SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-K

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

(Mark One)

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

For the fiscal year ended: December 31, 2003

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

---

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 30, 2003 was approximately
$3.6 million.

The
number of shares outstanding of the Registrant's common stock as of March 18, 2004 was 1,757,546.

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, 2003. Portions of such proxy statement are incorporated by reference into Part III of this report.



---



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."

PART I

Item 1. Business

Omtool, Ltd. ("Omtool" or the "Company") is a leading provider of electronic document delivery and management software that enables efficient, secure,
confirmed and cost-efficient document exchange between businesses. Omtool's products, licensed on a combination server/seat basis or on a server only or seat only basis, provide users with
an extensive, flexible feature set that converts, transmits, receives, and automatically archives documents in electronic formats. This enables users to streamline the handling and management of
business documents and assists businesses in complying with government regulations such as the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") and the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"). The features are also useful to any business that wants to track and archive documents and its transactions as well as secure and protect private information. Included in the
Company's products is a suite of utility and control functions that enables the conversion of paper documents to standard electronic formats and integrates with industry recognized document and
records management systems. Omtool's products enable the integration of business processes that include the exchange of hard copy and 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. AccuRoute®, Omtool's document routing and distribution software, integrates with many digital scanning and multifunctional devices to
allow paper documents to be digitized, distributed and archived. In addition Omtool's AccRoute software provides capture, distribution and compliance for movement of electronic documents and
information. 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. Genidocs, the Company's secure document delivery application,
integrates with existing e-mail systems and provides multiple options for content and attachment encryption, authentication, audit trail and delivery confirmation, and digital signatures.
Omtool's AccuRoute software further unifies the codes base and architecture of the Genidocs and Genifax product lines, with the routing capabilities of the AccuRoute software to provide a truly unique
customer specific product to easily manage documents, both paper and electronic documents with little or no user training required.

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; communication capacity can be
implemented and added over time through the addition of system components and connectors as needed to keep pace with demand. Additional Omtool servers can be added to a configuration to provide
failover through redundancy, helping to ensure continuous operation. Omtool intends to maintain a leadership position in its traditional market, secure electronic document exchange, while continuing
to consolidate functionality of all its products into a single, configurable platform, expand the level of integration with

1

---

complimentary
technologies such as document management, records management and extend its document capture capability to include virtually all multifunctional devices and scanners. In doing so, Omtool
will be pursuing a leadership position in the broader document delivery/exchange and management market which it believes will grow in response to increasingly regulated communications. Omtool will
continue to focus on those vertical markets where regulations and or business practices require confidentiality, timely electronic delivery and archiving of critical documents in electronic and paper
format.

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, control and monitor electronic document
exchange and track transactions from within their existing e-mail client application, thus eliminating the need for and expense of deploying and managing proprietary applications to
corporate desktops. In addition, with the development of Omtool's AccuRoute software, similar document exchange capabilities are available for paper documents. In recognition of the prevalence and
wide acceptance of Adobe's Portable Document Format ("PDF") as a popular and sometimes regulated exchange format, Omtool has added capabilities to all of its products to convert and send PDF
documents. Omtool's products also include the ability to convert and deliver to the user's desktop, as both fax and secure e-mail documents in PDF format. In addition, archive options
enable Omtool users to view and archive inbound PDF documents to resident document management systems, fully-profiled (an important issue for users of document managements systems since it is the
document profile that enables users to search for and find documents quickly) with essentially single-click simplicity.

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 http://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 and to comply with emerging government mandates and regulations, companies must focus on improving and streamlining
the exchange and management of documents, 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 realization of a fully electronic environment continues to fall short of expectations because of the existence and continued reliance on paper
as a means of exchange, collaboration and storage.

While
a significant amount of all documents originate in electronic form, 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 development and enhancements introduced its AccuRoute softwarea server-based
application that leverages the existing electronic-delivery and management tools embodied in the Genifax and Genidocs product lines, to enable users to deliver, manage and archive hardcopy documents,
electronically. These products enable both the efficient, secure and controlled electronic delivery and electronic archival that

2

---

makes
hardcopy content available across the enterprise for easy reuse and redistribution. 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.

As
business-to-business transactions continue to migrate to the Internet, and issues of privacy, confidentiality, tracking and archiving become the subject of
governmental regulation businesses may increasingly seek ways to address these issues through technological solutions
that combine a secure Internet-based electronic document exchange that acts as an alternative solution to paper-based document communications with the ability to quickly or automatically archive
documents, and to leverage existing hardware and networks to capture convert and manage information that exists solely in paper or hardcopy form. Such solutions must enable businesses to extend and
enhance their existing enterprise and web-based technology to provide the reliable and secure exchange, tracking and archiving of all electronic and hardcopy documents 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 believes that 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.
Document management system vendors tend to approach the issues from the point of view of archiving only, therefore those solutions may not incorporate all of the necessary features or be simple enough
to execute to warrant enterprise-wide adoption. Manufacturers scanner and manufacturers of multifunctional devices for the most part have incorporated scan to delivery functionality on a
relatively limited basis, leaving important tasks such as document profiling to the user as a "post scan" task, and most do not address the issue of confidential point-to-point
document delivery. Omtool has developed a suite of interwoven server and desktop products that provides enhanced, secure enterprise document exchange, incorporating hardcopy seamlessly and providing
integrated archiving that combined will enable companies to meet the needs of businesses for efficient, electronic document exchange and emerging regulatory requirements.

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, archive and confirm the secure delivery of every important document leaving the officewithout changing existing work habits. Omtool adds the
functionality and security missing from existing messaging, multifunction, enterprise resource planning ("ERP") and document management systems. Omtool's security and hardcopy and fax archive features
help companies meet ever-increasing government mandates and best practice policies that require the protection and preservation of confidential business and personal information that is
transmitted electronically. Omtool's enterprise software and desktop application cost-effectively adds accountability, improved security and archiving, and easy access to popular document
management systems for electronic document transactions.

Omtool's
products, licensed on a combination server/seat basis or on a server only or seat only basis provide users with an extensive, flexible feature set that converts, transmits,
receives, and automatically archives documents in electronic formats. This enables users to streamline the handling and management of business documents and assists businesses with complying with
government regulations. 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.

The
Company has invested heavily in re-architecting its core processing platform to be the common engine that supports all of Omtool's document exchange features and
functionality. The

3

---

common
engine is referred to as the Omtool Messaging Server, and the base product that supports this new engine is its AccuRoute software.

AccuRoute

Omtool's AccuRoute software enables users to capture and convert the data stored in hardcopy format to an image based (un-editable) or editable PDF
format which is then routed and archived. The key to the power of this product is that it provides a common user interface for all brands of scan-enabled multifunctional devices and
scanners by moving the document capture and delivery options from the device's control panel to the user's desktop. The AccuRoute software's desktop feature allows the user to pre-define
the document route, providing full access to corporate global address lists and personal contact lists, as well as the profiling functionality of the resident document/records management system. The
routing information is captured and encoded as a character-based string called an embedded directive which is the basis for the AccuRoute product's intelligent routing sheet. Printed, the intelligent
routing sheet is combined with the document to be routed and scanned. At the multi-function device ("MFD"), rather than using the front panel to create the same routing list (if the capability even
exists in the device) the user through a simple keystroke scans the document and directs the data to the AccuRoute server which reads the embedded directive and routes the document accordingly. Stored
as a PDF, the intelligent routing sheet can be archived for re-use, distributed to team members or posted on a web site for general use routing documents to a predefined set of
destinations.

The
modular design of the message server platform allows an organization to deploy a basic AccuRoute scan-to-route system for document capture, delivery and
archive, adding full enterprise fax functionality, including desktop and scan to fax, as needed simply by purchasing the appropriate components and fax modem hardware. Document routing instructions
encoded in an embedded directive can be combined with server routing rules to automatically archive inbound faxes in the resident document management system as well as route to numerous other
locations. This type of automated document routing streamlines paper intensive processes by eliminating the in-house scanning step as the document is essentially scanned when it is faxed
and provides efficient routing of electronic documents.

