ScanSoft Announces Fourth Quarter and Fiscal 2003 Results

Strong Performance in Network Speech and Digital Imaging Produce Results Ahead of Expectations

LONDON, United Kingdom, February 26, 2004 - ScanSoft, Inc. (Nasdaq: SSFT), the leading supplier of speech and imaging solutions, today announced financial results for the fourth quarter and full year ended December 31, 2003.

ScanSoft reported fourth quarter 2003 revenue of $46.9 million, a 65 percent increase over fourth quarter 2002 revenue of $28.4 million. Net income before amortization of acquisition-related intangible assets, restructuring charges and non-cash stock compensation was $6.0 million, or $0.05 per diluted share, compared with $6.7 million, or $0.09 per diluted share, for the fourth quarter of 2002. After including amortization of acquisition-related intangible assets, restructuring charges and non-cash stock compensation, ScanSoft reported fourth quarter 2003 net income of $1.3 million, or $0.01 per diluted share, compared with fourth quarter 2002 net income of $4.4 million, or $0.06 per diluted share.

For the year ended December 31, 2003, ScanSoft reported total revenue of $135.4 million, up 27 percent from revenue of $106.6 million in 2002. Net income before amortization of acquisition-related intangible assets, restructuring charges and non-cash stock compensation was $11.3 million, or $0.12 per diluted share, versus $18.6 million, or $0.26 per diluted share, for 2002. After including amortization of acquisition-related intangible assets, restructuring charges and non-cash stock compensation, ScanSoft reported a net loss of $5.5 million, or $0.07 per diluted share, for 2003 compared with net income of $6.3 million, or $0.09, for 2002.

"ScanSoft achieved solid revenue growth in the fourth quarter, driven by strong performance across all business segments," said Paul Ricci, chairman and CEO of ScanSoft. "Our results reflected significant progress in the SpeechWorks integration and strong performance by our channel partners, resulting in continued momentum in our network and embedded speech businesses. In addition, key new product launches in our productivity applications revitalized our imaging business."

Fourth Quarter Highlights

• Strength in Network Speech: ScanSoft experienced strong revenue from its SpeechWorks network speech solutions. The company's results were driven in part through the performance of its channel partners including Accenture, Avaya, Aspect, and Nortel Networks. Key customers in the quarter include Bank of America, PG&E, Hewlett-Packard, Telstra, Orange and Verizon. ScanSoft saw strong demand in packaged applications as it signed several SpeechPAK for Healthcare customers, and expanded its packaged application portfolio with the acquisition of LocusDialog, the leading supplier of speech-based auto-attendant applications.



• SpeechWorks Integration: ScanSoft largely completed the integration of SpeechWorks International, Inc., and expects to fully realize the anticipated cost synergies from the acquisition by the second quarter of 2004. All product direction and migration plans have been communicated and embraced by customers and partners, resulting in continued growth in network and embedded speech.



• Strategic Design Wins in Embedded Markets: In the fourth quarter, ScanSoft expanded its embedded business with key design wins and strengthened agreements with existing automotive partners worldwide. The company signed or expanded strategic agreements with leading manufacturers and technology companies including Bosch Blaupunkt, Infineon, Pioneer and Polycom.



• Renewed Growth in Imaging: Fueled by the launch of OmniPage Pro 14 and the newly introduced PDF Converter, ScanSoft experienced renewed growth in its imaging business. PDF Converter officially launched in October in conjunction with the worldwide Microsoft Office 2003 launch, while ScanSoft's flagship OCR solution, OmniPage Pro 14 Office, was introduced late in the quarter and was one of the most successful product launches in the company's history.



• Growing Demand for PDF Solutions: In the fourth quarter, ScanSoft launched PDF Converter, the first in a series of PDF-related products. These products build on ScanSoft's heritage of rich imaging capabilities and leverage the strength of partners and channels to bring innovative solutions to the market. Positive response from customers underscores the market opportunity for PDF solutions and alternatives.

