VOXWARE INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

[ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended June 30, 1997
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from
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Commission File Number 0-021403
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VOXWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)

Delaware 36-3934824
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

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305 College Road East
Princeton, New Jersey 08540
609-514-4100

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(Address, including zip code, and telephone
number (including area code) of registrant's
principal executive office)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value per share

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

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $30,176,047 as of August 31, 1997, based upon
the closing sale price of the Common Stock as quoted on the Nasdaq National
Market. This amount excludes an aggregate of 4,839,000 shares of Common Stock
held by executive officers, directors and by each entity that owns 5% or more of
the Common Stock outstanding at August 31, 1997. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant's Common Stock outstanding as of
August 31, 1997 was 12,502,758.

DOCUMENTS INCORPORATED BY REFERENCE

As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's fiscal 1997 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Annual Report on Form 10-K.

VOXWARE, INC.

FORM 10-K ANNUAL REPORT

For Fiscal Year Ended June 30, 1997

TABLE OF CONTENTS

PART I

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

Item 2. Properties ................................................................................ 13

Item 3. Legal Proceedings ......................................................................... 13

Item 4. Submission of Matters to a Vote of Security Holder ........................................ 13

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 15

Item 6. Selected Financial Data.................................................................... 16

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17

Item 8. Financial Statements and Supplementary Data................................................ 22

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 22

PART III

Item 10. Directors and Executive Officers of the Registrant ........................................ 22

Item 11. Executive Compensation .................................................................... 22

Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 22

Item 13. Certain Relationships and Related Transactions ............................................ 22

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 23

Index to Financial Statements and Schedules .......................................................... F-1

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PART I

THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD
LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS
ABOUT VOXWARE'S INDUSTRY, MANAGEMENT'S BELIEFS, AND CERTAIN ASSUMPTIONS MADE BY
VOXWARE'S MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS,"
"PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY
SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE
NOT LIMITED TO, THOSE SET FORTH HEREIN UNDER "IMPORTANT FACTORS REGARDING
FORWARD-LOOKING STATEMENTS," ATTACHED HERETO AS EXHIBIT 99, AS WELL AS THOSE
NOTED IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. UNLESS REQUIRED BY LAW,
THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER
REPORTS OR DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND
EXCHANGE COMMISSION.

ITEM 1. BUSINESS.

Overview

Voxware develops, markets, licenses and supports digital speech and audio
technologies, solutions and applications. MetaVoice, the Company's innovative
speech coding technology, is designed to reproduce high quality speech while
requiring very low communications bandwidth and processing power. In addition to
efficiently compressing speech, MetaVoice enables good quality speech
reproduction even when data are lost and delayed, and provides a broad array of
voice transformation capabilities. MetaSound, the Company's general audio coding
technology built on core technology licensed from Nippon Telegraph and Telephone
Corporation ("NTT"), was introduced during fiscal 1997 and is specifically
suitable for high quality music compression. These technologies enable Voxware
and its licensees to create a new generation of audio-enhanced communications
and interactive products for the Internet and other bandwidth-constrained
environments. The Company licenses its technologies to software and hardware
companies for a wide range of applications and services including interactive
computing and telephony over packet switched networks.

To accelerate adoption of its technologies, the Company seeks to broadly
license its products and establish strategic relationships with market leaders.
The Company's initial emphasis has been to license its technologies to leading
vendors of interactive computing applications such as America Online, Inc.,
Apple Computer, Inc., IBM Corporation, Microsoft Corporation, Netscape
Communication Corporation, Prodigy Services Corporation and The Walt Disney
Company as well as several smaller companies in this industry. The Company is
also targeting the market for telephony over packet switched networks in which
certain of the aforementioned companies participate. The Company's customers in
the market for telephony over packet switched networks also include vendors of
telephony hardware and related products and services such as Ariel Corporation,
Dialogic Corporation, Intervoice, Inc., Linkon Corporation, Natural MicroSystems
Corporation, Periphonics, Inc., and WorldCom, Inc.

Industry Background

Due to the emergence of powerful low-cost processors and the growth of the
Internet and other digital networks, the markets for digital speech technologies
are expanding. Digital speech and audio technologies are increasingly being
integrated into a variety of applications including Internet telephony,
voice-enabled Web pages, Internet broadcasting, interactive games, voice

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messaging, wireless and satellite communications, multimedia computing and
voice-enabled devices.

The Internet is a collection of thousands of computer networks and millions
of computer connections that enables individuals, businesses and institutions
worldwide to communicate and to access and share information. Any computer using
the open standard Internet Protocol can communicate with any other computer on
the Internet. The universal, open connectivity of the Internet enables computer
users to communicate using a variety of digital data types, including text,
graphics, voice and video. In addition to the Internet itself, there has also
been rapid growth in other networks based on the Internet Protocol: so-called
"intranets" - private networks, and "extranets" - commercial networks designed
with high-performance backbones, which may interconnect with the Internet. Both
intranets and extranets may allow higher quality voice and multimedia services
than is currently possible on the Internet.

A combination of significant technological trends has led to the widespread
adoption of the Internet by a growing number of individuals and business users.
The proliferation of communication-enabled multimedia personal computers, the
availability of intuitive, graphical Web browsers and an increasingly robust
network infrastructure, have allowed widespread access to the Internet and have
increased the use of the World Wide Web (the "Web") by a large number of users
for a broader range of applications. The Web enables users to find, retrieve and
link information on the Internet through a consistent graphical interface that
makes the underlying complexities transparent to the user. In addition, the Web
is an interactive environment, which facilitates the exchange of multimedia-rich
information and entertainment content among users worldwide. As a result, the
Web is changing the way in which people exchange information and communicate
with each other. Various current estimates identify approximately 30 million
Internet users in the U.S. and 70 million worldwide. According to the Global
Internet Project, this number could grow to a quarter-billion users worldwide by
the year 2000.

The Company believes that adding high quality voice and audio communication
capabilities to existing text and graphic applications for the Internet can
broaden and enrich Internet users' communications. As multimedia and
communications capabilities become prevalent components of personal computer
systems, a market for voice, audio and video products for the Internet is
emerging. Examples of emerging Internet voice and general audio applications are
multimedia Web pages incorporating pre-recorded voice, point-to-point and
multi-party telephony, telephony gateways linking Internet users to public and
private telephone networks, broadcasting of live and pre-recorded content, voice
messaging integrated with e-mail and Web pages and multiplayer games which allow
participants to speak to one another.

In addition, given the natural preference for speech as a medium for
communication and expression, voice capabilities are being added to a wide array
of products. The rapidly declining cost and increasing power of digital signal
processors ("DSPs") enable high quality voice using a fraction of the memory or
bandwidth historically required at prices that are acceptable for a range of
business and consumer applications. The increasing power of low cost DSPs makes
it possible to record and transform speech and audio for a wide variety of
products aimed at the consumer and business markets such as telephone answering
machines, personal electronic organizers and voice-enabled toys. The growth of
cellular telephony and improvements in radio and satellite technology have
enabled the development of new wireless services. These services include voice
paging systems, which are designed to deliver voice messages directly to a
paging device without the need for a user to call in to receive a message, and
hand-held satellite telephone systems, which are designed to allow mobile
telephone service to and from remote locations.

The Challenge: High Quality Speech and Audio Products and Services

The Internet was originally designed for conventional text data
applications such as e-mail and file transfers. These applications can generally
tolerate the low effective bandwidth, network congestion and inconsistent data
delivery characteristic of the Internet. By contrast, real-time speech
applications, which require continuously available bandwidth and suffer in the
presence of delays or gaps, must address these challenges to deliver high
quality speech over the Internet. Addressing these challenges effectively
requires a high degree of compression, and technologies that minimize the
perceptual effects of lost or missing data. Speech compression approaches,
however, are limited by the constraints of available processing power and
represent a trade-off between speech quality and the bandwidth required.

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Effective bandwidth on the Internet is limited to the lowest bandwidth
component of the pathway taken by the data. Most individual users are limited by
the transmission rates of their modems, typically 14.4 kilobits per second
("kbps"), 28.8 kbps or 33.6 kbps. Even on higher capacity connections, the
effective bandwidth is often reduced by the need to share available capacity
across many users. In addition, emerging multimedia applications on the Internet
typically comprise simultaneous voice, video and data streams, which must share
the available capacity, reducing the effective bandwidth available to voice
data.

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

In part, these challenges can be addressed by compressing the speech
signal, which decreases the number of bits required to encode and transmit the
signal. Reducing the effective bandwidth required to transmit the speech data
decreases the impact of congestion and inconsistent packet delivery. However,
speech compression technologies represent a trade-off between the quality of
speech delivered and the amount of bandwidth utilized. On the one hand,
technologies that achieve high speech quality generally require high bandwidth,
which can introduce unacceptable delays in delivery and make the speech playback
vulnerable to choppiness. On the other hand, technologies that attempt to reduce
bandwidth utilized typically offer unacceptable speech quality or require the
use of high power or specialty microprocessors. Speech compression technologies
are also limited by the constraints of the available processing power, which in
the case of typical Internet users consists of general purpose microprocessors
such as Intel's 486 and Pentium platforms.

Although the Internet is one of the fastest growing markets for speech
applications, several other significant markets also demand high-quality, very
low bandwidth speech. Diverse applications such as voice pagers, satellite
communications and low-cost electronic recording devices require high quality
speech and audio compression which minimizes the bandwidth and/or the processor
overhead required.

The Voxware Solution

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

The MetaVoice codec uses complex mathematical models that can accurately
reproduce human speech based on a finite number of descriptive parameters.
MetaVoice is currently capable of compressing speech data from a rate of 128
kbps to 2.4 kbps, enabling the creation of very small packets which are capable
of flowing through the network more easily in the presence of congestion and low
bandwidth. Similarly, MetaSound is currently capable of compressing music and
general audio data from a rate of 706 kbps to as low as 8 kbps.

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For Internet speech applications, Voxware's technologies exhibit the
following attributes, among others, relative to traditional technologies:

o More graceful handling of lost, delayed or out-of-sequence packets
through the Company's innovative transmission quality management
technologies - QoT(TM). QoT technologies utilize a variety of
strategies to maximize intelligibility and minimize delay of speech
data through the packet network.

o Enabling teleconferencing and other multiple voice stream applications
in a way that does not require mixing at a central distribution point,
resulting in lower cost and improved quality of service.

o Requiring very low processing power which permits operation using a
small fraction of the processing power on general purpose
microprocessors (e.g. Intel Pentium).

o Enhancing the ability to combine real-time speech with video and data
streams by permitting more bandwidth to be allocated to non-speech
data transmission.

