SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                 AMENDMENT NO. 1
                                       TO
                                    FORM 10-K
                                  ANNUAL REPORT
     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

       For the Fiscal Year Ended                 Commission File Number
             June 30, 2001                              0-20706

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

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


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

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

           Securities registered pursuant to Section 12(g) of the Act:
                      Common Stock, no par value per share

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

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

On February 8, 2002, the aggregate market price of the voting stock held by
non-affiliates of the Company was approximately $1,770,000 (For purposes hereof,
directors, executive officers and 10% or greater shareholders have been deemed
affiliates.)

On January 31, 2002, there were 35,373,477 outstanding shares of Common Stock,
no par value.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None.


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                                 DATA RACE, Inc.
                               INDEX TO FORM 10-K

                                                                            Page
                                                                          Number
PART I.

Item 1.    Business............................................................3

Item 2.    Properties.........................................................18

Item 3.    Legal Proceedings..................................................19

Item 4.    Submission of Matters to a Vote of Security Holders................19

PART II.

Item 5.    Market for Registrant's Common Stock and Related
               Stockholder Matters............................................19

Item 6.    Selected Financial Data............................................21

Item 7.    Management's Discussion and Analysis of Financial
               Condition and Results of Operations............................22

Item 7A.   Disclosures about Market Risk......................................28

Item 8.    Financial Statements and Supplementary Data .......................29

Item 9.    Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure...........................53

PART III.

Item 10.  Directors and Executive Officers of the Registrant..................54

Item 11.  Executive Compensation..............................................56

Item 12.  Security Ownership of Certain Beneficial Owners and Management......59

Item 13.  Certain Relationships and Related Transactions......................60

PART IV.

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K....61


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                                     PART I.

ITEM 1. 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.

     Historically, the Company's revenue has come from custom modem and network
multiplexer products. The Company's modem business comprised the design and
manufacture of special custom modems on an original equipment manufacturer's
(OEM) basis for the manufacturers of notebook computers. Today's notebook
computers generally do not use such custom modems. The market for the Company's
network multiplexer products has been in a state of steady decline. These units,
deemed counterproductive to the future of the Company, have been either sold or
discontinued. To develop a more reliable revenue base and a return to
profitability, the Company is depending on the success of the VocalWare IP
product line.

     The Company's VocalWare IP product line is intended to capitalize on the
communications requirements of the rapidly growing number of "teleworkers" who
need convenient simultaneous access to all of their corporate information assets
- voice, data and fax - when working from home or on the road. With VocalWare
IP, a user can be logged in from home, a hotel room, or an airport lounge,
reading e-mail and browsing the web. If a call comes into his normal office
phone extension, an image of his office phone pops up on the screen and rings,
showing Caller ID information. He can answer the phone, conference in
colleagues, and transfer the call, all while continuing his data work. At the
same time, he can read faxes sent to his office or can send faxes. The Company
refers to this set of capabilities as Telepresence(TM). If working at home,
normal home phone calls can also ring through while the data session continues,
without requiring a second phone line.

     The Company completed its second-generation development efforts in fiscal
2001, completing the evolution of its Be There! dial-up remote access solution
into a integrated dial-up and broadband access server. This second generation
solution allows users to access their office voice, e-mail, data and fax
resources over any access medium dial-up or broadband and works with all of the
leading manufacturers of voice and data products.

     The Company seeks to capture a leadership position in the market for remote
access solutions by capitalizing on its unique advanced technology, its patents,
other intellectual property and on developing relationships with leading network
and solution companies, which have influence with enterprise customers.

Industry Overview

     The Company operates within the remote access segment of the digital
communication products industry. VocalWare IP represents a new product category
in this industry bridging the gap between traditional voice and data solutions.
This industry has been characterized by high rates of growth and change due to
the emergence of the


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Internet and e-commerce. As the basis for value within the global economy shifts
from goods to information, global instantaneous access to all forms of
information, whether by phone, fax, or data link, is transitioning from a luxury
to a necessity for businesses. This need to give dispersed-knowledge workers and
consumers' instantaneous access to all forms of information has created a
multi-billion dollar remote access market.

The Enterprise Market

     As the workforce shifts from production worker to knowledge worker, the
need for companies to physically cluster their workers is diminishing in many
industries. Allowing employees to work at home or another location remote from
the corporate office offers substantial advantages to the employer, to the
employee, and to society as a whole. To the employer, remote work can yield
improved productivity, reduced turnover, reduced facility cost, the ability to
hire from a broader national labor pool, and an economical way of complying with
the mandates of legislative initiatives such as the Clean Air Act, the Americans
with Disabilities Act, and the Family and Medical Leave Act. To the employee,
remote work offers improved quality of life by reducing commuting time and
frustration, providing more family time, and the flexibility to live further
from the workplace. To society, remote work can offer reduced traffic congestion
and pollution.

     Traditionally, companies have provided remote access services to their
employees by purchasing and deploying data-only remote access hardware and
software within the company. Recently, an increasing number of companies have
begun to outsource their remote access capabilities to outside service
companies.

Mobile Professional

     The Company's VocalWare IP product line seeks to address the needs of
so-called "mobile professionals," traveling workers who require efficient,
readily available, phone, data, and fax connectivity to their offices. When
working from a hotel room or airport lounge, a mobile professional often needs
to retrieve and reply to e-mail, voice mail, and fax traffic, all within a very
limited time. At other times, the mobile professional may need to work
collaboratively with a colleague on a document while discussing it on the phone.

     The Company believes that the needs of the mobile professional are uniquely
met by the VocalWare IP system. We believe VocalWare IP's will increase a mobile
professional's productivity by providing simultaneous phone, fax, and data
connectivity to the office. When working from a hotel room or airport lounge, a
mobile professional can use the VocalWare IP system to retrieve and reply to
e-mail and fax traffic while simultaneously making phone calls and taking calls
placed to his or her personal office phone. In addition to productivity
improvements, VocalWare IP can yield hard-dollar savings for companies as a
result of reduced cellular phone costs, hotel telephone surcharges and calling
card rate long-distance charges.

Telecommuters

     Over the past several years, an increasing number of companies have adopted
telecommuting programs, either on a trial basis or as permanent programs, due to
a variety of economic, social, and legislative pressures. Studies in the last
few years have shown that there are substantial economic benefits to
corporations with telecommuting programs. More importantly, numerous studies of
telecommuting programs conducted in recent years have documented productivity
improvements among telecommuters, typically in the range of 10% to 30%.
Contributing to this improvement is the reduction in non-business discussions
with colleagues and the longer hours worked after dinner or at other periods
outside the traditional working day by someone whose office is in the home.
Because a commute is not required,


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companies are able to tap into labor resources for short peak-hour periods
during the day in ways that were impractical before telecommuting. We believe
the economic benefits currently outweigh the incremental costs by such a large
margin that for the foreseeable future, technology, not price, will remain one
of the major selection criteria for telecommuting products.

     There are also a variety of legislative forces behind the increases in
telecommuting. The Clean Air Act of 1990 encourages cities in non-attainment
zones to implement plans to reduce automobile emissions. Telecommuting is a
convenient and economical method of reducing such emissions. The Family and
Medical Leave Act and the Americans with Disabilities Act both require companies
to offer accommodations to workers who may not be able to work daily in the
corporate office, but who may be able to work from home for all or part of a
day.

     In addition to the legislative and economic forces, there are significant
social forces driving the increase in telecommuting. Eliminating the daily
commute has clear benefits for the environment and for traffic. Telecommuting
also improves workers' lifestyles as the time lost to commuting is recovered for
more leisurely activities. In addition, the ability to spend the day at home
with the family is attractive to many workers. For these and other reasons,
studies report that telecommuting improves employee morale and reduces employee
turnover.

     With VocalWare IP, a telecommuter can use the office PBX or Centrex and its
many features to send or receive network faxes and check e-mail all at one time
using one conventional phone line. Incoming calls to the business phone ring
immediately in the home so that telecommuting is completely transparent.
Four-digit extension calls transfer automatically, so even co-workers cannot
tell who is working from home. We believe VocalWare IP increases the
productivity of telecommuters by allowing them to accomplish multiple tasks
simultaneously.

Remote Call Center Workers

     Call center workers are generally groups of workers that deal with
customers over the telephone. Airline reservation centers are such an example in
which workers are connected by phone to the customers and by a network to a
computer database containing flight and space availability information. In
certain applications, workers must also send and receive faxes. Incoming phone
calls are typically routed through specialized computer systems to the next
available worker. Computers allow the monitoring of individual and overall
performance.

     Hiring and employee scheduling are two of the most challenging and costly
aspects of call center management. Many call centers operate on a 24 hour-a-day,
7 day-a-week basis, with peak call hours varying by industry, and by whether the
call center is inbound, outbound or both. It is often more economical to staff
the call center, at least partially, with part-time employees working from home.
Such remote call center workers, often parents of young children who cannot
afford to be away from home, can nevertheless work productively for a limited
number of hours while their children are napping, at school, or otherwise
occupied. Such part-time employees typically receive reduced benefits, making
them less costly to their employers. Very substantial capital savings may also
be realized, as additional facilities do not need to be built to house these
workers. In June 2000, DataMonitor, a research firm in the call center market,
estimated a cost saving of approximately $6,000 per agent when using the
VocalWare IP remote agent solution.

     Without VocalWare IP, connecting remote workers to call centers is
problematic. Such workers need a telephone connection to the customer and a
simultaneous data connection to the database, and often the ability to send and
receive faxes. To enable a remote call center worker to operate in this mode
would generally require the installation of multiple additional telephone or
ISDN lines to the worker's home. In addition to the expense of these
connections, it may take


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several months to get the service installed, connected, and operating properly.
With the high turnover rates common among call center employees, it may not be
feasible to have these services installed during the employee's tenure, and is
typically economically impractical.

     With the VocalWare IP system, the remote call center agent can use the
office PBX and ACD systems with all of their functionality while they
simultaneously access the corporate LAN for account information, as well as
process screen pops. That means remote agents can send a network fax, access the
Internet, and talk to a customer and review account information all at the same
time. Incoming calls ring immediately at the remote site. Furthermore, a unique
feature of the VocalWare IP system allows any calls placed to the worker's home
phone to be re-routed through the call center and back to the worker. In this
way, an emergency call from the school nurse, for example, will not be blocked
because the worker's phone line is tied up with the connection to the call
center. VocalWare IP provides the cost-effective, comprehensive solution that
allows call center agents to work from home as productively as they would in the
office.

Remote Offices

     The benefits that VocalWare IP brings to the branch office are the ability
to do true dynamic office space allocation. The flexibility of the VocalWare IP
server and combination of voice and data over any IP connection enables the
facilities manager to make every LAN outlet a portal to the enterprise's entire
communication network. VocalWare IP reduces the need for customer premise
equipment, such as physical devices, which many PBX extender products require.
We believe VocalWare IP can save companies up to $500 per user for every
employee that is relocated to a branch office by eliminating the need for a
switch technician to establish telephone service, reassign telephone numbers and
reallocate inside wire to the new user. The enterprise VocalWare IP solution
enables greater economies of scale and communications by aggregating all of the
branch office traffic into headquarters, thereby allowing effective utilization
of inter-exchange carriers and local exchange carriers. Once again, the
enterprise is able to achieve greater economies of scale and communications by
aggregating all of the branch office traffic into headquarters.

     Another important feature for the branch offices is total flexibility no
matter where the user moves in the enterprise. Whether the user is at the
headquarters location or at a branch location, the LAN and voice communications
are the same. With common dialing users retain all of their phone features. This
means that employees who move between headquarters and branch locations are able
to keep their same phone number and even more importantly, they do not have to
learn new phone features and dial-in protocols. Since we are utilizing the
centralized PBX instead of buying remote key systems and other remote access
devices, we are getting more effective utilization of the enterprise network,
thus enabling a greater ability to manage bandwidth requirements.

     The use of hoteling or telecenters for office space allocation allows
enterprises with a highly mobile workforce to dynamically assign office space
based upon the need at that current time. Some of the key applications that fit
a hoteling model are consulting firms, auditors, and in general any employer
that has numerous employees that travel a good portion of the time.

Strategy

     The Company strategy is to provide innovative, first-to-market,
high-value-added solutions. In devising product solutions, The Company typically
attempts to obtain input from prospective customers throughout the development
process. The Company applies substantial engineering and technical capabilities
to incorporate current remote access technologies, as well


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as the Company's own technological innovations and advances to the design of
products intended to meet the market needs of the customer.

     The Company believes that it has developed unique remote access technology
for the integration of voice and data using Internet Protocols, and it has
incorporated this technology into its VocalWare IP product line. The Company has
focused its VocalWare IP sales efforts on the enterprise market segment. Its
strategy has been to maintain a direct sales force while simultaneously
developing distribution partners. The direct sales force is intended to sell
directly to large potential customers and to support the initial sales efforts
of the partners.

     The Company's sales process relies on a four-step selling cycle. First, the
salesperson calls upon a sales prospect to present and demonstrate the VocalWare
IP product. In the second step, upon receipt of a conditional purchase order
from the customer, The Company installs a trial system in the corporate offices
of a prospect for technical evaluation. At the end of the specified trial period
(usually 30 to 60 days) The Company will invoice the customer for the VocalWare
product. In the fourth step, the Company anticipates that the number of users
would then expand, as the benefits were experienced first-hand within the
operating groups of the large target companies.

     The Company believes that its strategy to generate significant sales to the
enterprise market is dependent upon success in two important areas. First, the
Company's sales resources are focused upon moving its early customers to rolling
out the VocalWare IP products to a large number of their employees. The Company
believes that such large-scale operational reference customers are critical to
overcoming the Company's lack of name recognition and credibility in convincing
new prospects to buy VocalWare IP. Second, the Company is attempting to
establish one or more strategic relationships with other companies who have
established name recognition and sales/distribution capabilities. The Company
believes that such partnerships can greatly increase the visibility of its
product with prospective customers and provide these partners with a unique
solution to offer their customers. The Company is participating in a
telecommuting "Proof of Concept" with a US government agency where the Company
has installed a VocalWare server in November 2001 for testing purposes. A "Proof
of Concept" is not a contract. Neither we nor the US government agency involved
is committed to purchase the product during or after the term of the "Proof of
Concept".

Products

VocalWare IP Remote Access System

     VocalWare IP is a remote access system which allows a worker who is away
from his office to connect in over a conventional phone line, or broadband
connection such as DSL, ISDN or cable modem service, and have simultaneous
access to his office telephone, fax, data network and Internet connections. The
user can be connected from home or from a hotel room, anywhere in the world that
Internet access is available. While reading and writing e-mail, synchronizing
notes and calendars and surfing the Internet, a colleague or an outside caller
calls the user's office. An image of the user's office phone pops up on his
screen, rings and presents the caller's ID without interrupting the data
connections. He answers the phone and carries on a normal business conversation
while continuing to read e-mail and do other data work. He can also send a fax
to the person he is talking to (or to anyone else) and receive faxes sent to his
office while continuing to talk and use the full data capabilities. He can
conference in colleagues in his office or transfer the call to colleagues by
simply using the same button sequence on his phone that he would use if he were
in the corporate office.


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Existing Approaches

         The needs of teleworkers are currently being met by a variety of
partial solutions, including computer modems and remote access servers to
provide data connectivity; telephones (including cellular phones), PBX
extenders, DSL, and a variety of software products and communications services
providing some degree of phone access; and fax servers, fax modems, and
software, as well as remote physical fax machines to support remote fax access.
Although technology is advancing rapidly, the partial solutions currently
available typically require multiple phone lines or ISDN lines, which are often
unavailable and are generally expensive where they are available. These
solutions also generally require that the user act as systems integrator to
cause all of these disparate systems and services to function in unison. Such
partial solutions fail to accomplish the fundamental objective of a remote
access system, namely to allow teleworkers to perform their jobs at remote
locations just as effectively as they would in their offices.

The VocalWare IP Solution

     To address the teleworker market needs, the Company has developed the
VocalWare IP system. With the VocalWare IP remote access system, e-mail, file
server, intranet, Internet, fax and other data connections are supported, as
they would be in the office. An image of the worker's office telephone appears
on the worker's computer screen and has the same functions it would have in the
office. The teleworker can dial colleagues or place local or long-distance calls
through the company's WATS lines as if present in the office. Colleagues who
dial a teleworker's extension, or outsiders who call in on the teleworker's
corporate office direct line, will automatically and immediately be connected to
the teleworker in the remote location, all without disturbing the data
connections on which the teleworker is reading e-mail or browsing the Web. At
the same time, the teleworker can send and receive faxes over the company's fax
server, again without interrupting the phone and data connections. The Company
refers to this transparent combination of data, fax, and voice features that
enable a remote worker to operate just as he or she would in the office as
Telepresence(TM).

Current Product

     A VocalWare IP remote access system is made up of client software and
accessory products installed on the user's desktop or notebook computer, and a
server installed at the office. These components, along with their connections,
are diagrammed in Figure 1.

                                [GRAPHIC OMMITED]

     VocalWare IP is the next generation of the Company's integrated IP based
voice and data solutions. The VocalWare IP, which includes patented
voice-quality technology, utilizes the powerful new generation of Pentium
processors to perform speech and data compression, as well as multiplexing
functions while using the computer's microphone speaker and sound systems to act
as a telephone. The equipment is easy to install, use and manage and the
VocalWare IP Enterprise Access server is able to communicate with any
industry-standard v.90-capable modem. VocalWare also features a comprehensive
suite of simulated phones that provide a user-friendly interface and function as
a user's own office environment.

     The Company has also released two other client accessory products for
inclusion in the VocalWare IP family - VocalWare(TM) Turbo, and VocalWare(TM)
RealPhone. These new products provide the benefits of VocalWare 56k bandwidth,
improved voice quality and flexibility for those users whose systems do not
fully meet the basic requirements for VocalWare.

     The VocalWare Turbo is designed to work with laptops. It takes the place of
the sound-system and off-loads voice compression from the CPU. The RealPhone,
which targets desktop


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systems, connects to a standard home telephone (including cordless phones) and
features an industry-standard modem in addition to the functions of VocalWare
Turbo. This enables it to replace the previous generation of client cards.

     The VocalWare IP Enterprise Access Server transforms a computer into an
office. When in the office, a user simply connects to the office network and
works normally. When at home, the user can connect with cable modem, DSL line,
ISDN line or a dial-up modem and click on the VocalWare IP icon to be connected
to the office network, telephone and fax. The VocalWare IP Enterprise Access
Server supports V.90 (so-called "56k") connections, higher port densities to
support greater numbers of users per server, redundant fault-tolerant
configurations, voice over IP connections and users connecting over Local Area
Networks (LANs), DSL lines and cable modems.

Technology and Product Development

     The Company believes that the extension and enhancement of the existing
VocalWare product line and the development of new products that leverage
state-of-the-art local and wide-area connectivity technologies to provide remote
access to both corporate data and telephony facilities are critical to its
future success. The Company seeks to implement its innovative products using the
latest industry standards and technologies, thus enabling the Company to develop
and introduce products quickly in response to customer requirements and
identified market trends.

