<PAGE>

================================================================================

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549
                            ----------------------

                                   FORM 10-K

[ X ]  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
       Act of 1934
       For the fiscal year ended   June 30, 1999
                                 ----------------

[   ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934
       For the transition period from ______________

                        Commission File Number  0-021403
                                 VOXWARE, INC.
                                 -------------
            (Exact Name of Registrant as Specified in Its Charter)

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

                             305 College Road East
                         Princeton, New Jersey 08540
                                 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:  NONE
Securities registered pursuant to Section 12(g) of the Act:  COMMON STOCK, $.001
                              par value per share

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

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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $10,997,821 as of September 22, 1999, based
upon the closing sale price of the Common Stock as quoted on the Nasdaq National
Market. This amount excludes an aggregate of 2,398,961 shares of Common Stock
held by executive officers, directors and by each individual and entity that
owns 5% or more of the Common Stock outstanding at September 22, 1999. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

     The number of shares of the registrant's Common Stock outstanding as of
September 22, 1999 was 13,396,782.

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<PAGE>

                                 VOXWARE, INC.

                            FORM 10-K ANNUAL REPORT

                      For Fiscal Year Ended June 30, 1999

                               TABLE OF CONTENTS

<TABLE>
<S>                                                                                                 <C>
PART I

Item 1.  Business .................................................................................   3
Item 2.  Properties ...............................................................................  13
Item 3.  Legal Proceedings.........................................................................  13
Item 4.  Submission of Matters to a Vote of Security Holders.......................................  13

PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder Matters ................  14
Item 6.  Selected Financial Data...................................................................  15
Item 7.  Management's Discussion and Analysis of Results of Operations and Financial Condition.....  16
Item 8.  Financial Statements and Supplementary Data...............................................  24
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......  24

PART III

Item 10. Directors and Executive Officers of the Registrant .......................................  24
Item 11. Executive Compensation ...................................................................  24
Item 12. Security Ownership of Certain Beneficial Owners and Management............................  24
Item 13. Certain Relationships and Related Transactions ...........................................  24

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .........................  25
Index to Financial Statements...................................................................... F-1
</TABLE>

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                                       2
<PAGE>

                                    PART I

     THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD LOOKING STATEMENTS ARE BASED ON CURRENT
EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT VOXWARE'S INDUSTRY, MANAGEMENT'S
BELIEFS, AND CERTAIN ASSUMPTIONS MADE BY VOXWARE'S MANAGEMENT. WORDS SUCH AS
"ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES,"
VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT
ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH HEREIN UNDER
"IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS," ATTACHED HERETO AS
EXHIBIT 99. UNLESS REQUIRED BY LAW, VOXWARE UNDERTAKES NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY
REVIEW THE RISK FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS VOXWARE
FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.


ITEM 1.  BUSINESS.

Overview

     On February 18, 1999, we acquired substantially all of the assets of Verbex
Voice Systems, Inc. Since that time, our business objective has been to provide
noise-robust speech recognition products to the warehousing and manufacturing
markets. Prior to our acquisition of Verbex, our primary business was developing
marketing, licensing and supporting digital speech and audio technologies,
solutions and applications and, on September 21, 1999, our stockholders approved
the sale of substantially all of the assets of our speech coding business to
Ascend Communications, Inc. (a wholly owned subsidiary of Lucent Technologies,
Inc.).

     We operate within the multi-billion dollar "Automatic ID" market by selling
products which rely on speech input of data to complement bar-code scanning and
industrial data terminals in the warehouse, factory or other industrial setting
for applications such as warehouse picking, logistics receiving, returns order
processing, manufacturing inspection, and package and letter sorting. Speech
recognition products are designed to provide the ability to input data that
cannot be easily bar-coded, where key entry is impractical or where productivity
or safety are enhanced by having the workers' hands free while performing their
jobs. We distribute our current products to industrial and commercial customers
primarily through value-added resellers ("VARs"), systems integrators and
international distributors. In addition, we make direct sales to strategic
accounts. We believe that the large market for speech recognition products in
the industrial workplace has emerged and continues to grow due to the
convergence of the following factors:

 .   design advances which permit speech recognition products to be smaller,
     portable and more durable.

 .   advances in wireless communications permitting an enhanced interface
     between mobile PCs and servers, and the increasing deployment of wireless
     networks in warehouses and other industrial operations.

 .   an increased focus in industry of reducing the cost of logistics in order
     to increase profitability and achieve competitive advantages.

 .   growth in electronic commerce resulting in increased businesses with
     substantial warehouse picking functions.

 .   decreasing cost of microprocessors and digital signal processors.

<PAGE>
Products

     We have two major product lines; portable devices and stationary devices.
All of our products are based on our proprietary speech recognition technology.
For those products requiring "text-to-speech," we license software from third
parties.

     Portable Devices. We manufacture a line of portable devices led by the
Mobile Voice Pac ("MVP"), a rugged, continuous speech input/output device
designed for industrial applications that require mobility and connectivity. The
MVP weighs approximately 40 ounces and measures 8.8 inches in length, 3.5 inches
in width and 2.6 inches in depth. It is worn on the belt of the user and is
connected by wire to a headset with a microphone. When the user speaks into the
microphone, the electronics and software in the MVP process the speech signal to
determine what was said. After the MVP has determined what was said, that
information is typically transmitted by a wireless link to the system network,
which, depending upon the application, could be a warehouse management system, a
manufacturing tracking system or another software package that tracks inventory
or operations. The system network then records and processes the information,
sends additional instructions to the MVP user or takes other action. In
applications such as receiving and package sorting, the information processed
by the MVP is sometimes used to print a bar code label locally rather than being
transmitted by a wireless link to a system network.

     Some MVP models have built-in radios for real-time operation, and some we
specifically designed for non-real-time applications. We design and build all
models to be reliable and durable in industrial environments, and all models
incorporate continuous speech recognition technology specifically designed to
maintain accuracy in extremely loud facilities. The MVP is typically integrated
into a facility's management and information system via a standard software
interface built by us and used by a VAR constructing the complete application.

     We also manufacture a smaller, less rugged unit called the "Speech
Commander portable" that is used outside typical industrial environments (e.g.,
remittance processing by banks), but its utility and distribution is limited to
a small number of customers.

     We purchase parts and electronics boards for our products from external
vendors. We also have external vendors perform major sub-assemblies where
appropriate and cost efficient. Our employees perform final assembly and
testing. We also offer customers the opportunity to purchase accessories such as
headsets and computer hardware that we purchase from third party vendors for
resale.

     Stationary Devices. Certain industrial applications do not require a high
degree of mobility by each user. For those applications, we design and
manufacture a family of stationary PC or other computer electronics boards that
house digital signal processing chips and other electronics. The stationary
devices, like the portable devices, are connected by wire to a headset with a
microphone. The speech information is sent to the board in the computer. Much
like the MVP portable device, the board employs its electronics and software to
recognize what was said and sends commands to the computer to take action such
as communicating with the system network or printing a label.

     This product line has been proven in industrial applications such as
receiving and package sorting, and our sales of stationary products range from
individual boards to complete computer workstations, depending on the customer's
application.

     Stationary products consist of individual PC boards and complete systems,
including fully integrated PCs for some customers. We typically subcontract the
assembly of PC board products to local manufacturers, but our manufacturing
personnel perform final testing and shipment of the PC boards. When a customer
requires a fully integrated computer loaded with our board products in the PC or
workstation, our personnel perform the integration and testing. We also offer
customers the opportunity to purchase accessories such as headsets and computer
hardware that we purchase from third party vendors for resale.

Applications

     Our primary market area is the warehouse market. The warehouse market is
attractive because of the market's size, the move toward automation and
increased productivity, the advent of e-commerce and its impact on the supply
chain infrastructure, and Voxware's belief that speech-based products can add
considerable value to operational efficiency. According to Brooker and
Associates, an industry consultant we have retained, North America has between
500,000 and 750,000 warehouses. Those warehouse operations employ over 14
million people, including approximately 7 million pickers, and 1.5 million
receivers. Within this market, we intend to target the larger warehouse
operations with our industrial speech recognition products. Less than half of
the warehouse operations run by large US companies are estimated to be automated
with radio frequency ("RF") scanners, while less than 15% of those operated by
smaller

                                       4
<PAGE>

companies use RF systems today. We believe that the non-North American
marketplace also represents a substantial market. The primary applications that
we target in this area are warehouse picking and warehouse receiving, package
sorting, and returns order processing.

     The following is a description of some of these target application areas,
as well as a discussion of other application areas outside the warehousing
market where we believe our products have market value.

     Warehouse Picking. A large part of the distribution industry involves the
assembly of orders for individual customers by workers who walk through
warehouses, individually selecting items and preparing orders for shipment. This
"picking" function employs millions of workers in North America alone. Our
products are designed to be used by the worker doing the picking (the "picker")
to enhance the accuracy and speed of these operations. Using our system, picking
instructions are synthetically generated from electronic or written orders
received from the warehouse's customers and are sent by speech to a picker on
the warehouse floor wearing a headset and a portable device such as the MVP.
While keeping his hands and eyes free to walk through the warehouse and pick,
the picker listens to the instructions, acts upon them and confirms the
selections using voice commands spoken into the headset's microphone. We believe
that our speech-based products for picking applications have provided customers
with the benefits of increased productivity, accuracy and the elimination of
paper.

     An example of a warehouse picking application which we believe provides a
large target market for our products is grocery picking. Grocery warehouse
pickers are typically filling small, case-based orders very quickly and handling
hundreds of different items. In this environment, products that offer hands-
free, eyes-free operation can enhance speed and accuracy, and may be
particularly attractive in freezers where heavy gloves limit the pickers'
ability to execute the fine motor movements necessary to work with paper and
pen, keyboards or hand held computers or even scanners.

     Warehouse Receiving, Package Sorting and Returns Order Processing. A
distribution and warehousing facility may receive anywhere from hundreds to tens
of thousands of packages daily. Each of these packages must be formally received
such that the warehouse's system can account for and track the package. The
receiving process can be cumbersome, often relying on paper or PCs and manual
recording and input of information which may lead to high error rates and low
productivity. When a package arrives, dock workers wearing a headset and a
portable device such as the MVP speak information into their headsets about the
arriving packages, such as the purchase order number corresponding to the
package or some other identification information. The portable device recognizes
the information and communicates it to the distribution center or warehouse
software system, which adjusts the inventory count. Alternatively, the speech
data may be transmitted to a bar code printer that immediately prints a bar code
label to be adhered to the package and used to track the package internally
thereafter.

     An example of a logistics receiving market is the retail clothing industry,
which often uses a distribution method known as "cross-docking" in which goods
arrive in the distribution center on one truck and exit on another truck minutes
or hours later. The goods are routed to the appropriate trucks using bar code
scanners on conveyers inside the facility. However, since many packages arrive
without usable bar codes, labels must be generated on the receiving dock and
adhered to the package immediately. Because of the fast-paced, high-volume
receiving operations typical in clothing distribution operations, and because a
high percentage of arriving packages do not have usable bar codes, we believe
that this application lends itself well to a speech-based solution.

     Two specialized versions of the "receiving" application are package sorting
and returns order processing. In both circumstances, warehouse or distribution
center employees are formally accepting goods into their system, and information
must be recorded so that the central system can properly route and disposition
those items. We consider the application mechanics to be similar among cross-
docking, generic receiving, returns order processing, and package sorting, and
have therefore discussed them as a single application category.

     Manufacturing and Other Inspection. Newly manufactured goods are often
inspected at the end of or during the manufacturing process to highlight defects
and properly disposition the finished good. These inspections are typically
accomplished with pen and paper. Our products are designed to allow inspectors
to input more information faster without removing their hands or eyes from the
item under inspection. Verbex sold a small number of products in this market and
we intend to explore marketing opportunities in this area.

     Other Applications & Markets. Verbex also licensed its technology or sold
its products to banks looking for fast, efficient methods of recording the
amount of payment their customers make on credit card bills and other debts,

                                       5
<PAGE>

dentists interested in charting patient conditions without the use of an
assistant and customers deploying lumber grading systems for saw mills. In
addition, Verbex marketed a PC-based product targeted to consumers and an
automated telephony personal assistant software package for the small
office/home office market, and built speech-recognition OEM boards for a
hospital bed manufacturer to allow bed-ridden patients to control bed position,
television settings and other room devices using voice commands.

     Although standard products will be available for these "other" applications
when we encounter an opportunity, and we intend to fulfill support obligations
to existing customers, we do not intend to invest substantial sales, marketing,
or development resources to maintain or increase revenue from market areas other
than our primary target areas identified above.

Sales and Distribution

     We believe that the industrial marketplace for our products is large and
diverse. We believe that the establishment of a network of VARs with extensive
and specific knowledge of the various applications critical in the industrial
market is important in order for us to succeed in that market. VARs typically
purchase products from us at a discount and incorporate them into "application
systems" for various target markets. These application systems integrate our
products with additional hardware and software components and include service
and product support. VARs then resell or lease the application systems to end-
user customers. Building a network of VARs takes time and requires different
sales and marketing expertise than that required to build a consumer software
distribution channel, or an OEM relationship for technology.

     Verbex began to develop a network of VARs capable of not only marketing but
installing its products and servicing its customers. Generally, Verbex entered
into written agreements with VARs, pursuant to which VARs purchase products from
us at discounts ranging from 20% to 40%. These VAR agreements are usually for an
initial term of 15 months, which may be renewed for one or more 12-month terms,
although, under the VAR agreements signed by Verbex, either party may terminate
the agreement upon 30 days prior written notice. Under the VAR agreements, we
warrant to repair, replace or refund the purchase price of any defective product
delivered to a VAR or a VAR's customer, provided that we are notified of the
defective product within 90 days from delivery of the product to the end-user in
the case of software and one year from such delivery in the case of hardware.

     Voxware plans to focus on the expansion of Verbex's VAR channel not only in
the United States but abroad, with particular emphasis on the development of
strategic relationships with warehouse management system ("WMS") vendors and RF
system vendors. Assuring that our products are easily integrated with these
vendors' systems as well as other components of customers' asset management and
information systems will be a key factor in Voxware's success. We believe that
in the industrial speech recognition market, strategic partnerships with the
appropriate WMS vendors, as well as the major RF infrastructure corporations,
are critical to success. As is the case with the development of an effective VAR
channel discussed above, nurturing and building these relationships takes time.
There can be no assurance that we will be successful in developing strategic
partnerships with WMS and RF system vendors.

     Voxware intends to augment the development of the indirect VAR channel with
pull-through sales activities (which will be serviced by select VARs), as well
as strategic accounts serviced directly by Voxware personnel. It is our
intention, however, to move further away from a direct sales model as the
indirect channel develops over the long term. We intend to maintain a limited
marketing and sales presence in Europe, and also intend to monitor progress of
market opportunities within the Asian markets, but currently anticipate very
minimal investment in this geographic region until evidence of the Asian market
opportunities are strong enough to warrant additional investment.

     In July 1999, we entered into an agreement with a division of ITT
Industries, Inc. under which we have licensed our speech recognition products
and technologies to ITT for the creation of speech recognition products for sale
to military and other governmental customers. The agreement creates a strategic
relationship involving joint product development, cross-licensing of technology,
marketing and co-branding. Under the agreement, Voxware is evaluating ITT's
speech products and technologies for potential combination with Voxware's
products to create products for sale to non-military or governmental customers.
Voxware will receive a one-time license fee of $250,000 from ITT payable in two
installments during the year ending June 30, 2000 and, if ITT develops and sells
products incorporating Voxware's technologies, ITT will pay royalties to
Voxware. Voxware expects to recognize the one-time license fee over the five-
year term of the agreement, and royalty revenues in the fiscal quarters in which
they are reported to us by ITT. We cannot assure you as to whether ITT products
incorporating Voxware's technologies will be developed or sold, or what amount
of royalty revenues, if any, Voxware will receive from ITT.

                                       6
<PAGE>

Customers

     Historically, Verbex derived a significant portion of its net revenues from
sales to VARs and systems integrators. These third parties are trained and
supported by us and provide substantial leverage to our sales and support
capabilities. For the year ended December 31, 1998, these third parties
accounted for 52% of Verbex's total revenues.

     In addition, Verbex had long-standing relationships with certain customers
to whom Verbex sold its products directly and offered ongoing support and
maintenance. Historically, Verbex's five largest direct-sale customers have been
the United Parcel Service, which accounted for 15% of Verbex's total revenues in
1998, another major package handling company, a governmental agency, a branch of
the U.S. armed services and a major pharmaceutical company. For the year ended
December 31, 1998, these customers accounted for 25% of Verbex's total revenues.
There are no written agreements with any of these customers. The majority of our
direct sales are placed through purchase orders on an as-needed basis. 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, replacement or refund of purchase price,
provided that we are notified of the defect within 90 days from delivery to the
customer or end-user in the case of software and one year from the delivery in
the case of hardware. Substantially all components, parts and subassemblies
purchased by Voxware are covered by warranty by the manufacturer for periods
ranging from 30 days to one year.

Technology

     Speech recognition technology can be broadly segregated into two
categories: speaker-independent and speaker-dependent systems. Speaker-
independent products can recognize the utterances of any speaker using a
specific language, while speaker dependent systems require that each individual
user train the system to recognize his or her specific voice. Speaker-dependent
systems are typically much more accurate than speaker-independent systems, while
speaker-independent products offer greater flexibility.

     As a practical matter, many applications cannot use speaker-dependent
technology. For example, a telephone-based airline reservation system using
speech recognition would require speaker-independent technology, as the airline
cannot predict who will be calling. Thus, the airline would sacrifice some
accuracy in exchange for speaker independence. In warehouse or manufacturing
environments where accuracy in noisy environments is critical, the significant
accuracy improvements offered by speaker-dependent technologies over speaker-
independent technologies are typically considered to be worth the time required
to train the system for the user's voice.  Further, speaker independent systems
are by nature language independent, so workers with multiple accents, dialects,
and native languages can use the system without custom system development.

     Our current industrial product line is based on our proprietary VISE
speaker-dependent speech recognition technology, which is continuous, and highly
noise-tolerant. Users of products based on the VISE engine must train the
devices to their personal voices before using them, an acceptable requirement in
industrial applications. Our MVP product line and all of our stationary products
sold to industrial customers are based on the VISE technology. Our proprietary
VCORE software combines our VISE technology with an interface suitable for
applications such as toys, games and telephones. Although we have licensed VCORE
on a limited basis to a small number of customers for use in their products, our
strategy for the future does not emphasize technology licensing to OEMs.

     In addition to Verbex's VISE speaker-dependent technology, prior to our
acquisition of Verbex, Verbex had been in the process of developing FlexVISE, a
large vocabulary speaker-independent technology designed to maintain extremely
high accuracy in very high noise environments. We believe that this technology
is in the early stages of development and technological feasibility has not been
proven. We have not determined whether to dedicate resources to the further
development of FlexVISE, and we intend to investigate the feasibility of
obtaining and deploying speaker independent technology developed and owned by
third parties.

                                       7
<PAGE>

     We believe that providing a noise-robust, speaker independent, continuous
product to customers in our targeted application areas would enhance our
competitiveness in the marketplace. At present, however, we believe that very
large vocabulary capability is not considered a compelling requirement for
customers in our targeted application areas.

     Competition

     We encounter competition from two sources. First, in each application area,
alternatives to speech-based products exist. For example, in the package sorting
and remittance processing applications, keyboards are the most prevalent
alternative. Inspection, receiving, and inventory applications can use keyboards
as well, but often pen and paper comprise the alternative method in those cases.
In dental charting, the alternative solution is the use of an assistant
performing transcription. Some applications have access to more technologically
sophisticated alternatives. Bar code scanning devices, for example, represent a
competitive alternative to speech-based products in warehouse picking
applications. Thus, bar code product companies such as Symbol Technologies,
Inc., Intermec Technologies Corporation (a subsidiary of UNOVA, Inc.), LXE Inc.
(a wholly-owned subsidiary of Electromagnetic Sciences, Inc.), Teklogix
International Inc. and Telxon Corporation, can be considered competitors in the
warehouse picking marketplace.