Omtool's
fax-based client/server software platform deployed as part of a full AccuRoute system or solely as the Genifax product, 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.

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
business-to-business electronic document exchange solutions that include capture, conversion, archiving and exchange of either paper or electronically formatted documents. In
addition, Omtool intends to take advantage of its customer base, partnerships and knowledge of communication and enterprise solutions to become a leading provider of
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 and consolidate its product
offerings and to form strategic technology and distribution partnerships to further penetrate its markets.

Maintain Technology Leadership in the Enterprise Market.The Company intends to continue to invest in its electronic document
delivery strategy through integration with other document and records management system platforms, by continuing to refine the Omtool message server based platform with

4

---

additional
features, and by integrating with other third-party systems. In addition, where appropriate, Omtool will continue to invest in and refine its fax and secure messaging technologies as part
of the evolution of the AccuRoute platform to keep pace with its customer requirements. Where opportunities exist, Omtool will investigate repackaging parts of its existing technology to address
opportunities that the Company believes exists for low cost, distributed products that provide limited document exchange capabities.

Leverage Installed Base of Customers.The Company believes that with the AccuRoute platform, opportunities exist to expand
the user-base of its products and expand the use of its 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. The Company will actively seek opportunities to sell
its AccuRoute platform capabilities to existing customers who are currently using the Genifax
software; specifically to improve processes, reduce costs and address regulatory issues relating to information archiving and access.

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, healthcare and Fortune 1000 markets and intends to continue to focus its marketing and sales efforts on the those
markets.

The
Company believes that pending government regulations regarding privacy and the need to better manage paper documents will drive many healthcare organizations to
re-examine existing methods of delivering patient-related information and investigate ways to streamline paper-based processes to improve efficiency and eliminate redundancy. 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 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.

The
Company will also seek new opportunities to leverage its document capture, and archiving capabilities as new government mandates such as Sarbanes-Oxley dictate policy for tracking
and archiving any and all communications and documents relating to financial reporting.

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 will continue 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
continues to refine its North American and expand its 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.

Increase International Sales Presence.The Company intends to increase 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 2001, 2002 and 2003, approximately 10%, 14% and 19%, respectively, of the
Company's total revenues were derived from sales outside of North America

5

---

(primarily
in Europe). In 2004, the Company plans to increase its current level of investment in sales and marketing efforts directed towards international markets.

Leadership in the Microsoft Server and Messaging Environments.Windows server technology 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 server functionality and that offered in future Microsoft operating and messaging systems.

Leadership in the Document Capture and Delivery Software Environment.The AccuRoute platform provides a common set of
document capture and distribution tools across a broad set of multifunction devices from virtually all manufacturers. The Company believes that other companies will adopt policies to more effectively
control information exchange and archiving as paper will become an obstacle as it does not fit into the e-mail culture of today's business environment. The AccuRoute platform provides a
simple solution to the problem by enabling any MFD to become a means of seamlessly bridging the paper/electronic gap and because it is not hardware dependant, it is the ideal solution for mixed device
environments.

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,
Hummingbird, Worldox, and AccuTrack, providers of information and collaboration management software for enterprises.

Current Products and Services

AccuRoute

Omtool's AccuRoute software enables users to deliver a hardcopy documents from any brand of digital scanning and multifunction 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 archived to a resident document/records management
system or network file share, or printed on any network connected printer. The AccuRoute software uses an intelligent routing page, created at the user's desktop that encodes the document routing
information (a recipient list with corresponding delivery channels, as well as the printing and document management information). The AccuRoute software's routing sheet can be archived for
re-use, included as an attachment to an email document (that can also contain an additional document attachment) and routed to the AccuRoute server for processing and delivery or printed,
added to the paper document and scanned at the network-connected device.

6

---



Genifax

Omtool's Genifax software is multi-tiered client/server software for automating and integrating fax communication throughout an 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:



The
private fax feature has specific utility to the legal, healthcare and financial services markets as well as other markets where maintaining confidentiality of faxed documents is
either a regulated requirement or a best practice. An administrator may also take advantage of password/security features native to the Windows server operating system to provide needed protections.

Genifax
LE software 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 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 electronic document delivery and control features to the legal desktop in the context of existing work-flows
and habits.

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.

7

---

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:



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 designed for use by law firms, 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 was licensed typically on a shrink-wrap basis, primarily on
the Windows 95/98 and Windows NT operating systems. The LegalFax product supported Microsoft Exchange, Novell GroupWise, and Lotus Notes, and allowed users to fax using native transport protocol.
Additionally, the LegalFax product was 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. During 2003, the Company announced the release of Genifax LE as its state of the art product to serve this market. As such, the Company has also been migrating the LegalFax customer base to
Genifax LE and is discontinuing the active sales and marketing of the Legalfax product.

Hardware

The Company resells from third-party vendors certain hardware products, including intelligent fax boards and fax modems, to its customers. Hardware sales are
undertaken as a convenience to the

8

---

Company's
customers and hardware is not required to be purchased from the Company and can be alternatively obtained from a third party vendor. The fax boards and fax modems that are resold are not
functional without the Company's software and the Company is not in the business of selling fax boards and modems.

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 installation, training and consulting 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 2001, 2002 and 2003, sales outside of North America (primarily Europe) represented approximately 10%, 14% and 19%, respectively,
of total revenues.

In
support of its sales organization, the Company implements 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 delivery and management 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.

9

---

Customers

As of December 31, 2003, the Company had more than 8,200 customers worldwide. The Company's customer base reflects the cross-industry applicability of the
Company's products and services.

No
single customer accounted for 10% or more of total revenues in 2001, 2002 or 2003.

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
consolidate and enhance the Genifax, Genidocs and AccuRoute products into a single feature flexible platform. 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 retain skilled development engineers. If the Company needs to replace such engineers they 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
2001, 2002 and 2003 was approximately $3.2 million, $2.8 million and $2.2 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 compensation of skilled engineers and independent contractors.

Competition

In the distributed document capture and delivery 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 from a number of software vendors whose business focus was initially the high volume production scanning segment such as Kofax, Captiva, or forms management and process routing companies such
as Cardiff. e-Copy, a former Omtool business partner, has formed a relationship with Canon and has in the past year embedded their document capture and routing capabilities into the Canon
device front panel. Other potential software competitors include ScanSoft, as well as the document management vendors like Hummingbird and iManage who are seeking to develop, either through
partnerships or internally, scan-to-archive capabilities using standard e-mail as the transport, and a generic document profile as a means of entering the content
into their repository. The Company expects this market to mature and become increasingly competitive with success resulting from the formation of critical partnerships and alliances with both selected
hardware and software partners.

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 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 continue its focus and deliver a core,

10

---

modular
and scalable product on one of the most prolific system platforms, Windows 2000/2003, with features that appeal to the broadest segment of the electronic document exchange market, which
includes fax and all of the of the other document control and management features that Omtool offers.

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.

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.

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.

11

---

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, three pending U.S. patent applications, one pending PCT application, two pending foreign patent applications, one pending U.S.
trademark applications and four pending 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 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, 2003, the Company employed 72 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 expires in December 31, 2005. The Company believes that
this facility are adequate for its present operations. Additionally, the Company leases a facility for sales, customer service, accounting and support, in London, England, which expire in
May 2005.

12

---



Item 3. Legal Proceedings

None.

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

None.

