Voxware, Inc. - Form 10-Q/A

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(in thousands)

Operating lease obligations

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

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 last 90 days. YES x NO ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The page numbers in this Table of Contents reflect actual page numbers, not EDGAR page tag numbers.

References to Voxware, Company, we, us and our in this Form 10-Q/A Amendment No. 1 refer to Voxware, Inc. and its subsidiaries unless the context requires otherwise.

This Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 is being filed to present restated consolidated financial statements as of September 30, 2003 and for the three months then ended. A description of the adjustments that comprise the restatements is discussed in Note 2 of the Notes to Consolidated Financial Statements included in this report.

This report on Form 10-Q/A amends and restates Items 1 and 2 of Part I of the original Form 10-Q as filed on November 19, 2003.

The accompanying unaudited consolidated financial statements of Voxware, Inc. and its wholly-owned subsidiaries, Verbex Acquisition Corporation and Voxware n.v. (referred to hereafter as Voxware or the Company) as of September 30, 2003, and June 30, 2003, (the June 30, 2003 financial information included herein has been extracted from the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K/A Amendment No. 2 for the year ended June 30, 2003) and for the three months ended September 30, 2003 and 2002, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (including normal recurring adjustments) considered necessary to present fairly the consolidated financial statements have been made.

The consolidated statements of operations for the three months ended September 30, 2003, are not necessarily indicative of the results that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K/A Amendment No. 2 for the year ended June 30, 2003.

The Company’s operating results may fluctuate significantly in the future as a result of a variety of factors, including the Company’s ability to compete in the voice-based logistics market, the budgeting cycles of potential customers, the lengthy sales cycle of the Company’s solution, the volume of and revenues derived from sales of products utilizing our third-party partners network, the introduction of new products or services by the Company or its competitors, pricing changes in the industry, the degree of success of the Company’s efforts to penetrate its target markets, technical difficulties with respect to the use of products developed by the Company or its licensees, and general economic conditions.

Subsequent to the issuance of the Company’s September 30, 2003 consolidated financial statements, filed as part of Form 10-Q on November 19, 2003, management identified certain accounting errors, as discussed below, in its previously issued consolidated financial statements. As a result, the consolidated financial statements as of September 30, 2003 and for the three months ended September 30, 2003 have been restated from the amounts previously reported.

As the result of an internal review of the accounting treatment of certain specific transactions, conducted with the assistance of outside counsel and its independent auditing firm, the Company has discovered that it had not filed timely payroll tax returns and it had not made timely payments of its payroll tax liabilities, and that it had understated its liability for payroll taxes, as of September 30, 2003. As a result of this, the Company has accrued penalties and interest relating to its failure to timely report and remit its payroll tax liabilities and it has accrued for the understatement of the payroll tax liability. As of December 31, 2003, payments have been made to federal and state tax authorities on substantially all of the outstanding payroll taxes and interest. The Company is using its best efforts to negotiate a settlement of assessed penalties.

The Company has identified situations where customer arrangements were not adequately documented and billing errors occurred. In addition, the Company identified situations in which revenue was recognized prior to customer acceptance. Therefore, the recognition of revenue and related accounts receivable were overstated and deferred revenue was understated.

3. Other financing expenses in connection with the issuance of Series D Preferred Stock

On June 27, 2003, the Company completed a private placement of Series D Preferred Stock. In the Company’s previously reported consolidated financial statements, the Company recorded all of the related financing expenses in the wrong period.

The Company computes net loss per share under the provisions of SFAS No. 128, Earnings per Share ( SFAS 128 ), and Staff Accounting Bulletin, No. 98 ( SAB 98 ).

Under the provisions of SFAS 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of Common Stock outstanding during the period. The calculation of diluted net loss per share excludes potential common shares if the effect is anti-dilutive. Basic earnings per share are computed by dividing loss by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share are determined in the same manner as basic earnings per share, except that the number of shares is increased assuming exercise of dilutive stock options and warrants using the treasury stock method. As the Company had a net loss, the impact of the assumed exercise of the stock options, warrants and the assumed Preferred Stock conversion in the aggregate amount of 630,291,778 shares and 3,599,000 shares at September 30, 2003 and 2002, respectively, is anti-dilutive and as such, these amounts have been excluded from the calculation of diluted earnings per share.

At September 30, 2003, the Company has stock-based compensation plans which are described more fully in the Company’s annual report on Form 10-K/A Amendment No. 2 for the year ended June 30, 2003. The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 ( APB 25 ), Accounting for Stock Issued to Employees, using an intrinsic value approach to measure compensation expenses, if any. Under this method, compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price. Options issued to non-employees are accounted for in accordance with FASB Statement No. 148 (SFAS 148), Accounting for Stock-Based Compensation – Transition and Disclosure, which was released in December 2003 as an amendment of FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation, and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services, using a fair value approach.

SFAS 123 as amended by SFAS 148 established accounting and disclosure requirements using a fair value basis method of accounting for stock-based employee compensation plans. As allowed by SFAS 123 and amended by SFAS 148, the Company has elected to continue to follow the intrinsic value method of accounting as prescribed by APB 25 to account for employee stock options. Compensation expense charged to operations in the quarters ended September 30, 2003 and 2002 was $203,000 and

none, respectively. Deferred employee compensation of $3,017,000 and none as of September 30, 2003 and 2002, respectively, is included in the accompanying consolidated financial statements. In accordance with SFAS 123, 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 years 2003 and 2002: risk-free interest rates ranging from 0.00% to 1.75% 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 100%. The following table illustrates the effects on net loss applicable to common stockholders and net loss per share applicable to common stockholders if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:

On December 31, 2003, the FASB issued FASB Statement No. 148, Accounting for Stock Based Compensation—Transition and Disclosure (SFAS 148). SFAS 148 amend FASB Statement No. 123, Accounting for Stock Based Compensation, to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure on the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for the compensation using the fair value method of SFAS 123 or the intrinsic value method of APB Opinion 25. The Company adopted the required disclosure provisions of SFAS 148 as described under accounting policy footnote Stock Based Compensation.

In March 2003, the EITF published Issue No. 00-21 ( EITF 00-21 ), Accounting for Revenue Arrangements with Multiple Deliverables. This issue addresses certain aspects of the accounting by a vendor for arrangements under which it performs multiple revenue-generating activities and how to determine whether such an arrangement involving multiple deliverables contains more than one unit of accounting for purposes of revenue recognition. The guidance is effective for revenue arrangements that the Company entered into in fiscal periods beginning after June 15, 2003. Accordingly, the Company adopted EITF 00-21 on July 1, 2003. The Company determined the adoption of EITF 00-21 did not have a material impact on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150 ( SFAS 150 ), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 modifies the traditional definition of liabilities to encompass certain obligations that must be settled through the issuance of equity shares. These obligations are considered liabilities as opposed to equity or mezzanine financing under the provisions of SFAS 150. This new standard is effective immediately for financial instruments entered into or modified after May 31, 2003, and for all other financial instruments beginning in the first quarter of fiscal 2004. The adoption of SFAS 150 did not have a material impact on the Company’s consolidated financial statements.

During the three-months ended September 30, 2003, the holder of the Company’s Series B Preferred Stock converted 800 shares into 3,735,956 shares of Common Stock. As of September 30, 2003, the holder of the Company’s Series B Preferred Stock can

convert the remaining 966.619 outstanding shares into a total of 4,514,044 shares of Common Stock at a fixed conversion price of $0.00021413527 per share. See note 8[f] for subsequent events.

The Series D Preferred Stock has a 7% dividend payable in cash or equity, at the election of Voxware, and each preferred share is convertible into one share of Voxware Common Stock at an initial conversion price of $0.015 per share. As of September 30, 2003, the Company accrued dividends totaling $133,000.

