UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 1 to Form 10-K)

Commission file number 0-27038

NUANCE COMMUNICATIONS, INC.

(formerly ScanSoft, Inc.)

(Exact name of Registrant as Specified in its Charter)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $0.001 per share

Preferred Share Purchase Rights

      Indicate by check-mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o     No þ

      Indicate by check-mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     No þ

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

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

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ     No o

      Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

      The aggregate market value of the outstanding common equity held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $258,528,278 based upon the last reported sales price on the Nasdaq National Market for such date. For purposes of this disclosure, shares of Common Stock held by officers and directors of the Registrant and by persons who hold more than 5% of the outstanding Common Stock have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive.

      The number of shares of the Registrant’s Common Stock, outstanding as of November 30, 2005, was 160,200,839.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s definitive Proxy Statement to be delivered to stockholders in connection with the Registrant’s 2006 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

EXPLANATORY NOTE

      Nuance Communications, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/ A to amend its Form 10-K for the fiscal year ended September 30, 2005 as filed with the Securities and Exchange Commission on December 14, 2005 to correct certain errors in the footnotes to the Company’s consolidated financial statements, each as described in more detail below. The errors had no impact on the consolidated balance sheet or consolidated statement of operations of the Company included in Part II, Item 8, “Financial Statements and Supplementary Data” or any other information in the Company’s Form 10-K as originally filed. For the convenience of the reader, this Amendment No. 1 sets forth the complete text of the Form 10-K as so amended. This Amendment No. 1 does not reflect events that have occurred after the original filing of the Form 10-K or update the information set forth in the Form 10-K subsequent to such original filing date. In connection with the filing of this Amendment No. 1, the Company is including as exhibits to this Amendment No. 1 currently dated certifications from the Chief Executive Officer and Chief Financial Officer and currently dated consent letters from the independent registered public accounting firms.

NUANCE COMMUNICATIONS, INC.

TABLE OF CONTENTS

      Nuance, the Nuance logo, Dragon, NaturallySpeaking, OmniPage, PaperPort and ScanSoft are trademarks or registered trademarks of Nuance Communications, Inc. or its affiliates in the United States and/or other countries. All other trademarks are the property of their respective owners.

FORWARD LOOKING STATEMENTS

      THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT, IF THEY NEVER MATERIALIZE OR IF THEY PROVE INCORRECT, COULD CAUSE OUR RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT ARE STATEMENTS THAT COULD BE DEEMED FORWARD-LOOKING, INCLUDING STATEMENTS PERTAINING TO: OUR REVENUE, EARNINGS, CASH FLOW AND LIQUIDITY; OUR STRATEGY RELATING TO SPEECH AND IMAGING TECHNOLOGIES; THE POTENTIAL OF FUTURE PRODUCT RELEASES; OUR PRODUCT DEVELOPMENT PLANS AND INVESTMENTS IN RESEARCH AND DEVELOPMENT; FUTURE ACQUISITIONS; INTERNATIONAL OPERATIONS AND LOCALIZED VERSIONS OF OUR PRODUCTS; OUR CONTRACTUAL COMMITMENTS; OUR 2006 REVENUE EXPECTATIONS AND LEGAL PROCEEDINGS AND LITIGATION MATTERS. YOU CAN IDENTIFY THESE AND OTHER FORWARD-LOOKING STATEMENTS BY THE USE OF WORDS SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECTS,” “PLANS,” “ANTICIPATES,” “BELIEVES,” “ESTIMATES,” “PREDICTS,” “INTENDS,” “POTENTIAL,” “CONTINUE” OR THE NEGATIVE OF SUCH TERMS, OR OTHER COMPARABLE TERMINOLOGY. FORWARD-LOOKING STATEMENTS ALSO INCLUDE THE ASSUMPTIONS UNDERLYING OR RELATING TO ANY OF THE FOREGOING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH IN THIS ANNUAL REPORT UNDER THE HEADING “RISK FACTORS.” ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF. WE WILL NOT UNDERTAKE AND SPECIFICALLY DECLINE ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.

PART I

Introduction

      Nuance Communications, Inc. (“Nuance”, “the Company”, “we” or “our”), formerly ScanSoft, Inc. (“ScanSoft”), is a leading provider of speech and imaging solutions for businesses and consumers around the world. Our technologies, applications and services make user experiences more compelling by transforming the way people access, share, manage and use information in business and in daily life.

      We market and distribute our products indirectly through a global network of resellers, comprising system integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers and distributors; and directly to businesses and consumers through a dedicated direct sales force and our e-commerce website (www.nuance.com). The value of our solutions is best realized in vertical markets that are information and process intensive, such as healthcare, telecommunications, financial services, legal and government.

      Nuance was incorporated in 1992 as Visioneer. In 1999, we changed our name to ScanSoft, Inc. and ticker symbol to SSFT. In October 2005 we changed our name to Nuance Communications, Inc., and in November 2005 we changed our ticker symbol to NUAN. Our corporate headquarters and executive offices are located at 1 Wayside Road, Burlington, MA 01803. Our telephone number is 781-565-5000. We have approximately 25 regional sales and research and development offices throughout North America, Europe and Asia.

      On October 23, 2004, our Board of Directors approved a change in the Company’s fiscal year end from December 31 to September 30, effective beginning September 30, 2004. All references in this Form 10-K to the period ended September 30, 2004, or fiscal 2004, refer to the nine months ended September 30, 2004. References to fiscal 2005, refers to the twelve month period beginning on October 1, 2004 and ending on September 30, 2005. References to fiscal 2003, refers to the twelve month period beginning January 1, 2003 and ending on December 31, 2003.

      On October 18, 2005, we changed our name from ScanSoft, Inc. to Nuance Communications, Inc. Earlier, on September 15, 2005, we completed our acquisition of the company formerly known as Nuance Communications, Inc. For purposes of comparison and discussion, we will refer to this acquired company as “Former Nuance”.

Background

      From our founding in 1992 until December 2001, we focused exclusively on delivering imaging solutions that simplified converting and managing information as it moved from paper formats to electronic systems. On March 13, 2000, we merged with Caere Corporation, a California-based digital imaging software company, to expand our applications for document and electronic forms conversion. In December 2001, we entered the speech market through the acquisition of the Speech & Language Technology Business from Lernout & Hauspie. We believed speech solutions would provide significant growth opportunities and were a natural complement to our imaging solutions as they serve similar vertical markets with information intensive requirements.

      Our focus on providing competitive and value-added solutions for our customers and partners requires a broad set of technologies, service offerings and channel capabilities. We have made and expect to continue to make acquisitions of other companies, businesses and technologies to complement our internal investments in these areas. We have a team that focuses on evaluating market needs and potential acquisitions to fulfill them.

In addition, we have a disciplined methodology for integrating acquired companies and businesses after the transaction is complete. Since the beginning of 2003, we have completed a number of acquisitions, including:

Market Opportunity

      In the past decade, information has become an increasingly important source of capital for businesses and enterprises, and the speed and sophistication of information exchange through various means — information systems, call centers, documents, mobile devices — is often a defining characteristic of the most successful entities worldwide. Many organizations define their strategy, assess their ability to compete and manage their customer relationships based on the quality, diversity and availability of their information products, services and resources. The optimal format for vital business information is wide and varied, ranging from the spoken word in multiple languages and in multiple locations to paper, electronic files and Web content.

      Confronted by exponentially increasing information through more and more channels, consumers and business personnel employ a variety of resources for retrieving information, conducting transactions and performing their jobs. The Internet, telecommunications systems, wireless and mobile networks, and related corporate infrastructure have emerged as a powerful global communications network and channel for conducting business. These electronic systems have fundamentally changed the way organizations and consumers obtain information, communicate, purchase goods and conduct business.

      Businesses and manufacturers around the world share a common motivation to improve operating efficiency, enhance customer service and differentiate offerings. Customer satisfaction, employee productivity and company operating results can often be linked to an organization’s ability to effectively manage, utilize and communicate information.

      We believe that making the user experience more compelling represents a significant opportunity to help simplify the way people access, share, manage and use information in business and in daily life. Our products and technologies make user experiences more compelling by transforming the way people interact with information and systems and automate manual processes and help enterprises, professionals and consumers increase productivity, reduce costs and save time.

      We deliver premier, comprehensive technologies and services in two markets: speech and imaging. Our speech technologies enable voice-activated services over a telephone, transform speech into written word, and permit the control of devices and applications by simply speaking. Our imaging solutions eliminate the need to manually reproduce documents, automate the integration of documents into business systems, and enable the use of electronic documents and forms within database, Internet, mobile and other business applications. Our software is delivered as part of a larger integrated system, such as systems for customer service call centers, or as an independent application, such as dictation, document conversion or PDF, navigation systems in automobiles or digital copiers on a network. Our products and technologies deliver a measurable return on investment to our customers.

      We deliver speech solutions that use the human voice to interact with information systems and devices and make user experiences more compelling. We are working toward our vision of the future where natural conversations are the preferred way people interact with automated systems and devices. To achieve this, we are investing in technologies and solutions which enable conversational, speech-based applications to become more dynamic, sound more natural and perform tasks on multiple devices that adapt to personal preferences. We are investing in three speech areas — network speech, embedded speech and dictation.

      Through network speech, embedded speech and dictation solutions, we offer a comprehensive and innovative portfolio of speech technologies, expertise and solutions. Every day, millions of users and thousands of businesses utilize our solutions by calling directory assistance, receiving account information over the phone, dictating patient records or telling a navigation system their destination. We have deployed more than 3,000 speech applications for some of the world’s most respected companies.

      Network Speech. Organizations are looking for ways to improve the quality of the customer care that they deliver, while reducing the associated costs and ensuring a positive customer experience. They seek to automate revenue-generating transactions requiring immediate delivery of goods and services. They also demand solutions that efficiently and effectively connect a mobile workforce with real-time enterprise information, including customer data, directory information and schedules.

      Our network speech solutions allow users to direct their own calls, obtain information and conduct transactions by simply speaking naturally over any telephone. Our solutions are used within a wide range of applications, across many customer-service intensive industries, including financial services, telecommunications, healthcare, utilities, government, travel and entertainment. Our software is integrated into applications such as flight information, personal banking, directory assistance, equipment repair and claims processing. We provide an extensive portfolio of speech technologies and applications that offer superior accuracy, support up to 46 languages and make caller interactions more dynamic and natural. Our solutions adhere to global industry standards and we provide speech technologies and services in more languages than any other vendor.

      We complement our technologies and products with a professional services organization that supports customers and partners with business and systems consulting project management, user interface design and application development assistance. Our professional services are designed to shorten time-to-market, assist customers, reduce implementation risks and improve our customers’ competitive position. We service our customers from principal offices located domestically in Boston, Menlo Park, New York and San Francisco and internationally in Aachen, Germany; London, Mexico City, Montreal and Sydney. In addition, we offer packaged solutions for applications that are common across a large set of customers and vertical markets.

      We license our network speech products to enterprise businesses, such as those in the Fortune 1000, and telecommunications carriers. Although in certain cases we sell directly to our customer, the majority of our

solutions are fulfilled through our channel networks comprised of telecommunications equipment companies, systems integrators and technology providers including Avaya, Cisco, Genesys, Intervoice and Nortel, that integrate our solutions into hardware and software platforms.

      Embedded Speech. Automotive, mobile communications, consumer electronics and computer game manufacturers and their suppliers are accelerating the development of products that require enhanced voice control capabilities. In addition, a growing number of independent software and hardware vendors are incorporating voice control into multimedia applications and devices that allow users to interact with these systems by speaking.

      Our embedded speech solutions add voice control capabilities to applications integrated in a variety of automobiles and devices, such as mobile phones, PDAs, consumer electronics and navigation systems. This technology identifies specific words and phrases at any moment in time, converting spoken words into instructions that control functions within applications. Our solutions support dynamic vocabularies and have sophisticated noise management capabilities that improve accuracy, even in noisy environments. Our products scale to meet the size and accuracy requirements for automotive and navigation systems and offer rapid application development tools, extensive compatibility with hardware and operating systems and support multiple languages. We include toolkits with our software that help developers add our technologies to applications such as navigation systems, hands-free cell phone devices and voice-activated controls in an automobile.

      Our embedded speech solutions are used by automobile, cell phone, entertainment and aftermarket system manufacturers, and their suppliers, including Alpine, Bosch-Blaupunkt, Delphi, General Motors, LG, Microsoft, Motorola, Nokia, Pioneer, Samsung, Sony and Visteon. These technologies are included as part of a larger system, application or solution that is designed, manufactured and sold by our customers. These customers include handset and other device manufacturers and tier-one suppliers, companies whose size and importance qualifies them to be direct suppliers to the major automotive manufacturers, and in-dash radio, navigation system and other electronic device manufacturers.

      Dictation. Organizations demand solutions that increase productivity by automating repetitive business processes, including the creation of documents, data entry and completing forms. They also look for ways to maximize the productivity of their existing workers, including those with disabilities, and to comply with government requirements relating to workplace safety and accessibility. Organizations also seek solutions that can reduce the cost associated with manual transcription of professional documents. Since most people can speak more quickly than they can type, speech is a natural and efficient way to interact with computers to address these problems.

      Our Dragon dictation solutions increase productivity in the workplace by using speech to create documents, streamline repetitive and complex tasks, input data, complete forms and automate manual transcription processes. Our Dragon NaturallySpeaking solutions allow users to automatically convert speech into text at up to 160 words-per-minute, much faster than most people can type, while our Dragon MT (Medical Transcription) platform is a complete solution for automating the capture, processing and conversion of recorded dictation into electronic transcripts. Our software supports a vocabulary of more than 300,000 words that can be expanded by users to include specialized words and phrases, is designed to adapt to individual voice patterns and accents and is highly accurate, able to achieve accuracy rates of up to 99%.

      Our solutions are valuable within enterprises and workgroups for a number of reasons. Our software can operate within a distributed network environment, where speaker profiles can be stored on a server and accessed from any networked computer. Our solutions can also speech-enable existing business systems and applications, including Microsoft Office, customer service and practice management applications. Our software allows a user to interact with a computer completely by voice, increasing the productivity of disabled workers and those suffering from repetitive stress injury. Our solutions can also help government agencies address accessibility mandates, such as those described in Section 508 of the U.S. Government Rehabilitation Act. We also deliver versions of our products that are specialized for the medical and legal markets.