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:2002March 31, 2002

$
7.84

$
5.25June 30, 2002

$
10.01

$
5.25September 30, 2002

$
6.58

$
1.40December 31, 2002

$
3.15

$
1.262003March 31, 2003

$
2.38

$
1.54June 30, 2003

$
3.27

$
1.01September 30, 2003

$
4.85

$
2.39December 31, 2003

$
8.85

$
3.35


On
March 18, 2004, the closing price for the common stock was $13.75 per share. As of March 18, 2004, there were approximately 76 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
912 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

---

Item 6. Selected Consolidated Financial Data

The statements of consolidated operations data set forth below for the fiscal year ended 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 each of the fiscal years ended December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002 and 2003 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, 1999 and 2000 and the balance sheet data as of December 31, 1999, 2000 and 2001, 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                             |                          |        
|                                                     | Loss (income) on sale of AS/400 product line |                          |        
|                                                     |                                              |                          |        
|                                                     |                                              | Total operating expenses |        
|                                                     |                                              |                          |        
|Loss from operations                                 |                                              |                          | (10,686
|Interest and other income, net                       |                                              |                          | 668    
|                                                     |                                              |                          |        
|Loss before (benefit) provision for income taxes     |                                              |                          | (10,018
|(Benefit) provision for income taxes                 |                                              |                          | (857   
|                                                     |                                              |                          |        
|Net loss                                             |                                              | $                        | (9,161 
|                                                     |                                              |                          |        
|Net loss per share                                   |                                              |                          |        
|                                                     |                                              | Basic and diluted        |        
|                                                     |                                              |                          |        
|Weighted average number of common shares outstanding |                                              |                          |        
|                                                     |                                              | Basic and diluted        |        
|                                                     |                                              |                          |        

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

14

---



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 is a leading provider of electronic document delivery and management software that enables efficient, secure, confirmed and cost-efficient
document exchange between businesses. The Company was incorporated in March 1991 and shipped its initial facsimile software products in 1991. Omtool's products provide users with an extensive,
flexible feature set that converts, transmits, receives, and automatically archives documents in electronic formats. Included in the Company's products is a suite of utility and control functions that
enables the conversion of paper documents to standard electronic formats and integrates with industry recognized document and records management systems. Omtool's products enable the integration of
business processes that include the exchange of hard copy and 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. AccuRoute, Omtool's document
routing and distribution software, integrates with many digital scanning and multifunctional devices to allow paper documents to be digitized, distributed and archived. In addition, Omtool's AccuRoute
software provides capture, distribution and compliance for movement of electronic documents and information. 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. Genidocs, the Company's secure document delivery application, integrates with existing
e-mail systems and provides multiple options for content and attachment encryption, authentication, audit trail and delivery confirmation, and digital signatures. AccuRoute further unifies
the codes base and architecture of Genidocs and Genifax, coupled with the routing capabilities of the AccuRoute platform to provide a truly unique customer specific product to easily manage documents,
both paper and electronic documents with little or no user training required. 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.

The
Company resells, from third-party vendors, 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 hardware is not required to be purchased from the Company and can be alternatively obtained from a third-party vendor. The fax boards and fax modems that are
resold are not functional without the Company's software and the Company is not in the business of selling fax boards and modems. The Company purchases these hardware products as needed to ship to its
customers and the Company maintains a minimal inventory of these hardware products. Management believes that it has a good business relationship with suppliers of these products and that supply of
these products is stable.

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.
The Company

15

---

generates
a smaller portion of its service and other revenues from consulting, training and installation services.

The
Company's financial results for 2003 improved from 2002 as the net loss was reduced from $5.5 million in 2002 to $1.9 million in 2003. The Company also recorded a net
profit of $400,000 for the quarter ended December 31, 2003. Quarterly revenue for the last three quarters of 2003 was higher than it was for the same three quarters of 2002. However, annual
revenue for 2003 was 5% lower than it was for 2002 due to a weak first quarter in 2003. The Company's revenue however has grown in each subsequent quarter. The Company believes that there has been
some improvement in the demand for enterprise software solutions over this period which has led to an increase in information technology spending. The sales growth the Company has been experiencing in
the last three quarters of 2003 is a result of a steady improvement of sales transactions over the same time period. The current expected level of sales transactions and resulting revenues for 2004
combined with lower annual expenses (resulting from the third quarter of 2003 restructuring charge) leads management to believe that its results of operations will be better in each quarter in 2004
than in the comparable quarter of 2003. However, this expectation is subject to change if the current economic environment changes and the general softness in information technology spending returns
or if the Company's products do not achieve market acceptance. As a result of the losses incurred in the first three quarters of 2003, the Company reduced its work force and office space in
September 2003 to lower the overall cost of operations. Although the Company's operating cash flow for the year ended December 31, 2003 resulted in a use of cash of $1.4 million,
the Company's cash and cash equivalents at December 31, 2003 were approximately $8.2 million. As such, 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.

Although
the Company believes that recently there has been some improvement in the demand for enterprise software solutions, it cannot predict when that market will change. When the
market does change, the Company cannot predict whether, and to what extent, the demand for its products will increase or decrease. Any decrease in demand for the Company's products would most likely
result in decreased revenue which would in turn 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 September 2003 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 19%,
14% and 10% of the Company's total revenues in 2003, 2002 and 2001, 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

16

---

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 will continue 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 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 26%, 23% and 23% of the Company's total revenues for the years ended December 31, 2003, 2002 and 2001, respectively.

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, at 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. The hardware products that are resold are not functional without the Company's
software. 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. 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

17

---

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 this is a one-year period, but occasionally the Company sells multiple-year maintenance contracts in which case, the associated revenue is
recognized over the multiple-year term of the contract. 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,
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

18

---

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 approximately $367,000 and $615,000 at December 31, 2003, and 2002, respectively. Both components of calculating
the estimated reserve, specific identification and historic experience, 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 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 2002, and the outlook indicated that significant uncertainty would continue into 2003. These cumulative losses, together with the Company's prior losses, resulted in management's decision that it
was more likely than not that all of its deferred tax assets would not be realized in the foreseeable future. Accordingly, the remaining net deferred tax asset was written off in the second

19

---

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 and
the time period
that the Company has nexus. The assumptions and estimates used to determine this liability are subject to change as they are difficult to measure or value. In the event that 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           |                          | 29.9
|                                                 | Hardware                   |                          | 20.1
|                                                 | Service and other          |                          | 50.0
|                                                 |                            |                          |     
|                                                 |                            | Total revenues           |     
|                                                 |                            |                          |     
|Cost of revenues:                                |                            |                          |     
|                                                 | Software license           |                          | 2.0 
|                                                 | Hardware                   |                          | 13.6
|                                                 | Service and other          |                          | 22.9
|                                                 |                            |                          |     
|                                                 |                            | Total cost of revenues   |     
|                                                 |                            |                          |     
|Gross profit                                     |                            | 61.5                     |     
|                                                 |                            |                          |     
|Operating expenses:                              |                            |                          |     
|                                                 | Sales and marketing        |                          | 34.5
|                                                 | Research and development   |                          | 15.9
|                                                 | General and administrative |                          | 21.4
|                                                 | Restructuring              |                          | 5.9 
|                                                 |                            |                          |     
|                                                 |                            | Total operating expenses |     
|                                                 |                            |                          |     
|Loss from operations                             |                            | (16.2                    | )   
|Interest and other income, net                   |                            | 1.0                      |     
|                                                 |                            |                          |     
|Loss before (benefit) provision for income taxes |                            | (15.2                    | )   
|(Benefit) provision for income taxes             |                            | (1.0                     | )   
|                                                 |                            |                          |     
|Net loss                                         |                            | (14.2                    | )%  
|                                                 |                            |                          |     
|Gross profit:                                    |                            |                          |     
|                                                 | Software license           |                          | 93.2
|                                                 | Hardware                   |                          | 32.8
|                                                 | Service and other          |                          | 54.2

20

---

Fiscal Years Ended December 31, 2003 and 2002

Revenues

Total Revenues.The Company's total revenues were $13.7 million and $14.5 million for the years ended
December 31, 2003 and 2002, respectively, representing a decrease of 5%.

