ScanSoft Reports $2.7 Million in Second Quarter Operating Income

Company Exceeds Targets; Raises Full Year Guidance

PEABODY, Mass., - July 31, 2001 - ScanSoft, Inc. (Nasdaq: SSFT), a leading provider of paper-to-digital solutions for desktop, network and corporate workgroups, today announced financial results for the second quarter ended June 30, 2001.

Second Quarter Results
ScanSoft's revenues for the second quarter of 2001 were $15.1 million, an increase of 8 percent from the same period in 2000. ScanSoft reported income from operations for the second quarter of 2001 of $2.7 million versus a loss from operations of $3.7 million in the second quarter of 2000. Net income for the quarter was $2.4 million, or $0.05 per diluted share, compared with a loss of $4.0 million, or $0.09 per share, for the second quarter of 2000. In both quarters, income (loss) from operations and net income (loss) exclude amortization of intangible assets and the effect of a 2000 restructuring charge. After including the effect of amortization and a 2000 restructuring charge, ScanSoft reported a net loss of $4.4 million, or $0.09 per share, in the second quarter of 2001 compared with a net loss of $16.0 million, or $0.35 per share, for the second quarter of 2000.

For the first six months of 2001, ScanSoft reported total revenues of $27.9 million, up 30.3 percent from revenues of $21.4 million in the first half of 2000. Income from operations was $2.8 million, as compared to a six month loss of $7.4 million in 2000. Net income was $2.4 million versus a net loss of $7.7 million for the six months ended June 30, 2000. In both cases, income (loss) from operations and net income (loss) exclude amortization of intangible assets and the effect of a 2000 restructuring charge. After including the effect of amortization and a 2000 restructuring charge, ScanSoft reported a net loss of $11.3 million, or $0.24 per share, in the first six months of 2001 compared with a net loss of $40.0 million, or $1.05 per share, for the first half of 2000.

Comments on the Second Quarter

"We are pleased with our continued progress as demonstrated in our results this quarter. Our second quarter reflects strong revenues from our broad base of OEM partners, better-than-expected North American retail sales and early customer acceptance of our new product release, OmniPage Pro 11. Our revenue growth was achieved despite weakness in our European retail channel," said Paul Ricci, ScanSoft's chairman and chief executive officer. "We were able to exceed our net income targets because of our focus on delivering new products, increasing revenues from our core product lines and controlling costs."

Gross margins for the second quarter improved to 81 percent from 71 percent for the same period in 2000. Sales, general and administrative expenses improved to 42 percent of total revenue, down from 63 percent for the second quarter of 2000. Research and development expenses declined to 21 percent of revenue, compared with 34 percent for the three months ended June 30, 2000.

"We continue to realize the benefits of our efforts to improve operationalefficiencies," said Mike Tivnan, ScanSoft's president and chief operating officer. "These benefits are reflected in the on-time shipment of our new OmniPage Pro 11 product, continued expansion of our sales organization and progress with our productivity initiatives focused specifically on improving gross margins and reducing marketing expenses. We also continue to see significant cost efficiencies from the transfer of some research and development operations to Budapest."

ScanSoft continued to expand its global presence in the second quarter. In April, the company signed an agreement to license Asian optical character recognition technology to Microsoft for use in Asian language versions of their new Office XP. ScanSoft's OCR technology also is included in U.S. versions of Office XP, which began shipping to customers in May.

At June 30, 2001, ScanSoft reported ending cash balances of $8.0 million and no debt, $0.5 million better than the $7.5 million guidance announced on July 2, 2001. The Company began the quarter with $2.8 million in cash and short-term debt of $2.6 million. "This second quarter improvement of nearly $8 million in our net cash position is the result of a $5 million equity investment from the State of Wisconsin Investment Board and strong, positive operating cash flows of approximately $3 million," said Tivnan.

