ScanSoft Posts Record Fourth Quarter and Fiscal 2002 Revenue and Earnings

Revenue Up 70% Year-Over-Year; Company Anticipates Record Profits and Cash Flow on More Than 25% Revenue Growth in 2003

PEABODY, Mass., February 25, 2003 - ScanSoft, Inc. (Nasdaq: SSFT), a leading supplier of digital imaging, speech and language solutions, today announced financial results for the fourth quarter and full year ended December 31, 2002.

Fourth-Quarter Results

ScanSoft reported fourth-quarter 2002 revenue of $28.4 million, a 53 percent increase over fourth-quarter 2001 revenue of $18.6 million. Net income before amortization of acquisition-related intangible assets was $6.7 million, or $0.09 per diluted share, compared with $4.7 million, or $0.08 per diluted share, in the fourth quarter of 2001. After including amortization of acquisition-related intangibles, ScanSoft reported fourth-quarter 2002 net income of $4.4 million, or $0.06 per diluted share, compared with a fourth-quarter 2001 net loss of $2.4 million, or $0.04 per share. ScanSoft's operational cash flows for the fourth quarter of 2002 were $6.1 million compared with $4.4 million in the fourth quarter of 2001.

Full Year 2002 Results

For the full year 2002, ScanSoft reported total revenue of $106.6 million, up 70 percent from revenue of $62.7 million in 2001. Net income before acquisition-related amortization and restructuring charges was $18.5 million, or $0.25 per diluted share, versus $10.6 million, or $0.19 per diluted share for 2001. After including acquisition-related amortization and restructuring charges, ScanSoft reported net income of $6.3 million, or $0.09 per diluted share, for 2002 compared with a net loss of $16.9 million, or $0.34 per share, for 2001. ScanSoft's operational cash flows for the full year 2002 were $12.3 million.

Comments on the Fourth Quarter and Full Year

"ScanSoft closed 2002 by posting the strongest quarterly and full-year revenue, cash flow and earnings in the company's history," said Paul Ricci, chairman and CEO of ScanSoft. "During the fourth quarter, ScanSoft experienced strong performance in international markets and growth from our largest digital imaging OEM partners, which offset some weakness in domestic channel sales."

During the fourth quarter, ScanSoft expanded its relationships with Canon, Epson, Fuji-Xerox and Hewlett Packard through new OEM agreements for the company's award-winning document and PDF conversion, digital paper management and electronic forms products. In addition, ScanSoft added Chevron, Peugeot, Philips, Puerto Rico Electric and Total Fina to its customer base. The company completed the launch of OmniPage® Pro 12, the company's flagship document capture product, winning several awards including the Editors' Choice award from C/NET and PC Magazine, as well as the 2002 Product of the Year award from Transform Magazine.

Within its speech solutions, ScanSoft entered into new TTS licensing agreements with Analog Devices, Natural Microsystems and Verascape, and expanded relationships with Belgacom, Elix and Nuance. ScanSoft also signed a RealSpeak licensing agreement with IBM to extend the capabilities of IBM's WebSphere Voice Server. Dragon NaturallySpeaking customers signed during the fourth quarter included the German Ministry of Justice, the New York State Bar Association and the Social Security Administration.

International sales accounted for approximately 38 percent of total company revenue for the fourth quarter 2002 and approximately 33 percent for the full year. ScanSoft's record fourth-quarter cash flow enabled the company to exit 2002 with cash balances of $18.9 million. ScanSoft's gross margin for the fourth quarter of 2002 was a record 88 percent, an increase of eight points over the comparable quarter in 2001, reflecting continued productivity gains in the company's manufacturing and fulfillment operations and an increase in higher-margin license revenue. For the year 2002, gross margin was 85 percent, representing a five-point improvement over 2001. These gross margin figures exclude acquisition-related amortization. After including acquisition-related amortization, fourth-quarter gross margin was 81 percent in 2002 versus 61 percent in 2001, and full-year gross margin was 76 percent in 2002 compared with 57 percent in 2001.

Comments of the Acquisition of the Philips Speech Processing Business Units

On January 30, 2003, ScanSoft closed the acquisition of the Speech Processing Telephony and Voice Control business units and related intellectual property from Royal Philips Electronics (NYSE: PHG, AEX: PHI). Consideration for the transaction comprised a $27.5 million three-year, zero-interest convertible subordinated debenture, convertible at any time into common shares of ScanSoft at $6.00 per share; 4.1 million euros in cash, of which 3.1 million euros were paid at closing and 1 million euros are payable by December 31, 2003; and a 5 million euro 5% interest note due December 31, 2003. The cash payable is subject to adjustment in accordance with the provisions of the agreement as amended.