Software License.Software license revenues were $4.1 million for the year ended December 31, 2003 and
$4.4 million for the year ended December 31, 2002, representing a decrease of 6%. Software license revenues accounted for 30% of total revenues for each respective period. The Company
believes that there has been some improvement in the demand for enterprise software solutions over the past year which has led to an increase in information technology spending, however, the
improvement was not substantial enough nor early enough in the fiscal year to lead to improved software revenues for the year ended December 31, 2003. Included in software license revenue is a
reduction in the sales returns and allowance reserve of $147,000 relating to specific accounts where the Company has determined that the risk of a return is no longer present. The Company expects that
software license revenue will constitute a larger percentage of its total revenue in the future if demand for its newer software products, such as Accuroute, gain additional market acceptance.

Hardware.Hardware revenues were $2.8 million for the year ended December 31, 2003 and $2.7 million for
the year ended December 31, 2002, representing an increase of 1%. Hardware revenues accounted for 20% and 19% of total revenues for each respective period. The increase in hardware revenues was
primarily due to the change in the particular mix of hardware products sold. Included in hardware revenue is a reduction in the sales returns and allowance reserve of $51,000 relating to specific
accounts where the risk of a return is no longer present. The Company expects hardware revenue to constitute a smaller percentage of its total revenue in the future if the sales of software products
such as Accuroute, which does not require accompanying hardware, become a larger component of total revenue.

Service and Other.Service and other revenues were $6.9 million and $7.4 million for 2003 and 2002,
respectively, representing a decrease of 7%. Service and other revenues accounted for 50% and 51% of total revenues for each respective period. The decrease in service and other revenues was due to
the decrease in software maintenance and support revenues for the Company's legacy fax products resulting from a decrease in the renewals of software maintenance and support contracts for those
products for 2003 compared to 2002. This factor and the decrease in overall revenues explain the decrease in service and other revenues as a percentage of total revenues. Management intends to
increase its efforts to improve the renewal of its software maintenance contracts because they account for a significant portion of total revenue.

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 $280,000 and $347,000 in 2003 and 2002, respectively, representing 7% and 8% of software license revenues for
each respective period. Software license gross margin percentages improved to 93% in 2003 from 92% in 2002 due mostly to reductions in the expense associated with reproducing product documentation.
The decline in cost is due to lower software sales levels in 2003 than in 2002.

Hardware.Cost of hardware revenues consists primarily of the costs of third-party hardware products. Cost of hardware
revenues was $1.9 million and $1.8 million in 2003 and 2002, respectively, representing 67% and 65% of hardware revenues for each respective period. The increase in dollar amount for the
cost of hardware revenues for the fiscal year ended December 31, 2003 was due primarily to the increase of hardware unit sales accompanying the Company's products. The gross margin percentage
for hardware sales decreased to 33% for 2003 from 35% in 2002. The gross margin

21

---

decrease
is due mainly to a change in the mix of hardware products sold as each product sells at a different gross margin. The Company's unit cost of the hardware products remained the same in 2003
and management does not expect that it will change significantly enough in 2004 such that it would have a material impact on hardware margins in the future.

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 $3.2 million and $3.3 million in 2003 and 2002, respectively, representing 46%
and 45% of service and other revenues for each respective period. The gross margin percentage for service and other revenues decreased to 54% for 2003 from 55% in 2002. The decrease in dollar amount
of cost of service and other revenues is due to decreased wage expense and the associated overhead costs resulting from a decrease in the number of employees in the service department beginning in
September of 2003. The decline in gross margins is a result of the decreased service and other revenues. The Company does not foresee any significant changes to its service and other margins in 2004.

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 $4.7 million and $6.2 million in 2003 and 2002, respectively, representing 35% and 43% 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 during the third
quarter of 2003, along with decreases in advertising and direct marketing expenses. The decrease in expenses as a percent of total revenues is also due to these decreased costs. The Company expects
sales and marketing expenses are likely to decrease in absolute dollars as there will be fewer employees in the department in 2004 as a result of the restructuring that took place in the third quarter
of 2003.

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 $2.2 million and $2.8 million in 2003 and 2002, respectively, representing 16% and 19% of total revenues for each
respective period. In conjunction with a corporate restructuring, several positions were eliminated during the third quarter of 2003. 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. Management does not believe that the decrease in
the number of employees will have a material adverse effect on its ability to the development of new products and new versions of its existing products. 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
$2.9 million and $4.6 million in 2003 and 2002, respectively, or 21% and 32% of total revenues for each respective period. The decrease in dollar amount and as a percentage of total
revenues is due to reductions in depreciation, consulting and professional fee expenses combined with a decrease in accruals for state sales tax. Management will continue to monitor and reduce
professional fees and other general and administrative expenses when possible. The Company expects general and administrative expenses to remain consistent in absolute dollars.

22

---

Restructuring costsIn the third quarter of 2003, the Company announced a restructuring of certain of
its operations, and
recorded a pretax charge of $806,581 in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. The
charge includes severance-related costs associated with the workforce reduction, primarily in the Company's domestic operations, and costs associated with closing of its Oregon office. The reduction
in workforce consisted of three employees in the sales and marketing department, two employees performing general and administrative functions, three employees performing technical support services
and five employees in the research and development department.

The
following table summarizes the accrual and usage of the restructuring charges in 2003:

Lease

Severance

TotalTotal charge

$
17,420

$
789,161

$
806,581Cash payments


(17,420
)

(345,331
)

(362,751
)Ending balance, December 31, 2003

$


$
443,830

$
443,830


The
total cash impact of the restructuring is $806,581, which the Company anticipates will be paid by the end of the third quarter of 2004.

Interest and Other Income.Interest and other income consists principally of interest income earned on cash and cash
equivalents. Also included in 2003 is amounts recognized from the sale of common stock of Verso Technologies, Inc., ("Verso") as described below. Interest and other income was $140,000 for the
fiscal year ended December 31, 2003 and $181,000 for the fiscal year ended December 31, 2002. The decrease of 23% is due to changes in principal balances and lower interest rates.

Included
in the 2003 Interest and Other Income is $51,000 from the sale of common stock of Verso as described below. The remaining decline in interest and other income, net (excluding
the proceeds from the sale of Verso stock) is due to changes in principal balances of the Company's cash and cash equivalents.

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, a company publicly traded on the Nasdaq National Market under the symbol VRSO. The Company received 45,487 shares of Verso

23

---

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.

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 45,487 of its Verso Common Stock for approximately $11,000 and recorded the realized value in Interest and Other Income at that time.

On
July 18, 2003, the Company received an additional 11,029 shares of Verso Common Stock as certain conditions described in the purchase agreement were met. The Company sold those
shares on September 8, 2003 for $4.63 per share for total gross proceeds of $51,000 and recorded the realized value in Interest and Other Income at that time. The Company does not expect to
receive any additional shares of Verso common stock. The Company's warrant to purchase 8,580 shares of Verso common stock expires in November 2005. The fair value of the warrant is not material
to the Company's financial statements.

Provision for Income Taxes.During 2003, the Company recorded a $155,398 tax benefit which resulted from a tax refund that
its United Kingdom subsidiary received during the first quarter of 2003. This subsidiary had incurred a loss for the fiscal year ended December 31, 1999 which resulted in an income tax benefit.
The tax benefit was carried back to prior years' taxes paid and resulted in a tax refund. Because the subsidiary was undergoing an Inland Revenue audit for tax year 1999, the realizability of this
refund was not certain and therefore the Company did not record the benefit on its books until the audit was cleared and the cash was received, both of which occurred in the first quarter of 2003. The
Company provided a tax provision of $11,076 for its United Kingdom subsidiary based on the level of profitability that the subsidiary generated in 2003.

The
Company recorded a provision of $1.2 million against the valuation of its net deferred tax asset during the year 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 indicated 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.

24

---

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

25

---

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.Interest and other income consists principally of interest income earned on excess cash. Interest
and other income 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 during the year 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 2002, and the
outlook indicated that significant uncertainty would continue into the next fiscal year. These cumulative losses, together with the Company's prior losses, resulted in management's decision that it
was more likely than not that all of its deferred tax assets would 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.