      The Dragon Dictation Solutions family of products delivers enhanced productivity for professionals and consumers that create documents and transcripts, and are available in versions that deliver specific capabilities important to legal and healthcare industries. Healthcare represents the most significant market opportunity for our dictation solutions, as more than $10 billion is spent each year to manually convert recorded dictation into electronic transcripts. We have expanded our capabilities within healthcare by enhancing Dragon Naturally-Speaking Medical and through the introduction of the Dragon MT Workflow System, an XML-based platform used by medical transcription teams to automate the way they capture, process and convert recorded dictation into electronic transcripts. The Dragon MT Workflow System, based upon technology gained from the acquisition of MedRemote, can reduce transcription processing costs up to 50% when compared to manual systems. A growing number of healthcare vendors and integrators, including Agfa, Cerner, Dictaphone, IDX and SoftMed Systems, have joined with Nuance to speech-enable their healthcare solutions.

      We offer a range of desktop and server solutions, each with features that match a specific customer target. Our solutions are also used in enterprises and workgroups, particularly in the medical, legal, government, finance and education sectors. The Dragon NaturallySpeaking family of products includes legal and medical vocabularies; supports the creation of custom vocabularies; and delivers capabilities that allow a user to access the application from within distributed care provider facilities. Our dictation software is available in eight languages. We utilize a combination of our global reseller network and direct sales to distribute our speech recognition and dictation products.

      Every day, millions of people work with documents — as paper, as PDF, on email and using word processing applications. The proliferation of the Internet, email and personal computer networks have greatly simplified the ability to share documents, resulting in an ever-growing volume of documents to be used and stored. Our ScanSoft Imaging Solutions family of products are used by millions to automate the conversion of paper and PDF into fully-formatted documents that can be edited; to turn any digital document or photograph into a secure PDF that can be easily shared; and to empower everyone to eliminate the costs associated with paper documents through easy-to-use scanning, document management and electronic document routing solutions.

      Our ScanSoft Imaging Solutions are desktop applications that are used to reduce the time and costs associated with creating, sharing and using documents. We have versions of our products that enable us to provide solutions to OEM hardware vendors, home office, small business and enterprise customers.

      Document and PDF Conversion. Despite the broad use of personal computers, there is no single standard for sharing and using documents. Millions of documents are shared every day as paper, as PDF and as electronic files in various word processing formats, creating barriers to productivity when people need to move existing documents between those formats. For example, manually reproducing a paper or PDF document in Microsoft Word, complete with text, columns and graphics, is both time consuming and costly. These productivity challenges are compounded whenever new formats are introduced into the market, such as the XML Paper Specification (XPS) format developed by Microsoft in support of future versions of Microsoft Office and Microsoft Vista.

      Our solutions help people and businesses save time and money by automatically converting documents from one format to another — for example turning existing paper documents and PDF files into fully-formatted documents that can be edited using Microsoft Office, Corel WordPerfect and other editing applications. Our OmniPage product family, uses Optical Character Recognition and page segmentation technology to deliver highly accurate document and PDF conversion, replacing the need to manually re-create documents. Our software preserves document formatting and provides editing capabilities that re-create the complex components in a typical document, including formatted text, columns, graphics, tables and spreadsheets. Our products can be used with existing business applications and enable the distribution and publishing of documents to email, Internet and mobile applications using standard file formats, including XML, HTML, PDF and Open eBook.

      The proliferation of multifunction devices and digital copiers connected over a network has increased the number of documents that individuals within an enterprise are transforming into digital format. Our software solutions create a more efficient method to process static documents in enterprise content management and database systems (usually as searchable PDF representations), thereby enhancing the value of their investments in these systems. All of these documents can then be more easily archived, edited and combined within the enterprise.

      Our solutions are used by individuals, and in professional office settings, particularly in the government, legal, finance and education sectors. Our OCR software is available in 11 languages. We utilize a combination of our global reseller network and direct sales to distribute our document conversion and PDF products. We license our software to companies such as Brother, Canon, Dell, HP and Xerox, which bundle our solutions with multifunction devices, digital copiers, printers and scanners.

      We also license software development toolkits to independent software vendors, integrators and in-house developers to add document and PDF conversion capabilities to their applications. Our independent software vendor customers, who use our technology for production capture or desktop applications, include vendors such as Autodesk, Canon, EMC/Captiva, Filenet, Kofax, Microsoft, Sharp and Verity.

      Digital Paper Management. As the volume and complexity of corporate data continues to multiply, organizations are increasingly challenged in their efforts to simplify the way they store and manage all of their paper and digital documents. The wide dispersion of documents makes finding information even more difficult, time-consuming and costly. As a result, businesses need solutions that allow individuals, workgroups or the entire organization to more efficiently organize, find and share business documents.

      Our digital paper management solutions, the PaperPort product family, convert paper into digital documents that can be easily archived, retrieved and shared. Our software can be used in conjunction with network scanning devices to preserve an image of a document exactly as it appears on paper. Our software automatically indexes the scanned image, so that it can be stored together with other digital documents on a desktop, over a network or within an enterprise content management system. In a single search, users can quickly find scanned documents and existing digital files that match the search criteria.

      Within enterprises, workgroups and distributed teams, our solution can also facilitate the movement of scanned paper and digital documents into email, print and other business applications. This streamlines the flow of documents between workers, decreasing the time and costs associated with managing and using paper documents. Our solution integrates with established file systems to simplify the transfer of documents between desktop and enterprise content management systems.

      Our digital paper management solutions are used by individuals, and in enterprises and workgroups, especially those within the legal, healthcare, financial, government, real estate and education industries. Our digital paper management software is available in more than eight languages. We utilize a combination of our global reseller network and direct sales to distribute our digital paper management products. We also license our software to companies such as Brother, Hewlett-Packard, and Xerox, which bundle our solutions with multifunction devices, digital copiers, printers and scanners.

      Better PDF for Business. PDF, a published format specification invented by Adobe Systems, has become a popular way to share same-as-paper documents through email, PC networks and on the Web. Over 50 vendors, including Nuance, have implemented solutions based upon the public PDF specification, which is also the basis for PDF-A, a new International Standards Organization (ISO) standard. With over $700 million per year spent on various PDF solutions worldwide, we believe that there is a market opportunity for PDF products targeted specifically at office workers and businesses.

      Our “Better PDF for Business” product family is comprised of three desktop applications. PDF Converter, developed in collaboration with Microsoft, is an affordable solution used to turn existing PDF files into fully-formatted Microsoft Word, Microsoft Excel and Corel WordPerfect documents that can be edited. PD Create! is an affordable solution to enable the creation of PDF from all of your PC applications, including support for PDF security, font embedding and other advanced features. PDF Converter Professional is our flagship PDF application, providing businesses with an affordable alternative to Adobe Acrobat and Adobe

Acrobat Professional. PDF Converter Professional enables users to view, manipulate and edit PDF documents, as well as create and complete PDF forms. Our solutions are compatible with public PDF specifications, and have proven to be a cost-effective alternative to those offered by Adobe Systems.

      Our PDF solutions are used by individuals, and in enterprises and workgroups, especially those within the legal, healthcare, financial, government, real estate and education industries. Our PDF software is available in more than eight languages. We utilize a combination of our global reseller network and direct sales to distribute our PDF products.

Our Competitive Strengths

      Core Technology Assets. In recent years, we have developed and acquired extensive technology assets, intellectual property and industry expertise in speech and imaging. Our technologies are based on complex mathematical formulas, which require extensive linguistic and image data, acoustic models and recognition techniques. A significant investment in capital and time would be necessary to replicate our current capabilities. We continue to invest in the advancement of our technologies to maintain our market leading position and to develop new applications. As of September 30, 2005, we had 391 full-time employees in research and development, and our technologies were covered by more than 500 patents and patent applications, expiring on various dates between 2005 and 2020.

      Broad Distribution Channels. We maintain an extensive network of resellers to address the needs of specific markets, such as financial, legal, healthcare and government. We believe that our extensive channel relationships increase the difficulty for competitors to develop a similar channel network and make it difficult for our products to be displaced. In addition, our far-reaching channel network enables us to introduce new products quickly and effectively throughout the global marketplace.

      Leading Market Share. We have a strong market position in most of our product categories and are the market leader in document and PDF conversion, network-based speech recognition and text-to-speech, and dictation. Organizations tend to look to established market leading vendors when making product selections. As the established brand in our markets, we believe we can target and win more partnership arrangements and new customers than our competition.

      International Focus. The broad language coverage within our product offerings increases the likelihood that vendors selling globally will select our technology. Our language coverage is difficult for competitors to duplicate, and our presence in global markets limits the potential entry of new regional competitors. With more than one half of our employees located outside of North America, we are able to efficiently compete on a global basis.

      Multiple End Markets. We license to a range of end markets and maintain a tiered distribution model that provides a diversified revenue stream and broad market exposure. We are not dependent on any single market segment or set of end customers and earn revenue from both established and emerging markets.

      Specialized Professional Services. We complement our technologies and products with a professional services organization that supports customers and partners, particularly in speech, with business and systems consulting, project management, user interface design and application development assistance. Our professional services are designed to shorten time-to-market, assist clients, reduce implementation risks and improve clients’ competitive position.

Our Strategy

      Participate Broadly In Speech. We intend to leverage our comprehensive technologies and leadership in speech to expand our opportunities in the call center, automotive, healthcare, telecommunications and mobile markets. We also intend to pursue emerging opportunities to use our speech technology within consumer devices, games and other embedded applications. To expand our position in speech, we intend to introduce new versions of our products and applications; complete new license agreements with customers and partners that will resell our technologies; and continue to make strategic acquisitions that we believe complement our existing solutions and resources in the telecommunications, automotive and electronics markets.

      Pursue Opportunities for Dictation in Healthcare. We intend to increase our investments and efforts in providing dictation solutions to the healthcare market where we believe there is a large opportunity to automate transcription processes and information workflow. We have formed a healthcare-specific sales organization to aggressively pursue sales into care provider organizations; expanded our reseller and system integrator channels within healthcare; and entered into OEM license agreements with leading healthcare IT hardware and software vendors.

      Expand Worldwide Channels. We intend to expand our global channel network and build upon our existing distribution channels, especially in Europe, Asia and Latin America. Along these lines, we have added sales employees in different geographic regions and launched programs and events to help recruit new partners for our channel network.

      Expand PDF and Imaging Solutions. We intend to enhance the value and functionality of our PDF and imaging solutions to enable enterprises to address the proliferation of PDF, the expanded use of content management systems, and the widespread adoption of networked multifunction and digital scanning devices. We intend to continue to introduce new and improved versions of our products to take advantage of developing market opportunities. We also plan to enhance our software development toolkits so our technologies can be integrated with more third-party and OEM solutions.

      Pursue Strategic Acquisitions. We have selectively pursued strategic acquisitions to expand our technology, channel and service resources and to complement our organic growth. For example, during 2003 we completed the LocusDialog, SpeechWorks and Philips acquisitions, in fiscal 2004 we completed the Telelogue and B&G acquisitions, and in fiscal 2005 we completed the Rhetorical, ART, Phonetic, MedRemote and Former Nuance acquisitions. We intend to continue to pursue strategic acquisitions as a part of our growth strategy.

Sales, Distribution and Fulfillment

      We market and distribute our products indirectly through a global network of resellers, comprising system integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers and distributors; and directly through our dedicated direct sales force and through our e-commerce website (www.nuance.com). As of September 30, 2005, we had 300 sales and marketing employees worldwide.

      We have established relationships with more than 2,000 channel partners, including leading system vendors, independent software vendors, value-added resellers and distributors, through which we market and distribute our products and solutions. In speech, companies such as Avaya, Bosch-Blaupunkt, Cisco, Delphi, Dictaphone, Genesys, LG, Microsoft, Nokia, Nortel, Samsung and Visteon embed our technologies into telecommunications systems and automotive, PC, handset, healthcare or multimedia applications. In imaging, companies such as Brother, Dell, Hewlett-Packard, Visioneer and Xerox include our technology in digital copiers, printers and scanners, as well as multifunction devices that combine these capabilities. In addition, companies such as Corel, Canon, Captiva, Kofax, Sharp and Verity embed our imaging technology into their commercial software applications.

      We license our applications to enterprises, professionals and consumers through distribution and fulfillment partners, including 1450, Ingram Micro, Tech Data and Digital River. These distribution and fulfillment partners provide our products to computer superstores, consumer electronic stores, eCommerce Web sites, mail order houses and office superstores, such as Amazon.com, Best Buy, CDW, MicroWarehouse, Circuit City, CompUSA, Fry’s Electronics, Office Depot, PC Connection and Staples.

      In fiscal 2005 two distribution partners, Ingram Micro and Digital River, accounted for 11% and 9% of our consolidated total revenue, respectively. For fiscal 2004, Ingram Micro and Digital River accounted for 14% and 8% of our consolidated total revenue, respectively. Sales of our dictation, document and PDF conversion products and our digital paper management products represented approximately 20%, 20% and 9%, of our total revenue, respectively, for fiscal 2005, as compared to 17%, 25% and 9%, respectively in fiscal 2004.

Proprietary Technology

      We exploit our proprietary technology, trade secrets, know-how, continuing technological innovations and licensing opportunities to maintain our competitive position. We rely on patent law, copyright law, trade secret laws, secrecy, technical measures, licensee agreements and non-disclosure agreements to protect our technology, trade secrets and other proprietary rights. Our policy is to file patent applications to protect technology, inventions and improvements that are important to the development of our business, to maintain a technological advantage over our competitors and to generate licensing revenue. In this regard, we have obtained patents that directly relate to our products. Our speech and imaging technologies are covered by more than 500 patents and patent applications. These patents expire on various dates between 2005 and 2020.

      To protect our ownership rights in our software products, we license our products to OEMs and resellers on a non-exclusive basis with contractual restrictions on reproduction, distribution and transferability. In addition, we generally license our software in object code form only. We license certain of our software products to end-users by use of a “shrink-wrap” or “click wrap” customer license that restricts the end-user to personal use of the product.

      We require our employees to execute confidentiality and invention assignment agreements in order to protect our proprietary technology and other proprietary rights. We also rely on trade secrets and proprietary know-how to protect our proprietary rights.

