SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                               AMENDMENT NO. 1 TO
                                    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
  December 31, 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 20, 2002, there were approximately  35,373,000 outstanding shares of
the Company's Common Stock, no par value.


The  registrant  hereby  files this report on Form 10Q/A to amend its  Quarterly
Report on Form 10-Q as filed on February  20,  2002 for the 2nd  quarter  ending
December  31,  2001,  to  amend  Part  I.  Financial  Information  and  Part  II
Management's Discussion and Analysis of


                                       1
<PAGE>


Financial   Condition  and  Results  of  Operations.   No  other  items  in  the
registrant's  Quarterly  Report on Form 10-Q for the 2nd quarter ending December
31, 2001 have been amended.


                                 DATA RACE, Inc.
                               INDEX TO FORM 10-Q


<TABLE>
<CAPTION>
                                                                                                     Page
                                                                                                    Number
                                                                                                    ------
<S>                                                                                                     <C>
PART I.  FINANCIAL INFORMATION

Item 1. Interim Condensed Financial Statements (Unaudited):

          Condensed Balance Sheets as of December 31, 2001 and June 30, 2001.............................3

          Condensed Statements of Operations for the Three Months and Six Months
          Ended December 31, 2001 and 2000...............................................................4

          Condensed Statements of Cash Flows for the Six Months
          Ended December 31, 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..............................................................................15

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 .............................................................................................17
</TABLE>


                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  Interim Condensed Financial Statements


                                 DATA RACE, Inc.
                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           As of
                                                                           --------------------------------------
                                                                            Dec. 31, 2001           June 30, 2001
                                                                           --------------         ---------------
    ASSETS                                                                    (unaudited)
<S>                                                                        <C>                    <C>
    Current assets:
        Cash and cash equivalents........................................  $        9,332         $         9,334
        Accounts receivable, net.........................................             868                   2,026
        Inventory........................................................       2,394,609               2,876,506
                                                                           --------------         ---------------
            Total current assets.........................................       2,404,809               2,887,866

    Property and equipment, net..........................................         406,204                 674,798
    Other assets.........................................................          61,741                  84,630
                                                                           --------------         ---------------
            Total assets.................................................  $    2,872,754         $     3,647,294
                                                                           ==============         ===============

    LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

    Current liabilities:
        Accounts payable.................................................  $    2,011,523         $     2,327,133
        Accrued expenses.................................................         737,735                 638,167
         Obligations under capital lease, current........................         172,141                 125,078
         Convertible debentures..........................................       1,739,166               1,071,667
                                                                           --------------         ---------------
            Total current liabilities....................................       4,660,565               4,162,045

    Non-current liabilities:
         Obligations under capital lease, non-current....................              --                  47,063
                                                                           --------------         ---------------
                                                                                4,660,565               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 Dec 31, 2001 and June 30, 2001 respectively ................      62,466,062              62,420,978
        Additional paid-in capital.......................................      10,785,717               9,545,152
        Accumulated deficit..............................................     (74,563,339)            (72,527,944)
          Unamortized financing costs....................................        (476,251)                     --
            Total shareholders' equity (deficit).........................      (1,787,811)               (561,814)
                                                                           --------------         ---------------
             Total liabilities and shareholders' equity..................  $    2,872,754         $     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 Dec. 31,           Six Months Ended Dec. 31,
                                                            ------------------------------------ -----------------------------------
                                                                2001                2000                2001                2000
                                                            -----------         -----------         -----------         -----------
<S>                                                         <C>                <C>                  <C>                <C>
Total revenue ......................................        $        --         $        --         $     4,736         $     6,042

Cost of revenue ....................................              3,896             166,243              22,760             339,541
                                                            -----------         -----------         -----------         -----------

      Gross profit (loss) ..........................             (3,896)           (166,243)            (18,024)           (333,499)

Operating expenses:
  Engineering and product
  development ......................................            136,290           1,359,735             325,025           2,485,710
  Sales and marketing ..............................             53,073           1,419,930             124,871           2,580,813
  General and administration .......................            345,449           1,072,586             796,057           2,076,253
                                                            -----------         -----------         -----------         -----------
      Total operating expenses .....................            534,812           3,852,251           1,245,953           7,142,776
                                                            -----------         -----------         -----------         -----------

      Operating loss ...............................           (538,708)         (4,018,494)         (1,263,977)         (7,476,275)

        Interest income ............................                 --              70,395                  --             250,431

        Interest expense ...........................           (386,027)                 --            (765,860)                 --

        Other income (expense) .....................                 --                  --              (5,557)             60,148
                                                            -----------         -----------         -----------         -----------

        Net loss ...................................        $  (924,735)        $(3,948,099)        $(2,035,394)        $(7,165,696)
                                                            ===========         ===========         ===========         ===========

Per share data:

Net basic and diluted loss per share
       applicable to common stock ..................        $     (0.03)        $     (0.15)        $     (0.06)        $     (0.27)
                                                            -----------         -----------         -----------         -----------

Weighted average shares outstanding ................         35,373,000          26,682,000          35,317,000          26,445,000
                                                            -----------         -----------         -----------         -----------
</TABLE>


        See accompanying notes to interim condensed financial statements


                                       4
<PAGE>


                                 DATA RACE, Inc.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                    UNAUDITED


<TABLE>
<CAPTION>
                                                                                                    Six Months Ended December 31,
                                                                                                  ----------------------------------
                                                                                                      2001                  2000
                                                                                                  -----------           -----------
<S>                                                                                               <C>                    <C>
Cash flows from operating activities:
  Net loss from operations .............................................................          $(2,035,394)           (7,165,696)
  Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
    Depreciation and amortization ......................................................              204,599               234,659
     Amortized financing costs for July 2001 private placement .........................               76,815                    --
    Compensatory shares-consulting and legal fees ......................................               40,083                    --
    Loss (gain) on sale of property and equipment ......................................               44,870                (3,529)
    Non- cash beneficial conversion feature on June 2001convertible
     debentures ........................................................................              687,499                    --
    Changes in assets and liabilities:
    Accounts and notes receivable ......................................................                1,158               (93,070)
    Inventory ..........................................................................                   --            (2,063,016)
    Prepaid expenses, deposits and other assets ........................................               22,889              (379,370)
    Accounts payable ...................................................................              166,287               562,850
    Accrued expenses ...................................................................               99,568              (115,533)
                                                                                                  -----------           -----------
      Net cash (used) in operating activities ..........................................             (691,626)           (9,022,705)
                                                                                                  -----------           -----------

Cash flows from investing activities:
  Purchase of property and equipment ...................................................                   --              (891,072)
  Proceeds from sale of property and equipment .........................................               19,125                 4,146
                                                                                                  -----------           -----------
      Net cash provided (used) by investing activities .................................               19,125              (886,926)
                                                                                                  -----------           -----------

Cash flows from financing activities:
   Convertible debt ....................................................................              667,499                    --
  Payment on capital leases ............................................................                   --               (22,791)
  Net proceeds from issuance of common stock ...........................................                5,000             1,049,537
                                                                                                  -----------           -----------
      Net cash provided by financing activities ........................................              672,499             1,026,746
                                                                                                  -----------           -----------

Net decrease in cash and cash equivalents ..............................................                   (2)           (8,882,885)

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

Cash and cash equivalents at end of period .............................................          $     9,332             2,176,176
                                                                                                  -----------           -----------

Supplemental Disclosure:

 (i) Interest paid (received)                                                                     $   765,860              (250,431)
     Taxes paid                                                                                   $        --                    --

(ii) During the six-month  period ending  December 31, 2001 the Company  issued 500000 shares of its common stock as a result of the
     conversion of $20,000 debt.

(iii)During the six-month period ending December 31, 2001 the Company issued  16,366,612  warrants in conjunction with its July 2001
     private placement  resulting in the Company recording $553,066 financing cost that are being amortized on a straight line basis
     over a three year period beginning July 31,2001.  The Company  amortized $76,815 financing costs relating to these warrants for
     the six months ending December 31, 2001.

(iv) During the six months ending December 31, 2001 the Company returned $481,897 of inventory items to its vendor for credit.
</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  by  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


                                       6
<PAGE>

reseller agreements, has an inventory balancing provision, which generally gives
the reseller the opportunity to 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 December 31,
2001,  current  liabilities  exceed current assets by approximately  $2,300,000,
total  liabilities  exceed  total  assets by  approximately  $1,800,000  and the
accumulated  deficit  aggregated  approximately  $74,600,000.  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 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


                                       7
<PAGE>

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 and
six months ending December 31, 2001.

Inventory consists of the following:

                                          December 31,       June 30,
                                               2001            2001
                                           ----------       ----------
          Finished goods                   $  572,660       $1,054,557
          Work in process                     322,797          322,797
          Raw materials                     1,499,152        1,499,152
                                           ----------       ----------
          Total inventory                  $2,394,609       $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 20, 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,
$277,499,  principal  amount of  convertible  debentures  on October  18,  2001,
$40,000,  principal  amount of  convertible  debentures on December 19, 2001 and
$88,000, principal amount of convertible debentures on January 22, 2002. 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 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.
For the six months ending December 31, 2001 , there have been $20,000  principal
conversions on the notes.


                                       9
<PAGE>

6) Warrants

The  following  table  summarizes  the  outstanding  warrants  as of the  end of
December 31, 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                       Dec 31, 2001       June30, 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 Grenville $20,000
for its legal fees and expenses  incurred in connection  with the equity line of
credit.  The  Company  recorded  unamortized  financing  cost  of  $553,066  and
additional  paid in  capital  related to the  issuance  of these  warrants.  The
financing cost are being amortized over a three year period  beginning July, 31,
2001 on a straight line basis  resulting in the Company  amortizing  $76,815 for
the six months ending  December 31, 2001. 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.  On November 6, 2001,  the  Company  was dropped  from the OTCBB.  The
Company  notified  Grenville  Finance  of  this  occurrence  and  received  from
Grenville Finance a waiver of Article 6 section 6.2 (a) (ii) of the Common Stock
Purchase  Agreement on termination of the agreement based on the de-listing from
a principal market.


                                       10
<PAGE>
 Beneficial conversion features of convertible debt

The  beneficial  conversion  features of the  convertible  debentures  issued in
October and December 2001 have been  recognized by recording  additional paid in
capital and interest expense for the three months and six months ending December
31,  2001.  The amount of the  beneficial  conversion  and  interest  expense is
calculated as of the date of issuance as the  difference  between the conversion
price and the fair value of the common stock into which the note is convertible.
The Company recognized  beneficial conversion interest expense and corresponding
additional paid in capital for approximately $317,000 and $687,000 for the three
and six months ending December 31, 2001, respectively.

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. All dollar amounts discussed
below are approximate unless otherwise noted.

Revenue for the three months  ending  December  31, 2001 where  unchanged in the
amount of $0 compared to the same period of the prior fiscal  year.  Revenue for
the six months ending  December 31, 2001 decreased 22% to $4,700 from $6,000 for
the same period of the prior fiscal year.

Gross profit (losses) decreased by 97.7% and 94.6% to $3,900 and $18,000 for the
three and six months  ending  December  31,  2001 from  losses of  $166,000  and
$333,000 for the comparable periods of the prior fiscal year. These decreases in
gross profit (losses) are attributed to the Company's reduction of manufacturing
overhead  through the closing of its San Antonio  facility in August of 2000. In
July 2001, the Company reduced its production  support staff from 7 employees to
1 employee and relies upon contract manufacturing resources when necessary.

Engineering  and  product  development  expenses  decreased  by 90%  and  87% to
$136,000  and  $325,000  for the three and six months  ending  December 31, 2001
respectively from $1,360,000 and $2,486,000 compared to the same periods for the
prior fiscal year.  These decreases were primarily due to the reduction in staff
on July 10, 2001. The company currently has two employees sustaining development
effort.


                                       11
<PAGE>

Sales and  marketing  expenses  decreased by 96% and 95% to $53,000 and $125,000
for the three and six  months  ending  December  31,  2001 from  $1,420,000  and
$2,581,000 for the comparable  periods of the prior fiscal year. These decreases
were  primarily  due to the company  reducing its sales staff down to one person
and using  contract-marketing  consultants while  concentrating  specifically on
focused sales opportunities.

General and  administrative  expenses  decreased 67.8% and 61.7% to $346,000 and
$796,000 for the three and six months ending  December 31, 2001 from  $1,073,000
and $2,076,000  respectively,  compared to the same periods for the prior fiscal
year. The reductions in expense are directly  attributable  to reduced  staffing
and facilities savings through the closing of the San Antonio facility in August
2001. The Company has three employees performing administrative functions.

Income tax benefits  related to the losses for the six months ended December 31,
2001  were not  recognized  because  the  realization  of such  benefits  is not
assured. As of December 31, 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 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 $925,000 and
$2,035,000 for the three and six months ended December 31, 2001 respectively and
has  incurred  losses for each of the  preceding 3 years.  At December  31, 2001
current liabilities exceed current assets by approximately $2,300,000, and total
liabilities exceed total assets by approximately  $1,800,000 and the accumulated
deficit  aggregated  approximately  $74,600,000.   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.


                                       12
<PAGE>

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  additional  funds  through 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 December  31,  2001,  the Company had  approximately  $9,000 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 Company  recorded  unamortized  financing  cost of  $553,066  and
additional paid in capital related to the issuance of these warrants.


                                       13
<PAGE>

The financing cost are being amortized over a three year period  beginning July,
31, 2001 on a straight line basis  resulting in the Company  amortizing  $76,815
for the six months ending  December 31, 2001. 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. On November 6, 2001, the Company was dropped from the OTCBB.
The Company  notified  Grenville  Finance of this  occurrence  and received from
Grenville Finance a waiver of Article 6 section 6.2 (a) (ii) of the Common Stock
Purchase  Agreement on termination of the agreement based on the de-listing from
a principal market.

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 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 December  31,  2001,  the Company had  approximately  $1,700,000  of interest
bearing indebtedness. The interest rates are fixed and therefore, we do not have
any significant interest rate risk.


At December 31, 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.


                                       14
<PAGE>


                                 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
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.

None

b)       Reports on Form 8-K.

A report  on Form 8-K was  filed on  November  20,  2001 to  report a change  in
certifying accountant


                                       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:  April 3, 2002


                                       16