     When appropriate industry standards are not available, The Company may,
from time to time, seek to introduce and promote the required new standards in
the various industry forums and standards organizations.

     The Company regularly uses information derived from interaction with key
customers, its distribution channel partners, participation in industry
standards organizations, and market and technical research to set its
development directions and make design and product decisions.

     Users of the Company's products for telephone communication expect a
standard of reliability closer to that for normal telephony than that for normal
data communications software and other software applications. As a result, the
Company's development priorities include significant testing, quality assurances
as well as focus on a development and planning methodology and processes.

     Company-sponsored research and development expenses for continuing
operations were $5.0 million, $3.3 million, and $2.4 million for fiscal years
2001, 2000, and 1999, respectively.

Manufacturing and Suppliers

     The Company purchases key components used in the manufacture of its
products from third-party suppliers. The Company does not have any agreements
with component suppliers as the Company ordinarily avoid fixed long-term
commitments for components. This allows the Company to better coordinate
component inventory build-up and to select suppliers who have the most
technologically advanced, cost-effective components available at the time. The
Company also does not have any manufacturing agreements.

     The Company has moved all of its production for customer goods to outside
turnkey system integrators. We qualify and monitor our system integrators and
subcontractors through a stringent vendor-quality program to ensure they
consistently provide a quality product on time.


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This strategy was adopted to increase our flexibility and effectiveness in
responding to customer needs. At the same time, it allows us to reduce our
overall manufacturing costs by leveraging key strategic partnerships developed
by our system integrators with their suppliers. We are continually searching to
find top quality system integrators and subcontractors to ensure that we can
always meet our customers' requirements with the highest quality product.

Marketing, Sales, Distribution and Support

     In order to successfully penetrate the enterprise market, the Company
believes that it will need to maintain a small direct sales force while
simultaneously developing distribution partners. The small direct sales force is
intended to sell directly to large potential customers and to support the
initial sales efforts of the partners. The product is distributed to customers
in one of two ways: 1) shipped directly from the Company on direct sales or 2)
shipped directly to the resellers who ship to the end customer. Customer support
is through the Company's technical support group which is staffed five days a
week during normal business hours.

Competition

     Historically, there has been little to no other direct competition with
VocalWare. We believe VocalWare is the only product in the remote access segment
that can connect remote workers through a conventional phone line connection or
a broadband connection through the VocalWare IP server. However, there are
alternative solutions available today and other related products and services
have recently been announced. Many prospective customers, especially "mobile
professionals", can use a cell phone along with a notebook computer and modem to
receive many of the benefits of VocalWare. Certain PBX extender products
(including those from MCK, Multitech, and TelTone) can provide some of the
benefits of VocalWare to teleworkers working from home. In addition, ISDN, DSL
and cable modem services provide some of the benefits of VocalWare, in that they
can provide simultaneous voice and data without tying up the primary home phone
line. In this dynamic market, new products or services are announced frequently
and many of these may provide competitive solutions to our prospective
customers.

     There can be no assurance that competitors will not introduce comparable or
superior products incorporating more advanced technology at lower prices. See
"Certain Business Risks - We May Not Be Able to Compete Effectively with
Companies Having Greater Resources."

Intellectual Property

     The Company's success depends in part upon its proprietary technology,
including both its software programs and its hardware designs. The Company
relies upon patent, copyright, trademark, and trade secret laws to protect its
proprietary technology. The Company generally enters into nondisclosure
agreements with persons to whom it reveals its proprietary information, such as
component suppliers, subcontractors, and OEMs that the Company works with
concerning future products. Although it is unusual in the industry for patents
to be of substantial strategic value, the Company has ongoing programs seeking
patent and other intellectual property protection for its technologies and
products, and it sometimes grants licenses of its technology to other companies.
There can be no assurance that the Company's present protective measures will be
adequate to prevent misappropriation of its technology or independent third
party development of the same or similar technology. Many foreign jurisdictions
offer less protection of intellectual property rights than the United States,
and there can be no assurance that the protection provided to the Company's
proprietary technology by the laws of the United States or foreign jurisdictions
will be sufficient to protect the Company's technology.


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<PAGE>

     While the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that the rapid pace of
technological change in the remote access products industry will cause other
factors to be more significant in maintaining our competitive position. These
factors include the technical expertise, knowledge and innovative skill of our
management and technical personnel, name recognition, the timeliness and quality
of support services provided by us and our ability to rapidly develop, produce,
enhance, and market innovative products.

     In the current market, in which voice and data communications are
converging rapidly, the Company believes that the intellectual property of its
"virtual presence to an office" product innovations may be of significant
strategic value. Therefore, the Company protects its new ideas by regularly
filing patent applications on new product concepts and implementation methods.
In June 1998, the United States Patent and Trademark Office issued patent number
5,764,639 entitled "System and Method for Providing a Remote User with a Virtual
Presence to an Office." This patent will expire in November 2015. The patented
system and method provide remote users with the ability to work outside of the
office just as if they were physically located in the corporate office. The
Company also has other patents issued and pending related to the VocalWare IP
product technology. The Company intends to aggressively protect its rights under
its patents. See "Certain Business Risks - We Depend upon Our Proprietary
Technology and We May Not Be Able to Adequately Protect It."

     We commonly enter into licensing agreements with suppliers of components
that it desires to incorporate into its products. The Company may choose to
obtain additional licenses in the future, but believes that any necessary
licenses could be obtained on terms that would not have a material adverse
effect on our business.

Significant Customers

     During fiscal year ended June 30, 2001, we recorded revenues from shipments
of approximately 85% from three customers. The customers were Deloitte & Touche
LLP for approximately $22,000, Motorola Inc. for approximately $21,000, and
Minnesota National Guard for approximately $10,000. During fiscal years ended
June 30, 2000 and 1999 revenues from shipments to and fees from Sabratek
represented approximately 65% and 50% of revenues from continuing operations
respectively.

Backlog

     The Company's backlog at June 30, 2001 was not significant. The Company
does not believe that its backlog as of any particular date is necessarily
indicative of future sales because, as is customary in the industry, the Company
often allows changes in delivery schedules or certain order cancellations
without significant penalty, and because the time between order placement and
shipment is short.

Employees

     As of June 30, 2001, the Company employed 77 employees, including 8 in
manufacturing, 33 in engineering, 20 in sales, marketing and customer support,
and 16 in general and administration. None of our employees is represented by a
labor union. Subsequent to the fiscal year end we substantially reduced our
workforce to 6 employees. The Company believes its relations with its employees
are good. Competition for qualified personnel is intense, especially for
talented engineers and senior marketing personnel, and the Company believes that


                                       11
<PAGE>

its prospects for future growth and success will depend, in a significant part,
on its ability to retain and continue to attract highly skilled and capable
personnel in all areas of operations.

Certain Business Risks

     This Report contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements, which are
often identified by words such as "believes", "anticipates", "expects",
"estimates", "should", "may", "will" and similar expressions, represent our
expectations or beliefs concerning future events. Numerous assumptions, risks,
and uncertainties, including the factors set forth below, could cause actual
results to differ materially from the results discussed in the forward-looking
statements.

We Have Received a "Going Concern" Opinion from Our Independent Accountants and
May Be Forced to Sell or Merge Our Business or Face Bankruptcy Unless We Are
Able to Immediately Raise Capital to Fund Our Near Term Cash Needs

     The report of Lazar Levine & Felix LLP covering the financial statements
for fiscal 2001 included in this report contains an explanatory paragraph that
states that the Company's recurring losses from operations and accumulated
deficit raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments to asset
carrying values or the classification of liabilities that might result from the
outcome of that uncertainty. The Company will need to raise more money to
continue to finance our operations. The Company 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. The going concern opinion by our independent auditors may adversely
impact our dealings with third parties, such as customers, suppliers and
creditors, because of concerns about our financial condition.

     The going concern modification is contained in an explanatory paragraph to
the Independent Accountants' Report that also references note 3 to the financial
statements for the year ended June 30, 2001. Note 3 states that the following
factors raise substantial doubt about our ability to continue as a going
concern: (i) we have generated net losses for the years ended June 30, 2001,
2000 and 1999 and have generated an accumulated deficit of $ 72.5 million as of
June 30, 2001, (ii) we have historically funded operations with the proceeds
from the sale of preferred and common stock and (iii) we have not generated
positive cash flows from operations in either of the three years in the period
ended June 30, 2001.

     We anticipate that we will have insufficient working capital to fund our
near term cash needs unless we are able to raise additional capital in the near
future. Any failure to obtain an adequate and timely amount of additional
capital on commercially reasonable terms will have a material adverse effect on
our business, financial condition and the results of operations, including our
viability as an enterprise, and we may be forced to sell or merge our business
or face bankruptcy unless we are able to timely raise additional capital.

We Have a History of Operating Losses and Expect to Have Continued Losses

     We have suffered substantial recurring losses, and sales of our VocalWare
products have not resulted in significant revenue. For the fiscal years ended
June 30, 2001, 2000 and 1999 we have incurred operating losses (from continuing
operations) of approximately $16.8 million, $8.8 million and $8.5 million on
approximately $63,000, $316,000 and $836,000 of VocalWare sales respectively.
Although we have made reductions in workforce and associated expenses since


                                       12
<PAGE>

July 2001, we may never return to profitability or attain future revenue levels
sufficient to support our operations. In recent years we have funded operations
from the sale of equity securities.

We Will Need Additional Capital to Sustain Operations

     Because we have been unable to raise sufficient capital financing recently,
we have been required to suspend many of our operations and scale down our
operations. We may be required to suspend additional or all of our operations if
we cannot obtain additional long-term financing. It is possible that sources of
capital, such as investors, lenders or strategic partners, may perceive our
recent history of losses, current financial condition, reduction in the scope of
our operations or lack of significant VocalWare product sales as too great a
risk to bear. As a result, we may not be able to obtain additional capital on
favorable terms, if at all. Further, if we issue equity securities, shareholders
may experience additional dilution or the new equity securities may have rights
and preferences senior to the common stock. Even if our sales grow, we may
require additional capital to hire additional personnel and increase inventory
levels. We cannot predict the timing and amount of our future capital
requirements.

     Finally, there can be no assurance that we will be able to access
additional funds under our equity line of financing with Grenville Finance Ltd.
First, before we are permitted to draw down on the equity line of credit
financing, a registration statement registering for resale the shares to be
issued to Grenville under the financing must be declared effective by the
Securities and Exchange Commission. We can give no assurance and may be unable
to cause the registration statement to be declared effective. Second, the
maximum draw down amount of a draw down under our equity line facility will be
equal to (A) the lesser of (i) $1,000,000 and (ii) 15% of the weighted average
price for our common stock for the 30 calendar day period immediately prior to
the date that we deliver notice to the Investor of our intention to exercise a
draw down multiplied by (B) the total trading volume in respect of our common
stock for such period. Accordingly, if our stock price and trading volume do not
increase above current levels, then the maximum draw down amount formula will
severely restrict our ability to draw down all $30,000,000 pursuant to the
equity line facility with Grenville.

We Have Limited Liquidity and Capital Resources

     We have limited liquidity and capital resources and must obtain substantial
additional capital to support our research and development, sales and marketing
initiatives and general corporate purposes. If we do not obtain the necessary
capital resources, we may have to delay, reduce or eliminate some or all of our
initiatives.

     If we are unable to draw down on our equity line or choose not to do so, we
intend to pursue our needed capital resources through equity and debt financings
and strategic partnerships. We may fail to obtain the necessary capital
resources from any such sources when needed or on terms acceptable to us.

Our Future Success Depends on the Success of Recently Introduced VocalWare
Products

     Our success depends almost entirely on the success of our VocalWare product
line. The VocalWare products have not yet been and may never be widely accepted
in the market. We cannot assure the reader that we will establish a market for
VocalWare products or establish our credibility in that market. The market may
elect to embrace alternative products or service solutions to satisfy the need
for communication between the corporate headquarters and workers who are away
from their headquarters. The Be There! system which was the predecessor to


                                       13
<PAGE>

VocalWare had very limited success and failed to generate significant revenue
from the time it was released in 1997. The majority of our historical revenue
has come from products other than Be There!/VocalWare, and we are no longer
manufacturing or selling those other products. In March 2000, we sold our
network multiplexer business segment to concentrate all our efforts on the
VocalWare product line. Our inability to penetrate our target markets and
increase VocalWare sales would materially and adversely affect our business and
operations.

Our Dependence on Third Party Manufacturers and Third Party Component Suppliers
Increases Potential Manufacturing Problems and Adversely Affects Our Customer
Relationships and Operating Results

     In fiscal year 2001 we outsourced all of the manufacturing of our products.
Because of this reliance on third party manufacturers we cannot always exercise
direct control over manufacturing quality and costs. We use third party
component suppliers to provide components for our manufacturing of our products.
Because of this reliance on third party component suppliers, we can experience
delays in the manufacturing of our products based on external demands the third
party component suppliers may face in component allocations, component shortages
and component suppliers financial viability. We may also have problems with
production schedules of our products because of other demands placed on the
third party manufacturers and component suppliers.

We May Not Be Able to Respond Effectively to Rapid Technological Change in Our
Industry

     The rapid pace of technological change may prevent us from developing and
marketing new products, enhancing our existing products, or responding
effectively to emerging industry standards or new product introductions by
others. Our future success will be largely dependent on our ability to enhance
our existing products and to develop and introduce successful new products.
Rapidly changing technology, emerging industry standards, product proliferation
and short product life cycles characterize the market for our products. As the
technical complexity of new products increases, it may become increasingly
difficult to introduce new products quickly and according to schedule. Delays in
developing or shipping new or enhanced products could adversely affect our
operating results and customer relationships.

We May Not Be Able to Compete Effectively with Companies Having Greater
Resources

     The communications industry is intensely competitive. Several of our
existing and potential competitors have far more extensive financial,
engineering, product development, manufacturing, and marketing resources than we
have. As a result, these competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote much
greater resources to the development, promotion, and sale of their products and
services than we can. Many of these competitors have far greater brand
recognition, which places us at a competitive disadvantage for product
acceptance with an established competitor. In addition, some competitors have a
lower cost structure that gives them a competitive advantage on the basis of
price due to their financial condition and purchasing power. There is a growing
array of solutions for communication between the corporate headquarters and
remote workers, presenting a variety of alternatives to our VocalWare products.
We expect new competing alternatives to arise as new technologies develop. There
can be no assurance that consumers will choose our solution.


                                       14
<PAGE>

Our Business Could Suffer if We Lose Key Personnel or Cannot Attract Qualified
Personnel

     Our success is dependent largely on the skills, experience and performance
of key management, sales and technical personnel. We are especially dependent on
our senior officers and VocalWare products sales executives. Michael McDonnell
resigned his positions as President and Chief Executive Officer of the Company
and as a member of our Board of Directors on July 11, 2001, and we do not yet
know the extent to which his departure will adversely affect our business. James
G. Scogin, our chief financial officer since December 1999, has succeeded Mr.
McDonnell as President and Mr. Scogin has no prior experience as the president
or chief executive officer of a business. We have also substantially reduced our
staff to six full time employees to reduce our monthly cash expenditures. We do
not yet know the extent to which this reduction in staff will adversely affect
our business. We are also dependent on key technical personnel to introduce new
products and to remain in the forefront of technological advances. Due to the
complexity of our product, the loss of key personnel affects us in the time it
would take to replace the personnel and train them in our product, if we could
replace them at all. None of our senior executives or other employees has
employment contracts with us and may leave our employ at any time and engage in
competitive ventures. We do not have any insurance on our employees. Our future
success will also depend on our ability to attract highly skilled personnel.
Competition for qualified personnel is intense in our industry and we may not be
able to retain our key employees or attract and retain other qualified
personnel.

We Depend upon Our Proprietary Technology and We May Not Be Able to Adequately
Protect It

     Intellectual property laws of the United States and foreign countries may
not be adequate to protect our proprietary rights. Because our success depends
in part on our technological expertise and proprietary technologies, the loss of
our proprietary rights could have a material adverse effect on our business. We
rely on trade secret protection and, to a lesser extent, on patents and
copyrights to protect our proprietary technologies. These steps may not be
adequate to deter misappropriation or infringement of our proprietary
technologies. Competitors may also independently develop technologies that are
similar or superior to our technology. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent, as do the laws
of the United States. We have in the past and may in the future be involved in
intellectual property litigation, which could adversely affect our intellectual
property rights, could be costly, and could divert management's attention away
from the business. We may be required to bring or defend against litigation to
enforce our patents, to protect our trademarks, trade secrets, and other
intellectual property rights, to defend against infringement claims, to resolve
disputes under technology license arrangements, and to determine the scope and
validity of our proprietary rights or those of others. Our limited resources may
limit our ability to bring or defend against intellectual property litigation.
Adverse determinations in litigation, including litigation we initiate, could
result in the loss of our proprietary rights, subject us to significant
liabilities, require us to seek licenses from third parties, or prevent us from
manufacturing or selling our products.

Our Levels of Inventory Could Adversely Affect Our Liquidity and Viability or
Increase the Risk of Inventory Write-Offs

     Our business and financial condition could be materially adversely affected
if we do not effectively manage purchasing activities in the face of uncertain
revenue levels. In the past we have substantially increased our inventory levels
to meet anticipated shipment requirements. Increased levels of inventory without
corresponding sales could adversely affect our cash flow and increase the risk
of inventory write-offs pertaining to slow moving or obsolete product.


                                       15
<PAGE>

Failure of Our Products to Meet FCC and other Regulatory Standards Could Delay
the Introduction of New Products or Require Us to Modify Existing Products

     The failure of our products to conform to the regulations established by
the Federal Communications Commission or similar foreign regulatory bodies or to
meet applicable testing requirements could adversely affect our business. The
FCC and foreign regulators regulate aspects of our products. Our products must
typically be tested before they are sold. Foreign authorities often establish
telecommunications standards different from those in the United States, making
it difficult and more time consuming to obtain the required regulatory
approvals. A significant delay in obtaining regulatory approvals could delay the
introduction of our products into the market and adversely affect operating
results. In addition, changes in regulations or requirements applicable to our
products could affect the demand for our products or result in the need to
modify products, either of which could involve substantial costs or delays in
sales and adversely affect our operating results.

Our Common Stock has been Delisted by the NASDAQ National Market

     Effective July 11, 2001, our common stock was delisted by The Nasdaq
National Market due to our failure to pay overdue annual and additional listing
fees in the amount of $44,125 and our inability to meet the minimum bid price
requirements for continued listing. Effective November 6, 2001, our common stock
was delisted from the Over the Counter Bulletin Board (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 on 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.

The Issuance of Stock Pursuant To The Equity Line of Credit With Grenville May
Substantially Dilute the Interests of Other Security Holders Because the Number
of Shares the Company Will Sell Depends upon the Trading Price of the Shares
During Each Draw Down Period

     The shares issuable to Grenville pursuant to the equity line of credit will
be issued at a 17.5% discount to the average daily price of the common stock.
The number of shares that the Company will sell is directly related to the
trading price of its common stock during each draw down period. As the price of
the Company's common stock decreases, and if the Company decides to draw down on
the equity line of credit, it will be required to issue more shares of our
common stock for any given dollar amount invested by Grenville. Accordingly, the
shares of common stock then outstanding will be diluted.