In connection with the Private Placement of Series D Preferred Stock, if the Company fails to complete filing of registration statements, as defined in the transaction agreements, certain purchasers can also receive additional Common Stock warrants to purchase up to 18,666,667 additional shares of Common Stock at an exercise price of $0.015 per share. Such warrants, if issued, would expire on June 27, 2013. These warrants have not been issued as of the report date. The Company has filed a registration statement in a timely manner as required. Company counsel has received a comment letter from the Securities and Exchange Commission requesting additional information related to the filing of the registration statement. The Company is using its best efforts to respond to the Commission and have the registration statement become effective as soon as reasonably practicable. The holders of the Series D Preferred Stock have contingently waived their rights to receive these warrants.

On June 27, 2003, the Company closed the transactions contemplated by the Series D Preferred Stock Purchase Agreement, including the payment to Castle Creek of $650,000 and the amendment of the terms of the Series B Preferred Stock to delete the dividend, liquidation preference and redemption provisions of the Series B Preferred Stock. On July 17, 2003, a Stipulation of Dismissal With Prejudice was filed in the United States District Court for the District of Delaware, which dismissed the litigation brought by Castle Creek against the Company.

On May 7, 2003, the Company obtained a facility line of credit with Silicon Valley Bank. The maximum amount that can be drawn on the line of credit is $250,000. The amount available to us is subject to a borrowing base consisting of 80% of our eligible accounts receivable. This line of credit matures on May 6, 2004. The facility bears interest at prime plus 2% per annum and a handling fee of 0.25% of specific accounts receivable invoices financed. The line of credit is secured by eligible accounts receivable and inventory. As of December 31, 2003, there was no outstanding balance on this line of credit.

The Company’s wholly-owned subsidiary, Voxware n.v., maintains a facility line of credit with KBC Bank Roselare. The maximum amount that can be drawn on this line of credit is €250,000. This line of credit is due upon demand. The facility bears interest at 7.10% per annum and a handling fee of 1.50% of the gross advance amounts drawn, and is secured by 30% of Voxware n.v. inventory balances. As of September 30, 2003, there was $291,000 outstanding principal balance on the line of credit.

Voxware n.v. also has an equipment loan with KBC Bank Roselare. The original amount of this loan was €70,000. This equipment loan is due November 13, 2005, and is payable in 36 equal installments of €2,136. The facility bears interest at 6.12% per annum, and is secured by a blanket lien on equipment. As of September 30, 2003, there was an outstanding principal balance of $61,000.

The Company is managed in two operating segments: industrial voice-based solutions and speech compression technologies. The voice-based solutions business relates to the Company’s current business focus since the Verbex acquisition. The speech compression technologies business relates to the Company’s business focus prior to the Verbex acquisition. In September 1999, the Company sold substantially all of the assets related to the speech compression business to Ascend. The Company does not expect to proactively market the speech compression technologies in the future, and expects revenues generated from the licensing of the speech compression technologies business to decrease significantly over time.

Costs associated with corporate and administrative overhead expenses are included in the speech compression technologies segment. Intangible assets and goodwill related to the Verbex acquisition, and the amortization of those assets, are included in the industrial voice-based products segment. Business segment information for the three month periods ended September 30, 2003 and 2002 is included in the table below:

As defined in the transaction agreements for the warrants to purchase 93,333,333 shares of Series D Preferred Stock, certain purchasers received warrants to purchase 37,111,111 shares of Series D Preferred Stock at an exercise price of $0.001 per share. Such warrants will expire on June 27, 2013. During the quarter ended December 31, 2003, certain holders of the Company’s Series D Warrants exercised 37,011,706 in eligible warrants in exchange for 37,011,706 shares of the Company’s Series D Preferred Stock. As a result of the Company’s restatement of revenue for the year ended June 30, 2003 and in accordance with the terms of the warrants agreement, the Company will issue an additional 23,777,778 Series D Preferred Stock warrants to respective purchasers. The remaining 32,444,444 warrants have been cancelled as of December 31, 2003 in accordance with the terms set forth in the warrants agreement.

If the Company fails to complete filing of registration statements, as defined in the transaction agreements, these certain purchasers can also receive additional Common Stock warrants to purchase up to 18,666,667 additional shares of Common Stock at an exercise price of $0.015 per share. Such warrants, if issued, would expire on June 27, 2013. The Company has filed a registration statement in a timely manner, as required. Company counsel has received a comment letter from the Securities and Exchange Commission requesting additional information related to the filing of the registration statement. The Company is using its best efforts to respond to the Commission and have the registration statement become effective as soon as reasonably practicable. The holders of the Series D Preferred Stock have contingently waived their rights to receive these warrants.

In connection with the Series D Preferred Stock private placement, each respective Purchaser has agreed not to sell any shares of Common Stock issued upon the conversion of the Series D Preferred Stock for a period of one (1) year through June 27, 2004. In addition, each of the respective Purchasers has agreed for a period of two (2) years from the date of the closing that it shall limit its sale of any shares of Common Stock issued upon conversion of Series D Preferred Stock to no more than ten percent (10%) of the previous month’s trading volume on the principal securities exchange, automated quotation service or consolidated reporting system upon which the Company’s Common Stock is then listed and not to short sell any shares of Common Stock issued upon conversion of Series D Preferred Stock. All shares of Series D Preferred Stock rank senior in liquidation preference to all other securities issued by the Company.

This report contains forward-looking statements. Such statements are subject to certain factors that may cause our plans to differ or results to vary from those expected, including the risks associated with: our need to raise additional capital in order to meet the Company’s cash requirements over the next twelve months and continue as a going concern; our need to introduce new and enhanced products and services in order to increase market penetration, and the risk of obsolescence of its products and services due to technological change; our need to attract and retain key management and other personnel with experience in providing integrated voice-based solutions for e-logistics, specializing in the supply chain sector; the potential for substantial fluctuations in our results of operations; competition from others; our evolving distribution strategy and dependence on its distribution channels; the potential that voice-based products will not be widely accepted; and a variety of risks set forth from time to time in our filings with the SEC. We undertake no obligation to publicly release results of any of these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrences of unexpected results.

Statements contained in this Form 10-Q/A that are not based on historical fact are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by the use of forward-looking terminology such as may, will, expect, estimate, anticipate, continue, or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve risks and uncertainties.

We are a leading provider of voice-based technology that optimizes the front line logistics and distribution center workforce. Our primary product, VoiceLogistics, enables warehouse workers to perform a wide array of logistics tasks-such as picking, receiving, put away, replenishment, loading, returns processing, cycle counting, cross-docking and order entry-more efficiently and effectively. VoiceLogistics also gives distribution center management an effective tool for reducing logistics costs and optimizing complex materials handling processes.

The VoiceLogistics solution is a combination of software, hardware and professional services. Enabled by our patented speech recognition and patent-pending VoiceXML web browser technologies, the VoiceLogistics solution creates a dynamic, real-time link between highly mobile workers, the warehouse management system ( WMS ) and supervisory personnel. We believe that our solution is unique in the industry because it is the first web-based, people-centric, interactive speech recognition application engineered specifically to operate in highly demanding industrial environments. The Company was notified by the United States Patent and Trademark Office that its application for patent (Patent # 6662163) had been approved on December 9, 2003.

VoiceLogistics is primarily sold to large companies that operate warehouses and distribution centers. We have customers from a variety of industry sectors, including food service, grocery, retail, consumer packaged goods, third party logistics providers and wholesale distribution. Our technology has the ability to integrate easily (generally in less than 90 days) with an external WMS. VoiceLogistics revenues are generated from product sales, license fees, professional services, and maintenance fees.

