<PAGE>

                      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
      December 31, 1999                                    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.)


                            12400 Network Boulevard
                           San Antonio, Texas 78249
                           Telephone (210) 263-2000
              (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 11, 2000, there were 22,861,110 outstanding shares of 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 December 31, 1999 and June 30, 1999..   3

        Condensed Statements of Operations for the Three Months
        and Six Months Ended December 31, 1999 and 1998.....................   4

        Condensed Statements of Cash Flows for the Six Months
        Ended December 31, 1999 and 1998....................................   5

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

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations.................................  10

Item 3. Quantitative and Qualitative Disclosures about Market Risk..........  12


PART II.  OTHER INFORMATION
---------------------------

Item 1. Legal Proceedings...................................................  13

Item 2. Changes in Securities...............................................  13

Item 3. Defaults Upon Senior Securities.....................................  14

Item 4. Submission of Matters to a Vote of Security Holders.................  14

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

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

SIGNATURES..................................................................  17
----------

                                       2
<PAGE>

                         PART I.  FINANCIAL INFORMATION

ITEM 1.  Interim Condensed Financial Statements
-----------------------------------------------


                                DATA RACE, Inc.
                            CONDENSED BALANCE SHEETS
                                   UNAUDITED


<TABLE>
<CAPTION>
                                                                                           As of
                                                                         -----------------------------------------
                                                                           Dec. 31, 1999           June 30, 1999
                                                                         ------------------      -----------------
<S>                                                                      <C>                     <C>
ASSETS

Current assets:
  Cash and cash equivalents......................................        $        8,238,952      $       7,654,978
  Accounts receivable, net.......................................                    20,694                 55,068
  Inventory......................................................                    73,648                 95,095
  Prepaid expenses and deposits..................................                     7,913                153,615
  Net assets of discontinued operation...........................                   172,570                319,351
                                                                         ------------------      -----------------
    Total current assets.........................................                 8,513,777              8,278,107

Property and equipment, net......................................                 1,145,357              1,178,309
Other assets, net................................................                    25,389                 25,389
                                                                         ------------------      -----------------
    Total assets.................................................        $        9,684,523      $       9,481,805
                                                                         ==================      =================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable...............................................        $           98,350      $         230,216
  Accrued expenses...............................................                   542,895                535,974
                                                                         ------------------      -----------------
    Total current liabilities....................................                   641,245                766,190

Shareholders' equity:
  Convertible preferred stock....................................                 1,620,001              1,460,556
  Common stock...................................................                51,099,380             46,489,610
  Additional paid in capital.....................................                 7,464,287              7,464,287
  Retained deficit...............................................               (51,140,390)           (46,698,838)
                                                                         ------------------      -----------------

    Total shareholders' equity...................................                 9,043,278              8,715,615

                                                                         ------------------      -----------------
     Total liabilities and shareholders' equity..................        $        9,684,523      $       9,481,805
                                                                         ==================      =================
</TABLE>


       See accompanying notes to interim condensed financial statements

                                       3
<PAGE>

                                DATA RACE, Inc.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   UNAUDITED


<TABLE>
<CAPTION>
                                                   Three Months Ended Dec. 31,                    Six  Months Ended Dec. 31,
                                              --------------------------------------        ---------------------------------------
                                                    1999                   1998                   1999                   1998
                                              ---------------        ---------------        ---------------        ----------------


<S>                                           <C>                    <C>                    <C>                    <C>
Total revenue...........................      $        79,897        $       239,883        $       263,065        $        533,182

Cost of revenue.........................              196,949                253,618                365,644                 528,616
                                              ---------------        ---------------        ---------------        ----------------
      Gross profit......................             (117,052)               (13,735)              (102,579)                  4,566

