APPLIED VOICE RECOGNITION INC /DE/, SB-2, 2000-10-30

APPLIED VOICE RECOGNITION INC /DE/
SB-2, 2000-10-30
SERVICES, NEC

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<PAGE>

As filed with the Securities and Exchange Commission on October 30, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

APPLIED VOICE RECOGNITION, INC.

(Name of Small Business Issuer in its Charter)
Delaware 6770 76-0513154
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation or Code Number)
Organization)
1770 St. James Place, Suite 116
Houston, Texas 77056
(713) 621-3131
(Address and Telephone Number of Principal Executive Offices and Principal
Place of Business)
James G. Springfield, President, Chief Executive Officer and Vice Chairman
1770 St. James Place, Suite 116
Houston, Texas 77056
(713) 621-3131
(Name, Address and Telephone Number of Agent For Service)
----------------
With copy to:
Porter & Hedges, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002
(713) 226-0600
Attn: Samuel N. Allen

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.

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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
<PAGE>

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CALCULATION OF REGISTRATION FEE

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<TABLE>
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Aggregate Amount of
Securities to be Registered Registered (1) Price Per Share (2) Offering Price Registration Fee
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Common stock, $.001 par value.... 8,576,800 0.2965 $2,543,021 $671
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Common stock, $.001 par value,
issuable upon conversion of
notes........................... 3,392,000(3) 0.2965 $1,005,728 $266
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Common stock, $.001 par value,
issuable upon exercise of
warrants........................ 2,733,333 0.2965 $810,433 $214
</TABLE>
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(1) Does not include 21,210,176 shares covered by a previous registration
statement and included in the prospectus filed herewith pursuant to Rule
429 under the Securities Act of 1933. Aggregate registration fees of
$1,705.37 were previously paid regarding the shares covered by such
previous registration statement.
(2) Pursuant to Rule 457(c), the registration fee is calculated based on the
average of the bid and ask prices for the common stock reported on the
over-the-counter bulletin board on October 25, 2000.
(3) Pursuant to Rule 416(a), also registered hereunder is an indeterminate
number of shares that may be offered and issued to prevent dilution
resulting from stock splits, stock dividends or similar transactions or, in
the case of conversion of notes or exercise of warrants, due to adjustments
in the conversion or exercise rate.

The Registrant hereby amends this Registration Statement on such date or
date as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
included herein contains a combined prospectus that also relates to a total of
20,694,154 shares of common stock of Applied Voice Recognition, Inc. previously
registered for resale by selling stockholders under a Registration statement on
Form SB-2 No. 333-41710 and not yet resold. The previously filed Registration
Statement registered 21,210,176 shares of common stock for resale, 516,022 of
which have been sold or are no longer covered by this registration statement.
The registration fees with respect thereto were previously paid.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated October 30, 2000

Prospectus

Applied Voice Recognition, Inc.

14,702,133 Shares

Common Stock

This prospectus relates to the resale by some of our stockholders of
14,702,133 shares of our common stock. These shares consist of:

. 8,471,413 shares of common stock owned by certain of our stockholders;

. 2,733,333 shares of common stock issuable upon exercise of outstanding
warrants;

. 3,392,000 shares of common stock issuable upon the conversion of certain
of our outstanding convertible promissory notes, including shares
issuable in lieu of cash interest payments. The conversion rate of these
notes is subject to adjustment, and this prospectus also covers any
additional shares of common stock issuable as a result of any adjustment;
and

. 105,387 shares of common stock issued or issuable to a company that
provides us broker support services.

We will not receive any of the proceeds from the resale of shares offered by
the selling stockholders under this prospectus. We will, however, receive
$590,000 from the issuance of our common stock upon the selling stockholders'
exercise of their warrants, if the warrants are exercised in full.

Our common stock is traded on the Over-the-Counter Bulletin Board under the
symbol "EDOC." On October 25, 2000, the last reported sale price of our common
stock was $0.281 per share.

This investment involves risks. See "Risk Factors" beginning on page 5.

Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is November , 2000.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 5
Cautionary Note Regarding Forward-looking Statements..................... 6
Capitalization........................................................... 7
Common Stock Price Range and Dividend Policy............................. 8
Use of Proceeds.......................................................... 8
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 9
Business and Properties.................................................. 14
Management............................................................... 22
Security Ownership of Certain Beneficial Owners and Management........... 27
Certain Transactions..................................................... 29
Description of Capital Stock............................................. 32
Selling Stockholders..................................................... 35
Plan of Distribution..................................................... 38
Legal Matters............................................................ 39
Experts.................................................................. 39
Changes in Accountants................................................... 39
Index to Consolidated Financial Statements............................... F-1
</TABLE>

Where You Can Find More Information

This prospectus constitutes a part of a registration statement on Form SB-2
that we have filed with the SEC under the Securities Act. This prospectus omits
certain of the information contained in the registration statement, and
reference is made to the registration statement for further information about
us and the securities offered by this prospectus. Any statements contained in
this prospectus concerning any document filed as an exhibit to the registration
statement or otherwise filed with the SEC is not necessarily complete, and in
each instance, reference is made to the copy of the documents that have been
filed.

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any of these documents,
including this registration statement, at the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. You
also may read and copy any document we file at the SEC's public reference rooms
in New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-
0330 for further information about the public reference rooms. In addition, the
SEC maintains a site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file reports electronically with the SEC.

2
<PAGE>

SUMMARY

Applied Voice Recognition, Inc.

Our current principal business is providing traditional and Internet-based
medical transcription services. We have approximately 1,600 physician
transcription clients in four states and transcribe approximately 463,000
physician dictated medical records annually. Our medical transcription
operations currently provide our only source of revenue.

Our business strategy is to develop an Internet-based patient record storage
system called the e-DOCS Physician Network, or "EPN." The EPN is a secure,
business-to-business Internet application for the electronic organization,
storage and retrieval of medical transcription services and physicians'
handwritten notes of patient encounters. The EPN will be accessible 24 hours a
day, seven days a week. Ultimately, it will create a direct link to the
physician by facilitating improvements to the existing channel for
transcription and medical information.

In October 2000, we began physician testing of the EPN. We anticipate the
launch of the EPN in the fourth quarter 2000.

Our principal executive offices are at 1770 St. James Place, Suite 116,
Houston, Texas 77056, and our telephone number at that address is (713) 621-
3131.

Recent Developments

Recent Sales of Securities. In September 2000, we completed several private
placements of our securities. These private placements consisted of:

. 6,666,666 shares of common stock at a sale price $0.15 per share;

. a warrant to purchase 1,000,000 shares of our common stock at an
exercise price of $0.15 per share; and

. six convertible promissory notes in the aggregate principal amount of
$480,000, which are convertible into a number of shares of common stock
equal to the principal amount of the promissory notes, plus accrued and
unpaid interest, divided by the lesser of $0.15 or the lowest per share
price that we have sold shares of common stock between September 1, 2000
and the conversion date.

Conversion of Note. Effective October 26, 2000, N. Rudy Garza, one of our
directors, converted one of our convertible notes into 1,804,747 shares of our
common stock.

Changes in Management.

. Effective September 28, 2000, Timothy J. Connolly, our founder, resigned
his positions as president, chief executive officer and chairman of the
board of directors, but will continue to advise us and focus his efforts
on capital formation, investor relations and business development;

. Effective October 1, 2000, J. William Boyar was named chairman of the
board;

. Effective October 2, 2000, James G. Springfield became our president,
chief executive officer and vice chairman of our board of directors;

. Effective July 31, 2000, Anna M. Goss joined us as controller;

. Effective September 1, 2000, Russ M. Douglas resigned as our chief
technology officer; and

. Michael H. Leggett has been named director of technology to direct the
technical development for the EPN.

3
<PAGE>

Name Change. A proposal to change our name to e-DOCS.MD, Inc. will be
considered and voted on at our 2000 annual meeting of stockholders, which is
anticipated to be held in December 2000. We believe that the name e-DOCS.MD,
Inc. more accurately reflects our business and is more consistent with our
ongoing operations.

The Offering

This prospectus relates to the resale by some of our securityholders of up
to 14,702,133 shares of our common stock. These shares consist of:

. 8,471,413 shares of common stock owned by certain of our stockholders;

. 2,733,333 shares of common stock issuable upon exercise of outstanding
warrants; and

. 3,392,000 shares of common stock issuable upon the conversion of and
payment of accrued interest on our outstanding convertible promissory
notes. The conversion rate of these notes is subject to adjustment, and
this prospectus also covers any additional shares of common stock
issuable as a result of any adjustment; and

. 105,387 shares of common stock issued or issuable to a company that
provides us broker support services.

We will not receive any of the proceeds from the sale of the common stock
offered by this prospectus.

We currently do not have sufficient authorized common stock for issuance
upon conversion or exercise of all of our outstanding convertible notes,
options and warrants. A proposal to increase our authorized capital stock to
85,000,000 will be considered and voted on at our 2000 annual meeting of
stockholders, which is anticipated to be held in December, 2000.

4
<PAGE>

RISK FACTORS

Sufficiency of Funds We will be required to raise substantial additional
capital to implement our new e-commerce initiative,
We must raise additional the e-DOCS Physician Network(TM), which we call the
capital to continue "EPN," and to maintain and improve our current
operations and implement medical transcription operations. If we are unable
our business plan. to raise sufficient funds to satisfy our
requirements, there would be substantial doubt as
to our ability to continue as a going concern, and
we may be required to significantly curtail our
operations.

Limited History of We have incurred significant net losses since our
Business Operations inception and expect to continue to incur
significant losses in the future. For the year
Due to its limited ended December 31, 1999, we recorded a net loss of
nature, you should not $2,655,913, or $0.20 per share, on net sales of
rely on our operating $5,261,810. As of June 30, 2000, our accumulated
history as an indicator deficit was $19,221,407. Our limited operating
of our future history makes predicting future results of
performance. operations difficult, and we may not be able to
achieve profitability. You should consider our
prospects 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 such
as the electronic and Internet-based medical
transcription market, and the emerging business-to-
business e-commerce market.

Need for increase in If holders of our outstanding convertible notes,
authorized capital stock options and warrants were to attempt to convert the
notes or exercise the options or warrants before
We do not have sufficient the time of the adoption of an amendment to our
authorized common stock certificate of incorporation to sufficiently
for issuance upon increase our authorized common stock, or if the
conversion or exercise of amendment is not ultimately adopted, then we could
our outstanding face substantial potential liabilities to the
convertible notes, holders of the convertible notes, warrants and
options and warrants options due to our failure to be able to issue them
the required common stock.

Dependence on Principal Our future financial performance will depend in
Products and Services part on our ability to continue to develop and
establish our traditional and Internet-based
Our future results will medical transcription service, and to effectively
depend upon the success develop and introduce the EPN. However, we may not
of our current be successful in developing these or other products
operations, and the or services in a manner that meets with market
successful introduction acceptance. In addition, new product releases may
of our new business-to- contain undetected errors that require significant
business e-commerce design modifications, resulting in a loss of
initiative. customer confidence and adversely affecting the use
of our products and services.

Ability to Attract Our success in the medical transcription business
Qualified is dependent upon our ability to attract and retain
Transcriptionists qualified transcriptionists who can provide the
accuracy and turnaround time required for our
Competition for qualified customers. Competition for transcriptionists is
transcriptionists is intense. We may not be successful in attracting and
intense. retaining the personnel necessary to conduct our
business successfully. In addition, our inability
to attract, hire, assimilate and retain qualified
personnel could have a material adverse effect upon
our business. We ultimately may prove unable to
attract sufficient qualified transcriptionists.

Intellectual Property and
Property Rights We currently have two issued patents and three
patent applications pending, and rely on a
Our success will be combination of trade secret, copyright and
dependent upon a trademark laws, non-disclosure agreements and
combination of contractual provisions to protect our proprietary
proprietary software rights in our software and technology. However,
technology and hardware these protections may not prevent misappropriation
purchased and licensed of the technology. Moreover, third parties could
from third parties. Our independently develop competing technologies that
current protections may are substantially equivalent or superior to our
not be sufficient to technologies. Although we believe that our services
protect these and products and the proprietary rights we develop
technologies. or license do not infringe patents and proprietary
rights of other parties, those parties may assert
infringement claims, regardless of merit, against
us in the future.

5
<PAGE>

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This registration statement contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. When used in this registration statement, the words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
These forward-looking statements include statements regarding:

. our estimate of the sufficiency of our existing capital resources;

. our ability to raise additional capital to fund cash requirements for
future operations;

. the uncertainties involved in the rate of growth and acceptance of the
Internet;

. the adoption of electronic medical record technology by physicians and
patients; and

. the facilitating of e-commerce transactions.

You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other "forward-
looking" information. Before you invest in our common stock, you should be
aware that the occurrence of any of the events described in this prospectus
under the caption "Risk Factors" and elsewhere in this registration statement
could substantially harm our business, and that upon the occurrence of any of
these events, the trading price of our common stock could decline, and you
could lose all or part of your investment.

6
<PAGE>

CAPITALIZATION

The following table sets forth our unaudited capitalization as of June 30,
2000, and our unaudited as adjusted capitalization as of June 30, 2000, giving
effect to the private placement of 6,666,666 shares of common stock at a sale
price of $0.15 per share, and six convertible promissory notes in the aggregate
principal amount of $480,000. You should read this table along with our
selected consolidated financial information and our consolidated financial
statements and notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
June 30, 2000
--------------------------
Actual As Adjusted
------------ ------------
<S> <C> <C>
Cash and cash equivalents.......................... $ 399,340 $ 1,879,340
============ ============

Current portion of long-term obligations:
Preferred stock payable.......................... $ 473,543 $ 473,543
Note payable to related party.................... 250,000 250,000
Convertible notes payable........................ -- 480,000
Capital lease.................................... 71,915 71,915
Long-term debt................................... 58,333 58,333
------------ ------------
Total current portion of long-term
obligations................................... 853,791 1,333,791

Long-term obligations, net of current portion:
Preferred stock payable.......................... 327,894 327,894
Capital lease.................................... 241,699 241,699
Long-term debt................................... 58,334 58,334
------------ ------------
Total long-term obligations, net of current
portion....................................... 627,927 627,927

Stockholders' Equity:
Preferred stock, series 2, $.10 par value per
share........................................... 297 297
Common stock, $.001 par value per share.......... 39,617 46,284
Paid-in capital.................................. 20,160,716 21,154,049
Accumulated deficit.............................. (19,221,407) (19,221,407)
------------ ------------
Total stockholders' equity..................... 979,223 1,979,223
------------ ------------
Total capitalization........................... $ 2,460,941 $ 3,940,941
============ ============
</TABLE>

7
<PAGE>

COMMON STOCK PRICE RANGE AND DIVIDEND POLICY

Common Stock Price Range

Our common stock began trading on the Over-the-Counter Bulletin Board on
February 5, 1997, under the symbol "AVRI." We changed our ticker symbol to
"EDOC" on February 23, 1999.

The following table shows, for the periods indicated, the range of high and
low bid information for our common stock as reported by the Over-the-Counter
Bulletin Board. Any market for our common stock should be considered sporadic,
illiquid and highly volatile. Prices reflect inter-dealer quotations, without
adjustment for retail markup, markdowns or commissions, and may not represent
actual transactions. Our common stock's trading range during the periods
indicated is as follows:

<TABLE>
<CAPTION>
1998 High Low
---- ------ ------
<S> <C> <C>
1st quarter................................................ $3.812 $1.750
2nd quarter................................................ $3.312 $0.875
3rd quarter................................................ $1.875 $0.450
4th quarter................................................ $1.531 $0.625

<CAPTION>
1999 High Low
---- ------ ------
<S> <C> <C>
1st quarter................................................ $2.125 $0.906
2nd quarter................................................ $1.406 $1.062
3rd quarter................................................ $1.688 $0.438
4th quarter................................................ $0.530 $0.188

<CAPTION>
2000 High Low
---- ------ ------
<S> <C> <C>
1st quarter................................................ $4.000 $0.250
2nd quarter................................................ $1.562 $0.398
3rd quarter................................................ $0.656 $0.218
4th quarter (through October 26, 2000)..................... $0.406 $0.281
</TABLE>

As of October 26, 2000 there were 49,120,547 shares of common stock issued
and outstanding, 304 holders of record and approximately 4,500 beneficial
owners of our common stock.

Dividend Policy

We have neither declared nor paid any dividends on our common stock since
our inception. Presently, we intend to retain our earnings, if any, to provide
funds for reinvestment in the implementation of our business plan. Therefore,
we do not anticipate declaring or paying cash dividends on our common stock in
the foreseeable future. Any future dividends will be subject to the discretion
of our board of directors and will depend upon, among other things, future
earnings, our operating and financial condition, our capital requirements, debt
obligation agreements, general business conditions and other pertinent facts.

USE OF PROCEEDS

We will not receive any of the proceeds of the sale of the common stock
offered by this prospectus. We will, however, receive $590,000 from the
issuance of our common stock upon the selling stockholders' exercise of
warrants, if exercised in full.

8
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto and other detailed
information appearing elsewhere in this prospectus.

Overview

Our current revenue is derived from the out-sourced medical transcription of
patient records for physicians, clinics and hospitals through our wholly owned
subsidiary, e-DOCS Health Care Information Services. Our current customer base
includes approximately 1,600 physicians in four states.

After ten months of use by physicians, we recognized that the voice
recognition component of our previous product, VoiceCOMMANDER 99, was not
generating the cost and labor savings previously believed possible. However,
the market clearly indicated a preference for a browser-oriented tool for
Internet-based transcription and medical records storage services. Using the
experience gained from our first Internet-based service, VoiceCOMMANDER 99, we
have developed the next generation browser-based service, which we call the e-
DOCS Physician Network.

While we continue to provide medical transcription services, we are
developing the EPN, through our wholly-owned subsidiary, e-DOCS Physician
Network, Inc., as a medically centric, business-to- business application
service provider. The EPN is designed to provide a secure, browser-based
document handling solution directed at the independent transcription company
and the nation's 637,000 physicians, a majority of whom practice in groups of
five or less. We have used our experience in previously acquiring eight
independent transcription companies to provide a common technology platform to
these independent, capital-deficient businesses.

We are attempting to design the EPN to become the standard technology
platform for independent transcription, billing and coding companies and the
individual practicing physician. It is being developed in response to a need
identified by our existing customer base for a simple, secure document handling
solution to the daily needs of the medical services community.

The EPN is being designed to provide an efficient Internet-based delivery
system for medical transcription documents and an infrastructure for capturing,
organizing, storing and retrieving medical information. The services may
include medical transcription and storage, training, legacy system integration,
and the electronic storage and retrieval of the physician's hand-written notes
of a patient encounter. The EPN is designed to simplify how physicians interact
with medical information, without attempting to change their current practice
methodology. In addition, we believe the EPN will provide a streamlined, more
efficient medical billing and accounts receivable management process for
physicians.

We intend to provide the services of the EPN on a monthly subscription
basis. The transcription company can deliver its medically transcribed
documents through the EPN browser, allowing physicians to review their
transcription online and digitally sign the document. It will be available all
of the time from any location upon authorization of the user.

The basic browser based service will be provided to the physician at no
cost. The EPN will offer secure, long-term, Health Insurance Portability and
Accountability Act (HIPAA)--compliant document storage for a monthly
subscription fee. Other services anticipated to be provided include a basic
online medical record, including the capture of the physician's handwritten
patient notes without scanning. Our study of 42 practices throughout Texas and
Colorado showed that only one in 14 physicians currently use an electronic
medical record entry system. The remainder rely on handwritten patient notes.
Our research indicates many physicians prefer a simple document solution that
does not alter the way the physician practices medicine. We believe that use of
the EPN will not disrupt the physicians' normal operating procedures.
Additionally, cost reductions in medicine demand an approach based on use,
rather than large, up-front investments.

9
<PAGE>

We believe that the important competitive advantage of the EPN will be its
presentation of information to the physician rather than requiring the
physician to search the net to find information and services. A medical search
engine button will always be available adjacent to the patient record, allowing
the physician instant access to this resource at all times. In addition, we
plan to provide medical billing and receivable financing through our strategic
partnerships. We further intend to enter into strategic relationships with
well-known providers of other services, such as banking, travel and
professional liability insurance, and an upgraded path to a more sophisticated
medical record, if desired by the physician. The EPN will also provide access
to the distribution of pharmaceutical samples and information through our site.

Furthermore, the EPN will provide enabling infrastructure and services for
secure, online medical transactions. It will provide an integrated service
solution designed specifically for healthcare that will include roaming user
credentials, complete audit trail, fraud detection and directed delegation of
authority to medical records. Thus, the EPN is being designed to be a secure
facility with "state of the art" protection.

Results of Operations

Due to the evolution of our business strategy, we believe that our
historical results of operations for the periods presented may not be directly
comparable.

Six Months Ended June 30, 2000 vs. June 30, 1999

Revenue. Our primary source of revenue originated from the sale of
transcription services. During the six months ended June 30, 1999, we also
generated $469,949 in revenue from the sale of bundled products comprised of
software and hardware. There were no sales of bundled products in the six
months ended June 30, 2000. Net transcription service revenue decreased to
$1,221,390 for the six months ended June 30, 2000, a decrease of $659,520, from
the comparable period in 1999. The decrease is primarily attributable to the
sale of the net assets and contracts of certain of our medical transcription
services effective December 20, 1999.

Cost of Sales. Cost of sales for medical transcription consists primarily of
labor costs. Cost of sales for medical transcription decreased $357,405 for the
six month period ending June 30, 2000, as compared to the same period in 1999,
as a result of reduced transcription revenue. Related gross margin on medical
transcription services for the six months ended June 30, 2000 was $282,880,
resulting in a gross margin on transcription services of 23%, compared to 31%
for the comparative period in 1999. The decreased gross margin primarily
reflects increases in labor costs resulting from a shortage in skilled medical
transcriptionists.

Cost of sales for bundled products for the six months ended June 30, 1999
was $52,567 and related gross margin was $417,382.

Marketing and Sales Expense. Marketing and sales expense consists primarily
of marketing and sales salaries and commissions and advertising/promotional
expenditures. Marketing and sales expense decreased to $19,436 for the six
months ended June 30, 2000, down approximately $330,000 for the comparative
period in 1999. The decrease is the direct result of our increased focus on the
transcription business. The transcription industry does not require significant
marketing efforts.

General and Administrative Expense. General and administrative expense is
comprised primarily of compensation and related expenditures for administrative
and executive personnel, professional fees associated with legal, consulting,
and accounting services, and general corporate overhead. General and
administrative expense decreased for the six months ended June 30, 2000 to
$1,228,954, a decrease of approximately $2,710,000, from the same period in
1999. The decrease was primarily attributable to decreases in compensation,
legal and accounting fees, travel and consulting in 2000 related to the
decreased level of operations, and reflecting in 1999 a high level of
acquisition related activities.

Compensation for the six months ended June 30, 2000 decreased by
approximately $1,075,000 from the same period in 1999. The decrease reflected
the headcount decreases for disposed operations, as well as a reduction in
corporate office staff from 35 to seven.

10
<PAGE>

Legal and accounting fees for the six months ended June 30, 2000 decreased
by approximately $550,000 and consulting fees for the same period decreased by
approximately $325,000, as compared to the corresponding period in 1999. The
first half of 1999 reflected significant professional fees as a result of
ongoing acquisition activities. We have since curtailed our acquisition policy
with an emphasis on internal growth of our transcription business and
development of the EPN.

Travel related costs decreased approximately $150,000 for the six months
ended June 30, 2000 to the corresponding period in 1999. Significant
acquisition activities and a larger network of transcription companies in 1999
were the primary reasons for the decrease.

Research and Development Expense. Research and development expense consists
primarily of personnel costs including salaries, benefits and consultant costs
related to the research and preliminary development efforts on new software
products. Research and development expense decreased to $13,172 for the six
months ended June 30, 2000, down approximately $482,000 from the corresponding
periods in 1999. The decrease in research and development costs is attributable
to our change in business focus from software development to a transcription
service provider. During 2000, we capitalized approximately $207,000 in
development costs related to the EPN. In 1999 no development costs were
capitalized. Development costs associated with the EPN will largely be incurred
in the second and third quarters of 2000.

Through the period ended June 30, 2000, we have incurred operating losses,
since our inception, of approximately $23.1 million. To date, our operations
have not been profitable and there is no assurance that they will become
profitable in the future. Significant acquisitions and dispositions in 1999
distort the comparability between periods and as to future operations.

Fiscal Year 1999 vs. Fiscal Year 1998

Revenues. Revenues increased $4,544,453 from $717,357 in 1998 to $5,261,810
in 1999. The increase was attributable to our acquisition program ($4,126,590
related to transcription operations acquired in 1999) and a full year of
operations for our 1998 acquisitions.

Effective December 20, 1999, we disposed of the assets and related
operations of our medical transcription services in New York, New Jersey,
Houston, Texas and Manila, the Philippines. Revenues of ongoing operations are
expected to decline in 2000.

Cost of Sales. Cost of sales increased $3,618,920 from $432,246 in 1998 to
$4,051,166 in 1999. This increase was attributable to direct costs associated
with transcription operations acquired. Gross margins were 23% in 1999 compared
with 40% in 1998, reflecting the higher fixed costs and labor intensive nature
of our increased transcription operations.

Marketing and Sales Expense. Marketing and sales expense decreased 37% from
$1,265,927 in 1998 to $797,745 in 1999. This $468,182 decrease is the result of
our increased focus on the transcription business, which does not require
significant marketing efforts.

General and Administrative Expense. General and administrative expense
increased 25% from $5,640,238 in 1998 to $7,024,097 in 1999, up $1,383,859.

Administrative and executive compensation increased approximately $855,000
primarily as a result of personnel increases from acquisitions and severance
costs related to the termination of certain corporate officers.

Legal fees increased by $276,000 primarily because of expenses associated
with an abandoned registration statement, our exchange of assets,
extinguishment of debt and costs associated with the conversion of our
preferred stock into our common stock.

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Our acquisitions during 1999 resulted in increased office rent, depreciation
and goodwill amortization. These expenses increased approximately $653,000.

These increases were offset by decreases in other expenditures related to
outside consultants. As our business focus shifted to the transcription
business, and we developed the internal expertise to manage operations, we
hired fewer outside consultants.

Research and Development Expense. Research and development expense decreased
6% from $754,170 in 1998 to $711,404 in 1999 down $42,766. During 1998, we
capitalized approximately $291,000 of development costs. In 1999 no costs were
capitalized. These decreases were attributable to our change in focus from
software development to transcription service provider.

Interest Expense. Interest expense increased $651,222 from $216,680 in 1998
to $867,902 in 1999. Interest expense increased primarily because of increased
finance charges related to warrants issued in connection with debt and
preferred stock. Higher amounts of outstanding indebtedness and accretion of
discounts on preferred stock payables also contributed to the increase. Finance
charges associated with warrants and accretion of discounts on preferred stock
payables did not exist in 1998.

Extraordinary Gain on Extinguishment of Debt. In December 1999, some of our
indebtedness was forgiven in exchange for certain of our net assets and related
operations. The resulting gain of $5,562,750 was reflected as an extraordinary
item.

Liquidity and Capital Resources

At June 30, 2000, we had cash and cash equivalents of $399,340 and a working
capital deficiency of $1,130,805. This compares to cash and cash equivalents of
$53,529 and a working capital deficiency of $1,568,752 at December 31,1999. The
increase in working capital of approximately $438,000 is attributable to:

. cash received from exercise of stock options and warrants of
approximately $840,000; and

. approximately $370,000 from issuance of common stock reflected as a
liability in the December 31, 1999 financial statements;

. which were offset by current year operating losses.

In September 2000, we completed the private placement of:

. 6,666,666 shares of our common stock for net proceeds of $1,000,000;

. warrant to purchase 1,000,000 shares of our common stock at an exercise
price of $0.15 per share; and

. six convertible promissory notes in the aggregate principal amount of
$480,000.

The convertible promissory notes described above bear interest at a rate of
12% per annum, and unless converted, will mature on the earlier of February 28,
2001 or a change in our control. Upon adoption of an amendment to our
certificate of incorporation to increase our authorized common stock, the
convertible notes described above automatically will convert into a number of
shares of common stock equal to the principal amount of the promissory notes,
plus accrued and unpaid interest, divided by the lesser of $0.15 or the lowest
per share price for which we have sold shares of common stock between September
1, 2000 and the conversion date.

The warrant described above was issued as compensation to the placement
agent in the sale of the 6,666,666 shares of common stock described above. The
warrant has an exercise price of $0.15 per share, is exercisable immediately,
and expires on October 31, 2003.

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We believe our cash position, less known commitments and contingencies, plus
the net proceeds of approximately $1.5 million received in the September 2000
private placements, plus cash generated from operations should be adequate to
fund our on-going operations and fund the development of the EPN through
January 2001. We will require substantial additional capital during fiscal 2001
to implement and market the EPN.

