Strong Results in Speech Offset by Underperformance in North American Productivity Channels

EABODY, Mass., November 15, 2004 - ScanSoft, Inc. (Nasdaq: SSFT), a global leader of speech and imaging solutions, today announced financial results for the third quarter and nine-month fiscal year ended September 30, 2004. ScanSoft reported third quarter 2004 revenue of $42.3 million, a 29 percent increase over third quarter 2003 revenue of $32.9 million. On a GAAP basis, ScanSoft recognized a third quarter 2004 net loss of $5.9 million, or $0.06 per basic share, compared with a net loss of $3.7 million, or $0.04 per basic share, in the third quarter of 2003.

In addition to using GAAP results in evaluating ScanSoft's business, management also believes it is useful to measure results using a non-GAAP measure of net income (loss), which excludes, as applicable, amortization of intangible assets, non-cash stock-based compensation, restructuring charges, expenses related to the restatement of SpeechWorks financial statements, and certain one-time transition costs associated with changing independent registered public accounting firms. See "GAAP to non-GAAP Reconciliation" below for further information on ScanSoft's non-GAAP measure.

Using this non-GAAP measure, ScanSoft recognized a net loss of $0.3 million, or breakeven per diluted share, compared with net income of $1.5 million, or $0.02 per diluted share, for the third quarter of 2003.

"ScanSoft experienced a solid performance in our speech business with strong revenue for network and embedded solutions that generated significant year-over-year growth," said Paul Ricci, chairman and CEO of ScanSoft. "These achievements were offset by an isolated, disappointing performance for our productivity applications in North American channels. We underestimated the impact of two significant productivity application launches that occurred in November and believe the shortfall was also the result of transitory issues in our channels and sales strategy. We believe we have taken the necessary steps to see resolution and improvement in the current quarter."

Highlights from ScanSoft's third quarter include:

• Strong Performance in Network Speech: ScanSoft experienced strong revenue from its network speech technologies, applications and professional services, benefiting from new or expanded agreements with AOL, Delta, MetLife, PayPal, Qwest, T-Mobile and Wal*Mart.



• Embedded Speech: ScanSoft launched its first packaged application for mobile devices - an application designed to make mainstream mobile phones accessible to the visually impaired - for which the company recently announced a U.S.-based agreement with Cingular and a global agreement with Vodafone. ScanSoft also continued to see strong performance from its automotive initiatives with new design wins at Volkswagen, Motorola, Daimler Chrysler, Ford and Renault.



• Building PDF Momentum: ScanSoft continued to expand its presence in delivering PDF products designed specifically for business environments. The company has successfully launched products into its channel network and has signed initial volume license agreements with more than 50 organizations worldwide, including Airbus, The Euro Tunnel, The Gillette Company, Lockheed Martin Space Systems, The National Institute of Health, Pfizer, Inc., Siemens and Wells Fargo.



• Enhanced Operations: As previously disclosed, in September ScanSoft appointed Jamie Arnold, a highly regarded professional who brings a wealth of experience in large software companies and strong financial and operational skills, as its new chief financial officer. Also, as previously disclosed, in October, ScanSoft named BDO Seidman, LLP as its new independent registered public accounting firm, adding an ideal blend of domestic, regulatory and international capabilities to assist ScanSoft during its growth.

For the quarter ended September 30, 2004, ScanSoft generated $3.5 million in cash flow from operations and exited the quarter with cash and marketable securities of approximately $47.7 million, compared to $45.0 million in Q2 2004.

"Over the course of the last three years, ScanSoft has grown considerably and completed a number of ambitious, decisive and strategic initiatives to expand our business and establish leadership in the speech market," added Mr. Ricci. "Today, I can say without hesitation that our speech business has never been stronger and that global demand among partners, enterprises and carriers has never been greater. In 2005, through continued investments in innovation and our comprehensive solutions portfolio, ScanSoft is well positioned to extend our leadership and capitalize on the many opportunities for growth."

This morning, ScanSoft announced it has signed agreements to acquire Phonetic Systems, Ltd., ART Advanced Recognition Technologies, Inc. and Rhetorical Systems Ltd. that upon closing will further accelerate its growth and extend its ability to deliver highly valued solutions in three key speech segments - Directory Assistance, Enterprise Speech Applications and Wireless Solutions.

ScanSoft is delivering on its strategy for a future where natural, human conversations will be the predominant way that people retrieve information and interact with automated systems. To achieve this, ScanSoft has recognized that speech applications need to become more dynamic, sound more natural, interact more conversationally, perform tasks on multiple devices and adapt to personal preferences. These acquisitions provide ScanSoft with an array of technologies, customers, partners and talented employees to help ScanSoft fuel its growth and propel the quality of speech applications throughout the world. Please see today's release titled "ScanSoft to Extend Leadership, Resources in High-Growth Speech Markets through Acquisitions of Phonetic Systems, ART and Rhetorical."

