Growing Demand for Network, Dictation and Embedded Speech Solutions Produces Revenue Above Expectations

PEABODY, Mass., May 10, 2004 - ScanSoft, Inc. (Nasdaq: SSFT), the global leader of speech and imaging solutions, today announced financial results for the first quarter ended March 31, 2004.

ScanSoft reported first quarter 2004 revenue of $42.8 million, a 54 percent increase over first quarter 2003 revenue of $27.8 million. Net income before amortization of acquisition-related intangible assets, restructuring charges and non-cash stock compensation was $1.8 million, or $0.02 per diluted share, compared with $2.8 million, or $0.04 per diluted share for the first quarter of 2003. After including amortization of acquisition-related intangible assets, restructuring charges and non-cash stock compensation, ScanSoft reported a first quarter 2004 net loss of $2.8 million, or $0.03 per basic share, compared with a net loss of $0.2 million, or breakeven per basic share, in the first quarter of 2003.

"The company is off to a strong start in 2004 as we experienced increased demand in all of our speech segments and rapid growth internationally," said Paul Ricci, chairman and CEO of ScanSoft. "We are especially pleased with the growing demand from enterprise and telecommunications customers in our SpeechWorks division. We had strong performance for dictation in healthcare and record revenue in embedded speech. The company also enjoyed the continued benefits from recent launches of PDF Converter and OmniPage 14."

In addition, the company today disclosed that it saw increased royalty contributions from its speech partners, for the second sequential quarter, through the deployment of solutions in enterprise and telecommunications customers worldwide. In the first quarter, revenue contributions from partners and bookings for solutions services were each at record levels - strong indicators, the company believes, of growing demand for its speech applications and services. Bookings in the first quarter included Cox Communications, Nike, Dell and the Internal Revenue Service, as well as new contracts with a major North American wireless carrier with an expected valued this year in excess of $3 million and a Canadian leader in the travel industry with an expected value this year in excess of $1.7 million.

"Now two full quarters into the merger, we believe our results confirm the benefits of the SpeechWorks acquisition," Ricci said. "Our continued market share achievements across all segments of our speech business validates a sustained focus on and investment in our partner relationships, and our commitment to being the most partner-friendly speech solutions provider in the industry."

Frost & Sullivan, a leading industry research firm recognized the SpeechWorks Division of ScanSoft as the clear market share leader in the North American telephony-based speech technology and solutions market. The company far exceeded its competitors for market share in speech technology licenses and professional services (see today's announcement, "Frost & Sullivan Names ScanSoft Market Share Leader in North America Telephony Speech Market").

Other first quarter highlights include:

• Strong Growth in Embedded Solutions
  In the first quarter, embedded revenue grew considerably, as an increasing number of ScanSoft-powered solutions were brought to mass market, resulting in strong royalties. In addition, ScanSoft continued to secure key contracts in core automotive and navigation customers such as Pioneer, Denso, Navigon and Voice-Insight, while the company gained momentum in handheld devices with customers such as ReignCom and Microsoft.
  
  
• Record Revenue for Dictation Applications
  The company experienced record revenue worldwide from Dragon Naturally Speaking and its other dictation applications, through channel and value-added reseller partners, especially within healthcare organizations.
  
  
• Continued Performance from 2003 Product Launches
  OmniPage 14 and PDF Converter sustained momentum from recent launches. Imaging products performed well in all channels, with OEM partners such as Xerox, Kyocera Mita and Konica Minolta expanding their distribution of ScanSoft's scan-to-desktop applications into corporate environments.
  
  
• Streamlined Organization
  ScanSoft aligned the organization along two divisions - SpeechWorks Solutions and ScanSoft Productivity Applications - focusing global resources on high-growth markets and providing a platform to aggressively pursue targeted opportunities and manage resources more efficiently. The company named John Shagoury and Steve Chambers as division presidents for Productivity Applications and SpeechWorks Solutions, respectively.
  
  
• Warburg Pincus Strategic Investment
  Warburg Pincus, a leading private equity firm, purchased all outstanding shares previously held by Xerox Corporation for approximately $80 million. Warburg Pincus is widely recognized for bringing companies to new levels of achievement and value, as evidenced by its portfolio of enterprise software companies. William Janeway, a vice chairman at Warburg Pincus, has joined ScanSoft's board of directors.
  