26

---

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, 2003, the Company had cash and cash equivalents of $8.2 million and working capital of
$3.2 million. The Company believes that its existing cash and cash equivalents will be sufficient to meet the Company's working capital, capital expenditures and other liquidity requirements
for at least the next twelve months.

The
Company's operating activities used cash of $1.4 million and $2.2 million for the years ended December 31, 2003 and 2002, respectively. Management restructured
the organization in September 2003 to reduce operating expense and help preserve cash. Management believes that these reductions, which are anticipated to total approximately
$1.6 million annually, along with the revenue assumptions used for the Company's 2004 budget will lead to sufficient cash for at least the next twelve months. Net cash used during the year
ended December 31, 2003 consisted primarily of a net loss from operations and decreases to the accounts receivable reserve, accrued state sales tax, accounts payable and accrued liabilities.
The decrease in the accounts receivable reserve is due to the release of reserves relating to specific accounts where the risk of a return is no longer considered to be present. The decrease in
accounts payable is due to the timing of vendor payments. The decrease to accrued state sales tax is due to payments made to settle taxes due to certain states during the year. The Company expects to
continue to settle state sales taxes with other states in 2004 but cannot predict with any certainty the overall negative effect this might have on cash. The decrease to the accrued liabilities is due
to the timing of the Company's year end payroll and to a reduction in accrued professional fees. The uses of cash were offset by the non-cash effects of depreciation and amortization,
along with decreases to accounts receivable, prepaid expenses and inventory and an increase in accrued restructuring. The decrease in accounts receivable is due to management's increased focus on
improving working capital by decreasing days sales outstanding. 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 sale tax and accounts payable and decreases in accounts receivable and prepaid and other current assets.

Investing
activities provided cash of $1.4 million and used cash of $583,000 for the years ended December 31, 2003 and 2002, respectively. Cash proceeds in 2003 were from
the sale of short-term investments offset by the purchases of short-term investments and purchases of property, plant and equipment. The Company's investments are
professionally-managed and the Company has instructed its broker to earn the highest interest rate possible for low-risk securities. The Company's broker primarily purchases cash
equivalent securities but may, on occasion, purchase short-term investments. Property and equipment purchases were predominately of computer-related software and hardware products. The
principal uses in 2002 were purchases of short-term investments and property and equipment, offset by proceeds from the sale of short-term investments.

Financing
activities provided cash of $11,000 and used cash of $236,000 during the years ended December 31, 2003 and 2002. Cash provided by financing activities in 2003 consists
of proceeds from the issuance of treasury stock for stock option exercises. Cash used by financing activities in 2002 is due primarily to net proceeds from the issuance of treasury stock for stock
option exercises offset by the purchases of treasury stock.

Based
on its fourth quarter performance and current expectations, the Company believes that the cash, cash equivalents and cash generated from operations will satisfy its working capital
needs, capital expenditures and other liquidity requirements associated with its operations through at least the next twelve months. The Company expects that principal uses of cash will be for
operations, working capital,

27

---

payment
of sales taxes and purchases of property and equipment. Management currently has no plan to obtain additional financing if these expectations are not met. 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, 2003:

Less than
one year

One to
three years

Three to
five years

More than
Five yearsOperating lease obligations

$
365,000

$
270,000



Total obligations

$
365,000

$
270,000






Operating
lease requirements consist mainly of lease payments for the Company's offices in Salem, New Hampshire and London, England (See Item 2, Properties, of this
form 10-K for more information regarding the Company's leases). As of December 31, 2003, the Company did not have any long-term debt obligations, capital lease
obligations, or other long-term liabilities for which payments are required.

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, 2001, 2002 and 2003, 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
occur and, together with pricing pressures and a 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 Accuroute, Genifax and Genidoc software products to new customers as well
as increased product penetration into existing customers. The Company recently commenced its strategic expansion into document routing and distribution software, and has limited financial and
operating data and a limited operating history relevant to this solution. Accordingly, it is difficult to evaluate the

28

---

prospects
for the level of acceptance of this solution. 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, 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

29

---

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 Product Line and the Windows 2000/XP environment.The Company currently derives a significant portion
of its revenues from licenses of the Genifax product and related services and resale of related hardware. Continued market acceptance of the Genifax product is critical to the Company's future
success. As a result, any decline in demand for or failure to maintain broad market acceptance of the Genifax product line 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. There can be no assurance that the Company will continue to be successful in marketing the Genifax product or any new or enhanced versions of the Genifax product. 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

30

---



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. 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.

Intense Competition.The document routing and distribution software, 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

31

---

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, 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

32

---

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.

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 value added resellers ("VARs"), systems integrators, distributors and strategic business partners. Although the
Company has historically focused its efforts on marketing through its sales force, the Company continues to utilize resources to develop and expand 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.

Ability to obtain Additional Financing.We expect our current cash, cash equivalents and investments will meet our normal
working capital and capital expenditure needs for at least the next twelve months. We may need to raise additional funding at that time or earlier if we decide to

33

---

undertake
more rapid expansion, including acquisitions of complementary products or technologies, or if we increase our marketing and/or research and development efforts in order to respond to
competitive pressures. We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. We may obtain additional financing by issuing shares of our common stock,
which could dilute our existing stockholders. If we cannot raise needed funds on acceptable terms, or at all, we may not be able to develop or enhance our products or respond appropriately to
competitive pressures, which would seriously harm our business.

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.

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 increase 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

34

---

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 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, 2003, the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which
fair value disclosure would be required. 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 current investment
portfolio of cash equivalents 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

35

---

of
currency exchange rate movements on intercompany transactions was immaterial for the year ended December 31, 2003. 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-26,
respectively, of this Form 10-K.

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

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

Item 9a. Controls and Procedures







PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

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, 2003.

Executive Officers

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, 2003.

36

---



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, 2003.

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, 2003.

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 not later than 120 days after the close of the Company's fiscal year ended December 31, 2003.

Item 14. 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, 2003.

PART IV

Item 15. 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)                                    
|               |  |                                                                                                                                                                                                

37

---

|*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)                                                          
|*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)                                          
|*10.13 |  | Severance Agreement with Robert L. Voelk, dated August 29, 2003 (filed as Exhibit 10.13 to the Company's Form 10-Q for the fiscal quarter ended September 30, 2003 and incorporated herein by
reference)                              
|*10.14 |  | Severance Agreement with Daniel A. Coccoluto, dated August 29, 2003 (filed as Exhibit 10.14 to the Company's Form 10-Q for the fiscal quarter ended September 30, 2003 and incorporated herein by
reference)                          
|*10.15 |  | Severance Agreement and General Release with Michael K. Sheehy, dated September 2, 2003 (filed as Exhibit 10.15 to the Company's Form 10-Q for the fiscal quarter ended September 30, 2003 and
incorporated herein by reference)      
|*10.16 |  | Severance Agreement and General Release with Timothy P. Losik, dated September 2, 2003 (filed as Exhibit 10.16 to the Company's Form 10-Q for the fiscal quarter ended September 30, 2003 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)                                                                                                                                                                                        
|31.1   |  | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                
|31.2   |  | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                
|32.1   |  | 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.                                                                                    
|       |  |                                                                                                                                                                                                                                       

38

---

|32.2 |  | 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 furnished a Report on Form 8-K, dated October 22, 2003, pursuant to Item 12 thereof furnishing the results of its operations for the quarter
ended September 30, 2003.



The
exhibits required by this Item are listed under Item 15(a)(3).



The
financial statement schedules required by this Item are listed under Item 15(a)(2).

39

---



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 22nd day of March 2004.