While VoiceLogistics is our primary product and business focus, we also derive revenue from a legacy product line of stationary voice recognition devices, as well as from speech compression technologies that we have licensed. We expect that revenues generated from the licensing of our speech compression technologies will decrease significantly over time.

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. The amounts of assets and liabilities reported in our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions which are used for, but not limited to, the accounting for allowance for doubtful accounts, warranty costs, goodwill and intangible asset impairments, restructurings, inventory and income taxes. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of our consolidated financial statements.

We derive revenues from products and services. The products and services are sold separately as well as combined. Product sales include hardware and license fees (from our voice-based VISE and VoxBrowser proprietary software technologies that are installed on such hardware) generated from our VoiceLogistics and stationary device product lines. License fees include application software and speech coding software license fees generated from our VoiceLogistics product line and speech compression technologies segment. Sales to customers are subject to agreements, which outline terms and conditions, including applicable prices, licensing rights and payment terms ranging up to 90 days from delivery of such products and services. We do not include right of return provisions in our standard customer agreements. However, some customers sign initial trial agreements with us, where we generally allow them up to 90 days to evaluate our products where they have the right of return. When a customer signs such a trial agreement, we do not recognize revenue on such product sales until such time as a customer formally commits to purchase such products. Sales to resellers and other third parties may also include additional warranty provisions and specific price protection that is incremental to what customer arrangements generally contain.

VoiceLogistics is our primary product line. Our VoiceLogistics solution includes software and hardware components, and generally some combination of professional services, extended warranty, maintenance and customer support elements. The software component of our VoiceLogistics product line includes our voice-based VISE and VoxBrowser proprietary software technologies that are installed on our proprietary hardware. Product sales are comprised of such proprietary hardware and voice-based software. In addition, our proprietary application software is generally installed as part of our VoiceLogistics solution on a server, which communicates with both the central WMS (or system of record) and many wearable computers. The current hardware component utilized as part of the VoiceLogistics solution is our own proprietary system called the VLS-310. We also offer our VoiceLogistics customers the option to retain us to provide installation, implementation and training services, as well as other assistance in tailoring our solution to meet specific requirements within their facilities. We typically recognize all hardware, software and professional services revenues on initial customer sites in the period that the implementation is completed. For follow-on sites revenue is recognized in the period when hardware and software are delivered, and in the period when professional services are rendered. Additionally, we offer customers and resellers the option of entering into extended warranties on hardware and annual maintenance and technical support arrangements with us.

Our voice-based stationary devices, including our VoxSort product line, are sold by our resellers and us as a secondary product line. Our stationary devices generally include only software and hardware components. The software component includes our voice-based VISE technology that is installed on hardware. The hardware component of our stationary devices product line ranges from individual boards to complete workstations. Product sales are comprised of such proprietary hardware and voice-based software. We typically recognize all hardware and software revenues in the period when delivered. We do not presently offer customers or resellers who purchase such stationary device products the option to enter into extended warranties on hardware, or annual maintenance or technical support arrangements with us. Generally, customers contract with resellers for purchases of application software and other professional services.

Revenue is recognized when earned in accordance with applicable accounting standards, including AICPA Statement of Position ( SOP ) No. 97-2, Software Revenue Recognition, as amended. SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, does not currently apply since arrangements with our customers do not require significant production, modification, or customization to our software. Revenues from product sales and license fees generally are recognized upon shipment of hardware and applicable software, or completion of the implementation, if applicable, provided collection is determined to be probable and there are no significant post-delivery obligations. Vendor-specific objective evidence of the fair value of the hardware and software components is based on the price determined by management when the element is not yet sold separately, but is expected to be sold in the marketplace within six months of the initial determination of the price by management. Service revenues for professional services fees are generally recognized upon completion of implementation, or over the period in which such services are rendered, provided there are no significant post-delivery obligations connected with such services. Extended warranty and maintenance revenues, including the amounts bundled with initial or recurring revenues,

are recognized over the term of the warranty or support period, which is typically one year. If an acceptance period is required, revenues are recognized upon customer acceptance.

We continue to generate revenues from our speech coding technologies in the form of royalties, periodic license renewal fees, and maintenance fees. Royalty revenues are recognized at the time of the customers’ shipment of products incorporating our technology. Periodic license fees generally are recognized at the inception of the renewal period, provided that persuasive evidence of an arrangement exists, pricing is fixed or determinable, the payment is due within one year, and collection of the resulting receivable is deemed probable. Maintenance revenue, including the amounts bundled with initial or recurring revenues, are recognized over the term of the maintenance support period, which is typically one year.

The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and an assessment of international and economic risk, as well as the aging of the accounts receivable. If there is a change in a major customer’s credit worthiness or actual defaults differ from our historical experience, our estimates of recoverability of amounts due us could be affected.

We accrue for warranty costs based on our assessment of expected repair cost per unit, service policies and specific known issues. If we experience claims or significant changes in costs of services, such as third party vendor charges, materials or freight, which could be higher or lower than our historical experience, our cost of revenues could be affected.

Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not ultimately be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its ultimate disposition.

We evaluate the recoverability of goodwill annually or more frequently if impairment indicators arise, as required under Statement of Financial Accounting Standards ( SFAS ) No. 142, Goodwill and Other Intangible Assets. Goodwill is reviewed for impairment by applying a fair-value-based test at the business segment level. A goodwill impairment loss is recorded for any goodwill that is determined to be impaired. Under SFAS No. 144, Accounting for the Disposal of Long-Lived Assets, intangible assets are evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized for an intangible asset to the extent that the asset’s carrying value exceeds its fair value, which is determined based upon the estimated future cash flows expected to result from the use of the asset, including disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time.

Inventory purchases and purchase commitments are based upon forecasts of future demand. We value our inventory at the lower of standard cost (which approximates first-in, first-out cost) or market. If we believe that demand no longer allows us to sell our inventory above cost or at all, then we write down that inventory to market or write-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory write-offs could differ from our estimates.

Our deferred tax assets represent net operating loss carryforwards and temporary differences that will result in deductible amounts in future years if we have taxable income. We have established a 100% valuation allowance against our net deferred tax assets based on estimates and certain tax planning strategies. The carrying value of our net deferred tax assets assumes that it is more likely than not that we will not be able to generate sufficient future taxable income in certain tax jurisdictions to realize the net carrying value. If these estimates and related assumptions change in the future, we may be required to adjust the valuation allowance in future years.

The Company offers a standard parts warranty for periods varying from three months to one year. A provision for estimated future costs relating to warranty expense are recorded in the period the revenue is recognized.

The Company uses the reserve method for accounting for warranty claims. At September 30, 2003 and 2002, the reserves for warranty claims were $70,000 and $44,000. The reserve is included in accounts payable and accrued expenses on the accompanying balance sheet.

Our key accounting estimates and policies are reviewed with the Audit Committee of the Board of Directors.

Three Months Ended September 30, 2003 Versus Three Months Ended September 30, 2002

We recorded revenues of $1,433,000 for the three months ended September 30, 2003 compared to revenues of $1,572,000 for the three months ended September 30, 2002. The $139,000 (9% decrease in total revenues) reflects an increase in license fees, royalties and maintenance revenues, offset by a decrease in product sales and service revenues. During the three months ended September 30, 2003, we recognized $1,262,000 (88% of total revenue) from the sale of voice-based solution products compared to $1,451,000 (92% of total revenues) during the three months ended September 30, 2002. We expect that sales of voice-based solutions will comprise the most significant portion of our revenue in the foreseeable future. Revenues from speech compression

technologies for the three months ended September 30, 2003 approximated $171,000 (12% of total revenues) versus $121,000 (8% of total revenues) for the three months ended September 30, 2002.