  

"With our strong performance and momentum heading into the second quarter, we are confident that with the alignment, strength and focus of our organization, we are well positioned for continued growth," Ricci continued. "We remain committed to expense controls and synergy targets from the merger, and we believe that we are on course to generate additional efficiencies in our operating model throughout the year."

Investor Call

In conjunction with this announcement, ScanSoft management will conduct a Webcast and conference call on Monday, May 10 at 8:30 a.m. ET. Those who wish to listen to the live broadcast should visit the Investor Relations section of the company's Web site at www.scansoft.com at least 15 minutes prior to the event and follow the instructions provided to assure that the necessary audio applications are downloaded and installed.

The conference call can be heard live by dialing (800) 539-9343 or (706) 643-0195 and refer to the conference name ScanSoft, five minutes prior to the call. A replay of the call will be available within 24 hours of the announcement. To access the replay, dial (800) 642-1687 or (706) 645-9291 and enter conference number 7053499.

About ScanSoft, Inc.

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

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

This press release contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements relating to: future demand for, performance of, and opportunities for growth in ScanSoft's speech solutions and productivity applications; future revenue contributions from relationships with ScanSoft's partners; the future value of existing contracts; potential efficiencies and operational benefits from ScanSoft's organizational realignment; potential benefits from the strategic investment in ScanSoft by Warburg Pincus; potential synergies from, the acquisition of SpeechWorks; the continued strength of existing products, services and relationships as well as the introduction of new products, services and relationships; the market for ScanSoft's products; ScanSoft's strategic and operational plan; and future prospects regarding international operations. Such statements are based on current expectations that are subject to a number of risks and uncertainties, and actual results may differ materially. These risks and uncertainties include, without limitation, the following: fluctuations in demand for ScanSoft's existing and future products; the possible loss of, or a significant curtailment of, purchases by any one or more of ScanSoft's principal customers; ScanSoft's dependence on OEM customers; ScanSoft's reliance on a small number of distribution and fulfillment partners; difficulties with integrating product plans and operations of acquired businesses and the accounting effects of such acquisitions on ScanSoft's operating results; economic conditions in the United States and abroad; ScanSoft's ability to control and successfully manage its expenses, inventory and cash position; the effects of competition, including pricing pressure; possible defects in products and technologies; the ability of ScanSoft's two largest stockholders, one of which is Warburg Pincus, to influence matters requiring stockholder approval; and the potential volatility in ScanSoft's stock price. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in ScanSoft's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2003. ScanSoft undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this document.

ScanSoft, Inc. Supplemental Condensed Consolidated Statements of Operations Excluding amortization of intangible assets, non-cash stock compensation and restructuring charges (in 000's, except per share amounts) Unaudited Three months ended March 31, ------------------------ 2004 2003 ---------- ------------ Product licenses $30,856 $25,508 Professional services 10,008 1,008 Related parties 1,912 1,320 ---------- ------------ Total revenue 42,776 27,836 Costs and expenses: Cost of product licenses 3,476 3,270 Cost of professional services 6,726 1,032 Research and development 9,218 7,177 Selling, general and administrative 21,715 13,235 ---------- ------------ Total costs and expenses 41,135 24,714 ---------- ------------ Income from operations 1,641 3,122 Other income (expense), net 449 22 ---------- ------------ Income before income taxes 2,090 3,144 Provision for income taxes 299 345 ---------- ------------ Net income $1,791 $2,799 ========== ============ Net income per share: basic $0.02 $0.04 ========== ============ Net income per share: diluted $0.02 $0.04 ========== ============ Weighted average common shares: basic 106,409 67,689 ========== ============ Weighted average common and common equivalent shares: diluted 116,983 77,220 ========== ============ ScanSoft, Inc. Condensed Consolidated Statements of Operations Including amortization of intangible assets, non-cash stock compensation and restructuring charges (in 000's, except per share amounts) Unaudited Three months ended March 31, ------------------------ 2004 2003 ------------------------ Product licenses $30,856 $25,508 Professional services 10,008 1,008 Related parties 1,912 1,320 ------------------------ Total revenue 42,776 27,836 Costs and expenses: Cost of product licenses 3,476 3,270 Cost of professional services 6,726 1,032 Cost of revenue from amortization of intangible assets 2,816 2,057 Research and development 9,218 7,177 Selling, general and administrative 21,715 13,235 Stock based compensation 319 26 Amortization of other intangible assets 668 361 Restructuring and other charges 801 529 ------------------------ Total costs and expenses 45,739 27,687 ------------------------ Income (loss) from operations (2,963) 149 Other income (expense), net 449 22 ------------------------ Income (loss) before income taxes (2,514) 171 Provision for income taxes 299 345 ------------------------ Net loss $(2,813) $(174) ======================== Net loss per share: basic $(0.03) $(0.00) ======================== Net loss per share: diluted $(0.03) $(0.00) ======================== Weighted average common shares: basic 102,847 64,127 ======================== Weighted average common shares: diluted 102,847 64,127 ======================== ScanSoft, Inc. Condensed Consolidated Balance Sheet (Unaudited, in thousands) Assets March December 31, 2004 31, 2003 --------- --------- Current assets: Cash and cash equivalents $50,130 $42,584 Accounts receivable, net 32,643 40,271 Receivable from related party 1,474 2,133 Prepaid expenses and other current assets 8,012 9,691 --------- --------- Total current assets 92,259 94,679 Goodwill, net 243,508 243,266 Other intangible assets, net 50,263 54,286 Property and equipment, net 6,740 6,977 Other assets 3,701 2,732 --------- --------- Total assets $396,471 $401,940 ========= ========= Liabilities and stockholders' equity Current liabilities: Short term note payable $787 $904 Accounts payable and accrued expenses 24,931 28,596 Deferred revenue 10,341 13,672 Other current liabilities 8,561 7,202 --------- --------- Total current liabilities 44,620 50,374 Long term portion of deferred revenue 245 490 Long term note payable 27,850 27,859 Other long term liabilities 18,503 19,991 --------- --------- Total liabilities 91,218 98,714 Stockholders' equity: 305,253 303,226 --------- --------- Total liabilities and stockholders' equity $396,471 $401,940 ========= ========= ScanSoft, Inc. Reconciliation of Supplemental Financial Information (in 000's, except per share amounts) Unaudited Three months ended March 31, ---------------- 2004 2003 -------- ------- Non-GAAP Financial Measures: GAAP Gross Margin 69.6% 77.1% Cost of revenue from amortization of intangible assets 6.6% 7.4% -------- ------- Non-GAAP gross margin 76.2% 84.5% ======== ======= GAAP net income (loss) $(2,813) $(174) Cost of revenue from amortization of intangible assets 2,816 2,057 Amortization of other intangible assets 668 361 Restructuring and other charges 801 529 Stock based compensation 319 26 Net income excluding acquisition related amortization, non-cash stock compensation and -------- ------- restructuring charges $1,791 $2,799 ======== ======= Net income per share, excluding acquisition related amortization and restructuring charges: basic $0.02 $0.04 ======== ======= Net income per share, excluding acquisition related amortization and restructuring charges: diluted $0.02 $0.04 ======== ======= Shares used in computing net income per share, excluding acquisition related amortization and restructuring charges: Weighted average common shares: basic 106,409 67,689 ======== ======= Weighted average common and common equivalent shares: diluted 116,983 77,220 ======== =======

This press release and the reconciliation contained herein disclose certain financial measures that may be considered non-GAAP financial measures because they exclude amortization of acquisition-related intangible assets, restructuring charges and non-cash stock compensation. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States. These non-GAAP financial measures are provided to enhance the user's overall understanding of our current financial performance and our prospects for the future. Management believes that these non-GAAP financial measures present a useful measure of our operating performance because they exclude identified non-cash and restructuring charges. Management uses these measures for evaluating historical performance and for forecasting and planning for future periods. These measures, however, should be considered in addition to, and not as a substitute for, or superior to, other measures of financial performance prepared in accordance with generally accepted accounting principles. The non-GAAP measures included in our press release have been reconciled to the nearest GAAP measure.

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