Research and Development

      The market for our products and services is characterized by rapid technological change, frequent new product introductions and enhancements, evolving industry standards, and rapidly changing client requirements. As a result, we believe that our future growth is highly dependent on the timely and efficient introduction of new and updated products and technology. As of September 30, 2005, we employed 391 people in research and development, a majority of whom are located in international locations. Our employees based in overseas facilities extend our global focus while often lowering our overall cost of research and development. To promote efficiency in our research and development efforts, we have organized the effective use of global development teams and a comprehensively integrated development process. In addition, we have developed and refined our time-to-market process, which contributes to cost-effective resource management while promoting technology sharing across programs.

      Our future success will depend in part on our ability to anticipate changes, enhance our current products, develop and introduce new products that keep pace with technological advancements and address the increasingly sophisticated needs of our clients. Our research and development expenses for the twelve months ended September 30, 2005, the nine months ending September 30, 2004 and the twelve months ended December 31, 2003 were $38.9 million, $26.2 million and $33.9 million, respectively. We expect that we will continue to commit significant resources to research and development in the future. To date we have not capitalized any research and development expenses and all costs have been expensed as incurred.

International Operations

      We currently have offices in a number of international locations including: Australia, Belgium, Canada, Denmark, England, France, Germany, Hong Kong, Hungary, Italy, Japan, the Netherlands, Poland, Spain, Sweden and Taiwan. The scope of our international operations includes research and development, customer support and sales and marketing. Our international research and development is conducted in Budapest, Hungary; Merelbeke, Belgium; Aachen, Germany; Montreal, Canada and Tel Aviv, Israel. Additionally sales and support offices are located throughout the world to support our current international customers and to expand our international revenue opportunities.

      Geographic revenue classification is based on the country in which the sale originates. Revenue for the twelve months ended September 30, 2005 was 64% in the United States and 36% international, as compared to the nine months ended September 30, 2004 which was 68% in the United States and 32% international.

      For a discussion of risks attendant to our international operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors — A significant portion of our revenue is derived from sales in Europe and Asia. Our results could be harmed by economic, political, regulatory and other risks associated with these and other international regions.”

Competition

      There are a number of companies that develop or may develop products that compete in our targeted markets; however, currently there is no one company that competes with us in all of our product areas. The individual markets in which we compete are highly competitive, and are subject to rapid technology changes. Within speech, we compete with AT&T, Fonix, IBM, Loquendo, Microsoft, Philips, Telisma and Voice Signal. Within imaging, we compete directly with ABBYY, Adobe, I.R.I.S. and NewSoft. In speech, some of our partners such as Avaya, Cisco, Edify, Genesys and Nortel develop and market products that can be considered substitutes for our solutions. In addition, a number of smaller companies in both speech and imaging produce technologies or products that are competitive with our solutions in some markets. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the ability of their technologies to address the needs of our prospective customers.

      Some of our competitors or potential competitors in our markets, such as Adobe, IBM and Microsoft, have significantly greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do. see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors  — The markets in which we operate are highly competitive and rapidly changing, and we may be unable to compete successfully.”

Employees

      As of September 30, 2005, we employed 1,112 people on a full-time basis, 515 in the United States and 597 internationally. Of the total, 391 were in product research and development, 300 in sales and marketing, 196 in professional service consulting, 72 in operations and support, and 153 in finance and administration. Our employees may be subject to collective bargaining agreements at a company or industry level in those countries where this is part of the local labor law or practice. We have experienced no work stoppages and believe that our employee relations are good. We have utilized the services of consultants, third-party developers, and other vendors in our sales, development, manufacturing activities and finance and administration functions.

Available Information

      Our reports filed with Securities and Exchange Commission, including this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.nuance.com, as soon as reasonably practicable after such reports are filed electronically with the Securities and Exchange Commission.

      Our corporate headquarters and administrative, sales, marketing, research and development and support functions occupy approximately 88,400 square feet of space that we lease in Burlington, Massachusetts. We

also lease additional properties in the United States and a number of foreign countries. The following table summarizes our significant leased properties as of September 30, 2005:

      In addition to the properties referenced above, we also lease a number of small sales and marketing offices in the United States and internationally. As of September 30, 2005, we were productively utilizing substantially all of the space in our facilities, except for space identified above as “Not occupied” or that has been subleased to third parties. We believe that our existing facilities are adequate for our needs for at least the next twelve months.

      Like many companies in the software industry, we have from time to time been notified of claims that we may be infringing certain intellectual property rights of others. These claims have been referred to counsel, and they are in various stages of evaluation and negotiation. If it appears necessary or desirable, we may seek licenses for these intellectual property rights. There is no assurance that licenses will be offered by all claimants, that the terms of any offered licenses will be acceptable to us or that in all cases the dispute will be resolved without litigation, which may be time-consuming and expensive, and may result in injunctive relief or the payment of damages by us.

      From time to time, we receive information concerning possible infringement by third parties of our intellectual property rights, whether developed, purchased or licensed by us. In response to any such

circumstance, we have counsel investigate the matter thoroughly and we take all appropriate action to defend our rights in these matters.

      On May 18, 2005, Nuance Communications, Inc. (“Former Nuance”) received a copy of a complaint naming Former Nuance and the members of the board of directors as defendants in a lawsuit filed on May 13, 2005, in the Superior Court of the State of California, County of San Mateo, by Mr. Frank Capovilla, on behalf of himself and, purportedly, the holders of Former Nuance’s common stock. The complaint alleges, among other things, that Former Nuance’s board of directors breached their fiduciary duties to Former Nuance’s stockholders with respect to the Merger Agreement that was entered into with ScanSoft, Inc. The complaint seeks to declare that the Merger Agreement is unenforceable. The complaint also seeks an award of attorney’s and expert’s fees. We believe the allegations of this lawsuit are without merit and expect to vigorously contest the action.

      On August 5, 2004, Compression Labs, Inc. filed an action against us in the United States District Court for the Eastern District of Texas claiming patent infringement. Damages are sought in an unspecified amount. In the lawsuit, Compression Labs alleges that we are infringing United States Patent No. 4,698,672 entitled “Coding System for Reducing Redundancy.” We believe this claim has no merit, and we intend to defend the action vigorously.

      On July 15, 2003, Elliott Davis (“Davis”) filed an action against SpeechWorks in the United States District Court for the Western District for New York (Buffalo) claiming patent infringement. Damages are sought in an unspecified amount. In addition, on November 26, 2003, Davis filed an action against us in the United States District Court for the Western District for New York (Buffalo) also claiming patent infringement. Damages are sought in an unspecified amount. SpeechWorks filed an Answer and Counterclaim to Davis’s Complaint in its case on August 25, 2003 and we filed an Answer and Counterclaim to Davis’s Complaint in its case on December 22, 2003. We believe these claims have no merit, and intend on defending the actions vigorously.

      On November 27, 2002, AllVoice Computing plc (“AllVoice”) filed an action against us in the United States District Court for the Southern District of Texas claiming patent infringement. In the lawsuit, AllVoice alleges that we are infringing United States Patent No. 5,799,273 entitled “Automated Proofreading Using Interface Linking Recognized Words to Their Audio Data While Text Is Being Changed” (the “‘273 Patent”). The ‘273 Patent generally discloses techniques for manipulating audio data associated with text generated by a speech recognition engine. Although we have several products in the speech recognition technology field, we believe that our products do not infringe the ‘273 Patent because, in addition to other defenses, they do not use the claimed techniques. Damages are sought in an unspecified amount. We filed an Answer on December 23, 2002. On January 4, 2005, the case was transferred to a new judge of the United States District Court for the Southern District of Texas for administrative reasons. We believe that we have meritorious defenses and intend on defending the action vigorously.

      In August 2001, the first of a number of complaints was filed, in the United States District Court for the Southern District of New York, on behalf of a purported class of persons who purchased Former Nuance stock between April 12, 2000 and December 6, 2000. Those complaints have been consolidated into one action. The complaint generally alleges that various investment bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in Former Nuance’s initial public offering of securities. The complaint makes claims for violation of several provisions of the federal securities laws against those underwriters, and also against Former Nuance and some of Former Nuance’s directors and officers. Similar lawsuits, concerning more than 250 other companies’ initial public offerings, were filed in 2001. In February 2003, the court denied a motion to dismiss with respect to the claims against Former Nuance. In the third quarter of 2003, a proposed settlement in principle was reached among the plaintiffs, issuer defendants (including Former Nuance) and the issuers’ insurance carriers. The settlement calls for the dismissal and release of claims against the issuer defendants, including Former Nuance, in exchange for a contingent payment to be paid, if necessary, by the issuer defendants’ insurance carriers and an assignment of certain claims. The timing of the conclusion of the settlement remains unclear, and the settlement is subject to a number of conditions, including approval of the court. The settlement is not expected to have a material

impact upon our financial condition or results of operations, as payments, if any, are expected to be made by insurance carriers, rather than by us. In July 2004, the underwriters filed a motion opposing approval by the court of the settlement among the plaintiffs, issuers and insurers. In March 2005, the court granted preliminary approval of the settlement, subject to the parties agreeing to modify the term of the settlement which limits each underwriter from seeking contribution against its issuer for damages it may be forced to pay in the action. In the event a settlement is not concluded, we intend to defend the action vigorously. We believe that we have meritorious defenses to the claims against Former Nuance.

      We believe that the final outcome of these matters will not have a significant adverse effect on our financial position and results of operations. However, even if our defense is successful, the litigation could require significant management time and could be costly. Should we not prevail in any such litigation, our operating results, financial position and cash flows could be adversely impacted.

      On August 31, 2005, we held a special meeting of our stockholders at which the following actions were voted upon:

PART II

Market for Common Stock

      Our common stock commenced trading on the Nasdaq National Market on December 11, 1995 under the symbol “VSNR,” and traded under that symbol until March 3, 1999. Subsequent to March 3, 1999 and until November 21, 2005, our common stock traded under the symbol “SSFT”. Effective November 22, 2005, our common stock is now traded on the Nasdaq National Market under the symbol “NUAN”. As of November 30, 2005, there were outstanding 160,200,839 shares of common stock. The following table sets

forth for the periods indicated the high and low sale prices for our common stock as reported on the Nasdaq National Market. As our fiscal 2004 included the period beginning January 1, 2004 and ending September 30, 2004 there is no fourth quarter in that fiscal year.

      The equity compensation plan information incorporated by reference into Part III, Item 12 of this Form 10-K is hereby incorporated by reference into this Part II, Item 5.

      As of November 30, 2005, there were 1,086 stockholders of record and the last reported sale price of our common stock on the Nasdaq National Market was $6.22 per share.

Dividend Policy

      We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future.

      Our loan and security agreement with Silicon Valley Bank, as amended on March 31, 2004, and again on March 31, 2005 contains a restrictive covenant which prohibits us from paying or declaring any dividends on our capital stock during the term of the agreement (except for dividends payable solely in capital stock) without Silicon Valley Bank’s prior written consent. In addition, the zero coupon convertible subordinated debenture due in January 2006 that was issued to Koninklijke Royal Philips Electronics N.V. in connection with our acquisition of the Speech Processing Telephony and Voice Control business units of Philips contains a restrictive covenant which prohibits us from paying or declaring any dividend or distribution (other than distributions of our equity securities) on our capital stock while the debenture is outstanding. This restriction terminates if one half or more of the debenture is converted by Philips into our common stock.

      We have not publicly announced any currently effective authorization to repurchase shares of our common stock. However, upon vesting of restricted stock awards, employees are permitted to return to us a portion of the newly vested shares to satisfy the tax withholding obligations that arise in connection with such vesting. The following table summarizes fiscal 2005 repurchases of our common stock, which represent shares returned to satisfy tax withholding obligations:

      On October 23, 2004, our Board of Directors approved a change in the Company’s fiscal year end from December 31 to September 30, effective beginning September 30, 2004. All references in this Form 10-K to the period ended September 30, 2004 refer to the nine months ended September 30, 2004. References to fiscal 2005, refers to the period beginning on October 1, 2004 and ending on September 30, 2005. References to fiscal 2003, refers to the period beginning January 1, 2003 and ending on December 31, 2003.

      The following selected consolidated financial data is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The interim statement of operations for the nine months ended September 30, 2003 is unaudited and, in the opinion of management, reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results of operations for the nine months ended September 30, 2003.

      See Note 3 of Notes to Consolidated Financial Statements for further information on our acquisitions made during fiscal 2005, 2004 and 2003.

           On August 11, 2003, the Company acquired SpeechWorks International, Inc.

           On December 19, 2003, the Company acquired LocusDialog, Inc.

           On September 16, 2004, the Company acquired Brand & Groeber Communications GbR.

           On January 21, 2005, the Company acquired ART Advanced Recognition Technologies, Inc.

           On February 1, 2005, the Company acquired Phonetic Systems Ltd.

           On May 12, 2005, the Company acquired MedRemote, Inc.

           On September 15, 2005, the Company acquired Nuance Communications, Inc.

      The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in “Risk Factors” starting on page 31 and elsewhere in this Annual Report.

Forward-looking Statements

      This annual report contains forward-looking statements. These forward-looking statements include predictions regarding:

      You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

      Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in this annual report under the heading “Risk Factors”. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

Overview of the Business

      We offer businesses and consumers competitive and value-added speech and imaging solutions that facilitate the way people access, share, manage and use information in business and in daily life. We market and distribute our products indirectly through a global network of resellers, comprising system integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers and distributors; and directly to businesses and consumers through a dedicated direct sales force and our e-commerce website (www.nuance.com). The value of our solutions is best realized in vertical markets that are information and process intensive, such as healthcare, telecommunications, financial services, legal and government.

      Our strategy is to deliver premier, comprehensive technologies and services as an independent application or as part of a larger integrated system in two areas — speech and imaging. Our speech technologies enable voice-activated services over a telephone, transform speech into written word, and permit the control of devices and applications by simply speaking. Our imaging solutions eliminate the need to manually reproduce documents, automate the integration of documents into business systems, and enable the use of electronic documents and forms within database, Internet, mobile and other business applications. Our software is delivered as part of a larger integrated system, such as systems for customer service call centers, or as an independent application, such as dictation, document conversion or PDF, navigation systems in automobiles or digital copiers on a network. Our products and technologies deliver a measurable return on investment to our customers.

