**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-KSB**




**x**
            **ANNUAL
              REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
              OF
              1934**




For
      the
      fiscal year ended June 30, 2006




** ̈**
            **TRANSITION
              REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
              OF
              1934**







For
      the
      transition period from  to




Commission
      File Number 0-021403




**VOXWARE,
      INC.**


**(Name
      of Small Business Issuer in its Charter)**




**Delaware**
            
            **36-3934824****(State
                or Other Jurisdiction of**
              **Incorporation
                or Organization)**
            
            **(I.R.S.
                Employer**
              **Identification
                No.)**




**Lawrenceville
      Office Park**


**168
      Franklin Corner Road**


**Lawrenceville,
      NJ 08648**


**609-514-4100**


**(Address,
      including zip code, and telephone number (including area code) of registrant’s
      principal executive office)**




**Securities
      registered pursuant to Section 12(b) of the Act:**




**Title
                  of each class**
              
              **Name
                  of each exchange on which registered**Common
                  Stock, $0.001 par value per share
              
              NASDAQ
                  STOCK MARKET LLC
  **Securities
        registered pursuant to Section 12(g) of the Act:**
 None.
  Check
        whether the issuer: (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Securities Exchange Act of 1934 during the past 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 x No  ̈
  Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no discloser will 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-KSB or any
        amendment to this Form 10-KSB.  ̈
  Indicate
        by check mark whether registrant is a shell company (as defined in Rule 12b-2
        of
        the Securities Exchange Act of 1934).
 Yes  ̈ No x
  The
        revenues for the fiscal year ended June 30, 2006, the most recent fiscal
        year,
        were $15,478,000.
  The
        aggregate market value of the common voting stock held by non-affiliates
        of the
        Registrant was approximately $7,817,960 as of August 31, 2006, based upon
        the
        closing sale price of the Common Stock as quoted on the NASDAQ Capital Market.
  The
        number of shares of the Registrant’s Common Stock outstanding as of August 31,
        2006 is 6,262,844.
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
 Certain
        information required by Part III of this Annual Report on Form 10-KSB will
        be
        set forth in, and is incorporated by reference from the Registrant's Proxy
        Statement for, the 2006 Annual Meeting of Stockholders.












**VOXWARE,
          INC.**
 **ANNUAL
          REPORT ON FORM 10-KSB**
  **TABLE
          OF CONTENTS**
  **PART I**
                  
                  **3**ITEM 1.
                  BUSINESS
                  3ITEM 2.
                  PROPERTIES
                  12ITEM 3.
                  LEGAL
                    PROCEEDINGS
                  13ITEM 4.
                  SUBMISSION
                    OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  13
 **PART
                    II**
                  
                  **14**ITEM 5.
                  MARKET
                    FOR THE REGISTRANTS'S COMMON EQUITY AND RELATED STOCKHOLDER
                    MATTERS
                  14ITEM 6.
                  MANAGEMENT’S
                    DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                    CONDITION
                  15ITEM 7.
                  FINANCIAL
                    STATEMENTS AND SUPPLEMENTARY DATA
                  25ITEM 8.
                  CHANGES
                    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE
                  25ITEM 8A.
                  CONTROLS
                    AND PROCEDURES
                  25ITEM
                      8B.
                  OTHER
                    INFORMATION
                  25
 **PART
                    III**
                  
                  **26**ITEM 9.
                  DIRECTORS,
                    EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                    SECTION 16(a) OF THE EXCHANGE ACT
                  26ITEM 10.
                  EXECUTIVE
                    COMPENSATION
                  26ITEM 11.
                  SECURITY
                    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                    STOCKHOLDER MATTERS
                  26ITEM 12.
                  CERTAIN
                    RELATIONSHIPS AND RELATED TRANSACTIONS
                  26ITEM 13.
                  EXHIBITS
                    AND FINANCIAL STATEMENTS
                  26ITEM 14.
                  PRINCIPAL
                    ACCOUNTANT FEES AND SERVICES
                  30
  **INDEX TO CONSOLIDATED FINANCIAL
                        STATEMENTS**
                    **F-1**


Report
                    of Independent Registered Public Accounting
                    Firm
                F-2Consolidated
                    Balance Sheets as of June 30, 2006 and
                    2005
                F-3Consolidated
                    Statements of Operations for the years ended June 30, 2006 and
                    2005
                F-4Consolidated
                    Statements of Stockholders’ Equity for the years ended June 30, 2006
                    and 2005
                F-5Consolidated
                    Statements of Cash Flows for the years ended June 30,
                    2006 and 2005
                F-7Summary
                    of Accounting Policies and Notes to Consolidated Financial
                    Statements
                F-8







**PART
        I**
  This
        Annual Report on Form 10-KSB contains forward-looking statements, as defined
        in
        the Private Securities Litigation Reform Act of 1995, and information relating
        to us that are based on the beliefs of our management, as well as assumptions
        made by, and the information currently available to, our management. When
        used
        in this Annual Report, the words “estimate,” “project,” “believe,” “anticipate,”
“intend,” “expect” and similar expressions are intended to identify
        forward-looking statements. These statements reflect our current views with
        respect to future events, and are subject to risks and uncertainties that
        could
        cause actual results to differ materially from those contemplated in these
        forward-looking statements, including those risks discussed in this Annual
        Report. You are cautioned not to place undue reliance on these forward-looking
        statements, which speak only as of the date of this Annual Report. Except
        for
        special circumstances in which a duty to update arises when prior disclosure
        becomes materially misleading in light of subsequent circumstances, we do
        not
        intend to update any of these forward-looking statements to reflect events
        or
        circumstances after the date of this Annual Report, or to reflect the occurrence
        of unanticipated events. You should carefully review the risk factors set
        forth
        in other reports or documents we file from time to time with the Securities
        and
        Exchange Commission (the “SEC”).
  **** **ITEM 1.** **BUSINESS.**
  **Overview**
  Voxware
        is a leading provider of voice-based technology solutions that optimize the
        front line logistics and distribution center workforce. Our product,
        VoiceLogistics®, enables warehouse workers to perform a wide array of logistics
        tasks such as picking, receiving, put away, replenishment, loading and returns
        processing more efficiently and effectively. VoiceLogistics also provides
        distribution center management with an effective tool for managing the
        performance of assigned tasks by workers while reducing logistics costs and
        optimizing complex materials handling processes.
  Our
        VoiceLogistics solution is a combination of software, hardware and professional
        services. Enabled by our patented speech recognition VoiceXML Web browser
        technology, the VoiceLogistics solution creates a dynamic, real-time link
        between highly mobile workers, the warehouse management system (“WMS”) and
        supervisory personnel. In other words, warehouse workers wearing a small
        wireless portable computer receive their directions on where to go and what
        product/parts to pick via a computer voice generated from the Company’s
        application. The warehouse worker in turn talks back to the computer, telling
        it
        what product/parts they have retrieved and asking for the next set of
        instructions. Unlike a paper based system, this is real-time reporting with
        its
        inherent advantages. Additionally, unlike a bar code scanning system, it
        is
        hands-free, thus enabling the worker to be more productive and just as accurate.
        We believe that our patented solution is unique in the industry because it
        is
        the first open standards, Web-based, people-centric, interactive speech
        recognition technology engineered specifically to operate in highly demanding
        industrial environments. VoiceLogistics offers broad language support for
        a
        culturally diverse workforce.
  We
        sell
        VoiceLogistics primarily to large companies that operate warehouses and
        distribution centers. We have customers from a variety of industry sectors,
        including food service, grocery, retail, consumer packaged goods, automotive
        parts, third-party logistics providers and wholesale distribution. Our
        technology has the ability to integrate easily (generally in less than 60
        days)
        with an external WMS. VoiceLogistics revenues are generated primarily from
        hardware product sales, software license fees, professional services and
        maintenance fees.
  **Products
        and Services**
  The
        VoiceLogistics product line is the primary focus of our operations. It targets
        the mobile, front line workforce in modernized distribution centers, providing
        a
        highly interactive means of utilizing the powers of hearing and speech to
        optimize many logistics tasks.
 
 We
        offer
        two standard voice-based software products to our customers, VoiceLogistics
        ExpressTM and VoiceLogistics ProTM. Prior to the release of these products, we
        created customized VoiceLogistics solutions for our customers. VoiceLogistics
        Express is a standard application suite for enhancing distribution center
        workforce performance for a variety of logistics functions, including picking
        and replenishment. Launched in September 2005, the VoiceLogistics Express
        solution delivers a standard voice product that incorporates best practices
        developed, implemented and improved over the years for our existing customers
        in
        industries such as retail, manufacturing, and food and grocery.
 
 In
        March
        2006, we launched VoiceLogistics Pro which includes a basic suite of tools
        for
        designing, developing and integrating voice-enabled logistics solutions.
        Usable
        by non-programmers, VoiceLogistics Pro eliminates up to 90% of the coding
        effort
        required by conventional voice products. The output is a robust voice solution,
        complete with an operational voice interface and a direct connection to the
        appropriate WMS/ERP system. VoiceLogistics Pro utilizes modern Web service
        architecture, delivering complete independence from the specifics of client
        hardware, operating system, data base and WMS/ERP system details. A more
        powerful version of VoiceLogistics Pro, with enhanced functionality allowing
        for
        the development of more feature-rich applications, is expected to be released
        during fiscal 2007.
  -3-
  Each
        VoiceLogistics solution includes software and hardware components, and generally
        some professional services elements. The software component includes two
        important Voxware software technologies that are installed on each wearable
        computer. These technologies are comprised of our noise-robust Voxware
        Integrated Speech Recognition Engine (VISETM), designed specifically for high
        performance industrial environments, and our patented Voice Extensible Markup
        Language (VoiceXML) voice browser, called VoxBrowserTM, which uses standard Web
        technologies to enable application-level functionality on any certified wearable
        computer.
  The
        VoiceLogistics solution also generally includes a Voxware application software
        component installed on a server that communicates with a central WMS (or
        system
        of record) and a variety of special purpose wearable computers that are worn
        by
        individual warehouse workers. Using a standard wireless LAN, VoiceLogistics
        directs the workers by giving them tasks and directing and verifying their
        actions. Our solution also updates the central system, and is capable of
        responding immediately to a wide variety of situations that can develop as
        the
        work shift progresses. With VoiceLogistics, we believe workers are generally
        more productive and accurate than would otherwise be possible.
  Beginning
        in fiscal 2005, the VoiceLogistics wearable computer was the VLS-410. It
        is a
        highly rugged device that has been successfully deployed to thousands of
        warehouse workers in North America and abroad. We believe that the VLS-410
        offers some of the best internal components of any voice-only wearable computer
        for today’s industrial markets, including a fast 400 MHz Intel Xscale processor
        and 128 MB of SDRAM and 64MB Flash memory. Prior to the introduction of the
        VLS-410, we distributed the VLS-310.
 
 In
        September 2005, we introduced our hardware-independent strategy to enable
        leading hardware Auto-ID manufacturers to bring voice to a wide range of
        their
        mobile computers with the availability of VoxBrowser. These devices are put
        through Voxware’s Powered by VoxwareTM Certification Program, a process required
        of all third-party wireless computer manufacturers, enabling them to integrate
        our client software, VoxBrowser, on their mobile devices. Every terminal
        submitted for certification must meet Voxware’s minimum requirements. This
        process provides official recognition, and provides our valued VoiceLogistics
        customers with the confidence that all devices Powered by Voxware will operate
        satisfactorily in their ruggedized environments.
 
 The
        following devices have achieved full certification from us: Our VLS-410;
        LXE
        Inc.’s HX1, MX3X, MX7, VX6 and VX7 mobile computers; and Symbol Technologies,
        Inc. (“Symbol”)’s MC9060S and MC9060K mobile computers. We are continuing to
        work with these and other major vendors of wireless computers to provide
        VoxBrowser on their devices. We believe this will give customers an additional
        choice of hardware, and will allow us to expand our product line with new,
        multi-modal versions of VoiceLogistics, which will work both via speech
        recognition and other modes, such as keyboard, screen, RFID, or barcode
        scanning, as appropriate. We also offer customers the opportunity to purchase
        accessories such as headsets and computer hardware that we purchase from
        third-party vendors for resale.
  During
        fiscal year 2006, we entered into an agreement with LXE Inc. (“LXE”, a
        wholly-owned subsidiary of Electromagnetic Sciences, Inc.) to outsource the
        manufacturing of our VLS-410 hardware to LXE. Under the terms of the agreement,
        we licensed certain hardware technology to LXE for production and distribution
        by LXE. We further authorized LXE to resell our recently introduced VoxBrowser
        product. LXE authorized us to resell certain next generation hardware products
        to be developed in the future. Each party is authorized to resell the other
        party’s products throughout the world. The agreement has an initial term of five
        years and is subject to automatic renewals. Also during fiscal year 2006,
        Symbol
        endorsed our products by designating us as a “PartnerSelect Premier Independent
        Software Vendor” of voice-based solutions. We are actively soliciting similar
        relationships with other leading equipment vendors and their
        distributors.
 
 We
        offer
        professional services that include system implementation and training, as
        well
        as assistance in tailoring our solution to meet specific requirements within
        customers’ facilities. We also offer customers the option to enter into extended
        warranties on hardware, and annual software maintenance and customer support
        arrangements with us. We will continue to offer maintenance support and make
        software updates available to our customer’s tailored solutions, as well as
        provide enhancements, upon their request.
  **Sales
        and Distribution**
  We
        sell
        directly to large companies in North America and Europe. We also utilize
        third
        parties such as consultants, value added resellers (“VARs”), wireless computer
        manufacturers and vendors, and systems integrators to sell or assist us in
        selling our products. To date, we have signed agreements with several
        third-party partners. We believe that the establishment of a network of
        third-party partners with extensive knowledge of specific market sectors
        is
        important to our long-term success in those sectors.
  -4-
  Historically,
        our sales were generated primarily by our own sales force working directly
        with
        the end users of the VoiceLogistics solution. With the introduction of
        VoxBrowser in 2005 and VoiceLogistics Pro in March 2006, and our ongoing
        development of our VoiceLogistics products, we are investing substantial
        resources into expanding our partnership channels in North America and abroad.
        This is most recently evidenced through our relationships with LXE, Symbol
        and
        RedPrairie Corporation, among others. Our direct sales efforts currently
        contribute the majority of our revenues; however, we expect a shift to more
        third-party generated revenues in the future as our channel partner efforts
        expand.
 
 Voxware
        is actively working with third-party partners who purchase products and
        accessories from us at a discount and incorporate them into application systems
        for various target markets and/or consult with us in the development of
        application systems for end users. These application systems integrate our
        VoiceLogistics Pro product with additional hardware and software components,
        and
        include service and product support. These partners then resell or lease
        the
        application systems to their end user customers. Under these types of
        partnership agreements, we warrant to repair or replace any defective hardware
        product delivered to a third-party partner or their customer, provided that
        we
        are notified of the defective product generally within one year from delivery
        of
        the product to the end user. We believe that in the industrial speech
        recognition market, strategic partnerships with these various parties are
        critical to our success. We anticipate that, over time, an increasingly greater
        percentage of our revenues will be generated from software components as
        our
        partners supply a greater percentage of hardware and professional services
        to
        new VoiceLogisitics implementations.
  Building
        a network of third-party partners such as those described above takes time
        and
        requires different sales and marketing expertise than that required to build
        a
        direct to end user software distribution channel, or an original equipment
        manufacturer (“OEM”) relationship for technology. Challenges we face in
        establishing this network include overcoming existing relationships potential
        partners have with our competitors, and training new partners to develop
        and
        sell solutions based on VoiceLogistics Pro. There can be no assurance that
        we
        will be successful in developing strategic relationships with channel partners,
        hardware vendors, VARs, logistics consultants or WMS vendors that produce
        a
        favorable impact on our operations.
  **Customers**
  Our
        customers include some of the largest and best-known companies in their
        respective industries, including 7-Eleven, Inc., Argos Limited, AutoZone,
        Inc.,
        Dunkin’ Donuts, Somerfield Stores Ltd., West Marine, Inc., and US Foodservice.
        We grew our customer base in fiscal 2005 and 2006 and are optimistic our
        increased momentum in key market sectors such as retail, consumer packaged
        goods
        and food service will continue. For the fiscal year ended June 30, 2006,
        US
        Foodservice accounted for approximately 31% of our total revenues and Argos
        Limited accounted for approximately 15% of our total revenues. There can
        be no
        assurance that these customers will continue to seek our products and services
        at the same levels as they have in the past, or at all.
  Our
        standard warranty policy generally allows customers or end users to return
        defective products for repair or replacement, provided that we are notified
        of
        the defective product generally within 90 days from delivery of the product
        to
        the end user in the case of software, and up to one year in the case of
        hardware. Substantially all components, parts and subassemblies purchased
        by
        Voxware are covered by other manufacturer warranties for periods ranging
        from 30
        days to one year from date of purchase by us.
  **Competition**
  We
        encounter competition from two primary sources. We experience direct competition
        from companies offering similar voice-based solutions. Additionally, our
        solution competes with technologies that may be considered an alternative
        to
        voice-based solutions.
  The
        VoiceLogistics solution integrates hardware, software and service components.
        There are several alternative providers against whom we compete to market
        some
        or all of those components. The major competitor offering a similar solution
        is
        Vocollect, Inc., which markets a proprietary, wearable voice-based computer
        and
        complementary software. Vocollect, Inc. also indirectly sells voice-based
        systems within the logistics and distribution market to resellers who also
        compete against us. In addition to Vocollect, Inc. and their resellers, there
        are other vendors who promote similar solutions, including Lucas Systems,
        Inc,
        FKI Logistex (a subsidiary of FKI PLC), and TOPSystem Systemhaus GmbH. In
        July
        2005, FKI Logistex became a VAR reseller for us.
  In
        each
        application area, there exist alternatives to voice-based solutions. Barcode
        scanning devices, for example, represent a competitive alternative to
        voice-based products in certain warehouse picking applications. Thus, barcode
        product companies such as Symbol Technologies, Intermec Technologies Corporation
        (a subsidiary of UNOVA, Inc.), LXE, and Psion Teklogix can be considered
        competitors in the logistics and fulfillment marketplace. However, while
        these
        barcode product companies can sometimes be competitors to us, we also have
        begun
        establishing formal relationships with several of these companies to provide
        potential customers with complementary joint product offerings that integrate
        voice-based capabilities with alternative technologies. Likewise, in the
        package
        sorting and remittance processing segments, keyboards are the most prevalent
        alternative along with an increasing use of barcode scanning. Inspection,
        receiving, and inventory applications use keyboards as well, but often pen
        and
        paper comprise the primary alternative method in those cases.
 
 -5-
  Factors
        considered by prospective customers evaluating competing voice-based logistics
        solutions include technical features and functionality of the underlying
        hardware and software components, time required to deploy the solutions,
        quality
        and availability of professional and support services, and price and ongoing
        total cost of ownership. Hardware components are generally evaluated based
        upon
        such factors as size, weight, processing speed and multi-modal functionality.
        Our VLS-410 unit competes against Vocollect’s Talkman® series, as well as
        offerings from Symbol, LXE and other mobile computer device manufacturers.
        During fiscal 2006 Vocollect introduced a new series of Talkman that is smaller
        in size than our 410 series. Situations in which a customer values size of
        the
        hardware above what we believe are more important considerations presently
        puts
        Voxware at a competitive disadvantage. We believe this can be mitigated in
        the
        future by other hardware manufacturers offering products of similar size
        with
        expanded functionality beyond the Talkman series. Evaluations of competing
        software solutions generally consider, among other factors, the breadth of
        applications supporting various warehouse operations, support for different
        languages and warehouse management systems, and the portability, scalability
        and
        extensibility of the software. Deployment time is impacted primarily by the
        extent to which customized software development is required to implement
        the
        solution. We believe our VoiceLogistics Pro solution, coupled with our
        VoxBrowser client software, is unique in the industry, and gives us a
        competitive advantage by reducing the total cost of ownership because its
        open
        standards, web-based, people-centric design enables cross-platform portability,
        rapid deployment, and ease of application extension.
  Voice-based
        logistics applications offer real time updating of inventory systems, error
        checking capabilities to minimize picking mistakes, and hands-free
        communications allowing for easier handling of bulky or frozen products.
        Barcode
        scanning applications offer similar file update and error checking features,
        but
        lack the advantages of hands-free communication. Voice-based and barcode-based
        solutions both require substantially higher capital investments than paper-based
        and other low technology systems.
  **Patents
        and Proprietary Information**
  VoiceLogistics
        is based on our VISE speech engine, which is a highly noise-tolerant, continuous
        speech recognizer. We believe it is the first speech recognizer to be engineered
        specifically for use in highly demanding industrial environments.
        VoiceLogistics, and all of our other voice-based products sold to industrial
        customers, are based on VISE technology.
  Our
        VLS-410 wearable computer, and other certified mobile devices from leading
        terminal hardware manufacturers, incorporate an embedded version of our VISE
        speech recognition engine with a standards-based interface that allows for
        interfaces with a wide variety of WMS packages. Our VoiceLogistics solution
        also
        employs our patented invention of systems and methods for using standard
        Internet protocols in conjunction with VoiceXML Web pages to remotely program
        portable voice devices, such as our VoiceLogistics computer, that direct
        and
        guide users through defined tasks and work. The United States Patent and
        Trademark Office approved our application for patent protection of this
        invention (Patent #6662163) in 2003.
  We
        believe that owning and developing our core technologies represents a
        significant strategic and competitive advantage for us. We may, from time
        to
        time, file patent applications as deemed appropriate. Our success will depend
        in
        part on our ability to obtain patent protection for our products, preserve
        our
        trade secrets and operate without infringing the proprietary rights of other
        parties.
  The
        software market has traditionally experienced widespread unauthorized
        reproduction of products in violation of manufacturers’ intellectual property
        rights. Such activity is difficult to detect and legal proceedings to enforce
        the manufacturers’ intellectual property rights are often burdensome and involve
        a high degree of uncertainty and costs.
  Our
        success is also dependent upon unpatented trade secrets, which are difficult
        to
        protect. To help protect our rights, we require employees and consultants
        to
        enter into confidentiality agreements that prohibit disclosure of our
        proprietary information, and require the assignment to us of their ideas,
        developments, discoveries and inventions. We cannot assure you, however,
        that
        these agreements will provide adequate protection for our trade secrets,
        know-how, or other proprietary information in the event of any unauthorized
        use
        or disclosures.
 