Change in Fiscal Calendar

On October 25, 2004, ScanSoft announced that its board of directors approved a change in the Company's fiscal year-end to September 30, 2004 from December 31, 2004. As a result of the change in fiscal year, ScanSoft will file a report on Form 10-KT covering the nine-month period ended September 30, 2004, in lieu of filing a separate quarterly report on Form 10-Q for the quarter ended September 30, 2004. The Form 10-KT will include audited financial statements and is scheduled to be filed in early January 2005.

Investor Call

In conjunction with this announcement, the Company will broadcast its quarterly conference call over the Internet this afternoon at 4:30 p.m. ET. An accompanying exhibit is available on the Investor Relations section of the Company's Web site.

Those who wish to listen to the live broadcast should visit the Investor Relations section of the Company's Web site at www.scansoft.com at least 15 minutes prior to the event and follow the instructions provided to ensure that the necessary audio applications are downloaded and installed.

The conference call can also be heard live by dialing (888) 428-4480 or (651) 291-0900 and referring 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) 475-6701 or (320) 365-3844 and refer to access code 752851.

About ScanSoft, Inc.

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

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

This press release contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements relating to the resolution of issues relating to our channel and sales strategy for productivity applications; future demand for, performance of, and opportunities for growth in ScanSoft's speech solutions and productivity applications; the growth of the speech industry and the demand for speech solutions; future revenue contributions from relationships with ScanSoft's partners; the continued strength of existing products, services and relationships as well as the introduction of new products, services and relationships; the market for ScanSoft's products; ScanSoft's strategic and operational plan; the impact of the pending acquisitions of Phonetic Systems, ART and Rhetorical Systems; statements relating to the magnitude, timing, effects, and any synergies that may result from the proposed acquisitions; the ability of ScanSoft to close the acquisitions and to realize the anticipated benefits from the acquisitions; and future prospects regarding product lines, sales channels and international operations. Such statements are based on current expectations that are subject to a number of risks and uncertainties, and actual results may differ materially. These risks and uncertainties include, without limitation, the following: difficulties with integrating product plans and operations of acquired businesses and the accounting effects of such acquisitions on ScanSoft's operating and financial results; fluctuations in demand for ScanSoft's existing and future products; economic conditions in the United States and abroad; ScanSoft's ability to control and successfully manage its expenses, inventory and cash position; the effects of competition, including pricing pressure; possible defects in products and technologies; risks associated with the acquisitions, including transaction costs and the related integration of operations; failure to obtain and retain expected synergies and difficulties with integrating product plans and operations of acquired businesses; and ScanSoft's dependence on OEM customers. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in ScanSoft's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and its most recent quarterly reports on Form 10-Q. ScanSoft undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this document.

Third Quarter 2004 Financial Statements Follow - The attached unaudited financial statements have been prepared by management on a GAAP basis, except as noted, and are currently being audited by the Company's new independent registered public accounting firm.