Total product revenues increased $102,000 (8%) to $1,345,000 during the three months ended September 30, 2003 from $1,243,000 in the three months ended September 30, 2002. The increase in total product revenues is attributable to increases of $251,000 in license fees, and $141,000 in royalties and maintenance revenues, offset by a decrease of $290,000 in product sales. Royalty revenues are related to our speech compression business that was sold to Ascend, as discussed previously. Maintenance revenues are primarily generated from our VoiceLogistics product line. We anticipate that revenues from the speech compression business will continue to decline, both in absolute dollars and as a percentage of revenues. For the three month periods ended September 30, 2003 and 2002, 29% and 54% of our product revenues were attributable to product sales, respectively, 53% and 37% were attributable to license fees, respectively, and 18% and 9% were attributable to royalties and recurring revenues, respectively.

Service revenues were primarily attributable to customer maintenance support, fees for engineering services relating to our speech coding technologies business, and professional service fees relating to voice-based solutions. For the three months ended September 30, 2003, service revenues totaled $88,000, reflecting a decrease of $241,000 (73%) from service revenues of $329,000 for the three months ended September 30, 2002.

Cost of revenues increased $546,000 (92%) from $595,000 for the three months ended September 30, 2002 to $1,141,000 for the three months ended September 30, 2003.

Cost of product revenues increased $329,000 (77%) from $425,000 in the three months ended September 30, 2002 to $754,000 for the three months ended September 30, 2003. Such costs reflect materials, labor and overhead associated with the sale of our voice-based products. As of September 30, 2003 and 2002, our manufacturing staff, comprised of 6 (including 1 Voxware n.v. personnel) and 4 individuals, respectively, is included in cost of product revenues. The increase in cost of product revenues relative to the decrease in product sales is attributable primarily to the Company’s under estimation of the incremental manufacturing material costs required to handle the customer orders fulfilled for our VoiceLogistics product line during the three months ended September 30, 2003.

Cost of services revenues consists primarily of the expenses associated with customer maintenance support and professional services, including employee compensation and travel expenditures. Cost of service revenues increased $217,000 (128%) from $170,000 in the three months ended September 30, 2002 to $387,000 in the three months ended September 30, 2003. As of September 30, 2003 and 2002, our customer support and professional services staff, comprised of 15 (including 5 Voxware n.v. personnel) and 13 individuals, respectively, is included in the cost of service revenues. The increase in cost of service revenues relative to the decrease in service revenues is attributable primarily to the Company’s under estimation of the cost of professional services and customer support teams to service their sites equipped with the VoiceLogistics product line.

Total operating expenses increased by $907,000 (65%) to $2,300,000 in the three months ended September 30, 2003 from $1,393,000 in the three months ended September 30, 2002. As of September 30, 2003, headcount totaled 44 (including 7 Voxware n.v. personnel) compared to 23 at September 30, 2002. We routinely allocate from operating expenses to cost of revenues all actual time and related costs of research and development personnel who perform such work. During the three month periods ended September 30, 2003 and 2002, we allocated $45,000 and $25,000, respectively, of operating expenses to cost of revenues.

Research and development expenses primarily consist of employee compensation, consulting fees and equipment depreciation related to product research and development. Our research and development expenses increased $267,000 (61%) to $705,000 in the three months ended September 30, 2003 from $438,000 in the three months ended September 30, 2002. The increase in research and development expenses is due primarily to increased personnel costs and consulting fees paid during the year to develop new applications to broaden our VoiceLogistics product line. As of September 30, 2003, our research and development team was comprised of 22 (including 1 Voxware n.v. personnel) employees compared to 10 at September 30, 2002.

Sales and marketing expenses primarily consist of employee compensation (including direct sales commissions), travel expenses and trade shows. Sales and marketing expenses increased $636,000 (272%) to $870,000 in the three months ended September 30, 2003 from $234,000 in the three months ended September 30, 2002. The increase in sales and marketing expenses is due primarily to the ongoing activation of a fully functional marketing department during the second half of fiscal 2003 and continuing through the first quarter of fiscal 2004, and the increase in commissions due to increased annual sales activity. As of September 30, 2003, our sales and marketing staff was comprised of 13 (including 3 Voxware n.v. personnel) employees compared to 7 at September 30, 2002.

General and administrative expenses consist primarily of employee compensation and fees for insurance, rent, office expenses and professional services. General and administrative expenses increased $329,000 (83%) to $725,000 in the three months ended September 30, 2003 from $396,000 in the three months ended September 30, 2002. As of September 30, 2003, the general and administrative staff was comprised of 9 employees (including 3 Voxware n.v. personnel) compared to 6 at September 30, 2002. The increase in general and administrative expenses is due primarily to supporting the expansion of our global operations.

As of September 30, 2003, we had a worldwide staff of 65 full-time employees and consultants (including 13 Voxware n.v. personnel). The headcount consists of 21 in cost of revenues (which includes manufacturing, professional services and customer support), 22 in research and development, 13 in sales and marketing, and 9 in general and administrative.

Amortization of purchased intangibles totaled $325,000 for the three months ended September 30, 2002.

Interest expense for the three months ended September 30, 2003 was $24,000 compared to none for the three months ended September 30, 2002. This interest expense relates to the use of the Voxware n.v. facility line of credit and the equipment loan with KBC Bank Roselare during the quarter ended September 30, 2003 and interest on unpaid payroll taxes.

As of September 30, 2003, we had a total of $1,749,000 in cash and cash equivalents. As of June 30, 2003, we had $356,000 in cash and cash equivalents, and $3,891,000 of cash in an attorney’s escrow account which represented the net proceeds from the Series D Preferred Stock transaction. As of September 30, 2002, our cash, cash equivalents and short-term investments portfolio totaled $69,000.

Net cash used in operating activities totaled $2,638,000 for the three months ended September 30, 2003, primarily consisting of net loss of $2,052,000, a decrease of $1,536,000 in accounts payables and accrued expenses, offset by a decrease of $644,000 in accounts receivable, an increase of $351,000 in payroll tax, penalties and interest payable, stock-based compensation expense of $203,000 and amortization and depreciation of $67,000. Cash provided by operating activities totaled $63,000 for the three months ended September 30, 2002. The cash provided by operations consists primarily of the net loss of $415,000, a decrease in payables of $233,000, offset by amortization and depreciation of $398,000, and decreases in accounts receivable and inventory of $121,000 and $150,000, respectively.

For the three months ended September 30, 2003, cash provided by investing activities totaled $3,738,000 as a result of $3,891,000 being released from attorney’s escrow, net of $153,000 used to purchase property and equipment. In the three months ended September 30, 2002, there was no cash provided from investing activities.

For the three months ended September 30, 2003, cash provided by financing activities totaled $286,000. resulting in part from the receipt of proceeds from short-term borrowings of $291,000 offset by $5,000 repayment of long-term debt. In the three months ended September 30, 2002, there was no cash provided from financing activities.

On May 7, 2003, we obtained a facility line of credit with Silicon Valley Bank. The maximum amount that can be drawn on the line of credit is $250,000. The amount available to us is subject to a borrowing base consisting of 80% of our eligible accounts receivable. This line of credit matures on May 6, 2004. The facility bears interest at prime plus 2% per annum and a handling fee of 0.25% of specific accounts receivable invoices financed. The line of credit is secured by our eligible accounts receivable and inventory. As of March 18, 2004, there was no outstanding principal balance on this line of credit.