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

POWER OF ATTORNEY

We, the undersigned officers and directors of Omtool, Ltd., hereby severally constitute and appoint Robert L. Voelk and Daniel A. Coccoluto,
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 22, 2004
|/s/DANIEL A. COCCOLUTODaniel A. Coccoluto |  | Acting Chief Financial Officer, Secretary and Treasurer (principal financial and accounting officer) |  | March 22, 2004
|/s/RICHARD D. CRAMERRichard D. Cramer     |  | Director                                                                                             |  | March 22, 2004
|                                          |  |                                                                                                      |  |               

40

---

|/s/ARNOLD E. DITRIArnold E. Ditri                       |  | Director |  | March 22, 2004
|------------------------------------------------------- |  | -------- |  | --------------
|/s/ANDREW E. LIETZAndrew E. Lietz                       |  | Director |  | March 22, 2004
|/s/MARTIN A. SCHULTZMartin A. Schultz                   |  | Director |  | March 22, 2004
|/s/WILLIAM C. STYSLINGER, IIIWilliam C. Styslinger, III |  | Director |  | March 22, 2004

41

---



OMTOOL, LTD. AND SUBSIDIARIES        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Auditors                                                                       |  | F-2 
|Previously Issued Report of Independent Public Accountants                                           |  | F-3 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                         |  | F-4 
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001           |  | F-5 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001 |  | F-6 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001           |  | F-7 
|Notes to Consolidated Financial Statements                                                           |  | F-8 

F-1

---



REPORT OF INDEPENDENT AUDITORS

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

In
our opinion, the accompanying consolidated balance sheets 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, 2003 and 2002, and the results of their operations and their cash flows for the years 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. The consolidated financial statements of Omtool, Ltd. for the year 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 consolidated financial statements in their report dated January 16, 2002.

As
discussed above, the consolidated financial statements of Omtool, Ltd. for the year ended December 31, 2001 were audited by other independent accountants who have ceased
operations. As described in Note 6(d), these consolidated 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 consolidated 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 consolidated 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 consolidated financial statements taken as a whole.

/s/
PricewaterhouseCoopers LLP

Boston,
Massachusetts
January 15, 2004

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, 2001, and the consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31,
2000 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 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
consolidated financial statements. The adjustments to the 2001 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 $367,000 and $615,000 in 2003 and 2002, respectively |                                                                                                                                                   |           
|                                                           | Inventories, net                                                                           |                                                                                                                                                   |           
|                                                           | Prepaid expenses and other current assets                                                  |                                                                                                                                                   |           
|                                                           |                                                                                            |                                                                                                                                                   |           
|                                                           |                                                                                            | Total current assets                                                                                                                              |           
|Property and equipment, net                                |                                                                                            |                                                                                                                                                   | 394,623   
|Other assets                                               |                                                                                            |                                                                                                                                                   | 13,962    
|                                                           |                                                                                            |                                                                                                                                                   |           
|                                                           |                                                                                            | $                                                                                                                                                 | 10,491,936
|                                                           |                                                                                            |                                                                                                                                                   |           
|LIABILITIES AND STOCKHOLDERS' EQUITY                       |                                                                                            |                                                                                                                                                   |           
|Current liabilities:                                       |                                                                                            |                                                                                                                                                   |           
|                                                           | Accounts payable                                                                           |                                                                                                                                                   | $         
|                                                           | Accrued liabilities                                                                        |                                                                                                                                                   |           
|                                                           | Accrued restructuring                                                                      |                                                                                                                                                   |           
|                                                           | Accrued state sales tax                                                                    |                                                                                                                                                   |           
|                                                           | Deferred revenue, current                                                                  |                                                                                                                                                   |           
|                                                           |                                                                                            |                                                                                                                                                   |           
|                                                           |                                                                                            | Total current liabilities                                                                                                                         |           
|                                                           |                                                                                            |                                                                                                                                                   |           
|Long term liabilities                                      |                                                                                            |                                                                                                                                                   |           
|                                                           | Deferred revenue, long-term                                                                |                                                                                                                                                   |           
|                                                           |                                                                                            |                                                                                                                                                   |           
|                                                           |                                                                                            | Total liabilities                                                                                                                                 |           
|                                                           |                                                                                            |                                                                                                                                                   |           
|Commitments, contingencies and guarantees (Notes 9 and 11) |                                                                                            |                                                                                                                                                   |           
|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1,858,439 shares in 2003 and 2002, Outstanding1,750,250 and 1,744,500 shares in 2003 and 2002, respectively |           
|                                                           | Additional paid-in capital                                                                 |                                                                                                                                                   |           
|                                                           | Accumulated deficit                                                                        |                                                                                                                                                   |           
|                                                           | Treasury stock, at cost, 108,189 and 113,939 shares in 2003 and 2002, respectively         |                                                                                                                                                   |           
|                                                           | Accumulated other comprehensive loss                                                       |                                                                                                                                                   |           
|                                                           |                                                                                            |                                                                                                                                                   |           
|                                                           |                                                                                            | Total stockholders' equity                                                                                                                        |           
|                                                           |                                                                                            |                                                                                                                                                   |           
|                                                           |                                                                                            | $                                                                                                                                                 | 10,491,936
|                                                           |                                                                                            |                                                                                                                                                   |           

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 |                                                  |         
|                                                     | Restructuring              |                                                  |         
|                                                     |                            |                                                  |         
|                                                     |                            | Total operating expenses                         |         
|                                                     |                            |                                                  |         
|                                                     |                            | Loss from operations                             |         
|Interest and other income, net                       |                            |                                                  | 139,894 
|                                                     |                            |                                                  |         
|                                                     |                            | Loss before (benefit) provision for income taxes |         
|(Benefit) provision for income taxes                 |                            |                                                  | (144,322
|                                                     |                            |                                                  |         
|                                                     |                            | 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, 2000                                                            |  | 1,858,439    |  |                | 18,585 |  | (38,876  | ) |   | (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                                                            |  | 1,858,439    |  |                | 18,585 |  | (45,757  | ) |   | (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                                                            |  | 1,858,439    |  |                | 18,585 |  | (113,939 | ) |   | (924,570 | ) |   | 31,990,720
|                                                                                      |  |              |  |                |        |  |          |   |   |          |   |   |           
|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 |  |             |  |                |       |  | 5,750    |   |   | 46,636   |   |   | (36,098   
|                                                                                      |  |              |  |                |        |  |          |   |   |          |   |   |           
|Balance, December 31, 2003                                                            |  | 1,858,439    |  | $              | 18,585 |  | (108,189 | ) | $ | (877,934 | ) | $ | 31,954,622
|                                                                                      |  |              |  |                |        |  |          |   |   |          |   |   |           

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 reserves                                          |                                          
|                                                     |                                                                             | Compensation expense related to issuance of common stock to directors |                                          
|                                                     |                                                                             | Deferred income taxes                                                 |                                          
|                                                     |                                                                             | Changes in assets and liabilities                                    |                                          
|                                                     |                                                                             |                                                                       | Accounts receivable                      
|                                                     |                                                                             |                                                                       | Prepaid expenses and other current assets
|                                                     |                                                                             |                                                                       | Inventory                                
|                                                     |                                                                             |                                                                       | Accounts payable                         
|                                                     |                                                                             |                                                                       | Accrued liabilities                      
|                                                     |                                                                             |                                                                       | Accrued restructuring                    
|                                                     |                                                                             |                                                                       | 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                         |                                                                             |                                                                       | 77,740                                   
|                                                     |                                                                             |                                                                       |                                          
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                                       | 49,544                                   
|Cash and cash equivalents, beginning of year         |                                                                             |                                                                       | 8,192,523                                
|                                                     |                                                                             |                                                                       |                                          
|Cash and cash equivalents, end of year               |                                                                             | $                                                                     | 8,242,067                                
|                                                     |                                                                             |                                                                       |                                          