"2003 was a year of important accomplishment for ScanSoft and one that provided a strategic and operational foundation for the future," Ricci continued. "Our employees continue to drive innovation and improve our competitive position such that we look forward to 2004 with a unified vision and plan for success in the exciting markets for speech and imaging solutions worldwide."

ScanSoft will discuss the quarter and year in greater detail, progress on its integration, and revenue and earnings guidance on its investor conference call scheduled for this morning.

Amended 10b5-1 Policy

The company also stated that its board of directors has amended a policy intended to regulate trading in ScanSoft securities for insiders and affiliates, including all officers and directors of ScanSoft. The amended policy recommends all insiders and affiliates make purchases or sales of ScanSoft common stock pursuant to individual trading plans according to Rule 10b5-1 of the Securities Exchange Act. Any such plan must be implemented not less than 90 days in advance of any trading. Rule 10b5-1 trading plans provide for the periodic disposition of shares, according to a predetermined schedule of amounts and dates. 10b5-1 plans can only be implemented or amended during an open trading window. Insiders and affiliates who chose not to sell pursuant to a 10b5-1 plan may sell in compliance with Rule 144 of the Securities Act during an open trading window.

Investor Call

In conjunction with this announcement, ScanSoft management will conduct a Webcast and conference call on Thursday, February 26, 2004 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 5340706.

About ScanSoft, Inc.