The Issuance of Stock Pursuant to the Conversion of the 6% and 10% Convertible
Debentures May Substantially Dilute the Interests of Other Security Holders
Because the Number of Shares the Company Will Issue upon Conversion Will Depend
upon the Trading Price of Our Common Stock at the Time of Conversion if the
Trading Price Is Less Than the Set Price of the Debenture

     The holders of the our 6% convertible debentures may elect to convert the
debentures into shares of our common stock at any time at a discount of the
lesser of 110% of the market price of our common stock as of the date of
issuance of the debentures and 50% of the average of the 5 lowest closing bid
prices of our common stock during the 20 business days immediately preceding the
date notice of conversion is given to us by the holder. The table set forth
below outlines the number of shares of common stock that would be issuable upon
conversion in full of the debentures at several hypothetical conversion prices.
The table also sets forth the total


                                       16
<PAGE>

number of shares the investors would beneficially own at such hypothetical
adjustment prices, and assuming exercise in full of the warrants, and the
percentage that such shares would constitute of our resulting outstanding common
stock, assuming the investors had not purchased or sold any of our securities.

<TABLE>
<CAPTION>
                         Shares                                         Total Shares as a
   Hypothetical      Issuable Under     Shares Issuable   Total Shares      Percent of
 Conversion Price      Convertible           Under        Issuable to      Outstanding
       (1)            Debentures (1)        Warrants       Investors        Stock (2)
 ----------------     --------------        --------       ---------        ---------
<S>                   <C>                  <C>            <C>                <C>
      $0.01           113,000,000          1,000,000      114,000,000        322.32%
      $0.05            22,600,000          1,000,000       23,600,000         66.73%
      $0.10            11,130,000          1,000,000       12,130,000         34.78%
      $0.154(3)        12,356,828          1,000,000       13,356,828         37.76%
</TABLE>

----------
     (1) Assumes conversion in full of all $1,130,000 principal amount of
     convertible debentures at the hypothetical conversion price set forth
     above. Assumes interest is paid in cash and not in shares of common stock.

     (2) Based on 35,373,477 shares of common stock outstanding on November 9,
     2001, plus the shares issuable to the investors under the debentures and
     the warrants shown above.

     (3) At floating conversion prices above $0.154 per share, the investors
     would convert at the fixed conversion price of, as to $500,000 principal
     amount of convertible debentures, $0.154 per share, as to $240,000
     principal amount of convertible debentures, $0.0715 per share, as to
     $130,000 principal amount of convertible debentures, $0.0561 per share and,
     as to $277,499 principal amount of convertible debentures, $0.0484 per
     share.

The Sale of Material Amounts of the Company's Common Stock Could Reduce the
Price of Its Common Stock and Encourage Short Sales

     As the Company sells shares of its common stock pursuant to the equity line
of credit and then Grenville sells the common stock, the Company's common stock
price may decrease due to the additional shares in the market. The price may
also decrease if the holders of the convertible debentures elect to convert the
debentures into common stock and to sell the common stock. As the price of our
common stock decreases, and if the Company decides to draw down on the equity
line of credit, it will be required to issue more shares of its common stock for
any given dollar amount invested by Grenville, subject to a designated minimum
threshold price specified by us. This may encourage short sales, which could
place further downward pressure on the price of the Company's common stock.

Our Stock Price is Highly Volatile

     The market price of our common stock in the past has been highly volatile,
and likely will continue to be highly volatile. This is caused in part by the
relatively low aggregate market value of our publicly traded shares. Events or
circumstances may cause a much greater percentage change in the market price of
our shares than the market price of a company with a higher aggregate market
value. There are many events or circumstances, including those highlighted in
these risk factors, which could cause the market price of our stock to
fluctuate. Many of those events or circumstances are outside our control. In
addition, stock prices for many technology companies fluctuate widely for
reasons unrelated to their business, financial condition or operating results.


                                       17
<PAGE>

Our Business May Be Adversely Affected by Class Action Litigation Due to Stock
Price Volatility

     The filing of securities class action litigation against companies often
occurs following periods of volatility in the market price of a company's
securities. We are currently and may in the future be a target of securities
litigation. See "Item 3. LEGAL PROCEEDINGS." Securities litigation could have a
material adverse effect on our business if it is filed against us because it
could result in substantial costs and a diversion of management's attention and
resources. It may also adversely affect our ability to raise capital, our sales
efforts, and our ability to attract a strategic partner.

We could be required to pay infringement damages, licensing fees or modify our
products if our products are found to be infringing upon the rights of others

     It is common in the computer industry for companies to assert intellectual
property infringement claims against other companies. As a consequence, the
Company indemnifies some OEM customers in certain respects against intellectual
property claims relating to our products. The Company presently is not aware of
any material intellectual property claims pending against it. If an intellectual
property claim were brought against the Company and one of Company's products
were found to be infringing upon the rights of others, the Company could be
required to pay infringement damages, pay licensing fees, modify its products so
that they are not infringing, or discontinue offering products that were found
to be infringing, any of which could materially adversely affect our business
and results of operations. In addition, the assertion of such claims against one
or more of the Company's vendors could adversely affect the availability from
those vendors of components used by us.

The "penny stock" rules may restrict the ability of broker-dealers to sell the
Company's securities in the secondary market.

     The trading of our shares is subject to limitations set forth in Rule 15g-9
of the Securities Exchange Act. This rule imposes sales practice requirements on
broker-dealers who sell so-called penny stocks to persons other than established
customers, accredited investors or institutional investors. Accredited investors
are generally defined to include individuals with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together with their
spouses during the previous two years and expected annual income of that amount
during the current year. For sales of shares to other persons, broker-dealers
must make special suitability determinations, and obtain the written consent of
the purchaser to the sale prior to consummating the sale and are generally
prohibited from making cold-calls or other unsolicited inquiries to purchasers
without complying with these rules. These rules may adversely affect the ability
of broker-dealers and others to sell our shares or to sell shares in the
secondary market.

ITEM 2. PROPERTIES

     In June 2000, the Company's corporate headquarters, sales and marketing,
product development and engineering were relocated to Plano, Texas and consist
of one building totaling approximately 10,000 square feet of leased space. Also,
the Company had a facility for distribution, co-engineering, accounting and
sales and technical support in one building totaling approximately 21,000 square
feet of leased space in San Antonio, Texas. In August of 2000, a second building
located in San Antonio, Texas of approximately 29,000 square feet was subleased.
The building located in Plano, Texas, is subject to a five-year lease that
commenced in June 2000. The buildings located in San Antonio, Texas, consisting
of approximately 21,000


                                       18
<PAGE>

and 29,000 square feet, are subject to ten- and seven-year leases, respectively,
which commenced in April 1996. In August 2001, the Company terminated its lease
for 21,000 square feet in San Antonio, Texas and leased approximately 1,000
square feet in San Antonio, Texas for distribution and accounting. This lease is
on a month-to-month term. The Company believes that its existing facilities are
adequate to meet current requirements, including foreseeable short-term
requirements to support the growth of its VocalWare product line.

ITEM 3.  LEGAL PROCEEDINGS

     On May 18, 2001, the Company, executive officers, Michael McDonnell,
previously the President and Chief Executive Officer (resigned in July 2001),
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                     PART II

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

     The Company's Common Stock was traded on the NASDAQ National Market under
the symbol RACE since the Company's initial public offering on October 7, 1992.
For the two most recent fiscal years ended June 30, 2000 and June 30, 2001, the
following table lists on a per share basis for the period indicated, the high
and low reported sale prices for the Company's Common Stock as quoted on, prior
to July 11, 2001, the NASDAQ National Market, after July 10, 2001 and prior to
November 6, 2001, the OTCBB and after November 5, 2001 the "pink sheets". These
price quotations reflect inter-dealer prices, without adjustment for retail
mark-ups, markdowns or commissions and may not necessarily represent actual
transactions.

         Period                                       High         Low
         ------                                       ----         ---
         July 1, 1998 to September 30, 1999          $3.75        $2.25
         October 1, 1998 to December 31, 1999         5.00          .875
         January 1, 1999 to March 31, 2000            6.875        2.50
         April 1, 1999 to June 30, 2000               8.50         2.813
         July 1, 1999 to September 30, 2000           6.75         4.375
         October 1, 1999 to December 31, 2000         5.625         .75
         January 1, 2000 to March 31, 2001            1.75          .359
         April 1, 2000 to June 30, 2001                .93          .07

     As of January 31, 2001, the last sale price of the Company's Common Stock
was $0.05 as reported on the "pink sheets". As of January 31, 2001, there were
231 shareholders of record, although the Company believes that the number of
beneficial owners is significantly greater.


                                       19
<PAGE>

     The Company has never declared or paid cash dividends on the Common Stock.
The Company presently intends to retain earnings, if any, for the operation and
development of its business and does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. Future earnings, capital
requirements, the financial condition and prospects of the Company, and other
relevant factors as determined by the Board of Directors, will influence the
determination of any future cash dividend decisions. There is no assurance that
the Company will pay any dividends in the future.



                                       20
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data presented below for, and as of the end of, each
of the fiscal years in the five-year period ended June 30, 2001, are derived
from the audited financial statements of DATA RACE, Inc. The selected financial
data should be read in conjunction with the Company's financial statements and
notes thereto appearing elsewhere in this report and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".

<TABLE>
<CAPTION>
                                                                         Fiscal Years Ended June 30,
                                                                      -------------------------------------------------------------
                                                                         2001         2000         1999         1998         1997
                                                                      ---------    ---------    ---------    ---------    ---------
                                                                      (in thousands, except per share data)
<S>                                                                   <C>          <C>          <C>          <C>          <C>
Operating Statement Data:
Revenue from continuing operations ................................   $      63    $     316    $     836    $   1,951    $      --

Cost of revenue ...................................................       1,345          762        1,533        2,409           --
                                                                      ---------    ---------    ---------    ---------    ---------
      Gross profit (loss) from continuing operations ..............      (1,282)        (446)        (697)        (458)          --

Total operating expenses from continuing
      operations ..................................................      14,964        9,030        8,603        8,936           --
                                                                      ---------    ---------    ---------    ---------    ---------

      Operating loss ..............................................     (16,246)      (9,476)      (9,300)      (9,394)          --
Other (loss) income, net ..........................................        (530)         440          135          136          201
                                                                      ---------    ---------    ---------    ---------    ---------
Income (loss) from continuing operations ..........................     (16,776)      (9,036)      (9,165)      (9,258)         201
Income (loss) from discontinued operations ........................          --          218          620          229       (6,493)
                                                                      ---------    ---------    ---------    ---------    ---------
     Net loss .....................................................   $ (16,776)   $  (8,818)   $  (8,545)   $  (9,029)   $  (6,292)
                                                                      =========    =========    =========    =========    =========

Loss per share:
     Net loss .....................................................   $ (16,776)   $  (8,818)   $  (8,545)   $  (9,029)   $  (6,292)
     Effect of  beneficial  conversion  features  of
       convertible preferred stock ................................          --         (235)      (3,889)        (457)      (2,063)
                                                                      ---------    ---------    ---------    ---------    ---------

     Net loss applicable to common stock ..........................   $ (16,776)   $  (9,053)   $ (12,434)   $  (9,486)   $  (8,355)
                                                                      =========    =========    =========    =========    =========

     Net loss per common share -basic and diluted .................   $    (.60)   $   (0.41)   $   (0.77)   $   (1.60)   $   (1.71)
                                                                      =========    =========    =========    =========    =========

Weighted average shares outstanding ...............................      27,812       21,940       16,119        5,937        4,873
                                                                      =========    =========    =========    =========    =========

Balance Sheet Data (at year end):
Working capital (deficit) .........................................   $  (1,274)   $  10,290    $   7,506    $   1,056    $   4,888
Total assets ......................................................       3,647       13,192        9,520        4,009        9,470
Shareholders' equity (deficit) ....................................        (562)      11,728        8,716        2,557        6,863
</TABLE>


                                       21
<PAGE>


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

Results of Operations

     From its inception in 1983, the Company has designed, manufactured, and
marketed advanced technology communication products. The Company's strategy is
to provide innovative, first-to-market, high-value-added solutions to meet the
needs of knowledge workers who are remote from their headquarters office.

     During fiscal year 2001, the Company completed the development of the
VocalWare IP integrated server by integrating the dial up remote access solution
of the formerly marketed Be There! product line with the broadband remote access
solution of the VocalWare product line. This solution allows users to access
their office voice, e-mail, data and fax resources over any access medium with
all of the leading manufacturers of voice and data products. The Company entered
into beta program agreements with a major global carrier, a major cable
provider, a major airline and an agency of the federal government for the
VocalWare IP integrated server. From the beta agreements the Company shipped 35
VocalWare servers and 840 VocalWare user licenses for approximately $701,000 and
entered into an exclusive licensing rights agreement for approximately $365,000
with LYNUX.

     In January 2001, these servers were returned based on non-payment from
LYNUX and the Company notified LYNUX that the exclusive licensing rights
agreement had been terminated. The Company in the quarter ended December 31,
2000 reversed the accounts receivable and deferred revenue for approximately
$365,000. During the second quarter of fiscal 2001, the Company shipped $625,000
of servers and user licenses to a reseller. This transaction was not recorded as
revenue as the transaction did not meet the Company's criteria for revenue
recognition. The reseller was given extended terms over normal reseller
agreements. In July 2001, the reseller returned the servers and user licenses
back to the Company based on the uncertainty of the Company continuing as a
going concern.

     The Company was disappointed in its revenue for the fiscal year. This was
based on the following factors. (i) A longer sales cycle than originally
planned. The Company originally planned for a sales cycle of 30 days where the
potential customer would place an order after a 30-day trial period. In reality
the sales cycle can be as long as one year. (ii) A decline in the general
economic conditions in the telecommunications industry and decreases in spending
for information technology. (iii) The Company's inability to show its viability
as a going concern. Potential customers have concerns about the Company's
ability as a going concern. The VocalWare IP product line is considered a
strategic asset of the customer and questions concerning the viability of the
Company can delay or terminate potential orders.

     The Company's goal of returning to profitability and developing a more
dependable revenue base depends on the success of the VocalWare IP product line.
Although the Company has not recorded significant revenue from sales of the
VocalWare IP product line, the Company has expended substantial resources on its
development and market introduction.

Fiscal 2001 Compared to Fiscal 2000 for Continuing Operations

     Total revenue from continuing operations in fiscal 2001 decreased 80.2% to
approximately to $63,000 from approximately $316,000 in fiscal 2000. This
decrease is attributable to the following conditions: 1) the financial condition
of the Company as a viable ongoing business, 2) the longer than expected sales
cycle of placing the product with a potential


                                       22
<PAGE>

customer and receiving an order, and 3) the changes in general economic
conditions and specific market conditions in the communications industries and
the overall decrease in information technology spending.

     Total gross profits (loss) from continuing operations in fiscal 2001
increased 187.7% to approximately $1,282,000 from approximately $446,000 in
fiscal 2001. This increase was primarily the result of a 27% increase in
material and overhead production cost coupled with the Company recording a
provision for potential inventory obsolescence in the amount of approximately
$422,000. The additional material costs where necessary to insure product supply
from its key component supplier and material purchased by the Company's contract
manufacturing integrator. Materials held on behalf of the Company at the
manufacturing integrator's facility are recorded as inventory as well as any
associated accounts payable for unpaid balances. See note 5 "Inventory" in the
accompanying notes to the financial statements.

     Engineering and product development expenses have increased by 51.7% to
approximately $5.0 million in fiscal 2001 from approximately $3.3 million in
fiscal 2000. This increase was primarily due to outside contract engineering
expenditures and workforce increases for continued development and enhancements
of the VocalWare IP products.

     Sales and marketing expenses increased 81.7% during fiscal 2001 to
approximately $4.8 million from approximately $2.6 million in fiscal 2000. This
increase was primarily due to increased headcount in the sales and marketing
staff and the associated travel which were both necessary to properly market,
coordinate, distribute, train and service VocalWare IP products.

     General and administrative expenses increased 67.1% during fiscal 2001 to
approximately $5.2 million from approximately $3.1 million in fiscal 2000. This
increase reflected increased staffing that management believed was necessary to
support recent organizational growth as well as impairment adjustments for
assets no longer deemed viable by the Company.

     Income tax benefits related to losses for fiscal year 2001 are not
recognized because the utilization of such benefits cannot be assured.
Accordingly, a 100% valuation allowance has been recorded against the Company's
deferred income tax asset. As of June 30, 2001, the Company had federal and
state tax net operating loss carryforwards of approximately $70,980,000 that
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, due to such
ownership change, the ability to utilize remaining NOL carryforwards may be
significantly restricted.

Fiscal 2000 Compared to Fiscal 1999 for Continuing Operations

     In March 2000, the Company sold its network multiplexer line to HT
Communications. Also during the second quarter of fiscal 1999, the Company did
not bid on additional custom modem business. Therefore, the following discussion
is limited to the Company's continuing operations of its VocalWare IP business
segment. Discontinued operations are separately discussed below.

     Total revenue from continuing operations in fiscal 2000 decreased 62.2% to
$316,000 from $836,000 in fiscal 1999. The decrease is primarily due to
decreased shipments to Sabratek Inc, as a result of that customer's bankruptcy
filing and declines in custom modem revenue from fiscal 1999. Also impacting
revenue is the Company's decision to discontinue the first


                                       23
<PAGE>

generation Be There! remote access system in favor of the Company's new
generation of VocalWare IP products which were scheduled to be released
throughout fiscal 2001.

     Gross profit (loss) margins for fiscal 2000 from continued operations
decreased to (140.9)% from (83.4)% for fiscal 1999. The decline in gross margin
from continuing operations is directly related to decreased shipments to
Sabratek Inc. and manufacturing variances caused by the decreased volumes. Due
to financial difficulties and eventual bankruptcy, Sabratek, Inc. unexpectedly
cancelled its purchase agreement with the Company in the second quarter of
fiscal year 2000. The Company was not able to adjust its production overhead
until after the third quarter of the fiscal year 2000 and therefore incurred
manufacturing variances associated with decreased volumes.

     Engineering and product development expenses had increased by 38.1% to $3.3
million in fiscal 2000 from $2.4 million in fiscal 1999. This increase was
primarily due to workforce increases and outside project development contracts
associated with development expenditures necessary for the Company's new
VocalWare IP product line.

     Sales and marketing expenses increased 35.8% during fiscal 2000 to $2.6
million from $1.9 million in fiscal 1999. This increase was primarily due to the
Company ramping up its sales and marketing forces in anticipation of delivering
its new VocalWare IP product line to the market in early fiscal 2001.

     General and administrative expenses decreased 27.3% during fiscal 2000 to
$3.1 million from $4.3 million in fiscal 1999. This decrease was attributable to
decreases in non-cash expenses associated with a consulting agreement and
non-cash legal expenses associated with a patent infringement lawsuit. The
decrease is offset in part by severance and retirement packages for two officers
totaling approximately $480,000.