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

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

The MetaSound codecs were developed based on technology licensed from NTT.
They are designed to compress a wide range of audio types and are specifically
targeted at online music applications. The MetaSound codecs are available in
four monaural bit rates - 8, 10, 16 and 24 kbps.

Core Technology

MetaVoice and MetaSound Coding Technologies

Voxware's innovative approach to speech coding, MetaVoice, is designed to
achieve high speech quality with very low bandwidth and processing power
requirements. The MetaVoice codec uses a mathematical model that can accurately
reproduce human speech based on a finite number of descriptive parameters. To
encode a speaker's voice, MetaVoice uses sophisticated mathematical algorithms
which analyze input speech and extract accurate estimates of the model
parameters. These parameters are converted into discrete values which can be
compressed to relatively few "bits" of information for transmission. The
receiving application converts these bits back to model parameters which
MetaVoice's speech synthesis model uses to reconstruct a close perceptual
approximation of the original speech. MetaVoice is currently capable of
compressing speech data from 128 kbps to 2.4 kbps while still maintaining good
quality speech.

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

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

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

Despite the above advantages, few companies have developed or marketed a
commercial speech-specific parametric compression system because of the
technical challenges it presents. MetaVoice is designed (i) to operate within
the processing and memory constraints of standard personal computers and
embedded devices, (ii) to address real world challenges including variations in
microphones, sound cards and room acoustics and the presence of background noise
and (iii) to faithfully reproduce the widest possible range of voice types. The
Company believes MetaVoice is the first 2.4 kbps speech codec to achieve
widespread distribution on the Internet.

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

The Company's MetaSound codecs were developed based on core technology
licensed from NTT. They are designed to compress a wide range of audio types and
are specifically targeted at online music applications. The MetaSound codecs are
available in four monaural bit rates - 8, 10, 16 and 24 kbps. The Company is
also developing stereo versions of MetaSound as well as different bit rates for
certain additional applications.

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

QoT(TM) -- Quality of Transmission Management

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

Voice Modeling: VoiceFont(R) and Voice Effects Technologies

MetaVoice's proprietary approach to coding the perceptually relevant
attributes of the human voice are being developed for use in transforming voice
attributes including pitch, timbre and timing. The Company has released its
first version of VoiceFont, which enables the manipulation of a speaker's voice

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into a fixed set of transformations. The Company plans to continue its research
of voice modeling for applications such as lip synchronization, text
synchronization and mimicking a target voice.

The Voxware Strategy

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

Extend Technological Leadership

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

Target the Emerging Market for Internet Telephony

The Company is developing technologies that are specifically designed to
address issues associated with voice over data networks and seeks to license
these technologies to software and hardware companies which are developing
applications for this market. The market for Internet telephony software,
hardware and services is at an early stage of development and as such, the
Company is engaged in long-term initiatives in both product development and
marketing in an effort to capitalize on the potential long-term growth of this
nascent market. As a result, the Company expects to enter into lengthy product
development programs and lengthy sales cycles in order to target the emerging
market opportunities in Internet telephony.

Accelerate Adoption of Technology Through Strategic Relationships

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

Deepen Market Penetration Through Broad Licensing Program

The Company seeks to broadly license its MetaVoice and MetaSound
technologies in market segments where complementary applications incorporating
speech and audio can benefit from the low bandwidth requirements exhibited by
MetaVoice and MetaSound. To date, the primary markets in which the Company is
licensing its technologies include Internet telephony and conferencing,
interactive games and consumer chat applications. The Company intends to seek to
leverage the low bandwidth and processing requirements of its technologies to
address a variety of applications beyond the Internet, such as wireless
telephony, voice pagers, digital answering machines, audio-enabled toys,
satellite communications and low-cost electronic recording devices.

Build Multiple Distribution Channels

The Company has established multiple channels for the distribution of its
products to its targeted market segments. The Company's direct sales force
combines field sales and telemarketing to reach software and hardware companies.
The Company will seek to develop indirect marketing channels such as bundling
agreements with OEMs and vendors of telephony hardware and related products and
value added resellers. In addition, the Company engages in Internet-based
distribution via its Web site.

Develop Recurring Revenue Through Royalty-Based Licensing

The Company's objective is for a significant portion of its future revenues
to be in the form of royalties or other recurring payments based upon the sales
of products by the Company's licensees which incorporate the Company's
technologies. The Company has entered into license agreements providing for
royalties and recurring payments and it is the intention of the Company to
continue to pursue license opportunities that include a recurring revenue
component. Due to the early stage of development of the Company's primary target

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markets, the Company expects that these royalty-based agreements will require
several quarters in order to yield significant royalty revenues, if any, to the
Company.

Products

The Company has four product groups that leverage its core speech and audio
processing core technologies: Software Development Kits ("SDKs"), Applications,
Embedded Systems Products and Voice Modeling Products.

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

Voxware Compression Toolkit (VCT) - The VCT is a development API that
enables integration into applications requiring speech or audio technology,
providing access to Voxware's real-time, low-complexity, frequency domain
codecs at data rates as low as 1,200 bps. Applications include one-way
audio streaming over the Internet, compression of speech and audio for
multimedia CD products, unified messaging applications, digital voice
paging, digital answering machines, narrowband PCS devices, voice
recording, Internet audio conferencing and music sampling over the
Internet. The VCT is Voxware's broadest and most comprehensive toolkit, and
includes Voxware's industry leading MetaVoice (speech) and MetaSound
(audio) codecs.

DirectVox SDK - The DirectVox product is an SDK designed specifically for
online game developers interested in adding two-way, real-time voice to
online Web games. DirectVox is designed to replace or augment text-based
communications while a game is underway.

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

Applications

Voxware's application products are pre-packaged, off-the-shelf software
products that require no programming expertise to deploy. The Company has
developed three WindowsTM-driven applications which utilize MetaVoice technology
for communication on the Internet: VoxPhone, VoxChat and ToolVox.

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

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

ToolVox - The ToolVox system consists of an encoder, incorporating either
the RT24 or the RT29HQ codecs which compress recorded speech files into the
".vox" file format, and a player which decodes the speech data to reproduce
the original speech. The ToolVox system allows Web content providers to
incorporate pre-recorded voice as part of their multimedia Web pages. The
player is designed as a Netscape NavigatorTM or Microsoft Internet
ExplorerTM plug-in (i.e., an add-in application which supplements the basic
browser functionality) and as a helper application with other Web browsers.

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When configured as a plug-in, the player receives streaming audio data from
the Web server and begins playback as soon as a small buffer is received,
typically within a few seconds. In addition, ToolVox can play back music
transmitted in MIDI format. Speech and MIDI data can stream simultaneously,
allowing background music effects with narration.

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

Voice Modeling: VoiceFont(R) and Voice Effects Technologies
MetaVoice's proprietary approach to coding the perceptually relevant
attributes of the human voice are being developed for use in transforming voice
attributes including pitch, timbre and timing. The Company has released its
first version of VoiceFont which enables the manipulation of a speaker's voice
into a fixed set of transformations. The Company plans to continue its research
of voice modeling for applications such as lip synchronization, text
synchronization and mimicking a target voice.

Research and Product Development

Voxware believes that continued timely development and introduction of new
products are essential to establishing, maintaining and increasing its
competitive position. The Company currently conducts most of its product
development effort in-house. The Company also employs independent contractors to
assist with certain product development and testing activities. The Company's
Research and Development group consisted of 44 engineers and programmers as of
August 31, 1997. Voxware intends to continue to emphasize core research and
development.

The Company has several products under development, including the following
products scheduled for release during the fiscal year ending June 30, 1998:

VIPSuite
VIPSuite is designed to provide application developers access to Voxware's
codecs and QoT technology and will be targeted specifically to developers of
Internet telephony gateways and Internet telephones. VIPSuite is designed to
leverage Voxware's codec research and Internet telephony expertise, resulting in
an SDK built to address the challenges inherent in building real-time, two-way
voice communication systems over the Internet, intranets, and corporate local
area networks. VIPSuite will include Voxware's most advanced coding and Internet
speech transmission technologies, enabling "Voice Over Internet Protocol"
("VoIP") developers to simultaneously improve voice quality while reducing
speech latency and delay, bringing VoIP quality closer to the quality achievable
over conventional telephone networks. Specifically, VIPSuite is designed to
provide four integrated capabilities:

1. Speech coding, based on Voxware's MetaVoice coding technologies.
2. Frame loss concealment, which masks the perceptual impact of lost or
delayed data by interpolating missing data automatically.
3. Adaptive Jitter Buffer Control, which minimizes latency due to irregular
arrival of packets. 4. Adaptive Transmission Control, which automatically adds
redundancy or "interleaves" frames to further reduce the impact of lost or
dropped data.

VIPSuite is expected to begin shipping on host platforms in the quarter ending
December 31, 1997.

SC-3/6/10 Codec
The SC-3/6/10 Codec is Voxware's latest MetaVoice codec under development,
specifically designed for VoIP applications and intended to be included as part
of future versions of VIPSuite. It is designed to be a three codec family,

10

consisting of a communications quality codec at 3.2 kbps, a toll-quality codec
at 6.4 kbps, and a wideband speech codec at approximately 10 kbps. SC-3/6 is
expected to be released for software-based applications in the quarter ending
December 31, 1997, and SC-10 is expected to be released for software-based
applications by the quarter ending June 30, 1998. The SC-3/6/10 family has a
special characteristic in that the lower-rate bit streams are expected to be
embedded within the higher rate streams; thus the SC-6 would have embedded
within it the SC-3 bit stream, and the SC-10 would have embedded within it the
SC-6 and SC-3 bit streams. This arrangement is expected to have a number of
practical advantages, allowing redundant information to be added to packets to
improve robustness at low bandwidth, and allowing the system to adapt to
changing bandwidth availability.

Strategic Relationships and Licensees

The Company seeks to establish and extend strategic relationships with
market leaders in order to rapidly achieve market penetration. The Company
believes these strategic relationships will broaden the Company's user base and
accelerate adoption of the Company's core technologies. The Company believes
that such strategic relationships can provide early insight into and influence
on future industry standards, offer access to leading edge technology and
support optimization of the Company's technology on key computing platforms.

