ScanSoft Announces Second Quarter Results for Fiscal Year 2005; Strong

ScanSoft Announces Second Quarter Results for Fiscal Year 2005; Strong Performance Across Speech Drives Revenue Growth of 24% Year Over Year; Improved Operating Efficiency Generates Earnings above Expectations

    Business Editors/High-Tech Editors

    PEABODY, Mass.--(BUSINESS WIRE)--May 9, 2005--ScanSoft, Inc. (Nasdaq: SSFT), a global leader of speech and imaging solutions, today announced financial results for the second fiscal quarter of 2005 ended March 31, 2005. ScanSoft reported revenue of $53.1 million for the quarter ended March 31, 2005, a 24 percent increase over revenue of $42.8 million for the quarter ended March 31, 2004.
    On a GAAP basis, ScanSoft recognized a net loss of $1.0 million, or $0.01 per share, in the second quarter of fiscal 2005, compared with a net loss of $2.8 million, or $0.03 per share, in the quarter ended March 31, 2004.
    In addition to using GAAP results in evaluating ScanSoft's business, management also believes it is useful to measure results using a non-GAAP measure of net income (loss), which excludes, as applicable, non-cash taxes, non-cash interest expense, amortization of intangible assets, non-cash stock-based compensation and restructuring charges. See "GAAP to non-GAAP Reconciliation" below for further information on ScanSoft's non-GAAP measure.
    Using this non-GAAP measure, ScanSoft recognized non-GAAP net income for the second quarter of fiscal 2005 of $3.5 million, or $0.03 per diluted share, compared with non-GAAP net income of $1.9 million, or $0.02 per diluted share, for the quarter ended March 31, 2004.
    "Our second quarter performance was driven by strong revenues within dictation and network speech," said Paul Ricci, ScanSoft chairman and CEO. "In addition, our sustained focus on expense control and productivity throughout the business yielded improved operating margins. These results are further indication of the growth, success and benefits afforded by our diverse product families and ongoing technology investments."

    Highlights from ScanSoft's second quarter of fiscal 2005 include:

--	Achievement in Speech - ScanSoft is delivering on its strategy to enable natural, human conversations as a preferred way that people retrieve information and interact with automated systems. Throughout the quarter, leading organizations across the globe turned to ScanSoft and its portfolio of speech technologies, applications and services to manage and improve customer interactions.
--	Continued Adoption within Network Speech - The company signed new or expanded agreements with partners and customers such as Cigna, United and XM Radio. Revenue was particularly strong within ScanSoft's international operations, with new or expanded agreements with customers and partners including Caisse d'Epargne, Volkswagen, Vodafone Australia and Xerox.
--	Demand for Dictation Solutions - ScanSoft sustained momentum from the launch of Dragon NaturallySpeaking 8, as awareness of its high level of accuracy and expanded capabilities grew among customers and partners. The healthcare market continued to be a significant source of increased demand, especially within medical institutions, such as St. John's Heath System, and medical transcription organizations such as Cymed.
--	Expanded Opportunity for Business PDF - Throughout the quarter, ScanSoft benefited from sales of its PDF products, as a host of organizations selected ScanSoft PDF solutions for their business needs. During the quarter, the company signed new or expanded volume licensing agreements with large organizations and institutions including Paris Metro and Skadden, Arps.
--	Enhanced Operational Capabilities- The company improved operating margins through continued focus on budgetary discipline and cost synergies from acquisitions.

    For the quarter ended March 31, 2005, ScanSoft generated $9.9 million in cash flow from operations and exited the quarter with cash and marketable securities of approximately $29.7 million.
    In a separate announcement, ScanSoft and Nuance Communications, Inc. (Nasdaq: NUAN) today announced a definitive agreement whereby ScanSoft will acquire all of the outstanding common stock of Nuance, merging the two organizations into a single company with the expertise and resources required to satisfy the increasing demand for powerful speech solutions. See today's press release titled, ScanSoft and Nuance to Merge, Creating Comprehensive Portfolio of Enterprise Speech Solutions and Expertise.

    Investor Call

    In conjunction with this announcement, the Company will broadcast its quarterly conference call over the Internet this afternoon at 5:00 p.m. ET.
    Those who wish to listen to the live broadcast should visit the Investor Relations section of the Company's Web site at www.scansoft.com at least 15 minutes prior to the event and follow the instructions provided to ensure that the necessary audio applications are downloaded and installed.
    The conference call can be heard live by dialing (800) 230-1766 or (612) 332-0637, five minutes prior to the call and reference conference code 780664. A replay of the call will be available within 24 hours of the announcement. To access the replay, dial (800) 475-6701 or (320) 365-3844 and refer to access code 780664.

    About ScanSoft, Inc.

    ScanSoft, Inc. (Nasdaq: SSFT) is a global leader of speech and imaging solutions that are used to automate a wide range of manual processes - saving time, increasing worker productivity and improving customer service. For more information regarding ScanSoft products and technologies, please visit www.scansoft.com.

    Trademark reference: ScanSoft and the ScanSoft logo are registered trademarks or trademarks of ScanSoft, Inc. in the United States and other countries. All other company or product names mentioned may be the trademarks of their respective owners.

    This press release contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements relating to the future demand for, performance of, and opportunities for growth in ScanSoft's speech solutions and productivity applications; the growth of the speech industry and the demand for speech solutions; future revenue contributions from relationships with ScanSoft's partners; the continued strength of existing products, services and relationships as well as the introduction of new products, services and relationships; ScanSoft's strategic and operational plan; the ability to consummate the Nuance merger; and future prospects regarding product lines, sales channels and international operations. Such statements are based on current expectations that are subject to a number of risks and uncertainties, and actual results may differ materially. These risks and uncertainties include, without limitation, the following: difficulties with integrating product plans and operations of acquired businesses and the accounting effects of such acquisitions on ScanSoft's operating and financial results; fluctuations in demand for ScanSoft's existing and future products; economic conditions in the United States and abroad; ScanSoft's ability to control and successfully manage its expenses, inventory and cash position; the effects of competition, including pricing pressure; possible defects in ScanSoft's products and technologies; failure to obtain and retain expected synergies from acquired businesses; and ScanSoft's dependence on OEM customers. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in ScanSoft's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K/T for the fiscal year ended September 30, 2004, and its most recent quarterly reports on Form 10-Q. ScanSoft undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this document.

    IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC

    ScanSoft plans to file with the SEC a Registration Statement on Form S-4 in connection with the transaction and ScanSoft and Nuance plan to file with the SEC and mail to their respective stockholders a Joint Proxy Statement/Prospectus in connection with the transaction. The Registration Statement and the Joint Proxy Statement/Prospectus will contain important information about ScanSoft, Nuance, the transaction and related matters. Investors and security holders are urged to read the Registration Statement and the Joint Proxy Statement/Prospectus carefully when they are available. Investors and security holders will be able to obtain free copies of the Registration Statement and the Joint Proxy Statement/Prospectus and other documents filed with the SEC by ScanSoft and Nuance through the web site maintained by the SEC at www.sec.gov. In addition, investors and security holders will be able to obtain free copies of the Registration Statement and the Joint Proxy Statement/Prospectus from ScanSoft by contacting ScanSoft Investor Relations at (978) 977-2000 or from Nuance by contacting Nuance Investor Relations at (650) 847-0000.
    ScanSoft and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of ScanSoft and Nuance in connection with the transaction described herein. Information regarding the special interests of these directors and executive officers in the transaction described herein will be included in the Joint Proxy Statement/Prospectus described above. Additional information regarding these directors and executive officers is also included in ScanSoft's proxy statement for its 2005 Annual Meeting of Stockholders, which was filed with the SEC on January 28, 2005. This document is available free of charge at the SEC's web site at www.sec.gov and from ScanSoft by contacting ScanSoft Investor Relations at (978) 977-2000.
    Nuance and its directors and executive officers also may be deemed to be participants in the solicitation of proxies from the stockholders of ScanSoft and Nuance in connection with the transaction described herein. Information regarding the special interests of these directors and executive officers in the transaction described herein will be included in the Joint Proxy Statement/Prospectus described above. Additional information regarding these directors and executive officers is also included in Nuance's proxy statement for its 2005 Annual Meeting of Stockholders, which was filed with the SEC on May 2, 2005. This document is available free of charge at the SEC's web site at www.sec.gov and from Nuance by contacting Nuance Investor Relations at (650) 847-0000.

ScanSoft, Inc. Condensed Consolidated Statements of Operations (in 000's, except per share amounts) Unaudited

Three months ended Six months ended March 31, March 31, ----------------- ----------------- 2005 2004 2005 2004 -------- -------- -------- --------

Product licenses $37,929 $30,856 $84,763 $67,320 Professional services 15,184 10,008 28,928 18,010 Related parties - 1,912 - 4,316 -------- -------- -------- -------- Total revenue 53,113 42,776 113,691 89,646

Costs and expenses: Cost of product licenses 4,467 3,476 9,983 8,045 Cost of professional services 9,678 6,726 19,270 12,637 Cost of revenue from amortization of intangible assets 2,683 2,816 5,508 5,851 -------- -------- -------- -------- Total costs of revenue 16,828 13,018 34,761 26,533

Gross Margin 36,285 29,758 78,930 63,113

Research and development 10,126 9,218 19,236 18,087 Selling and marketing 19,575 16,867 38,126 34,351 General and administrative 6,392 4,848 13,259 9,625 Amortization of other intangible assets 979 668 1,648 1,519 Stock based compensation 656 319 1,354 494 Restructuring and other charges - 801 659 1,428 -------- -------- -------- -------- Total operating expenses 37,728 32,721 74,282 65,504

Income (loss) from operations (1,443) (2,963) 4,648 (2,391)

Other income (expense), net 324 449 (566) 465 -------- -------- -------- --------

Income (loss) before income taxes (1,119) (2,514) 4,082 (1,926)

Provision (benefit) for income taxes (117) 299 1,943 (443) -------- -------- -------- --------

Net income (loss) $(1,002) $(2,813) $2,139 $(1,483) ======== ======== ======== ========

Net Income (loss) per share: basic $(0.01) $(0.03) $0.02 $(0.01) ======== ======== ======== ======== Net income (loss) per share: diluted $(0.01) $(0.03) $0.02 $(0.01) ======== ======== ======== ========

Weighted average common shares: basic 105,563 102,847 105,264 101,213 ======== ======== ======== ======== Weighted average common shares: diluted 105,563 102,847 112,812 101,213 ======== ======== ======== ========

ScanSoft, Inc. Condensed Consolidated Balance Sheet (Unaudited, in thousands)

Assets March 31, September 30, 2005 2004

Current assets: Cash and cash equivalents $25,882 $22,963 Marketable Securities 2,691 7,373 Accounts receivable, net 45,540 36,523 Prepaid expenses and other current assets 6,667 6,629 --------- ------------- Total current assets 80,780 73,488

Goodwill, net 300,818 246,424 Long term marketable securities 1,167 17,355 Other intangible assets, net 54,390 43,898 Property and equipment, net 9,944 7,985 Other assets 5,591 3,503 --------- ------------- Total assets $452,690 $392,653 ========= =============

Liabilities and stockholders' equity

Current liabilities: Short term note payable $27,895 $457 Accounts payable and accrued expenses 40,817 28,135 Deferred revenue 16,418 10,529 Other current liabilities 24,919 6,427 --------- ------------- Total current liabilities 110,049 45,548 --------- -------------

Long term portion of deferred revenue 110 147 Long term note payable 45 27,700 Other long term liabilities 33,477 17,513 --------- ------------- Total liabilities 143,681 90,908

Stockholders' equity: 309,009 301,745 --------- -------------

Total liabilities and stockholders' equity $452,690 $392,653 ========= =============

ScanSoft, Inc. Reconciliation of Supplemental Financial Information (in 000's, except per share amounts) Unaudited

Three months ended Six months ended March 31, March 31, ------------------- ----------------- 2005 2004 2005 2004 ---------- -------- -------- --------

GAAP net income (loss) $(1,002) $(2,813) $2,139 $(1,483) Cost of revenue from amortization of intangible assets 2,683 2,816 5,508 5,851 Amortization of other intangible assets 979 668 1,648 1,519 Restructuring and other charges - 801 659 1,428 Stock based compensation 656 319 1,354 494 Non-cash interest expense 286 89 352 67 Non-cash taxes (68) 42 1,024 362 ---------- -------- -------- -------- Non-GAAP net income (loss) $3,534 $1,922 $12,684 $8,238 ========== ======== ======== ========

Non-GAAP net income (loss) basic: $0.03 $0.02 $0.12 $0.08 ========== ======== ======== ========

Non-GAAP net income (loss) diluted: $0.03 $0.02 $0.11 $0.07 ========== ======== ======== ========

Shares used in computing non-gaap net income (loss) per share:

Weighted average common shares: basic 105,563 102,847 105,264 101,213 ========== ======== ======== ======== Weighted average common and common equivalent shares: diluted 113,279 113,421 112,812 112,167 ========== ======== ======== ========

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CONTACT: ScanSoft, Inc. Richard Mack, 978-977-2175 richard.mack@scansoft.com or ScanSoft, Inc. Jonna Schuyler, 617-428-4444 jonna.schuyler@scansoft.com

KEYWORD: MASSACHUSETTS INDUSTRY KEYWORD: SOFTWARE EARNINGS CONFERENCE CALLS SOURCE: ScanSoft, Inc.

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