On June 27, 2003, we completed a private placement of Series D Preferred Stock and Series D Preferred Stock warrants and common stock warrants to purchase up to 93,333,333 shares (of which 37,111,111 warrants were issued) of Series D Preferred Stock and 18,666,667 shares of Common Stock to various accredited investors. As a result of the restatement of revenue as of June 30, 2003, the Company will issue an additional 23,777,778 warrants to holders of the Company’s Series D Preferred Stock in accordance with the terms set forth in the agreements. The remaining 32,444,444 warrants have been cancelled as of December 31, 2003 in accordance with the terms set forth in the agreements. In total, we issued 485,267,267 shares of Series D Preferred Stock, which shares are convertible into 485,267,267 shares of Common Stock, which resulted in proceeds to us of approximately $5,063,000, net of transaction costs. In addition to cash transaction costs, we issued warrants to acquire 9,333,333 shares of Common Stock to Ridgecrest Capital Partners, an investment banker advisor, as an advisory fee. The exercise price for such warrants is $0.015 per share and the warrants expire in 10 years. The Series D Preferred Stock has a 7% dividend payable in cash or equity, at our election, and is initially convertible into our Common Stock on a one-for-one basis. These purchasers can also receive additional warrants to purchase up to 18,666,667 shares of Common Stock at an exercise price of $0.001 per share if we fail to complete filing of a registration statement, as described in the transaction agreements. The holders of the Series D Preferred Stock have certain registration rights, as described in the transaction agreements. The holders of the Series D Preferred Stock have contingently waived their rights to receive these warrants.

During the quarter ended December 31, 2003, certain holders of the Company’s Series D Warrants exercised 37,011,706 in eligbible warrants in exchange for 37,011,706 shares of the Company’s Series D Preferred Stock.

On December 30, 2003, the Company entered into a credit facility with Silicon Valley Bank (the “SVB facility”). The SVB facility provides the Company with $2,000,000 in financing, comprised of a $1,500,000 term loan and $500,000 working capital facility. The term loan is payable in monthly installments over a 36-month period commencing February 1, 2004. The SVB facility bears interest at a rate of prime (4% as of December 31, 2003) plus ½ percent and is secured by all of the Company’s assets, including its intellectual property and a guarantee of the Company’s two largest shareholders. In exchange for the SVB facility guarantee, the shareholders were granted 133,333,333 Series D warrants to purchase shares of the Company’s Series D Preferred Stock. The warrants are exercisable into shares of the Company’s Series D Preferred at an exercise price of $0.015.

Proceeds from the $1,500,000 term loan were used to satisfy $1,310,000 of outstanding Federal and State payroll tax liabilities including related interest of $59,000. The remaining $190,000 were used for operating activities. As of March 31, 2004, the Company had not drawn on the $500,000 working capital facility.

As of February 29, 2004, the Company had a total of approximately $797,000 in cash and cash equivalents. Subsequent to September 30, 2003, the Company successfully negotiated payment terms through February 2005 with its major vendors to fulfill its obligation on various outstanding liabilities as of September 30, 2003. Management is currently seeking to raise additional capital to fund operations in the future.

Our wholly-owned subsidiary, Voxware n.v., also maintains a facility line of credit with KBC Bank Roeselare. The maximum amount that can be drawn on this line of credit is €250.000. This line of credit is due upon demand. The facility bears interest at 7.10% per annum and a handling fee of 1.50% of the gross advance amounts drawn, and is secured by 30% of Voxware n.v. inventory balances. As of September 30, 2003, there was a $291,000 outstanding principal balance on this line of credit. As of March 31, 2004, there was no outstanding principal balance on this line of credit.

Voxware n.v. also has an equipment loan with KBC Bank Roeselare. The original amount of this loan was €70,000. This equipment loan is due November 13, 2005, and is payable in 36 equal installments of €2,136. The facility bears interest at 6.12% per annum, and is secured by a blanket lien on equipment. As of September 30, 2003, there was an outstanding principal balance of $61,000. As of March 31, 2004, there was an outstanding principal balance of $55,000.

We believe that adequate capital resources will be available to fund our operations for the year ending June 30, 2004.

The following table summarizes our contractual obligations at September 30, 2003, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51 “Consolidated Financial Statements.” FIN 46 prescribes how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46 was scheduled to be effective for variable interest entities created after January 31, 2003. On December 24, 2003, the FASB published a revision to FIN 46 (“FIN No. 46( R )”). FIN No. 46( R ) clarifies certain provisions of FIN 46 and exempts certain entities from its requirements. For interests in variable interest entities acquired prior to January 31, 2003, the provisions of FIN No. 46( R ) will be applied on March 31, 2004. The Company does not anticipate that the adoption of FIN 46 and FIN No. 46( R ) will have a material effect on its financial position or results of operations.

EITF 00-21 on July 1, 2003. The Company determined the adoption of EITF 00-21 did not have a material impact on its consolidated financial statements.

We operate in a rapidly changing business environment that involves substantial risk and uncertainty. The following discussion addresses some of the risks and uncertainties that could cause, or contribute to causing, actual results to differ materially from expectations. We caution all readers to pay particular attention to the descriptions of risks and uncertainties described below and in other sections of this report and our other filings with the Securities and Exchange Commission ( SEC ).

We do not presently know of any additional risks and uncertainties that are currently deemed material and which may also impair our business operations and financial results. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our Common Stock could decline and we may be forced to consider additional alternatives.

This Form 10-Q/A also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this Form 10-Q/A.

If we continue to incur operating losses, we may be unable to continue our operations. We have incurred operating losses since we started our company in August 1993. As of September 30, 2003, we had an accumulated deficit of $60,344,000. If we continue to incur operating losses and fail to consistently be a profitable company, we may be unable to continue our operations. In addition, we expect to continue to incur net losses in at least the near term quarters. Our future profitability depends on our ability to obtain significant customers for our products, to respond to competition, to introduce new and enhanced products, and to successfully market and support our products. We cannot assure you that we will achieve or sustain significant sales or profitability in the future.

If we cannot raise adequate capital in the future, we may be unable to continue our product development, marketing and business generally. In the future, we may need to raise additional capital to fund operations, including product development and marketing. Funding from any source may not be available when needed or on favorable terms. If we cannot raise adequate funds to satisfy our capital requirements, we may have to limit, delay, scale-back or eliminate product development programs or marketing or other activities. We might be forced to sell or license our technologies. Any of these actions might harm our business. We cannot assure you that any additional financing will be available or, if available, that the financing will be on terms favorable to us. If additional financing is obtained, the financing may be dilutive to our current stockholders.

We rely substantially on key customers. Our customer base is highly concentrated. For the three months ended September 30, 2003, three customers accounted for 51% of our total revenues. We believe that a substantial portion of our net sales will continue to be derived from sales to a concentrated group of customers. However, the volume of sales to a specific customer is likely to vary from period to period, and a significant customer in one period may not purchase our products in a subsequent period. In general, there are no ongoing written commitments by customers to purchase our products. Our net sales in any period generally have been and likely will continue to be in the near term, derived from a relatively small number of sales transactions. Therefore, the loss of one or more major customers could materially adversely affect our results of operations.

If our VoiceLogistics family of products is not successful in the market, we will not be able to generate substantial revenues or achieve sustained profitability. Our success is substantially dependent on the success of our VoiceLogistics family of products. If our VoiceLogistics products are accepted by the market, these products will account for the vast majority of our net revenue in the future. If our VoiceLogistics products are unsatisfactory, or if we are unable to generate significant demand for these products, or we fail to develop other significant products, our business will be materially and adversely affected.

