<PAGE>
 
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                       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, 1998
                                  -------------------
     
[ ]     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 $8,896,413 as of August 31, 1998, based upon the
closing sale price of the Common Stock as quoted on the Nasdaq National Market.
This amount excludes an aggregate of 3,808,075 shares of Common Stock held by
executive officers, directors and by each entity that owns 5% or more of the
Common Stock outstanding at August 31, 1998.  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 August
31, 1998 was 13,292,524.

                      DOCUMENTS INCORPORATED BY REFERENCE

  As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's fiscal 1998 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Annual Report on Form 10-K.

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<TABLE> 
                                                             VOXWARE, INC.

                                                       FORM 10-K ANNUAL REPORT

                                                  For Fiscal Year Ended June 30, 1998

                                                            TABLE OF CONTENTS


<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 .........................................................  23             
                                                                                                                                 
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 ..................................... 24             

Index to Financial Statements ................................................................................... F-1   
</TABLE>

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                                     PART I
                                        
  THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN 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, AS WELL AS
THOSE NOTED IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE.  UNLESS REQUIRED
BY LAW, THE COMPANY 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 THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION.


ITEM 1.    BUSINESS.


OVERVIEW

  Voxware develops, markets, licenses and supports digital speech and audio
technologies, solutions and applications. MetaVoice(TM), the Company's
innovative speech coding technology, is designed to reproduce high quality
speech while requiring very low communications bandwidth and processing power.
In addition to efficiently compressing speech, MetaVoice enables good quality
speech reproduction even when data are lost and delayed, and provides a broad
array of voice transformation capabilities. MetaSound(TM), the Company's general
audio coding technology built on core technology licensed from Nippon Telegraph
and Telephone Corporation ("NTT"), is specifically suitable for high quality
music compression. These technologies enable Voxware and its licensees to create
a new generation of audio-enhanced communications and interactive products for
bandwidth-constrained environments, such as consumer devices, wireless systems,
and the Internet. The Company licenses its technologies to software and hardware
companies for a wide range of applications and services including consumer
devices, multimedia applications, wireless communications, and Internet Protocol
(IP) telephony. To accelerate adoption of its technologies, the Company seeks to
broadly license its products and establish strategic relationships with market
leaders.

The Company's initial emphasis was to license its technologies to leading
vendors of multimedia applications, particularly in the Internet software
market.  The Company continues to target the multimedia applications market, and
the Company also markets its technologies to the consumer devices, wireless
communications, and IP telephony markets.


INDUSTRY BACKGROUND

  Due to the emergence of powerful low-cost processors and the growth of the
Internet and other digital networks, the markets for digital speech technologies
are expanding. Given the natural preference for speech as a medium for
communication and expression, voice capabilities are being added to a wide array
of products. The rapidly declining cost and increasing power of digital signal
processors ("DSPs") enable high quality voice using a fraction of the memory or
bandwidth historically required at prices that

                                       3
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are acceptable for a range of business and consumer applications. The increasing
power of low cost DSPs makes it possible to record and transform speech and
audio for a wide variety of products aimed at the consumer and business markets
such as pocket translators, telephone answering machines and other recording
devices, wireless personal digital assistants (PDA's), set-top boxes, console
games, smart phones, network computers, personal electronic organizers and 
voice-enabled toys. The growth of cellular telephony and improvements in radio
and satellite technology have enabled the development of new wireless services.
These services include voice paging systems, which are designed to deliver voice
messages directly to a paging device without the need for a user to call in to
receive a message, and hand-held satellite telephone systems, which are designed
to allow mobile telephone service to and from remote locations.

  In addition, a combination of significant technological trends has led to the
widespread adoption of the Internet by a growing number of individuals and
business users. The proliferation of communication-enabled multimedia personal
computers, the availability of intuitive, graphical Web browsers and an
increasingly robust network infrastructure, have allowed widespread access to
the Internet and have increased the use of the World Wide Web (the "Web") by a
large number of users for a broader range of applications. The Web enables users
to find, retrieve and link information on the Internet through a consistent
graphical interface that makes the underlying complexities transparent to the
user. In addition, the Web is an interactive environment, which facilitates the
exchange of multimedia-rich information and entertainment content among users
worldwide. The Company believes that adding high quality voice and audio
communication capabilities to existing text and graphic applications for the
Internet can broaden and enrich Internet users' communications. As multimedia
and communications capabilities become prevalent components of personal computer
systems, a market for voice, audio and video products for the Internet is
emerging. Examples of emerging Internet voice and general audio applications are
multimedia Web pages incorporating pre-recorded voice, point-to-point and multi-
party telephony, telephony gateways linking Internet users to public and private
telephone networks, broadcasting of live and pre-recorded content, voice
messaging integrated with e-mail and Web pages and multiplayer games which allow
participants to speak to one another.


MARKET STRATEGY

  The Company's initial target market was primarily multimedia software
developers and products. Over the past fiscal year, the Company has been
broadening its strategic focus to markets other than multimedia software.
Specifically, in targeting customers in the electronic devices market, and in
aiming to provide customized solutions to customers in that market, the Company
has aimed to be selective in marketing and licensing to customers who the
Company believes are more likely to provide a higher quality OEM relationship
than its existing licensees in the multimedia software market. Over at least the
next several quarters, the Company expects to continue to sign fewer new
licensing agreements on a per-quarter basis in comparison to the prior year
comparable periods. At the same time, the Company's objective is to form
relationships with customers that the Company believes have more significant
potential for generating recurring revenue over the long term than the Company's
existing licensees in the multimedia software market. There can be no assurance,
however, as to the success of the Company's activities in these markets, or
whether the Company will form OEM relationships with such customers which
provide the Company with recurring revenue or prove beneficial to the Company.

  While any hardware-based customers (for example in the consumer devices and
wireless communications markets) may have more potential for recurring revenue
to the Company over the long term, over at least the next several quarters, the
Company would not expect any significant revenue from these customers reflecting
the longer revenue cycles inherent in hardware-based deals. Specifically, and in
contrast to multimedia which often may be characterized by acceptance of
deliverables up front and associated recognition of revenue, recognition of
revenue (if any) in hardware-based deals is contingent upon a variety of factors
including: preparation of feasibility studies, development and delivery of
customized software, testing and acceptance of software, development of the
licensee's hardware and product, successful integration of software into the
licensee's hardware and product, and shipment of the licensee's product. Each of
the foregoing contingencies applicable to hardware-based transactions is
uncertain and takes time, and none of the foregoing contingencies are certain to
be successfully achieved. Therefore the revenue recognition cycle in hardware-
based transactions is longer than in software-based transactions. It should also
be noted that certain hardware-based markets such as wireless communications,
are relatively new markets with new products, which further contributes to the
time delay and the uncertainty with respect to revenue recognition.

                                       4
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TARGET MARKETS

Consumer Devices

  The "consumer devices" marketplace is quite extensive and includes:
translators, set-top boxes, personal digital assistants (PDA's), smartphones,
voice memo devices, and toys. More and more handheld and other devices are
utilizing voice. The advent of lower cost memory and processors and the need for
more user-friendly, higher-quality sound is driving this move to speech. One
example is handheld translators. When a user inputs a word to be translated into
a handheld translator, the device plays back the word or phrase in the language
selected by the translator user. That "sound" is stored electronically on the
device along with the sounds of thousands of other words the translator is
capable of handling. To store all that sound data electronically would consume
an enormous amount of memory, driving the size and cost of the device beyond a
reasonable figure. To reduce the amount of memory required, the sound data is
compressed to a fraction of its original size, then inserted into the device's
memory. When the user asks for a translation, that compressed sound is
decompressed and played back to the user. Voxware provides the software that
performs that compression and decompression, often saving its customers money
and/or device size.

  The Electronic Industries Association estimates that the consumer electronics
market is approximately a $65 billion per year market.  The Company believes 
that the addition of speech capability to a growing number of consumer
electronic devices represents an opportunity for Voxware. In addition,
compression algorithms using 20-year old technology continue to be used in the
consumer devices market. Historically, the sound for many of these devices was
provided by text-to-speech products that generated a highly mechanical and
synthetic sound. Updating this sound capability in an economical manner also
presents potential market opportunities to Voxware.

  Consumer devices compression applications include translation, voice memo and
dictation, answering machine message storage, and providing voicemail
attachments to emails to preclude the need to use the tiny keyboards of most
PDA's. Voxware has developed low complexity (i.e., little processing power is
required and the software can therefore run on less expensive chips) and low
memory footprint algorithms specifically targeted to this market.

  During the Company's fiscal year ended June 30, 1998, the Company formed
relationships with several consumer device manufacturers for the license of the
Company's technologies to those customers. As of August 31, 1998, none of these
customers have shipped any products containing Voxware technology. The Company
believes that this is because it generally takes several quarters to develop,
test and ship products incorporating Voxware technologies. There can be no
assurance as to what extent, if any, or when, these customers will ship products
containing Voxware technology.


Wireless Communications

  The Company believes that wireless communications potentially represents one
of the more attractive and growing markets in high technology today.  Wireless
telephones, pagers, data communication devices, satellite communications, and
wireless local loop systems are just a few of the application segments in the
wireless marketplace poised for expansion.  According to the 1997 Multimedia
Telecommunications Market Review and Forecast, the market for mobile wireless
devices is expected to grow from $577 million in 1996 to over $2 billion in the
year 2000. Voxware's speech technologies have been designed and developed to
perform in an especially robust manner in links characterized by data loss and
limited bandwidth, which is the environment encountered in typical wireless
systems. The Company is investing efforts in understanding the needs of this
market for its speech compression and related technologies, so that it can move
to meet those needs.


Multimedia and IP Telephony

  The design of the Internet is fundamentally different from the architecture of
conventional voice networks. The Internet is a "packet-switched" network which
breaks down data into a series of smaller, discrete "packets" for transmission.
Each packet of data travels independently through the network to the destination
address, where application software reassembles the packets to recreate the
original data set. Due to the tremendous growth of Internet usage and the higher
bandwidth demands of multimedia applications and massive file transfers,
congestion occurs routinely on the Internet. As currently designed, the Internet
handles congestion by discarding or delaying packets or by sending packets from
the same source along different pathways, which can result in packets sent in
sequence arriving out of order. If the data packets represent a real-time speech
stream, the listener may perceive a gap or "choppiness" as a result of missing,
late-arriving or out-of-sequence packets.  In part, these challenges can be

                                       5
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addressed by compressing the speech signal, which decreases the number of bits
required to encode and transmit the signal.

  A majority of the Company's current licensees compete in the multimedia
Internet software market. Many of the companies in this market, including a
signficant number of the Company's licensees, are poorly capitalized, compete
against much more established companies and/or have businesses that are
relatively immature. Many of the licenses entered into in the multimedia
Internet software market have been in effect for a long period of time and the
Company believes that a significant number of its licensees which compete in
this market have not incorporated, and may never incorporate, Voxware's
technologies into their products. Therefore, the Company may never derive
royalties or other recurring revenues from many of its existing license
agreements in the multimedia Internet software market. While the Company does
not expect the multimedia Internet software market to generate significant
recurring revenues to the Company, if any, the Company expects to continue to
selectively pursue opportunities in that market since that market has the
potential to continue to offer non-recurring revenue opportunities to the
Company through initial license fees and service revenues. With respect to IP
telephony, initial deployments in that market have primarily utilized
standardized codec technologies (and not Voxware's proprietary codec
technologies). In addition, initial deployments in IP telephony have generally
been characterized by bandwidth-rich managed networks (Intranets), which
generally do not benefit significantly from low bandwidth solutions such as
Voxware's technologies. Principally, in consequence of these factors, the
requirement for Voxware's technologies in the IP telephony market is not
expected to significantly arise at least for the next two years, if ever. The
Company continues to assess potential opportunities in that market.