With the acquisition of the Philips business units complete, ScanSoft expects to leverage this technology into broader penetration and increased market share in the high-growth automotive, embedded and telephony markets. As ScanSoft completes the Philips integration process, management will apply the same operational and cost controls used in previous acquisitions. As part of the integration, ScanSoft expects to incur a restructuring charge of approximately $0.5 million to $1.0 million for the first quarter 2003.

Outlook for 2003

"We expect another record year for ScanSoft in 2003, with record profits and cash flow on revenue growth of more than 25 percent," said Ricci. "Our growth objectives derive from product launches in each solution category during 2003, new products from the Philips acquisition and an expanded sales presence. We approach these goals armed with a sales force numbering approximately 100 and the recent momentum of our international operations and our digital imaging OEM partners. During 2003, we intend to enter new markets, expand our presence in existing markets and continue our focus on across-the-board improvements in our operating margins."

Accordingly, ScanSoft expects 2003 revenue to be in the range of $135 million to $140 million. Earnings per diluted share, before acquisition-related amortization and restructuring charges, are expected to be in the range of $0.33 to $0.35. After acquisition-related amortization and restructuring charges, the company expects 2003 earnings per diluted share to be in the range of $0.20 to $0.22. ScanSoft expects revenue and earnings growth to be weighted toward the second half of 2003 as the integration of the Philips Speech Processing businesses is completed. For 2003, the company expects revenues to be approximately evenly split between its document capture and speech solutions.

Investor Call

In conjunction with this announcement, the company will conduct its quarterly conference call at 8:30 a.m. (ET) today, February 25, 2003. To listen to the call, please telephone (800) 474-8920 or (719) 457-2727 five minutes prior to the call. A replay of the call will be available from 11:30 a.m. (ET) on Tuesday, February 25 through 11:30 p.m. (ET) Monday, March 3, 2003. To access the replay, dial (888) 203-1112 or (719) 457-0820 and refer to confirmation code 784098.

The conference call will also be broadcast live over the Internet. Investors interested in listening to the call should log onto the company's Web site at www.nuance.com at least 10 minutes prior to the broadcast. Investors will also have access to an archived version of the call on the company's Web site.

About ScanSoft, Inc.

ScanSoft, Inc. (Nasdaq: SSFT) is a leading supplier of imaging, speech and language 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.nuance.com.

Trademark reference: ScanSoft, the ScanSoft logo, 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.

Safe Harbor Statement: 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. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. The forward-looking statements herein include statements addressing future financial and operating results of ScanSoft and the integration benefits and other aspects of the Philips asset acquisition.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: the company's ability to successfully integrate and manage the Philips assets and technology; failure to retain customers; demand for our products; our ability to maintain our profit margins; difficulties with integrating product plans, schedules and resources; difficulties in implementing planned cost reductions; failure to obtain and retain expected synergies; risks associated with the Philips asset acquisition, transaction costs and the related integration of operations; and other economic, business, and competitive factors affecting the business generally.

More detailed information about these factors is set forth in ScanSoft's filings with the Securities and Exchange Commission, including the Prospectus dated February 10, 2003, the Annual Report on Form 10-K for fiscal 2001 and the most recent quarterly reports on Form 10-Q. ScanSoft is under no obligation to (and expressly disclaims any such obligation to) update or alter the forward-looking statements, whether as a result of new information, future events or otherwise.

Management believes that the Company's adjusted financial results more accurately represent ScanSoft's operating activities for the periods presented. Adjusted results exclude the non-cash amortization of intangible assets and restructuring costs associated with the Company's acquisitions, including the Speech & Language business of Lernout & Hauspie (L&H) in December 2001. This Supplemental Financial Information does not purport to be prepared in compliance with Generally Accepted Accounting Principles.

The reconciliation of adjusted results to GAAP is shown above. GAAP results include costs represented in the following line items: "Cost of revenue from amortization of intangible assets," "Restructuring and other charges" and "Amortization of intangible assets." The Company's adjusted financial results exclude these items in the calculation of operating income, net income and net income (loss) per share.

Amortization expenses in 2002 were $11.2 million compared with $27.5 million in 2001. On January 1, 2002, the company adopted Financial Accounting Standards Board Statement No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS addresses the financial accounting and reporting for acquired goodwill and other intangible assets, including how goodwill and other intangible assets should be accounted for after they have been originally recorded. SFAS 142 provides that goodwill and intangible assets that have indefinite useful lives not be amortized but rather be tested annually for impairment; intangible assets with finite lives will continue to be amortized over their useful lives. The adoption of this pronouncement resulted in approximately $10.4 million of less amortization expense for the year ended December 31, 2002.

Restructuring costs reported during 2002 are related to the Company's first quarter consolidation of facilities, worldwide sales organizations and research and development teams. In the first quarter of 2002, the Company recorded a restructuring charge in the amount of $0.6 million for severance payments to these employees, and a restructuring charge of $0.4 million for certain termination fees to be incurred as a result of exiting the facilities.