The Company and Netscape are parties to a software license agreement
pursuant to which Netscape has a license to use and distribute certain of
Voxware's products, including the RT24 codec. Netscape has also made a minority
equity investment in the Company and has a representative on the Company's Board
of Directors. During the year ended June 30, 1997, license fee revenue earned
from Netscape accounted for 16% of the Company's total revenues and 59% of the
Company's royalties and recurring license fee revenues. The Netscape License
Agreement may be terminated by Netscape at any time on 90 days notice. The
Company believes that Netscape is reevaluating certain of its product plans as
its business focus and objectives are shifting, and accordingly, there can be no
assurance that Netscape will not terminate or seek to modify the Netscape
license agreement in such a way that would reduce the revenue the Company earns
from Netscape. If Netscape terminates the Netscape license agreement or does not
incorporate and distribute the Company's products and technologies in its own
products, the Company's business, operating results and financial condition will
be materially adversely affected. The success of the Company is dependent on the
ability of industry leaders such as Netscape and other of the Company's
licensees to continue to achieve widespread distribution and acceptance of their
products which incorporate the Company's products. Failure by Netscape and other
of the Company's licensees to continue to achieve widespread distribution and
acceptance of their products which incorporate the Company's products may have a
material adverse effect on the Company's business, operating results and
financial condition. See Exhibit 99 "Important Factors Regarding Forward-Looking
Statements--Netscape Relationship."

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

The following table sets forth certain companies that have entered into
license agreements with Voxware, the majority of which provide for potential
recurring revenue streams:

America Online, Inc. Linkon Corporation USFI, Inc.
Andrea Electronics Lucent Technologies Inc. Unisys Corporation
Apple Computer, Inc. Microsoft Corporation VDOnet Corporation Ltd.
Disney Online Mpath Interactive, Inc. Vienna Systems Corporation
Dialogic Corporation Natural MicroSystems Corporation White Pine Software, Inc.
IBM Corporation Netscape Communications Corporation WorldCom, Inc.
InterVoice, Inc. Oracle Corporation Zoll Medical Corporation
LifeCycle Systems, Inc. Periphonics, Inc.

11

Sales, Marketing and Distribution

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

As of August 31, 1997, the Company had 24 direct sales and marketing
personnel. Codec licensing is handled primarily through the direct field sales
force. During the year ended June 30, 1997, the Company added sales offices in
Europe and Asia in order to create business relationships with international
software and hardware companies. The Company intends to continue to intensify
and expand its overall sales efforts (which include direct, indirect and
tele-sales efforts) and, as a result, intends to increase the absolute dollar
level of sales and marketing expenses in future periods.

Customer Support

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

Competition

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

Patents and Proprietary Information

To date, the Company has applied for four patents relating to the Company's
voice coding technology and related technologies. The Company expects to
routinely file patent applications as deemed appropriate. The Company's success
will depend in part on its ability to obtain patent protection for its products,
preserve its trade

12

secrets and operate without infringing the proprietary rights of other parties.
There can be no assurance that patent applications to which the Company holds
rights will result in the issuance of patents, or that any issued patents will
provide commercially significant protection to the Company's technology,
products and processes. In addition, there can be no assurance that others will
not independently develop substantially equivalent proprietary information not
covered by patents to which the Company owns rights or obtain access to the
Company's know-how or that others will not claim to have or will not be issued
patents which may prevent the sale of one or more of the Company's products. In
addition, the laws of certain countries may not protect the Company's
intellectual property. The software market has traditionally experienced
widespread unauthorized reproduction of products in violation of manufacturers'
intellectual property rights. Such activity is difficult to detect and legal
proceedings to enforce the manufacturers' intellectual property rights are often
burdensome and involve a high degree of uncertainty and costs. The Company's
success is also dependent upon unpatented trade secrets which are difficult to
protect. To help protect its rights, the Company requires employees and
consultants to enter into confidentiality agreements that prohibit disclosure of
the Company's proprietary information and requires the assignment to the Company
of their ideas, developments, discoveries and inventions. There can be no
assurance, however, that these agreements will provide adequate protection for
the Company's trade secrets, know-how, or other proprietary information in the
event of any unauthorized use or disclosures.

Employees

As of August 31, 1997, the Company had 86 full-time employees consisting of
44 in research and development, 24 in sales and marketing and 18 in
administration and finance. None of the Company's employees is represented by a
labor union or is subject to a collective bargaining agreement. The Company
believes that its employee relations are good.

ITEM 2. PROPERTIES.

The Company leases its principal facility, which contains approximately
18,000 square feet of office space in Princeton, NJ. The initial term of the
lease for the Company's current office space will expire on May 31, 2003. In
addition, the Company rents on a month-to-month basis approximately 1,000 square
feet of office space in Oxfordshire, United Kingdom. The Company believes that
existing facilities are adequate for operations through the year ending June 30,
1999 and that additional space will be available as needed thereafter.

ITEM 3. LEGAL PROCEEDINGS.

The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's business, operating results or financial
condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1997.

13

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company and their respective ages and
positions with the Company as of August 31, 1997 were as follows:

Name Age Position
---- --- --------

Michael Goldstein............. 44 President, Chief Executive Officer and Director
Kenneth H. Traub.............. 36 Executive Vice President, Chief Financial Officer,
Secretary and Director
Bathsheba Malsheen.......... 46 Chief Operating Officer
J. Gerard Aguilar........... 30 Vice President, Research and Development and Director
Steven J.Ott................ 36 Vice President, Sales
Nicholas Narlis............. 37 Vice President, Chief Accounting Officer and Treasurer

Michael Goldstein has served as President and Chief Executive Officer and
as a Director of the Company since January 1994. From April 1993 to December
1993, Mr. Goldstein served as Vice President of Business Development of
Donovan Data Systems, Inc., a data processing service provider. From 1986 to
March 1993, Mr. Goldstein was a consultant with McKinsey & Company, Inc.,
where he was an advisor to technology companies. From 1983 to June 1986, Mr.
Goldstein served as Vice President of Macmillan Software Company, a scientific
publisher and division of Macmillan, Inc. Mr. Goldstein holds an M.B.A. from
the Harvard Graduate School of Business Administration and a Sc.B. from Brown
University.

Kenneth H. Traub is a co-founder of Voxware and has served as Executive
Vice President, Chief Financial Officer and Secretary and as a Director of the
Company since February 1995. From 1989 to February 1995, Mr. Traub held
various management positions, including Corporate Vice President, with
Trans-Resources, Inc., a diversified, multinational company, where Mr. Traub
was responsible for acquisitions, financings and strategic planning. From
January 1993 to February 1995, Mr. Traub was also President of Conservation
Securities Corp., an investment company affiliated with Trans-Resources, Inc.
Mr. Traub holds an M.B.A. from the Harvard Graduate School of Business
Administration and a B.A. from Emory University.

Bathsheba J. Malsheen, PhD has served as Chief Operating Officer of the
Company since May 1997. She previously served as Vice President of OEM
Licensing since joining Voxware in October 1996. From April 1990 to October
1996, Dr. Malsheen held various executive positions with Centigram
Communications Corporation, a voice messaging company, most recently as
General Manager of their Technology Business Unit and was responsible for
licensing of text-to-speech software products. Previously, she worked for
Speech Plus, Inc. where she served as Director of Speech Technology from 1985
to 1990. Dr. Malsheen holds a Ph.D. and M.A. from Brown University and a B.A.
from Hofstra University.

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

Steven J. Ott has served as Vice President, Sales of the Company since
October 1994. From January 1990 to June 1994, Mr. Ott held various executive
positions with Legent Corporation ("Legent"), a systems management software
company, most recently as Vice President, Corporate Development. Prior to his
appointment as Vice President, Corporate Development, Mr. Ott served as
Director, North American Sales Programs and Regional Manager Northeast Sales for
Legent. From 1987 to 1989, Mr. Ott served as District Sales Manager for Business
Software Technology, Inc., a developer of systems management software. From 1982
to 1987, Mr. Ott served as Area Sales Manager for DBMS, Inc., a database and
data administration software company. Mr. Ott holds a B.S. from Quinnipiac
College.

14

Nicholas Narlis has served as Vice President and Chief Accounting Officer
of the Company since March 1997 and as Treasurer since June 1996. He previously
served as Controller and Chief Accounting Officer from March 1996 through
February 1997. From 1992 to March 1996, Mr. Narlis served in various capacities
at Dendrite International, Inc., a sales force automation software and service
company, including most recently Director of Finance. Previously, from 1983 to
May 1992, Mr. Narlis worked for KPMG Peat Marwick where he served as a Senior
Manager from 1989 to May 1992 in the New Jersey Audit Practice Unit. Mr. Narlis
holds a B.S. from Rider University and is a Certified Public Accountant.

PART II

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

Market Information

The Company's Common Stock is traded on the National Market segment of The
Nasdaq Stock Market under the symbol "VOXW." The Company commenced trading on
The Nasdaq Stock Market on October 31, 1996. The following table sets forth the
high and low sale prices as quoted on The Nasdaq Stock Market.

High Low
---- ---

Quarter ended December 31, 1996 (beginning October 31, 1996) $ 8.50 $ 6.375

Quarter ended March 31, 1997 $ 7.625 $ 2.00

Quarter ended June 30, 1997 $ 6.00 $ 3.75

July 1, 1997 through September 25, 1997 $ 6.50 $ 4.00

As of September 25, 1997 there were approximately 242 holders of record of
the Company's Common Stock. Because many of the Company's shares of Common Stock
are held by brokers and other institutions on behalf of stockholders, the
Company is unable to estimate the total number of stockholders represented by
these record holders. The Company has never declared or paid any cash dividends
on its Common Stock. The Company does not anticipate paying any cash dividends
in the foreseeable future.

15

ITEM 6. SELECTED FINANCIAL DATA.

The selected statement of operations data for the three years ended June
30, 1997 and the selected balance sheet data as of June 30, 1996 and 1997 have
been derived from the financial statements of the Company, which have been
audited by Arthur Andersen LLP, independent public accountants, included
elsewhere in this Form 10-K. The selected statement of operations data for the
period from Inception (August 20, 1993) to June 30, 1994 and the balance sheet
data as of June 30, 1994 and 1995 have been derived from the Company's audited
financial statements not included herein. The selected statement of operations
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in the Prospectus.