     Income tax benefits related to losses for fiscal year 2000 are not
recognized because the utilization of such benefits cannot be assured.
Accordingly, a 100% valuation allowance was recorded against the Company's
deferred income tax asset. As of June 30, 2000, the Company had federal and
state tax net operating loss carryforwards of approximately $53,664,000, which
expire beginning in 2009. 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, due to such
ownership changes, the ability to utilize remaining NOL carryforwards may be
significantly restricted.

Discontinued Operations and HT Communications Receivable

     The majority of the Company's revenue in fiscal 1999 and in prior years
resulted from operations that the Company has now exited. Revenues from
discontinued operations decreased 64.0% in fiscal 2000 to $720,000 from
$1,999,000 in fiscal 1999 as a result of the Company's decision to exit that
market. The Company sold its network multiplexer business to HT Communications
in March 2000 for $350,000. The Company to date has received approximately
$6,000 in principal payments and $4,500 in royalty payments. The Company is in
the process of filing suit against HT Communications demanding payment on the
past due balances. Due to defaults upon the agreement between the Company and HT
communications, the Company removed the unrecognized portion of the deferred
gain in the amount of $331,601 from its books along with the associated note
receivable.


                                       24
<PAGE>

Liquidity and Capital Resources

     Operating losses have had and continue to have a substantial negative
effect on the Company's cash balance. At June 30, 2001, the Company had
approximately $9,000 in cash and cash equivalents, compared to approximately
$11,059,000 at June 30, 2000.

     At the beginning of fiscal 2001, the company recorded a note receivable of
$350,000 due from HT Communications resulting from the sale by the Company of a
discontinued segment in March 2000. Subsequent to the end of fiscal year 2001
this note became uncollectable due to HT Communications filing bankruptcy. As
such, the Company wrote off the receivable in September 2001.

     During fiscal year 2001, the Company increased its inventory in response to
business opportunities forecasted and the lead-time required to receive the
material components. The Company's inventory at retail is valued at $4,000,000
to $7,000,000 depending on the size and type of server configuration.

     The build up in inventory was the result of the Company having to procure
unique key components essential for the deployment of the Vocal Ware server.
Approximately 400 units of a unique component board where procured during the
fiscal year along with nearly 210 chassis units that make up the Vocal Ware
server. The Company anticipates that the number of units on hand at the end of
the fiscal year will be sufficient for the immediate future to meet any need
that current potential customers would required during fiscal 2002. The general
slow down in the economy and the longer than anticipated sales cycle however
make it difficult for the Company to estimate additional requirements. The
inventory value at year ending June 30,2001 is net of inventory reserves of
approximately $1.0M.

     During the first half of fiscal year 2001, in anticipation of projected
sales, the Company increased its staff by over 50% by adding 31 people to field
key positions to assure its growth. To support its business model and the
additional staff, the Company invested approximately $1,000,000 in equipment
purchases in fiscal 2001. Approximately $434,000 of those purchases pertained to
a new e-business platform in which the Company was unifying its sales, customer
service, MRP and accounting systems. Implementation of the system had to be
abandoned during May of 2001 due to the Company's financial difficulties and the
loss of key personnel responsible for implementation of the system. The Company
recorded as an asset impairment, approximately $403,000 relating to the
e-business platform. In addition the Company recorded approximately $778,000 as
an asset impairment on non-amortized leasehold improvements pertaining to the
early termination of the San Antonio facilities in August 2001. The Company
anticipated this action as it was consolidating its facilities prior to the
close of the fiscal year ending June 30, 2001. The Company believes its
facilities are more than adequate to meet the current and future needs during
fiscal 2002 without modification or further expense. Further, the Company feels
that capital expenditures in fiscal 2001 for capital equipment are adequate to
support foreseeable needs throughout fiscal 2002.

     Accounts payable during fiscal 2001 increased by 85% compared to the
increase reflected in the cash flow statement for fiscal 2000. This increase is
directly attributable to inventory purchases as discussed above.

     An increase in notes payable of approximately $1,072,000 during fiscal 2001
reflect the Company's reliance upon outside financing to continue its operations
until such time revenues are sufficient to sustain the Company's future
operations.


                                       25
<PAGE>

     The Company does not believe that current cash will be sufficient to meet
the Company's current and ongoing operating expenses and capital requirements
and it is continuing to explore financing alternatives.

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. As shown in the
financial statements, the Company incurred a substantial loss of $16,775,750 for
the year ended June 30, 2001 and has incurred losses for each of the preceding 2
years. At June 30, 2001, current liabilities exceed current assets by
$1,274,179, total liabilities exceed total assets by $561,814 and the
accumulated deficit aggregated $72,527,944. 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. See "ITEM 1 BUSINESS - Certain Business
Risks - We Will Need Additional Capital to Sustain Operations" and "Financing
Activities - Equity Line of Credit" below as part of this ITEM 7.

     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".

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

Financing Activities

March 2001

     In March 2001, the Company received net proceeds of approximately
$2,000,000 for issuance of common stock and warrants. (See Note 10 of Notes to
the Financial Statements)


                                       26
<PAGE>

May 2001

     In May 2001, the Company issued 10% secured convertible promissory notes
and common stock purchase warrants for $700,000. (See Note 9 of Notes to the
Financial Statements)

6% Convertible Debentures

     On June 12, 2001 the Company signed an agreement to place up to $1 million
in 6% convertible debentures and warrants to two accredited investors. The
parties amended the agreement on July 17, 2001 and October 18, 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, as
amended, and pursuant to Section 4(2) of the Securities Act of 1933, as amended,
the Company issued to the investors $500,000 principal amount of convertible
debentures on June 18, 2001, $240,000 principal amount of convertible debentures
on July 30, 2001, $130,000 principal amount of convertible debentures on
September 6, 2001 and $277,499 principal amount of convertible debentures on
October 18, 2001. On June 18, 2001, the Company also issued to the investors
common stock purchase warrants to purchase up to 1,000,000 shares of common
stock at an exercise price of $0.14. On October 18, 2001 the parties amended the
agreement to increase the investment amount by $147,499 and the Company granted
to the investors a security interest in all of the assets of the Company
covering all prior and future indebtedness of the Company to the investors. We
have received proceeds from the sale of the convertible debentures equal to
$1,147,499 less $80,000 to Hadrian Investments Limited for placement agent fees,
or 8% of the proceeds received for the first $1,000,000 principal amount of
convertible debentures issued to the investors, and less $25,000 to cover the
legal expenses of the investors. We currently owe Hadrian Investments Limited an
additional $11,799.92 in connection with this financing, or 8% of the last
$147,499 convertible debentures issued to the investors. 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.

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 an accredited investor, 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


                                       27
<PAGE>

money, subject to a formula based on average stock prices and average trading
volumes, setting the maximum amount of any request for any given draw. The
amount of money that Grenville will provide and the number of shares to be
issued to Grenville in return for that money is settled twice during a 22 day
trading period following the draw down request based on the formula in the stock
purchase agreement. Grenville receives a 17.5% discount to the market price of
Company common stock during the 22-day period and the Company receives the
settled amount of the draw down, less 8% of such amount to Hadrian Investments
Limited for placement agent fees. Additionally, we issued to Hadrian 500,000
shares in lieu of a cash payment of $25,000 for services rendered to the Company
by Hadrian. In addition, the Company issued a warrant to Grenville to purchase
up to 16,366,612 shares of Company common stock at an exercise price of $0.07027
and paid Grenville $20,000 for its legal fees and expenses incurred in
connection with the equity line of credit. The issuances of the securities to
the accredited investors are made pursuant to Section 4(2) of the Securities
Act. The Company will use the proceeds from the equity line for general
corporate purposes.

ITEM 7A. DISCLOSURES ABOUT MARKET RISK

     The following discusses our 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. Actual results could vary materially as a result of a number of
factors including those set forth in the "Certain Business Risk" section.

     At June 30, 2001, we had approximately of $1.1 million of interest bearing
indebtedness. The interest rates are fixed and therefore, we do not have any
significant interest rate risk.

     At June 30, 2001 we did not own any equity investments. Therefore, we 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, we do not have any significant direct
foreign currency exchange rate risk.


                                       28
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                                     PAGE
<S>                                                                                                  <C>
Independent Auditors' Report - Current................................................................31
Independent Auditors' Report - Predecessor............................................................32

Financial Statements
     Balance Sheets as of June 30, 2001 and 2000......................................................33
     Statements of Operations for the years ended June 30, 2001, 2000 and 1999........................34
     Statements of Shareholders' Equity for the years ended June 30, 2001, 2000 and 1999..............35
     Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999........................41
     Notes to Financial Statements....................................................................42
</TABLE>

All schedules are omitted, because they are not required, are not applicable, or
the information is included in the financial statements and notes thereto.



                                       29
<PAGE>

INDEPENDENT AUDITORS' REPORT


Board of Directors and Shareholders
DATA RACE, Inc.
Plano, Texas

     We have audited the accompanying balance sheet of DATA RACE, Inc. as of
June 30, 2001, and the related statements of operations, shareholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DATA RACE, Inc. as of June
30, 2001, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $16,775,750 for the year ended June 30, 2001
and has incurred substantial losses for each of the preceding 2 years. At June
30, 2001, current liabilities exceed current assets by $1,274,179 and total
liabilities exceed total assets by $561,814. These factors and others discussed
in Note 3, raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.


                                                   LAZAR LEVINE & FELIX LLP

New York, New York
November 2, 2001


                                       30
<PAGE>


INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders


DATA RACE, Inc.:

     We have audited the accompanying balance sheet of DATA RACE, Inc. as of
June 30, 2000, and the related statements of operations, shareholders' equity,
and cash flows for each of the years in the two-year period ended June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DATA RACE, Inc. as of June
30, 2000, and the results of its operations and its cash flows for each of the
years in the two-year period ended June 30, 2000, in conformity with generally
accepted accounting principles.



                                                           KPMG LLP

San Antonio, Texas
September 11, 2000


                                       31
<PAGE>


DATA RACE, Inc.
BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           As of June 30,
                                                                                          -------------------------------
                                                                                               2001              2000
                                                                                          -------------     -------------
<S>                                                                                       <C>               <C>
ASSETS

Current assets:
    Cash and cash equivalents ........................................................    $       9,334     $  11,059,061
    Accounts receivable, net .........................................................            2,026             6,401
    Note receivable, current .........................................................               --           233,333
    Inventory ........................................................................        2,876,506           249,876
    Prepaid expenses and deposits ....................................................               --           206,001
                                                                                          -------------     -------------
        Total current assets .........................................................        2,887,866        11,754,672

Note receivable, non-current .........................................................               --           116,667
Property and equipment, net ..........................................................          674,798         1,235,919
Other assets .........................................................................           84,630            84,630
                                                                                          -------------     -------------
        Total assets .................................................................    $   3,647,294     $  13,191,888
                                                                                          =============     =============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable .................................................................    $   2,327,133     $     504,001
    Accrued expenses .................................................................          638,167           960,346
     Obligations under capital lease, current ........................................          125,078                --
     Convertible debentures ..........................................................        1,071,667                --
                                                                                          -------------     -------------
        Total current liabilities ....................................................        4,162,045         1,464,347

Non-current liabilities:
     Obligations under capital lease, non-current ....................................           47,063                --
                                                                                          -------------     -------------
                                                                                              4,209,108         1,464,347
                                                                                          -------------     -------------

Commitments and contingencies

Shareholders' equity (deficit):
    Common stock, no par value, 70,000,000 shares authorized 34,358,521 and
      26,083,364 shares issued and outstanding at June 30, 2001 and 2000,
      respectively ...................................................................       62,420,978        59,806,425
    Additional paid-in capital .......................................................        9,545,152         7,673,310
    Accumulated deficit ..............................................................      (72,527,944)      (55,752,194)
                                                                                          -------------     -------------
        Total shareholders' equity (deficit) .........................................         (561,814)       11,727,541
                                                                                          -------------     -------------
         Total liabilities and shareholders' equity ..................................    $   3,647,294     $  13,191,888
                                                                                          =============     =============
</TABLE>

See accompanying notes to financial statements


                                       32
<PAGE>


DATA RACE, Inc.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                Years Ended June 30,
                                                                             ---------------------------------------------------
                                                                                  2001               2000                1999
                                                                             -------------      -------------      -------------
<S>                                                                          <C>                <C>                <C>
Total revenue from continuing operations ...............................     $      62,698      $     316,212      $     835,798

Cost of revenue ........................................................         1,344,506            761,759          1,532,733
                                                                             -------------      -------------      -------------

      Gross profit (loss) ..............................................        (1,281,808)          (445,547)          (696,935)
                                                                             -------------      -------------      -------------

Operating expenses:
  Engineering and product development ..................................         4,995,226          3,293,231          2,384,787
  Sales and marketing ..................................................         4,757,711          2,618,432          1,927,894
  General and administration ...........................................         5,211,493          3,118,612          4,290,885
                                                                             -------------      -------------      -------------
      Total operating expenses .........................................        14,964,430          9,030,275          8,603,566
                                                                             -------------      -------------      -------------

      Operating loss ...................................................       (16,246,238)        (9,475,822)        (9,300,501)

Other income (loss) ....................................................          (529,512)           440,450            135,189
                                                                             -------------      -------------      -------------

Loss from continuing operations ........................................       (16,775,750)        (9,035,372)        (9,165,312)

Income from discontinued operations ....................................                --            217,734            620,452
                                                                             -------------      -------------      -------------

        Net loss .......................................................     $ (16,775,750)     $  (8,817,638)     $  (8,544,860)
                                                                             =============      =============      =============


Per share data:
  Net loss .............................................................     $ (16,775,750)     $  (8,817,638)     $  (8,544,860)
  Effect of beneficial conversion feature of
    convertible preferred stock ........................................                --           (235,718)        (3,888,923)
                                                                             -------------      -------------      -------------
  Net loss applicable to common
    stock ..............................................................     $ (16,775,750)     $  (9,053,356)     $ (12,433,783)
                                                                             =============      =============      =============

  Net basic and diluted loss from
     continuing operations per common share ............................     $       (0.60)     $       (0.42)     $       (0.81)
                                                                             =============      =============      =============
  Net basic and diluted loss per common
      share ............................................................     $       (0.60)     $       (0.41)     $       (0.77)
                                                                             =============      =============      =============


Weighted average shares outstanding ....................................        27,812,000         21,940,000         16,119,000
                                                                             =============      =============      =============
</TABLE>

See accompanying notes to financial statements


                                       33
<PAGE>


DATA RACE, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                        Series A Convertible            Series C Convertible         Series D Convertible
                                        Preferred Stock                 Preferred Stock              Preferred Stock
                                        --------------------------------------------------------------------------------------
                                        Shares         Amount           Shares       Amount          Shares        Amount
                                        --------------------------------------------------------------------------------------
<S>                                             <C>    <C>                  <C>      <C>                  <C>      <C>
Balances at June 30, 1998                       175    $   224,970          1,681    $ 1,380,001             --    $        --
Net loss                                         --             --             --             --             --             --
Issuance of convertible
preferred stock, net of
offering cost of $248,820                        --             --             --             --          2,500         60,688
Redemption of preferred stock                  (124)      (165,653)            --             --             --             --
Issuance of restricted common
stock and warrants, net
offering costs of $552,475                       --             --             --             --             --             --
Accretion of beneficial
conversion feature on
convertible preferred stock                      --             --             --             --             --      2,478,655
Conversion of convertible
preferred stock to common
stock                                           (51)       (59,317)        (1,681)    (1,380,001)        (2,500)    (2,539,343)
Common stock issued for legal
and consulting services                          --             --             --             --             --             --
Exercise of stock options and
warrants                                         --             --             --             --             --             --
Employee stock purchase plan                     --             --             --             --             --             --
                                        --------------------------------------------------------------------------------------
Balances at June 30, 1999                        --             --             --             --             --             --
Net loss                                         --             --             --             --             --             --
Issuance of common stock and
warrants, net of offering
costs of $300,000                                --             --             --             --             --             --
Issuance of common stock and
warrants, net of offering
costs of $419,999                                --             --             --             --             --             --
Accretion of beneficial
conversion feature on
convertible preferred stock                      --             --             --             --             --             --
Conversion of convertible
preferred stock to common
stock                                            --             --             --             --             --             --
Common stock issued for legal
and consulting services                          --             --             --             --             --             --
Exercise of stock options and
warrants                                         --             --             --             --             --             --
Employee stock purchase plan                     --             --             --             --             --             --
                                        --------------------------------------------------------------------------------------
Balances at June 30, 2000                        --             --             --             --             --             --
Net loss                                         --             --             --             --             --             --
Issuance of common stock in
exercise of warrants relating
to class A and B preferred
stock                                            --             --             --             --             --             --
Issuance of common stock in
cashless exercise of warrants
related to November 1998
private placement                                --             --             --             --             --             --
Issuance of common stock and
warrants in connection with
March 2001 private placement
net of offering costs                            --             --             --             --             --             --
Modification of warrant terms
to acquire common stock in
connection with the sale of
common stock in the March 2001
private placement                                --             --             --             --             --             --
Stock option compensation                        --             --             --             --             --             --
Issuance of common stock in
connection with convertible
debt                                             --             --             --             --             --             --
Exercise of warrants in
connection with June 2001
warrant agreement                                --             --             --             --             --             --
Exercise of stock options                        --             --             --             --             --             --
Employee stock purchase plan                     --             --             --             --             --             --
                                        --------------------------------------------------------------------------------------
Balance at June 30, 2001                         --    $        --             --    $        --             --    $        --
                                        ======================================================================================
</TABLE>

