's ability to expand its product and service offerings; and the Company's ability to satisfy working capital requirements. These forward-looking statements are based largely on
the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking
statements as a result of a number of factors including, but not limited to, those factors described in "Certain Factors Affecting Future Operating Results."

Overview

Omtool, Ltd. is a leading provider of e-mail and fax-based messaging software that enables secure, confirmed document exchange
between businesses. The Company was incorporated in March 1991 and shipped its initial facsimile software products in 1991. Omtool's premier application, Genidocs, integrates with existing
e-mail systems and provides multiple options for content and attachment encryption, authentication, audit trail and delivery confirmation, and digital signatures. Genifax, Omtool's
enterprise fax software, offers a scalable, server-based feature set, and shares a common Windows server-based architecture with the Genidocs product line. AccuRoute, Omtool's proprietary document
routing and distribution software integrates with certain digital scanning and multifunctional devices and allows distribution of digitized paper documents. Omtool's enhanced messaging products,
Genidocs and Genifax, coupled with the AccuRoute, have been integrated with both digital scanning and multifunction devices thus enabling paper documents to be securely delivered electronically. A
significant portion of the Company's revenues is derived from licensing the rights to use its fax software products directly to end-users and indirectly through resellers. During 2002, the
Genifax product line accounted for 48% of total software revenue, the Fax Sr. product line accounted for 23% of total software revenue, the Genidocs product line accounted for 11% of total software
revenue, the LegalFax product line accounted for 10% of total software revenue and the Accuroute product line accounted for 8% of total software revenues.

The
Company also derives revenues from the sale of third-party hardware products such as intelligent fax boards and fax modems. Hardware sales are undertaken as a convenience to the
Company's customers and hardware is neither bundled with the Company's software products nor required to be purchased from the Company. Omtool primarily resells intelligent fax boards from third party
vendors.
The Company purchases these hardware products as needed to ship to its customers and the Company maintains a minimal inventory of these hardware products.

Service
and other revenues have consisted primarily of the sale of support contracts. Revenue from support contracts is recognized ratably over the term of the support contract period,
which is typically one year. The Company generates a smaller portion of its service and other revenues from consulting, training and installation services.

The
Company's financial results for 2002 declined from financial results for 2001, due primarily to the general economic softness in information technology spending as reflected in a
decrease in demand for enterprise software solutions. This decrease reflected the overall sluggishness of the United States economy in 2002 causing customers and prospective customers to defer
technology spending. As a result of this decrease in demand, the Company's revenues for the year ended December 31, 2002 decreased 6% from revenues for the year ended December 31, 2001,
and the Company's net loss increased from $3.7 million for the year ended December 31, 2001 to a net loss of $5.5 million for the year ended December 31, 2002. The Company
has experienced declining revenues and increasing

15

---

operating losses over an extended period of time. Based upon the current economic environment, general softness in information technology spending, products that may not achieve market acceptance,
and short forecasting visibility, the Company cannot estimate that the financial and operating performance, financial position or cash flow will improve over the next year. As a result of the losses
incurred and the anticipation of a continuing decline in the United States economy, the Company reduced its work force and office space in June 2002 to lower the overall cost of operations.
Although the Company's operating cash flow for the year ended December 31, 2002 resulted in a use of cash of $2.2 million, the Company's cash, cash equivalents and short-term
investments at December 31, 2002 were approximately $9.8 million. The Company believes that its existing cash and cash equivalents will be sufficient to meet the Company's working
capital and capital expenditures for at least the next year.

The
Company cannot predict when the market for enterprise software solutions will improve. When the market does improve, the Company cannot predict whether, and to what extent, the
demand for its products will increase. The Company believes that the current lack of demand for enterprise software solutions will continue during 2003, and that its operations and financial results
will continue to be negatively affected during that period. Any continued decline in the Company's revenues will have a significant impact on the Company's financial results, particularly because a
significant portion of the Company's operating costs (such as personnel, rent and depreciation) are fixed in advance of a particular quarter. As a result, despite cost savings realized from the
Company's June 2002 restructuring, the Company's costs for sales and marketing, research and development and general and administrative could continue to increase as a percentage of revenues,
thereby affecting the Company's operating results.

The
Company's future revenues and operating results may fluctuate from quarter to quarter based on the number and size of sales transactions the Company enters into with customers, the
adequacy of provisions for losses, general economic conditions and other factors. In addition, revenues from a large order may constitute a significant portion of the Company's total revenues in a
particular quarter.

The
Company has historically derived a majority of its total revenues from sales within North America. Sales outside of North America (primarily in Europe) represented approximately 14%,
10% and 14% of the Company's total revenues in 2002, 2001 and 2000, respectively. The Company's gross profit on these sales approximates the gross profit on sales within North America. The Company's
strategy is to expand its international presence (primarily in Europe) and to increase its investment in sales and marketing efforts directed toward international markets. There can be no assurance
that the Company will be able to maintain or increase international sales of its products, and the failure to do so may have a material adverse effect on the Company's business, financial condition
and results of operations.

The
Company's United Kingdom subsidiary transacts business primarily in its local currency. The Company manages its foreign exchange exposure by monitoring its net monetary position
using natural hedges of its assets and liabilities denominated in local currencies. There can be no assurance that this policy will eliminate all currency exposure. Foreign currency exposure has not
been material to the Company's financial position or results of operations to date. If the Company's business denominated in foreign currencies increases, the Company may be required to use
derivatives to hedge foreign currency exposure.

The
Company continues to actively recruit value-added resellers ("VARs"), systems integrators, resellers and distributors to expand its indirect distribution channel. The Company is
pursuing sales opportunities via its solution/reseller channel as well as focusing sales efforts on specific market segments in order to facilitate product acceptance. Sales through the Company's
indirect distribution channels represent approximately 23%, 23% and 38% of the Company's total revenues for the years ended December 31, 2002, 2001 and 2000, respectively.

16

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Critical Accounting Policies and Estimates

The Company has identified the policies and estimates below as critical to its business operations and the understanding of its results of operations. The impact
and any associated risks related to these policies on the Company's business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations
where such policies affect the Company's reported and expected financial results. Note that the Company's preparation of this Form 10-K requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company's financial statements, and the reported amounts of
revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition and Accounts Receivable Reserves.The Company derives its revenue from primarily two sources
(i) product revenue, which includes software license and hardware revenue and (ii) services
and support revenue, which includes software maintenance and support, installation, training and consulting revenue. The Company licenses its software products on a perpetual basis. The Company
generates revenue from licensing the rights to use its software products and sales of hardware directly to end-users and indirectly through resellers. The Company's resellers order
products from the Company based on purchase orders received from end-users and do not order stock. The Company's products are sold to resellers and directly to end-users
without any specifically stated rights of return. Occasionally, however, the Company, in its sole discretion, will accept a product return if the end-user finds that the product does not
fit its needs. The Company also sells hardware products, which are provided by a third-party, on a pass through basis, plus an additional mark-up, to end-users and indirectly
through resellers. To support its software products, the Company sells software maintenance and support, installation, training and consulting services to end-users and indirectly through
resellers.

The
Company applies the provisions of Statement of Position ("SOP") 97-2,Software Revenue Recognition, as amended by SOP
98-9, Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions, to all transactions
involving the sale of multiple elements including software, hardware and service revenue. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. This bulletin establishes guidelines for revenue recognition. The Company's revenue recognition policy
complies with this pronouncement as well. The Company applies the provisions of SFAS No. 48,Revenue Recognition When Right of Return Exists,
with respect to providing for potential future product returns. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in
any accounting period. Material differences may result in the amount and timing of the Company's revenue if management made different judgments or utilized different estimates.

The
Company recognizes revenue from the sale of software products and hardware to both end-users and resellers when persuasive evidence of an arrangement exists, the products
have been delivered, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and there are no customer acceptance provisions. The Company maintains a reserve for
potential product returns. Software maintenance and support revenue is recognized ratably over the term of the related maintenance period, typically one-year. Other services revenue is
recognized as the services are performed. If an arrangement includes an acceptance provision, the Company will defer all revenue until the customer accepts the products. Acceptance generally occurs
upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period.

The
Company's transactions frequently involve the sales of software, hardware and related services under multiple element arrangements. Revenue under multiple element arrangements is
allocated to each element under the residual method, in accordance with SOP 98-9, Modification of SOP 97-2,Software Revenue Recognition, With Respect
to Certain Transactions. Under this method, revenue is allocated first to all undelivered elements, such as services, based on the fair value of those elements,

17

---

which is the price charged when these elements are sold separately and unaccompanied by other elements. The Company's services are not essential to the functionality of the software as these services
do not alter the capabilities of the software and do not carry a significant degree of risk to perform. The amount allocated to the delivered elements, such as software license and hardware revenue,
is the difference between the total arrangement value and the amount allocated to the undelivered elements. If the delivered elements include both software and hardware, the amount allocated to
hardware
revenue is based on the price charged to the Company by the third party vendor plus an additional mark up, with the remainder allocated to software revenue. To the extent that a discount is offered in
the arrangement, the entire discount is allocated to the delivered element or elements. If the delivered elements include hardware and software, the discount is allocated to the hardware and software
based on their respective list prices.

For
all sales, the Company uses a binding purchase order, a signed contract or a credit card authorization as evidence of an arrangement. Sales through the Company's resellers are
evidenced by a master agreement governing the relationship, together with binding purchase orders, on a transaction-by-transaction basis.

At
the time of the transaction, the Company assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured. If a
significant portion of a fee is due beyond the Company's normal payment terms, which are thirty to sixty days from invoice date, the Company accounts for the fee as not being fixed or determinable. In
these cases, the Company recognizes revenue as the fees become due. The Company assesses collection based on a number of factors, including past transaction history with the customer and the
credit-worthiness of the customer. The Company reviews D&B credit reports for all of its resellers and adjusts its credit limits with those resellers accordingly. If the reseller does not have a
favorable report or the Company does not have enough credit information to distinguish if the reseller is credit-worthy then the Company predominantly sells to such resellers on C.O.D. terms. The
Company does not request collateral from its customers. If the Company determines that collection of a fee is not reasonably assured, the fee is deferred and revenue is recognized at the time
collection becomes reasonably assured, which is generally upon receipt of payment.

The
Company reserves for potential product returns and makes adjustments to the reserve as needed, based on historical product return rates, and considers the impact of new product
introductions, changes in customer demand and acceptance of the Company's products. Management's calculation of the estimated return reserve is based upon (1) an account specific review of
potential returns, where a return probability is known, and (2) a general estimate based upon past historical returns as a percentage of revenue. Significant management judgments and estimates
must be made and used in connection with establishing the sales returns reserve in any accounting period. Material differences may result in the amount and timing of revenue for any period if
management made different judgments or utilized different estimates. Similarly, management must make estimates of the uncollectability of the Company's accounts receivable. Management specifically
analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for
doubtful accounts. Management's calculation of the estimated accounts receivable reserve is based upon (1) an account specific review of potential uncollectible accounts, where a bad debt
probability is known, and (2) a general estimate based upon past historical bad debts as a percentage of accounts receivable.

The
Company's combined accounts receivable and returns reserve was $615,000, $630,000 and $980,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Both
components of calculating the estimated reserve, specific identification and historic ratio, are material judgments. These judgments are based on historic trends, taking into consideration current
business and economic conditions, which could change materially, thus changing the required reserve level materially. The

18

---

potential change could be positive, in the event the reserve estimate proves unnecessary, or negative, if the reserve proves inadequate.

The
Company's deferred revenue is comprised mainly of revenue that is deferred for software maintenance and support contracts. The other components of deferred revenue are the amounts
from sales transactions that were deferred because they did not meet all of the provisions of the Company's revenue recognition policy.

Software Development Costs.Software development costs are considered for capitalization when technological feasibility is
established in accordance with SFAS No. 86,Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed. The Company
sells software in a market that is subject to rapid technological change, new product introductions and changing customer needs. Accordingly, the Company has determined that it cannot determine
technological feasibility until the development state of the product is nearly complete. The time period during which cost could be capitalized from the point of reaching technological feasibility
until the time of general product release is very short and, consequently, the amounts that might be capitalized are not material to the Company's consolidated financial position or results of
operations. Therefore, the Company charges all software development costs to operations in the period incurred.

Taxes.The Company is required to estimate its income and state sales taxes. This process involves estimating the Company's
actual current tax obligations together with assessing differences resulting from the different treatment of items for tax and accounting purposes which result in deferred income tax assets and
liabilities and accrued state sales tax liabilities. The Company has deferred income tax assets and liabilities and accrued state sales tax liabilities included within its balance sheet.

The
Company's deferred tax assets are assessed for each reporting period as to whether it is more likely than not that they will be recovered from future taxable income, including
assumptions regarding on-going tax planning strategies. To the extent the Company believes that recovery is uncertain, the Company must establish a valuation allowance for assets not
expected to be recovered. Changes to the valuation allowance are included as an expense or benefit within the tax provision in the statement of operations.

During
the quarter ended June 30, 2002, the Company recorded an additional valuation allowance of approximately $1.2 million against all of its net deferred tax assets.
SFAS No. 109,Accounting for Income Taxes, requires a valuation allowance to be recorded against deferred tax assets when it is more likely than
not that some or all of the deferred tax assets will not be realized. As a result of the downturn in the economy, the Company incurred significant and previously unanticipated losses in the first half
of the current fiscal year, and the current outlook indicates that significant uncertainty will continue into the next fiscal year. These cumulative losses, together with the Company's prior losses,
resulted in management's decision that it is more likely than not that all of its deferred tax assets will not be realized in the foreseeable future. Accordingly, the remaining net deferred tax asset
was written off in
the second quarter of 2002. Significant judgment was involved in management's decision to write off its net deferred tax assets. If management had concluded differently, the Company's net loss for the
year ended December 31, 2002 would have been materially different.

The
Company will continue to provide a valuation allowance against all of its net deferred tax assets until it returns to an appropriate level of taxable income. The ultimate realization
of these deferred tax assets depends upon the Company's ability to generate sufficient future taxable income. If the Company is successful in generating sufficient future taxable income, the Company
will reduce the valuation allowance through a reduction in income tax expense in the future.

Accrued
state sales taxes are estimated for each reporting period based on tax rates in effect for the reporting periods in each of the states where the Company has potential nexus. In
the event that

19

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actual results differ from these estimates, the Company's state sales taxes expense could be materially impacted.