      Our extensive technology assets, intellectual property and industry expertise in speech and digital capture provide us with a competitive advantage in markets where we compete. Our technologies are based on complex mathematical formulas, which require extensive amounts of linguistic and image data, acoustic models and recognition techniques. A significant investment in capital and time would be necessary to replicate our current capabilities, and we continue to build upon our leadership position. Our speech technology has industry-leading recognition accuracy, provides recognition for 46 languages and natural sounding synthesized speech in 25 languages, and supports a broad range of hardware platforms and operating systems. Our digital capture technology is recognized as the most accurate in the industry, with rates as high as 99.8%, and supports more than 100 languages. Our technologies are covered by more than 500 patents or patent applications. Our intellectual property, whether purchased and included as an asset on our balance sheet, or developed internally and thus not generally included on our balance sheet, is critical to our success and competitive position, and ultimately to our market value. We rely on a combination of patents, copyrights, trademarks, services marks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights.

      Our strategy includes participating broadly in speech, pursuing opportunities for dictation in the healthcare industry and other key vertical markets, expanding our PDF and imaging solutions, providing our partners and customers with a comprehensive portfolio of solutions, promoting the broad adoption of our technology, building global sales and channel relationships and pursuing strategic acquisitions that complement our resources.

      Nuance was incorporated in 1992 as Visioneer. In 1999, we changed our name to ScanSoft, Inc. and ticker symbol to SSFT. In October 2005, we changed our name to Nuance Communications, Inc., and in November 2005 we changed our ticker symbol to NUAN. From our founding until 2001, we focused exclusively on delivering imaging solutions that simplified converting and managing information as it moved from paper formats to electronic systems. On March 13, 2000, we merged with Caere Corporation, a California-based digital imaging software company, to expand our applications for document and electronic forms conversion. In December 2001, we entered the speech market through the acquisition of the Speech & Language Technology Business from Lernout & Hauspie. We believed speech solutions were a natural complement to our imaging solutions as both are developed, marketed and delivered through similar resources and channels. We continue to execute against our strategy of being the market leader in speech through the

organic growth of our business as well as through strategic acquisitions. Since the beginning of fiscal 2003, we have completed a number of acquisitions, including:

      Our focus on providing competitive and value-added solutions for our customers and partners requires a broad set of technologies, service offerings and channel capabilities. We have made and expect to continue to make acquisitions of other companies, businesses and technologies to complement our internal investments in these areas. We have a team that focuses on evaluating market needs and potential acquisitions to fulfill them. In addition, we have a disciplined methodology for integrating acquired companies and businesses after the transaction is complete.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

      The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, in particular those related to revenue recognition, the costs to complete the development of custom software applications and valuation allowances (specifically sales returns and other allowances); accounting for patent legal defense costs; the valuation of goodwill, other intangible assets and tangible long-lived assets; estimates used in the accounting for acquisitions; assumptions used in valuing stock-based compensation instruments; evaluating loss contingencies; and valuation allowances for deferred tax assets. Actual amounts could differ significantly from these estimates. Our management bases its estimates and judgments on historical experience and various other factors that are believed to be

reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenue and expenses that are not readily apparent from other sources. These estimates and judgments are discussed with, and reviewed by, the audit committee of our board of directors.

      We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and results of operations and require our most difficult and subjective judgments.

Revenue Recognition

      As a result of our SpeechWorks acquisition in August 2003, professional services became a material component of our business. As a result of this and the implementation of Oracle, in January 2004, we began to separately track and disclose professional services revenue and cost of revenue. Prior to 2004, we did not separately disclose professional services revenue and cost of revenue as they were immaterial and it is not practical to reclassify these revenues and associated costs retroactively.

      We recognize revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, “Modification of SOP 97-2 with Respect to Certain Transactions”, SOP 81-1 “Accounting for Performance of Construction Type and Certain Performance Type Contracts” and the Securities and Exchange Commission’s Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements” (“SAB 104”) and Emerging Issues Task Force (“EITF”) 01-9 “Accounting for Consideration Given by a Vendor (Including a Reseller of the Vendor’s Products)”, Statement of Financial Accounting Standards (“SFAS”) 48 “Revenue Recognition When Right of Return Exists” and EITF 01-14, “Income Statement Characterization of Reimbursements for ’Out-of-Pocket’ Expenses Incurred”. In general we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectibility is probable, and vendor specific objective evidence (“VSOE”) exists for any undelivered elements. We reduce revenue recognized for estimated future returns, price protection and rebates and certain marketing funds.

      Certain distributors and value-added resellers have been granted rights of return for as long as the distributors or resellers hold the inventory. We have not aggregated and analyzed historical returns from distributors and resellers to form a basis in order to estimate the future sales returns by distributors and resellers. As a result, we recognize revenue from sales to these distributors and resellers when they have sold products through to retailers and end-users. Title and risk of loss generally pass to the distributor or reseller upon shipment from us, at which time the transaction is invoiced and payment is due. Based on reports from distributors and resellers of their inventory balances at the end of each period, we record an allowance against accounts receivable and a reduction of revenue for the sales price of all inventories subject to return.

      We also make an estimate of sales returns by retailers or end users directly or through our distributors or resellers based on historical returns experience. We have aggregated and analyzed historical returns from retailers and end users which forms the basis of our estimate of future sales returns by retailers or end users. In accordance with SFAS 48, the provision for these estimated returns is recorded as a reduction of revenue at the time that the related revenue is recorded. If actual returns from retailers differ significantly from our estimates, such differences could have a material impact on our results of operations for the period in which the actual returns become known. Our accounts receivable balance was $69.5 million and $36.5 million at September 30, 2005 and 2004, respectively. These balances are net of sales returns and other allowances of $10.1 million and $8.8 million and allowances for doubtful accounts of $3.5 million and $2.5 million as of September 30, 2005 and 2004, respectively.

      Revenue from royalties on sales of our products by OEMs to third parties, where no professional services are included, is typically recognized upon delivery to the third party when such information is available, or when we are notified by the OEM that such royalties are due as a result of a sale, provided that all other revenue recognition criteria are met.

      When we provide professional services considered essential to the functionality of the software, such as custom application development for a fixed fee, we recognize revenue from the fees for such services and any

related software licenses based on the percentage-of-completion method in accordance with SOP 81-1. We generally determine the percentage of completion by comparing the labor hours incurred to date to the estimated labor hours required to complete the project. We consider labor hours to be the most reliable available measure of progress on these projects. Adjustments to estimates to complete are made in the periods in which facts resulting in a change become known. When the estimate indicates a loss, such loss is recorded in the period identified. Significant judgments and estimates are involved in determining total estimated costs, and therefore the percent complete of each contract. If our estimates change, the adjustment could have a material effect on our results of operations in the period of the change.

      When we provide services on a time and materials basis, we recognize revenue as we perform the services based on actual time incurred. Other professional services not considered essential to the functionality of the software are limited and primarily include training and feasibility studies, which are recognized as revenue when the related services are performed.

      When we provide software support and maintenance services, we recognize the revenue ratably over the term of the related contracts, typically one year.

      We may sell, under one contract or related contracts, software licenses, custom software applications and other services considered essential to the functionality of the software and a maintenance and support arrangement. The total contract value is attributed first to the maintenance and support arrangement based upon VSOE of its fair value, equal to its stated list price as a fixed percentage of the related software product’s price and additionally based upon stated renewal rates. The remainder of the total contract value is then attributed to the software license and related professional services, which are typically recognized as revenue using the percentage of completion method. As a result, discounts inherent in the total contract value are attributed to the software license and related professional services. We may sell, under one contract or related contracts, software licenses, a maintenance and support arrangement and professional services not considered essential to the functionality of the software. In those arrangements, the total contract value is attributed first to the undelivered elements of maintenance and support and professional services based on VSOE of their respective fair values, as described above. The remainder of the contract value is attributed to the software licenses, which are typically recognized as revenue upon delivery, provided all other revenue recognition criteria are met. As a result, discounts inherent in the total contract value are attributed to the software licenses.

      We follow the guidance of EITF 01-9 in determining whether consideration given to a customer should be recorded as an operating expense or a reduction of revenue recognized from that same customer. Consideration given to a customer is recorded as a reduction of revenue unless both of the following conditions are met:

      When the above conditions are not met, consideration, including that in the form of our equity instruments (if applicable), is recorded as a reduction of revenue, to the extent we have recorded cumulative revenue from the customer or reseller. As a result of this policy, we have recorded a $0.5 million, $0.3 million and $0.2 million reduction in total revenue for the fiscal year ended September 30, 2005, the nine months ended September 30, 2004 and the fiscal year ended December 31, 2003, respectively.

      We follow the guidance of EITF 01-14, “Income Statement Characterization of Reimbursements for ’Out-of-Pocket’ Expenses Incurred”, and record reimbursements received for out-of-pocket expenses as revenue, with offsetting costs recorded as cost of revenue. Out-of-pocket expenses generally include, but are not limited to, expenses related to airfare, hotel stays and out-of-town meals.

Accounting for Patent Legal Defense Costs

      We have capitalized external legal costs incurred in the defense of our patents where we believe it is probable and to the extent that the future economic benefit of the patent will be increased. We monitor the legal costs incurred and the anticipated outcome of the legal action and, if changes in the anticipated outcome occur, write off capitalized costs, if any, in the period the change is determined. As of September 30, 2005 and 2004, capitalized patent legal defense costs were $2.3 million and $0.5 million, respectively.

Valuation of Long-lived Tangible and Intangible Assets and Goodwill

      We have significant long-lived tangible and intangible assets and goodwill, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant long-lived tangible and intangible assets other than goodwill, are patents and core technology, completed technology and trademarks, and fixed assets which are typically amortized using the straight-line method over their estimated useful lives. The values of intangible assets, with the exception of goodwill, were initially determined by a risk-adjusted, discounted cash flow approach. We assess the potential impairment of identifiable intangible assets and fixed assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable and at least annually. Factors we consider important, which could trigger an impairment of such assets, include the following:

      Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would materially impact future results of operations and financial position in the reporting period identified.

      Effective January 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets”. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. The standard also requires us to test goodwill for impairment on at least an annual basis. We use July 1st as the date of the annual impairment test. The impairment test compares the fair value of the reporting unit to its carrying amount, including goodwill, to assess whether impairment is present. We have reviewed the provisions of SFAS 142 with respect to the criteria necessary to evaluate the number of reporting units that exist, based on our review we have determined that we operate in one reporting unit. Based on this assessment test, we have not had any goodwill impairment charges during our history. We assess the impairment of goodwill more often if indicators of impairment arise. Due to the addition of $150.8 million of goodwill relating to our acquisition of Former Nuance, we reviewed the goodwill for impairment as of September 30, 2005, and again determined that no impairment exists.

      In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded carrying value for the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. In fiscal 2005, a restructuring charge was recorded that included a $0.2 million charge related to certain leasehold improvements. No impairment charge was recorded in fiscal 2004. In fiscal 2003 a charge of $0.2 million was recorded relating to a portion of the technology acquired from Philips.

      Significant judgments and estimates are involved in determining the useful lives of our intangible assets, determining what reporting units exist and assessing when events or circumstances would require an interim

impairment analysis of goodwill or other long-lived assets to be performed. Changes in our organization or our management reporting structure, as well as other events and circumstances, including but not limited to technological advances, increased competition and changing economic or market conditions, could result in (a) shorter estimated useful lives, (b) additional reporting units, which may require alternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit, and/or (c) other changes in previous assumptions or estimates. In turn, this could have a significant impact on our consolidated financial statements through accelerated amortization and/or impairment charges.

Accounting for Acquisitions

      We have completed a number of significant business and other asset acquisitions over the preceding five years which have resulted in significant goodwill and other intangible asset balances. Our future business strategy contemplates that we may continue to pursue additional acquisitions in the future. Our accounting for acquisitions involves significant judgments and estimates primarily, but not limited to: the fair value of certain forms of consideration, the fair value of acquired intangible assets, which involve projections of future revenues and cash flows, the fair value of other acquired assets and assumed liabilities, including potential contingencies, and the useful lives and, as applicable, the reporting unit, of the assets. Our financial position or results of operations may be materially impacted by changes in our initial assumptions and estimates relating to prior or future acquisitions. Additionally, under SFAS 142, we determine the fair value of the reporting unit, for purposes of the first step in our annual goodwill impairment test, based on our market value. If prior or future acquisitions are not accretive to our results of operations as expected, our market value declines dramatically, or we determine we have more than one reporting unit, we may be required to complete the second step which requires significant judgments and estimates and which may result in material impairment charges in the period in which they are determined.

Accounting for Stock-based Compensation Instruments

      We apply the principles of SFAS 123 “Accounting for Stock-based Compensation” to value any grants of equity instruments to non-employees as well as to calculate pro forma information relative to our employee awards for disclosure purposes. Application of this principle inherently includes a number of estimates and assumptions including stock price volatility factors. We base our estimates and assumptions on the best information available at the time of valuation; however, changes in these estimates and assumptions including stock price volatility factors could have a material effect on the valuation of the underlying instruments.

Accounting for Long-Term Facility Obligations

      We have historically acquired companies which have previously established restructuring charges relating to lease exit costs, and we have recorded restructuring charges of our own that include lease exit costs. We follow the provisions of EITF 95-3 “Recognition of Liabilities in Connection with a Purchase Business Combination” or SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities”, as applicable. In accounting for these obligations, we are required to make assumptions relating to the time period over which the facility will remain vacant, sublease terms, sublease rates and discount rates. We base our estimates and assumptions on the best information available at the time of the obligation having arisen. These estimates are reviewed and revised as facts and circumstances dictate; changes in these estimates could have a material effect on the amount accrued on the balance sheet.

Loss Contingencies

      We are subject to legal proceedings, lawsuits and other claims relating to labor, service and other matters arising in the ordinary course of business. Quarterly, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential

liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.

Accounting for Income Taxes

      As part of the process of preparing our consolidated financial statements, we are required to calculate our income tax expense based on taxable income by jurisdiction. There are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue-sharing and cost-reimbursement arrangements among related entities and the differing tax treatment of revenue and cost items across various jurisdictions.

      Additionally, we monitor the realization of our deferred tax assets based on changes in circumstances, for example, recurring periods of income for tax purposes following historical periods of cumulative losses or changes in tax laws or regulations. Our income tax provisions and our assessment of the realizability of our deferred tax assets involve significant judgments and estimates. If we continue to generate taxable income through profitable operations in future years we may be required to recognize these deferred tax assets through the reduction of the valuation allowance which would result in a material benefit to our results of operations in the period in which the benefit is determined, excluding the recognition of the portion of the valuation allowance which relates to net deferred tax assets acquired in a business combination and stock compensation.