 **Employees**
  As
        of
        June 30, 2006, we had 89 full-time employees and consultants, consisting
        of 38
        individuals in cost of goods sold (which includes professional services,
        customer support and production), 19 individuals in research and development,
        21
        individuals in sales and marketing, and 11 individuals in general and
        administrative. Forty-two of our employees are located at our Cambridge,
        Massachusetts facility, 26 individuals are located at our corporate offices
        in
        Lawrenceville, New Jersey, 7 individuals work with our sales and customer
        support office in the United Kingdom, and 14 individuals work elsewhere.
        None of
        our employees are represented by a labor union or is subject to a collective
        bargaining agreement. We believe we have good relations with our
        employees.
  -6-
  **Corporate
        Information**
  We
        were
        incorporated on August 20, 1993 in the State of Delaware. Our headquarters
        is
        located at Lawrenceville Office Park, 168 Franklin Corner Road, Lawrenceville,
        NJ 08648. Our telephone number is +1 609-514-4100.
  We
        file
        annual, quarterly and current reports, proxy statements and other documents
        with
        the SEC, under the Securities Exchange Act of 1934, as amended (the “Exchange
        Act”). You may read and copy any materials that we file with the SEC at the
        SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and
        at
        233 Broadway, 16th Floor, New York, New York 10279. You may obtain information
        on the operation of the Public Reference Room by calling the SEC at +1 800
        SEC-0330. Our reports, proxy statements and other documents filed electronically
        with the SEC are available at the website maintained by the SEC at http://www.sec.gov .
        In
        addition, we also make available free of charge on or through our Internet
        website, http://www.voxware.com ,
        our
        annual, quarterly and current reports, and, if applicable, amendments to
        those
        reports, filed or furnished pursuant to Section 13(a) of the Exchange Act,
        as
        soon as reasonably practicable after we electronically file such reports
        with
        the SEC. Copies of our SEC filings may also be obtained by calling our main
        number and asking for investor relations or emailing: ir@voxware.com .
        Information on our website is not a part of this report.  In addition, our
        Code of Business Conduct and Ethics is posted on our Internet website,
http://www.voxware.com, and any amendment thereof or waiver thereto will
        be promptly posted on our Internet website.
     -7-
  **Risk
        Factors**
 
 We
        operate in a rapidly changing business environment that involves substantial
        risk and uncertainty. The following discussion addresses some of the risks
        and
        uncertainties that could cause, or contribute to cause, actual results to
        differ
        materially from expectations. We caution all readers to pay particular attention
        to the descriptions of risks and uncertainties described below and in other
        sections of this report, and our other filings with the SEC.
 
 If
        any of
        the following risks actually occur, our business, financial condition or
        results
        of operations could be materially adversely affected. In such case, the trading
        price of our Common Stock could decline and we may be forced to consider
        additional alternatives.
 
 This
        Report on Form 10-KSB contains forward-looking statements that involve risks
        and
        uncertainties. Our actual results could differ materially from those anticipated
        in the forward-looking statements as a result of certain factors, including
        the
        risks described below and elsewhere in this Annual Report on Form
        10-KSB.
 
 **Risks
        Relating to Our Business and Operations**
 **If
        we continue to incur operating losses, we may be unable to continue our
        operations.** We
        have
        incurred operating losses since we started our company in August 1993. During
        the year ended June 30, 2006, the net loss applicable to common stockholders
        of
        $6,843,000 contributed to an accumulated deficit of $73,389,000 as of June
        30,
        2006. If we continue to incur operating losses and consistently fail to be
        a
        profitable company, we may be unable to continue our operations. In addition,
        we
        plan to continue to increase spending in research and development, along
        with
        sales and marketing, at levels higher than in the recent past, and possibly
        disproportionate to revenue, thus incurring net losses in the near term.
        Our
        future profitability depends on our ability to obtain significant customers
        for
        our products, to identify, engage and support significant partners to sell
        our
        products, to respond to competition, to introduce new and enhanced products,
        and
        to successfully market and support our products. We cannot assure you that
        we
        will achieve or sustain significant sales or profitability in the
        future.
 
 **If
        we cannot raise adequate capital in the future, we may be unable to continue
        our
        product development, marketing and business, generally.** In the
        future, we may need to raise additional capital to fund operations, including
        product development and marketing. Funding from any source may not be available
        when needed or on favorable terms. If we cannot raise adequate funds to satisfy
        our capital requirements, we may have to limit, delay, scale-back or eliminate
        product development programs, marketing or other activities. We might be
        forced
        to sell or license our technologies. Any of these actions might harm our
        business. If additional financing is obtained, the financing may be dilutive
        to
        our current stockholders.
 
 **We
        rely substantially on key customers.** Our
        customer base is highly concentrated. For the year ended June 30, 2006, one
        customer accounted for 31% of our total revenues and another customer accounted
        for 15% of our total revenues. We believe that a substantial portion of our
        net
        sales will continue to be derived from a concentrated group of customers.
        However, the volume of sales to a specific customer is likely to vary from
        period to period, and a significant customer in one period may not purchase
        our
        products in a subsequent period. In general, there are no ongoing written
        commitments by customers to purchase our products. Our net sales in any period
        generally have been, and likely will continue to be, in the near term, derived
        from a relatively small number of sales transactions. Therefore, the loss
        of one
        or more major customers, or a delay in their orders, could have a material
        adverse affect on our results of operations.
 
 **If
        our VoiceLogistics family of products is not successful in the market, we
        will
        not be able to generate substantial revenues or achieve sustained
        profitability.** Our
        success is substantially dependent on the success of our VoiceLogistics family
        of products. If the market accepts our VoiceLogistics products, these products
        will account for the vast majority of our net revenue in the future. If our
        VoiceLogistics products are unsatisfactory, or if we are unable to generate
        significant demand for these products, or if we fail to develop other
        significant products, our business will be materially and adversely affected.
 
 **We
        have a sole source vendor for our primary hardware products** .
        Effective in the second quarter of fiscal 2006, one vendor supplies us with
        our
        primary wearable computer hardware product. Any disruption in supply by this
        vendor would prohibit us from shipping our products, and thus recognizing
        revenue. In addition, other vendors provide custom-made components that would
        take time to reproduce with other suppliers should a current vendor fail
        to
        deliver quality product in a timely manner.
 
 **We
        are relying on third-party hardware manufacturers to develop and bring to
        market
        portable voice-compatible computer equipment on which to run our
        software.** Sales of
        our VoiceLogistics Pro and VoxBrowser software products depend, in part,
        upon
        the delivery by third-party hardware manufacturers of robust Voxware-certified
        mobile computing devices with sufficient memory, voice capabilities and form
        factor. While we anticipate the entrance of numerous such devices in the
        marketplace in the future, our customers seeking best-of-breed hardware units
        to
        drive our software currently have a limited selection from which to choose.
        We
        cannot assure you that third-party manufacturers will develop and market
        hardware units compatible with our software on a timely basis, if at
        all.
 
 -8-
  **If
        we do not develop or acquire and introduce new and enhanced products on a
        timely
        basis, our products may be rendered obsolete.** The
        markets for our speech recognition products and voice-based technologies
        are
        characterized by rapidly changing technology. The introduction of products
        by
        others based on new or more advanced technologies could render our products
        obsolete and unmarketable. Therefore, our ability to build on our existing
        technologies and products to develop and introduce new and enhanced products
        in
        a cost effective and timely manner will be a critical factor in our ability
        to
        grow and compete. We cannot assure you that we will develop new or enhanced
        products successfully and in a timely manner. Further, we cannot assure you
        that
        the market will accept new or enhanced products. Our failure to develop new
        or
        enhanced products, including our failure to develop or acquire the technology
        necessary to do so, would have a material adverse effect on our business.
 
 **If
        our competitors introduce better or less expensive products, our products
        may
        not be profitable to sell or to continue to develop.** The
        business in which we engage is highly competitive. Advances in technology,
        product improvements and new product introductions, as well as marketing
        and
        distribution capabilities, and price competition influence success. Failure
        to
        keep pace with product and technological advances could adversely affect
        our
        competitive position and prospects for growth. Our products compete with
        those
        being offered by larger, traditional computer industry participants who have
        substantially greater financial, technical, marketing and manufacturing
        resources than we do. We cannot assure you that we will be able to compete
        successfully against these competitors, or that competitive pressures faced
        by
        us would not adversely affect our business or operating results.
 
 **If
        we cannot integrate our speech recognition products with other components
        of
        customer systems, we may not be able to sell our products.** Although
        state-of-the-art speech recognition technology is important to generating
        sales
        in our target markets, other components of a voice-based system are also
        necessary. Our products must be easily integrated with customers’ asset
        management and information systems. The ability to incorporate speech
        recognition products into customers’ systems, quickly and without excessive cost
        or disruption, will be a key factor in our success. We do not now possess
        all
        the necessary components for system integration. Acquisitions, joint ventures
        or
        other strategic relationships may be required for us to develop or obtain
        access
        to the necessary components to achieve market penetration. The development
        of
        strategic relationships with other software vendors can be a lengthy process
        as
        potential partners evaluate the benefit to their business of integrating
        voice-based solutions, and in particular, our software, into their product
        offerings. We cannot assure you that our efforts will be successful and,
        to the
        extent we are unsuccessful, our business may be materially adversely
        affected.
  **There
        are a number of factors which may cause substantial variability in our quarterly
        operating results.** Our
        revenue, gross profit, operating income or loss, and net income or loss,
        may
        vary substantially from quarter-to-quarter due to a number of factors. Many
        factors, some of which are not within our control, may contribute to
        fluctuations in operating results. These factors include, but are not limited
        to, the following:
  •
              market
                  acceptance of our products;
 •
              timing
                  and levels of purchases by
                  customers;
 •
              interruption
                  and delays in production caused by vendor
                  delays;
 •
              new
                  product and service introductions by our competitors or
                  us;
 •
              market
                  factors affecting the availability or cost of qualified technical
                  personnel;
 •
              timing
                  and customer acceptance of our new product and service offerings;
 •
              effectiveness
                  of sales efforts by third-party partners;
 •
              length
                  of sales cycle; and
 •
              industry
                  and general economic conditions.
 
 We
        cannot
        assure you that any of these factors will not substantially influence our
        quarterly operating results.
  **If
        our third-party partners do not effectively market and service our products,
        we
        may not generate significant revenues or profits from sales of our
        products.** We
        utilize third parties, such as hardware system vendors, WMS companies,
        distributors, consultants, value added resellers, and system integrators,
        to
        sell and/or assist us in selling our products. To date we have signed agreements
        with several of these third-party partners, and we expect these partners
        to
        contribute an increasing percentage of overall revenues in the future. We
        believe that the establishment of a network of third-party partners, with
        extensive and specific knowledge of the various applications critical in
        the
        industrial market, is important for us to succeed in that market. Some
        third-party partners also purchase products from us at a discount and
        incorporate them into application systems for various target markets, and/or
        consult us in the development of application systems for end users. Once
        signed,
        new partners must be trained in the development and sale of voice-based
        logistics solutions. Accordingly, there can be a significant lead time between
        the signing of agreements with partners and the recognition of revenues
        generated by the partners. For the foreseeable future, we may sell fewer
        products if we cannot attract and retain third-party partners to sell and
        service our products effectively and provide timely and cost-effective customer
        support. An increasing number of companies compete for access to the types
        of
        partners we use. Additionally, we may experience conflicts between our
        distribution channel partners who may compete against one another. Our sales
        may
        suffer as a result of these conflicts.
 
 -9-
  Either
        party generally may terminate our current arrangements with third-party partners
        at any time upon 30 days prior written notice. We cannot assure you that
        our
        partners will continue to purchase and re-sell our products, or provide us
        with
        adequate levels of support. If our partner relationships are terminated or
        otherwise disrupted, our operating performance and financial results may
        be
        adversely affected.
 
 **If
        we cannot attract and retain management and other personnel with experience
        in
        the areas of our business focus, we will not be able to manage and grow our
        business.** We have
        been developing and selling our speech recognition products and voice-based
        technologies since February 1999. Since that time, we have been hiring personnel
        with skills and experience relevant to the development and sale of these
        products and technologies. If we cannot continue to hire such personnel and
        to
        retain personnel hired, our ability to operate our business will be materially
        adversely affected. On June 30, 2006, the Company accelerated the vesting
        of
        outstanding stock options to all of its employees, thereby eliminating a
        possible reason for employees to remain with the Company. Competition for
        qualified personnel is intense, and we cannot assure you that we will be
        able to
        attract, assimilate or retain qualified personnel.
 
 **If
        the export of our technology is deemed a violation of the regulations of
        the
        United States Department of Commerce, Bureau of Industry and Security, our
        business will be substantially harmed.** The
        Bureau of Industry and Security (“BIS”) oversees implementation and enforcement
        of the Export Administration Regulations (“EAR”), which control the export of
        most commercial items. The BIS regulates "dual-use" items that have both
        commercial and military or proliferation applications, however, purely
        commercial items without an obvious military use are also subject to the
        EAR.
        The EAR prohibit the export of certain technologies, while the export of
        other
        technologies is restricted in certain geographical regions or to certain
        entities. Exporters deemed in violation of the EAR are subject to substantial
        penalties. We are developing international channels for the distribution
        of our
        speech recognition and voice-based technology, and anticipate increasing
        our
        dependence upon revenue derived from foreign sources. If some or all of our
        products are classified as a restricted technology under the EAR, our ability
        to
        generate revenue from international sources will be materially adversely
        affected.
 
 **If
        we cannot deliver RoHS compliant equipment, our sales to customers in the
        European Union countries will be harmed.** The
        Restriction of Hazardous Substances Directive (“RoHS”) was adopted by the
        European Union (“EU”) and took effect on July 1, 2006. RoHS restricts the use of
        six hazardous materials in the manufacture of various types of electronic
        and
        electrical equipment. Non-compliant electronic equipment may continue to
        be
        distributed only if it was already in the EU marketplace as of July 1, 2006.
        Such equipment may no longer be imported into EU countries after that date.
        We
        expect to deliver RoHS compliant versions of our VLS-410 wearable computer
        and
        related accessories during the second quarter of fiscal 2007. Likewise, RoHS
        compliant versions of certified terminals distributed by LXE, Inc. and Symbol
        Technologies, Inc., among other vendors, are expected to be available at
        various
        dates during the first and second quarters of fiscal 2007. While we hold
        in
        Europe an inventory of non-compliant VLS-410 units that are available for
        sale
        to our customers, we cannot assure you that this inventory is sufficient
        to meet
        the demand for sales of these units through December 2006. We also cannot
        assure
        you that we will not experience delays in delivering RoHS compliant equipment
        certified to operate VoiceLogistics software. If this inventory proves to
        be
        insufficient, or if we experience delays in delivering RoHS compliant equipment,
        we may lose opportunities to sell our hardware and related software and
        professional services to customers in EU countries.
 
 **If
        we cannot protect our proprietary rights and trade secrets, or if we are
        found
        to be infringing on the patents and proprietary rights of others, our business
        would be substantially harmed.** Our
        success depends in part on our ability to protect the proprietary nature
        of our
        products, preserve our trade secrets, and operate without infringing upon
        the
        proprietary rights of others. If others obtain and copy our technology, or
        claim
        that we are making unauthorized use of their proprietary technology, we may
        become involved in lengthy and costly disputes to resolve questions of ownership
        of the technology. If we are found to be infringing on the proprietary rights
        of
        others, we could be required to seek licenses to use necessary technology.
        We
        cannot assure you that licenses of third-party patents or proprietary rights
        would be made available to us on acceptable terms, if at all. In addition,
        the
        laws of certain countries may not protect our intellectual property because
        the
        laws of some foreign countries do not protect proprietary rights to the same
        extent as the laws of the United States, and many companies have encountered
        significant problems and costs in protecting their proprietary rights in
        these
        foreign countries. To protect our proprietary rights, we seek patents and
        we
        enter into confidentiality agreements with our employees and consultants
        with
        respect to proprietary rights and unpatented trade secrets. We cannot assure
        you
        those patent applications in which we hold rights will result in the issuance
        of
        patents. We cannot assure you that any issued patents will provide significant
        protection for our technology and products. In addition, we cannot assure
        you
        that others will not independently develop competing technologies that are
        not
        covered by our patents. We cannot assure you that confidentiality agreements
        will provide adequate protection for our trade secrets, know-how, or other
        proprietary information in the event of any unauthorized use or disclosures.
        Any
        unauthorized disclosure and use of our proprietary technology could have
        a
        material adverse effect on our business.
  -10-
  **Risks
        Relating to Our Securities**
 **The
        price of our Common Stock has been highly volatile due to factors that will
        continue to affect the price of our stock.** Our
        Common Stock traded as high as $16.50 and as low as $4.15 per share (after
        giving effect to the December 12, 2005 reverse split of all outstanding shares
        of our Common Stock at an exchange ratio of 1-for-150 (the “Reverse Split”))
        between July 1, 2005 and June 30, 2006. Historically, the over-the-counter
        markets and NASDAQ Capital Market for securities such as our Common Stock
        have
        experienced extreme price fluctuations. Some of the factors leading to this
        volatility include:
 
 •
              fluctuations
                  in our quarterly revenue and operating results;
 •
              announcements
                  of product releases by us or our competitors;
 •
              announcements
                  of acquisitions and/or partnerships by us or our competitors;
 •
              increases
                  in outstanding shares of our Common Stock upon exercise or conversion
                  of
                  derivative securities, and the issuances of our Common Stock pursuant
                  to
                  our private placement transactions;
                  and
 •
              delays
                  in producing finished goods inventory for shipment.
 
 There
        is
        no assurance that the price of our Common Stock will not continue to be volatile
        in the future.
 
 **A
        significant portion of our total outstanding shares of Common Stock may be
        sold
        in the market in the near future. This could cause the market price of our
        Common Stock to drop significantly, even if our business is doing well.** Sales
        of
        a substantial number of shares of our Common Stock in the public market could
        occur at any time. These sales, or the perception in the market of such sales,
        may have a material adverse effect on the market price of our Common Stock.
        On
        October 25, 2005, we registered 1,084,383,899 shares (7,229,226 shares after
        giving effect to the Reverse Split) of Common Stock, including an aggregate
        of
        193,070,922 shares (1,287,139 shares after giving effect to the Reverse Split)
        of Common Stock issuable upon the exercise of warrants. We also previously
        registered all shares of Common Stock that we may issue under our employee
        benefit plans. Of the shares outstanding, approximately 2,999,220 shares
        are
        subject to lock-up agreements, which expire one year from effectiveness of
        the
        registration statement on Form S-2 (File No. 333-128690), or November 7,
        2006.
        Sales of remaining outstanding shares, when sold, could reduce the market
        price
        of our Common Stock.
 
 **Future
        sales of our Common Stock in the public market could adversely affect the
        price
        of our Common Stock.** Sales
        in
        the public market of substantial amounts of our Common Stock that are not
        currently freely tradable, or even the potential for such sales, could impair
        the ability of our stockholders to recoup their investment or make a profit.
        As
        of August 31, 2006, these shares include:
  •
              approximately
                  235,469 shares of our Common Stock owned by our executive officers
                  and
                  directors; and
 •
              approximately
                  2,258,500 shares of our Common Stock issuable to warrant holders
                  and
                  option holders, which may be sold under various prospectuses filed
                  under
                  the Securities Act of 1933, as amended, or the Securities
                  Act.
 
 The
        sale
        of substantial amounts of our Common Stock by certain affiliates, including
        our
        largest stockholders, or the sale of substantial amounts of our Common Stock
        received through the exercise of outstanding options and/or warrants, or
        the
        perception of such sales, may have a material adverse effect on our stock
        price.
 
 If
        the
        holders of the warrants and options to purchase our Common Stock elect to
        have
        their collective holdings assumed by a potential acquirer of us, the potential
        acquirer could be deterred from completing the acquisition. Also, if the
        holders
        of the warrants and options to purchase our Common Stock elect to have their
        holdings remain outstanding after an acquisition of us, the potential acquirer
        could be deterred from completing the acquisition.
 
 **Our
        management and other affiliates have significant control of our Common Stock
        and
        could control our actions in a manner that conflicts with our interests and
        the
        interests of other stockholders.** As of
        August 31, 2006, our executive officers, directors and affiliated entities
        together beneficially own approximately 6,262,823 shares of our Common Stock,
        assuming the exercise of options, warrants and other Common Stock equivalents,
        which are currently exercisable, held by these stockholders. As a result,
        these
        stockholders, acting together, will be able to exercise considerable influence
        over matters requiring approval by our stockholders, including the election
        of
        directors, and may not always act in the best interests of other stockholders.
        Such a concentration of ownership may have the effect of delaying or preventing
        a change in our control, including transactions in which our stockholders
        might
        otherwise receive a premium for their shares over then current market prices.
 
 **If
        we are unable to maintain our listing on the NASDAQ Capital Market, the
        marketability of our Common Stock could be adversely
        affected.** Our
        Common Stock is currently listed on the NASDAQ Capital Market under the symbol
        “VOXW”. In order for our Common Stock to continue trading on the NASDAQ Capital
        Market, we must meet certain minimum financial requirements. Among other
        requirements, the minimum bid price of our Common Stock must remain at least
        $1.00 per share and the market value of publicly held shares, as defined
        by the
        NASDAQ Capital Market, must remain at least $1,000,000. In addition, we must
        continue to meet at least one of the following three requirements:
 
 -11-
  •
              Stockholders’
                  equity must be at least $2,500,000;
 •
              Market
                  value of our Common Stock must be at least $35,000,000;
                  or
 •
              Net
                  income from continuing operations must be at least
                  $500,000.
 
 While
        we
        satisfy the requirements for continued listing on the NASDAQ Capital Market
        as
        of June 30, 2006, continued periods of operating losses may adversely affect
        our
        ability to maintain minimum required values of stockholders’ equity or Common
        Stock market value. If we are unable to satisfy the criteria to maintain
        listing
        of our Common Stock, our Common Stock could be subject to delisting. Trading,
        if
        any, of our Common Stock would thereafter be conducted on the OTC Bulletin
        Board
        or in the so-called “Pink Sheets”. As a consequence, it would be far more
        difficult for our stockholders to trade in our Common Stock and it may be
        more
        difficult to obtain accurate and current information concerning market prices
        for our Common Stock.
 
 **Risks
        Relating to Accounting Rules and Internal Controls**
 **Changes
        in, or interpretations of, accounting rules and regulations, such as expensing
        of stock options, could result in unfavorable accounting
        charges.** We
        prepare our consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America. These principles
        are subject to interpretation by the SEC and various bodies formed to interpret
        and create appropriate accounting policies. A change in these policies can
        have
        a significant effect on our reported results, and may even retroactively
        affect
        previously reported transactions. Our accounting policies that recently have
        been, or may be, affected by changes in the accounting rules are as
        follows:
 •
                revenue
                    recognition;
 •
                accounting
                    for share-based payments; and
 •
                accounting
                    for income taxes.
 In
          particular, the Financial Accounting Standard Board ("FASB") recently enacted
          Statement of Financial Accounting ("SFAS") No. 123 (revised 2004), "Share-Based
          Payment" ("SFAS 123R") which we will adopt effective July 1, 2006. SFAS
          123R
          requires all share-based payments to employees, including grants of employee
          stock options, to be recognized as compensation expense in the consolidated
          financial statements based upon their fair values. In anticipation of
          implementing SFAS 123R, we elected to accelerate the vesting of all unvested
          stock options held by our employees as of June 30, 2006. As a result of
          the
          accelerated vesting, options to purchase 672,323 shares of Common Stock
          may be
          exercised currently.
 