                        ScanSoft, Inc.             Condensed Consolidated Statements of Operations                  (in 000's, except per share amounts)                                Unaudited                                       Three months      Nine months                                         ended             ended                                      September 30,     September 30,                                    ----------------- -----------------                                       2004     2003     2004     2003                                    -------- -------- -------- --------  Product licenses                   $30,322  $29,167  $98,117  $84,246 Professional services               11,997    3,783   33,104    4,283                                    -------- -------- -------- --------     Total revenue                   42,319   32,950  131,221   88,529  Costs and expenses: Cost of product licenses             3,615    3,387   10,633    9,573 Cost of professional services        8,078    3,381   22,743    6,070 Cost of revenue from amortization  of intangible assets                2,810    2,752    8,431    7,481 Research and development             8,491    9,543   26,321   25,070 Selling, general and administrative 23,558   15,624   66,857   42,702 Stock based compensation               451      104    1,301      155 Amortization of other intangible  assets                                664      662    1,967    1,446 Restructuring and other charges          -    1,719      801    3,065                                    -------- -------- -------- --------  Total costs and expenses            47,667   37,172  139,054   95,562  Income (loss) from operations       (5,348)  (4,222)  (7,833)  (7,033)  Other income (expense), net           (251)     248       (6)     658                                    -------- -------- -------- --------  Income (loss) before income taxes   (5,599)  (3,974)  (7,839)  (6,375)  Provision for income taxes             349     (243)   1,333      473                                    -------- -------- -------- --------  Net loss                           $(5,948) $(3,731) $(9,172) $(6,848)                                    ======== ======== ======== ========  Net loss per share:  basic          $(0.06)  $(0.04)  $(0.09)  $(0.10)                                    ======== ======== ======== ======== Net loss per share:  diluted        $(0.06)  $(0.04)  $(0.09)  $(0.10)                                    ======== ======== ======== ========  Weighted average common shares:  basic                             104,604   83,694  101,599   71,286                                    ======== ======== ======== ======== Weighted average common shares:  diluted                           104,604   83,694  101,599   71,286                                    ======== ======== ======== ========                               ScanSoft, Inc. Supplemental Condensed Consolidated Statements of Operations, Non-GAAP                  (in 000's, except per share amounts)                                Unaudited                                       Three months      Nine months                                          ended             ended                                      September 30,     September 30,                                    ----------------- -----------------                                      2004     2003     2004     2003                                    -------- -------- -------- --------  Product licenses                   $30,322  $29,167  $98,117  $84,246 Professional services               11,997    3,783   33,104    4,283                                    -------- -------- -------- --------     Total revenue                   42,319   32,950  131,221   88,529  Costs and expenses: Cost of product licenses             3,615    3,387   10,633    9,573 Cost of professional services        8,078    3,381   22,743    6,070 Research and development             8,491    9,543   26,321   25,070 Selling, general and administrative 21,837   15,624   65,136   42,702                                    -------- -------- -------- --------  Total costs and expenses            42,021   31,935  124,833   83,415  Income from operations                 298    1,015    6,388    5,114  Other income (expense), net           (251)     248       (6)     658                                    -------- -------- -------- --------  Income before income taxes              47    1,263    6,382    5,772  Provision for income taxes             349     (243)   1,333      473                                    -------- -------- -------- --------  Net income (loss)                    $(302)  $1,506   $5,049   $5,299                                    ======== ======== ======== ========  Net income (loss) per share:   basic                              $(0.00)   $0.02    $0.05    $0.07                                    ======== ======== ======== ========  Net income (loss) per share:  diluted                            $(0.00)   $0.02    $0.04    $0.06                                    ======== ======== ======== ========  Weighted average common shares:  basic                             104,604   87,256  105,161   74,848                                    ======== ======== ======== ========  Weighted average common and common equivalent shares:    diluted                           104,604   98,050  114,406   85,570                                    ======== ======== ======== ========                              ScanSoft, Inc.                  Condensed Consolidated Balance Sheet                        (Unaudited, in thousands)  Assets                                             Sept. 30,  Dec. 31,                                                       2004      2003 Current assets:       Cash and cash equivalents                     $22,930   $42,584       Marketable Securities                           7,373         -       Accounts receivable, net                       36,850    40,271       Receivable from related party                       -     2,133       Prepaid expenses and other current assets       6,673     9,691                                                    --------- ---------              Total current assets                    73,826    94,679  Goodwill, net                                       246,424   243,266 Long term marketable securities                      17,355         - Other intangible assets, net                         43,898    54,286 Property and equipment, net                           7,985     6,977 Other assets                                          4,330     2,732                                                    --------- --------- Total assets                                       $393,818  $401,940                                                    ========= =========        Liabilities and stockholders' equity  Current liabilities:       Short term note payable                          $457      $904       Accounts payable and accrued expenses          28,816    28,596       Deferred revenue                               10,842    13,672       Other current liabilities                       6,427     7,202                                                    --------- ---------              Total current liabilities               46,542    50,374                                                    --------- --------- Long term portion of deferred revenue                   147       490 Long term note payable                               27,700    27,859 Other long term liabilities                          17,478    19,991                                                    --------- --------- Total liabilities                                    91,867    98,714  Stockholders' equity:                               301,951   303,226                                                    --------- ---------  Total liabilities and stockholders' equity         $393,818  $401,940                                                    ========= =========                              ScanSoft, Inc.          Reconciliation of Supplemental Financial Information                  (in 000's, except per share amounts)                                Unaudited                                       Three months      Nine months                                         ended             ended                                      September 30,     September 30,                                    ----------------- -----------------                                      2004     2003     2004     2003                                    -------- -------- -------- --------  GAAP net loss                      $(5,948) $(3,731) $(9,172) $(6,848) Cost of revenue from amortization  of intangible assets                2,810    2,752    8,431    7,481 Amortization of other intangible  assets                                664      662    1,967    1,446 Restructuring and other charges          -    1,719      801    3,065 Stock based compensation               451      104    1,301      155 Costs associated with SpeechWorks  restatement                         1,321        -    1,321        - Redundant costs associated with  change in Independent Accountants     400        -      400        -                                     -------- -------- -------- -------- Non-GAAP net income (loss)           $(302)  $1,506   $5,049   $5,299                                    ======== ======== ======== ========   Non-GAAP net income (loss) basic:   $(0.00)   $0.02    $0.05    $0.07                                    ======== ======== ======== ========  Non-GAAP net income (loss)  diluted:                           $(0.00)   $0.02    $0.04    $0.06                                    ======== ======== ======== ========  Shares used in computing non-gaap  net income (loss) per share:  Weighted average common shares:  basic                             104,604   87,256  105,161   74,848                                    ======== ======== ======== ========  Weighted average common and  common equivalent shares:  diluted                           104,604   98,050  114,406   85,570                                    ======== ======== ======== ======== 

This press release and the reconciliation contained herein disclose certain financial measures that may be considered non-GAAP financial measures because they exclude the amortization of intangible assets, non-cash stock-based compensation, restructuring charges, expenses related to the restatement of SpeechWorks financial statements, and one-time transition costs associated with changing independent registered public accounting firms. See "GAAP to non-GAAP Reconciliation" above for further information on ScanSoft's non-GAAP measure. 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.

Contact Information