Operating expenses:
  Engineering and product
   development..........................              816,927                570,479              1,654,083               1,136,011
  Sales and marketing...................              464,198                492,694                992,817               1,033,829
  General and administration............              688,232              1,380,104              1,930,227               2,822,732
                                              ---------------        ---------------        ---------------        ----------------
      Total operating expenses..........            1,969,357              2,443,277              4,577,127               4,992,572
                                              ---------------        ---------------        ---------------        ----------------
      Operating loss....................           (2,086,409)            (2,457,012)            (4,679,706)             (4,988,006)

Other income............................              125,749                 28,748                227,046                  56,129
                                              ---------------        ---------------        ---------------        ----------------

Loss from continuing operations.......             (1,960,660)            (2,428,264)            (4,452,660)             (4,931,877)

Income from discontinued operation......               57,094                194,433                170,553                 379,920
                                              ---------------        ---------------        ---------------        ----------------
      Net loss..........................      $    (1,903,566)       $    (2,233,831)       $    (4,282,107)       $     (4,551,957)
                                              ===============        ===============        ===============        ================

Per share data:
      Net loss..........................           (1,903,566)            (2,233,831)            (4,282,107)             (4,551,957)
      Effect of beneficial conversion
        feature of convertible
        preferred stock.................              (79,723)            (1,172,488)              (159,445)             (2,454,035)
                                              ---------------        ---------------        ---------------        ----------------
      Net loss applicable to common
        stock...........................      $    (1,983,289)       $    (3,406,319)       $    (4,441,552)       $     (7,005,992)
                                              ===============        ===============        ===============        ================
Net basic/diluted loss from continuing
        operations per common share           $         (0.10)       $         (0.23)       $         (0.22)       $          (0.50)
                                              ===============        ===============        ===============        ================
Net basic/diluted loss per common
        share                                 $         (0.09)       $         (0.22)       $         (0.21)       $          (0.48)
                                              ===============        ===============        ===============        ================
Weighted average shares outstanding.....           21,145,000             15,645,000             20,738,000              14,741,000
                                              ===============        ===============        ===============        ================
</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 Dec. 31,
                                                                         --------------------------------------------
                                                                                1999                       1998
                                                                         ------------------         -----------------
<S>                                                                      <C>                        <C>
Cash flows from operating activities:
 Net loss from continuing operations.............................        $       (4,452,660)        $      (4,931,877)
 Adjustments to reconcile net loss to net cash provided by (used
  in) operating activities:
  Depreciation and amortization..................................                   140,225                   173,228
  Non-cash consulting fee........................................                   520,086                 1,890,813
  Changes in assets and liabilities:
  Accounts receivable............................................                    34,374                  (141,850)
  Inventory......................................................                    21,447                   160,120
  Prepaid expenses, deposits, and other assets...................                   145,702                         -
  Accounts payable...............................................                  (131,866)                   85,104
  Accrued expenses...............................................                     6,921                  (641,276)
                                                                         ------------------         -----------------
   Net cash used in operating activities.........................                (3,715,771)               (3,405,738)
                                                                         ------------------         -----------------

Cash flows from investing activities:
 Purchase of property and equipment..............................                  (107,273)                   (5,695)
 Proceeds from sale of property and equipment....................                         -                     2,835
                                                                         ------------------         -----------------
   Net cash used in investing activities.........................                  (107,273)                   (2,860)
                                                                         ------------------         -----------------

Cash flows from financing activities:
 Net proceeds from the issuance of preferred stock...............                         -                 2,859,346
 Net proceeds from the issuance of common stock
   and related warrants..........................................                 4,089,684                 2,400,979
                                                                         ------------------         -----------------
   Net cash provided by financing activities.....................                 4,089,684                 5,260,325
                                                                         ------------------         -----------------
   Cash flows provided by discontinued operation.................                   317,334                   230,353
                                                                         ------------------         -----------------

Net increase (decrease) in cash and cash equivalents.............                   583,974                 2,082,080

Cash and cash equivalents at beginning of period.................                 7,654,978                 1,644,294
                                                                         ------------------         -----------------

Cash and cash equivalents at end of period.......................        $        8,238,952         $       3,726,374
                                                                         ==================         =================
</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" or the "Company") designs, manufactures, and
markets a line of communication products for remote access to the corporate
environment.  Its unique client/server product, the Be There/VocalWare Remote
Access System, gives teleworkers access to all elements of corporate
communications networks, including the Internet, Intranet and PBX.  Through Be
There!/VocalWare, remote workers send and receive e-mail, fax and phone calls
simultaneously over a single communication connection.