Results of Operations

The following table sets forth certain financial data for the periods indicated as a percentage of total revenues:

|                                       |                                       | Year Ended December 31,  |     
|-------------------------------------- | ------------------------------------- | ------------------------ | ----
|
|Revenues:                              |                                       |                          |     
|                                       | Software license                      |                          | 30.2
|                                       | Hardware                              |                          | 18.9
|                                       | Service and other                     |                          | 50.9
|                                       |                                       |                          |     
|                                       |                                       | Total revenues           |     
|                                       |                                       |                          |     
|Cost of revenues:                      |                                       |                          |     
|                                       | Software license                      |                          | 2.4 
|                                       | Hardware                              |                          | 12.2
|                                       | Service and other                     |                          | 22.7
|                                       |                                       |                          |     
|                                       |                                       | Total cost of revenues   |     
|                                       |                                       |                          |     
|Gross profit                           |                                       | 62.7                     |     
|                                       |                                       |                          |     
|Operating expenses:                    |                                       |                          |     
|                                       | Sales and marketing                   |                          | 42.5
|                                       | Research and development              |                          | 19.4
|                                       | General and administrative            |                          | 31.5
|                                       | Asset write-off                       |                          |    
|                                       | Settlement costs                      |                          |    
|                                       | Income on sale of AS/400 product line |                          |    
|                                       |                                       |                          |     
|                                       |                                       | Total operating expenses |     
|                                       |                                       |                          |     
|Loss from operations                   |                                       | (30.7                    | )   
|Interest and other income, net         |                                       | 1.3                      |     
|                                       |                                       |                          |     
|Loss before provision for income taxes |                                       | (29.4                    | )   
|Provision for income taxes             |                                       | 8.7                      |     
|                                       |                                       |                          |     
|Net loss                               |                                       | (38.1                    | )%  
|                                       |                                       |                          |     
|Gross profit:                          |                                       |                          |     
|                                       | Software license                      |                          | 92.1
|                                       | Hardware                              |                          | 35.3
|                                       | Service and other                     |                          | 55.5

20

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Fiscal Years Ended December 31, 2002 and 2001

Revenues

Total Revenues.The Company's total revenues were $14.5 million and $15.4 million for the years ended
December 31, 2002 and 2001, respectively, representing a decrease of 6%.

Software License.Software license revenues were $4.4 million for the year ended December 31, 2002 and
$5.1 million for the year ended December 31, 2001, representing a decrease of 13%. Software license revenues accounted for 30% and 33% of total revenues for each respective period. The
decline in software license revenue can be attributed to a number of factors that include the general softness in information technology spending which is reflected in a decrease in demand for
enterprise software solutions and a decline in the growth rate of the overall U.S. economy causing customers and prospective customers to defer technology purchases. The decrease in software license
revenue as a percent of total revenue is primarily attributable to the decrease in software revenues.

Hardware.Hardware revenues were $2.7 million for the year ended December 31, 2002 and $3.1 million for
the year ended December 31, 2001, representing a decrease of 13%. Hardware revenues accounted for 19% and 20% of total revenues for each respective period. The decrease in hardware revenues was
primarily due to the decrease in the number of software sales made in the year ended December 31, 2002 resulting in a decrease in accompanying hardware sales.

Service and Other.Service and other revenues were $7.4 million and $7.2 million for 2002 and 2001,
respectively, representing an increase of 3%. Service and other revenues accounted for 51% and 47% of total revenues for each respective period. The increase in service and other revenues was due to
the increase in maintenance contracts sold by the Company accompanying its newer Genifax and Genidocs products lines, along with an increase in installation revenues. These factors and the decrease in
software and hardware revenues explain the increase in service and other revenues as a percentage of total revenues.

Cost of Revenues

Software License.Cost of software license revenues consists primarily of the costs of sublicensing third-party software
products, product media and product duplication. Cost of software license revenues was $347,000 and $431,000 in 2002 and 2001, respectively, representing 8% of software license revenues for each
respective period. Software license gross margin percentages remained at 92% in 2002 and 2001.

Hardware.Cost of hardware revenues consists primarily of the costs of third-party hardware products. Cost of hardware
revenues was $1.8 million and $2.1 million in 2002 and 2001, respectively, representing 65% and 67% of hardware revenues for each respective period. The decrease in dollar amount for the
cost of hardware revenues for the fiscal year ended December 31, 2002 was due primarily to the decrease of hardware unit sales accompanying the Company's products. The gross margin percentage
for hardware sales increased to 35% for 2002 from 33% in 2001. The gross margin increase is due mainly to a change in the mix of hardware products sold as each product sells at a different gross
margin.

Service and Other.Cost of service and other revenues consists primarily of the costs incurred in providing telephone support
as well as other miscellaneous customer service-related expenses. Cost of service and other revenues was $3.3 million and $4.1 million in 2002 and 2001, respectively, representing 45%
and 57% of service and other revenues for each respective period. The gross margin percentage for service and other revenues increased to 55% for 2002 from 43% in 2001. The decrease in dollar amount
of cost of service and other revenues is due to decreased wage expense and the

21

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associated overhead costs resulting from a decrease in headcount in the service department. The improvement in gross margins is a result of these decreased costs.

Operating Expenses

Sales and Marketing.Sales and marketing expenses consist primarily of employee salaries, benefits, commissions, and
associated overhead costs, and the cost of marketing programs such as advertisements, direct mailings, public relations, trade shows, seminars and related communication
costs. Sales and marketing expenses were $6.2 million and $6.3 million in 2002 and 2001, respectively, representing 42% and 41% of total revenues for each respective period. The decrease
in dollar amount was due to a decrease in overhead costs associated with a decreased number of employees in the sales and marketing departments as a result of a corporate restructuring which took
place at the end of the second quarter of 2002. The increase in expenses as a percent of total revenues is due to the decrease in revenues. The Company expects sales and marketing expenses are likely
to increase in absolute dollars.

Research and Development.Research and development expenses include expenses associated with the development of new products,
enhancements of existing products and quality assurance activities, and consist primarily of employee salaries, benefits, and associated overhead costs as well as consulting expenses and the cost of
software development tools. Research and development expenses were $2.8 million and $3.2 million in 2002 and 2001, representing 19% and 21% of total revenues for each respective period.
In conjunction with a corporate restructuring, several positions were eliminated during the quarter ended June 30, 2002. The decrease in dollar amount and as a percentage of total revenue is
primarily attributable to the decrease in overhead costs of supporting a decreased number of employees in the research and development department. The Company expects research and development expenses
to remain consistent in absolute dollars.

General and Administrative.General and administrative expenses consist primarily of employee salaries and benefits for
administrative, executive and finance personnel and associated overhead costs, as well as consulting, accounting and legal expenses and sales tax. General and administrative expenses were
$4.6 million and $3.6 million in 2002 and 2001, respectively, or 32% and 24% of total revenues for each respective period. The increase in dollar amount and as a percentage of total
revenues is due to decreased revenue combined with an increase in state sales tax accruals for the year. The Company expects general and administrative expenses are likely to decrease in absolute
dollars.

Interest and Other Income, net.Interest and other income, net consists principally of interest income earned on excess cash.
Interest and other income, net was $181,000 for the fiscal year ended December 31, 2002 and $631,000 for the fiscal year ended December 31, 2001. The decrease of 71% is due to changes in
principal balances and lower interest rates.

Provision for Income Taxes.The Company recorded a provision of $1.2 million against the valuation of its net deferred
tax asset in the twelve months ended December 31, 2002. SFAS No. 109 requires a valuation allowance to be recorded against deferred tax assets when it is more likely than not that some
or all of the deferred tax assets will not be realized. As a result of the downturn in the economy, the Company incurred significant and previously unanticipated losses in the first half of the
current fiscal year, and the current outlook indicates that significant uncertainty will continue into the next fiscal year. These cumulative losses, together with the Company's prior losses, resulted
in management's decision that it is more likely than not that all of its deferred tax assets will not be realized in the foreseeable future. Accordingly, the remaining deferred tax asset of
$1.2 million was written off in the second quarter of 2002.

22

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Fiscal Years Ended December 31, 2001 and 2000

Revenues

Total Revenues.The Company's total revenues were $15.4 million and $16.9 million for the years ended
December 31, 2001 and 2000, respectively, representing a decrease of 9%. Included in the 2001 and 2000 revenues are reversals of a $350,000 and $1.1 million, respectively, of the
Company's accounts receivable reserve that management determined was no longer necessary (see footnote 2(k) of Notes to Consolidated Financial Statements). Prior to 2000, the Company offered a
thirty-day money back guarantee to its customers and a business decision was made in late 1999 to eliminate that money back guarantee. That decision led to a significantly lower level of
returns in 2000. Additionally, the Company's overall level of revenues and its accounts receivable balance were significantly lower in 2000 than in 1999. These combined factors led to management's
decision to reduce its level of reserves in 2000. The level of returns continued to further decline in 2001 leading to management's decision to further reduce its level of reserves.

Software License.Software license revenues were $5.1 million for the year ended December 31, 2001 and
$6.0 million for the year ended December 31, 2000, representing a decrease of 16%. Software license revenues accounted for 33% and 36% of total revenues for each respective period. The
decline in software license revenue can be attributed to a number of factors which include softness in demand for enterprise fax solutions and a decline in the growth rate of the overall U.S. economy
causing existing customers and prospective customers to defer technology purchases.

Hardware.Hardware revenues were $3.1 million for the year ended December 31, 2001 and $4.2 million for
the year ended December 31, 2000, representing a decrease of 26%. Hardware revenues accounted for 20% and 25% of total revenues for each respective period. The decrease in hardware revenues was
primarily due to the decrease in the number of software sales made in the twelve month period ending December 31, 2001 resulting in a decrease in accompanying hardware sales.

Service and Other.Service and other revenues were $7.2 million and $6.7 million for 2001 and 2000,
respectively, representing an increase of 8%. Service and other revenues accounted for 47% and 39% of total revenues for each respective period. The increase in service and other revenues was due to
the increase in support renewals from the Company's installed customer base, resulting in an increase in service and other revenues as a percentage of total revenues.

Cost of Revenues

Software License.Cost of software license revenues was $431,000 and $423,000 in 2001 and 2000, respectively, representing 9%
and 7% of software license revenues for each respective period. Software license gross margin percentages decreased to 91% in 2001 from 93% in 2000. The decrease in gross margin is attributable to
increased product duplication costs and increased royalty payments as a result of increased sales of product with associated royalty payments.

Hardware.Cost of hardware revenues was $2.1 million and $3.0 million in 2001 and 2000, respectively,
representing 67% and 71% of hardware revenues for each respective period. The decrease in dollar amount for the cost of hardware revenues for the fiscal year ended December 31, 2001 was due
primarily to the decrease of hardware unit sales accompanying the Company's products. The gross margin percentage for hardware sales increased to 33% for 2001 from 29% in 2000. The gross margin
increase is due mainly to a change in the mix of the particular hardware products sold.

Service and Other.Cost of service and other revenues was $4.1 million and $4.2 million in 2001 and 2000,
respectively, representing 57% and 63% of service and other revenues for each respective period. The gross margin percentage for service and other revenues increased to 43% for 2001 from

23

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37% in 2000. The decrease in dollar amount of cost of service and other revenues and the improvement in gross margins is due primarily to the reduced number of employees within the customer service
department.

Operating Expenses

Sales and Marketing.Sales and marketing expenses were $6.3 million in each of the twelve month periods ending
December 31, 2001 and 2000, representing 41% and 37% of total revenues for each respective period. The increase in expenses as a percent of total revenues is due to the decrease in revenues.

Research and Development.Research and development expenses were $3.2 million and $3.8 million in 2001 and
2000, representing 21% and 22% of total revenues for each respective period. The decrease in the dollar amount and in the expenses as a percentage of revenue was due to lower wages paid per employee
in the research and development department.

General and Administrative.General and administrative expenses were $3.6 million and $3.9 million in 2001 and
2000, respectively, or 24% and 23% of total revenues for each respective period. The decrease in dollar amount is due to the fewer numbers of employees in the department. The increase in general and
administrative expenses as a percent of total revenues is due to decreased revenue.

Asset Write-Off.In April 1999, the Company purchased 262,346 shares of Series B Preferred Stock
("Preferred Stock") of.comfax, Inc. (which later changed its name to MessageClick, Inc. ("MessageClick")) a development-stage company that developed and marketed Internet-based facsimile
communications devices. As part of the transaction, the Company purchased a patent, U.S. Patent No. 5,872,845, entitled Method and Apparatus for Interfacing Fax Machines to Digital
Communication Networks from MessageClick. The Company paid $850,000 for the Preferred Stock and the patent.

The
Company initially recorded its investment in MessageClick at the total purchase price of $850,000 and placed no value on the patent. The Company has not used the patent. At the end
of each subsequent quarter, the Company evaluated the carrying cost of this investment and adjusted the balance, if it was deemed appropriate, to what the Company believed to be its realizable value.
In making this decision, the Company reviewed the most recent MessageClick financial statements that were made available to the Company's management, had discussions with MessageClick's management,
and reviewed documents relating to subsequent rounds of financing received by MessageClick. Based on the aforementioned, the Company determined that as of December 31, 1999, the carrying value
of the investment was $708,335. During each of the first, second and third quarters of Fiscal 2000, the Company reduced the carrying value of the investment by $70,833. During the fourth quarter of
2000, the Company wrote-off the entire remaining carrying value of the investment. The decision to write-off the investment is described below.

On
November 3, 2000, MessageClick was acquired by Verso Technologies, Inc. ("Verso"), a company publicly traded on the Nasdaq National Market under the symbol VRSO. The
Company received 45,487 shares of Verso common stock, $243.47 cash, which included cash the Company was entitled to and cash in lieu of fractional shares of Verso, and a warrant to purchase 8,580
shares of Verso common stock in exchange for its 262,346 shares of Preferred Stock. The 45,487 shares of Verso common stock received by the Company were unregistered and the Company was restricted
from selling these shares for twelve months from the date of the acquisition. Additionally, the Company only had "piggy back" registration rights for those shares of Verso common stock. Furthermore,
the Company potentially would receive an additional 20,642 shares of Verso common stock if certain conditions of the purchase agreement were met. No other shares were ever issued to the Company

24

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under the acquisition agreement because as certain conditions described in the agreement were never met.

At
the time of the acquisition, Verso was trading at $3.38 per share and at December 31, 2000 Verso was trading at $1.50 ($68,230.50 value for the 45,487 shares). Additionally, as
of March 30, 2001 (prior to the Company filing its Form 10-K for the year ended December 31, 2000), Verso was trading at $0.75 a
share, thus providing a trading value as of March 30, 2001 of the Company's investment of $34,115.25. Due to the rapid and significant decline in Verso's common stock, the restriction on sale
of the stock, the uncertainty of the ultimate realizability of the stock and the immateriality of the value of the shares, the Company decided to write-off the entire carrying value of
$708,335 of the investment as of December 31, 2000.

In
2002, the Company sold its entire interest in Verso stock at a value of approximately $11,000 and recorded the realized value in Interest and Other Income.

