SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q
                                QUARTERLY REPORT
     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended                                   Commission File Number
  September 30, 2001                                           0-20706


                                 DATA RACE, Inc.
             (Exact name of registrant as specified in its charter)


         Texas                                           74-2272363
(State of Incorporation)                    (I.R.S.Employer Identification No.)


                         6509 Windcrest Drive, Suite 120
                               Plano, Texas 75024
                            Telephone (972) 265-4000
               (Address, including zip code, and telephone number,
        including area code, of registrant's principal executive offices)

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

    Securities registered pursuant to Section 12(g) of the Act: Common Stock



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 [_]

On February 14, 2002, there were approximately  35,343,000 outstanding shares of
the Company's Common Stock, no par value.


                                       1
<PAGE>


                                 DATA RACE, Inc.
                               INDEX TO FORM 10-Q


                                                                           Page
                                                                          Number
                                                                          ------
PART I.  FINANCIAL INFORMATION

Item 1.  Interim Condensed Financial Statements (Unaudited):

         Condensed Balance Sheets as of September 30, 2001 and
         June 30, 2001.......................................................3

         Condensed Statements of Operations for the Three Months
         Ended September 30, 2001 and 2000...................................4

         Condensed Statements of Cash Flows for the Three Months
         Ended September 30, 2001 and 2000...................................5

         Notes to Interim Condensed Financial Statements.....................6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations................................11

Item 3.  Quantitative and Qualitative Disclosure about Market Risk..........14

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings..................................................14

Item 2.  Changes in Securities..............................................15

Item 3.  Defaults Upon Senior Securities....................................15

Item 4.  Submission of Matters to a Vote of Security Holders................15

Item 5.  Other Information..................................................15

Item 6.  Exhibits and Reports on Form 8-K...................................15

SIGNATURES .................................................................16


                                       2
<PAGE>


                          PART I. FINANCIAL INFORMATION

ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS


                                 DATA RACE, Inc.
                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       As of
                                                                         ----------------------------------
                                                                         Sept. 30, 2001       June 30, 2001
                                                                         --------------      --------------
                                                                           (unaudited)
<S>                                                                      <C>                 <C>
ASSETS

Current assets:
    Cash and cash equivalents ......................................     $        2,887      $        9,334
    Accounts receivable, net .......................................              2,026               2,026
    Inventory ......................................................          2,531,289           2,876,506
                                                                         --------------      --------------
        Total current assets .......................................          2,536,202           2,887,866

Property and equipment, net ........................................            506,670             674,798
Other assets .......................................................             84,630              84,630
                                                                         --------------      --------------
        Total assets ...............................................     $    3,127,502      $    3,647,294
                                                                         ==============      ==============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable ...............................................     $    1,976,582      $    2,327,133
    Accrued expenses ...............................................            786,775             638,167
     Obligations under capital lease, current ......................            172,139             125,078
     Convertible debentures ........................................          1,421,687           1,071,667
                                                                         --------------      --------------
        Total current liabilities ..................................          4,354,165           4,162,045

Non-current liabilities:
     Obligations under capital lease, non-current ..................                 --              47,063
                                                                         --------------      --------------
 ...................................................................          4,354,165           4,209,108
                                                                         --------------      --------------

Commitments and contingencies

Shareholders' equity (deficit):
    Common stock, no par value, 70,000,000 shares authorized
      35,373,477 and 34,358,521 shares issued and outstanding at
      Sept 30, 2001 and June 30, 2001 respectively .................         62,466,062          62,420,978
    Additional paid-in capital .....................................          9,915,152           9,545,152
    Accumulated deficit ............................................        (73,607,877)        (72,527,944)
        Total shareholders' equity (deficit) .......................         (1,226,663)           (561,814)
                                                                         --------------      --------------
         Total liabilities and shareholders' equity ................     $    3,127,502      $    3,647,294
                                                                         ==============      ==============
</TABLE>