If we do not develop or acquire and introduce new and enhanced products on a timely basis, our products may be rendered obsolete. The markets for our speech recognition products and voice-based technologies are characterized by rapidly changing technology. The introduction of products by others based on new or more advanced technologies could render our products obsolete and unmarketable. Therefore, our ability to build on our existing technologies and products to develop and introduce new and enhanced products in a cost effective and timely manner will be a critical factor in our ability to grow and compete. We cannot assure you that we will develop new or enhanced products successfully and in a timely manner. Further, we cannot assure you that new or enhanced products will be accepted by the market. Our failure to develop new or enhanced

products, including our failure to develop or acquire the technology necessary to do so, would have a material adverse effect on our business.

If our competitors introduce better or cheaper products, our products may not be profitable to sell or to continue to develop. The business in which we engage is highly competitive. Success is influenced by advances in technology, product improvements and new product introductions, as well as marketing and distribution capabilities, and price competition. Failure to keep pace with product and technological advances could adversely affect our competitive position and prospects for growth. Our products compete with those being offered by larger, traditional computer industry participants who have substantially greater financial, technical, marketing and manufacturing resources than us. We cannot assure you that we will be able to compete successfully against these competitors or that competitive pressures faced by us would not adversely affect our business or operating results.

If we cannot integrate our speech recognition products with other components of customer systems, we may not be able to sell our products. Although state-of-the-art speech recognition technology is important to generating sales in our target markets, other components of a voice-based system are also necessary. Our products must be easily integrated with customers’ asset management and information systems. The ability to incorporate speech recognition products into customers systems quickly and without excessive cost or disruption will be a key factor in our success. We do not now possess all the necessary components for system integration. Acquisitions, joint ventures or other strategic relationships may be required for us to develop or obtain access to the necessary components to achieve market penetration. We cannot assure you that our efforts will be successful and, to the extent we are unsuccessful, our business may be materially adversely affected.

There are a number of factors, which may cause substantial variability in our quarterly operating results. Our revenue, gross profit, operating income and net income may vary substantially from quarter to quarter due to a number of factors. Many factors, some of which are not within our control, may contribute to fluctuations in operating results. These factors include the following:

We cannot assure you that any of these factors will not substantially influence our quarterly operating results.

If our third-party partners do not effectively market and service our products, we may not generate significant revenues or profits from sales of our products. We expect to utilize third parties, such as RF system vendors, consultants, value-added resellers, and system integrators, to sell and/or assist us in selling our products. To date, we have signed agreements with several of these third-party partners. We believe that the establishment of a network of third-party partners with extensive and specific knowledge of the various applications critical in the industrial market is important for us to succeed in that market. Some third-party partners also purchase products from us at a discount and incorporate them into application systems for various target markets and/or consult us in the development of application systems for end users. For the foreseeable future, we may sell fewer products if we cannot attract and retain third-party partners to sell and service our products effectively and that provide timely and cost-effective customer support. An increasing number of companies compete for access to the types of partners we use. Our current arrangements with third-party partners generally may be terminated by either party at any time upon 30 days prior written notice. We cannot assure you that our partners will continue to purchase and re-sell our products or provide us with adequate levels of support. If our partner relationships are terminated or otherwise disrupted our operating performance and financial results may be adversely affected.

If we cannot attract and retain management and other personnel with experience in the areas of our business focus, we will not be able to manage and grow our business. We have been developing and selling our speech recognition products and voice-based technologies since February 1999. Since that time, we have been hiring personnel with skills and experience relevant to the development and sale of these products and technologies. If we cannot continue to hire such personnel and to retain any personnel hired, our ability to operate our business profitably will be materially adversely affected. Competition for qualified personnel is intense and we cannot assure you that we will be able to attract, assimilate or retain qualified personnel.

If we cannot protect our proprietary rights and trade secrets, or if we are found to be infringing on the patents and proprietary rights of others, our business would be substantially harmed. Our success depends in part on our ability to protect the proprietary nature of our products, preserve our trade secrets and operate without infringing the proprietary rights of others. If others obtain and copy our technology or others claim that we are making unauthorized use of their proprietary technology, we may get involved in lengthy and costly disputes to resolve questions of ownership of the technology. If we are found to be infringing on the proprietary rights of others, we could be required to seek licenses to use necessary technology. We cannot assure you that licenses of third-party patents or proprietary rights would be made available to us on acceptable terms, if at all. In addition, the laws of certain countries may not protect our intellectual property because the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary rights in these foreign countries. To protect our proprietary rights, we seek patents and we enter into confidentiality agreements with our employees and consultants with respect to proprietary rights and unpatented trade secrets. We cannot assure you that patent applications in which we hold rights will result in the issuance of patents. We cannot assure you that any issued patents will provide significant protection for our technology and products. In addition, we cannot assure you that others will not independently develop competing technologies that are not covered by our patents. We cannot assure you that confidentiality agreements will provide adequate protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use or disclosures. Any unauthorized disclosure and use of our proprietary technology could have a material adverse effect on our business.

The price of our Common Stock has been highly volatile due to factors that will continue to affect the price of our stock. Our Common Stock closed as high as $0.20 and as low as $0.08 per share between July 1, 2003 and September 30, 2003. Historically, the over-the-counter markets for securities such as our Common Stock have experienced extreme price fluctuations. Some of the factors leading to this volatility include:

There is no assurance that the price of our stock will not continue to be volatile in the future.

Dilution and other factors may continue to affect the price of our common stock in the future. Our stockholders have experienced, and will continue to experience, substantial dilution as a result of the terms of our Series B Preferred Stock, Series D Preferred Stock, warrants and stock options issued, or potentially to be issued, in connection with prior private placements and our stock option plans. Any increase in the number of shares of Common Stock issuable may result in a decrease in the value of the outstanding shares of Common Stock. Such dilution and other factors may have a material adverse affect on the price of our Common Stock in the future.

On June 24, 2003, the Company stockholders approved the 2003 Stock Option Plan. An aggregate of 90,000,000 shares of the Company’s Common Stock have been reserved for issuance under the 2003 Stock Option Plan.

On June 27, 2003, we issued to various accredited investors 485,267,267 shares of Series D Preferred Stock, and Series D Preferred Stock warrants and Common Stock warrants (collectively, the 2003 Warrants ) to purchase up to 93,333,333 shares of Series D Preferred Stock and 18,666,667 shares of Common Stock, respectively.

As defined in the transaction agreements for the warrants to purchase 93,333,333 shares of series D Preferred Stock, certain purchasers received warrants to purchase 37,111,111 shares of Series D Preferred Stock at an exercise price of $0.001 per share. Such warrants will expire on June 27, 2013. During the quarter ended December 31, 2003, certain holders of the Company’s Series D Warrants exercised 37,011,706 in eligible warrants in exchange for 37,011,706 shares of the Company’s Series D Preferred Stock. As a result of the Company’s restatement of revenue for the year ended June 30, 2003 and in accordance with the terms of the warrant agreements, the Company will issue an additional 23,777,778 Series D Preferred Stock warrants to respective purchasers. The remaining 32,444,444 warrants have been cancelled as of December 31, 2003 in accordance with the terms set forth in the warrant agreements.

On December 30, 2003, the Company issued 133,333,333 warrants. The warrants are convertible into 133,333,333 shares of the Company’s Series D Preferred Stock at an exercise price of $0.015 per share. These warrants were issued in consideration for the Company’s two largest investors guaranteeing the Company’s credit facility with Silicon Valley Bank.

The perceived risk of dilution or any actual dilution occasioned by the conversion of Series B and Series D Preferred Stock, exercise of the 2003 Warrants and/or issuance of awards under the 2003 Stock Option Plan may cause our stockholders to sell their shares, which would contribute to the downward movement in stock price of the Common Stock. In addition, the significant downward pressure on the trading price of the Common Stock could encourage investors to engage in short sales, which would further contribute to the downward spiraling price of the Common Stock.