Settlement Costs.In March of 2001, the Company reached an agreement-in-principle to settle the class
action shareholder lawsuit for $6.0 million. On June 28, 2001, the parties filed a definitive settlement agreement with the Court. On July 6, 2001, the Court preliminarily
approved the proposed terms of the definitive settlement agreement. On October 23, 2001, the Court ordered final approval of the settlement, and final judgment has entered and become effective,
resulting in full dismissal of the Class Action litigation against all defendants. The terms of the $6 million settlement included a contribution by the Company's directors' and officers'
liability insurance carriers of $4.3 million, and a contribution by the Company of $1.7 million. The Company accrued its portion of the settlement as of December 31, 2000 (see
Note 13 of Notes to Consolidated Financial Statements).

(Income) Loss on Sale of AS/400 Product Line.On January 4, 2000, Omtool sold to IPP certain business assets
consisting of intellectual property, goodwill, customer lists, customer contracts, equipment and other assets related to the Company's software products and third party hardware products for facsimile
and other communication applications for the IBM AS/400 product line (the "AS/400 Assets"). The sale price for the AS/400 Assets was $600,000 payable in four equal installments, with the first payment
on January 4, 2000 and the remaining payments in April, July and October of 2000. In addition, the Company reserved the three remaining installment payments totaling $450,000 due to the
uncertainty surrounding the collectibility of such funds. This uncertainty was due to the fact that the purchaser of these assets was a relatively new company whose liquidity status was unknown to the
Company and therefore collectibility of such funds was not assured. The purchase price for the AS/400 Assets was determined through arm's-length negotiations between management of IPP and management
of Omtool.

The
Company received payments of $150,000, $149,831 and $147,152 from IPP in the second, third and fourth quarters of 2000 respectively, and recorded those amounts as a recovery in each
of the quarters ended June 30, 2000, September 30, 2000 and December 31, 2000 (see Note 12 of Notes to Consolidated Financial Statements).

Interest and Other Income, net.Interest and other income, net was $631,000 for the fiscal year ended December 31,
2001 and $1.1 million for the fiscal year ended December 31, 2000. The decrease of 43% is due to changes in principal balances and interest rates.

Provision for Income Taxes.The Company recorded a net loss for the years ended December 31, 2001 and 2000 and did not
record a benefit from income taxes as realizability of net operating loss carryforwards is uncertain (see Note 5 of Notes to Consolidated Financial Statements).

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Liquidity and Capital Resources

Since 1996, the Company has financed its operations primarily through cash flow from operations, the private sales of preferred stock and the Company's initial
public offering of common stock completed in August 1997. At December 31, 2002, the Company had cash and cash equivalents of $8.2 million, short-term investments of
$1.6 million and working capital of $4.7 million.

The
Company's operating activities used cash of $2.2 million and $4.9 million for the years ended December 31, 2002 and 2001, respectively. Net cash used during the
year ended December 31, 2002, consisted primarily of a net loss from operations and a decrease to accrued liabilities due to timing of the Company's year end payroll and fewer accruals for
bonuses in 2002 than in 2001. This was offset by a write-off of the deferred tax asset as discussed in footnote 5 of Notes to Consolidated Financial Statements, depreciation and
amortization, an increase in accrued state sales tax and accounts payable and decreases in accounts receivable and prepaid and other current assets. The increase in accounts payable and decrease in
accounts receivable is due to management's increased focus on improving working capital by decreasing days sales outstanding and lengthening the Company's payment terms. Net cash used during the year
ended December 31, 2001, consisted primarily of a net loss from operations and a decrease in accrued liabilities offset by depreciation and amortization and an increase in deferred revenue.

Investing
activities used cash of $583,000 and provided cash of $1.7 million for the years ended December 31, 2002 and 2001, respectively. The principal uses in both 2002
and 2001 were purchases of short-term investments and property and equipment, offset by proceeds from the sale of short-term investments.

Financing
activities used cash of $236,000 and $142,000 during the years ended December 31, 2002 and 2001, respectively, due primarily to the purchases of treasury stock.

The
Company has experienced declining revenues and increasing operating losses over an extended period of time. Based upon the current economic environment, general softness in
information technology spending, the release of new and emerging products that may not achieve market acceptance, and shortened forecasting visibility, the Company cannot estimate that the financial
and operating performance, financial position or cash flow will improve over the next twelve months. The Company expects that its cash needs for the foreseeable future will be provided by a
combination of its
continuing operations, collections of its accounts receivable, the proceeds of the sales of its short-term investments and its existing cash balance. The Company expects that principal
uses of cash will be for operations, working capital and purchases of property and equipment. Management currently has no plan to obtain additional financing if these expectations are not met. Subject
to the factors contained herein, the Company believes that it has sufficient liquidity and cash available to meet the operating needs of the Company for at least the next twelve months. There can be
no assurance that any necessary additional financing will be available to the Company on commercially reasonable terms, or at all.

The
following table represents the approximate amounts of payments due under specified contractual obligations as of December 31, 2002:

Less than
one year

One to
three years

Three to
five years

More than
Five yearsOperating lease obligations

$
376,000

$
620,000



Purchase obligations


113,000






Total obligations

$
489,000

$
620,000






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Operating lease requirements consist mainly of lease payments for the Company's offices in Salem, NH and London, England (See Item 2, Properties, of this form 10-K for
more information regarding the Company's leases). Purchase obligations consist of payments appropriated for the purchase of equipment. These purchase obligations were fully paid in the first Quarter
of 2003. As of December 31, 2002, the Company did not have any long-term debt obligations, capital lease obligations, or other long-term liabilities for which payments
are required.

Recently Issued Accounting Standards

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146").
SFAS 146 requires the recognition of a liability for costs associated with an exit plan or disposal activity when incurred and nullifies Emerging Issues Task Force ("EITF") Issue
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", which allowed recognition
at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that may be initiated by the Company after December 31,
2002. The Company does not anticipate the adoption of SFAS 146 will have a material effect on its financial position or results of operations.

In
November 2002, the FASB Emerging Issues Task Force released Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF
00-21 establishes three principles: (a) revenue arrangements with multiple deliverables should be divided into separate units of accounting; (b) arrangement consideration
should be allocated among the separate units of accounting based on their relative fair values; and (c) revenue recognition criteria should be considered separately for separate units of
accounting. EITF 00-21 is effective for all arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company is currently
reviewing and evaluating the scope of EITF 00-21, but management currently believes that the Company's multiple element arrangements fall within the scope of SOP 97-2 and
therefore, EITF 00-21 will not be applicable to the Company.

In
November 2002, the FASB issued FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, and of the
obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the
guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives. The disclosure requirements are effective for financial
statements issued after December 15, 2002 and the recognition / measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002.
The following is a summary of the Company's agreements that it has determined are within the scope of FIN No. 45.

As
permitted under Delaware law, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was
serving, at the Company's request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and enables it to recover a
portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes that the estimated fair value of these indemnification agreements is minimal.

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The
Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to
reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally its resellers or certain customers, in connection with any U.S. patent, or any copyright or other
intellectual property infringement claim by any third party with respect to its products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement.
The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or
settle claims related to these indemnification agreements. As a result, the Company believes that the estimated fair value of these agreements is minimal.

The
Company warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the
licensed products to certain of its customers for the life of the product. If necessary, the Company would provide for the estimated cost of product warranty based on specific warranty claims and
claim history, however, the Company has never incurred significant expense under its product warranty. As a result, the Company believes that the estimated fair value on these agreements is minimal.

In
December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based CompensationTransition and
Disclosurean Amendment of FAS 123" ("FAS 148"). FAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting
provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). The standard is intended to encourage the adoption of the
provisions of FAS 123 relating to the fair value-based method of accounting for employee stock options. The Company currently applies the disclosure-only provisions of
FAS 123. Under the provisions of
FAS 148, companies that choose to adopt the accounting provisions of FAS 123 will be permitted to select from three transition methods: the prospective method, the modified prospective
method and the retroactive restatement method. The prospective method, however, may no longer be applied for adoptions of the accounting provisions of FAS 123 for periods beginning after
December 15, 2003. FAS 148 requires certain new disclosures that are incremental to those required by FAS 123, which must also be made in interim financial statements. The
transition and annual disclosure provisions of FAS 148 are effective for fiscal years ending after December 31, 2002. The new interim disclosure provisions are effective for the first
interim period beginning after December 15, 2002. The Company will continue to account for stock based compensation to employees under APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The interpretation further clarifies the identity of a
party with a controlling financial interest that may be achieved through arrangements that do not involve voting interests. This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The entity shall disclose the primary beneficiary of a variable
interest entity including the nature, purpose, size and activities of the variable interest entity and the enterprise's maximum exposure to loss as a result of its involvement with the variable
interest entity. The Company does not anticipate the adoption of FIN 46 will have a material effect on its financial position or results of operations.

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Certain Factors Affecting Future Operating Results

The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The discussion highlights
some of the risks which may affect future operating results.

Information
provided by the Company from time to time including statements in this Form 10-K which are not historical facts are so-called "forward-looking
statements" that involve risks and uncertainties, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, statements contained in
Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical facts (including, but not limited to, statements concerning: the plans and objectives of
management; expectations for sales and marketing, research and development and general and administrative expenses; developments relating to the Company's product and service offerings, markets and
acquisitions; anticipated trends in the Company's business; the Company's strategic alliances; changes in the regulatory environment; the Company's expected liquidity and capital resources and the
Company's critical accounting policies) may constitute forward-looking statements. These forward-looking statements are neither promises nor guarantees, but are subject to
risk and uncertainties that could cause actual results to differ materially from the expectations set forth in the forward-looking statements. Factors that may cause such differences include, but are
not limited to, the factors discussed below, and the other risks discussed from time to time in the Company's other filings with the Securities and Exchange Commission.

Future Operating Results Uncertain.The Company incorporated and shipped its initial facsimile software products in 1991. In
the years ending December 31, 2000, 2001 and 2002, the Company had operating losses and decreasing revenues. There can be no assurance that the Company will be able to increase its level of
revenues or return to profitability in the future; as the Company's operating history makes the prediction of future operating results difficult or impossible. Increases in operating expenses may
continue and, together with pricing pressures and a continued decline in the growth rate of the overall U.S. economy, may result in a continued decrease in operating income and operating margin
percentage. The Company's ability to improve its operating results will depend upon, among other things, its ability to increase sales of the Company's secure
business-to-business electronic document exchange solutions and client/server facsimile solutions to new customers as well as increased product penetration into existing
customers. The Company commenced its strategic expansion into secure business-to-business electronic document exchange solutions market in the fourth quarter of 2000, and has
limited financial and operating data and a limited operating history relevant to these solutions. Accordingly, it is difficult to evaluate the prospects for the level of acceptance of the Company's
secure business-to-business electronic document exchange solutions. Future operating results will depend on many other factors, including, without limitation, the degree and
rate of growth of the markets in which the Company competes, the level of acceptance of the Windows NT, Windows 2000 and Windows XP operating systems, the level of product and price competition, the
ability of the Company to establish strategic relationships and develop and market new and enhanced products and to control costs, the ability of the Company to expand its direct sales force and
indirect distribution channels both domestically and internationally and the ability of the Company to attract and retain key personnel. As a result, it is possible that in the future the Company's
operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected.

Product Concentration.To date, much of the Company's revenues have been attributable to licenses of the Company's
facsimile-based enterprise solutions and related products and services. The Company expects such products and related services to continue to account for much of the Company's future revenues.
However, recently the amount of revenues attributable to the licenses of such products has declined and there can be no assurances that such decline will not continue. Furthermore, in
September 2000, the Company changed its strategic focus to the development of secure

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business-to-business electronic document exchange solutions. The Company introduced its secure business-to-business electronic document exchange
products, Genidocs and Genifax, to the market in the fourth quarter of 2000 and it introduced its proprietary document and routing software, Accuroute, in the second quarter of 2002. To date, the
Company has not recognized a significant amount of revenues from its Genidocs and Accuroute products. The Company expects that its Genidocs and Accuroute products may account for an increasing portion
of future revenues. However, there can be no assurances that the Genidocs and Accuroute products will be financially successful or result in any significant revenues. Factors adversely affecting the
pricing of or demand for such products, such as competition or technological change, could have a material adverse effect on the Company's business, financial condition and results of operations. The
Company's prospects must be considered in light of
the risks and difficulties frequently encountered by companies dependent upon operating revenues from a new product line in an emerging and rapidly evolving market.

New Products and Technological Change.The markets for the Company's products are relatively new and are characterized by
rapid technological change, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The Company's future success will depend
upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments and respond to evolving end-user requirements.
There can be no assurance that the Company will be successful in developing and marketing new products or product enhancements on a timely basis, or that new products or product enhancements developed
by the Company, such as the Genidocs, Genifax and Accuroute products will achieve market acceptance. The introduction of products embodying new technologies and the emergence of new industry standards
could render the Company's existing products obsolete and unmarketable. From time to time, the Company and its competitors may announce new products, capabilities or technologies that have the
potential to replace or shorten the life cycle of the Company's existing product offerings. There can be no assurance that announcements of new product offerings by the Company or its competitors will
not cause customers to defer or forego the licensing of the Company's existing or planned products and have a material adverse effect on the Company's business, financial condition and results of
operations.

The Market Risks for Secure Business-to-Business Electronic Document Exchange Solutions.The market
for Genidocs, the Company's secure business-to-business electronic document exchange solution is new and evolving rapidly. The Company's success will depend upon the adoption
and use by current and potential customers of secure business-to-business electronic document exchange solutions. The Company's success will also depend upon acceptance of its
technology as the standard for providing these solutions. The adoption and use of the Company's secure business-to-business electronic document exchange solution will involve
changes in the manner in which businesses have traditionally exchanged information. The Company's ability to influence usage of its secure business-to-business electronic
document exchange solution by customers is limited. The Company intends to spend considerable resources educating potential customers about the value of secure
business-to-business electronic document exchange solutions. It is difficult to assess, or to predict with any assurance, the present and future size of the potential market
for the Company's secure business-to-business electronic document exchange solution, or its growth rate, if any. Moreover, the Company cannot predict whether the Company's
secure business-to-business electronic document exchange solution will achieve any market acceptance. Any future products or future product enhancements that are not favorably
received by customers may not be profitable and, furthermore, could damage the Company's reputation or brand name.