OVERVIEW OF RESULTS OF OPERATIONS

      On October 23, 2004, our Board of Directors approved a change in our fiscal year end from December 31 to September 30, effective beginning September 30, 2004. All references in this Form 10-K to the period ended September 30, 2004 refer to the nine months ended September 30, 2004, and are also referred to as fiscal 2004. References to fiscal 2005, refers to the period beginning on October 1, 2004 and ending on September 30, 2005. References to fiscal 2003, refers to the period beginning on January 1, 2003 and ending on December 31, 2003. References to fiscal 2006, refers to the period beginning on October 1, 2005 and ending on September 30, 2006.

      The following table presents, as a percentage of total revenue, certain selected financial data for the twelve months ended September 30, 2005, the nine months ended September 30, 2004 and September 30, 2003 and for the year ended December 31, 2003. The interim statement of operations for the nine months ended September 30, 2003 is unaudited and, in the opinion of management, reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results of operations for the nine months ended September 30, 2003.

RESULTS OF OPERATIONS

      We derive our revenue from licensing our software products to customers through distribution partners and value-added resellers, royalty revenue from OEM partners, license fees from sales of our products to customers and from professional services, which include, but are not limited to, custom software applications and other services considered essential to the functionality of the software, training, and maintenance associated with software license transactions. Our speech technologies use the human voice to interact with information systems and devices and make user experiences more compelling. Our imaging solutions help businesses save time and money by automatically converting paper documents and PDF files into editable and usable digital business documents that can be easily archived, retrieved and shared.

      Total revenue for the twelve month period ended September 30, 2005 increased by $101.5 million to $232.4 million, or 77.5%, compared to the nine month period ended September 30, 2004. The increase in revenue is attributed to several factors, including: a longer fiscal period in 2005, which includes a seasonally strong fourth calendar quarter that contributed $60.6 million of total revenue; excluding that incremental quarter, the total revenue increased $40.9 million, or 31.2%. The substantial majority of the growth derived from comparative periods was the result of organic growth in product lines existing as of January 1, 2004, and a lesser extent was based on revenue related to acquisitions consummated in late fiscal 2004 and during fiscal 2005.

      Total revenue for fiscal 2004 decreased by $4.5 million, or 3.3%, as compared to fiscal 2003. The decrease in revenue was attributable largely to the shorter fiscal period that was partially offset by several factors, including: fiscal 2004 having nine months of SpeechWorks revenue as compared to approximately four months in fiscal 2003, as well as to modest revenue in fiscal 2004 from acquisitions closed in the latter portion of the fiscal year.

      Related party revenue declined significantly in fiscal 2005, consisting of only $39,000 of revenue from Convergys, a company at which one of our directors is an executive. This compares to total related party revenue of $2.0 million and $4.3 million in each of fiscal 2004 and 2003, respectively. The majority of related party revenue for fiscal 2004 and 2003 was from Xerox, who ceased to be a related party as of June 30, 2004, and thus had only a partial year of activity in related party revenue in fiscal 2004, and a full year in fiscal 2003.

      The geographic revenue split in fiscal 2005 was 64% of total revenue in the United States and 36% international. For fiscal 2004 68% of total revenue was in the United States and 32% international, as compared to fiscal 2003 which had 71% of total revenue in the United States and 29% international.

      Product revenue for fiscal 2005 increased by $73.5 million, or 75.2%, as compared to fiscal 2004. The increase in product revenue is generally attributable to the factors discussed above with respect to total

revenue, including the seasonably strong fourth calendar quarter of calendar 2004 that contributed $46.8 million of increased product revenue; in addition to the revenue from the additional three-month period, the product revenue increased $26.6 million, or 27.3%. The substantial majority of the growth in addition to the additional three months was growth from organic products that we had in our product portfolio as of January 1, 2004, and a lesser portion was based on revenue related to recent acquisitions. Speech related product revenue increased to approximately 60% of total product revenue for fiscal 2005, up from approximately 55% of total product revenue in fiscal 2004. Expressed in dollars, revenue from speech related products totaled $104.2 million for fiscal 2005, as compared to $54.6 million for fiscal 2004. Within speech, network revenue remained relatively stable at approximately 25% of total product revenue in fiscal 2005, while embedded revenue increased to approximately 10% of total product revenue in fiscal 2005, up from approximately 7% in fiscal 2004. The increase in embedded revenue is largely attributable to the acquisition of ART in January 2005. Dictation revenue in fiscal 2005 increased to approximately 25% of total product revenue, up from approximately 22% for fiscal 2004, primarily due to the release of Dragon NaturallySpeaking 8.0 in the first quarter of fiscal 2005, as well as the May 2005 acquisition of MedRemote.

      Imaging related product revenue increased to $66.9 million for fiscal 2005, up 53% relative to fiscal 2004. 33% of this increase is due to the additional three months included in fiscal 2005, and the majority of the remaining increase is attributable to increased sales of our PaperPort product family, which had a new release in the first quarter of fiscal 2005.

      As a result of the SpeechWorks acquisition in August 2003, professional services became a material component of our business. As a result of professional services increased significance and the implementation of Oracle, in January 2004, we began to separately track and disclose professional services revenue and cost of revenue. Prior to 2004, we did not separately disclose professional services revenue and cost of revenue as they were immaterial and it is not practical to reclassify this revenue and associated costs retroactively.

      Professional services revenue for fiscal 2005 increased by $28.0 million, or 84.4%, as compared to fiscal 2004. The increase in professional services revenue is partially attributed to the additional three months included in fiscal 2005, including the seasonably strong fourth calendar quarter of calendar 2004 that contributed $13.7 million of increased professional services revenue; in addition to the revenue from that extra three-month period, the professional services revenue increased $14.3 million, or 30.4%. The substantial majority of the growth derived from comparative periods was derived from organic growth in products existing as of January 1, 2004, and a lesser portion was based on recent acquisitions. The organic growth is primarily due to the continued demand for consulting services, both in project size and in the volume of projects. Technical support revenue also contributed to the growth, both from organic products, and from revenue added from certain of the acquisitions during the period. Technical support revenue comprised 6.0% of total revenue for fiscal 2005, as compared to 5.6% in fiscal 2004. Also contributing to the total growth, but at a smaller scale, was an increase inapplication service provider revenue.

      For the fiscal year ended September 30, 2006, we expect to see total revenue grow by approximately 35% to 40%, as compared to fiscal 2005 total revenue of $232.4 million. We anticipate the majority of the growth to come from our speech related products and services, while we expect the imaging product family to contribute relative growth of 5% to 8%.

      As a result of the SpeechWorks acquisition in August 2003, professional services became a material component of our business. As a result of this, and the implementation of Oracle in January 2004, we began to separately track and disclose professional services revenue and cost of revenue. Prior to 2004, we did not separately disclose professional services revenue and associated cost of revenue as they were immaterial and it is not practical to reclassify these revenues and associated costs retroactively.

      Cost of product revenue in fiscal 2005 and 2004 primarily consists of material and fulfillment costs, manufacturing and operations costs, and also third-party royalty expenses. Cost of product revenue for fiscal 2005 grew to $20.4 million compared to fiscal 2004. This 96.8% increase is due to a number of factors, most significant of which is the additional three months included in 2005 as compared to 2004. Additionally, the expenses have increased along with the 75.2% growth in product revenue as compared to fiscal 2004. As a percentage of product revenue, cost of product revenue for fiscal 2005 increased to 11.9% as compared to 10.6% in fiscal 2004. This increase is primarily due to higher third party royalty expense that amounted to $4.2 million for fiscal 2005, compared to $1.2 million in fiscal 2004. The $3.0 million increase is due to a number of factors including more products that have royalties associated with them and higher royalties associated with renegotiated contracts with third parties for certain imaging products and the 75.2% increase in product revenue. Partially offsetting the royalty increase was a modest decrease in material costs of product revenue, from 5.0% of product revenue in fiscal 2004 to 4.6% for fiscal 2005.

      Cost of professional services revenue in fiscal 2005 and 2004 primarily consists of compensation for consulting employees and product support personnel, outside consultants and overhead. Cost of professional services for fiscal 2005 grew to $39.6 million, a 72.4% increase compared to fiscal 2004. This increase is due to a number of factors including the additional three months included in fiscal 2005. Additionally, incremental costs were necessary to support the 84.4% growth in related revenue. As a percentage of professional services revenue, cost of professional services revenue for fiscal 2005 dropped to 64.7% compared to 69.2% for fiscal 2004. The percentage decrease in professional services cost as a percent of professional services revenue is attributable to a number of factors, including a reduction in outside consultant expenses and a more efficient utilization of existing headcount.

      Cost of product revenue as a percentage of product revenue for fiscal 2004 was 10.6%, compared to 19.3% of total revenue for fiscal 2003. As noted above, the revenue and costs of revenue for fiscal 2004 and 2003 are not fully comparable due to the professional services being specifically identified in fiscal 2004. Notwithstanding this change in fiscal 2004, the fiscal 2003 professional services were not significant and so some comparison can still be made on an aggregate gross margin basis, as discussed below.

      Cost of revenue from amortization of intangible assets consists of the amortization of acquired patents and core and completed technology. These assets are amortized into expense over their estimated useful lives. We evaluate these assets for impairment and for appropriateness of their remaining life on an ongoing basis. Cost of revenue from the amortization of intangible assets was $9.2 million in fiscal 2005 and $8.4 million in fiscal 2004. The increase relates to the additional three months in the fiscal 2005 period, partially offset by the net amount of amortization of intangible assets that became fully amortized in fiscal 2004 and new amortization on assets established in connection with our acquisitions during fiscal 2004 and 2005. The cost of revenue related to the amortization of intangible assets in fiscal 2003 was $10.5 million, $2.1 million more than in fiscal 2004. The difference between the two periods primarily is a result of the additional three months in the fiscal 2003 period, partially offset by the increase relating to the acquisitions consummated in fiscal 2003 and 2004.

      We expect the cost of revenue from amortization of intangible assets to increase in fiscal 2006 due to the amortization of intangible assets arising from fiscal 2005 acquisitions, which will be largely offset by the amortization on certain existing assets that was finalized during fiscal 2005. Based on the amortization of the intangible assets existing as of September 30, 2005, and assuming no impairment or reduction in expected lives, we expect the fiscal 2006 amortization will be $9.6 million.

      Gross margin for fiscal 2005 increased to 70.3%, up 2.2%, from 68.1% in fiscal 2004. The increase in fiscal 2005 is largely a result of a reduction in the amortization of intangibles as a percentage of revenue, decreasing to 3.9% from 6.4% in fiscal 2004. This decrease in margin is driven by two factors, a 0.9% shift in the mix of total revenue towards lower margin professional services and the increased third party royalties on product revenue, these being largely offset by the nearly 4.5% improvement on the margin of the professional services.

      Gross margin was 68.1% of revenue for the nine months ended September 30, 2004 as compared to 72.9% for the twelve months ended December 31, 2003. The decrease is directly attributable to the increase in professional services revenue, which increased to 25.4% of total revenue for fiscal 2004 from 8.6% in fiscal 2003. The increase in professional services revenue, which has a lower relative gross margin, was attributable to the acquisitions of SpeechWorks and Phillips.

      Research and development expense primarily consists of salary and benefits costs of engineers. We believe that the development of new products and the enhancement of existing products are essential to our success. Accordingly, we plan to continue to invest in research and development activities. To date, we have not capitalized any internal development costs as the cost incurred after technological feasibility but before release of product has not been significant. In fiscal 2005 we continued to invest in research and development, increasing expenses to $38.9 million compared to $26.2 million in 2004. The increase in expenses after reflecting the effect of the three months ended December 2004, results in additional expenses of $3.9 million, or 11% on an annualized basis. While continuing to increase in absolute dollars, this investment has decreased relative to our total revenue, with research and development expenses in fiscal 2005 comprising 16.8% of total revenue, as compared to 20.0% of total revenue for fiscal 2004. This decrease as a percentage of total revenue is due to a number of factors, including relative synergies that we have begun to realize following certain of our acquisitions. Research and development expenses for fiscal 2004 were 20.0% of total revenue, compared to 25.1% of total revenue for fiscal 2003. This percentage decrease reflects synergies in our infrastructure relative to the increased revenue base, while modestly continuing to increase the absolute dollars spent in comparable periods.

      While we will continue to invest in research and development in fiscal 2006, we expect research and development expenses to decline as a percentage of revenue due to growth in total revenue and as a result of synergies related to our overall growth, both organic and as a result of certain of our acquisitions.

      Sales and marketing expenses include salaries and benefits, commissions, advertising, direct mail, public relations, tradeshows and other costs of marketing programs, travel expenses associated with the sales team and overhead. Sales and marketing expense increased $28.8 million to $77.9 million in fiscal 2005, a 58.6% increase compared to fiscal 2004. The increase in expenses after reflecting the effect of the three months ended December 2004, results in additional expenses of $10.2 million, or 15% on an annualized basis. Absolute dollars have increased, however the sales and marketing expense as a percent of total revenue dropped to 33.5% in fiscal 2005, from 37.5% in fiscal 2004. Decreases in expenses as a percent of revenue were derived largely from an improved efficiency of the sales organization, allowing for total compensation of sales and marketing employees to decrease as a percentage of revenue, to 18.9% of total revenue for fiscal 2005, down from 21.1% for fiscal 2004. Additionally, while the cost of marketing programs increased in absolute terms to $16.8 million for fiscal 2005 from $10.7 million for fiscal 2004, this represents a decrease in terms of the percentage compared to total revenue of 1.0%, from 8.2% in fiscal 2004 to 7.2% in fiscal 2005.

      Sales and marketing expense was 37.5% of total revenue for fiscal 2004, compared to 36.0% in fiscal 2003. The increase in sales and marketing expenses in absolute dollars and as a percentage of total revenue in 2004 was the result of increased compensation costs primarily resulting from the investment in additional sales and marketing personnel added as part of the SpeechWorks and LocusDialog acquisitions completed late in 2003.

The increase in fiscal 2004 absolute dollars spent was offset partially by the three fewer months included in fiscal 2004 as compared to fiscal 2003.

      We expect sales and marketing expenses to increase as we continue to pursue our strategic goals. While increasing in absolute dollars, we are expecting to see a decrease in sales and marketing expenses as a percentage of revenue in fiscal 2006 as the expected revenue growth outpaces the expenses in this area.

      General and administrative expenses primarily consist of personnel costs for administration, finance, human resources, information systems, facilities and general management, fees for external professional advisors including accountants and attorneys, insurance, and provisions for doubtful accounts.