Discontinued Business Segment

The Board of Directors approved, discontinuing the network multiplexer business
segment effective January 20, 2000. The discontinued operations line item in the
accompanying condensed statement of operations shows the results of this
business segment for the periods presented. The Company does not anticipate a
loss from the disposal of the network multiplexer assets.

The operating results of the discontinued operation are as follows (in
thousands):

<TABLE>
<CAPTION>

                                        Three months ended Dec. 31, 1999        Six months ended Dec. 31, 1998
                                        --------------------------------        ------------------------------
                                              1999           1998                    1999         1998
                                              ----           ----                    ----         ----
<S>                                     <C>             <C>                       <C>           <C>
Net revenues                                 $ 249         $ 548                     $ 602        $1,165
Gross profit                                   132           248                       309           541
Net income                                      57           194                       171           380
</TABLE>

Summaries of the assets and liabilities of the discontinued operation are as
follows (in thousands):

<TABLE>
<CAPTION>
                        Dec. 31, 1999           June 30, 1999
                        -------------           -------------
<S>                     <C>                     <C>
Current assets             $ 182                    352
Non-current assets            20                      5
                         -------                -------
                             202                    357
                         -------                -------
Current liabilities           29                     38
                         -------                -------
Net assets of
 discontinued operation    $ 173                    319
                         =======                =======
</TABLE>


Basis of Presentation

The unaudited interim 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, 1999 Annual Report on Form 10-K and the Quarterly Report on Form
10-Q for the quarter ended September 30, 1999. The condensed balance sheet data
as of June 30, 1999 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.

2) Earnings 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 stockholders 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. At December 31, 1999, the
Company has stock options, warrants and convertible preferred stock outstanding
which could result in the issuance of approximately 5,805,000 common shares.

                                       6
<PAGE>

3) Inventory
------------

Inventory is valued at the lower of standard cost (approximates first-in, first-
out) or market (net realizable value).  Inventory consists of the following:

<TABLE>
<CAPTION>
                                       December 31,            June 30,
                                           1999                  1999
                                      --------------        --------------
<S>                                   <C>                   <C>
                Finished goods        $       16,318        $       19,889
                Work in process               70,131                82,832
                Raw materials                 39,297               115,527
                                      --------------        --------------
                Total inventory       $      125,746        $      218,248
                                      ==============        ==============

</TABLE>

Included in inventory at December 31, 1999 and June 30, 1999 is $52,098 and
$123,153, respectively, of network multiplexer inventory.

4) Convertible Preferred Stock
------------------------------

In fiscal 1999, the Company completed the first and second closings of a private
placement of its Series E and F Convertible Preferred Stock ("Convertible
Preferred Stock") and related Common Stock Purchase Warrants ("Class B
Warrants") to First Capital Group of Texas L.P. (the "Investor"), an investment
firm managed by the Chairman of the Board of the Company, at an aggregate price
of $750,000 for each closing. The Convertible Preferred Stock have a stated
value of $1,000 per share; bear an 8% premium payable upon conversion or
redemption or in liquidation (in the case of conversion the Company may elect to
pay such premium in Common Stock); are non-voting except in limited
circumstances; rank senior to the Common Stock in liquidation; and are
redeemable at a premium at the option of the holder upon the occurrence of
certain major corporate transactions and triggering events.