Dependence on Genifax and Fax Sr. NT Product Lines and the Windows NT/2000 Environment.The Company currently derives a
significant portion of its revenues from licenses of the Genifax and Fax Sr. NT products and related services and resale of related hardware. Continued market acceptance of the Genifax and Fax Sr. NT
products are critical to the Company's future success. As a result, any decline

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in demand for or failure to maintain broad market acceptance of the Genifax and Fax Sr. NT product lines as a result of competition, technological change or otherwise, would have a material adverse
effect on the Company's business, financial condition and results of operations. The Company's future
financial performance will depend in large part on new and enhanced versions of the Genifax product and customer acceptance of the Fax Sr. NT product. There can be no assurance that the Company will
continue to be successful in marketing the Genifax and Fax Sr. NT products or any new or enhanced versions of the Genifax product. In addition, there can be no assurance that the Windows NT operating
system will not be replaced by a new or enhanced operating system. There can be no assurance that the Company will be successful in developing products for new or enhanced operating systems such as
Windows 2000 or Windows XP, or that such systems will not obviate the need for the Company's products. If any new or enhanced operating system gains widespread use and the Company fails to develop and
provide its products for this operating system on a timely basis, the Company's business, financial condition and results of operations would be materially adversely affected.

Dependence on Client/Server Environment.The Company's enterprise, client/server facsimile software products are intended to
help organizations efficiently manage their facsimile communications, utilizing a client/server computing environment. The client/server market is relatively new and there can be no assurance that
organizations will move away from the use of stand-alone fax machines or continue to adopt client/server environments, or that customers of the Company that have begun the migration to a client/server
environment will broadly implement this model of computing. The Company's future financial performance will depend in large part on continued growth in the market for client/server applications, which
in turn will depend in part on the growth in the number of organizations implementing client/server computing environments. There can be no assurance that these markets will continue to grow or that
the Company will be able to respond effectively to the evolving requirements of these markets. If the market for client/server application products and services does not grow in the future, grows more
slowly than the Company anticipates, or if the Company fails to respond effectively to evolving requirements of this market, the Company's business, financial condition and results of operations would
be materially adversely affected.

Risks Associated with Listing on the Nasdaq SmallCap Market.In August 2002, the Nasdaq National Market ("Nasdaq")
informed the Company that its common stock had traded for 30 consecutive trading days below the minimum bid price and that the Company had until November 4, 2002, to demonstrate compliance with
Nasdaq's listing requirements by maintaining a bid price for its common stock of at least $1.00 for a minimum of ten consecutive trading days. The Company did not regain compliance and on
October 29, 2002, the Company applied to transfer from the Nasdaq National Market to the Nasdaq SmallCap Market. On November 26, 2002, the Company transferred to The Nasdaq SmallCap
Market and it was afforded the remainder of this market's 180 calendar day grace period, or until February 3, 2003, to regain compliance with the minimum bid price per share requirement. On
January 14, 2003, Omtool's Board of Directors voted a one-for-seven stock split of the Company's Common Stock effective January 15, 2003 pursuant to a special
meeting of stockholders that was held on the same day approving an amendment to the Company's Amended and Restated Certificate of Incorporation of the Company to effect a reverse stock split. On
February 5, 2003, the Company was notified by Nasdaq that it had regained compliance and the matter is now closed. The Company cannot predict the impact, if any, of a change in listing to the
SmallCap Market. In addition, the Company cannot predict the continuance of its listing status in the future including the possibility of delisting from the Nasdaq Small Cap Market. The delisting of
the Company's common stock from Nasdaq may materially impair the stockholder's ability to buy and sell shares of the Company's common stock and could have an adverse effect on the market price of, and
the efficiency of the trading market for, the Company's common stock. Furthermore, the delisting of the Company's common stock could significantly impair the Company's ability to raise capital should
it desire to do so in the future.

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Intense Competition.The secure business-to-business electronic document exchange solution and
enterprise, client/server facsimile solution markets are intensely competitive and rapidly changing and the Company expects competition to continue to increase. The Company believes its ability to
compete successfully depends upon a number of factors both within and beyond its control, including product performance; reliability and features; product adoption; ease of use; product scalability;
quality of support services; price/performance; timeliness of enhancements and new product releases by the Company and its competitors; the emergence of new computer-based facsimile and secure
business-to-business electronic document exchange solutions and standards; name recognition; the establishment of strategic alliances with industry leaders and industry and
general economic trends.

The
Company may not be able to compete successfully against current and future competitors in the secure business-to-business electronic document exchange
solutions market, and the competitive pressures the Company faces could harm its business and prospects. In the intensely competitive and rapidly changing business-to-business
secure document exchange market, the Company competes directly with Authentica, Sigaba, Tumbleweed, and Zixit and a number of other providers. There are also other categories of technology solution
that overlap and compete in certain ways with aspects of the Company's products. These include:



The
Company expects the competition in the business-to-business secure document exchange market to increase over time.

The
Company competes directly with a large number of vendors of facsimile products, including providers of facsimile software products for client/server networks such as RightFAX (a
subsidiary of Captaris), Fenestrae, TopCall International and Biscom. The Company also competes with providers offering a range of alternative facsimile solutions including outsourcing network
facsimile solutions, such as Easylink Services; operating systems containing facsimile and document e-mail features; low-end
fax modem products; providers of desktop fax software; single-platform facsimile software products; and customized proprietary software solutions. In addition, providers of operating systems or
business software applications may bundle competitive facsimile solutions as part of their broader product offerings.

Many
of the Company's competitors and potential competitors have longer operating histories and greater financial, technical, sales, marketing and other resources, as well as greater
name recognition and market acceptance of their products and technologies than the Company. In addition, there are relatively low barriers to entry in the markets in which the Company operates and
intends to operate, and new competition may arise either from expansion by established companies or from new emerging companies or from resellers of the Company's products. There can be no assurance
that current or potential competitors of the Company will not develop products comparable or superiorin terms of price and performance featuresto those developed by the
Company, adapt more quickly than the Company to new or emerging technologies and changes in market opportunities or customer requirements, establish alliances with industry leaders, or take advantage
of acquisition opportunities more readily than the Company. In addition, no assurance can be given that the Company will not be required to make substantial additional investments in connection with
its research, development,

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engineering, marketing, sales and customer service efforts in order to meet any competitive threat, or that such required investments will not have a material adverse effect on operating margins.
Changes in government laws and regulations may also affect our ability to maintain competitiveness. Increased competition may result in reduction in market share, pressure for price reductions and
related reductions in gross margins, any of which could materially adversely affect the Company's ability to achieve its financial and business goals. There can be no assurance that in the future the
Company will be able to successfully compete against current and future competitors.

Fluctuations in Quarterly Results of Operations; Seasonality.The Company's quarterly revenues and results of operations have
fluctuated significantly in the past and will likely fluctuate significantly in the future. Causes of such fluctuations have included and may include, among others, the demand for the Company's
products and services; the size and timing of orders; the number, timing and significance of new product announcements by the Company and its competitors; the ability of the Company to develop,
introduce, market and ship new and enhanced versions of the Company's current and planned products on a timely basis; the level of product and price competition; changes in operating expenses; changes
in average selling prices and mix of the Company's products; changes in the Company's sales incentive strategy; the mix of direct and indirect sales, and general economic factors, including a
continued decline in the growth rate of the overall U.S. economy. In addition, the sale of the Company's products often involves delays because customers tend to implement the products on a large
scale and they also must establish certain minimum hardware capabilities. The Company's products therefore often have a lengthy sales cycle while the customer evaluates and receives approvals for the
purchase of the Company's products. During such sales cycles, the Company may expend substantial funds and management efforts yet receive no revenues. It is difficult to accurately predict the sales
cycle of any large order. If one or more large orders fail to close as forecasted in a fiscal quarter, the Company's revenues and operating results for such quarter could be materially adversely
affected. Any one or more of these or other factors could have a material adverse effect on the Company's business, financial condition and results of operations. The potential occurrence of any one
or more of these factors makes the prediction of revenues and results of operations on a quarterly basis difficult and performance forecasts derived from such predictions unreliable.

In
general, revenues are difficult to forecast because the market for secure business-to-business electronic document exchange, enterprise client/server facsimile
solutions software and routing and distribution software is evolving rapidly and the Company's sales cyclefrom the customer's initial evaluation through purchase of licenses and the
related support servicesvaries substantially from customer to customer. License fee revenues in any quarter depend on orders received and shipped in that quarter with an increasing
percentage of orders in any quarter being received in the last weeks of the quarter. License fee revenues from quarter to quarter are difficult to forecast, as no significant order backlog exists at
the end of any quarter because the Company's products typically are shipped upon receipt of customers' orders.

A
substantial portion of the Company's operating expense is related to personnel, facilities, equipment and marketing programs. The level of spending for such expense cannot be adjusted
quickly and is therefore fixed in the short term. The Company's expense levels for personnel, facilities, equipment and marketing programs are based, in significant part, on the Company's expectations
of future revenues on a quarterly basis. If actual revenue levels on a quarterly basis are below management's expectations, results of operations are likely to be adversely affected by a similar
amount because a relatively small amount of the Company's expense varies with its revenue in the short term.

Due
to all of the foregoing factors, it is likely that in some future periods the Company's results of operations will be below the expectations of securities analysts and investors. In
such event, the price of the Company's common stock would likely be materially adversely affected.

33

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Expansion of Indirect Channels; Potential for Channel Conflict; Strategic Alliances.The Company markets its products and
services directly through telesales and indirectly through marketing channels such as VARs, systems integrators, distributors and strategic business partners. Although the Company has historically
focused its efforts on marketing through its sales force, the Company is increasing resources dedicated to developing and expanding indirect marketing channels. There can be no assurance that the
Company will be able to attract and retain a sufficient number of qualified VARs, systems integrators, distributors and strategic business partners to successfully market the Company's products. In
addition, there can be no assurance that the Company's resellers and strategic business partners will not develop, acquire or market computer-based facsimile products that are competitive with the
Company's products. The failure to retain its VARs, systems integrators, distributors and strategic partners could have a material adverse effect on the Company's business, financial condition and
results of operations.

The
distributor agreements generally provide that either party may terminate the agreement without cause upon 30 days written notice to the other party. The Company also resells
its products on a purchase order basis through other VARs, systems integrators and distributors. Either party may terminate such relationships, at any time, and therefore there can be no assurance
that any VAR, systems integrator or distributor will continue to represent the Company's products. Furthermore, the Company's strategic alliances may be terminated by either party, at any time; there
can be no assurances that such strategic alliances will continue. The inability to retain certain VARs, systems integrators, distributors or strategic business partners, or the development or
marketing by VARs, systems integrators, distributors or strategic business partners of competitive offerings, could have a material adverse effect on the Company's business, financial condition and
results of operations.

Selling
through indirect channels may limit the Company's contacts with its customers. As a result, the Company's ability to accurately forecast sales, evaluate customer satisfaction and
recognize emerging customer requirements may be hindered. The Company's strategy of marketing its products directly to end-users and indirectly through VARs, systems integrators and
distributors may result in distribution channel conflicts. The Company's direct sales efforts may compete with those of its indirect channels and, to the extent different resellers target the same
customers, resellers may also come into conflict with each other. As the Company strives to expand its indirect distribution channels, there can be no assurance that emerging channel conflicts will
not materially adversely affect its relationships with existing VARs, systems integrators or distributors or adversely affect its ability to attract new VARs, systems integrators and distributors.

Risks Associated with Acquisitions.The Company may augment its internal growth with acquisitions of businesses, products and
technologies that could complement or expand the Company's business. Certain of these businesses may be marginally profitable or unprofitable. In order to achieve anticipated benefits from these
acquisitions, the Company must successfully integrate the acquired
businesses with its existing operations and no assurance can be given that the Company will be successful in this regard. The Company has limited experience in integrating acquired companies into its
operations, in expanding the scope of operations of required businesses, in managing geographically dispersed operations and in operating internationally. In the past the Company has incurred
one-time costs and expenses in connection with acquisitions and it is likely that similar one-time costs and expenses would be incurred in connection with future acquisitions.
In addition, attractive acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the possible need to obtain regulatory approval.
There can be no assurance that the Company will be able to complete future acquisitions. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds either
through public or private financings, including bank borrowings. Any financing, if available at all, may be on terms which are not favorable to the Company. The Company may also issue shares of its
common stock to acquire such businesses, which may dilute the Company's existing stockholders.

34

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Ability to Manage Growth.The Company may expand its operations and anticipates that expansion may be required in order to
address potential market opportunities. The Company may increase the size of its sales and marketing and research and development expenditures as necessary. There can be no assurance that such
expansion would be completed successfully or that it would generate sufficient revenues to cover the Company's expenses. The Company will need to continue to attract and retain highly qualified
technical, sales and managerial personnel. There can be no assurance that the Company will be able to retain or continue to hire such personnel in the future. The inability of the Company to
effectively expand operations and manage growth, if any, could have a material adverse effect on the Company's business, financial condition and results of operations.

Risks Associated with the Use of Arthur Andersen as Independent Auditors.Arthur Andersen LLP ("Andersen"), the Company's
former independent public accountants that audited the Company's financial statements until June 28, 2002, was found guilty by a jury on June 15, 2002 of federal obstruction of justice
in connection with the government's investigation of Enron Corporation. Andersen ceased practicing before the SEC effective August 31, 2002. Although the Company has no reason to believe that
those financial statements are incorrect, it is possible that events arising out of the indictment may adversely affect Andersen's ability to satisfy any claims arising from its provision of auditing
and other services to the Company, including claims that may arise out of Andersen's audit of the Company's financial statements. The SEC has indicated that it will continue accepting financial
statements audited or reviewed by Andersen provided that the Company comply with the applicable rules and orders issued by the SEC in March 2002 for such purpose.

Risks Associated with International Expansion.An element of the Company's strategy is to continue to maintain its
international sales. The Company expects to face competition from secure business-to-business electronic document exchange solutions and local facsimile product providers in
their native countries. To successfully maintain international sales, the Company needs to recruit and retain additional international resellers and distributors. There can be no assurance that the
Company will be able to maintain international sales of its products or that the Company's international distribution channels will be able to adequately market, service and support the Company's
products. International operations generally are subject to certain risks, including dependence on independent
resellers, fluctuations in foreign currency exchange rates, compliance with foreign regulatory and market requirements, variability of foreign economic conditions and changing restrictions imposed by
United States export laws. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing
international operations, difficulties in enforcing intellectual property rights and the burdens of complying with a wide variety of foreign laws. The Company has a sales office outside of the United
States, such operations are subject to certain additional risks, including difficulties in staffing and managing such operations and potentially adverse tax consequences including restrictions on the
repatriation of earnings. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, the Company's business,
financial condition and results of operations. To date, a majority of the Company's sales have been made in United States dollars and the Company has not engaged in any hedging transactions through
the purchase of derivative securities or otherwise.

Dependence on Key Personnel.The Company's future performance depends, in significant part, upon the continued service of its
key technical, sales and senior management personnel, most of who are not bound by an employment agreement or by a noncompetition agreement. The loss of the services of one or more of the Company's
executive officers or other key employees could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success also depends on
its continuing ability to attract and retain highly qualified

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technical, sales and managerial personnel. Competition for such personnel is intense, and the Company has experienced difficulty in recruiting qualified technical personnel. There can be no assurance
that the Company will be able to retain or continue to hire key technical, sales and managerial personnel in the future.