Our capital requirements will depend on many factors, including, cash flow
from operations, additional working capital requirements, additional product
development expenses and capital expenditures. To the extent that existing
resources are insufficient to fund our operations in the short- or long-term,
we will need to raise additional funds through public or private financings. We
may not be able to raise additional financing on terms favorable to us or to
our stockholders without substantial dilution of their ownership and rights. If
we are unable to raise sufficient funds to satisfy either short- or long-term
requirements, there would be substantial doubt as to our ability to continue as
a going concern. We may be required to significantly curtail our operations,
sell our transcription operations, significantly alter our business strategy,
forego market opportunities or obtain funds through arrangements with strategic
partners or others that may require us to relinquish material rights to certain
of our technologies or potential markets.

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BUSINESS AND PROPERTIES

General

Our current principal business is providing traditional and Internet-based
medical transcription services. Medical transcription is the conversion of
dictated information into a standard text format for inclusion in a patient's
permanent medical records. We have approximately 1,600 physician transcription
clients in four states, and transcribe approximately 463,000 physician-dictated
medical records annually. Our medical transcription operations currently
provide our only source of revenue.

Our business strategy is to develop an Internet-based patient record storage
system called the e-DOCS Physician Network, or "EPN," using the experience we
gained from acquiring eight independent transcription companies and developing
Internet-based software. The EPN is a vertical Internet application service
provider for the service of the medical community operated through our wholly-
owned subsidiary e-DOCS Physicians Network, Inc. It is directed at independent
transcription companies as well as medical billing and collection firms,
medical coding companies, independent practice associations, preferred provider
organizations, other strategic partnerships we may enter into and at the
nation's 637,000 clinical physicians, a majority of whom practice in groups of
five or less. We intend to provide a common technology platform for these types
of independent, capital-deficient businesses. The EPN is a secure, business-to-
business Internet application for the electronic organization, storage and
retrieval of medical transcription services and physicians' handwritten notes
of patient encounters. It will also provide access to this medical information
24 hours a day, seven days a week. Ultimately, the EPN will create a direct
link to the physician by facilitating improvements to the existing channel for
transcription and medical information.

In October 2000, we began physician testing of the EPN. We anticipate the
launch of the EPN in the fourth quarter 2000.

Recent Developments

Recent Sales of Securities. In September 2000, we completed several private
placements of our securities. These private placements consisted of:

. 6,666,666 shares of common stock at a sale price $0.15 per share;

. a warrant to purchase 1,000,000 shares of our common stock; and

. six convertible promissory notes in the aggregate principal amount of
$480,000.

Conversion of Note. Effective October 26, 2000, N. Rudy Garza, one of our
directors, converted one of our convertible notes into 1,804,747 shares of our
common stock.

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Changes in Management.

. Effective October 1, 2000, J. William Boyar was named chairman of the
board of directors;

. Effective October 2, 2000, James G. Springfield became our president,
chief executive officer and vice chairman of the board of directors;

. Effective July 31, 2000, Anna M. Goss joined us as controller;

. Effective September 1, 2000, Russ M. Douglas resigned as our chief
technology officer; and

. Michael H. Leggett has been named director of technology to direct the
technical development for the EPN.

Forbearance Agreements. On May 3, 2000, we entered into a forbearance
agreement with each of Hillel Bronstein, Stuart Szpicek, and Yaniv Dagan
relating to the issuance of 575 shares of our convertible Series 1 preferred
stock to Cornell Transcription, Inc. as part of the purchase price under the
terms of the asset purchase agreement between AVRI Health Care Information
Services, Inc., a Delaware corporation and our wholly-owned subsidiary, and
Cornell Transcription, Inc., a New York corporation of which Mr. Bronstein,
Mr. Szpicek, and Mr. Dagan are shareholders. The terms of the forbearance
agreements required Mr. Bronstein, Mr. Szpicek, and Mr. Dagan to not exercise
any enforcement rights or remedies under, or with respect to, the asset
purchase agreement resulting from our inability to register the shares of our
common stock underlying the Series 1 preferred stock until the earlier of when
the common stock is registered or August 15, 2000. The affected shares were
registered on August 11, 2000.

As consideration for the forbearance, we:

. granted Mr. Bronstein warrants to purchase 118,750 shares of common
stock, granted Mr. Szpicek warrants to purchase 118,750 shares of common
stock, and granted Mr. Dagan warrants to purchase 12,500 shares of
common stock; and

. paid interest in common stock to each of Mr. Bronstein, Mr. Szpicek and
Mr. Dagan at a rate of 1% per month on the cash value of the shares of
common stock held by, and owed to them under the forbearance agreements
through the expiration of the forbearance period. In addition, we paid
the legal fees of Mr. Bronstein and Mr. Szpicek totaling $40,000.

Company History

Our predecessor, Voice Technology Partners, L.P., a Texas limited
partnership, was founded in 1994. In August 1996, the partnership's assets were
contributed to a Delaware corporation. In December 1996, the Delaware
corporation completed a share exchange with Summa Vest, Inc., a Utah
corporation, which immediately changed its name to Applied Voice Recognition,
Inc. In January 1998, the Utah corporation reincorporated in Delaware. In March
1999 we began using the assumed name e-DOCS.net.

Before the first quarter of 1998, our principal efforts were focused on the
sales of VoiceCOMMANDER(TM). We sold this voice recognition software to the
general business community through retail sales channels and our internal sales
force. In the first quarter of 1998, we narrowed the focus of our business plan
to concentrate our efforts on medical transcription services.

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In March 1998, we began expanding into the healthcare transcription industry
by acquiring Transcription Resources of Dallas, Texas. The operation of
Transcription Resources during 1998 provided us with valuable industry
experience that enabled us to develop a software product that provides
healthcare professionals with a tool for Internet-based transcription and
dictation services. The product, VoiceCOMMANDER 99, provided a mobile dictation
technology designed to improve the quality and reduce the costs of healthcare
information needs.

After ten months of use by physicians, we recognized that the voice
recognition component of VoiceCOMMANDER 99 was not generating the cost and
labor savings previously believed possible. However, the market indicated a
preference for a browser-oriented tool for Internet-based transcription and
medical records storage services. We never derived significant revenues from
VoiceCOMMANDER 99, and have ceased the development and use of it as part of our
business plan. Nevertheless, we believe that our use of VoiceCOMMANDER 99 has
provided us with a unique experience that will allow us to respond to
technological changes in the future.

During 1998 and 1999, we acquired eight traditional transcription companies
in various markets in the U.S. and the Philippines. Under an asset purchase
agreement dated January 7, 2000, and effective as of December 20, 1999, we sold
the net assets and contracts of four of these medical transcription service
operations, which were based in New York, New Jersey, Houston, Texas and
Manila, the Philippines, for consideration of approximately $9.4 million. The
purchasers were Lonestar Medical Transcription USA, Inc., a Delaware
corporation and, at the time of purchase, a wholly-owned subsidiary of L&H
Investment Co., N.V., a Belgium company. Additionally, Lonestar and L&H
Investment obtained the non-exclusive rights to our VoiceCOMMANDER 99 code.

The $9.4 million purchase price consisted of:

. the forgiveness of a $2.0 million promissory note held by Lernout &
Hauspie Speech Products, N.V., a Belgium company and an affiliate of L&H
Investment;

. the forgiveness of a $1.5 million promissory note held by L&H
Investment;

. the forgiveness of approximately $94,000 in interest;

. the retirement of $5.0 million in series D preferred stock held by L&H
Investment and forgiveness of approximately $318,000 in dividends; and

. approximately $457,000 in cash for our accounts receivables sold.

We also converted warrants held by L&H Investment to purchase approximately
3.5 million shares of our common stock at $1.25 per share into a warrant to
purchase 800,000 shares of our common stock at $0.37 per share. Lonestar became
the holder of this warrant, and in May 2000, performed a cashless exercise of
the warrant for 572,132 shares of our common stock. The Lernout & Hauspie
promissory note, the L&H Investment promissory note and the series D preferred
stock were convertible into 5,405,405, 4,054,054 and 13,513,513 shares of our
common stock, respectively. The disposition removed substantial indebtedness
from our books and potential dilution to our common stockholders.

During our fiscal years ended December 31, 1998 and 1999, we spent
approximately $754,000 and $711,000, respectively, on research and development
activities. Those activities focused primarily on the development of our
medical transcription operations and VoiceCOMMANDER 99. During those two years
we did not have any expenditures on the development of the EPN.

Industry Overview

Medical Transcription Industry. Medical transcription is the conversion of
dictated information into a standard text format for inclusion in a patient's
permanent medical records. Increasingly, patients' permanent

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medical records are being maintained as electronic patient records. The notes
are either transcribed in-house or transmitted by phone lines or courier to an
outside service. According to the Medical Transcription Industry Alliance,
physicians in the U.S. are currently spending over $6.6 billion dollars per
year on transcription, growing at a rate of 15-20% annually. Whether it is
performed in-house or out-sourced to professional transcription services, most
of the costs associated with transcription are attributable to labor in the
form of typing and quality assurance. The medical transcription industry also
is very fragmented, with approximately 1,500 transcription companies
domestically according to the Medical Transcription Industry Alliance. The
medical transcription market includes individual physicians, physician groups
and hospitals.

Healthcare Internet Industry. The healthcare industry is in a period of
rapid change, which is being influenced by government regulation, industry
consolidation, quality of care issues and technological change. Healthcare
providers are outsourcing administrative activities in an effort to reduce
costs. We and other out-source medical transcription service providers are
using emerging technologies like the Internet and digital imaging to improve
the transcription process and the management of electronic patient records.

Products and Services

Medical Transcription. We derive substantially all of our revenue from
providing value-added medical transcription services to clients through our
four transcription operations. Our traditional transcription business provides
a computer-based service for transcription of physician dictation. While our
service arrangements vary by customer (some of which require transcription to
be performed on-site), these services are primarily provided from remote
locations using telecommunications and Internet capabilities. As a result, many
of our transcription employees are able to work as "telecommuters" using
networked computers in their homes. Our transcription services are typically
paid for on a per line transcribed basis.

The e-DOCS Physician Network. Our research indicates many physicians prefer
a simple document technology that does not alter the way the physician
practices medicine. The EPN is designed to become the standard technology
platform for independent billing and coding and transcription companies and the
individual practicing physician. It is being developed in response to a need
identified by our existing customer base for a simple, secure solution to the
daily needs of the medical services community.

The opportunity for the EPN is created by the fundamental need for the
medical transcription industry to have a direct connection to physicians. With
approximately 637,000 actively practicing physicians in the U.S., the physician
office market accounts for approximately $215 billion of healthcare spending
and directs up to another $600 billion in spending, as reported by Wit Capital.
Physician office services are expected to exceed $400 billion by 2008. The
physician market is extremely fragmented, with over a majority in groups of
less than five doctors according to the American Medical Association. Our
research of 42 practices throughout Texas and Colorado indicated only one in 14
physicians currently use an electronic medical record entry system. The
remainder rely on handwritten patient notes.

The EPN is being designed to provide an efficient Internet-based delivery
system for medical transcription documents and an infrastructure for capturing,
organizing, storing and retrieving medical information. The services may
include medical transcription and storage, training, legacy system integration,
and the electronic storage and retrieval of the physician's hand-written notes
of a patient encounter. The EPN is being designed to simplify how physicians
interact with medical information without attempting to change their current
practice methodology. In addition, we believe the EPN will provide a
streamlined, more efficient medical billing process for physicians. It also
will support opportunities for other physician interests in related content,
services and products, such as banking, travel, and professional liability
insurance.

We intend to provide the services of the EPN on a monthly subscription
basis. The transcription company can deliver its medically transcribed
documents through the EPN browser, allowing physicians to review their
transcriptions online and digitally sign the documents. It will be available
all of the time from any location upon authorization of the user.

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We believe that the EPN's important competitive advantage will be its
presentation of information to the physician rather than requiring the
physician to search the Internet to find information and services. A medical
search engine button will always be available adjacent to the patient record,
allowing the physician instant access to this resource at all times. In
addition, we plan to provide medical billing and receivable financing through
our strategic partnerships. We further intend to enter into strategic
relationships with well-known providers of other services, such as banking,
medical and office supplies, and an upgrade path to a more sophisticated
medical record, if desired by the physician. The EPN will provide access to the
sale and distribution of pharmaceuticals through our site.

Furthermore, the EPN will provide enabling infrastructure and services for
secure, online medical transactions. It will provide an integrated service
technology designed specifically for healthcare that will include roaming user
credentials, complete audit trail, fraud detection and directed delegation of
authority to medical records.

Competition

Medical Transcription Industry. We compete in the highly fragmented medical
transcription industry that is predominately populated by small, regional or
local companies, with a limited number of national companies. MTIA estimates
that the total annual cost of transcribing medical records in the United States
is greater than $6.6 billion. Of this amount, MTIA reports that approximately
$1.0 billion is currently outsourced to medical transcription companies.

While the transcription services industry remains highly fragmented, there
has been a significant trend towards consolidation. We believe that this trend
is in response to the greater technological demands of the customer base and
the consolidation of healthcare service providers into larger national
companies. Smaller, regional and local medical service providers are at a
disadvantage because they are not able to achieve sufficient economies of scale
to obtain a return on significant investments in technology. The consolidation
of healthcare service providers is reducing the number of potential medical
transcription customers, while increasing the information management
requirements of those customers. We believe that the larger healthcare service
providers prefer to use a smaller number of larger, more technologically-
advanced, medical transcription service providers.

The number of large national transcription service providers has decreased
in recent years due to industry consolidation. The largest medical
transcription service providers are Medquist, Inc. and LHSP. We believe that
our ability to compete with these providers and others depends upon many
factors within and outside of our control, including the timing and market
acceptance of our transcription services, service quality, performance, price,
reliability, customer service and support and the ability to attract qualified
transcriptionists.

Increased competition may result in price reductions for our services,
reduced operating margins and an inability to increase our market share, any of
which would have a material adverse effect on our business.

Healthcare Internet Industry. High growth, intense competition, and
technological change characterize the market for electronic healthcare
information services and e-commerce. In addition to the direct competitors that
we will be facing in the electronic medical records market, we will face
competition from many companies with significantly greater financial resources,
well-established brand names and large installed customer bases. We expect
significant competition from:

. Traditional healthcare information system vendors, including Cerner
Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC,
Medic, a division of Misys PLC, and Shared Medical

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Systems Corporation, each of which focus on providing information
systems to large healthcare enterprises and physician practice groups.
They also have large installed bases of customers. Although they have
not traditionally focused on providing electronic medical record
services, they have begun to pursue a variety of Internet strategies,
some of which could provide functions competitive with our products and
services; and

. Major Internet companies, including those not currently specializing in
the healthcare industry, which also may enter our markets. Many of these
companies have longer operating histories, larger customer bases,
substantially greater financial, technical, sales and marketing
resources and greater name recognition than we do, and we may be unable
to compete successfully against them. The most significant competitive
factors include clinical focus, service reliability, breadth of product
offerings, price performance ratio, network security, ease of access and
use, content bundling, customer support, brand recognition and operating
experience. However, we believe we will be able to compete favorably in
most of these areas by targeting the smaller healthcare enterprises and
physician practice groups.

Government Regulation and Healthcare Reform

The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation
of healthcare organizations. Proposals to reform the U.S. healthcare system
have been and will continue to be considered by the U.S. Congress. These
programs may contain proposals to increase or decrease government involvement
in healthcare or change the operating environment for our potential customers.
Healthcare organizations may react to these proposals and the uncertainty
surrounding them by curtailing or deferring investments, including those for
our products and services. On the other hand, changes in the regulatory
environment have in the past increased, and may continue to increase, the needs
of healthcare organizations for cost-effective information management, which
may enhance the marketability of our applications and services. We cannot
predict with any certainty what impact, if any, these proposals or any future
healthcare reforms might have on our business.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
mandates the use of standard transactions and identifiers, prescribed security
measures and other provisions within two years after the adoption of final
regulations by the Department of Health and Human Services. It will be
necessary for our products and services to be in compliance with the proposed
regulations. Congress also is likely to consider legislation that would
establish rules about individuals' rights to access their own or someone else's
medical information within legislation known as a "patient bill of rights".
This legislation, if enacted, would likely define what is to be considered
protected health care information and outline steps to ensure the
confidentiality of this information.

The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our EPN databases are subject to
substantial and rapidly evolving regulation governing both the disclosure and
the use of confidential patient medical record information. Legislation
governing the dissemination of medical record information has been proposed at
both the state and federal levels. This legislation may require holders of
medical records to implement security measures that may require substantial
expenditures by us or materially restrict the ability of healthcare providers
to submit information from patient records using our applications.

In October 1999, the Department of Health and Human Services proposed new
rules under the HIPAA. The proposed rules would require the formulation of
policies and systems that give individuals access to their health care
information. In addition, these rules would require that safeguards be
constructed to protect this information against unauthorized access. The
proposed rules include new penalties for violations of an individual's right to
keep his health information private. These proposed rules are expected to
become final in 2000.

There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may
be adopted that address issues such as online content, user

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privacy, pricing and characteristics and quality of applications and services.
For example, although two key provisions of the act were held unconstitutional,
the Communications Decency Act of 1996 prohibited the transmission over the
Internet of some types of information and content.

Internet user privacy has become an issue in the United States. Current
United States privacy law consists of a few disparate statutes directed at
specific industries that collect personal data, none of which specifically
covers the collection of personal information online. The United States or any
state may adopt legislation to attempt to protect this privacy. Any legislation
addressing these issues could affect the way in which we are allowed to conduct
our business, especially those aspects that involve the collection or use of
personal information, and could have a material adverse effect on our business.
Moreover, it may take years to determine the extent to which existing laws
governing issues such as property ownership, libel, negligence and personal
privacy are applicable to the Internet.

The tax treatment of the Internet and e-commerce is currently unsettled.
Several proposals have been made at the federal, state and local levels and by
some foreign governments that could impose taxes on the sale of goods and
services and some other Internet activities. A recently passed law places a
temporary moratorium on specific types of taxation on e-commerce. We cannot
predict the effect of current attempts at taxing or regulating commerce over
the Internet. Any legislation that substantially impairs the growth of e-
commerce could have a material adverse effect on our business.

Intellectual Property

Patents. We regard our software as proprietary and rely on a combination of
copyright and trade secret laws in attempting to protect those rights. We enter
into software license agreements with end-users of our products that outline
the terms and conditions under which our products can be used. Despite these
precautions, unauthorized third parties may be able to copy aspects of our
products or to obtain and use information that we regard as proprietary.

We are applying for a patent that describes the process for presenting
medical details about pharmaceutical products to doctors though the use of an
Internet browser. We also hold a variety of patents and have made patent
applications that are useful to our transcription business. These patents and
applications relate to various aspects of our speech recognition, user
interface and Internet technology.

The patent process is lengthy and complex. Each patent must go through
rigorous examination and may involve amplifying submissions. We may, based upon
response from the patent office, abandon efforts on any patents that are deemed
not to warrant further investment of our resources. There can be no assurance
that any patents will be issued or, if issued, will provide us with significant
protection against competitors. Our current intention is to develop products
based on our existing intellectual property rights only to the extent these
rights relate to the development of the EPN. However, we may seek to sell or
license these rights in the future.

Certain of our competitors have obtained, and we believe that certain of our
competitors are seeking, patent protection on various aspects of their speech
recognition technologies. Many of our competitors have significantly greater
resources than we do. We believe that, because of the rapid pace of
technological change in the software industry, factors such as the
technological and creative skills of our personnel are more important to
establishing and maintaining a technology leadership position than are the
various legal protections of our technology.

Litigation, which could result in substantial cost to and diversion of
effort by us, may be necessary to enforce any patent issued to us, to protect
trade secrets or know-how owned by us, or to determine the scope and validity
of the proprietary rights of others. Adverse findings in any proceeding could
subject us to significant liabilities to third parties, require us to seek
licenses from third parties, and adversely affect our ability to sell our
products. We are not aware of any controversy likely to lead to litigation
relating to intellectual property issues. However, there can be no assurances
that our products and services will not infringe on patent or other rights of
others, for which licenses might not be available to us.

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Trademarks. We have been granted U.S. Trademarks for each of APPLIED VOICE
RECOGNITION, VoiceCOMMANDER, LAWCOMMANDER, VOICECOMMANDER (CTM), GIVING PEOPLE
POWER OVER TECHNOLOGY, and MIKE ROFONE (word mark) plus miscellaneous designs
of the Mike Rofone character. In addition we have applied for U.S. trademarks
for It's About Time, Physician Internet Portal, P.I.P., e-DOCS.net (trademark),
e-DOCS.net (service mark), Virtual Physician Private Network, e-DOCS
(trademark), e-DOCS (service mark), MedVault, and e-DOCS Physician Network, all
of which are pending. The U.S. Trademark Office has notified us that our
application for the e-DOCS trademark may not be approved under the notion that
the term "e-DOCS" may now be generic. There can be no assurance that any of our
pending or future trademark registrations will be issued or, if issued, will
provide us with significant protection against competitors.

Assignments. Pursuant to our transaction with Lonestar and LHIC as described
above, we provided each with the non-exclusive right to our VoiceCOMMANDER 99
code. However, those rights do not include the right to any future improvements
we may make. We are not entitled to receive any licensing fee or other form of
compensation for Lonestar's and LHIC's use of the VoiceCOMMANDER 99 code.

Employees

As of September 30, 2000, we employed or contracted with 89 persons on a
full-time basis, of whom seven were located in our corporate headquarters in
Houston, Texas, and 82 were located at branch locations in Texas and Colorado.
Included in the branch location totals are 76 people who provide transcription
services to us from their homes, of which 30 are independent contractors. None
of our employees are represented by a labor union, and we consider our
relations with our employees and at-home transcriptionists to be good.

Properties and Equipment

We do not own any real property. We lease office space for our headquarters
in Houston, Texas, and for our branch operations. The headquarters office,
located at 1770 St. James Place, Suite 116, Houston, Texas currently consists
of approximately 3,633 square feet at a basic rental rate of $5,449.50 per
month.

We have branch offices in Dallas, Texas and Tyler, Texas. Our branch offices
range from 1,000 to 1,500 square feet and lease terms vary from month to month
to approximately two years remaining on the lease.

We have a significant investment in the latest in personal computer hardware
and software technology, which is required to develop and maintain our
sophisticated software products, as well as being available for demonstrations
in-house and at trade shows. We also own personal computers and printers that
are used by our sales and administrative staffs.

Legal Proceedings

There are no material legal proceedings to which we are a party or of which
any of our property is the subject other than ordinary, routine claims
incidental to our business.

21
<PAGE>

MANAGEMENT

Directors and Executive Officers

The following table provides information concerning each our executive
officer and director as of the date hereof:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
J. William Boyar............... 49 Chairman of the board of directors
James G. Springfield........... 36 President, chief executive officer and vice
chairman of the board of directors
Jackson L. Nash................ 55 Chief financial and accounting officer and
secretary
Daniel Dornier................. 38 Director
James S. Cochran, M.D.......... 56 Director
N. Rudy Garza.................. 41 Director
I. Bobby Majumder.............. 32 Director
</TABLE>

J. William Boyar has been a director since August 1997 and chairman of the
board since October 1, 2000. Mr. Boyar is chairman of the Houston-based law
firm Boyar & Miller P.C. and has 24 years of experience in representing multi-
million dollar domestic and international businesses which include public and
private company acquisitions, dispositions, capitalization and financing of
assets. He received his undergraduate degree in English from Tulane University
and his J.D. from Tulane University School of Law. Boyar & Miller, P.C.
represents us as outside counsel on various legal matters.

James G. Springfield joined us on October 2, 2000 as our president, chief
executive officer and vice chairman. Before joining us, Mr. Springfield was
with the Memorial Hermann Healthcare System for over 12 years, his most recent
role as chief operating officer of Memorial Hermann Hospital. Before that, he
served as the vice president and chief executive officer of Memorial Hermann
Children's Hospital from December 1997 until December 1999. He also served as
the vice president of senior services for the Memorial Hermann Healthcare
System. He previously served as the assistant vice president of operations for
Memorial Hospital Southwest and worked at that hospital for six years. He began
his career as a financial analyst with Memorial in 1988 and completed his
administrative fellowship with the system in 1991. Mr. Springfield is a
diplomate of the American College of Healthcare Executives and is also is a
member of the Healthcare Finance Management Association. Mr. Springfield
received a BBA from Baylor University in 1987 and a masters in healthcare
administration from the University of Houston-Clear Lake in 1991.

Jackson L. Nash has served as chief financial officer and secretary since
February 2000. Mr. Nash was vice president and chief financial officer of
Windsor Frozen Food Company, Ltd. from June 1996 to March 1999, and vice
president, chief financial officer and secretary of Trans American Refining
Corporation during 1994 and 1995. Mr. Nash was with Ernst & Young for 20 years,
leaving the firm as an audit partner in 1992, to become an independent
consultant. Mr. Nash received his undergraduate degree in accounting from the
University of Texas and is a certified public accountant in the state of Texas.

Daniel Dornier has served as a director since September 1998. From August
1991 to June 1993, Mr. Dornier was an investment banker with SBC-Warburg Dillon
Reed. From June 1993 to June 1995, he served as a private investment manager
for various companies owned by the Dornier family. From 1995 to 1998,
Mr. Dornier served as president of Dornier Capital Advisors, where he managed
investment portfolios for high net worth individuals in Europe. In 1999, he co-
founded Greenwich AG, which focuses on early stage investments in high-growth
companies in Germany and the United States. Mr. Dornier studied business at the
University of Nuertingen, Germany and received an MBA from the Swiss Campus of
City University in Bellevue, Washington.

22
<PAGE>

James S. Cochran, M.D. has been a director since February 1999. Since 1978,
Dr. Cochran has been practicing medicine with Urology Specialists & Associates,
a private practice of eight physicians in Dallas, Texas. Dr. Cochran also holds
a position as clinical instructor in urology at the University of Texas
Southwestern Medical School as well as the position of chief medical officer of
Physicians Data Corp and Ultrasight, Inc. In addition to being a member of
numerous professional societies, such as the American Urological Association,
the American Medical Association and the American Fertility Society, among
others, he is also a member of several national advisory boards including Prime
Medical Inc. and Indigo, Inc. Dr. Cochran is the former president of the
medical/dental staff of Presbyterian Hospital of Dallas and is chairman of the
urology process improvement committee. Dr. Cochran received his undergraduate
degree in biochemistry from Rice University and doctor of medicine from the
University of Texas Southwestern Medical School.

N. Rudy Garza has been a director since September 1999. From 1983 to 1996,
Mr. Garza served as vice president and chief executive officer of S. D. Garza
Engineering, Inc., a civil and environmental engineering company, and was
involved in mergers, acquisitions and the raising of equity. In 1996, Mr. Garza
founded G-51 Capital, LLC and has served as its president since then. Mr. Garza
is a seed and early stage venture capitalist specializing in Texas-centric
Internet and software companies. Mr. Garza received his undergraduate degree in
finance from St. Edward's University and his MBA from the University of Texas.

I. Bobby Majumder has been a director since May 2000. Mr. Majumder is a
partner in the law firm of Gardere & Wynne, L.L.P. and has been practicing
corporate and securities law since 1993. Mr. Majumder earned his undergraduate
degree in Philosophy from Trinity University and his J.D. from Washington & Lee
University.

Director Compensation

None of the directors receive any compensation to attend board meetings.
However, all board members are eligible to receive stock options under our 1997
Incentive Plan. In February 2000, Messrs. Connolly, Boyar, Cochran, Dornier and
Garza each were granted options to purchase 100,000 shares of our common stock
at an exercise price of $0.453 per share. These options vest and become
exercisable in equal monthly installments over a twelve-month period beginning
February 22, 2000. In May 2000, Mr. Majumder was granted options to purchase
100,000 shares of our common stock at an exercise price of $0.625 per share.
Mr. Majumder's options vest and become exercisable in equal monthly
installments over a twelve-month period beginning May 3, 2000. In October 2000,
Mr. Boyar was granted additional options to purchase 500,000 shares of our
common stock at an exercise price of $0.31 per share. These options vest and
become exercisable in equal monthly installments over a 15-month period
beginning October 1, 2000.

Employment Agreements

Each officer serves at the discretion of the board of directors, subject to
the terms of his employment agreement, if any, and is eligible to receive stock
options pursuant to our 1997 Incentive Plan.

James G. Springfield. On August 29, 2000, we entered into an employment
agreement with James G. Springfield, our new president, chief executive officer
and vice chairman of our board of directors. The term of the agreement
commenced October 2, 2000, and will continue for an initial term expiring on
December 31, 2003. The expiration date will automatically be extended for
successive one year periods following the expiration of the initial term unless
the agreement is otherwise terminated in accordance with its terms. The
agreement may be terminated either by Mr. Springfield or us by written notice
at least 90 days before the expiration of the initial term or any succeeding
one year term. We have agreed to pay Mr. Springfield as follows:

. for the period from the commencement date until August 31, 2001, a
monthly base salary of $14,166;

. for the period from September 1, 2001 until August 31, 2002, a monthly
base salary of $15,000;

23
<PAGE>

. for the period from September 1, 2002 until the expiration date, a
monthly base salary of $16,666.

In addition to his base salary, Mr. Springfield is entitled to receive a
bonus of up to 100% of his base salary provided he meets certain performance
criteria set by our compensation committee. Mr. Springfield also is entitled to
participate in all health, dental, disability, life insurance and other benefit
programs we now have or may establish in the future.