TECHNOLOGIES 

  Voxware has developed a comprehensive, integrated set of speech and audio
coding technologies specifically to address the challenges associated with real-
time speech and audio communication in low bandwidth media and devices and over
the Internet. MetaVoice and MetaSound are designed to deliver high quality
speech and audio in a fraction of the bandwidth generally required by
conventional compression solutions and within the constraints of available
processing power. These characteristics are designed to make MetaVoice and
MetaSound preferred solutions for speech and general audio communications in
environments such as consumer and business products and devices and the Internet
where transmission bandwidth, processing power and storage capacity are limited.
MetaVoice and MetaSound are designed to operate on a broad range of application
platforms and processors. Voxware's technologies enable its customers to add new
speech, music and general audio capabilities to their existing products and to
create a new generation of integrated speech-, music- and audio-enabled
products.

  The MetaVoice codec uses complex mathematical models that can accurately
reproduce human speech based on a finite number of descriptive parameters.
MetaVoice is currently capable of compressing speech data from a rate of 128
kbps to 2.4 kbps, enabling the creation of very small packets which are capable
of flowing through the network more easily in the presence of congestion and low
bandwidth.  Similarly, MetaSound is currently capable of compressing music and
general audio data from a rate of 706 kbps to as low as 6 kbps.

  The Company believes that the low bandwidth and processing requirements of
MetaVoice potentially have significant advantages in markets such as wireless
telephony and certain consumer and business products. For instance, the
efficient compression of MetaVoice could enable telecommunications providers to
expand the capacity of their network systems. In addition, embedding MetaVoice
on a wide variety of DSP chips could expand memory for digital answering
machines, personal data assistants, voice-enabled toys and other products.

  MetaVoice also incorporates powerful capabilities for speech manipulation and
special effects unique to its model of human speech. Based on these additional
characteristics, the Company is developing technologies for manipulation of
voice to modify voice identity, modulate pitch and alter playback speed.

  The MetaSound codecs were developed based on technology licensed from NTT.
They are designed to compress a wide range of audio types and are specifically
targeted at online music applications.  The MetaSound codecs are available in  8
monaural bit rates - 6, 8, 10, 16, 24, 32, 40, and 48 kbps, as well as 8 stereo
bit rates - 12, 16, 20, 32, 48, 64, 80, and 96 kbps.

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 MetaVoice and MetaSound Coding Technologies

  Two principal design choices, in combination, underlie MetaVoice's ability to
produce high quality speech at low bandwidth:

  .  Speech specific vs. general audio coding--MetaVoice is designed
     specifically to encode speech signals rather than music or other general
     audio signals. Speech signals typically contain only one voice at a time,
     whereas music and other general audio signals may contain dozens of
     simultaneous "voices"--both human and instrumental. Also, as compared to
     music signals, the rate at which speech signals change is limited by the
     human vocal apparatus. MetaVoice exploits these characteristics of speech
     to achieve greater compression than is generally achievable with general
     audio coding technologies.


  .  Parametric vs. waveform coding--MetaVoice is a parametric codec, whereas
     most conventional speech codecs are waveform codecs which use linear
     prediction techniques to reduce the amount of information necessary to
     represent the input speech signal. When the number of bits used to
     represent the waveform is reduced below critical limits as the compression
     is increased, the linear prediction approach can no longer reproduce an
     accurate waveform, resulting in poor speech quality. At low bit rates, a
     properly engineered parametric codec such as MetaVoice is capable of
     delivering speech quality superior to that of a waveform codec.

  In addition, MetaVoice technology is highly tolerant of lost data packets,
making it well suited to Internet transmission. The codec is designed to predict
successive information segments. If a packet is lost, the codec automatically
interpolates across the information it has available, reducing the perceptual
impact of the missing information.  The Company has developed several different
speech codecs based on MetaVoice technology.  These include RT24, RT29, SC3/6,
VR12 and VR15 which are designed to address varying needs in the marketplace.

  The Company licenses its MetaVoice and MetaSound codecs to third parties for
use in their products. The codecs are generally delivered to licensees in the
form of software development kits ("SDKs") which provide a high level interface
that simplifies integration of the codec into the licensee's application. The
licensee of a codec receives an encoder to convert the speech and / or audio
files into the appropriate format and a player to reconstruct the original
speech and / or audio. Voxware's codecs operate on a wide range of processors,
such as Intel's 486, Pentium, Pentium Pro and MMX, Motorola's PowerPC and 68040,
SPARC, Digital's Alpha and other general purpose processors. The Company is
currently porting its codecs to popular DSP processors and other DSP processors
based on customers' specific requirements. Voxware's SDKs provide a uniform
environment for most popular operating systems, including Microsoft Windows 3.x,
95 and NT, Mac OS and several Unix platforms (see "PRODUCTS"). The

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time required for a licensee to incorporate the Company's codecs into its
product varies from as little as a few minutes in the case of preexisting
software applications using standard interfaces, to several quarters in the case
of devices requiring porting to new platforms or other adaptation of the codecs.


 VIPSuite

  VIPSuite is designed to provide software application developers access to
Voxware's codecs and QoT technology and is targeted principally to developers of
Internet telephony gateways and Internet telephones.  VIPSuite is designed to
provide four integrated capabilities:

  1. Speech coding, based on Voxware's MetaVoice coding technologies known as
     SC-3/6 (a communications quality scaleable codec at 3.2 kbps and  a toll-
     quality codec at 6.4 kbps), which is also marketed separately from
     VIPSuite.

  2. Frame loss concealment, which masks the perceptual impact of lost or
     delayed data by interpolating missing data automatically.

  3. Adaptive Jitter Buffer Control, which minimizes latency due to irregular
     arrival of packets.

  4. Adaptive Transmission Control, which automatically adds redundancy or
     "interleaves" frames to further reduce the impact of lost or dropped data.


 QoT(TM) -- Quality of Transmission Management

  The Company has also developed QoT technology to enhance the quality of voice
transmitted over the Internet or other IP networks.  This  technology manages
the incoming data from the codec, interpolating the missing data to minimize
perceptual degradation.  Based on continuously updated measurements of network
performance, Voxware's QoT technologies adjust the buffers on the receiving end,
and send instructions to the transmitter on how data should be "packetized" for
transmission.  When the Internet is congested and is losing or delaying a
relatively high percentage of packets, these technologies add error correction
information into each outgoing packet. At the point of reception, playback
buffers are dynamically shortened or lengthened and speech synthesis is
manipulated to minimize delay and reduce the perception of choppiness.


Voice Modeling:  VoiceFont and Voice Effects Technologies

  MetaVoice's proprietary approach to coding the perceptually relevant
attributes of the human voice are available for use in transforming voice
attributes including pitch, timbre and timing. The Company has released its
first version of VoiceFont, which enables the manipulation of a speaker's voice
into a fixed set of transformations.  The Company has no current plans to
continue its research of voice modeling except as may be agreed upon with a
specific customer on a case-by-case basis, however the Company makes voice
modeling technologies available to licensees desiring such technologies.


PRODUCTS

  The Company has marketing groups which target the following markets:  Consumer
Devices, Multimedia Software, Wireless Communications and IP Telephony.  In
performing marketing functions, these marketing groups leverage Voxware's core
speech and audio processing technologies, which are: Software Development Kits
("SDKs"), Applications, and Embedded Systems Products.


 Software Development Kits

  Voxware has developed several SDKs designed to enable customers to integrate
real-time speech and audio into their products.  These SDKs include Application
Programming Interfaces (APIs) in various languages (e.g., C and C++) and
operating systems, and comprehensive documentation.  Additionally, Voxware
provides application development and integration aid for customers interested in
accelerating application development activities.  Available SDKs include:

  VOXWARE COMPRESSION TOOLKIT (VCT) - The VCT is a development API that enables
  integration into applications requiring speech or audio technology, providing
  access to Voxware's real-time, low-complexity, frequency domain codecs at data
  rates as low as 1,200 bps.  Applications include one-way audio streaming over
  the Internet, compression of speech and audio for multimedia CD products,
  unified messaging applications, and

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  music sampling over the Internet. The VCT is Voxware's broadest and most
  comprehensive toolkit, and includes Voxware's industry leading MetaVoice
  (speech) and MetaSound (audio) codecs.

  VOXWARE CONFERENCING PLATFORM (VCP) -  The VCP is an SDK which enables
  Internet conferencing capabilities when integrated into Websites and other
  applications.  Websites built using the VCP can enable voice- and audio-
  enhanced capabilities including audience participation in:  product
  discussions, product tips and support exchanges, product feedback to a
  company, discussions of relevant issues related to the respective site, and an
  overall expansion from one-way Web promotion to a multi-dimensional
  information exchange.

  TELEPHONY NETWORK TOOLKIT (TNT) -  The Telephony Network Toolkit (TNT) is an
  SDK that enables software application developers to add real-time, PC-to-PC,
  voice communications to PC applications.  Developers can use TNT to send and
  receive voice data in real time over a TCP/IP network.  With just a few TNT
  API function calls, applications can connect to another TNT-based application
  on another person's computer, allowing a conversation as though they were
  talking on the telephone.  TNT automatically handles a variety of network
  error conditions (missing, out-of-sequence, or delayed packets) that normally
  disrupt voice communications over the Internet, and continually monitors
  incoming packets and adjusts buffer sizes accordingly as network conditions
  change.


 Applications

  Voxware's application products are software products that require no
programming expertise to deploy. The Company has developed three Windows(TM)-
driven applications which utilize MetaVoice technology for communication on the
Internet: VoxPhone, VoxChat and ToolVox. Distribution of VoxPhone is largely
through third party distributors rather than directly by the Company to end
users; and VoxChat and ToolVox are marketed as foundation technologies that are
customized for specific OEM customers, and as of January 1998 are not sold
directly to end users or distributors.

  VOXPHONE - VoxPhone is Voxware's Internet telephone client software, allowing
  users to speak with other H.323-compatible telephone users.  VoxPhone allows
  users to take advantage of Voxware's speech coding and QoT technology.  Users
  can talk to other H.323 phones individually, or conference up to 5 additional
  conversationalists.

  VOXCHAT -  Using the VCP SDK, Voxware has developed the VoxChat Internet
  conferencing application for customers that would rather not build their own
  conferencing application.  VoxChat is a scalable voice conferencing system
  that enables the creation of Internet and intranet-based conferences,
  broadcasts, public and private chat rooms, and distance learning venues. It is
  a client/server system that allows up to 200 users per server, offering real-
  time free-form or moderated audio conferencing over IP networks. It can be
  configured with different user limits, and allows text conferencing and
  Internet content.  VoxChat is built on top of a highly scalable architecture
  that uses less processing power on the server than conventional architectures.