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 electronic document delivery and management software that enables efficient, secure,
confirmed and cost-efficient document exchange between businesses. Omtool's products, licensed on a combination server/seat basis or on a server only or seat only basis, provide users with
an extensive, flexible feature set that converts, transmits, receives, and automatically archives documents in electronic formats. This enables users to streamline the handling and management of
business documents and assists businesses in complying with government regulations such as the Sarbanes-Oxley of 2002 ("Sarbanes-Oxley") and the Health Insurance Portability and Accountability Act of
1996 ("HIPAA"). The features are also useful to any business that wants to track and archive documents and the document's transactions and secure and protect private information. Included in the
Company's products is a suite of utility and control functions that enables the conversion of paper documents to standard electronic formats and integrates with industry recognized document and
records management systems. Omtool's products enable the integration of business processes that include the exchange of hard copy and 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. AccuRoute®, Omtool's document routing and distribution software, integrates with many digital scanning and multifunctional devices to
allow paper documents to be digitized, distributed and archived in addition to providing capture, distribution and compliance for movement of electronic documents and information.
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.
Genidocs, the Company's secure document delivery application, integrates with existing e-mail systems and provides multiple options for content and attachment encryption,
authentication, audit trail and delivery confirmation, and digital signatures. AccuRoute further unifies the codes base and architecture of Genidocs and Genifax, coupled with the routing capabilities
of AccuRoute to provide a truly unique customer specific product to easily manage documents, both paper and electronic with little or no user training required.

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 2003 improved from 2002 as the net loss was reduced from $5.5 million in 2002 to $1.9 million in 2003. The Company also recorded a net
profit of $400,000 for the quarter ended December 31, 2003. Quarterly revenue for the last three quarters of 2003 was higher than it was for the same three quarters of 2002. However, annual
revenue for 2003 was 5% lower than it was for 2002 due to a weak first quarter in 2003. The Company's revenue has grown in each subsequent quarter since then. The Company believes that there has been
some improvement in the demand for enterprise software solutions over this period which has led to an increase in information technology spending. The sales growth the Company has been experiencing in
the last three quarters of 2003 is a result of a steady improvement of sales bookings over the same time period. The current expected level of sales bookings and resulting revenues for 2004 combined
with the lower annual expenses resulting from the third quarter of 2003 restructuring charge lead management to believe that its results of operations will be better in each quarter in 2004 than it
was in the same quarter of 2003. However, this expectation is subject to change if the current economic environment changes and the

F-8

---

general
softness in information technology spending returns or if the Company's products do not achieve market acceptance. As a result of the losses incurred in the first three quarters of 2003, the
Company reduced its work force and office space in September 2003 to lower the overall cost of operations. Although the Company's operating cash flow for the year ended December 31, 2003
resulted in a use of cash of $1.4 million, the Company's cash, cash equivalents and short-term investments at December 31, 2003 were approximately $8.2 million. As
such, 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.

(2) Summary of Significant Accounting Policies and Estimates

The accompanying consolidated financial statements reflect the application of certain accounting policies and estimates as described in this note and elsewhere in
the notes to the 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 for 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. The hardware that is resold
is not functional without the Company's software. 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. 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

F-9

---

related
maintenance period. 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 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 short term deferred revenue and long term 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, 2003 and 2002:

December 31,2003

2002Deferred revenue

$
568,295

$
431,983Deferred maintenance and support, current


2,738,179


2,936,559Deferred maintenance and support, long-term


205,967


29,026$
3,512,441

$
3,397,568


(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

F-10

---

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.

(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 $6,692,912 and
$6,837,255 at December 31, 2003 and 2002, respectively, and consisted primarily of investments in money market funds and commercial paper.

(e) Short-Term Investments

As of December 31, 2003, the Company had no short term investments. As of December 31, 2002, the Company had $1,597,155 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.

(f) Advertising Expense

The Company recognizes advertising expense as incurred. For the years ended December 31, 2003, 2002 and 2001, the Company recognized $78,803, $312,313 and
$545,353, 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.

F-11

---

(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 |  |                                                               | 5,125,465 |            
|                                               |  |                                                               |           |            
|                                               |  |                                                               |           | $          
|                                               |  |                                                               |           |            

Depreciation
expense was $413,525, $509,932 and $714,100 for the years ended December 31, 2003, 2002 and 2001, 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 SFAS No. 123,Accounting for Stock-Based Compensation, to stock-based employee
compensation.

|                                                                                                          |                                | Year Ended December 31, |           
|--------------------------------------------------------------------------------------------------------- | ------------------------------ | ----------------------- | ----------
|
|Net loss, as reported                                                                                     |                                | $                       | (1,945,765
|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 |                                |                         | (662,166  
|                                                                                                          |                                |                         |           
|Pro forma net loss                                                                                        |                                | $                       | (2,607,931
|                                                                                                          |                                |                         |           
|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, judgments and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

F-12

---

statements
and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from the recorded 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.

The
following schedule summarizes the activity of the Company's accounts receivable reserve for the three years ended December 31, 2003:

Year Ended

Balance at
Beginning of
Year

Increases

Reductions

Balance at
End of
YearDecember 31, 2001

$
980,000

65,000
(1)
(415,000
) (2)
$
630,000December 31, 2002

$
630,000

80,000
(1)
(95,000)
(2)
$
615,000December 31, 2003

$
615,000

345,000
(1)
(593,000)
(2)
$
367,000


---

In
accordance with APB Opinion No. 20,Accounting Changes,the following table displays the effects of the net reduction in the
accounts receivable reserve which impacted net loss and net loss per share (excludes write-offs):

Year Ended

Net Loss

Net Loss
per ShareDecember 31, 2001

$
350,000

$
0.19December 31, 2002

$
15,000

$
0.01December 31, 2003

$
218,000

$
0.12


As
of December 31, 2003, one customer accounted for 10% of the Company's accounts receivable balance. As of December 31, 2002, one customer accounted for 10% and one
customer accounted for 23% of the Company's accounts receivable balance. The Company does not believe that this

F-13

---

concentration
of credit risk represents a material risk of loss with respect to its financial position as of December 31, 2003 and 2002. For the years ended December 31, 2003, 2002 and
2001, 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, 2003, 2002 and 2001.

(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 2003, 2002 and 2001 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, 2003, 2002 and 2001, there were 247,793, 378,698 and 332,728 outstanding stock options, respectively, which have an antidilutive effect.

(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 building maintenance charges received in 2003, 2002 and 2001 was $62,037,
$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 provided 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, and therefore there were no payments made to the Director in 2003.

F-14

---



(4) Accrued Liabilities

Accrued liabilities consist of the following:

December 31,2003

2002Accrued health insurance expense

$
205,547

$
308,854Accrued salary and salary-related


466,903


597,035Accrued professional fees


145,962


275,477Other accrued expenses


383,947


483,680$
1,202,359

$
1,665,046


(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, 2003, the Company had available federal net operating loss carryforwards of approximately
$21.1 million to be used to offset future taxable income, if any. The Company also has federal tax credit carryforwards of approximately $894,000. If not utilized, these carryforwards expire
through 2023. 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.

The
components of the deferred tax asset are as follows:

December 31,2003

2002Net operating loss carryforward

$
7,166,000

$
6,555,000Research and development tax credit carryforwards


894,000


932,000Accrued liabilities and reserves


1,072,000


853,000Valuation allowance


(9,132,000
)

(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 2002, and the outlook indicated that significant uncertainty would
continue into the next fiscal year. These cumulative losses, together with the Company's prior losses, resulted in management's decision that it was more likely than not that all of its deferred tax
assets would not be realized in the foreseeable future. Accordingly, the remaining net deferred tax asset was written off in the second quarter of 2002.