We have granted Mr. Springfield options to purchase 3,600,000 shares of our
common stock, subject to our stockholders' approval of the proposals described
in the following paragraph. The exercise price of the options is $0.31 per
share, the fair market value of the common stock on the date of grant. One-
twelfth of the options vest on the last day of each of the first 12 calendar
quarters during the initial term. The options are also subject to forfeiture if
Mr. Springfield is terminated for cause or if he terminates the agreement
before the expiration of the initial term, and are subject to accelerated
vesting upon a change in control and certain other circumstances.

We currently do not have a sufficient number of shares of common stock
available for issuance under our stock option plan to provide Mr. Springfield
with all of the options granted. In addition, we do not have a sufficient
number of shares of common stock authorized for issuance under our certificate
of incorporation to issue common stock upon full exercise of Mr. Springfield's
options. Therefore, Mr. Springfield's options are subject to our stockholders'
approval of a proposal to increase the number of shares issuable under our
stock option plan, and a proposal to increase the number of authorized shares
of common stock under our certificate of incorporation. These proposals will be
considered and voted upon at our 2000 annual meeting, which is anticipated to
be in December 2000.

Timothy J. Connolly. On July 1, 1997, we entered into an employment
agreement with Timothy J. Connolly, our former chief executive officer,
president and chairman of the board. On September 28, 2000, his employment
agreement was amended to reflect his resignation as president and chief
executive officer and as a director. Under the amended agreement, Mr. Connolly
will provide us consulting services in the areas of capital raising, investor
and public relations and business development as we may request from time to
time. Mr. Connolly's employment is not exclusive or full-time, and he may
perform services for companies other than us in his sole discretion. The term
of the contract, as amended, expires December 31, 2001. According to the
agreement, Mr. Connolly receives an annual base salary of $250,000 for 2000.
Mr. Connolly's employment agreement allows him, at his option, to be paid
additional shares of common stock in lieu of his future cash salary on terms
agreeable to Mr. Connolly and us. Mr. Connolly has received all of his salary
from February 15, 2000 through October 15, 2000 in common stock and has agreed
that all salary that otherwise would accrue under his employment agreement
during the period October 16, 2000 through December 31, 2000, will be deferred
until January 2, 2001, whereupon it will be paid to him in cash. In addition,
options to purchase 100,000 shares of common stock granted to Mr. Connolly as a
member of our board were deemed fully vested and are exercisable through
January 6, 2010. In addition to the base salary, Mr. Connolly is entitled to
receive a bonus, if any, as may be determined by our board of directors. Mr.
Connolly is entitled to terminate employment with us and receive 100% of the
base salary under his contract if a change of control occurs as defined in his
contract.

Jackson L. Nash. On February 14, 2000, we entered into a letter agreement
with Jackson L. Nash as our chief financial officer. The term of the agreement
is effective until terminated by either us or Mr. Nash. The contract provides
for payment at a rate of $80 per hour. We have granted Mr. Nash options to
purchase 50,000 shares of our common stock at an exercise price of $0.5672 per
share. One-eleventh of these options vested on February 22, 2000, the date of
grant. The rest of Mr. Nash's options vest in equal monthly installments over a
ten-month period beginning March 1, 2000.

Executive Compensation

The following table provides certain summary information concerning
compensation paid or accrued during the fiscal years ended December 31, 1999,
1998 and 1997 to our chief executive officer and to each of

24
<PAGE>

the other most highly compensated executive officers during the fiscal year
ended December 31, 1999 (the "Named Executive Officers"):

<TABLE>
<CAPTION>
Annual Compensation Number of
------------------------- Securities
Name and Principal Other Annual Underlying
Position Year Salary Bonus Compensation (1) Options
------------------ ---- ------ ----- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Eric A. Black (3)....... 1999 $104,167 $ 25,000 -- 1,500,000(4)
chief executive officer
Timothy J. Connolly..... 1999 $250,000 $109,250 -- --
chairman of the board 1998 $224,417(5) -- $11,605(2) --
1997 $157,833 24,399 9,433(2) 500
Robin P. Ritchie (3).... 1999 $161,665 -- -- --
chairman of the board 1998 $ 50,000 -- -- 300,000(6)
H. Russell Douglas...... 1999 $178,675 $ 15,020 -- --
chief technology
officer 1998 $188,401(5) -- 9,000(2) 110,000
1997 $113,500 -- 7,500(2) 100,500
Richard A. Cabrera (3).. 1999 $103,979 $ 25,000 -- 210,000(4)
chief financial officer --
Milton A. Speigelhauer
(3).................... 1999 $159,842 -- -- 150,000(6)
vice president of
marketing and sales
</TABLE>
--------
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus reported for each executive officer.
(2) Includes commissions and car allowance, if pertinent.
(3) On December 20, 1999, Mr. Black, Mr. Ritchie, Mr. Cabrera, and Mr.
Speigelhauer agreed to terminate their employment contracts.
(4) These options were forfeited upon the termination of employment contracts.
(5) Includes 32,143 and 21,429 shares of common stock issued to Timothy J.
Connolly and H. Russell Douglas, respectively, in lieu of cash salaries.
The value of this amounted to $76,001 and $51,001, respectively.
(6) The unvested options were forfeited upon the termination of employment.
With respect to the vested options, we agreed to extend the exercisable
period for an additional three years from December 20, 1999.

Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/share) Date
---- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Eric A. Black (1)............... 1,500,000 71.14% $1.03 8/2/09
Richard A. Cabrera (1).......... 210,000 9.96% $1.25 4/15/09
</TABLE>
--------
(1) On December 20, 1999 Eric A. Black's and Richard A. Cabrera's employment
contracts terminated in connection with our reorganization. Upon
termination, Mr. Black and Mr. Cabrera agreed to forfeit the vested and
unvested shares of the option grants.

25
<PAGE>

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year Ended Option
Values

The following table provides certain information with respect to options
exercised during the fiscal year ended December 31, 1999 by the Chief Executive
Officer and each of the Named Executive Officers listed in the preceding
tables:

<TABLE>
<CAPTION>
Number of Securities
Number Underlying Value of Unexercised
of Shares Unexercised Options at In-The-Money Options at
Acquired Fiscal Year-End (#) Fiscal Year-End ($)
on Value ------------------------- ------------------------------
Exercise Realized Exercisable Unexercisable Exercisable(1) Unexercisable(1)
--------- -------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Black (2)....... -- -- -- -- -- --
Timothy J. Connolly..... -- -- 333 167 -- --
Robin P. Ritchie (3).... -- -- 140,625 -- -- --
H. Russell Douglas...... -- -- 100,000 110,000 -- --
Richard A. Cabrera (2).. -- -- 333 167 -- --
Milton A. Speigelhauer
(3).................... -- -- 66,667 -- -- --
</TABLE>
--------
(1) The value for these options is not presented because the fair market value
price of our common stock is less than the option price.
(2) During 1999, Eric A. Black and Richard A. Cabrera were granted options to
purchase 1,500,000 and 210,000 shares of our common stock, respectively, in
connection with their employment agreements. On December 20, 1999, Mr.
Black's and Mr. Cabrera's contracts terminated as the result of our
reorganization. Upon termination, Mr. Black and Mr. Cabrera agreed to
forfeit the vested and unvested options.
(3) On December 20, 1999, Robin P. Ritchie's and Milton A. Speigelhauer's
employment contracts terminated in connection with our reorganization. Upon
termination, Mr. Ritchie and Mr. Speigelhauer agreed to forfeit the
unvested options. We extended the life of the vested options for an
additional three years from December 20, 1999.

26
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, derived from our
transfer records, filings with the Securities and Exchange Commission and other
public information, regarding the beneficial ownership of common stock as of
October 12, 2000, by each person who is known by us to beneficially own more
than five percent of the outstanding shares of common stock, each of the named
executive officers and directors, and all directors and executive officers as a
group.

<TABLE>
<CAPTION>
Number
Name and Address of Beneficial Owner of Shares of
(1) Common Stock (2) Percent of Class (2)
------------------------------------ ---------------- -------------------
<S> <C> <C>
Greenwich, AG.......................... 7,156,483(3) 14.45%
Neuer Wall 32
20354 Hamburg, Germany
Voice Technologies Partners, Ltd....... 5,590,000 11.38%
Entrepreneurial Investors Limited...... 5,402,222 11.00%
Citibank Building, Second Floor
East Mall Drive
P.O. Box F-42544
Freeport, Bahamas
Timothy J. Connolly.................... 4,458,353(4) 9.06%
(5)
Jan Carson Connolly.................... 4,458,353(4) 9.06%
(6)
Daniel Dornier......................... 8,319,005(7) 16.75%
25 Field Point Drive
Greenwich, Connecticut 06830
James G. Springfield................... 2,000 *
N. Rudy Garza.......................... 2,829,747(8) 5.64%
(9)
J. William Boyar....................... 345,000(10) *
James S. Cochran, M.D.................. 142,246(11) *
I. Bobby Majumder...................... 66,667(12) *
Jackson L. Nash........................ 45,454(13) *
All directors and executive officers as
a group (7 persons)................... 11,750,119 22.92%
</TABLE>
--------
* Indicates less than one percent.

(1) Except as otherwise indicated, the addresses for the above-referenced
persons are 1770 St. James Place, Suite 116, Houston, Texas 77056.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of October 12, 2000 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares set forth
opposite such stockholder's name.

27
<PAGE>

(3) Includes 400,000 shares of common stock issuable upon exercise of
currently exercisable warrants in connection with a bridge loan agreement.
(4) Mr. Connolly has voting and disposition control over the shares of common
stock owned by Voice Technologies Partners, L.P., by virtue of owning all
of the outstanding stock of Voice Technologies Management Corp., the
managing general partner of Voice Technologies Partners, L.P. Ms. Carson
Connolly also owns a partnership interest in Voice Technologies Partners,
L.P.
(5) Includes 100,000 shares of common stock issuable upon exercise of
currently exercisable director stock options. Also includes 1,917,296
shares of common stock beneficially owned by his wife, Jan Carson
Connolly.
(6) Includes 2,541,057 shares of common stock and options to purchase common
stock beneficially owned by her husband, Timothy J. Connolly.
(7) Includes 141,111 shares of common stock issuable upon exercise of director
stock options. In addition, Mr. Dornier beneficially owns 6,756,483 shares
and 400,000 shares of the common stock and warrant holdings of Greenwich,
AG, by virtue of being a director and its chief executive officer.
(8) Includes 1,025,000 shares of common stock issuable upon exercise of
currently exercisable warrants and director stock options.
(9) Includes 1,804,747 shares of common stock issued upon conversion of a
convertible promissory note, including settlement of all related accrued
interest.
(10) Includes 335,000 shares of common stock issuable upon exercise of director
stock options.
(11) Includes 142,246 shares of common stock issuable upon exercise of director
stock options.
(12) Includes 66,667 shares of common stock issuable upon exercise of director
stock options.
(13) Includes 45,454 shares of common stock issuable upon exercise of options.

28
<PAGE>

CERTAIN TRANSACTIONS

Dornier Promissory Note

On September 1, 2000, in connection with completion of private placements
with several accredited investors, we issued a promissory note to Daniel
Dornier, who is a member of our board of directors. The note has a stated
principal amount of $100,000 and bears interest at 12%. The note will be
automatically converted into shares of common stock when our certificate of
incorporation is amended to increase the authorized capital to permit the
issuance of our common stock upon conversion of this note and others. The note
is convertible into the number of shares of common stock equal to $100,000 plus
any accrued and unpaid interest divided by the lesser of $0.15 or the lowest
per share price that we have sold shares of common stock between September 1,
2000, and the conversion date of the note. Unless converted, the note matures
on the earlier of February 28, 2001, or a change in control in connection with
our merger, acquisition or sale of all or substantially all of our assets.

Garza Agreement

On February 22, 2000, we entered into a one-time oral consulting agreement
with N. Rudy Garza, one of our directors, that paid Mr. Garza a fee of $10,000
to provide consulting services relating to the preparation and review of our
business plan.

G-51 Capital

In July 1999, we entered into a convertible promissory note and warrant
purchase agreement, which was amended in November 1999, with G-51 Capital, an
affiliate of N. Rudy Garza who is a member of our board of directors. The note
had a stated principal amount of $250,000 and bore interest at 9%. The note was
secured by a security interest in certain of our assets. Effective October 26,
2000, the note was converted into 1,804,747 shares of our common stock at an
adjusted price of $0.15 per share, based on the pricing used in our September
2000 private placements. The warrant is exercisable into 833,333 shares of our
common stock at an exercise price of $1.25 per share.

Greenwich, AG

In July 1999, we entered into a convertible promissory note and warrant
purchase agreement with Greenwich, AG, an affiliate of Daniel Dornier who is a
member of our board of directors. The note, which we repaid in December 1999,
had a stated principal amount of $500,000 and bore interest at 9%. The warrant
entitles Greenwich, AG to purchase 400,000 shares of our common stock at $1.25
per share and is currently exercisable.

Lernout & Hauspie Affiliates

Jo Lernout and Thomas Denys, were appointed to our board of directors on
February 8, 1999 and resigned as of December 20, 1999, in connection with our
reorganization. Mr. Lernout is an executive with Lernout & Hauspie Speech
Products and Mr. Denys is an executive with L&H Investment Co., N.V. The
following summarizes agreements between us and Lernout & Hauspie and its
affiliates, L&H Investment Co., N.V. and Lonestar Medical Transcription USA,
Inc.

Value Added Reseller Agreement. On September 30, 1998, we entered into a
$300,000 value added reseller agreement with Lernout & Hauspie. Lernout &
Hauspie develops and licenses dictation software for use in the health care
industry. The agreement gives us rights to a world-wide non-exclusive license
of software products developed by Lernout & Hauspie. On December 27, 1998, this
agreement was amended to include additional requirements. In accordance with
the amended agreement, we prepaid Lernout & Hauspie

29
<PAGE>

$1,000,000 for additional software licenses. On December 20, 1999, the
agreement was further amended to delete any further development and support
requirements, and to extend the software licenses through March 31, 2001.

Series D Preferred Stock Agreement. On December 31, 1998, we entered into a
series D preferred stock and warrant purchase agreement to sell up to 5,000
shares of series D convertible preferred stock to L&H Investment. The preferred
shares have a par value of $.10 and were priced at $1,000 per share. The shares
were cancelled as of December 20, 1999.

Lonestar Medical Transcription USA, Inc. Pursuant to an asset purchase
agreement dated January 7, 2000 and effective as of December 20, 1999, we sold
the net assets and contracts of our medical transcription service operations
based in New York, New Jersey, Houston, Texas and Manila, the Philippines for
approximately $9.4 million to Lonestar and its then parent company L&H
Investment. Additionally, Lonestar and L&H Investment obtained non-exclusive
rights to our VoiceCOMMANDER 99 code.

The $9.4 million purchase price consisted of:

. the forgiveness of a $2.0 million promissory note held by Lernout &
Hauspie;

. the forgiveness of a $1.5 million promissory note held by L&H
Investment;

. the forgiveness of approximately $94,000 in interest;

. the retirement of $5.0 million in series D preferred stock held by L&H
Investment and forgiveness of approximately $318,000 in dividends; and

. approximately $457,000 in cash for our accounts receivable sold.

In connection with this reorganization, Eric A. Black, our former president
and chief executive officer, and Richard A. Cabrera, our former chief financial
officer and secretary resigned their positions with us, effective as of
December 20, 1999. Messrs. Black and Cabrera became employees of Lonestar and
we agreed to release them from the non-compete clauses of their employment
contracts.

Bridge Loan Agreements

During the month of December 1998, we entered into various bridge loan
agreements with: Timothy J. Connolly, William T. Kennedy, Robin P. Ritchie and
Milton A. Speigelhauer, who were officers; N. Rudy Garza, one of our directors;
Jan Carson Connolly, a former employee; and a third party. The aggregate
balance of the 1998 bridge loans was $335,333, and bore interest at 12% per
annum. In connection with the 1998 bridge loans, we granted warrants to
purchase 355,495 shares of common stock at exercise prices ranging from $0.94
per share to $1.06 per share. The bridge loans plus accrued interest were
payable upon the earlier of six months following the date of the notes or three
business days following our receipt of $2,000,000 in equity funding. On
December 31, 1998, we received $2,000,000 in equity funding and paid the 1998
bridge loans in January 1999.

Series E Preferred Stock Agreement

On August 18, 1999, we entered into a series E preferred stock purchase
agreement to sell up to 2,000 shares of series E convertible preferred stock
for $2,000,000 to Greenwich, AG, of which Daniel Dornier is a director. The
preferred shares have a par value of $.10 and were priced at $1,000 per share.
These series E preferred shares were exchanged for series G preferred stock in
January 2000.

30
<PAGE>

Series G Preferred Stock Agreements

On January 7, 2000, we entered into a letter agreement under which certain
of our preferred stockholders agreed to exchange their shares of preferred
stock for a new series G preferred stock. The series G preferred stock reduced
the conversion price of the existing series of preferred stock and contained a
mandatory conversion provision that required the series G preferred stock to be
converted into common stock within seven days of issuance. The result of these
transactions was the resetting of the conversion price for each existing series
of preferred stock followed by an automatic conversion of the new series G
preferred stock into our common stock. Each of these series G preferred stock
exchange agreements are described below.

Entrepreneurial Investors, Ltd. On January 20, 2000, we entered into a stock
exchange agreement with the Entrepreneurial Investors, Ltd., to exchange their
shares of our series A preferred stock for shares of series G preferred stock.
On March 23, 2000, Entrepreneurial Investors converted its 186,000 shares of
series A preferred stock into 14,880 shares of series G preferred stock. Upon
conversion, Entrepreneurial Investors also received stock dividends amounting
to 347.166 shares of series G preferred stock. On March 30, 2000, the entire
15,227.166 shares of series G preferred stock automatically converted into
5,075,722 shares of our common stock.

Holders of Series C Preferred Stock. On February 11, 2000, we entered into a
stock exchange agreement with the holders of the our series C preferred stock,
which includes Daniel Dornier and certain of his relatives, to exchange their
shares of series C preferred stock. On March 1, 2000 and March 23, 2000, the
series C investors converted their 153,538.8 series C shares into 15,353.8
shares of series G preferred stock. Upon conversion, the holders of the series
C preferred stock received stock dividends amounting to 287.34 shares of series
G preferred stock. On March 8, 2000, 14,516.68 shares of series G preferred
stock were automatically converted into 4,838,894 shares of our common stock,
and on March 30, 2000, the remaining 1,124.458 shares were converted into
374,819 shares of our common stock.

Greenwich, AG. On February 11, 2000, we entered into a stock exchange
agreement with Greenwich, AG to exchange its shares of series E preferred stock
for shares of series G preferred stock based on the primary terms set forth in
a letter agreement dated January 7, 2000. In March of 2000, Greenwich, AG
converted their 2,000 shares of series E preferred stock into 20,000 shares of
series G preferred stock and received stock dividends amounting to 269.448
shares of series G preferred stock. Those 20,269.448 shares of series G
preferred stock were converted into 6,756,483 shares or our common stock in
March of 2000.

Option and Warrant Forfeiture Agreement

In September 2000, Timothy J. Connolly and his wife, Jan Carson Connolly,
agreed to surrender warrants to purchase an aggregate of 100,073 shares of our
common stock at an exercise price of $1.00 per share and options to purchase an
aggregate of 283,000 shares of our common stock with exercise prices ranging
from $0.91 to $3.50 per share.

Boyar & Miller, P.C.

During 1999, we paid Boyar & Miller, P.C. a total of $450,905 in legal fees
and expenses for legal work performed as our outside counsel. J. William Boyar,
a director, is a shareholder, director and the chairman of Boyar & Miller. The
payments represented 8.56% of Boyar & Miller's gross revenues for 1999.

31
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Under our amended and restated certificate of incorporation, our authorized
capital stock consists of 50,000,000 shares of common stock, par value $.001
per share, and 2,000,000 shares of preferred stock, par value $.10 per share.
As of October 26, 2000, we had 49,120,547 shares of common stock and 2,978
shares of series 2 preferred stock outstanding. In addition, we had outstanding
options that are exercisable for 6,149,554 shares of common stock (of which
1,638,128 are currently vested) and outstanding warrants that are convertible
into 4,238,226 shares of common stock. In September 2000 we completed the
private placement of six promissory notes that are convertible into 3,392,000
shares of common stock and, in late October 2000, we issued additional warrants
that are convertible into 900,000 shares of common stock.

We currently do not have sufficient authorized capital stock for issuance
upon exercise and conversion of these options, warrants and notes; however, a
proposal to increase our authorized common stock to 85,000,000 shares will be
considered and voted upon at our 2000 annual meeting of stockholders, which is
anticipated to be held in December 2000.

All of the members of our board of directors, our executive officers and Mr.
Connolly, our former president, chief executive officer and chairman have
agreed to not exercise their outstanding options, which are exercisable for a
total of 4,945,555 shares of common stock, until we have received stockholder
approval to increase our authorized common stock.

Common Stock

Holders of common stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of common stock are not entitled to cumulative
voting rights. Therefore, holders of a majority of the shares voting for the
election of directors can elect all the directors. Subject to the terms of any
outstanding series of preferred stock, the holders of common stock are entitled
to dividends in such amounts and at such times as may be declared by our board
of directors out of funds legally available therefor. Upon liquidation or
dissolution, holders of common stock are entitled to share ratably in all net
assets available for distribution to stockholders after payment of any
liquidation preferences to holders of preferred stock. Holders of common stock
have no redemption, conversion or preemptive rights.

Preferred Stock

The board of directors, without any action by our stockholders, is
authorized to issue up to a total of 2,000,000 shares of preferred stock in one
or more series and to determine the voting rights (including the right to vote
as a series on particular matters), preferences as to dividends and in
liquidation and the conversion and other rights of each such series. The board
of directors could issue a series of preferred stock that could, depending on
the terms of the series, provide for a liquidation preference over the common
stock or impede the completion of a merger, tender offer or other takeover
attempt. The board of directors, in so acting, could issue preferred stock
having terms that discourage an acquisition attempt through which an acquiror
may be otherwise able to change the composition of the board of directors,
including a tender or exchange offer or other transaction that some, or a
majority, of our stockholders might believe to be in their best interests. In
addition, the issuance of preferred stock could adversely affect the voting
power of the holders of common stock.

Series 2 Preferred Stock. Set forth below is a summary of the terms of our
outstanding series 2 preferred stock.

32
<PAGE>

Dividends. The shares of series 2 preferred stock are entitled to dividends
payable quarterly in arrears on the first day of January, April, July and
October of each year. The dividend rate from the date of issuance is 8.0% per
annum. Dividends are payable, at our option, in cash or in additional shares of
series 2 preferred stock.

Liquidation Preference. Upon any liquidation, dissolution or winding up,
voluntary or involuntary, the shares of series 2 preferred stock are entitled
to a liquidation preference over the common stock of $100 per share, plus an
amount per share equal to all earned but unpaid dividends.

Conversion. The series 2 preferred stock will be convertible at the holder's
option into a number of shares of common stock equal to (i) $100 per share of
series 2 preferred stock being converted, plus any earned but unpaid dividends,
if any, divided by (ii) the greater of $1.00 per share or the average daily
closing price of our common stock for the thirty day period immediately
preceding the effective date of any such conversion on the Nasdaq Over-the-
Counter Bulletin Board. We have registered shares of common stock issuable upon
conversion of the series 2 preferred stock for resale under the Securities Act
of 1933. These shares of series 2 preferred stock are subject to automatic
conversion if we undertake an underwritten public offering with an aggregate
market value of $10,000,000 or more.

Redemption. Any shares of the series 2 preferred stock may be redeemed, at
our option, after the third anniversary of the date of their issuance, at a
redemption price of $100 per share plus any accrued but unpaid dividends.

Ranking. The series 2 preferred stock will be subordinate to all lettered
series of preferred stock and to claims of creditors, including holders of our
outstanding debt instruments.

Voting Rights. The series 2 preferred stock has no voting rights before
conversion except as provided by law.

Provisions of the Certificate of Incorporation and Delaware Law

Our bylaws direct that special meetings of the stockholders may only be
called by a majority of the members of the board of directors, the chairman of
the board of directors or the president. The bylaws further provide that
stockholders' nominations to the board of directors and other stockholder
business proposed to be transacted at stockholder meetings must be timely
received by us in a proper written form that meets the prescribed content
requirements. These provisions may have the effect of deterring certain tender
offers or hostile takeovers or may delay or prevent changes in control of our
management.

Limitation of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. Although section
102(b) does not change directors' duty of care, it enables corporations to
limit available relief of certain equitable remedies such as injunction or
rescission. Our certificate of incorporation limits the liability of our
directors to us and to our stockholders (in their capacity as directors but not
in their capacity as officers) to the fullest extent permitted by section
102(b)(7). Specifically, our directors will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability:

. for any breach of the director's duty of loyalty to us or our
stockholders;

. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in section 174 of the Delaware General
Corporation Law; or

. for any transaction from which the director derived an improper personal
benefit.

33
<PAGE>

Indemnification. To the maximum extent permitted by law, our certificate of
incorporation and bylaws provide for mandatory indemnification of our directors
and officers, and permit indemnification of our employees and agents against
all expense, liability and loss to which they may become subject or which they
may incur as a result of being or having been a director, officer, employee or
agent. In addition, we must advance or reimburse our directors and officers,
and may advance or reimburse employees and agents, for expenses incurred by
them in connection with indemnifiable claims.

Insofar as we may permit indemnification for liabilities arising under the
Securities Act to our directors, officers and controlling persons, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

34
<PAGE>

SELLING STOCKHOLDERS

The following table sets forth certain information concerning the selling
stockholders.

<TABLE>
<CAPTION>
Number of Shares Owned Number of Shares Owned
Before Offering (1)(2) After Offering (1)(2)
------------------------------- --------------------------
No. of Percent of Shares No. of Percent of
Selling Stockholders Shares Class Offered Shares Class
-------------------- ------------- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cornelius Dornier....... 1,119,390(3) 2.26% 1,117,368(4) 2,022 *
Daniel Dornier.......... 9,732,339(5) 19.05% 9,188,532(6) 543,807 1.06%
Greenwich, AG........... 7,863,150(7) 15.66% 7,463,150(8) 400,000 *
Michael Jahr............ 1,011,048(9) 2.03% 706,667(10) -- *
Aspen Investments,
Inc.................... 706,667(10) 1.42% 706,667(10) -- *
Renke Thye.............. 212,000(10) * 212,000(10) -- *
James W. Neighbors...... 833,333(11) 1.70% 833,333(11) -- *
Budd Heyman, M.D........ 833,333(11) 1.70% 833,333(11) -- *
John and Evelene
Kramer................. 843,333(12) 1.72% 843,333(12) -- *
Rodney B. Ryan, M.D..... 2,500,000(11) 5.09% 2,500,000(11) -- *
Laura and Alexander
Gryschuk............... 1,666,667(11) 3.39% 1,666,667(11) -- *
David M. Khalilzad...... 915,000(13) 1.83% 915,000(13) -- *
Jack Irwin.............. 20,000(13) * 20,000(13) -- *
Thomas Szemiot.......... 5,000(13) * 5,000(13) -- *
Jonathan Goldstein,
M.D.................... 10,000(13) * 10,000(13) -- *
Dr. Louis & Irene Katz.. 10,000(13) * 10,000(13) -- *
Morton Mower, M.D....... 10,000(13) * 10,000(13) -- *
Todd Stauffer........... 20,000(13) * 20,000(13) -- *
N. Rudy Garza........... 2,829,747(14) 5.26% 2,638,080(15) -- *
Fin Map Corporation..... 400,000(13) * 400,000(13) -- *
Wilson, Lombard &
Partner, Inc........... 500,000(13) 1.01% 500,000(13) -- *
Princeton Research,
Inc.................... 105,387(11) * 105,387(11) -- *
Hillel Bronstein........ 805,378(16) 1.64% 805,378(16) -- *
Stuart Szpicek.......... 829,821(17) 1.69% 829,821(17) -- *
Yaniv Dagan............. 80,038(18) * 79,938(19) 100 *
Colleen McBrien......... 367,333(20) * 367,333(20) -- *
James McBrien........... 367,333(20) * 367,333(20) -- *
Linda Willhite.......... 105,000(21) * 100,000(22) 5,000 *
Anita Morrison.......... 193,634(23) * 193,634(23) -- *
Timothy Cook............ 700,000(24) 1.41% 700,000(24) -- *
Kay Cook................ 700,000(24) 1.41% 700,000(24) -- *
Lonestar Medical
Transcription USA,
Inc.................... 572,132(25) 1.16% 572,132(25) -- *
Entrepreneurial
Investors LTD.......... 5,475,422(11) 11.15% 5,075,722(11) 326,500 *
Gabriele Dornier........ 766,057(11) 1.56% 764,035(11) 2,022 *
Matthia Dornier......... 510,706(11) 1.04% 509,358(11) 1,348 *
Silvius Dornier......... 1,021,411(11) 2.08% 1,018,715(11) 2,696 *
Herman Ebel............. 663,916(11) 1.35% 662,164(11) 1,752 *
Stephen L. Pampush...... 51,071(11) * 50,936(11) 135 *
Peter Widenman.......... 51,071(11) * 50,936(11) 135 *
Equity Services LTD..... 375,811(11) * 374,819(11) 992 *
</TABLE>

35
<PAGE>

--------
* Indicates less than one percent.
(1) The selling stockholders have sole voting and sole investment power with
respect to all shares owned, except as otherwise noted.
(2) Ownership is determined in accordance with Rule 13d-3 under the Exchange
Act, except for the inclusion of shares issuable upon conversion of
convertible notes described in the notes below. The actual number of
shares beneficially owned and offered for sale hereunder is subject to
adjustment and could be materially less or more than the estimated amount
indicated depending upon factors which we cannot predict at this time.
(3) Consists of 766,057 shares of common stock beneficially owned, plus
353,333 shares of common stock issuable upon conversion of convertible
notes. Issuance of these shares is subject to our stockholders' approval
of a proposal to increase our authorized common stock.
(4) Consists of 764,035 shares of common stock beneficially owned, plus
353,333 shares of common stock issuable upon conversion of convertible
notes.
(5) Consists of 7,777,894 shares of common stock beneficially owned, 1,413,334
shares of common stock issuable upon conversion of outstanding convertible
notes, 141,111 shares underlying exercisable stock options and 400,000
shares underlying an exercisable warrant.
(6) Consists of 7,775,198 shares of common stock beneficially owned and
1,413,334 shares of common stock issuable upon conversion of outstanding
convertible notes.
(7) Consists of 6,756,483 shares of common stock beneficially owned, 706,667
shares of common stock issuable upon conversion of outstanding convertible
notes and 400,000 shares underlying an exercisable warrant.
(8) Consists of 6,756,483 shares of common stock beneficially owned, plus
706,667 shares of common stock issuable upon conversion of outstanding
convertible notes.
(9) Consists of 304,381 shares of common stock beneficially owned and 706,667
shares of common stock issuable upon conversion of outstanding convertible
notes.
(10) Consists of shares issuable upon the conversion of convertible notes.
(11) Consists of shares of common stock beneficially owned.
(12) Consists of 833,333 shares of common stock beneficially owned and 10,000
shares of common stock underlying an exercisable warrant.
(13) Consists of common stock issuable upon the exercise of warrants.
(14) Consists of 1,804,747 shares of common stock beneficially owned, 91,667
shares underlying exercisable stock options and 933,333 shares underlying
warrants to purchase common stock.
(15) Consists of 1,804,747 shares of common stock beneficially owned and
833,333 shares underlying a warrant to purchase common stock.
(16) Consists of 686,628 shares of common stock beneficially owned and 118,750
shares underlying a warrant to purchase common stock.
(17) Consists of 711,071 shares of common stock beneficially owned and 118,750
shares underlying a warrant to purchase common stock.
(18) Consists of 67,538 shares of common stock beneficially owned and 12,500
shares underlying a warrant to purchase common stock.
(19) Consists of 67,438 shares of common stock beneficially owned and 12,500
shares underlying a warrant to purchase common stock.
(20) Includes a total of 367,333 shares underlying our series 2 preferred stock
to be issued in February 2001 and February 2002, of which 187,340 and
179,993 shares will be owned by Ms. McBrien and Mr. McBrien, respectively,
who are married to each other.