ScanSoft, Inc. (Nasdaq: SSFT) is the leading supplier 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, 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: potential synergies from, and the completion of the integration of, the acquisition of SpeechWorks; the future performance of, and opportunities for growth in, the speech and imaging businesses; the 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 future prospects regarding international operations; and future sales of ScanSoft common stock by insiders and affiliates and the use of 10b5-1 plans to effect any such sales. 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 results; economic conditions in the United States and abroad; ScanSoft's ability to control and successfully manage its expenses, inventory and cash position; fluctuations in demand for ScanSoft's existing and future products; the effects of competition, including pricing pressure; possible defects in products and technologies; ScanSoft's dependence on OEM customers; the reluctance of insiders and affiliates to adopt 10b5-1 trading plans; the potential volatility in ScanSoft's stock price; and uncertainty in the market and market acceptance of the disposition of ScanSoft common stock by insiders and affiliates pursuant to 10b5-1 plans. 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, 2002 and its most recent quarterly report on Form 10-Q for the quarter ended September 30, 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 Fiscal Year ended December 31, December 31, 2003 2002 2003 2002 Revenue, third parties $44,467 $27,655 $128,681 $101,524 Revenue, related parties 2,404 780 6,718 5,095 Total revenue 46,871 28,435 135,399 106,619 Costs and expenses: Cost of revenue 10,479 3,482 26,123 16,419 Research and development 8,869 6,323 33,938 27,633 Selling, general and administrative 22,261 11,693 64,964 43,668 Total costs and expenses 41,609 21,498 125,025 87,720 Income from operations 5,262 6,937 10,374 18,899 Other income (expense), net 18 162 675 (16) Income before income taxes 5,280 7,099 11,049 18,883 Provision (benefit) for income taxes (742) 420 (269) 254 Net income $6,022 $6,679 $11,318 $18,629 Net income per share: basic $0.06 $0.10 $0.14 $0.28 Net income per share: diluted $0.05 $0.09 $0.12 $0.26 Weighted average common shares: basic 103,072 66,709 81,960 67,010 Weighted average common and common equivalent shares: diluted 114,648 73,850 92,862 72,796 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 Fiscal Year ended December 31, December 31, 2003 2002 2003 2002 Revenue, third parties $44,467 $27,655 $128,681 $101,524 Revenue, related parties 2,404 780 6,718 5,095 Total revenue 46,871 28,435 135,399 106,619 Costs and expenses: Cost of revenue 10,479 3,482 26,123 16,419 Cost of revenue from amortization of intangible assets 3,035 1,976 10,516 9,470 Research and development 8,869 6,323 33,938 27,633 Selling, general and administrative 22,261 11,693 64,964 43,668 Stock based compensation 175 27 330 103 Amortization of other intangible assets 851 236 2,297 1,682 Restructuring and other charges 627 - 3,693 1,041 Total costs and expenses 46,297 23,737 141,861 100,016 Income (loss) from operations 574 4,698 (6,462) 6,603 Other income (expense), net 18 162 675 (16) Income (loss) before income taxes 592 4,860 (5,787) 6,587 Provision (benefit) for income taxes (742) 420 (269) 254 Net income (loss) $1,334 $4,440 $(5,518) $6,333 Net income (loss) per share: basic $0.01 $0.07 $(0.07) $0.09 Net income (loss) per share: diluted $0.01 $0.06 $(0.07) $0.09 Weighted average common shares: basic 103,072 66,709 78,398 67,010 Weighted average common shares: diluted 114,648 73,850 78,398 72,796 ScanSoft, Inc. Condensed Consolidated Balance Sheet (Unaudited, in thousands) Assets December 31, 2003 December 31, 2002 Current assets: Cash and cash equivalents $ 42,584 $ 18,853 Accounts receivable, net 40,271 15,650 Receivable from related party 2,133 1,518 Prepaid expenses and other current assets 9,691 4,408 Total current assets 94,679 40,429 Goodwill, net 243,266 63,059 Other intangible assets, net 54,286 33,823 Property and equipment, net 6,977 2,846 Other assets 2,732 3,533 Total assets $401,940 $143,690 Liabilities and stockholders' equity Current liabilities: Short term note payable $ 904 $ 3,273 Accounts payable and accrued expenses 28,596 16,858 Deferred revenue 13,672 1,790 Other current liabilities 7,202 1,666 Total current liabilities 50,374 23,587 Long term portion of deferred revenue 490 244 Long term note payable 27,859 - Other long term liabilities 19,991 481 Total liabilities 98,714 24,312 Stockholders' equity: 303,226 119,378 Total liabilities and stockholders' equity $401,940 $143,690 ScanSoft, Inc. Reconciliation of Supplemental Financial Information (in 000's, except per share amounts) Unaudited Three months ended Fiscal Year ended December 31, December 31, 2003 2002 2003 2002 Non-GAAP Financial Measures: GAAP Gross Margin 71% 81% 73% 76% Cost of revenue from amortization of intangible assets 6% 7% 8% 9% Non-GAAP gross margin 78% 88% 81% 85% GAAP net income (loss) $ 1,334 $ 4,440 $(5,518) $ 6,333 Cost of revenue from amortization of intangible assets 3,035 1,976 10,516 9,470 Amortization of other intangible assets 851 236 2,297 1,682 Restructuring and other charges 627 - 3,693 1,041 Stock based compensation 175 27 330 103 Net income excluding acquisition related amortization and restructuring charges $ 6,022 $ 6,679 $11,318 $18,629 Net income per share, excluding acquisition related amortization and restructuring charges: basic $ 0.06 $ 0.10 $ 0.14 $ 0.28 Net income per share, excluding acquisition related amortization and restructuring charges: diluted $ 0.05 $ 0.09 $ 0.12 $ 0.26 Shares used in computing net income per share, excluding acquisition related amortization and restructuring charges: Weighted average common shares: basic 103,072 66,709 81,960 67,010 Weighted average common and common equivalent shares: diluted 114,648 73,850 92,862 72,796

This press release and the reconciliation contained herein disclose certain financial measures that exclude acquisition-related amortization, restructuring charges and non-cash compensation that are considered non-GAAP financial measures. 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 ScanSoft's current financial performance and ScanSoft's prospects for the future. Management believes that these measures present a more representative measure of ScanSoft's 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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