     Companies that build competitive speech recognition-based systems comprise
the second source of competition for Voxware. Vocollect, Inc. markets a wearable
speech-based computer and complementary software targeted primarily at the
warehouse picking market. Similarly, SyVox Corporation offers a wearable speech-
based computer product for the industrial marketplace. In addition, companies
like Xybernaut Corporation, ViA, Inc. and others also market wearable computer
products incorporating speech recognition technologies, although the latter
group targets hands-busy applications that require visual information, a market
segment Voxware is specifically not targeting.

     There are also several traditional speech recognition companies not
currently focusing primarily on the industrial market, including Dragon Systems,
Inc., IBM, Philips Electronics N.V. and Lernout & Hauspie Speech Products N.V.
If these companies decide to focus on the industrial market, our business could
be materially and adversely affected.

Sale of Speech Coding Business

     Prior to our acquisition of Verbex, Voxware developed, marketed, licensed
and supported digital speech and audio technologies, solutions and applications.
On September 21, 1999, our stockholders approved the sale of substantially all
of the assets of our speech coding business to Ascend (a wholly owned subsidiary
of Lucent Technologies, Inc.). Upon closing, Voxware received $4,146,000 in
cash. We had previously received $204,000 of the purchase price, and the
remaining $750,000 is being held in escrow for 18 months (until March 21, 2001)
to secure Voxware's indemnification provisions under the sale of assets
agreement. The sale to Ascend does not include our rights and obligations under
our existing speech coding license agreements. As part of the sale, we received
a license from Ascend to use the speech coding technologies necessary to service
those existing licensees. We will also seek to license our audio compression
technologies that were not sold to Ascend. With the consent of Ascend, we may
also license the speech coding technologies to new licensees for uses that are
not competitive with Ascend. We do not have any agreements or arrangements with
Ascend relating to any general or specific guidelines for obtaining Ascend's
consent. Therefore, we cannot assure you that Ascend will consent to any new
licenses which we propose to enter into relating to the speech coding
technologies. Voxware's revenue from licensing speech coding technologies and
audio compression technologies has been decreasing from quarter to quarter over
the last two years. Therefore, we expect that, even if Ascend is willing to give
its consent, our new licensing activity relating to the speech coding
technologies will decrease significantly over time. Further, over time, as we
focus on the Verbex business, we expect that revenues from licensees of speech
coding technologies will become a less significant part of our revenues.
Therefore, we do not expect revenue from new licensing activity to materially
affect our financial position. We intend to continue to sell our speech coding
products opportunistically in the future, and to continue to maintain
relationships with existing licensees. However, we do not intend to pro-actively
market or sell these products, or invest material resources in the growth of
this business area.

                                       8
<PAGE>

Patents and Proprietary Information

     With our acquisition of Verbex, we acquired certain patents and patent
applications related to the Verbex technology. The Company expects to routinely
file patent applications as deemed appropriate. The Company's success will
depend in part on its ability to obtain patent protection for its products,
preserve its trade secrets and operate without infringing the proprietary rights
of other parties. We cannot assure you that patent applications to which we hold
rights will result in the issuance of patents, or that any issued patents will
provide commercially significant protection to our technology, products and
processes. In addition, we cannot assure you that others will not independently
develop substantially equivalent proprietary information not covered by patents
to which we own rights or obtain access to our know-how or that others will not
claim to have or will not be issued patents which may prevent the sale of one or
more of our products. In addition, the laws of certain countries may not protect
our intellectual property. 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 requires 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 September 22, 1999, we had 31 full-time employees consisting of 14 in
research and development, 11 in sales and marketing and 6 in administration and
finance. Fifteen of our employees are located at our Cambridge, Massachusetts
facility, and 11 are located at our corporate offices in Princeton, New Jersey.
The remainder work at various other locations. None of our employees is
represented by a labor union or is subject to a collective bargaining agreement.
We believe that our employee relations are good.


ITEM 2. PROPERTIES.

     We lease our principal facility, which contains approximately 18,000 square
feet of office space in Princeton, New Jersey. The initial term of the lease for
our current office space will expire on May 31, 2003. Total payments under this
lease consist of a base rent of $21.30 per square foot, plus escalations for
property operating expenses, property taxes and other items. We entered into a
Sublease Agreement in July 1998, under which we subleased to a third party
approximately 47% of the space in the facility. The initial term of that
Sublease Agreement will expire on May 31, 2003.

     We also lease space in Cambridge, Massachusetts for research and
development, product engineering and final assembly and testing. This space
occupies approximately 5,035 square feet. Total payments under the lease consist
of a base rent of $14.75 per square foot, an electricity charge of $1.50 per
square foot, an expense charge of 7.9% of the landlord's building expenses and
$150 per month for three parking spaces. The lease expires on May 31, 2000,
subject to our option to extend the lease for one additional month by paying a
base rent of $23.00 per square foot for the months of April, May and June 2000.
We believe that existing facilities are adequate for operations through the year
ending June 30, 2000 and that additional space will be available as needed
thereafter.


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.

                                       9
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.


EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company and their respective ages and positions
with the Company as of September 22, 1999 were as follows:

<TABLE>
<CAPTION>
                  Name                  Age                      Position
                  ----                  ---                      --------
     <S>                                <C>    <C>
     Bathsheba J. Malsheen, Ph.D. ...    48    President, Chief Executive Officer and Director
     Nicholas Narlis ................    39    Vice President, Chief Financial Officer, Secretary and
                                               Treasurer
     Sherri L. Meade ................    52    Vice President, Engineering and Operations
     David C. Vetter ................    54    Chief Technical Officer
     Juergen C.H. Lemmermann ........    61    Vice President, Operations
</TABLE>

     Bathsheba J. Malsheen, Ph.D. has served as President, Chief Executive
Officer and Director of the Company since October 1997. She previously served as
Chief Operating Officer of the Company from May 1997 through October 1997, and
as Vice President of OEM Licensing since joining Voxware in October 1996 through
April 1997. From April 1990 to October 1996, Dr. Malsheen held various executive
positions with Centigram Communications Corporation, a voice messaging company,
most recently as General Manager of their Technology Business Unit and was
responsible for licensing of text-to-speech software products. Previously, she
worked for Speech Plus, Inc. where she served as Director of Speech Technology
from 1985 to 1990. Dr. Malsheen holds a Ph.D. and M.A. from Brown University and
a B.A. from Hofstra University.

     Nicholas Narlis has served as Vice President, Chief Financial Officer and
Secretary of the Company since April 1998, and Treasurer of the Company since
June 1996. He previously served as Vice President and Chief Accounting Officer
of the Company from March 1997 through April 1998, and as Controller and Chief
Accounting Officer from March 1996 through February 1997. From 1992 to March
1996, Mr. Narlis served in various capacities at Dendrite International, Inc., a
sales force automation software and service company, including most recently
Director of Finance. Previously, from 1983 to May 1992, Mr. Narlis worked for
KPMG Peat Marwick where he served as a Senior Manager from 1989 to May 1992 in
the New Jersey Audit Practice Unit. Mr. Narlis holds a B.S. from Rider
University and is a Certified Public Accountant.

     Sherri L. Meade has served as Vice President, Engineering and Operations
since June 1999. From November 1995 through May 1999, Ms. Meade served as
Director, Software Engineering Operations at Dialogic Corporation, a
manufacturer of telecommunications and computer telephony components.
Previously, from 1993 through August 1995, Ms. Meade served as Director of
Software Development at Franklin Electronic Publishers, which designs, develops
and distributes hand held electronic information products. In 1992, Ms. Meade
was Director of Development Services at Commodore International, which
developed, manufactured and distributed Personal Computing products. From 1969
through 1992, Ms. Meade held various management and engineering positions at
IBM, most recently as Program Manager of PenTablet Systems within the Personal
Computing division. Ms. Meade holds a B.S. in Mathematics from the State
University of New York at Stony Brook.

     David C. Vetter has served as Chief Technical Officer of Voxware since
February 1999, when Voxware acquired substantially all of the assets of
Verbex. From 1987 through February 1999, Mr. Vetter served as Vice President of
Research and Development at Verbex. Previously, from 1978 through 1987, Mr.
Vetter held various management and consulting positions in the area of
commercial development of speech recognition products for Milton-Bradley,
Digital Equipment Corporation, General Instruments and other organizations. Mr.
Vetter holds a B.S. in Humanities and Mathematics from the Massachusetts
Institute of Technology and an M.A. in Physics from the University of
Massachusetts.

                                       10
<PAGE>

     Juergen C. H. Lemmermann has served as Vice President, Operations of
Voxware since February 1999, when Voxware acquired substantially all of the
assets of Verbex. Mr. Lemmermann previously served as Vice President, Operations
at Verbex since 1986. From 1976 through 1986, Mr. Lemmermann served in various
capacities in the Verbex division of Exxon Enterprises, most recently as
Director of Operations. Previously, Mr. Lemmermann served in various
manufacturing operations positions for several semiconductor manufacturing
firms. Mr. Lemmermann holds the equivalent of a B.S. in Business Administration.
He was educated in Germany.


                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS.

Market Information

     Our Common Stock is traded on the National Market segment of The Nasdaq
Stock Market under the symbol "VOXW." The following table sets forth the high
and low sale prices as quoted on The Nasdaq Stock Market.

<TABLE>
<CAPTION>
                                                                                      High          Low
                                                                                      ----          ---
<S>                                                                                  <C>           <C>
Fiscal Year Ended June 30, 1997
Quarter ended December 31, 1996 (beginning October 31, 1996)                         $ 8.50        $6.375
Quarter ended March 31, 1997                                                         $7.625        $ 2.00
Quarter ended June 30, 1997                                                          $ 6.00        $ 4.00

Fiscal Year Ended June 30, 1998
Quarter ended September 30, 1997                                                     $6.063        $ 3.75
Quarter ended December 31, 1997                                                      $6.688        $3.188
Quarter ended March 31, 1998                                                         $ 4.00        $2.031
Quarter ended June 30, 1998                                                          $ 3.50        $ 2.00

Fiscal Year Ended June 30, 1999
Quarter ended September 30, 1998                                                     $2.375        $0.813
Quarter ended December 31, 1998                                                      $ 1.50        $0.469
Quarter ended March 31, 1999                                                         $1.969        $0.750
Quarter ended June 30, 1999                                                          $1.563        $0.625

Fiscal Year Ending June 30, 2000
Quarter ending September 30, 1999 (through September 24, 1999)                       $1.281        $0.938
</TABLE>

     As of September 24, 1999 there were approximately 170 holders of record of
our Common Stock.  Because many of the shares of our Common Stock are held by
brokers and other institutions on behalf of stockholders we are unable to
estimate the total number of stockholders represented by these record holders.
We have never declared or paid any cash dividends on our Common Stock.  We do
not anticipate paying any cash dividends in the foreseeable future.

                                       11
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

     The selected statement of operations data for the three years ended June
30, 1999 and the selected balance sheet data as of June 30, 1998 and 1999 have
been derived from the financial statements of the Company, which have been
audited by Arthur Andersen LLP, independent public accountants, and which
financial statements are included elsewhere in this Form 10-K. The selected
statements of operations data for the fiscal years ended June 30, 1995 and 1996,
and the balance sheet data as of June 30, 1995 and 1996 have been derived from
the Company's 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 Form 10-K.

<TABLE>
<CAPTION>
                                                      1995         1996         1997        1998         1999
                                                      ----         ----         ----        ----         ----
                                                            (In thousands, except per share data)
<S>                                                 <C>          <C>          <C>         <C>          <C>
Statement of Operations Data:
 Revenues:
   Product revenues:.
     Product sales.............................     $     -      $     -      $     -     $      -     $    791
     License fees..............................           -        1,256        5,432        2,935          705
     Royalties and recurring revenues..........           -          238        1,996        1,918          511
                                                    --------     --------     --------    ---------    ---------
       Total product revenues..................           -        1,494        7,428        4,853        2,007
   Service revenues............................           -          113          351        1,029          879
                                                    --------     --------     --------    ---------    ---------
       Total revenues..........................           -        1,607        7,779        5,882        2,886
                                                    --------     --------     --------    ---------    ---------
 Cost of revenues:
    Cost of product revenues...................           -           17          178          142          429
    Cost of service revenues...................           -           28          164          441          542
                                                    --------     --------     --------    ---------    ---------
       Total cost of revenues..................           -           45          342          583          971
                                                    --------     --------     --------    ---------    ---------
       Gross profit............................           -        1,562        7,437        5,299        1,915
                                                    --------     --------     --------    ---------    ---------
 Operating expenses:
    Research and development...................         537        2,497        7,796        4,726        2,058
    Sales and marketing........................         332        1,084        4,018        3,844        2,513
    General and administrative.................         365          980        3,204        2,467        1,691
    Amortization of purchased intangibles......           -            -            -            -          478
                                                    --------     --------     --------    ---------    ---------
       Total operating expenses................       1,234        4,561       15,018       11,037        6,740
                                                    --------     --------     --------    ---------    ---------
       Operating loss..........................      (1,234)      (2,999)      (7,581)      (5,738)      (4,825)
 Interest income...............................          65          132          722          844          539
                                                    --------     --------     --------    ---------    ---------
 Net loss......................................      (1,169)      (2,867)      (6,859)      (4,894)      (4,286)
 Accretion of preferred stock to
       redemption value........................           -           (7)          (5)           -            -
                                                    --------     --------     --------    ---------    ---------
 Net loss applicable to common stockholders....     $(1,169)     $(2,874)     $(6,864)    $ (4,894)    $ (4,286)
                                                    ========     ========     ========    =========    =========
 Basic and diluted net loss per common share...     $ (0.23)     $ (0.67)     $ (0.38)    $  (0.38)    $  (0.32)
                                                    ========     ========     ========    =========    =========
 Weighted average number of
       common shares outstanding...............       5,056        5,784       10,242       12,890       13,330
                                                    ========     ========     ========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                                             June 30,
                                                    --------------------------------------------------------
                                                       1995        1996        1997        1998       1999
                                                      -------    --------    --------    --------    -------
Balance Sheet Data:                                                       (In thousands)
<S>                                                 <C>          <C>         <C>         <C>         <C>
 Cash, cash equivalents and
   short-term investments......................        $1,523    $ 3,837      $16,469     $13,537    $ 4,446
 Working capital...............................         1,418      3,887       16,966      13,743      4,446
 Total assets..................................         1,667      5,336       20,221      15,557     12,592
 Redeemable Series A Convertible
   Preferred Stock.............................             -      5,938            -           -          -
 Stockholders' equity (deficit)................         1,556     (1,076)      17,376      13,913      9,709
</TABLE>

                                       12
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION.

     This report contains forward-looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may cause
our plans and results to differ significantly from plans and results discussed
in forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in "Important
Factors Regarding Forward-Looking Statements" attached hereto as Exhibit 99.

Overview

     On February 4, 1999, we entered into an agreement with Ascend (which at the
time was publicly owned but since then was acquired by Lucent Technologies, Inc.
and is now a wholly owned subsidiary of Lucent) to sell to Ascend substantially
all of our assets relating to what had historically been our primary business of
developing and selling speech coding technologies and products. The sale to
Ascend was consummated on September 21, 1999. Also on February 4, 1999, we
entered into a definitive agreement with Verbex to acquire substantially all of
the assets of Verbex. The Verbex transaction was consummated on February 18,
1999. Since that time, Voxware has been focusing its efforts on Verbex's
business of developing and selling speech recognition products for the
warehousing and manufacturing markets as well as other industrial markets.

     Verbex historically generated revenues primarily from product sales,
licenses and development services. Verbex product sales consist of: portable
devices used for mobile industrial speech-recognition applications (Verbex's MVP
product line); stationary speech-recognition devices, primarily used for
warehouse receiving and package sorting applications; and accessories that
complemented its product offerings, including microphones, headsets and computer
hardware. Verbex also licensed its VCORE speech recognition software application
for use in embedded applications, and provided maintenance services to
customers, generally under one- to three-year agreements. Development services
consist of providing technical resources and assistance to customer-specific
development efforts, which include porting Verbex's technology to specific
customer platforms. Revenues from product sales are generally recognized when
products are shipped.

     Prior to its acquisition of Verbex, Voxware generated revenues relating to
its speech and audio coding business from two sources: fees from software
product licenses and fees for services provided. Voxware's speech and audio
coding product revenues consist of two components: software license fees, and
royalties and recurring revenues. Voxware licensed its products primarily to
software and hardware companies which incorporated Voxware's products and
technologies into their products. Arrangements with customers, which were
negotiated on a case-by-case basis, included one or more of the following:
initial license fees, quarterly license fees, annual license fees or royalties
based on the licensee's revenue generated or units shipped of products
incorporating Voxware's technologies. As a result, the timing and amount of our
revenues were substantially dependent on the timing and efforts of our licensees
in developing and marketing products incorporating our products and
technologies. Software product revenues are generally recognized upon shipment,
provided that there are no significant post-delivery obligations, persuasive
evidence of an arrangement exists, pricing is fixed or determinable, the payment
is due within one year and collection of the resulting receivable is deemed
probable. If an acceptance period is required, revenues are recognized upon
customer acceptance. Royalty revenues are recognized in the period of customer
shipment. Service revenues consist of customer maintenance support and
engineering fees. Customer maintenance support revenues are recognized over the
term of the support period, which typically lasts for one year. Engineering fees
are generally recognized upon customer acceptance or upon delivery if customer
acceptance is not required. All research and development costs are expensed as
incurred.

     The sale to Ascend did not include Voxware's rights and obligations under
its existing license agreements. We will continue to have revenue from existing
licensees of our speech coding technology in the multimedia and consumer devices
markets after the sale to Ascend, in the form of periodic license renewal fees,
royalties and service fees. With the consent of Ascend, we may also license our
speech coding technologies after the sale for uses that are not competitive with
Ascend. Although we do not have any agreements or arrangements with Ascend
relating to any general or specific guidelines for obtaining Ascend's consent,
we believe that Ascend will consent to our licensing the speech coding
technologies in the multimedia and consumer devices markets. We do not believe
that we will have any revenues from new licensees in the Internet Protocol
("IP") telephony market. Our revenue from licensing speech coding technologies
and audio compression technologies has been decreasing over the last two years.
Therefore, we expect that, even if Ascend is willing to give its consent, our
new licensing activity relating to the speech coding technologies will decrease
significantly after the sale to Ascend. Further, over time, as we focus on

                                       13
<PAGE>

the Verbex business, we expect that revenues from licenses of speech coding
technologies will become a less significant part of our revenues.

     The majority of our existing licensees of our speech compression products
compete in the multimedia Internet software market, which is a relatively new
market, and many of the companies compete against much more established
companies and/or have businesses that are relatively immature. We believe that a
significant number of our licensees which compete in this market have not
incorporated, and may never incorporate, Voxware's technologies into their
products. Therefore, we may never derive royalties or other recurring revenues
from many of our existing license agreements in the multimedia Internet software
market. With respect to Internet Protocol ("IP") telephony, deployments in that
market have primarily utilized standardized codec technologies (and not
Voxware's proprietary codec technologies). In addition, deployments in IP
telephony have been characterized by bandwidth-rich managed networks
(Intranets), which networks generally do not benefit significantly from low
bandwidth solutions such as Voxware's technologies. As a result of these
factors, demand for Voxware's technologies in the IP telephony market has not
been significant. In connection with the sale to Ascend, have discontinued our
activities in the IP telephony market.

     Based on our assessment regarding the multimedia Internet software and IP
telephony markets, in fiscal 1998 we shifted our business and marketing emphasis
to OEM customers in the electronic devices market.

     Voxware has only a limited operating history upon which an evaluation of
Voxware and its prospects can be based. Since its inception, Voxware has
incurred significant losses and, as of June 30, 1999, Voxware had an accumulated
deficit of $20,303,000. In at least the near term quarters, we expect to incur
net losses as we pursue a new line of business. The recent sale of our existing
business to Ascend and recent acquisition of the speech recognition systems
business of Verbex makes the prediction of future results of operations
impossible. Therefore, Voxware's historical revenues should not be taken as
indicative of future revenues. In addition, Voxware's operating results may
fluctuate significantly in the future as a result of a variety of factors,
including, but not limited to, the entrance into a new line of business, the
budgeting cycles of potential customers, the volume of, and revenues derived
from sales of products by our licensees that incorporate our products, the rate
of new licensing activity, as well as the termination of existing license
agreements, the introduction of new products or services by the Voxware or its
competitors, pricing changes in the industry, the degree of success of Voxware's
efforts to penetrate its target markets, technical difficulties with respect to
the use of products developed by Voxware or its licensees, the level of usage of
the Internet, and general economic conditions.

Results of Operations

Fiscal 1999 Versus Fiscal 1998

Revenues

     Voxware recorded revenues of $2,886,000 for the year ended June 30, 1999
compared to revenues of $5,882,000 for the year ended June 30, 1998. The
$2,996,000 total decrease in revenues reflects decreases in the amounts of
license fees, royalties and recurring revenues and service revenues from our
speech compression technology products, partially offset by an increase in
industrial speech recognition product sales.

     During the year ended June 30, 1998, Voxware derived approximately
$4,437,000 (75% of total revenues) from multimedia customers versus
approximately $974,000 (34% of total revenues) for the year ended June 30, 1999.
The $3,463,000 decrease in multimedia revenues reflects the deterioration of the
multimedia Internet software market for Voxware's speech compression products, a
shift in Voxware's focus away from the speech compression business and toward
Verbex's industrial speech recognition products business after Voxware's
acquisition of Verbex in February 1999, and also reflects that revenues earned
from major customers during the fiscal year ended June 30, 1998 were not
repeated or replaced during the year ended June 30, 1999. In particular, the
amendment and termination of Voxware's agreement with Netscape, under which
Voxware derived $1,250,000 (21% of total revenues) in revenues during the fiscal
year ended June 30, 1998 and none during the fiscal year ended June 30, 1999,
accounts for a significant portion of the reduction in Voxware's revenues. We
are not currently receiving any revenue from Netscape and we do not anticipate
receiving any revenues from Netscape in the future.

     During the fiscal year ended June 30, 1999, Voxware recognized $809,000 of
revenue from the sale of speech recognition products, all of which was recorded
after our acquisition of substantially all of the assets of Verbex in February
1999. These revenues represent Voxware's

                                       14
<PAGE>

first revenues recognized from the sale of Verbex products. We expect that over
time, sales of speech recognition products will comprise the most significant
portion of our revenue.

     Total product revenues decreased $2,846,000 from $4,853,000 in the fiscal
year ended June 30, 1998 to $2,007,000 in the fiscal year ended June 30, 1999.
The decrease in product revenues reflects a decrease in the amount of license
fees recognized during the fiscal year ended June 30, 1999 compared to the
amount of license fees recognized during the fiscal year ended June 30, 1998,
and a decrease in the amount of royalties and recurring revenues recognized
during the period from customers who licensed the Company's products in previous
periods. These decreases were partially offset by $809,000 in product sales
attributable to speech recognition products. We believe that the factors
discussed in the "Overview" above were primarily responsible for the overall
decrease in product revenues. For the fiscal years ended June 30, 1999 and 1998,
39% and none of the Company's product revenues were attributable to product
sales, respectively, 35% and 60% were attributable to license fees,
respectively, and 25% and 40% were attributable to royalties and recurring
revenues, respectively.

     Service revenues were primarily attributable to customer maintenance
support and fees for engineering services. For the fiscal year ended June 30,
1999, service revenues totaled $879,000, reflecting a decrease of $150,000 from
service revenues of $1,029,000 for the fiscal year ended June 30, 1998. The
decrease in service revenues is primarily attributable to (i) a decline in
customer maintenance support revenues because we had a much smaller portfolio of
customers to which we provided maintenance support services during the fiscal
year ended June 30, 1999 than we did for the fiscal year ended June 30, 1998,
and (ii) a decline in development services revenues because of our shift in
focus away from the custom development facet of the speech compression business
to the operation of Verbex's business. Service revenues for the fiscal year
ended June 30, 1999 includes $273,000 earned pursuant to a services agreement
between Voxware and Ascend, under which ten of Voxware's engineers performed
services for Ascend at various times from February 4, 1999 through June 24,
1999. All ten of those employees became employees of Ascend on June 24, 1999.


     Cost of Revenues

     Cost of revenues increased $388,000 from $583,000 for the fiscal year ended
June 30, 1998 to $971,000 for the fiscal year ended June 30, 1999. The increase
in cost of revenues reflects increases in cost of product revenues and cost of
services revenues.

     Cost of product revenues increased $287,000 from $142,000 in the fiscal
year ended June 30, 1998 to $429,000 in the fiscal year ended June 30, 1999,
reflecting materials, labor and overhead costs associated with hardware products
related to the Verbex business. Such costs accounted for the majority of cost of
products revenues in fiscal 1999. As of June 30, 1999, Voxware had a
manufacturing staff of four compared to none at June 30, 1998. In fiscal 1998,
cost of products revenues represented costs related to our speech compression
software licensing business, for which revenues declined significantly in fiscal
1999. Since the industrial speech recognition hardware products business is a
lower gross margin business than software licensing, cost of products revenues
increased as a percentage of product revenues in fiscal 1999.

     Cost of services revenues consists primarily of the expenses associated
with customer maintenance support and engineering services, including employee
compensation and equipment depreciation. Cost of service revenues increased
$101,000 from $441,000 in the fiscal year ended June 30, 1998 to $542,000 in the
fiscal year ended June 30, 1999. The increase in cost of service revenues is
primarily attributable to Voxware's services agreement with Ascend. Under this
agreement, ten of Voxware's engineers performed services for Ascend at various
times from February 4, 1999 through June 24, 1999. For these services, Voxware
earned services fees which were based upon those employees' salaries, and
provided Voxware lower gross margins than the gross margins on other services
fees. As a result, cost of service revenues increased as a percentage of
revenues during fiscal 1999 as compared to fiscal 1998.


     Operating Expenses

     Total operating expenses decreased by $4,297,000 (39%) from $11,037,000 in
the fiscal year ended June 30, 1998 to $6,740,000 in the fiscal year ended June
30, 1999. The decrease primarily reflects headcount reductions in each of
research and development, sales and marketing and administration, and other cost
reductions associated with

                                       15
<PAGE>

the restructuring of Voxware's business focus over the past several quarters
prior to the Ascend and Verbex transactions. As of June 30, 1999, our headcount
totaled 31, compared to total headcount of 46 as of June 30, 1998.

     Research and development expenses primarily consist of employee
compensation and equipment depreciation and lease expenditures related to
product research and development. Research and development expenses decreased
$2,668,000 (56%) from $4,726,000 in the fiscal year ended June 30, 1998 to
$2,058,000 in the fiscal year ended June 30, 1999. As of June 30, 1999, we had a
research and development staff of 11 compared to 24 at June 30, 1998.

     Sales and marketing expenses primarily consist of employee compensation
(including sales commissions), travel expenses and trade shows. Sales and
marketing expenses decreased $1,331,000 (35%) from $3,844,000 in the fiscal year
ended June 30, 1998 to $2,513,000 in the fiscal year ended June 30, 1999. As of
June 30, 1999, Voxware had a sales and marketing staff of 9 compared to 12 at
June 30, 1998.

     General and administrative expenses consist primarily of employee
compensation and fees for insurance, rent, office expenses and professional
services. General and administrative expenses decreased $776,000 (31%) from
$2,467,000 in the fiscal year ended June 30, 1998 to $1,691,000 in the fiscal
year ended June 30, 1999. The decrease in general and administrative expenses
was primarily realized through reductions in personnel, recruitment and general
cost savings achieved through expense management. As of June 30, 1999, Voxware
had a general and administrative staff of 7 compared to 10 at June 30, 1998.

     Amortization of purchased intangibles totaled $478,000 for the fiscal year
ended June 30, 1999. These intangibles related to the acquisition of Verbex in
February 1999. The total amount of intangibles capitalized from the Verbex
acquisition approximated $5,158,000, and those intangibles are being amortized
over four years.


     Interest Income

     Interest income decreased $305,000 to $539,000 for the fiscal year ended
June 30, 1999 from $844,000 for the fiscal year ended June 30, 1998. The
decrease is primarily related to the decrease in Voxware's total cash, cash
equivalents and short-term investments portfolio balance as a result of cash
used for operations and the acquisition of substantially all of the assets of
Verbex for approximately $5,200,000 plus transaction costs in February 1999. As
of June 30, 1999, Voxware's cash, cash equivalents and short-term investments
portfolio totaled $4,446,000 compared to $13,537,000 at June 30, 1998.


     Income Taxes

     As of June 30, 1999, we had approximately $18,000,000 of federal net
operating loss carryforwards which will begin to expire in 2009 if not utilized.
As of June 30, 1999, we have provided a full valuation allowance on the net
deferred tax asset because of the uncertainty regarding realization of the
deferred asset, primarily as a result of considering such factors as our limited
operating history, the volatility of the market in which we compete, the
operating losses incurred to date and the operating losses anticipated in future
periods.

     In addition, during 1999, the State of New Jersey passed legislation which
allows New Jersey technology companies to apply for the transfer or sale of
unused New Jersey state net operating losses and research and development tax
credits for cash. Profitable companies can buy these losses and credits at a
discount, thereby reducing their state tax obligation. Voxware applied to the
State of New Jersey to sell up to approximately $14,900,000 of its New Jersey
State net operating losses which, if approved, could provide Voxware up to
approximately $1,000,000 cash. In addition, we have entered into an agreement
with a broker who specializes in identifying buyers of New Jersey net operating
losses and tax credits. We are currently awaiting a determination from the State
of New Jersey to determine what amount, if any, of Voxware's State of New Jersey
net operating losses qualify to be sold. We cannot assure you that these net
operating losses will qualify to be sold or, if they qualify to be sold, that
Voxware will be able to identify a buyer for these net operating losses.

                                       16
<PAGE>

Fiscal 1998 Versus Fiscal 1997

 Revenues

  We recognized revenues of $5,882,000 for the year ended June 30, 1998
compared to revenues of $7,779,000 for the year ended June 30, 1997. The
decrease in total revenues is primarily attributable to our change in strategic
focus from primarily targeting the multimedia software market in fiscal 1997 to
primarily targeting the consumer devices and wireless communications markets in
the latter half of fiscal 1998. The consumer devices and wireless communications
markets are characterized by longer selling cycles than the multimedia software
market, which impacted our revenues during fiscal 1998.

  For the year ended June 30, 1998, total revenues included $1,250,000 (21% of
total revenues) from our largest customer, Netscape. Netscape discontinued
certain of its products during fiscal 1998, including products which would
incorporate our technologies, and consequently Voxware and Netscape entered
into a second amendment of their software license agreement which terminated
Netscape's rights pursuant to their software license agreement. License fee
revenues for fiscal 1998 include a final payment of $400,000 from Netscape
pursuant to this amendment. In addition, one other company accounted for 15% of
total revenues for the year ended June 30, 1998. We are not currently receiving
any revenues from Netscape, and we do not anticipate receiving any revenues
from Netscape in the future.

  At June 30, 1998 Netscape was not a stockholder in Voxware. At June 30, 1997
Netscape was a 4% stockholder in Voxware. For the year ended June 30, 1997,
total revenues included $1,250,000 (16% of total revenues) from Netscape. In
addition, two other customers each accounted for 15% of revenues for the year
ended June 30, 1997.

 Product Revenues

  Product revenues totaled $4,853,000 and accounted for 83% of total revenues
for the year ended June 30, 1998 compared to $7,428,000, which accounted for
95% of total revenues, for the year ended June 30, 1997. Additionally, the
decrease in product revenues as a percentage of total revenues from fiscal 1997
to fiscal 1998 is also attributable to our strategy of providing customized
products to customers in the consumer devices and wireless communications
markets. This entails performing a higher level of engineering services for
customers than did our previous business strategy. As a result, we derived a
greater portion of our revenues from providing services to customers in fiscal
1998 than in fiscal 1997.

  In fiscal 1998, product revenues consisted of $2,935,000 in license fees (60%
of product revenues) and $1,918,000 in royalties and recurring revenues (40% of
product revenues). In fiscal 1997, product revenues consisted of $5,432,000 in
initial license fees (73% of product revenues) and $1,996,000 in royalties and
recurring license fees (27% of product revenues).

  For the year ended June 30, 1998, product revenues included a total of
$1,250,000 (26% of total product revenues) from our largest customer, Netscape.
As detailed above, this amount was comprised of $400,000 in license fees and
$850,000 in royalties and recurring revenues. License fee revenues for fiscal
1998 include a final payment of $400,000 from Netscape pursuant to this
amendment. For the year ended June 30, 1997, Netscape accounted for
approximately $1,250,000 of royalties and recurring revenues (17% of total
product revenues).


                                      17
<PAGE>


  Included in product revenues for the year ended June 30, 1997 is $480,000 in
fees earned by Voxware for product development efforts.

 Service Revenues

  Service revenues consist of customer support and engineering fees. Customer
support services include providing updates and technical support to licensees
of our products. Engineering services include providing technical resources and
technical assistance to support customer-specific development efforts, which
include porting our technologies to specific hardware platforms and providing
customized speech and audio solutions to customers.

  During the year ended June 30, 1998, we recognized $1,029,000 in service
revenues (17% of total revenues), compared to service revenues of $351,000 (5%
of total revenues) for the year ended June 30, 1997. This increase in service
revenues was primarily attributable to increases in engineering fees earned
from porting technologies to customers' specific hardware platforms and in
providing customized speech and audio solutions to customers. The increase in
service revenues as a percentage of total revenues from fiscal 1997 to fiscal
1998 is attributable to the decrease in non-service revenues in fiscal 1998
caused largely by our revised strategy which focused on the consumer devices and
wireless communications markets.

 Cost of Revenues

  Cost of product revenues consists primarily of costs of licensed technology.
Cost of product revenues totaled $142,000 or 3% of product revenues for the
year ended June 30, 1998 compared to $178,000 or 2% of product revenues for the
year ended June 30, 1997. The decrease in cost of product revenues is directly
attributable to the decrease in product revenues recognized during those
periods.

  Cost of service revenues consists primarily of the expenses associated with
the staffing of a customer support group and providing engineering services,
which consist primarily of employee compensation and equipment depreciation.
Cost of service revenues totaled $441,000 or 43% of service revenues for the
year ended June 30, 1998 compared to $164,000 or 47% of service revenues for
the year ended June 30, 1997. The absolute dollar increase in cost of services
is directly attributable to the increase in service revenues during those
periods, which includes a significant increase in non-recurring engineering
fees in fiscal 1998 compared to fiscal 1997.

 Operating Expenses

  Total operating expenses decreased $3,981,000 (27%) from $15,018,000 in
fiscal 1997 to $11,037,000 in fiscal 1998. This decrease in total operating
expenses primarily reflects headcount reductions in application development and
support and other cost reductions associated with the strategic restructuring
of our business focus. A significant number of our personnel were engaged in
researching, marketing and selling products in the consumer application
software market during fiscal 1997. During fiscal 1998, we restructured our
business away from consumer application software and toward an OEM model
primarily targeting the consumer devices and wireless communications markets,
which requires fewer personnel (including employees and independent
contractors) than the consumer application software business focus in fiscal
1997.


                                       18
<PAGE>


  Under the consumer application software model, Voxware pursued a direct sales
and marketing model, which required Voxware to generate revenues by marketing
and selling directly to independent software vendors, most of which were in the
multimedia software market. On the research and development side, Voxware
invested a significant amount of resources in developing a variety of
applications incorporating Voxware's speech compression technologies. From a
sales perspective, under the consumer application model Voxware had an
international sales force that called directly on independent software vendors,
a technical support team that supported the direct sales force, and an inside
sales and customer support team to answer end users' questions about Voxware's
applications. In addition, Voxware invested considerable resources in
developing marketing communications programs and materials for end users, and
attending trade shows.

  In contrast, Voxware's OEM model in the consumer devices and wireless
communications market was an indirect model whereby Voxware's objective was to
target manufacturers of retail products who market and sell products
incorporating Voxware's technologies and pay Voxware royalties on sales to end
users. This indirect model required a significantly lower cost and headcount
structure than the consumer application software direct sales model, primarily
because it relied on licensing core technologies that are customized for the
respective licensee's platforms, rather than the development and marketing of
products and applications to end users. Under an OEM model, the objective is to
license technology to customers who will then commit the development, marketing
and sales resources necessary to distribute Voxware's technologies through
sales of the customer's product. As a result, the size of Voxware's
development, sales and marketing teams were all significantly reduced in
comparison to those under the consumer application model. As of June 30, 1998,
our resources were primarily dedicated to an OEM model targeting the consumer
devices and wireless communications markets. As of June 30, 1998, our headcount
totaled 46, compared to 91 as of June 30, 1997. In connection with the decrease
in headcount, in July 1998 we entered into a Sublease Agreement under which we
subleased approximately 47% of the space in our Princeton office facility. The
initial term of that Sublease Agreement will expire on May 31, 2003.

  In comparing fiscal 1998 to fiscal 1997, the overall decrease in total
operating expenses was comprised of a $3,070,000 (39%) decrease in research and
development expenses, a $174,000 (4%) decrease in sales and marketing expenses
and a $737,000 (23%) decrease in general and administrative expenses. During
fiscal 1998, we decreased accrued expenses approximately $465,000 through
reducing operating expenses by the same amount. This amount related to
estimates accrued in previous periods for certain liabilities and contingencies
which are no longer deemed necessary. The accrued expenses decrease during
fiscal 1998 related to (1) a legal contingency reserve of $300,000, which was
included in general and administrative, (2) software costs totaling $110,000,
of which $14,000 was included in research and development, $82,000 was included
in sales and marketing and $14,000 was included in general and administrative
and (3) officer bonus accruals of $55,000, which were included in general and
administrative. In total, as a result of these reversals of liabilities accrued
in prior periods, fiscal 1998 operating expenses were reduced by the following
amounts and in their respective line items of the statement of operations:
research and development was reduced by $14,000, sales and marketing was
reduced by $82,000 and general and administrative was reduced by $369,000.

  The legal contingency reserve relates to a loss contingency accrual of
$250,000 and estimated legal costs of $50,000 accrued during the quarter ended
September 30, 1996 in accordance with SFAS #5 "Accounting for Contingencies."
As noted under the heading "Uncertainty Regarding Patents and Proprietary
Rights" on page 9 of the Company's Form S-1, which became effective October 30,
1996, Elk Industries, Inc. asserted in two letters to Voxware during the
quarter ended September 30, 1996 that Voxware's "Internet-based streaming audio
systems" infringe U.S. Patent No. 4,124,773 owned by Elk Industries. At that
time, we were engaged in marketing to vendors of Internet-based streaming
applications, including our major customer, Netscape. During the quarter ended
September 30, 1996, we accrued the amounts noted above in accordance with our
policy of accruing the probable estimated loss from legal claims upon receiving
notice of the claims. The amount of this accrual represented an estimate of
what we believed would be the minimum amount necessary to settle the claim of
Elk Industries. During the quarter ended December 31, 1997, we re-evaluated the
risk and considered that, among other things, (1) approximately one year had
passed without receiving any additional letters or other communications in
regard to this issue, and (2) we no longer viewed our sales opportunity in the
Internet-based streaming applications market to be substantial. As a result, we
determined that the risk of loss under this contingency was now deemed minimal
and reversed the accrual against the general and administrative line item of
the statement of operations.


                                       19
<PAGE>


  The software costs accrual relates to an accrual for a software purchase that
was intended to provide a company-wide solution, primarily for contract and
account management for sales and marketing purposes, and also for product
quality assurance and financial purposes. In January 1997, we signed a software
license agreement with a vendor for an approximate value of $110,000.
Subsequent to signing the agreement, we became aware that the software package
did not have the capabilities to meet our requirements. We returned the
software to the vendor, but recorded an accrual on the books until it appeared
probable that the vendor would not enforce the contract and pursue legal action
against us. During the quarter ended March 31, 1998, after approximately one
year had passed since we returned the software to the vendor, and since we had
not been notified by the vendor of any claim, we determined that the accrual
was unnecessary and reversed the accrual to the respective line items of the
statement of operations.

  The officer bonus accrual was originally recorded as of June 30, 1997 as an
estimated bonus, including payroll taxes, for the year then ended for our then
President and Chief Executive Officer, Michael Goldstein. In fiscal 1998,
approximately up until Mr. Goldstein's resignation in October 1997, our Board
of Directors considered whether to pay Mr. Goldstein any bonus for the year
ended June 30, 1997. In fiscal 1998, after Mr. Goldstein resigned and we
decided not to pay him any bonus for the year ended June 30, 1997, we reversed
this accrual to the general and administrative line item in the statement of
operations.

  Research and development expenses primarily consist of employee compensation
and equipment depreciation and lease expenditures related to product research
and development. Research and development expenses decreased $3,070,000 from
$7,796,000 in fiscal 1997 to $4,726,000 in fiscal 1998. This decrease in
research and development expenses primarily resulted from restructuring our
business focus away from consumer application software and toward an OEM model,
which requires fewer personnel (including employees and independent contractors)
than a consumer application software business model. As of June 30, 1998, we had
a research and development staff of 24 compared to 49 at June 30, 1997.

  Sales and marketing expenses primarily consist of employee compensation
(including direct sales commissions), travel expenses, trade shows and costs of
promotional materials. Sales and marketing expenses decreased $174,000 from
$4,018,000 in fiscal 1997 to $3,844,000 in fiscal 1998. This decrease in sales
and marketing expenses was primarily due to the restructuring of our focus to
an OEM model, which requires less promotion and marketing than the previous
consumer application software business model, as well as a decrease in the size
of our sales force and marketing staff from 24 at June 30, 1997 to 12 at June
30, 1998. The decreases realized from the business model transition were
partially offset by increases in expenses related to our sales offices in
Europe and Asia which were opened during the fourth quarter of fiscal 1997, and
expenses incurred in connection with the formation of a product management and
marketing function for the purpose of employing an OEM business model in its
target markets.

  General and administrative expenses consist primarily of employee
compensation and fees for insurance, rent, office expenses and professional
services. General and administrative expenses decreased $737,000 from
$3,204,000 in fiscal 1997 to $2,467,000 in fiscal 1998. The decrease in general
and administrative expenses was primarily realized through reductions in
personnel, recruitment and general cost savings achieved through expense
management. As of June 30, 1998, we had a general and administrative staff of
10 compared to 18 at June 30, 1997.

 Interest Income

  Interest income increased $122,000 from $722,000 in fiscal 1997 to $844,000
in fiscal 1998. This increase in interest income primarily relates to the
timing of our initial public offering, which closed during November and
December 1996. As the initial public offering occurred approximately four
months after the start of fiscal 1997, we earned approximately eight months'
interest income on the remaining net proceeds from the initial public offering
during fiscal 1997, as compared to a full year's interest income earned on the
remaining net proceeds from the initial public offering during fiscal 1998.


                                       20
<PAGE>

 Income Taxes

  As of June 30, 1998, we had approximately $14,000,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income; these such carryforwards begin to expire in 2009.

  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. As of June 30, 1998, we had
deferred tax assets of approximately $6,100,000 relating primarily to net
operating loss carryforwards. The net deferred tax asset has been fully offset
by a valuation allowance.

Liquidity and Capital Resources

     As of June 30, 1999, we had a total of $4,446,000 in cash, cash equivalents
and short-term investments consisting of $2,438,000 of cash and cash equivalents
and $2,008,000 in short-term investments. In September 1999, we received
$4,146,000 upon the closing of the Ascend transaction and $750,000 was placed in
escrow for a period of 18 months to secure our indemnification obligations.
Voxware also received a deposit of $204,000 from Ascend in January 1999 which
was restricted until the closing of the transaction, and is included in
restricted cash-current in the June 30, 1999 balance sheet. Our cash, cash
equivalents and short-term investments portfolio is liquid and investment grade,
consisting of high-grade money-market funds, United States Government-backed
securities and commercial paper and corporate obligations. Since inception, we
have primarily financed its operations through the sale of equity securities.

     Cash of $6,564,000, $4,218,000 and $3,617,000 was used to fund operations
for the years ended June 30, 1997, 1998 and 1999, respectively. Cash used for
investing activities totaled $6,021,000 in fiscal 1997, which was related to
equipment purchases and the purchase of short-term investments. Cash provided by
investing activities totaled $1,393,000 in fiscal 1998 due to the liquidation of
short-term investments, offset by equipment purchase. In fiscal 1999, cash used
in investing activities totaled $3,174,000, reflecting Voxware's purchase of
Verbex Voice Systems, Inc. and equipment purchases, offset by liquidations of
short-term investments.

     For the years ended June 30, 1997, 1998 and 1999, cash provided by
financing activities totaled $19,375,000, $1,347,000 and $80,000 respectively.
In fiscal 1997, $19,375,000 of cash was provided by financing activities,
reflecting $18,517,000 in net proceeds from the initial public offering,
$763,000 in proceeds from the exercise of common stock warrants and options and
$95,000 from the issuance of common stock pursuant to the Employee Stock
Purchase Plan. In fiscal 1998, $1,347,000 of cash was provided by financing
activities, reflecting $1,158,000 in proceeds from the exercise of common stock
options and $189,000 from the issuance of common stock pursuant to the Employee
Stock Purchase Plan. In fiscal 1999, $80,000 was provided by financing
activities, reflecting $19,000 in proceeds from the exercise of common stock
options and $61,000 from the issuance of common stock pursuant to the Employee
Stock Purchase Plan.

     We have a $2,000,000 revolving line of credit with Silicon Valley Bank.
Borrowings under the credit facility bear interest at the bank's prime lending
rate. As amended on February 1, 1999, the credit facility requires Voxware to
secure all indebtedness with cash held at the bank's offices in an amount not
less that 100% of the outstanding amount of all indebtedness to the bank. The
credit facility requires payment of all outstanding principal, if any, plus all
accrued interest on March 30, 2000. In connection with the lease of our office
facility, we have outstanding a $300,000 standby letter of credit at June 30,
1999 naming the lessor of the office facility beneficiary of the standby letter
of credit in the event that we default on the lease. As required by the credit
facility, we have secured the $300,000 standby letter of credit with cash that
is included in "other assets, net" in the June 30, 1999 balance sheet. In
addition to the credit facility, the agreement with Silicon Valley Bank provides
a lease component in the amount of $1,500,000 for the purpose of providing a
facility for the financing of the lease payments that we owe to an equipment
lessor, of which none was outstanding as of June 30, 1999.

     We have no material commitments for capital expenditures except for those
under operating leases for our facilities and leased equipment. At June 30,
1999, our working capital totaled approximately $4,446,000. We

                                       21
<PAGE>

believe that our current cash, cash equivalents and short-term investments
balances, together with the approximately $4,146,000 in cash received upon the
closing of the Ascend transaction on September 21, 1999, will be sufficient to
fund our working capital and capital expenditures requirements, exclusive of
cash required for possible acquisitions of, or investments in businesses,
products and technologies until at least June 30, 2000.

     Year 2000 Compliance

     The efficient operation of Voxware's business is dependent in part on
computer software programs and operating systems which it uses internally
(collectively, the "Internal Programs and Systems"). Voxware's Internal Programs
and Systems consist of our accounting system, inventory system, payroll system,
electronic mail system, telephone and PBX systems, and UNIX and Microsoft
Windows NT servers. All of these systems are based in-house, with the exception
of the payroll system, which is based at the vendor's facility.

     We have been evaluating our Internal Programs and Systems to identify
potential Year 2000 compliance problems. We have primarily conducted these
evaluations and assessments using Voxware's information technology personnel,
including coordinating evaluations and assessments with the respective vendors
of these computer software programs and operating systems. These actions are
necessary to ensure that the Internal Programs and Systems will be Year 2000
compliant. Based on present information, we believe that we will be able to
achieve Year 2000 compliance through a combination of modification of some
existing Internal Programs and Systems and the replacement of other Internal
Programs and Systems with new programs and systems that are already Year 2000
compliant.

     We have recently completed the upgrade of our inventory system to one that
is Year 2000 compliant at a cost of approximately $10,000, which was paid for by
Verbex prior to the acquisition of Verbex. Voxware did not have, and had no need
for an inventory system until the acquisition of Verbex.

     We have been informed by ADP, our outside payroll processor, that our
payroll system is Year 2000 compliant.

     We have been informed by the vendor of our e-mail system that the system is
Year 2000 compliant. We are conducting our own internal assessment of the e-mail
system and we expect that assessment to be completed by the third calendar
quarter of 1999. We believe that, to the extent that e-mail system is not Year
2000 compliant, we can receive an upgrade from the vendor or replace the system
on a timely basis at no cost or at minimal cost.

     Our telephone and PBX systems have been upgraded to be Year 2000 compliant.

     We have no reason to believe that UNIX and Microsoft Windows NT servers are
not Year 2000 compliant or, to the extent that they are not compliant, that the
vendors will not make appropriate upgrades available to all of their customers
at no cost or at minimal cost.

     In addition to our Internal Programs and Systems, the products we sell and
license externally to customers (collectively, the "External Programs"), have
been assessed for Year 2000 compliance. With respect to the speech compression
technologies and products historically sold by Voxware, we are not aware of any
Year 2000 issues. Verbex had assessed its products, the MVP, Speech Commander
and our stationary boards. Verbex concluded that it could be advisable for the
users of those products to take precautions to mitigate possible Year 2000
issues, such as not operating the product during the period of time when the
calendar changes from December 31, 1999 to January 1, 2000. We have hired the
director of engineering at Verbex in connection with the Verbex acquisition and
we have commenced our own review of the Year 2000 compliance of Voxware's
External Programs. While Voxware is not yet aware of any Year 2000 issues with
our External Programs that are expected to have a material financial impact on
Voxware as a result of our assessments to date, we continue to assess our
External Programs. Should we identify any material Year 2000 problems, we are
currently setting up a process that will enable us to contact our customers
promptly so that we can provide instructions to mitigate or avert Year 2000
issues related to the External Programs. We cannot assure you however, that in
the event that we encounter Year 2000 issues, we will be able to provide
adequate instructions, or that our instructions will mitigate or avert Year 2000
issues related to our External Programs. We may need to recall products and
undertake to modify, upgrade or replace the products. Any such undertaking could
be expensive and could have a material adverse effect on Voxware and its
financial condition.

     To date, costs incurred in evaluating our Internal Programs and Systems and
External Progrmas have not been material. Anticipated costs necessary to
complete evaluations of our Internal Programs and Systems and complete
modifications and/or replacements are not expected to be material. We expect
that the total cost of these efforts and

                                       22
<PAGE>

upgrades should not exceed $50,000, including the cost of the upgraded inventory
system described above. Voxware further estimates that less than than $20,000 of
internal labor costs have been incurred to date for personnel working to resolve
Year 2000 issues. We cannot assure you that our efforts and the efforts of our
vendors will be successful in making all of our systems and products Year 2000
compliant or that the cost and time required to achieve Year 2000 compliance
will not exceed our current estimates. As a result, and due to uncertainty of
the potential impact that Year 2000 issues may have on Voxware, there can be no
assurance that Year 2000 issues will not have a material impact on our future
results of operations or financial condition.

     Voxware expects to identify and resolve all Year 2000 problems that could
materially adversely affect its business operations. However, Voxware believes
that it is not possible to determine with complete certainty that all Year 2000
problems affecting Voxware or its customers have been identified or corrected.
The number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, no one can accurately predict how
many Year 2000-related failures will occur or the severity, duration, or
financial consequences of these perhaps inevitable failures. As a result,
Voxware believes that the following consequences are possible:

          .    a significant number of operational inconveniences and
               inefficiencies for Voxware and its customers that will divert
               management's time and attention and financial and human resources
               from ordinary business activities;

          .    a lesser number of serious system failures that will require
               significant efforts by Voxware or its customers to prevent or
               alleviate material business disruptions;

          .    several routine business disputes and claims for pricing
               adjustments or penalties due to Year 2000 problems by customers,
               which will be resolved in the ordinary course of business; and

          .    a few serious business disputes alleging that Voxware failed to
               comply with the terms of contracts or industry standards of
               performance, some of which could result in litigation or contract
               termination.

     Voxware is currently formulating contingency plans for each of its material
systems. We believe that our accounting and inventory systems are our most
important Internal Systems for which to ensure Year 2000 compliance. We believe
that the inventory system is Year 2000 compliant and that the accounting system
can be made Year 2000 compliant or replaced at a reasonable cost as set forth
above. We will continue to work closely with the vendors of these systems to
assure Year 2000 compliance.


Recent Accounting Pronouncements

     See Note 1 in "Notes to Financial Statements" for recent accounting
pronouncements.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     We do not engage in significant activity with respect to market risk
sensitive instruments. Accordingly, our risk with respect to market risk
sensitive instruments is immaterial.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The financial statements required by this Item are included in this Report
on Form 10-K beginning on page F-1.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

     None.

                                       23
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS OF THE COMPANY

The directors of the Company and their respective ages and principal occupations
are as follows:

<TABLE>
<CAPTION>
                   Name                     Age                   Offices with the Company
                   ----                     ---                   ------------------------
     <S>                                    <C>     <C>
     Bathsheba J. Malsheen, Ph.D. ......    48      President, Chief Executive Officer and Director
     David B. Levi (1)(2) ..............    66      Director
     Eli Porat .........................    53      Director
</TABLE>

          (1)  Member of the Compensation Committee.
          (2)  Member of the Audit Committee.

     Bathsheba J. Malsheen, Ph.D. has served as President, Chief Executive
Officer and Director of the Company since October 1997. She previously served as
Chief Operating Officer of the Company from May 1997 through October 1997, and
as Vice President of OEM Licensing since joining Voxware in October 1996 through
April 1997. From April 1990 to October 1996, Dr. Malsheen held various executive
positions with Centigram Communications Corporation, a voice messaging company,
most recently as General Manager of their Technology Business Unit and was
responsible for licensing of text-to-speech software products. Previously, she
worked for Speech Plus, Inc. where she served as Director of Speech Technology
from 1985 to 1990. Dr. Malsheen holds a Ph.D. and M.A. from Brown University and
a B.A. from Hofstra University.

     David B. Levi has served as a director of Voxware since January 1998. Mr.
Levi served as President of Natural MicroSystems Corporation, a provider of
hardware and software for developers of high-value telecommunications solutions
from June 1991 to April 1995. In November 1995 Mr. Levi became President of
Voice Processing Corp ("VPC"). VPC merged with Voice Control Systems, Inc.
("VCS"), a supplier of telecommunications based speech recognition systems, in
November 1996 and Mr. Levi served as Chief Operating Officer of VCS until his
retirement in October 1997. Prior to 1991, Mr. Levi held Chief Executive Officer
an Chief Operating Officer positions at Raytheon Data Systems (a division of
Raytheon Corp.), Centronics Data Computer Corp., and Raster Technologies Inc.
and consulted to Regional Bell Operating Companies. Mr. Levi currently serves on
the Board of Directors of PictureTel, Inc., and Microlog Corporation. Mr. Levi
holds an A.B. from Harvard College and an M.B.A. from the Harvard Graduate
School of Business Administration.

     Eli Porat has served as a director of Voxware since August 1998. Mr. Porat
has served as Chairman and CEO of Ensemble Solutions Inc., a provider of
electronic distribution through a suite of electronic business products, since
August 1997. From May 1996 to August 1997 he was a General Partner of DEFTA
Partners, a venture capital group specializing in Internet telephony
investments. From 1991 to May 1996, Mr. Porat was the President and CEO of
DSPGroup, Inc., a developer of digital signal processing cores used in a wide
range of applications such as wireless communications, telephony and personal
computers. Prior to 1991, Mr. Porat held various senior-level positions with
ZYMOS Computer Systems Inc., Sytek Inc. and Intel Corporation. He also serves on
the Board of Directors of Starfish Software, Inc., a leading supplier of core
device, server and desktop technologies for wireless and wireline Connected
Information Devices. Mr. Porat has an M.S.E.E.C.S. and a B.S.E.E.C.S. from the
University of California at Berkeley.

     Although we have a classified Board of Directors, due to recent
resignations from the Board of Directors, each of the incumbent directors agreed
to stand for re-election at Voxware's annual meeting of stockholders held on
September 21, 1999. Each of the incumbent directors was elected at the annual
meeting, and has agreed that if he or she wishes to continue to serve on the
Board of Directors, he or she will be subject to reelection at our next annual
meeting of stockholders.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) under the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than ten
percent of our Common Stock, to file initial reports of ownership and reports of
changes in ownership with the SEC. Executive officers, directors and greater
than ten percent beneficial owners are required by the SEC to furnish us with
copies of all Section 16 forms they file.

     Based upon a review of the copies of such forms furnished to us and written
representations from our executive officers and directors, we believe that the
reporting requirements of Section 16, as amended, applicable to our executive
officers, directors and greater than ten percent beneficial owners were complied
with on a timely basis, except that Juergen C.H. Lemmermann, Vice President of
Operations, failed to timely report one transaction on Form [3]. This
transaction has been subsequently reported.

                                       24
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

     The following table provides information concerning compensation paid to or
earned for the fiscal years ended June 30, 1999, 1998 and 1997 by each
individual serving as the Chief Executive Officer of Voxware during the fiscal
year ended June 30, 1999, the next two most highly compensated executive
officers who were serving as executive officers at June 30, 1999 and one person
who would have been among the four most highly compensated executive officers of
Voxware except he was not serving as an executive officer at June 30, 1999 (the
"Named Executive Officers").

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                       Long Term
                                                  Annual Compensation                 Compensation
                                     ----------------------------------------------   -------------
                                                                                       Securities
                                            Fiscal                                     Underlying        All Other
Name and Principal Position                 Period      Base Salary        Bonus         Options      Compensation (1)
---------------------------                 ------      -----------        -----      -------------   ----------------
<S>                                         <C>         <C>                <C>        <C>             <C>
Bathsheba J. Malsheen, Ph.D...............    1999       $206,700          $60,813       300,000         $    ---
   President and                              1998       $198,752          $41,875       200,000         $    ---
   Chief Executive Officer (2)                1997       $113,345          $16,000       160,000         $    ---

Nicholas Narlis...........................    1999       $150,000          $43,500       150,000         $  2,612
  Vice President, Chief Financial Officer,    1998       $133,538          $21,675        70,000         $  1,999
  Secretary and Treasurer                     1997       $106,667          $20,000        35,000         $    850

J. Gerard Aguilar.........................    1999       $126,608          $32,800           ---         $    ---
  Vice President, Research and                1998       $127,199          $16,380           ---         $  1,584
  Development (3)                             1997       $ 94,925          $30,000           ---         $    ---

Eric R. Nahm..............................    1999       $ 22,769          $  ---         80,000         $    ---
  Vice President of Sales (4)                 1998       $  ---            $  ---            ---         $    ---
                                              1997       $  ---            $  ---            ---         $    ---
</TABLE>

___________
(1)  All Other Compensation for Mr. Narlis consists of $2,219, $1,999 and $850
     in Voxware contributions to Mr. Narlis's account under our 401(k) Plan in
     fiscal 1999, 1998 and 1997, respectively, and disability insurance
     premiums, of which Voxware is not the beneficiary, totaling $393 in fiscal
     1999. All Other Compensation for Mr. Aguilar consists of life and
     disability insurance premiums, of which Voxware is not the beneficiary,
     totaling $1,584 paid on behalf of Mr. Aguilar in fiscal 1998.
(2)  Dr. Malsheen joined Voxware in October 1996, and became an executive
     officer in May 1997.
(3)  Mr. Aguilar resigned from Voxware effective June 21, 1999.
(4)  Mr. Nahm joined Voxware in February 1999 in connection with our acquisition
     of Verbex, where he had previously served as Vice President of Sales and
     Marketing, and resigned from Voxware effective August 31, 1999.

     The following table summarizes stock options granted during fiscal 1999 to
the Named Executive Officers.

                       Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                                                        Individual Grants
                               ---------------------------------------------------------------------------------------------------
                                    Number of                                                       Potential Realized Value at
                                    Securities                                                      Assumed Annual Rate of Stock
                                    Underlying    Percentage of                                        Price Appreciation for
                                                                                                       ----------------------
                                     Options      Total Options                                           Option Term (3)
                                                                                                          ---------------
Name                               Granted (1)     Granted (2)    Exercise Price  Expiration Date          5%            10%
----                               -----------    -------------   --------------  ---------------         ---            ---
<S>                            <C>                <C>             <C>             <C>               <C>                <C>
Bathsheba J. Malsheen, Ph.D....      300,000           24.1%         $1.56           08/13/08          $294,323        $745,871
Nicholas Narlis................      150,000           12.0%         $1.56           08/13/08          $147,161        $372,936
J. Gerard Aguilar (4) .........           --            --              --                 --                --              --
Eric R. Nahm (5)...............       80,000            6.4%         $1.19           04/05/09          $ 59,770        $151,469
</TABLE>

                                       25
<PAGE>

________
(1)  These options vest over a four year period from the date of grant, becoming
     exercisable as to 25% on the first anniversary of the date of grant, and at
     6.25% per quarter thereafter.
(2)  Based on an aggregate of 1,182,500 options granted to employees in fiscal
     1999, including options granted to the Named Executive Officers.
(3)  Represents the hypothetical gains or "option spreads" that would exist for
     the options at the end of their ten year term. These gains are based on
     assumed rates of annual compound stock price appreciation of 5% and 10%
     from the date the option was granted to the end of the option term and are
     calculated based on the exercise price per share on the date of grant. Such
     5% and 10% assumed annual compound rates of stock price appreciation are
     mandated by the rules of the SEC and do not represent our estimate or
     projection of the future Voxware Common Stock price.
(4)  Mr. Aguilar resigned from Voxware effective June 21, 1999.
(5)  Mr. Nahm resigned from Voxware effective August 31, 1999.

  The following table sets forth certain information concerning the number and
value of unexercised options held by each of the Named Executive Officers on
June 30, 1999.

                         Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                                              Number of Securities Underlying           Value of Unexercised In-the-Money
                                                  Unexercised Options (#)              Options at Fiscal Year-End ($) (1)
                                       --------------------------------------------------------------------------------------
Name                                        Exercisable          Unexercisable         Exercisable         Unexercisable
----                                        -----------          -------------         -----------        --------------
<S>                                    <C>                       <C>                   <C>                <C>
Bathsheba J. Malsheen, Ph.D......              316,250              343,750               $    --             $    --
Nicholas Narlis..................              141,874              138,126               $    --             $    --
J. Gerard Aguilar (2)............                   --                   --               $    --             $    --
Eric R. Nahm (3).................                   --               80,000               $    --             $    --
</TABLE>

--------
(1)  Based on the difference between $1.031, which was the closing price per
     share on June 30, 1999, and the exercise price of the option.
(2)  Mr. Aguilar resigned from Voxware effective June 21, 1999.
(3)  Mr. Nahm resigned from Voxware effective August 31, 1999.


Employment Agreements

     Bathsheba J. Malsheen, Ph.D., President and Chief Executive Officer of
Voxware, has a three-year employment agreement with Voxware which commenced in
August 1998. Dr. Malsheen currently receives an annual base salary of $180,000
and also receives allowances for residential and vehicle lease payments.

     Nicholas Narlis, Vice President, Chief Financial Officer and Treasurer of
Voxware, has a three-year employment agreement with Voxware which commenced in
August 1998. Mr. Narlis currently receives an annual base salary of $150,000.

     Each of the foregoing employment agreements are automatically renewable for
successive one-year terms unless terminated by either party.

     Under the employment agreements for each of Dr. Malsheen and Mr. Narlis, if
either of them, respectively, is dismissed for any reason other than Cause (as
defined in their respective employment agreements), death or disability, he or
she shall be entitled to receive an amount equal to: in the case of
Dr. Malsheen, twelve months salary at her then current rate; or in the case of
Mr. Narlis, nine months salary at his then current rate.

     Each of the employment agreements grant to Voxware the rights to any
information created, discovered or developed by the executive which is related
to or useful in the business of Voxware. The employment agreements prohibit the
executive from disclosing our proprietary information and contain certain
covenants by the executive not to compete with Voxware.

                                       26
<PAGE>

Director Compensation

     Our 1998 Stock Option Plan for Non-Employee Directors was adopted by the
Board of Directors in October 1997 and approved by our stockholders in January
1998. The plan provides for the automatic grant of options to purchase shares of
our Common Stock to directors who are not officers, nor employees, nor
consultants of Voxware or any of its subsidiaries (other than the Chairman of
the Board of Directors of Voxware who shall be eligible if he or she is not
otherwise an officer, employee or consultant of Voxware). Subject to the
provisions of the plan, the Board has the power and authority to interpret the
plan, to prescribe, amend and rescind rules and regulations relating to the plan
and to make all other determinations deemed necessary or advisable for the
administration of the plan.

     Under the plan, each eligible individual receives an option to purchase
30,000 shares of our Common Stock (the "Initial Options") on the date of his or
her initial election or appointment to the Board; provided that all outside
directors elected at the 1998 Annual Meeting of Stockholders in January 1998
received the initial option whether or not they served on the Board of Directors
prior to the meeting. In addition, on the date of an eligible individual's
reelection to the Board, if he or she has attended at least seventy-five percent
(75%) of the meetings of the Board of Directors that were held while he or she
was a director in the just completed calendar year, he or she will be granted an
option to purchase an additional 10,000 shares of our Common Stock. All options
granted under the plan will have an exercise price equal to the fair market
value on the date of grant. Options granted under the plan vest in 12 equal
quarterly installments beginning at the end of the first three-month period
following the date of grant.

     In September 1997, we implemented a plan, which was approved by our
stockholders at our 1998 Annual Meeting of Stockholders, pursuant to which we
pay (or paid in 1998):

 .    on the last day of the month in which the annual meeting of stockholders is
     held in each calendar year commencing with the 1998 meeting, to each non-
     employee director elected at the meeting, an annual retainer equal to a
     number of shares of our Common Stock with a fair market value on that date
     of $10,000;

 .    on the last day of the month in which the 1998 meeting was held, to each
     person who served as a non-employee director from the time of our initial
     public offering through the date of the 1998 meeting, a retainer equal to
     the number of shares of our Common Stock with a fair market value of
     $10,000, based on the fair market value per share on September 19, 1997,
     the date the Board approved the plan; and

 .    on the last day of the month in which any newly appointed non-employee
     director is appointed after the annual meeting of stockholders in any year
     (provided that the director is appointed at least six months prior to the
     next annual meeting of stockholders), to the newly appointed director, a
     retainer equal to a number of shares of our Common Stock with a fair market
     value on that date of $10,000.

     In addition, commencing on the date of the 1998 meeting, we have paid
$1,000 to each non-employee director attending any regular or special meeting of
the Board of Directors, and $500 to each non-employee director attending any
regular or special meeting of any Committee of the Board of Directors.


          COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Since our annual meeting of stockholders on September 21, 1999, the
Compensation Committee has been composed of Messrs. David B. Levi and Eli Porat.
Prior to the annual meeting, and during fiscal 1999, the Compensation Committee
was composed of Messrs. Andrew I. Fillat and David B. Levi. No interlocking
relationship exists between any member of the Compensation Committee and any
member of the compensation committee of any other company, nor has any such
interlocking relationship existed in the past. No member or nominee of the
Compensation Committee is or was formerly an officer or an employee of Voxware.


                         COMPENSATION COMMITTEE REPORT

     The Compensation Committee of the Board of Directors advises the Chief
Executive Officer and the Board of Directors on compensation matters generally,
determines the compensation of the Chief Executive Officer and the

                                       27
<PAGE>

President, reviews and takes action on the recommendation of the Chief Executive
Officer as to the appropriate compensation of other officers and key personnel,
and approves the grants of bonuses to officers and key personnel. The
Compensation Committee also is responsible for the administration of our 1994
Stock Option Plan and 1998 Stock Option Plan for Outside Directors.

     General Compensation Policy for Executive Officers. The fundamental policy
of the Compensation Committee is to provide our executive officers with
competitive compensation opportunities based upon their contribution to our
development and financial success and their personal performance. It is the
Compensation Committee's objective to have a portion of each executive officer's
compensation contingent upon Voxware's performance as well as upon each
executive officer's own level of performance. Accordingly, the compensation
package for each executive officer is comprised of three elements: (1) base
salary which reflects individual performance and is designed primarily to be
competitive with salary levels in the industry, (2) cash bonuses which reflect
the achievement of performance objectives and goals, and (3) long-term stock-
based incentive awards which strengthen the mutuality of interests between the
executive officers and our stockholders.

     Factors. The principal factors which the Compensation Committee considered
with respect to each executive officer's compensation for fiscal 1999 are
summarized below. The Compensation Committee may, however, in its discretion
apply entirely different factors with respect to executive compensation for
future years.

          .    Base Salary. The base salary for each executive officer is
               determined on the basis of the following factors: experience,
               personal performance, the salary levels in effect for comparable
               positions within and without the industry, and internal base
               salary comparability considerations. The weight given to each of
               these factors differs from individual to individual, as the
               Compensation Committee deems appropriate. Base salaries are
               generally reviewed on an annual basis, with adjustments made in
               accordance with the factors indicated above. The Compensation
               Committee utilized specific compensation information available
               for similar positions at competitor companies for comparative
               compensation purposes in determining base salaries for fiscal
               1999.

          .    Bonus. The incentive compensation of executive officers is
               closely related to Voxware's performance, taking into account our
               change in business focus in February 1999 to Verbex's business. A
               portion of the cash compensation of executive officers consists
               of contingent compensation. Bonus awards are based on, among
               other things, performance objectives and goals that are tailored
               to the responsibilities and functions of key executives,
               including qualitative measures of Voxware's performance such as
               progress in the development, marketing and adaptation of
               Voxware's technologies to its target markets, the establishment
               of key strategic relationships with customers in our target
               markets, and proficient usage of our available resources.

          .    Long-Term Incentive Compensation. Long-term incentives are
               provided through grants of stock options. The grants are designed
               to align the interests of each executive officer with those of
               the stockholders and provide each individual with a significant
               incentive to manage Voxware from the perspective of an owner with
               an equity stake. Each option grant allows the individual to
               acquire shares of our Common Stock at a fixed price per share
               (generally, the market price on the grant date) over a specified
               period of time (up to ten years). Each option generally becomes
               exercisable in installments over a four-year period, contingent
               upon the executive officer's continued employment with Voxware.
               Accordingly, the option grant will provide a return to the
               executive officer only if the executive officer remains employed
               by Voxware during the vesting period, and then only if the market
               price of the underlying shares appreciates.

               The number of shares subject to each option grant is set at a
               level intended to create meaningful opportunity for appreciation
               based on the executive officer's current position with Voxware,
               the base salary associated with that position, the size of
               comparable awards made to individuals in similar positions within
               the industry, and the individual's personal performance in recent
               periods. The Compensation Committee also considers the number of
               unvested options held by the executive officer in order to
               maintain an appropriate level of equity incentive for that
               individual. However, the Compensation Committee does not adhere
               to any specific guidelines as to the relative option holdings of
               our executive officers. Options to acquire an aggregate of
               695,000 shares were granted to executive officers in fiscal 1999.

                                       28
<PAGE>

               Through our Employee Stock Purchase Plan, we offer additional
               opportunities for equity ownership to executive officers.

     CEO Compensation. In determining the compensation payable to our Chief
Executive Officer, the Compensation Committee considered the CEO's performance
in fiscal 1999, and Voxware's performance taking into account our change in
business focus in February 1999 to Verbex's business.

     Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code generally denies a federal income tax deduction for
compensation exceeding $1,000,000 paid to the CEO or any of the four other
highest paid executive officers, excluding performance-based compensation.
Through June 30, 1999, this provision has not affected our tax deductions, but
the Committee will continue to monitor the potential impact of Section 162(m) on
our ability to deduct executive compensation.

     Summary. The Compensation Committee believes that its compensation
philosophy of paying its executive officers well by means of competitive base
salaries and cash bonus and long-term incentives, as described in this report,
serves the interests of Voxware and its stockholders.

                                              The Compensation Committee

                                              Eli Porat
                                              David B. Levi


                               PERFORMANCE GRAPH

     The graph below compares the cumulative total stockholder return on our
Common Stock with the cumulative total stockholder return of (i) the Nasdaq
National Market--U.S. Index, and (ii) the Hambrecht & Quist Technology Index,
assuming an investment in each of $100 on October 31, 1996. The graph commences
on the date our Common Stock became publicly traded.


                             [GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
         Voxware, Inc.  Nasdaq U.S.  H&Q Technology
         -------------  -----------  --------------
<S>      <C>            <C>          <C>
10/31/96      100             100           100
12/31/96      100             106           109
03/31/97       55             100           104
</TABLE>

                                       29
<PAGE>

<TABLE>
<S>           <C>          <C>             <C>
06/30/97         67           119            125
09/30/97         75           139            151
12/31/97         48           130            128
03/31/98         38           152            155
06/30/98         29           157            158
09/30/98         10           141            141
12/31/98         13           183            199
03/31/99         10           205            218
06/30/99         14           224            256
</TABLE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth information regarding the beneficial
ownership of our Common Stock as of September 22, 1999, by (i) each person or
group who is known by Voxware to own beneficially more than 5% of our Common
Stock, (ii) each of our directors, (iii) each of the Named Executive Officers
and (iv) all executive officers and directors as a group. Unless indicated
otherwise, the address of each of these persons is c/o Voxware, Inc. 305 College
Road East, Princeton, New Jersey 08540.

    ----------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      Number of Shares              Percentage of Shares
                   Name and Address of Beneficial Owner          Beneficially Owned (1) (2)          Beneficially Owned
                   ------------------------------------          --------------------------
<S>                                                              <C>                                <C>
J. Gerard Aguilar (3).........................................             1,348,000                        10.1%
Advent International Group (4)................................               999,999                         7.5%
         75 State Street
         Boston, MA 02109
Bathsheba J. Malsheen, Ph.D. (5)..............................               380,250                         2.8%
Nicholas Narlis (6)...........................................               152,125                         1.1%
David B. Levi (7).............................................                20,462                           *
Eli Porat (8).................................................                12,500                           *
All Directors and Executive Officers as a group (7 persons)...               641,832                         4.3%
</TABLE>

--------
*Less than 1% of outstanding shares of our Common Stock.
(1)  Number of shares beneficially owned is determined by assuming that options
     that are held by such person (but not those held by any other person) and
     which are exercisable or convertible within 60 days have been exercised or
     converted.
(2)  Unless otherwise noted, we believe that all persons named in the table have
     sole voting and investment power with respect to all shares beneficially
     owned by them.
(3)  Mr. Aguilar resigned from Voxware effective June 21, 1999.
(4)  Includes the ownership by the following venture capital funds managed by
     Advent International Corporation: 2,500 shares owned by Advent
     International Investors II Limited Partnership, 250,000 shares owned by
     Adtel Limited Partnership, 400,000 shares owned by Advent Crown Fund C.V.,
     175,000 shares owned by Adwest Limited Partnership, 13,512 shares owned by
     Advent Israel (Bermuda) Limited Partnership, 111,487 shares owned by Advent
     Israel Limited Partnership and 47,500 shares owned by Advent Partners
     Limited Partnership. In its capacity as manager of these funds, Advent
     International Corporation exercises sole voting and investment power with
     respect to all shares held by these funds. Advent International Corporation
     exercises its voting and investment power through a group of three persons,
     Douglas R. Brown, President and Chief Executive Officer, Dennis R.
     Costello, Senior Vice President responsible for managing North American
     Investment Activities and Janet L. Hennessey, Vice President responsible
     for monitoring public securities, none of whom may act independently and a
     majority of whom must act in concert to exercise voting or investment power
     over the beneficial holdings of such entity. Therefore, no individual in
     this group is deemed to share voting or investment power.
(5)  Includes 376,250 shares of our Common Stock issuable upon the exercise of
     stock options.
(6)  Includes 148,125 shares of our Common Stock issuable upon the exercise of
     stock options.
(7)  Includes 17,500 shares issuable upon the exercise of stock options.

                                       30
<PAGE>

(8)  Includes 12,500 shares issuable upon the exercise of stock options.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     None.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a)  List of documents filed as part of this Form 10-K:

          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-K.

          2.   FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule for each of the years ended June 30, 1997, 1998 and 1999 is filed as
part of this Form 10-K and should be read in conjunction with the Financial
Statements, and related notes thereto, of the Company.

                                 VOXWARE, INC.
                Schedule II--Valuation and Qualifying Accounts
                        Allowance for Doubtful Accounts
                   Years Ended June 30, 1997, 1998 and 1999
                                (in thousands)

<TABLE>
<CAPTION>
                                 Balance at        Charged to Costs                        Balance at
                            Beginning of Period      and Expenses         Deductions      End of Period
                          ----------------------------------------------------------------------------------
<S>                       <C>                      <C>                    <C>             <C>
Year ended June 30, 1997           $ 25                 $467                   $ 92            $400
                                   ====                 ====                   ====            ====

Year ended June 30, 1998           $400                 $795                   $688            $507
                                   ====                 ====                   ====            ====

Year ended June 30, 1999           $507                 $119                   $265            $361
                                   ====                 ====                   ====            ====
</TABLE>

     Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the information is otherwise included in
this Form 10-K.

          3.   EXHIBITS. The following is a list of Exhibits filed as part of
this Annual Report on Form 10-K. Where so indicated by footnote, Exhibits which
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.

Exhibit No.    Description
-----------    -----------

2.1            Asset Purchase Agreement dated as of February 4, 1999 by and
               between Ascend Communications, Inc. and Voxware, Inc.**(1)
2.2            Acquisition Agreement by and among Voxware, Inc., Verbex
               Acquisition Corporation and Verbex Voice Systems, Inc. dated as
               of February 4, 1999.**(1)
3.1            Certificate of Incorporation, as amended.**(2)
3.2            Bylaws.**(2)
10.1           Voxware, Inc. 1994 Stock Option Plan.**(2)

                                       31
<PAGE>

10.2           Form of Voxware, Inc. Stock Option Agreement.**(2)
10.3           Form of Indemnification Agreement.**(2)
10.7           Employment Agreement dated February 28, 1994, with J. Gerard
               Aguilar.**(2)
10.9           Technology Transfer Agreement Effective May 19, 1995, between
               Suat Yeldener Ph.D. and Voxware, Inc.**(2)+
10.20          1996 Employee Stock Purchase Plan.**(2)
10.22          Loan Agreement dated October 31, 1996 between Silicon Valley and
               the Company.**(3)
10.23          Loan Modification Agreement dated May 5,1997 between Silicon
               Valley Bank and the Company.**(4)
10.24          Employment Agreement dated August 13, 1998, with Bathsheba J.
               Malsheen.**(5)
10.25          Employment Agreement dated August 13, 1998, with Nicholas
               Narlis.**(5)
10.26          Loan Modification Agreement dated February 1, 1999 between
               Silicon Valley Bank and the Company.**(5)
16.1           Letter from Ernst & Young LLP respecting change in certifying
               accountant.**(2)
23.1           Consent of Arthur Andersen LLP.*
27.1           Financial Data Schedule.*
99             Important Factors Regarding Forward-Looking Statements.*

___________
*    Filed herewith.
**   Previously filed with the Commission as Exhibits to, and incorporated by
     reference from, the following documents:
     (1)  Filed in connection with the Company's quarterly report on Form 10-Q
          for the quarter ended December 31, 1998.
     (2)  Filed in connection with 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 quarter ended September 30, 1996.
     (4)  Filed in connection with the Company's quarterly report on Form 10-Q
          for the quarter ended March 31, 1997.
     (5)  Filed in connection with the Company's annual report on Form 10-K for
          the fiscal year ended June 30, 1998.
+    Confidential treatment has been granted for portions of such document.

     (b)  Reports on Form 8-K:

          Current Report on Form 8-K filed on February 9, 1999 (relating to the
          sale of the Company's speech coding technology to Ascend
          Communications, Inc. and the purchase of certain assets and
          liabilities of Verbex Voice Systems, Inc.). Amendment to previously
          filed Form 8-K filed on Form 8-K/A on May 4, 1999

                                       32
<PAGE>

                                  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.

                                   VOXWARE, INC.


                                   By: /s/ Bathsheba J. Malsheen
                                       -------------------------
                                   President and Chief Executive Officer


                               POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints each of BATHSHEBA J. MALSHEEN and
NICHOLAS NARLIS, or either of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Form 10-K Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting said attorney-in-fact and agent, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

<TABLE>
<S>                                     <C>                                     <C>
/s/ Bathsheba J. Malsheen               President and Chief Executive           September 24, 1999
---------------------------------
    Bathsheba J. Malsheen               Officer and Director (principal
                                        executive officer)

/s/ Nicholas Narlis                     Vice President,                         September 24, 1999
---------------------------------
    Nicholas Narlis                     Chief Financial Officer,
                                        Secretary and Treasurer
                                        (principal financial officer
                                        and principal accounting officer)

/s/ David Levi                          Director                                September 24, 1999
---------------------------------
    David Levi

/s/ Eli Porat                           Director                                September 24, 1999
---------------------------------
    Eli Porat
</TABLE>

                                       33
<PAGE>

                                                                    Exhibit 23.1

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 File No. 333-27069.


                                        ARTHUR ANDERSEN LLP

Roseland, New Jersey
September 24, 1999

                                       34
<PAGE>

                                                                      Exhibit 99

                                 VOXWARE, INC.
            Important Factors Regarding Forward-Looking Statements

     IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K, THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY
AND ITS BUSINESS BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY
HAVE A SIGNIFICANT IMPACT IN THE COMPANY'S BUSINESS, OPERATING RESULTS OR
FINANCIAL CONDITION. THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH
BELOW AND ELSEWHERE IN THIS FORM 10-K.


     Voxware has a Limited Operating History and a Significant Accumulated
Deficit

     Voxware, Inc. was founded in August 1993. Accordingly, we have only a
limited operating history upon which an evaluation of Voxware and our prospects
can be based. Since our inception, Voxware has incurred significant losses and,
as of June 30, 1999, we had an accumulated deficit of $20,303,000. Our prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving industries. To address these risks and
achieve profitability and increased sales levels, we must, among other things,
establish and increase market acceptance of our products, respond effectively to
competitive pressures, introduce, or enter into agreements with others which
result in the introduction of, products incorporating our technologies and
enhancements to our products and successfully market and support our products
and enhancements. We cannot assure you that we will achieve or sustain
significant sales or profitability in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7 of this
Annual Report on Form 10-K.


     Voxware has no Operating History in the Area of its New Business Focus

     With the completion of the Verbex acquisition, we have changed our business
focus to the sale of speech recognition-based products for the warehousing and
manufacturing markets and other industrial markets. As a result of the sale of
our speech coding business to Ascend, we will not invest further in the
development of our speech coding and audio compression technologies, and will
continue to license those technologies only on a limited basis. Specifically,
our existing business will be continued primarily to the extent necessary to
service our existing licensees of speech coding technologies. We may also
license our speech coding technologies in instances which require limited or no
customization for sales to multimedia and consumer devices customers. We have no
operating history in our new line of businesses. Accordingly, we cannot assure
you that our future operations will generate substantial revenues, or operating
or net income. Our prospects must be considered in light of the risks, expenses,
problems and delays inherent in establishing a new business. Specifically, to
achieve profitability and increased sales levels, we must, among other things,
establish and increase market acceptance of the Verbex products, respond
effectively to competitive pressures, introduce, or enter into agreements with
others which result in the introduction of, products incorporating the Verbex
technologies and enhancements to the Verbex products and successfully market and
support the products and enhancements.


     Both Voxware and Verbex have a History of Operating Losses

     We incurred net losses of approximately $2,867,000 in fiscal 1996,
$7,044,000 in fiscal 1997, $4,709,000 in fiscal 1998 and $4,286,000 in fiscal
1999. Although our primary business during fiscal 1996, fiscal 1997 and through
February 18, 1999, the date of our acquisition of Verbex, was developing and
commercializing speech coding technologies and products, you must consider the
fact that we have incurred losses from continuing operations since our inception
and we expect to continue to incur net losses in at least the near term quarters
as we develop the Verbex products. In addition, Verbex incurred a loss from
operations of approximately $627,000 and a net loss of approximately $1,007,000
in fiscal 1998 and has also incurred operating losses since inception. Verbex's
independent

                                       35
<PAGE>

public accountants have included an explanatory paragraph in Verbex's financial
statements for the year ended December 31, 1998 stating that there is
substantial doubt as to Verbex's ability to continue as a going concern. Voxware
acquired substantially all the assets of Verbex in February 1999 and we believe
that we will have sufficient cash to operate the Verbex business for at least 12
months beyond June 30, 1999.

     During the years ended June 30, 1998, 1997, and 1996, we received licensing
revenues from Netscape Communications Corporation which accounted for 21%, 16%
and 31% respectively of our total revenues. The license agreement with Netscape
has been amended and terminated and we have not received any revenues from
Netscape since the third quarter of fiscal 1998 which ended March 31, 1998, and
we will not receive any additional revenues from Netscape. If we fail to
generate revenues to replace these revenues, it will further increase the
likelihood that our losses will continue. We cannot assure you that we will be
able to generate revenues to replace the revenues formerly received from
Netscape.


     Voxware Needs to Develop or Acquire and Introduce New and Enhanced Products
to Achieve Market Penetration; Voxware's Products are Subject to Obsolescence
due to Rapid Technological Change

     The markets for our speech recognition products and technologies acquired
from Verbex are characterized by rapidly changing technology. The introduction
of products by others incorporating new technologies could render our products
obsolete and unmarketable. We believe that our ability to build on the
technology and products acquired from Verbex 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 be competitive. We believe that there may be
opportunities to enhance the Verbex technologies and products by combining them
with complementary or competing technologies developed by others, either through
acquisition, joint venture or other similar arrangement. We cannot assure you
that we will develop new or enhanced products successfully and in a timely
manner, or that we will conclude any transaction involving the acquisition of,
or combination with, the technologies and products of any other person. Further,
we cannot assure you that any new or enhanced products will achieve market
acceptance. Our failure to develop new or enhanced products, including our
failure to develop or acquire the technology necessary to do so, could have a
material, adverse effect on us and our business. In addition, although the
possession of robust speech recognition technology is a key pre-requisite to
entry into the industrial marketplace, other components of a speech recognition-
based system are also necessary. Voxware believes that its products must be
easily integrated with other components of 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 Voxware's success. We do not now possess all the necessary
components. Additional 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. We cannot assure you that
our efforts will be successful and, to the extent we are unsuccessful, our
business may be materially, adversely affected.


     Voxware Needs to Attract and Retain Key Management and Other Personnel With
Experience in the Areas of its New Business Focus

     In order to succeed in developing the Verbex business, we will need to
develop a work force with skills and experience relevant to the development and
sale of Verbex's products, including the skills to enhance those products and
develop new products. We will need to retain the key employees of Verbex, and to
attract other personnel experienced in speech recognition for the industrial
warehousing and manufacturing markets and related businesses, especially in the
areas of management, product development and marketing. Our performance will be
substantially dependent on the performance of our executive officers,
particularly Bathsheba J. Malsheen, our President and Chief Executive Officer.
Dr. Malsheen has been operating the Verbex business only since February 1999. If
we are unable to attract and retain key employees and management personnel who
are experienced in the areas of our new business focus, our business, operating
results and financial condition could be materially adversely effected.
Competition for qualified personnel is intense and we cannot assure you that we
will be able to attract, assimilate or retain qualified personnel in the future.

     Voxware will be Dependent on the MVP Product Family

     Sales of the MVP product family, which was introduced by Verbex in July
1998, accounted for approximately 11% of Verbex's net revenue in 1998 and are
expected to account for a much larger percentage of our net revenue in

                                       36
<PAGE>

the future. Any decline in demand for these products, whether as a result of new
competitive products, price competition, technological change or other factors,
could materially and adversely affect our future financial results.

     Historical Voxware Financial Information is of Limited Relevance to Assess
Future Operating Results; Operating Results of Voxware will be Subject to
Substantial Potential Fluctuations

     As a result of our acquisition of Verbex and the sale of the speech coding
assets to Ascend, our business is now substantially different than the business
we have pursued since our inception. Therefore, our past financial performance
is of limited value in predicting or assessing future results. Further, since
Verbex is under our management, with new strategies and resources, we believe
that the historical financial performance of Verbex may not be indicative of
future results. Therefore, we believe that there is limited historical financial
information on which to base an assessment of the sale and our new business
focus. In addition, after the consummation of the sale of the speech coding
assets, we expect significant annual and quarterly fluctuations in our results
of operations. Initially, and for several quarters, our financial performance
will be impacted by efforts to implement new marketing strategies for Verbex's
products and technologies and to integrate new personnel into the management of
Voxware. Thereafter, fluctuations in financial performance from period to period
are expected to be caused by the timing and structure of new customer
agreements, the timing of new product announcements and releases by us and our
competitors, and general economic conditions. We cannot assure you that the
level of sales and gross profits, if any, that we achieve in any particular
fiscal period will not be significantly lower than in other, including
comparable, fiscal periods.


     Voxware's New Line of Business is in a Highly Competitive Industry

     The business in which we intend to engage is highly competitive and acutely
influenced by advances in technology, product improvements and new product
introductions, marketing and distribution capabilities, and price competition.
Failure to keep pace with product and technological advances could adversely
affect our competitive position and prospects for growth. The products being
manufactured and marketed by us since the Verbex acquisition and by competitors
are becoming increasingly more complex. As the technological and functional
capabilities of future products increase these products will begin to compete
with those being offered by larger, traditional computer industry participants
who have substantially greater financial, technical, marketing and manufacturing
resources than us. We cannot assure you that we will be able to compete
successfully against these new competitors or that competitive pressures faced
by us would not adversely affect our business or operating results.

     Voxware has an Evolving Distribution Strategy; Voxware will be Dependent on
its Distribution Channels

     Verbex sold its products primarily through VARs and, to a lesser extent,
through OEMs and direct sales. We plan to expand Verbex's VAR channel not only
in the United States but abroad, with particular emphasis on the development of
strategic relationships with WMS vendors and RF system vendors. However, we will
sell fewer products if we cannot attract or retain VARs that can market our
products effectively or that will provide timely and cost-effective customer
support. For the years ended December 31, 1996, 1997 and 1998, VARs and systems
integrators accounted for 35%, 53% and 52% of Verbex's total revenues,
respectively. Verbex's top four VARs accounted for approximately 33% of its
total revenues in 1998, with Vicor Industries, Inc. accounting for 11% of total
revenues.

     An increasing number of companies compete for access to the distribution
channels we use, and our arrangements with our distributors generally may be
terminated by either party at any time upon 30 days prior written notice. We
cannot assure you that our distributors will continue to purchase our products
or provide us with adequate levels of promotional support. Any termination or
significant disruption of our relationship with any of our major distributors,
or a significant reduction in sales volume attributable to any of our principal
resellers, could adversely affect our day-to-day operating performance and
future financial results.

     Voxware will Operate in a Developing Market; Acceptance of Speech Products
is Uncertain

     Because the speech industry is relatively new and rapidly evolving, it is
difficult to accurately predict demand and market acceptance for our recently
introduced products. The speech industry currently has a limited number of
proven products and applications. Popular perceptions about the use of speech
recognition products (including reliability, cost, ease-of-use and quality) may
impact the growth of the market for such products. While we believe that our
speech recognition technology offers significant advantages over competing
products for a broad range of warehouse and industrial applications, we cannot
assure you that the market for speech recognition products will

                                       37
<PAGE>

grow significantly or that our products will become widely accepted. Therefore,
it is difficult to predict the size and future growth rate, if any, of this
market. In addition, our existing and future products may become obsolete and
unmarketable if competing products based on new technologies are introduced to
the market. From time to time, we and our competitors may announce new products,
capabilities or technologies that have the potential to replace or limit the
usefulness of our existing product offerings. As a result, customers may refrain
from purchasing any of our existing products. If the market for our products
does not develop as quickly as we expect, or becomes more competitive, or if our
new products do not achieve market acceptance, our future financial results will
be adversely affected.

     Voxware Will Need Additional Capital in the Future

     In September 1999 we completed the sale of our speech coding assets to
Ascend for $5.1 million, of which $204,000 was received in January 1999,
$4,146,000 was received upon closing and $750,000 is being held in escrow for 18
months to secure our indemnification obligations under the agreement. As of June
30, 1999, Voxware had approximately $4,446,000 in cash, cash equivalents and
short-term investments. Based on our currently planned research and development
and marketing programs, we anticipate that this amount, together with the
proceeds from the Ascend sale and interest income, should be adequate to satisfy
our capital and operational requirements for at least 12 months following June
30, 1999. We may need additional funding prior to that time if we want to enter
into a transaction to acquire other products or technology. After that period,
unless we generate substantial cash from operations, we will require additional
financing to continue the development of our technologies and products and to
finance any further acquisitions, joint ventures or other strategic
relationships. We cannot assure you that any additional financing will be
available or, if available, that the financing will be on terms favorable to us
or, if obtained, that the financing will not be dilutive to our current
stockholders.


     Potential For Delisting Of Common Stock

     Our common stock is currently traded on the National Market segment of the
Nasdaq Stock Market. The requirements for continued listing on such market
include, among other things, a requirement that our common stock maintain a
minimum bid price of $1.00 per share. There can be no assurance that our common
stock will not in the future be removed for failure to continue to satisfy the
National Market requirements. Any such removal would have a material adverse
effect on the trading market for our common stock.


     Year 2000 Issues

     We are aware of the computing issues associated with the coming of the
millennium ("Year 2000"), most notably whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. We are working internally and with certain suppliers to
either verify Year 2000 compliance or identify and execute appropriate changes
to make such systems Year 2000 compliant. We believe that the cost of completing
any modifications for Year 2000 compliance to the systems used by Voxware will
not be material. However, there can be no assurance that the we or our suppliers
will be correct in their assertions that their products are Year 2000 compliant
or that our estimate of the cost of systems modifications for Year 2000
compliance will ultimately prove to be correct.


     Uncertainty Regarding Patents and Proprietary Rights

     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. We cannot assure you that patent
applications to which we hold rights will result in the issuance of patents, or
that any issued patents will provide commercially significant protection to our
technology and products. In addition, we cannot assure you that others will not
independently develop substantially equivalent proprietary information not
covered by patents to which we own rights or obtain access to our know-how, or
that others will not claim to have or will not be issued patents which may
prevent the sale of one or more of our products. Litigation, which could be
costly and time consuming, may be necessary to determine the scope and validity
of others' proprietary rights, or to enforce any patents issued to us, in either
case, in judicial or administrative proceedings. An adverse outcome could
subject us to significant liabilities to third parties, require


                                       38
<PAGE>

us to obtain licenses from third parties or require us to cease any related
research and development activities or product sales. We cannot assure you that
licenses required under third-party patents or proprietary rights would be made
available on acceptable terms, if at all. In addition, the laws of certain
countries may not protect our intellectual property.

     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
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 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.

                                       39
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                                       <C>
Report of Independent Public Accountants...............................................................   F-2
Consolidated Balance Sheets............................................................................   F-3
Consolidated Statements of Operations..................................................................   F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)...   F-5
Consolidated Statements of Cash Flows..................................................................   F-6
Notes to Financial Statements..........................................................................   F-7
</TABLE>

                                      F-1
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Voxware, Inc.:

     We have audited the accompanying consolidated balance sheets of Voxware,
Inc. (a Delaware corporation) and Subsidiary as of June 30, 1999 and 1998 and
the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit) and cash flows for each of
the three years in the period ended June 30, 1999. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Voxware, Inc. and Subsidiary
as of June 30, 1999 and 1998 and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles.

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14 (a) 2
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.


                                 ARTHUR ANDERSEN LLP

Roseland, New Jersey
September 24, 1999

                                      F-2
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      June 30,
                                                                           -----------------------------
                                                                                1998            1999
                                                                           -------------   -------------
                                                                                (In thousands, except
                                                                              share and per share data)
                                 ASSETS
<S>                                                                        <C>             <C>
Current assets:
  Cash and cash equivalents.............................................        $  9,149      $  2,438
  Short-term investments................................................           4,388         2,008
  Accounts receivable, net..............................................           1,254           989
  Inventory, net........................................................              --           249
  Prepaid expenses and other current assets.............................             268           778
  Restricted cash.......................................................              --           604
                                                                                --------      --------
     Total current assets...............................................          15,059         7,066
                                                                                --------      --------
Property and equipment, net.............................................             407           395
Intangible assets, net..................................................              --         4,680
Other assets, net.......................................................              91           451
                                                                                --------      --------
                                                                                $ 15,557      $ 12,592
                                                                                ========      ========
               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.................................        $  1,097      $  2,089
  Deferred revenues.....................................................             219           531
                                                                                 --------      --------
     Total current liabilities..........................................           1,316         2,620
                                                                                --------      --------
Deferred rent...........................................................             328           263
                                                                                --------      --------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.001 par value, 10,000,000 shares authorized;
    none issued and outstanding.........................................              --            --
  Common stock, $.001 par value, 30,000,000 shares authorized;
     13,292,524 and 13,381,367 shares issued and outstanding at
     June 30, 1998 and 1999, respectively...............................              13            13
  Additional paid-in capital............................................          29,915        29,995
  Unrealized gain on available-for-sale securities......................               2             4
  Accumulated deficit...................................................         (16,017)      (20,303)
                                                                                --------      --------
     Total stockholders' equity.........................................          13,913         9,709
                                                                                --------      --------
                                                                                $ 15,557      $ 12,592
                                                                                ========      ========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                     Year Ended June 30,
                                                                      ------------------------------------------------
                                                                            1997             1998            1999
                                                                      --------------    -------------    -------------
                                                                            (In thousands, except per share data)
<S>                                                                   <C>               <C>              <C>
Revenues:
   Product revenues:
      Product sales...........................................           $   --            $    --           $    791
      License fees............................................              5,432             2,935               705
      Royalties and recurring revenues........................              1,996             1,918               511
                                                                         ---------         ---------         ---------
       Total product revenues.................................              7,428             4,853             2,007
   Service revenues...........................................                351             1,029               879
                                                                         ---------         ---------         ---------
       Total revenues.........................................              7,779             5,882             2,886
                                                                         ---------         ---------         ---------

Cost of revenues:
   Cost of product revenues...................................                178               142               429
   Cost of service revenues...................................                164               441               542
                                                                         ---------         ---------         ---------
      Total cost of revenues..................................                342               583               971
                                                                         ---------         ---------         ---------
       Gross profit...........................................              7,437             5,299             1,915
                                                                         ---------         ---------         ---------

Operating expenses:
   Research and development...................................              7,796             4,726             2,058
   Sales and marketing........................................              4,018             3,844             2,513
   General and administrative.................................              3,204             2,467             1,691
   Amortization of purchased intangibles......................                ---               ---               478
                                                                         ---------         ---------         ---------
      Total operating expenses................................             15,018            11,037             6,740
                                                                         ---------         ---------         ---------
      Operating loss..........................................             (7,581)           (5,738)           (4,825)
Interest income...............................................                722               844               539
                                                                         ---------         ---------         ---------
Net loss......................................................             (6,859)           (4,894)           (4,286)
Accretion of preferred stock to redemption value..............                 (5)               --                --
                                                                         ---------         ---------         ---------
Net loss applicable to common stockholders....................           $ (6,864)         $ (4,894)         $ (4,286)
                                                                         =========         =========         =========
Basic and diluted net loss per common share...................           $  (0.67)         $  (0.38)         $  (0.32)
                                                                         =========         =========         =========
Weighted average number of common shares outstanding..........             10,242            12,890            13,330
                                                                         =========         =========         =========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>



                         VOXWARE, INC. AND SUBSIDIARY

       CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
                      AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                           Stockholders' Equity (Deficit)
                                                              -----------------------------------------------------------------


                                                 Redeemable
                                                  Series A         Common Stock      Additional      Accumulated
                                                Convertible      ------------------   Paid-in    Other Comprehensive  Comprehensive
                                              Preferred Stock     Shares     Amount   Capital       Income (Loss)        Loss
                                              ---------------    --------- -------- ---------- --------------------   -------------
                                                                      (in thousands, except share data)
<S>                                           <C>                <C>       <C>      <C>           <C>                   <C>
Balance, June 30, 1996.......................    $ 5,938         5,947,496   $ 6       $ 3,177        $ --
  Exercise of common stock
    warrants.................................         --           696,250     1           760          --
  Accretion of redemption
    premium on Redeemable
    Series A Convertible
    Preferred Stock..........................          5                --    --            --          --
  Mandatory conversion of
    Redeemable Series A Convertible
    Preferred Stock..........................     (5,943)        3,000,000     3         5,940          --
  Issuance of common stock upon
    Initial Public Offering, net of
    offering costs of $1,175.................         --         2,823,237     3        18,514          --
  Exercise of common stock
    options..................................         --             5,000    --             2          --
  Issuance of common stock pursuant to
   Employee Stock Purchase Plan..............         --            25,275    --            95          --
Comprehensive loss:
  Net loss...................................         --                --    --            --          --              $(6,859)
  Unrealized loss on available-for-sale
    securities...............................         --                --    --            --          (2)                  (2)
                                                                                                                        -------
  Comprehensive loss.........................         --                --    --            --          --              $(6,861)
                                                                                                                        =======
                                                 ----------------------------------------------------------------------------------
Balance, June 30, 1997.......................         --        12,497,258    13        28,488          (2)
  Exercise of common stock options...........         --           701,746    --         1,158          --
  Issuance of common stock pursuant to
   Employee Stock Purchase Plan..............         --            74,109    --           189          --
  Issuance of common stock to pay
   non-employee directors annual retainer....         --            19,411    --            80          --
Comprehensive loss:
 Net loss....................................         --                --    --            --          --              $(4,894)
  Unrealized gain on available-for-sale
    securities...............................         --                --    --            --           4                    4
                                                                                                                        -------
  Comprehensive loss.........................         --                --    --            --          --              $(4,890)
                                                                                                                        =======
                                                 ----------------------------------------------------------------------------------
Balance, June 30, 1998.......................         --        13,292,524    13        29,915           2
  Exercise of common stock options...........         --            11,000    --            19          --
  Issuance of common stock pursuant to
    Employee Stock Purchase Plan.............         --            77,843    --            61          --
Comprehensive loss:
  Net loss...................................         --                --    --            --          --              $(4,286)
  Unrealized gain on available-for-sale
    securities...............................         --                --    --            --           2                    2
                                                                                                                        -------
  Comprehensive loss.........................         --                --    --            --          --              $(4,284)
                                                                                                                        =======
                                                 ----------------------------------------------------------------------------------
Balance, June 30, 1999.......................    $    --        13,381,367   $13       $29,995         $ 4
                                                 ==================================================================================


























<CAPTION>






                                                 Accumulated
                                                   Deficit          Total
                                                 -----------       ----------

<S>                                              <C>              <C>
Balance, June 30, 1996.......................      $ (4,259)      $ (1,076)
  Exercise of common stock
    warrants.................................            --            761
  Accretion of redemption
    premium on Redeemable
    Series A Convertible
    Preferred Stock..........................            (5)            (5)
  Mandatory conversion of
    Redeemable Series A Convertible
    Preferred Stock..........................            --          5,943
  Issuance of common stock upon
    Initial Public Offering, net of
    offering costs of $1,175.................            --         18,517
  Exercise of common stock
    options..................................            --              2
  Issuance of common stock pursuant to
   Employee Stock Purchase Plan..............            --             95
Comprehensive loss:
  Net loss...................................        (6,859)        (6,859)
  Unrealized loss on available-for-sale
    securities...............................            --             (2)

  Comprehensive loss.........................            --              --

                                              -----------------------------
Balance, June 30, 1997.......................       (11,123)        17,376
  Exercise of common stock options...........            --          1,158
  Issuance of common stock pursuant to
   Employee Stock Purchase Plan..............            --            189
  Issuance of common stock to pay
   non-employee directors annual retainer....            --             80
Comprehensive loss:
 Net loss....................................        (4,894)        (4,894)
  Unrealized gain on available-for-sale
    securities...............................            --              4

  Comprehensive loss.........................            --             --

                                              -----------------------------
Balance, June 30, 1998.......................       (16,017)        13,913
  Exercise of common stock options...........            --             19
  Issuance of common stock pursuant to
    Employee Stock Purchase Plan.............            --             61
Comprehensive loss:
  Net loss...................................        (4,286)        (4,286)
  Unrealized gain on available-for-sale
    securities...............................            --              2

  Comprehensive loss.........................            --             --

                                              -----------------------------
Balance, June 30, 1999.......................      $(20,303)       $ 9,709
                                              =============================
</TABLE>


       The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                    Year Ended June 30,
                                                                              -----------------------------------
                                                                                 1997         1998        1999
                                                                              ----------    ---------    --------
<S>                                                                          <C>           <C>          <C>
Operating Activities:
 Net loss................................................................     $  (6,859)    $ (4,894)    $ (4,286)
 Adjustments to reconcile net loss to net cash used in operating
  activities:
  Depreciation and amortization...........................................          222          224          688
  Provision for doubtful accounts.........................................          467          795          119
  Stock-based directors' compensation.....................................           --           80           --

 Changes in assets and liabilities:
  Accounts receivable.....................................................       (2,819)         773          602
  Inventory...............................................................           --           --          (32)
  Prepaid expenses and other current assets...............................         (255)          41         (496)
  Restricted cash.........................................................           --           --         (604)
  Other assets............................................................          309          (36)        (346)
  Accounts payable and accrued expenses...................................        1,762       (1,030)         526
  Deferred revenues.......................................................          368         (258)         280
  Deferred rent...........................................................          241           87          (68)
                                                                              ----------    ---------    ---------
    Net cash used in operating activities.................................       (6,564)      (4,218)      (3,617)
                                                                              ----------    ---------    ---------
Investing Activities:
 Purchases of short-term investments......................................     (105,325)     (65,506)     (34,995)
 Sales and maturities of short-term investments...........................       99,481       66,964       37,377
 Purchases of property and equipment......................................         (177)         (65)        (156)
 Purchase of Verbex Voice Systems, Inc. ..................................           --           --       (5,400)
                                                                              ----------    ---------    ---------
    Net cash provided by (used in) investing activities...................       (6,021)       1,393       (3,174)
                                                                              ----------    ---------    ---------
Financing Activities:
 Proceeds from issuance of common stock, net..............................       18,517           --           --
 Proceeds from exercise of common stock warrants..........................          761           --           --
 Proceeds from exercises of common stock options..........................            2        1,158           19
 Issuance of common stock pursuant to
  Employee Stock Purchase Plan............................................           95          189           61
                                                                              ----------    ---------    ---------
    Net cash provided by financing activities.............................       19,375        1,347           80
                                                                              ----------    ---------    ---------
Increase (decrease) in cash and cash equivalents..........................        6,790       (1,478)      (6,711)
Cash and cash equivalents, beginning of period............................        3,837       10,627        9,149
                                                                              ----------    ---------    ---------
Cash and cash equivalents, end of period..................................       10,627        9,149        2,438
Short-term investments, end of period.....................................        5,842        4,388        2,008
                                                                              ----------    ---------    ---------
Cash, cash equivalents and short-term investments, end of period..........    $  16,469     $ 13,537     $  4,446
                                                                              ==========    =========    =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
  Conversion of Redeemable Series A Convertible Preferred Stock
    to common stock                                                           $   5,943     $     --     $     --

  Accretion of redemption premium on Redeemable Series A
    Convertible Preferred Stock                                               $       5     $     --     $     --

  Cashless exercise of 378 warrants, converted at a rate of one-half
    share of common stock per warrant (converted to 189 shares of
    common stock) in December 1996                                            $      --     $     --     $     --

  Unrealized gain (loss) on short-term investments                            $      (2)    $      4     $      2
                                                                              ==========    =========    =========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  The Company

     Voxware, Inc.'s (the "Company") primary business, through its Verbex
Acquisition Corporation subsidiary, is the development, marketing and selling of
speech- recognition products to the industrial, manufacturing and warehousing
markets. The Company's products rely on speech input of data to complement
bar-code scanning and industrial data terminals in the warehouse, factory
orother industrial settings. Applications for the Company's speech-recognition
products include warehouse picking, logistics receiving, returns order
processing, warehouse inventory and cycle counting, manufacturing inspection,
package and letter sorting and remittance processing. The Company has two major
speech-recognition product lines: portable and stationary devices. Both types of
devices are based on the Company's proprietary speech recognition technology.

     As described below, in addition to the industrial speech-recognition
products business, the Company also licenses its digital speech coding
technologies and products on a limited basis to customers in the multimedia
applications and consumer devices markets.


     Sale of Assets to Ascend

     On February 4, 1999, the Company entered into a definitive agreement with
Ascend Communications, Inc. ("Ascend", which is now a wholly owned subsidiary of
Lucent Technologies, Inc.), to sell to Ascend for approximately $5.1 million in
cash substantially all of its assets relating to what has historically been the
Company's primary business of developing and licensing speech compression
technologies and products. On September 21, 1999, the Company's stockholders
approved the sale. Upon closing in September 1999, the Company of received
$4,146,000 in cash. The Company had previously received $204,000 of the purchase
price, which is included in restricted cash as of June 30, 1999. The remaining
$750,000 is being held in escrow for 18 months (until March 21, 2001) to secure
Voxware's indemnification provisions under the agreement with Ascend. As a
result of the sale, the Company expects to record a gain of approximately
$3,700,000 during the fiscal year ending June 30, 2000 and a gain of
approximately $750,000 during the fiscal year ending June 30, 2001.
Additionally, the Company has deferred costs totaling approximately $515,000
associated with the sale of assets to Ascend. These deferred costs are included
in prepaid expenses and other current assets as of June 30, 1999, and will be
offset against the gain on sale to be recorded during the year ending June 30,
2000. The sale does not include the Company's rights and obligations under its
existing license agreements and, as part of the sale, the Company received a
license back from Ascend to use the technology necessary to service the
Company's existing licensees in the speech compression business. With the
consent of Ascend, the Company may also license the speech coding technologies
to new licensees for uses that are not competitive with Ascend.


     Acquisition of Assets of Verbex Voice Systems, Inc.

     On February 18, 1999, the Company acquired substantially all of the assets
of Verbex Voice Systems, Inc. ("Verbex") for approximately $5.2 million in cash.
Since that time, the Company's primary business focus has been Verbex's business
of developing and selling speech recognition products for the warehousing and
manufacturing markets as well as other industrial markets. This will include the
exploration of strategic alternatives to augment Verbex's business, including
mergers, acquisitions and joint ventures.

     Future Operations

     The Company's primary business focus is currently the development and sale
of speech recognition products for the warehousing and manufacturing markets and
other industrial markets. This is the business that had been conducted by Verbex
prior to the Company's acquisition of Verbex in February 1999. The Company has
only a limited operating history upon which an evaluation of the Company and its
prospects can be based. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
early stage of development, particularly companies in new and rapidly evolving
markets. Since its inception, the Company has incurred significant losses and,
as of June 30, 1999, the Company had an accumulated deficit of $20,303,000. In
addition, 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 Verbex's business, the budgeting cycles of potential customers, the
volume of, and revenues derived from sales of products by the Company's value-
added resellers that incorporate the Company's products into third-party
customers' systems, the introduction of new products or services by the

                                      F-7
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)

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

     Principles of Consolidation

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


     Use of Estimates

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


     Revenue Recognition

     The Company generates revenues from products and services. Product revenues
consist of product sales, license fees, and royalties and recurring revenues.
Product sales represent shipments of portable and stationary speech recognition-
based products for industrial markets. Revenues from product sales are generally
recognized upon shipment. The Company began shipping speech recognition-based
products subsequent to its acquisition of substantially all of the assets of
Verbex, which occurred on February 18, 1999. License fees are generated from
licensing the Company's speech compression technologies to customers in the
multimedia and consumer devices markets and from licensing the Company's speech
recognition-based software applications acquired in the Verbex transaction.
License fees are generally recognized upon shipment of the underlying
technologies, provided that there are no significant post-delivery obligations,
persuasive evidence of an arrangement exists, pricing is fixed or determinable,
the payment is due within one year and collection of the resulting receivable is
deemed probable. Royalties and recurring revenues include royalties, which are
generally based on a percentage of licensees' sales or units shipped, and pre-
determined periodic license fees. Royalty revenues are recognized at the time of
the customer's shipment of products incorporating the Company's technology.
Recurring product license fees are generally recognized at the inception of the
renewal period, provided that there are no significant post-delivery
obligations, persuasive evidence of an arrangement exists, pricing is fixed or
determinable, the payment is due within one year and collection of the resulting
receivable is deemed probable. Service revenues from customer maintenance
support, including the amounts bundled with initial or recurring revenues, are
recognized over the term of the maintenance support period, which is typically
one year. Service revenues from engineering fees are recognized upon customer
acceptance or over the period in which services are provided if customer
acceptance is not required.

     In fiscal 1998, the Company adopted the provisions of Statement of Position
97-2 "Software Revenue Recognition." The adoption had no significant impact on
the accompanying consolidated financial statements.

                                      F-8
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)


     Research and Development

     Research and development expenditures are charged to operations as
incurred. Pursuant to Statement of Financial Accounting Standards 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 expensed when incurred unless technological feasibility has been
established. Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant.


     Reverse Stock Split

     On September 19, 1996 the Company effected a one for two reverse stock
split and decreased its authorized common stock to 30,000,000 shares. All
references in the accompanying financial statements to the number of common
shares and per share amounts have been retroactively restated to reflect the
reverse stock split.


     Net Loss Per Share

     The Company has presented net loss per common share pursuant to Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share" and the
Securities and Exchange Commission Staff Accounting Bulletin No. 98.

     Basic loss per common share was computed by dividing net loss applicable to
common stockholders by the weighted average number of shares of common stock
outstanding. Diluted loss per common share has not been presented, since the
impact on loss per share using the treasury stock method is anti-dilutive due to
the Company's losses.


     Cash, Cash Equivalents and Short-Term Investments

     Cash and cash equivalents consist of investments in highly liquid short-
term instruments, with maturities of 90 days or less from the date of purchase.
Short-term investments consist primarily of high-grade United States Government-
backed securities and corporate obligations with maturities between 90 and 365
days from the date of purchase. The Company's entire short-term investment
portfolio is classified as available-for-sale and is stated at fair value as
determined by quoted market values. Changes in the net unrealized holding gains
and losses are included as a separate component of stockholders' equity.

                                      F-9
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)


     The following table details the Company's investments as of June 30, 1998
and 1999:

<TABLE>
<CAPTION>
                                                                          June 30, 1998
                                                                          -------------
                                                                        Gross          Gross
                                                                        -----          -----
                                                                     Unrealized     Unrealized
                                                                     ----------     ----------
                                                   Amortized Cost       Gains         Losses       Fair Value
                                                   --------------       -----         ------       ----------
                                                                         (in thousands)
          <S>                                      <C>               <C>            <C>            <C>
          U.S. Government Agencies                     $    35           $ --           $ --          $    35
          Corporate obligations                         12,852              3             (1)          12,854
                                                       -------           ----           ----          -------
                                                       $12,887           $  3           $ (1)         $12,889
                                                       =======           ====           ====          =======

          Included in cash and cash equivalents        $ 8,501           $ --           $ --          $ 8,501
          Included in short-term investments             4,386              3             (1)           4,388
                                                       -------           ----           ----          -------
                                                       $12,887           $  3           $ (1)         $12,889
                                                       =======           ====           ====          =======
</TABLE>

<TABLE>
<CAPTION>
                                                                          June 30, 1999
                                                                          -------------
                                                                        Gross          Gross
                                                                        -----          -----
                                                                     Unrealized     Unrealized
                                                                     ----------     ----------
                                                   Amortized Cost       Gains         Losses       Fair Value
                                                   --------------       -----         ------       ----------
                                                                         (in thousands)
          <S>                                      <C>               <C>            <C>            <C>
          U.S. Government Agencies                      $   --           $ --           $ --          $   --
          Corporate obligations                          4,275              5             (1)          4,279
                                                        ------           ----           ----          ------
                                                        $4,275           $  5           $ (1)         $4,279
                                                        ======           ====           ====          ======

          Included in cash and cash equivalents         $2,271           $ --           $ --          $2,271
          Included in short-term investments             2,004              5             (1)          2,008
                                                        ------           ----           ----          ------
                                                        $4,275           $  5           $ (1)         $4,279
                                                        ======           ====           ====          ======
</TABLE>

     The Company has not experienced any significant realized gains or losses on
its investments during the years ended June 30, 1998 and 1999. For purposes of
determining gross realized gains and losses, the cost of short-term investments
sold is based upon specific identification.  As of June 30, 1998 and 1999, all
short-term investments were due within one year.


     Accounts Receivable

     Accounts receivable as of June 30, 1998 and 1999 consisted of the
following:

<TABLE>
<CAPTION>
                                                                                  June 30,
                                                                       -------------------------------
                                                                            1998            1999
                                                                       --------------  ---------------
                                                                               (in thousands)
          <S>                                                          <C>             <C>
          Accounts receivable - billed............................         $1,383            $1,144
          Accounts receivable - unbilled..........................            378               206
                                                                           ------            ------
                                                                            1,761             1,350
          Less--allowance for doubtful accounts...................           (507)             (361)
                                                                           ------            ------
                                                                           $1,254            $  989
                                                                           ======            ======
</TABLE>

     Accounts receivable - unbilled relates to revenues recognized, but which
were not billed as of the end of the reporting period in accordance with payment
schedules pursuant to contractual agreements with customers.

                                      F-10
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)

     Inventory

     Inventory is stated at lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. Inventory, net as of June 30, 1998 and
1999 consisted of the following:

<TABLE>
<CAPTION>
                                                                June 30,
                                                      -----------------------------
                                                          1998            1999
                                                      -------------  --------------
                                                             (in thousands)
     <S>                                              <C>            <C>
     Raw materials.................................      $   --            $  93
     Work-in process...............................          --               59
     Finished goods................................          --               97
                                                         ------            -----
     Inventory, net................................      $   --            $ 249
                                                         ======            =====
</TABLE>

     Property and Equipment

     Property and equipment are stated at cost. 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. The Company adopted Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during the year ended June 30, 1997. The
adoption of SFAS 121 had no impact on the Company's consolidated financial
statements.

     Warranty

     The Company's standard warranty policy generally allows customers or end-
users to return defective products for repair, replacement or refund of purchase
price, provided that notification of the defect is provided within 90 days from
delivery to the customer or end-user in the case of software and one year from
the delivery in the case of hardware. Substantially all components, parts and
subassemblies purchased by the Company are covered by warranty by the
manufacturer for periods ranging from 30 days to one year.

     Loss Contingencies

     In accordance with Statement of Financial Accounting Standards No. 5 ("SFAS
5"), the Company's policy is to accrue an estimated loss if it is both probable
that one or more future events will occur confirming the fact of the loss, and
the amount of the loss can be reasonably estimated. In the case of legal claims,
it is the Company's policy to accrue probable estimated losses from legal
claims upon receiving notice of such claims.

     Acquisition of Verbex Voice Systems, Inc. and Intangible Assets

     On February 18, 1999, the Company acquired substantially all of the assets
of Verbex for a total of approximately $5,400,000, which consists of $4,800,000
paid upon closing, an estimated purchase price adjustment of $250,000, which has
not been finalized or paid, plus transaction costs of approximately $350,000.
When paid, the purchase price adjustment will be released from an escrow account
which was established at the closing of the Verbex transaction. As of June 30,
1999, the escrow balance totaled $400,000 and is included in restricted cash.
The acquisition was accounted for under the purchase method of accounting,
whereby the purchase price is allocated to the assets acquired and liabilities
assumed of Verbex based on their fair market values at the acquisition date. The
excess of purchase price over the fair value of net assets acquired was assigned
to identifiable intangibles and goodwill. Intangible assets acquired from Verbex
include capitalized software and underlying intellectual property rights, value
added reseller agreements and relationships, customer lists and engineering work
force. These intangibles and goodwill are being amortized over four years which
represents the estimated economic life of these assets. Verbex's results of
operations have been included in the Company's consolidated financial statements
from the date of the acquisition. The table lists the assets that were acquired
and liabilities that were assumed as a result of the Verbex acquisition:

<TABLE>
<CAPTION>
                                                       (in thousands)
     <S>                                                <C>
     Assets acquired:
     Accounts receivable.........................          $  456
     Inventory...................................             218
     Prepaid expenses and other current assets,
       property and equipment and other assets...              68
     Intangible assets...........................           5,158
                                                           ------
                                                            5,900
     Liabilities assumed:
     Accounts payable............................            (131)
     Accrued expenses............................            (352)
     Deferred revenues...........................             (17)
                                                           ------
                                                             (500)
                                                           ------
     Price paid in cash (includes purchase
     price adjustment and transaction costs).....          $5,400
                                                           ======
</TABLE>

                                      F-11
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)

     Unaudited pro forma condensed combined statements of operations data for
Voxware and Verbex for the years ended June 30, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
         <S>
                                                                       Year Ended June 30,
                                                                      1998           1999
                                                                    --------       --------
         <S>                                                        <C>            <C>
                                                                         (in thousands)
         Total revenues.........................................    $  7,877       $   4,603
         Operating loss.........................................      (8,353)         (6,070)
         Net loss...............................................      (7,492)         (5,527)
         Basic and diluted net loss per common share............    $  (0.58)       $  (0.42)
                                                                    ========        ========
         Weighted average number of common shares outstanding...      12,890          13,330
                                                                    ========        ========
</TABLE>

     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). The Company's customer base principally comprises value-added
resellers, and companies within the warehousing, manufacturing, distribution,
computer software and hardware industries. The Company does not typically
require collateral from its customers.

     Major Customers

     One of the Company's customers accounted for 13% and 7% of revenues,
respectively, for the years ended June 30, 1999 and 1998. Another customer
accounted for 12% of revenues for the year ended June 30, 1999. Accounts
receivable due from these two customers as of June 30, 1999 totaled
approximately $65,000 and $241,000, respectively. Another customer accounted for
21% and 16% of revenues, respectively, for the years ended June 30, 1998 and
1997. Another customer accounted for 15% of revenues for each of the years ended
June 30, 1998 and 1997. Another customer accounted for 15% of revenues for the
year ended June 30, 1997.


     Income taxes

     Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases 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 which are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.


     Stock-Based Compensation

     The Company accounts for its stock-based compensation in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Effective July 1, 1996, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123") which establishes financial accounting
and reporting standards for stock-based employee compensation plans. SFAS No.
123 permits entities to provide pro forma disclosures of net income (loss) and
net income (loss) per share for employee stock option grants made in fiscal year
1996 and future years as if the fair value based method of accounting defined by
this standard had been applied (see Note 4).


Recently Adopted Accounting Pronouncements

     Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards 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 loss.

     The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in fiscal year 1999. SFAS No. 131
establishes standards for reporting information about operating segments and
related disclosures about products, geographic information and major customers.
See Note 11.

                                      F-12
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)


Recently Issued Accounting Pronouncements

     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
that entities capitalize certain costs related to internal use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending June 30, 2000. Adoption of SOP 98-1 is expected to have no
material impact on the Company's consolidated financial condition or results of
operations.

     In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires that entities expense start-up costs as incurred.
The Company is required to implement SOP 98-5 for the year ending June 30, 2000.
Adoption of SOP 98-5 is expected to have no material impact on the Company's
consolidated financial condition or results of operations.

Reclassifications

     Certain prior year balances have been reclassified to conform with the
current year presentation.

2. PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
                                                                June 30,
                                                        -------------------------
                                                         1998              1999
                                                        -------          --------
                                                             (in thousands)
     <S>                                                <C>              <C>
     Equipment....................................       $ 504             $  652
     Leasehold improvements.......................          56                 92
     Furniture and fixtures.......................         418                432
                                                         -----             ------
                                                           978              1,176
     Less--Accumulated depreciation...............        (571)              (781)
                                                         -----             ------
                                                         $ 407             $  395
                                                         =====             ======
</TABLE>

     Depreciation expense was approximately $222,000, $224,000 and $210,000 for
the years ended June 30, 1997, 1998 and 1999, respectively.


3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

<TABLE>
<CAPTION>
                                                                                 June 30,
                                                                         -------------------------
                                                                          1998              1999
                                                                         -------          --------
                                                                              (in thousands)
     <S>                                                                 <C>              <C>
     Accounts payable................................................      $  376           $  561
     Accrued compensation and benefits...............................         370              237
     Accrued professional fees.......................................         154              117
     Accrued costs related to the Ascend and Verbex transactions
     (see Note 1)....................................................         ---              793

     Other accrued expenses..........................................         197              381
                                                                           ------           ------
                                                                           $1,097           $2,089
                                                                           ======           ======
</TABLE>

                                      F-13
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)


4. STOCKHOLDERS' EQUITY:

  Stock Option Plans

     Pursuant to the 1994 Stock Option Plan, as amended (the "Plan"), the
Company may grant to eligible individuals incentive stock options (as defined in
the Internal Revenue Code) and nonqualified stock options. An aggregate of
3,200,000 shares of common stock have been reserved for issuance under the Plan.
The exercise price for incentive stock options may not be less than 100% (110%
for holders of 10% or more of the combined voting power of all classes of stock
of the Company) of the fair value of the shares on the date of grant and at
least par value for nonqualified stock options. 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 case 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 has granted 70,000 options at prices ranging from $1.00 to
$2.00 outside of the 1994 Stock Option Plan ("Outside Options").

     Additionally, pursuant to the 1998 Stock Option Plan for Outside Directors
(the "Outside Directors Plan") which was approved by the Company's stockholders
in January 1998, the Company has granted a total of 90,000 options at an
exercise price of $3.75 per share. Pursuant to the Outside Directors Plan, each
non-employee director of the Company shall receive an option to purchase 30,000
shares of the Company's common stock (the "Initial Option") on the date of his
or her 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 his or her election
or appointment to the Board of Directors (the "Initial Grant Date"). In
addition, on the date of his or her re-election to the Board of Directors, if he
or she is still a non-employee director on such date and has met certain other
requirements defined in the Outside Directors Plan, he or she shall receive an
option to purchase 10,000 shares of the Company's common stock (the "Additional
Option") on the date of his or her 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 his or her re-election or appointment to the Board of Directors (the
"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.

Information relative to the 1994 Stock Option Plan, the Outside Options and the
Outside Directors Plan is as follows:

<TABLE>
<CAPTION>
                                                                   Price            Aggregate
                                                Shares            Per Share          Proceeds
                                               ---------       -------------       -----------
     <S>                                       <C>             <C>                 <C>
     Outstanding at June 30, 1996...........   1,261,150       $ 0.50--$7.88         3,106,075
        Granted.............................     652,450       $ 3.63--$7.88         3,724,486
        Exercised...........................      (5,000)      $        0.50            (2,500)
        Canceled............................    (180,937)      $ 1.50--$7.88        (1,107,613)
                                               ---------       -------------       -----------
     Outstanding at June 30, 1997...........   1,727,663       $ 0.50--$7.88         5,720,448
        Granted.............................     845,650       $ 2.00--$5.69         3,164,213
        Exercised...........................    (701,871)      $ 0.50--$6.00        (1,157,720)
        Canceled............................    (461,767)      $ 1.00--$7.88        (1,945,115)
                                               ---------       -------------       -----------
     Outstanding at June 30, 1998...........   1,409,675       $ 0.50--$7.88       $ 5,781,826
        Granted.............................   1,182,500       $ 0.63--$2.38         1,521,988
        Exercised...........................     (11,000)      $ 1.50--$2.00           (19,000)
        Canceled............................    (343,100)      $ 1.06--$7.88        (1,317,141)
                                               ---------                           -----------
     Outstanding at June 30, 1999...........   2,238,075       $ 0.50--$7.88       $ 5,967,673
                                               =========       =============       ===========
</TABLE>

     As of June 30, 1999, there were 761,803 options exercisable at an aggregate
exercise price of $2,545,987. As of June 30, 1999, there were 319,054 additional
options to purchase common stock available for grant under the 1994 Stock Option
Plan. As of June 30, 1998, there were 318,117 options exercisable at an
aggregate exercise price of $194,903.

                                      F-14
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)


     The Company adopted the disclosure requirements of SFAS No. 123 effective
for the Company's June 30, 1997 financial statements. The Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock-based
compensation. Accordingly, compensation cost has been computed based on the
intrinsic value of the stock option at the date of grant, which represents the
difference between the exercise price and the fair value of the Company's stock.
As the exercise price of the stock options equaled the fair value of the
Company's stock at the date of option issuance, no compensation cost has been
recorded in the accompanying statements of operations. Had compensation been
determined consistent with SFAS No. 123, the Company's net loss and net loss per
share would have been adjusted to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                            Year Ended June 30,
                                                            -------------------
                                                       1997         1998        1999
                                                       ----         ----        ----
                                                  (in thousands, except per share data)
     <S>                                            <C>          <C>         <C>
     Net loss:            As reported..........     $(6,864)     $(4,894)    $(4,286)
                          Pro forma............     $(7,483)     $(5,662)    $(5,512)

     Net loss per share:  As reported..........     $ (0.67)     $ (0.38)    $ (0.32)
                          Pro forma............     $ (0.73)     $ (0.44)    $ (0.41)
</TABLE>

     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 years 1997, 1998 and 1999: risk-free interest rates ranging
from 5.7% to 7.1% based on the rate in effect on the date of grant; no expected
dividend yield; expected lives of 8 years for the options; and expected
volatility of 75%.

     Because the SFAS No. 123 method of accounting is not required to be applied
to options granted prior to the fiscal year ended June 30, 1996, the resulting
pro forma compensation cost may not be representative of that expected in future
years. The weighted average fair value of options granted was $4.48, $2.93 and
$0.99 for the fiscal years ended June 30, 1997, 1998 and 1999, respectively.

     Information with respect to options outstanding at June 30, 1999 is as
follows:

<TABLE>
<CAPTION>
                                                                        Weighted Average
                                                  Weighted Average         Remaining        Number of Vested
    Exercise Price Per Share          Shares       Exercise Price       Contractual Life         Shares
--------------------------------------------------------------------------------------------------------------
<S>                               <C>             <C>                   <C>                 <C>
          $0.50--$1.66               1,196,000          $1.28                  9.2                    281,125
          $2.00--$3.00                 183,900          $2.32                  8.0                     84,841
          $3.06--$4.94                 694,300          $3.96                  8.2                    297,320
          $4.63--$7.88                 163,875          $7.56                  7.3                     98,517
                                  ----------------------------------------------------------------------------
                                     2,238,075          $2.65                  8.7                    761,803
                                  ============================================================================
</TABLE>

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 of shares to non-employee directors. 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. In fiscal 1998 as
part of this plan, the Company also granted shares to non-employee directors who
had served as directors since the Company's initial public offering in October
1996. For the year ended June 30, 1998, the Company granted a total of 19,411
shares of common stock pursuant to this plan and recorded $80,000 associated
compensation expense. The Company did not grant any shares pursuant to this plan
during fiscal 1999 because the Company did not hold an Annual Meeting of
Stockholders during fiscal 1999.

                                      F-15
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)


Warrants

     In March 1994, the Company sold 1,000,000 shares of common stock and
warrants ("Warrants") to purchase an aggregate of 1,000,000 shares of common
stock for $1.50 per share, subject to adjustment in certain circumstances. In
lieu of paying cash upon the exercise of the Warrants, the Warrant holders had
the right to have the Company convert all or a portion of the Warrants into
shares of common stock at a rate of two Warrants for each share of common stock
via a "Cashless Exercise." During the year ended June 30, 1997, of the remaining
885,000 Warrants, 377,500 Warrants were converted into 188,750 shares of common
stock via Cashless Exercises and Warrants to purchase 507,500 shares of common
stock were exercised for $1.50 per share.

Employee Stock Purchase Plan

     In December 1996 the Company adopted an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code and reserved 200,000 shares of common
stock for issuance under the plan. Under this plan, employees are entitled to
purchase shares at 85% of the fair market value. During the years ended June 30,
1997, 1998 and 1999, the Company issued 25,275, 74,109 and 77,843 shares of
common stock, respectively, at average purchase prices of $3.77, $2.55 and $0.82
per share, respectively, pursuant to the Employee Stock Purchase Plan.


5. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK:

     During fiscal 1996, the Company sold to investors 6,000,000 shares of
$0.001 par value Redeemable Series A Convertible Preferred Stock ("Series A
Preferred Stock") for $1.00 per share resulting in net proceeds to the Company
of approximately $5,931,000. Upon consummation of the Company's Initial Public
Offering of common stock in October 1996, each share of Series A Preferred Stock
converted into one-half share of the Company's common stock.


6. CREDIT FACILITY:

     The Company has a $2,000,000 revolving line of credit with Silicon Valley
Bank, as amended (the "Credit Facility"). Borrowings under the Credit Facility
will bear interest at the bank's prime lending rate. As amended on February 1,
1999, the Credit Facility requires the Company to secure all indebtedness with
cash held at the bank's offices in an amount not less that 100% of the
outstanding amount of all indebtedness. The Credit Facility requires payment of
all outstanding principal, if any, plus all accrued interest on March 30, 2000.
In connection with the lease of the Company's Princeton, New Jersey office
facility, Voxware had outstanding a $300,000 standby letter of credit at June
30, 1999 naming the lessor of the office facility beneficiary of the standby
letter of credit in the event that the Company defaults on the lease. As
required by the Credit Facility, the Company has secured the $300,000 standby
letter of credit with cash that is included in "other assets, net" in the June
30, 1999 balance sheet. In addition to the Credit Facility, the agreement with
Silicon Valley Bank provides a lease component in the amount of $1,500,000 for
the purpose of providing a facility for the financing of the lease payments owed
to an equipment lessor, of which none was outstanding as of June 30, 1999.


7. 401(k) SAVINGS PLAN:

     Effective January 1997 the Company adopted a 401(k) Savings Plan (the
"401(k) Plan") available to all employees. The 401(k) Plan permits participants
to contribute up to 10% of their base salary to the 401(k) Plan not to exceed
the limits established by the Internal Revenue Code. In addition, the Company
matches 25% of employee contributions on the initial 6% contributed by
employees. Employees vest immediately in all employee contributions and Company
match contributions. In connection with the 401(k) Plan, the Company recorded
compensation expense of approximately $27,000, $52,000 and $33,000 for the years
ended June 30, 1997, 1998 and 1999 respectively.

                                      F-16
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)


8. INCOME TAXES:

     As of June 30, 1999, the Company had approximately $18,000,000 of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards begin to expire in 2009. Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period. As of
June 30, 1999, the effect of such limitations, if imposed, is not expected to be
material.

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and for income tax purposes. As of June 30, 1999, the Company had deferred tax
assets of approximately $7,200,000 relating primarily to net operating loss
carryforwards. The net deferred tax asset has been fully offset by a valuation
allowance.


9. COMMITMENTS AND CONTINGENCIES:

     The Company leases its office facilities and certain equipment under
operating leases with remaining noncancelable lease terms generally in excess of
one year. Rent expense was approximately $756,000, $810,000 and $599,000 for the
years ended June 30, 1997, 1998 and 1999, respectively. Future minimum rental
payments for the Company's office facility and equipment under operating leases
as of June 30, 1999 are as follows:

<TABLE>
<CAPTION>
                                                     (in thousands)
           <S>                                       <C>
           Year Ending June 30,
              2000.................................     $  498
              2001.................................        396
              2002.................................        387
              2003.................................        351
                                                        ------
                                                        $1,632
                                                        ======
</TABLE>

     In July 1998 the Company entered into a Sublease Agreement under which the
Company subleased approximately 47% of the space in its Princeton, New Jersey
office facility. Rental income related to this sublease has been netted against
rent expense in the Company's financial statements. The initial term of the
Sublease Agreement will expire on May 31, 2003. The amounts expected to be
received under the Sublease Agreement are not included in the above schedule. In
connection with the Company's acquisition of substantially all of the assets of
Verbex Voice Systems, Inc. in February 1999 (see Note 1), the Company assumed a
lease for space in Cambridge, Massachusetts. The Cambridge space is primarily
used for research and development, product engineering and final assembly and
testing. The Cambridge lease expires on May 31, 2000, subject to an option to
extend the lease through June 30, 2000.
    The Company has outstanding a $300,000 standby letter of credit in
connection with the Company's office facility lease (see Note 6).

     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 three-year employment and severance agreements with two
officers. The agreements provide for minimum salary levels, adjusted annually at
the discretion of the board of directors. Each of the agreements are
automatically renewable for successive one-year terms, unless terminated by
either party.

                                      F-17
<PAGE>

                         VOXWARE, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)

10. RELATED-PARTY TRANSACTIONS:

     The Company derived approximately 16%, 21% and none of its revenues for the
years ended June 30, 1997, 1998 and 1999, respectively, from Netscape
Communications Corporation, which owned 500,000 shares of the Company's common
stock as of June 30, 1997, and none as of June 30, 1998 and 1999.


11. SEGMENT INFORMATION:

     The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in fiscal year 1999. Prior to the Company's
acquisition of Verbex in February 1999 (Note 1), the Company had been managed in
one operating segment. Since the Verbex acquisition, the Company has been
managed in two operating segments: industrial speech recognition products and
speech compression technologies. The industrial speech recognition products
business relates to the Company's current business focus since the Verbex
acquisition in February 1999. The speech compression technologies business
relates to the Company's business focus prior to the Verbex acquisition in
February 1999. In September 1999, the Company sold substantially all of the
assets related to the speech compression business to Ascend. In connection with
the sale to Ascend, the Company received a license back from Ascend to service
the Company's existing speech compression licensees, and to continue to license
the speech compression technologies for uses that are not competitive with
Ascend, subject to the consent of Ascend. The Company does not expect to pro-
actively market the speech compression technologies in the future, and expects
new licensing activity relating to the speech compression technologies business
to decrease significantly over time.

     Business segment information for the year ended June 30, 1999 is included
in the table below. Corporate and administrative overhead expenses, including
costs related to executive management, accounting and finance, information
systems and human resources are included in the speech compression technologies
segment. Intangible assets and goodwill related to the Verbex acquisition (Note
1), and the amortization of those assets, are included in the industrial speech
products segment.

<TABLE>
<CAPTION>
                                        Industrial Speech     Speech Compression
                                        Products Segment      Technologies Segment      Total
                                        -----------------     --------------------    -------
        <S>                             <C>                         <C>               <C>
        Revenues                        $    809                    $  2,077          $ 2,886
        Loss from operations                (938)                     (3,887)          (4,825)
        Depreciation and amortization        488                         200              688
        Identifiable assets                6,156                       6,436           12,592
</TABLE>

     Additionally, for the years ended June 30, 1997, 1998 and 1999, revenues
included approximately $141,000, $543,000 and $524,000, respectively, of sales
to customers outside the United States. These sales outside the United States
related to the speech compression technologies segment.


                                      F-18