 In
        addition, the Internal Revenue Service ("IRS") began implementing a new
        interpretation of section 409A of the Internal Revenue Code effective
        January 1, 2005. Section 409A affects the accounting of certain
        deferred compensation arrangements, including stock options. Section 409A
        requires the withholding of taxes from employees as vesting occurs on options
        that are issued below fair market value ("FMV"). The default position of
        the IRS
        is that for a publicly traded company, its trading value is its FMV. In the
        past, we issued stock options at what we believe was FMV, however these prices
        at times varied from the trading value on the Over the Counter Bulletin Board
        due to the highly volatile nature of the stock price. Accordingly, we have
        taken
        a deferred compensation charge on our books, but have not withheld taxes
        from
        our employees as their options vest. The IRS has issued guidelines that allow
        for a company to show that if its stock is not readily tradable, FMV may
        be
        determined through other approved methods, rather than trading value. We
        filed a
        private letter ruling request with the IRS on the matter of whether or not
        our
        stock is readily tradable, but the IRS elected not to respond to the request
        pending the issuance of final rules regarding the application of section
        409A.
        An adverse opinion from the IRS on the private letter ruling, or the issuance
        of
        unfavorable final rules, may impact our reported financial results and may
        impact the way we compensate employees, which in turn could impact our ability
        to retain competent staff. Even if the IRS rules favorably, we would still
        be
        required to support the Company’s position that its options were issued at FMV
        and, therefore, are excluded from section 409A coverage. If we are unable
        to
        sustain this case, there may be similar repercussions as if we had lost the
        ruling in the first place.
  **ITEM 2.** **PROPERTIES.**
  Effective
        July 1, 2000, we entered into a lease for our headquarters facility, which
        contains approximately 4,000 square feet of office space in Lawrenceville,
        New
        Jersey. The initial term of this lease expired on June 30, 2003, but has
        been
        extended through December 31, 2007. On July 27, 2005, the lease was amended
        to
        include an additional 1,350 square feet. Payments under this lease consist
        of a
        base rent of $19.00 per square foot through December 31, 2004, $19.76 per
        square
        foot from January 1, 2005 to November 30, 2005, $20.29 per square foot from
        December 1, 2005 through December 31, 2006, and $21.40 per square foot
        thereafter. Beginning in 2005, the lease requires us to pay for escalations
        in
        property operating expenses, property taxes and other items.
  Our
        principal facility, which is located in Cambridge, Massachusetts, contains
        approximately 9,500 square feet of office space. We lease this space for
        research and development, customer support, professional services, product
        engineering, and final assembly and testing. Total payments under this lease
        consist of a base rent of $27.00 per square foot, an electricity charge of
        $1.50
        per square foot, and an expense charge of 14.9% of the landlord’s building
        expenses. On October 1, 2003, the base rent was reduced to $20.00 per square
        foot. The existing term for the lease of this office space will expire on
        June
        30, 2007.
 
 -12-
  In
        June
        2004, we leased approximately 400 square feet in Reading, England. This facility
        serves as a sales and service office for our customers based in the United
        Kingdom. The initial lease term expired in June 2005, but renews automatically
        in three-month increments until terminated in writing. We are obligated to
        pay
        minimum lease payments of approximately £2,250 per month, plus a pro rata share
        of operating expenses for the building.
  We
        may
        need to lease additional space to meet our growing needs during the fiscal
        year
        ending June 30, 2007.
  **ITEM 3.** **LEGAL
            PROCEEDINGS.**
  We
        are
        subject to various legal proceedings and claims, either asserted or unasserted,
        which arise in the ordinary course of business. While the outcome of these
        claims cannot be predicted with certainty, we do not believe that the outcome
        of
        any of these legal matters will have a material adverse effect on our business,
        operating results or financial condition.
  **ITEM 4.** **SUBMISSION
            OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
  Not
        applicable.
 
 -13-
  **PART
        II** ****
   **ITEM 5.** **MARKET
            FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
            MATTERS.**
  **Market
        Information**
  From
        March 1, 2001 through December 11, 2005, our Common Stock traded on the NASDAQ
        OTC Bulletin Board under the symbol VOXW.ob. From December 12, 2005 through
        March 19, 2006, our Common Stock was traded on the NASDAQ OTC Bulletin Board
        under the symbol VXWR.ob after giving effect to the 1-for-150 reverse split
        of
        all the outstanding shares of our Common Stock (“the Reverse Split”). On March
        20, 2006, our Common Stock began trading on the NASDAQ Capital Market under
        the
        symbol VOXW. The following table sets forth the high and low sale prices
        per
        share, after adjustment for Reverse Split, as quoted on the NASDAQ OTC Bulletin
        Board and NASDAQ Capital Market for our two most recent fiscal
        years:
 
 **High**
              
              **Low**Fiscal
                  Year Ended June 30, 2005Quarter
                  ended September 30, 2004
              
              $
              8.250
              
              $
              4.800Quarter
                  ended December 31, 2004
              
              $
              14.250
              
              $
              4.500Quarter
                  ended March 31, 2005
              
              $
              10.650
              
              $
              6.150Quarter
                  ended June 30, 2005
              
              $
              9.750
              
              $
              4.950Fiscal
                  Year Ended June 30, 2006Quarter
                  ended September 30, 2005
              
              $
              16.500
              
              $
              6.000Quarter
                  ended December 31, 2005
              
              $
              10.500
              
              $
              4.220Quarter
                  ended March 31, 2006
              
              $
              7.500
              
              $
              4.880Quarter
                  ended June 30, 2006
              
              $
              7.250
              
              $
              4.150
 
  As
        of
        June 30, 2006, there were approximately 337 holders of record of our Common
        Stock. We have never declared nor paid any cash dividends on our Common Stock.
        We do not anticipate paying any cash dividends in the foreseeable
        future .
  **Sale
        of Unregistered Securities**
 
 On
        August
        11, 2005, we entered into a Common Stock Purchase Agreement with certain
        accredited investors, pursuant to which we agreed to issue an aggregate of
        up to
        206,250,000 shares (1,375,000 shares after giving effect to the Reverse Split)
        of our Common Stock, $0.001 par value per share, in a private placement.
        On
        August 11, 2005, we issued and sold an aggregate of 188,860,967 shares
        (1,259,073 shares after giving effect to the Reverse Split) of Common Stock,
        and
        on August 22, 2005, the private placement's second and final closing, we
        issued
        and sold an additional 17,389,030 shares (115,927 shares after giving effect
        to
        the Reverse Split) of Common Stock. A total of 206,249,997 shares (1,375,000
        shares after giving effect to the Reverse Split) of Common Stock were issued
        through the August 2005 private placement. In connection with the private
        placement, the holders of a majority of our Series D Preferred Stock agreed
        to
        convert all of our outstanding shares of Series D Preferred Stock into shares
        of
        Common Stock. As a result, 649,016,089 shares (4,326,774 shares after giving
        effect to the Reverse Split) of Common Stock were issued upon conversion
        of all
        of the outstanding shares of Series D Preferred Stock and 1,902,857 shares
        (12,686 shares after giving effect to the Reverse Split) of Common Stock
        were
        issued in lieu of paying cash dividends on the Series D Preferred Stock from
        July 1, 2005 to August 11, 2005. Warrants to purchase 156,879,326 shares
        (1,045,862 shares after giving effect to the Reverse Split) of Common Stock
        were
        issued to the holders of warrants to purchase Series D Preferred Stock as
        a
        result of the conversion of the Series D Preferred Stock.
 
 We
        did
        not employ an underwriter in connection with the issuance of the securities
        described above. We believe that the issuance of the foregoing securities
        was
        exempt from registration under Section 4(2) of the Securities Act of 1933,
        as
        amended, as transactions not involving a public offering. Each of the investors
        represented to us that it was
        an
        accredited investor , **** acquired
        the securities for investment purposes only and not with a view to distribution,
        and had adequate information about us.
 
 **Purchase
        of Equity Securities by the Small Business Issuer and Affiliated
        Purchases**
 
 None.
  -14-
  **ITEM 6.** **MANAGEMENT’S
            DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
            CONDITION.**
  This
        report contains forward-looking statements. Such statements are subject to
        certain factors that may cause our plans to differ or results to vary from
        those
        expected, including the risks associated with our need to introduce new and
        enhanced products and services in order to increase market penetration, and
        the
        risk of obsolescence of our products and services due to technological change;
        our need to attract and retain key management and other personnel with
        experience in providing integrated voice-based solutions for logistics,
        specializing in the supply chain sector; the potential for substantial
        fluctuations in our results of operations; competition from others; our evolving
        distribution strategy and dependence on its distribution channels; the potential
        that voice-based products will not be widely accepted; and a variety of risks
        set forth from time to time in our filings with the SEC. We undertake no
        obligation to publicly release results of any of these forward-looking
        statements that may be made to reflect events or circumstances after the
        date
        hereof, or to reflect the occurrences of unexpected results.
 
 **Overview**
 
 We
        are a
        leading provider of voice-based technology that helps optimize the activities
        of
        warehouse and other logistics workers by providing real-time wireless
        connections between warehouse workers and logistics management solutions.
        Utilizing our leading speech recognition capabilities, we enable logistics
        management software and systems to streamline and enhance the accuracy and
        productivity of warehouse workers in performing repetitive, high-volume,
        labor-intensive tasks, including picking, receiving, put away, replenishment,
        loading, and returns processing. Our voice-enabled solutions enable customers
        to
        reduce logistics costs and optimize complex materials handling processes
        through
        the delivery of voice prompts and responses that can be tailored to individual
        customer requirements. We generate revenues primarily from hardware product
        sales, software license fees, professional services and maintenance
        fees.
  The
        VoiceLogistics solution is a combination of software, hardware and professional
        services available through two productized offerings. VoiceLogistics Express
        is
        a standard application suite for enhancing distribution center workforce
        performance for a variety of logistics functions. VoiceLogistics Pro is a
        suite
        of tools enabling non-programmers to design, develop and integrate voice-based
        logistics solutions. Our VoxBrowser software offers our patented combination
        of
        powerful speech recognition software in VoiceXML compliant Web browser
        technology. This is client software designed to run on a wide variety of
        industry-standard mobile computers devised for demanding warehouse environments.
        These serve as the basis for the dynamic real-time link between highly mobile
        logistics workers, the warehouse management system (“WMS”) and supervisory
        personnel. We believe that our patented solution is unique in the industry
        because it is the first open standards, Web-based, people-centric, interactive
        speech recognition technology designed to VoiceXML standards, and is engineered
        specifically to operate in highly demanding industrial environments. VoxBrowser
        allows for the development and deployment of voice-based logistics solutions
        independent of the hardware platform on which it operates.
  We
        sell
        VoiceLogistics primarily to large companies that operate warehouses and
        distribution centers in North America and Europe. We have customers from
        a
        variety of industry sectors, including food service, grocery, retail, consumer
        packaged goods, automotive parts, third-party logistics providers and wholesale
        distribution. Our technology has the ability to integrate easily (generally
        in
        less than 60 days) with an external WMS.
 
 Historically,
        our sales were generated primarily by our own sales force working directly
        with
        the end users of the VoiceLogistics solution. In fiscal year 2006, we began
        investing substantial resources into expanding our partnership channels,
        with
        particular emphasis on the development of relationships with terminal equipment
        manufacturers and vendors, VARs (value added resellers), logistics consultants
        and WMS vendors. This is most recently evidenced through our relationships
        with
        LXE, Symbol and RedPrairie Corporation, among others. With the introduction
        of
        VoxBrowser in 2005 and VoiceLogistics Pro in March 2006, highly customized
        voice-enabled logistics solutions can be deployed by third-party partners
        on any
        certified mobile computer equipment. Our direct sales currently contributes
        the
        majority of our revenues; however, we expect a shift to more third-party
        generated revenues in the future as our channel development efforts expand.
        Additionally, we anticipate a greater percentage of our revenues in the future
        derived from software licenses as VoiceLogistics Pro software is deployed
        by
        third-party partners on hardware offered by other manufacturers.
 
 Effective
        as of October 1, 2005, we entered into an agreement with LXE to outsource
        the
        manufacturing of our VLS-410 hardware. Under the terms of the agreement,
        we
        licensed certain hardware technology to LXE for production and distribution
        by
        LXE. We further authorized LXE to resell our recently introduced VoxBrowser
        product. LXE authorized us to resell certain next generation hardware products
        to be developed in the future. Each party is authorized to resell the other
        party’s products throughout the world. The agreement has an initial term of five
        years and is subject to automatic renewals. On January 6, 2006, Symbol endorsed
        our products by designating us as a “PartnerSelect Premier Independent Software
        Vendor” of voice-based solutions. We are actively soliciting similar
        relationships with other leading equipment vendors and their distributors.
 
 -15-
  **Selected
        Financial Data**
 
 The
        selected statement of operations data for the fiscal years ended June 30,
        2006
        and 2005, and the selected balance sheet data as of June 30, 2006 and 2005,
        have
        been derived from our audited financial statements, which are included elsewhere
        in this Annual Report on Form 10-KSB. The selected statements of operations
        data
        for the fiscal years ended June 30, 2004, 2003 and 2002, and the balance
        sheet
        data as of June 30, 2004, 2003 and 2002, have been derived from our audited
        financial statements not included herein. The selected statement of operations
        data set forth below should be read in conjunction with Management’s Discussion
        and Analysis of Results of Operations and Financial Condition and the financial
        statements and notes thereto included elsewhere in this Annual Report on
        Form
        10-KSB.
  **Year
                  Ended June
                  30,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006****(In
                  thousands, except per share data)**Statement
                  of Operations Data:Total
                  revenues
              
              $
              4,501
              
              $
              8,392
              
              $
              11,650
              
              $
              17,502
              
              $
              15,478Total
                  cost of revenues
              
              $
              2,417
              
              $
              4,342
              
              $
              7,669
              
              $
              8,065
              
              $
              7,303Net
                  loss applicable to commonstockholders
              
              $
              (53,917
              )
              $
              (7,644
              )
              $
              (10,326
              )
              $
              (1,456
              )
              $
              (6,843
              )Net
                  loss per share applicable tocommon
                  stockholders - basic anddiluted
              
              $
              (435.40
              )
              $
              (46.99
              )
              $
              (43.86
              )
              $
              (3.78
              )
              $
              (1.22
              )Weighted
                  average number of sharesused
                  in computing net loss percommon
                  share-basic and diluted,adjusted
                  for Reverse Split
              
              
              124
              
              
              163
              
              
              235
              
              
              386
              
              
              5,596
 
 **Year
                  Ended June
                  30,****2002**
              ****
              **2003**
              ****
              **2004**
              ****
              **2005**
              ****
              **2006****(In
                  thousands)**Balance
                  Sheet Data:Cash,
                  cash equivalents, cash held inattorney's
                  escrow account, andshort
                  term investments
              
              $
              6
              
              $
              4,247
              
              $
              1,124
              
              $
              3,639
              
              $
              6,909Working
                  capital (deficit)
              
              $
              (327
              )
              $
              2,550
              
              $
              (1,942
              )
              $
              604
              
              $
              4,005Total
                  assets
              
              $
              3,191
              
              $
              8,847
              
              $
              5,413
              
              $
              7,414
              
              $
              10,646Long-term
                  debt
              
              $
              -
              
              $
              38
              
              $
              1,013
              
              $
              334
              
              $
              253Series
                  A, B and C mandatorilyredeemable
                  convertible preferredstock
              
              $
              4,342
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Stockholders'
                  equity (deficit)
              
              $
              (3,559
              )
              $
              3,772
              
              $
              (2,241
              )
              $
              810
              
              $
              4,327
  **Critical
        Accounting Policies**
  The
        preparation of financial statements and related disclosures in conformity
        with
        accounting principles generally accepted in the United States of America
        requires management to make judgments, assumptions and estimates that affect
        the
        amounts reported in our consolidated financial statements and accompanying
        notes. We base our estimates and judgments on historical experience and on
        various other assumptions that we believe are reasonable under the
        circumstances. However, future events are subject to change, and the best
        estimates and judgments routinely require adjustment. The amounts of assets
        and
        liabilities reported in our balance sheets, and the amounts of revenues and
        expenses reported for each of our fiscal periods, are affected by estimates
        and
        assumptions which are used for, but not limited to, the accounting for allowance
        for doubtful accounts, warranty costs, goodwill and intangible asset
        impairments, restructurings, inventory and income taxes. Actual results could
        differ from these estimates. The following critical accounting policies are
        significantly affected by judgments, assumptions and estimates used in the
        preparation of our consolidated financial statements.
  -16-
  Revenue
        is recognized when earned in accordance with applicable accounting standards,
        including AICPA Statement of Position (SOP) No. 97-2, “Software Revenue
        Recognition”, as amended by SOP 98-9. SOP No. 81-1, “Accounting for Performance
        of Construction-Type and Certain Production-Type Contracts”, applies to the
        initial site implementation for certain customers requiring significant
        customization to our software. Revenues from product sales and license fees
        generally are recognized upon shipment of hardware and applicable software,
        or
        completion of the implementation, if applicable, provided collection is
        determined to be probable and there are no significant post-delivery
        obligations. If an acceptance period is required to ensure satisfactory delivery
        of customized software development, as typically occurs for the initial site
        implementation for new customers, revenues are recognized upon customer
        acceptance. Vendor-specific objective evidence of the fair value of certain
        hardware elements that are not sold separately is determined using the residual
        method. Service revenues for professional services fees are generally recognized
        upon completion of implementation, or over the period in which such services
        are
        rendered, provided there are no significant post-delivery obligations connected
        with such services.
 
 Deferred
        revenue consists of unearned customer deposits and postcontract customer support
        (“PCS”) arrangements. Customer deposits are recognized as revenue upon customer
        acceptance of the underlying product and services in conjunction with the
        recognition of deferred project costs. PCS arrangements include extended
        hardware warranty, software maintenance revenues and depot management service
        fees. These arrangements, which sometimes include amounts bundled with initial
        revenues, are deferred upon invoicing and recognized as revenue over the
        term of
        the warranty or service period, which is typically one year.
  We
        continue to generate royalty revenues from our legacy speech coding technology
        business, which was sold in 1999. Royalties are earned on technologies our
        customers incorporate into their products for resale. Revenues are recognized
        at
        the time of the customers’ shipment of those products, as estimated based upon
        historical reports received periodically from our customers. If our customers’
business operations change substantially, our actual royalty revenues earned
        could differ from our estimates.
  The
        allowance for doubtful accounts is based on our assessment of the collectibility
        of specific customer accounts and an assessment of international and economic
        risk, as well as the aging of the accounts receivable. If there is a change
        in a
        major customer’s credit worthiness or actual defaults differ from our historical
        experience, our estimates of recoverability of amounts due us could be affected.
  Research
        and development expenditures are charged to operations as incurred. Pursuant
        to
        SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased
        or
        Otherwise Marketed", development costs incurred in connection with the research
        and development of software products and enhancements to existing software
        products are charged to expense as incurred until technological feasibility
        has
        been established, at which time such costs are capitalized until the product
        is
        available for general release to customers.
 
 We
        accrue
        for warranty costs based on our estimate of expected repair cost per unit,
        service policies and specific known issues. If we experience claims or
        significant changes in costs of services, such as third-party vendor charges,
        materials or freight, which could be higher or lower than our historical
        experience, our cost of revenues could be affected.
  Inventory
        purchases and purchase commitments are based upon forecasts of future demand.
        We
        value our inventory at the lower of average cost or market. If we believe
        that
        demand no longer allows us to sell our inventory above cost, or at all, then
        we
        write down that inventory to market or write off excess inventory levels.
        If
        customer demand subsequently differs from our forecasts, requirements for
        inventory write-offs could differ from our estimates.
  Our
        deferred tax assets represent net operating loss carry-forwards and temporary
        differences that will result in deductible amounts in future years if we
        have
        taxable income. We have established a 100% valuation allowance against our
        net
        deferred tax assets based on estimates and certain tax planning strategies.
        The
        carrying value of our net deferred tax assets assumes that it is more likely
        than not that we will not be able to utilize the benefit of these tax assets
        to
        offset future taxable income in certain tax jurisdictions. If these estimates
        and related assumptions change in the future, we may be required to adjust
        the
        valuation allowance in future years.
  Our
        key
        accounting estimates and policies are reviewed with the Audit Committee of
        our
        Board of Directors.
  **Off-Balance
        Sheet Arrangements**
  We
        do not
        have any off-balance sheet arrangements.
  -17-
  **Results
        of Operations**
  **Fiscal
        2006 Versus Fiscal 2005**
 
 Year
                  Ended
                June
                  30, 2006
              
              %
                  of Total
                Revenue
              
              Year
                  Ended
                June
                  30, 2005
              
              %
                  of
                Total
                  Revenue
              
              $
                  Change
              
              %
                  ChangeProduct
                  revenues
              
              $
              11,922
              
              
              77
              %
              $
              13,859
              
              
              79
              %
              $
              (1,937
              )
              
              (14
              %)Services
                  revenues
              
              
              3,556
              
              
              23
              %
              
              3,643
              
              
              21
              %
              
              (87
              )
              
              (2
              %)Total
                  revenues
              
              
              15,478
              
              
              100
              %
              
              17,502
              
              
              100
              %
              
              (2,024
              )
              
              (12
              %)Cost
                  of product revenues
              
              
              3,952
              
              
              26
              %
              
              4,380
              
              
              25
              %
              
              (428
              )
              
              (10
              %)Cost
                  of service revenues
              
              
              3,351
              
              
              22
              %
              
              3,685
              
              
              21
              %
              
              (334
              )
              
              (9
              %)Total
                  cost of revenues
              
              
              7,303
              
              
              47
              %
              
              8,065
              
              
              46
              %
              
              (762
              )
              
              (9
              %)Gross
                  profit
              
              
              8,175
              
              
              53
              %
              
              9,437
              
              
              54
              %
              
              (1,262
              )
              
              (13
              %)Research
                  and development
              
              
              3,160
              
              
              20
              %
              
              2,274
              
              
              13
              %
              
              886
              
              
              39
              %Sales
                  and marketing
              
              
              5,091
              
              
              33
              %
              
              2,985
              
              
              17
              %
              
              2,106
              
              
              71
              %General
                  and administrative
              
              
              2,756
              
              
              18
              %
              
              2,992
              
              
              17
              %
              
              (236
              )
              
              (8
              %)Amortization
                  of deferredemployee
                  compensation
              
              
              4,062
              
              
              26
              %
              
              1,630
              
              
              9
              %
              
              2,432
              
              
              149
              %Total
                  operating expenses
              
              
              15,069
              
              
              97
              %
              
              9,881
              
              
              56
              %
              
              5,188
              
              
              53
              %Operating
                  loss
              
              
              (6,894
              )
              
              (45
              %)
              
              (444
              )
              
              (3
              %)
              
              (6,450
              )
              
              N/MInterest
                  expense, net of interest income
              
              
              (45
              )
              
              (0
              %)
              
              (247
              )
              
              (1
              %)
              
              202
              
              
              82
              %Other
                  expenses, net
              
              
              (52
              )
              
              (0
              %)
              
              (69
              )
              
              (0
              %)
              
              17
              
              
              25
              %Net
                  loss before income taxes
              
              
              (6,991
              )
              
              (45
              %)
              
              (760
              )
              
              (4
              %)
              
              (6,231
              )
              
              (820
              %)Benefit
                  from income taxes
              
              
              228
              
              
              1
              %
              
              0
              
              
              0
              %
              
              228
              
              
              N/ANet
                  loss
              
              $
              (6,763
              )
              
              (44
              %)
              $
              (760
              )
              
              (4
              %)
              $
              (6,003
              )
              
              (790
              %)
  **Revenues**
  Our
        total
        revenues were $15,478,000 for the year ended June 30, 2006 compared to total
        revenues of $17,502,000 for the year ended June 30, 2005. The $2,024,000
        (12%)
        decrease in total revenues is primarily due to decreases in revenues generated
        from the sale of hardware units, licensing of software and professional
        services, offset by increases in hardware warranties and software maintenance
        services. Product revenues accounted for 77% of revenues during the year
        ended
        June 30, 2006 as compared to 79% during the fiscal year ended June 30, 2005.
        Service revenues accounted for 23% of revenue during the year ended June
        30,
        2006 as compared to 21% during the prior year.
 