The perceived risk of dilution or any actual dilution occasioned by the conversion of Series B and Series D Preferred Stock, exercise of the 2003 Warrants and/or issuance of awards under the 2003 Stock Option Plan could also make it difficult to obtain additional financing. New investors could either decline to make an investment in us due to the potential negative effect of the dilution on a potential investment or require that their investment be on terms at least as favorable as the terms of the Series D Preferred Stock Purchase Agreement.

Future sales of our Common Stock in the public market could adversely affect the price of our Common Stock. Sales of substantial amounts of our Common Stock in the public market that are not currently freely tradable, or even the potential for such sales, could impair the ability of our stockholders to recoup their investment or make a profit. As of March 31, 2004, these shares include:

If the holders of the Series B Preferred Stock, the Series D Preferred Stock and the 2003 Warrants elect to have their collective holdings assumed by a potential acquirer of our Company, the potential acquirer could be deterred from completing an acquisition.

Also, if the holders of Series B Preferred Stock, Series D Preferred Stock and the 2003 Warrants elect to have their holdings remain outstanding after an acquisition of us, the potential acquirer could be deterred from completing an acquisition of Voxware.

Among our obligations, which an acquirer might be forced to assume which, would act as a deterrent are:

In connection with the Series D Preferred Stock financing, we will register additional shares of our Common Stock. In connection with the Series D Preferred Stock financing, we will register 552,883,274 additional shares of our Common Stock underlying the Series D Preferred Stock, Series D Preferred Stock warrants and Common Stock warrants. Consequently, sales of substantial amounts of our Common Stock in the public market, or the perception that such sales could occur, may adversely affect the market price of our Common Stock.

Our management and other affiliates have significant control of our Common Stock and could control our actions in a manner that conflicts with our interests and the interests of other stockholders. As of March 8, 2004, our executive officers, directors and affiliated entities together beneficially own approximately 542,145,502 shares of our Common Stock, assuming the exercise of options, warrants and other Common Stock equivalents which are currently exercisable, held by these stockholders. As a result, these stockholders, acting together, will be able to exercise considerable influence over matters requiring approval by our stockholders, including the election of directors, and may not always act in the best interests of other stockholders. Such a concentration of ownership may have the effect of delaying or preventing a change in our control, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices.

Our Common Stock is considered a penny stock and may be difficult to sell. The SEC has adopted regulations which generally define penny stock to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Presently, the market price of our Common Stock is substantially less than $5.00 per share and therefore may be designated as a penny stock according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our Common Stock and may affect the ability of investors to sell their shares. In addition, since our Common Stock is traded on the NASD OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of our Common Stock.

We currently maintain our cash equivalents in highly liquid short-term instruments with maturities of 90 days or less from the date of purchase. Our primary objective is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. We would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates.

We frequently denominate our sales to certain European customers in Euro and Pound Sterling, and also incur expenses in currencies other than the functional currency from our Voxware n.v. reporting subsidiary. Although we do not currently hedge

certain balance sheet exposures and inter-company balances against future movements in foreign currency exchange rates, we do anticipate exploring using foreign exchange contracts in the future. We did not hold derivative financial instruments for trading purposes during the three month periods ended September 30, 2003 and 2002, and we do not intend to utilize derivative financial instruments for trading purposes in the future.

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-145 (e) and 15d-145(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act ), as of September 30, 2003. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of September 30, 2003, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

We were required to redeem our outstanding Series B Preferred Stock thirty months after August 10, 2000 (or February 10, 2003) provided funds were legally available under Delaware law. We did not redeem the Series B Preferred Stock on the redemption date, as we believed that funds were not legally available for such redemption. On February 13, 2003, Castle Creek Technology Partners, LLC ( Castle Creek ), the holder of the Series B Preferred Stock, filed a lawsuit against us in the United States District Court in Delaware seeking redemption of the Series B Preferred and payment of the applicable redemption payment.

As part of the transactions contemplated by the Series D Preferred Stock Purchase Agreement dated as of April 16, 2003, we and Castle Creek executed a Settlement Agreement and Mutual Release pursuant to which the lawsuit filed by Castle Creek against us would be dismissed upon the consummation of the financing contemplated by the Series D Preferred Stock Purchase Agreement and payment to Castle Creek of the consideration described in the Exchange Agreement entered into between us and Castle Creek on April 16, 2003.

On June 27, 2003, we closed the transactions contemplated by the Series D Preferred Stock Purchase Agreement, including the payment to Castle Creek of $650,000 and the amendment of the terms of the Series B Preferred Stock to delete the dividend, liquidation preference and redemption provisions of the Series B Preferred Stock. On July 17, 2003, a Stipulation of Dismissal With Prejudice was filed in the United States District Court for the District of Delaware, which dismissed the litigation brought by Castle Creek against us.

We are subject to various other 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, we do not believe that the outcome of any of these legal matters will have a material adverse effect on our business, operating results or financial condition.

On June 24, 2003, pursuant to our 2003 Stock Option Plan, we granted options to purchase an aggregate of 65,660,913 shares of our Common Stock to executive officers, employees, consultants and members of our Board of Directors in exchange for services provided to us as employees, consultants and directors. Such options were granted at an exercise price equal to $0.015 per share, with 25% of such options becoming exercisable on the first anniversary of the date of grant and 6.25% becoming exercisable at the end of each successive three-month period thereafter.

No underwriter was employed by us in connection with the issuance of the securities described above. We believe that issuance of the foregoing securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving a public offering. Each of the recipients acquired the securities for investment purposes only and not with a view to distribution and had adequate information about us.

Current report on Form 8-K filed January 6, 2004 (announcing the appointment of Thomas Drury as President of Voxware, Inc.)

Current report on Form 8-K filed January 6, 2004 (relating to the Loan and Security Agreement with Silicon Valley Bank)

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


VOXWARE, INC. (Registrant)

By:		/s/ THOMAS J. DRURY, JR.

		Thomas J. Drury, Jr. President and Chief Executive Officer (Principal Executive Officer)



By:		/s/ ALLEN M. ADLER

		Allen M. Adler Chief Financial Officer (Principal Financial and Accounting Officer)


Class		Shares Outstanding at April 6, 2004
Common Stock, $.001 par value		39,390,352



ITEM 1	CONSOLIDATED FINANCIAL STATEMENTS

	Consolidated Balance Sheets September 30, 2003 (unaudited) and June 30, 2003	3

	Consolidated Statements of Operations Three Months Ended September 30, 2003 and 2002 (unaudited)	4

	Consolidated Statements of Cash Flows Three Months Ended September 30, 2003 and 2002 (unaudited)	5

	Notes to Consolidated Financial Statements	6

ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	21

ITEM 4	CONTROLS AND PROCEDURES	22

PART II OTHER INFORMATION

ITEM 1	LEGAL PROCEEDINGS	22

ITEM 2	CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF SECURITIES	22

ITEM 6	EXHIBITS AND REPORTS ON FORM 8-K	23

SIGNATURES		24


	September 30, 2003 (Restated. See Note 2)			June 30, 2003
	(unaudited)
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	1,749		$	356
Cash held in attorney’s escrow account		—			3,891
Accounts receivable, net of allowance for doubtful accounts of $37,000 and $73,000 at September 30, 2003 and June 30, 2003, respectively		1,609			2,258
Inventory, net		1,171			815
Prepaid expenses and other current assets		163			267

Total current assets		4,692			7,587
Property and equipment, net		273			187
Goodwill		1,039			1,039
Other assets, net		35			34

	$	6,039		$	8,847

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	291		$	—
Current portion of long-term debt		28			28
Accounts payable and accrued expenses		1,739			3,149
Payroll tax, penalties and interest payable		1,664			1,312
Deferred revenues		482			548