2001 Comments and Guidance

"Our results for the second quarter and the first half reflect a sustained focus on our most critical operational objectives, which we established early in the year. We made significant progress against each of these objectives and expect to continue this progress during the balance of the year," said Ricci. "These objectives include expanding our sales capacity domestically and internationally; strengthening our balance sheet; better leveraging our industry partnerships, as with our Microsoft agreements; achieving operational efficiency through targeted productivity initiatives and strict cost controls; and increasing revenue through the timely launch of new products, as with the introduction of OmniPage Pro 11. We are committed to additional product launches in each of our remaining two product categories by the end of the year.

"We remain cautious in our forward-looking guidance because of the uncertainties of the economic climate. We are particularly concerned about the weakening environment in Europe," Ricci said. "We also note that third quarter revenues are traditionally flat with the second quarter because of seasonality. Based on our business plans, including the full-scale retail launch of OmniPage Pro 11 in the U.S. and Europe, we expect third quarter revenue in the range of $14.5 million to $15.5 million. We anticipate that revenues in the middle of that range will produce EPS, before amortization of intangibles, of $0.03."

Ricci added, "For the full year of 2001, we remain comfortable with our previous revenue guidance of 20 to 25 percent growth over 2000. Because of continued progress on our operational initiatives, we are again raising our full-year profitability outlook. We now expect to achieve EPS, before amortization, of $0.11 to $0.15, compared with previous guidance of $0.08 to $0.12."

Investor Call
In conjunction with this announcement, the company will conduct its quarterly conference call at 10:00 a.m. (ET) today, July 31, 2001. To listen to the call, please telephone (719) 457-2692 or (800) 310-1961 approximately 10 minutes beforehand. For those who are not available to listen to the live conference call, a replay will be available via telephone starting at approximately 1:00 p.m. (ET) on July 31 until 11:30 p.m. (ET) on August 7. The access number for the replay is (719) 457-0820 or (888) 203-1112; confirmation number 438298.

The conference call will also be broadcast live over the Internet. 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 has established numerous strategic partnerships with the industry's leading scanner and multifunction vendors to deliver the most comprehensive and cost-effective solutions for its customers. Vendors who have chosen ScanSoft's cutting-edge products and technologies include Brother, Canon, Epson, Fujitsu, Hewlett-Packard, IBM/Lotus, Mustek, Primax, Sharp, Symantec Corporation, Visioneer, Xerox and others. ScanSoft's leading technologies have been licensed by Microsoft for use in Office XP and other future products.

ScanSoft software is sold, marketed and supported worldwide through retail, dealer and OEM channels and the Internet, capturing the small to medium size business and corporate markets. There are more than 8 million registered users of ScanSoft products. ScanSoft can be found on the Web at www.nuance.com.

Trademark reference: ScanSoft, OmniPage, TextBridge, PaperPort, PaperPort Deluxe, Pagis, OmniForm, eOmniForm, and Developer's Kit 2000 are registered trademarks or trademarks of ScanSoft, Inc., in the United States and/or other countries. All other trademarks and trade names are hereby recognized and may be registered to their respective holders.

Safe Harbor Statement: Except for the historical information contained herein, this press release includes forward-looking statements within the meaning of Section 21(e) of the Securities Exchange Act of 1934. These statements include the Company's expectations: full year revenue increase of 20 percent to 25 percent for 2001; and full year earnings per share, before amortization of intangible results, of $0.11 to $0.15. These statements are based on ScanSoft's current expectations and estimates as to prospective events and circumstances that may or may not be in ScanSoft's control and as to which there can be no firm assurances given. These forward-looking statements are subject to risks and uncertainties and there can be no assurance that any of these forward-looking statements may prove to be correct and actual results may differ materially. These risks and uncertainties include, but are not limited to, economic conditions in the U.S. and abroad, the ability to complete an deliver products and services within currently estimated time frames and budgets, our ability to effectively manage diverse and geographically dispersed operations, difficulties with integrating product plans, schedules and resources,difficulties in implementing planned cost reductions, potential that the information and estimates used to predict the cost savings were not accurate, market acceptance of ScanSoft's products, competitive products, pricing pressures, maintenance of distribution channels, and other risks detailed from time to time in ScanSoft's SEC reports. ScanSoft disclaims any intent or obligation to update these forward-looking statements.