  TOOLVOX - The ToolVox system consists of an encoder, incorporating either the
  RT24 or the RT29HQ codecs which compress recorded speech files into the ".vox"
  file format, and a player which decodes the speech data to reproduce the
  original speech. The ToolVox system allows Web content providers to
  incorporate pre-recorded voice as part of their multimedia Web pages.


 Embedded Systems Products

  Voxware also makes its leading speech and audio codecs available to customers
building products that use digital signal processors (DSPs) and RISC processors
to house the speech codecs.  For example, consumer products, telephony DSP
boards, and children's toys all use DSPs to process speech.  Voxware has ported
its speech and audio technologies to industry-leading DSPs such as those
manufactured by Texas Instruments, Motorola, Hitachi, and others.  Voxware
offers codecs previously ported to DSPs, and undertakes new porting activities
at customer requests on a case-by-case basis.

                                       9
<PAGE>
 
THE VOXWARE STRATEGY

  The Company's objective is to establish its core technologies as preferred
solutions for speech and audio communications in its target markets. The
Company's strategy incorporates the following key elements:


 Establish Technological Leadership

  The Company markets low bandwidth speech and audio compression in its target
markets. The Company intends to continue to extend the functionality and uses of
its core technologies. By continuing to invest in research and development, the
Company believes that it can further improve its technologies, allowing it to
deliver continued improvements in compression and quality performance.


 Target the Markets for Consumer Devices, Wireless Communications, and Internet
Telephony

  The Company is developing technologies that are specifically designed to
address issues associated with voice in consumer devices, voice in wireless
communications and voice over data networks, and seeks to license these
technologies to software and hardware companies which are developing
applications for these markets. Some of the Company's target markets for
software, hardware and services are at early stages of development and as such,
the Company is engaged in long-term initiatives in both product development and
marketing in an effort to capitalize on the potential long-term growth of these
markets. As a result, the Company expects to enter into lengthy product
development programs and lengthy sales cycles in order to target the
opportunities in those markets.


  Accelerate Adoption of Technology and Enhancement of Offerings Through
Strategic Relationships

  The Company seeks to establish and extend strategic relationships with market
leaders in order to rapidly achieve market penetration. The Company believes
these strategic relationships may broaden the Company's user base, accelerate
adoption of the Company's core technologies, and enhance and broaden the
Company's offerings.


 Deepen Market Penetration Through Selective Licensing Program

  The Company seeks to selectively license its MetaVoice and MetaSound
technologies in market segments where complementary applications incorporating
speech and audio can benefit from the low bandwidth requirements exhibited by
MetaVoice and MetaSound. To date, the primary markets in which the Company is
licensing its technologies include Internet telephony and conferencing,
interactive games and consumer chat applications. The Company intends to seek to
leverage the low bandwidth and processing requirements of its technologies to
address a variety of applications beyond the Internet, such as pocket
translators, wireless personal digital assistants (PDA's), set-top boxes,
console games, smart phones, network computers, wireless telephony, digital
answering machines, audio-enabled toys, satellite communications and low-cost
electronic recording devices.


 Build Multiple Distribution Channels

  The Company seeks to establish multiple channels for the distribution of its
products to its targeted market segments. The Company's direct sales force seeks
to reach software and hardware companies. The Company will seek to develop
indirect marketing channels such as bundling agreements with OEMs and vendors of
telephony hardware and related products and value added resellers.


 Develop Recurring Revenue Through Royalty-Based Licensing

  The Company's objective is for a significant portion of its future revenues to
be in the form of royalties or other recurring payments based upon the sales of
products by the Company's licensees which incorporate the Company's
technologies, and in the form of service revenues.  The Company has entered into
license agreements providing for royalties and recurring payments and service
revenues, and it is the intention of the Company to continue to pursue license
opportunities that generally include a recurring revenue and/or service
component.  In part due to the early stage of development of some of the
Company's primary target markets, the Company expects that these royalty-based
and service-based agreements will require several quarters in order to yield
significant royalty and/or service revenues, if any, to the Company.

                                       10
<PAGE>
 
RESEARCH AND PRODUCT DEVELOPMENT

  Voxware believes that continued timely development and introduction of new
technologies are essential to establishing, maintaining and increasing its
competitive position. The Company currently conducts most of its product
development effort in-house. The Company also employs independent contractors to
assist with certain product development and testing activities. The Company's
Research and Development group consisted of 23 engineers and programmers as of
August 31, 1998.  Voxware intends to continue to emphasize core research and
development.

  The Company has several products under development, including the following
products scheduled for final release during the fiscal year ending June 30,
1999:
 
ULC15 -  The Ultra-Low Complexity decoder is designed for playback-only
applications on consumer devices such as translators, electronic dictionaries
and others in which data is compressed on a system other than the device itself.
It thus represents a favorable trade between speech quality and complexity,
while maintaining very low bit rates (below 2 kbps). Initial versions of this
technology have been licensed to customers in the consumer devices market.

LC Line - The Low Complexity line of codecs are also designed and targeted to
the consumer devices marketplace, but for applications that require both
encoding and decoding on-chip.  The LC line is also distinguished by its high
quality-medium bit rate structure, and offers bit rates from 16 kbps through 64
kbps.  The LC technology codes both voice and music effectively, and offers very
low full-duplex complexities.  A launch customer for the first LC products has
been signed by Voxware.

ITU4 - Voxware has submitted a candidate algorithm to the International
Telecommunications Union ("ITU") for the ITU's  on-going 4 kbps standard codec
competition.  The Company believes that satellite communication companies may be
interested  in the winner of this competition, and the ITU has identified
wireless applications as one of the key target markets for the new standard. The
Company believes that its submission is considered very competitive, and that
the Company's participation in the competition can  enhance its entry into the
wireless devices marketplace.  There can be no assurance as to the Company's
success in that competition.  Even if the Company is successful in that
competition, there can be no assurance that that success will result in any
significant revenue to the Company.


STRATEGIC RELATIONSHIPS AND LICENSEES

  The Company seeks to establish and extend strategic relationships with market
leaders in order to rapidly achieve market penetration. The Company believes
these strategic relationships can broaden the Company's user base, accelerate
adoption of the Company's core technologies, and enhance and broaden the
Company's offerings. The Company believes that such strategic relationships can
provide early insight into and influence on future industry standards, offer
access to leading edge technology and support optimization of the Company's
technology on key computing platforms. The success of the Company is dependent
on the ability of licensees to achieve widespread distribution and acceptance of
their products which incorporate the Company's products. Failure by the
Company's licensees to achieve widespread distribution and acceptance of
products which incorporate the Company's products will have a material adverse
effect on the Company's business, operating results and financial condition. See
EXHIBIT 99 "IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS."

  The Company broadly licenses its codecs and bundles its applications with the
products of software and hardware companies. The Company generally seeks to
obtain a combination of initial payments and recurring revenue payments from
licensees. The amount and structure of these payments are dependent on many
factors including the licensed codec or application, the licensee's intended
application and target market. The Company believes that developing a recurring
revenue stream will be a key to the Company's financial success. The Company's
licensees have no obligation to develop or market products incorporating the
Company's technologies.  Whether a recurring revenue stream develops and the
nature and amount of that revenue stream will depend on many factors, including
the success of the Company's licensees in developing and selling products which
incorporate the Company's technologies.

                                       11
<PAGE>
 
SALES, MARKETING AND DISTRIBUTION

  The Company sells its products directly to software and hardware companies.
The Company's direct sales force combines field focuses on major Internet
software developers, hardware OEMs, as well as Internet and telecommunication
service providers.

  As of August 31, 1998, the Company had 10 direct sales and marketing
personnel. Codec licensing is handled primarily through the direct field sales
force. The Company also has sales offices in Europe and Asia in order to create
business relationships with international software and hardware companies. The
Company intends to continue to invest in its overall sales efforts and, as a
result, intends to maintain or increase the absolute dollar level of sales and
marketing expenses in future periods, depending upon future revenue levels.


CUSTOMER MAINTENANCE AND ENGINEERING SERVICES

  The Company believes that customer maintenance and engineering services are
important competitive factors for its business. Customer maintenance services
include providing updates and error corrections to licensees of the Company's
products and, in the case of multimedia software licensees, porting the
Company's technologies to specific software platforms that are considered
industry standards.  Engineering services include providing technical resources
to support customer-specific development efforts, which include porting the
Company's technologies to specific hardware platforms.  The Company provides
those services, along with product demonstration software, evaluation software
and application notes via its engineering and support teams located in
Princeton, New Jersey.


COMPETITION

  The market for speech and audio technologies and products is intensely
competitive. The Company expects competition to persist, intensify and increase
in the future. Many of the Company's current and potential competitors have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company. The Company's competition for voice processing software products and
services is primarily emerging from two sources: developers of speech
compression algorithms and developers of software applications that incorporate
speech. Direct competitors include DSP Group, Inc., Lernout & Hauspie Speech
Products N.V., DVSI, Cipro, and Lucent Technologies, Inc. in the speech coding
market and Electric Magic Co., FreeTel Communications,  Netspeak Corp., PGP
Inc., and VocalTec, Ltd., Inc. in the Internet applications market. Several of
these companies are developing new products or enhancing existing products
specifically to operate in low bandwidth environments. Companies that have
developed low bit rate parametric speech compression technologies but do not
currently compete with the Company directly include Texas Instruments,
Incorporated. The competition in the market for Internet telephony products, in
particular, is intense. Many companies, including Intel Corporation, Microsoft
and Netscape distribute free Internet telephony applications offering basic
functionality. In addition to the Company's current competitors, the Company
expects other established companies, including large software companies, such as
Microsoft, and telecommunications companies, such as interexchange carriers
(such as AT&T Corp. and MCI Telecommunications), regional Bell operating
companies and cable companies, to compete in the markets for speech compression
technologies and digital speech applications, including Internet telephony. The
ability of certain of the Company's competitors to bundle other services and
products with voice products could put the Company at a competitive
disadvantage. In addition to specific corporate competitors, Voxware encounters
competition in certain markets from standard coding technologies.  These include
G.xxx series codecs, MPEG-X codecs, and older algorithms such as LPC10.  Voxware
also encounters competition from its prospective customers, when such
prospective customers have their own internal speech encoding research and
development.


PATENTS AND PROPRIETARY INFORMATION

  To date, the Company has applied for six patents relating to the Company's
voice coding technology and related technologies, two of which have been issued.
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. There can be no assurance
that patent applications to which the Company holds rights will result in the
issuance of patents, or that any issued patents will provide commercially
significant protection to the Company's technology, products and processes. In
addition, there can be no assurance that others will not independently develop
substantially equivalent

                                       12
<PAGE>
 
proprietary information not covered by patents to which the Company owns rights
or obtain access to the Company's 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 the
Company's products. In addition, the laws of certain countries may not protect
the Company's 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.
The Company's success is also dependent upon unpatented trade secrets which are
difficult to protect. To help protect its rights, the Company requires employees
and consultants to enter into confidentiality agreements that prohibit
disclosure of the Company's proprietary information and requires the assignment
to the Company of their ideas, developments, discoveries and inventions. There
can be no assurance, however, that these agreements will provide adequate
protection for the Company's trade secrets, know-how, or other proprietary
information in the event of any unauthorized use or disclosures.