Item 7(a). Quantitative and Qualitative Disclosures About Market Risk

Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments

As of December 31, 2002, the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's investments consist of money market funds and commercial paper that are carried on the Company's books at
amortized cost, which approximates fair market value. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments.

Primary Market Risk Exposures

The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of
cash equivalent and short-term investments is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these
investments. The Company's exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of its United Kingdom subsidiary are
almost exclusively conducted in its local currency. The United Kingdom subsidiary operating results are translated into U.S. dollars and consolidated for reporting purposes. The impact of currency
exchange rate movements on intercompany transactions was immaterial for the year ended December 31, 2002. Currently, the Company does not engage in foreign currency hedging activities.

Item 8. Financial Statements

The Company's Consolidated Financial Statements, together with the auditors' reports thereon, appear at pages F-1 through F-25,
respectively, of this Form 10-K.

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

The Company changed its independent accountants in June 2002 as reported in its Current Report on Form 8-K dated June 28, 2002.

PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

The information concerning directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 2002.

Executive Officers

The information concerning officers of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be

36

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filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 2002.

Item 11. Executive Compensation and Other Information

The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 2002.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 2002.

Item 13. Certain Relationships and Related Transactions

The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission within 120 days after the close of the Company's fiscal year ended December 31, 2002.

Item 14. Controls and Procedures



Item 15. Principal Accountant Fees and Services

The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 2002.

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PART IV

Item 16. Exhibits, Financial Statement Schedule and Reports on Form 8-K



(1)  Consolidated
Financial Statements Listed under Part II, Item 8 and included herein by reference.

(2)  Consolidated
Financial Statement Schedules



(3)  Exhibits

|Exhibit
Number |  | Description of Document                                                                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.3 to the Company's Registration Statement on Form S-1, No. 333-29397 and incorporated herein by reference)                                       
|3.2            |  | Amended and Restated By-laws of the Company (filed as Exhibit 3.4 to the Company's Registration Statement on Form S-1, No. 333-29397 and incorporated herein by reference)                                                            
|3.3            |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation                                                                                                                                                         
|4.1            |  | Specimen certificate representing the common stock (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1, No. 333-29397 and incorporated herein by reference)                                                     
|*10.1          |  | 1996 Stock Option Plan (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1, No. 333-29397 and incorporated herein by reference)                                                                                
|*10.2          |  | 1997 Stock Plan, as amended, (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8, No. 333-91659 and incorporated herein by reference)                                                                           
|*10.3          |  | 1997 Employee Stock Purchase Plan (filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1, No. 333-29397 and incorporated herein by reference)                                                                     
|10.4           |  | Lease dated November 26, 1997 between H.J. Brooks Limited Liability Company and the Company (filed as Exhibit 10.4 to the Company's Form 10-K, No. 0-22871 and incorporated herein by reference)                                      
|10.5           |  | Form of Omtool Software License (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1, No. 333-29397 and incorporated herein by reference)                                                                      
|10.6           |  | Agreement of Sublease dated as of October 31, 2000, by and between eSped.com, Inc. and the Company (filed as Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by
reference)
|*10.7          |  | Letter dated December 14, 1999 from the Company to Robert L. Voelk (filed as Exhibit 10.9 to the Company's Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference)                                
|*10.8          |  | Letter dated July 19, 2000 from the Company to Robert L. Voelk (filed as Exhibit 10.10 to the Company's Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference)                                   
|*10.9          |  | Consulting Arrangement with Arnold E. Ditri (filed as Exhibit 10.9 to Company's Form 10-Q for the fiscal quarter ended March 31, 2002 and incorporated herein by reference)                                                           
|*10.10         |  | Severance Letter with Timothy P. Losik (filed as Exhibit 10.10 to the Company's Form 10-Q for fiscal quarter ended June 30, 2002 and incorporated herein by reference)                                                                
|10.11          |  | Offer Letter with Michael K. Sheehy (filed as Exhibit 10.11 to the Company's Form 10-Q for the fiscal quarter ended September 30, 2002 and incorporated herein by reference)                                                          

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|*10.12 |  | Severance Eligibility Letter with Michael K. Sheehy (filed as Exhibit 10.12 to the Company's Form 10-Q for the fiscal quarter ended September 30, 2002 and incorporated herein by reference)
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|21     |  | Subsidiaries of the Company (filed as Exhibit 21 to the Company's Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference)                               
|23     |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                       
|23.1   |  | Consent of Arthur Andersen LLP                                                                                                                                                              
|24     |  | Power of Attorney (included on signature page)                                                                                                                                              
|99.1   |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                          
|99.2   |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                          

---

The
Company filed a Report on Form 8-K dated December 13, 2002 to report that the Company announced that it planned to hold a special meeting of its
stockholders in order to solicit approval of its proposal that would give the Company's Board of Directors authority to effect a reverse stock split of up to one-for-ten shares
of the Company's Common Stock pursuant to Item 5.

The
Company filed a Report on Form 8-K dated January 14, 2003 to report that at a special meeting of the stockholders of the Company, an amendment to the
Company's Amended and Restated Certificate of Incorporation to effect a reverse stock split was approved by a majority of the outstanding shares of the Company's Common Stock pursuant to Item 5.



The
exhibits required by this Item are listed under Item 14(a)(3).



The
financial statement schedules required by this Item are listed under Item 14(a)(2).

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Salem, State of New Hampshire, on the 10th day of March 2003.

| |  | OMTOOL, LTD.
| |  | ------------
| |  | By:         

POWER OF ATTORNEY

We, the undersigned officers and directors of Omtool, Ltd., hereby severally constitute and appoint Robert Voelk and Timothy Losik, and each of them
singly, our true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution in each of them, to sign for us and in our names in the capacities
indicated below, and generally to do all such things in our names and on our behalf in our capacities as officers and directors to enable Omtool, Ltd. to comply with the provisions of the
Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys,
or any of them.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date indicated.

|Name                                  |  | Title                                                                                                                                            |  | Date          
|------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------
|                                      |  |                                                                                                                                                  |  |               
|/s/ROBERT L. VOELKRobert L. Voelk     |  | Chairman, Chief Executive Officer and President                                                                                                  |  | March 10, 2003
|/s/TIMOTHY P. LOSIKTimothy P. Losik   |  | Executive Vice President, Chief Operating Officer, Chief Financial Officer, Secretary and Treasurer (principal financial and accounting officer) |  | March 10, 2003
|/s/RICHARD D. CRAMERRichard D. Cramer |  | Director                                                                                                                                         |  | March 10, 2003
|                                      |  |                                                                                                                                                  |  |               

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|/s/ARNOLD E. DITRIArnold E. Ditri                       |  | Director |  | March 10, 2003
|------------------------------------------------------- |  | -------- |  | --------------
|/s/ANDREW E. LIETZAndrew E. Lietz                       |  | Director |  | March 10, 2003
|/s/MARTIN A. SCHULTZMartin A. Schultz                   |  | Director |  | March 10, 2003
|/s/WILLIAM C. STYSLINGER, IIIWilliam C. Styslinger, III |  | Director |  | March 10, 2003

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CERTIFICATIONS

I,
Robert L. Voelk, certify that:





|Date: March 10, 2003 |  |     |                                                          
|-------------------- |  | --- | ---------------------------------------------------------
|                     |  | By: | /s/ROBERT L. VOELKRobert L. Voelk Chief Executive Officer

42

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I,
Timothy P. Losik, certify that:





|Date: March 10, 2003 |  |     |                                                            
|-------------------- |  | --- | -----------------------------------------------------------
|                     |  | By: | /s/TIMOTHY P. LOSIKTimothy P. Losik Chief Financial Officer

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OMTOOL, LTD. AND SUBSIDIARIES        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Accountants                                                                    |  | F-2 
|Previously Issued Report of Independent Public Accountants                                           |  | F-3 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                         |  | F-4 
|Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000           |  | F-5 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000 |  | F-6 
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000           |  | F-7 
|Notes to Consolidated Financial Statements                                                           |  | F-8 

F-1

---



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Omtool, Ltd.:

In
our opinion, the accompanying consolidated balance sheet as of December 31, 2002 and the related consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Omtool, Ltd. and its subsidiaries at December 31, 2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of Omtool, Ltd. as of
December 31, 2001, and for each of the two years in the period ended December 31, 2001, prior to the revisions discussed in Note 6 (d), were audited by other independent
accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 16, 2002.

As
discussed above, the financial statements of Omtool, Ltd. as of December 31, 2001 and for each of the two years in the period ended December 31, 2001, were
audited by other independent accountants who have ceased operations. As described in Note 6 (d), these financial statements have been revised to give effect to the
one-for-seven reverse stock split. We audited the adjustments described in Note 6 (d) that were applied to revise the 2001 and 2000 financial statements. In our
opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review or apply any procedures to the 2001 and 2000 financial statements of the Company
other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

/s/
PricewaterhouseCoopers LLP

Boston,
Massachusetts
January 27, 2003

F-2

---



This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Omtool, Ltd.'s filing on Form 10-K for the year ended
December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23.01 for further
discussion. The consolidated balance sheet as of December 31, 2000, and the consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31,
1999 referred to in this report have not been included in the accompanying financial statements. As discussed in Note 6 (d), the Company has revised the 2001 and 2000 consolidated financial
statements to reflect the one-for-seven reserve stock split that was effective on January 15, 2003. The Arthur Andersen LLP report does not extend to these changes to
the 2001 and 2000 consolidated financial statements. The adjustments to the 2001 and 2000 consolidated financial statements were reported on by PricewaterhouseCoopers LLP as stated in their report
appearing herein.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
Omtool, Ltd.:

We
have audited the accompanying consolidated balance sheets of Omtool, Ltd. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Omtool, Ltd. and subsidiaries as of
December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.



Boston,
Massachusetts
January 16, 2002

F-3

---



OMTOOL, LTD. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                               |                                                                                            | December 31,                                                                                                                                      |           
|---------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------- | ----------
|
|ASSETS                                         |                                                                                            |                                                                                                                                                   |           
|Current assets:                                |                                                                                            |                                                                                                                                                   |           
|                                               | Cash and cash equivalents                                                                  |                                                                                                                                                   | $         
|                                               | Short-term investments                                                                     |                                                                                                                                                   |           
|                                               | Accounts receivable, less reserves of $615,000 and $630,000 in 2002 and 2001, respectively |                                                                                                                                                   |           
|                                               | Inventory                                                                                  |                                                                                                                                                   |           
|                                               | Prepaid expenses and other current assets                                                  |                                                                                                                                                   |           
|                                               | Deferred tax asset                                                                         |                                                                                                                                                   |           
|                                               |                                                                                            |                                                                                                                                                   |           
|                                               |                                                                                            | Total current assets                                                                                                                              |           
|Property and equipment, net                    |                                                                                            |                                                                                                                                                   | 615,703   
|Other assets                                   |                                                                                            |                                                                                                                                                   | 13,962    
|                                               |                                                                                            |                                                                                                                                                   |           
|                                               |                                                                                            | $                                                                                                                                                 | 12,692,193
|                                               |                                                                                            |                                                                                                                                                   |           
|LIABILITIES AND STOCKHOLDERS' EQUITY           |                                                                                            |                                                                                                                                                   |           
|Current liabilities:                           |                                                                                            |                                                                                                                                                   |           
|                                               | Accounts payable                                                                           |                                                                                                                                                   | $         
|                                               | Accrued liabilities                                                                        |                                                                                                                                                   |           
|                                               | Accrued state sales tax                                                                    |                                                                                                                                                   |           
|                                               | Deferred revenue                                                                           |                                                                                                                                                   |           
|                                               |                                                                                            |                                                                                                                                                   |           
|                                               |                                                                                            | Total current liabilities                                                                                                                         |           
|                                               |                                                                                            |                                                                                                                                                   |           
|Commitments and contingencies (Notes 9 and 13) |                                                                                            |                                                                                                                                                   |           
|Stockholders' equity:                          |                                                                                            |                                                                                                                                                   |           
|                                               | Preferred stock, $.01 par value                                                            |                                                                                                                                                   |           
|                                               |                                                                                            | Authorized2,000,000 shares; Issued and outstandingnone                                                                                          |           
|                                               | Common stock, $.01 par value                                                               |                                                                                                                                                   |           
|                                               |                                                                                            | Authorized35,000,000 shares; Issued1,858,482 shares in 2002 and 2001, Outstanding1,744,542 and 1,812,724 shares in 2002 and 2001, respectively |           
|                                               | Additional paid-in capital                                                                 |                                                                                                                                                   |           
|                                               | Accumulated deficit                                                                        |                                                                                                                                                   |           
|                                               | Treasury stock (113,940 and 45,758 shares, at cost in 2002 and 2001, respectively)         |                                                                                                                                                   |           
|                                               | Accumulated other comprehensive loss                                                       |                                                                                                                                                   |           
|                                               |                                                                                            |                                                                                                                                                   |           
|                                               |                                                                                            | Total stockholders' equity                                                                                                                        |           
|                                               |                                                                                            |                                                                                                                                                   |           
|                                               |                                                                                            | $                                                                                                                                                 | 12,692,193
|                                               |                                                                                            |                                                                                                                                                   |           

The
accompanying notes are an integral part of these consolidated financial statements.

F-4

---



OMTOOL, LTD. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                     |                                       | Years ended December 31,               |          
|---------------------------------------------------- | ------------------------------------- | -------------------------------------- | ---------
|
|Revenues:                                            |                                       |                                        |          
|                                                     | Software license                      |                                        | $        
|                                                     | Hardware                              |                                        |          
|                                                     | Service and other                     |                                        |          
|                                                     |                                       |                                        |          
|                                                     |                                       | Total revenues                         |          
|                                                     |                                       |                                        |          
|Cost of revenues:                                    |                                       |                                        |          
|                                                     | Software license                      |                                        |          
|                                                     | Hardware                              |                                        |          
|                                                     | Service and other                     |                                        |          
|                                                     |                                       |                                        |          
|                                                     |                                       | Total cost of revenues                 |          
|                                                     |                                       |                                        |          
|                                                     |                                       | Gross profit                           |          
|                                                     |                                       |                                        |          
|Operating expenses:                                  |                                       |                                        |          
|                                                     | Sales and marketing                   |                                        |          
|                                                     | Research and development              |                                        |          
|                                                     | General and administrative            |                                        |          
|                                                     | Asset write-off                       |                                        |          
|                                                     | Settlement costs                      |                                        |          
|                                                     | Income on sale of AS/400 product line |                                        |          
|                                                     |                                       |                                        |          
|                                                     |                                       | Total operating expenses               |          
|                                                     |                                       |                                        |          
|                                                     |                                       | Loss from operations                   |          
|Interest and other income, net                       |                                       |                                        | 181,114  
|                                                     |                                       |                                        |          
|                                                     |                                       | Loss before provision for income taxes |          
|Provision for income taxes                           |                                       |                                        | 1,255,456
|                                                     |                                       |                                        |          
|                                                     |                                       | Net loss                               |          
|                                                     |                                       |                                        |          
|Net loss per share                                   |                                       |                                        |          
|                                                     |                                       | Basic and diluted                      |          
|                                                     |                                       |                                        |          
|Weighted average number of common shares outstanding |                                       |                                        |          
|                                                     |                                       | Basic and diluted                      |          
|                                                     |                                       |                                        |          

The
accompanying notes are an integral part of these consolidated financial statements.