36
<PAGE>

(21) Includes 100,000 shares underlying our series 2 preferred stock to be
issued in December 2000 and December 2001, and 5,000 shares underlying
exercisable stock options.
(22) Includes 100,000 shares underlying our series 2 preferred stock to be
issued in December 2000 and December 2001.
(23) Includes 64,544 shares issuable upon conversion of our series 2 preferred
stock and 129,090 shares underlying our series 2 preferred stock to be
issued in February 2001 and February 2002.
(24) Includes 233,334 shares issuable upon conversion of our series 2 preferred
stock held by Ms. and Mr. Cook, who are married to each other, of which
116,667 shares will be owned by each of Mr. and Ms. Cook. Also includes
466,666 shares underlying our series 2 preferred stock to be issued in
May 2001 and May 2002, of which 233,333 shares will be owned by each of
Mr. and Ms. Cook.
(25) Represents shares issued in connection with the May 2000 cashless exercise
of a warrant to purchase our common stock.

37
<PAGE>

PLAN OF DISTRIBUTION

Of the common stock offered under this prospectus, 6,125,333 shares are
issuable upon the conversion of outstanding convertible notes or upon the
exercise of outstanding warrants. We currently do not have a sufficient number
of shares of authorized common stock available for issuance upon conversion of
the notes or exercise of the warrants. A proposal to increase our authorized
common stock to 85,000,000 shares will be considered and voted upon at our 2000
annual meeting, which is anticipated to be held in December 2000. Until our
authorized common stock is increased, we will be unable to issue common stock
issuable upon the conversion of the notes or exercise of the warrants.
Therefore, the common stock offered hereby that is issuable upon the conversion
or exercises will not be available for distribution under this prospectus until
we have sufficient authorized shares of common stock for issuance to these
selling stockholders.

Pursuant to this prospectus, the selling stockholders may sell shares of
common stock from time to time in transactions on such exchanges or markets as
the common stock may be listed for trading, in separately- negotiated
transactions, in an underwritten offering, or by a combination of these methods
of sale, at fixed prices that may be changed, at market prices prevailing at
the time of sale, at prices related to prevailing market prices or at
negotiated prices. As used in this prospectus, "selling stockholders" includes
pledgees, donees, transferees and other successors in interest to a selling
stockholder, who are selling shares received from a selling stockholder after
the date of this prospectus. The selling stockholders may sell their common
stock to or through broker-dealers, and the broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or the purchasers of the shares for whom the broker-
dealers may act as agent or to whom they sell as principal, or both (which
compensation to a particular broker-dealer might be in excess of customary
commissions).

Other methods by which the shares of common stock may be sold include,
without limitation:

. transactions that involve cross or block trades or any other transaction
permitted by the OTCBB or other trading markets;

. "at the market" to or through market makers or into an existing market
for the common stock;

. in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents;

. through transactions in options or swaps or other derivatives (whether
exchange-listed or otherwise);

. through short sales; or

. any combination of these methods of sale.

The selling stockholders also may enter into options or other transactions
with broker-dealers that require the delivery to the broker-dealers of the
common stock offered hereby, which common stock such broker-dealers may resell
pursuant to this prospectus. The selling stockholders also may make sales
pursuant to rule 144 under the Securities Act, if that exemption from
registration is available.

The selling stockholders and any broker-dealers who act in connection with
the sale of shares of common stock hereunder will be subject to prospectus
delivery requirements because they may be deemed to be "underwriters" as that
term is defined in the Securities Act, and any commissions received by them and
profit on any resale of the shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.

After we are notified by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through
a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act of 1933, disclosing:

. the name of each such selling stockholder and of the participating
broker-dealer;

38
<PAGE>

. the type and number of securities involved;

. the price at which the securities were sold;

. the commissions paid or discounts or concessions allowed to the broker-
dealer, where applicable;

. that the broker-dealer did not conduct any investigations to verify the
information set out in this prospectus; and

. other facts material to the transaction.

We will bear all costs, expenses and fees in connection with the
registration of the common stock offered hereby. Brokerage commissions
attributable to the sale of common stock, if any, will be borne by the selling
stockholders. We have informed the selling stockholders that the anti-
manipulative provisions of Regulation M promulgated under the Securities
Exchange Act of 1934 may apply to their sales.

LEGAL MATTERS

The legality of the securities offered hereby will be passed on for us by
Porter & Hedges, L.L.P., Houston, Texas.

EXPERTS

The consolidated financial statements of Applied Voice Recognition, Inc. at
December 31, 1998, and for the year then ended, appearing in this prospectus
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon (which contain an explanatory paragraph describing
conditions that raise substantial doubt about our ability to continue as a
going concern as described in Note 2 to the consolidated financial statements)
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.

Our consolidated financial statements for the year ended December 31, 1999
included in this prospectus have been audited by Weinstein Spira & Company,
P.C., independent auditors, as stated in their report thereon (which contains
an explanatory paragraph describing conditions that raise substantial doubt
about our ability to continue as a going concern as described in Note 2 to the
consolidated financial statements) and have been so included in reliance upon
the report of Weinstein Spira & Company, P.C. given their authority as experts
in accounting and auditing.

CHANGES IN ACCOUNTANTS

On November 17, 1999, Ernst & Young LLP notified us that it was declining to
stand for re-election as our independent certifying accountant. The opinion on
the financial statements for the year ended December 31, 1998 included an
explanatory paragraph describing our financial condition and issues related to
the uncertainty as to our ability to continue as a going concern. We and Ernst
& Young LLP had no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.

On March 1, 2000, we engaged Weinstein Spira & Company, P.C. as our
independent accountants. We did not consult Weinstein Spira & Company, P.C. on
any accounting, auditing or financial reporting issue prior to its appointment.

39
<PAGE>

APPLIED VOICE RECOGNITION, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-2
Report of Independent Auditors............................................. F-3
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Operations...................................... F-6
Consolidated Statements of Stockholders' Equity............................ F-7
Consolidated Statements of Cash Flows...................................... F-17
Notes to Consolidated Financial Statements................................. F-18
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Applied Voice Recognition, Inc.
Houston, Texas

We have audited the accompanying Consolidated Balance Sheet of Applied Voice
Recognition, Inc. as of December 31, 1999, and the related Consolidated
Statements of Operations, Stockholders' Equity and Cash Flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Applied Voice Recognition, Inc. as of December 31, 1999, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that Applied Voice Recognition, Inc. will continue as a going concern.
As more fully described in Note 2, the Company has incurred recurring operating
losses and cash deficits from operations. Without the assurance of new capital,
these conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

WEINSTEIN SPIRA & COMPANY, P.C.

Houston, Texas
March 29, 2000

F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Applied Voice Recognition, Inc.
Houston, Texas

We have audited the accompanying Consolidated Balance Sheet of Applied Voice
Recognition, Inc. as of December 31, 1998, and the related Consolidated
Statements of Operations, Stockholders' Equity, and Cash Flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Applied Voice Recognition, Inc. as of December 31, 1998, and the results of
its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared
assuming that Applied Voice Recognition, Inc. will continue as a going concern.
As more fully described in Note 2, the Company has incurred recurring operating
losses and has incurred cash deficits from operations. Without the assurance of
new capital, these conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.

ERNST & YOUNG, LLP

Houston, Texas
March 27, 1999

F-3
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
June 30, ---------------------
2000 1999 1998
ASSETS ----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................... $ 399,340 $ 53,529 $1,377,913
Accounts receivable, net of allowance of
$74,900, $74,900 and $32,500,
respectively............................... 478,049 258,668 213,305
Other receivable............................ -- 747,137 1,000,000
Inventory................................... -- -- 37,221
Prepaid licenses............................ -- -- 440,000
Deposits, prepaid expenses and deferred
financing costs............................ 3,550 6,074 35,927
Deferred expenses........................... 101,466 -- 264,570
---------- ---------- ----------
Total Current Assets...................... 982,405 1,065,408 3,368,936
PROPERTY AND EQUIPMENT, NET................. 648,019 858,492 697,298

OTHER ASSETS
Prepaid software rights..................... 970,900 970,900 560,000
Software development costs, net of
accumulated amortization of $0, $0 and
$67,697, respectively...................... 207,320 -- 397,369
Other intangibles, net of accumulated
amortization of $66,648, $42,173 and $0,
respectively............................... 422,835 447,310 613,039
Goodwill, net of accumulated amortization of
$61,009, $44,988 and $15,555,
respectively............................... 488,881 504,899 657,888
---------- ---------- ----------
Total Other Assets........................ 2,089,936 1,923,109 2,228,296
---------- ---------- ----------
$3,720,360 $3,847,009 $6,294,530
========== ========== ==========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
June 30, --------------------------
2000 1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Trade payables....................... $ 343,770 $ 365,639 $ 356,660
Accrued expenses..................... 915,649 1,167,416 897,998
Stock dividend payable............... -- 246,774 156,536
Current portion of preferred stock
payable............................. 473,543 474,000 638,144
Common stock payable................. -- -- 13,500
Note payable to sellers.............. -- -- 297,884
Note payable to related party........ 250,000 250,000 --
Bridge loans payable................. -- -- 335,333
Current portion of capital lease
obligation.......................... 71,915 64,354 41,493
Current portion of long-term debt.... 58,333 65,977 11,542
Deferred revenue..................... -- -- 39,120
------------ ------------ ------------
Total Current Liabilities.......... 2,113,210 2,634,160 2,788,210

Preferred stock payable, net of
current portion..................... 327,894 683,460 70,683
Capital lease, net of current
portion............................. 241,699 279,670 97,869
Long-term debt, net of current
portion............................. 58,334 141,091 797
------------ ------------ ------------
Total Liabilities.................. 2,741,137 3,738,381 2,957,559
------------ ------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock; $.10 par value;
2,000,000 shares authorized
Series A; 186,000 shares issued and
outstanding in 1998................. -- -- 18,600
Series B; 1,680 and 2,285 shares
issued and outstanding in 1999 and
1998, respectively................. -- 168 228
Series C; 153,538 issued and
outstanding in 1998................ -- -- 15,353
Series D; 3,000 shares issued and
outstanding in 1998................ -- -- 300
Series 2; 2,977 shares and 500
shares issued and outstanding in
2000 and 1999, respectively........ 297 50 --
Common Stock; $.001 par value;
50,000,000 shares authorized;
39,616,793, 35,269,794 and
16,040,994 shares issued and
outstanding, respectively........... 39,617 35,269 16,040
Paid-in Capital...................... 20,160,716 18,199,066 18,136,867
Accumulated Deficit.................. (19,221,407) (18,125,925) (14,850,417)
------------ ------------ ------------
Total Stockholders' Equity........... 979,223 108,628 3,336,971
------------ ------------ ------------
Total Liabilities and Stockholders'
Equity.............................. $ 3,720,360 $ 3,847,009 $ 6,294,530
============ ============ ============
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Six Months Ended For the Year Ended
June 30, December 31,
------------------------ ------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Net hardware, software and
related revenues......... $ -- $ 469,949 $ 503,843 $ 302,254
Net transcription service
revenues................. 1,221,390 1,880,910 4,757,967 415,103
----------- ----------- ----------- -----------
Total Net Revenues...... 1,221,390 2,350,859 5,261,810 717,357
Hardware, software and
related cost of sales.... -- 52,567 428,643 202,125
Transcription cost of
services................. 938,510 1,295,915 3,622,523 230,121
----------- ----------- ----------- -----------
Total Cost of Sales..... 938,510 1,348,482 4,051,166 432,246
----------- ----------- ----------- -----------
Gross Margin.............. 282,880 1,002,377 1,210,644 285,111
----------- ----------- ----------- -----------
OPERATING EXPENSES
Marketing and sales....... 19,436 349,042 797,745 1,265,927
General and
administrative........... 1,228,954 3,939,519 7,024,097 5,640,238
Research and development.. 13,172 495,865 711,404 754,170
----------- ----------- ----------- -----------
Total Operating
Expenses............... 1,261,562 (4,784,426) 8,533,246 7,660,335
----------- ----------- ----------- -----------
Operating Margin.......... (978,682) (3,782,049) (7,322,602) (7,375,224)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Other income (expense).... (1,256) (58,399) (52,556) 2,497
Interest income........... 15,448 20,834 24,397 72,013
Interest expense.......... (130,992) (289,856) (867,902) (216,680)
Loss on investments....... -- -- -- (803,125)
----------- ----------- ----------- -----------
Total Other Income
(Expense).............. (116,800) (327,421) (896,061) (945,295)
----------- ----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY
ITEM..................... (1,095,482) (4,109,470) (8,218,663) (8,320,519)
Gain on extinguishment of
debt..................... -- -- 5,562,750 --
----------- ----------- ----------- -----------
NET LOSS.................. $(1,095,482) $(4,109,470) $(2,655,913) $(8,320,519)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS
PER SHARE:
Loss before extraordinary
item..................... $ (0.03) $ (0.27) $ (0.54) $ (0.68)
Extraordinary gain........ -- -- 0.34 --
----------- ----------- ----------- -----------
NET LOSS.................. $ (0.03) $ (0.27) $ (0.20) $ (0.68)
=========== =========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------
Series A Series B Series C Series D
----------------- --------------- ---------------- --------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- ------- ------ ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 312,500 $31,250 -- $ -- -- $ -- -- $ --
Issuance of 129,399
shares of common stock
in lieu of officer's
compensation...........
Issuance of 14,407
shares of common stock
in lieu of employee
cash bonuses...........
Issuance of 44,286
shares of common stock
for services...........
Issuance of additional
56,250 shares of common
stock as part of
previous stock
transaction............
Issuance of 25,000
shares of common stock
in connection with
furniture purchase.....
Issuance of warrants to
purchase 532,000 shares
of common stock for
consulting services....
Issuance of warrants and
options to purchase
1,020,000 shares of
common stock for
advisory services......
Issuance of warrant to
purchase 355,500 shares
in connection with
bridge loan financing..
Exercise of options to
purchase 51,167 shares
of common stock........
Conversion of 126,500
shares of Series A
Preferred Stock in
exchange for 683,100
shares of common
stock.................. (126,500) (12,650)
Series A Preferred Stock
Dividend paid with
common stock...........
Sale of 3,000 shares of
shares of Series B
Preferred Stock for
$3,000,000 in
connection with private
placement.............. 3,000 300
Expected deemed dividend
related to discount on
conversion of Series B
Preferred Stock........
Issuance of warrant to
purchase 150,000
shares, to third party,
in connection with
Series B Private
Placement..............
Conversion of 715 shares
of Series B Preferred
Stock in exchange for
1,147,171 shares of
common stock........... (715) (72)
Series B Preferred Stock
Dividend paid with
common stock...........
Sale of 220,750 shares
of Series C Preferred
Stock for $2,207,500 in
connection with private
placement.............. 220,750 22,075
Issuance of Series C
Preferred shares, to
third party, in
connection with Series
C Private Placement.... 11,038 1,104
Cash expense related to
Series C Private
Placement..............
Issuance of warrant to
purchase 220,750
shares, to third party,
in connection with
Series C Private
Placement..............
Conversion of 78,250
shares of Series C
Preferred Stock in
exchange for 782,500
shares of common
stock.................. (78,250) (7,826)
Series C Preferred Stock
dividend paid with
common stock...........
Sale of 3,000 shares of
Series D Preferred
Stock for $3,000,000 in
connection with private
placement.............. 3,000 300
Cash expenses on legal
and placement costs
related to Series D
Private Placement......
Issuance of two warrants
to purchase a total of
2,000,000 shares, to
Series D Investor, in
connection with Series
D Private Placement....
Accrued dividend on
Preferred Stock Series
A & C..................
Unrealized holding
loss...................
Investment write-off....
Net loss for the twelve
months ended December
31, 1998...............
-------- ------- ----- ------- ------- ------- ----- -------
Balance at December 31,
1998................... 186,000 $18,600 2,285 $ 228 153,538 $15,353 3,000 $ 300
</TABLE>

F-7
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------------
Series A Series B Series C Series D
------------------- --------------- ------------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- -------- ------- ------ --------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock
options................
Issuance of 2,000 shares
of Series D Preferred
Stock and related
warrants............... 2,000 200
Expiration of warrants..
Stock bonus paid to
employees..............
Common Stock issued for
services...............
Issuance of warrants in
connection with
promissory note........
Conversion of Series B
Preferred shares....... (605) (60)
Issuance of Series E
Preferred Stock and
related warrants.......
Preferred Stock and
warrants retired in
connection with sale of
assets and issuance of
warrants............... (5,000) (500)
Conversion of A, C and E
Preferred Stock to
Common Stock........... (186,000) (18,600) (153,538) (15,353)
Issuance of Preferred
Stock for debt.........
Issuance of Common Stock
for debt...............
Common Stock issued for
payment of accrued
dividends on Preferred
Stock..................
Preferred Stock
dividend...............
Net loss................
--------- -------- ------- ----- --------- -------- ------- -----
Balance at December 31,
1999................... -- $ -- 1,680 $ 168 -- $ -- -- $ --
Conversion of Series B
Preferred Stock........ (1,680) (168)
Issuance of Series 2
Preferred Stock........
Issuance of common stock
for officer's
compensation and
expense reimbursement..
Issuance of common stock
for former officer's
severance pay..........
Issuance of common stock
for additional purchase
consideration..........
Issuance of common stock
for contingent purchase
consideration..........
Conversion of Series 2
Preferred Stock........
Warrant and stock option
exercises..............
Reclassification........
Net loss................
--------- -------- ------- ----- --------- -------- ------- -----
Balance at June 30,
2000................... -- $ -- -- $ -- -- $ -- -- $ --
========= ======== ======= ===== ========= ======== ======= =====
</TABLE>

F-8
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Preferred Stock
---------------------------
Series E Series 2
------------- -------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1997...................... -- $ -- -- $ --
Issuance of 129,399 shares of common stock in lieu
of officer's compensation........................
Issuance of 14,407 shares of common stock in lieu
of employee cash bonuses.........................
Issuance of 44,286 shares of common stock for
services.........................................
Issuance of additional 56,250 shares of common
stock as part of previous stock transaction......
Issuance of 25,000 shares of common stock in
connection with furniture purchase...............
Issuance of warrants to purchase 532,000 shares of
common stock for consulting services.............
Issuance of warrants and options to purchase
1,020,000 shares of common stock for advisory
services.........................................
Issuance of warrant to purchase 355,500 shares in
connection with bridge loan financing............
Exercise of options to purchase 51,167 shares of
common stock.....................................
Conversion of 126,500 shares of Series A Preferred
Stock in exchange for 683,100 shares of common
stock............................................
Series A Preferred Stock Dividend paid with common
stock............................................
Sale of 3,000 shares of shares of Series B
Preferred Stock for $3,000,000 in connection with
private placement................................
Expected deemed dividend related to discount on
conversion of Series B Preferred Stock...........
Issuance of warrant to purchase 150,000 shares, to
third party, in connection with Series B Private
Placement........................................
Conversion of 715 shares of Series B Preferred
Stock in exchange for 1,147,171 shares of common
stock............................................
Series B Preferred Stock Dividend paid with common
stock............................................
Sale of 220,750 shares of Series C Preferred Stock
for $2,207,500 in connection with private
placement........................................
Issuance of Series C Preferred shares, to third
party, in connection with Series C Private
Placement........................................
Cash expense related to Series C Private
Placement........................................
Issuance of warrant to purchase 220,750 shares, to
third party, in connection with Series C Private
Placement........................................
Conversion of 78,250 shares of Series C Preferred
Stock in exchange for 782,500 shares of common
stock............................................
Series C Preferred Stock dividend paid with common
stock............................................
Sale of 3,000 shares of Series D Preferred Stock
for $3,000,000 in connection with private
placement........................................
Cash expenses on legal and placement costs related
to Series D Private Placement....................
Issuance of two warrants to purchase a total of
2,000,000 shares, to Series D Investor, in
connection with Series D Private Placement.......
Accrued dividend on Preferred Stock Series A & C..
Unrealized holding loss...........................
Investment write-off..............................
Net loss for the twelve months ended December 31,
1998.............................................
------ ------ ------ ------
Balance at December 31, 1998...................... -- $ -- -- $ --
</TABLE>

F-9
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Preferred Stock
--------------------------------
Series E Series 2
--------------- ---------------
Shares Amount Shares Amount
------- ------ ------- ------
<S> <C> <C> <C> <C>
Exercise of stock options......................
Issuance of 2,000 shares of Series D Preferred
Stock and related warrants....................
Expiration of warrants.........................
Stock bonus paid to employees..................
Common Stock issued for services...............
Issuance of warrants in connection with
promissory note...............................
Conversion of Series B Preferred shares........
Issuance of Series E Preferred Stock and
related warrants.............................. 2,000 200
Preferred Stock and warrants retired in
connection with sale of assets and issuance of
warrants......................................
Conversion of A, C and E Preferred Stock to
Common Stock.................................. (2,000) (200)
Issuance of Preferred Stock for debt........... 500 50
Issuance of Common Stock for debt..............
Common Stock issued for payment of accrued
dividends on Preferred Stock..................
Preferred Stock dividend.......................
Net loss.......................................
------- ----- ------- -----
Balance at December 31, 1999................... -- $ -- 500 $ 50

Conversion of Series B Preferred Stock.........
Issuance of Series 2 Preferred Stock........... 4,235 423
Issuance of common stock for officer's
compensation and expense reimbursement........
Issuance of common stock for former officer's
severance pay.................................
Issuance of common stock for additional
purchase consideration........................
Issuance of common stock for contingent
purchase consideration........................
Conversion of Series 2 Preferred Stock......... (1,758) (176)
Warrant and stock option exercises.............
Reclassification...............................
Net loss.......................................
------- ----- ------- -----
Balance at June 30, 2000....................... -- $ -- 2,977 $ 297
======= ===== ======= =====
</TABLE>

F-10
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Common Stock Additional Paid-in Capital
------------------ -----------------------------------------------
Shares Amount Series A Series B Series C Series D
---------- ------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 12,989,820 $12,991 $2,468,750 $ -- $ -- $ --
Issuance of 129,399
shares of common stock
in lieu of officer's
compensation........... 129,399 129
Issuance of 14,407
shares of common stock
in lieu of employee
cash bonuses........... 14,047 14
Issuance of 44,286
shares of common stock
for services........... 44,286 44
Issuance of additional
56,250 shares of common
stock as part of
previous stock
transaction............ 56,250 56
Issuance of 25,000
shares of common stock
in connection with
furniture purchase..... 25,000 25
Issuance of warrants to
purchase 532,000 shares
of common stock for
consulting services....
Issuance of warrants and
options to purchase
1,020,000 shares of
common stock for
advisory services......
Issuance of warrant to
purchase 355,500 shares
in connection with
bridge loan financing..
Exercise of options to
purchase 51,167 shares
of common stock........ 51,167 50
Conversion of 126,500
shares of Series A
Preferred Stock in
exchange for 683,100
shares of common
stock.................. 683,100 683 (999,350)
Series A Preferred Stock
Dividend paid with
common stock........... 70,217 70
Sale of 3,000 shares of
shares of Series B
Preferred stock for
$3,000,000 in
connection with private
placement.............. 2,999,700
Expected deemed dividend
related to discount on
conversion of Series B
Preferred Stock........ 852,998
Issuance of warrant to
purchase 150,000
shares, to third party,
in connection with
Series B Private
Placement..............
Conversion of 715 shares
of Series B Preferred
Stock in exchange for
1,147,171 shares of
common stock........... 1,147,171 1,147 (1,252,488)
Series B Preferred Stock
Dividend paid with
common stock........... 22,812 23
Sale of 220,750 shares
of Series C Preferred
Stock for $2,207,500 in
connection with private
placement.............. 2,185,425
Issuance of Series C
Preferred shares, to
third party, in
connection with Series
C Private Placement....
Cash expense related to
Series C Private
Placement..............
Issuance of warrant to
purchase 220,750
shares, to third party,
in connection with
Series C Private
Placement..............
Conversion of 78,250
shares of Series C
Preferred Stock in
exchange for 782,500
shares of common
stock.................. 782,500 783 (774,675)
Series C Preferred Stock
dividend paid with
common stock........... 25,225 25
Sale of 3,000 shares of
Series D Preferred
Stock for $3,000,000 in
connection with private
placement.............. 2,999,700
Cash expenses on legal
and placement costs
related to Series D
Private Placement......
Issuance of two warrants
to purchase a total of
2,000,000 shares, to
Series D Investor, in
connection with Series
D Private Placement....
Accrued dividend on
Preferred Stock Series
A & C..................
Unrealized holding
loss...................
Investment write-off....
Net loss for the twelve
months ended December
31, 1998...............
---------- ------- ---------- ----------- ---------- ----------
Balance at December 31,
1998................... 16,040,994 $16,040 $1,469,400 $ 2,600,210 $1,410,750 $2,999,700
</TABLE>

F-11
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Common Stock Additional Paid-in Capital
------------------ ----------------------------------------------
Shares Amount Series A Series B Series C Series D
---------- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Exercise of stock
options................ 10,000 10
Issuance of 2,000 shares
of Series D Preferred
Stock and related
warrants............... 2,274,800
Expiration of warrants..
Stock bonus paid to
employees.............. 26,320 26
Common Stock issued for
services............... 17,820 18
Issuance of warrants in
connection with
promissory note........
Conversion of Series B
Preferred shares....... 608,680 609 (606,175)
Issuance of Series E
Preferred Stock and
related warrants.......
Preferred Stock and
warrants retired in
connection with sale of
assets and issuance of
warrants............... (4,999,500)
Conversion of A, C and E
Preferred Stock to
Common Stock........... 17,045,918 17,046 (1,469,400) (1,410,750)
Issuance of Preferred
Stock for debt.........
Issuance of Common Stock
for debt............... 1,468,539 1,469
Common Stock issued for
payment of accrued
dividends on Preferred
Stock.................. 51,523 51
Preferred Stock
dividend...............
Net loss................
---------- ------- ---------- ---------- ---------- ----------
Balance at December 31,
1999................... 35,269,794 $35,269 $ -- $1,994,035 $ -- $ 275,000
Conversion of Series B
Preferred Stock........ 1,672,020 1,672 (1,994,035)
Issuance of Series 2
Preferred Stock........
Issuance of common stock
for officer's
compensation and
expense reimbursement.. 654,703 656
Issuance of common stock
for former officer's
severance pay.......... 398,149 398
Issuance of common stock
for additional purchase
consideration.......... 163,583 164
Issuance of common stock
for contingent purchase
consideration.......... 58,000 58
Conversion of Series 2
Preferred Stock........ 143,039 143
Warrant and stock option
exercises.............. 1,257,505 1,257
Reclassification........ (275,000)
Net Loss................
---------- ------- ---------- ---------- ---------- ----------
Balance at June 30,
2000................... 39,616,793 $39,617 $ -- $ -- $ -- $ --
========== ======= ========== ========== ========== ==========
</TABLE>