The Series E Convertible Preferred Stock is convertible into Common Stock at the
option of the holder (subject to acceleration in certain events) at a conversion
price equal to $1.00 (which represents a premium to the Common Stock closing
price of $0.5938 on July 8, 1998, the date the Company reached an agreement in
principle with the Investors regarding the terms of the Private Placement).  The
Series F Convertible Preferred Stock will be convertible into Common Stock at
the option of the holder, (subject to acceleration in certain events) at a
conversion price equal to the trailing five-day average closing bid price of the
Common Stock on the date of the second closing, which was $3.43125. Subject to
certain limitations, all Preferred Stock outstanding five years after the
issuance date will convert automatically into Common Stock at the applicable
conversion price.  In each case, the number of shares of Common Stock issuable
upon conversion of one share of Preferred Stock is computed by dividing the
share's stated value of $1,000 by the applicable conversion price, plus any
shares of Common Stock which the Company elects to issue in payment of the
accrued premium on the Preferred Stock.  As of February 11, 2000 none of the 750
shares of Series E Convertible Preferred Stock or 750 shares of Series F
Convertible Preferred Stock had been converted.

5) December Private Placement
-----------------------------

                                       7
<PAGE>

On December 10, 1999, the Company completed a private placement of 1,904,761
shares of its common stock and warrants to purchase 571,429 shares of common
stock to three institutional investors for an aggregate price of $4,000,000.
The warrants are exercisable at a price of $3.00 per share through December 10,
2001. As of February 11, 2000, all warrants from the December private
placement are outstanding.

6) Warrants
-----------

The Company has outstanding warrants, issued in connection with its private
placement of Series A Convertible Preferred Stock, to purchase approximately
25,000 shares of common stock.  These warrants are exercisable until January
2000 at an exercise price of $16.38 per common share.

The Company has outstanding warrants, issued in connection with its private
placement of Series C Convertible Preferred Stock, to purchase approximately
54,000 shares of common stock.  These warrants are exercisable until November
2000 at an exercise price of $6.44 per common share.

The Company has outstanding warrants, issued in connection with its private
placement of Series E and F Convertible Preferred Stock, to purchase
approximately 281,000 shares of common stock.  These warrants are exercisable
until January 2001 at an exercise price of $0.80 per common share.

The Company has outstanding warrants, issued in connection with its private
placement of Series D Convertible Preferred Stock, to purchase approximately
60,000 shares of common stock.  These warrants are exercisable until July 2000
at an exercise price of $0.6625 per common share.

The Company has outstanding warrants, issued in connection with its November
1998 private placement, to purchase approximately 957,000 shares of common
stock. These warrants are exercisable until November 2000 at an exercise price
of $2.25 per common share.

The Company has outstanding warrants, issued in connection with its June 1999
private placement, to purchase approximately 694,000 shares of common stock.
These warrants, are exercisable until June 2001 at an exercise price of $4.02
per common share.

The Company also has outstanding warrants, issued in connection with its
December 1999 private placement, to purchase approximately 571,000 shares of
common stock.  These warrants are exercisable until December 2001 at an exercise
price of $3.00 per common share.

7) Segment Information
----------------------

                                       8
<PAGE>

In January 2000, the Company exited the network multiplexer business to
concentrate all its efforts and resources on the Be There!/VocalWare remote
access system. The Company, after exiting the network multiplexer business,
operates in one business segment.

There are no intersegment revenues recorded by the Company.






<PAGE>

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

Results of Operations

Revenue from continuing operations for the three months ended December 31, 1999
decreased 67% to $80,000 from $240,000 in the comparable period of the prior
fiscal year. Revenue from continuing operations for the six months ended
December 31, 1999 decreased 51% to $263,000 from $533,000 in the comparable
period of the prior fiscal year. These decreases were primarily due to the
declines in custom modern revenue from the first quarter of fiscal year 1999 and
decreased shipments to Sabratek Corporation in the second quarter of fiscal year
2000.