F-5

---



OMTOOL, LTD. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                                      |  | Common Stock |  | Treasury Stock |        |  |          |   |   |            |   |   |           
|------------------------------------------------------------------------------------- |  | ------------ |  | -------------- | ------ |  | -------- | - | - | ---------- | - | - | ----------
|
|
|Balance, December 31, 1999                                                            |  | 1,858,482    |  | $              | 18,585 |  | (60,017  | ) | $ | (1,201,998 | ) | $ | 32,326,829
|Comprehensive loss:                                                                   |  |              |  |                |        |  |          |   |   |            |   |   |           
|Net loss                                                                              |  |             |  |                |       |  |         |   |   |           |   |   |          
|Change in cumulative translation adjustment                                           |  |             |  |                |       |  |         |   |   |           |   |   |          
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Total comprehensive loss                                                              |  |             |  |                |       |  |         |   |   |           |   |   |          
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Exercise of stock options and issuance of shares through Employee Stock Purchase Plan |  |             |  |                |       |  | 21,140   |   |   | 423,362    |   |   | (141,128  
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Balance, December 31, 2000                                                            |  | 1,858,482    |  |                | 18,585 |  | (38,877  | ) |   | (778,636   | ) |   | 32,185,701
|Comprehensive loss:                                                                   |  |              |  |                |        |  |          |   |   |            |   |   |           
|Net loss                                                                              |  |             |  |                |       |  |         |   |   |           |   |   |          
|Change in cumulative translation adjustment                                           |  |             |  |                |       |  |         |   |   |           |   |   |          
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Total comprehensive loss                                                              |  |             |  |                |       |  |         |   |   |           |   |   |          
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Purchase of treasury stock                                                            |  |             |  |                |       |  | (15,720  | ) |   | (128,092   | ) |   | (22,245   
|Issuance of shares through Employee Stock Purchase Plan                               |  |             |  |                |       |  | 1,697    |   |   | 33,142     |   |   | (24,964   
|Compensation expense related to issuance of common stock to directors                 |  |             |  |                |       |  | 7,142    |   |   | 139,500    |   |   | (102,000  
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Balance, December 31, 2001                                                            |  | 1,858,482    |  |                | 18,585 |  | (45,758  | ) |   | (734,086   | ) |   | 32,036,492
|Comprehensive loss:                                                                   |  |              |  |                |        |  |          |   |   |            |   |   |           
|Net loss                                                                              |  |             |  |                |       |  |         |   |   |           |   |   |          
|Change in cumulative translation adjustment                                           |  |             |  |                |       |  |         |   |   |           |   |   |          
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Total comprehensive loss                                                              |  |             |  |                |       |  |         |   |   |           |   |   |          
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Purchase of treasury stock                                                            |  |             |  |                |       |  | (72,242  | ) |   | (255,339   | ) |   |          
|Exercise of stock options and issuance of shares through Employee Stock Purchase Plan |  |             |  |                |       |  | 4,060    |   |   | 64,855     |   |   | (45,772   
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           
|Balance, December 31, 2002                                                            |  | 1,858,482    |  | $              | 18,585 |  | (113,940 | ) | $ | (924,570   | ) | $ | 31,990,720
|                                                                                      |  |              |  |                |        |  |          |   |   |            |   |   |           

The accompanying notes are an integral part of these consolidated financial statements.

F-6

---



OMTOOL, LTD. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                             | Years ended December 31,                                              |                                          
|---------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------- | -----------------------------------------
|
|Cash Flows from Operating Activities:                |                                                                             |                                                                       |                                          
|                                                     | Net loss                                                                    |                                                                       | $                                        
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities |                                                                       |                                          
|                                                     |                                                                             | Depreciation and amortization                                         |                                          
|                                                     |                                                                             | Accounts receivable reserve                                           |                                          
|                                                     |                                                                             | Compensation expense related to issuance of common stock to directors |                                          
|                                                     |                                                                             | Deferred income taxes                                                 |                                          
|                                                     |                                                                             | Non-cash restructuring costs and asset write-off                      |                                          
|                                                     |                                                                             | Changes in assets and liabilities                                    |                                          
|                                                     |                                                                             |                                                                       | Accounts receivable                      
|                                                     |                                                                             |                                                                       | Prepaid expenses and other current assets
|                                                     |                                                                             |                                                                       | Inventory                                
|                                                     |                                                                             |                                                                       | Accounts payable                         
|                                                     |                                                                             |                                                                       | Accrued liabilities                      
|                                                     |                                                                             |                                                                       | Accrued state sales tax                  
|                                                     |                                                                             |                                                                       | Deferred revenue                         
|                                                     |                                                                             |                                                                       |                                          
|                                                     |                                                                             |                                                                       |                                          
|                                                     |                                                                             |                                                                       |                                          
|Cash Flows from Investing Activities:                |                                                                             |                                                                       |                                          
|                                                     | Purchases of property and equipment                                         |                                                                       |                                          
|                                                     | Purchases of short-term investments                                         |                                                                       |                                          
|                                                     | Proceeds from sale of short-term investments                                |                                                                       |                                          
|                                                     | Decrease in other assets                                                    |                                                                       |                                          
|                                                     |                                                                             |                                                                       |                                          
|                                                     |                                                                             |                                                                       |                                          
|                                                     |                                                                             |                                                                       |                                          
|Cash Flows from Financing Activities:                |                                                                             |                                                                       |                                          
|                                                     | Net proceeds from issuance of common stock                                  |                                                                       |                                          
|                                                     | Purchase of treasury stock                                                  |                                                                       |                                          
|                                                     |                                                                             |                                                                       |                                          
|                                                     |                                                                             |                                                                       |                                          
|                                                     |                                                                             |                                                                       |                                          
|Exchange rate effect on cash                         |                                                                             |                                                                       | 57,419                                   
|                                                     |                                                                             |                                                                       |                                          
|Net (decrease) increase in cash and cash equivalents |                                                                             |                                                                       | (3,001,595                               
|Cash and cash equivalents, beginning of year         |                                                                             |                                                                       | 11,194,118                               
|                                                     |                                                                             |                                                                       |                                          
|Cash and cash equivalents, end of year               |                                                                             | $                                                                     | 8,192,523                                
|                                                     |                                                                             |                                                                       |                                          

The
accompanying notes are an integral part of these consolidated financial statements.

F-7

---



OMTOOL, LTD. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Operations

Omtool, Ltd. ("Omtool" or the "Company") is a leading provider of e-mail and fax-based messaging software that enables secure,
confirmed document exchange between businesses. The Company targets large and mid-sized corporations, business and healthcare organizations, law firms and government entities as the
primary markets for its complete electronic document delivery product line. Omtool's products, licensed on a combination server/seat or server only basis, provide users with an extensive, flexible
feature set for transmitting and receiving electronic documents that enables users to improve management of their messaging activities. Included in the Company's products is a suite of utility and
control functions that are designed to maintain document integrity. Omtool's products enable the integration of business processes that include the exchange of electronic documents such as legal
contracts, financial transactions, medical records and purchase order processing. Omtool's products minimize risks by preserving the security of high value documents while facilitating increased
productivity, reducing costs and fulfilling emerging business requirements. Omtool's premier application, Genidocs, integrates with existing e-mail systems and provides multiple options
for content and attachment encryption, authentication, audit trail and delivery confirmation, and digital signatures. Genifax, Omtool's enterprise fax software, offers a scalable, server-based feature
set, and shares a common Windows server-based architecture with the Genidocs product line. AccuRoute is Omtool's proprietary document routing and distribution software. AccuRoute integrates with
certain digital scanning and multifunctional devices allowing for the distribution of paper documents that have been digitized. Omtool's enhanced messaging products, Genidocs and Genifax, coupled with
AccuRoute, have been integrated with both digital scanning and multifunction devices enabling paper documents to be securely delivered electronically.

The
Company is subject to a number of risks associated with emerging, technology-oriented companies with a limited operating history, including, but not limited to, continued market
acceptance of the Company's products, competition from substitute products and larger companies and the continued ability to manage and finance the Company's anticipated future growth.

The
Company's financial results for 2002 declined from financial results for 2001, due primarily to the general economic softness in information technology spending as reflected in a
decrease in demand for enterprise software solutions. This decrease reflected the overall sluggishness of the United States economy in 2002 causing customers and prospective customers to defer
technology purchases. As a result of this decrease in demand, the Company's revenues for the year ended December 31, 2002 decreased 6% from revenues for the year ended December 31, 2001,
and the Company's net loss increased from $3.7 million for the year ended December 31, 2001 to a net loss of $5.5 million for the year ended December 31, 2002. The Company
has experienced declining revenues and increasing operating losses over an extended period of time. Based upon the current economic environment, general softness in information technology spending,
products that may not achieve market acceptance, and short forecasting visibility, the Company cannot estimate that the financial and operating performance, financial position or cash flow will
improve over the next year. As a result of the losses incurred and the anticipation of a continuing decline in the United States economy, the Company reduced its work force and office space in
June 2002 to lower the overall cost of operations. Although the Company's operating cash flow for the year ended December 31, 2002 resulted in a use of cash of $2.2 million, the
Company's cash, cash equivalents and short-term investments at December 31, 2002 were $9.8 million. The Company believes that its existing cash and cash equivalents will be
sufficient to meet the Company's working capital and capital expenditures for at least the next year.

F-8

---

(2) Summary of Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain accounting policies as described in this note and elsewhere in the notes to
consolidated financial statements.

(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been
eliminated in consolidation. Certain reclassifications of prior year amounts have been made to conform to current year presentation.

(b) Revenue Recognition

The Company derives its revenue from primarily two sources (i) product revenue, which includes software license and hardware revenue and
(ii) services and support revenue, which includes software maintenance and support, installation, training and consulting revenue. The Company generates revenue from licensing the rights to use
its software products and sales of hardware directly to end-users and indirectly through resellers. The Company's resellers order products from the Company based on
purchase orders received from end-users and do not order stock. The Company's products are sold to resellers and directly to end-users without any specifically stated rights of
return. Occasionally, however, the Company, in its sole discretion, will accept a product return if the end-user finds that the product does not fit its needs. The Company also sells
hardware products, which are provided by a third-party, on a pass through basis, plus an additional mark-up, to end-users and indirectly through resellers. To support its
software products, the Company sells software maintenance and support, installation, training and consulting services to end-users and indirectly through resellers.

The
Company applies the provisions of Statement of Position ("SOP") 97-2,Software Revenue Recognition, as amended by SOP
98-9, Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions, to all transactions
involving the sale of multiple elements including software, hardware and service revenue. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. This bulletin establishes guidelines for revenue recognition. The Company's revenue recognition policy
complies with this pronouncement as well. The Company applies the provisions of SFAS No. 48,Revenue Recognition When Right of Return Exists,
with respect to providing for potential future product returns.

The
Company recognizes revenue from the sale of software products and hardware to both end-users and resellers when persuasive evidence of an arrangement exists, the products
have been delivered, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and there are no customer acceptance provisions. The Company maintains a reserve for
potential product returns. Software maintenance and support revenue is recognized ratably over the term of the related maintenance period, typically one-year. Other services revenue is
recognized as the services are performed. If the fee is considered to be not fixed or determinable, the Company recognizes revenue as the fees become due. If the Company determines that collection of
a fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of payment. If an arrangement includes
an acceptance provision, the Company will defer all revenue until the customer accepts the products. Acceptance generally occurs upon the earlier of receipt of a written customer acceptance or
expiration of the acceptance period. The Company reserves for potential product returns and makes adjustments to the reserve as needed, based

F-9

---

on historical product return rates, and considers the impact of new product introductions, changes in customer demand and acceptance of the Company's products.

The
Company's transactions frequently involve the sales of software, hardware and related services under multiple element arrangements. Revenue under multiple element arrangements is
allocated to each element under the residual method, in accordance with SOP 98-9, Modification of SOP 97-2,Software Revenue Recognition, With Respect
to Certain Transactions. Under this method, revenue is allocated first to all undelivered elements, such as services, based on the fair value of those elements, which is the
price charged when these elements are sold separately and unaccompanied by other elements. The Company's services are not essential to the functionality of the software as these services do not alter
the capabilities of the software and do not carry a significant degree of risk to perform. The amount allocated to the delivered elements, such as software license and hardware revenue, is the
difference between the total arrangement value and the amount allocated to the undelivered elements. If the delivered elements include both software and hardware, the amount allocated to hardware
revenue is based on the price charged to the Company by the third party vendor plus an additional
mark up, with the remainder allocated to software revenue. To the extent that a discount is offered in the arrangement, the entire discount is allocated to the delivered element or elements. If the
delivered elements include hardware and software, the discount is allocated to the hardware and software based on their respective list prices.

The
Company's deferred revenue is comprised mainly of revenue that is deferred for software maintenance and support contracts. The other components of deferred revenue are the amounts
from sales transactions that were deferred because they did not meet all of the provisions of the Company's revenue recognition policy. Deferred revenue consisted of the following as of
December 31, 2002 and 2001:

December 31,2002

2001Deferred revenue

$
431,983

$
179,217Deferred maintenance and support


2,965,585


3,204,542$
3,397,568

$
3,383,759


(c) Software Development Costs

Software development costs are considered for capitalization when technological feasibility is established in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86,Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed.The Company sells software in
a market that is subject to rapid technological change, new product introductions and changing customer needs. Accordingly, the Company has determined that it cannot determine technological
feasibility until the development state of the product is nearly complete. The time period during which costs could be capitalized from the point of reaching technological feasibility until the time
of general product release is very short and, consequently, the amounts that could be capitalized are not material to the Company's consolidated financial position or results of operations.

F-10

---

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents were $6,837,255 and
$10,015,624 at December 31, 2002 and 2001, respectively, and consisted primarily of investments in money market funds and commercial paper.

(e) Short-Term Investments

As of December 31, 2002 and 2001, the Company had $1,597,155 and $1,296,750 invested in securities consisting of commercial paper. In accordance with SFAS
No. 115, the Company has classified its short-term investments as available-for-sale. These securities have been recorded at market value, which approximates
amortized cost at December 31, 2002 and 2001.

(f) Advertising Expense

The Company recognizes advertising expense as incurred. For the years ended December 31, 2002, 2001 and 2000, the Company recognized $312,313, $545,353 and
$104,210, respectively, as advertising expense.