 Several
        factors contributed to our decline in revenues from fiscal 2005 to fiscal
        2006.
        A significant competitor introduced a new, compact hardware unit, thus creating
        a more competitive environment in which we market our VLS-410 unit. In addition,
        a few large customers postponed planned implementations for reasons we believe
        are unrelated to our products or those of our competitors. Examples of factors
        influencing such delays included changes in a customer’s executive management
        team leading to the reduction of the pace at which the VoiceLogistics solution
        is implemented at additional sites, and another customer’s decision to delay
        implementing the VoiceLogistics solution at a site while evaluating whether
        to
        retain the third party logistics operator of that site. In addition, another
        customer sold a key subsidiary and re-deployed the VoiceLogistics solution
        to a
        remaining site, thus eliminating a site at which VoiceLogistics could be
        newly
        implemented.
  Product
        revenues include sales of VoiceLogistics solution ("VLS") hardware units
        and
        accessories, licensing of software, extended hardware warranty, and royalties
        from our speech compression technology. Total product revenues decreased
        $1,937,000 (14%) to $11,922,000 during the year ended June 30, 2006, from
        $13,859,000 in the year ended June 30, 2005. The decrease in product revenues
        during the year ended June 30, 2006 was driven by a 17% decrease in the number
        of units sold during the period, coupled with a lower average price per unit.
        The lower average price per unit is due to a combination of client software
        not
        being included in upgrades of VLS-410 units as replacements to VLS-310 units
        at
        existing customer sites, and increased competitive pressures. During the
        year
        ended June 30, 2006, upgrades accounted for 35% of units shipped as compared
        to
        16% during the year ended June 30, 2005. As a result of the introduction
        of
        VoxBrowser and VoiceLogistics Pro products, which are not dependent on our
        proprietary hardware platform, we anticipate that software licenses will
        account
        for a greater percentage of product revenues in the future, with less emphasis
        on hardware sales.
  -18-
  Services
        revenues are derived from professional services fees relating to voice-based
        solutions and ongoing customer support activities. For the year ended June
        30,
        2006, services revenues totaled $3,556,000, a decrease of $87,000 (2%) from
        services revenues of $3,643,000 for the year ended June 30, 2005. Professional
        services decreased $480,000 (20%) from $2,357,000 during the year ended June
        30,
        2005 to $1,877,000 during the year ended June 30, 2006, reflecting a decrease
        in
        the number of new site deployments completed during fiscal 2006 as compared
        to
        fiscal 2005. We expect the capabilities of our VoiceLogistics Pro product
        will
        allow faster and less expensive implementations in the future. Additionally,
        VoiceLogistics Pro provides tools to allow third-party partners to develop
        voice-enabled logistics solutions independent of our professional services
        staff. As a result, we expect professional services revenues for new customers
        to decline in the future. Customer support services increased $393,000 (31%)
        from $1,286,000 during the year ended June 30, 2005 to $1,679,000 during
        the
        year ended June 30, 2006. Revenues from customer support services tend to
        grow
        over time as additional software licenses are sold.
 
 **Cost
        of Revenues**
  Total
        cost of revenues decreased $762,000 (9%) from $8,065,000 for the fiscal year
        ended June 30, 2005 to $7,303,000 for the fiscal year ended June 30,
        2006.
  Cost
        of
        product revenues decreased $428,000 (10%) from $4,380,000 in the year ended
        June
        30, 2005, to $3,952,000 in the year ended June 30, 2006. Such costs reflect
        materials, labor and overhead associated with the sale of our voice-based
        products. Included in our cost of product revenues is our manufacturing staff,
        which was comprised of 5 individuals as of June 30, 2006, as compared to
        6
        individuals as of June 30, 2005. The decrease in cost of product revenues
        is
        primarily attributable to the 17% decrease in the number of units shipped
        during
        the year ended June 30, 2006, as compared to the year ended June 30, 2005.
        Warranty costs were lower during the year ended June 30, 2006 than in the
        year
        ended June 30, 2005 because the VLS-410, which we began to sell late in fiscal
        year 2004, has proven more reliable and less expensive to maintain than its
        predecessor, the VLS-310. Warranty coverage on all VLS-310 units expired
        prior
        to June 30, 2005. Cost of product revenues, as a percentage of product revenues,
        may gradually decline, and thus, our margins earned on product revenues may
        increase, since software licensing is expected to account for a higher
        percentage of product revenues in the future. However, such margin increases
        may
        be offset if end users seek to purchase third party hardware directly from
        us
        versus through third-party partners.
 
 Cost
        of
        services revenues consists primarily of the expenses associated with customer
        maintenance support and professional services, including employee compensation,
        outside consulting services and travel expenditures. Professional services
        costs
        are tracked by project, and are deferred until the related project revenue
        is
        recognized. Costs of customer support and professional services staff in
        support
        of our sales and research and development activities are recorded as operating
        expenses. As of June 30, 2006, our customer support and professional services
        staff was comprised of 34 individuals, as compared to 37 individuals as of
        June
        30, 2005. Cost of services revenues decreased $334,000 (9%) from $3,685,000
        in
        the year ended June 30, 2005 to $3,351,000 in the year ended June 30, 2006.
        The
        total cost of our customer support and professional services groups increased
        $8,000 from $4,089,000 in the year ended June 30, 2005 to $4,097,000 in the
        year
        ended June 30, 2006. Costs incurred by these groups in support of our sales
        and
        research and development activities, which are classified as operating expenses
        in our statement of operations, increased from $262,000 in fiscal 2005 to
        $791,000 in fiscal 2006. Redirecting the efforts of the customer support
        and
        professional services groups had the effect of reducing cost of services
        revenues by $529,000 in the year ended June 30, 2006, while increasing operating
        expenses by the same amount. This decrease to cost of services revenues was
        offset by an increase of $217,000 of project costs recognized during the
        year
        ended June 30, 2006, which had been deferred as of June 30, 2005, as compared
        to
        the year ended June 30, 2005.
  **Operating
        Expenses**
  Total
        operating expenses increased by $5,188,000 (53%) to $15,069,000 in the fiscal
        year ended June 30, 2006 from $9,881,000 in the fiscal year ended June 30,
        2005.
        As of June 30, 2006, headcount associated with operating expenses (research
        and
        development, sales and marketing, general and administrative) totaled 51
        individuals compared to 46 individuals as of June 30, 2005.
  Research
        and development expenses primarily consist of employee compensation, consulting
        fees and other costs associated with our voice recognition technology, hardware
        platform and VoiceLogistics software suite. In addition, costs incurred by
        our
        customer support and professional services teams relating to the development
        of
        our VoiceLogistics software suite are charged to research and development.
        As of
        June 30, 2006, our research and development team was comprised of 19 individuals
        compared to 20 individuals at June 30, 2005. Our research and development
        expenses increased $886,000 (39%) to $3,160,000 in the year ended June 30,
        2006,
        from $2,274,000 in the year ended June 30, 2005. The increase in research
        and
        development expenses during the year ended June 30, 2006 is due primarily
        to
        $90,000 of increased personnel costs, $396,000 of increased consulting fees,
        and
        $398,000 of increased costs incurred by our customer support and professional
        services teams in support of research and development activities. The increases
        are primarily related to the development of VoiceLogistics Express, which
        was
        launched in September 2005, and VoiceLogistics Pro, which was launched in
        March
        2006. Research and development costs in fiscal 2007 are expected to remain
        at or
        above levels experienced in fiscal 2006, with efforts focused on continued
        enhancement of VoiceLogistics Pro.
 
 -19-
  Sales
        and
        marketing expenses primarily consist of employee compensation (including
        direct
        sales commissions), third-party partnership fees, travel expenses and trade
        show
        expenses. Our sales and marketing staff was comprised of 21 individuals at
        June
        30, 2006 compared to 15 individuals at June 30, 2005. Sales and marketing
        expenses increased $2,106,000 (71%) to $5,091,000 in the year ended June
        30,
        2006, from $2,985,000 in the year ended June 30, 2005. The increase in sales
        and
        marketing expenses is due primarily to increases of $957,000 in salary and
        related charges, $441,000 in travel costs, $315,000 in marketing programs
        and
        $92,000 recruiting fees, reflecting our focus on expanding customer base
        and
        channel partner relationships both domestically and abroad. In addition,
        costs
        incurred by our customer maintenance support and professional services teams
        in
        support of our sales and marketing activities increased $131,000 in the year
        ended June 30, 2006 as compared to the year ended June 30, 2005. We expect
        to
        continue investing additional resources in the expansion of our marketing
        programs and channel partner relationships. Due to the significant lead time
        required to identify, engage, and train third-party partners in the sale
        and
        development of VoiceLogistics solutions, we anticipate sales and marketing
        expenses during fiscal year 2007 will remain at levels above the prior fiscal
        year.
 
 General
        and administrative expenses consist primarily of employee compensation and
        fees
        for insurance, rent, office expenses, professional services and public company
        related charges. The general and administrative staff was comprised of 11
        individuals at both June 30, 2006 and 2005. General and administrative expenses
        decreased $236,000 (8%) to $2,756,000 in the year ended June 30, 2006 from
        $2,992,000 in the year ended June 30, 2005. Outside professional services
        costs,
        including legal, accounting and outside consulting fees, decreased $96,000
        during the year ended June 30, 2006 compared to the year ended June 30, 2005,
        while equipment, supplies and related office expenses decreased $46,000,
        and
        severance costs decreased approximately $30,000. These decreases were offset
        by
        increased personnel costs of $68,000 associated with staff hired during fiscal
        year 2005.
 
 The
        non-cash charge of deferred employee compensation expense for the year ended
        June 30, 2006 was $4,062,000 as compared to $1,630,000 for the year ended
        June
        30, 2005, an increase of $2,432,000 (149%). This increase is primarily the
        result of the accelerated vesting on June 30, 2006 of all outstanding options
        to
        purchase shares of our Common Stock held by our employees. The acceleration
        of
        vesting of these options was undertaken primarily to eliminate any future
        compensation expense we would otherwise recognize in our income statement
        with
        respect to these options due to the FASB statement "Share-Based Payment"
        (FAS
        123R), which we are implementing effective July 1, 2006. Our balance sheet
        includes deferred compensation of $40,000 as of June 30, 2006 related to
        non-employee options (e.g. directors) as compared to $4,022,000 as of June
        30,
        2005. Accordingly, our deferred compensation charges will be substantially
        lower
        in fiscal year 2007.
  **Interest
        Expense**
 
 Interest
        expense is reported net of interest income earned. Net interest charges for
        the
        year ended June 30, 2006 were $45,000, compared to $247,000 for the year
        ended
        June 30, 2005, a decrease of $202,000 (82%). The decrease is primarily due
        to
        interest income of $204,000 earned during the year ended June 30, 2006 on
        the
        net proceeds received from the sale of our Common Stock in August 2005. Interest
        expense relates primarily to the Silicon Valley Bank ("SVB") credit facility
        issued December 30, 2003. The interest rate on the SVB credit facility was
        8.75%
        as of June 30, 2006 as compared to 6.5% as of June 30, 2005.
 
 **Other
        Expense**
  Other
        expenses, primarily related to fluctuations in foreign currency exchange
        rates,
        totaled $52,000 for the year ended June 30, 2006 compared to $69,000 for
        the
        year ended June 30, 2005, a decrease of $17,000. During the year ended June
        30,
        2006, approximately $3,882,000 (25%) of revenues were derived from transactions
        denominated in currencies other than US dollars. These revenues were partially
        offset by cost of revenues totaling approximately $677,000 and operating
        expenses totaling approximately $596,000 denominated in currencies other
        than US
        dollars.
  **Income
        Taxes**
  The
        benefit from income taxes for the year ended June 30, 2006 is comprised of
        two
        components - a gain of $248,000 generated by the sale of net operating loss
        carryforwards, partially offset by a provision of $20,000 against the Company’s
        operations. The State of New Jersey passed legislation in 1999 allowing
        qualified technology companies based in New Jersey to apply for transfer
        or sale
        of unused State of New Jersey net operating losses for cash. Profitable
        companies can buy these losses at a discount, thereby reducing their state
        tax
        obligations. We received a determination letter from the State of New Jersey
        to
        sell $3,133,000 of our losses, which generated cash proceeds of $248,000
        during
        the year ended June 30, 2006. We did not participate in the program during
        fiscal 2005.  We are not qualified to participate in this program during
        calendar year 2006, so the program will not impact our results of operations
        in
        fiscal year 2007.
 
 -20-
  The
        provision for income taxes was $20,000 for the year ended June 30, 2006,
        as
        compared to $0 for the year ended June 30, 2005. During the year ended June
        30,
        2006, we had a net loss before taxes of $6,991,000 for accounting purposes.
        There are significant differences in calculating income or loss for accounting
        and tax purposes, primarily relating to charges such as amortization of deferred
        employee compensation that are recorded in the current period for accounting
        purposes, but are deferred for tax purposes. Furthermore, tax laws differ
        in
        each jurisdiction, yielding differing amounts of taxable income or loss in
        each
        jurisdiction. While we have substantial net operating losses to offset taxable
        income in some taxing jurisdictions, certain restrictions preclude us from
        fully
        utilizing the benefit of these net operating losses. In addition, the expansion
        of our business requires us to file taxes in jurisdictions where we did not
        previously operate, and thus do not have established net operating losses
        to
        offset the tax liability.
  **Liquidity
        and Capital Resources**
  As
        of
        June 30, 2006, we had $6,909,000 in cash and cash equivalents, compared to
        $3,639,000 in cash and cash equivalents as of June 30, 2005, an increase
        of
        $3,270,000. Our working capital as of June 30, 2006 was $4,005,000 compared
        to
        $604,000 as of June 30, 2005, an increase of $3,401,000.
  Net
        cash
        used in operating activities totaled $2,608,000 for fiscal 2006, primarily
        consisting of a net loss of $6,763,000, adjusted for a decrease of $791,000
        in
        accounts payable and accrued expenses, and an increase of $66,000 in accounts
        receivable; offset by an increase of $450,000 in deferred revenues, a decrease
        in deferred project costs of $96,000 and non-cash charges including amortization
        of deferred employee compensation of $4,062,000, amortization of financing
        costs
        of $178,000, depreciation and amortization charges of $201,000, and provision
        for doubtful accounts of $80,000. Changes to the balances of accounts receivable
        were primarily due to the decrease in revenue during the three months ended
        June
        30, 2006 as compared to the three months ended June 30, 2005. Changes to
        deferred project costs were due primarily to the timing of sales within the
        year. Accounts payable and accrued expenses decreased during the year ended
        June
        30, 2006, as funding from the August 2005 private placement provided resources
        that allowed us to reduce our outstanding liabilities. Net cash provided
        by
        operating activities totaled $1,869,000 for fiscal 2005, primarily consisting
        of
        a net loss of $760,000, an increase in deferred revenue of $758,000, a decrease
        of $444,000 in accounts receivable, a decrease of $412,000 in accounts payables
        and accrued expenses, an increase in inventory of $292,000, a decrease of
        $336,000 in prepaid and other current assets, an increase of $119,000 of
        deferred project costs, as well as non-cash charges of $1,630,000 for
        amortization of deferred employee compensation, $172,000 for amortization
        of
        deferred finance charges, and $94,000 for depreciation and
        amortization.
  In
        the
        year ended June 30, 2006, net cash used in investing activities totaled $396,000
        as a result of purchases of property and equipment totaling $351,000 and
        capitalized software development costs totaling $45,000. In fiscal 2005,
        net
        cash used in investing activities totaled $108,000 as a result of purchases
        totaling $161,000 of property and equipment netted against proceeds of $53,000
        for the disposal of assets.
  Net
        cash
        provided by financing activities totaled $6,289,000 in fiscal year 2006,
        compared to $742,000 in fiscal year 2005. A private placement of our Common
        Stock in August 2005 yielded net proceeds of approximately $6,190,000, while
        $58,000 was raised from the exercise by employees of options to purchase
        Common
        Stock. During the year ended June 30, 2006, we borrowed $1,300,000 against
        our
        working line of credit and $437,000 against a separate line of credit for
        the
        purchase of equipment. The $1,000,000 borrowed against the working line of
        credit as of June 30, 2005 was fully paid during the year ended June 30,
        2006.
        In addition, $681,000 was paid against long-term debt, and $15,000 was paid
        to
        repurchase fractional shares created by the Reverse Split of our Common Stock
        in
        December 2005. In fiscal 2005, $1,300,000 was provided by short-term borrowing
        against the working line of credit, of which $300,000 was subsequently repaid
        in
        the same year. $376,000 was paid against long-term debt, while proceeds from
        the
        exercise of stock options totaled $118,000.
  During
        fiscal years 2003 and 2004, we completed a series of private placements of
        Series D Convertible Preferred Stock (the “Series D Preferred Stock”). The
        Series D Preferred Stock had a 7% dividend payable in cash or equity, at
        our
        election, and was convertible into Common Stock on a one-for-one basis. Pursuant
        to these transactions, warrants to purchase Series D Preferred Stock were
        also
        provided to certain holders of the Series D Preferred Stock. As of June 30,
        2005, 649,621,940 shares of Series D Preferred Stock, and warrants to purchase
        156,879,326 shares of Series D Preferred Stock, were outstanding. In July
        2005,
        605,851 shares of Series D Preferred Stock were converted into Common
        Stock.
 
 On
        August
        11, 2005, we entered into a Common Stock Purchase Agreement with certain
        accredited investors, pursuant to which we agreed to issue an aggregate of
        up to
        206,250,000 shares (1,375,000 shares after giving effect to the Reverse Split)
        of our Common Stock in a private placement. On August 11, 2005, we issued
        and
        sold an aggregate of 188,860,967 shares (1,259,073 shares after giving effect
        to
        the Reverse Split) of Common Stock, and on August 22, 2005, the private
        placement's second and final closing, we issued and sold an
  -21-
  additional
        17,389,030 shares (115,927 shares after giving effect to the Reverse Split)
        of
        Common Stock. A total of 206,249,997 shares (1,375,000 shares after giving
        effect to the Reverse Split) of Common Stock were issued through the August
        2005
        private placement (the “Private Placement”). We received aggregate proceeds of
        approximately $6,600,000 before expenses and commissions. In connection with
        the
        Private Placement, the holders of a majority of our Series D Preferred Stock
        agreed to convert all of the outstanding shares of Series D Preferred Stock
        into
        shares of Common Stock. As a result, the remaining 649,016,089 shares of
        Series
        D Preferred Stock were converted into 649,016,089 shares (4,326,774 shares
        after
        giving effect to the Reverse Split) of Common Stock, and 1,902,857 shares
        (12,686 shares after giving effect to the Reverse Split) of Common Stock
        were
        issued in lieu of paying cash dividends on the Series D Preferred Stock for
        the
        period July 1, 2005 to August 11, 2005. As of August 31, 2005, taking into
        consideration the Private Placement and unrelated exercises of stock options,
        we
        had 936,277,855 shares (6,241,852 shares after giving effect to the Reverse
        Split) of Common Stock issued and outstanding. No shares of Series D Preferred
        Stock remain outstanding. Further, the holders of a majority of our Series
        D
        Preferred Stock agreed to amend and restate all of our outstanding warrants
        to
        purchase shares of Series D Preferred Stock into warrants to purchase shares
        of
        Common Stock. In addition, certain holders of Series D Preferred Stock waived
        their right to receive options to purchase up to 18,666,667 shares (124,444
        shares after giving effect to the Reverse Split) of our Common Stock as a
        result
        of delays in registering shares issued under the 2003 and 2004 sales of Series
        D
        Preferred Stock.
 
 We
        are
        using the proceeds from the Private Placement to fund significantly increased
        research and development activities during fiscal years 2006 and 2007, as
        well
        as support the substantial expansion of our sales and marketing channels
        domestically and abroad. We added significant personnel costs and marketing
        program expenses in these areas in advance of offsetting revenues. We also
        increased capital expenditures from $161,000 during fiscal year 2005 to $351,000
        during fiscal year 2006 to meet our growing personnel needs for computers
        and
        telephones, and to upgrade our existing information technology. These cost
        increases are reflected in our operations for the year ended June 30, 2006,
        and
        will continue to impact the results of our operations during fiscal year
        2007.
 