Gross profit margins from continuing operations for the three and six months
ended December 31, 1999, were down from the comparable periods of the prior
fiscal year. The decreased gross margins were primarily due to increased
manufacturing variances attributable to reduced production volumes.

Revenue and gross profit margins for the discontinued network multiplexer
segment have decreased from the comparable periods of the prior fiscal year.
This decrease was primarily due to a declining market and the Company's decision
to allocate its resources to the Be There!/VocalWare business.

Engineering and product development expenses from continuing operations for the
three and six months ended December 31, 1999 increased 43% and 46%,
respectively, from the comparable periods of the prior fiscal year. These
increases were primarily due to outside contract engineering expenditures and
workforce increases for the next generation of Be There!/VocalWare products.

Sales and marketing expenses from continuing operations for the three and six
months ended December 31, 1999 decreased 6% and 4%, respectively, from the
comparable periods of the prior fiscal year. These decreases were primarily due
to reduced discretionary expenses.

General and administrative expenses from continuing operations for the three and
six months ended December 31, 1999 decreased 50% and 32%, respectively, from the
comparable periods of the prior fiscal year. These decreases were attributable
to decreases in non-cash fees under the consulting agreement with Liviakis
Financial Corporation for investor relations services offset in part by non-cash
expenses incurred for litigation associated with the Company's patent
infringement lawsuit with Lucent Technologies and additional accounts receivable
reserve provisions associated with Sabratek Corporation.

Income tax benefits related to the losses for the three and six months ended
December 31, 1999 were not recognized because the utilization of such benefits
is not assured.  As of December 31, 1999, the Company had federal tax net
operating loss carryforwards of approximately $48,000,000, which expire
beginning in 2008. The Internal Revenue Code section 382 limits NOL
carryforwards when an ownership change of more than 50% of the value of stock in
a loss corporation occurs within a three year period.  Accordingly, the ability
to utilize remaining NOL carryforwards may be significantly restricted.

                                       10
<PAGE>

Liquidity and Capital Resources

Operating losses have had and continue to have a substantial negative effect on
the Company's cash balance.  At December 31, 1999, the Company had approximately
$8,239,000 in cash and cash equivalents.

In December 1999, the Company received net proceeds of approximately $3,700,000
from the issuance of common stock and warrants.

Historically, the majority of the Company's revenue was derived from shipments
of custom modem and network multiplexer products. Revenue from shipments of
custom modems has ended as the market has shifted away from custom modem
products.  The Company has exited the network multiplexer products business due
to declining revenue in that segment and is now focusing its resources on the Be
There!/VocalWare business.

The Company's strategy is to focus its sales efforts on establishing an
increasing number of large customers using the Be There!/VocalWare products, to
develop a new generation of products that will address the market's need for an
easy-to-install software client that can run over the new broadband
communications services, including DSL, cable modems, and IP networks, and to
establish one or more strategic partnerships with well-established companies
that would enhance the Company's market presence and credibility and provide
financial assistance.  The ability of the Company to successfully execute its
strategy to increase sales is subject to numerous risks and such success cannot
be assured.  The Company's return to profitability and development of a more
dependable revenue base depends on the success of the Be There!/VocalWare
product line, which has not generated substantial revenue to date.  The Company
does not anticipate a return to profitability as long as its expenditures on the
Be There!/VocalWare system remain disproportionate to attendant revenue.

The Company's ability to sustain operations, make future capital expenditures,
and fund the development and marketing of new or enhanced products is highly
dependent on existing cash, the ability to raise additional capital, and the
ability to successfully attract a strategic partner.  The timing and amount of
the Company's future capital requirements can not be accurately predicted.  The
failure to obtain additional financing when needed or the failure to obtain a
strategic partner would have a substantial adverse effect on the Company.

Year 2000 Compliance

The Company has evaluated and adjusted all known date-sensitive systems and
equipment for Year 2000 compliance.  The assessment phase of the Year 2000
project is complete.  Company personnel performed virtually all of the
compliance.  The total estimated cost of the Year 2000 conversion was not deemed
material to the Company and has been expensed as incurred.