(g) Inventory

Inventories consist of circuit boards purchased from third-party vendors. Inventories are finished goods and are stated at lower of cost or market, with cost
determined on the first-in, first-out basis. The Company reviews its inventory at the end of each month to ensure that there are no factors that would render the inventory
obsolete. To determine obsolescence, the Company considers current market conditions as well as specific vendor information related to the hardware products sold by the Company. If the inventory is
considered obsolete, then the Company will write the inventory down to zero value.

(h) Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is calculated using
straight-line methods over the following useful lives:

|                                               |  |                                                               |           | December 31
|---------------------------------------------- |  | ------------------------------------------------------------- | --------- | -----------
|
|
|Computer equipment                             |  | 1  5 years                                                   |           | $          
|Computer software                              |  | 2  3 years                                                   |           |            
|Furniture and fixtures                         |  | 5  7 years                                                   |           |            
|Leasehold improvements                         |  | Shorter of the life of the lease or the estimated useful life |           |            
|                                               |  |                                                               |           |            
|                                               |  |                                                               |           |            
|LessAccumulated depreciation and amortization |  |                                                               | 4,627,168 |            
|                                               |  |                                                               |           |            
|                                               |  |                                                               |           | $          
|                                               |  |                                                               |           |            

F-11

---

Depreciation
expense was $509,932, $714,100 and $823,055 for the years ended December 31, 2002, 2001 and 2000, respectively. The Company capitalizes expenditures that materially
increase asset lives and charges ordinary repairs and maintenance to operations as incurred.

(i) Stock Based Compensation

The Company accounts for stock-based compensation for employees under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees,and related interpretations. The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation,to stock-based
employee compensation.

|                                                                                                          |                                | Year Ended December 31, |           
|--------------------------------------------------------------------------------------------------------- | ------------------------------ | ----------------------- | ----------
|
|Net loss, as reported                                                                                     |                                | $                       | (5,519,755
|Add: Stock-based employee compensation included in reported net loss                                      |                                |                         |          
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards |                                |                         | (945,430  
|                                                                                                          |                                |                         |           
|Pro forma net loss                                                                                        |                                | $                       | (6,465,185
|                                                                                                          |                                |                         |           
|Net loss per share:                                                                                       |                                |                         |           
|                                                                                                          | Basic and diluted, as reported |                         | $         
|                                                                                                          | Basic and diluted, pro forma   |                         | $         

(j) Use of Estimates

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

(k) Concentration of Credit Risk and Fair Value of Financial Statements

The amount reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate
their fair value due to their short-term maturities. Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable.
Omtool's cash, cash equivalents, and short-term investments are held with financial institutions that the Company believes to be of high credit standing. The Company has not experienced
significant losses related to receivables from individual customers or groups of customers in any specific industry or by geographic area. Due to these factors, no additional credit risk beyond
amounts provided for collection losses is believed by management to be inherent in the Company's accounts receivable.

F-12

---

The
following schedule summarizes the activity of the Company's accounts receivable reserve for the three years ended December 31, 2002:

|Year Ended        |  | Balance at
Beginning of
Year |           | Reductions |             | Balance at
End of
Year
|----------------- |  | ---------------------------- | --------- | ---------- | ----------- | ----------------------
|December 31, 2000 |  | $                            | 2,090,000 |            | (1,110,000) | (1)                   
|December 31, 2001 |  | $                            | 980,000   |            | (350,000)   | (1)                   
|December 31, 2002 |  | $                            | 630,000   |            | (15,000)    | (1)                   

---

In
accordance with APB Opinion No. 20,Accounting Changes,the following table displays the effects of the reductions in the
accounts receivable reserve on the net loss and net loss per share:

|Year Ended        |  | Net Loss |           | Net Loss
per Share
|----------------- |  | -------- | --------- | ------------------
|December 31, 2000 |  | $        | 1,110,000 |                   
|December 31, 2001 |  | $        | 350,000   |                   
|December 31, 2002 |  | $        | 15,000    |                   

As
of December 31, 2002, one customer accounted for 10% and one customer accounted for 23% of the Company's accounts receivable balance. As of December 31, 2001, one
customer accounted for 16% of the Company's accounts receivable balance. The Company does not believe that this concentration of credit risk represents a material risk of loss with respect to its
financial position as of December 31, 2002. For the years ended December 31, 2002, 2001 and 2000, no single customer accounted for greater than 10% of the Company's total revenues.

(l) Foreign Currency Translation

The Company translates the financial statements of its foreign subsidiaries in accordance with SFAS No. 52,Foreign Currency
Translation. Accordingly, assets and liabilities are translated at exchange rates in effect at the end of the year, and revenues and expenses are translated at the average
exchange rates during the year. All cumulative translation gains or losses from the translation into the Company's reporting currency are included as a separate component of stockholders' equity
(accumulated other comprehensive income) in the accompanying consolidated balance sheets. Net gains and losses resulting from foreign exchange transactions were not material for the years ended
December 31, 2002, 2001 and 2000.

(m) Net Loss Per Share

The Company reports earnings per share in accordance with SFAS No. 128,Earnings per Share. Diluted
weighted average shares outstanding for 2002, 2001 and 2000 exclude the potential common shares from stock options because to include them would have been antidilutive for the year presented. For the
years ended December 31, 2002, 2001 and 2000, there were 378,698, 332,728 and 198,921 outstanding stock options, respectively, which have an antidilutive effect.

F-13

---



(2) Summary of Significant Accounting Policies (Continued)

(n) Recently Issued Accounting Standards

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146").
SFAS 146 requires the recognition of a liability for costs associated with an exit plan or disposal activity when incurred and nullifies Emerging Issues Task Force (EITF) Issue
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", which allowed recognition
at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that may be initiated by the Company after December 31,
2002. The Company does not anticipate the adoption of SFAS 146 will have a material effect on its financial position or results of operations.

In
November 2002, the FASB Emerging Issues Task Force released Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF
00-21 establishes three principles: (a) revenue arrangements with multiple deliverables should be divided into separate units of accounting; (b) arrangement consideration
should be allocated among the separate units of accounting based on their relative fair values; and (c) revenue recognition criteria should be considered separately for separate units of
accounting. EITF 00-21 is effective for all arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company is currently
reviewing and evaluating the scope of EITF 00-21, but management currently believes that the Company's multiple element arrangements fall within the scope of SOP 97-2 and
therefore, EITF 00-21 will not be applicable to the Company.

In
November 2002, the FASB issued FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45").
FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and
annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or
to guarantees accounted for as derivatives. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition / measurement requirements are
effective on a prospective basis for guarantees issued or modified after December 31, 2002. The following is a summary of the Company's agreements that it has determined are within the scope of
FIN No. 45.

As
permitted under Delaware law, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was
serving, at the Company's request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and enables it to recover a
portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes that the estimated fair value of these indemnification agreements is minimal.

The
Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to
reimburse the

F-14

---

indemnified party for losses suffered or incurred by the indemnified party, generally its resellers or certain customers, in connection with any U.S. patent, or any copyright or other intellectual
property infringement claim by any third party with respect to its products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum
potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the Company believes that the estimated fair value of these agreements is minimal.

The
Company warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the
licensed products to certain of its customers for the life of the product. If necessary, the Company would provide for the estimated cost of product warranty based on specific warranty claims and
claim history, however, the Company has never incurred significant expense under its product warranty. As a result, the Company believes that the estimated fair value on these agreements is minimal.

In
December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based CompensationTransition and
Disclosurean Amendment of FAS 123" ("FAS 148"). FAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting
provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). The standard is intended to encourage the adoption of the
provisions of FAS 123 relating to the fair value-based method of accounting for employee stock options. The Company currently applies the disclosure-only provisions of
FAS 123. Under the provisions of FAS 148, companies that choose to adopt the accounting provisions of FAS 123 will be permitted to select from three transition methods: the
prospective method, the modified prospective method and the retroactive restatement method. The prospective method, however, may no longer be applied for adoptions of the accounting provisions of
FAS 123 for periods beginning after December 15, 2003. FAS 148 requires certain new disclosures that are incremental to those required by FAS 123, which must also be made
in interim financial statements. The transition and annual disclosure provisions of FAS 148 are effective for fiscal years ending after December 31, 2002. The new interim disclosure
provisions are effective for the first interim period beginning after December 15, 2002. The Company will continue to account for stock based compensation to employees under APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The interpretation further clarifies the identity of a
party with a controlling financial interest that may be achieved through arrangements that do not involve voting interests. This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The entity shall disclose the primary beneficiary of a variable
interest entity including the nature, purpose, size and activities of the variable interest entity and the enterprise's maximum exposure to loss as a result of its involvement with the variable
interest entity. The Company does not anticipate the adoption of FIN 46 will have a material effect on its financial position or results of operations.

F-15

---

(3) Related Party Transactions

On October 31, 2000, the Company entered into an agreement with eSped.com, Inc. ("eSped") to sublease from the Company 4,500 square feet of the
premises the Company is occupying at its Salem, New Hampshire, headquarters. Robert L. Voelk, the Chief Executive Officer and Chairman of the Board of Omtool is also the Chief Executive Officer and
Chairman of the Board of eSped and Mr. Schultz, a Director of Omtool is a Director of eSped. The sub-lease is a tenancy at will and commenced on February 1, 2001. Either
party may terminate the sublease with 120 days written notice to the other party. The amount of rent payments and the percentage of building maintenance charges received in 2002 and 2001 was
$55,323 and $50,710, respectively, and has been recorded as a reduction in general and administrative expenses in the accompanying consolidated financial statements. The Company believes that the
terms of the sublease have been negotiated at arms-length.

The
Company entered into a consulting arrangement with a Director of the Company in July 2001. Under this arrangement, the Director provides consulting services to the Company.
The Company paid
$106,184 and $162,114 to the Director for the years ended December 31, 2002 and 2001, respectively. As of August 1, 2002, the Company terminated this consulting arrangement.

(4) Accrued Liabilities

Accrued liabilities consist of the following:

|                                  |  | December 31,
|--------------------------------- |  | ------------
|
|Accrued health insurance expense  |  | $           
|Accrued salary and salary-related |  |             
|Accrued professional fees         |  |             
|Other accrued expenses            |  |             
|                                  |  |             
|                                  |  | $           
|                                  |  |             

(5) Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes,the
objective of which is to recognize the amount of current and deferred income taxes at the date of the financial statements as a result of all differences in the tax basis and financial statement
carrying amount of assets and liabilities as measured by enacted tax laws. At December 31, 2002, the Company had available federal net operating loss carryforwards of approximately
$19.3 million to be used to offset future taxable income, if any. The Company also has federal tax credit carryforwards of approximately $932,000. If not utilized, these carryforwards expire
through 2022. If certain ownership changes occur, as defined by Section 382 of the Internal Revenue Code of 1986, as amended ("IRC"), there could be annual limitations on the amount of
carryforwards that can be realized in future periods.

F-16

---

The
components of the deferred tax asset are as follows:

|                                                  |  | December 31, |           
|------------------------------------------------- |  | ------------ | ----------
|
|Net operating loss carryforward                   |  | $            | 6,555,000 
|Research and development tax credit carryforwards |  |              | 932,000   
|Accrued liabilities and reserves                  |  |              | 853,000   
|Valuation allowance                               |  |              | (8,340,000
|                                                  |  |              |           
|Net deferred tax asset                            |  |              |          
|                                                  |  |              |           

Under
SFAS No. 109, the Company recognizes a deferred tax asset for the future benefit of its temporary differences if it concludes that it is more likely than not that the
deferred tax asset will be realized. During the quarter ended June 30, 2002, the Company recorded an additional valuation allowance of approximately $1.2 million against all of its net
deferred tax assets. SFAS No. 109 requires a valuation allowance to be recorded against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not
be realized. As a result of the downturn in the economy, the Company incurred significant and previously unanticipated losses in the first half of the current fiscal year, and the current outlook
indicates that significant uncertainty will continue into the next fiscal year. These cumulative losses, together with the Company's prior losses, resulted in management's decision that it is more
likely than not that all of its deferred tax assets will not be realized in the foreseeable future. Accordingly, the remaining net deferred tax asset was written off in the second quarter of 2002.

The
Company will continue to provide a valuation allowance against all of its net deferred tax assets until it returns to an appropriate level of taxable income. The ultimate realization
of these deferred tax assets depends upon the Company's ability to generate sufficient future taxable income. If the Company is successful in generating sufficient future taxable income, the Company
will reduce the valuation allowance through a reduction in income tax expense in the future.

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

|                                             |                                           | Year Ended December 31, |     
|-------------------------------------------- | ----------------------------------------- | ----------------------- | ----
|
|Income tax benefit at federal statutory rate |                                           | (34.0                   | )%  
|(Decrease) increase in tax resulting from   |                                           |                         |     
|                                             | State tax benefit, net of federal benefit |                         | (4.8
|                                             | Tax-exempt interest                       |                         |    
|                                             | Research and development tax credits      |                         | 2.2 
|                                             | Difference in foreign tax rates           |                         | 0.2 
|                                             | Increase in valuation allowance           |                         | 63.5
|                                             | Other                                     |                         | 2.3 
|                                             |                                           |                         |     
|Provision for income taxes                   |                                           | 29.4                    | %   
|                                             |                                           |                         |     

F-17

---

The
provision for income taxes in the accompanying consolidated statements of operations consists of the following:

|                           |         | Year Ended December 31,
|-------------------------- | ------- | -----------------------
|
|Current                    |         |                        
|                           | Federal |                        
|                           | State   |                        
|                           | Foreign |                        
|                           |         |                        
|Deferred                   |         |                        
|                           | Federal |                        
|                           | State   |                        
|                           | Foreign |                        
|                           |         |                        
|                           |         |                        
|                           |         |                        
|Provision for income taxes |         | $                      
|                           |         |                        

The
components of domestic and foreign income (loss) before income taxes are as follows:

|         |  | Year Ended December 31, |           
|-------- |  | ----------------------- | ----------
|
|Domestic |  | $                       | (4,470,194
|Foreign  |  |                         | 205,895   
|         |  |                         |           
|         |  | $                       | (4,264,299
|         |  |                         |           

(6) Stockholders' Equity

(a) Treasury Stock

In October 1998 and in October 2002, the Company's Board of Directors authorized the repurchase of up to 142,857 shares and $250,000 worth of
shares, respectively, of the Company's common stock. Subject to price and market considerations and applicable securities laws, such purchases will be made from time to time on the open market. No
time limit was placed on the duration of the repurchase programs. The Company may use the repurchased shares to offset shares issued in connection with various Company employee stock plans. As of
December 31, 2002, the Company repurchased a total of 140,223 shares under the 1998 program and $250,000 worth, or 71,428 shares, under the 2002 program for a combined total of 211,651 shares
under both programs.