      General and administrative expenses were $30.2 million, or 13.0%, of total revenue in fiscal 2005, as compared to $17.8 million, or 13.6% of total revenue for fiscal 2004, a $12.5 million, or 69.6% increase. The increase in expenses after reflecting the effect of the three months ended December 2004, results in additional expenses of $5.5 million, or 22% on an annualized basis. The increase in the expenses in 2005 is attributable to several factors which are necessary to support the growth, complexity and regulatory requirements of our growing business. The increase primarily is the result of costs relating to incremental headcount and fees for professional consultants. The costs relating to headcount are primarily attributable to additional team members in the finance, facilities and IT departments. The increase in expenditures for professional consultants includes fees for Sarbanes Oxley compliance, as well as to accounting and legal advisors, and also for advisors supporting our planning and integration efforts related to our acquisition of Former Nuance.

      General and administrative expenses were 13.6% of total revenue in fiscal 2004 compared to 12.0% in fiscal 2003. The total expenses increased despite the shorter period included in fiscal 2004. The increase in fiscal 2004 was due to several factors, including: the increase in expenses relating to the SpeechWorks and LocusDialgo acquisitions that were consummated in the latter portion of fiscal 2003, professional fees related to the restatement of certain historical financial statements of SpeechWorks and for professional fees related to compliance with Sarbanes Oxley regulatory requirements.

      We expect to begin to see general and administrative expenses as a percentage of total revenue decrease as the revenue growth outpaces the expense growth, and as we begin to see reductions in certain expenses such as those relating to our compliance with Sarbanes Oxley in fiscal 2006. Notwithstanding the decrease as a percentage of total revenue, we expect to continue to increase the total amount expended relating to general and administrative expenses as we add headcount and incur other expenses to support the growth of our business.

      Amortization of other intangible assets into operating expense includes amortization of acquired customer and contractual relationships, non-compete agreements and acquired trade names and trademarks. These assets are amortized into expense over their estimated useful lives. We evaluate these assets for impairment and for appropriateness of their remaining life on an ongoing basis. Operating expenses derived from the amortization of intangible assets was $4.0 million in fiscal 2005 and $2.0 million in fiscal 2004. The increase relates to the additional three months included in fiscal 2004, and to the amortization of intangible assets that were purchased in connection with our acquisitions during fiscal 2004 and 2005. The cost of revenue related to the amortization of intangible assets in fiscal 2003 was $2.3 million, or $0.3 million more than in fiscal 2004. The decrease in fiscal 2004 was the result of three fewer months than in the fiscal 2003 period, offset partially by the increase in amortization relating to the intangible assets acquired by us during fiscal 2003 and 2004.

      We expect the operating expense derived from amortization of intangible assets to increase significantly in fiscal 2006 due to the amortization of intangible assets arising from fiscal 2005 acquisitions, offset by amortization of certain existing assets that became fully amortized in fiscal 2005. Based on the amortizable intangible assets as of September 30, 2005, and assuming no impairment or reduction in expected lives, we expect that the fiscal 2006 amortization included in operating expenses will be $8.7 million.

      Stock-based compensation expenses primarily result from non-cash charges for restricted common shares or units issued with exercise or purchase prices that are less than the fair market value of the common stock on the date of grant. We incur expenses as the underlying equity instrument vests, generally over a period between two and four years. We have issued more equity instruments containing stock-based compensation in fiscal 2005 and 2004 relative to our history, and thus as these instruments vest we are incurring additional expenses. Specifically we issued instruments that represented 1.0 million, 1.1 million and 0.6 million shares in fiscal 2005, 2004 and 2003 respectively. This compares to a cumulative issuance of 0.1 million shares in prior years in total. We incurred expense of $2.8 million, $1.3 million and $0.3 million in fiscal 2005, 2004 and 2003, respectively, relating to the vesting of these instruments.

      In September 2005, we assumed options to purchase common stock in connection with our acquisition of Former Nuance. We established $4.2 million in deferred compensation relating to the intrinsic value of the unvested portion of these options. We incurred expenses of $0.2 million relating to this vesting that occurred subsequent to the acquisition date in fiscal 2005.

      We expect stock-based compensation expense to increase significantly in fiscal 2006 due to the adoption of SFAS 123R “Share-Based Payment” which is effective for us beginning in the first quarter of fiscal 2006. We are currently evaluating the impact of SFAS 123R on our results of operations.

      In fiscal 2005, 2004 and 2003 we incurred restructuring charges of $7.2 million, $0.8 million and $3.7 million, respectively. Fiscal 2005 charges are the result of a plan of restructuring to eliminate ten employees in the first quarter, a plan of restructuring relative to certain of our facilities in June 2005, and a September 2005 plan of restructuring for additional facilities and a reduction of approximately 40 persons in connection with our acquisition of Former Nuance. The facilities charges included $0.2 million related to the write-down of leasehold improvements based on their net book value relative to the fair market value for their shortened lives. The reduction in personnel was primarily from the research and development and sales and marketing teams, and was based on elimination of redundancies resulting from our acquisition of Former Nuance. In fiscal 2004, we incurred restructuring charges in relation to separation agreements with two former members of our senior management team, and in fiscal 2003 we recorded charges reflecting the termination of 106 employees as a result of the Philips and SpeechWorks acquisitions, as well as for other facility and employee related decisions associated with various corporate activities.

      Other income (expense), net comprises interest income, interest expense and other income (expense), net. Interest income was $1.2 million for fiscal 2005, as compared to $0.4 million in fiscal 2004 and $0.5 million for fiscal 2003. The increase in interest income in fiscal 2005 was primarily due to higher cash and investment balances during the year, as compared to the two prior fiscal periods.

      Interest expense increased to $1.6 million for fiscal 2005, compared to $0.3 million in fiscal 2004, and $0.8 million in fiscal 2003. This increase in interest expense in fiscal 2005 compared to fiscal 2004 is attributable largely to the deferred installment payments of $16.4 million and $17.5 million, respectively, related to the acquisitions of ART and Phonetic in the second quarter of fiscal 2005. Fiscal 2003 interest expense was larger than fiscal 2004 due to a note payable relating to the acquisition of Philips that was outstanding during most of fiscal 2003 and not during fiscal 2004.

      Other income (expense), net was $(0.2) million, $(0.1) million and $1.0 million for fiscal 2005, 2004 and 2003, respectively, and is primarily comprised of foreign exchange gains and losses. Fiscal 2003 included foreign currency gains of $1.2 million that did not occur in either fiscal 2005 or 2004, and which comprise the majority of the difference between periods.

      We expect that interest expense will increase significantly in fiscal 2006 as a result of recording discounts against certain of the operating leases that have been accrued in purchase accounting, as well as under certain of our restructuring activities.

      In fiscal 2005, the Company’s effective tax rate was a provision of 488.3% versus a provision of 16.6% in fiscal 2004. The variance from the federal statutory rate for fiscal 2005 was primarily due to the increase in the Company’s valuation allowance with respect to certain deferred tax assets.

      In fiscal 2004, the Company’s effective tax rate was a provision of 16.6% versus a benefit of 4.6% in fiscal 2003. The variance from the federal statutory rate for fiscal 2004 was primarily due to state, federal and foreign credits for research and development, offset by increases in the valuation allowance.

      In fiscal 2003, the Company’s effective tax rate was a benefit of 4.6%. The variance from the statutory rate for fiscal 2003 was due primarily to a federal refund received relating to Caere Corporation for taxes paid prior to its acquisition by Nuance, offset by increases in the valuation allowance.

      At September 30, 2005, Nuance had net deferred tax assets of approximately $214.8 million which were subject to consideration of a valuation allowance. A full valuation allowance has been provided against the net deferred tax assets in the United States due to the uncertainty of their realization as a result of cumulative historical losses. In the future, a period of sustained profitability will cause us to reassess the need for the valuation allowance. We may be required to recognize these deferred tax assets through the reduction of the valuation allowance which would result in a material benefit to our results of operations and adjustments to recorded goodwill and shareholder equity in the period in which the benefit is determined.

      We recorded a net loss of $(5.4) million, $(9.4) million and $(5.5) million in fiscal 2005, 2004 and 2003, respectively. These net losses amounted to a per share basic net loss of $(0.05), $(0.09) and $(0.07) in fiscal 2005, 2004 and 2003, respectively. The basic net losses are derived from our common shares outstanding, net of treasury shares held.

LIQUIDITY AND CAPITAL RESOURCES

      As of September 30, 2005, we had cash and cash equivalents of $71.7 million, marketable securities of $24.1 million, and working capital of $12.1 million as compared to $23.0 million in cash and cash equivalents, marketable securities of $7.4 million, long-term marketable securities of $17.4 million and working capital of $27.9 million at September 30, 2004. In addition to our cash, investments and working capital, we have $11.7 million of certificates of deposit relating to certain of our facilities leases, these amounts are included in Other Assets as of September 30, 2005. During 2004, we adopted a formal investment policy in order to achieve a higher yield on our cash position by investing in short and long-term marketable securities.

      We have reported a net loss of $(5.4) million for fiscal 2005, a net loss of $(9.4) million for the fiscal 2004 and a net loss of $(5.5) million for fiscal 2003. We had an accumulated deficit of $167.2 million at September 30, 2005.

      Net cash provided by operating activities for fiscal 2005 was $16.2 million, as compared to $6.3 million for fiscal 2004. Cash provided by operations in each of fiscal 2005 and 2004 primarily came from income from operations, after adjustments for non-cash amortization, depreciation and stock compensation. Fiscal 2005 net income and non-cash items were further benefited from an increase of $13.5 million in accounts payable and accrued expenses, and these were offset by an increase in accounts receivable of $19.8 million. The increase in accounts receivable represents a 41.4% increase relative to the September 30, 2004 gross accounts receivable of $47.8 million; this compares to a total increase in revenues during fiscal 2005 of 77.5% as compared to fiscal 2004. In fiscal 2004, net income and non-cash items were impacted by decreased accounts receivable balance, and these were collectively partially offset by lower deferred revenue and lower aggregated accounts payable and accrued expenses.

      Net cash used in investing activities for fiscal 2005 was $44.6 million, as compared to $28.7 million in fiscal 2004. Significant components of our net cash used in investing activities in fiscal 2005 included $61.3 million relating to acquisitions and $4.6 million for the purchase of new property and equipment. These expenditures were offset partially by $21.1 million of redemptions of marketable securities. Net cash used in investing activities in fiscal 2004 consisted of $25.0 million invested in marketable securities, $3.3 million in capital expenditures and $0.7 million in net cash paid for acquisitions.

      Net cash provided by financing activities for fiscal 2005 was $76.5 million, as compared to $2.7 million in fiscal 2004. Net cash provided by financing activities in fiscal 2005 primarily consisted of $73.9 million in net proceeds from the sale of common stock to Warburg Pincus in May 2005 and September 2005, also contributing were $6.2 million in proceeds from employees’ purchases of common stock under our incentive stock programs. These proceeds were partially offset by payments on licensing arrangement of $2.8 million, the repurchase of shares of our common stock totaling $0.4 million and an additional $0.5 million that we paid on our debt obligations. Net cash provided by financing activities in fiscal 2004 consisted of $6.1 million in proceeds from issuance of common stock under employee stock compensation plans and $0.6 million in proceeds from the issuance of common stock warrants. This was partially offset by a $2.8 million payment associated with a licensing agreement, a $0.7 million payment of note payable and deferred acquisition payments and a $0.4 million payment to the former Caere president and CEO in connection with the settlement of a non-competition and consulting agreement.

      On October 31, 2002, we entered into a Loan and Security Agreement (as amended, the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) that consisted of a $10.0 million revolving loan (the “Credit Facility”). The Company amended this Loan and Security Agreement as of March 31, 2004, extending the term to March 31, 2006. Under this amendment, we must comply with both a minimum adjusted quick ratio and a minimum tangible net worth calculation, as defined in the Loan Agreement. Depending on our adjusted quick ratio, borrowings under the Credit Facility bear interest at the Bank’s prime rate plus up to 0.75%, (collectively 6.75% at September 30, 2005), as defined in the Loan Agreement. The maximum permissable amount of borrowings outstanding at any one time was amended to the lesser of $20.0 million or a borrowing base equal to either 80% or 70% of eligible accounts receivable, as defined in the Loan Agreement, based on our adjusted quick ratio, reduced in all cases by the amount of outstanding letters of credit. Borrowings under the Loan Agreement cannot exceed the borrowing base and must be repaid in the event they exceed the calculated borrowing base or upon expiration of the loan term. Borrowings under the Loan Agreement are collateralized by substantially all of our personal property, predominantly our accounts receivable, but not our intellectual property. On March 31, 2005, we further amended the Loan and Security Agreement. This amendment modified the terms under which the minimum adjusted quick ratio covenant is calculated. All other terms remained the same. As of September 30, 2005, no amounts were outstanding under the Credit Facility. As of September 30, 2005 $6.1 million was committed for outstanding letters of credit. In connection with our acquisition of Former Nuance, we recorded $150.8 million of goodwill, which caused us to no longer satisfy the tangible net worth covenant, and therefore as of September 30, 2005, we were no longer in compliance with all covenants in the Loan Agreement. We can make no guarantees as to our ability to receive a waiver of our non-compliance, or of our ability to become in compliance with the covenants as they currently exist. If we are unable to successfully amend the Loan Agreement, or otherwise satisfy the parties secured by the outstanding letters of credit, we will no longer have the borrowing capacity under the Loan Agreement, and may be required to deposit $6.1 million of our existing cash or investments to satisfy the parties secured by our outstanding letters of credit. We believe that it is probable we will be able to satisfy these parties, and therefore we have not recorded a restriction on the $6.1 million.

      In fiscal 2005, 2004 and 2003 we have incurred restructuring charges of $7.2 million, $0.8 million and $3.7 million, respectively. Fiscal 2005 activities are the result of a plan of restructuring to eliminate ten employees in the first quarter, a plan of restructuring relative to certain of the our facilities in June 2005, and a September 2005 plan of restructuring for additional facilities and the reduction of approximately 40 personnel that was the result of future operational decisions made in connection with our acquisition of Former Nuance. In fiscal 2004 we incurred the restructuring charges in relation to separation agreements with two former members of our senior management team, and in fiscal 2003 we recorded charges reflecting the termination of 106 employees as a result of the Philips and SpeechWorks acquisitions, as well as for other facility and employee related decisions made associated with various corporate activities.