Total current liabilities		4,204			5,037
Long-term debt, net of current maturities		33			38
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.001 par value, 865,000,000 shares authorized as of September 30, 2003 and June 30, 2003:
7% cumulative Series D convertible preferred stock ($7,412 and $7,283 aggregate liquidation preference at September 30, 2003 and June 30, 2003, respectively); 485,267,267 shares issued and outstanding at September 30, 2003 and June 30, 2003		485			485
Series B convertible preferred stock; 966.619 and 1,766.619 shares issued and outstanding at September 30, 2003 and June 30, 2003, respectively		—			—
Common stock, $.001 par value, 1,035,000,000 shares authorized as of September 30, 2003 and June 30, 2003; 31,946,875 and 28,210,919 shares issued and outstanding as of September 30, 2003 and June 30, 2003, respectively		32			28
Additional paid-in capital		64,641			64,644
Accumulated deficit		(60,344	)		(58,163	)
Deferred employee compensation		(3,017	)		(3,220	)
Accumulated other comprehensive gain (loss)		5			(2	)

Total stockholders’ equity		1,802			3,772

	$	6,039		$	8,847


	Three Months Ended September 30,
	(Restated. See Note 2) 2003			2002
	(In thousands, except per share data)
Revenues:
Product revenues:
Product sales	$	389		$	679
License fees		708			457
Royalties and maintenance revenues		248			107

Total product revenues		1,345			1,243
Service revenues		88			329

Total revenues		1,433			1,572

Cost of revenues:
Cost of product revenues		754			425
Cost of service revenues		387			170

Total cost of revenues		1,141			595

Gross profit		292			977

Operating expenses:
Research and development		705			438
Sales and marketing		870			234
General and administrative		725			396
Amortization of purchased intangibles		—			325

Total operating expenses		2,300			1,393

Operating loss		(2,008	)		(416	)
Interest expense		(24	)		—
Other expense, net		(20	)		2
Adjustment of warrants to fair value		—			(1	)

Net loss		(2,052	)		(415	)
Accretion of preferred stock and warrants to redemption value		—			(267	)
Beneficial conversion feature treated as a dividend		—			(34	)
Dividends-Series D convertible preferred stock		(129	)		—

Net loss applicable to common stockholders	$	(2,181	)	$	(716	)

Net loss per share applicable to common stockholders-basic and diluted	$	(0.07	)	$	(0.03	)

Weighted average number of shares used in computing net loss per common share-basic and diluted		30,551			21,766


	Three Months Ended September 30,
	2003 (Restated. See Note 2)			2002
	(in thousands)
Operating activities:
Net loss	$	(2,052	)	$	(415	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		67			398
Provision for doubtful accounts		5			33
Gain on write-down of warrants to fair value		—			1
Amortization of deferred employee compensation		203			—
Changes in operating assets and liabilities:
Accounts receivable		644			121
Inventory		(356	)		150
Prepaid expenses and other current assets		104			9
Other assets, net		(1	)		(10	)
Accounts payable and accrued expenses		(1,536	)		(233	)
Payroll tax, penalties and interest payable		351			—
Deferred revenues		(67	)		9

Net cash (used in) provided by operating activities		(2,638	)		63

Investing activities:
Cash released from attorney’s escrow account		3,891			—
Purchase of property and equipment		(153	)		—

Net cash provided from investing activities		3,738			—

Financing activities:
Proceeds from short-term borrowings		291			—
Repayment of long-term debt		(5	)		—

Net cash provided from financing activities		286			—

Effect of foreign currency exchange rate on changes in cash		7			—
Increase in cash and cash equivalents		1,393			63
Cash and cash equivalents, beginning of period		356			6

Cash and cash equivalents, end of period	$	1,749		$	69

OTHER CASH FLOW INFORMATION:
Cash paid for interest	$	6		$	—

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Accretion of preferred stock to redemption value	$	—		$	267

Conversion of Series B mandatorily redeemable preferred stock into common stock	$	—		$	200

Beneficial conversion feature on Series B mandatorily redeemable preferred stock treated as a dividend	$	—		$	34

Reclassification of preferred stock dividends to accrued liabilities	$	—		$	28

Exchange of Series B convertible preferred stock into common stock	$	4		$	—

Accrued dividends on Series D convertible preferred stock	$	129		$	—


	As previously reported			As restated
Consolidated Balance Sheet:
Accounts receivable, net	$	2,395		$	1,609
Inventory, net		895			1,171
Total current assets		5,202			4,692
Total assets		6,549			6,039
Accounts payable and accrued expenses		2,593			1,739
Payroll tax, penalties and interest payable		—			1,664
Deferred revenues		296			482
Total current liabilities		3,208			4,204
Accumulated deficit		(58,838	)		(60,344	)
Total stockholders’ equity		3,308			1,802
Total liabilities and stockholders’ equity	$	6,549		$	6,039

Consolidated Statement of Operations:
Product sales	$	1,046		$	389
Total product revenues		2,002			1,345
Service revenues		261			88
Total revenues		2,263			1,433
Cost of product revenues		948			754
Cost of service revenues		364			387
Total cost of revenues		1,312			1,141
Gross profit		951			292
General and administrative		709			725
Total operating expenses		2,284			2,300
Operating loss		(1,333	)		(2,008	)
Interest expense		(10	)		(24	)
Net (loss)		(1,363	)		(2,052	)
Net (loss) applicable to common stockholders	$	(1,492	)	$	(2,181	)
Net (loss) per share applicable to common stockholders – basic and diluted	$	(0.05	)	$	(0.07	)


	Three Months Ended September 30,
	2003			2002
	(in thousands, except per share data)
Net loss applicable to common stockholders:
As reported	$	(2,181	)	$	(716	)
Add:
Stock-based employee compensation included in net loss		203			—
Less:
Stock-based compensation expense determined under fair-value method for all awards, net of related tax effects		327			108

Pro forma net loss applicable to common stockholders	$	(2,305	)	$	(824	)

Net loss per share applicable to common stockholders-basic and diluted
As reported	$	(0.07	)	$	(0.03	)

Pro forma	$	(0.08	)	$	(0.04	)


	Voice-Based Products Segment			Speech Compression Technologies Segment			Total
	2003			2003			2003
	(in thousands)
Revenues	$	1,262		$	171		$	1,433
Operating loss		(1,969	)		(39	)		(2,008	)
Depreciation and amortization		67			—			67
Identifiable assets		5,890			149			6,039

	2002			2002			2002
	(in thousands)
Revenues	$	1,451		$	121		$	1,572
Operating loss		(308	)		(108	)		(416	)
Depreciation and amortization		330			68			398
Identifiable assets		1,527			1,026			2,553


	Shares
Date	Series B Preferred	Common
November 20, 2003	200	933,989
January 27, 2004	200	933,989
February 18, 2004	200	933,989
March 11, 2004	200	933,989
April 6, 2004	166.619	778,088



3.1		Certificate of Amendment dated December 30, 2003 to the Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed January 6, 2004.

4.1		Series D Convertible Preferred Stock Purchase Warrant dated December 30, 2003 issued to Edison Venture Fund V, L.P., incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed January 6, 2004.

10.1		Loan and Security Agreement dated December 30, 2003 between Voxware, Inc. and Silicon Valley Bank, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed January 6, 2004.

10.2		Intellectual Property Security Agreement dated as of December 30, 2003 by and between Voxware, Inc. and Silicon Valley Bank, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed January 6, 2004.

10.3		Unconditional Guaranty dated December 30, 2003 executed by Edison Venture Fund V, L.P., incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed January 6, 2004.

10.4		Unconditional Guaranty dated December 30, 2003 executed by Cross Atlantic Technology Fund II, L.P., incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed January 6, 2004.

31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.