F-12
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Additional Paid-in Capital
-----------------------------
Series E Series 2 Common
-------- -------- -----------
<S> <C> <C> <C>
Balance at December 31, 1997.................... $ -- $ -- $ 6,212,101
Issuance of 129,399 shares of common stock in
lieu of officer's compensation................. 313,255
Issuance of 14,407 shares of common stock in
lieu of employee cash bonuses.................. 33,418
Issuance of 44,286 shares of common stock for
services....................................... 116,956
Issuance of additional 56,250 shares of common
stock as part of previous stock transaction.... (56)
Issuance of 25,000 shares of common stock in
connection with furniture purchase............. 20,275
Issuance of warrants to purchase 532,000 shares
of common stock for consulting services........ 596,780
Issuance of warrants and options to purchase
1,020,000 shares of common stock for advisory
services....................................... 390,650
Issuance of warrant to purchase 355,500 shares
in connection with bridge loan financing....... 121,959
Exercise of options to purchase 51,167 shares of
common stock................................... 90,259
Conversion of 126,500 shares of Series A
Preferred Stock in exchange for 683,100 shares
of common stock................................ 1,011,317
Series A Preferred Stock Dividend paid with
common stock................................... 111,779
Sale of 3,000 shares of shares of Series B
Preferred Stock for $3,000,000 in connection
with private placement.........................
Expected deemed dividend related to discount on
conversion of Series B Preferred Stock.........
Issuance of warrant to purchase 150,000 shares,
to third party, in connection with Series B
Private Placement.............................. 93,000
Conversion of 715 shares of Series B Preferred
Stock in exchange for 1,147,171 shares of
common stock................................... 1,251,413
Series B Preferred Stock Dividend paid with
common stock................................... 20,275
Sale of 220,750 shares of Series C Preferred
Stock for $2,207,500 in connection with private
placement......................................
Issuance of Series C Preferred shares, to third
party, in connection with Series C Private
Placement......................................
Cash expense related to Series C Private
Placement......................................
Issuance of warrant to purchase 220,750 shares,
to third party, in connection with Series C
Private Placement.............................. 66,225
Conversion of 78,250 shares of Series C
Preferred Stock in exchange for 782,500 shares
of common stock................................ 781,718
Series C Preferred Stock dividend paid with
common stock................................... 20,912
Sale of 3,000 shares of Series D Preferred Stock
for $3,000,000 in connection with private
placement......................................
Cash expenses on legal and placement costs
related to Series D Private Placement..........
Issuance of two warrants to purchase a total of
2,000,000 shares, to Series D Investor, in
connection with Series D Private Placement..... 720,000
Accrued dividend on Preferred Stock Series A &
C..............................................
Unrealized holding loss.........................
Investment write-off............................
Net loss for the twelve months ended December
31, 1998.......................................
---- ---- -----------
Balance at December 31, 1998.................... $ -- $ -- $11,972,236
</TABLE>

F-13
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Additional Paid-in Capital
-----------------------------------
Series E Series 2 Common
----------- --------- -----------
<S> <C> <C> <C>
Exercise of stock options................. 9,990
Issuance of 2,000 shares of Series D
Preferred Stock and related warrants.....
Expiration of warrants.................... (606,949)
Stock bonus paid to employees............. 32,890
Common Stock issued for services.......... 19,016
Issuance of warrants in connection with
promissory note.......................... 436,710
Conversion of Series B Preferred shares... 605,626
Issuance of Series E Preferred Stock and
related warrants......................... 1,999,800 74,000
Preferred Stock and warrants retired in
connection with sale of assets and
issuance of warrants..................... (1,126,260)
Conversion of A, C and E Preferred Stock
to Common Stock.......................... (1,999,800) 4,964,478
Issuance of Preferred Stock for debt...... 49,950
Issuance of Common Stock for debt......... 447,397
Common Stock issued for payment of accrued
dividends on Preferred Stock............. 39,427
Preferred Stock dividend..................
Net loss..................................
----------- --------- -----------
Balance at December 31, 1999.............. $ -- $ 49,950 $16,868,561
Conversion of Series B Preferred Stock.... 2,182,137
Issuance of Series 2 Preferred Stock...... 423,120
Issuance of common stock for officer's
compensation and expense reimbursement 226,236
Issuance of common stock for former
officer's severance pay.................. 112,952
Issuance of common stock for additional
purchase consideration................... 112,218
Issuance of common stock for contingent
purchase consideration................... 57,942
Conversion of Series 2 Preferred Stock.... (175,490) 175,523
Warrant and stock option exercises........ 841,047
Reclassification.......................... 275,000
Net loss..................................
----------- --------- -----------
Balance at June 30, 2000.................. $ -- $ 297,580 $20,851,616
=========== ========= ===========
</TABLE>

F-14
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Other
Reduction Accumulated
of Paid-in Comprehensive Accumulated
Capital Income (Loss) Deficit Total
----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at December 31,
1997.................... $(1,140,433) $ 62,221 $ (5,367,280) $ 2,279,600
Issuance of 129,399
shares of common stock
in lieu of officer's
compensation............ 313,384
Issuance of 14,407 shares
of common stock in lieu
of employee cash
bonuses................. 33,432
Issuance of 44,286 shares
of common stock for
services................ 117,000
Issuance of additional
56,000 shares of common
stock as part of
previous stock
transaction............. --
Issuance of 25,000 shares
of common stock in
connection with
furniture purchase...... 20,300
Issuance of warrants to
purchase 532,000 shares
of common stock for
consulting services..... 596,780
Issuance of warrants and
options to purchase
1,020,000 shares of
common stock for
advisory services....... 390,650
Issuance of warrant to
purchase 355,500 shares
in connection with
bridge loan financing... 121,959
Exercise of options to
purchase 51,167 shares
of common stock......... 90,309
Conversion of 126,500
shares of Series A
Preferred Stock in
exchange for 683,100
shares of common stock.. --
Series A Preferred Stock
Dividend paid with
common stock............ (111,849) --
Sale of 3,000 shares of
shares of Series B
Preferred stock for
$3,000,000 in connection
with private placement.. 3,000,000
Expected deemed dividend
related to discount on
conversion of Series B
Preferred Stock......... (852,998) --
Issuance of warrant to
purchase 150,000 shares,
to third party, in
connection with Series B
Private Placement....... (93,000) --
Conversion of 715 shares
of Series B Preferred
Stock in exchange for
1,147,171 shares of
common stock............ --
Series B Preferred Stock
Dividend paid with
common stock............ (20,298) --
Sale of 220,750 shares of
Series C Preferred Stock
for $2,207,500 in
connection with private
placement............... 2,207,500
Issuance of Series C
Preferred shares, to
third party, in
connection with Series C
Private Placement....... 1,104
Cash expense related to
Series C Private
Placement............... (230,771) (230,771)
Issuance of warrant to
purchase 220,750 shares,
to third party, in
connection with Series C
Private Placement....... (66,225) --
Conversion of 78,250
shares of Series C
Preferred Stock in
exchange for 782,500
shares of common stock.. --
Series C Preferred Stock
dividend paid with
common stock............ (20,937) --
Sale of 3,000 shares of
Series D Preferred Stock
for $3,000,000 in
connection with private
placement............... 3,000,000
Cash expenses on legal
and placement costs
related to Series D
Private Placement....... (65,000) (65,000)
Issuance of two warrants
to purchase a total of
2,000,000 shares, to
Series D Investor, in
connection with Series D
Private Placement....... (720,000) --
Accrued dividend on
Preferred Stock Series
A, B & C................ (156,536) (156,536)
Unrealized holding loss.. (675,643) (675,643)
Investment write-off..... 613,422 613,422
Net loss for the twelve
months ended December
31, 1998................ (8,320,519) (8,320,519)
----------- --------- ------------ -----------
Balance at December 31,
1998.................... $(2,315,429) $ -- $(14,850,417) $ 3,336,971
</TABLE>

F-15
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

For the Years Ended December 31, 1999 and 1998 and the Six Months Ended June
30, 2000

<TABLE>
<CAPTION>
Reduction Other
of Paid- Accumulated
in Comprehensive Accumulated
Capital Income (Loss) Deficit Total
--------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Exercise of stock options.. 10,000
Issuance of 2,000 shares of
Series D Preferred Stock
and related warrants...... (275,000) 2,000,000
Expiration of warrants..... 606,949 --
Stock bonus paid to
employees................. 32,916
Common Stock issued for
services.................. 19,034
Issuance of warrants in
connection with promissory
note...................... 436,710
Conversion of Series B
Preferred shares.......... --
Issuance of Series E
Preferred Stock and
related warrants.......... (104,000) 1,970,000
Preferred Stock and
warrants retired in
connection with sale of
assets and issuance of
warrants.................. 995,000 (5,131,260)
Conversion of A, C and E
Preferred Stock to Common
Stock..................... 104,000 171,421
Issuance of Preferred Stock
for debt.................. 50,000
Issuance of Common Stock
for debt.................. 448,866
Common Stock issued for
payment of accrued
dividends on Preferred
Stock..................... 39,478
Preferred Stock dividend... (619,595) (619,595)
Net loss................... (2,655,913) (2,655,913)
--------- ------ ------------ -----------
Balance at December 31,
1999...................... $(988,480) $ -- $(18,125,925) $ 108,628
Conversion of Series B
Preferred Stock........... 189,606
Issuance of Series 2
Preferred Stock........... 423,543
Issuance of common stock
for officer's compensation
and expense
reimbursement............. 226,892
Issuance of common stock
for former officer's
severance pay............. 113,350
Issuance of common stock
for additional purchase
consideration............. 112,382
Issuance of common stock
for contingent purchase
consideration............. 58,000
Conversion of Series 2
Preferred Stock........... --
Warrant and stock option
exercises................. 842,304
Net loss................... (1,095,482) (1,095,482)
--------- ------ ------------ -----------
Balance at June 30, 2000... $(988,480) $ -- $(19,221,407) $ 979,223
========= ====== ============ ===========
</TABLE>

F-16
<PAGE>

APPLIED VOICE RECOGNITION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Six Months Ended For the Year Ended
June 30, December 31,
------------------------ ------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss.................. $(1,095,482) $(4,109,470) $(2,655,913) $(8,320,519)
Adjustments to reconcile
net loss to cash used in
operating activities:
Depreciation and
amortization............ 164,819 285,661 659,775 197,713
Loss on investment write-
off..................... -- -- -- 803,125
Loss on inventory write-
off..................... -- -- -- 36,900
Stock and warrants issued
for services and finance
costs................... -- 5,529 455,744 1,737,836
Stock and options issued
as compensation......... 226,892 32,916 32,916 346,816
Gain on extinguishment of
debt.................... -- -- (5,562,750) --
Interest on preferred
stock payable........... 67,520 80,665 206,852 --
Write-down of prepaid
software rights......... -- -- 329,100 --
Changes in operating
assets and liabilities:
Accounts receivable...... (219,381) (760,142) (179,727) 334,597
Other receivable......... 747,137 -- -- --
Inventory................ -- -- 37,201 245,543
Prepaid licenses......... -- -- (300,000) (750,000)
Deposits, prepaid
expenses and other
assets.................. (98,942) 192,763 261,010 (784,037)
Accounts payable and
accrued expenses........ 79,336 458,783 (124,941) 103,590
Common stock payable..... -- -- (13,500) 13,500
----------- ----------- ----------- -----------
Net Cash Used in
Operating Activities... (128,101) (3,813,295) (6,854,233) (6,034,936)
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of equipment..... (40,261) (321,533) (1,372,552) (369,516)
Proceeds from sale of
assets................... -- 240,000 696,939 --
Cash paid for purchase of
transcription companies.. -- (736,857) (775,000) (398,312)
Capitalized software
costs.................... (207,320) -- -- (300,025)
----------- ----------- ----------- -----------
Net Cash Used in
Investing Activities... (247,581) (818,390) (1,450,613) (1,067,853)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from bridge
loans.................... -- 1,500,000 4,000,000 335,333
Principal payment on
seller debt.............. -- (229,629) (297,884) --
Principal payment on
bridge loans............. -- (335,333) (835,333) --
Principal payment on third
party debt............... (90,401) (3,748) (45,104) (42,882)
Principal payment on
related party debt....... -- -- -- (126,250)
Principal payments under
capital lease............ (30,410) (29,534) (71,217) (17,835)
Warrants and options
granted in connection
with bridge loans........ -- -- -- 121,959
Proceeds from related
party debt............... -- -- 250,000 --
Sale of preferred stock... -- 2,700,000 3,970,000 7,208,604
Cash expenditures related
to sale of stock......... -- -- -- (295,771)
Stock options and warrants
exercised................ 842,304 10,000 10,000 90,309
----------- ----------- ----------- -----------
Net Cash Provided by
Financing Activities... 721,493 3,611,756 6,980,462 7,273,467
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............... 345,811 (1,019,929) (1,324,384) 170,678
Cash and Cash Equivalents--
Beginning of Period....... 53,529 1,377,913 1,377,913 1,207,235
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS--
END OF PERIOD............. $ 399,340 $ 357,984 $ 53,529 $ 1,377,913
=========== =========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-17
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999 and 1998 and June 30, 2000

(Information as of and for the six months ended June 30, 2000 and 1999 is
unaudited)

NOTE 1--DESCRIPTION OF BUSINESS

Applied Voice Recognition, Inc. (the "Company" or "AVRI") provides
traditional and electronic transcription services to approximately 1,200
physicians in six states. The Company has begun development of the e-Docs
Physician's Network (EPN) through a newly formed subsidiary, Virtual Physicians
Network, Inc. The EPN is being designed to provide a secure browser-based
service which would allow transcription companies to deliver their product and
doctors to review transcriptions online. The EPN would include a document
storage service that will allow physicians to access their records 24 hours a
day online.

The Company was reincorporated as a Delaware Corporation on January 29,
1998. Previously, the Company was a Utah corporation by virtue of a share
exchange that was treated as a reverse merger on December 11, 1996 with Summa
Vest, Inc.

On December 1, 1998, the Company formed a new wholly owned subsidiary, AVRI
Health Care Information Services, Inc., a Delaware Corporation (AVRI Health
Care), which was primarily formed for the purpose of acquiring companies in the
transcription service business.

NOTE 2--LIQUIDITY AND MANAGEMENT'S PLAN

The Company has incurred significant losses and cash deficits since
inception. The Company has been dependent upon outside financing to develop its
software products and to provide working capital. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.

Beginning in the fourth quarter of 1999, the Company suspended its
acquisitions program and focused on restructuring the core operations of the
transcription companies acquired. As of December 31, 1999, the Company had
reduced its corporate head count from 35 to 7 and had sold its operations in
Manila, New York, New Jersey and a portion of its Houston operations. These
actions reduced the monthly losses by approximately $300,000, while reducing
revenue by $250,000 per month.

Since the Company's announcement of its restructuring on January 7, 2000,
liquidity has significantly improved. Gross revenues averaging $200,000 per
month have been achieved, and warrants and options have been exercised,
resulting in net proceeds to the Company of approximately $840,000 through June
30, 2000. Management believes current resources are adequate for the
development costs of the e-Docs Physician's Network (EPN) as well as the
Company's working capital needs through January 31, 2001.

It will be necessary for the Company to raise additional capital for the
rollout of EPN intended to occur in the fourth quarter of 2000. While
management is confident capital is available, there are no assurances that the
necessary capital can be obtained.

NOTE 3--SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, and have been prepared in
accordance with generally accepted accounting principles. All significant
intercompany transactions and balances have been eliminated.

F-18
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates to be made by
management. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, and notes payable
approximate fair value due to the short-term maturity of the instruments. The
carrying amount of long-term debt approximates fair value because the interest
rates under the credit agreement are variable, based on current market.

Stock Options

The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations ("APB 25") in
accounting for its employee stock options. The pro forma disclosures required
by Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation ("SFAS 123"), which established a fair-value-based method of
accounting for stock-based compensation plans, are set forth in Note 8.

Cash and Cash Equivalents

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

Inventories

Inventories consist of computer equipment and are determined using actual
cost based on a first-in, first-out ("FIFO") basis. FIFO inventory is stated at
the lower of cost or market.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed by the
straight-line method using rates based on the estimated useful lives of the
related assets. Estimated useful lives used for depreciation purposes are as
follows:

<TABLE>
<S> <C>
Computer equipment................................................ 3 Years
Third party software.............................................. 3 Years
Office equipment.................................................. 5 Years
Furniture......................................................... 7 Years
</TABLE>

Prepaid Licenses and Prepaid Software Rights

Prepaid licenses were stated at cost. During 1999, the Company shifted its
business focus, discontinuing development of the license related technology.
The vendor agreed to exchange the license related payments for rights to
produce and resell 3,291 units of a completed market transcription product. At
December 31, 1999, prepaid software resale rights are stated at estimated
resale value less disposal costs, resulting in a charge to 1999 operations of
$329,100.

F-19
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

Capitalized Software Costs

The costs of direct labor and allocated overhead specific to development
activities for products that are technologically feasible are capitalized
through the date of market release. All other research and development costs
are charged against operations in the period incurred. Amounts capitalized are
amortized on a straight-line basis over a three-year life commencing upon
market release. For the year ended December 31, 1998, the Company incurred
$58,808 of related amortization expense.

As a result of the December 20, 1999 disposition of assets, the Company
expensed the remaining $397,369 of capitalized software costs as an offset to
the extraordinary gain on extinguishment of debt.

Intangibles and Goodwill

Intangibles and goodwill are amortized using the straight-line method over
their estimated useful lives, which range from 10 to 20 years. Intangibles
include trade names and customer lists. Goodwill represents the excess purchase
price over the fair value of net assets acquired for acquisitions accounted for
as purchases. The Company periodically monitors intangibles and goodwill to
determine if subsequent events or circumstances have occurred that have
compromised the viability of the asset. To the extent such an event has
happened, the Company will make necessary revisions to the balance or
amortization life. Management believes that there have been no such events or
circumstances which warrant revision to the remaining useful life, or which
affect the recoverability of intangibles and goodwill. Intangibles and goodwill
associated with disposed operations are reflected in the calculation of the
extraordinary gain on extinguishment of debt.

Revenue Recognition

In October 1997, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements (e.g. software products, upgrades,
enhancements, customer support, installation and training) to be allocated to
each element on the relative fair values of the elements. The fair value of an
element is based on evidence, which is specific to the vendor. The revenue
allocated to software products, including specified upgrades or enhancements,
generally is recognized upon delivery of the products. The revenue allocated to
unspecified upgrades and updates and post contract customer support generally
is recognized when upgrades are delivered or as the services are performed. If
there is not appropriate evidence of the fair value for all elements of the
arrangement, all revenue from the arrangement is deferred until such evidence
exists or until all elements are delivered. In March 1998, the AICPA issued SOP
98-4 which defers for one year the implementation of the provisions of SOP 97-2
relating to the fair value determination of each revenue element. The Company
has adopted SOP 97-2, however, the impact of this is not considered to be
significant.

Fees for transcription-related services are based primarily on contracted
per line rates, and revenue is recognized upon the rendering of services and
delivery of transcribed materials.

Maintenance Revenues

The Company defers unearned revenues associated with maintenance contracts
sold to customers, and the term of each contract is typically one year. All
deferred revenues are amortized into revenue on a pro rata basis based on the
life of the maintenance contract.

F-20
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

Concentration of Credit Risk

Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company periodically
evaluates the creditworthiness of its customers and generally does not require
collateral. The Company's customer base consists of clinics, hospitals, sole
practitioners, and commercial companies. No customer accounted for 10% or more
of revenues for any of the periods presented.

Advertising

The Company expenses all advertising costs as incurred. The Company expensed
$350,867 and $122,242 in 1999 and 1998, respectively.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the
differences reverse.

Comprehensive Income

As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in comprehensive income.

NOTE 4--ACQUISITIONS AND DISPOSITIONS

During 1999, the Company entered into four asset purchase agreements with
transcription companies located in Texas. Each acquisition was accounted for as
a purchase. The results of operations of acquisitions are included in the
Company's Statement of Operations from the date of acquisition. A description
of these acquisitions follows:

Reyna Transcriptions, Inc. On February 22, 1999, e-Docs Health Care
Information Services, Inc., a wholly owned subsidiary of AVRI, acquired the
assets of Reyna Transcriptions ("Transcription Plus"). Transcription Plus
provides medical transcription services.

Pursuant to the Asset Purchase Agreement, the Company acquired certain
assets for a purchase price of $75,000 in cash and an unsecured note in the
amount of $175,000 payable in three equal annual payments beginning February
22, 2000, bearing interest at 8%. The Company allocated purchase price in
excess of net assets acquired to identifiable intangible assets and customer
lists in the amount of $122,500, and to goodwill in the amount of $122,500,
which will be amortized over 10 and 20 years, respectively.

PRN Transcription, Inc. On February 22, 1999, e-Docs Health Care Information
Services, Inc., a wholly owned subsidiary of AVRI, acquired the assets of PRN
Transcription, Inc. ("PRN"). PRN provides medical transcription services.

Pursuant to the Asset Purchase Agreement (the "Agreement"), the Company
acquired certain assets and assumed certain liabilities of PRN. The total
purchase price consisted of: (i) $200,000 in cash and (ii) $377,000

F-21
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

of the Company's Series 2 Preferred Stock, par value $.10 per share. The Series
2 Preferred Stock will be issued in three equal annual installments with a
stated value of $125,667 each installment. These installments are payable on
February 23, 2000, February 23, 2001 and February 23, 2002. In addition, the
Company may issue additional Series 2 Preferred Stock with a stated value of up
to $174,000 to PRN, if PRN meets or exceeds certain revenue targets, as set
forth in the agreement, over the next three years. Any additional consideration
will be accounted for as additional intangible assets. For purchase accounting
purposes, a preferred stock payable of $292,608 has been recorded for the net
present value of the commitment to issued preferred stock. The discounted
amount of $84,392 is being amortized to interest expense.

The Series 2 Preferred Stock carries an 8% cumulative dividend payable in
cash or in additional shares of Preferred Stock at the Company's option.
Dividends are payable quarterly and in arrears on the first day of each
January, April, July and October commencing on January 1, 2000. Each share of
the Series 2 Preferred Stock when issued will be convertible at any time into a
number of shares of Common Stock equal to (i) $100 per share of Series 2
Preferred Stock being converted, plus any earned but unpaid dividends, if any,
divided by (ii) the greater of $1.00 per share or the average daily closing
price of the Company's Common Stock for the thirty day period immediately
preceding the effective date of any such conversion on the Nasdaq Over-the-
Counter Bulletin Board (OTCBB). The Company has agreed to register such shares
of Common Stock issued upon conversion of the Preferred Stock for resale under
the Securities Act of 1933, as amended, at the expense of the Company. These
shares of preferred stock are subject to automatic conversion if the Company
undertakes an underwritten public offering with an aggregate market value of
$10,000,000 or more. Any shares of the Series 2 Preferred Stock may be
redeemed, at the Company's option, after the third anniversary of the date of
their issuance, at a redemption price of $100 per share plus any accrued but
unpaid dividends. Except as otherwise required by the Delaware General
Corporate Law, the holders of the Series 2 Preferred Stock shall have no voting
rights.

AVRI incurred approximately $5,000 of acquisition related expenses, which
has been included in the purchase price allocation. The Company allocated the
excess purchase price over net assets acquired of $477,608 to identified
intangibles and customer lists in the amount of $238,804, and to goodwill in
the amount of $238,804, which will be amortized over 10 years and 20 years,
respectively.

Am Transcription, Inc. On February 26, 1999, e-Docs Health Care Information
Services, Inc., a wholly owned subsidiary of AVRI, acquired the assets of AM
Transcription, Inc. ("AM"). AM provides medical transcription services.
Pursuant to the Asset Purchase Agreement (the "Agreement") the Company acquired
certain assets and assumed certain liabilities of AM. The total purchase price
consisted of: (i) $200,000 in cash and (ii) $250,000 of the Company's Series 2
Preferred Stock, par value $.10 per share, less liabilities assumed of $56,365.
The Series 2 Preferred Stock will be issued in three equal annual installments
with a stated value of $64,545 each installment. These installments are payable
on February 27, 2000, February 27, 2001 and February 27, 2002. For purchase
accounting purposes, a preferred stock payable of $150,287 has been recorded
for the net present value of the commitment to issued preferred stock. The
discounted amount of $43,348 is being amortized to interest expense.

AVRI incurred approximately $5,000 of acquisition related expenses, which
has been included in the purchase price allocation. The Company allocated the
excess purchase price over net assets of $335,287 to identified intangibles and
customer lists in the amount of $167,643, and to goodwill in the amount of
$167,644, which will be amortized over 10 years and 20 years, respectively.

A Word Above, Inc. On May 28, 1999, e-Docs Health Care Information Services,
Inc., a wholly owned subsidiary of AVRI, acquired the assets of A Word Above,
Inc. ("A Word Above"). A Word Above provides medical transcription services.

F-22
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

Pursuant to the Stock Purchase Agreement (the "Agreement") the Company
acquired all of the common stock of A Word Above. The Agreement excluded
certain assets and liabilities from the transaction. The total purchase price
consisted of: (i) $300,000 payable in cash and (ii) $700,000 of the Company's
Series 2 Preferred Stock, par value $.10 per share. The Series 2 Preferred
Stock will be issued in three equal annual installments with a stated value of
$233,333 each installment. These installments are payable on May 29, 2000, May
29, 2001 and May 29, 2002. For purchase accounting purposes, a preferred stock
payable of $532,752 has been recorded for the net present value of the
commitment to issued preferred stock. The discounted amount of $167,248 is
being amortized to interest expense.

AVRI incurred approximately $7,000 of acquisition related expenses, which
has been included in the purchase price allocation. The Company allocated the
excess purchase price over net assets acquired of $714,364 to identified
intangibles and customer lists of $357,182, and to goodwill of $357,182, which
will be amortized over 10 years and 20 years, respectively.

During 1998, the Company entered into three asset purchase agreements with
transcription companies located in Texas, New York, and Colorado. Each
acquisition was accounted for as a purchase. A description of these
acquisitions follows:

Transcription Resources. On March 17, 1998, AVRI, acquired the assets of
Transcription Resources ("TR") a sole proprietorship. Subsequently, during
1998, AVRI transferred the acquired assets to AVRI Health.

TR specializes in providing transcription services to the healthcare
industry throughout the country.

Pursuant to the Asset Purchase Agreement (the "Agreement"), the Company
acquired certain assets for a purchase price of $150,000, less liabilities
assumed, or $37,091 net. The net amount is payable in the form of a non-
interest bearing note with an original maturity of December 31, 1998. The note
was repaid in 1999. The acquisition of TR resulted in approximately $56,000 of
goodwill which will be amortized over a five-year period.

Cornell Transcription, Inc. On December 1, 1998, AVRI Health acquired
certain assets and assumed certain liabilities of Cornell Transcription, Inc.,
a New York corporation ("Cornell") and all of the common stock of Outsource
Transcription Philippines, Inc. ("OTP"), a stock corporation formed under the
laws of the Republic of the Philippines.

Cornell specializes in providing transcription services to the healthcare
industry in the New York and surrounding areas. Cornell has offices in
Hackensack, New Jersey; Miami, Florida; and Manila in the Philippines. OTP
provides transcription services to Cornell.

The total purchase price for Cornell and OTP consisted of: (i) promissory
note issued by AVRI Health in the aggregate principal amount of $270,000 (the
"Note"), (ii) $275,000 in cash, (iii) the assumption of certain capital lease
obligations, and (iv) approximately 684 shares of the Company's Series 1
Preferred Stock, par value $.10 per share. The agreement includes a contingent
purchase price of approximately $160,000, payable in 160 shares of Series 1
Preferred Stock, with the attainment of certain quarterly revenue targets over
the next four calendar quarters, subsequent to the sale date.

The Note is a non-interest bearing, unsecured note payable to Cornell, which
was payable as follows: (i) $150,000 on or before February 28, 1999, and (ii)
$120,000 in twelve equal monthly installments of $10,000 each, payable on the
first day of each month commencing on January 1, 1999, and continuing
thereafter until December 1, 1999. Due to the $120,000 note being non-interest
bearing, the Company recorded the discounted

F-23
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

amount of the note of $110,793 using an imputed interest rate of 15%, as part
of the purchase price allocation. The discounted amount was amortized to
interest expense over the life of the note.