See accompanying notes to financial statements


                                       3
<PAGE>


                                 DATA RACE, Inc.
                       CONDENSED STATEMENTS OF OPERATIONS
                                    UNAUDITED

<TABLE>
<CAPTION>
                                                                                Three Months Ended September 30,
                                                                                    2001                2000
                                                                                -------------      -------------
<S>                                                                             <C>                <C>
Total operating revenue .....................................................   $       4,736      $       6,042

Cost of revenue .............................................................          18,864            173,298
                                                                                -------------      -------------

      Gross profit (loss) ...................................................         (14,128)          (167,256)
                                                                                -------------      -------------

Operating expenses:
  Engineering and product development .......................................         188,735          1,125,975
  Sales and marketing .......................................................          71,799          1,160,883
  General and administration ................................................         450,607          1,003,667
                                                                                -------------      -------------
      Total operating expenses ..............................................         711,141          3,290,525
                                                                                -------------      -------------

      Operating loss ........................................................        (725,269)        (3,457,781)

Other income (loss) .........................................................        (354,664)           240,184
                                                                                -------------      -------------


      Net loss ..............................................................   $  (1,079,933)     $  (3,217,597)
                                                                                =============      =============

Per share data:
      Net loss ..............................................................   $  (1,079,933)     $  (3,217,597)
      Net basic and diluted loss per share applicable to common stock .......   $       (0.03)     $       (0.12)
                                                                                =============      =============

Weighted average shares outstanding .........................................      35,373,000         26,209,000
                                                                                =============      =============
</TABLE>

        See accompanying notes to interim condensed financial statements


                                       4
<PAGE>


                                 DATA RACE, Inc.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                    UNAUDITED


<TABLE>
<CAPTION>
                                                                        Three Months Ended September 30,
                                                                       ----------------------------------
                                                                            2001                 2000
                                                                       -------------        -------------
<S>                                                                    <C>                  <C>
Cash flows from operating activities:
  Net loss from operations ......................................      $  (1,079,933)       $  (3,217,597)
  Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
    Depreciation and amortization ...............................            104,133               93,387
    Compensatory shares-consulting and legal fees ...............             40,084                   --
    Loss on sale of property and equipment ......................             44,870               (3,529)
    Non-cash beneficial conversion feature on June
     2001 convertible debentures ................................            370,000                   --
    Changes in assets and liabilities:
    Accounts and notes receivable ...............................                 --             (672,640)
    Inventory ...................................................                 --             (643,920)
    Prepaid expenses, deposits and other assets .................                 --              (91,537)
    Accounts payable ............................................             (8,334)             232,560
    Accrued expenses ............................................            148,608               51,687
    Deferred revenue ............................................                 --              364,392
                                                                       -------------        -------------
      Net cash (used) in operating activities ...................           (380,572)          (3,887,197)
                                                                       -------------        -------------

Cash flows from investing activities:
  Purchase of property and equipment ............................                 --             (377,043)
  Proceeds from sale of property and equipment ..................             19,125                4,146
                                                                       -------------        -------------
      Net cash provided by investing activities .................             19,125             (372,897)
                                                                       -------------        -------------

Cash flows from financing activities:
   Convertible debt .............................................            350,000
  Payment on capital leases .....................................                 --              (10,877)
  Net proceeds from issuance of common stock ....................              5,000            1,002,188
                                                                       -------------        -------------
      Net cash provided by financing activities .................            355,000              991,311
                                                                       -------------        -------------

Net decrease in cash and cash equivalents .......................             (6,447)          (3,268,783)

Cash and cash equivalents at beginning of period ................              9,334           11,059,061
                                                                       -------------        -------------

Cash and cash equivalents at end of period ......................      $       2,887        $   7,790,278
                                                                       =============        =============

Supplemental Disclosure:
     Interest paid ..............................................      $     371,295        $       2,494
     Taxes paid .................................................      $          --        $          --
</TABLE>

        See accompanying notes to interim condensed financial statements


                                       5
<PAGE>


                                 DATA RACE, Inc.
                 NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
                                    UNAUDITED


1)   Summary of Significant Accounting Policies

Description of Business

DATA RACE, Inc. ("Data Race",  "we" or the "Company"),  currently doing business
as  IP  AXESS,  designs,   manufactures,   and  markets  a  line  of  innovative
communications  products to meet the needs of remote workers. The Company's lead
product, the VocalWare(TM) IP remote access system, provides virtual presence to
the  corporate  environment  byt  allowing  a remote  worker to  connect  to the
corporate  office over a normal dial-up  telephone line or a number of broadband
access mediums such as digital subscriber lines (DSL), cable modems,  integrated
services digital networks  (ISDN),  asynchronous  transfer modes (ATM) and frame
relay, and  simultaneously  have full access to the corporate data network,  the
office phone extension, and the office fax system.

Basis of Presentation

The unaudited interim,  condensed  financial  statements reflect all adjustments
(consisting of normal recurring  accruals) that in the opinion of management are
necessary  for a  fair  presentation  of  the  financial  position,  results  of
operations and cash flows for such periods. These financial statements should be
read in conjunction  with the Company's  financial  statements and notes thereto
included in the June 30, 2001 Annual Report on Amendment No. 1 to Form 10-K. The
condensed  balance  sheet  data as of June 30,  2001  included  herein  has been
derived from such audited financial  statements.  Interim period results are not
necessarily  indicative of the results to be expected for any future  periods or
the full year.

Revenue Recognition

Revenue is  generally  recognized  upon direct sale and  shipment of products to
end-user  customers or when contractual  services have been provided to end-user
customers,  title has  passed to the  end-user  customer,  the fee and terms are
fixed or determinable,  and collectibility is reasonably assured. Such method is
in accordance with Staff Accounting  Bulletin (SAB) No. 101, Revenue Recognition
in  Financial   Statements.   Revenue  is  generally  recognized  upon  reseller
(indirect)  sale of products when title has passed to the  reseller,  a reseller
agreement   exists,   the  fee  and  terms  are  fixed  or   determinable,   and
collectibility  is reasonably  assured.  The Company does have a reservation  of
title on resellers  where the products are delivered to  reseller's  location or
reseller's  end-user  location  outside the United States.  The Company reserves
title in the products  until either:  a) reseller pays in full for the products;
or b) reseller  sells the product to a third party at which time title passes to
the third party.  The Company,  in most  reseller  agreements,  has an inventory
balancing  provision,  which  generally  gives the reseller the  opportunity  to


                                       6
<PAGE>

balance  its  inventory  by  returning  for credit up to 20% of the value of the
products shipped during a quarter. The Company will record a liability for up to
20% on sales by resellers for the  inventory  balancing  provision.  The Company
also has price protection for most resellers where products shipped to resellers
whose  price  have  been  decreased  will be price  protected  if the  resellers
products  are  unopened  and shipped to  reseller  180 days or less prior to the
effective  date of price  decrease.  The reseller  must submit a claim within 30
days of the effective date of the price decrease to receive credit in the amount
of the price decrease multiplied by the qualifying units.

Revenue from  service  obligations  and  licensing  agreements  are deferred and
recognized  ratably over the period of the obligation or agreement.  The Company
recognizes  revenue and gross  profit from  evaluation  units  shipped only upon
receipt  of  payment  or  upon  customer   acceptance  and  reasonably   assured
collection.

2) Going Concern Uncertainty

The  accompanying  financial  statements  have been prepared in conformity  with
accounting principles generally accepted in the United States of America,  which
contemplates  continuation  of the Company as a going  concern.  The Company has
incurred  substantial  losses for its past three fiscal years.  At September 30,
2001,  current  liabilities  exceed current assets by approximately  $1,818,000,
total  liabilities  exceed  total  assets by  approximately  $1,226,000  and the
accumulated  deficit  aggregated  approximately  $73,608,000.  In view of  these
matters,  realization  of a major  portion  of the  assets  in the  accompanying
balance  sheet is dependent  upon the  Company's  ability to meet its  financing
requirements, and the success of its future operations.

In addition, effective July 11, 2001, the Company's common stock was delisted by
The Nasdaq National Market due to a failure to pay overdue annual and additional
listing fees in the amount of $44,125 and the  inability to meet the minimum bid
price requirements for continued listing.

Operating losses have had and continue to have a substantial  negative effect on
the Company's cash balance. The Company's goal of returning to profitability and
developing a more dependable revenue base relies on the success of the VocalWare
IP product  line. To  successfully  penetrate  the target  markets,  the Company
expects that significant  additional resources will need to be expended in order
to expand its sales and marketing  infrastructure and operation systems,  and to
finance inventory and receivables.

The Company has historically  funded  operations with the proceeds from the sale
of equity  securities and has not generated  positive cash flows from operations
for the past three years.  The Company will need to raise more money to continue
to finance its operations and may not be able to obtain additional  financing on
acceptable terms, or at all. Any


                                       7
<PAGE>

failure  to  raise  additional  financing  will  likely  place  the  Company  in
significant financial jeopardy.

During July 2001, the Company decreased its overhead through payroll  reductions
and related  benefit  costs  (reducing  its  workforce  from 77  employees  to 6
employees).  Management  is also  currently  consolidating  operations  into one
location thereby  effecting  savings on rent and associated  facility costs. The
Company  believes  that  these cost  reductions  and the  raising of  additional
financing will allow them to continue in existence.

3) Earnings (Loss) Per Share

Net  loss  per  share  of  common  stock is  presented  in  accordance  with the
provisions  of  Statement of Financial  Accounting  Standards  ("SFAS") No. 128,
Earnings Per Share.  Under SFAS No. 128, basic  earnings/loss per share excludes
dilution for potentially  dilutive securities and is computed by dividing income
or loss  available  to common  shareholders  by the weighted  average  number of
common shares  outstanding  during the period.  Diluted  earnings/loss per share
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were  exercised or converted  into common stock.
Diluted loss per share approximates basic loss per share, as no potential common
shares  are to be  included  in the  computation  when  a loss  from  continuing
operations available to common shareholders exists.

4) Inventory

Inventory  is valued  at the  lower of cost  (principally  standard  cost  which
approximates  first-in,  first-out)  or market  (net  realizable  value).  Costs
include materials, labor, overhead, and subcontract charges as applicable. If in
the ordinary course of business,  management  determines that the utility of its
inventory  is no  longer  as great as its cost,  due to  obsolescence,  physical
deterioration,  changes in price  levels,  etc.,  the Company  will  recognize a
reduction in the value of its  inventory  and record a  corresponding  charge to
income.  No  significant  inventory  adjustments  where made  during the quarter
ending September 30, 2001.

Inventory consists of the following:

                                          September 30,          June 30,
                                               2001                2001
                                          ------------        ------------
          Finished goods                  $  1,054,577        $  1,054,557
          Work in process                      322,797             322,797
          Raw materials                      1,153,915           1,499,152
                                          ------------        ------------
          Total inventory                 $  2,531,289        $  2,876,506
                                          ============        ============


                                       8
<PAGE>


5) Convertible Debt

May 2001 Private Placement

In May 2001,  the Company issued one year,  10% secured  convertible  promissory
notes and 1,166,667 common stock purchase  warrants for $700,000.  The notes are
convertible  at any time at the  holders'  option into common stock at $0.30 per
share.  The warrants are  exercisable  at a price of $0.30 per share through May
2006. As of February 14, 2002, there have been no conversions on the notes.

June 2001 Private Placement

On June 12, 2001,  the Company  signed an agreement to place up to $1 million in
6%  convertible  debentures  and warrants to two  institutional  investors.  The
parties  amended the agreement on July 17, 2001,  October 18, 2001, and December
19, 2001. The  convertible  debentures have an interest rate of 6% per annum and
mature 3 years from their date of issuance.  Under the terms of the  convertible
debentures,  the  holders can elect at any time prior to maturity to convert the
balance outstanding on the debentures into shares of Company common stock at the
lesser of a fixed price that  represents  a 10% premium to the closing bid price
of common stock at the time the debentures were issued and 50% of the average of
the 5 lowest  closing bid prices of Company  common stock during the 25 business
days  immediately  preceding the  conversion  date.  Under the  agreements,  and
pursuant to Section 4(2) of the  Securities  Act of 1933,  amended,  the Company
issued to the investors $500,000  principal amount of convertible  debentures on
June 18, 2001,  $240,000 principal amount of convertible  debentures on July 30,
2001,  $130,000 principal amount of convertible  debentures on September 6, 2001
and $277,499, principal amount of convertible debentures on October 18, 2001. On
June 18, 2001,  the Company also issued to the investors  common stock  purchase
warrants to purchase up to 1,000,000 shares of common stock at an exercise price
of $0.14.  On October 18, 2001 the parties amended the agreement to increase the
investment  amount by  $147,499  and the  Company  granted  to the  investors  a
security  interest  in all of the assets of the Company  covering  all prior and
future  indebtedness  of the Company to the investors.  On December 19, 2001 and
January 22,  2002 the parties  increased  the  investment  amount by $40,000 and
$88,000,  respectively, by the issuance of additional 6% convertible debentures.
The Company used the proceeds from the private  placement  primarily for general
corporate  purposes.  The Company is obligated to file a registration  statement
for the shares  issuable  upon  conversion  of the  convertible  debentures  and
warrants with the SEC. The Company was also obligated to cause the  registration
statement to be declared  effective by October 2, 2001 and is currently accruing
liquidated damages at the rate of 2% of the outstanding  principal amount of the
convertible debentures per month. These penalties may be paid in cash or, at the
investors'  option,  in  common  stock.  In  addition,  if  the  Company  issues
additional shares of common


                                       9
<PAGE>


stock, then antidilution  provisions contained in the convertible debentures may
reduce the  conversion  price of the  shares  issued to the  investors  so as to
prevent  dilution of the their  investment  in the  Company.  As of February 14,
2002, there have been $150,000 principal conversions on the notes.

6) Warrants

The  following  table  summarizes  the  outstanding  warrants  as of the  end of
September 30, 2001 and June 30, 2001, respectively. Each warrant in the table is
convertible  into one share of the  Company's  common  stock  for the  indicated
price.

<TABLE>
<CAPTION>
Warrants outstanding as of               Sept 30, 2001      June 30, 2001        Price        Expiration
--------------------------               -------------      -------------        -----        ----------
<S>                                         <C>                 <C>           <C>            <C>
June 2001 6% convertible debentures          1,000,000          1,000,000     $ 0.14         Jun. 2004
Equity Line of Credit                       16,366,612              --          0.07027      Jul. 2004
May 2001 10% convertible notes               1,166,667          1,166,667       0.30         May 2006
March 2001 private placement                   304,762            304,762       0.9875       Mar. 2006
June 2000 private placement                    471,822            471,822       5.45         Jun. 2002
December 1999 private placement                571,429            571,429       0.9875       Dec. 2003
June 1999 private placement                    693,888            693,888       0.9875       Dec. 2003
                                         -------------      -------------

Total warrants outstanding                  20,575,180          4,208,568
                                         =============      =============
</TABLE>

7) Shareholders Equity

Equity Line of Credit

On July 26, 2001, the Company signed what is sometimes  termed an equity line of
credit or an equity draw down facility with  Grenville  Finance Ltd. In general,
Grenville has committed up to $30 million to purchase our common stock over a 36
month  period  beginning  after  and  during  the  period a resale  registration
statement registering the shares purchased pursuant to the equity line of credit
is effective. During the periods the resale registration statement is effective,
the Company  may request a draw of up to $1 million of that money,  subject to a
formula based on average stock prices and average trading  volumes,  setting the
maximum  amount of any  request  for any given  draw.  The  amount of money that
Grenville  will  provide and the number of shares to be issued to  Grenville  in
return for that money is settled twice during a 22-day trading period  following
the draw down  request  based on the  formula in the stock  purchase  agreement.
Grenville  receives a 17.5% discount to the market price of Company common stock
during the 22-day period and the Company receives the settled amount of the draw
down, less 8% of such amount to Hadrian  Investments Limited for placement agent
fees.  Additionally,  we  issued  to  Hadrian  500,000  shares in lieu of a cash
payment of $25,000 for services rendered to the Company by Hadrian. In addition,
the Company issued a warrant to Grenville to purchase up to 16,366,612 shares of
Company common stock at an exercise price of $0.07027 and paid


                                       10
<PAGE>

Grenville  $20,000 for its legal fees and expenses  incurred in connection  with
the equity line of credit.  The issuances of the  securities  to the  accredited
investors are made pursuant to Section 4(2) of the  Securities  Act. The Company
will use the proceeds from the equity line for general corporate purposes.

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Results of Operations

During July 2001 the Company  decreased its overhead through payroll  reductions
and related  benefit  costs by reducing  its  workforce  from 77  employees to 6
employees.  Management  is also  currently  consolidating  operations  into  one
location thereby  effecting  savings on rent and associated  facility costs. The
Company  believes  that  these cost  reductions  and the  raising of  additional
financing will allow them to continue in existence.

Revenue for the three months ending  September 30, 2001  decreased 22% to $4,700
from $6,000 for the same period of the prior fiscal year.

Gross profit loss for the three months ending  September  30, 2001  decreased by
91.6% to $14,128 from a loss of $167,256 for the same period of the prior fiscal
year.  The  decrease  in gross  profit  loss is  attributable  to the  Company's
reduction  of  manufacturing  overhead  through  the  closing of its San Antonio
facility in August of 2000 and in July 2001,  reducing  its  production  support
staff from 7 employees to 1 employee.

Engineering  and  product  development  expenses  for  the  three  months  ended
September 30, 2001 decreased 83% from the comparable period for the prior fiscal
year.  This  decrease was  primarily  due to the  reduction in staff on July 10,
2001. The company currently has two employees sustaining development effort.

Sales and  marketing  expenses  for the three months  ended  September  30, 2001
decreased 94% from the comparable period of the prior fiscal year. This decrease
was primarily due to the company reducing its sales staff down to one person.

General and  administrative  expenses for the three months ended  September  30,
2001 decreased 57% primarily due to reduced staffing.  The Company currently has
three employees performing administrative functions.

Income tax benefits  related to the losses for the three months ended  September
30, 2001 were not  recognized  because the  realization  of such benefits is not
assured.  As of September  30, 2001,  the Company had Federal tax net  operating
loss  carryforwards of approximately  $71,200,000 that expire beginning in 2008.
The Company also has research


                                       11
<PAGE>

and  experimentation  credit  carryforwards  for federal  income tax purposes of
approximately  $678,000,  which began expiring in 2000, and alternative  minimum
tax credit  carryforwards  of approximately  $84,000.  The Internal Revenue Code
section 382 limits NOL and tax credit  carryforwards when an ownership change of
more  than  fifty  percent  of the value of stock in a loss  corporation  occurs
within a three-year  period.  In fiscal 1999,  1998 and 1997 the Company  issued
preferred  stock that has since been converted  into common stock.  Accordingly,
the  ability  to  utilize  remaining  NOL and tax  credit  carryforwards  may be
significantly restricted.

Liquidity and Capital Resources

The  accompanying  financial  statements  have been prepared in conformity  with
accounting principles generally accepted in the United States of America,  which
contemplates  continuation  of the Company as a going  concern.  As shown in the
financial  statements,  the Company incurred a loss of approximately  $1,080,000
for the three months ended  September 30, 2001 and has incurred  losses for each
of the  preceding 3 years.  At  September  30, 2001 current  liabilities  exceed
current assets by approximately  $1,818,000 and total  liabilities  exceed total
assets  by  approximately  $1,226,000  and the  accumulated  deficit  aggregated
approximately  $73,607,000.  In view of these  matters,  realization  of a major
portion of the assets in the  accompanying  balance sheet is dependent  upon the
Company's  ability to meet its  financing  requirements,  and the success of its
future operations.

In addition, effective July 11, 2001, the Company's common stock was delisted by
The Nasdaq National Market due to a failure to pay overdue annual and additional
listing fees in the amount of $44,125 and the  inability to meet the minimum bid
price requirements for continued listing. Effective November 6, 2001, our common
stock was dropped from the OTCBB for failure to timely file reports  required to
be filed by  Section 13 or 15(d) of the  Securities  Exchange  Act of 1934.  Our
common  stock  continues  to be  traded in the "pink  sheets"  under the  symbol
"RACE". We can provide no assurance that an active public trading market for our
common stock will be re-established.

Operating losses have had and continue to have a substantial  negative effect on
the Company's cash balance. The Company's goal of returning to profitability and
developing a more dependable revenue base relies on the success of the VocalWare
IP product  line. To  successfully  penetrate  the target  markets,  the Company
expects that significant  additional resources will need to be expended in order
to expand its sales and marketing  infrastructure and operation systems,  and to
finance inventory and receivables.

The Company has historically  funded  operations with the proceeds from the sale
of equity  securities and has not generated  positive cash flows from operations
for the past three  years.  The  Company  will need to raise more money thru its
equity line of credit to continue to finance its operations and pay its existing
creditors.  Any failure to raise


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<PAGE>


additional funds thru its equity line of credit will likely place the Company in
significant financial jeopardy as the Company does not believe that current cash
will be sufficient to meet the Company's current and ongoing operating expenses.

At September  30, 2001,  the Company had  approximately  $2,000 in cash and cash
equivalents.

Equity Line of Credit

In July 2001,  the  Company  signed what is  sometimes  termed an equity line of
credit or an equity draw down facility with  Grenville  Finance Ltd. In general,
Grenville has committed up to $30 million to purchase our common stock over a 36
month  period  beginning  after  and  during  the  period a resale  registration
statement registering the shares purchased pursuant to the equity line of credit
is effective. During the periods the resale registration statement is effective,
the Company  may request a draw of up to $1 million of that money,  subject to a
formula based on average stock prices and average trading  volumes,  setting the
maximum  amount of any  request  for any given  draw.  The  amount of money that
Grenville  will  provide and the number of shares to be issued to  Grenville  in
return for that money is settled twice during a 22-day trading period  following
the draw down  request  based on the  formula in the stock  purchase  agreement.
Grenville  receives a 17.5% discount to the market price of Company common stock
during the 22-day period and the Company receives the settled amount of the draw
down, less 8% of such amount to Hadrian  Investments Limited for placement agent
fees.  Additionally,  we  issued  to  Hadrian  500,000  shares in lieu of a cash
payment of $25,000 for services rendered to the Company by Hadrian. In addition,
the Company issued a warrant to Grenville to purchase up to 16,366,612 shares of
Company common stock at an exercise price of $0.07027 and paid Grenville $20,000
for its legal fees and expenses  incurred in connection  with the equity line of
credit.  The issuances of the  securities to the  accredited  investors are made
pursuant  to  Section  4(2) of the  Securities  Act.  The  Company  will use the
proceeds from the equity line for general corporate purposes.

Disclosure Regarding Forward Looking Statements

Except  for  the   historical   information,   this  report   contains   various
"forward-looking  statements"  which  represent  the Company's  expectations  or
beliefs concerning future events,  including  expectations regarding the rate of
use of existing  cash and  regarding  the success of the  Company's  strategy to
increase  sales and return to  profitability.  The Company  cautions  that these
forward-looking  statements  involve a number of risks and uncertainties and are
qualified  by  important  factors  that  could  cause  actual  results to differ
materially from those in the  forward-looking  statements.  Such factors include
lack of adequate capital;  changing market trends and market needs;  uncertainty
regarding  the  breadth  of  market  acceptance  of  the  teleworker   products;
uncertainty  regarding  the  length of the sales  process;  rapid or  unexpected
technological changes; new or increased


                                       13
<PAGE>


competition from companies with greater resources than the Company; inability to
resolve  technical  issues  or  overcome  other  development  obstacles  and the
Company's  success in  developing  new  strategic  and  financial  partnerships.
Additional factors which qualify forward-looking statements are set forth in the
Company's  other SEC  filings,  including  the Form 10-K for  fiscal  2001.  The
Company's  failure to succeed in its efforts,  including its  development of new
strategic and financial  partnerships,  could have a material  adverse effect on
the Company's financial condition and operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The following discusses the Company's exposure to market risk related to changes
in interest  rates,  equity prices and foreign  currency  exchange  rates.  This
discussion  contains  forward-looking  statements  that are subject to risks and
uncertainties.

At September  30, 2001,  the Company had  approximately  $1,400,000  of interest
bearing indebtedness. The interest rates are fixed and therefore, we do not have
any significant interest rate risk.

At  September  30,  2001,  the  Company  did  not own  any  equity  investments.
Therefore, the Company did not have any direct equity price risk.

Substantially  all  Company  revenues  are  realized  in  U.S.  dollars  and  no
significant  asset or cash account  balances are maintained in currencies  other
than the United States dollar.  Therefore, the Company does not have significant
direct currency exchange rate risk.


                                 DATA RACE, Inc.

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On May 18, 2001, the Company, executive officers, Michael McDonnell,  previously
the President and Chief  Executive  Officer  (resigned in July 2001),  and James
Scogin,  Acting President and Chief Financial Officer and John Liviakis,  one of
our significant  shareholders  were sued in the United States District Court for
the Northern  District of  Illinois,  Eastern  Division,  by Robert  Plotkin,  a
Chicago-based  attorney,  and  several  of Mr.  Plotkin's  relatives  and family
trusts,  who are all  shareholders  of the  Company.  The amount of the monetary
damages being sought is $20,000,000.  The complaint  alleges that the plaintiffs
were  induced  to  purchase  shares  of our  common  stock  based  upon  alleged


                                       14
<PAGE>


misrepresentations and omissions of material fact. The proceeding has been moved
to the United States District Court for the Eastern  District of Texas,  Sherman
Division in October 11, 2001.  Discovery has not  commenced,  but we believe the
lawsuit is without  merit and intend to  vigorously  defend The Company  against
these allegations.

Item 2.  Changes in securities

None.

Item 3.  Defaults upon senior securities

None.

Item 4.  Submission of matters to a vote of security holders

None

Item 5.  Other information

None.

Item 6.  Exhibits and Reports on Form 8-K

a)       Exhibits.

10.1     Letter Agreement between  the Company,  Alpha Capital  and Stonestreet,
         dated July 19, 2001.

b)       Reports on Form 8-K.

A report on Form 8-K was filed on July 24,  2001 to report the  completion  of a
private placement.



                                       15
<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  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.

                                DATA RACE, INC.

                                By:  /s/ James G. Scogin
                                     --------------------------
                                     James G. Scogin, Acting President and Chief
                                     Financial Officer


                                     Date:  February 14, 2002



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