EMPLOYEES

  As of August 31, 1998, the Company had 43 full-time employees consisting of 23
in research and development, 10 in sales and marketing and 10 in administration
and finance.  None of the Company's employees is represented by a labor union or
is subject to a collective bargaining agreement.  The Company believes that its
employee relations are good.


ITEM 2.    PROPERTIES.

  The Company leases its principal facility, which contains approximately 18,000
square feet of office space in Princeton, NJ.  The initial term of the lease for
the Company's current office space will expire on May 31, 2003.  The Company
entered into a Sublease Agreement in July 1998, under which the Company
subleased approximately 47% of the space in said principal facility.  The
initial term of that Sublease Agreement will expire on May 31, 2003.  The
Company believes 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.

  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.


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, 1998.


EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company and their respective ages and positions
with the Company as of August 31, 1998 were as follows:

<TABLE>
<CAPTION>
   NAME                                      AGE   POSITION
   ----                                      ---   --------
<S>                                          <C>   <C>
  Bathsheba J. Malsheen, Ph.D.....            47   President, Chief Executive Officer and Director
  Nicholas Narlis.................            38   Vice President, Chief Financial Officer, Secretary and
                                                   Treasurer
  J. Gerard Aguilar...............            31   Vice President, Research and Development and Director
</TABLE>

                                       13
<PAGE>
 
  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.

  J. Gerard Aguilar is a co-founder of Voxware and has served as Vice President,
Research and Development since January 1994 and as a Director of the Company
since its incorporation in August 1993.  Mr. Aguilar served as the Company's
President and Secretary from its incorporation through January 1994 and
Treasurer from its incorporation through June 1996.  Prior thereto, Mr. Aguilar
had been independently developing certain of the Company's technologies since
1991.  Mr. Aguilar holds an M.S.E.E. and a B.S.E.E. from the Florida Institute
of Technology.



                                    PART II

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

Market Information


  The Company's 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>
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

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                  
                                                                                                                
July 1, 1998 through September 24, 1998                              $  2.375             $ 0.813                    
                                                                                                
</TABLE>

  As of September 25, 1998 there were approximately 173 holders of record of the
Company's Common Stock.  Because many of the Company's shares of Common Stock
are held by brokers and other institutions on behalf of stockholders, the
Company is unable to estimate the total number of stockholders represented by
these record holders.  The Company has never declared or paid any cash dividends
on its Common Stock.  The Company does not anticipate paying any cash dividends
in the foreseeable future.

                                       14
<PAGE>
 
 
ITEM 6.    SELECTED FINANCIAL DATA.

  The selected statement of operations data for the three years ended June 30,
1998 and the selected balance sheet data as of June 30, 1997 and 1998 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 statement of
operations data for the periods from Inception (August 20, 1993) to June 30,
1994 and for the fiscal year ended June 30, 1995, and the balance sheet data as
of June 30, 1994, 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>
                                                                   PERIOD FROM
                                                                    INCEPTION
                                                                   (AUGUST 20,
                                                                      1993)               FISCAL YEAR ENDED JUNE 30,
                                                                   TO JUNE 30,            --------------------------
                                                                       1994          1995       1996        1997        1998
                                                                       ----          ----       ----        ----        ----
                                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                 <C>            <C>         <C>         <C>         <C>

STATEMENT OF OPERATIONS DATA:
 Revenues:
  Product revenues:
     License fees..............................................     $    --        $     --    $  1,256    $  5,432    $  2,935
     Royalties and recurring revenues..........................          --              --         238       1,996       1,918
                                                                    -------        --------    --------    --------    --------
       Total product revenues..................................          --              --       1,494       7,428       4,853
  Service revenues.............................................          --              --         113         351       1,029
                                                                    -------        --------    --------    --------    --------
          Total revenues.......................................          --              --       1,607       7,779       5,882
                                                                    -------        --------    --------    --------    --------
  Cost of revenues:
     Cost of product revenues..................................          --              --          17         208         112
     Cost of service revenues..................................          --              --          28         164         441
                                                                    -------        --------    --------    --------    --------
          Total cost of revenues...............................          --              --          45         372         553
                                                                    -------        --------    --------    --------    --------
          Gross profit..........................................         --              --       1,562       7,407       5,329
                                                                    -------        --------    --------    --------    --------
 Operating expenses:
     Research and development..................................          93             537       2,497       7,845       4,677
     Sales and marketing.......................................           9             332       1,084       4,124       3,738
     General and administrative................................         113             365         980       3,204       2,467
                                                                    -------        --------    --------    --------    --------
          Total operating expenses.............................         215           1,234       4,561      15,173      10,882
                                                                    -------        --------    --------    --------    --------
          Operating loss.......................................        (215)         (1,234)     (2,999)     (7,766)     (5,553)
 Interest income...............................................          --              65         132         722         844
                                                                    -------        --------    --------    --------    --------
 Net loss......................................................        (215)         (1,169)     (2,867)     (7,044)     (4,709)
 Accretion of preferred stock to redemption value..............          --              --          (7)         (5)         --
                                                                    -------        --------    --------    --------    --------
 Net loss applicable to common stockholders....................     $  (215)       $ (1,169)   $ (2,874)   $ (7,049)   $ (4,709)
                                                                    =======        ========    ========    ========    ========
 Basic net loss per common share...............................     $ (0.07)       $  (0.23)   $  (0.50)   $  (0.69)   $  (0.37)
                                                                    =======        ========    ========    ========    ========
 Weighted average number of common shares outstanding..........       2,908           5,056       5,784      10,242      12,890
                                                                    =======        ========    ========    ========    ========
<CAPTION>
                                                                                             JUNE 30,
                                                                      ----------------------------------------------------------
                                                                       1994          1995       1996        1997        1998
                                                                      ------        ------     ------      ------      ------
                                                                                            (IN THOUSANDS)
<S>                                                                   <C>           <C>        <C>         <C>         <C>
BALANCE SHEET DATA:                                                                        
 Cash, cash equivalents and short-term investments.............     $   307        $  1,523    $  3,837    $ 16,469    $ 13,537
 Working capital...............................................         255           1,418       3,887      16,811      13,743
 Total assets..................................................         359           1,667       5,336      20,221      15,557
 Redeemable Series A Convertible Preferred Stock...............          --              --       5,938          --          --
 Stockholders' equity (deficit)................................         306           1,556      (1,076)     17,191      13,913
</TABLE>

                                      15

<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
the Company's 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

  Voxware develops, markets, licenses and supports digital speech and audio
technologies and solutions. MetaVoice, the Company's innovative speech coding
technology, is designed to reproduce high quality speech while requiring very
low communications bandwidth and processing power. MetaSound, the Company's
general audio coding technology built on core technology licensed from Nippon
Telegraph and Telephone Corporation is specifically suitable for high quality
music compression. The Company licenses its technologies to software and
hardware companies for a wide range of applications and services, and primarily
targets the following four markets:  consumer devices, multimedia software,
wireless communications and Internet Protocol (IP) telephony.

  Since Voxware's inception in August 1993, the Company has raised net proceeds
of approximately $29,848,000 as follows:  approximately $8,838,000 through
private placements; approximately $18,517,000 through the Initial Public
Offering which was declared effective on October 30, 1996; and approximately
$2,493,000 through other sales of equity securities, including exercises of
common stock options and all outstanding common stock warrants.

  The Company generates revenues from two sources:  fees from product licenses
and fees for services provided.  Product revenues consist of two components:
license fees, and royalties and recurring revenues.  Voxware's products are
licensed primarily to software and hardware companies which incorporate the
Company's products and technologies into their products.  The Company generally
negotiates contract terms with customers on a case by case basis, with
arrangements that have historically 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 the Company's technologies.  One of the Company's objectives is to
develop recurring revenue through entering into licensing agreements with third
parties which provide for royalties or other recurring payments.  As a result,
the timing and amount of the Company's revenues are substantially dependent on
the timing and efforts of the Company's licensees in developing and marketing
products incorporating the Company's products and technologies.  There can be no
assurance as to the timing or success of any licensee implementation or the
timing or amount of recurring revenues, if any, from any licensee product.

  A majority of the Company's existing licensees compete in the multimedia
Internet software market, which is a relatively new market, and many of the
companies in this market are poorly capitalized, compete against much more
established companies and/or have businesses that are relatively immature.
Many of the licenses entered into in the multimedia Internet software market
have been in existence for a significant period of time and the Company believes
that a significant number of its licensees which compete in this market have not
incorporated, and may never incorporate, Voxware's technologies into their
products. Therefore, the Company may never derive royalties or other recurring
revenues from many of its existing license agreements in the multimedia Internet
software market. While the Company does not expect the multimedia Internet
software market to generate significant recurring revenues to the Company, the
Company expects to continue to pursue opportunities in that market since that
market has the potential to continue to offer non-recurring revenue
opportunities to the Company through initial license fees and service revenues.
With respect to IP telephony, initial deployments in that market have primarily
utilized standardized codec technologies (and not Voxware's proprietary codec
technologies).  In addition, initial 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.  Principally, in consequence of these factors, the
requirement for Voxware's technologies in the IP telephony market is not
expected to significantly arise at least for the next two years, if ever. With
respect to the wireless market, the Company is investing resources in efforts to
understand the needs of this market, if any, for its speech compression and
related technologies.  There can be no assurance as to the Company's success in
the wireless market, and to date the Company has not generated any significant
revenues in this market.

  During fiscal 1998, the Company restructured its workforce in connection with
the shift of its strategic focus to markets other than multimedia software,
including consumer devices and wireless communications, which the

                                       16
<PAGE>
 
Company believes have more significant potential for recurring revenues over the
long term. While the Company believes the consumer devices and wireless
communications markets may have more significant potential for recurring revenue
over the long term, over at least the next several quarters, the Company's
revenues are expected to continue to be affected by the longer revenue cycles
inherent in these hardware-based deals. Specifically, and in contrast to
multimedia which often may be characterized by acceptance of deliverables up
front and corollary recognition of revenue, recognition of revenue (if any) in
hardware-based deals is in part contingent upon a variety of factors including:
preparation of feasibility studies, development and delivery of customized
software, testing and acceptance of such software, development of the licensee's
hardware and product, successful integration of said software into the
licensee's hardware and product, and shipment of the licensee's product. Each of
the foregoing contingencies applicable to hardware-based transactions takes
time, and none of the foregoing contingencies are certain to occur. Therefore
the revenue recognition cycle in hardware-based transactions is much longer than
in software-based transactions. It should also be noted that hardware-based
markets such as voice-enabled consumer devices and wireless communications, are
new markets with new products, which further contributes to the time delay and
the uncertainty with respect to revenue recognition. There can be no assurance
as to the success of the Company's activities in these markets, or in
successfully forming relationships with targeted customers in these markets. It 
is the Company's continuing policy to evaluate potential strategic relationships
that could allow the Company to broaden its product offerings and achieve 
synergies in the Company's target markets.