The Series I Preferred Stock, which was issuable to Cornell December 2,
1999, carried a 10% cumulative dividend payable in cash or in additional common
or preferred shares at the Company's option. (See Note 8.) For purchase
accounting purposes, a preferred stock payable of $594,666 was recorded for the
net present value of the commitment to issue preferred stock, discounted using
a rate of 15%. The discount amount of $89,334 was amortized to interest
expense. Each share of the Series 1 Preferred Stock was convertible at any time
into a number of shares of common stock equal to (i) $1,000 per share of Series
1 Preferred Stock being converted, plus any earned but unpaid dividends, if
any, divided by (ii) the average closing price of the Company's Common Stock
for the thirty day period immediately preceding the effective date of such
conversion on OTCBB. Any such shares of Common Stock issued upon conversion of
the Series 1 Preferred Stock shall be registered for resale under the
Securities Act of 1933, as amended, at the expense of the Company.

The shares of Series 1 Preferred Stock are not subject to automatic
conversion. Any shares of the Series 1 Preferred Stock may be redeemed, at the
Company's option, after the third anniversary of the date of their issuance, at
a redemption price of $1,000 per share plus any accrued but unpaid dividends.

AVRI Health Care incurred approximately $80,000 of acquisition related
expenses, which has been included in the purchase price allocation. The Company
allocated the excess purchase price over net assets of $1,060,008 to identified
intangibles and customer lists in the amount of $530,004, and to goodwill in
the amount of $530,004, which will be amortized over 10 years and 20 years,
respectively.

LRW Transcription. On December 31, 1998, AVRI Health Care acquired the
assets of Linda R. Willhite Transcription ("LRW Transcription") a sole
proprietorship owned by Linda R. Willhite. LRW Transcription specializes in
providing transcription services to the healthcare industry in the Denver,
Colorado metropolitan area.

Pursuant to the Asset Purchase Agreement (the "Agreement"), the Company
acquired certain assets owned by LRW Transcription. The total purchase price
consisted of: (i) $75,000 in cash, including amounts paid by the Company to the
creditors of LRW Transcription, (ii) and $150,000 of the Company's Series 2
Preferred Stock, par value $.10 per share. The Series 2 Preferred Stock will be
issued in three equal annual installments with a stated value of $50,000 each
installment. These installments are payable on December 31, 1999, December 31,
2000 and December 31, 2001. In addition, the Company may issue additional
Series 2 Preferred Stock with a stated value of up to $125,000 to LRW
Transcription, if LRW Transcription meets or exceeds certain revenue targets,
as set forth in the agreement, over the next three years. Any additional
consideration will be accounted for as additional intangible assets. For
purchase accounting purposes a preferred stock payable of $114,161 has been
recorded for the net present value of the commitment to issued preferred stock.
The discounted amount of $35,839 is being amortized to interest expense.

F-24
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

the Securities Act of 1933, as amended, at the expense of the Company. These
shares of preferred stock are subject to automatic conversion if the Company
undertakes an underwritten public offering with an aggregate market value of
$10,000,000 or more. Any shares of the Series 2 Preferred Stock may be
redeemed, at the Company's option, after the third anniversary of the date of
their issuance, at a redemption price of $100 per share plus any accrued but
unpaid dividends. Except as otherwise required by the Delaware General
Corporate Law, the holders of the Series 2 Preferred Stock shall have no voting
rights.

AVRI Health Care incurred approximately $25,000 of acquisition related
expenses, which has been included in the purchase price allocation. The Company
allocated the excess purchase price over net assets of $166,070 to identified
intangibles and customer lists in the amount of $83,035, and to goodwill in the
amount of $83,035, which is being amortized over 10 years and 20 years,
respectively.

Dispositions

Effective December 20, 1999, AVRI and its wholly owned subsidiaries, e-Docs
Health Care Information Services, Inc. and A Word Above, sold the net assets
and contracts of the Company's medical transcription service operations based
in New York, New Jersey, Houston, Texas and the Philippines and granted the
non-exclusive rights to the VoiceCommander99(TM) code to Lonestar Medical
Transcription USA, Inc. ("Lonestar"). The parent of Lonestar, L&H Investment
Co., N.V. ("LHIC") was a preferred stockholder prior to the purchase.

Pursuant to the Asset Purchase Agreement (the "Agreement") the Company sold
certain assets and Lonestar assumed certain liabilities of AVRI. The total
purchase price consisted of: (i) $456,939 in cash, representing the value of
80% of the accounts receivable purchased; (ii) forgiveness of a $2.0 million
promissory note held by an affiliate of the purchaser; (iii) forgiveness of a
$1.5 million promissory note held by LHIC; (iv) forgiveness of $94,360 of
accrued interest; and (v) retirement of $5.0 million in Series D Preferred
Stock held by LHIC and forgiveness of $318,458 accrued, unpaid dividends; and
(v) conversion of warrants to purchase 3.5 million shares of AVRI common stock
at $1.25 a share to warrants to purchase 800,000 shares of AVRI common stock at
$.37 per share. The new warrants were valued at $200,000 using the Black-
Scholes valuation model.

Amounts collected on accounts receivable in excess of the 80% included in
the purchase price are to be remitted to AVRI by Lonestar.

The gain on the extinguishment of debt has been reflected in the financial
statements as an extraordinary gain of $5,562,750.

After the effect of the dispositions, the Company offers transcription
services in six states from offices in Houston, Dallas, and Tyler, Texas; and
Denver, Colorado.

F-25
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

NOTE 5--PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
Computer equipment.................................... $ 647,301 $ 578,770
Third party software.................................. 36,904 47,071
Office equipment and furniture........................ 114,141 134,126
Office equipment on capital lease..................... 415,136 118,098
---------- ---------
1,213,482 878,065
Less accumulated depreciation......................... (354,990) (180,767)
---------- ---------
Property and equipment, net........................... $ 858,492 $ 697,298
========== =========
</TABLE>

NOTE 6--INDEBTEDNESS

Indebtedness is summarized below:

<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
-------- -------
<S> <C> <C>
Long-term Debt:
Note payable to a bank, secured by accounts receivable,
fixtures and equipment, prime plus 2% interest, monthly
payments of principal and interest of $909, note matures
March 2003................................................... $ 31,223 --
Note payable to individual, unsecured, 8% interest due
annually, annual principal payments of $58,333, note matures
February 2002 (see Note 4)................................... 175,000 --
Note payable to a bank, unsecured, 9.25% interest, monthly
payments of principal and interest of $879, note matures
January 2000................................................. 845 $12,339
-------- -------
207,068 12,339
Less current maturities....................................... 65,977 11,542
-------- -------
Net long-term debt............................................ $141,091 $ 797
======== =======
</TABLE>

Future maturities of long-term debt as of December 31, 1999, are as follows:

Note Payable to Related Parties

During 1999, the Company entered into a Convertible Promissory Note and
Warrant Purchase Agreement, as amended with a shareholder. The note has a
stated principal amount of $250,000 and bears interest at 9%. The note is
secured by a security interest in certain assets of the Company. The note is
convertible into Common Stock at a price of $.37 common share. The conversion
price is adjustable downward based on the pricing of future common stock issues
or issuances of subsequent convertible issues with more favorable conversion
terms. Contingent warrants may be issuable as a result of future equity
transactions.

F-26
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

During 1998, the Company had a note payable to a trust of $126,250 which was
unsecured and carried 12% annual percentage rate of interest. Interest payments
were due on a quarterly basis and interest was non-compounding. In addition to
this interest, the trust received a total of 180,000 shares of Common Stock in
the Company. These shares were valued at $1.50 each, which approximated fair
value at the date of issuance, and the aggregate value of $270,000 was recorded
as a finance cost. In 1998, the Company recorded $67,500 of interest expense
related to these shares. A balloon payment on the principal balance of $125,000
was paid on May 18, 1998.

During the month of December 1998, the Company entered into various bridge
loan agreements (the "Bridge Loans") with certain officers of $144,917, a
former employee of $60,416 and to third parties of $130,000. The aggregate
balance of the Bridge Loans amounted to $335,333, and bore interest at 12% per
annum. The Bridge Loans plus accrued interest were payable upon the earlier of
six months following the date of the note or three business days following the
receipt of $2,000,000 in equity funding. On December 31, 1998, the Company
received $2,000,000 in equity funding and paid the Bridge Loans in January
1999, plus accrued interest, in accordance with the agreement. In connection
with the Bridge Loans, the Company granted warrants to purchase 355,495 shares
of common stock resulting in approximately $122,000 of finance cost, using the
Black Scholes method of valuation. (See Note 8 "Warrants")

NOTE 7--LEASES

Capital

The future minimum lease payments on office equipment as of December 31,
1999 are as follows:

<TABLE>
<S> <C>
2000............................................................... $153,744
2001............................................................... 153,744
2002............................................................... 129,773
2003............................................................... 108,730
2004............................................................... 44,128
--------
Total payments..................................................... 590,119
Less: Amounts representing interest................................ (246,095)
--------
Net present value.................................................. 344,024
Less: Current maturities........................................... (64,354)
--------
Long-term portion.................................................. $279,670
========
</TABLE>

Operating

The Company leases various office space and equipment under non-cancelable
operating leases. The Company incurred rental expense of $21,029, $55,871,
$296,512 and $149,520 for the three months ending March 31, 2000 and 1999 and
for the years ending December 31, 1999 and 1998, respectively, in connection
with operating leases on office space and equipment. Future minimum lease
payments as of December 31, 1999, are as follows:

<TABLE>
<S> <C>
2000................................................................ $ 64,454
2001................................................................ 48,830
2002................................................................ 33,585
2003................................................................ 2,640
--------
Total............................................................. $149,509
========
</TABLE>

F-27
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

NOTE 8--STOCKHOLDERS' EQUITY

Preferred Stock

The Company is authorized to issue up to 2,000,000 shares of preferred stock
with a par value of $.10 per share. All dividends accrue whether or not
declared or set aside. Since inception, the Company sold, via private
placements, the following shares of preferred stock:

Series A Preferred Stock. During 1997, the Company completed a private
placement, totaling $2,500,000 in proceeds, by the issuance of 312,500 shares
of Series A Convertible Preferred Stock. These shares have a par value of $.10
per share and were sold for $8.00 each to two accredited investors ("Series A
Investors").

The shareholders of the Series A Preferred Stock were entitled to cumulative
dividends at a rate of 4% per annum, payable in shares of the Company's Common
Stock based on a share price equal to the average closing price of such Common
Stock on the OTCBB for the 30 days prior to the particular dividend date.

Each of the Series A shares was convertible into 5.4 shares of common stock,
at the stockholders option, at any given time. The holders of the Series A
Preferred Stock were also (a) entitled to demand the registration of Common
Stock issued upon conversion of the Series A Preferred Stock at the cost of the
Company at any time after December 31, 1997, and (b) entitled to have such
converted shares of Common Stock registered at the Company's cost in connection
with any registration statement filed by the Company. If the holders of the
Series A Preferred Stock had not converted their shares to Common Stock within
three years of their issuance, the Company could redeem such shares for $8.00
per share plus any accrued and unpaid dividends. The agreement with the Series
A Shareholders provided for certain specific anti-dilution adjustments and
protective provisions.

On December 4, 1998, the Series A Investor converted 126,500 of the Series A
Preferred Stock for 683,100 shares of the Company's common stock. As of
December 31, 1998, 186,000 shares of Series A Preferred Stock remained
outstanding.

As of December 31, 1998, the Company had declared and paid stock dividends,
to the Series A Investor, totaling 70,217 shares of common stock. The market
value of the stock dividends, as of the dividend date, amounted to $111,849.
The Company accrued $20,536 of stock dividends payable to the Series A Investor
at December 31, 1998.

Effective December 31, 1999, all shares of Series A Preferred stock and
related accrued unpaid dividends were converted to common stock. (See below)

Series B Preferred Stock. On March 11, 1998, the Company completed a
$3,000,000 private placement by the issuance of 3,000 shares of Series B
Convertible Preferred Stock. These shares have a par value of $.10 and were
priced at $1,000 per share and were sold to two accredited investors ("Series B
Investors").

The preferred shares convert into common stock at a rate equal to 78% of the
five-day average closing bid price of the five consecutive days preceding the
conversion date. The discount from market price resulted in a deemed dividend
of approximately $830,000.

This series pays a 5% cumulative dividend payable in arrears at the time of
each conversion. The dividend is payable in cash or stock at the Company's
option. At any time, the Purchasers are entitled to convert the entire face
amount of the Series B Preferred Shares, plus accrued and unpaid dividends into
common stock. This series is subject to automatic conversion on March 11, 2000,
if not converted by that date. In connection

F-28
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

with this placement, an option to purchase 150,000 shares of common stock was
granted to Continental Capital & Equity Corporation, the placement agent, and
was valued at $93,000 in total using the Black Scholes model as discussed in
Stock Options, and recorded as a reduction to Paid in Capital. In the event of
liquidation, dissolution or winding up of the Company, the holders of Series B
Preferred Stock are entitled to share in the assets, if any, remaining after
payment of all debts and liabilities of the Company, and after payment to
Series A Preferred Stock holders in an amount of $8.00 per share, which right
is in preference to any payment to the holders of Common Stock.

During the months of July and August 1998, the Series B Investors exercised
their conversion right and converted 715 shares of preferred stock for
1,147,171 shares of the Company's Common Stock. During 1999, the Series B
Investors converted 605 shares of preferred stock for 608,680 shares of Common
Stock.

Upon conversion in 1998, the Series B Investors received stock dividends
amounting to 22,812 shares of common stock. The aggregate market value of the
stock dividends, as of the measurement date, was $20,275. At December 31, 1998,
stock dividends payable are estimated to be 121,444 shares. The Company accrued
$121,444 of stock dividends payable to the Series B Investors at December 31,
1998. Upon conversion in 1999, the Series B Investors received stock dividends
amounting to 51,523 shares of common stock. The aggregate market value of the
stock dividends, as of the measurement date, was $39,478.

During the month of February 2000, the Series B Preferred Stockholders
converted 760 shares of Series B Preferred Stock in exchange for 991,888 shares
of the Company's Common Stock. In connection with these conversions, the
Company issued 119,366 shares of accrued Common Stock dividends.

Effective as of March 11, 2000, the remaining 920 shares of Series B
Preferred Stock and related accrued dividends of $96,759 were automatically
converted into 560,766 shares of Common Stock.

Series C Preferred Stock. On July 28, 1998, the Company sold in a private
placement 220,750 shares of Series C Convertible Preferred Stock (the "Series C
Preferred Stock"), par value $.10 per share, for a purchase price of $10 per
share, to accredited investors (the "Series C Investors"). The Series C
Preferred Stock pay a 4% cumulative dividend payable in arrears at the time of
each conversion. Dividends were payable quarterly and in arrears on the first
day of each January, April, July, and October commencing on October 1, 1998, in
cash or stock at the Company's option. Each of the Series C Preferred Stock
converted into ten shares of common stock. In addition to the above-referenced
shares, an additional 11,038 Series C Preferred Stock were issued to Equity
Services, LTD. ("ESL"), as part of their compensation for placing the Series C
Preferred Stock. As of July 28, 1998, the market value of the shares issued to
ESL was approximately $110,000 and was recorded as a reduction to Paid in
capital.

On November 12, 1998, the Series C Investors converted 78,250 of the Series
C Preferred Stock for 782,500 shares of the Company's common stock.

Effective December 31, 1999, all shares of Series C Preferred Stock and
accrued unpaid dividends were converted to common stock. (See below)

Series D Preferred Stock. On December 31, 1998, the company entered into a
Series D Preferred Stock and Warrant Purchase Agreement to sell up to 5,000
shares of Series D Convertible Preferred Stock. These shares had a par value of
$.10 and were priced at $1,000 per share and were sold to accredited investors.
This agreement is broken down into three closings of 2,000 shares, 1,000
shares, and 2,000 shares respectively, each closing being subject to the
Company's meeting certain financial and/or operational targets.

F-29
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

As of December 31, 1998 the Company had met the first and second targets and
had received the funding for the first target. The Company recorded a
receivable for the second target, as of December 31, 1998, and reflected the
shares as issued in the Statement of Stockholders Equity. The funding for the
second target was received in January 1999. The final target was reached as of
February 28, 1999, and the final shares issued.

Additionally, the Company granted the Series D shareholders three warrants
to purchase a total of 2,500,000 shares of common stock, at an exercise price
of $1.25 per share. Using the Black Scholes valuation method, the Company
recorded approximately $720,000 of related cost, attributable to the first and
second issuances, and $275,000 attributable to the third issuance, as an offset
to additional paid in capital.

All of the Series D Convertible Preferred shares, warrants and accrued
dividends were forgiven as part of the sale transaction discussed in Note 4.

Series E Preferred Stock. On August 18, 1999, the Company completed a
$2,000,000 private placement by the issuance of 2,000 shares of Series E
Preferred Stock. These shares had a par value of $.10, were priced at $1,000
per share and were sold to accredited investors ("Series E Investors").

At any time, the Purchasers were entitled to convert the entire face amount
of the Series B Preferred Shares, plus accrued and unpaid dividends into common
stock. In connection with this placement, warrants to purchase 400,000 shares
of common stock at a price of $1.25 per share were issued to the Series E
Investors, and was valued at $74,000 in total using the Black Scholes model as
discussed in Stock Options, and recorded as a reduction to paid in capital.

An agreement was entered into on January 7, 2000, which would convert all
shares of Series A Preferred Stock, Series C Preferred Stock and Series E
Preferred Stock and accrued dividends to a new Series G Preferred Stock, which
in 7 days would convert to common stock. To induce conversion, the Series G
Preferred Shares would be converted based on a common share price of $.30 per
share, resulting in the issuance of 17,045,918 shares of common stock. Although
the conversion took place in March 2000, the conversion transaction has been
reflected in the accompanying statements as though it occurred during 1999. The
market price of the Company's common stock was $.27 at December 31, 1999.

Series 1 and Series 2 Preferred Stock. On December 2, 1999, the Company was
required to issue Series 1 Preferred Stock as part of the 1998 acquisition of
Cornell Transcription, Inc. Pre-acquisition liabilities reduced the issuable
preferred shares downward by 250 shares, resulting in an adjustment of the
purchase price by approximately $250,000. On December 31, 1999, the holders of
the preferred shares elected to convert their preferred shares to 1,464,654
shares of common stock.

On February 23, 2000, the Company issued 1,911 shares of Series 2 Preferred
Stock as planned deferred purchase price payments for transcription company
acquisitions. These shares were subsequently converted into 115,755 shares of
Common Stock.

During the month of March 2000, the Series 2 Preferred Stockholders
converted 1,757 shares of Series 2 Preferred Stock in exchange for 143,039
shares of the Company's Common Stock.

In May 2000, the Company issued and held in escrow 2,333 shares of Series 2
Preferred Stock. The shares were part of the planned deferred payments for the
acquisition of A Word Above, Inc.

Common Stock

In February 1998, the Company agreed to issue 30,000 shares of Common Stock
to a third party in exchange for consulting services, which shares were issued
in June 1998. Based on the fair market value, the Company valued the Common
Stock issuance at approximately $83,000 and recorded the related expense.

F-30
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

On March 6, 1998, the Company issued 98,323 shares of common stock in lieu
of cash salaries and bonuses to officers and certain employees. Based on the
fair market value of the common stock, the Company recognized approximately
$234,000 of related salary expense.

On March 6, 1998, the Company issued 14,286 shares of common stock to two
third parties in consideration for their consulting services. Based on the fair
market value of the common stock, the Company recognized approximately $34,000
of related expense.

On April 30, 1998, the Company issued 45,113 shares of common stock to an
officer upon resignation. Based on the fair market value of the common stock,
the Company recognized approximately $113,000 of related expense.

On October 16, 1998, the Company issued 25,000 shares to a third party in
exchange for office furniture. Based on the fair market value of the common
stock, the Company recorded the asset at $20,300.

During 1999, the Company issued 17,820 shares for services. Based on the
fair market value of the common stock, the Company recorded $19,034 of related
expense.

On February 28, 2000, the Company issued 1,054,852 shares of Common Stock in
lieu of cash salaries, expense reimbursements, and severance pay to an officer
of the Company and to two former officers.

During the month of March 2000, certain employees and several third party
individuals exercised stock options and stock warrants. As the result of this,
the Company issued 670,378 shares of Common Stock.

In May 2000, the Company issued 572,132 shares of common stock to Lonestar
Medical Transcription USA, Inc. in a cashless exercise of a warrant to purchase
800,000 shares of the Company's common stock.

In May 2000, the Company issued 58,000 shares of common stock as contingent
purchase price for the acquisition of PRN Transcription, Inc.

See Preferred Stock section for conversions to and dividends paid in Common
Stock related to preferred stock instruments.

Stock Options

In August 1996, the Company adopted the 1996 Stock Option Plan (the "Plan")
that provides for the issuance of stock options to employees, directors (who
are also employees), independent contractors, and consultants. The aggregate
number of shares available for issuance under the Plan is the greater of 7,000
shares, or 7% of the number of shares of the Company's Common Stock which are
outstanding from time to time.

Generally, options granted have five- to ten-year terms and vest and become
fully exercisable in three years. Stock options issued under the Plan can be
either incentive stock options or nonqualified stock options.

In December 1996, the Company adopted the 1996 Director Stock Option Plan
(the "Director Plan") that provides for the issuance of stock options to the
directors of the Company. The aggregate number of shares available for issuance
under the Director Plan is the greater of 3,000 shares, or 3% of the number of
shares of the Company's common stock which are outstanding from time to time.
Generally, options granted have five-year terms and vest and become fully
exercisable in three years. Stock options issued under the Director Plan can be
either incentive stock options or nonqualified stock options.

In October 1997, both the Plan and the Director Plan were amended by the
1997 Incentive Plan (the "Amended Plan"). The Amended Plan assumed all
outstanding stock options granted under the prior plans without modification.
The Amended Plan provides for the issuance of stock options, stock appreciation
rights, supplemental payments, restricted stock, performance units, performance
shares, and other stock-based awards.

F-31
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

Designated employees, outside directors, and consultants are eligible to
participate. An aggregate of 3,000,000 shares of Common Stock is available for
issuance under the Amended Plan. Generally, options granted have ten-year terms
and vest and become fully exercisable in three years. Stock options issued
under the Amended Plan can be either incentive stock options or nonqualified
stock options.

During 1999 and 1998, the Company issued nonqualified stock options under
the Amended Plan, which had exercise prices approximate or equal to the fair
market value of the Common Stock at the date of grant.

A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
Weighted
Average Exercise
Options Price
-------- --------
(In thousands,
except price per
share)
<S> <C> <C>
Outstanding--December 31, 1997............................. 1,871 $3.08
Exercised.................................................. (35) $2.55
Granted.................................................... 1,057 $1.30
Forfeited.................................................. (781) $3.17
------
Outstanding--December 31, 1998............................. 2,112 $2.14
Exercised.................................................. (10) $1.00
Granted.................................................... 2,108 $1.07
Forfeited.................................................. (2,720) $1.41
------
Outstanding--December 31, 1999............................. 1,490 $1.95
======
Options exercisable at December 31, 1999 .................. 919 $1.82
======
</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Weighted average fair value of options granted during
the period............................................. $ .82 $ 1.36
Weighted average remaining contractual life............. 8.4 Years 8.9 Years
Range of exercise price................................. $.61-$4.00 $.61-$2.88
</TABLE>

From January 1, 2000 through June 30, 2000, the Company granted to employees
and directors additional options to purchase 1,075,000 shares of common stock
at exercise prices ranging from $0.31 to $0.63. Subsequent to June 30, 2000,
the Company granted additional options to purchase a total of 4,200,000 shares
of common stock at an exercise price of $0.31, of which 4,100,000 are
contingent upon stockholder approval to increase the number of the Company's
authorized shares to 85,000,000.

F-32
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

The Company applies APB 25 in accounting for the Plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. Pro
forma information regarding net income and earnings per common share is
required by SFAS 123 as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model ("Black--Scholes") with the following assumptions:

<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Risk free interest rate................................ 5.0% 5.05%
Dividend yield......................................... 0% 0%
Volatility factor...................................... 1.21 0.73
Weighted average expected life--stock options.......... 3 Years 4 Years
Weighted average expected life--warrants............... 1.5 Years 1.5 Years
</TABLE>

The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Had
compensation for the Company's stock-based compensation plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with the methods of SFAS123, the Company's net income and earnings per common
share would have been adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998
------------------------ ------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- -----------
(in thousands, except price per share)
<S> <C> <C> <C> <C>
Net loss.................... $(2,655,913) $(3,385,625) $(8,320,519) $(9,517,608)
Loss per common share....... $ (0.16) $ (0.24) $ (0.68) $ (0.77)
</TABLE>

Warrants and Non-employee Options

The following is a description of the outstanding warrants and stock options
issued for services by the Company. The Company has determined the value of the
warrants issued using either the minimal value method for all warrants granted
prior to the Company's becoming effectively publicly traded on February 4,
1997, or the Black-Scholes model and the risk-free rate, dividend rate,
volatility and weighted average expected life discussed above for stock options
for all grants subsequent to February 4, 1997.

On November 1, 1997, the Company granted to two consultants options to
purchase 150,000 shares of the Company's common stock, each with an exercise
price of $4.88. The options were granted in exchange for consulting services.
On April 23, 1998, the related consulting agreements were extended in term and
the option agreement was modified to provide for immediate vesting of the
options. Of the options granted, 100,000 were granted to a board member whose
consulting services were devoted to the development of the Company's new
transcription related product VoiceCommander99(TM). As a result of these option
grants, the Company has

F-33
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

recorded $309,000 of deferred consulting expense. The expense was amortized
over the life of the agreement that expired on March 31, 1999. The stock
options were valued using the Black-Scholes valuation model (assumptions
described above). For the years ended December 31, 1999 and 1998, the Company
has recognized approximately $62,000 and $247,000 of related expense,
respectively.

On June 1, 1998, the Company granted to three consultants options to
purchase 382,000 shares of the Company's common stock, each with an exercise
price of $1.88. The options were granted in exchange for consulting services.
Of the options granted, 250,000 were granted to a board member whose consulting
services were devoted to the development of the Company's new transcription
related product VoiceCommander99(TM). As a result of these option grants, the
Company has recorded $288,000 of deferred consulting expense. The expense is
amortizable over the remaining life of the consulting agreements. The stock
options were valued using the Black-Scholes valuation model (assumptions
described above). For the years ended December 31, 1999 and 1998, the Company
has recognized approximately $85,000 and $203,000, respectively, of related
expense.

On May 15, 1998, the Company granted to the Company's Medical Advisory Board
(the "MAB") options to purchase 255,000 shares of the Company's common stock,
each with an exercise price of $2.06. The options were granted in exchange for
three years worth of advisory services related to the Company's business
efforts in the health care industry. On November 20, 1998 the Company and MAB
mutually agreed to disband the MAB, for business reasons. In consideration for
the term held by the MAB, the Company modified the previous grant and allowed
the members of the MAB to keep fully vested options to purchase 85,000 shares
of common stock. All other terms of the option agreements remained the same. As
a result of the option grants, the Company has recognized approximately $73,950
of consulting expense. The stock options were valued using the Black-Scholes
valuation model (assumptions described above).

In August 1996, the Company granted to officers (and founding stockholders)
250,000 stock warrants with an exercise price of $0.14 per share, and to non-
employee directors of the Company 150,000 stock warrants with an exercise price
of $0.14. The warrants were granted under the Director Plan discussed above and
have a five-year life. At December 31, 1999, 20,000 warrants are outstanding.

On September 16, 1996, the Company entered into a two-year Licensing
Agreement with a professional athlete to use his name and likeness in marketing
and promotional materials to be produced and published by the Company.
Consideration paid for this licensing arrangement was 500,000 shares of Common
Stock (included in the total shares outstanding at December 31, 1996) and a
warrant to purchase another 500,000 shares at $1.50 per share at any time on or
before August 31, 2001. None of the warrants have been exercised as of December
31, 1999.

On July 21, 1997 the Company granted to a broker of the Private Placement a
warrant to purchase 100,000 shares of Common Stock at an exercise price of
$1.78. In addition to this, on July 23, 1997, the Company sold to the same
broker, for an aggregate price of $100, a warrant to purchase up to 168,750
shares of Common Stock for $1.78 per share. Broker fees of $345,750 were offset
against the proceeds of the Private Placement. The broker fees were estimated
using the Black-Scholes model. These warrants expired in 1999.

F-34
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

In February 1998, the Company granted to a third party three warrants to
purchase 85,000 shares of common stock. The three warrants are structured as
follows:

<TABLE>
<CAPTION>
Number of
Shares
Underlying Exercise
Warrant Price
---------- --------
<S> <C> <C>
First warrant............................................ 30,000 $4.00
Second warrant........................................... 25,000 $4.25
Third warrant............................................ 30,000 $4.50
</TABLE>

The warrants were granted in exchange for consulting services. Using the
Black Scholes model, the Company assessed the fair value of the warrants at
$118,700. At December 31, 1998, the Company recorded related expenditures of
$94,960 and recognized related deferred expenses of $23,740. These warrants
expired in 1999.