      The remaining restructuring accrual of $5.8 million as of September 30, 2005 is composed of (i) $1.8 million in employee related costs, and (ii) lease exit costs of $4.0 million. With regards to the employee related costs, most of the balance was recorded under the restructuring charge from the fourth quarter of fiscal 2005, and the balance will be significantly paid in fiscal 2006. The employee related payments

made in fiscal 2005 were primarily related to the charges recorded in the first and third quarters of fiscal 2005. The accrual for lease exit costs is largely due to the fiscal 2005 restructuring activities. The lease exit costs recorded in fiscal 2005, and remaining accrued as September 30, 2005 include gross payments of $5.3 million, offset by estimated sublease payment of $1.7 million, and further reduced by $0.3 million to arrive at the net present value of the obligation. In addition to the fiscal 2005 lease exit costs, prior fiscal years restructurings remain on the balance sheet as well. The gross value of $6.0 million of lease exit costs will be paid out approximately as follows: $1.9 million in fiscal 2006, $0.6 million per annum through fiscal 2009, and then $0.5 million per annum in fiscal 2010 through the middle of fiscal 2013.

      Although we generated $16.2 million of cash from operations for fiscal 2005, and ended the year with a cash balance of $71.7 million and marketable securities of $24.1 million, there can be no assurance that we will be able to continue to generate cash from operations or secure additional equity or debt financing if required.

      In connection with the Philips Speech Processing Telephony and Voice Control Business Unit acquisition we issued a $27.5 million, zero interest convertible debenture due January 2006. In connection with the ART acquisition, we are committed to pay $16.4 million in December 2005. In connection with the Phonetic acquisition, we agreed to (i) pay $17.5 million in February 2007 and (ii) make contingent payments of up to an additional $35.0 million in cash, in 2006 through 2008 if at all, upon the achievement of certain performance targets. Our acquisition of B&G has provisions through January 2007 that may require us to pay up to an additional 5.5 million euro based on the achievement of certain performance targets (approximately $6.8 million based on exchange rates at September 30, 2005). In connection with several acquisitions we have assumed obligations relating to certain lease facilities that were abandoned by the acquired companies prior to the acquisition date, or have been or will be abandoned by us in connection with a restructuring plan generally formulated concurrently with, and implemented as a result of, our acquisition of each of these companies. We are committed to pay $104.0 million in connection with these leases, which are included in the contractual obligations disclosed below. In connection with our acquisition of Former Nuance we have $18.2 million of payments for shares purchased and for transaction costs that will be paid in fiscal 2006, and that are included in accrued expenses at September 30, 2005. In addition to costs accrued as of September 30, 2005 relating to our acquisition of Former Nuance, we are committed to pay $1.9 million in severance and related one-time payments to former employees of Former Nuance so long as they remain with us through specified dates in fiscal 2006. These $1.9 million in payments are not accrued as of September 30, 2005 as they are related to future performance obligations of these employees.

      We believe that cash flows from future operations in addition to cash and marketable securities on hand will be sufficient to meet our working capital, investing, financing and contractual obligations, as they become due for the foreseeable future. We also believe that in the event future operating results are not as planned, that we could take actions, including restructuring actions and other cost reduction initiatives, to reduce operating expenses to levels which, in combination with expected future revenue, will continue to generate sufficient operating cash flow. In the event that these actions are not effective in generating operating cash flows we may be required to issue equity or debt securities on less than favorable terms.

Contractual Obligations

      The following table outlines our contractual payment obligations as of September 30, 2005:

      Through September 30, 2005, we have not entered into any off balance sheet arrangements or transactions with unconsolidated entities or other persons.

FOREIGN OPERATIONS

      Because we have international subsidiaries and distributors that operate and sell our products outside the United States, we are exposed to the risk of changes in foreign currency exchange rates or declining economic conditions in these countries. In certain circumstances, we have entered into forward exchange contracts to hedge against foreign currency fluctuations on intercompany balances with our foreign subsidiaries. We use these contracts to reduce our risk associated with exchange rate movements, as the gains or losses on these contracts are intended to offset any exchange rate losses or gains on the hedged transaction. We do not engage in foreign currency speculation. Hedges are designated and documented at the inception of the hedge and are evaluated for effectiveness monthly. Forward exchange contracts hedging firm commitments qualify for hedge accounting when they are designated as a hedge of the foreign currency exposure and they are effective in minimizing such exposure.

      On November 3, 2003, we entered into a forward exchange contract to hedge our foreign currency exposure related to 3.5 million euros of intercompany receivables from our Belgian subsidiary to the United States. The contract had a one year term that expired on November 1, 2004. On November 1, 2004 we renewed this forward hedge contract; the renewed contract had a one-year term expiring on November 1,

2005; however it was cancelable at our discretion. In February 2005, the Company liquidated the contract. A $0.5 million unrealized loss had been recorded on this contract as of September 30, 2004, and we recognized a net gain of less than $0.1 million in fiscal 2005 through the termination of this hedge.

      On November 5, 2003, we entered into a forward exchange contract to hedge our foreign currency exposure related to 7.5 million Singapore dollars of inter-company receivables from our Singapore subsidiary to the United States. The original contract expired on January 30, 2004, but was extended to October 29, 2004. The contract was not further extended and thereby terminated on October 29, 2004. We realized a loss of approximately $0.2 million related to this hedge.

      As of September 30, 2005, we had no outstanding foreign exchange derivative contracts.

      With our increased international presence in a number of geographic locations and with international revenue having increased in fiscal 2005 and expected to continue to increase in fiscal 2006, we are exposed to changes in foreign currencies including the euro, Canadian dollar, Japanese yen, Israeli new shekel and the Hungarian forint. Changes in the value of these foreign currencies relative to the value of the U.S. dollar could adversely affect future revenue and operating results.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS 154, “Accounting Changes and Error Corrections”, which replaces APB 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28”. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, and is therefore required to be adopted by us in the first quarter of fiscal 2007. We are currently evaluating the effect that the adoption of SFAS 154 will have on our consolidated results of operations and financial condition, but do not expect it will have a material impact.

      In December 2004, the FASB issued SFAS 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, which is a revision of SFAS 123. SFAS 123R supersedes APB 25, and amends SFAS 95, “Statement of Cash Flows”. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R is now effective for the first fiscal year beginning after June 15, 2005. As a result, the new standard will be effective for us beginning October 1, 2005. In March 2005, the SEC issued SAB 107 regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. We are evaluating the requirements of SFAS 123R and SAB 107 and expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and have not determined whether the adoption will result in amounts that are similar to the current pro-forma disclosures under SFAS 123.

      In November 2004, the FASB issued SFAS 151, “Inventory Costs”, an amendment of Accounting Research Bulletin (“ARB”) 43, Chapter 4, “Inventory Pricing”. SFAS 151 amends previous guidance regarding treatment of abnormal amounts of idle facility expense, freight, handling costs, and spoilage. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” which was the criterion specified in ARB 43. In addition, this Statement requires that allocation of fixed production overheads to the cost of the production be based on normal capacity of the production facilities. This pronouncement is effective for us for fiscal periods beginning October 1, 2005. We are currently evaluating the effect that the adoption of SFAS 151 will have on our consolidated results of operations and financial condition, but do not expect it will have a material impact.

RISK FACTORS

      You should carefully consider the risks described below when evaluating our company and when deciding whether to invest in us. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we do not currently believe are important to an investor may also harm our business operations. If any of the events, contingencies, circumstances or conditions described in the following risks actually occurs, our business, financial condition or our results of operations could be seriously harmed. If that happens, the trading price of our common stock could decline and you may lose part or all of the value of any of our shares held by you.

Risks Related to Our Business

      Our revenue and operating results have fluctuated in the past and we expect our revenue and operating results to continue to fluctuate in the future. Given this fluctuation, we believe that quarter to quarter comparisons of our revenue and operating results are not necessarily meaningful or an accurate indicator of our future performance. As a result, our results of operations may not meet the expectations of securities analysts or investors in the future. If this occurs, the price of our stock would likely decline. Factors that contribute to fluctuations in our operating results include the following:

      Due to the foregoing factors, among others, our revenue and operating results are difficult to forecast. Our expense levels are based in significant part on our expectations of future revenue, and we may not be able to reduce our expenses quickly to respond to a shortfall in projected revenue. Therefore, our failure to meet revenue expectations would seriously harm our operating results, financial condition and cash flows.

      As part of our business strategy, we have in the past acquired, and expect to continue to acquire, other businesses and technologies. In connection with past acquisitions, we issued a substantial number of shares of our common stock as transaction consideration. We may continue to issue equity securities for future acquisitions that would dilute our existing stockholders, perhaps significantly depending on the terms of the acquisition. We may also incur debt in connection with future acquisitions, which, if available at all, may place additional restrictions on our ability to operate our business. Furthermore, our acquisition of the speech and language technology operations of Lernout & Hauspie Speech Products N.V. and certain of its affiliates, including L&H Holdings USA, Inc. (collectively, L&H), our acquisition of the Speech Processing Telephony and Voice Control business units from Philips, our acquisition of SpeechWorks International, Inc., LocusDialog, Inc., Telelogue, Inc., Rhetorical Systems, Ltd., ART Advanced Recognition Technologies, Inc., Phonetic Systems Ltd. and MedRemote required substantial integration and management efforts. Our recently completed acquisition of Former Nuance will likely pose similar challenges. Acquisitions of this nature involve a number of risks, including:

      As a result of these and other risks, we may not realize anticipated benefits from our acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could seriously harm our business.

      Under accounting principles generally accepted in the United States of America, we have accounted for our acquisitions using the purchase method of accounting. Under purchase accounting, we record the market value of our common stock or other form of consideration issued in connection with the acquisition and the amount of direct transaction costs as the cost of acquiring the company or business. We have allocated that cost to the individual assets acquired and liabilities assumed, including various identifiable intangible assets such as acquired technology, acquired trade names and acquired customer relationships based on their respective fair values. Intangible assets generally will be amortized over a five to ten year period. Goodwill is not subject to amortization but is subject to at least an annual impairment analysis, which may result in an impairment charge if the carrying value exceeds its implied fair value. As of September 30, 2005, we had identified intangible assets amounting to approximately $92.4 million and goodwill of approximately $458.3 million.

      We sustained recurring losses from operations in each reporting period through December 31, 2001. We reported a net loss of $5.4 million, $9.4 million and $5.5 million for fiscal year 2005, 2004 and 2003, respectively. We had an accumulated deficit of $167.2 million at September 30, 2005. If we are unable to regain profitability, the market price for our stock may decline, perhaps substantially. We cannot assure you that our revenues will grow or that we will achieve or maintain profitability in the future. If we do not achieve profitability, we may be required to raise additional capital to maintain or grow our operations. The terms of any additional capital, if available at all, may be highly dilutive to existing investors or contain other unfavorable terms, such as a high interest rate and restrictive covenants.

      Sales of our dictation, document and PDF conversion products and our digital paper management products represented approximately 20%, 20% and 9%, of our total revenue, respectively, for fiscal 2005, as compared to 17%, 25% and 9%, respectively, in fiscal 2004.

      Our products are sold through, and a substantial portion of our revenue is derived from, a network of over 2000 channel partners, including value-added resellers, computer superstores, consumer electronic stores, mail order houses, office superstores and eCommerce Web sites. We rely on a small number of distribution and fulfillment partners, including 1450, Digital River and Ingram Micro to serve this network of channel partners. For fiscal 2005, two distribution and fulfillment partners, Ingram Micro and Digital River, accounted for 11% and 9% of our consolidated total revenue, respectively. For fiscal 2004, Ingram Micro and Digital River, accounted for 14% and 8% of our consolidated total revenue, respectively. A disruption in these distribution and fulfillment partner relationships could negatively affect our ability to deliver products, and hence our results of operations in the short term. Any prolonged disruption for which we are unable to arrange alternative fulfillment capabilities could have a more sustained adverse impact on our results of operations.

      Although we perform ongoing credit evaluations of our distribution and fulfillment partners’ financial condition and maintain reserves for potential credit losses, we do not require collateral or other form of security from our major customers to secure payment. While, to date, losses due to non-payment from customers have been within our expectations, we cannot assure you that instances or extent of non-payment will not increase in the future. At September 30, 2005 and 2004, no one customer represented more than 10% of our accounts receivable. If any of our significant customers were unable to pay us in a timely fashion, or if we were to experience significant credit losses in excess of our reserves, our results of operations, cash flows and financial condition would be seriously harmed.

      We have invested and expect to continue to invest heavily in the acquisition, development and marketing of speech technologies. The market for speech technologies is relatively new and rapidly evolving. Our ability to increase revenue in the future depends in large measure on acceptance of speech technologies in general

and our products in particular. The continued development of the market for our current and future speech solutions will also depend on the following factors:

      Sales of our speech products would be harmed if the market for speech software does not continue to develop or develops more slowly than we expect, and, consequently, our business could be harmed and we may not recover the costs associated with our investment in our speech technologies.

      There are a number of companies that develop or may develop products that compete in our targeted markets. The individual markets in which we compete are highly competitive, and are rapidly changing. Within imaging, we compete directly with ABBYY, Adobe, I.R.I.S. and NewSoft. Within speech, we compete with AT&T, Fonix, IBM, Microsoft and Philips. In speech, some of our partners such as Avaya, Cisco, Edify, Genesys and Nortel develop and market products that can be considered substitutes for our solutions. In addition, a number of smaller companies in both speech and imaging produce technologies or products that are in some markets competitive with our solutions. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the ability of their technologies to address the needs of our prospective customers.

      The competition in these markets could adversely affect our operating results by reducing the volume of the products we license or the prices we can charge. Some of our current or potential competitors, such as Adobe, IBM and Microsoft, have significantly greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do.

      Some of our customers, such as IBM and Microsoft, have developed or acquired products or technologies that compete with our products and technologies. These customers may give higher priority to the sale of these competitive products or technologies. To the extent they do so, market acceptance and penetration of our products, and therefore our revenue, may be adversely affected.

      Our success will depend substantially upon our ability to enhance our products and technologies and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological advancements. If we are unable to develop new products and enhance functionalities or technologies to adapt to these changes, or if we are unable to realize synergies among our acquired products and technologies, our business will suffer.