 On
        December 30, 2003, we entered into a credit facility with Silicon Valley
        Bank
        (the “SVB Facility”). The SVB Facility initially provided us with $2,000,000 in
        financing, comprised of a $1,500,000 term loan and $500,000 working capital
        facility. The term loan is payable in monthly installments over a 36-month
        period commencing February 1, 2004. The SVB Facility bears interest at a
        rate of
        prime (8.25% as of June 30, 2006) plus 0.5% per annum, and is secured by
        all of
        our assets, including our intellectual property, and a guarantee by our two
        largest stockholders. In exchange for the SVB Facility guarantee, the
        stockholders were granted warrants to purchase 133,333,333 shares of our
        Series
        D Preferred Stock at an exercise price of $0.015 per share. As a result of
        the
        August 2005 Private Placement, these warrants were converted into warrants
        to
        purchase 133,333,333 shares (888,889 shares after giving effect to the Reverse
        Split) of Common Stock at an exercise price of $0.015 per share ($2.25 per
        share
        after giving effect to the Reverse Split).
  We
        engaged Hempstead & Co. as our valuation expert to assist in determining the
        fair value of the guarantee for which the warrants were issued. Based on
        the
        work performed by Hempstead & Co., we recorded a deferred financing asset of
        $500,000 on our balance sheet as of December 31, 2003. This deferred asset
        is
        being amortized over 36 months commencing on January 1, 2004, and has a
        remaining balance of $88,000 as of June 30, 2006.
  On
        May
        28, 2004, we entered into a modification agreement to the term loan with
        SVB
        deferring the seven monthly principal payments originally scheduled to occur
        from June 1, 2004 through December 1, 2004. Commencing on January 1, 2005,
        and
        over the remaining 24 payments, the deferred principal payments will be
        amortized and added to the original principal payment amount. The initial
        term
        of the loan has not been extended, and the final term loan payment, due on
        December 1, 2006, shall include all outstanding term loan principal and accrued
        interest.
 
 On
        December 8, 2004, we entered into a second loan modification agreement with
        SVB
        wherein, among other factors, the working capital line of credit was increased
        from $500,000 to $2,000,000. The terms of the modification agreement allowed
        for
        immediate availability of $666,667 under this working capital line of credit.
        The amount of availability is determined by subtracting from $2,000,000 the
        amount outstanding under the term loan. The principal amount due under the
        term
        loan was $333,000 as of June 30, 2006, with $1,667,000 available under the
        working capital line of credit at that date. Effective January 1, 2005, the
        monthly principal payment under the term loan is approximately $56,000. These
        monthly principal payments under the term loan have the effect of increasing
        the
        available working capital line of credit by an equal amount. The renewal
        interest rate is at prime plus one-half percent, with a minimum prime interest
        rate of 4.5%. As of June 30, 2006, we borrowed $1,300,000 against the $1,667,000
        available through the working capital facility.
 
 On
        November 9, 2005, we entered into a third loan modification agreement with
        SVB,
        providing us with a line of credit of up to $1,000,000 (the “Equipment Line”) to
        finance the acquisition of certain eligible equipment purchased on or after
        April 1, 2005. We first drew upon the Equipment Line on December 16, 2005,
        and
        were required to make interest-only payments, at a rate of prime plus 1.75%,
        on
        the principal balance through May 9, 2006. At that date, the Equipment Line
        was
        converted into a term loan with 30 fixed monthly payments of approximately
        $17,000. Effective May 9, 2006, the interest rate was fixed at 9.5%. The
        unpaid
        principal balance outstanding as of June 30, 2006 was $423,000.
 
 -22-
  On
        January 20, 2006, with an effective date of December 26, 2005, we entered
        into a
        fourth loan modification agreement with SVB, renewing the working capital
        line
        of credit to December 26, 2006. The terms remained materially the same as
        the
        second loan modification agreement, with the exception that letters of credit,
        foreign exchange contracts, and certain cash management related services,
        to the
        extent they may impose a liability on the bank, are deducted from the available
        limit that we may borrow. Letters of credit, foreign exchange contracts,
        and
        certain cash management related services are each limited to a maximum of
        $100,000 in accordance with the terms of the fourth loan modification. As
        June
        30, 2006, we had no outstanding letters of credit or foreign exchange contracts,
        but do have a corporate credit card secured by the line of credit, which
        places
        a $35,000 restriction on the working capital line of credit.
 
 On
        May
        24, 2006 we entered into a fifth loan modification agreement with SVB, providing
        an additional $3,000,000 credit facility with SVB comprised of a $1,500,000
        revolving line of credit (the "Revolver") and a $1,500,000 non-formula term
        loan
        (the "2006 Term Loan") to fund our anticipated working capital needs. The
        Revolver provides for a line of credit up to $1,500,000, with a $1,000,000
        sub-limit to be established for cash management and foreign exchange
        requirements. The availability under the Revolver is limited to a borrowing
        base
        advance rate that is 80% against Eligible Accounts, as defined by the Revolver.
        Amounts outstanding under the Revolver bear interest at a rate of prime plus
        1.25%. Upon two consecutive quarters of profitability, the interest rate
        will be
        reduced to a rate of prime plus 0.5%. The Revolver is available until October
        31, 2007. The 2006 Term Loan provides, in addition to our borrowings under
        its
        existing credit facility, for up to $1,500,000 in available funds. Amounts
        outstanding under the 2006 Term Loan bear interest at a rate of prime plus
        1.75%. The 2006 Term Loan is available until March 31, 2007. Under certain
        conditions, any borrowings under the Company's 2006 Term Loan will be reserved
        against the availability of the Revolver. No funds were borrowed against
        either
        the Revolver or the 2006 Term Loan as of June 30, 2006.
 
 We
        are
        expanding our partnership channel, with particular emphasis on the development
        of relationships with mobile computer equipment manufacturers and vendors,
        VARs,
        logistics consultants and WMS vendors. With the introduction of VoiceLogistics
        Pro and VoxwBrowser, independent third-party partners are able to develop
        and
        deliver voice-enabled logistics solutions on other manufacturers’ hardware. As a
        result of the partner relationships and product offerings, a greater percentage
        of revenue is likely to be derived from software than has occurred historically,
        with a lower percentage of total revenue derived from hardware and professional
        services. The gross margin generated by software revenue is higher than that
        earned on hardware and professional services revenue. However, by being farther
        removed from the end customer of our VoiceLogistics solutions, a similar
        mix in
        sales may yield overall lower margins, and we may experience increased days
        to
        collect accounts receivable, thereby impacting cash availability.
 
 We
        believe that adequate capital resources will be available to fund our operations
        for the year ending June 30, 2007. Our business plans for the current fiscal
        year estimate revenues will increase from the year ended June 30, 2006. Our
        customer base continues to expand, with existing customers expected to implement
        VoiceLogistics in additional sites as they experience favorable results with
        our
        products, and new customers brought to us through VARs and other channel
        partners. We expect the majority of fiscal year 2007 revenues will come from
        existing customers, but partnership channels established during the year
        ended
        June 30, 2006 are expected to begin contributing to our revenues during the
        year. As of June 30, 2006, $200,000 was available under our working capital
        line
        of credit with SVB for short-term operating needs, and an aggregate of
        $3,000,000 was available to borrow under the Revolver and 2006 Term Loan.
        In
        addition, we believe we are able to raise additional capital through either
        new
        equity or debt financing arrangements, and may elect to utilize such an
        arrangement to fund further expansion of our operations.
 
 As
        of
        June 30, 2006, 12,000,000 shares of our Common Stock were authorized, of
        which
        6,262,844 were issued and outstanding. The following table summarizes the
        dilutive impact in the event of the exercise of all options and warrants
        to
        purchase stock, including options and warrants whose strike price exceeds
        the
        market value of our Common Stock.
  -23-
  **Dilutive
                  Effect of Options and Warrants as of June 30,
                  2006**Common
                  stock issued and outstanding as of June 30, 2006
              
              
              6,262,844Dilutive
                  instruments:Outstanding
                  warrants to purchase common stock *
              
              
              1,161,706Outstanding
                  options to purchase common stock *
              
              
              1,099,992Common
                  stock plus dilutive instruments outstanding
              
              
              8,524,542Options
                    to purchase common stock available to issuepursuant
                    to various stock option plans
              
              
              210,129Common
                    stock outstanding if all dilutive instrumentsare
                    converted and exercised
              
              
              8,734,671* 
                    Includes all "in-the-money" and "out-of-the-money" warrants and
                    options.
  **Effect
        of Recent Accounting Pronouncements**
  In
        December 2004, FASB issued SFAS No. 123R, “Share Based Payment" ("SFAS 123R"),
        requiring all share-based payments to employees, including grants of employee
        stock options, to be recognized as compensation expense in the consolidated
        financial statements based upon their fair values. On March 29, 2005, the
        SEC
        issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides the Staff’s
        views regarding interactions between SFAS 123R and certain SEC rules and
        regulations, and provides interpretations of the valuation of share-based
        payments for public companies. The Company is adopting SFAS 123R effective
        July
        1, 2006. In anticipation of implementing SFAS 123R, the Company elected to
        accelerate the vesting of all unvested stock options held by our employees
        as of
        June 30, 2006. As a result of the accelerated vesting, options to purchase
        672,323 shares of Common Stock became exercisable on that date. Fiscal year
        2006
        compensation expense included a charge of $2,463,000 due to the accelerated
        vesting of options. The effect on our results of operations from expensing
        stock
        options using the Black-Scholes method is presented in the accompanying Notes
        to
        Consolidated Financial Statements. Based upon stock options outstanding as
        of
        September 1, 2006, the Company expects to record the following compensation
        charges in accordance with SFAS 123R:
 
 **Year
                  ended June 30,****(in
                  thousands)**2007
              
              $
              1282008
              
              
              882009
              
              
              602010
              
              
              432011
              
              
              7Total
              
              $
              326
 
 
 In
        June
        2006, the FASB issued Interpretation No 48, “Accounting for Uncertainty in
        Income Taxes-an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
        clarifies the accounting for uncertainty in income taxes recognized in a
        company’s financial statements in accordance with SFAS No. 109, “Accounting for
        Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. FIN 48 is effective
        for
        fiscal years beginning after December 15, 2006. The Company has not yet
        determined the impact that the adoption of FIN 48 will have on its reported
        financial results.
 
 Management
        does not believe that any other recently issued, but not yet effective,
        accounting standards, if currently adopted, would have a material effect
        on the
        accompanying financial statements.
 
 **Quantitative
        and Qualitative Disclosure About Market Risk**
 
 Interest
        Rate Sensitivity
  We
        currently maintain an investment portfolio consisting mainly of cash
        equivalents. The primary objective of our investment activities is to maintain
        the safety of principal and preserve liquidity, while maximizing yields without
        significantly increasing risk. This is accomplished by investing in highly
        liquid short-term instruments with maturities of 90 days or less from the
        date
        of purchase.
 
 We
        also
        maintain a credit facility with SVB that includes a term loan, equipment
        line of
        credit and working capital line of credit. In addition, this credit facility
        provides additional borrowing capacity as of June 30, 2006 via an asset-based
        revolving line of credit and term loan. Interest on this credit facility
        is
        based on the prime interest rate. Interest rate changes would impact our
        interest income earned, but would be partially offset by changes to our interest
        expense charges. Accordingly, we would not expect our operating results or
        cash
        flows to be affected to any significant degree by a sudden change in market
        interest rates.
  -24-
  Foreign
        Currency Exchange Rate
  We
        frequently denominate our sales to certain European customers in Euros and
        Pound
        Sterling. Although we do not currently hedge certain balance sheet exposures
        and
        inter-company balances against future movements in foreign currency exchange
        rates, we do anticipate exploring using foreign exchange contracts in the
        future. We did not hold derivative financial instruments for trading purposes
        during fiscal years 2006 and 2005.
  **ITEM 7.** **FINANCIAL
            STATEMENTS AND SUPPLEMENTARY DATA.**
  The
        financial statements and supplementary data required by this Item are included
        in this Annual Report on Form 10-KSB beginning on page F-1.
  **ITEM 8.** **CHANGES
            IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
            DISCLOSURE.**
  None.
  **ITEM 8A.** **CONTROLS
            AND PROCEDURES.**
  **Disclosure
        Controls and Procedures**
 
 We
        maintain disclosure controls and procedures designed to ensure that information
        required to be disclosed in our Exchange Act reports is recorded, processed,
        summarized and reported within the time periods specified in the SEC’s rules and
        forms, and that such information is accumulated and communicated to our
        management, including our chief executive officer and our chief financial
        officer/principal accounting officer, as appropriate, to allow timely decisions
        regarding required disclosure. In designing and evaluating our disclosure
        controls and procedures, management recognized that any controls and procedures,
        no matter how well designed and operated, can provide only reasonable assurance
        of achieving their objectives.
 
 Our
        management, with the participation of our chief executive officer and chief
        financial officer, evaluated the effectiveness of our disclosure controls
        and
        procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
        Act)
        as of June 30, 2006. Based on this evaluation, our chief executive officer
        and
        chief financial officer concluded that, as of June 30, 2006, our disclosure
        controls and procedures were functioning effectively to provide reasonable
        assurance that the information required to be disclosed by us in reports
        filed
        under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized
        and reported within the time periods specified in the SEC’s rules and forms and
        (ii) accumulated and communicated to our management, including our chief
        executive officer and chief financial officer, as appropriate to allow timely
        decision regarding disclosures.
 
 **Changes
        in Internal Controls**
 
 There
        were no changes during the quarter ended June 30, 2006 in our internal control
        over financial reporting or in other factors that materially affected, or
        are
        reasonably likely to materially affect, our internal controls over financial
        reporting.
  **ITEM
            8B.** **OTHER
            INFORMATION.**
  None.
  -25-
  **PART
        III** ****
   **ITEM 9.** **DIRECTORS,
            EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
            16(a)
            OF THE EXCHANGE ACT.** ****
  The
        information relating to our directors, nominees for election as directors
        and
        executive officers under the headings “Election of Directors” and “Executive
        Officers” in our definitive proxy statement for the 2006 Annual Meeting of
        Stockholders is incorporated herein by reference to such proxy statement.
  **ITEM 10.** **EXECUTIVE
            COMPENSATION.** ****
  The
        discussion under the heading “Executive Compensation” in our definitive proxy
        statement for the 2006 Annual Meeting of Stockholders is incorporated herein
        by
        reference to such proxy statement.
  **ITEM 11.** **SECURITY
            OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
            MATTERS.** ****
  The
        discussion under the heading “Security Ownership of Certain Beneficial Owners
        and Management” in our definitive proxy statement for the 2006 Annual Meeting of
        Stockholders is incorporated herein by reference to such proxy statement.
  **ITEM 12.** **CERTAIN
            RELATIONSHIPS AND RELATED TRANSACTIONS.** ****
  The
        discussion under the heading “Certain Relationships and Related Transactions” in
        our definitive proxy statement for the 2006 Annual Meeting of Stockholders
        is
        incorporated herein by reference to such proxy statement.
  **ITEM 13.** **EXHIBITS
            AND FINANCIAL STATEMENTS.** ****
  List
        of
        documents filed as part of this Annual Report on Form 10-KSB.
  1.
        FINANCIAL STATEMENTS. The financial statements listed in the accompanying
        Index
        to Financial Statements appearing on page F-1 are filed as part of this Annual
        Report on Form 10-KSB.
  2.
        EXHIBITS. The following is a list of Exhibits filed as part of this Annual
        Report on Form 10-KSB. Where so indicated by footnote, Exhibits that were
        previously filed are incorporated by reference. For Exhibits incorporated
        by
        reference, the location of the Exhibit in the previous filing is indicated
        in
        parentheses.
  (a)Exhibit
                      No.
                  
                  Description2.1
                  
                  Asset
                      Purchase Agreement, dated as of February 4, 1999, by and between
                      Ascend
                      Communications, Inc. and Voxware, Inc.**(1)3.1(a)
                  
                  Amended
                      and Restated Certificate of Incorporation**(11)3.1(b)
                  
                  Certificate
                      of Amendment to the Amended and Restated Certificate of
                      Incorporation.**(12)3.1(c)
                  
                  Certificate
                      of Amendment to the Amended and Restated Certificate of Incorporation
                      **(13)3.1(d)
                  
                  Certificate
                      of Amendment to the Amended and Restated Certificate of Incorporation,
                      filed with the Secretary of State of the State of Delaware
                      on December 29,
                      2004.**(25)3.1(e)
                  
                  Certificate
                      of Amendment to the Company’s Amended and Restated Certificate of
                      Incorporation, as amended, as filed with the Secretary of State
                      of the
                      State of Delaware on November 28, 2005.**(22)3.2
                  
                  Amended
                      and Restated Bylaws.**(11)4.1
                  
                  Stock
                      Restriction and Registration Rights Agreement, dated April
                      4, 2000, by and
                      among Voxware, Inc., Verbex Acquisition Corporation, InRoad,
                      Inc. and
                      Stratos Product Development
                      LLC.**(3)







-26-




4.3
              
              Warrant
                  issued to Stratos Product Development, LLC, dated April 4,
                  2000.**(3)4.4
              
              Amendment
                  to Warrants, dated as of July 7, 2003, by and among Voxware, Inc.
                  and
                  Stratos Product Development, LLC and InRoad, Inc.**(25)4.5
              
              Form
                  of Common Stock Purchase Warrant.**(10)4.6
              
              Form
                  of Common Stock Purchase Warrant issued to Ridgecrest Capital
                  Partners.**(10)4.7
              
              Form
                  of Series D Convertible Preferred Stock Purchase
                  Warrant.**(10)4.8
              
              Form
                  of Series D Convertible Preferred Stock Purchase Warrant to be
                  issued to
                  Edison Venture Fund V, L.P., dated December 30,
                  2003.**(12)4.9
              
              Form
                  of Series D Convertible Preferred Stock Purchase Warrant to be
                  issued to
                  Cross Atlantic Technology Fund II, L.P., dated December 30,
                  2003.**(12)4.10
              
              Form
                  of Common Stock Purchase Warrant issued to former holders of Series
                  D
                  Convertible Preferred Stock Purchase Warrants (see Exhibits 4.7,
                  4.8 and
                  4.9).**(25)4.11
              
              Form
                  of Common Stock Purchase Warrant issued toMufson
                  Howe Hunter & Company LLC, dated August 11, 2005.**(25)4.12
              
              Form
                  of Common Stock Purchase Warrant issued toAlan
                  A. Nash, dated August 11, 2005.**(25)4.13
              
              Form
                  of Common Stock Purchase Warrant issued toDuncan
                  J. L. Fitzwilliams, dated August 11, 2005.**(25)4.14
              
              Form
                  of Common Stock Purchase Warrant issued toEmma
                  Smith, dated August 11, 2005.**(25)10.1
              
              Voxware,
                  Inc. 1994 Stock Option Plan.**(2)10.2
              
              Form
                  of Voxware, Inc. Stock Option Agreement.**(2)10.3
              
              Form
                  of Indemnification Agreement.**(2)10.4
              
              Securities
                  Purchase Agreement, dated as of August 10, 2000, by and between
                  Voxware,
                  Inc. and Castle Creek Technology Partners, LLC.**(4)10.5
              
              Registration
                  Rights Agreement, dated as of August 15, 2000, by and between Voxware,
                  Inc. and Castle Creek Technology Partners, LLC.**(4)10.6
              
              Securities
                  Purchase Agreement, dated as of April 19, 2001, by and between
                  Voxware,
                  Inc. and Castle Creek Technology Partners, LLC, together with the
                  form of
                  Additional Share Warrant attached as an exhibit
                  thereto.**(7)10.7
              
              Registration
                  Rights Agreement, dated as of April 19, 2001, by and between Voxware,
                  Inc.
                  and Castle Creek Technology Partners, LLC, together with the form
                  of
                  Remedy Warrant attached as an exhibit thereto.**(7)10.8
              
              Voxware,
                  Inc. 1998 Stock Option Plan for Outside Directors.**(8)10.9
              
              Voxware,
                  Inc. Plan to Pay Non-Employee Directors an Annual
                  Retainer.**(8)10.10
              
              Series
                  D Convertible Preferred Stock Purchase Agreement, dated as of April
                  16,
                  2003, by and among Voxware, Inc. and the Purchasers
                  thereto.**(10)








-27-




10.11
              
              Exchange
                  Agreement, dated as of April 16, 2003, by and between Voxware,
                  Inc. and
                  Castle Creek Technology Partners, LLC.**(10)10.12
              
              Exchange
                  Agreement, dated as of April 16, 2003, by and among Voxware, Inc.
                  and
                  certain holders of its Series C Convertible Preferred
                  Stock.**(10)10.13
              
              Exchange
                  Agreement, dated as of April 16, 2003, by and among Voxware, Inc.,
                  Creafund n.v., Avvision BVBA, BVBA Com2Wizards, Eurl Val D Auso
                  and Wim
                  Deneweth.** (10)10.14
              
              Settlement
                  Agreement, dated as of April 16, 2003, by and between Voxware,
                  Inc. and
                  Castle Creek Technology Partners, LLC.**(10)10.15
              
              Investor
                  Rights Agreement, dated as of June 27, 2003, by and between Voxware,
                  Inc.
                  and the Investors thereto.**(11)10.16
              
              Stockholders
                  Agreement, dated as of June 27, 2003, by and between Voxware, Inc.
                  and the
                  Holders and Investors listed on Schedule 1
                  thereto.**(11)10.17
              
              Voxware,
                  Inc. 2003 Stock Option Plan.**(11)10.18
              
              Form
                  of Voxware, Inc. Stock Option Agreement.**(11)10.19
              
              Loan
                  and Security Agreement, dated as of December 29, 2003, by and between
                  Voxware, Inc. and Silicon Valley Bank.**(12)10.20
              
              Intellectual
                  Property Security Agreement, dated as of December 29, 2003, by
                  and between
                  Voxware, Inc. and Silicon Valley Bank.**(12)10.21
              
              Unconditional
                  Guaranty of Edison Venture Fund V, L.P., as guarantor, dated as
                  of
                  December 29, 2003.**(12)10.22
              
              Unconditional
                  Guaranty of Cross Atlantic Technology Fund II, L.P., as guarantor,
                  dated
                  as of December 29, 2003.**(12)10.23
              
              Executive
                  Employment Agreement, dated March 3, 2004, by and between Voxware,
                  Inc.
                  and Thomas J. Drury, Jr.**(12)10.24
              
              Indemnification
                  Agreement, dated February 2004, by and between Voxware, Inc. and
                  Thomas J.
                  Drury, Jr.**(25)10.25
              
              Executive
                  Employment Agreement, dated June 21, 2004, by and between Voxware,
                  Inc.
                  and Paul Commons**(12)10.26
              
              Indemnification
                  Agreement, dated June 21, 2004, by and between Voxware, Inc. and
                  Paul
                  Commons.**(25)10.27
              
              First
                  Loan Modification Agreement dated May 28, 2004, by and between
                  Voxware,
                  Inc. and Silicon Valley Bank**(12)10.28
              
              Waiver
                  Letter, dated October 8, 2004, from Silicon Valley Bank to Voxware,
                  Inc.**(12)10.29
              
              Second
                  Loan Modification Agreement, dated December 8, 2004, between Voxware,
                  Inc.
                  and Silicon Valley Bank**(16)10.30
              
              Form
                  of Common Stock Purchase Agreement, date as of August 11, 2005
                  by and
                  between Voxware, Inc. and certain accredited
                  investors.**(20)10.31
              
              Form
                  of Amendment No. 2 to Stockholders Agreement, dated as of August
                  11, 2005
                  by and between Voxware, Inc. and certain accredited
                  investors.**(20)








-28-






10.32
              
              Form
                  of Amended and Restated Investor Rights Agreement, dated as of
                  August 11,
                  2005 by and between Voxware, Inc. and certain accredited
                  investors.**(20)10.33
              
              Third
                  Loan Modification Agreement, dated as of November 9, 2005, by and
                  between
                  Voxware, Inc. and Silicon Valley Bank.**(21)10.34
              
              Ratification
                  of Guarantee of Cross Atlantic Technology Fund II,
                  L.P.**(21)10.35
              
              Ratification
                  of Guarantee of Edison Venture Fund V, L.P.**(21)10.36
              
              Fourth
                  Loan Modification Agreement, dated as of January 20, 2006, by and
                  between
                  Voxware, Inc. and Silicon Valley Bank.**(23)10.37
              
              Loan
                  and Security Agreement dated as of May 24, 2006 between Silicon
                  Valley
                  Bank and Voxware, Inc.**(24)10.38
              
              Fifth
                  Loan Modification Agreement dated as of May 24, 2006 between Silicon
                  Valley Bank and Voxware, Inc.**(24)10.39
              
              Amendment
                  to Loan Arrangement with Voxware, Inc. dated as of May 24, 2006,
                  from
                  Edison Venture Fund V, L.P.**(24)10.40
              
              Amendment
                  to Loan Arrangement with Voxware, Inc. dated as of May 24, 2006,
                  from
                  Cross Atlantic Technology Fund II, L.P.**(24)10.41
              
              Amendment
                  to Loan Arrangement with Voxware, Inc. dated as of May 24, 2006,
                  from
                  Verbex Acquisition Corporation.**(24)10.42
              
              License,
                  Development and Reseller Agreement, dated as of September 26, 2005,
                  by and
                  between Voxware, Inc. and LXE, Inc.**†(26)21.1
              
              Subsidiaries
                  of Voxware, Inc.**(11)23.1
              
              Consent
                  of BDO Seidman, LLP*23.2
              
              Consent
                  of Hempstead & Co.*31.1
              
              Certification
                  of principal executive officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.*31.2
              
              Certification
                  of the principal financial officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.*32.1
              
              Certification
                  of the principal executive officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.*32.2
              
              Certification
                  of the principal financial officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.*99.1
              
              Hempstead
                  & Co. valuation report dated February 16,
                  2004.**(14)







*
            Filed herewith.




**
            Previously
              filed with the Commission as Exhibits to, and incorporated by reference
              from, the following documents:




***
            The attachments to this document have not been filed because the Company
              believes that the information contained therein is not deemed material.









-29-




(1)
            Filed
              in connection with the Company’s Quarterly Report on Form 10-Q for the
              fiscal quarter ended December 31, 1998.




(2)
              Filed
                  in connection with the Company’s Registration Statement on Form S-1 (File
                  Number 33-08393).




(3)
              Filed
                  in connection with the Company’s Quarterly Report on Form 10-Q for the
                  fiscal quarter ended March 31, 2000.




(4)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on August 16, 2000.




(5)
              Filed
                  in connection with the Company’s Annual Report on Form 10-K for the fiscal
                  year ended June 30, 1998.




(6)
              Filed
                  in connection with the Company’s Registration Statement on Form S-2 (File
                  Number 33-68646).




(7)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on April 20, 2001.




(8)
              Filed
                  in connection with the Company’s Registration Statement on Form S-8 (File
                  Number 33-33342).




(9)
              Filed
                  in connection with the Company’s Annual Report on Form 10-K for the fiscal
                  year ended June 30, 2002.




(10)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on April 17, 2003.




(11)
              Filed
                  in connection with the Company’s Annual Report on Form 10-K for the fiscal
                  year ended June 30, 2003.




(12)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on January 6, 2004.




(13)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on May 7, 2004.




(14)
              Filed
                  in connection with the Company's Annual Report on Form 10-K for
                  the fiscal
                  year ended June 30, 2004.




(15)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on November 12, 2004.




(16)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on December 10, 2004.




(17)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on December 15, 2004.




(18)
              Filed
                  in connection with the Company's Quarterly Report on Form 10-QSB
                  for the
                  fiscal quarter ended December 31,
                  2004.




(19)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on February 9, 2005.




(20)
              Filed
                  in connection with the Company’s Current Report on Form 8-K that was filed
                  on August 11, 2005.




(21)
                Filed
                    in connection with the Company’s Current Report on Form 8-K that was filed
                    on November 9, 2005.
  (22)
                Filed
                    in connection with the Company’s Current Report on Form 8-K that was filed
                    on November 29, 2005.
  (23)
                Filed
                    in connection with the Company’s Current Report on Form 8-K that was filed
                    on January 24, 2006.
  (24)
                Filed
                    in connection with the Company’s Current Report on Form 8-K that was filed
                    on May 24, 2006.
  (25)
                Filed
                    in connection with the Company’s Annual Report on Form 10-KSB for the
                    fiscal year ended June 30,
                    2005.
  (26)
                Filed
                    in connection with the Company's Quarterly Report on Form 10-QSB
                    for the
                    fiscal quarter ended September 30,
                    2005.
   **ITEM 14.** **PRINCIPAL
            ACCOUNTANT FEES AND SERVICES.** ****
  The
        discussion under the heading “Independent Auditors Fees and Other Matters” in
        our definitive proxy statement for the 2006 Annual Meeting of Stockholders
        is
        incorporated herein by reference to such proxy statement.
  -30-





**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 this 28th day of
        September 2006.




VOXWARE,
                  INC.By:
              /s/
                  Thomas J. Drury, Jr.Thomas
                  J. Drury, Jr., President andChief
                  Executive Officer
   -31-
  Pursuant
        to the requirements 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 dates indicated.
  **Signature**
              
              **Title**
              
              **Date**/s/
                  Joseph A. Allegra
              
              Chairman
                  and Director
              
              September
                  28, 2006Joseph
                  A. Allegra/s/
                  Thomas J. Drury, Jr.
              
              President
                  and Chief Executive
              
              September
                  28, 2006Thomas
                  J. Drury, Jr.
              
              Officer
                  (principal executive officer)and
                  Director/s/
                  Paul Commons
              
              Chief
                  Financial Officer
              
              September
                  28, 2006Paul
                  Commons
              
              (principal
                  financialand
                  principal accounting officer)/s/
                  James L. Alexandre
              
              Director
              
              September
                  28, 2006James
                  L. Alexandre/s/
                  Donald R. Caldwell
              
              Director
              
              September
                  28, 2006Donald
                  R. Caldwell/s/
                  Michael Janis
              
              Director
              
              September
                  28, 2006Michael
                  Janis/s/
                  David B. Levi
              
              Director
              
              September
                  28, 2006David
                  B. Levi
 
  -32-






**VOXWARE,
      INC. AND SUBSIDIARIES**






**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS** ****






Consolidated
                Financial Statements:Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of June 30, 2006 and 2005
            F-3Consolidated
                Statements of Operations for the years ended June 30, 2006 and
                2005
            F-4Consolidated
                Statements of Stockholders’ Equity for the years ended June 30, 2006 and
                2005
            F-5Consolidated
                Statements of Cash Flows for the years ended June 30, 2006 and
                2005
            F-7Summary
                of Accounting Policies and Notes to Consolidated Financial
                Statements
            F-8






F-1




**Report
      of Independent Registered Public Accounting Firm**









Board
      of
      Directors and Stockholders


Voxware,
      Inc. and Subsidiaries


Lawrenceville,
      NJ




We
      have
      audited the accompanying consolidated balance sheets of Voxware, Inc. and
      subsidiaries as of June 30, 2006 and 2005, and the related consolidated
      statements of operations, stockholders’ equity, and cash flows for the years
      then ended. 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 the standards of the Public Company
      Accounting Oversight Board (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. The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our a udits
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also 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,
      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 consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Voxware, Inc. and
      subsidiaries at June 30, 2006 and 2005, 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.




*/s/
      BDO Seidman,
      LLP*


BDO
      Seidman, LLP


Bethesda,
      Maryland


September
      8, 2006




F-2


**Voxware,
                  Inc. and Subsidiaries****Consolidated
                  Balance Sheets****(in
                  thousands, except share data)****June
                  30, 2006**
              
              **June
                  30, 2005****ASSETS****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              6,909
              
              $
              3,639Accounts
                  receivable, net of allowance for doubtful accounts of $184 and$116
                  at June 30, 2006 and June 30, 2005, respectively
              
              
              2,394
              
              
              2,408Inventory,
                  net
              
              
              629
              
              
              616Deferred
                  project costs
              
              
              54
              
              
              150Prepaids
                  and other current assets
              
              
              85
              
              
              61**Total
                  current assets**
              
              
              10,071
              
              
              6,874**PROPERTY
                  AND EQUIPMENT, NET**
              
              
              388
              
              
              238**OTHER
                  ASSETS**Deferred
                  financing costs, net
              
              
              88
              
              
              266Capitalized
                  software development costs
              
              
              45
              
              
              -Other
                  assets, net
              
              
              54
              
              
              36**Total
                  other assets**
              
              
              187
              
              
              302**TOTAL
                  ASSETS**
              
              $
              10,646
              
              $
              7,414**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Current
                  portion of long-term debt
              
              $
              503
              
              $
              666Line
                  of credit
              
              
              1,300
              
              
              1,000Accounts
                  payable and accrued expenses
              
              
              2,312
              
              
              3,103Deferred
                  revenues
              
              
              1,951
              
              
              1,501**Total
                  current liabilities**
              
              
              6,066
              
              
              6,270Long-term
                  debt, net of current maturities
              
              
              253
              
              
              334**Total
                  liabilities**
              
              
              6,319
              
              
              6,604**STOCKHOLDERS'
                  EQUITY**7%
                    cumulative Series D Convertible Preferred Stock, $0.001 par value,
                    ($9,744aggregate
                    liquidation preference at June 30, 2005); 649,621,940 shares
                    issuedand
                    outstanding at June 30, 2005
              
              
              -
              
              
              650Common
                      Stock, $0.001 par value, 12,000,000 and 1,500,000,000 sharesauthorized
                      as of June 30, 2006 and June 30, 2005, respectively;6,262,844
                      and 521,354 shares issued and outstanding atJune
                      30, 2006 and June 30, 2005, respectively
              
              
              6
              
              
              1Additional
                  paid-in capital
              
              
              77,753
              
              
              70,795Accumulated
                  deficit
              
              
              (73,389
              )
              
              (66,626
              )Deferred
                  compensation
              
              
              (40
              )
              
              (4,022
              )Accumulated
                  other comprehensive (loss) gain
              
              
              (3
              )
              
              12**Total
                  stockholders' equity**
              
              
              4,327
              
              
              810**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              10,646
              
              $
              7,414




See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.







F-3


**Voxware,
                  Inc. and Subsidiaries****Consolidated
                  Statements of Operations****(in
                  thousands, except per share
                  data)****Year
                  Ended June 30,****2006**
              
              **2005****REVENUES**Product
                  revenues
              
              $
              11,922
              
              $
              13,859Services
                  revenues
              
              
              3,556
              
              
              3,643**Total
                  revenues**
              
              
              15,478
              
              
              17,502**COST
                  OF REVENUES**Cost
                  of product revenues
              
              
              3,952
              
              
              4,380Cost
                  of service revenues
              
              
              3,351
              
              
              3,685**Total
                  cost of revenues**
              
              
              7,303
              
              
              8,065**GROSS
                  PROFIT**
              
              
              8,175
              
              
              9,437**OPERATING
                  EXPENSES**Research
                  and development
              
              
              3,160
              
              
              2,274Sales
                  and marketing
              
              
              5,091
              
              
              2,985General
                  and administrative
              
              
              2,756
              
              
              2,992Amortization
                  of deferred employee compensation
              
              
              4,062
              
              
              1,630**Total
                  operating expenses**
              
              
              15,069
              
              
              9,881**OPERATING
                  LOSS**
              
              
              (6,894
              )
              
              (444
              )**OTHER
                  (EXPENSES) INCOME**Interest
                  expense, net of interest income
              
              
              (45
              )
              
              (247
              )Other
                  (expenses) income, net
              
              
              (52
              )
              
              (69
              )**LOSS
                  BEFORE INCOME TAXES**
              
              
              (6,991
              )
              
              (760
              )**BENEFIT
                  FROM INCOME TAXES**
              
              
              228
              
              
              -**NET
                  LOSS**
              
              
              (6,763
              )
              
              (760
              )Dividends-Series
                  D Convertible Preferred Stock
              
              
              (80
              )
              
              (696
              )**NET
                  LOSS APPLICABLE TO COMMON STOCKHOLDERS**
              
              $
              (6,843
              )
              $
              (1,456
              )**NET
                  LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS**Basic
                  and diluted
              
              $
              (1.22
              )
              $
              (3.78
              )**WEIGHTED
                  AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON
                  SHARE**Basic
                  and diluted
              
              
              5,596
              
              
              386


See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.




F-4




**Voxware,
                  Inc. and Subsidiaries****Consolidated
                  Statements of Stockholders' Equity****(in
                  thousands, except share data)****Series
                  D Preferred**
              
              
              
              ****
              
              
              
              
              
              ****
              
              
              
              ******Number
                  of Shares**
              
              **Stated**
                **Value**
                **Amount**
              
              **Common
                  Stock**
                **Number
                  of Shares**
              
              **Par**
                **Value**
                **$.001
                  Amount**
              
              **Additional
                  Paid-in
                  Capital**
              
              **Deferred
                  Employee Compensation**
              
              **Accumulated
                  Other Comprehensive (Loss)
                  Gain**
              
              **Accumulated
                  Deficit**
              
              **Total**Balance,
                  June 30, 2004
              
              
              659,424,187
              
              $
              660
              
              
              306,957
              
              $
              1
              
              $
              67,901
              
              $
              (4,937
              )
              $
              -
              
              $
              (65,866
              )
              $
              (2,241
              )Amortization
                  of deferredcompensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,630
              
              
              -
              
              
              -
              
              
              1,630Reclassification
                    of preferred stockrecission
                    liability to equity
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,051
              
              
              -
              
              
              -
              
              
              -
              
              
              2,051Conversion
                    of Series D warrantsinto
                    Series D preferred stock
              
              
              132,476
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Conversion
                    of Series D preferredstock
                    into common stock
              
              
              (9,934,723
              )
              
              (10
              )
              
              66,231
              
              
              -
              
              
              10
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                      of common stock insettlement
                      of accrued divdendsto
                      Series D preferred stock
              
              
              -
              
              
              -
              
              
              99,688
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of stock options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,024
              
              
              (1,024
              )
              
              -
              
              
              -
              
              
              -Forfeited
                  stock options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (309
              )
              
              309
              
              
              -
              
              
              -
              
              
              -Exercise
                  of stock options
              
              
              -
              
              
              -
              
              
              48,478
              
              
              -
              
              
              118
              
              
              -
              
              
              -
              
              
              -
              
              
              118Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (760
              )
              
              (760
              )Foreign
                    currency translationadjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12
              
              
              -
              
              
              12Total
                  Comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (748
              )Balance,
                  June 30, 2005
              
              
              649,621,940
              
              $
              650
              
              
              521,354
              
              $
              1
              
              $
              70,795
              
              $
              (4,022
              )
              $
              12
              
              $
              (66,626
              )
              $
              810


See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.




F-5




**Voxware,
                  Inc. and Subsidiaries****Consolidated
                  Statements of Stockholders' Equity (Continued)****(in
                  thousands, except share data)****Series
                  D Preferred****Number
                  of Shares**
              
              **Stated**
                **Value**
                **Amount**
              
              **Common
                  Stock**
                **Number
                  of Shares**
              
              **Par**
                **Value**
                **$.001
                  Amount**
              
              **Additional
                  Paid-in
                  Capital**
              
              **Deferred
                  Employee
                  Compensation**
              
              **Accumulated
                  Other Comprehensive (Loss)
                  Gain**
              
              **Accumulated
                  Deficit**
              
              **Total**Balance,
                  June 30, 2005
              
              
              649,621,940
              
              $
              650
              
              
              521,354
              
              $
              1
              
              $
              70,795
              
              $
              (4,022
              )
              $
              12
              
              $
              (66,626
              )
              $
              810Amortization
                    of deferredcompensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,062
              
              
              -
              
              
              -
              
              
              4,062Conversion
                    of Series D preferredstock
                    into common stock
              
              
              (649,621,940
              )
              
              (650
              )
              
              4,330,813
              
              
              4
              
              
              646
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                    of common stock insettlement
                    of accrued divdendsto
                    Series D preferred stock
              
              
              -
              
              
              -
              
              
              12,685
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of common stock forcash,
                  net of transaction costs
              
              
              -
              
              
              -
              
              
              1,375,000
              
              
              1
              
              
              6,189
              
              
              -
              
              
              -
              
              
              -
              
              
              6,190Issuance
                  of stock options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              257
              
              
              (257
              )
              
              -
              
              
              -
              
              
              -Forfeited
                  stock options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (177
              )
              
              177
              
              
              -
              
              
              -
              
              
              -Exercise
                    of stock optionsand
                    stock warrants
              
              
              -
              
              
              -
              
              
              23,705
              
              
              -
              
              
              58
              
              
              -
              
              
              -
              
              
              -
              
              
              58Cash
                      paid in lieu of issuingfractional
                      shares due to reversestock
                      split
              
              
              -
              
              
              -
              
              
              (713
              )
              
              -
              
              
              (15
              )
              
              -
              
              
              -
              
              
              -
              
              
              (15
              )Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,763
              )
              
              (6,763
              )Foreign
                    currency translationadjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (15
              )
              
              -
              
              
              (15
              )Total
                  Comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,778
              )Balance,
                  June 30, 2006
              
              
              -
              
              $
              -
              
              
              6,262,844
              
              $
              6
              
              $
              77,753
              
              $
              (40
              )
              $
              (3
              )
              $
              (73,389
              )
              $
              4,327




See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.




F-6




**Voxware,
                  Inc. and
                  Subsidiaries****Consolidated
                  Statements of Cash Flows****(in
                  thousands)****Year
                  Ended June 30,****2006**
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  loss
              
              $
              (6,763
              )
              $
              (760
              )**Adjustments
                  to reconcile net loss to net cash (used in) provided by operating
                  activities:**Depreciation
                  and amortization
              
              
              201
              
              
              94Loss
                  on disposal of equipment
              
              
              -
              
              
              23Provision
                  for doubtful accounts
              
              
              80
              
              
              2Amortization
                  of deferred employee compensation
              
              
              4,062
              
              
              1,630Amortization
                  of deferred financing costs
              
              
              178
              
              
              172**Changes
                  in assets and liabilities:**Accounts
                  receivable
              
              
              (66
              )
              
              444Inventory
              
              
              (13
              )
              
              (292
              )Deferred
                  project costs
              
              
              96
              
              
              (119
              )Prepaid
                  expenses and other current assets
              
              
              (24
              )
              
              336Other
                  assets, net
              
              
              (18
              )
              
              (7
              )Accounts
                  payable and accrued expenses
              
              
              (791
              )
              
              (412
              )Deferred
                  revenues
              
              
              450
              
              
              758**Net
                  cash (used in) provided by operating activities**
              
              
              (2,608
              )
              
              1,869**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchase
                  of property and equipment
              
              
              (351
              )
              
              (161
              )Proceeds
                  from disposal of property and equipment
              
              
              -
              
              
              53Capitalized
                  software development costs
              
              
              (45
              )
              
              -**Net
                  cash used in investing activities**
              
              
              (396
              )
              
              (108
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                  from short-term borrowings
              
              
              1,737
              
              
              1,300Proceeds
                  from equity financing
              
              
              6,190
              
              
              -Repayment
                  of long-term debt
              
              
              (681
              )
              
              (376
              )Repayment
                  of short-term borrowings
              
              
              (1,000
              )
              
              (300
              )Purchase
                  of fractional shares created by reverse stock split
              
              
              (15
              )
              
              -Proceeds
                  from exercise of stock options and warrants
              
              
              58
              
              
              118**Net
                  cash provided by financing activities**
              
              
              6,289
              
              
              742Effects
                  of foreign currency exchange rate on cash and cash
                  equivalents
              
              
              (15
              )
              
              12**NET
                  INCREASE IN CASH AND CASH EQUIVALENTS**
              
              
              3,270
              
              
              2,515**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
              
              
              3,639
              
              
              1,124**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              6,909
              
              $
              3,639**SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                  paid for interest
              
              $
              69
              
              $
              71Conversion
                  of Series D convertible preferred stock into common stock
              
              $
              650
              
              $
              10Issuance
                  of common stock in payment of Series D preferred stock
                  dividends
              
              $
              80
              
              $
              696Reclassification
                  of preferred stock rescission liability to equity
              
              $
              -
              
              $
              2,051




See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.




F-7




**Summary
      of Accounting Policies and Notes to Consolidated Financial
      Statements**




**SUMMARY
      OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.**




**1.** **THE
      COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**




*Nature
      of Business Operations*





Voxware,
      Inc. and subsidiaries (“Voxware”, or the “Company”) is a leading provider of
      voice-based technology that helps optimize the activities of warehouse and
      other
      logistics workers by providing real-time wireless connections between warehouse
      workers and logistics management solutions. Utilizing the Company’s leading
      speech recognition capabilities, Voxware enables logistics management software
      and systems to streamline and enhance the accuracy and productivity of warehouse
      workers in performing repetitive, high-volume, labor-intensive tasks, including
      picking, receiving, put away, replenishment, loading, and returns processing.
      The Company’s voice-enabled solutions enable customers to reduce logistics costs
      and optimize complex materials handling processes through the delivery of voice
      prompts and responses that can be tailored to individual customer requirements.
      Voxware generates revenues primarily from hardware product sales, software
      license fees, professional services and maintenance fees.




The
      VoiceLogistics ® solution
      is a combination of software, hardware and professional services available
      through two productized offerings. VoiceLogistics ExpressTM is a standard
      application suite for enhancing distribution center workforce performance for
      a
      variety of logistics functions. VoiceLogistics ProTM is a suite of tools enabling
      non-programmers to design, develop and integrate voice-based logistics
      solutions. The Company’s VoxBrowserTM software offers a patented combination of
      powerful speech recognition software in VoiceXML-compliant Web browser
      technology. This is client software designed to run on a wide variety of
      industry-standard mobile computers devised for demanding warehouse environments.
      These serve as the basis for the dynamic real-time link between highly mobile
      logistics workers, the warehouse management system (“WMS”) and supervisory
      personnel. Voxware believes that its patented solution is unique in the industry
      because it is the first open standards, Web-based, people-centric, interactive
      speech recognition technology designed to VoiceXML standards, and is engineered
      specifically to operate in highly demanding industrial environments. VoxBrowser
      allows for the development and deployment of voice-based logistics solutions
      independent of the hardware platform on which it operates.




VoiceLogistics
      is sold primarily to large companies that operate warehouses and distribution
      centers in North America and Europe. Voxware has customers from a variety of
      industry sectors, including food service, grocery, retail, consumer packaged
      goods, automotive parts, third-party logistics providers and wholesale
      distribution. The Company’s technology has the ability to integrate easily
      (generally in less than 60 days) with an external WMS.





The
      United Kingdom accounted for 22% and 9% of the Company’s total revenue for
      fiscal years 2006 and 2005, respectively.





The
      Company’s operating results may fluctuate significantly in the future as a
      result of a variety of factors, including the Company’s ability to compete in
      the voice-based logistics market, the budgeting cycles of potential customers,
      the lengthy sales cycle of the Company’s solutions, the volume of and revenues
      derived from sales of products utilizing our third-party partners network,
      the
      introduction of new products or services by the Company or its competitors,
      pricing changes in the industry, the degree of success of the Company’s efforts
      to penetrate its target markets, technical difficulties with respect to the
      use
      of products developed by the Company or its licensees, and general economic
      conditions.





*Summary
      of Significant Accounting Policies*




**Use
      of Estimates**





The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make judgments, assumptions and estimates that affect
      the
      amounts reported in the Company’s consolidated financial statements and
      accompanying notes. The Company bases its estimates and judgments on historical
      experience and on various other assumptions that it believes are reasonable
      under the circumstances. However, future events are subject to change, and
      the
      best estimates and judgments routinely require adjustment. The amounts of assets
      and liabilities reported in the Company’s balance sheets, and the amounts of
      revenues and expenses reported for each of its fiscal periods, are affected
      by
      estimates and assumptions which are used for, but not limited to, the accounting
      for allowance for doubtful accounts, warranty costs, impairments, inventory,
      deferred compensation and income taxes. Actual results could differ from these
      estimates.





F-8




**Principles
      of Consolidation**





The
      accompanying consolidated financial statements include the financial statements
      of Voxware, Inc. and its wholly-owned subsidiaries, Verbex Acquisition
      Corporation and Voxware n.v. All significant inter-company balances and
      transactions have been eliminated in consolidation.





**Revenue
      Recognition**





Revenue
      is recognized when earned in accordance with applicable accounting standards,
      including AICPA Statement of Position (“SOP”) No. 97-2, “Software Revenue
      Recognition”, as amended by SOP No. 98-9. SOP No. 81-1, “Accounting for
      Performance of Construction-Type and Certain Production-Type Contracts”, applies
      to the initial site implementation for certain customers requiring significant
      customization to our software. Revenues from product sales and license fees
      generally are recognized upon shipment of hardware and applicable software,
      or
      completion of the implementation, if applicable, provided collection is
      determined to be probable and there are no significant post-delivery
      obligations. If an acceptance period is required to ensure satisfactory delivery
      of customized software development, as typically occurs for the initial site
      implementation for new customers, revenues are recognized upon customer
      acceptance. Vendor-specific objective evidence of the fair value of certain
      hardware elements that are not sold separately is determined using the residual
      method. Service revenues for professional services fees are generally recognized
      upon completion of implementation, or over the period in which such services
      are
      rendered, provided there are no significant post-delivery obligations connected
      with such services.





Deferred
      revenues consist of unearned customer deposits and postcontract customer support
      (“PCS”) arrangements. Customer deposits are recognized as revenue upon customer
      acceptance of the underlying product and services in conjunction with the
      recognition of deferred project costs. PCS arrangements include extended
      hardware warranty, software maintenance revenues and depot management service
      fees. These arrangements, which sometimes include amounts bundled with initial
      revenues, are deferred upon invoicing and recognized as revenues over the term
      of the warranty or service period, which is typically one year. Maintenance
      revenues, including the amounts bundled with initial or recurring revenues,
      are
      recognized over the term of the maintenance support period, which is typically
      one year.





The
      Company continues to generate royalty revenues from our legacy speech coding
      technology business, which was sold in 1999. Royalties are earned on
      technologies our customers incorporate into their products for resale. Revenues
      are recognized at the time of the customers’ shipment of those products, as
      estimated based upon historical reports received periodically from our
      customers.





**Research
      and Development**





Research
      and development expenditures are charged to operations as incurred. Pursuant
      to
      Statement of Financial Accounting Standards No. 86 (“SFAS 86”), “Accounting for
      the Cost of Computer Software to be Sold, Leased or Otherwise Marketed”,
      development costs incurred in connection with the research and development
      of
      software products and enhancements to existing software products are charged
      to
      expense as incurred until technological feasibility has been established, at
      which time such costs are capitalized until the product is available for general
      release to customers. The Company defines technological feasibility as the
      point
      at which there is a completed working model of the software product, the
      completeness of which is to be confirmed by testing. According to SFAS 86,
      the
      working model is generally deemed to exist with commencement of beta
      testing.





**Reverse
      Split**





On
      December 12, 2005, the Company effected a reverse split of all outstanding
      shares of the Company’s Common Stock, $0.001 par value per share (the “Common
      Stock”), at an exchange ratio of 1-for-150 (the “Reverse Split”). Under the
      terms of the Reverse Split, each shareholder received one share of Common Stock
      for every one hundred fifty shares of Common Stock owned as of the effective
      date. No fractional shares of Common Stock were issued as a result of the
      Reverse Split. In lieu of any fractional shares to which the stockholder would
      otherwise be entitled, the Company paid cash equal to such fraction multiplied
      by the closing trading price of the Common Stock on the trading day immediately
      preceding the effective day of the Reverse Split. There were no shares of Series
      D Preferred Stock outstanding on December 12, 2005, so Series D Preferred Stock
      was not impacted by the Reverse Split. All references in the consolidated
      financial statements to Common Stock shares and per share data have been
      adjusted retroactive to July 1, 2004 in response to the Reverse
      Split.





**Net
      Loss Per Share**





Basic
      net
      loss per share was computed by dividing the net loss applicable to common
      shareholders by the weighted average number of common shares outstanding for
      the
      fiscal years ended June 30, 2006 and 2005. Due to the Company’s net losses for
      the fiscal years ended June 30, 2006 and 2005, the effect of including Common
      Stock equivalents in the calculation of net loss per share would be
      anti-dilutive. Therefore, outstanding Common Stock equivalents of 1,099,992
      and
      941,313,679 (6,275,425 after consideration of the Reverse Split) in the fiscal
      years ended June 30, 2006 and 2005, respectively, have not been included in
      the
      calculation of net loss per share. As a result, basic net loss per share is
      the
      same as diluted net loss per share for the fiscal years ended June 30, 2006
      and
      2005.





F-9




**Cash
      and Cash Equivalents**





The
      Company currently maintains an investment portfolio consisting mainly of cash
      equivalents. Cash and cash equivalents consist of investments in highly liquid
      short-term instruments (short-term bank deposits and commercial paper) with
      maturities of 90 days or less from the date of purchase.





**Accounts
      Receivable and Credit Policies**





Accounts
      receivable are uncollateralized customer obligations due under normal trade
      terms requiring payment within 30 days, depending on contractual terms. Unpaid
      accounts do not bear interest. Accounts receivable are stated at the amount
      billed to the customer. Payments of accounts receivable are allocated to the
      specific invoices identified on the customer’s remittance advice or, if
      unspecified, are applied to the earliest unpaid invoice.




The
      carrying amount of accounts receivable is reduced by a valuation allowance
      that
      reflects management’s best estimate of the amounts that will not be collected.
      Customer account balances with invoices dated over 90 days old are considered
      delinquent and are reserved for in the valuation allowance. In addition,
      management reviews all other accounts receivable balances and, based on an
      assessment of current creditworthiness, estimates the portion, if any, of the
      balance that will not be collected.





**Inventory**





We
      value
      our inventory at the lower of average cost (which approximates first-in,
      first-out cost) or market. If we believe that demand no longer allows us to
      sell
      our inventory above cost or at all, we write down that inventory to market
      or
      write off excess inventory levels.





**Property
      and Equipment**





Property
      and equipment are stated at cost. Purchases of property and equipment valued
      at
      less than $1,000 are charged to expense. Depreciation is computed on a
      straight-line basis over the useful lives of the assets, ranging from three
      to
      seven years. Maintenance, repairs and minor replacements are charged to expense
      as incurred.





**Impairment
      of Long-Lived Assets**





The
      Company reviews its long-lived assets, including property and equipment, and
      intangible assets subject to amortization, for impairment whenever events or
      changes in circumstances indicate that the carrying amount of the assets may
      not
      be fully recoverable. To determine the recoverability of its long-lived assets,
      the Company evaluates the estimated future undiscounted cash flows that are
      directly associated with, and that are expected to arise as a direct result
      of,
      the use and eventual disposition of the long-lived asset. If the estimated
      future undiscounted cash flows demonstrate that recoverability is not probable,
      an impairment loss would be recognized. An impairment loss would be calculated
      based on the excess carrying amount of the long-lived asset over the long-lived
      asset’s fair value.





**Warranty**




The
      Company warrants all manufacturer defects on its voice-based solutions,
      generally commencing upon shipment, and extending for a minimum of three and
      up
      to twelve months. The Company accrues warranty costs based on historical
      experience and management’s estimates. Changes in accrued warranty costs were as
      follows:




**Balance
                  at**
                **Beginning
                  of**
                **Period**
              
              **Charged**
                **Costs
                  and**
                **Expenses**
              
              **Deductions**
              
              **Balance
                  at**
                **End
                  of**
                **Period****(In
                  thousands)**Year
                  ended June 30, 2005
              
              $
              186
              
              $
              43
              
              $
              155
              
              $
              74Year
                  ended June 30, 2006
              
              
              74
              
              
              85
              
              
              91
              
              
              68


F-10




**Concentration
      of Credit Risk**





Financial
      instruments that potentially subject the Company to concentration of credit
      risk
      consist principally of cash balances and trade receivables. The Company invests
      its excess cash in highly liquid investments (short-term bank deposits and
      commercial paper). The Company’s customer base principally comprises
      distribution and logistics companies in food service, grocery, retail, consumer
      packaged goods, third-party logistics providers, wholesale distributors, as
      well
      as value-added resellers. The Company does not typically require collateral
      from
      its customers.





Two
      customers accounted for 31% and 15% of total revenue for the fiscal year ended
      June 30, 2006. These customers accounted for 30% and 14%, respectively, of
      total
      receivables at that date. One customer accounted for 36% of total revenue for
      the fiscal year ended June 30, 2005, and 21% of total receivables at that
      date.





The
      Company began utilizing a sole source vendor for its primary wearable computer
      hardware products effective in the second quarter of fiscal 2006. The Company
      did not purchase any inventory from this vendor during the year ended June
      30,
      2005. During the year ended June 30, 2006, 40% of the Company’s inventory
      purchases were derived from this vendor. Any disruption in supply by this vendor
      would prohibit the Company from shipping products, and thus recognizing
      revenues.





**Income
      Taxes**





Deferred
      income tax assets and liabilities are determined based on differences between
      the financial statement reporting and tax basis of assets and liabilities,
      and
      are measured using the enacted tax rates and laws that will be in effect when
      the differences are expected to reverse. The measurement of deferred income
      tax
      assets is reduced, if necessary, by a valuation allowance for any tax benefits
      that are not expected to be realized. The effect of a change in tax rates on
      deferred income tax assets and liabilities is recognized in the period that
      such
      tax rate changes are enacted.





**Foreign
      Currency Translation**





The
      Company’s wholly-owned subsidiary, Voxware n.v., utilizes their local currency
      (Euro) as their functional currency. Their assets and liabilities are translated
      into U.S. dollars monthly, at exchange rates as of the balance sheet date.
      Revenues, expenses, gains and losses are translated monthly, at average exchange
      rates during the period. Resulting foreign currency translation adjustments
      are
      included as a component of other comprehensive (loss) gain.





**Stock-Based
      Compensation**





The
      Company accounts for employee stock-based compensation in accordance with
      Accounting Principals Board (APB) Opinion No. 25, “Accounting for Stock Issued
      to Employees,” ("APB 25") using an intrinsic value approach to measure
      compensation expenses, if any. Under this method, compensation expense is
      recorded on the date of the grant only if the current market price of the
      underlying stock exceeds the exercise price. Options issued to non-employees
      are
      accounted for in accordance with SFAS 123 and Emerging Issues Task Force Issue
      No. 96-18, “Accounting for Equity Instruments that are Issued to Other than
      Employees for Acquiring, or in Conjunction with Selling, Goods and Services”,
      using a fair value approach.





SFAS
      123
      established accounting and disclosure requirements using a fair value-basis
      method of accounting for stock-based employee compensation plans. As allowed
      by
      SFAS 123, the Company has elected to continue to follow the intrinsic value
      method of accounting as prescribed by APB 25 to account for employee stock
      options. Compensation expense was charged to operations in fiscal years 2006
      and
      2005 respectively as follows:




**June 30,****2006**
              
              **2005****(in
                  thousands)**Cost
                  of product revenues
              
              $
              13
              
              $
              5Cost
                  of service revenues
              
              
              129
              
              
              44Research
                  and development
              
              
              297
              
              
              174Sales
                  and marketing
              
              
              372
              
              
              118General
                  and administrative
              
              
              3,251
              
              
              1,289$
              4,062
              
              $
              1,630


The
      Company is adopting SFAS 123R effective July 1, 2006. SFAS 123R requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized as compensation expense in the consolidated financial
      statements based upon their fair values. In anticipation of implementing SFAS
      123R, the Company elected to accelerate the vesting of all unvested stock
      options held by our employees as of June 30, 2006. As a result of the
      accelerated vesting, options to purchase 672,323 shares of Common Stock became
      exercisable on that date. Fiscal year 2006 compensation expense included a
      charge of $2,463,000 due to the accelerated vesting of options.




F-11





Deferred
      compensation of $40,000 and $4,022,000 as of June 30, 2006 and 2005,
      respectively, is included in the balance sheet of the accompanying consolidated
      financial statements. Because of the acceleration of vesting of employee stock
      options on June 30, 2006, deferred compensation at that date relates to unvested
      stock options held by non-employees, e.g. board of directors. In accordance
      with
      SFAS 123, the fair value of each option grant is estimated on the date of grant
      using the Black-Scholes option-pricing model with the following assumptions
      used
      for grants in fiscal 2006 and 2005: risk-free interest rates ranging from 4.08%
      to 4.52%  based
      on
      the rate in effect on the date of grant; no expected dividend yield; expected
      lives of 6.1 years for the options; and expected volatility of 101%. The
      assumptions used to calculate stock-based compensation expense determined under
      the fair-value method for the year ended June 30, 2005 are adjusted to reflect
      the company’s current estimates for expected life of options and expected
      volatility. The following table illustrates the effects on net loss applicable
      to Common Stockholders, and net loss per share applicable to Common
      Stockholders, if the Company had applied the fair value recognition provisions
      of SFAS 123 to stock-based employee compensation:




**Year
                  Ended June 30,****2006**
              
              **2005****(in
                  thousands, except per share data)**Net
                  loss applicable to common stockholders:As
                  reported
              
              $
              (6,843
              )
              $
              (1,456
              )Add:Stock-based
                  employee compensation included in net loss
              
              
              4,062
              
              
              1,630Less:Stock-based
                  compensation expense determined underfair-value
                  method for all awards
              
              
              (1,553
              )
              
              (1,241
              )Pro
                  forma net income (loss) applicable to common stockholders
              
              $
              (4,334
              )
              $
              (1,067
              )Net
                  income (loss) applicable to common stockholders - basic and
                  dilutedAs
                  reported
              
              $
              (1.22
              )
              $
              (3.78
              )Pro
                  forma
              
              $
              (0.77
              )
              $
              (2.76
              )Weighted
                  average number of shares outstanding for use in computingnet
                  loss per share applicable to common stockholders
              
              
              5,596
              
              
              386
  The
      pro
      forma results above are not intended to be indicative of or a projection of
      future results.





**Comprehensive
      Income (Loss)**





The
      Company has adopted SFAS No. 130, “Reporting Comprehensive Income”,("SFAS 130").
      Comprehensive income is a more inclusive financial reporting methodology that
      includes disclosure of certain financial information that historically has
      not
      been recognized in the calculation of net income (loss). SFAS 130 requires
      that
      all items defined as comprehensive income, including changes in the amounts
      of
      unrealized gains and losses on available-for-sale securities, be shown as a
      component of comprehensive income (loss). The only items of other comprehensive
      income of the Company in the fiscal years ended June 30, 2006 and 2005 are
      foreign currency translation adjustments.





**Recent
      Accounting Pronouncements**





In
      December 2004, FASB issued FAS
      123R, requiring
      all share-based payments to employees, including grants of employee stock
      options, to be recognized as compensation expense in the consolidated financial
      statements based upon their fair values. As amended by the Securities and
      Exchange Commission (“SEC”) on April 14, 2005, this standard is effective for
      the quarter beginning January 1, 2006 for small business public filers. On
      March
      29, 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107"), which
      provides the Staff’s views regarding interactions between FAS 123R and certain
      SEC rules and regulations, and provides interpretations of the valuation of
      share-based payments for public companies. The Company is adopting FAS 123R
      and
      SAB 107 effective July 1, 2006. The effect on the Company’s results of
      operations from expensing stock options using the Black-Scholes method is
      presented in the accompanying Notes to Consolidated Financial Statements. Based
      upon stock options outstanding as of September 1, 2006, the Company expects
      to
      record the following compensation charges in accordance with SFAS
      123R:




F-12




**Year
                  ended June 30,**
              
              **(in
                  thousands)**2007
              
              $
              1282008
              
              
              882009
              
              
              602010
              
              
              432011
              
              
              7Total
              
              $
              326




In
      June
      2006, the FASB issued Interpretation No 48, “Accounting for Uncertainty in
      Income Taxes-an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company’s financial statements in accordance with SFAS No. 109, “Accounting for
      Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 is effective
      for
      fiscal years beginning after December 15, 2006. The Company has not yet
      determined the impact that the adoption of FIN 48 will have on its reported
      financial results. Management does not believe that any other recently issued,
      but not yet effective, accounting standards, if currently adopted, would have
      a
      material effect on the accompanying financial statements.








**2.** **INVENTORY:**


**June 30,****2006**
              
              
              **2005****(in
                  thousands)**Raw
                  materials
              
              $
              42
              
              $
              181Work
                  in process
              
              
              400
              
              
              338Finished
                  goods
              
              
              236
              
              
              231Less:
                  inventory reserve
              
              
              (49
              )
              
              (134
              )Inventory
                  - net
              
              $
              629
              
              $
              616




**3.** **PROPERTY
      AND EQUIPMENT:**




**June
                  30,****2006**
              
              
              **2005****(In
                  thousands)**Equipment
              
              $
              1,682
              
              $
              1,338Leasehold
                  improvements
              
              
              91
              
              
              91Furniture
                  and fixtures
              
              
              460
              
              
              4532,233
              
              
              1,882Less:
                  Accumulated depreciation
              
              
              (1,845
              )
              
              (1,644
              )Property
                  and equipment, net
              
              $
              388
              
              $
              238
  Depreciation
      expense was approximately $201,000 and $94,000 for the fiscal years ended June
      30, 2006 and 2005, respectively. During the fiscal year ended June 30, 2005,
      assets with a value of $103,000, with $27,000 in related accumulated
      depreciation, were sold for $53,000, resulting in a loss on sale of assets
      of
      $23,000. There were no disposals of assets during the year ended June 30,
      2006.





F-13





**4.** **ACCOUNTS
      PAYABLE AND ACCRUED EXPENSES:**




**June
                  30,****2006**
              
              **2005****(In
                  thousands)**Accounts
                  payable - trade
              
              $
              640
              
              $
              928Accrued
                  compensation and benefits
              
              
              552
              
              
              883Accrued
                  professional fees
              
              
              386
              
              
              290Accrued
                  royalties
              
              
              40
              
              
              45Accrued
                  inventory
              
              
              17
              
              
              123Warranty
                  reserves
              
              
              68
              
              
              74Other
                  accrued expenses
              
              
              609
              
              
              760Accounts
                  payable and accrued expenses
              
              $
              2,312
              
              $
              3,103


**5.** **DEBT:**




On
      December 30, 2003, the Company entered into a credit facility (the “SVB
      Facility”) with Silicon Valley Bank (“SVB”). The SVB Facility initially provided
      the Company with $2,000,000 in financing, comprised of a $1,500,000 term loan
      and $500,000 working capital facility. The term loan is payable in monthly
      installments over a 36-month period commencing February 1, 2004. The SVB
      Facility bears interest at a rate of prime (8.25% as of June 30, 2006) plus
      0.5%
      per annum, and is secured by all of the Company’s assets, including its
      intellectual property, and a guarantee by the Company’s two largest
      shareholders. In exchange for the SVB Facility guarantee, the shareholders
      were
      granted 133,333,333 Series D warrants to purchase shares of the Company’s Series
      D Preferred Stock. The warrants are exercisable into shares of the Company’s
      Series D Preferred Stock at an exercise price of $0.015 per share. As a result
      of the August 2005 Private Placement, these warrants were converted into
      warrants to purchase 133,333,333 shares (888,889 shares after giving effect
      to
      the Reverse Split) of Common Stock at an exercise price of $0.015 per share
      ($2.25 per share shares after giving effect to the Reverse Split). The SVB
      Facility contains certain covenants, all of which the Company is in compliance
      with as of June 30, 2006.




The
      Company engaged Hempstead & Co. as its valuation expert to assist in
      determining the fair value of the guarantee for which the warrants were issued.
      Based on the work performed by Hempstead & Co., the Company recorded a
      deferred financing asset of $500,000 on its balance sheet as of December 31,
      2003. This deferred asset is being amortized over 36 months commencing on
      January 1, 2004, and has a remaining balance of $88,000 as of June 30, 2006.




On
      May
      28, 2004, the Company entered into a modification agreement to the SVB term
      loan, deferring the seven monthly principal payments originally scheduled to
      occur from June 1, 2004 through December 1, 2004. Commencing on January 1,
      2005,
      and over the remaining twenty-four (24) payments, the deferred principal
      payments will be amortized and added to the original principal payment amount.
      The initial term of the loan has not been extended, and the final term loan
      payment, due on December 1, 2006, shall include all outstanding term loan
      principal and accrued interest.





On
      December 8, 2004, the Company entered into a second loan modification agreement
      with SVB wherein, among other factors, the working capital line of credit was
      renewed to December 27, 2005 and increased from $500,000 to $2,000,000. The
      terms of the modification agreement allowed for immediate availability of
      $666,667 under this working capital line of credit. The amount of availability
      is determined by subtracting from $2,000,000 the amount outstanding under the
      term loan. The principal amount due under the term loan was $333,000 as of
      June
      30, 2006, leaving $1,667,000 available under the working capital line of credit
      at that date. Effective January 1, 2005, the monthly principal payment under
      the
      term loan is approximately $56,000. These monthly principal payments under
      the
      term loan have the effect of increasing the available working capital line
      of
      credit by an equal amount. The renewal interest rate is at prime plus 0.5%,
      with
      a floor rate of prime at 4.5%. As of June 30, 2006, the Company has borrowed
      $1,300,000 of the $1,667,000 available under the working capital line of
      credit.





On
      November 9, 2005, the Company entered into a third loan modification agreement
      with SVB, providing the Company with a line of credit of up to $1,000,000 (the
      “Equipment Line”) to finance the acquisition of certain eligible equipment
      purchased on or after April 1, 2005. The Company first drew upon the Equipment
      Line on December 16, 2005, and was required to make interest-only payments,
      at a
      rate of prime plus 1.75%, on the principal balance through May 9,
      2006.  At
      that
      date, the Equipment Line was converted into a term loan with 30 fixed monthly
      payments of approximately $17,000. Effective May 9, 2006, the interest rate
      was
      fixed at 9.5%. The unpaid principal balance outstanding as of June 30, 2006
      was
      $423,000.





On
      January 20, 2006, with an effective date of December 26, 2005, the Company
      entered into a fourth loan modification agreement with SVB, renewing the working
      capital line of credit to December 26, 2006. The terms remained materially
      the
      same as the second loan modification agreement, with the exception that letters
      of credit, foreign exchange contracts, and certain




F-14




cash
      management related services, to the extent they may impose a liability on SVB,
      are deducted from the available limit the Company may borrow. Letters of credit,
      foreign exchange contracts, and certain cash management related services are
      each limited to a maximum of $100,000 in accordance with the terms of the fourth
      loan modification. As of June 30, 2006, the Company had no outstanding letters
      of credit or foreign exchange contracts, but does have a corporate credit card
      secured by the line of credit, which places a $35,000 restriction on the working
      capital line of credit.





On
      May
      24, 2006, the Company entered into a fifth loan modification agreement with
      SVB,
      providing an additional $3,000,000 credit facility comprised of a $1,500,000
      revolving line of credit (the "Revolver") and a $1,500,000 Non-Formula Term
      Loan
      (the "2006 Term Loan") to fund the Company's anticipated working capital needs.
      The Revolver provides for a line of credit up to $1,500,000, with a $1,000,000
      sub-limit to be established for cash management and foreign exchange
      requirements. The availability under the Revolver is limited to a borrowing
      base
      advance rate that is 80% against Eligible Accounts (as such term is defined
      in
      the Revolver). Amounts outstanding under the Revolver bear interest at a rate
      of
      prime plus 1.25%. Upon two consecutive quarters of profitability, the interest
      rate will be reduced to a rate of prime plus 0.5%. The Revolver is available
      until October 31, 2007. The 2006 Term Loan provides, in addition to the
      Company's borrowings under its existing credit facility, for up to $1,500,000
      in
      available funds. Amounts outstanding under the 2006 Term Loan bear interest
      at a
      rate of prime plus 1.75%. The 2006 Term Loan is available until March 31, 2007.
      Under certain conditions, any borrowings under the Company's 2006 Term Loan
      will
      be reserved against the availability of the Revolver. No funds were borrowed
      against the Revolver or 2006 Term Loan as of June 30, 2006.





Future
      minimum payments under the credit facility are as follows as of June 30, 2006
      (in thousands):




**Silicon
                  Valley Bank****Term
                  Loan**
              
              **Equipment**
                **Line**
              
              **Working**
                **Line
                  of**
                **Credit**
              
              **Total**Short
                  Term
              
              $
              333
              
              $
              170
              
              $
              1,300
              
              $
              1,803Long
                  Term:Fiscal
                  year 2008
              
              
              
              
              
              187
              
              
              
              
              
              187Fiscal
                  year 2009
              
              
              
              
              
              66
              
              
              
              
              
              66Total
                  Debt
              
              $
              333
              
              $
              423
              
              $
              1,300
              
              $
              2,056






**6.** **STOCKHOLDERS’
      EQUITY (DEFICIT):**




**Authorized
      Number of Shares**




During
      the fiscal year ended June 30, 2005, the Company’s stockholders approved an
      increase in the number of authorized shares of Common Stock from 1,035,000,000
      to 1,500,000,000 shares. In conjunction with the Reverse Split, the Company
      reduced the total number of authorized shares of Common Stock from 1,500,000,000
      shares to 12,000,000 shares.




**Series
      D Preferred Stock, Series D Preferred Stock Warrants, Common Stock and Common
      Stock Warrants**




In
      2003
      and 2004, the Company issued Series D Preferred Stock through a series of
      private placements. The Series D Preferred Stock had a 7% dividend payable
      in
      cash or equity, at the election of the Company, and each share of Series D
      Preferred Stock was convertible into one share of the Company’s Common Stock at
      an initial conversion price of $0.015 per share. The Company paid in-kind
      dividends to holders of the Series D Preferred Stock through the issuance of
      1,902,857 shares (12,686 shares after giving effect to the Reverse Split) of
      the
      Company’s Common Stock for the year ended June 30, 2006. For the year ended
      2005, the Company paid in-kind dividends to holders of the Series D Preferred
      Stock through the issuance of 14,952,957 shares (99,688 shares after giving
      effect to the Reverse Split) of the Company's Common Stock.





Pursuant
      to the transaction documents relating to our private placements consummated
      in
      2003 and 2004, the Company agreed to provide certain registration rights to
      the
      purchasers. Accordingly, the Company filed a registration statement in a timely
      manner, as required by such transaction documents. On September 9, 2004, the
      SEC
      asserted, among other things, a violation of Section 5 of the Securities Act
      in
      connection with these transactions. As such, the purchasers of the Series D
      Preferred Stock related to the April 2004 offering obtained the right to require
      the Company to repurchase the shares of Series D Preferred Stock sold at the
      original purchase price, plus statutory interest from the date of purchase
      for a
      period of one year following the date of violation. Upon learning of the SEC’s
      position in September 2004, the Company sought and obtained waivers of any
      right
      of rescission from the affected stockholders for 100% of the shares. However,
      since the waivers were not obtained until after year-end, a current liability
      in
      the amount of $2,051,000 was recorded at June 30, 2004. As 100% of the affected
      stockholders have since waived their rescission right, this amount was reclassed
      from a current liability to additional paid in capital in September
      2004.




F-15




In
      August
      2005, the Company conducted a private placement of 206,249,997 shares (1,375,000
      shares after giving effect to the Reverse Split) of its Common Stock at a price
      of $0.032 per share ($4.80 per share shares after giving effect to the Reverse
      Split) to certain accredited investors. Aggregate proceeds to the Company were
      approximately $6,200,000, net of expenses and commissions. In connection with
      this transaction, the holders of a majority of the Company’s Series D Preferred
      Stock agreed to convert all of the Company’s outstanding shares of Series D
      Preferred Stock into shares of the Company’s Common Stock. As a result,
      649,016,089 shares of Series D Preferred Stock were converted into 649,016,089
      shares (4,326,774 shares after giving effect to the Reverse Split) of Common
      Stock and 1,902,857 shares (12,686 shares after giving effect to the Reverse
      Split) of the Company’s Common Stock was issued in lieu of paying cash dividends
      on the Series D Preferred Stock for the period July 1, 2005 through August
      11,
      2005. Further, the holders of a majority of the Company’s Series D Preferred
      Stock agreed to amend and restate all of the Company’s outstanding warrants to
      purchase shares of Series D Preferred Stock into warrants to purchase shares
      of
      Common Stock of the Company. In addition, certain holders of Series D Preferred
      Stock waived their right to receive options to purchase up to an aggregate
      of
      18,666,667 shares (124,444 shares after giving effect to the Reverse Split)
      of
      Common Stock as a result of delays in registering shares issued under the 2003
      and 2004 sales of Series D Preferred Stock.





As
      of
      June 30, 2006, the Company had warrants outstanding to purchase 1,161,706 shares
      of the Company’s Common Stock at exercise prices ranging from $0.15 per share to
      $18.825 per share. Of the warrants outstanding at June 30, 2006, 1,112,093
      were
      granted in conjunction with the 2003 and 2004 private placements, 43,527 were
      granted in conjunction with the August 2005 private placement, and 6,091 were
      granted in conjunction with other transactions. The first of these warrants
      were
      exercisable in April 2000 and the last expire April 2014.




**Stock
      Option Plans**




As
      of
      June 30, 2006, options to purchase 3,694 shares of Common Stock were outstanding
      pursuant to the 1994 Stock Option Plan as amended (“1994 Plan”). These options
      may be exercised at prices ranging from $5.25 to $1,153.20 per share. There
      are
      no additional shares available for future option grants under the 1994 Plan. The
      period which an option may be exercised is fixed by the Board of Directors,
      up
      to a maximum of ten years (five years in cases of incentive stock options
      granted to holders of 10% or more of the combined voting power of all classes
      of
      stock of the Company), and options typically vest over a four-year period.




Additionally,
      options to purchase 417 shares of Common Stock were outstanding as of June
      30,
      2006 pursuant to the 1998 Stock Option Plan for Outside Directors (“1998 Plan”),
      which was approved by the Company’s stockholders in January 1998. These options
      may be exercised at prices ranging from $140.70 to $562.50 per share. There
      were
      483 shares available for future option grants under the 1998 Plan as of June
      30,
      2006. Pursuant to the 1998 Plan, each non-employee director of the Company
      shall
      receive an option to purchase 30,000 shares (200 shares after giving effect
      to
      the Reverse Split) of the Company’s Common Stock (Initial Option) on the date of
      their election or appointment to the Board of Directors, at an exercise price
      equal to the Company’s stock price at the end of the day of their election or
      appointment to the Board of Directors (Initial Grant Date). In addition, on
      the
      date of their re-election to the Board of Directors, if they are still a
      non-employee director on such date and have met certain other requirements
      defined in the Outside Directors Plan, they shall receive an option to purchase
      10,000 shares (67 shares after giving effect to the Reverse Split) of the
      Company’s Common Stock (Additional Option) on the date of their re-election or
      appointment to the Board of Directors, at an exercise price equal to the
      Company’s stock price at the end of the day of their re-election or appointment
      to the Board of Directors (Additional Grant Date). All options granted under
      the
      Outside Directors Plan shall be exercisable as to one-twelfth of the shares
      issued under each option on the last day of each of the 12 three-month periods
      immediately following the applicable grant date.




In
      June
      2003, the Company’s stockholders approved the 2003 Stock Option Plan (“2003
      Plan”). Pursuant to the 2003 Plan, the Company may grant to eligible individuals
      incentive stock options (as defined in the Internal Revenue Code) and
      nonqualified stock options. As of June 30, 2006, options to purchase 1,095,881
      shares of Common Stock were outstanding under the 2003 Plan. Of such options,
      50,000 shares were granted to non-employee directors of the Company. The period
      during which an option may be exercised is fixed by the Board of Directors,
      up
      to a maximum of ten years (five years in cases of incentive stock options
      granted to holders of 10% or more of the combined voting power of all classes
      of
      stock of the Company), and options typically vest over a four-year period.




The
      Company typically would issue stock options at a price equal to the fair market
      value on the date of grant. In the event that options are granted at a price
      below the trading value on the date of grant, the difference is recorded as
      deferred compensation and amortized over the vesting period of the option.




F-16




Information
      relative to the 1994 Plan, 1998 Plan and 2003 Plan is as follows:







**Range
                of Exercise Price****Per
                Share**
            
            **Weighted
                Price****Shares**
            
            **Minimum**
            
            **Maximum**
            
            **Per
                Share**Outstanding
                at June 30, 2004 (132,704 exercisable)
            
            
            528,279
            
            $
            2.250
            
            $
            1,181.250
            
            $
            10.500Granted
            
            
            318,964
            
            
            2.250
            
            
            3.750
            
            
            3.000Exercised
            
            
            (48,478
            )
            
            2.250
            
            
            3.000
            
            
            2.400Canceled
            
            
            (96,143
            )
            
            2.250
            
            
            1,181.250
            
            
            34.950Outstanding
                at June 30, 2005 (189,969 exercisable)
            
            
            702,622
            
            $
            2.250
            
            $
            1,153.200
            
            $
            4.350Granted
            
            
            473,736
            
            
            3.750
            
            
            7.500
            
            
            5.560Exercised
            
            
            (22,707
            )
            
            2.250
            
            
            4.800
            
            
            2.535Canceled
            
            
            (53,659
            )
            
            2.250
            
            
            360.000
            
            
            3.504Outstanding
                at June 30, 2006 (1,059,573 exercisable)
            
            
            1,099,992
            
            $
            2.250
            
            $
            1,153.200
            
            $
            4.959


Information
      with respect to options outstanding at June 30, 2006 and 2005 is as follows:




**Outstanding**
              
              **Exercisable****Exercise
                  Price Per Share**
              
              **Number
                  of**
                **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Average**
                **Remaining**
                **Contractual
                  Life**
              
              **Number
                  of**
                **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price****(in
                  Dollars)**
              
              **(in
                  Years)**
              
              
              
              **(in
                  Dollars)**June
                  30, 2005$2.25
                  - $3.00
              
              
              682,631
              
              $
              2.505
              
              
              8.79
              
              
              187,148
              
              $
              2.340$3.01
                  - $5.00
              
              
              11,167
              
              
              3.750
              
              
              9.85
              
              
              -
              
              
              -$5.01
                  - $6.50
              
              
              4,833
              
              
              5.550
              
              
              9.26
              
              
              94
              
              
              5.760$6.51
                  - $10.00
              
              
              47
              
              
              6.750
              
              
              7.33
              
              
              29
              
              
              6.750$10.01
                  - $1,181.25
              
              
              3,944
              
              
              325.950
              
              
              4.58
              
              
              3,823
              
              
              335.565$2.25
                  - $1,181.25
              
              
              702,622
              
              $
              4.365
              
              
              8.79
              
              
              191,094
              
              $
              9.015June
                  30, 2006$2.25
                  - $3.00
              
              
              626,591
              
              $
              2.501
              
              
              7.81
              
              
              619,923
              
              $
              2.502$3.01
                  - $5.00
              
              
              180,232
              
              
              4.740
              
              
              9.09
              
              
              180,230
              
              
              4.740$5.01
                  - $6.50
              
              
              223,412
              
              
              5.713
              
              
              9.89
              
              
              214,663
              
              
              5.692$6.51
                  - $10.00
              
              
              65,860
              
              
              7.243
              
              
              9.37
              
              
              40,860
              
              
              7.086$10.01
                  - $1,181.25
              
              
              3,897
              
              
              328.508
              
              
              3.57
              
              
              3,897
              
              
              328.508$2.25
                  - $1,181.25
              
              
              1,099,992
              
              $
              4.959
              
              
              8.80
              
              
              1,059,573
              
              $
              4.905




The
      resulting pro forma compensation cost may not be representative of that expected
      in future years. The weighted average exercise price, which approximates the
      weighted average grant date fair value, of options granted was $5.56 and $2.25
      for the fiscal years ended June 30, 2006 and 2005, respectively.




**Annual
      Stock Grant Retainer to Directors**




In
      January 1998 the Company’s Board of Directors and stockholders approved a plan
      which provides for the granting to non-employee directors options to purchase
      shares of Common Stock. Each calendar year in which the Company holds an Annual
      Meeting of Stockholders, each non-employee director will receive shares valued
      at $10,000 based on the market price of the Company’s Common Stock, as defined
      in the plan. For the fiscal years ended June 30, 2006, and 2005, there were
      no
      shares of Common Stock granted pursuant to this plan. However, during the fiscal
      year ended June 30, 2006, non-employee directors received options to purchase
      4,500,000 shares (30,000 shares after giving effect to the Reverse Split) of
      Common Stock pursuant to the 2003 Plan.




Since
      April 2001, all non-employee directors have volunteered to not be paid for
      attending any regular or special meeting of any committee of the Board of
      Directors until further notice. Accordingly, the Company has not accrued any
      charges during the period pursuant to this plan for the grant of Common Stock
      for attendance by members of the Board of Directors at any regular or special
      meeting of any committee of the Board of Directors.





F-17





**7.** **401(k)
      SAVINGS PLAN:**




Effective
      January 1997, the Company adopted a 401(k) Savings Plan ("401(k) Plan") that
      is
      available to all employees. The 401(k) Plan permits participants to contribute
      up to 85% of their base salary, pre-tax, not to exceed the limits established
      by
      the Internal Revenue Code. The Company previously matched 25% of employee
      contributions on the initial 6% contributed by employees. Effective January
      1,
      2002, the Company match was suspended.




All
      employee contributions and Company match contributions vest immediately. The
      Company recorded no compensation expenses in connection with the 401(k) Plan
      for
      the fiscal years ended June 30, 2006 and 2005.







**8.** **INCOME
      TAXES:**




The
      benefit from income taxes for the year ended June 30, 2006 is comprised of
      two
      components - a gain of $248,000 generated by the sale of net operating loss
      carryforwards, partially offset by a provision of $20,000 against the Company’s
      operations. The State of New Jersey passed legislation in 1999 allowing
      qualified technology companies based in New Jersey to apply for transfer or
      sale
      of unused State of New Jersey net operating losses for cash. Profitable
      companies can buy these losses at a discount, thereby reducing their state
      tax
      obligations. Voxware received a determination letter from the State of New
      Jersey to sell $3,133,000 of its losses, which generated cash proceeds of
      $248,000 during the year ended June 30, 2006. The Company did not participate
      in
      the program during fiscal 2005. Voxware is not qualified to participate in
      this
      program during calendar year 2006, so the program will not impact the Company’s
      results of operations in fiscal year 2007.





The
      provision for income taxes was $20,000 for the year ended June 30, 2006, as
      compared to $0 for the year ended June 30, 2005. During the year ended June
      30,
      2006, the Company had a loss before taxes of $6,991,000 for accounting purposes.
      There are significant differences in calculating income or loss for accounting
      and tax purposes, primarily relating to charges such as amortization of deferred
      employee compensation that are recorded in the current period for accounting
      purposes, but are deferred for tax purposes. Furthermore, tax laws differ in
      each jurisdiction, yielding differing amounts of taxable income or loss in
      each
      jurisdiction. While the Company has substantial net operating losses to offset
      taxable income in some taxing jurisdictions, certain restrictions preclude
      it
      from fully utilizing the benefit of these net operating losses. In addition,
      the
      expansion of the Company’s business requires it to file taxes in jurisdictions
      where it did not previously operate, and thus does not have established net
      operating losses to offset the tax liability.




Deferred
      tax assets reflects the impact of temporary differences as follows:




June
                  30,(in
                  thousands)
              
              2006
              
              2005Deferred
                  tax assets:Net
                  operating loss carryforwards
              
              $
              14,179
              
              $
              13,010Allowances
                  and reserve accounts
              
              
              265
              
              
              42Accrued
                  expenses
              
              
              487
              
              
              348Deferred
                  balances
              
              
              694
              
              
              -Research
                  and development credit
              
              
              975
              
              
              966Total
                  deferred tax assets
              
              
              16,600
              
              
              14,366Valuation
                  Allowance
              
              
              (16,409
              )
              
              (14,356
              )Deferred
                  tax liabilities:Capitalized
                  software
              
              
              (16
              )
              
              -Depreciation
                  & amortization
              
              
              (175
              )
              
              (10
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
  As
      of
      June 30, 2006, the Company had approximately $39,000,000 of federal net
      operating loss carry-forwards for tax reporting purposes available to offset
      future taxable income; such carry-forwards begin to expire in 2009. Net
      operating loss carry-forwards were $38,000,000 as of June 30, 2005. The Company
      has established a full valuation allowance against their deferred tax assets.
      The Company is not aware of any factors which would generate significant
      differences between taxable income and pre-tax accounting income in future
      years
      except for the reversal of current or future net deductible temporary
      differences. A full valuation allowance has been provided on the net deferred
      tax asset because of the uncertainty regarding realization of the deferred
      asset
      as a result of the operating losses incurred to date.




F-18




The
      Tax
      Reform Act of 1986 enacted a complex set of rules limiting the potential
      utilization of net operating loss and tax credit carry-forwards in periods
      following a corporate “ownership change.” In general, for federal income tax
      purposes, an ownership change is deemed to occur if the percentage of stock
      of a
      loss corporation owned (actually, constructively and, in some cases, deemed)
      by
      one or more “5% shareholders” has increased by more than 50 percentage points
      over the lowest percentage of such stock owned during a three-year testing
      period. During 2003, such a change in ownership occurred. As a result of the
      change, the Company’s ability to utilize certain of its net operating loss
      carry-forwards will be limited. The Company has not yet assessed the impact
      of
      the August 2005 private placement on its ability to utilize net operating loss
      carry-forwards.





Research
      and development credits expire
      in
      accordance with provisions of applicable tax law, and have remaining lives
      ranging from 6 to 20 years. The
      Company had no accumulated earnings in Europe.







**9.** **COMMITMENTS
      AND CONTINGENCIES:**




The
      Company leases its office facilities and certain equipment under operating
      leases with remaining non-cancelable lease terms generally in excess of one
      year. Rent expense, including escalations, was approximately $536,000 and
      $431,000 for the fiscal years ended June 30, 2006 and 2005, respectively. Future
      minimum rental payments for the Company’s office facilities and equipment under
      operating leases as of June 30, 2006 are as follows:




(in
                  thousands)Year
                  ending June 30, 2007
              
              $
              385Year
                  ending June 30, 2008
              
              
              17Year
                  ending June 30, 2009
              
              
              1$
              403




The
      Company is subject to various legal proceedings and claims, either asserted
      or
      unasserted, which arise in the ordinary course of business. While the outcome
      of
      these claims cannot be predicted with certainty, management does not believe
      that the outcome of any of these legal matters will have a material adverse
      effect on the Company’s business, operating results or financial condition.




The
      Company has a three-year employment agreement with two of its officers. The
      agreement provides for minimum salary levels, adjusted annually at the
      discretion of the Board of Directors, and a bonus based upon the Company’s
      performance as measured against a business plan approved by the Company’s Board
      of Directors.





F-19