On March 11, 1998, the Company granted to a third party a warrant to
purchase 150,000 shares of the Company's common stock, with an exercise price
of $2.30. The warrant was granted in exchange for their assistance with the
private placement of 3,000 shares of Series B Convertible Preferred Stock. As a
result of this option grant, the Company recognized approximately $93,000 of
expense allocable to paid in capital. The warrant was valued using the Black-
Scholes model.

On July 22, 1998, the Company granted to an investment banking firm warrants
to purchase 500,000 shares of the Company's common stock, with an exercise
price of $1.50. The warrants were granted in exchange for their financial
advisory services and assistance with private placements. As a result of these
warrant grants, the Company has recorded $140,000 of deferred consulting
expense. The expense is amortizable over the one-year life of the agreement.
For the years ended December 31, 1999 and 1998, the Company recognized
approximately $82,000 and $58,000 of consulting expense, respectively. The
warrants were valued using the Black-Scholes model.

On July 31, 1998, the Company granted to a third party a warrant to purchase
220,750 shares of the Company's common stock, with an exercise price of $1.50.
The warrant was granted in exchange for the third party's assistance with the
private placement of 220,750 shares of Series C Convertible Preferred Stock. As
a result of this option grant, the Company recognized approximately $66,000 of
cost allocable to paid-in-capital. The warrant was valued using the Black-
Scholes model.

On November 20, 1998, the Company agreed to grant to a third party three
warrants. The first warrant grants the option to purchase 150,000 shares of
common stock at an exercise price of $1.00. The second warrant grants the
option to purchase 100,000 shares of common stock at an exercise price of
$2.00. The third warrant grants the option to purchase 100,000 shares of common
stock at an exercise price of $3.00. The third party was engaged to perform
financial advisory services. As a result of these grants, the Company has
estimated and recorded $59,000 of deferred consulting expense, based on an
analysis using the Black-Scholes model. The expense is amortizable over the
remaining life of the advisory agreement. For the years ended December 31, 1999
and 1998, the Company has recognized approximately $29,000 and $30,000,
respectively, of related expense. The warrants were valued using the Black-
Scholes model. These warrants expired in 1999.

During December 1998, the Company granted 355,500 warrants to officers, a
director and a third party (165,084 warrants to officers, 60,416 warrants to a
director, and 130,000 warrants to a third party) at an exercise price range of
$.94 per share to $1.06 per share. The warrants were granted in connection with
Bridge

F-35
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

Loans made by these individuals to the Company. The Company has recognized
finance costs of approximately $122,000, based on an analysis using the Black-
Scholes model. The Company recorded this charge in interest expense in the
fourth quarter.

In connection with the sale of the Series D Preferred Stock, on December 31,
1998, the Company granted to the Series D Investors two warrants to purchase
common stock. The first and second warrant grant the Series D Investor the
option to purchase 1,500,000 and 500,000 shares of the Company's common stock,
respectively, at an exercise price of $1.25. The Company has estimated and
recorded $720,000 as a reduction to paid in capital, based on an analysis using
the Black Scholes model.

In connection with the sale of 2,000 shares of Series D Preferred Stock in
1999, the Company granted to the Series D Investors a warrant to purchase
500,000 shares of the Company's common stock at $1.25 per share. In connection
with debt related to the Series D Investors, an additional 1,125,000 warrants
were issued in 1999. The Company recorded $394,000 in finance charges, based on
an analysis using the Black-Scholes model. As part of the extinguishment
transaction, all of the warrants issued to Series D Investors in 1999 and 1998
were forgiven, and a new warrant to purchase 800,000 shares of stock at $.37
per share was issued.

During 1999, in connection with the sale of Series E Preferred Stock, a
total of 550,000 warrants to purchase common stock were granted at an exercise
price of $1.25. The Company recorded $74,000 as a reduction to paid-in capital,
and $42,000 was recorded as finance charges.

A summary of the Company's warrant activity and related information follows:

<TABLE>
<CAPTION>
Weighted
Average
Exercise
Warrants Price
-------- --------
(In thousands,
except price per
share)
<S> <C> <C>
Outstanding--December 31, 1997............................. 1,680 $1.57
Exercised.................................................. (17) $0.14
Granted.................................................... 4,107 $1.60
Forfeited.................................................. (150) $2.30
------
Outstanding--December 31, 1998............................. 5,620 $1.58
Granted.................................................... 2,975 $1.01
Forfeited.................................................. (4,379) $1.26
------
Outstanding--December 31, 1999............................. 4,216 $1.39
======
</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Weighted average fair value of warrants granted during
the period............................................. $ .33 $ 1.41
Weighted average remaining contractual life............. 2.1 Years 2.5 Years
Range of exercise price................................. $.14-$4.88 $.14-$4.88
</TABLE>

In May 2000, in consideration for a forbearance agreement relating to the
issuance of convertible preferred stock in connection with an acquisition, AVRI
granted three warrants to individuals to purchase 118,750, 118,750 and 12,500
shares of common stock at the lower of $1.75 per share or the average closing
price of the common stock for the 30 day period immediately preceding the
effective date of the warrant. The Company has estimated and recorded $70,000
as additional cost for the purchase of Cornell Transcription, Inc. based on an
analysis using the Black Scholes model. (see Note 17)

F-36
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

NOTE 9--EARNINGS PER SHARE

The following table sets forth the computation of basic and dilutive loss
per share:

<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------------ ------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss................... $(1,095,482) $(4,109,470) $(2,655,913) $(8,320,519)
Preferred stock dividend... -- (212,921) (619,595) (1,161,516)
----------- ----------- ----------- -----------
Numerator for basic and
diluted earnings per
share--loss available to
Common Stockholders....... $(1,095,482) $(4,322,391) $(3,275,508) $(9,482,035)
=========== =========== =========== ===========
Denominator:
Denominator for basic and
diluted earnings per
share--weighted average
shares outstanding........ 38,042,046 16,077,881 16,367,383 13,867,732
</TABLE>

All outstanding options and warrants are antidilutive and therefore have not
been included using the treasury stock method for diluted computation. All
potential common shares from conversions of preferred stock are antidilutive
and have been excluded from diluted computations.

NOTE 10--INCOME TAXES

At December 31, 1999, the Company had a net operating loss carryforward of
approximately $14,500,000 expiring between 2010 and 2019.

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31, 1999
and 1998 are as follows:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation expense............................... $ 14,370 $ 5,870
Capitalized research and development............... -- 124,905
----------- -----------
Total deferred tax liabilities..................... 14,370 130,775
----------- -----------
Deferred tax assets:
Net operating loss carryforward.................... 4,914,811 4,420,189
Research and development credit.................... 245,894 165,894
Stock based compensation expense................... 560,878 316,831
Allowance for doubtful accounts.................... 25,466 11,050
Other.............................................. 1,169 1,169
----------- -----------
Total deferred tax assets.......................... 5,748,218 4,915,133
Net deferred tax asset............................. 5,733,848 4,784,358
Valuation allowance for deferred tax assets........ (5,733,848) (4,784,358)
----------- -----------
Net deferred taxes................................. $ -- $ --
=========== ===========
</TABLE>

F-37
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

The valuation allowance for the full amount of deferred tax assets has been
reserved due to uncertainty concerning the Company's ability to utilize the
benefit of the net operating loss.

NOTE 11--NON-CASH TRANSACTIONS

Following is a list of non-cash transactions.

<TABLE>
<CAPTION>
For the Six
Months Ended For the Year Ended
June 30, December 31,
---------------- ------------------
2000 1999 1999 1998
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Preferred stock payable issued in
connection with
acquisitions............................. $ -- $442,895 $975,647 $ 708,827
Capital lease obligations assumed in
connection with acquisitions............. -- 46,894 46,894 107,846
Common stock issued in connection with
acquisition.............................. 170,382 -- -- --
Note payable issued in connection with
acquisition.............................. -- 175,000 175,000 297,884
Issuance of common stock for furniture.... -- -- -- 20,300
Stock dividend payable.................... -- -- 619,595 156,536
Stock and warrants issued for services and
finance costs............................ -- -- 455,744 1,104,430
Stock issued in lieu of cash
compensation............................. 226,892 32,916 32,916 346,816
Warrants issued in connection with bridge
financing charged to interest expenses... -- -- -- 121,959
Issuance of common stock, preferred stock
and warrants for private placement fees.. -- -- -- 879,225
Issuance of preferred stock in connection
with Series D Funding.................... -- -- 1,000,000
Deemed dividend on Series B Preferred..... -- -- 852,995
Preferred stock issued in payment of
debt..................................... 423,543 -- 498,866 --
Conversion of Series A, Series C and
Series E and related dividend to common
stock.................................... -- -- 205,575 --
Conversion of Series B to common stock.... 1,672 -- 609 --
Writedown of prepaid software resell
rights................................... -- -- 329,100 --
Common stock issued for dividends......... 189,606 -- 39,478 --
Issuance of common stock for Accrued
Liabilities.............................. 113,350 -- -- --
Conversion of Series 2 to common stock.... 175,523 -- -- --
</TABLE>

NOTE 12--401(K) PLAN

The Company has a 401(K) plan, which allows all of the company's employees
to participate. The Company does not match any of the employee's contributions.

NOTE 13--FOREIGN OPERATIONS

The Company had medical transcriptions operations in the Philippines which
were sold during 1999.

NOTE 14--JOINT PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENT

On December 31, 1997, the Company entered into a joint product development
and distribution agreement with Voice It Worldwide ("Voice It"). Both the
Company and Voice It agreed to commit technical and financial

F-38
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

resources as would have been necessary to carry out the development of a joint
product. In connection with this agreement, the Company purchased 471,700
shares of Voice It common stock at a price of $1.06 per share for a total of
$500,000 and Voice It purchased 50,000 licenses of VoiceCommander(TM) (formerly
known as SpeechCommander) for $1,000,000. Both transactions were reflected in
the December 31, 1997 financial statements. The Company believes that Voice It
has breached its agreement with the Company by, among other things, failing to
make contractually agreed upon payments for the software licenses. Because of
this and the lack of success in the joint product development and distribution
agreement, and Voice It's Chapter 11 bankruptcy, the Company has abandoned the
strategy of joint development and distribution.

During the second quarter of 1998, the collectibility of the receivable due
from Voice It was assessed to be uncertain. Because of this, the Company wrote-
off the remaining receivable balance of approximately $708,000.

On April 13, 1998, Voice It's common stock was delisted from trading on The
Nasdaq Small Cap Market for failure to comply with certain NASDAQ maintenance
standards. The common stock of Voice It is now traded on the Over The Counter
Bulletin Board. Subsequent to this event, the market price of Voice It's common
stock dropped and has remained at a lower value. Furthermore, in November 1998,
Voice It declared Chapter 11 Bankruptcy. Based on these facts, at the end of
1998 the Company deemed its investment in Voice It to be permanently impaired
and has recognized a loss of $500,000.

NOTE 15--VALUE ADDED RESELLER AGREEMENT

On September 30, 1998 the Company entered into a "Value Added Reseller
Agreement" ("VAR Agreement") with Lernout & Hauspie Speech Products (L&H). L&H
develops and licenses dictation software for use in the health care industry.

The VAR Agreement gave the Company rights to a world-wide non-exclusive
license of certain software products developed by L&H. On December 27, 1998,
this agreement was amended to include additional requirements. In accordance
with the amended agreement, the Company prepaid L&H $1,000,000. The entire
prepaid amount of $1,000,000 is reflected in the December 31, 1998 financial
statements of which $560,000 is classified as long term.

During 1999 the Company made additional payments of $ 300,000. During late
1999, the Company shifted its business focus, discontinuing development of the
license related technology. The vendor agreed to exchange the license related
payments for rights to produce and resell 3,291 units of a completed market
transcription product. At December 31, 1999 prepaid software resale rights are
stated at estimated resale value less disposal costs, resulting in a charge to
1999 operations of $329,100.

NOTE 16--INVESTMENTS

On September 12, 1997, the Company entered into an agreement with Wade Cook
Financial Corporation ("Wade"). In accordance with the terms of the agreement,
the Company exchanged 100,000 shares of its Common Stock for 14,433 shares
(which subsequently have split to 129,897 shares) of Wade's common stock. The
shares acquired are not registered under the Securities Act of 1933 or under
any state securities laws. As the result of this, the Company cannot transfer
or sell the acquired shares. As of December 31, 1998, physical transfer of
relevant stock certificates between the Company and Wade had not occurred.
Therefore, the Company wrote-off this investment and realized a loss of
$303,125 on this investment.

F-39
<PAGE>

APPLIED VOICE RECOGNITION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998 and June 30, 2000

NOTE 17--COMMITMENTS AND CONTINGENCIES

The Company was obligated to register the shares issued in the acquisition
of Cornell Transcription, Inc. on or before December 31, 1999. The Company was
unable to register these shares on a timely basis and entered into an agreement
granting the Company an extension until August 15, 2000 to register the shares.
The Company agreed to pay interest of 1% per month based on the market value of
the securities to be registered. The market value is calculated using the
average final transaction price for the 30-day period prior to May 5, 2000. The
agreed market value of the securities is $1,523,240. In addition, warrants to
purchase 250,000 shares of Common Stock were issued and an estimate of interest
to be incurred through August 15, 2000 was included in accrued liabilities at
December 31, 1999. On August 12, 2000, a registration statement on Form SB-2
became effective, registering the shares issued in the acquisition of Cornell
Transcription Inc. The Company also registered shares for the settlement in
stock of any accrued interest payable, which were issued to the previous owners
of Cornell Transcription, Inc. in late August 2000.

NOTE 18--SUBSEQUENT EVENTS

During the third quarter of 2000, the Company identified an impairment of
the prepaid software rights carried at $970,000 in the June 30, 2000 financial
statements. Based on current disposition plans, the asset is not fully
recoverable and the Company will write down the asset in the third quarter. The
amount of the write-off, which is currently being estimated, is expected to be
in the range of $500,000 to $650,000.

In July 2000, the Company issued 500,000 shares of common stock valued at
$125,000 as payment for software development.

In July and August 2000, 365,500 common shares were issued to officers,
employees and consultants in lieu of cash compensation of $89,125.

In August 2000, the Company issued 109,307 shares of common stock for
payment of interest in the amount of $114,663.

On September 1, 2000, the Company issued six convertible promissory notes in
the aggregate amount of $480,000. These notes are convertible into at least
3,200,000 shares of common stock.

Additionally, in September 2000, the Company issued 6,666,666 shares of
common stock at a purchase price of $0.15 per share and a warrant to the
placement agent to acquire 1,000,000 shares of common stock at an exercise
price of $0.15 per share.

Effective October 26, 2000 a convertible promissory note was converted into
1,804,747 shares of common stock.

F-40
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. Indemnification Of Directors And Officers

Section 145 of the General Corporation Law of Delaware, commonly referred to
as the DGCL, permits a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action. In an
action brought to obtain a judgment in the corporation's favor, whether by the
corporation itself or derivatively by a stockholder, the corporation may only
indemnify for expenses, including attorney's fees, actually and reasonably
incurred in connection with the defense or settlement of such action, and the
corporation may not indemnify for amounts paid in satisfaction of a judgment or
in settlement of the claim. In any such action, no indemnification may be paid
in respect of any claim, issue or matter as to which such person shall have
been adjudged liable to the corporation except as otherwise approved by the
Delaware Court of Chancery or the court in which the claim was brought. In any
other type of proceeding, the indemnification may extend to judgments, fines
and amounts paid in settlement, actually and reasonably incurred in connection
with such other proceeding, as well as to expenses (including attorneys fees).

The statute does not permit indemnification unless the person seeking
indemnification has acted in good faith and in a manner reasonably believed to
be in, or not opposed to, the best interests of the corporation and, in the
case of criminal actions or proceedings, the person had no reasonable cause to
believe his conduct was unlawful. The statute contains additional limitations
applicable to criminal actions and to actions brought by or in the name of the
corporation. The determination as to whether a person seeking indemnification
has met the required standard of conduct is to be made:

. by a majority vote of a quorum of disinterested members of the board of
directors;

. by independent legal counsel in a written opinion, if such a quorum does
not exist or if the disinterested directors so direct; or

. by the stockholders.

Our Certificate of Incorporation and Bylaws require us to indemnify our
directors, officers, employees and agents to the fullest extent permitted under
Delaware law. Our Certificate of Incorporation eliminates the personal
liability of our directors to us or our stockholders for monetary damages for
breach of their fiduciary duties, except for liability:

. for any breach of a director's duty of loyalty to us or our
stockholders;

. for acts or omissions not in good faith or that involve intentional,
misconduct or a knowing violation of law;

. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in section 174 of the Delaware General
Corporation Law; or

. for any transaction from which a director derived an improper personal
benefit.

We have officers' and directors' indemnity insurance against expenses of
defending claims or payment of amounts arising out of good-faith conduct
believed by the officer or director to be in or not opposed to our best
interest.

II-1
<PAGE>

ITEM 25. Other Expenses Of Issuance And Distribution

The following table sets forth the various expenses, all of which will be
borne by us, in connection with the sale and distribution of the securities
being registered. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee.

<TABLE>
<S> <C>
SEC Registration Fee................................................ $ 1,151
Accounting fees and expenses........................................ 10,000
Legal fees and expenses............................................. 25,000
Printing and mailing expenses....................................... 15,000
Miscellaneous....................................................... 2,000
-------
Total........................................................... $53,151
=======
</TABLE>

ITEM 26. Recent Sales Of Unregistered Securities

We have set forth below our sales of unregistered securities for each of the
years in the three-year period ended December 31, 1999 and for the quarters
ended March 31, 2000, June 30, 2000 and September 30, 2000.

Year Ended December 31, 1997

In January 1997, we issued a warrant to purchase up to 150,000 shares of our
common stock at an exercise price of $1.60 to Rick Huttner, one of our
directors, in exchange for financial consulting services.

In February 1997, we issued a warrant to purchase up to 50,000 shares of our
common stock to an individual in exchange for financial consulting services.

In March 1997, we sold 100,000 shares of our common stock to an unaffiliated
investor at a purchase price of $1.60 per share for a total of $250,000.

In April 1997, we issued a total of 100,000 shares of our common stock to
two individuals in exchange for financial consulting services.

In August and September, 1997, we completed the private placement of
1,595,625 shares of our common stock for a purchase price of $1.60 per share
and 312,500 shares of our series A preferred stock, par value $.01 per share
for a purchase price of $8.00 per share. We closed the first offering of
125,000 shares of the series A preferred stock on August 1, 1997 for a purchase
price of $8.00 per share for an aggregate of $1,000,000, and closed the second
offering of 187,500 shares of the series A preferred stock on August 11, 1997
for an aggregate of $1,500,000. Additionally, we closed our offering of common
stock on August 27, 1997 and received the aggregate purchase price of
$2,553,000. In connection with this private placement, we issued a total of
135,156 shares of our common stock to the placement agents for their services
as well as an option for 168,750 shares at an exercise price of $1.78, and a
warrant for 100,000 shares with exercise prices equal to 75% of the average
closing price of our common stock during the 5 trading days immediately prior
to the date the warrant is exercised.

In September 1997, we issued 100,000 shares of our common stock in exchange
for 14,433 shares of common stock in Wade Cook Financial Corporation as
described in note 16 to our consolidated financial statements for the year
ended December 31, 1999, included herein. Also in September 1997, we issued
warrants to purchase 100,000 shares of our common stock to Rick Huttner, one of
our directors, in exchange for consulting services.

In October 1997, we issued 7,500 shares of our common stock as payment for
office furniture.

In November 1997, we issued 10,000 shares of our common stock to Rick
Huttner, one of our directors, in exchange for consulting services.

II-2
<PAGE>

During December 1997, Akin Olajuwon exercised options for a total of 11,100
shares of our common stock at an exercise price of $1.38 for a total amount
paid to us of $15,318.

Over the course of 1997, we issued warrants to purchase a total of 580,000
shares of our common stock at an exercise price of $1.60 per share to a total
of 10 investors in connection with $580,000 in bridge loans made to us by these
investors.

In addition, we issued 333,332 shares of our common stock to our directors
under our 1996 Director Stock Option Plan at exercise prices between $2.75 and
$3.75, and options to purchase 1,766,000 shares of our common stock to
employees under our 1996 Stock Option Plan at exercise prices between $2.50 and
$5.38.

Year Ended December 31, 1998

Series A Preferred Stock. On December 4, 1998, we issued 683,100 shares of
our common stock upon the conversion of 126,500 shares of our series A
preferred stock by Entrepreneurial Investors, Ltd., the holder of our series A
preferred stock. As of December 31, 1998, we had declared and paid stock
dividends to Entrepreneurial Investors, totaling 70,217 shares of our common
stock. We relied upon the exemption provided by Section 3(a)(9) under the
Securities Act of 1933 for these issuances.

Series B Preferred Stock. On four occasions during the months of July and
August 1998, we issued shares of our common stock when the holders of our
series B preferred stock exercised their conversion rights and converted 715
shares of the series B preferred stock for 1,147,171 shares of our common
stock. Upon conversion, the Series B Investors received stock dividends
amounting to 22,812 shares of our common stock. We relied upon the exemption
provided by Section 3(a)(9) under the Securities Act of 1933 for these
issuances.

On March 11, 1998, we completed a $3,000,000 private placement of 3,000
shares of our series B convertible preferred stock. These shares have a par
value of $.10 and were priced at $1,000 per share and were sold to two
accredited investors. In connection with this placement, we granted an option
to purchase 150,000 shares of our common stock to Continental Capital & Equity
Corporation for investor relations services.

Series C Preferred Stock. On November 12, 1998, we issued shares of our
common stock when certain of the series C preferred holders converted 78,250 of
our series C preferred stock for 782,500 shares of our common stock. As of
December 31, 1998, we had declared and paid stock dividends, to the series C
investors, totaling 25,225 shares of our common stock. In addition, on January
1, 1999, we declared a stock dividend totaling 14,556 shares to the series C
investors. We relied upon the exemption provided by Section 3(a)(9) under the
Securities Act of 1933 for these issuances.

Series D Preferred Stock. On December 31, 1998, we entered into a Series D
Preferred Stock and Warrant Purchase Agreement to sell up to 5,000 shares of
our series D convertible preferred stock to L&H Investment Co., N.V., an
accredited investor. These shares have a par value of $.10 and were priced at
$1,000 per share. This agreement was broken down into three closings of 2,000,
1,000, and 2,000 shares, respectively. Each closing was subject to our meeting
financial and/or operational targets.

As of December 31, 1998, we had met the first and second targets and had
received the funding for the first target. We received the funding for the
second target in January 1999. The final target was based on results as of
February 28, 1999. We met the February targeted results and received the third
funding under the agreement in March 1999.

Additionally, we granted L&H Investment three warrants to purchase a total
of 2,500,000 shares of our common stock, at exercise price of $1.25 per share.
The three warrants were issued in connection with the first, second, and third
closing described above to purchase our common shares as follows: 1,500,000;
500,000; and 500,000, respectively.

II-3
<PAGE>

Common Stock. In February 1998, we agreed to issue 30,000 shares of our
common stock, to a third party, in exchange for consulting services, which were
issued in June 1998.

On March 6, 1998, we issued 98,323 shares of our common stock, in lieu of
cash salaries and bonus, to officers and employees.

On March 6, 1998, we issued 14,286 shares of our common stock to two third
parties in consideration for consulting services.

On April 30, 1998, we issued 45,113 shares of our common stock to Jan Carson
Connolly upon her resignation as one of our officers.

On October 16, 1998, we issued 25,000 shares of our common stock to a third
party in exchange for office furniture.

Stock Options. On November 1, 1997, we granted to two consultants options to
purchase 150,000 shares of our common stock, each with an exercise price of
$4.88. We granted the options in exchange for consulting services. On April 23,
1998, we extended the terms of the related consulting agreements and modified
the option agreement to provide for immediate vesting of the options. Of the
options granted, 100,000 were granted to Michael Wilson, a board member, whose
consulting services were devoted to the development of our new transcription
related product VoiceCOMMANDER 99 (TM).

On June 1, 1998, we granted to three consultants options to purchase 382,000
shares of our common stock, each with an exercise price of $1.88. We granted
the options in exchange for consulting services. Of the options granted,
250,000 were granted to Michael Wilson, a board member, whose consulting
services were devoted to the development of our new transcription related
product VoiceCOMMANDER 99 (TM).

On May 15, 1998, we revised options granted to our Medical Advisory Board
options to purchase 85,000 shares of our common stock. These options were
granted in exchange for consulting services.

Year Ended December 31, 1999

Series B Preferred Stock. During 1999, we periodically issued shares of our
common stock when the holders of our series B preferred stock exercised their
conversion rights and converted an aggregate of 605 shares of the series B
preferred stock into 608,680 shares of our common stock. As of December 31,
1999, the series B investors received stock dividends amounting to 51,523
shares of our common stock. We relied upon the exemption provided by Section
3(a)(9) under the Securities Act of 1933 for these issuances.

Series D Preferred Stock. Effective December 20, 1999, we sold the net
assets and contracts of some of our medical transcription service operations to
Lonestar Medical Transcription USA, Inc. The parent of Lonestar Medical
Transcription, L&H Investment Co., N.V., was the series D preferred stock
holder prior to the sale. In exchange for the sale, L&H Investment retired all
of its holdings in series D preferred stock, which amounted to $5.0 million. In
addition to this, L&H Investment also forgave $3.5 million in debt; $94,360 of
accrued interest; $318,458 of accrued, unpaid dividends; and converted warrants
to purchase 3.5 million shares of our common stock at $1.25 a share to warrants
to purchase 800,000 shares of our common stock at $.37 share.

Series E Preferred Stock. On August 18, 1999, we completed a $2,000,000
private placement of 2,000 shares of series E convertible preferred stock.
These shares have a par value of $.10 and were priced at $1,000 per share and
were sold to Greenwich, AG.

Series 1 Preferred Stock. On December 31, 1999, we issued 448.866 shares of
series 1 preferred stock as deferred payment of a portion of the purchase price
for our acquisition of assets from Cornell Transcription, Inc. in accordance
with the terms of the Asset Purchase Agreement dated December 1, 1998. On
December 31, 1999, Cornell Transcription, Inc. converted those 448.866 shares
of series 1 preferred stock into 1,464,654 shares of our common stock. We
relied upon the exemption provided by Section 3(a)(9) under the Securities Act
of 1933 for these issuances.

II-4
<PAGE>

Series 2 Preferred Stock. On December 31, 1999, we issued 500 shares of
series 2 preferred stock as deferred payment of a portion of the purchase price
for our acquisition of Linda Willhite Transcription in accordance with the
terms of the Asset Purchase Agreement dated December 31, 1998.

Year Ended December 31, 2000

Series A Preferred Stock. On January 20, 2000, we entered into a Stock
Exchange Agreement with the holder of our series A preferred stock,
Entrepreneurial Investors, Ltd., to exchange their shares of preferred stock
for shares of series G preferred stock based on the primary terms set forth in
a Letter Agreement dated January 7, 2000. Those terms included the series G
preferred stock having a reduced conversion price with a mandatory conversion
provision that requires the series G shares to be converted into our common
stock within seven days of their issuance. The effective result being the
resetting of the conversion price for the series A preferred stock from $1.48
to $.30, followed by the prompt conversion of the preferred stock into our
common stock. On March 23, 2000, Entrepreneurial Investors converted its
186,000 of series A preferred stock into 14,880 shares of series G preferred
stock. Upon conversion, Entrepreneurial Investors also received stock dividends
amounting to 347.166 shares of series G preferred stock. On March 30, 2000,
those 15,227.166 shares of series G preferred stock converted into 5,075,722
shares of our common stock. We relied upon the exemption provided by Section
3(a)(9) under the Securities Act of 1933 for these issuances.

Series B Preferred Stock. On March 11, 2000, the remaining 919.715 shares of
series B preferred stock were automatically converted into 514,059 additional
shares of our common stock in accordance with the terms of the Certificate of
Designation for the series B preferred stock. Upon conversion, the series B
investors also received stock dividends amounting to 51,476 shares of our
common stock. We relied upon the exemption provided by Section 3(a)(9) under
the Securities Act of 1933 for these issuances.

Series C Preferred Stock. February 11, 2000, we entered into a Stock
Exchange Agreement with the holders of our series C preferred stock to exchange
their shares of preferred stock for shares of series G preferred stock based on
the primary terms set forth in a Letter Agreement dated January 7, 2000. Those
terms included the series G preferred stock having a reduced conversion price
with a mandatory conversion provision that requires the series G shares to be
converted into our common stock within seven days of their issuance. The
effective result being the resetting of the conversion price for the series C
preferred stock from $1.00 to $.30, followed by the prompt conversion of the
preferred stock into our common stock. On March 1, 2000 and March 23, 2000 the
series C investors converted their 153,538 shares into 15,353.8 shares of
series G preferred stock. Upon conversion, the holders of the series C
preferred stock received stock dividends amounting to 287.34 shares of series G
preferred stock. On March 8, 2000, 14,516.68 shares of those series G preferred
stock were converted into 4,838,894 shares of our common stock, and on March
30, 2000, the remaining 1,124.458 were converted into 374,819 shares of our
common stock. We relied upon the exemption provided by Section 3(a)(9) under
the Securities Act of 1933 for these issuances.