See accompanying notes to financial statements


                                       34
<PAGE>


DATA RACE, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                          Series E Convertible            Series F Convertible
                                          Preferred Stock                 Preferred Stock                 Common Stock
                                          ------------------------------------------------------------------------------------------
                                          Shares          Amount          Shares           Amount         Shares          Amount
                                          ------------------------------------------------------------------------------------------
<S>                                               <C>     <C>             <C>     <C>       <C>           <C>            <C>
Balances at June 30, 1998                          --     $        --     $        --                       9,126,406    $33,334,779
Net loss                                           --              --              --              --              --             --
Issuance of convertible
preferred stock, net of
offering cost of $248,820                         750         473,425             750         491,113              --             --
Redemption of preferred stock                      --              --              --              --              --             --
Issuance of restricted common
stock and warrants, net of
offering costs of $552,475                         --              --              --              --       3,134,064      5,705,745
Accretion of beneficial
conversion feature on
convertible preferred stock                        --         336,574              --         159,444              --             --
Conversion of convertible
preferred stock to common
stock                                              --              --              --              --       4,499,567      3,978,661
Common stock issued for legal
and consulting services                            --              --              --              --       2,325,300      2,318,938
Exercise of stock options and
warrants                                           --              --              --              --       1,080,895      1,126,998
Employee stock purchase plan                       --              --              --              --          18,291         24,489
                                          ------------------------------------------------------------------------------------------
Balances at June 30, 1999                         750         809,999             750         650,557      20,184,523     46,489,610
Net loss                                           --              --              --              --              --             --
Issuance of common stock and
warrants, net of offering
costs of $300,000                                  --              --              --              --       1,904,761      3,700,000
Issuance of common stock and
warrants, net of offering
costs of $419,999                                  --              --              --              --       1,572,738      5,580,001
Accretion of beneficial
conversion feature on
convertible preferred stock                        --          53,426              --         182,292              --             --
Conversion of convertible
preferred stock to common
stock                                            (750)       (863,425)           (750)       (832,849)      1,094,447      1,696,274
Common stock issued for legal
and consulting services                            --              --              --              --         190,000        520,088
Exercise of stock options and
warrants                                           --              --              --              --       1,131,602      1,807,517
Employee stock purchase plan                                                                                    5,293         12,935
                                          ------------------------------------------------------------------------------------------
Balances at June 30, 2000                          --              --              --              --      26,083,364     59,806,425
Net loss                                           --              --              --              --              --             --
Issuance of common stock in
exercise of warrants relating
to class A and B preferred
stock                                              --              --              --              --         210,222        472,999
Issuance of common stock in
cashless exercise of warrants
related to November 1998
private placement                                  --              --              --              --         297,313             --
Issuance of common stock and
warrants in connection with
March 2001 private placement
net of offering costs                              --              --              --              --       3,047,620      1,147,888
Modification of warrant terms
to acquire common stock in
connection with the sale of
common stock in the March 2001
private placement                                  --              --              --              --              --             --
Stock option compensation                          --              --              --              --              --             --
Issuance of common stock in
connection with convertible
debt                                               --              --              --              --       2,687,417        130,234
Exercise of warrants in
connection with June 2001
warrant agreement                                  --              --              --              --       1,673,343        200,000
Exercise of stock options                          --              --              --              --         272,142        571,424
Employee stock purchase plan                       --              --              --              --          87,100         92,008
                                          ------------------------------------------------------------------------------------------
Balance at June 30, 2001                           --              --              --              --      34,358,521    $62,420,978
                                          ==========================================================================================
</TABLE>

See accompanying notes to financial statements


                                       35
<PAGE>


DATA RACE, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                       Additional                                      Total
                                                       Paid-In                 Accumulated             Shareholders'
                                                       Capital                 Deficit                 Equity
                                                       ------------------------------------------------------------
<S>                                                    <C>                     <C>                     <C>
Balances at June 30, 1998                              $  1,882,303            $(34,265,055)           $  2,556,998
Net loss                                                         --              (8,544,860)             (8,544,860)
Issuance of convertible preferred stock,
net of offering cost of $248,820                          2,725,954                      --               3,751,180
Redemption of preferred stock                                    --                      --                (165,653)
Issuance of restricted common stock and
warrants, net of offering costs of
$552,475                                                  1,941,780                      --               7,647,525
Accretion of beneficial conversion
feature on convertible preferred stock                      914,250              (3,888,923)                     --
Conversion of convertible preferred
stock to common stock                                            --                      --                      --
Common stock issued for legal and
consulting services                                              --                      --               2,318,938
Exercise of stock options and warrants                           --                      --               1,126,998
Employee stock purchase plan                                     --                      --                  24,489
                                                       ------------------------------------------------------------
Balances at June 30, 1999                                 7,464,287             (46,698,838)              8,715,615
Net loss                                                         --              (8,817,638)             (8,817,638)
Issuance of common stock and warrants,
net of offering costs of $300,000
                                                                 --                      --               3,700,000
Issuance of common stock and warrants,
net of offering costs of $419,999
                                                                 --                      --               5,580,001
Accretion of beneficial conversion
feature on convertible preferred stock
                                                                 --                (235,718)                     --
Conversion of convertible preferred
stock to common stock                                            --                      --                      --
Common stock issued for legal and
consulting services                                         209,023                      --                 729,111
Exercise of stock options and warrants
                                                                 --                      --               1,807,517
Employee stock purchase plan                                     --                                          12,935
                                                       ------------------------------------------------------------
Balances at June 30, 2000                                 7,673,310             (55,752,194)             11,727,541
Net loss                                                         --             (16,775,750)            (16,775,750)
Issuance of common stock in exercise of
warrants relating to class A and B
preferred stock                                                  --                      --                 472,999
Issuance of common stock in cashless
exercise of warrants related to November
1998 private placement                                           --                      --                      --
Issuance of common stock and warrants in
connection with March 2001 private
placement net of offering costs                             164,718                      --               1,312,606
Modification of warrant terms to acquire
common stock in connection with the sale
of common stock in the March 2001
private placement                                           687,394                      --                 687,394
Stock option compensation                                   176,873                      --                 176,873
Issuance of common stock in connection
with convertible debt                                            --                      --                 130,234
Exercise of warrants in connection with
June 2001 warrant agreement                                      --                      --                 200,000
Accretion of beneficial conversion
feature on convertible debentures issued
in May 2001                                                 685,074                      --                 685,074
Accretion of beneficial conversion
feature on convertible debentures issued
pursuant to convertible debentures
purchase agreement executed in June 2001                    157,783                      --                 157,783
Exercise of stock options                                        --                      --                 571,424
Employee stock purchase plan                                     --                      --                  92,008
                                                       ------------------------------------------------------------
Balance at June 30, 2001                               $  9,545,152            $(72,527,944)           $   (561,814)
                                                       ============================================================
</TABLE>

See accompanying notes to financial statements


                                       36
<PAGE>


DATA RACE, Inc.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                       Years Ended June 30,
                                                                    ------------------------------------------------------
                                                                        2001                 2000                  1999
                                                                    ------------         ------------         ------------
<S>                                                                 <C>                  <C>                  <C>
Cash flows from operating activities:
  Net loss from continuing operations                               $(16,775,750)        $ (9,035,372)        $ (9,165,312)
  Adjustments to reconcile net loss from continuing
   operations to net cash (used in) operating
   activities:
    Depreciation and amortization                                        538,762              297,454              310,795
    Non-cash consulting and legal fees                                        --              729,111            2,318,939
    Non-cash beneficial conversion feature on
     convertible debentures for May and June 2001
     private placements                                                  842,857                   --                   --
    Non-cash stock option compensation                                   176,873                   --                   --
    Loss on impaired property and equipment                            1,180,978                   --                   --
    Loss on sales of property and equipment                               35,598                3,773                   --
    Changes in assets and liabilities:
      Accounts and notes receivable                                      354,375               48,667               22,703
      Inventory                                                       (2,626,630)            (154,781)             309,210
      Prepaid expenses, deposits and other assets                        206,001             (111,627)            (153,615)
      Accounts payable                                                 1,823,132              273,785              (65,778)
      Accrued expenses                                                  (322,179)              74,372             (568,936)
                                                                    ------------         ------------         ------------
        Net cash used in operating activities                        (14,565,983)          (7,874,618)          (6,991,994)
                                                                    ------------         ------------         ------------

Cash flows from investing activities:
  Purchase of property and equipment                                  (1,045,058)            (339,351)             (27,411)
  Proceeds from sale of property and equipment                             4,146                   --                3,235
                                                                    ------------         ------------         ------------
      Net cash used in investing activities                           (1,040,912)            (339,351)             (24,176)
                                                                    ------------         ------------         ------------

Cash flows from financing activities:
  Convertible notes                                                    1,071,667                   --                   --
  Capital leases, net                                                     18,836                   --                   --
  Redemption of Series A preferred stock                                      --                   --             (165,653)
  Net proceeds from the issuance of preferred stock                           --                   --            3,751,180
  Net proceeds from issuance of common stock                           3,466,665           11,100,453            8,799,012
                                                                    ------------         ------------         ------------
      Net cash provided by financing activities                        4,557,168           11,100,453           12,384,539
                                                                    ------------         ------------         ------------

Cash flows from discontinued operations                                       --              517,599              642,315
                                                                    ------------         ------------         ------------

Net increase (decrease) in cash and cash  equivalents                (11,049,727)           3,404,083            6,010,684


Cash and cash equivalents at beginning of year                        11,059,061            7,654,978            1,644,294
                                                                    ------------         ------------         ------------

Cash and cash equivalents at end of year                            $      9,334         $ 11,059,061         $  7,654,978
                                                                    ============         ============         ============

Supplemental Disclosure:
     Interest income (expense)                                      $   (616,932)        $    395,078         $    129,624
     Taxes paid                                                     $         --         $         --         $         --
</TABLE>

See accompanying notes to financial statements.


                                       37
<PAGE>

DATA RACE, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 2001, 2000, and 1999


1) Description of Business and Summary of Significant Accounting Policies

Description of Business

     DATA RACE, Inc. ("Data Race" or the "Company"), currently doing business as
IP AXESS, provides integrated IP based remote work solutions over multiple
access media. The Company's VocalWare(TM) IP client/server product line provides
users in remote locations with simultaneous access to critical corporate
resources including phone, fax, Internet, and E-mail over a single connection
via: DSL, cable modem, LAN, Frame Relay, ATM or high speed dial-up through VPN,
local ISP POP, or PSTN. The Company, after exiting the network multiplexer
business in January 2000, currently operates in one business segment.

Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

     The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

Accounts Receivable

     Accounts receivable as shown is net of allowance for doubtful accounts of
approximately $2,000 and $500 at June 30, 2001 and 2000, respectively.

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.

Property and Equipment

     Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments. Major renewals and
betterments are charged to the property accounts while replacements,
maintenance, and repairs that do not improve or extend the lives of the
respective assets are expensed currently. Depreciation of property and equipment
is provided at amounts calculated to amortize the cost of the assets over their
useful economic lives using the straight-line method for financial reporting
purposes and accelerated methods for income tax purposes. Equipment held under
capital leases and leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset.

     During fiscal year 2001, the Company invested approximately $434,000 in a
new e-business platform in which the Company was unifying its sales, customer
service, MRP and


                                       38
<PAGE>

accounting systems. Implementation of the system had to be abandoned during May
of 2001 due to the Company's financial difficulties and the loss of key
personnel responsible for implementation of the system. The Company recorded as
an asset impairment, approximately $403,000 relating to the e-business platform.
In addition the Company recorded approximately $778,000 in asset impairment on
non-amortized leasehold improvements in August 2001 pertaining to the early
termination of the San Antonio facilities. The Company anticipated this action
as it was consolidating its facilities prior to the close of the fiscal year
ending June 30, 2001. The Company believes its facilities are more than adequate
to meet the current and future needs during fiscal 2002 without modification or
further expense.

Convertible Preferred Securities

     The beneficial conversion features of the Series A, C, D, E and F
Convertible Preferred Stock ("Preferred Stock") have been recognized by
allocating a portion of the proceeds to additional paid-in capital. The amount
allocated to additional paid-in capital consists of the conversion discount on
the Preferred Stock and the value attributed to the warrants. The conversion
discount 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 security
is convertible. Because the security provides for more than one conversion rate,
the computation is made using the conversion terms most beneficial to the
investor, regardless of the actual discount applied upon conversion. The value
of the warrants is calculated using the Black-Scholes option pricing model and
may not correspond to a market value.

     The calculated intrinsic value of the beneficial conversion features of the
Preferred Stock, the offering costs and the premium results in non-cash charges
to the loss available to common shareholders in the computation of loss per
common share over the conversion period. As a result, approximately $ 0,
$236,000, and $3,889,000 in non-cash charges are reflected in the loss per
common share for the years ended June 30, 2001, 2000, and 1999, respectively.

Fair Value of Financial Instruments

     The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and notes payable. The book
value of cash and cash equivalents, accounts receivable, notes receivable,
accounts payable and notes payable are representative of their respective fair
values due to the short-term maturity of those instruments.

     The benefical conversion features of the convertible debentures issued in
May and June 2001 have been recognized by recording additional paid in capital
and interest expense for the year ending June 30, 2001. The amount of the
benefical 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 value of the benefical
conversion is calculate using the Black-Scholes option pricing model and may not
correspond to market value. The May 2001 benefical conversion feature using the
model assuming a risk free rate of return of 4.93% and a volatility of 152.96%
resulted in the company recording a one time charge to additional
paid-in-capital of $685,074 and a corresponding charge to interest expense in
May 2001. The June 2001 benefical conversion feature relating to the June 2001
private placement using the Black-Scholes model assuming a volatility of 166.17%
and risk free rate of return 4.35% resulted in the Company recording a one time
charge to additional paid-in-capital of $ 157.783 and a corresponding charge to
interest expense in June 2001.


                                       39
<PAGE>

Income Taxes

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Revenue Recognition

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

Comprehensive Income

     The Financial Accounting Standards Board ("FASB") issued Statement No. 130,
"Reporting Comprehensive Income", in June of 1997. This statement established
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. For all periods
presented, no elements of comprehensive income exist other than loss from
operations.

Warranty Expense

     The Company generally offers one or two year warranty coverage on the
majority of its products. Warranty costs are accrued and expensed when revenue
is recognized based upon the Company's experience with such costs. As of June
30, 2001, the Company had no accrual for warranty costs.

Research and Development

     All engineering and product research and development expenditures are
charged against operations as incurred. Research and development costs charged
to continuing operations


                                       40
<PAGE>

aggregated approximately $5,000,000, $3,293,000 and $2,385,000 in fiscal 2001,
2000, and 1999, respectively.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

     Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired on this basis, the impairment loss to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.

Stock Based Compensation

     The Company accounts for stock-based compensation using the intrinsic value
method described in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related interpretations (including
FASB Interpretation No. 44). Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
Common Stock at the date of the grant over the amount an employee must pay to
acquire the stock. The Company has adopted the disclosure requirements of SFAS
No. 123, "Accounting for Stock Based Compensation."

     Equity instruments issued to non-employees that are fully vested and
non-forfeitable are measured at fair value at the issuance date and expensed in
the period over which the benefit is expected to be received. Equity instruments
issued to non-employees which are either unvested or forfeitable, for which
counter-party performance is required for the equity instrument to be earned,
are measured initially at fair value and subsequently adjusted for changes in
fair value until the earlier of: (1) the date at which a commitment for
performance is required for performance by the counter-party to earn the equity
instrument is reached, or (2) the date of which the counter-party's performance
is complete.

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 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.
Potentially dilutive securities are excluded from the computation of diluted
earnings/loss per share when their inclusion would be antidilutive. The Company
had approximately 3,434,000 and 2,734,000 options outstanding as of June 30,
2001 and 2000, respectively. The Company had no preferred stock outstanding as
of June 30, 2001 and 2000. As of June 30, 2001, the Company had warrants
outstanding to purchase 20,575,180 shares of common stock. As of June 30, 2000
the Company had warrants outstanding to purchase 2,808,139 shares of common
stock.

New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the pooling of interest method of
accounting is no longer allowed for business combinations and goodwill and other
intangible assets deemed to have indefinite lives will no


                                       41
<PAGE>

longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives.

     In August 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, (FASB 144) which is effective for fiscal years
beginning after December 15, 2001. FASB 144 supercedes FASB 121 on the
impairment of long-lived assets and certain reporting provision of APB 30
dealing with the disposal of a business segment.

2) Discontinued Operations

     The Board of Directors approved discontinuing the network multiplexer
product business segment in January 2000. Accordingly, the financial statements
for the years ended June 30, 2000 and 1999 reflect the operations of the
multiplexer product business as a discontinued operation. The Company sold its
network multiplexer business to HT Communications in March 2000 for $350,000.
The Company to date has received approximately $6,000 in principal payments and
$4,500 in royalty payments. The Company is in the process of filing suit against
HT Communications demanding payment on the past due balances. Due to defaults
upon the agreement between the Company and HT communications, the Company
removed the unrecognized portion of the deferred gain in the amount of $331,601
from its books along with the associated note receivable balance.

3) 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. As shown in the
financial statements, the Company incurred a substantial loss of $16,775,750 for
the year ended June 30, 2001 and has incurred losses for each of the preceding 2
years. At June 30, 2001, current liabilities exceed current assets by
$1,274,179, total liabilities exceed total assets by $561,814 and the
accumulated deficit aggregated $72,527,944. 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. See ITEM 1 BUSINESS - Certain Business
Risks - We Will Need Additional Capital to Sustain Operations and footnote 10,
Shareholders' Equity - Equity Line of Credit.

     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 (subsequent to the balance sheet date) the Company
decreased its overhead through payroll reductions and related benefit costs
(reducing its workforce from 77 employees to 6 employees). Management is also
currently consolidating operations into one location thereby effecting savings
on rent and associated facility costs. The Company believes


                                       42
<PAGE>

that these cost reductions and the raising of additional financing will allow
them to continue in existence.

4) Accounts Receivable and Major Customers

     During fiscal 2001 aggregate revenues from shipments to three customers
represented 85% of total revenues. Revenue from shipments to and fees from
Sabratek (a significant customer) represented 65.2% and 50% of revenue from
continuing operations for fiscal 2000 and 1999, respectively. Credit limits,
ongoing credit evaluation, and account-monitoring procedures are used by the
Company to minimize the risk of loss on accounts receivable. Generally,
collateral is not required. Export revenues were 4% of total revenue for fiscal
1999. Export revenues were not significant during fiscal 2001 or fiscal 2000.

5) Inventory

Inventory consists of the following:

                                          June 30, 2001        June 30, 2000
                                          -------------        -------------
     Finished goods ..................     $1,054,557           $  138,014
     Work in progress ................        322,797               80,151
     Raw materials ...................      1,499,152               31,711
                                           ----------           ----------
          Total net inventory ........     $2,876,506           $  249,876
                                           ==========           ==========

     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.

6) Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                     June 30,       June 30,        Useful
                                                       2001           2000          Lives
                                                   -----------    -----------     ----------
<S>                                                <C>            <C>             <C>
     Leasehold improvements ...................    $      --      $ 1,560,385
     Furniture, fixtures and equipment ........      3,103,959      2,345,925     2 - 5 yrs.
                                                   -----------    -----------
                                                     3,103,959      3,906,310
     Accumulated depreciation .................     (2,429,161)    (2,670,391)
                                                   -----------    -----------
         Total property and equipment .........    $   674,798    $ 1,235,919
                                                   ===========    ===========
</TABLE>

     Because the Company terminated the lease for the San Antonio, Texas
facility after the close of its fiscal year 2001 (August, 2001), the Company
elected to record an asset impairment for the San Antonio leasehold improvements
resulting in a loss of $778,278. The Company also wrote off $402,700 in impaired
assets relating to its inability to further proceed with the implementation of
its new e-business integrated operating platform. The e-business platform was to
internally unify the Company's sales, customer service, material resources
planning (MRP) and accounting systems activities. The cost of this operating
platform consisted of the cost to acquire servers, associate server software,
applications software, initial training and external consultant implementation.
Implementation of the system had to be abandoned during May of 2001 due to
financial difficulties and the loss of key personnel responsible for
implementing this system. The total impairment loss of $1,180,978 is included in
General and Administration expenses.