                                       11
<PAGE>

Although the Company to date has not experienced any problems associated with
Year 2000 issues. The Company can not be certain that unexpected Year 2000
compliance problems of its products or its computer systems or the systems of
its vendors, customers and service providers, will not occur.  Any such problems
could have a material and adverse affect on the Company's business, financial
condition or operating results.

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
1999 and the Form 10-Q for the quarter ended September 30, 1999.  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 Company does not believe that it is currently exposed to material risks
associated with market risk sensitive instruments.

                                       12
<PAGE>

                          Part II - Other Information

                                DATA RACE, Inc.

Item 1.  Legal proceedings
--------------------------

On October 29, 1999, the United States Magistrate Court (the "Court") issued its
opinion in the Company's patent infringement lawsuit against Lucent Technologies
("Lucent").  The Court found that the Lucent Virtual Telephone product does not
infringe the Company's patent claims.  The Court also found that Lucent had
failed in its challenge to the patent's validity and enforceability.  The
Company has filed an appeal of this decision.

Item 2.  Changes in securities
------------------------------

On December 10, 1999, the Company completed a private placement of 1,904,761
shares of its common stock (the "Common Shares") and warrants to purchase
571,429 shares of common stock (the "Warrants") to Cranshire Capital, L.P.,
Keyway Investments Ltd., and Lionhart Investments Ltd. (the "Investors") for an
aggregate price of $4,000,000.  The Warrants are exercisable at a price of $3.00
per share through December 10, 2001.  The Company intends to use the proceeds
from the private placement primarily for general corporate purposes.

The Company has filed a registration statement under the Securities Act covering
the resale of the Common Shares and the shares of common stock issuable upon
exercise of the Warrants. The Company will incur certain penalties if the
registration statement is not declared effective by April 13, 2000. These
penalties may be paid in cash or, at the Investors' option, in common stock. The
penalty resulting from the late filing of the registration statement has been
waived by the Investors as the delay was caused by one of the investors. In
addition, if the Company issues additional shares of common stock prior to the
effective date of the registration statement, then antidilution provisions
contained in the securities purchase agreement may require the Company to issue
additional shares of common stock to the Investors so as to prevent dilution of
the Investors' investment in the Company.

In connection with the private placement, the Company granted to the Investors a
right of first refusal to purchase additional securities issued by the Company
(subject to certain exceptions including securities issued for a merger,
consolidation, acquisition, or under existing stock option plans and outstanding
convertible securities) to prevent dilution of the Investors' investment in
Company stock prior to June 7, 2000.

As compensation for the investment by the Investors, the Company paid to a
placement agent a cash fee equal to 6% of the gross proceeds received by the
Company from the Investors.

THE SUMMARY OF THE DECEMBER PRIVATE PLACEMENT SET FORTH ABOVE IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE PURCHASE AGREEMENTS AND THE OTHER DOCUMENTS
EXECUTED BY THE COMPANY IN CONNECTION WITH THE PRIVATE PLACEMENT.  SUCH
DOCUMENTS ARE

                                       13
<PAGE>

FILED (OR INCORPORATED BY REFERENCE) AS EXHIBITS TO THIS FORM 10-Q.

The offer and sale by the Company of the securities in the December Private
Placement was made in reliance upon Section 4(2) of the Securities Act, the non-
public offering exemption from the registration requirements of the Securities
Act.

Item 3.  Defaults upon senior securities
----------------------------------------

None.

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

An annual meeting of shareholders of the Company was held on November 4, 1999.
Dr. W. B. Barker, Jeffery P. Blanchard, Matthew A. Kenny, George R. Grumbles and
Dwight E. Lee were elected as directors of the Company, each to hold office
until the next annual meeting of shareholders or until his successor has been
elected and qualified, subject to earlier resignation or removal.  Additionally,
the shareholders approved the DATA RACE, Inc. 1999 Stock Option Plan, approved
the amendment to the Company's Articles of Incorporation, increasing the
authorized number of shares of Common Stock, and ratified the appointment of
KPMG LLP as independent accountants for the 2000 fiscal year.

The results of the voting at the annual shareholders meeting held on November 4,
1999 were as follows:
                                 Proposal No. 1
                            (Election of Directors)

<TABLE>
<CAPTION>
Company Nominee                        For               Against            Non- Votes
---------------                        ---               -------            ----------
<S>                                <C>                  <C>                 <C>
Dr. W. B. Barker                   16,957,459             928,158                -
Jeffery P. Blanchard               16,858,684           1,026,933                -
Matthew A. Kenny                   16,756,684           1,128,933                -
George R. Grumbles                 16,759,884           1,125,733                -
Dwight E. Lee                      16,754,884           1,130,733                -
</TABLE>

The Company has also appointed to its Board of Directors Thomas Bishop and Byron
Smith.  These appointees will hold office until the next annual meeting of
shareholders or until his successor has been elected and qualified, subject to
earlier resignation or removal.

                                 Proposal No. 2
              (Approval of DATA RACE, Inc. 1999 Stock Option Plan)

<TABLE>
<CAPTION>
For                    Against             Abstain           Non-Votes
--                     -------             -------           ---------
<S>                    <C>                 <C>               <C>
16,557,948             1,256,385           71,284                    -
</TABLE>

                                       14
<PAGE>

                                 Proposal No. 3
(Approval of amendment to the Company's Articles of Incorporation increasing the
                 authorized number of shares of capital stock)

<TABLE>
<CAPTION>
For                    Against             Abstain           Non-Votes
--                     -------             -------           ---------
<S>                    <C>                 <C>               <C>
16,714,834             1,117,608           53,175                    -
</TABLE>


                                 Proposal No. 4
             (Ratification of KPMG LLP as independent accountants)

<TABLE>
<CAPTION>
For                    Against             Abstain           Non-Votes
--                     -------             -------           ---------
<S>                    <C>                 <C>               <C>
17,707,669             145,190             32,758                    -
</TABLE>

Item 5.  Other information
--------------------------

None.

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

(a) Exhibits.
-------------

Exhibit                        Description
-------                        -----------

3.1  Articles of Amendment to the Articles of Incorporation of the Company,
     filed January 21, 1999. (a)
10.1 Securities Purchase Agreement dated December 10, 1999, by and among DATA
     RACE, Inc. and Cranshire Capital, L.P., Keyway Investments Ltd., and
     Lionhart Investments Ltd., as the Investors. (b)
10.2 Registration Rights Agreement dated December 10, 1999, by and among DATA
     RACE, Inc. and Cranshire Capital, L.P., Keyway Investments Ltd., and
     Lionhart Investments Ltd., as the Investors. (b)
10.3 Warrant Agreement, dated December 10, 1999, issued to Cranshire Capital,
     L.P. (b)
10.4 Warrant Agreement, dated December 10, 1999, issued to Keyway Investments
     Ltd. (b)
10.5 Warrant Agreement, dated December 10, 1999, issued to Lionhart Investments
     Ltd. (b)
27.0 Financial Data Schedule.  (c)

-----------
(a)  Filed as an exhibit to Form S-3 Registration Statement No. 333-71319
     effective April 20, 1999.
(b)  Filed as an exhibit to Form 8-K Current Report filed on December 17, 1999.
(c)  Filed herewith

                                       15
<PAGE>

(b) Reports on Form 8-K.
------------------------

A report on Form 8-K was filed on December 17, 1999, to report the completion of
a private placement of common stock and common stock purchase warrants.

                                       16
<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, Vice President,
                                Chief Financial Officer, Treasurer and Secretary
                                (Principal Financial and Accounting Officer)

                           Date:  February 17, 2000

                                       17