Series E Preferred Stock. On February 11, 2000, we entered into a Stock
Exchange Agreement with Greenwich, AG to exchange its shares of series E
preferred stock for shares of series G preferred stock based on the primary
terms set forth in a Letter Agreement dated January 7, 2000. Those terms
included the series G preferred stock having a reduced conversion price with a
mandatory conversion provision that requires the series G shares to be
converted into our common stock within seven days of their issuance. The
effective result being the resetting of the conversion price for the series E
preferred stock from $1.00 to $.30, followed by the prompt conversion of the
preferred stock into our common stock. In March of 2000, Greenwich, AG
converted their 2,000 shares of series E preferred stock and received stock
dividends amounting to 269.448 shares of series G preferred stock. Those
20,269.448 shares of series G preferred stock were converted into 6,756,483
shares of our common stock in March of 2000. We relied upon the exemption
provided by Section 3(a)(9) under the Securities Act of 1933 for these
issuances.

Series 2 Preferred Stock. On February 23, 2000, we issued 1,256.66 shares of
series 2 preferred stock as deferred payment of a portion of the purchase price
for our acquisition of PRN Transcription, Inc. in accordance with the terms of
the Asset Purchase Agreement dated February 22, 1999. On March 14, 2000, we

II-5
<PAGE>

converted those 1,256.66 shares of series 2 preferred stock into 82,822 shares
of our common stock. We relied upon the exemption provided by Section 3(a)(9)
under the Securities Act of 1933 for these issuances.

On February 23, 2000, we issued 645.44 shares of series 2 preferred stock as
deferred payment of a portion of the purchase price for our acquisition of AM
Transcription, Inc. in accordance with the terms of the Asset Purchase
Agreement dated February 26, 1999. On March 14, 2000, we converted those 645.44
shares of series 2 preferred stock into 32,953 shares of our common stock. We
relied upon the exemption provided by Section 3(a)(9) under the Securities Act
of 1933 for these issuances.

In May 2000, we issued and held in escrow 2,333 shares of series 2 preferred
stock as part of the deferral payouts in connection with our acquisition. We
relied on the exemption from registration under Section 4(2) under the
Securities Act.

Common Stock. On January 7, 2000, we issued to Lonestar Medical
Transcription USA, Inc., in accordance with the Asset Purchase Agreement
between us and Lonestar effective December 20, 1999, a warrant to purchase
800,000 unregistered shares of our common stock at an exercise price of $0.37
per share subject to adjustment. The shares are also subject to a Registration
Rights Agreement effective December 20, 1999. Lonestar performed a cashless
exercise of the warrant on May 15, 2000, and has been issued 572,132 shares of
our common stock.

In May 2000, we issued 163,583 shares of common stock under the Forbearance
Agreements described in the prospectus. We relied on the exemption from
registration under Section 4(2) under the Securities Act.

In May 2000, we issued 58,000 shares as the contingent purchase price for
the acquisition of PRN Transcription, Inc. We relied on the exemption from
registration under Section 4(2) under the Securities Act.

In July 2000, we issued 500,000 shares of common stock as payment for
software development efforts. We relied on the exemption from registration
under Section 4(2) under the Securities Act.

In July and August 2000, we issued 365,500 shares to officers, employees,
and consultants in lieu of cash compensation. These shares were issued pursuant
to our 1997 Incentive Plan. We relied on the exemption from registration under
Section 4(2) under the Securities Act.

In August 2000, we issued 109,307 shares of common stock for the payment of
interest in the amount of $114,663. The interest related to our inability to
register shares issued in the acquisition of Cornell Transcription, Inc. prior
to December 31, 2000. We relied on the exemption from registration under
Section 4(2) under the Securities Act.

Effective October 26, 2000, N. Rudy Garza, one of our directors, converted
one of our convertible notes into 1,804,747 shares of our common stock.

Private Placements. During September 2000, we completed several private
placements with accredited investors. We relied upon the exemptions from
registration under Section 4(2) and Rule 506 of the Securities Act of 1933. We
received net proceeds from these private placements of approximately $1.5
million. In connection with these private placements we also entered into
registration rights agreements with the investors. These transactions are
discussed below.

Convertible Promissory Notes. On September 1, 2000, we issued six
convertible promissory notes in the aggregate principal amount of $480,000.
One promissory note, in the principal amount of $100,000, was issued to
Daniel Dornier, a member of our board of directors. The promissory notes
will be automatically converted into at least 3,200,000 shares of common
stock when our certificate of incorporation is amended to increase the
authorized capital to permit the issuance of common stock upon conversion
of the promissory notes.

Common Stock and Warrant to Purchase Common Stock. Additionally, in
September 2000, we issued 6,666,666 shares of our common stock at a
purchase price of $0.15 per share, and a warrant to the placement agent to
acquire 1,000,000 shares of our common stock at an exercise price of $0.15
per share.

II-6
<PAGE>

ITEM 27. Exhibits

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Asset Purchase Agreement by and between Transcription Resources dated
March 17, 1998 (Exhibit 2.2 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).

2.2 Asset Purchase Agreement by and among the Company, Cornell and
Acquisition Sub dated December 1, 1998 (Exhibit 2.1 to the Company's
Current Report on Form 8-K as filed with the Commission on
December 16, 1998 is incorporated herein by reference).

2.3 Asset Purchase Agreement by and among the Company and LRW
Transcription dated December 31, 1998 (Exhibit 2.1 to the Company's
Current Report on Form 8-K as filed with the Commission on
January 15, 1999 is incorporated herein by reference).

2.4 Stock Purchase Agreement by and among Timothy E. Cook and Kay F. Cook,
A Word Above, Inc. and e-DOCS Health Care Information Services, Inc.
dated May 28, 1999 (Exhibit 2.1 to the Company's Current Report on
Form 8-K as filed with the Commission on June 14, 1999 is incorporated
herein by reference).

2.5 Asset Purchase Agreement between the Company and Lonestar Medical
Transcription USA, Inc. and L&H Investment Co., N.V., dated
January 7, 2000 and effective as of December 20, 1999 (Exhibit 2.1 to
the Company's Current Report on Form 8-K as filed with the Commission
on January 24, 2000, is incorporated herein by reference).

3.1 Amended and Restated Certificate of Incorporation as filed with the
Delaware Secretary of State on January 29, 1998 (Exhibit 4.1 to the
Company's Current Report on Form 8-K as filed with the Commission on
January 20, 1998 is incorporated herein by reference).

3.2 Certificate of Ownership and Merger of Applied Voice Recognition,
Inc., a Utah corporation, with and into the Company dated
January 26, 1998 (Exhibit 3.3 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).

3.3 Certificate of Designation for the Series 2 Preferred Stock
(Exhibit 3.1 to the Company's Current Report on Form 8-K as filed with
the Commission on January 15, 1999 is incorporated herein by
reference).

3.4 Amended and Restated Bylaws of the Company as adopted on
November 7, 1997 (Exhibit 4.3 to the Company's Current Report on Form
8-K as filed with the Commission on January 20, 1998 is incorporated
herein by reference).

4.1 Registration Rights Agreement between the Company and Equity Services,
Ltd., a Nevis company ("ESL") dated July 31, 1997 (Exhibit 4.1 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed
with the Commission on April 15, 1998, is incorporated herein by
reference).

4.2 Registration Rights Agreement between the Company and ESL dated
August 12, 1997 (Exhibit 4.2 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).

4.3 Amended and Restated Registration Rights Agreement between the Company
and Entrepreneurial Investors, Ltd., a Bahamas Company dated
January 8, 1998 (Exhibit 4.3 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).

4.4 Registration Rights Agreement between the Company and ENTREPRENEURIAL
INVESTORS dated August 12, 1997 (Exhibit 4.4 to the Company's Form
10-KSB for the period ended December 31, 1997, as filed with the
Commission on April 15, 1998, is incorporated herein by reference).

4.5 Registration Rights Agreement by and between the Company and Voice It
Worldwide, Inc., a Colorado corporation ("Voice It") dated
December 31, 1997 (Exhibit 4.5 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).
</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.6 Form of Registration Rights Agreement between the Company and the
Series B Preferred Stock investors dates March 11, 1998 (Exhibit 4.6
to the Company's Form 10-KSB for the period ended December 31, 1997,
as filed with the Commission on April 15, 1998, is incorporated herein
by reference).

4.7 Registration Rights Agreement between the Company and the Series C
Preferred Stock Investors dated July 30, 1998 (Exhibit 3.2 to the
Company's Form 10-QSB for the period ended June 30, 1998, as filed
with the Commission on August 14, 1998, is incorporated herein by
reference).

4.8 Registration Rights Agreement between the Company and L & H Investment
Company dated December 31, 1998 (Exhibit 4.9 to the Company's Form
10-KSB for the period ended December 31, 1999, as filed with the
Commission on March 31, 1999, is incorporated herein by reference).

4.9 Investor Rights Agreement between the Company and L & H Investment
Company dated December 31, 1998 (Exhibit 4.11 to the Company's Form
10-KSB for the period ended December 31, 1999, as filed with the
Commission on March 31, 1999, is incorporated herein by reference).

4.10 Registration Rights Agreement between the Company and Greenwich, AG,
dated August 18, 1999 (Exhibit 4.1 to the Company's Current Report on
Form 8-K as filed with the Commission on August 27, 1999, is
incorporated herein by reference).

4.11 Form of Warrant issued to Greenwich, AG dated August 18, 1999
(Exhibit 4.2 to the Company's Current Report on Form 8-K as filed with
the Commission on August 27, 1999, is incorporated herein by
reference).

4.12 Registration Rights Agreement between the Company and Lonestar Medical
Transcription USA, Inc., dated January 7, 2000, to be effective as of
December 20, 1999 (Exhibit 4.2 to the Company's Form 10-QSB for the
quarter ended March 31, 2000 as filed with the Commission on
May 15, 2000, incorporated herein by reference).

4.13* Form of Lock-Up Agreements.

4.14* Form of Option and Warrant Forfeiture Agreement.

4.15 Form of Warrant to Purchase Common Stock of Applied Voice Recognition,
Inc. d/b/a e-DOCS.net (Exhibit 4.1 to the Company's Current Report on
Form 8-K as filed with the Commission on October 5, 2000, is
incorporated herein by reference).

4.16 Form of Convertible Promissory Note (Exhibit 4.2 to the Company's
Current Report on Form 8-K as filed with the Commission on October 5,
2000, is incorporated herein by reference).

4.17 Form of Registration Rights Agreement--Placement Agent (Exhibit 4.3 to
the Company's Current Report on Form 8-K as filed with the Commission
on October 5, 2000, is incorporated herein by reference).

4.18 Form of Registration Rights Agreement--(Common Stock) (Exhibit 4.4 to
the Company's Current Report on Form 8-K as filed with the Commission
on October 5, 2000, is incorporated herein by reference).

4.19 Form of Registration Rights Agreement--(Convertible Promissory Note)
(Exhibit 4.5 to the Company's Current Report on Form 8-K as filed with
the Commission on October 5, 2000, is incorporated herein by
reference).

4.20* Form of Subscription Agreement.

5.1* Opinion of Porter & Hedges, L.L.P. with respect to legality of
securities.

10.1 Joint Product Development Agreement by and between the Company and
Voice It dated December 31, 1997 (Exhibit 10.1 to the Company's Form
10-KSB for the period ended December 31, 1997, as filed with the
Commission on April 15, 1998, is incorporated herein by reference).
</TABLE>

II-8
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.2 OEM Distribution Agreement between the Company and IBM dated
December 17, 1996. (Exhibit 10.2 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).

10.3 1997 Incentive Plan effective as of October 1, 1997 (Exhibit 4.1 to
the Company's Form S-8 (No. 333-44191) as filed with the Commission on
January 13, 1998, is incorporated herein by reference).

10.4 License Agreement between the Company and Hakeem, Inc. dated September
1996 (Exhibit 10.4 to the Company's Form 10-KSB/A-1 for the period
ended December 31, 1997, as filed with the Commission on
April 30, 1998, is incorporated herein by reference).

10.5 Employment Agreement between the Company and Timothy J. Connolly
effective as of July 1, 1997 (Exhibit 10.12 to the Company's Form
10-KSB/A-1 for the period ended December 31, 1997, as filed with the
Commission on April 30, 1998, is incorporated herein by reference).

10.6 Value Added Reseller Agreement between Lernout & Hauspie Speech
Products N.V. and the Company effective September 1, 1998
(Exhibit 11.3 to the Company's Form 10-QSB for the period ended
September 30, 1998, as filed with the Commission on November 17, 1998,
is incorporated herein by reference).

10.7 Stock Purchase Agreement between the Company and L & H Investment
Company dated December 31, 1998 (Exhibit 10.23 to the Company's
Form 10-KSB for the period ended December 31, 1999, as filed with the
Commission on March 31, 1999, is incorporated herein by reference).

10.8 Voting Agreement by and among Voice Technologies Partners, Ltd., L & H
Investment Company and the Company dated December 31, 1998
(Exhibit 10.24 to the Company's Form 10-KSB for the period ended
December 31, 1999, as filed with the Commission on March 31, 1999, is
incorporated herein by reference).

10.9 Co-sale and Tag-along Rights Agreement by and among Voice Technologies
Partners, Ltd., L & H Investment Company and the Company dated
December 31, 1998 (Exhibit 10.25 to the Company's Form 10-KSB for the
period ended December 31, 1999, as filed with the Commission on
March 31, 1999, is incorporated herein by reference).

10.10 Form of December 1998 Bridge Loan Promissory Note (Exhibit 10.26 to
the Company's Form 10-KSB for the period ended December 31, 1999, as
filed with the Commission on March 31, 1999, is incorporated herein by
reference).

10.11 Form of December 1998 Bridge Loan Warrant (Exhibit 10.27 to the
Company's Form 10-KSB for the period ended December 31, 1999, as filed
with the Commission on March 31, 1999, is incorporated herein by
reference).

10.12 Employment Agreement between Richard A. Cabrera and the company dated
April 7, 1999 (Exhibit 10.1 to the Company's Form 10-QSB for the
period ended March 31, 1999, as filed with the Commission on
May 14, 1999 is incorporated herein by reference).

10.13 Convertible Promissory Note and Warrant Purchase Agreement, between
the Company and L&H Investment Co. N.V., dated May 24, 1999
(Exhibit 10.2 to the Company's Form 10-QSB for the period ended
June 30, 1999, as filed with the Commission on August 13, 1999, is
incorporated herein by reference).

10.14 Convertible Promissory Note and Warrant Purchase Agreement, between
the Company and Greenwich, AG dated July 20, 1999 (Exhibit 10.31 to
the Company's Registration Statement No. 333-41710, as filed with the
Commission on July 19, 2000, is incorporated herein by reference).

10.15 Convertible Promissory Note and Warrant Purchase Agreement, between
the Company and G-51 Capital LLC, dated July 20, 1999 (Exhibit 10.32
to the Company's Registration Statement No. 333-41710, as filed with
the Commission on July 19, 2000, is incorporated herein by reference).
</TABLE>

II-9
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.16 Employment Agreement between Eric Black and the Company dated
August 2, 1999 (Exhibit 10.5 to the Company's Form 10-QSB for the
period ended June 30, 1999, as filed with the Commission on
August 13, 1999, is incorporated herein by reference).

10.17 First Amendment to Employment Agreement by Timothy J. Connolly, dated
August 2, 1999 (Exhibit 10.6 to the Company's Form 10-QSB for the
period ended June 30, 1999, as filed with the Commission on
August 13, 1999, is incorporated herein by reference).

10.18 Series E Preferred Stock and Warrant Purchase Agreement, between the
Company and Greenwich, AG dated August 18, 1999 (Exhibit 10.1 to the
Company's Current Report on Form 8-K as filed with the Commission on
August 27, 1999, is incorporated herein by reference).

10.19 Convertible Secured Promissory Note Purchase Agreement, between the
Company and Lernout & Hauspie Speech Products, N.V. dated
November 5, 1999 (Exhibit 10.6 to the Company's Form 10-QSB for the
period ended September 30, 1999, as filed with the Commission on
November 15, 1999, is incorporated herein by reference).

10.20 Convertible Secured Promissory Note issued to Lernout & Hauspie Speech
Products, N.V. dated November 5, 1999 (Exhibit 10.7 to the Company's
Form 10-QSB for the period ended September 30, 1999, as filed with the
Commission on November 15, 1999, is incorporated herein by reference).

10.21 Amendment to Convertible Promissory Note, between the Company and L&H
Investment Company, N.V. dated November 5, 1999 (Exhibit 10.8 to the
Company's Form 10-QSB for the period ended September 30, 1999, as
filed with the Commission on November 15, 1999, is incorporated herein
by reference).

10.22 Stock Exchange Agreement between the Company and Entrepreneurial
Investors, Ltd. dated January 20, 2000 (Exhibit 10.39 to the Company's
Form 10-KSB for the period ended December 31, 1999, as filed with the
Commission on March 30, 2000, is incorporated herein by reference).

10.23 Stock Exchange Agreement between the Company and the holders of the
Company's Series C Preferred Stock dated February 11, 2000
(Exhibit 10.40 to the Company's Form 10-KSB for the period ended
December 31, 1999, as filed with the Commission on March 30, 2000, is
incorporated herein by reference).

10.24 Stock Exchange Agreement between the Company and Greenwich, AG dated
February 11, 2000 (Exhibit 10.41 to the Company's Form 10-KSB for the
period ended December 31, 1999, as filed with the Commission on
March 30, 2000, is incorporated herein by reference).

10.25 Agreement with Respect to Termination of Employment by and between the
Company, Richard A. Cabrera, and Lonestar Medical Transcription USA,
Inc. dated effective as of December 20, 1999 (Exhibit 10.42 to the
Company's Form 10-KSB for the period ended December 31, 1999, as filed
with the Commission on March 30, 2000, is incorporated herein by
reference).

10.26 Agreement with Respect to Termination of Employment by and between the
Company, Eric A. Black, and Lonestar Medical Transcription USA, Inc.
dated effective as of December 20, 1999 (Exhibit 10.43 to the
Company's Form 10-KSB for the period ended December 31, 1999, as filed
with the Commission on March 30, 2000, is incorporated herein by
reference).

10.27 First Amended and Restated Employment Agreement between the Company
and Timothy J. Connolly dated effective as of January 1, 2000
(Exhibit 4.1 to the Company's Form S-8 (No. 333-31040) as filed with
the Commission on February 24, 1999, is incorporated herein by
reference).

10.28 First Amended and Restated Employment Agreement between the Company
and Milton A. Spiegelhauer dated effective as of January 1, 2000
(Exhibit 4.2 to the Company's Form S-8 (No. 333-31040) as filed with
the Commission on February 24, 1999, is incorporated herein by
reference).

10.29 First Amended and Restated Employment Agreement between the Company
and Robin P. Ritchie dated effective January 1, 2000 (Exhibit 4.3 to
the Company's Form S-8 (No. 333-31040) as filed with the Commission on
February 24, 1999, is incorporated herein by reference).
</TABLE>

II-10
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.30 Consulting Agreement between the Company and Jackson L. Nash dated
February 8, 2000 (Exhibit 10.47 to the Company's Form 10-KSB for the
period ended December 31, 1999, as filed with the Commission on
March 30, 2000, is incorporated herein by reference).

10.31 Amendment II to Value Added Reseller Agreement between the Company and
Lernout & Hauspie Speech Products, N.V. executed January 7, 2000, to
be effective as of December 20, 1999 (Exhibit 10.11 to the Company's
quarterly report on Form 10-QSB for the quarter ended March 31, 2000,
as filed with the Commission on May 15, 2000, is incorporated herein
by reference).

10.32 Technology License Agreement between the Company and Lonestar Medical
Transcription USA, Inc. dated January 7, 2000, to be effective as of
December 20, 1999 (Exhibit 10.12 to the Company's quarterly report on
Form 10-QSB for the quarter ended March 31, 2000, as filed with the
Commission on May 15, 2000, is incorporated herein by reference).

10.33 Medical Transcription Services Agreement between the Company and
Lonestar Medical Transcription USA, Inc. dated January 7, 2000, to be
effective as of December 20, 1999 (Exhibit 10.13 to the Company's
quarterly report on Form 10-QSB for the quarter ended March 31, 2000,
as filed with the Commission on May 15, 2000, is incorporated herein
by reference).

10.34 Employment Agreement between the Company and H. Russel Douglas dated
effective as of April 1, 2000 (Exhibit 10.14 to the Company's
quarterly report on Form 10-QSB for the quarter ended March 31, 2000,
as filed with the Commission on May 15, 2000, is incorporated herein
by reference).

10.35 Forbearance Agreement between the Company, e-DOCS Health Care
Information Services, Inc., Hillel Bronstein, and Cornell
Transcription, Inc. dated May 4, 2000 (Exhibit 10.15 to the Company's
quarterly report on Form 10-QSB for the quarter ended March 31, 2000,
as filed with the Commission on May 15, 2000, is incorporated herein
by reference).

10.36 Warrant Agreement issued by the Company to Hillel Bronstein dated
May 4, 2000 (Exhibit 10.53 to the Company's Registration Statement
No. 333-41710, as filed with the Commission on July 19, 2000, is
incorporated herein by reference).

10.37 Forbearance Agreement between the Company, e-DOCS Health Care
Information Services, Inc., and Stuart Szpicek dated May 4, 2000
(Exhibit 10.17 to the Company's quarterly report on Form 10-QSB for
the quarter ended March 31, 2000, as filed with the Commission on
May 15, 2000, is incorporated herein by reference).

10.38 Warrant Agreement issued by the Company to Stuart Szpicek dated
May 4, 2000 (Exhibit 10.55 to the Company's Registration Statement
No. 333-41710, as filed with the Commission on July 19, 2000, is
incorporated herein by reference).

10.39 Forbearance Agreement between the Company, e-DOCS Health Care
Information Services, Inc., and Yaniv Dagan dated May 4, 2000
(Exhibit 10.19 to the Company's quarterly report on Form 10-QSB for
the quarter ended March 31, 2000, as filed with the Commission on
May 15, 2000, is incorporated herein by reference).

10.40 Warrant Agreement issued by the Company to Yaniv Dagan dated
May 4, 2000 (Exhibit 10.57 to the Company's Registration Statement
No. 333-41710, as filed with the Commission on July 19, 2000, is
incorporated herein by reference).

10.41* Non-qualified Stock Option Agreement between the Company and J.
William Boyar dated as of October , 2000.

10.42* Qualified Stock Option Agreement between the Company and James
Springfield dated as of October , 2000.

10.43* Agreement between the Company and Wilson, Lombard, & Partner, Inc.
dated as of October , 2000.
</TABLE>

II-11
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.44* Agreement between the Company and FinMap Corporation dated as of
October , 2000.

10.45* Employment Agreement between the Company and James Springfield dated
as of August 29, 2000.

16.1 Letter dated November 19, 1999, from Ernst & Young LLP to the
Commission (Exhibit 16.1 to the Company's Current Report on Form 8-K,
as filed with the Commission on November 19, 1999, is incorporated
herein by reference).

21.1 List of Subsidiaries (Exhibit 21.1 to the Company's Form 10-KSB for
the period ended December 31, 1999, as filed with the Commission on
March 30, 2000, is incorporated herein by reference).

23.1* Consent of Weinstein Spira & Company, P.C.

23.2* Consent of Ernst & Young LLP.

23.3* Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1).

24.1* Power of Attorney (included on signature page at II-13).
</TABLE>
--------
*Filed herewith.
**To be included with amendment.

ITEM 28. Undertakings

Undertaking to Update.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:

(i) include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");

(ii) reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in the
Registration Statement; and

(iii) include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;

Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended
(the"Exchange Act") that are incorporated by reference in the Registration
Statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II-12
<PAGE>

Undertaking With Respect to Indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

II-13
<PAGE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James G. Springfield and Jackson L. Nash, and
each of them, any of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre- and post-effective amendments and
supplements to this Registration Statement, and to file the same, or caused to
be filed the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents, 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 might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, and each of them, or the substitute or substitutes of any of
them, may lawfully do or cause to be done by virtue hereof.

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements of filing on Form SB-2 and has duly caused this
Registration Statement to be signed on our behalf by the undersigned, thereon
duly authorized in the City of Houston, State of Texas on ,
2000.

APPLIED VOICE RECOGNITION, INC.

/s/ James G. Springfield
By __________________________________
James G. Springfield
President, Chief Executive Officer
and Vice Chairman of the Board of
Director

In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form SB-2 has been signed below by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ James G. Springfield President, Chief Executive October 30, 2000
____________________________________ Officer and Vice Chairman of
James G. Springfield the Board of Directors
(Principal Executive
Officer)

/s/ Jackson L. Nash Chief Financial Officer and October 30, 2000
____________________________________ Secretary (Principal
Jackson L. Nash Financial and accounting
Officer)

/s/ J. William Boyar Chairman of the Board of October 30, 2000
____________________________________ Directors
J. William Boyar
</TABLE>

II-14
<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
Director October 30, 2000
____________________________________
Daniel S. Dornier

/s/ James S. Cochran, M.D. Director October 30, 2000
____________________________________
James S. Cochran, M.D.

/s/ N. Rudy Garza Director October 30, 2000
____________________________________
N. Rudy Garza

Director October 30, 2000
____________________________________
I. Bobby Majumder
</TABLE>

II-15
<PAGE>

EXHIBIT LIST

II-16
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.5 Registration Rights Agreement by and between the Company and Voice It
Worldwide, Inc., a Colorado corporation ("Voice It") dated
December 31, 1997 (Exhibit 4.5 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).

4.6 Form of Registration Rights Agreement between the Company and the
Series B Preferred Stock investors dates March 11, 1998 (Exhibit 4.6
to the Company's Form 10-KSB for the period ended December 31, 1997,
as filed with the Commission on April 15, 1998, is incorporated herein
by reference).

4.13* Form of Lock-Up Agreements.

4.14* Form of Option and Warrant Forfeiture Agreement.

4.16 Form of Convertible Promissory Note (Exhibit 4.2 to the Company's
Current Report on Form 8-K as filed with the Commission on October 5,
2000, is incorporated herein by reference).

II-17
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
4.20* Form of Subscription Agreement.

5.1* Opinion of Porter & Hedges, L.L.P. with respect to legality of
securities.

10.2 OEM Distribution Agreement between the Company and IBM dated
December 17, 1996. (Exhibit 10.2 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).

10.3 1997 Incentive Plan effective as of October 1, 1997 (Exhibit 4.1 to
the Company's Form S-8 (No. 333-44191) as filed with the Commission on
January 13, 1998, is incorporated herein by reference).

II-18
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.13 Convertible Promissory Note and Warrant Purchase Agreement, between
the Company and L&H Investment Co. N.V., dated May 24, 1999
(Exhibit 10.2 to the Company's Form 10-QSB for the period ended
June 30, 1999, as filed with the Commission on August 13, 1999, is
incorporated herein by reference).

10.16 Employment Agreement between Eric Black and the Company dated
August 2, 1999 (Exhibit 10.5 to the Company's Form 10-QSB for the
period ended June 30, 1999, as filed with the Commission on
August 13, 1999, is incorporated herein by reference).

II-19
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.26 Agreement with Respect to Termination of Employment by and between the
Company, Eric A. Black, and Lonestar Medical Transcription USA, Inc.
dated effective as of December 20, 1999 (Exhibit 10.43 to the
Company's Form 10-KSB for the period ended December 31, 1999, as filed
with the Commission on March 30, 2000, is incorporated herein by
reference).

10.30 Consulting Agreement between the Company and Jackson L. Nash dated
February 8, 2000 (Exhibit 10.47 to the Company's Form 10-KSB for the
period ended December 31, 1999, as filed with the Commission on
March 30, 2000, is incorporated herein by reference).

II-20
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.39 Forbearance Agreement between the Company, e-DOCS Health Care
Information Services, Inc., and Yaniv Dagan dated May 4, 2000
(Exhibit 10.19 to the Company's quarterly report on Form 10-QSB for
the quarter ended March 31, 2000, as filed with the Commission on
May 15, 2000, is incorporated herein by reference).

10.41* Non-qualified Stock Option Agreement between the Company and
J. William Boyar dated as of October , 2000.

10.42* Qualified Stock Option Agreement between the Company and James
Springfield dated as of October , 2000.

10.43* Agreement between the Company and Wilson, Lombard, & Partner, Inc.
dated as of October , 2000.

10.44* Agreement between the Company and FinMap Corporation dated as of
October , 2000.

10.45* Employment Agreement between the Company and James Springfield dated
as of August 29, 2000.

21.1 List of Subsidiaries (Exhibit 21.1 to the Company's Form 10-KSB for
the period ended December 31, 1999, as filed with the Commission on
March 30, 2000, is incorporated herein by reference).

23.1* Consent of Weinstein Spira & Company, P.C.

23.2* Consent of Ernst & Young LLP.

23.3* Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1).

24.1* Power of Attorney (included on signature page at II-13).
</TABLE>
--------
*Filed herewith.

II-21