F-15

---

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) provision at federal statutory rate |                                             | (34.0                   | )%  
|(Decrease) increase in tax resulting from               |                                             |                         |     
|                                                         | State tax provision, net of federal benefit |                         | 2.8 
|                                                         | Research and development tax credits        |                         | (3.6
|                                                         | Increase in valuation allowance             |                         | 37.9
|                                                         | Difference in foreign tax rates             |                         | (6.9
|                                                         | Other                                       |                         | (3.1
|                                                         |                                             |                         |     
|(Benefit) provision for income taxes                     |                                             | (6.9                    | )%  
|                                                         |                                             |                         |     

The
(benefit) 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 |                        
|                                     |         |                        
|                                     |         |                        
|                                     |         |                        
|(Benefit) provision for income taxes |         | $                      
|                                     |         |                        

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

|         |  | Year Ended December 31, |           
|-------- |  | ----------------------- | ----------
|
|Domestic |  | $                       | (2,601,795
|Foreign  |  |                         | 511,708   
|         |  |                         |           
|         |  | $                       | (2,090,087
|         |  |                         |           

F-16

---

(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, 2003, the Company had 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, 2003, 614,634 shares of common stock were reserved for issuance pursuant to stock option plans and the employee stock purchase plan.

(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.

F-17

---

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. In accordance with the 1997 Plan, stock options that are canceled or expired are added back to the potential options available
for future issuance.

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,
as amended by SFAS No. 148,Accounting for Stock-Based CompensationTransition and Disclosure,for options granted using the
Black-Scholes option pricing model prescribed by SFAS No. 123. Based on the use of the Black-Scholes option pricing model, options granted in 2003, 2002 and 2001 had a weighted average fair
value of $2.20, $4.22 and $5.39, respectively. The assumptions used are as follows:

Year Ended December 31,2003

2002

2001Risk-free interest rate

2.68
%
3.67
%
4.58
%Volatility

95.0
%
95.0
%
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. Based on the market price of the Company's
common stock at the grant date, the Company recorded compensation expense of $37,500 during the year ended December 31, 2001.

F-18

---

The
following is a summary of all stock option activity:

|                               |                      | Number of
Shares |          | Weighted Average
Exercise Price
Per Share |            | Weighted
Average
Exercise Price
|------------------------------ | -------------------- | ---------------- | -------- | ----------------------------------------- | ---------- | -------------------------------
|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 |                  | (55,016  | )                                         | 5.04-34.13 |                                
|                               |                      |                  |          |                                           |            |                                
|Outstanding, December 31, 2002 |                      | 378,698          |          | 1.47-38.50                                |            |                                
|                               | Granted              |                  | 25,000   |                                           | 1.48-3.70  |                                
|                               | Exercised            |                  | (286     | )                                         | 1.75       |                                
|                               | Canceled and expired |                  | (155,619 | )                                         | 1.47-34.13 |                                
|                               |                      |                  |          |                                           |            |                                
|Outstanding, December 31, 2003 |                      | 247,793          |          | $1.47-$38.50                              |            | $                              
|                               |                      |                  |          |                                           |            |                                
|Exercisable, December 31, 2003 |                      | 159,829          |          | $1.48-$38.50                              |            | $                              
|                               |                      |                  |          |                                           |            |                                
|Exercisable, December 31, 2002 |                      | 155,105          |          | $1.47-$38.50                              |            | $                              
|                               |                      |                  |          |                                           |            |                                
|Exercisable, December 31, 2001 |                      | 87,757           |          | $1.75-$38.50                              |            | $                              
|                               |                      |                  |          |                                           |            |                                

At
December 31, 2003, options to purchase 361,872 shares of common stock were available for future grants under the 1997 Plan.

The
range of exercise prices for options outstanding and options exercisable at December 31, 2003 are as follows:

|            |  | Options Outstanding |  |     |  | Options Exercisable
|----------- |  | ------------------- |  | --- |  | -------------------
|
|
|$1.48-1.75  |  | 6,655               |  | 7.5 |  | $                  
|3.70-5.25   |  | 121,145             |  | 7.8 |  |                    
|6.37-8.40   |  | 6,948               |  | 7.2 |  |                    
|12.95-17.50 |  | 52,923              |  | 6.1 |  |                    
|20.13-25.38 |  | 33,144              |  | 5.9 |  |                    
|30.63-38.50 |  | 26,978              |  | 4.8 |  |                    
|            |  |                     |  |     |  |                    
|            |  | 247,793             |  | 6.8 |  | $                  
|            |  |                     |  |     |  |                    

(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

F-19

---

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, 2003, 18,491 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 $114,000, $159,000 and $130,000 to the Profit-Sharing Plan for the
years ended December 31, 2003, 2002 and 2001, respectively. Additional profit-sharing contributions to the Profit-Sharing Plan are at the discretion of the Company's management. During 2003,
2002 and 2001, 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.

Future
minimum lease payments under these leases at December 31, 2003 are approximately as follows:

Year ending December 31,2004

$
365,0002005


270,000$
635,000


Rent
expense, net of subrentals, included in the accompanying consolidated statements of operations was $444,000, $447,000 and $463,000 for the years ended December 31, 2003, 2002
and 2001, respectively.

(10) Restructuring Costs

In the third quarter of 2003, the Company announced a restructuring of certain of its operations, and recorded a pretax charge of $806,581 in accordance with SFAS
No. 146,Accounting for Costs Associated with Exit or Disposal Activities. The charge includes severance-related costs associated with the
workforce reduction in the Company's domestic operations and costs associated with the closing of its Oregon office. The reduction in workforce consisted of three employees in the Company's sales and
marketing department, two employees performing general and administrative functions, three employees performing technical support and five employees in the Company's research and development
department. The balance of this charge consists of costs incurred as a result of the closure of the Company's Oregon facility.

F-20

---

The
following table summarizes the accrual and usage of the restructuring charges in 2003:

|                                  |  | Lease |         | Severance |   | Total    |  
|--------------------------------- |  | ----- | ------- | --------- | - | -------- | -
|Total charge                      |  | $     | 17,420  |           | $ | 789,161  |  
|Cash payments                     |  |       | (17,420 | )         |   | (345,331 | )
|                                  |  |       |         |           |   |          |  
|Ending balance, December 31, 2003 |  | $     |        |           | $ | 443,830  |  
|                                  |  |       |         |           |   |          |  

The
total cash impact of the restructuring is $806,581, which the Company anticipates will be paid entirely by the end of the third quarter of 2004.

(11) Guarantees

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 45.

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 of these agreements is minimal.

F-21

---



(12) Segment and Geographic Information

To date, the Company has viewed its operations and manages its business as principally one segment, 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 $3.1 million, $2.8 million and $2.3 million in 2003, 2002 and 2001, 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,
2003, 2002 and 2001:

Year Ended December 31,2003

2002

2001Total revenues (1)United States

$
10,647,321

$
11,668,319

$
13,021,036United Kingdom


1,281,283


1,309,888


978,872Rest of World


1,818,642


1,498,482


1,353,859$
13,747,246

$
14,476,689

$
15,353,767Long-lived assets (2)North America

$
392,801

$
600,116Europe


15,784


29,549$
408,585

$
629,665


---

(13) 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

F-22

---

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.

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 45,487 of its Verso Common Stock for approximately $11,000 and recorded the realized value in Interest and Other Income at that time.

On
July 18, 2003, the Company received an additional 11,029 shares of Verso Common Stock as certain conditions described in the purchase agreement were met. The Company sold those
shares on September 8, 2003 for $4.63 per share for total gross proceeds of $51,000. This amount is included in interest and other income. The Company does not expect to receive any additional
shares of Verso common stock. The Company's warrant to purchase 8,580 shares of Verso common stock expires in November 2005. The fair value of the warrant is not material to the Company's
consolidated financial statements.

F-23

---

(14) Quarterly Results of Operations (unaudited)

The following table presents a condensed summary of quarterly results of operations for the years ended December 31, 2003 and 2002.

|                            |                   | Year Ended December 31, 2003
|--------------------------- | ----------------- | ----------------------------
|
|Total revenues              |                   | $                           
|Gross profit                |                   |                             
|Net (loss) income           |                   |                             
|Net (loss) income per share |                   |                             
|                            | Basic and diluted |                             

|                   |                   | 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 |                              | $         

F-24

---

QuickLinks