Period from
Inception
(August 20, 1993) Fiscal Year Ended June 30,
to June 30, --------------------------
1994 1995 1996 1997
-------- -------- -------- --------
(In thousands, except per share data)

Statement of Operations Data:
Revenues:
Product revenues:
Initial license fees ................. $ -- $ -- $ 1,256 $ 5,432
Royalties and recurring license fees . -- -- 238 1,996
-------- -------- -------- --------
Total product revenues .......... -- -- 1,494 7,428
-------- -------- -------- --------
Service revenues ............................. -- -- 113 351
Total revenues ..................... -- -- 1,607 7,779
Cost of revenues:
Cost of product revenues .................. -- -- 17 208
Cost of service revenues .................. -- -- 28 164
-------- -------- -------- --------
Total cost of revenues ............. -- -- 45 372
-------- -------- -------- --------
Gross profit ....................... -- -- 1,562 7,407
-------- -------- -------- --------
Operating expenses:
Research and development .................. 93 537 2,497 7,845
Sales and marketing ....................... 9 332 1,084 4,124
General and administrative ................ 113 365 980 3,204
-------- -------- -------- --------
Total operating expenses ........... 215 1,234 4,561 15,173
-------- -------- -------- --------
Operating loss ..................... (215) (1,234) (2,999) (7,766)
Interest income ................................ -- 65 132 722
-------- -------- -------- --------
Net loss ....................................... $ (215) $ (1,169) $ (2,867) $ (7,044)
======== ======== ======== ========

Net loss per share $ (0.62)
========
Shares used in computing net loss per share 11,301
========

June 30,
---------------------------------------------
1994 1995 1996 1997
------ ------ ------ ------

Balance Sheet Data:
Cash, cash equivalents and short-term investments.... $307 $1,523 $3,837 $16,469
Working capital...................................... 255 1,418 3,887 16,811
Total assets......................................... 359 1,667 5,336 20,221
Redeemable Series A Convertible Preferred Stock...... -- -- 5,938 --
Stockholders' equity (deficit)....................... 306 1,556 (1,076) 17,191

16

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

This report contains forward-looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may cause
the Company's plans and results to differ significantly from plans and results
discussed in forward-looking statements. Factors that might cause or contribute
to such differences include, but are not limited to, those discussed in
"Important Factors Regarding Forward-Looking Statements" attached hereto as
Exhibit 99.

Overview

Voxware develops, markets, licenses and supports digital speech and audio
technologies, solutions and applications. MetaVoice, the Company's innovative
speech coding technology, is designed to reproduce high quality speech while
requiring very low communications bandwidth and processing power. In addition to
efficiently compressing speech, MetaVoice enables a broad array of voice
transformation capabilities. MetaSound, the Company's general audio coding
technology built on core technology licensed from Nippon Telegraph and Telephone
Corporation, was introduced during fiscal 1997 and is specifically suitable for
high quality music compression. These technologies enable Voxware and its
licensees to create a new generation of audio-enhanced communications and
interactive products for the Internet and other bandwidth-constrained
environments. The Company licenses its technologies to software and hardware
companies for a wide range of applications and services including interactive
computing and telephony over packet switched networks.

From inception (August 20, 1993) to June 30, 1995, the Company's operating
activities related primarily to performing research and development, recruiting
personnel, raising capital and purchasing operating assets. The Company
commenced product releases in July 1995 and, for accounting purposes, emerged
from the development stage commencing in July 1995. Since inception, the Company
has raised net proceeds of approximately $28,501,000 as follows: approximately
$8,838,000 through private placements; approximately $18,517,000 through its
initial public offering which was declared effective on October 30, 1996; and
approximately $1,146,000 through other sales of equity securities, including
exercises of all outstanding common stock warrants.

The Company generates revenues from two sources: fees from product licenses
and fees for services provided. Product revenues account for a majority of the
Company's revenues and consist of two components: initial license fees and
royalties and recurring license fees. Voxware's products are licensed primarily
to software and hardware companies which incorporate the Company's products and
technologies into their products. The Company generally negotiates contract
terms with customers on a case by case basis, with arrangements that have
historically included one or more of the following: initial license fees,
quarterly license fees, annual license fees or royalties based on the licensee's
revenue generated or units shipped of products incorporating the Company's
technologies. One of the Company's objectives is to develop recurring revenue
through entering into licensing agreements with third parties which provide for
royalties or other recurring payments. As a result, the timing and amount of the
Company's revenues are substantially dependent on the timing and efforts of the
Company's licensees in developing and marketing products incorporating the
Company's products and technologies. There can be no assurance as to the timing
or success of any licensee implementation or the timing or amount of recurring
revenues from any licensee product. Since inception, the Company has entered
into over 80 license agreements, approximately 69 of which provide for potential
royalties and / or recurring license fees. To date the Company has recognized
$2,234,000 in royalties and recurring license fees which were derived from 13
licensees. Service revenues consist of customer support and engineering fees.
Customer support services include providing updates and technical support to
licensees of the Company's products and porting the Company's technologies to
specific software platforms that are considered industry standards. Engineering
services include providing technical resources to support customer-specific
development efforts, which include porting the Company's technologies to
specific hardware platforms.

Software product revenues are generally recognized upon shipment, provided
that there are no significant post-delivery obligations, the payment is due
within one year and collection of the resulting receivable is deemed probable.
If an acceptance period is required, revenues are recognized upon customer
acceptance. Royalty revenues are recognized in the period of customer shipment.
For the three months and one year ended June 30, 1997, respectively,
approximately $693,000 and $1,996,000 of royalties and recurring license fees
have been recognized; since inception, $2,234,000 of royalties and recurring

17

license fees have been recognized. Customer support revenues, including amounts
bundled with license fees, are recognized over the term of the support period,
which typically lasts one year. Engineering fees are recognized upon customer
acceptance or over the period in which services are provided if customer
acceptance is not required. All research and development costs have been
expensed as incurred.

The Company has only a limited operating history upon which an evaluation
of the Company and its prospects can be based. As of June 30, 1997, the Company
had an accumulated deficit of $11,308,000. Although the Company has experienced
revenue growth in recent periods, the limited operating history of the Company
makes the prediction of future results of operations impossible and, therefore,
the Company's recent revenue growth should not be taken as indicative of the
rate of revenue growth, if any, that can be expected in the future. In addition,
the Company's operating results may fluctuate significantly in the future as a
result of a variety of factors, including the level of usage of the Internet,
the budgeting cycles of potential customers, the volume of, and revenues derived
from sales of products by the Company's licensees that incorporate the Company's
products, the amount and timing of capital expenditures and other costs relating
to the expansion of the Company's operations, the introduction of new products
or services by the Company or its competitors, pricing changes in the industry,
technical difficulties with respect to the use of products developed by the
Company and general economic conditions.

Period to Period Comparisons

The following table presents selected financial information for the periods
indicated. This information has been derived from the Company's unaudited
financial statements which, in the opinion of management, reflect all
adjustments necessary to fairly present this information when read in
conjunction with the financial statements and notes thereto included elsewhere
in this Report on Form 10-K. The results of operations for any period are not
necessarily indicative of the results to be expected for any future period.

Three Months Ended
-----------------------------------------------------------------------------------------
September December March June September December March June
30, 1995 31, 1995 31, 1996 30, 1996 30, 1996 31, 1996 31, 1997 30, 1997
------ -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)

Statement of Operations Data:
Revenues:
Product revenues:
Initial license fees $ 93 $ 107 $ 504 $ 552 $ 913 $ 1,059 $1,647 $ 1,813
Royalties and
recurring license fees -- -- -- 238 238 377 688 693
------ ------ ------ ------- ------- ------- ------- ------
Total product revenues 93 107 504 790 1,151 1,436 2,335 2,506
Service revenues -- 1 2 110 52 76 77 146
------ ------ ------ ------- ------- ------- ------- ------
Total revenues 93 108 506 900 1,203 1,512 2,412 2,652
------ ------ ------ ------- ------- ------- ------- ------
Cost of revenues:
Cost of product revenues 3 3 3 8 24 21 103 60
Cost of service revenues 2 3 5 18 26 51 43 44
------ ------ ------ ------- ------- ------- ------- ------
Total cost of revenues 5 6 8 26 50 72 146 104
------ ------ ------ ------- ------- ------- ------- ------
Gross profit 88 102 498 874 1,153 1,440 2,266 2,548
------ ------ ------ ------- ------- ------- ------- ------
Operating expenses:
Research and development 249 324 630 1,294 1,863 2,074 2,104 1,804
Sales and marketing 107 199 331 447 801 1,086 1,165 1,072
General and administrative 74 165 298 442 857 878 778 691
------ ------ ------ ------- ------- ------- ------- ------
Total operating expenses 430 688 1,259 2,183 3,521 4,038 4,047 3,567
------ ------ ------ ------- ------- ------- ------- ------
Operating loss (342) (586) (761) (1,309) (2,368) (2,598) (1,781) (1,019)
Interest income 17 16 51 47 36 189 259 237
------ ------ ------ ------- ------- ------- ------- ------
Net loss $ (325) $ (570) $ (710) $(1,262) $(2,332) $(2,409) $(1,522) $(782)
====== ====== ====== ======= ======= ======= ======= ======
Net loss per share (1) $(0.04) $(0.07) $(0.08) $ (0.14) $ (0.25) $ (0.21) $ (0.12) $(0.06)
====== ====== ====== ======= ======= ======= ======= ======
Shares used in computing
net loss per share 8,501 8,570 8,776 9,043 9,268 11,269 12,467 12,476
====== ====== ====== ======= ======= ======= ======= ======

(1) For periods prior to its initial public offering, reflects the conversion
of the Company's Series A Preferred Stock into Common Stock. See Note 1 of
"Notes to Financial Statements."

18

TOTAL REVENUES. The Company recognized revenues of $7,779,000 for the year ended
June 30, 1997 compared to revenues of $1,607,000 for the year ended June 30,
1996. The Company had no revenues during the period from Inception to June 30,
1995. The three month period ended September 30, 1995 was the first full quarter
in which the Company's products and services were made commercially available.
Revenues have increased each quarter from the quarter ended September 30, 1995,
and from the year ended June 30, 1996 to the year ended June 30, 1997 as the
Company entered into an increasing number of license agreements providing
customers with the right to use the Company's products and services, and as the
Company recognized royalties and recurring license fees derived from customers
which licensed the Company's products in previous periods. However, there can be
no assurance that period-to-period revenue increases will continue in future
periods.

The Company's largest customer, Netscape Communications Corporation
("Netscape"), was a 4% stockholder as of June 30, 1997 and accounted for 16% and
31% of total revenues, respectively, for the years ended June 30, 1997 and 1996,
and accounted for 59% and 100% of the Company's royalties and recurring license
fee revenues, respectively, for the years ended June 30, 1997 and 1996. The
Netscape license agreement may be terminated by Netscape at any time on 90 days
notice. The Company believes that Netscape is reevaluating certain of its
product plans as its business focus and objectives are shifting and,
accordingly, there can be no assurance that Netscape will not terminate or seek
to modify the Netscape license agreement in such a way that the would reduce the
revenue the Company receives from Netscape. If Netscape terminates the Netscape
license agreement or does not incorporate and distribute the Company's products
and technologies in its own products, the Company's business, operating results
and financial condition will be materially adversely affected.

In addition, two other customers each accounted for 15% of revenues for the
year ended June 30, 1997.

PRODUCT REVENUES. Product revenues totaled $7,428,000 and accounted for 95% of
total revenues for the year ended June 30, 1997 compared to $1,494,000, which
accounted for 93% of total revenues, for the year ended June 30, 1996. These
dollar increases in product revenues were primarily due to the increased volume
of licenses of the Company's products to new customers, and an increase in the
amount of royalties and recurring license fees recognized from customers which
licensed the Company's products in previous periods. In fiscal 1997, product
revenues consisted of $5,432,000 in initial license fees (73% of product
revenues) related to 56 agreements and $1,996,000 in royalties and recurring
license fees (27% of product revenues) which were derived from a total of 13
customers. Included in product revenues for the year ended June 30, 1997 is
$480,000 in fees earned by Voxware for product development efforts. For the year
ended June 30, 1996, product revenues included $1,256,000 in initial license
fees (84% of product revenues) related to 24 agreements and $238,000 (16% of
product revenues) in royalties and recurring license fees which were derived
from one customer, Netscape.

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

GROSS PROFIT

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

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

19

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

OPERATING EXPENSES. On a year-to-year basis, operating expenses have increased
significantly since inception, totaling $1,234,000, $4,561,000 and $15,173,000
for the years ended June 30, 1995, 1996 and 1997, respectively. This trend
reflects the costs associated with the development of infrastructure, rapid
growth and increased efforts to commercialize the Company's products and
services. The Company believes that the infrastructure necessary to achieve its
near term objectives has essentially been established and, as such, expects the
near term quarterly level of operating expenses to remain fairly consistent with
the amount incurred during the three months ended June 30, 1997.

RESEARCH AND DEVELOPMENT. Research and development expenses primarily consist of
employee compensation and equipment depreciation and lease expenditures related
to product research and development. Research and development expenses totaled
$537,000, $2,497,000 and $7,845,000 for the years ended June 30, 1995, 1996 and
1997, respectively. These dollar increases in research and development expenses
were primarily due to increasing the research and development staff from 6 at
June 30, 1995 to 33 at June 30, 1996 to 49 at June 30, 1997, increases in
external consulting costs and costs associated with developing and enhancing the
functionality of the Company's family of products. The Company believes that the
research and development infrastructure necessary to achieve its near term
objectives has essentially been established and, as such, expects the near term
quarterly level of research and development expenses to remain fairly consistent
with the amount incurred during the three months ended June 30, 1997.

SALES AND MARKETING. Sales and marketing expenses consist primarily of employee
compensation (including direct sales commissions), travel expenses, trade shows
and costs of promotional materials. Sales and marketing expenses totaled
$332,000, $1,084,000 and $4,124,000 for the years ended June 30, 1995, 1996 and
1997, respectively. These dollar increases in sales and marketing expenses were
primarily due to the expansion of the Company's sales force and marketing staff
from 3 at June 30, 1995 to 8 at June 30, 1996 to 24 at June 30, 1997, and
increased expenses associated with the promotion and marketing of the Company's
products and services. The Company intends to continue to intensify and expand
its overall sales efforts (which include direct, indirect and tele-sales
efforts) and, as a result, intends to increase the absolute dollar level of
sales and marketing expenses in future periods.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee compensation and fees for insurance, rent, office expenses
and professional services. General and administrative expenses totaled $365,000,
$980,000 and $3,204,000 for the years ended June 30, 1995, 1996 and 1997,
respectively. These dollar increases in general and administrative expenses were
primarily due to increasing the administrative staff from 3 at June 30, 1995 to
13 at June 30, 1996 to 18 at June 30, 1997, and increased expenses related to
insurance, rent, office expenses and professional services. The Company believes
that the general and administrative infrastructure necessary to achieve its near
term objectives has essentially been established and, as such, expects the near
term quarterly level of general and administrative expenses to remain fairly
consistent with the amount incurred during the three months ended June 30, 1997.

INTEREST INCOME Interest income totaled $65,000, $132,000 and $722,000 for the
years ended June 30, 1995, 1996 and 1997, respectively. The increase in
interest income from fiscal 1995 to fiscal 1996 primarily reflects interest
earned on the net proceeds from the Series A Convertible Preferred Stock
financings consummated in December 1995 and March 1996. The increase in
interest income from fiscal 1996 to fiscal 1997 primarily reflects interest
earned on the net proceeds from the Company's initial public offering closed
during November and December 1996 (see "Liquidity and Capital Resources"
below).

INCOME TAXES. As of June 30, 1997, the Company had approximately $8,400,000 of
federal net operating loss carryforwards for tax reporting purposes available to
offset future taxable income; such carryforwards begin to expire in 2009. Under
the Tax Reform Act of 1986, the amounts of and benefits from net operating

20

losses carried forward may be impaired or limited in certain circumstances.
Events which may cause limitations in the amount of net operating losses that
the Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period. As of
June 30, 1997, the effect of such limitations, if imposed, is not expected to be
material.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. As of June 30, 1997, the Company
had deferred tax assets of approximately $4,400,000 relating primarily to net
operating loss carryforwards. The net deferred tax asset has been fully offset
by a valuation allowance.

Liquidity and Capital Resources

As of June 30, 1997, the Company had $10,627,000 in cash and cash
equivalents and $5,842,000 in short-term investments. The Company's cash and
short-term investments portfolio is liquid and investment grade, consisting of
high-grade money-market funds, United States Government-backed securities and
commercial paper and corporate obligations. Since inception, the Company has
primarily financed its operations through the sale of equity securities.

Cash of $1,102,000, $3,274,000 and $6,564,000 was used to fund operations
for the years ended June 30, 1995, 1996 and 1997, respectively. Additionally,
cash used in investing activities was $101,000 and $586,000 for the years ended
June 30, 1995 and 1996, respectively, and was related to purchases of equipment.
In 1997, $6,021,000 was used in investing activities, primarily related to the
increase in short-term investments. For the years ended June 30, 1995, 1996 and
1997, cash provided by financing activities totaled $2,419,000, $6,174,000 and
$19,375,000, respectively. Cash provided by financing activities in 1995 related
to the issuance of common stock. In 1996, $5,932,000 of cash provided by
financing activities was attributable to the issuance of Series A Preferred
Stock and $242,000 related to exercises of common stock warrants and options.
All Series A Preferred Stock converted into Common Stock upon the closing of the
Company's initial public offering. In 1997, $19,375,000 of cash was provided by
financing activities, reflecting $18,517,000 in net proceeds from the initial
public offering, $763,000 in proceeds from the exercise of common stock warrants
and options and $95,000 from the issuance of common stock pursuant to the
Employee Stock Purchase Plan.

In October 1996, the Company entered into a $2,000,000 revolving line of
credit with Silicon Valley Bank, which was amended to a $5,000,000 revolving
line of credit in May 1997 (the "Credit Facility"). In addition to the revolving
line of credit, the Credit Facility contains a lease component in the amount of
$1,500,000 for the purpose of providing a facility for the financing of the
lease stream of payments that the Company owes to an equipment lessor.
Borrowings under the Credit Facility will bear interest at the bank's prime
lending rate, which approximates the prime rate. The Credit Facility contains
certain restrictive financial covenants including a minimum quick ratio, a
minimum tangible net worth requirement, a maximum debt to tangible net worth
ratio and certain other covenants, as defined in the agreement. In connection
with the lease of the Company's office facility, the Company has outstanding a
$300,000 standby letter of credit at June 30, 1997 naming the lessor of the
office facility beneficiary of the standby letter of credit in the event that
the Company defaults on the lease. As this letter of credit was established
under the terms of the Credit Facility, the Company has $4,700,000 available for
borrowing under the Credit Facility. As of and during the year ending June 30,
1997 there were no amounts outstanding under the Credit Facility.

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

The Company has no material commitments other than those under normal
building and equipment operating leases. The Company anticipates increases in
its capital expenditures and operating lease arrangements beyond June 30, 1997
consistent with its anticipated growth. The Company believes that its current
cash, cash equivalents and short-term investments balances will be sufficient to
fund its working capital and capital expenditures requirements, exclusive of
cash required for possible acquisitions of, or investments in businesses,
products and technologies at least through June 30, 1998.

21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

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

ITEM 11. EXECUTIVE COMPENSATION.

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

22

PART IV

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

(a) List of documents filed as part of this Form 10-K:

1. FINANCIAL STATEMENTS. The financial statements listed in the
accompanying Index to Financial Statements appearing on page F-1 are filed as
part of this annual report on Form 10-K.

2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule of the Company for each of the years ended June 30, 1995, 1996 and 1997
is filed as part of this Form 10-K and should be read in conjunction with the
Financial Statements, and related notes thereto, of the Company.

VOXWARE, INC.
Schedule II--Valuation and Qualifying Accounts

Allowance for Doubtful Accounts

Years Ended June 30, 1995, 1996 and 1997
(in thousands)

Balance
Balance at Charged to Costs at End
Beginning of Period and Expenses Deductions of Period
-------------------------------------------------------------------------

Year ended June 30, 1995 $-- $-- $-- $--
==== ==== ==== ===

Year ended June 30, 1996 $-- $ 25 $-- $ 25
==== ==== ==== ====

Year ended June 30, 1997 $ 25 $ 467 $ 92 $ 400
==== ===== ==== =====

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

3. EXHIBITS. The following is a list of Exhibits filed as part of this
Annual Report on Form 10-K. Where so indicated by footnote, Exhibits which were
previously filed are incorporated by reference. For Exhibits incorporated by
reference, the location of the Exhibit in the previous filing is indicated in
parentheses.

Exhibit No. Description

3.1 Certificate of Incorporation, as amended.**(1)
3.2 Bylaws.**(1)
10.1 Voxware, Inc. 1994 Stock Option Plan.**(1)
10.2 Form of Voxware, Inc. Stock Option Agreement.**(1)
10.3 Form of Indemnification Agreement.**(1)
10.4 Series A Preferred Stock Purchase Agreement, dated December 19,
1995, as amended.**(1)
10.5 Employment Agreement dated January 3, 1994, with Michael
Goldstein, as amended.**(1)
10.6 Employment Agreement dated February 1, 1995, with Kenneth H.
Traub.**(1)
10.7 Employment Agreement dated February 28, 1994, with J. Gerard
Aguilar.**(1)

23

10.8 Employment Agreement dated August 15, 1994, with Steven J.
Ott.**(1)
10.9 Technology Transfer Agreement Effective May 19, 1995, between
Suat Yeldener Ph.D. and Voxware, Inc.**(1)+
10.10 Software License Agreement, dated January 31, 1996, with
Netscape Communications Corporation.**(1)+
10.11 License Agreement, dated June 28, 1996 with America Online,
Inc.**(1)+
10.12 License Agreement, dated September 26, 1995 with Microsoft
Corporation.**(1)+
10.13 License Agreement, dated June 28, 1996 with USFI, Inc.**(1)+
10.14 License Agreement, dated March 29, 1996 with VDOnet Corporation
Ltd.**(1)+
10.15 License Agreement, dated June 28, 1996 with Vienna Systems
Corporation.**(1)+
10.16 Lease, dated April 10, 1996, between College Road Associates,
Limited Partnership and the Company.**(1)
10.17 Acquisition Agreement, dated January 30, 1996, with K & F
Software.**(1)
10.18 Stockholders Agreement, dated December 19, 1995, as
amended.**(1)
10.19 License Agreement, dated September 13, 1996 with Lucent
Technologies Inc.**(1)+
10.20 1996 Employee Stock Purchase Plan.**(1)
10.21 License Agreement, dated September 27, 1996 with Disney
Online.**(1)+
10.22 Loan Agreement dated October 31, 1996 between Silicon Valley
and the Company.**(2)
10.23 Loan Modification Agreement dated May 5,1997 between Silicon
Valley Bank and the Company.**(3)
10.24 Agreement dated March 31, 1997 by and between the Company and
Microsoft regarding the license of the Company's RT24
Codec.**+(4)
10.25 Letter Agreement dated April 17, 1997 by and between the
Company and Microsoft clarifying Microsoft's rights under the
RT24 Codec license.**+(4)
10.26 Agreement dated March 31, 1997 by and between the Company and
Microsoft regarding the license of the Company's MetaSound
Codec.**+(4)
11.1 Computation of Per Share Earnings.
16.1 Letter from Ernst & Young LLP respecting change in certifying
accountant.**(1)
23.1 Consent of Arthur Andersen LLP.*
27.1 Financial Data Schedule.*
99 Important Factors Regarding Forward-Looking Statements.*

- -----------
* Filed herewith.
** Previously filed with the Commission as Exhibits to, and incorporated by
reference from, the following documents:
(1) Filed in connection with Registration Statement on Form S-1 (File
Number 33-08393).
(2) Filed in connection with the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1996.
(3) Filed in connection with the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 1997.
(4) Filed in connection with the Amendment to the Company's quarterly
report on Form 10-Q/A for the quarter ended March 31, 1997.
+ Confidential treatment has been granted for portions of such document.

(b) Reports on Form 8-K:

No Current Report on Form 8-K was filed by the Company in the fourth
quarter ended June 30, 1997.

24

SIGNATURES

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

VOXWARE, INC.

By: /s/ Michael Goldstein
----------------------------------
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints each of MICHAEL GOLDSTEIN and KENNETH H.
TRAUB, or either of them, his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Form 10-K Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting said attorney-in-fact and agent, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

/s/ Michael Goldstein President and Chief Executive September 18, 1997
- ------------------------------------
Michael Goldstein Officer and Director (principal
executive officer)

/s/ Kenneth H. Traub Executive Vice President, September 18, 1997
- ------------------------------------
Kenneth H. Traub Chief Financial Officer,
Secretary and Director (principal
financial officer)

/s/ J. Gerard Aguilar Director September 18, 1997
- ------------------------------------
J. Gerard Aguilar

/s/ William J. Geary Director September 18, 1997
- ------------------------------------
William J. Geary

/s/ Jordan S. Davis Director September 18, 1997
- ------------------------------------
Jordan S. Davis

/s/ Andrew I. Fillat Director September 18, 1997
- ------------------------------------
Andrew I. Fillat

/s/ David Roux Director September 18, 1997
- ------------------------------------
David Roux

/s/ Richard M. Schell Director September 18, 1997
- ------------------------------------
Richard M. Schell

/s/ Nicholas Narlis Vice President, September 18, 1997
- ------------------------------------
Nicholas Narlis Chief Accounting Officer
and Treasurer (principal
accounting officer)

25

VOXWARE, INC.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Public Accountants.................................................................... F-2
Balance Sheets.............................................................................................. F-3
Statements of Operations.................................................................................... F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)..................... F-5
Statements of Cash Flows.................................................................................... F-6
Notes to Financial Statements............................................................................... F-7

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Voxware, Inc.:

We have audited the accompanying balance sheets of Voxware, Inc. (a
Delaware corporation) as of June 30, 1997 and 1996 and the related statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended June
30, 1997. 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 Voxware, Inc. as of June 30,
1997 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
August 4, 1997

F-2

VOXWARE, INC.

BALANCE SHEETS

June 30,
--------------------------------
1996 1997
--------------- ---------------
(In thousands, except
share and per share data)
ASSETS

Current assets:
Cash and cash equivalents ................................................. $ 3,837 $ 10,627
Short-term investments .................................................... -- 5,842
Accounts receivable, net of allowance for doubtful accounts of
$25 and $400 ........................................................... 470 2,822
Prepaid expenses and other current assets ................................. 54 309
-------- --------
Total current assets ................................................. 4,361 19,600
Property and equipment, net .................................................... 611 566
Other assets, net .............................................................. 364 55
-------- --------
$ 5,336 $ 20,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ..................................... $ 365 $ 2,312
Deferred revenues ......................................................... 109 477
-------- --------
Total current liabilities ............................................ 474 2,789
-------- --------
Deferred rent .................................................................. -- 241
-------- --------
Redeemable Series A Convertible Preferred Stock ................................ 5,938 --
-------- --------

Commitments and contingencies (Note 9)

Stockholders' equity (deficit):
Preferred stock, $.001 par value, 10,000,000 shares authorized; 6,000,000
Redeemable Series A Convertible shares issued and outstanding at June
30, 1996; no shares issued and outstanding at June 30, 1997 ............ -- --
Common stock, $.001 par value, 30,000,000 shares authorized;
5,947,496 and 12,497,258 shares issued and outstanding at June 30,
1996 and 1997, respectively ............................................. 6 13
Additional paid-in capital ................................................ 3,177 28,488
Unrealized loss on available-for-sale securities .......................... -- (2)
Accumulated deficit ....................................................... (4,259) (11,308)
-------- --------
Total stockholders' equity (deficit) ................................. (1,076) 17,191
-------- --------
$ 5,336 $ 20,221
======== ========

The accompanying notes are an integral part of these statements.

F-3

VOXWARE, INC.

STATEMENTS OF OPERATIONS

Year Ended June 30,
---------------------------------------

1995 1996 1997
-------- -------- --------
(In thousands, except per share data)
Revenues:
Product revenues:
Initial license fees ............... $ -- $ 1,256 $ 5,432
Royalties and recurring license fees -- 238 1,996
-------- -------- --------
Total product revenues ........ -- 1,494 7,428
Service revenues ..................... -- 113 351
-------- -------- --------
Total revenues .................. -- 1,607 7,779
-------- -------- --------
Cost of revenues:
Cost of product revenues ............. -- 17 208
Cost of service revenues ............. -- 28 164
-------- -------- --------
Total cost of revenues ............. -- 45 372
-------- -------- --------
-- 1,562 7,407
-------- -------- --------
Operating expenses:
Research and development ............. 537 2,497 7,845
Sales and marketing .................. 332 1,084 4,124
General and administrative ........... 365 980 3,204
-------- -------- --------
Total operating expenses ........... 1,234 4,561 15,173
-------- -------- --------
Operating loss ..................... (1,234) (2,999) (7,766)
Interest income ......................... 65 132 722
-------- -------- --------
Net loss ................................ $ (1,169) $ (2,867) $ (7,044)
======== ======== ========

Net loss per share ...................... $ (0.62)
========

Shares used in computing
net loss per share
11,301
========

The accompanying notes are an integral part of these statements.

F-4

VOXWARE, INC.

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

Stockholders' Equity
(Deficit)
------------------------------------------------------------------------------------

Redeemable Unrealized
Series A Loss on
Convertible Common Stock Additional Available-
Preferred --------------------- Paid-in for-Sale Accumulated
Stock Shares Amount Capital Securities Deficit Total
----- ------ ------ ------- ---------- ------- -----

(in thousands, except share data)

Balance, June 30, 1994 ................... $ -- 4,122,496 $ 4 $ 518 $ -- $ (216) $ 306
Sale of common stock ................ -- 1,650,000 2 2,417 -- -- 2,419
Net loss ............................ -- -- -- -- -- (1,169) (1,169)
--------- ----------- ------ --------- ------ --------- ---------
Balance, June 30, 1995 ................... -- 5,772,496 6 2,935 -- (1,385) 1,556
Sale of Redeemable Series A
Convertible Preferred Stock ...... 5,931 -- -- -- -- -- --
Exercise of common stock
warrants ......................... -- 115,000 -- 172 -- -- 172
Exercise of common stock
options .......................... -- 60,000 -- 70 -- -- 70
Accretion of redemption
premium on Redeemable
Series A Convertible
Preferred Stock .................. 7 -- -- -- -- (7) (7)
Net loss ............................ -- -- -- -- -- (2,867) (2,867)
--------- ----------- ------ --------- ------ --------- ---------
Balance, June 30, 1996 ................... 5,938 5,947,496 6 3,177 -- (4,259) (1,076)

Exercise of common stock
warrants ......................... -- 696,250 1 760 -- -- 761
Accretion of redemption
premium on Redeemable
Series A Convertible
Preferred Stock .................. 5 -- -- -- -- (5) (5)
Mandatory conversion of
Redeemable Series A Convertible
Preferred Stock .................. (5,943) 3,000,000 3 5,940 -- -- 5,943
Issuance of common stock upon
Initial Public Offering, net of
offering costs of $1,175,000 ..... -- 2,823,237 3 18,514 -- -- 18,517
Exercise of common stock
options .......................... -- 5,000 -- 2 -- -- 2
Issuance of common stock pursuant
to Employee Stock Purchase Plan .. -- 25,275 -- 95 -- -- 95
Unrealized loss on available-for-sale
securities ....................... -- -- -- -- (2) -- (2)
Net loss ............................ -- -- -- -- -- (7,044) (7,044)
--------- ----------- ------ --------- ------ --------- ---------
Balance, June 30, 1997 ................... $ -- $12,497,258 $ 13 $ 28,488 $ (2) $ (11,308) 17,191
========= =========== ====== ========= ====== ========= =========

The accompanying notes are an integral part of these statements.

F-5

VOXWARE, INC.

STATEMENTS OF CASH FLOWS
(In thounuds)

Year Ended June 30,
-------------------------------------------
1995 1996 1997
--------- --------- ---------

Operating activities:
Net loss ......................................................................... $ (1,169) $ (2,867) $ (7,044)
Adjustments to reconcile net loss to net cush used in
operating activities:
Depreciation and amortization ................................................... 17 104 222
Provision for doubtful accounts ................................................. -- 25 467
Changes in assets and liabilities:
Accounts receivable ......................................................... -- (495) (2,819)
Prepaid expense and other current assets .................................... (5) (49) (255)
Other assets ................................................................ (3) (355) 309
Accounts payable and accrued expenses ....................................... 58 254 1,947
Deferred revenues ........................................................... -- 109 368
Deferred rent ............................................................... -- -- 241
--------- --------- ---------
Net cash used in operating activities ................................... (1,102) (3,274) (6,564)
--------- --------- ---------

Investing activities:
Purchases of short-term investments .............................................. -- -- (105,325)
Maturities and sales of short-term investments ................................... -- -- 99,481
Purchases of property and equipment .............................................. (101) (586) (177)
--------- --------- ---------
Net cash used in investing activities ................................... (101) (586) (6,021)
--------- --------- ---------

Financing activities:
Proceeds from issuance of common stock, net ...................................... 2,419 -- 18,517
Proceeds from exercise of common stock warrants .................................. -- 172 761
Proceeds from exercise of common stock options ................................... -- 70 2
Proceeds from sale of Redeemable Series A
Convertible Preferred Stock ................................................. -- 5,932 --
Issuance of common stock pursuant to Employee Stock Purchase Plan ................ -- -- 95
--------- --------- ---------
Net cash provided by financing activities ............................... 2,419 6,174 19,375
--------- --------- ---------

Increase in cash and cash equivalents .............................................. 1,216 2,314 6,790
Cash and cash equivalents, beginning of period ..................................... 307 1,523 3,837
--------- --------- ---------
Cash and cash equivalents, end of period ........................................... 1,523 3,837 10,627
Shom-term investments, end of period ............................................... -- -- 5,842
--------- --------- ---------
Cash and short-term investments, end of period ..................................... $ 1,523 $ 3,837 $ 16,469
========= ========= =========

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Conversion of Redeemable Series A Convertible Preferred Stock
to Common Stock ......................................................... $ -- $ -- $ 5,943
Accretion of redemption premium on Redeemable Series A
Convertible Preferred Stock ............................................. $ -- $ 7 $ 5
Cashless exercise of 377,500 warrants, converted at a rate of
one-half share of Common Stock per warrant (converted to 188,750
shares of Common Stock) in December 1996 ................................ $ -- $ -- $ --
Unrealized loss on short-term investments ................................... $ -- $ -- $ (2)
========= ========= =========

The accompanying notes are an integral part of these statements.

F-6

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The Company

Voxware, Inc. (the "Company") develops, markets, licenses and supports
digital speech and audio technologies, solutions and applications. The Company
licenses its products to software and hardware companies.

The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards. The introduction of products
incorporating new technology and the emergence of new industry standards could
render the Company's products obsolete and unmarketable and could exert price
pressures on existing products. The Company's ability to anticipate changes in
technology and industry standards and successfully develop and introduce new and
enhanced products, as well as additional applications for existing products, in
each case on a timely basis, will be a critical factor in the Company's ability
to grow and to be competitive. The Company has only a limited operating history
upon which an evaluation of the Company and its prospects can be based. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the early stage of
development, particularly companies in new and rapidly evolving markets. As of
June 30, 1997, the Company had an accumulated deficit of $11,308,000. In
addition, the Company's annual and interim operating results may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside the Company's control. These factors include the level of usage of
the Internet, the budgeting cycles of potential customers, the amount and timing
of capital expenditures and other costs relating to the expansion of the
Company's operations, the introduction of new products or services by the
Company or its competitors, pricing changes in the industry, technical
difficulties with respect to the use of products developed by the Company,
general economic conditions and economic conditions specific to the Internet.
The Company believes that its capital resources are adequate to fund the
Company's operations for the year ending June 30, 1998.

The Company was incorporated in the State of Delaware on August 20, 1993 as
Advanced Communication Technologies, Inc. and changed its name to Voxware, Inc.
in May 1994. The Company consummated an Initial Public Offering of Common Stock
("IPO") which closed on November 4, 1996 and December 4, 1996. The Company
offered and sold an aggregate of 2,823,237 shares of common stock at an initial
public offering price of $7.50 per share. The net proceeds to the Company from
the IPO, after payment of offering expenses, were approximately $18,517,000.

Summary of Significant Accounting Policies

Use of Estimates

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

F-7

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Revenue Recognition

The Company generates revenues from two sources: fees from product licenses
and fees for services provided. Product revenues consist of initial license fees
and royalties and recurring license fees. Product revenues from initial license
fees are generally recognized upon shipment, provided that there are no
significant post-delivery obligations, the payment is due within one year and
collection of the resulting receivable is deemed probable. Royalties and
recurring license fees include royalties, which are generally based on a
percentage of licensees' sales or units shipped, and pre-determined periodic
license fees. Royalty revenues are recognized at the time of the customer's
shipment of products incorporating the Company's technology. Recurring product
license fees are generally recognized at the inception of the renewal period,
provided that there are no significant post-delivery obligations, the payment is
due within one year and collection of the resulting receivable is deemed
probable. Service revenues from customer support, including the amounts bundled
with initial or recurring license fees, are recognized over the term of the
support period, which is typically one year. Service revenues from engineering
fees are recognized upon customer acceptance or over the period in which
services are provided if customer acceptance is not required.

Research and Development

Research and development expenditures are charged to operations as
incurred. Pursuant to Statement of Financial Accounting Standards No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise
Marketed", development costs incurred in connection with the research and
development of software products and enhancements to existing software products
are expensed when incurred unless technological feasibility has been
established. Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant.

Reverse Stock Split

On September 19, 1996 the Company effected a one for two reverse stock
split and decreased its authorized common stock to 30,000,000 shares. All
references in the accompanying financial statements to the number of common
shares and per share amounts have been retroactively restated to reflect the
reverse stock split.

Net Loss Per Share

For periods subsequent to the Company's IPO, net loss per share is
calculated by dividing net loss by the weighted average number of common shares
outstanding for the respective periods adjusted for the dilutive effect of
common stock equivalents, which consist of stock options, using the treasury
stock method. Pursuant to the requirements of the Securities and Exchange
Commission, common stock issued by the Company during the twelve months
immediately preceding the initial public offering, plus the number of common
equivalent shares which became issuable during the same period pursuant to the
grant of common stock options, have been included in the calculation of the
shares used in computing net loss per share as if they were outstanding for all
periods presented (using the treasury stock method and the initial public
offering price of $7.50 per share). Pursuant to the policy of the Securities and
Exchange Commission the calculation of shares used in computing net loss per
share also includes the Redeemable Series A Convertible Preferred Stock which
converted into 3,000,000 shares of common stock effective upon the closing of
the IPO.

F-8

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and,
when adopted, will require restatement of prior years' earnings per share. If
the Company had adopted SFAS No. 128 for the period ended June 30, 1997, there
would have been no effect on net loss per share, on either the basic or diluted
basis.

Cash, Cash Equivalents and Short-term investments

Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with maturities of 90 days or less from the date of
purchase. Short-term investments consist primarily of high-grade United States
Government-backed securities and corporate obligations with maturities between
90 and 365 days from the date of purchase. The Company's entire short-term
investment portfolio is classified as available-for-sale and is stated at fair
value as determined by quoted market values. Changes in the net unrealized
holding gains and losses are included as a separate component of stockholders'
equity (deficit).

The following table details the Company's investments as of June 30, 1997:

Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ----------- ---------- ----------
(in thousands)

U.S. Government Agencies ................................. $ 1,000 $ -- $ (1) $ 999
Corporate obligations .................................... 13,980 -- (1) 13,979
-------- -------- -------- --------
$ 14,980 $ -- $ (2) $ 14,978
======== ======== ======== ========

Included in cash and cash equivalents .................... $ 9,136 -- -- $ 9,136
Included in short-term investments ....................... 5,844 -- (2) 5,842
-------- -------- -------- --------
$ 14,980 $ -- $ (2) $ 14,978
======== ======== ======== ========

The Company has not experienced any significant realized gains or losses on its
investments through June 30, 1997. For purposes of determining gross realized
gains and losses, the cost of short-term investments sold is based upon specific
identification. As of June 30, 1997, all short-term investments are due within
one year.

Accounts Receivable

Accounts receivable as of June 30, 1996 and 1997 consisted of the
following:

June 30,
-----------------------
1996 1997
------- -------
(in thousands)
Accounts receivable - billed ................... $ 385 $ 1,629
Accounts receivable - unbilled ................. 110 1,593
------- -------
495 3,222
Less--allowance for doubtful accounts .......... (25) (400)
------- -------
$ 470 $ 2,822
======= =======

"Accounts receivable - unbilled" relates to revenues recognized, but which
were not billed as of the end of the reporting period in accordance with payment
schedules pursuant to contractual agreements with customers.

F-9

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the useful lives of the assets ranging from three to
seven years. Maintenance, repairs and minor replacements are charged to expense
as incurred. In accounting for property and equipment, the Company adopted
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" during the year ended June 30, 1997. The adoption of SFAS 121 had no impact
on the Company's financial statements.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash balances and trade receivables. The
Company invests its excess cash with highly liquid investments (short-term bank
deposits). The Company's customer base principally comprises companies within
the software, computer and telecommunications industries. The Company does not
typically require collateral from its customers.

Major Customers

The Company's largest customer, which is also a related party, accounted
for 16% and 31% of revenues, respectively, for the years ended June 30, 1997 and
1996 (see Note 10). In addition, two other customers each accounted for 15% of
revenues for the year ended June 30, 1997.

Income taxes

Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The measurement of
deferred income tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits which are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.

Stock Based Compensation

The Company accounts for its stock based compensation in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Effective July 1, 1996, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") which establishes financial accounting and
reporting standards for stock based employee compensation plans. SFAS No. 123
permits entities to provide pro forma disclosures of net income (loss) and net
income (loss) per share for employee stock option grants made in fiscal year
1996 and future years as if the fair value based method of accounting defined by
this standard had been applied (see Note 4).

Reclassifications

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

F-10

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

2. PROPERTY AND EQUIPMENT:

June 30,
-----------------------
1996 1997
------- -------
(in thousands)
Equipment ...................................... $ 410 $ 457
Leasehold improvements ......................... 50 50
Furniture and fixtures ......................... 276 406
----- -----
736 913
Less--Accumulated depreciation ................. (125) (347)
----- -----
$ 611 $ 566
===== =====

Depreciation expense was approximately $17,000 and $104,000 and $222,000
for the years ended June 30, 1995, 1996 and 1997, respectively.

3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

June 30,
-----------------------
1996 1997
------- -------
(in thousands)
Accounts payable ......................... $ 194 $ 293
Accrued compensation and benefits ........ 110 711
Accrued professional fees ................ 57 553
Accrued software costs ................... -- 240
Other accrued expenses ................... 4 515
------ ------
$ 365 $2,312
====== ======

4. STOCKHOLDERS' EQUITY:

Stock Option Plans

Pursuant to the 1994 Stock Option Plan (the "Plan"), the Company may grant
to eligible individuals incentive stock options (as defined in the Internal
Revenue Code) and nonqualified stock options. An aggregate of 2,350,000 shares
of common stock have been reserved for issuance under the Plan. The exercise
price for incentive stock options may not be less than 100% (110% for holders of
10% or more of the combined voting power of all classes of stock of the Company)
of the fair value of the shares on the date of grant and at least par value for
nonqualified stock options. The period during which an option may be exercised
is fixed by the Board of Directors up to a maximum of ten years (five years in
case of incentive stock options granted to holders of 10% or more of the
combined voting power of all classes of stock of the Company) and options
typically vest over a four-year period.

The Company has granted a total of 70,000 options at prices ranging from
$1.00 to $2.00 outside of the 1994 Stock Option Plan ( "Outside Options ").

F-11

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Information relative to the 1994 Stock Option Plan and the Outside Options is as
follows:

Price Aggregate
Shares Per Share Proceeds
------ --------- --------

Outstanding at June 30, 1994 377,500 $ 0.50--$ 3.00 $ 657,500
Granted ............... 584,000 $ 1.00--$ 1.50 745,750
----------- -------------- -----------
Outstanding at June 30, 1995 961,500 $ 0.50--$ 3.00 1,403,250
Granted ............... 421,150 $ 1.50--$ 7.88 1,865,300
Exercised ............. (60,000) $ 0.50--$ 1.50 (70,000)
Canceled .............. (61,500) $ 1.50--$ 2.40 (92,475)
----------- -------------- -----------
Outstanding at June 30, 1996 1,261,150 $ 0.50--$7.88 3,106,075
Granted ............... 652,450 $ 3.63--$7.88 3,724,486
Exercised ............. (5,000) $ 0.50 (2,500)
Canceled .............. (180,937) $ 1.50--$ 7.88 (1,107,613)
----------- -------------- -----------
Outstanding at June 30, 1997 1,727,663 $ 0.50--$7.88 $ 5,720,448
=========== ============== ===========

As of June 30, 1997, there were 808,327 options exercisable at an aggregate
exercise price of $1,334,081. As of June 30, 1997, there were 627,337 additional
options to purchase common stock available for grant under the 1994 Stock Option
Plan. As of June 30, 1996, there were 545,116 options exercisable at an
aggregate exercise price of $845,589.

The Company adopted the disclosure requirements of SFAS No. 123 effective
for the Company's June 30, 1997 financial statements. The Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock based
compensation. Accordingly, compensation cost has been computed based on the
intrinsic value of the stock option at the date of grant, which represents the
difference between the exercise price and the fair value of the Company's stock.
As the exercise price of the stock options equaled the fair value of the
Company's stock at the date of option issuance, no compensation cost has been
recorded in the accompanying statements of operations. Had compensation been
determined consistent with SFAS No. 123, the Company's net loss and net loss per
share would have been adjusted to the following pro forma amounts:

Year Ended June 30,
----------------------------
1996 1997
---- ----
(in thousands)

Net loss: As reported.................................... $ (2,867) $ (7,044)
Pro forma...................................... $ (2,927) $ (7,663)

Net loss per share: As reported.................................... $ (0.62)
Pro forma...................................... $ (0.68)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in fiscal year 1996 and 1997: risk-free interest rates ranging from 5.7%
to 7.1% based on the rate in effect on the date of grant; no expected dividend
yield; expected lives of 8 years for the options; and expected volatility of
75%.

Because the SFAS No. 123 method of accounting is not required to be applied to
options granted prior to the fiscal year ended June 30, 1996, the resulting pro
forma compensation cost may not be representative of that expected in future
years. The weighted average fair value of options granted was $3.47 and $4.48
for the fiscal years ended June 30, 1996 and 1997, respectively.

F-12

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Information with respect to options outstanding at June 30, 1997 is as
follows:

Weighted Average
Exercise Remaining
Price Per Weighted Average Contractual Life
Period Issued Shares Share Exercise Price
------------------------------- ------------------ --------------- --------------------- -------------------

Prior to July 1, 1995......... 831,500 $0.50-$3.00 $1.48 7.1 years
During the year ended June
30, 1996...................... 298,963 $1.50-$7.88 $3.68 8.7 years
During the year ended June
30, 1997...................... 597,200 $3.63-$7.88 $5.64 9.6 years

Warrants

In March 1994, the Company sold 1,000,000 shares of common stock and
warrants ("Warrants") to purchase an aggregate of 1,000,000 shares of common
stock for $1.50 per share, subject to adjustment in certain circumstances. In
lieu of paying cash upon the exercise of the Warrants, the Warrant holders had
the right to have the Company convert all or a portion of the Warrants into
shares of common stock at a rate of two Warrants for each share of common stock
via a "Cashless Exercise". During the year ended June 30, 1996, Warrants to
purchase 115,000 shares of common stock were exercised for $1.50 per share.
During the year ended June 30, 1997, of the remaining 885,000 Warrants, 377,500
Warrants were converted into 188,750 shares of common stock via Cashless
Exercises and Warrants to purchase 507,500 shares of common stock were exercised
for $1.50 per share.

Employee Stock Purchase Plan

In December 1996 the Company adopted an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code and reserved 200,000 shares of common
stock for issuance under the plan. Under this plan, employees are entitled to
purchase shares at 85% of the fair market value. During the year ended June 30,
1997, the Company issued 25,275 shares of common stock at a purchase price of
$3.77 pursuant to the Employee Stock Purchase Plan.

5. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK:

During fiscal 1996, the Company sold to investors 6,000,000 shares of
$0.001 par value Redeemable Series A Convertible Preferred Stock ("Series A
Preferred Stock") for $1.00 per share resulting in net proceeds to the Company
of approximately $5,931,000. Upon consummation of the IPO, each share of Series
A Preferred Stock converted into one-half share of the Company's common stock.

F-13

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

6. CREDIT FACILITY:

In October 1996, the Company entered into a $2,000,000 revolving line of
credit with Silicon Valley Bank, which was amended to a $5,000,000 revolving
line of credit in May 1997 (the "Credit Facility"). In addition to the revolving
line of credit, the Credit Facility contains a lease component in the amount of
$1,500,000 for the purpose of providing a facility for the financing of the
lease stream of payments that the Company owes to an equipment lessor (see Note
9). Borrowings under the Credit Facility will bear interest at the bank's prime
lending rate. The Credit Facility contains certain restrictive financial
covenants including a minimum quick ratio, a minimum tangible net worth
requirement, a maximum debt to tangible net worth ratio and certain other
covenants, as defined in the agreement. The Credit Facility requires payment of
all outstanding principal, if any, plus all accrued interest on April 5, 1998.
In connection with the lease of the Company's office facility, the Company has
outstanding a $300,000 standby letter of credit at June 30, 1997 naming the
lessor of the office facility beneficiary of the standby letter of credit in the
event that the Company defaults on the lease. As this letter of credit was
established under the terms of the Credit Facility, the Company has $4,700,000
available for borrowing under the Credit Facility. As of and during the year
ending June 30, 1997 there were no amounts outstanding under the Credit
Facility.

7. 401(k) SAVINGS PLAN:

Effective January 1997 the Company adopted a 401(k) Savings Plan (the
"401(k) Plan") available to all employees. The 401(k) Plan permits participants
to contribute up to 10% of their base salary to the 401(k) Plan not to exceed
the limits established by the Internal Revenue Code. In addition, the Company
matches 25% of employee contributions on the initial 6% contributed by
employees. Employees vest immediately in all employee contributions and Company
match contributions. In connection with the 401(k) Plan, the Company recorded
compensation expense of approximately $27,000 for the year ended June 30, 1997.

8. INCOME TAXES:

As of June 30, 1997, the Company had approximately $8,400,000 of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards begin to expire in 2009. Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period. As of
June 30, 1997, the effect of such limitations, if imposed, is not expected to be
material.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and for income tax purposes. As of June 30, 1997, the Company had deferred tax
assets of approximately $4,400,000 relating primarily to net operating loss
carryforwards. The net deferred tax asset has been fully offset by a valuation
allowance.

F-14

VOXWARE, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

9. COMMITMENTS AND CONTINGENCIES:

The Company leases its office facility and certain equipment under
operating leases with remaining noncancelable lease terms generally in excess of
one year. Rent expense was approximately $20,000, $64,000 and $756,000 for the
years ended June 30, 1995, 1996 and 1997, respectively. Future minimum rental
payments for the Company's leases of its office facility and equipment under
operating leases as of June 30, 1997 are as follows:

(in thousands)
Year Ending June 30,
1998................................... $ 707
1999................................... 753
2000................................... 391
2001................................... 391
2002................................... 387
Thereafter............................. 351
-------
$ 2,980
=======

The Company has outstanding a $300,000 standby letter of credit in
connection with the Company's office facility lease (see Note 6).

The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's business, operating results or financial
condition.

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

10. RELATED-PARTY TRANSACTIONS:

The Company derived approximately 31% and 16% of its revenues for the years
ended June 30, 1996 and 1997, respectively, from Netscape Communications
Corporation, which owns 500,000 shares of the Company's common stock.

11. SEGMENT INFORMATION:

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