(b) Reserved Common Stock

As of December 31, 2002, 620,098 shares of common stock were reserved for issuance pursuant to stock option plans and the employee stock purchase plan.

F-18

---



(6) Stockholders' Equity (Continued)

(c) Preferred Stock

The Company's Amended and Restated Certificate of Incorporation provides for, and the Board of Directors and stockholders authorized, 2,000,000 shares of $0.01
par value preferred stock. The Board of Directors has the authority to issue such shares in one or more series and to fix the relative rights and preferences without vote or action by the
stockholders. The Board of Directors has no present plans to issue any shares of preferred stock.

(d) Reverse Stock Split

On January 14, 2003, Omtool's Board of Directors voted a one-for-seven stock split of the Company's Common Stock effective
January 15, 2003. All references in the Consolidated Financial Statements referring to shares, share prices, per share amounts and stock plans have been adjusted retroactively for the
one-for-seven stock split.

(7) Stock Plans

(a) Stock Option Plans

The Company's 1996 Stock Option Plan (the "1996 Plan") provided for the granting of options covering 214,286 shares of common stock. The 1996 Plan, administered
by the Board of Directors, allows for the granting of "incentive stock options" within the meaning of the IRC and nonqualified stock options. Incentive stock options under the 1996 Plan are granted at
not less than the fair market value per share of common stock on the date of grant or 110% of fair market value for any stockholder who holds more than 10% of the total combined voting power of all
classes of stock of the Company. Under the terms of the 1996 Plan, options vest and become exercisable as determined by the Board of Directors and expire 10 years after the date of grant. In
1997, the Company's Board of Directors voted that no further options may be granted or issued under the 1996 Plan.

The
Company's 1997 Stock Plan, as amended, (the "1997 Plan") provides for the issuance of common stock pursuant to the grant to employees of "incentive stock options" within the meaning
of the IRC and the grant of nonqualified stock options, stock awards or opportunities to make direct purchases of stock in the Company to employees, consultants, directors and officers of the Company.
Under the terms of the 1997 Plan, options vest and become exercisable as determined by the Board of Directors and expire 10 years after the date of grant. The aggregate number of shares of
common stock which may be issued pursuant to the 1997 Plan is 614,285.

The
Company accounts for stock-based compensation for employees under APB Opinion No. 25,Accounting for Stock Issued to Employees,
and related interpretations, and follows the disclosure-only alternative under SFAS No. 123,Accounting for Stock-Based Compensation,
for options granted using the Black-Scholes option pricing model prescribed by SFAS No. 123. Based on the use of the

F-19

---

Black-Scholes option pricing model, options granted in 2002, 2001 and 2000 had a weighted average fair value of $4.22, $5.39 and $11.55, respectively. The weighted average assumptions are as follows:

Year Ended December 31,2002

2001

2000Risk-free interest rate

3.67
%
4.58
%
6.25
%Volatility

95.0
%
85.0
%
85.0
%Expected dividend yield





Expected lives

4 Years

4 Years

4 Years


On
July 11, 2001, in accordance with the Company's 1997 Stock Plan, as amended, the Board of Directors approved grants of 3,571 shares each of fully vested common stock to two
members of the Company's Board of Directors in exchange for services rendered to the Company in connection with their service on the Board of Directors. These grants were made at the current fair
market value of the Company's common stock and, the Company recorded compensation expense of $37,500 during the year ended December 31, 2001.

The
following is a summary of all stock option activity:

|                               |                      | Number of
Shares |          | Exercise Price
per Share |             | Weighted
Average
Exercise Price
|------------------------------ | -------------------- | ---------------- | -------- | ------------------------ | ----------- | -------------------------------
|Outstanding, December 31, 1999 |                      | 316,358          |          | $1.75-$63.00             |             | $                              
|                               | Granted              |                  | 127,447  |                          | 6.37-20.13  |                                
|                               | Exercised            |                  | (18,169  | )                        | 12.95-20.63 |                                
|                               | Canceled and expired |                  | (226,715 | )                        | 12.95-63.00 |                                
|                               |                      |                  |          |                          |             |                                
|Outstanding, December 31, 2000 |                      | 198,921          |          | 1.75-38.50               |             |                                
|                               | Granted              |                  | 169,289  |                          | 5.04-14.44  |                                
|                               | Canceled and expired |                  | (35,482  | )                        | 1.75-34.13  |                                
|                               |                      |                  |          |                          |             |                                
|Outstanding, December 31, 2001 |                      | 332,728          |          | 1.75-38.50               |             |                                
|                               | Granted              |                  | 101,288  |                          | 1.47-8.19   |                                
|                               | Exercised            |                  | (302     | )                        | 1.75-6.39   |                                
|                               | Canceled and expired |                  | (55,001  | )                        | 5.04-34.13  |                                
|                               |                      |                  |          |                          |             |                                
|Outstanding, December 31, 2002 |                      | 378,698          |          | $1.47-$38.50             |             | $                              
|                               |                      |                  |          |                          |             |                                
|Exercisable, December 31, 2002 |                      | 155,105          |          | $1.47-$38.50             |             | $                              
|                               |                      |                  |          |                          |             |                                
|Exercisable, December 31, 2001 |                      | 87,757           |          | $1.75-$38.50             |             | $                              
|                               |                      |                  |          |                          |             |                                
|Exercisable, December 31, 2000 |                      | 38,444           |          | $1.75-$57.75             |             | $                              
|                               |                      |                  |          |                          |             |                                

At
December 31, 2002, options to purchase 235,588 shares of common stock were available for future grants under the 1997 Plan.

F-20

---

The
range of exercise prices for options outstanding and options exercisable at December 31, 2002 are as follows:

|            |  | Options Outstanding |  |     |  | Options Exercisable
|----------- |  | ------------------- |  | --- |  | -------------------
|
|$1.47-1.75  |  | 2,263               |  | 3.8 |  | $                  
|3.99-5.25   |  | 150,859             |  | 8.7 |  |                    
|6.37-8.40   |  | 58,305              |  | 8.9 |  |                    
|12.95-19.25 |  | 97,507              |  | 7.3 |  |                    
|20.13-25.38 |  | 35,287              |  | 7.0 |  |                    
|30.63-38.50 |  | 34,477              |  | 5.9 |  |                    
|            |  |                     |  |     |  |                    
|            |  | 378,698             |  | 7.9 |  | $                  
|            |  |                     |  |     |  |                    

(b) 1997 Employee Stock Purchase Plan

The 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") provides for the issuance of a maximum of 28,571 shares of common stock pursuant to the exercise
of nontransferable options granted to participating employees. The exercise price for the option for each six-month purchase period is 85% of the lesser of the market price of the common
stock on the first or last business day of the six-month purchase period. As of December 31, 2002, 13,027 shares had been issued under the 1997 Purchase Plan.

(8) 401(k) and Profit-Sharing Plan

The Company's 401(k) and Profit-Sharing Plan (the "Profit-Sharing Plan") covers all eligible employees and allows for voluntary contributions by eligible
employees. The Company matches 50% of eligible employee contributions up to a specified amount. The Company contributed approximately $159,000, $130,000 and $60,000 to the Profit-Sharing Plan for the
years ended December 31, 2002, 2001 and 2000, respectively. Additional profit-sharing contributions to the Profit-Sharing Plan are at the discretion of the Company's management. During 2002,
2001 and 2000, the Company made no additional discretionary contributions.

(9) Lease Commitments

The Company leases certain equipment and its office facilities under operating leases that expire at various times through December 2005.

F-21

---

Future
minimum lease payments under these leases at December 31, 2002 are approximately as follows:

Year ending December 31,2003


376,0002004


354,0002005


266,000$
996,000


Rent
expense, net of subrentals, included in the accompanying consolidated statements of operations was $447,000, $463,000 and $568,000 for the years ended December 31, 2002, 2001
and 2000, respectively.

(10) Segment and Geographic Information

To date, the Company has viewed its operations and manages its business as principally one segment, software product sales and associated services. As a result,
the financial information disclosed herein represents all of the material financial information related to the Company's principal operating segment in accordance with SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information.

Total
revenues from international sources were approximately $2.8 million, $2.3 million and $3.1 million in 2002, 2001 and 2000, respectively. The Company's revenues
from international sources were primarily generated from customers located in Europe. The following table represents amounts relating to geographic locations for the years ended December 31,
2002, 2001 and 2000:

Year Ended December 31,2002

2001

2000Total revenues (1)United States

$
11,668,319

$
13,021,036

$
13,835,107United Kingdom


1,309,888


978,872


1,399,838Rest of World


1,498,482


1,353,859


1,672,072$
14,476,689

$
15,353,767

$
16,907,017Long-lived assets (2)North America

$
600,116

$
789,915

$
1,154,219Europe


29,549


60,413


96,951$
629,665

$
850,328

$
1,251,170


---

F-22

---

(11) Asset Write-off

In April 1999, the Company purchased 262,346 shares of Series B Preferred Stock ("Preferred Stock") of.comfax, Inc. (which later changed its
name to MessageClick, Inc. ("MessageClick")) a development-stage company that developed and marketed Internet-based facsimile communications devices. As part of the transaction, the Company
purchased a patent, U.S. Patent No. 5,872,845, entitled Method and Apparatus for Interfacing Fax Machines to Digital Communication Networks from MessageClick. The Company paid $850,000 for the
Preferred Stock and the patent.

The
Company initially recorded its investment in MessageClick at the total purchase price of $850,000 and placed no value on the patent. The Company has not used the patent. At the end
of each subsequent quarter, the Company evaluated the carrying cost of this investment and adjusted the balance, if it was deemed appropriate, to what the Company believed to be its realizable value.
In making this decision, the Company reviewed the most recent MessageClick financial statements that were made available to the Company's management, had discussions with MessageClick's management,
and reviewed documents relating to subsequent rounds of financing received by MessageClick. Based on the aforementioned, the Company determined that as of December 31, 1999, the carrying value
of the investment was $708,335. During each of the first, second and third quarters of Fiscal 2000, the Company reduced the carrying value of the investment by $70,833. During the fourth quarter of
2000, the Company wrote-off the entire remaining carrying value of the investment. The decision to write-off the investment is described below.

On
November 3, 2000, MessageClick was acquired by Verso Technologies, Inc. ("Verso"), a company publicly traded on the Nasdaq National Market under the symbol VRSO. The
Company received 45,487 shares of Verso common stock, $243.47 cash, which included cash the Company was entitled to and cash in lieu of fractional shares of Verso, and a warrant to purchase 8,580
shares of Verso common stock in exchange for its 262,346 shares of Preferred Stock. The 45,487 shares of Verso common stock received by the Company were unregistered and the Company was restricted
from selling these shares for twelve months from the date of the acquisition. Additionally, the Company only had "piggy back" registration rights for those shares of Verso common stock. Furthermore,
the Company potentially would receive an additional 20,642 shares of Verso common stock if certain conditions of the purchase agreement were met. No other shares were ever issued to the Company under
the acquisition agreement because those certain conditions described in the agreement were never met.

At
the time of the acquisition, Verso was trading at $3.38 per share and at December 31, 2000, Verso was trading at $1.50 ($68,230.50 value for the 45,487 shares). Additionally,
as of March 30, 2001 (prior to the Company filing its Form 10-K for the year ended December 31, 2000), Verso was trading at $0.75 a share, thus providing a trading
value as of March 30, 2001 of the Company's investment of $34,115.25. Due to the rapid and significant decline in Verso's common stock, the restriction on sale of the stock, the uncertainty of
the ultimate realizability of the stock and the immateriality of the value of the shares, the Company decided to write-off the entire carrying value of $708,335 of the investment as of
December 31, 2000.

In
2002, the Company sold its entire interest in Verso stock at a value of approximately $11,000 and recorded the realized value in Interest and Other Income, net.

F-23

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(12) Disposal of AS/400 Product Line

On January 4, 2000, Omtool sold to International Presence PLC ("IPP") certain business assets consisting of intellectual property, goodwill, customer
lists, customer contracts, equipment and other assets related to the Company's software products and third-party hardware products for facsimile and other communication applications for the IBM AS/400
product line (the "AS/400 Assets"). The sale price for the AS/400 Assets was $600,000 payable in four equal installments, with the first payment on January 4, 2000 and the remaining payments in
April, July and October of 2000. In addition, the Company reserved the three remaining installment payments totaling $450,000 due to the uncertainty surrounding the collectibility of such funds. This
uncertainty was due to the fact that the purchaser of these assets was a relatively new company whose liquidity status was unknown to the Company and therefore collectibility of such funds was not
assured. The purchase price for the AS/400 Assets was determined through arm's-length negotiations between management of IPP and management of Omtool.

The
components of the loss from the sale of the AS/400 Assets during 1999 were as follows:

Consideration received for assets sold

$
(600,000
)LessReserve for proceeds receivable


450,000Net proceeds


(150,000
)Carrying value of assets sold, net of deferred taxes


2,644,500Additional reserve required for AS/400 receivables not sold


173,000Loss on sale of AS/400 product line

$
2,667,500


The
Company received payments aggregating $446,983 from IPP during 2000 and recorded them as a recovery in the year ended December 31, 2000.

(13) Litigation Settlement

On October 5, 1999, a purported securities class action complaint was filed in the United States District Court for the District of New Hampshire. As of
March 31, 2001, the parties reached an agreement-in-principle to settle the Class Action. On June 28, 2001, the parties filed a definitive settlement agreement
with the Court. On July 6, 2001, the Court preliminarily approved the proposed terms of the definitive settlement agreement. On October 23, 2001, the Court ordered final approval of the
settlement, and final judgment has entered and become effective, resulting in full dismissal of the Class Action litigation against all defendants. The terms of the $6 million settlement
included a contribution by the Company's directors' and officers' liability insurance carriers of $4.3 million, and a contribution by the Company of $1.7 million. The Company accrued its
portion of the settlement as of December 31, 2000.

F-24

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(14) Quarterly Results of Operations (unaudited)

The following table presents a condensed summary of quarterly results of operations for the years ended December 31, 2002 and 2001.

|                   |                   | Year Ended December 31, 2002 |           
|------------------ | ----------------- | ---------------------------- | ----------
|
|Total revenues     |                   | $                            | 3,962,624 
|Gross profit       |                   |                              | 2,601,245 
|Net loss           |                   |                              | (1,087,402
|Net loss per share |                   |                              |           
|                   | Basic and diluted |                              | $         

|                   |                   | Year Ended December 31, 2001 |          
|------------------ | ----------------- | ---------------------------- | ---------
|
|Total revenues     |                   | $                            | 3,914,436
|Gross profit       |                   |                              | 2,061,667
|Net loss           |                   |                              | (716,704 
|Net loss per share |                   |                              |          
|                   | Basic and diluted |                              | $        

F-25

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