                                       43
<PAGE>

7) Accrued Expenses

Accrued expenses consists of the following:

                                         June 30, 2001      June 30, 2000
                                         --------------------------------
Deferred gain ........................     $   --             $334,788
Payroll ..............................      399,651            215,833
Accrued vacation .....................      133,764             82,164
Other ................................      104,752            327,561
                                         --------------------------------
     Total accrued expenses ..........     $638,167           $960,346
                                         ================================

     Due to defaults upon the agreement between the Company and HT
communications, the Company removed the unrecognized portion of the deferred
gain in the amount of $331,601 from its books along with the associated note
receivable (see Note 2).

8) Income Taxes

     As a result of operating losses sustained, there was no income tax expense
(benefit) for the fiscal years ended June 30, 2001, 2000 and 1999. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at June 30, 2001 and 2000 are presented
below:

<TABLE>
<CAPTION>
                                                                                  June 30,
                                                                                 ---------------------------------
                                                                                     2001                 2000
                                                                                 ------------         ------------
<S>                                                                              <C>                  <C>
Deferred tax assets:
     Accounts receivable due to allowances for financial reporting
           purposes ..........................................................   $        700         $        192
     Inventory, principally due to write-down for financial reporting
           purposes ..........................................................        327,800              208,312
     Property and equipment, due to difference in depreciation ...............         67,300              223,007
     Accrued expenses ........................................................        168,500              128,240
     Net operating loss carryforwards ........................................     24,396,100           19,514,286
     Alternative minimum tax credit carryforwards ............................         93,700               83,645
     Research and experimentation credit carryforwards .......................        881,600              678,176
     Other, net ..............................................................           --                  4,068
                                                                                 ------------         ------------
         Total gross deferred tax assets .....................................     25,935,700           20,839,926
         Less valuation allowance ............................................    (25,935,700)         (20,839,926)
                                                                                 ------------         ------------
         Net deferred tax asset ..............................................   $       --           $       --
                                                                                 ============         ============
</TABLE>

     The valuation allowance related to deferred tax assets increased by
approximately $5,096,000 and $3,040,000 during the years ended June 30, 2001 and
2000, respectively.

     In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based upon the level of
historical taxable income, management has provided a 100% valuation allowance
for the Company's deferred tax assets at June 30, 2001. The amount of the
deferred tax asset considered realizable, however, could fluctuate in the near
term if estimates of future taxable income during the carryforward period are
adjusted.

     Reconciliation of the U.S. Federal statutory rate to the Company's
effective tax rate for each fiscal year is as follows:

<TABLE>
<CAPTION>
                                                                         2001          2000          1999
                                                                       -------       -------       -------
<S>                                                                       <C>           <C>           <C>
     U. S. Federal statutory rate ................................        34.0%         34.0%         34.0%
     Increase (reduction) in income taxes resulting from:
     Provision for valuation allowance ...........................       (34.0)        (34.0)        (34.0)
                                                                       -------       -------       -------
     Net effective tax rate ......................................        --            --            --
                                                                       =======       =======       =======
</TABLE>


                                       44
<PAGE>

     At June 30, 2001, the Company had net operating loss ("NOL") carryforwards
for federal and state income tax purposes of approximately $70,980,000, which
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.

9) Convertible Debentures

May 2001 Private Placement of Convertible Notes

     In May 2001 the Company issued two 10% secured convertible promissory notes
with principal amounts, in the aggregate, of $700,000, and 1,166,667 common
stock purchase warrants. The notes mature one year from their date of issuance.
The notes and warrants were issued pursuant to Section 4(2) of the Securities
Act, as amended, in equal amounts to two accredited investors. The proceeds to
the Company from the sale of the notes was $700,000. The Company used the
proceeds from the private placement primarily for general corporate purposes.
The notes are convertible at any time at the holders option into common stock at
$0.30 per share. The warrants of which the total value are $110,179, are
exercisable at a price of $0.30 per share through May 2006.

June 2001 Private Placement of Convertible Debentures

     On June 12, 2001 the Company signed an agreement to place up to $1 million
in 6% convertible debentures and warrants to two accredited investors. The
parties amended the agreement on July 17, 2001 and October 18, 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, as
amended, and pursuant to Section 4(2) of the Securities Act of 1933, as amended,
the Company issued to the investors $500,000 principal amount of convertible
debentures on June 18, 2001, $240,000 principal amount of convertible debentures
on July 30, 2001, $130,000 principal amount of convertible debentures on
September 6, 2001 and $277,499 principal amount of convertible debentures on
October 18, 2001. On June 18, 2001, the Company also issued to the investors
common stock purchase warrants to purchase up to 1,000,000 shares of common
stock at an exercise price of $0.14. On October 18, 2001 the parties amended the
agreement to increase the investment amount by $147,499 and the Company granted
to the investors a security interest in all of the assets of the Company
covering all prior and future indebtedness of the Company to the investors. We
have received proceeds from the sale of the convertible debentures equal to
$1,147,499 less $80,000 to Hadrian Investments Limited for placement agent fees,
or 8% of the proceeds received for the first $1,000,000 principal amount of
convertible debentures issued to the investors, and less $25,000 to cover the
legal expenses of the investors. We currently owe Hadrian Investments Limited an
additional $11,799.92 in connection with this financing, or 8% of the last
$147,499 convertible debentures issued to the investors. 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


                                       45
<PAGE>

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.

10) Shareholders' Equity

Equity Line of Credit

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

March 2001 Private Placement

     On March 2, 2001, the Company completed a Section 4(2) private placement of
3,047,620 shares of its common stock, and warrants to purchase 304,762 shares of
common stock to three accredited investors, Protius Overseas Limited, Keyway
Investments Ltd., and Lionhart Investments Ltd., for an aggregate price of
$2,000,000. The warrants are exercisable at a price of $0.9875 per share through
March 2, 2006. The Company used the proceeds from the private placement
primarily for general corporate purposes.

     The Company has agreed to file a registration statement under the
Securities Act of 1933, covering the resale of the common shares and the shares
of common stock issuable upon exercise of the warrants. The Company has
incurred, and continues to incur, certain penalties since the registration
statement was not declared effective by May 31, 2001. 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 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, (i) the Company granted to the
Investors a right of first refusal to purchase additional securities issued by
the Company (subject to certain exceptions) prior to August 29, 2001 and (ii)
agreed to reduce to $0.9875 the exercise price of warrants to purchase an
aggregate of 1,265,317 shares of the Company's Common Stock issued in connection
with the Company's June 1999 and December 1999 private placements and to extend
the term of these warrants for two years to December 10, 2003.


                                       46
<PAGE>

June 2000 Private Placement

     On June 13, 2000, the Company completed a private placement of 1,572,738
shares of its common stock and warrants to purchase 471,822 shares of common
stock to six institutional investors including three investors from the
Company's June 1999 and December 1999 private placements for an aggregate price
of $6,000,000. Each warrant entitles the holder to purchase one share of common
stock at an exercise price of $5.45 at any time through June 12, 2002.

December 1999 Private Placement

     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. Each warrant entitles the holder to purchase one share of common
stock at an exercise price of $3.00 through December 10, 2001.

June 1999 Private Placement

     In June 1999, the Company completed a private placement of 2,132,955 shares
of its common stock, and warrants to purchase 693,888 shares of common stock to
three institutional investors for an aggregate price of $6,000,000. Each
investor purchased one-third of the securities issued in the private placement.
Each warrant entitles the holder to purchase one share of common stock at an
exercise price of $4.02 through June 2001.

November 1998 Private Placement

     In November 1998, the Company obtained a binding commitment for a private
placement (the "November Private Placement") of its restricted common stock and
common stock purchase warrants to up to five accredited investors, for an
aggregate price of $2,200,000. The purchase price for one share of common stock
and one warrant was $2.25. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of $2.25 per share, at any time on or
before the second anniversary of the closing date.

     The investors included the Company's former President and CEO and Liviakis
Financial Communications Inc. ("LFC").

Series E & F Convertible Preferred Stock

     In July 1998, the Company completed the first closing of a private
placement of its Series E Convertible Preferred Stock ("Series E Preferred
Stock") and related Common Stock Purchase Warrants ("Class B Warrants") to First
Capital Group of Texas L.P. (the "Class B Investor"), an investment firm managed
by the Company's Chairman of the Board, at an aggregate price of $750,000. In
January 1999, the Company completed the second closing of the private placement
of its Series F Convertible Preferred Stock (Series F Preferred Stock) and
related Class B Warrants to the Class B Investor for an aggregate price of
$750,000.

     In June 2000 all of the 750 shares of Series E Preferred Stock and 750
shares of Series F Preferred Stock had been converted and all the Class B
Warrants were exercised.

Warrants

     In June 2001, the Company issued 1,000,000 warrants in conjunction with the
6% convertible debentures totaling $1,000,000. The warrants are exercisable at a
price of $0.14 per share through June 2004.

     In May 2001, the Company issued 1,166,667 warrants in conjunction with 10%
secured convertible promissory notes totaling $700,000. The warrants are
exercisable at a price of $0.30 per share through May 2006.


                                       47
<PAGE>

     In March 2001, the Company issued 304,762 warrants at $0.9875 to acquire
its common stock in conjunction with its private placement.

     Also, in connection with the private placement of common stock and warrants
to acquire common stock for proceeds of $2 million in March 2001, the Company
agreed to modify the terms of pre-existing warrants to acquire an aggregate of
1,265,317 shares of the Company's common stock. The Company reduced the strike
price of these warrants from a weighted-average amount of $3.56 to $0.98 per
share, and extended the expiration date of the warrants from December 2001 to
December 2003. The change in the fair value of these warrants as a result of the
modifications is $687,394, which has been recorded as a cost of the issuance of
the common stock and related warrants.

     In September 2000, the Company issued 210,222 shares of its common stock in
conjunction with the exercise of 210,222 warrants from the November 1998 private
placement. In a cashless exercise, the Company issued 297,313 shares of its
common stock as result of the exercise of 690,333 warrants. The remaining 56,110
warrants balance of the November 1998 private placement expired in November
2000. In November 2000, the remaining balance of Series C Warrants expired.

     In July 2000, remaining warrants for the class A and B first and second
close expired.

     The following table shows the outstanding warrants for each of the fiscal
years ending June 30, 2001, 2000 and 1999 respectively. Each warrant in the
table is convertible to one share of the Company's common stock for the
indicated price.

<TABLE>
<CAPTION>
Warrants outstanding as of June 30,           2001           2000            1999          Price       Expiration
-----------------------------------           ----           ----            ----          -----       ----------
<S>                                        <C>            <C>             <C>            <C>           <C>
June 2001 6% convertible debentures         1,000,000          --              --        $  0.14        Jun. 2004
May 2001 10% convertible notes              1,166,667          --              --           0.30         May 2006
March 2001 private placement                  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         693,888         0.9875      Dec. 2003
November 1998 private placement                  --         956,655       1,001,109         2.25        Nov. 2000
Series C Warrants                                --          53,977          53,977         6.435       Nov. 2000
Class A and B second close                       --          24,968         249,383         0.6625      Jul. 2000
Class A and B first close                        --          35,400          35,400         0.6625      Jul. 2000
Class A and B first and second close             --            --           281,250         0.80        Jul. 2000
Series A warrants                                --            --            25,274        16.375       Jan. 2000
                                           ----------     ---------       ---------

Total warrants outstanding                  4,208,568     2,808,139       2,340,281
                                           ==========     =========       =========
</TABLE>

Stock Option Plans

     Under the Company's existing stock option plans (the "Plans"), stock
options to purchase up to 4,680,842 shares of common stock were originally
authorized to be granted to employees, directors, and certain other persons. As
of June 30, 2001, 3,434,057 stock options covering shares of common stock were
outstanding under the Plans and 1,246,785 shares were available for issuance
upon exercise of options, which may be granted in the future under the Plans.


                                       48
<PAGE>

     Options under the Plans may either be incentive stock options or
non-qualified stock options (except in the case of the Company's non-qualified
stock option plan which permits only the issuance of non-qualified stock
options). Options under the Plans may be granted for a term not to exceed ten
years (five years with respect to incentive stock options granted to any person
having 10% or more voting power of the Company) and are not transferable other
than by will or the laws of descent and distribution. Incentive stock options
may be exercised within 90 days after the optionee's termination of employment
(to the extent exercisable prior to such termination), and one year after the
optionee's disability. The exercise price of the options under the Plans must be
at least equal to the fair market value of the common stock on the date of
grant, or 110% of such value for incentive stock options granted to any person
having 10% or more of the voting power of the Company. The aggregate fair market
value of the common stock for which any employee may be granted incentive stock
options that first become exercisable in any one calendar year may not exceed
$100,000. Options may be exercised by payment of cash or by tender of shares of
common stock (valued at their then current market value). The Compensation
Committee of the Board of Directors administers the Plans.

     On December 10, 1998, the Compensation Committee and the Board of Directors
authorized and granted the Board of Directors and the Chief Executive Officer of
the Company the right to exchange up to 100% of their outstanding options, both
vested and unvested, for replacement options at a rate of three replacement
options for every four options surrendered. These replacement options are
exercisable at a price of $3.625 per share (the fair market value at the date of
repricing). A total of 609,500 options were exchanged for 442,125 replacement
options. The replacement options vest in two equal installments on June 10, 1999
and December 10, 1999.

     On September 12, 2000, the Company's Board of Directors adopted the Stock
Option Plan, authorizing the grant of 1,250,000 incentive stock options and
non-qualified stock options to employees, directors and certain other persons.
On November 11, 2000, the shareholders approved the 2000 Stock option plan
authorizing 1,250,000 options for future grants.

     On April 21, 1998, the Board of Directors authorized and granted the
non-officer employees of the Company, the right to exchange up to 100% of their
outstanding options, both vested and unvested, for replacement options at a rate
of one replacement option for each option surrendered. These replacement options
are exercisable at a price of $1.7813 per share (the fair market value at the
date of repricing). A total of 341,604 options were exchanged. Officers, other
than the Chief Executive Officer, were authorized and granted the right to
exchange up to 100% of their outstanding options; both vested and unvested, for
replacement options at a rate of two replacement options for every three options
surrendered. These replacement options are exercisable at a price of $1.7813 per
share (the fair market value at the date of repricing). A total of 294,750
options were exchanged for 196,499 replacement options. The replacement options
vest in two equal installments on October 21, 1998 and April 21, 1999.

     A summary of option activity under the Plans for the fiscal years ended
June 30, 2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                      2001                        2000                        1999
                                     ------------------------    ------------------------    ------------------------
                                                    Weighted                    Weighted                    Weighted
                                                    Average                     Average                     Average
                                                    Exercise                    Exercise                    Exercise
                                      Shares        Price         Shares        Price         Shares        Price
                                     ----------    ----------    ----------    ----------    ----------    ----------
<S>                                  <C>           <C>            <C>          <C>            <C>          <C>
Outstanding at
beginning of year ..................  2,733,708    $     3.77     1,689,516    $     3.21     1,494,898    $     5.00
Granted ............................  1,555,748          3.86     2,147,650          3.63     1,292,380          3.50
Exercised ..........................    272,142          2.10       565,132          2.28       292,233          2.02
Expired ............................    583,257          4.88       538,326          2.99       805,529          7.86
                                     ----------    ----------    ----------    ----------    ----------    ----------
Outstanding at year
End ................................ $3,434,057    $     3.75     2,733,708    $     3.77     1,689,516    $     3.21
                                     ==========                  ==========                  ==========
Options exercisable at
year end ...........................  2,143,142    $     3.47     1,373,145    $     3.51       911,498    $     2.68
Shares available for
future grant .......................  1,246,785          --         697,784          --         574,758          --
</TABLE>


                                       49
<PAGE>


     The following summarizes information regarding the Company's stock options
outstanding at June 30, 2001:

<TABLE>
<CAPTION>
                                       Weighted Average
Range of                               Remaining         Weighted           Number            Weighted
Exercise              Number           Contractual Life  Average            Exercisable at    Average
Price                 Outstanding      Years             Exercise Price     June 30,  2001    Exercise Price
-------------------  ---------------  ---------------- ------------------  ---------------- ----------------
<S>                     <C>                    <C>             <C>              <C>               <C>
$   .01  - $  1.13        412,046              9.7             $   .62            197,646         $   .14
   1.63  -    2.06        427,070              6.7                1.70            364,568            1.71
   2.50  -    2.94        150,650              8.5                2.69            126,900            2.63
   3.37  -    3.97        694,000              8.0                3.61            647,666            3.59
   4.13       8.88      1,735,291              8.8                5.08            791,362            4.95
  13.00  -   14.50         15,000              4.5               14.00             15,000           14.00
--------- ---------  ---------------  ---------------- ------------------  ---------------- ----------------
$  1.63  - $ 14.50      3,434,057              8.5             $  3.75          2,143,142         $  3.47
========= =========  ===============  ================ ==================  ================ ================
</TABLE>

     The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option and stock purchase plans. Had compensation cost
been recognized consistent with SFAS No. 123, the Company's net loss and loss
per share would have been increased to pro forma amounts indicated below for the
years ended June 30, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                             2001                 2000               1999
                                          ---------------      ---------------    ---------------
<S>                                       <C>                  <C>                <C>
Net loss applicable to
common stock            As Reported       $  (16,775,750)      $   (9,053,356)    $  (12,433,783)
                        Pro Forma            (17,519,425)         (11,699,109)       (13,415,803)

Net diluted loss per    As Reported       $        (0.60)      $        (0.41)    $        (0.77)
share
                        Pro Forma                  (0.63)               (0.53)             (0.83)
</TABLE>

     The per share weighted average value of stock options issued by the Company
during fiscal 2001, 2000 and 1999 was $4.34, $5.81 and $2.80 respectively, on
the date of grant using the Black-Scholes option-pricing model. The Company used
the following weighted-average assumptions to determine the fair value of stock
options granted for the fiscal years ended June 30, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                       Stock                                 Employee Stock
                                       Option Plans                          Purchase Plan

                                       2001         2000         1999        2001          2000         1999
                                      --------------------------------      ---------------------------------
<S>                                   <C>          <C>          <C>         <C>           <C>          <C>
Dividend yield                           0.0%        0.0%         0.0%        0.0%          0.0%         0.0%
Expected volatility                    208.7%      137.3%       142.0%       92.3%         92.3%        92.3%
Risk-free rate of return                4.67%       5.23%         4.7%       4.67%         5.23%         4.7%
Average expected option life          3.6yrs       3.6yrs       3.6yrs      0.5yrs        0.5yrs       0.5yrs
</TABLE>


                                       50
<PAGE>

Consultant and Advisor Stock Plan

     In April of 1999, the Company established a Consultant and Advisor Stock
Plan (the "Consultant and Advisor Stock Plan") for the purpose of providing
incentives to and compensating consultants and advisors for their contributions
to the Company. In June 2001 the Company amended the plan by increasing the
number of shares issuable under the plan from 500,000 shares to 1,000,000 shares
of the Company's common stock.

     Under the Consultant and Advisor Stock Plan, the Company may issue up to an
aggregate of 1,000,000 shares of Common Stock to consultants and advisors whom
are natural persons providing bona fide services to the Company. Shares may not
be issued under the Consultant and Advisor Stock Plan to directors or officers
of the Company, or for services rendered in promoting or maintaining a market in
the Company's securities.

     The Company recognizes as expense the market value of shares on the day of
issuance for such consulting services as the recipients generally sold the
shares upon issuance. The Company does not amortize additional compensation
expense for this plan. For the years ended June 30, 2000 and 1999, the Company
issued approximately 190,000 and 100,000 shares of common stock with a value of
approximately $520,000 and $428,000 respectively. The company did not issue any
other shares in conjunction with this plan for the year ending June 30, 2001.

11) Commitments

     The Company's facilities consisted of three buildings of approximately
21,000, 29,000 and 10,000 square feet, which are subject to ten, seven and five
year operating leases, respectively. The total net rent expense charged to
operations was approximately $290,000, $282,000, and $286,000, in fiscal 2001,
2000, and 1999 respectively.

     In September 2000, the company sublet 29,000 square feet of its San
Antonio, Texas facilities to Teftec, Inc. a nonaffiliated company with the
approval of Crow Holdings Company, the company's landlord. In fiscal 2001, the
company received $125,000 in rents from Teftec resulting in net rent expense of
$290,000 for fiscal 2001, for all leased facilities.

     The following is a schedule of future minimum lease payments under
non-cancelable operating leases as of June 30, for each fiscal year shown below:

                                              Operating
           Fiscal year ending June 30,         Leases
           ----------------------------     -----------
             2002......................     $   387,000
             2003......................         347,000
             2004......................         229,000
             2005......................         229,000
             Thereafter................         148,000
                                            -----------
                                            $ 1,340,000
                                            ===========

     During fiscal year 2001, the company entered into three capital leases for
capital equipment. A summary is presented below for all capital leases including
provisions for interest. Each lease may be bought out at the end of its term for
$1.00

                                                                  Capital
           Fiscal year ending June 30,                            Leases
           ------------------------------------                -----------
             2002..............................                $   141,000
             2003..............................                     42,000
             2004..............................                     21,000
                                                               -----------
             Total future payments for capital leased              204,000
             Less interest under capital lease obligations         (32,000)
                                                               -----------
             Net present value of capital leases               $   172,000


                                       51
<PAGE>

     Each leased asset is depreciated over the life of the lease. The maximum
lease term is 36 months. Prior to June 30, 2001 the Company recorded asset
impairment for these leases since completing the original lease obligation will
be dependent upon additional cash being generated by the Company. The company is
also responsible for all property taxes that may be assessed from time to time
per the agreement.

12) Related Party Transactions

     Certain outside directors also receive consulting fees for services
rendered from time to time to the Company. In fiscal 1999, no such person
received in excess of $60,000 for such services. In fiscal 2001 and fiscal 2000,
First Capital Group of Texas II, L.P., an investment firm managed by Jeffery P.
Blanchard, the Company's Chairman of the Board, respectively received $74,000
and $71,000 in consulting fees. In February 2001, the Company received a 30-day
loan from First Capital Group of Texas II, L.P in the amount of $150,000 that
the Company repaid in March including a nominal amount of interest. In May 2001
First Capital Group of Texas II, L.P., as part of the Company's May private
placement, invested $350,000 in the form of a convertible promissory note (see
Note 9.)

     In July 1998, and January 1999, the Company completed the first and second
closings respectively, of a Private Placement (see Note 9) involving, among
other things, the sale of its Series E and F Preferred Stock and related Common
Stock Purchase Warrants to First Capital Group of Texas II, L.P., an investment
firm managed by Jeffery P. Blanchard, the Company's Chairman of the Board, at an
aggregate amount of $750,000 for each closing.

     In fiscal 2000, two officers resigned their positions with the Company. The
total severance and retirement package was approximately $480,000 and was
recorded as an expense in fiscal 2000.

13) Employee Benefit Plans

     Effective March 1, 1992, the Company adopted the DATA RACE, Inc. 401(k)
Plan under section 401(k) of the Internal Revenue Code of 1986, as amended.
Under the Plan, substantially all employees eligible to participate may elect to
contribute up to the lesser of 15% of their salary or the maximum allowed under
the Code. All full time employees with at least one year of continuous service
and who have completed 1,000 work hours are eligible for the Plan. The Company
may elect to make contributions to the Plan at the discretion of the Board of
Directors. The Company made contributions of approximately $76,000 in fiscal
2001, $65,000 in fiscal 2000, and $68,000 in fiscal 1999. Subsequent to the
close of its fiscal year on June 30, 2001, the Company terminated its 401k plan
through board of director resolution on July 13, 2001. For the quarter ending
June 30, 2001, the company opted not to match employee contributions.

     In December 1993, the Company adopted the DATA RACE, Inc. Employee Stock
Purchase Plan ("ESPP") pursuant to which eligible employees may purchase up to
an aggregate of 200,000 shares of the Company's common stock at 85% of the fair
market value of the common stock through payroll deductions. In 1997, the ESPP
was amended to offer two consecutive six-month plan periods, beginning February
1 and August 1, respectively. Of the 200,000 shares available in this Plan,
approximately 194,000 shares have been purchased as of June 30, 2001.


                                       52
<PAGE>

14) Legal Matters

     On May 18, 2001, the Company, executive officers, Michael McDonnell,
previously the President and Chief Executive Officer (resigned in July 2001),
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.

     The Company is not aware of any other legal matters.

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

     On November 20, 2000, KPMG, the Company's auditors who performed audit work
on the Company's financial statements for the fiscal years ending June 30, 2000
and June 30, 1999 contained herein, resigned. The resignation was the result of
an initial dispute concerning revenue recognition for the quarter ending
September 30, 2000. In filing the Company's 10-Q for the quarter ending
September 30, 2000, the Company resolved the dispute by reporting revenue as
recommended by KPMG.

     Deloitte & Touche LLP was previously the principal accountants for the
Company for the period from January 10, 2001 through October 4, 2001. Deloitte &
Touche LLP had issued no reports with respect to the Company during this period.
On October 4, 2001, Deloitte & Touche LLP resigned.

     During the Company's interim quarterly periods ended December 31, 2000 and
March 31, 2001, there were no disagreements between the Company and Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to their satisfaction would have caused them to make reference in
connection with their review to the subject matter of the disagreement.

     On October 12, 2001, the Company appointed and engaged Lazar Levine & Felix
LLP ("Lazar") as the Company's principal independent public accountant. The
Company has not directly or indirectly during its two most recent fiscal years
or during the subsequent interim period prior to appointing Lazar consulted
Lazar regarding (a) either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, or (b) any
matter that was either the subject of a disagreement with the Company's prior
principal independent auditors KPMG, LLP, or Deloitte & Touche LLP, or a
reportable event.

     All changes in accountants where approved by the Company's Board of
Directors.

     The Company has no disputes resolved or unresolved with its current or
previous auditors.


                                       53
<PAGE>


                                    PART III*

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information concerning the current
directors and executive officers of the Company:

                Name                  Age           Position with Company
                ----                  ---           ---------------------
James G. Scogin....................   40      Acting President, Chief Financial
                                              Officer, Secretary and Treasurer

Michael A. McDonnell...............   46      President, Chief Executive Officer
                                              and Director
Jeffrey C. Kissell.................   46      Senior Vice President of Product
                                              and Business Development

Bradley Frohman....................   40      Vice President of Engineering
Jeffrey P. Blanchard...............   48      Chairman of the Board of Directors
General Harold "Buck" Adams........           Director
Thomas Bishop......................   47      Director
George R. Grumbles.................   67      Director
Matthew A. Kenny...................   68      Director
Byron Smith........................   46      Director

     Michael A. McDonnell had served as President, Chief Executive Officer and
Director since April 2000 and as Chief Operating Officer since joining the
Company in November 1999. Prior to joining the Company, Mr. McDonnell served as
a vice president and general manager of GTE Communications Corporation ("GTE")
for three years. While employed by GTE, Mr. McDonnell was a member of a business
unit development team instrumental in creating a billion-dollar division focused
on the delivery of integrated communication services available across GTE's
strategic business units. From 1993 to 1996 Mr. McDonnell was a national
director with NEC America, were he assisted in the creation and launch of NEC's
Computer Telephony Integration initiative, along with growing the Video Sales
unit, and Data Communications group. He holds a BA degree from San Diego State
University. Mr. McDonnell resigned from the Company and his Board position in
July 2001.

     James G. Scogin has served as Acting President and Chief Financial Officer
since July 2001 and Senior Vice President-Finance, Chief Financial Officer,
Secretary and Treasurer since January 2000. The Company has employed Mr. Scogin
since 1997 when he joined the Company as Controller. Prior to joining the
Company, Mr. Scogin was Vice President-Controller, Treasurer, Secretary and
Chief Accounting Officer of 50-OFF Stores, Inc. in San Antonio, Texas from 1992
to 1997. He holds a BBA from Baylor University and is a CPA.

     Jeffrey C. Kissell joined the Company as Senior Vice President, Product and
Business Development in July 2000. Prior to joining the Company, Mr. Kissell
served as Vice President of National Marketing for GTE Service Corporation
("GTES"). Mr. Kissell held various senior management positions with GTES during
his 22-year career there. Mr. Kissell's responsibilities included the
development of marketing programs, product design, pricing and distribution for
GTES's domestic operations. He holds a BA degree from St. Francis College, a MBA
from Indiana University and is a CPA. Mr. Kissell resigned from the Company in
June 2001.

     Bradley L. Frohman joined the Company as Vice President of Engineering in
July 2000. Prior to joining the Company, Mr. Frohman served as director of
advanced wireless infrastructure products for Motorola, Inc. ("Motorola"). Mr.
Frohman's responsibilities at Motorola during his 10-year career were exploring
and delivering prototypes for cellular VoIP, distributed processing environments
and multi-RF technologies on IP networks. He holds a BS degree in computer
science and mathematical science from Vanderbilt University and a MS


                                       54
<PAGE>

degree in computer science from Johns Hopkins University. Mr. Frohman resigned
from the Company in July 2001.

     Jeffrey P. Blanchard has served as a Director of the Company since August
1985 and as Chairman of the Board of Directors since October 1996. Mr. Blanchard
has been the Managing Director of First Capital Group of Texas, Ltd., since
January 1984. Since September 1995, Mr. Blanchard has been the Managing Director
of First Capital Group of Texas II, L.P., an investment firm which provides
private equity to middle-market companies throughout the Southwest United
States. From January 1989 to December 1994, Mr. Blanchard served as Vice
President and Investment Manager of Victoria Capital Corporation, a venture
capital investment company.

     General Harold "Buck" Adams was appointed to the Board of Directors in
February 2001. General Adams is a retired Brigadier General of the Air Force.

     Thomas Bishop was appointed to the Board of Directors in January 2000. Mr.
Bishop is the Chief Executive Officer of Compu-Care Management Systems, Inc., an
Internet-based application service provider. Prior to joining Compu-Care, Mr.
Bishop served as Vice President of Development and Chief Technology Officer for
Tivoli Systems.

     Matthew A. Kenny was elected to the Board of Directors in February 1995.
From 1984 until 1989, Mr. Kenny was President and CEO of RACAL-MILGO. Mr. Kenny
joined MILGO in 1968. From 1989 to 1993, Mr. Kenny was Chairman of the Board and
CEO of Physical Health Devices, Inc. From 1989 to the present, he has been a
managing partner in Venture Solutions, and since 1994 he has been President and
CEO of Core Technology Development, Inc., Fort Lauderdale, Florida.

     George R. Grumbles was appointed to the Board of Directors in February
1995. From 1985 until his retirement in 1993, Mr. Grumbles served as a Vice
President of Motorola and the President and CEO of Universal Data Systems, which
he joined in 1972.

     Byron Smith was appointed to the Board of Directors in January 2000. Mr.
Smith was the Executive Vice President, Consumer Broadband Services and Chief
Marketing Officer at Excite@Home. Mr. Smith oversaw the @Home Service, media
sales, engineering and operations, Excite Studios, @Home Solutions, affiliate
marketing with cable partner, Customer Care, and all marketing for Excite@Home.


                                       55
<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

     The Summary Compensation Table shows certain compensation information for
the fiscal years ended June 30, 2001, 2000 and 1999, for the Chief Executive
Officer and of the three most highly compensated executive officers (hereinafter
referred to as the "named executive officers").

<TABLE>
<CAPTION>
                                             Summary Compensation Table

                                               Annual Compensation                Long-Term
                                               -------------------               Compensation
                                                                                    Awards
                                                                                    ------

                                                                                  Securities
                                                     Base Salary                  Underlying        All Other
                                      Year               ($)       Bonus ($)       Options (#)    Compensation ($)
                                      ----               ---       ---------       -----------    ----------------
<S>                                   <C>           <C>             <C>             <C>              <C>
Michael A. McDonnell.............     2001          $330,000(2)     $37,337         184,536          $5,250(1)
President and CEO                     2000           207,019(3)          --         250,000

Jeffery Kissell..................     2001           116,875(4)      13,184          70,405              --
Senior Vice President of Product
and Business Development


Bradley Frohman..................     2001           134,262(5)      11,984          55,959           2,102(1)
Vice President of Engineering

James G. Scogin..................     2001           132,500         11,583          67,928          27,414(6)
Senior Vice President, Chief          2000           103,030             --         145,000           3,017(1)
Operating and Financial Officer,      1999            80,500             --          15,000           1,946(1)
Secretary and Treasurer
</TABLE>

----------

(1)  Represents contributions made by the Company under the Company's 401(k)
     plan.

(2)  Mr. McDonnell resigned from the Company in July 2001.

(3)  Represents compensation from commencement of employment on November 23,
     1999.

(4)  Represents compensation from commencement of employment on July 17, 2000
     until his resignation from the Company on June 14, 2001.

(5)  Represents compensation from commencement of employment on July 3, 2000
     until his resignation from the Company in July 2001.

(6)  Represents a $25,000 relocation payment and $2,414 in contributions made by
     the Company under the Company's 401(k) plan.

     Perquisites and other personal benefits did not exceed the lesser of either
$50,000 or 10% of the total annual salary and bonus reported for any named
executive officer.

Director Compensation

     Outside directors each receive compensation of $1,000 for each Board of
Directors meeting attended. Outside directors are eligible to receive options
under the Company's stock option plans and are automatically granted options
under the Company's 1999 stock option plan. Outside directors are reimbursed for
their out-of-pocket expenses involved in connection with their services as
directors. Certain outside directors also receive consulting fees for services
rendered from time to time to the Company. In fiscal 2001, no such person
received in excess of $60,000 for such services, except for First Capital Group
of Texas Ltd., of which Mr. Blanchard is the Managing Director, received
approximately $74,000 for consulting services.


                                       56
<PAGE>

Employment Agreements

     The Company does not have written employee agreements with the officers of
the Company. The officers of the Company are employed on an "at will basis".

Consultant and Advisor Stock Plan

     In April 1999, the Company established a Consultant and Advisor Stock Plan
for the purpose of providing incentives to and compensating consultants and
advisors for their contributions to the Company. In June 2001 the Company
amended the plan by increasing the number of shares issuable under the plan from
500,000 shares to 1,000,000 shares of the Company's common stock.

     Under the Consultant and Advisor Stock Plan, the Company may issue up to an
aggregate of 1,000,000 shares of Common Stock to consultants and advisors who
are natural persons providing bona fide services to the Company. Shares may not
be issued under the Consultant and Advisor Stock Plan to directors or officers
of the Company, or for services rendered in promoting or maintaining a market in
the Company's securities. The number and type of shares issuable under the
Consultant and Advisor Stock Plan are subject to appropriate adjustment for
stock splits, stock dividends, mergers, reorganizations and other similar
capital changes. The Consultant and Advisor Stock Plan is administered by the
Company's Compensation Committee (or the full Board of Directors), which has the
exclusive power to construe and prescribe rules under the plan. The Board of
Directors may at any time modify, amend or terminate the Consultant and Advisor
Stock Plan. As of December 1, 2001, approximately 790,000, shares of common
stock had been issued under the Consultant and Advisor Stock Plan.

Employee Stock Purchase Plan

     The Company has an Employee Stock Purchase Plan structured to qualify under
Section 423 of the Internal Revenue Code of 1986. Under the Employee Stock
Purchase Plan, all full-time employees of the Company possessing less than 5% of
the voting power of the Company may elect to participate in the Purchase Plan
through a payroll deduction program. Under the Employee Stock Purchase Plan,
options to purchase up to 200,000 shares of Company common stock may be granted
to participants. In June 2001, this plan was terminated and no additional shares
were issues since February 1, 2001. As of December 1, 2001, approximately
194,000 shares of common stock had been issued under the Employee Stock Purchase
Plan.

     The Compensation Committee, which administers the Employee Stock Purchase
Plan, establishes offering periods for the Employee Stock Purchase Plan, which
may last up to 24 months. Prior to each offering period, participants may
authorize payroll deductions of up to 20% of their annual compensation. At the
beginning of the offering period, participants are granted an option to purchase
the number of shares of common stock that may be purchased with the total amount
of the participant's payroll deductions taken over the offering period at an
exercise price equal to the lesser of 85% of the fair market value of the common
stock on the first day of the offering period or the last day of the offering
period. Unless the participant has withdrawn from participation, the
participant's option will be exercised automatically on the last day of the
offering period.

     A participant may withdraw from the Purchase Plan at any time during an
offering period. If a participant's employment with the Company terminates for
any reason other than death, disability, or retirement, his or her option to
purchase common stock under the Purchase Plan will immediately terminate, and
the amount of such participant's payroll deductions will be paid to him or her
in cash. If a participant's employment with the Company terminates due to death,
disability, or retirement, such participant (or his or her legal representative)
will have the right to continue participation in the Purchase Plan with respect
to the offering period. No option granted under the Purchase Plan may be
transferred except by will or the laws of descent and distribution.


                                       57
<PAGE>

1997 Nonqualified Employee Stock Option Plan

     Permit NASD grants to non-officer employees and to officers as an
inducement to employment.

Stock Option Plans

     Under the Company's existing stock option plans, as of December 10, 2001,
stock options covering an aggregate of 1,439,270, shares of Common Stock were
outstanding with a weighted average exercise price of $3.67 per share, and an
aggregate of 3,241,572 shares of Common Stock were available for issuance upon
exercise of options that may be granted in the future.

     Options under the option plans may either be incentive stock options or
non-qualified stock options. Options under the option plans may be granted for a
term not to exceed ten years (five years with respect to incentive stock options
granted to any person having 10% or more voting power of the Company) and are
not transferable other than by will or the laws of descent and distribution. The
exercise price of the options under the plans must be at least equal to the fair
market value of the Common Stock on the date of grant, or 110% of such value for
incentive stock options granted to any person having 10% or more of the voting
power of the Company.

     The aggregate fair market value of the Common Stock for which any employee
may be granted incentive stock options, which first become exercisable in any
one calendar year may not exceed $100,000. Options may be exercised by payment
of cash or by tender of shares of common stock (valued at their then current
market value). In the event of a change of control, all unvested options vest
and become exercisable. The Compensation Committee of the Board of Directors
administers the Plans, except that the full Board administers the stock option
grants to members of the Compensation Committee.

Stock Option Grant Table

     The following table sets forth certain information concerning options
granted to the named executive officers during the Company's fiscal year ended
June 30, 2001:

<TABLE>
<CAPTION>
                                           Option Grants in Last Fiscal Year

                                                    Percent of                                  Potential Realizable
                                      Number of        Total                                       Value at Assumed
                                        Shares        Options                                    Annual Rates of Stock
                                      Underlying    Granted to     Exercise or                  Price Appreciation for
                                       Options     Employees in    Base Price    Expiration         Option Term(1)
               Name                    Granted      Fiscal Year      ($/Sh)         Date           5%($)      10%($)
               ----                    -------      -----------      ------         ----           -----      ------
<S>                                   <C>               <C>          <C>         <C>             <C>        <C>
Michael A. McDonnell...........       125,000(2)        8.03%        $5.09       10/02/2010      400,838    1,011,638
                                       59,536(3)        3.83%         0.01       01/02/2011          375          947

Jeffery C. Kissell.............        50,000(2)        3.21%         5.09       10/02/2010      160,500      404,500
                                       20,405(3)        1.31%         0.01       01/02/2011          129          324

Bradley Frohman................        37,500(2)        2.8%          5.09       10/02/2010      120,375      303,491
                                       33,062(2)        2.13%         7.38       10/02/2010      153,718      387,956
                                       18,459(3)        1.19%         0.01       01/02/2011          120          293

James G. Scogin................        50,000(2)        3.21%         5.09       10/02/2010      160,500      404,500
                                       17,928(3)        1.5%          0.01       01/02/2011          113          285
</TABLE>

-----------------
(1)  As required by rules of the SEC, potential values stated are based on the
     assumption that the Company's Common Stock will appreciate in value from
     the date of the grant to the end of the option term (ten years from the
     date of grant) at annualized rates of 5% and 10% (total appreciation of
     approximately 63% and 159%), respectively, and therefore are not intended
     to forecast possible future appreciation, if any, in the price of the
     Common Stock. The exercise price of each option equals the fair market
     value of the Common Stock on the grant date.

(2)  Options vest 10% on October 2, 2000, 40% on October 2, 2001 and remaining
     50% in twelve monthly installments starting November 1, 2001 to October 1,
     2002.

(3)  Options vested 100% on January 2, 2001.


                                       58
<PAGE>


Stock Option Exercises and Holdings Table

     The following table shows stock options exercised by the named executive
officers during the fiscal year ended June 30, 2001, including the aggregate
value of gains on the date of exercise. In addition, the table includes the
number of shares covered by both exercisable and non-exercisable stock options
as of June 30, 2001. Also reported are the values of "in-the-money",
"in-the-money" options, which represent the positive spread between the exercise
price of any such existing stock options and the market price of the Common
Stock price as of June 30, 2001.

               Aggregated Option Exercises in Last Fiscal Year and

                          Fiscal Year End Option Value

<TABLE>
<CAPTION>
                                                              Number of Unexercised         Value of Unexercised
                               Shares                           Options at Fiscal          In-the-Money Options at
                             Acquired on       Value              Year-End (#)               Fiscal Year-End ($)
           Name             Exercise (#)    Realized ($)    Exercisable/Unexercisable   Exercisable/Unexercisable(1)
           ----             ------------    ------------    -------------------------   ----------------------------
<S>                              <C>            <C>              <C>                               <C>
Michael A. McDonnell...          --             --               184,536/450,000                   5,358/0

Jeffery C. Kissell.....          --             --               70,405/100,000                    1841/0

Bradley Frohman........          --             --                89,021/75,000                    1661/0

James G. Scogin........          --             --               67,928/171,500                    1614/0
</TABLE>

------------
(1)  Values stated are based on the last sale price of $.10 per share of the
     Company's common stock on June 30, 2001 the last trading day of the fiscal
     year, and equal the aggregate amount by which the market value of the
     option shares exceeds the exercise price of such options at the end of the
     fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the ownership
of Common Stock as of December 1, 2001 by (i) each person known by the Company
to be the beneficial owner of more than 5% of the outstanding Common Stock; (ii)
each director and director nominee; (iii) each named executive officer and (iv)
all executive officers, directors and nominees as a group. Unless otherwise
noted, each shareholder listed below has sole voting and investment power with
respect to the shares beneficially owned. Options included in the following
table represent options currently exercisable or exercisable within 60 days of
December 1, 2001.

<TABLE>
<CAPTION>
                                                             Number        Percent of
                      Name                                  of Shares         Class
                      ----                                  ---------         -----
<S>                                                        <C>                  <C>
Michael A. McDonnell ...............................              3,000         *
Jeffrey P. Blanchard................................       1,377,325(1)         3.89%
General Harold "Buck" Adams.........................                  0         *
Tom Bishop..........................................          80,000(2)         *
George R. Grumbles..................................         133,125(3)         *
Matthew A. Kenny....................................         133,125(4)         *
Byron Smith ........................................          80,000(5)         *
James G. Scogin ....................................         190,858(6)         *
Jeffrey Kissell ....................................              3,000         *
Bradley Frohman ....................................              1,500         *
All Directors and Executive Officers as a Group
     (10 persons)...................................       1,994,433(7)         5.53.%
Cranshire Capital L.P. (8)..........................       3,618,453(9)         9.7%
(10) Alpha Capital A.G..............................      3,262,257(11)         9.9%
(12) Stonestreet L. P...............................      2,995,616(13)         9.9%
</TABLE>


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<PAGE>


*    Indicates less than 1%.

(1)  Includes 49,375 shares subject to options held by Mr. Blanchard and
     approximately 1,275,000 shares held by First Capital Group of Texas II,
     L.P., an investment fund managed by Mr. Blanchard. Excludes 4,666,666
     shares that are issuable upon conversion of a secured convertible
     promissory note; and 583,333 shares of common stock issuable upon the
     exercise of a warrant. First capital agree not to convert any portion of
     its note or exercise any portion of its warrant unless and until our
     shareholders approve the increase of the number of shares of common stock
     which we are authorized to issue to 130,000,000 shares.

(2)  Includes 80,000 shares subject to options held by Mr. Bishop.

(3)  7Includes 133,125 shares subject to options held by Mr. Grumbles.

(4)  Includes 133,125 shares subject to options held by Mr. Kenny.

(5)  Includes 80,000 shares subject to options held by Mr. Smith.

(6)  189,511 shares subject to options held by Mr. Scogin.

(7)  Includes 665,136 shares subject to options held by such persons.

(8)  Information with respect to the beneficial ownership of such shareholder
     and certain affiliated persons was derived from Schedule 13G filed, January
     22, 2001 by Cranshire Capital L.P., EURAM CAP STRAT. "A" FUND LIMITED,
     Downsview Capital, Inc., JMJ Capital, Inc. and Mitchell P. Kopin. The
     address of such shareholders is 666 Dundee Road, Suite 1901, Northbrook, IL
     60062.

(9)  Includes 1,713,690, shares of common stock obligated to be issued by the
     Company that have not been issued as of December 10, 2001, and excludes
     warrants to purchase 2,921,749 shares of common stock due to exercise
     limitations and restrictions.

(10) Information with respect to the beneficial ownership of such shareholder
     and certain affiliated individuals was derived from Schedule 13G filed on
     July 12, 2001 by Alpha. The address of such shareholder is Lettstrasse 32,
     Furstentum 9490, Vaduz, Liechtenstein.

(11) Includes shares of common stock, shares of common stock underlying the 6%
     convertible debentures and shares of common stock underlying warrants. Both
     the 6% convertible debentures and the warrants preclude the shareholder
     from converting or exercising into a number of shares of common stock to
     the extent the shareholder's beneficial ownership at any time exceeds 9.9%
     of the then issued and outstanding shares of common stock.

(12) Information with respect to the beneficial ownership of such shareholder
     and certain affiliated individuals was derived from Schedule 13G/A filed on
     August 29, 2001 by Stonestreet. The address of such shareholder is 260 Town
     Centre Blvd., Suite 201, Markham, ON L3R 8h8 Canada.

(13) Includes shares of common stock, shares of common stock underlying the 6%
     convertible debentures and shares of common stock underlying warrants. Both
     the 6% convertible debentures and the warrants preclude the shareholder
     from converting or exercising into a number of shares of common stock to
     the extent the shareholder's beneficial ownership at any time exceeds 9.9%
     of the then issued and outstanding shares of common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Certain outside directors also receive consulting fees for services
rendered from time to time to the Company. In fiscal 1999, no such person
received in excess of $60,000 for such services. In fiscal 2001 and fiscal 2000,
First Capital Group of Texas II, L.P., an investment firm managed by Jeffery P.
Blanchard, the Company's Chairman of the Board, respectively received $74,000
and $71,000 in consulting fees. In February 2001, the Company received a 30 day
loan from First Capital Group of Texas II, L.P. in the amount of $150,000 which
the Company repaid in March including a nominal amount of interest. In May 2001
First Capital Group of Texas II, L.P., as part of the Company's May 2001 private
placement, invested approximately $350,000 in the form of a convertible
promissory note (see Note 9 to the financial statements.)

     In July 1998, and January 1999, the Company completed the first and second
closings respectively, of a Private Placement (see Note 10 to the financial
statements) involving, among other things, the sale of its Series E and F
Preferred Stock and related Common Stock Purchase Warrants to First Capital
Group of Texas II, L.P., an investment firm managed by Jeffery P. Blanchard, the
Company's Chairman of the Board, at an aggregate amount of $750,000 for each
closing.


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<PAGE>


                                    PART IV.

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

(a) 1.  Financial Statements

              Independent Auditors' Reports

              Balance Sheets as of June 30, 2001 and 2000

              Statements of Operations for the fiscal years ended June 30, 2001,
              2000, and 1999

              Statements of Shareholders' Equity for the fiscal years ended June
              30, 2001, 2000, and 1999

              Statements of Cash Flows for the fiscal years ended June 30, 2001,
              2000, and 1999

              Notes to Financial Statements

    2.  Financial Statement Schedules

              Schedules are either not required or the necessary information is
              included in the financial statements or notes thereto.

    3.  Exhibits

       3.1    Articles of Amendment to and Restatement of the Articles of
              Incorporation of the Company, filed December 27, 1991. (a)

       3.2    Articles of Correction to Articles of Amendment to and Restatement
              of the Articles of Incorporation of the Company, filed August 13,
              1992. (a)

       3.3    Articles of Amendment to the Articles of Incorporation of the
              Company, filed August 21, 1992. (a)

       3.4    Bylaws of the Company and Amendment to Bylaws. (a)(b)

       3.5    Statement of Resolution Establishing Series B Participating
              Cumulative Preferred Stock. (f)

       3.6    Articles of Amendment to the Articles of Incorporation of the
              Company, filed January 21,1999 (i)

       4.1    Specimen Common Stock Certificate. (a)

       10.1   *401(k) Profit Sharing Plan, effective March 1, 1992. (a)

       10.2   Form of Indemnification Agreement between the Company and each
              director. (c)

       10.3   *Amended and Restated Employee Stock Purchase Plan adopted in
              February 1996. (e)

       10.4   *1994 Stock Option Plan. (d)


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<PAGE>

       10.5   *1995 Stock Option Plan. (e)

       10.6   *1997 Stock Option Plan. (g)

       10.7   *1998 Stock Option Plan. (h)

       10.8   *1999 Stock Option Plan (i)

       10.9   *2000 Stock Option Plan (j)

       10.10  Securities Purchase Agreement dated June 25, 1999, by and among
              DATA RACE, Inc. and Cranshire Capital, L.P., Keyway Investments
              Ltd., and Lionhart Investments Ltd., as the Investors. (k)

       10.11  Registration Rights Agreement dated June 25, 1999, by and among
              DATA RACE, Inc. and Cranshire Capital, L.P., Keyway Investments
              Ltd., and Lionhart Investments Ltd., as the Investors. (k)

       10.12  Warrant Agreements dated June 25, 1999, issued to Cranshire
              Capital, L.P., Keyway Investments Ltd., and Lionhart Investments
              Ltd. (k)

       10.13  Securities Purchase Agreement, dated December 10, 1999, between
              the Company, Cranshire Capital, L.P., Keyway Investments Ltd., and
              Lionhart Investments Ltd. (l)

       10.14  Registration Rights Agreement, dated December 10, 1999, between
              the Company, Cranshire Capital, L.P., Keyway Investments Ltd., and
              Lionhart Investments Ltd. (l)

       10.15  Warrant Agreement dated December 10, 1999 issued to Cranshire
              Capital, L.P., Keyway Investments Ltd., and Lionhart Investments
              Ltd. (l)

       10.16  Securities Purchase Agreement dated June 12, 2000, between the
              Company, Cranshire Capital, L.P., Keyway Investments Ltd.,
              Lionhart Investments Ltd., EURAM Cap Strat. "A" Fund Limited, ICN
              Capital Ltd., and G-Bar Limited Partnership (m)

       10.17  Registration Rights Agreement dated June 12, 2000, between the
              Company, Cranshire Capital, L.P., Keyway Investments Ltd.,
              Lionhart Investments Ltd., EURAM Cap Strat. "A" Fund Limited, ICN
              Capital Ltd., and G-Bar Limited Partnership (m)

       10.18  Warrant Agreement, dated June 12, 2000, between the Company,
              Cranshire Capital, L.P., Keyway Investments Ltd., Lionhart
              Investments Ltd., EURAM Cap Strat. "A" Fund Limited, ICN Capital
              Ltd., and G-Bar Limited Partnership (m)

       10.19  Securities Purchase Agreement dated March 2, 2001, between the
              Company, Protius Overseas Limited, Keyway Investments Ltd., and
              Lionhart Investments Ltd (n)

       10.20  Registration Rights Agreement dated March 2, 2001, between the
              Company, Protius Overseas Limited, Keyway Investments Ltd., and
              Lionhart Investments Ltd (n)

       10.21  Warrant Agreement, dated March 2, 2001, between the Company,
              Protius Overseas Limited, Keyway Investments Ltd., and Lionhart
              Investments Ltd. (n)

       10.22  Consultant and Advisor Stock Plan (l)

       10.23  *Description of Transaction Bonus Plan (l)

       10.24  Convertible Debentures and Warrants Purchase Agreement, dated June
              12, 2001, between the Company, Alpha Capital AG and Stonestreet,
              L.P. (r)


                                       62
<PAGE>

       10.25  Registration Rights Agreement, dated June 12, 2001, between the
              Company, Alpha Capital AG and Stonestreet, L.P. (r)

       10.26  Form of 6% Convertible Debentures issued to Alpha Capital and
              Stonestreet (r)

       10.27  Form of Warrants issued to Alpha Capital and Stonestreet (r)

       10.28  Letter Agreement between the Company, Alpha Capital and
              Stonestreet, dated July 19, 2001 (r)

       10.29  Letter Agreement between the Company, Alpha Capital and
              Stonestreet, dated October 18, 2001 (q)

       10.30  Security Agreement between the Company, Alpha Capital and
              Stonestreet, dated October 18, 2001 (q)

       10.31  Common Stock Purchase Agreement between the Company and Grenville
              Finance Ltd. dated July 26, 2001 (q)

       10.32  Registration Rights Agreement between the Company and Grenville
              Finance Ltd. dated June 13, 2001 (q)

       10.33  Stock Purchase Warrant issued to Grenville Finance Ltd. (q)

       16     Change in certifying accountant (p)

       23.1   Consent of KPMG LLP (q)

       23.2   Consent of Lazar, Levine & Felix, LLP (q)

       24     Powers of Attorney to sign amendments to this report. Reference is
              made to the Signature page of this report.

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

(a)  Filed as an exhibit to Form S-1 Registration Statement No. 33-51170,
     effective October 7, 1992.

(b)  Filed as an exhibit to Form 10-Q for the quarter ended December 31, 1996.

(c)  Filed as an exhibit to Form 10-K Annual Report for fiscal year ended June
     30, 1993.

(d)  Filed as an exhibit to Form 10-K Annual Report for fiscal year ended June
     30, 1995.

(e)  Filed as an exhibit to Form 10-K Annual Report for fiscal year ended June
     30, 1996.

(f)  Filed as an exhibit to Form 10-K Annual Report for fiscal year ended June
     30, 1997.

(g)  Incorporated by reference to appendix A of the Company's Definitive Proxy
     Statement dated December 12, 1997.

(h)  Incorporated by reference to appendix A of the Company's Definitive Proxy
     Statement dated October 14, 1998.

(i)  Incorporated by reference to appendix A of the Company's Definitive Proxy
     Statement dated October 12, 1999.


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<PAGE>

(j)  Incorporated by reference to appendix A of the Company's Definitive Proxy
     Statement dated September 20, 2000.

(k)  Filed as an exhibit to Form 8-K filed on June 25, 1999.

(l)  Filed as an exhibit to Form 8-K filed on December 17, 1999.

(m)  Filed as an exhibit to Form 8-K filed on June 21, 2000.

(n)  Filed as an exhibit to Form 8-K on March 7, 2001.

(o)  Filed as an exhibit to Form 8-K on December 4, 2001.

(p)  Filed as an exhibit on Form 8-K on November 20, 2000.

(q)  Filed herewith.

(r)  Filed as an exhibit on Form 8-K on July 24, 2001.

*    Management contract or compensatory plan, contract or arrangement

(b)  Reports on Form 8-K

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


                                       64

<PAGE>

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereunto duly authorized.

                                       DATA RACE, INC., DBA IP AXESS

                                       By: /s/ JAMES G. SCOGIN
                                           -----------------------------------
                                               James G. Scogin
                                           President, Chief Financial Officer
                                           and Principal Accounting Officer

                                       Date: February 12, 2001

     Each person whose signature appears below authorizes and, or either of
them, each of whom may action without joinder of the other, to execute in the
name of each such person who is then an officer or director of the Registrant
and to file any amendments to this annual report on Form 10-K necessary or
advisable to enable the Registrant to comply with the Securities Exchange Act of
1934, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission in respect thereof, which amendments may make such
changes in such report as such attorney-in-fact may deem appropriate.

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Name                              Title                        Date

/s/JAMES G. SCOGIN                President, Chief Financial   February 12, 2002
------------------------------    Officer and Principal
James G. Scogin                   Accounting Officer


/s/JEFFREY P. BLANCHARD           Chairman of the Board        February 12, 2002
------------------------------    of Directors
Jeffrey P. Blanchard


/s/THOMAS BISHOP                  Director                     February 12, 2002
------------------------------
Thomas Bishop


/s/GEORGE R. GRUMBLES             Director                     February 12, 2002
------------------------------
George R. Grumbles


/s/MATTHEW A. KENNY               Director                     February 12, 2002
------------------------------
Matthew A. Kenny


/s/BYRON SMITH                    Director                     February 12, 2002
------------------------------
Byron Smith


/s/GENERAL HAROLD "BUCK" ADAMS    Director                     February 12, 2002
------------------------------
General Harold "Buck" Adams


                                       65