  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 services include providing updates and technical
support to licensees of the Company's products.  Engineering services include
providing technical resources and technical assistance to support customer-
specific development efforts, which include porting the Company's technologies
to specific hardware platforms and providing customized speech and audio
solutions to customers.  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 Company has only a limited operating history upon which an evaluation of
the Company and its prospects can be based.  Since its inception, the Company
has incurred significant losses and, as of June 30, 1998, the Company had an
accumulated deficit of  $16,017,000.  In at least the near term quarters, the
Company expects to incur net losses as a result of the long revenue cycles
described.  The limited operating history of the Company makes the prediction of
future results of operations impossible and, therefore, the Company's historical
revenues should not be taken as indicative of future revenues.  In addition, the
Company's operating results may fluctuate significantly in the future as a
result of a variety of factors, including, but not limited to, the budgeting
cycles of potential customers, the volume of, and revenues derived from sales of
products by the Company's licensees that incorporate the Company's 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 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, the
level of usage of the Internet, and general economic conditions.


RESULTS OF OPERATIONS


FISCAL 1998 VERSUS FISCAL 1997


TOTAL REVENUES.

    The Company 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 revenues is primarily attributable to the Company's 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.  As detailed
previously, the consumer devices and wireless communications markets are
characterized by longer selling cycles

                                       17
<PAGE>
 
than the multimedia software market, which impacted the Company's revenues
during fiscal 1998. As a result, the Company expects to continue to sign fewer
new licensing agreements on a per-quarter basis in comparison with the number of
new licensing agreements signed during fiscal 1997. At the same time, the
Company's objective is to form relationships with customers that the Company
believes have more significant potential for recurring revenue over the long
term than do the Company's existing licensees, particularly those in the
multimedia Internet software market. There can be no assurance, however, as to
the success of the Company's activities in these markets, or in successfully
forming relationships with such customers.

  For the year ended June 30, 1998, total revenues included $1,250,000 (21% of
total revenues) from the Company's largest customer, Netscape Communications
Corporation ("Netscape"). Netscape discontinued certain of its products during
fiscal 1998, including products which would incorporate the Company's
technologies, and consequently Voxware and Netscape entered into a second
amendment of their software license agreement which terminated certain of
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.

  At June 30, 1998 Netscape was not a stockholder in the Company.  At June 30,
1997 Netscape was a 4% stockholder in the Company.  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.  This decrease in product
revenues was mainly attributable to the Company's shift in strategy from
primarily targeting the multimedia software market in fiscal 1997 to primarily
targeting the consumer devices and wireless communications markets, with a
lesser focus on the multimedia software and IP telephony markets, in the latter
half of fiscal 1998.  As detailed previously, the consumer devices and wireless
communications markets are characterized by longer selling cycles than the
multimedia software market, which impacted the Company's revenues during fiscal
1998.  Additionally, the decrease in product revenues as a percentage of total
revenues from fiscal 1997 to fiscal 1998 is attributable to the Company's
revised strategy which focuses on the consumer devices and wireless
communications markets.  The Company seeks to provide customized solutions to
customers in these markets, which entails performing a higher level of
engineering services for customers than did the previous business strategy.  As
a result, the Company derived a greater portion of its 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).  As noted above, this decrease
in license fees revenues was mainly attributable to the Company's shift in
strategy from primarily targeting the multimedia software industry in fiscal
1997 to primarily targeting the consumer devices and wireless communications 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 the Company's license fees revenues
during fiscal 1998.

  For the year ended June 30, 1998, product revenues included a total of
$1,250,000 (26% of total product revenues) from the Company's largest customer,
Netscape.  This amount was comprised of $400,000 in license fees and $850,000 in
royalties and recurring revenues. Netscape discontinued certain of its products
during fiscal 1998, including products which would incorporate the Company's
technologies, and consequently Voxware and Netscape entered into a second
amendment of their software license agreement which terminated certain of
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.  For the year ended June 30, 1997, Netscape
accounted for approximately $1,250,000 of royalties and recurring revenues (17%
of total product revenues).

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

                                       18
<PAGE>
 
SERVICE REVENUES.

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

  During the year ended June 30, 1998, the Company 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 the Company's revised strategy which focuses on the consumer
devices and wireless communications markets.  The Company seeks to provide
customized solutions to customers in these markets, which entails performing a
higher level of engineering services for customers than did the previous
business strategy.  As a result, the Company derived a greater portion of its
revenues from providing services to customers in fiscal 1998 than in fiscal
1997.


GROSS PROFIT

COST OF PRODUCT REVENUES.  Cost of product revenues consists primarily of costs
of licensed technology.  Cost of product revenues totaled $112,000 or 2% of
product revenues for the year ended June 30, 1998 compared to $208,000 or 3% 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.  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 $4,291,000 (28%) from $15,173,000 in
fiscal 1997 to $10,822,000 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 aforementioned strategic
restructuring of the Company's business focus.  A significant number of the
Company's personnel were engaged in researching, marketing and selling products
in the consumer application software market during fiscal 1997.  During fiscal
1998, the Company restructured its business away from consumer application
software and toward an OEM (original equipment manufacturer) 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.  As of June 30,
1998, the Company's resources were primarily dedicated to an OEM (original
equipment manufacturer) model targeting the consumer devices and wireless
communications markets.  As of June 30, 1998, the Company's headcount totaled
46, compared to 91 as of June 30, 1997.  In connection with the decrease in
headcount, in July 1998 the Company entered into a Sublease Agreement under
which the Company subleased approximately 47% of the space in its 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 $3,168,000 (40%) decrease in research and
development expenses, a $386,000 (9%) decrease in sales and marketing expenses,
and a $737,000 (23%) decrease in general and administrative expenses.  During
fiscal 1998, the Company decreased accrued expenses approximately $650,000
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.

                                       19
<PAGE>
 
RESEARCH AND DEVELOPMENT.  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 $3,168,000 from $7,845,000 in fiscal 1997 to $4,677,000 in fiscal
1998.  This decrease in research and development expenses primarily resulted
from restructuring the Company's business focus away from consumer application
software and toward an OEM (original equipment manufacturer) model, which
requires fewer personnel (including employees and independent contractors) than
a consumer application software business model.  As of June 30, 1998, the
Company had a research and development staff of 24 compared to 49 at June 30,
1997.  The Company expects to continue to invest in research and development
projects that may provide additional technologies and products for its targeted
markets.  As such, the Company expects near term quarterly research and
development expenditures to remain relatively consistent with the level incurred
during the fourth quarter of fiscal 1998.  During the fourth quarter of fiscal
1998, the Company's research and development expenses totaled approximately
$838,000.

SALES AND MARKETING.  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
$386,000 from $4,124,000 in fiscal 1997 to $3,738,000 in fiscal 1998.  This
decrease in sales and marketing expenses was primarily due to the restructuring
of the Company's 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 the Company's 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 the Company's 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.  The Company
expects near term quarterly sales and marketing expenditures to remain
relatively consistent with the level incurred during the fourth quarter of
fiscal 1998. During the fourth quarter of fiscal 1998, the Company's sales and
marketing expenses totaled approximately $818,000.  If the Company is successful
in significantly increasing its revenues, the Company anticipates increasing the
level of quarterly sales and marketing expenditures in order to expand its sales
force and marketing efforts, as necessary.

GENERAL AND ADMINISTRATIVE.  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, the Company had a general and
administrative staff of 10 compared to 18 at June 30, 1997.  The Company
believes that the current size of the general and administrative staff is
appropriate for fiscal 1999, and expects near term quarterly general and
administrative expenditures to remain relatively consistent with the level
incurred during the fourth quarter of fiscal 1998, exclusive of approximately
$300,000 of non-recurring charges incurred during that quarter.  During the
fourth quarter of fiscal 1998, the Company's general and administrative expenses
totaled approximately $798,000.

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 the Company's Initial Public Offering ("IPO"), which
closed during November and December 1996 (see "LIQUIDITY AND CAPITAL RESOURCES
below").  As the IPO occurred approximately four months after the start of
fiscal 1997, the Company earned approximately eight months' interest income on
the remaining net proceeds from the IPO during fiscal 1997, as compared to a
full year's interest income earned on the remaining net proceeds from the IPO
during fiscal 1998.  The Company anticipates near term quarterly interest income
to decrease from the level earned during fiscal 1998 in connection with an
anticipated decrease in cash, cash equivalents and short-term investments
associated with the Company's expected net losses in at least the near term
quarters.

INCOME TAXES.  As of June 30, 1998, the Company had approximately $14,000,000 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

                                       20
<PAGE>
 
change of more than 50% over a three year period. As of June 30, 1998, 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 the amounts used for income tax purposes.  As of June 30, 1998, the Company
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.


FISCAL 1997 VERSUS FISCAL 1996

TOTAL REVENUES.

The Company recognized revenues of $7,779,000 for the year ended June 30, 1997
compared to revenues of $1,607,000 for the year ended June 30, 1996. Revenues
increased from fiscal 1996 to fiscal 1997 as the Company entered into an
increasing number of license agreements providing customers with the right to
use the Company's products and services, and as the Company recognized royalties
and recurring license fees derived from customers which licensed the Company's
products in previous periods.  The Company's largest customer, Netscape
Communications Corporation ("Netscape"), was a 4% stockholder as of June 30,
1997 and accounted for 16% and 31% of total revenues, respectively, for the
years ended June 30, 1997 and 1996.  In addition, two other customers each
accounted for 15% of revenues for the year ended June 30, 1997.

PRODUCT REVENUES.  Product revenues totaled $7,428,000 and accounted for 95% of
total revenues for the year ended June 30, 1997 compared to $1,494,000, which
accounted for 93% of total revenues, for the year ended June 30, 1996.  These
dollar increases in product revenues were primarily due to the increased volume
of licenses of the Company's products to new customers, and an increase in the
amount of royalties and recurring license fees recognized from customers which
licensed the Company's products in previous periods.  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).  Included in product revenues for the year ended June 30, 1997 is
$480,000 in fees earned by Voxware for product development efforts.  For the
year ended June 30, 1996, product revenues included $1,256,000 in initial
license fees (84% of product revenues) and $238,000 (16% of product revenues) in
royalties and recurring license fees which were derived from one customer,
Netscape.

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

  Service revenues were primarily attributable to customer support and fees for
engineering.  During the year ended June 30, 1997, the Company recognized
$351,000 in service revenues (5% of total revenues), compared to service
revenues of $113,000 (7% of total revenues) for the year ended June 30, 1996.
The increase in service revenues for the year ended June 30, 1997 compared to
service revenues for the year ended June 30, 1996 was primarily attributable to
an increase in the number of contracts entered into, the majority of which
provide for service revenues which are recognized over the term of the
respective contract.


GROSS PROFIT

COST OF PRODUCT REVENUES. Cost of product revenues consisted primarily of costs
of licensed technology, product media and duplication, manuals and packaging
materials related to licenses of the Company's products to new customers.  Cost
of product revenues totaled $208,000 or 3% of product revenues for the year
ended June 30, 1997 compared to $17,000 or 1% of product revenues for the year
ended June 30, 1996.  The increase in cost of product revenues for the year
ended June 30, 1997 compared to the year ended June 30, 1996 was directly
attributable to the increase in product revenues recognized during those
periods.

COST OF SERVICE REVENUES.  Cost of service revenues consisted primarily of the
expenses associated with the staffing of a customer support group and
engineering services, which consisted primarily of providing employee
compensation and equipment depreciation.  Cost of service revenues totaled
$164,000 or 47% of service revenues for

                                       21
<PAGE>
 
the year ended June 30, 1997 compared to $28,000 or 25% of product revenues for
the year ended June 30, 1996. The absolute dollar increase in cost of services
for the year ended June 30, 1997 compared to cost of services for the year ended
June 30, 1996 was directly attributable to the increase in service revenues from
fiscal 1996 to fiscal 1997.

OPERATING EXPENSES.  Operating expenses increased $10,612,000 from $4,561,000 in
fiscal 1996 to $15,173,000 in fiscal 1997, reflecting significant increases in
costs associated with the development of infrastructure, rapid growth and
increased efforts to commercialize the Company's products and services.

RESEARCH AND DEVELOPMENT.  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
increased $5,348,000 from $2,497,000 in fiscal 1996 to $7,845,000 in fiscal
1997.  This increase in research and development expenses was primarily due to
increasing the research and development staff from 33 at June 30, 1996 to 49 at
June 30, 1997, increases in external consulting costs and costs associated with
developing and enhancing the functionality of the Company's family of products.

SALES AND MARKETING.  Sales and marketing expenses consist primarily of employee
compensation (including direct sales commissions), travel expenses, trade shows
and costs of promotional materials. Sales and marketing expenses increased
$3,040,000 from $1,084,000 in fiscal 1996 to $4,124,000 in fiscal 1997.  This
increase in sales and marketing expenses was primarily due to the expansion of
the Company's sales force and marketing staff from 8 at June 30, 1996 to 24 at
June 30, 1997, and increased expenses associated with the promotion and
marketing of the Company's products and services.

GENERAL AND ADMINISTRATIVE.  General and administrative expenses consist
primarily of employee compensation and fees for insurance, rent, office expenses
and professional services.  General and administrative expenses increased
$2,224,000 from $980,000 in fiscal 1996 to $3,204,000 in fiscal 1997.  This
increase in general and administrative expenses was primarily due to increasing
the administrative staff from 13 at June 30, 1996 to 18 at June 30, 1997, and
increased expenses related to insurance, rent, office expenses and professional
services.

INTEREST INCOME.  Interest income increased $590,000 from $132,000 in fiscal
1996 to $722,000 in fiscal 1997.  This increase in interest income from
primarily reflects interest earned on the net proceeds from the Company's
initial public offering closed during November and December 1996 (see "LIQUIDITY
AND CAPITAL RESOURCES" below).


LIQUIDITY AND CAPITAL RESOURCES

  As of June 30, 1998, the Company had $13,537,000 in cash, cash equivalents and
short-term investments, comprised of $9,149,000 in cash and cash equivalents and
$4,388,000 in short-term investments.  The Company's cash 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, the Company has primarily
financed its operations through the sale of equity securities.

  Cash of $3,274,000, $6,564,000 and $4,218,000 was used to fund operations for
the years ended June 30, 1996, 1997 and 1998, respectively.  Cash used in
investing activities was $586,000 and $6,021,000 for the years ended June 30,
1996 and 1997, respectively, and was related to equipment purchases in fiscal
1996.  In fiscal 1997, cash used in investing activities was related to
equipment purchases and the purchase of short-term investments.  In fiscal 1998,
cash provided by investing activities totaled $1,393,000 due to the liquidation
of short-term investments, offset by equipment purchases.

  For the years ended June 30, 1996, 1997 and 1998, cash provided by financing
activities totaled $6,174,000, $19,375,000 and $1,347,000, respectively.  In
fiscal 1996, $5,932,000 of cash provided by financing activities was
attributable to the issuance of Series A Preferred Stock and $242,000 related to
exercises of common stock warrants and options.  All Series A Preferred Stock
converted into Common Stock upon the closing of the Company's initial public
offering, which was consummated in October and November 1996.  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.

                                       22
<PAGE>
 
  The Company has a $2,000,000 revolving line of credit with Silicon Valley
Bank, as amended (the "Credit Facility").  In addition to the revolving line of
credit, the Credit Facility contains a separate lease line component in the
amount of $1,500,000 for the purpose of providing a facility for the financing
of the lease stream of payments that the Company owes to an equipment lessor.
Borrowings under the Credit Facility will bear interest at the bank's prime
lending rate. The Credit Facility contains certain restrictive financial
covenants including a minimum quick ratio, a minimum tangible net worth
requirement and a maximum debt to tangible net worth ratio, as defined in the
agreement.  The Credit Facility requires payment of all outstanding principal,
if any, plus all accrued interest on March 30, 1999.  In connection with the
lease of the Company's office facility, the Company has outstanding a $300,000
standby letter of credit at June 30, 1998 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 this letter of credit was established under
the terms of the Credit Facility, the Company has $1,700,000 available for
borrowing under the Credit Facility.  As of and for the years ended June 30,
1998 and 1997 there were no amounts outstanding under the Credit Facility.

  In November 1996 and December 1996, the Company closed on an initial public
offering of Common Stock ("IPO").  The Company offered and sold 2,823,237 shares
of Common Stock at an IPO price of $7.50 per share.  The net proceeds to the
Company from the IPO after payment of offering expenses were approximately
$18,517,000.

  The Company has no material commitments other than those under normal building
and equipment operating leases.  At June 30, 1998, the Company's working capital
totaled approximately $13,743,000.  The Company believes that its current cash,
cash equivalents and short-term investments balances will be sufficient to fund
its working capital and capital expenditures requirements, exclusive of cash
required for possible acquisitions of, or investments in businesses, products
and technologies at least through June 30, 1999.


Year 2000 Compliance

  The efficient operation of the Company's business is dependent in part on
computer software programs and operating systems which it uses internally
(collectively, the "Internal Programs and Systems"). The Company has been
evaluating its Internal Programs and Systems to identify potential Year 2000
compliance problems, and has primarily conducted these evaluations and
assessments using the Company's information technology personnel. These actions
are necessary to ensure that the Internal Programs and Systems will be Year 2000
compliant. It is anticipated that modification or replacement of some of the
Internal Programs and Systems may be necessary to make such Programs and Systems
Year 2000 compliant. The Company is also communicating with its suppliers and
others to coordinate Year 2000 conversion. To date, costs incurred in evaluating
its Internal Programs and Systems have not been material, and anticipated costs
necessary to complete such evaluations, modifications and/or replacements are
not expected to be material. Based on present information, the Company believes
that it will be able to achieve such 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. However, there can be no assurance that
these efforts will be successful.

  With respect to software programs which the Company licenses externally to
customers (collectively, the "External Programs"), these programs are primarily
not date-dependent and, as such, the Company does not expect significant, if
any, Year 2000 problems related to its External Programs. Costs incurred to date
to evaluate and identify potential Year 2000 compliance problems contained in
the Company's Internal Programs and Systems and External Programs have not been
material, and the Company expects that future expenses and capital expenditures
associated with achieving Year 2000 compliance will not have a material effect
on its financial results in fiscal 1999 and fiscal 2000.

Recent Accounting Pronouncements

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


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

  The financial statements of the Company required by this Item are attached to
this Report on Form 10-K beginning on page F-1.

                                       23
<PAGE>
 
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.

  None.


                                    PART III

                                        
ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

  The information concerning the Company's directors and regarding compliance
with Section 16 of the Securities Exchange Act of 1934 required by this Item
will be set forth in the Company's definitive Proxy Statement, to be filed
within 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K, and is incorporated by reference to the Company's Proxy Statement.

  The information concerning the Company's executive officers required by this
Item is incorporated by reference herein to the section of this Report in Part
I, Item 4 entitled "EXECUTIVE OFFICERS OF THE COMPANY."


ITEM 11.    EXECUTIVE COMPENSATION.

  The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.


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

  The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

  The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.


                                    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
of the Company for each of the years ended June 30, 1996, 1997 and 1998 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.

                                       24
<PAGE>
 
                                 VOXWARE, INC.
                 Schedule II--Valuation and Qualifying Accounts
                        Allowance for Doubtful Accounts
                    Years Ended June 30, 1996, 1997 and 1998
                                 (in thousands)

<TABLE>
<CAPTION>
                        
                                           Balance at         Charged to                      
                                          Beginning of         Costs and                          Balance at   
                                             Period            Expenses            Deductions    End of Period 
                                     ---------------------------------------------------------------------------
 
<S>                                     <C>                 <C>                <C>              <C>
 
Year ended June 30, 1996                  $   --                $   25            $    --            $   25
                                          ======                ======            =======            ======  
 
 
Year ended June 30,  1997                 $   25                $  467            $    92            $  400
                                          ======                ======            =======            ======   
 
 
Year ended June 30, 1998                  $  400                $  795            $   688            $  507
                                          ======                ======            =======            ======    
</TABLE>



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

     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.

<TABLE> 
<CAPTION> 

Exhibit No.    Description
-----------    -----------
<S>            <C> 
3.1            Certificate of Incorporation, as amended.**(1)
3.2            Bylaws.**(1)
10.1           Voxware, Inc. 1994 Stock Option Plan.**(1)
10.2           Form of Voxware, Inc. Stock Option Agreement.**(1)
10.3           Form of Indemnification Agreement.**(1)
10.7           Employment Agreement dated February 28, 1994, with J.
               Gerard Aguilar.**(1)
10.9           Technology Transfer Agreement Effective May 19, 1995,
               between Suat Yeldener Ph.D. and Voxware, Inc.**(1)+
10.11          License Agreement, dated June 28, 1996 with America Online,
               Inc.**(1)+
10.14          License Agreement, dated March 29, 1996 with VDOnet Corporation
               Ltd.**(1)+
10.15          License Agreement, dated June 28, 1996 with Vienna Systems
               Corporation.**(1)+
10.16          Lease, dated April 10, 1996, between College Road Associates,
               Limited Partnership and the Company.**(1)
10.19          License Agreement, dated September 13, 1996 with Lucent
               Technologies Inc.**(1)+
10.20          1996 Employee Stock Purchase Plan.**(1)
10.21          License Agreement, dated September 27, 1996 with Disney
               Online.**(1)+
</TABLE> 

                                       25
<PAGE>
 
<TABLE> 
<S>            <C> 
10.22          Loan Agreement dated October 31, 1996 between Silicon Valley and
               the Company.**(2)
10.23          Loan Modification Agreement dated May 5,1997 between Silicon
               Valley Bank and the Company.**(3)
10.24          Agreement dated March 31, 1997 by and between the Company and
               Microsoft regarding the license of the Company's RT24 Codec.**+(4)
10.25          Letter Agreement dated April 17, 1997 by and between the Company
               and Microsoft clarifying Microsoft's rights under the RT24 Codec
               license.**+(4) Agreement dated March 31, 1997 by and between the Company and
               Microsoft regarding the license of the Company's MetaSound Codec.**+(4)
10.27          Employment Agreement dated August 13, 1998, with Bathsheba J.
               Malsheen.*
10.28          Employment Agreement dated August 13, 1998, with Nicholas
               Narlis.*
16.1           Letter from Ernst & Young LLP respecting change in certifying
               accountant.**(1)
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 Registration Statement on Form S-1 (File Number 33-
        08393).
    (2) Filed in connection with the Company's quarterly report on Form 10-Q for the
        quarter ended September 30, 1996.
    (3) Filed in connection with the Company's quarterly report on Form 10-Q for the
        quarter ended March 31, 1997.
    (4) Filed in connection with the Amendment to the Company's quarterly report on Form
        10-Q/A for the quarter ended March 31, 1997.
+ Confidential treatment has been granted for portions of such document.

   (b)      Reports on Form 8-K:
 
        No Current Report on Form 8-K was filed by the Company in the fourth
quarter ended June 30, 1998.
</TABLE> 

                                       26
<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:

/s/ Bathsheba J. Malsheen    President and Chief Executive    September 25, 1998
-------------------------    Officer and Director (principal
    Bathsheba J. Malsheen    executive officer)             
                             

/s/ Nicholas Narlis          Vice President,                  September 25, 1998
-------------------          Chief Financial Officer,  
    Nicholas Narlis          Secretary and Treasurer (principal
                             financial officer and principal  
                             accounting officer)               


/s/ J. Gerard Aguilar        Director                         September 25, 1998
---------------------                                        
J. Gerard Aguilar
 
 
/s/ Andrew I. Fillat         Director                         September 25, 1998
-----------------------
    Andrew I. Fillat

 
/s/ David Levi               Director                         September 25, 1998
-----------------------
    David Levi
 

/s/ Eli Porat                Director                         September 25, 1998
-----------------------
    Eli Porat
 
                                       27
<PAGE>
 
                                 VOXWARE, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>

<S>                                                                                                     <C>
Report of Independent Public Accountants............................................................... F-2
Balance Sheets......................................................................................... F-3
Statements of Operations............................................................................... F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)................ F-5
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 balance sheets of Voxware, Inc. (a Delaware
corporation) as of June 30, 1998 and 1997 and the related 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, 1998. These 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 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. as of June 30,
1998 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1998, 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


Princeton, New Jersey
August 5, 1998

                                      F-2
<PAGE>
 
                                 VOXWARE, INC.

                                BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             JUNE 30,
                                                                     -------------------------
                                                                        1997           1998
                                                                     ----------     ----------
                                                                       (IN THOUSANDS, EXCEPT
                                                                     SHARE AND PER SHARE DATA)
<S>                                                                  <C>            <C>
                                 ASSETS
Current assets:
  Cash and cash equivalents......................................... $  10,627      $   9,149
  Short-term investments............................................     5,842          4,388
  Accounts receivable, net..........................................     2,822          1,254
  Prepaid expenses and other current assets.........................       309            268
                                                                     ----------     ----------
      Total current assets..........................................    19,600         15,059
Property and equipment, net.........................................       566            407
Other assets, net...................................................        55             91
                                                                     ----------     ----------
                                                                     $  20,221      $  15,557
                                                                     ==========     ==========
                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses............................. $   2,312      $   1,097
  Deferred revenues.................................................       477            219
                                                                     ----------     ----------
      Total current liabilities.....................................     2,789          1,316
                                                                     ----------     ----------
Deferred rent.......................................................       241            328
                                                                     ----------     ----------

Commitments and contingencies (Note 9)

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;
    12,497,258 and 13,292,524 shares issued and outstanding at
    June 30, 1997 and 1998, respectively............................        13             13
  Additional paid-in capital........................................    28,488         29,915
  Unrealized gain (loss) on available-for-sale securities...........        (2)             2
  Accumulated deficit...............................................   (11,308)       (16,017)
                                                                     ----------     ----------
      Total stockholders' equity....................................    17,191         13,913
                                                                     ----------     ----------
                                                                     $  20,221      $  15,557
                                                                     ==========     ==========
</TABLE>
                                        

        The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>
 
                                 VOXWARE, INC.

                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                     YEAR ENDED JUNE 30,
                                                           --------------------------------------
                                                             1996           1997           1998
                                                           --------       --------       --------
                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                        <C>            <C>            <C>
Revenues:
  Product revenues:
    License fees.......................................... $ 1,256        $ 5,432        $ 2,935
    Royalties and recurring revenues......................     238          1,996          1,918
                                                           --------       --------       --------
      Total product revenues..............................   1,494          7,428          4,853
  Service revenues........................................     113            351          1,029
                                                           --------       --------       --------
      Total revenues......................................   1,607          7,779          5,882
                                                           --------       --------       --------
Cost of revenues:
  Cost of product revenues................................      17            208            112
  Cost of service revenues................................      28            164            441
                                                           --------       --------       --------
      Total cost of revenues..............................      45            372            553
                                                           --------       --------       --------
        Gross profit......................................   1,562          7,407          5,329
                                                           --------       --------       --------
Operating expenses:
  Research and development................................   2,497          7,845          4,677
  Sales and marketing.....................................   1,084          4,124          3,738
  General and administrative..............................     980          3,204          2,467
                                                           --------       --------       --------
      Total operating expenses............................   4,561         15,173         10,882
                                                           --------       --------       --------
      Operating loss......................................  (2,999)        (7,766)        (5,553)
Interest income...........................................     132            722            844
                                                           --------       --------       --------
Net loss..................................................  (2,867)        (7,044)        (4,709)
Accretion of preferred stock to redemption value..........      (7)            (5)            --
                                                           --------       --------       --------
Net loss applicable to common stockholders................ $(2,874)       $(7,049)       $(4,709)
                                                           ========       ========       ========
Basic net loss per common share........................... $ (0.50)       $ (0.69)       $ (0.37)
                                                           ========       ========       ========
Weighted average number of common shares outstanding......   5,784         10,242         12,890
                                                           ========       ========       ========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>
                                 
                                 VOXWARE, INC.

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

<TABLE>
<CAPTION>
                                                                        STOCKHOLDERS' EQUITY (DEFICIT)
                                            ---------------------------------------------------------------------------------------
                                            
                                            REDEEMABLE                                       UNREALIZED GAIN
                                             SERIES A                                          (LOSS) ON                
                                            CONVERTIBLE       COMMON STOCK      ADDITIONAL      AVAILABLE
                                             PREFERRED    -------------------     PAID-IN        FOR-SALE      ACCUMULATED
                                               STOCK        SHARES     AMOUNT     CAPITAL       SECURITIES       DEFICIT     TOTAL
                                            -----------   ----------   ------   ----------   ---------------   -----------  -------
                                                                         (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                         <C>           <C>          <C>      <C>          <C>               <C>          <C>
Balance, June 30, 1995..................... $        --    5,772,496   $    6   $    2,935     $      --       $   (1,385)  $ 1,556
  Sale of Redeemable Series A
    Convertible Preferred Stock............       5,931           --       --           --            --               --        --
  Exercise of common stock
    warrants...............................          --      115,000       --          172            --               --       172
  Exercise of common stock
    options................................          --       60,000       --           70            --               --        70
  Accretion of redemption
    premium on Redeemable
    Series A Convertible
    Preferred Stock........................           7           --       --           --            --               (7)       (7)

  Net loss.................................          --           --       --           --            --           (2,867)   (2,867)
                                            -----------   ----------   ------   ----------   ---------------   ----------   -------
Balance, June 30, 1996.....................       5,938    5,947,496        6        3,177            --           (4,259)   (1,076)

  Exercise of common stock
    warrants...............................          --      696,250        1          760            --               --       761
  Accretion of redemption
    premium on Redeemable
    Series A Convertible
    Preferred Stock........................           5           --       --           --            --               (5)       (5)

  Mandatory conversion of
    Redeemable Series A Convertible
    Preferred Stock........................      (5,943)   3,000,000        3        5,940            --               --     5,943
  Issuance of common stock upon
    Initial Public Offering, net of
    offering costs of $1,175...............          --    2,823,237        3       18,514            --               --    18,517
  Exercise of common stock
    options................................          --        5,000       --            2            --               --         2
  Issuance of common stock pursuant to
    Employee Stock Purchase Plan...........          --       25,275       --           95            --               --        95
  Unrealized loss on available-for-sale
    securities.............................          --           --       --           --            (2)              --        (2)

  Net loss.................................          --           --       --           --            --           (7,044)   (7,044)
                                            -----------   ----------   ------   ----------   ---------------   -----------  -------
Balance, June 30, 1997.....................          --   12,497,258       13       28,488            (2)         (11,308)   17,191
  Exercise of common stock
    options................................          --      701,746       --        1,158            --               --     1,158
  Issuance of common stock pursuant to
    Employee Stock Purchase Plan...........          --       74,109       --          189            --               --       189
  Unrealized gain on available-for-sale
    securities.............................          --           --       --           --             4               --         4
  Issuance of common stock to pay
    non-employee directors annual retainer.          --       19,411       --           80            --               --        80
  Net loss.................................          --           --       --           --            --           (4,709)   (4,709)
                                            -----------   ----------   ------   ----------   ---------------   -----------  -------
Balance, June 30, 1998..................... $        --   13,292,524   $   13   $   29,915     $       2       $  (16,017)  $13,913
                                            ===========   ==========   ======   ==========   ===============   ===========  =======
</TABLE>
                                        
        The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>
 
                                 VOXWARE, INC.

                           STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                                       Year Ended June 30,
                                                                                        --------------------------------------------

                                                                                           1996             1997             1998
                                                                                        ----------       ----------       ----------

<S>                                                                                     <C>              <C>              <C>
Operating activities:
   Net loss                                                                             $  (2,867)       $  (7,044)       $  (4,709)

   Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization                                                            104              222              224
     Provision for doubtful accounts                                                           25              467              795
     Non-cash directors' compensation                                                        --               --                 80
     Changes in assets and liabilities:
           Accounts receivable                                                               (495)          (2,819)             773
           Prepaid expenses and other current assets                                          (49)            (255)              41
           Other assets                                                                      (355)             309              (36)
           Accounts payable and accrued expenses                                              254            1,947           (1,215)
           Deferred revenues                                                                  109              368             (258)
           Deferred rent                                                                       --              241               87
                                                                                        ----------       ----------       ----------

                Net cash used in operating activities                                      (3,274)          (6,564)          (4,218)

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


Investing activities:
   Purchases of short-term investments                                                       --           (105,325)         (65,506)
   Maturities and sales of short-term investments                                            --             99,481           66,964
   Purchases of property and equipment                                                       (586)            (177)             (65)

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

                Net cash provided by (used in) investing activities                          (586)          (6,021)           1,393
                                                                                        ----------       ----------       ----------


Financing activities:
   Proceeds from issuance of common stock, net                                               --             18,517             --
   Proceeds from exercise of common stock warrants                                            172              761             --
   Proceeds from exercise of common stock options                                              70                2            1,158
   Proceeds from sale of Redeemable Series A
           Convertible Preferred Stock                                                      5,932             --               --
   Issuance of common stock pursuant to Employee Stock Purchase Plan                         --                 95              189
                                                                                        ----------       ----------       ----------

                Net cash provided by financing activities                                   6,174           19,375            1,347
                                                                                        ----------       ----------       ----------


Increase (decrease) in cash and cash equivalents                                            2,314            6,790           (1,478)

Cash and cash equivalents, beginning of period                                              1,523            3,837           10,627
                                                                                        ----------       ----------       ----------

Cash and cash equivalents, end of period                                                    3,837           10,627            9,149
Short-term investments, end of period                                                        --              5,842            4,388
                                                                                        ----------       ----------       ----------

Cash and short-term investments, end of period                                          $   3,837        $  16,469        $  13,537
                                                                                        ==========       ==========       ==========

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                                             $       7        $       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
                                                                                        ==========       ==========       ==========

</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>
 
                                 VOXWARE, INC.

                         NOTES TO FINANCIAL STATEMENTS

1.   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  The Company

     Voxware, Inc. (the "Company") develops, markets, licenses and supports
digital speech and audio technologies, solutions and applications.  The Company
licenses its products to software and hardware companies for a wide range of
applications and services including consumer devices, multimedia applications,
wireless communications, and Internet Protocol (IP) telephony.

     The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards.  The introduction of products
incorporating new technology and the emergence of new industry standards could
render the Company's products obsolete and unmarketable and could exert price
pressures on existing products.  The Company's ability to anticipate changes in
technology and industry standards and successfully develop and introduce new and
enhanced products, in each case on a timely basis, will be a critical factor in
the Company's ability to grow and to be competitive.  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, 1998, the Company had an accumulated deficit of $16,017,000. In
addition, the Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, including the budgeting cycles of
potential customers, the volume of, and revenues derived from sales of products
by the Company's licensees that incorporate the Company's 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 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, the
level of usage of the Internet, and general economic conditions.  The Company
believes that its capital resources are adequate to fund the Company's
operations for the year ending June 30, 1999.

 
  Summary of Significant Accounting Policies

     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 two sources: fees from product licenses
and fees for services provided. Product revenues consist of license fees and
royalties and recurring revenues. Product revenues from license fees 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. 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.

                                      F-7
<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


     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 financial statements.


     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-8
<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

     The following table details the Company's investments as of June 30, 1997
and 1998:
<TABLE>
<CAPTION>
                                                                     JUNE 30, 1997
                                                                     -------------
                                                                 GROSS          GROSS 
                                                                 -----          -----
                                                 AMORTIZED     UNREALIZED     UNREALIZED
                                                 ---------     ----------     ----------   
                                                   COST          GAINS          LOSSES       FAIR VALUE
                                                   ----          -----          ------       ---------- 
                                                                    (IN THOUSANDS)
<S>                                              <C>           <C>            <C>            <C> 
        U.S. Government Agencies                 $   1,000     $    --        $     (1)      $      999
        Corporate obligations                       13,980          --              (1)          13,979
                                                 ---------     -------        --------       ----------
                                                 $  14,980     $    --        $     (2)      $   14,978
                                                 =========     =======        ========       ==========
 
        Included in cash and cash equivalents    $   9,136     $    --        $     --       $    9,136
        Included in short-term investments           5,844          --              (2)           5,842
                                                 ---------     -------        --------       ----------
                                                 $  14,980     $    --        $     (2)      $   14,978
                                                 =========     =======        ========       ==========

<CAPTION>
                                                                     JUNE 30, 1998
                                                                     -------------
                                                                 GROSS          GROSS 
                                                                 -----          -----
                                                 AMORTIZED     UNREALIZED     UNREALIZED
                                                 ---------     ----------     ----------   
                                                   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>

     The Company has not experienced any significant realized gains or losses on
its investments during the years ended June 30, 1997 and 1998. 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, 1997 and 1998, all
short-term investments were due within one year.


  ACCOUNTS RECEIVABLE

     Accounts receivable as of June 30, 1997 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
                                                                  JUNE 30,
                                                              -----------------
                                                               1997       1998
                                                              ------     ------
                                                               (IN THOUSANDS)
<S>                                                           <C>        <C>
        Accounts receivable - billed......................... $1,629     $1,383
        Accounts receivable - unbilled.......................  1,593        378
                                                              ------     ------
                                                               3,222      1,761
        Less--allowance for doubtful accounts................   (400)      (507)
                                                              ------     ------
                                                              $2,822     $1,254
                                                              ======     ======
</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-9
<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


     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.  In accounting for property and equipment, 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 financial statements.


     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 companies within
the computer software, hardware and telecommunications industries. The Company
does not typically require collateral from its customers.


     MAJOR CUSTOMERS

     The Company's largest customer accounted for 21%, 16% and 31% of revenues,
respectively, for the years ended June 30, 1998, 1997 and 1996.  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 ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement requires companies to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. SFAS 130 is effective for financial statements issued for fiscal years
beginning after December 15, 1997. Management believes that SFAS 130 will not
have a material effect on the Company's financial statements.

                                      F-10
<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


     In June 1997, the FASB issued SFAS No, 131, "Disclosure About Segments of
an Enterprise and Related Information" ("SFAS 131"). This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact, if any, of the adoption of this pronouncement
on the Company's existing disclosures.


     RECLASSIFICATIONS

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


2.  PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                      -----------------
                                                       1997       1998
                                                      ------     ------
                                                       (IN THOUSANDS)
<S>                                                   <C>        <C>
        Equipment.................................... $  457     $  504
        Leasehold improvements.......................     50         56
        Furniture and fixtures.......................    406        418
                                                      ------     ------
                                                         913        978
        Less--Accumulated depreciation...............   (347)      (571)
                                                      ------     ------
                                                      $  566     $  407
                                                      ======     ======
</TABLE>
                                        
     Depreciation expense was approximately $104,000, $222,000 and $224,000 for
the years ended June 30, 1996, 1997 and 1998, respectively.


3.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                      -----------------
                                                       1997       1998
                                                      ------     ------
                                                       (IN THOUSANDS)
<S>                                                   <C>        <C>
        Accounts payable............................. $  293     $  376
        Accrued compensation and benefits............    711        370
        Accrued professional fees....................    553        154
        Accrued software costs.......................    240         47
        Other accrued expenses.......................    515        150
                                                      ------     ------
                                                      $2,312     $1,097
                                                      ======     ======
</TABLE>


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
(during fiscal 1998, the Company's stockholders approved an amendment to
increase the number of shares of common stock reserved for issuance under the
Plan from 2,350,000 shares to 3,200,000 shares). 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").

                                      F-11
<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

     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, 1995...............    961,500      $0.50--$ 3.00      $ 1,403,250
           Granted.................................    421,150      $1.50--$ 7.88        1,865,300
           Exercised...............................    (60,000)     $0.50--$ 1.50          (70,000)
           Canceled................................    (61,500)     $1.50--$ 2.40          (92,475)
                                                    ----------      -------------      -----------
        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
                                                    ==========      =============      =========== 
</TABLE>

     As of June 30, 1998, there were 318,117 options exercisable at an aggregate
exercise price of $1,194,903. As of June 30, 1998, there were 1,158,454
additional options to purchase common stock available for grant under the 1994
Stock Option Plan. As of June 30, 1997, there were 808,327 options exercisable
at an aggregate exercise price of $1,334,081.

                                      F-12
<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO 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,
                                                                    -------------------
                                                             1996         1997         1998
                                                             ----         ----         ----
                                                           (IN THOUSANDS EXCEPT, PER SHARE DATA)
<S>                                                        <C>          <C>          <C> 
        Net loss:            As reported...............    $(2,867)     $(7,044)     $(4,709)
                             Pro forma.................    $(2,927)     $(7,663)     $(5,477)
 
        Net loss per share:  As reported...............    $ (0.50)     $ (0.69)     $ (0.37)
                             Pro forma.................    $ (0.51)     $ (0.75)     $ (0.42)
</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 1996, 1997 and 1998: 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 $3.47, $4.48 and
$2.93 for the fiscal years ended June 30, 1996, 1997 and 1998, respectively.

     Information with respect to options outstanding at June 30, 1998 is as
follows:

<TABLE>
<CAPTION>
                                                                      Weighted
                                                                       Average
                                             Weighted Average         Remaining            Number of 
Exercise Price Per Share        Shares        Exercise Price       Contractual Life      Vested Shares
------------------------------------------------------------------------------------------------------ 
<S>                           <C>            <C>                    <C>                  <C>
$0.50--$1.50                     91,500            $1.35                 6.6                 83,500
$2.00--$3.00                    268,275            $2.36                 9.0                 72,438
$3.06--$4.56                    772,900            $3.98                 9.2                 78,298
$4.63--$7.88                    277,000            $6.92                 8.4                 83,881
                           --------------------------------------------------------------------------- 
                              1,409,675            $4.08                 8.8                318,117
                           ===========================================================================
</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 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.

                                      F-13

<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO 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, 1996, Warrants to
purchase 115,000 shares of common stock were exercised for $1.50 per share.
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 year ended June 30,
1998, the Company issued 74,109 shares of common stock at an average purchase
price of $2.55 per share pursuant to the Employee Stock Purchase Plan.  During
the year ended June 30, 1997, the Company issued 25,275 shares of common stock
at a purchase price of $3.77 per share 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.

                                      F-14
<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


6.  CREDIT FACILITY:

     The Company has a $2,000,000 revolving line of credit with Silicon Valley
Bank, as amended (the "Credit Facility"). In addition to the revolving line of
credit, the Credit Facility contains a separate lease line component in the
amount of $1,500,000 for the purpose of providing a facility for the financing
of the lease stream of payments that the Company owes to an equipment lessor
(see Note 9). Borrowings under the Credit Facility will bear interest at the
bank's prime lending rate. The Credit Facility contains certain restrictive
financial covenants including a minimum quick ratio, a minimum tangible net
worth requirement and a maximum debt to tangible net worth ratio, as defined in
the agreement. The Credit Facility requires payment of all outstanding
principal, if any, plus all accrued interest on March 30, 1999. In connection
with the lease of the Company's office facility, the Company has outstanding a
$300,000 standby letter of credit at June 30, 1998 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 this letter of credit was established
under the terms of the Credit Facility, the Company has $1,700,000 available for
borrowing under the Credit Facility. As of and for the years ended June 30, 1998
and 1997 there were no amounts outstanding under the Credit Facility.


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 and $52,000 for the years ended
June 30, 1997 and 1998, respectively.


8.  INCOME TAXES:

     As of June 30, 1998, the Company had approximately $14,000,000 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, 1998, 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, 1998, the Company 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.

                                      F-15
<PAGE>
 
                                 VOXWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


9.  COMMITMENTS AND CONTINGENCIES:

  The Company leases its office facility and certain equipment under operating
leases with remaining noncancelable lease terms generally in excess of one year.
Rent expense was approximately $64,000, $756,000 and $810,000 for the years
ended June 30, 1996, 1997 and 1998, respectively.  Future minimum rental
payments for the Company's office facility and equipment under operating leases
as of June 30, 1998 are as follows:

<TABLE>
<CAPTION>
                                           (IN THOUSANDS)
        Year Ending June 30,
<S>                                        <C>
           1999............................   $  771
           2000............................      391
           2001............................      391
           2002............................      387
           2003............................      351
           Thereafter......................       --
                                           --------------
                                              $2,291
                                           ==============
</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.  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.

     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 employment and severance agreements with three officers,
the terms of which range from three to five years. The agreements provide for
minimum salary levels, adjusted annually at the discretion of the board of
directors.


10. RELATED-PARTY TRANSACTIONS:

     The Company derived approximately 31%, 16% and 21% of its revenues for the
years ended June 30, 1996, 1997 and 1998, respectively, from Netscape
Communications Corporation, which owned 500,000 shares of the Company's common
stock as of June 30, 1996 and 1997, and none as of June 30, 1998.


11. SEGMENT INFORMATION:

     The Company conducts its business within one industry segment. For the
years ended June 30, 1996, 1997 and 1998, revenues included approximately
$184,000, $141,000 and $543,000, respectively, of sales to customers outside the
United States.

                                      F-16