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SECURITIES AND EXCHANGE COMMISSION
Washington, 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)

For the fiscal year ended: December 31, 2002

OR

For the transition period from                                      to                                     

Commission File Number 0-22871

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

PART I

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

Item 1. Business

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

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

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

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

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

Industry Background

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

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

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

The Omtool Solution

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

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

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

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

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

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

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

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

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

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

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Strategy

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

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

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

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

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

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

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

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

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

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

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

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

Current Products and Services

Genidocs

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

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

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

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Automated PDF conversion and delivery;



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Cost recovery tracking and client bill-back reporting;



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Document management archiving;

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Encryption (including PKI);



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Digital signatures;



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Sender/Recipient authentication;



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Certified delivery notification, audit trails, 3rd party time stamps; and



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Secure reply.

Genifax

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

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Redundancy and failover capability to ensure a failsafe capability where fax-based messaging is mission critical;



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Fax Center as the administrative tool to replace the traditional fax room and manual distribution by routing electronically;



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Embedded Directives, a new capability in the Genifax software, that automatically routes inbound faxes to predefined recipients using proprietary coding;



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Approval Workflow that allows administrative review and approval for both inbound and outbound activity; and



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The Genifax software secure fax feature that ensures the sender that the recipient fax machine is identified prior to the actual delivery.

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

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

AccuRoute

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

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

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

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

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

Fax Sr.

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

LegalFax

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

Discontinued Products

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

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

Hardware

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

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

Customer Service

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

Sales and Marketing

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

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

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

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

Customers

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

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

Research and Development

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

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

Competition

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

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Document management solutions from vendors such as Documentum, Hummingbird and iManage whose electronic collaboration solutions compete with certain aspects of the Company's solutions;



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Electronic forms and electronic signature solutions from vendors such as Adobe, PureEdge, CreateForm and Silanis that offer the creation of electronic documents with electronic signatures; and



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Security infrastructure solutions from vendors such as Verisign and Entrust whose solutions can be used to build applications that enable secure document communications.

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

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

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

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

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

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

Proprietary Rights

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

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

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

Employees

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

Item 2. Properties

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

Item 3. Legal Proceedings

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

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

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

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

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

PART II

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

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

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

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

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

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Item 6. Selected Consolidated Financial Data

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

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

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

Overview

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

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

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

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

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

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

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

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

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

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