      Our management’s assessment of the effectiveness of our internal control over financial reporting, as of September 30, 2005, identified a material weakness in our internal controls related to tax accounting, primarily as a result of a lack of necessary corporate accounting resources and ineffective execution of certain controls designed to prevent or detect actual or potential misstatements in the tax accounts. While we intend to take remediation measures to correct this material weakness (which measures are more fully described in Item 9A of this report), we cannot assure you that we will not have material weaknesses or significant deficiencies in our internal controls in the future. Any failure in the effectiveness of our system of internal control over financial reporting could have a material adverse impact on our ability to report our financial results in an accurate and timely manner.

      Since we license our products worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue from international operations will represent an increasing portion of our total revenue. Reported international revenue for fiscal 2005 and 2004 represented 36% and 32% of our total revenue, respectively. Most of these international revenues are generated by sales in Europe and Asia. In addition, some of our products are developed and manufactured outside the United States. A significant portion of the development and manufacturing of our speech products are completed in Belgium, and a significant portion of our imaging research and development is conducted in Hungary. In connection with the Philips acquisition, we added an additional research and development location in Aachen, Germany, and in connection with the acquisitions of Locus Dialog and Former Nuance, we added additional research and development centers in Montreal, Canada. Our acquisitions of ART and Phonetic added research and development and professional services operations in Tel Aviv, Israel. Accordingly, our future results could be harmed by a variety of factors associated with international sales and operations, including:

      Because we have international subsidiaries and distributors that operate and sell our products outside the United States, we are exposed to the risk of changes in foreign currency exchange rates or declining economic conditions in these countries. In certain circumstances, we have entered into forward exchange contracts to hedge against foreign currency fluctuations on intercompany balances with our foreign subsidiaries. We use these contracts to reduce our risk associated with exchange rate movements, as the gains or losses on these contracts are intended to offset any exchange rate losses or gains on the hedged transaction. We do not engage in foreign currency speculation. Hedges are designated and documented at the inception of the hedge and are evaluated for effectiveness monthly. Forward exchange contracts hedging firm commitments qualify for hedge accounting when they are designated as a hedge of the foreign currency exposure and they are effective in minimizing such exposure. With our increased international presence in a number of geographic locations and with international revenue projected to increase in fiscal 2006, we are exposed to changes in foreign currencies including the euro, Canadian dollar, Japanese yen, Israeli new shekel and the Hungarian forint. Changes in the value of the euro or other foreign currencies relative to the value of the U.S. dollar could adversely affect future revenues and operating results.

      If any of our key employees were to leave us, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. Our employment relationships are generally at-will and we have had key employees leave us in the past. We cannot assure you that one or more key employees will not leave us in the future. We intend to continue to hire additional highly qualified personnel, including software engineers and operational personnel,

but we may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm our business.

Risks Related to Our Intellectual Property and Technology

      Our success and competitive position depend in large part on our ability to obtain and maintain intellectual property rights protecting our products and services. We rely on a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights. Unauthorized parties may attempt to copy aspects of our products or to obtain, license, sell or otherwise use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect our technology from unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same or superior to ours and that do not infringe our rights. In these cases, we would be unable to prevent our competitors from selling or licensing these similar or superior technologies. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Although the source code for our proprietary software is protected both as a trade secret and as a copyrighted work, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation, regardless of the outcome, can be very expensive and can divert management efforts.

      From time to time, we are subject to claims that we or our customers may be infringing or contributing to the infringement of the intellectual property rights of others. We may be unaware of intellectual property rights of others that may cover some of our technologies and products. If it appears necessary or desirable, we may seek licenses for these intellectual property rights. However, we may not be able to obtain licenses from some or all claimants, the terms of any offered licenses may not be acceptable to us, and we may not be able to resolve disputes without litigation. Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. In the event of a claim of intellectual property infringement, we may be required to enter into costly royalty or license agreements. Third parties claiming intellectual property infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to develop and sell our products.

      On August 5, 2004, Compression Labs, Inc. filed an action against us in the United States District Court for the Eastern District of Texas claiming patent infringement. Damages are sought in an unspecified amount. In the lawsuit, Compression Labs alleges that we are infringing United States Patent No. 4,698,672 entitled “Coding System for Reducing Redundancy.” We believe this claim has no merit, and we intend to defend the action vigorously.

      On July 15, 2003, Elliott Davis (“Davis”) filed an action against SpeechWorks in the United States District Court for the Western District for New York (Buffalo) claiming patent infringement. Damages are sought in an unspecified amount. In addition, on November 26, 2003, Davis filed an action against us in the United States District Court for the Western District for New York (Buffalo) also claiming patent infringement. Damages are sought in an unspecified amount. SpeechWorks filed an Answer and Counterclaim to Davis’s Complaint in its case on August 25, 2003 and we filed an Answer and Counterclaim to Davis’s Complaint in its case on December 22, 2003. We believe these claims have no merit, and we intend on defending the actions vigorously.

      On November 27, 2002, AllVoice Computing plc (“AllVoice”) filed an action against us in the United States District Court for the Southern District of Texas claiming patent infringement. In the lawsuit, AllVoice

alleges that we are infringing United States Patent No. 5,799,273 entitled “Automated Proofreading Using Interface Linking Recognized Words to their Audio Data While Text is Being Changed” (the “’273 Patent”). The ’273 Patent generally discloses techniques for manipulating audio data associated with text generated by a speech recognition engine. Although we have several products in the speech recognition technology field, we believe that our products do not infringe the ’273 Patent because, in addition to other defenses, they do not use the claimed techniques. Damages are sought in an unspecified amount. We filed an Answer on December 23, 2002. We believe this claim has no merit and we intend to defend the action vigorously.

      We believe that the final outcome of the current litigation matters described above will not have a significant adverse effect on our financial position and results of operations. However, even if our defense is successful, the litigation could require significant management time and could be costly. Should we not prevail in these litigation matters, we may be unable to sell and/or license certain of our technologies we consider to be proprietary, and our operating results, financial position and cash flows could be adversely impacted.

      Complex software products such as ours may contain errors, defects or bugs. Defects in the solutions or products that we develop and sell to our customers could require expensive corrections and result in delayed or lost revenue, adverse customer reaction and negative publicity about us or our products and services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even if unsuccessful, would likely be time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm our reputation, financial results and competitive position.

Risks Related to Our Corporate Structure, Organization and Common Stock

      On March 19, 2004, Warburg Pincus, a global private equity firm agreed to purchase all outstanding shares of our stock held by Xerox Corporation for approximately $80 million. Additionally, on May 9, 2005 and September 15, 2005 we sold shares of common stock, and warrants to purchase common stock to Warburg Pincus for aggregate gross proceeds of approximately $75.1 million. As of September 30, 2005, Warburg Pincus beneficially owned approximately 24.3% of our outstanding common stock, including warrants exercisable for up to 7,066,538 shares of our common stock and 3,562,238 shares of our outstanding Series B Preferred Stock, each of which is convertible into one share of our common stock. Wellington Management (“Wellington”) is our second largest stockholder, owning approximately 6.8% of our common stock as of September 30, 2005. Because of their large holdings of our capital stock relative to other stockholders, Warburg Pincus and Wellington, acting individually or together, have a strong influence over matters requiring approval by our stockholders.

      Our stock price historically has been and may continue to be volatile. Various factors contribute to the volatility of our stock price, including, for example, quarterly variations in our financial results, new product introductions by us or our competitors and general economic and market conditions. While we cannot predict the individual effect that these factors may have on the market price of our common stock, these factors, either individually or in the aggregate, could result in significant volatility in our stock price during any given period of time. Moreover, companies that have experienced volatility in the market price of their stock often are subject to securities class action litigation. If we were the subject of such litigation, it could result in substantial costs and divert management’s attention and resources.

      Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new regulations promulgated by the Securities and Exchange Commission and Nasdaq National Market rules, are resulting in increased general and administrative expenses for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, our business may be harmed.

      Provisions of our certificate of incorporation, bylaws and Delaware law, as well as other organizational documents could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:

      We have significant portion of our foreign-based operations where transactions, assets and liabilities are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of currencies. Our primary foreign currency exposures relate to our short-term intercompany balances with our foreign subsidiaries. The primary foreign subsidiaries have functional currencies denominated in the Euro, Canadian Dollar, Japanese Yen, Israeli New Shekel, and Hungarian forint that are re-measured each reporting period with any exchange gains and losses recorded in our consolidated statements of operations. These exposures may change over time as business practices evolve. We evaluate our foreign currency exposures on an ongoing basis and make adjustments to our foreign currency risk management program as circumstances change.

      Based on currency exposures existing at September 30, 2005, a 10% movement in foreign exchange rates would not expose us to significant gains or losses in earnings or cash flows. We may use derivative instruments to manage the risk of exchange rate fluctuations; however, at September 30, 2005 there were no outstanding derivative instruments. Further, we do not use derivative instruments for trading or speculative purposes.

      In certain instances, we have entered into forward exchange contracts to hedge against foreign currency fluctuations. These contracts are used to reduce our risk associated with exchange rate movements, as the gains or losses on these contracts are intended to offset the exchange rate losses or gains on the underlying exposures. We do not engage in foreign currency speculation. The success of our foreign currency risk management program depends upon the ability of the forward exchange contracts to offset the foreign

currency risk associated with the hedged transaction. To the extent that the amount or duration of the forward exchange contract and hedged transaction vary, we could experience unanticipated foreign currency gains or losses that could have a material impact on our results of operations. In addition, the failure to identify new exposures and hedge them in a timely manner may result in material foreign currency gains and losses.

      On November 3, 2003, we entered into a forward exchange contract to hedge our foreign currency exposure related to 3.5 million euros of inter-company receivables from our Belgian subsidiary to the United States. The contract had a one-year term that expired on November 1, 2004. On November 1, 2004, we renewed this forward hedge contract; the renewed contract had a one-year term expiring on November 1, 2005; however it was cancelable at our discretion. In February 2005, the Company liquidated the contract. A $0.5 million unrealized loss was recorded on this contract as of September 30, 2004, and we recognized a net gain of less than $0.1 million in fiscal 2005 related to this hedge.

      On November 5, 2003, we entered into a forward exchange contract to hedge our foreign currency exposure related to 7.5 million Singapore dollars of inter-company receivables from our Singapore subsidiary to the United States. The original contract expired on January 30, 2004, but was extended to October 29, 2004. The contract was not further extended and thereby terminated on October 29, 2004. We realized a loss of approximately $0.2 million in connection with this hedge.

      While the contract amounts of derivative instruments provide one measure of the volume of these transactions, they do not represent the amount of our exposure to changes in foreign currency exchange rates. Because the terms of the derivative instrument and underlying exposure are matched generally at inception, changes in foreign currency exchange rates should not expose us to significant losses in earnings or net cash outflows when exposures are properly hedged, but could have an adverse impact on liquidity.

      We are exposed to interest rate risk as a result of our significant cash and cash equivalent and short-term marketable securities holdings. The rate of return that we may be able to obtain on investment securities will depend on market conditions at the time we make these investments and may differ from the rates we have secured in the past.

      At September 30, 2005, we held $71.7 million of cash and cash equivalents and $24.1 million of short-term marketable securities. Our cash and cash equivalents primarily consist of cash and money-market funds and our short-term marketable securities consist primarily of government agency and corporate securities. Due to the low current market yields and relatively short-term nature of our investments, a hypothetical increase in market rates is not expected to have a material effect on the fair value of our portfolio or results of operations.

Nuance Communications, Inc. Consolidated Financial Statements

NUANCE COMMUNICATIONS, INC.

INDEX TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Nuance Communications, Inc.

Burlington, Massachusetts

      We have audited the accompanying consolidated balance sheets of Nuance Communications, Inc. (the “Company”) (formerly ScanSoft, Inc.) as of September 30, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the year ended September 30, 2005 and the nine months ended September 30, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nuance Communications, Inc. at September 30, 2005 and 2004, and the results of its operations and its cash flows for the year ended September 30, 2005 and the nine months ended September 30, 2004, in conformity with accounting principles generally accepted in the United States.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Nuance Communications, Inc.’s internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 14, 2005, expressed an unqualified opinion on management’s assessment on the effectiveness of the internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting because of the existence of a material weakness.

Boston, Massachusetts

December 14, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Nuance Communications, Inc.

Burlington, Massachusetts

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Nuance Communications, Inc. (the “Company”) (formerly ScanSoft Inc.) did not maintain effective internal control over financial reporting as of September 30, 2005, because of the effect of the material weakness identified in management’s assessment, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of ART Advanced Recognition Technologies, Inc., which the Company acquired on January 21, 2005, Phonetic Systems Ltd., which the Company acquired on February 1, 2005, and Nuance Communications, Inc., the entity acquired by the Company on September 15, 2005, whose name the Company adopted in accordance with an amendment to its Certificate of Incorporation on October 17, 2005, and all of these acquired entities are included in the 2005 consolidated financial statements of Nuance Communications, Inc. from the respective dates of each acquisition, and collectively constituted approximately 46% of consolidated assets as of September 30, 2005, and approximately 4% of consolidated revenues for the year ended September 30, 2005. Management did not assess the effectiveness of internal control over financial reporting at these entities because the Company acquired these entities during its fiscal year ended September 30, 2005. Refer to Note 3 to the consolidated financial statements for further discussion of these acquisitions and their impact on the Company’s consolidated financial statements. Our audit of internal

control over financial reporting of Nuance Communications, Inc. also did not include an evaluation of the internal control over financial reporting of these entities referred to above.

      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness was identified and included in management’s assessment:

      This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 consolidated financial statements, and this report does not affect our report dated December 14, 2005 on those financial statements, which expressed an unqualified opinion.

      In our opinion, management’s assessment that Nuance Communications, Inc. did not maintain effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by COSO. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Nuance Communications, Inc. did not maintain effective internal control over financial reporting as of September 30, 2005, based on the criteria established in Internal Control-Integrated Framework issued by COSO.

Boston, Massachusetts

December 14, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Nuance Communications, Inc. (formerly ScanSoft, Inc.):

      In our opinion, the consolidated statements of operations, of stockholders’ equity and comprehensive income (loss) and of cash flows for the year ended December 31, 2003 (appearing on pages 53 through 57 of the Nuance Communications, Inc. (formerly ScanSoft, Inc.) Annual Report on Form 10-K) present fairly, in all material respects, the results of operations and cash flows of Nuance Communications, Inc. and its subsidiaries for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Boston, MA

February 26, 2004

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS