<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM __________ TO __________.

                        COMMISSION FILE NUMBER 333-96217

                           NUANCE COMMUNICATIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                  94-3208477
    (STATE OF INCORPORATION)             (IRS EMPLOYER IDENTIFICATION NUMBER)






                              1005 HAMILTON AVENUE
                          MENLO PARK, CALIFORNIA 94025
                                 (650) 847-0000
          (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]

32,881,250 shares of the registrant's common stock, $0.01 par value, were
outstanding as of October 31, 2001.


<PAGE>
                   NUANCE COMMUNICATIONS, INC. & SUBSIDIARIES

                          FORM 10-Q, SEPTEMBER 30, 2001

                                    CONTENTS

<TABLE>
<CAPTION>
 ITEM
NUMBER                                                                 PAGE
------                                                                 ----
<S>      <C>                                                          <C>
                       PART I: FINANCIAL INFORMATION

Item 1.  Financial Statements
         Consolidated Balance Sheets:
         September 30, 2001 and December 31, 2000....................    1
         Consolidated Statements of Operations:
         Three and nine months ended September 30, 2001 and 2000.....    2
         Consolidated Statements of Cash Flows:
         Nine months ended September 30, 2001 and 2000...............    3
         Notes to Consolidated Financial Statements..................    4
Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................    8
Item 3.  Quantitative and Qualitative Disclosures about Market
         Risk........................................................   19

                        PART II: OTHER INFORMATION

Item 1.  Legal Proceedings...........................................   19
Item 6.  Exhibits and Reports on Form 8-K............................   19
SIGNATURES...........................................................   20
</TABLE>





<PAGE>
                    NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   September 30,     December 31,
                                                                       2001             2000
                                                                   -------------     ------------
                                                                    (UNAUDITED)
<S>                                                                <C>               <C>
Current assets:
  Cash and cash equivalents                                          $ 184,213        $ 219,047
  Short-term investments                                                    --            8,728
  Accounts receivable, net of allowance for doubtful
     accounts of $1,424 and $1,823, respectively                         7,353           19,106
  Prepaid expenses and other current assets                              5,080            4,280
                                                                     ---------        ---------
          Total current assets                                         196,646          251,161
  Property and equipment, net                                           10,066            9,414
  Intangible assets                                                      3,783            5,217
  Other assets                                                          18,501           13,546
                                                                     ---------        ---------
          Total assets                                               $ 228,996        $ 279,338
                                                                     =========        =========

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt                                         --               12
  Accounts payable                                                       1,239            1,649
  Accrued liabilities                                                   14,868           12,389
  Restructuring accrual                                                  8,977               --
  Deferred revenue                                                      12,041           10,745
                                                                     ---------        ---------
          Total current liabilities                                     37,125           24,795
  Long-term debt, less current portion                                      --               32
  Restructuring accrual                                                 22,385               --
  Other liabilities                                                         --            2,520
                                                                     ---------        ---------
          Total liabilities                                             59,510           27,347
                                                                     ---------        ---------
Commitments (Note 9)
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares
  authorized; 32,879,188 shares and 32,158,875 shares
  issued and outstanding, respectively                                      33               32
  Additional paid-in capital                                           323,266          316,958
  Deferred stock compensation                                           (3,188)          (7,636)
  Accumulated other comprehensive loss                                    (129)             (16)
  Accumulated deficit                                                 (150,496)         (57,347)
                                                                     ---------        ---------
          Total stockholders' equity                                   169,486          251,991
                                                                     ---------        ---------
          Total liabilities and stockholders' equity                 $ 228,996        $ 279,338
                                                                     =========        =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                        1


<PAGE>
                    NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                 Three Months          Nine Months
                                             Ended September 30,   Ended September 30,
                                             -------------------   --------------------
                                               2001       2000       2001        2000
                                             --------    -------   --------    --------
<S>                                          <C>         <C>       <C>         <C>
Revenue:
  License                                    $  5,065    $10,465   $ 15,757    $ 25,185
  Service.................................      4,116      3,995     14,437       9,219
                                             --------    -------   --------    --------
    Total revenue.........................      9,181     14,460     30,194      34,404
                                             --------    -------   --------    --------
Cost of revenue:
  License.................................        --          40        --           53
  Service.................................      3,502      3,055     12,612       6,780
                                             --------    -------   --------    --------
    Total cost of revenue.................      3,502      3,095     12,612       6,833
                                             --------    -------   --------    --------
  Gross profit............................      5,679     11,365     17,582      27,571
                                             --------    -------   --------    --------
Operating expenses:
  Sales and marketing (1) ................      8,822      8,493     30,934      23,332
  Research and development (1) ...........      4,360      5,283     14,687      14,406
  General and administrative (1) .........      3,089      2,502     10,256       6,800
  Amortization of intangibles.............        478        --       1,433         --
  Non-cash compensation expense...........      1,763      1,138      4,829       3,292
  Restructuring charge and asset
    impairment............................        --         --      55,028         --
                                             --------    -------   --------    --------
    Total operating expenses..............     18,512     17,416    117,167      47,830
                                             --------    -------   --------    --------
Loss from operations......................    (12,833)    (6,051)   (99,585)    (20,259)
  Interest and other income, net..........      1,675      1,529      6,956       3,007
                                             --------    -------   --------    --------
  Loss before provision for income taxes..    (11,158)    (4,522)   (92,629)    (17,252)
  Provision for income taxes..............        218         85        521         231
                                             --------    -------   --------    --------
    Net loss..............................   $(11,376)   $(4,607)  $(93,150)   $(17,483)
                                             ========    =======   ========    ========
Basic and diluted net loss per share......    $ (0.35)   $ (0.15)   $ (2.88)   $  (0.88)
                                             ========    =======   ========    ========
Shares used to compute basic and diluted
 net loss per share.......................     32,646     29,797     32,334      19,799
                                             ========    =======   ========    ========

(1) Excludes non-cash compensation and other non-cash expenses as follows:

    Sales and marketing...................   $    810    $   243   $  1,922    $    703
    Research and development..............   $    760    $   523   $  2,307    $  1,513
    General and administrative............   $    193    $   372   $    600    $  1,076
                                             --------    -------   --------    --------
                                             $  1,763    $ 1,138   $  4,829    $  3,292
</TABLE>




The accompanying notes are an integral part of these consolidated financial
statements.

                                        2


<PAGE>
                    NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                                ------------------------
                                                                  2001           2000
                                                                ---------      ---------
<S>                                                             <C>            <C>
Cash flows from operating activities:
  Net loss ................................................     $ (93,150)     $ (17,483)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Tenant improvement asset impairment ..................        20,898             --
     Depreciation and amortization ........................         3,284          1,762
     Amortization of intangibles ..........................         1,433             --
     Non-cash compensation and other expenses .............         4,829          3,292
     Provision for doubtful accounts ......................           686            387
     Changes in operating assets and liabilities:
     Accounts receivable ..................................        11,067         (7,593)
     Prepaid expenses and other assets ....................         1,607         (2,814)
     Accounts payable .....................................          (410)          (512)
     Restructuring accrual ................................        31,362             --
     Accrued and other liabilities ........................           (40)         5,520
     Deferred revenue .....................................         1,296          2,279
                                                                ---------      ---------
          Net cash used in operating activities ...........       (17,138)       (15,162)
                                                                ---------      ---------
Cash flows from investing activities:

  Purchase of marketable securities .......................            --        (19,485)
  Purchase of long-term investment ........................            --        (11,273)
  Maturities of marketable securities .....................         8,728         30,722
  Purchases of property and equipment .....................       (24,921)        (6,432)
  Disposals of property and equipment .....................            87             --
  Purchased technology ....................................        (7,000)            --
                                                                ---------      ---------
          Net cash used in investing activities ...........       (23,106)        (6,468)
                                                                ---------      ---------
Cash flows from financing activities:

  Proceeds from issuance of common stock ..................            --         80,341
  Repurchase of common stock ..............................          (365)            (8)
  Proceeds from exercise of stock options .................         3,583          5,813
  Proceeds from ESPP ......................................         2,349             --
  Proceeds from exercise of Series D warrant ..............            --          1,000
  Repayment of borrowings .................................           (44)        (2,098)
                                                                ---------      ---------
          Net cash provided by financing activities .......         5,523         85,048
                                                                ---------      ---------
  Effect of exchange rate fluctuations on cash and cash
     equivalents ..........................................          (113)           (37)
  Net increase (decrease) in cash and cash equivalents ....       (34,834)        63,381
  Cash and cash equivalents, beginning of period ..........       219,047         18,073
                                                                ---------      ---------
  Cash and cash equivalents, end of period ................     $ 184,213      $  81,454
                                                                =========      =========
Supplementary disclosures of cash flow information:
  Cash paid during the period for:
     Interest...............................................    $       28     $      78
     Income taxes...........................................    $       60     $      --

Supplementary disclosure of non-cash transaction:
  Issuance of warrant.......................................    $      526     $      --
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.

                                        3


<PAGE>
                    NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements have been prepared by Nuance
Communications, Inc. (the Company) in accordance with instructions to Form 10-Q
and Article 10 of Regulation S-X. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation, have been included. The results of operations
for the three and nine month periods ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year or for
any future periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements contained
in the Company's Form 10-K filed with the Securities and Exchange Commission on
April 2, 2001.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires certain accounting and
reporting standards for derivative financial instruments and hedging activities.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Statement became
effective for the Company on January 1, 2001. Because the Company does not
currently hold any derivative instruments and does not engage in hedging
activities, the adoption of these statements did not have a material impact on
the Company's financial position or results of operations.

On June 29, 2001, the FASB approved for issuance SFAS 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. Major provisions of
these Statements are as follows: all business combinations initiated after June
30, 2001 must use the purchase method of accounting; the pooling of interest
method of accounting is prohibited except for transactions initiated before July
1, 2001; intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights or
are separable from the acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a related contract, asset
or liability; goodwill and intangible assets with indefinite lives are not
amortized but are tested for impairment annually using a fair value approach,
except in certain circumstances, and whenever there is an impairment indicator;
other intangible assets will continue to be valued and amortized over their
estimated lives; in-process research and development will continue to be written
off immediately; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting; effective January 1, 2002,
existing goodwill will no longer be subject to amortization. Goodwill acquired
subsequent to June 30, 2001 will not be subject to amortization.

Nuance Communications will apply SFAS 141 to business combinations initiated
after June 30, 2001. SFAS 142 is effective beginning in the first quarter of
2002 with the exception of goodwill and intangibles assets acquired after June
30, 2001, which will be subject immediately to the non-amortization and
amortization provisions.

In August 2001, the FASB issued SFAS 144, Accounting for the Impairment of
Long-Lived Assets. SFAS 144 supercedes SFAS 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS 144 retains the requirements of SFAS 121 whereby an impairment loss should
be recognized if the carrying value of the asset is not recoverable from its
undiscounted cash flows and develops one accounting model for long-lived assets
that are to be disposed of by sale. SFAS 144 eliminates goodwill from its scope,
therefore it does not require goodwill to be allocated to long-lived assets.
SFAS 144 broadens the scope of APB 30 provisions for the presentation of
discontinued operations to include a component of an entity (rather than a
segment of a business). The statement is effective for fiscal years beginning
after December 15, 2001, with early adoption permitted. Management is currently
assessing the provisions of this statement to determine their impact on the
Company's consolidated results of operations and financial position.

Beginning in the first quarter of 2002, the Company will no longer amortize
goodwill, thereby eliminating annual goodwill amortization of approximately $1.8
million, based on anticipated amortization for 2002. Amortization for the nine
months ended September 30, 2001 was approximately $1.4 million. As of September
30, 2001, unamortized goodwill was approximately $3.7 million.

3. RESTRUCTURING CHARGE AND ASSET IMPAIRMENT

In April 2001, the Company's Board of Directors approved a restructuring plan
that would align the Company's expenses with revised anticipated demand and
create a more efficient organization. In connection with the restructuring plan,
the Company recorded a restructuring charge of $34.1 million for the lease loss
and severance costs and an asset impairment charge of $20.9 million on tenant
improvements.

In conjunction with the restructuring plan, the Company decided not to occupy a
new leased facility. This decision has resulted in a lease loss of $32.6
million, comprised of a sublease loss, broker commissions and other facility
costs, and an asset impairment charge of $20.9 million. To determine the
sublease loss, the loss after the Company's cost recovery efforts from
subleasing the building, certain assumptions were made




                                       4
<PAGE>

related to the (1) time period over which the building will remain vacant (2)
sublease terms (3) sublease rates. The lease loss is an estimate under SFAS No.
5 Accounting for Contingencies and represents the low end of the range and will
be adjusted in the future upon triggering events (change in estimate of time to
sublease, actual sublease rates, etc.). The Company has estimated that the high
end of the lease loss could be $55 million if operating lease rental rates
continue to decrease in these markets or should it take longer than expected to
find a suitable tenant to sublease the facility.

The Company recorded $1.5 million in costs associated with severance and related
benefits. The Company reduced its headcount by approximately 80 employees, with
reductions ranging between 10% and 20% across all functional areas and affecting
several locations. The Company expects to save an estimated $8.0 million
annually of salary and related benefits as a result of this reduction in
headcount. In addition, the real estate restructuring plan is expected to lower
facilities expenses which would have been incurred had the Company occupied the
new leased facility.

The restructuring charge as of September 30, 2001 is as follows (in millions):

<TABLE>
<CAPTION>
                                                             Severance
                                                   Lease    and Related        Total
                                                   Loss       Benefits     Restructuring
                                                   -----    -----------    -------------
  <S>                                              <C>      <C>            <C>
  Total charge in second quarter 2001              $32.6        $1.5           $34.1
  Amount utilized in second quarter 2001           $   0        $1.2           $ 1.2
                                                   -----        ----           -----
  Accrual balance at June 30, 2001                 $32.6        $0.3           $32.9
  Amount utilized in third quarter 2001            $ 1.4        $0.1           $ 1.5
                                                   -----        ----           -----
  Accrual balance at September 30, 2001            $31.2        $0.2           $31.4
</TABLE>

Total cash outlay for the restructuring plan is expected to be $34.1 million,
with $31.4 million accrued at September 30, 2001 and $2.7 million paid out
through September 30, 2001. The Company expects $8.9 million of the lease loss
to be paid out over the next twelve months, and the remaining $22.3 million to
be paid out over the remaining life of the lease of approximately 10 years. The
Company expects the remaining $200,000 of employee severance and related
benefits accrual to be paid out by March 31, 2002.

4. NET LOSS PER SHARE

Historical net loss per share has been calculated under SFAS No. 128, Earnings
Per Share. Basic net loss per share on a historical basis is computed using the
weighted average number of shares of common stock outstanding. Diluted net loss
per share is equal to basic net loss per share for all periods presented since
potential common shares from conversion of the convertible preferred stock,
stock options and warrants are antidilutive. The total number of shares excluded
from diluted net loss per share was 8,002,000 for the three months ended
September 30, 2001 and 7,196,000 for the nine months ended September 30, 2001.
The total number of shares excluded from diluted net loss per share was
5,857,000 for the three months ended September 30, 2000 and 11,892,000 for the
nine months ended September 30, 2000.

The following table presents the calculation of basic and diluted net loss per
share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                Three Months Ended          Nine Months Ended
                                                   September 30,              September 30,
                                              ----------------------      ----------------------
                                                2001          2000          2001          2000
                                              --------      --------      --------      --------
<S>                                           <C>           <C>           <C>           <C>
Net loss ................................     $(11,376)     $ (4,607)     $(93,150)     $(17,483)
                                              ========      ========      ========      ========
Basic:
  Weighted average shares of common stock
   outstanding ..........................       32,842        30,554        32,625        20,353
  Less: Weighted average shares of common
   stock subject to repurchase ..........         (196)         (757)         (291)         (554)
                                              --------      --------      --------      --------
Weighted average shares used in computing
 basic and diluted net loss per share ...       32,646        29,797        32,334        19,799
                                              ========      ========      ========      ========
Basic and diluted net loss per share ....     $  (0.35)     $  (0.15)     $  (2.88)     $  (0.88)
                                              ========      ========      ========      ========
</TABLE>




                                       5
<PAGE>

5. NON-CASH COMPENSATION AND OTHER NON-CASH EXPENSES

In connection with the grant of certain stock options to employees through March
31, 2000, the Company recorded deferred stock compensation within stockholders'
equity of $8.7 million, representing the difference between the estimated fair
value of the common stock for accounting purposes and the option exercise price
of these options at the date of grant. Such amount is presented as a reduction
of stockholders' equity and is being amortized over the vesting period of the
applicable options using an accelerated method of amortization. Under the
accelerated method, each vested tranche of options is accounted for as a
separate option grant awarded for past services. Accordingly, the compensation
expense is recognized over the period during which the services will be
provided; however, the method results in a front-loading of the compensation
expense. The Company recorded amortization of deferred compensation of $592,000
and $1.8 million for the three and nine months ended September 30, 2001 and $1.1
million and $3.3 million for the three and nine months ended September 30, 2000,
relating to approximately 3,152,000 options with a weighted average exercise
price of $8.58.

In connection with the SpeechFront acquisition, the Company recorded deferred
compensation of $4.1 million. This amount is part of the purchase agreement and
is payable to the founders in common stock, approximately 38,710 shares, and
contingent upon their continued employment. Approximately $871,000 and $2.6
million was amortized in the three and nine months ended September 30, 2001
related to these deferred compensation amounts.

In December 2000, the Company issued to a customer a warrant to purchase 100,000
shares of common stock at an exercise price of $138.50 per share subject to
certain anti-dilution adjustments. The warrant is exercisable at the option of
the holder, in whole or part, at any time between January 17, 2001 and August
2002. In January 2001, the Company valued the warrant at $526,000, utilizing the
Black-Scholes valuation model using the following assumptions; risk-free
interest rate of 5.5% expected dividend yields of zero, expected life of 1.5
years, and expected volatility of 80%. The Company amortized $84,000 and
$236,000 related to this warrant in the three and nine months ended September
30, 2001. In the nine months ended September 30, 2001, the Company received an
invoice for $72,000 from this customer and reduced the warrant expense for the
period by this amount. In the three months ended September 30, 2001, the Company
did not receive any invoices from this customer and warrant expense was not
reduced during this period.

In July 2001, an employee was terminated effective September 2001. The employee
was allowed to continue to vest in their stock options which resulted in a pre
tax non-cash compensation charge of $216,000 in accordance with the FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation.

The Company expects to amortize $5.8 million, $1.8 million and $500,000 of
non-cash compensation and other expenses in 2001, 2002 and 2003, respectively.

6. PURCHASED TECHNOLOGY

The Company entered into an agreement with a third-party that gives the Company
non-exclusive Intellectual Property Rights to software code. The Company has
paid this third-party a $7.0 million license fee related to this agreement. $2.5
million of this fee was paid in the three months ended March 31, 2001 and $4.5
million was paid in the three months ended June 30, 2001. This license fee is
being amortized to research and development expense during the development stage
and thereafter as cost of revenue over a period of five years, and $350,000 and
$875,000 was amortized in the three and nine months ended September 30, 2001,
respectively.

7. ACQUISITION

On November 10, 2000, in an acquisition accounted for under the purchase method
of accounting, the Company acquired all the outstanding shares of SpeechFront
Inc. (SpeechFront) for approximately $7.1 million, including acquisition costs
of approximately $129,000. SpeechFront is a developer of voice instant messaging
systems. The consideration included approximately 16,590 shares of the Company
common stock valued at $1.7 million and cash of approximately $5.3 million. The
purchase agreement contained additional payments, of approximately $4.1 million,
to be made in common stock, approximately 38,710 shares, contingent upon the
continued employment of the founders of SpeechFront. Maximum future payments,
contingent solely on continued employment of the founders, is $1.7 million,
approximately 16,590 shares, and is payable upon the eighteen month anniversary
of the acquisition date. The remaining $2.4 million, approximately 22,120
shares, also relates to the continued employment of the founders, and is payable
upon the twelve-month anniversary of the acquisition date, or earlier if certain
performance milestones are achieved. The contingent payments will be accounted
for as compensation expense over the term of the employment condition and not as
part of the purchase price. Upon consummation of the acquisition, the Company
established an escrow for these contingent payments. The allocation of the
purchase price to the assets acquired and liabilities assumed based on
preliminary estimates of fair value, which are subject to final adjustment, are
as follows (in thousands):





                                       6
<PAGE>

<TABLE>
<S>                                                           <C>
Cash........................................................  $  136
Other current assets........................................       7
Property and equipment......................................      66
Acquired in-process research and development................   1,500
Goodwill....................................................   5,336
Workforce...................................................     200
                                                              ------
                                                               7,245
Less: Liabilities assumed...................................     (95)
                                                              ------
                                                              $7,150
                                                              ======
</TABLE>

At the time of acquisition, Nuance expensed $1.5 million of purchased in-process
research and development. Other purchased intangible assets, including goodwill
and workforce of approximately $5.5 million are being amortized a straight-line
basis over their estimated useful lives of thirty-six and eighteen months,
respectively. Beginning on November 10, 2000, SpeechFront's operating results
were included with those of the Company. The value assigned to purchased
in-process technology, based on the income method prepared by an independent
third-party was determined by identifying research projects in areas for which
technological feasibility had not been established. SpeechFront's in-process
projects included the research and development associated with the voice instant
messaging + Mobile HQ product.

The value of in-process research and development was determined by estimating
the costs to develop the purchased in-process technology into a commercially
viable product, estimating the resulting net cash flows from such project and
discounting the net cash flows back to their present value. The discount rate
includes a risk-adjusted discount rate to take into account the uncertainty
surrounding the successful development of the purchased in-process technology.
The risk-adjusted discount rate applied to the projects' cash flows was 30% for
the in-process technology. The Company believes that the estimated in-process
technology amounts represent fair value and do not exceed the amount a
third-party would pay for the projects. The valuation includes cash inflows from
in-process technology through 2006 with revenues commencing in 2002. Where
appropriate, the Company allocated anticipated cash flows from an in-process
research and development project to reflect contributions of the core
technology.

At the time of the acquisition, SpeechFront's remaining tasks were approximately
35 percent complete based on engineering man-month data and technological
progress. As of September 30, 2001, these tasks were 90% complete and are
expected to be complete by December 31, 2001. If the projects are not successful
or completed in a timely manner, management's product pricing and growth rates
may not be achieved and Nuance may not realize the financial benefits expected
from the projects. The Company is not disclosing pro forma financial information
for the quarter ending September 30, 2000 due to the immateriality of
differences between actual and pro forma results.

8. SEGMENT REPORTING

The Company has two operating segments: licenses and services. Revenue and cost
of revenue for the segments are identical to those presented on the accompanying
consolidated statements of operations. The Company does not track expenses nor
derive profit or loss based on these segments.

Sales of licenses and services through September 30, 2001 occurred through
resellers and direct sales representatives located in the Company's headquarters
in Menlo Park, California, and in other locations. These sales were supported
through the Menlo Park location. The Company does not separately report costs by
region internally.

9. COMMITMENTS

The Company leases its facilities under non-cancelable operating leases with
various expiration dates through July 2012. Future minimum lease payments under
these agreements as of December 31, 2000, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             OPERATING
                        FISCAL YEAR                            LEASE
                        -----------                          ---------
<S>                                                          <C>
2001.......................................................   $ 4,274
2002.......................................................     8,308
2003.......................................................     8,583
2004.......................................................     8,570
2005.......................................................     8,263
Thereafter.................................................    61,055
                                                              -------
          Total minimum lease payments.....................   $99,053
                                                              =======
</TABLE>



                                       7
<PAGE>

In May 2000, the Company entered into a lease for a new headquarters facility.
The lease has an eleven-year term, which began in August 2001, and provides for
monthly rent payments starting at approximately $600,000. An $11.0 million
certificate of deposit secures a letter of credit required by the landlord for a
rent deposit. In conjunction with the restructuring plan (see note 3), the
Company decided not to occupy this new leased facility. The facility will be
subleased and the sublease income will be used to offset rental payments.

In July 2001, the Company renewed its lease on one of its facilities in
California. The lease has a three-year term, which began in August 2001, and
provides for monthly rent payment of approximately $60,000. The Company will pay
out a total of $2.2 million over the life of the lease, with $289,000 being paid
in 2001, $701,000 being paid in 2002, $722,000 being paid in 2003 and $460,000
being paid in 2004.

10. LITIGATION

In March 2001, the first of a number of stockholder complaints was filed in the
United States District Court for the Northern District of California against the
Company and certain of its officers. Those lawsuits have been consolidated and
an amended complaint has been filed on behalf of a purported class of people who
purchased the Company's stock during the period January 31, 2001 through March
15, 2001, alleging false and misleading statements and insider trading in
violation of the federal securities laws. The plaintiffs are seeking unspecified
damages. The Company believes that the allegations are without merit and intends
to defend the litigation vigorously. An unfavorable resolution of this
litigation could have a material adverse effect on the Company's business,
results of operations, or financial condition.

In June and July 2001, putative shareholder derivative actions were filed in
California state court alleging breaches of fiduciary duty and insider trading
by various of our directors and officers. While we are named as a nominal
defendant, the lawsuits do not appear to seek any recovery against us.
Proceedings in these actions have been stayed.

In August 2001, the first of a number of complaints was filed in federal
district court for the Southern District of New York on behalf of a purported
class of persons who purchased the Company's stock between April 12, 2000 and
December 6, 2000. The complaint generally alleges that various investment bank
underwriters engaged in improper and undisclosed activities related to the
allocation of shares in our initial public offering of securities. The
complaints bring claims for violation of several provisions of the federal
securities laws against those underwriters, and also against us and some of our
directors and officers. Similar lawsuits concerning more than 180 other
companies' initial public offerings have been filed this year. We believe that
the allegations against us are without merit and intend to defend the litigation
vigorously.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this report. The
results shown herein are not necessarily indicative of the results to be
expected for the full year or any future periods.

This Report on Form 10-Q contains forward-looking statements, within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act,
including but not limited to our expectations for results over the balance of
the year, regarding expense trends, cash positions, future capital requirements
and our outlook for the Company, as well as our expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this Report on Form 10-Q are based on information available to us on
the date hereof, and we assume no obligation to update any such forward-looking
statements. These statements involve risks and uncertainties and actual results
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including, but not limited to,
those set forth in Factors that affect future results and elsewhere in this
Report on Form 10-Q. In particular, see "Factors that affect future results -
Our ability to accurately forecast our quarterly sales is limited, our costs are
relatively fixed in the short term and we expect our business to be affected by
seasonality. As a result, our quarterly operating results may fluctuate" and "We
are exposed to general economic conditions."

OVERVIEW:

We develop, market and support a voice interface software platform that makes
the content and services of the Internet, telecommunications networks and
enterprises accessible from any telephone. The software platform consists of
software servers that run on industry-standard hardware and perform speech
recognition, natural language understanding and voice authentication. We sell
products and services through a combination of value-added resellers, original
equipment manufacturers, systems integrators and directly to end users.

On March 15, 2001, we announced our revised expectations for our first quarter
financial results based upon our then-current outlook, including a revenue
shortfall and a larger than expected net loss for the quarter due to general
economic conditions which have led customers and customer prospects to postpone
capital investment in Nuance products and service offerings based on Nuance
products. On April 19, 2001, we announced that the trends seen in the first
quarter were expected to continue in the second quarter as a result of a
continuing weak economic environment. We are not certain when the economic
environment will improve.




                                       8
<PAGE>

In April 2001, we announced a restructuring plan that reduced our workforce by
approximately 80 employees. In connection with that reduction, we recorded a
lease loss and a tenant improvement asset impairment (see note 3). These charges
were recorded to align our cost structure with changing market conditions and to
create a more efficient organization. They were recorded in the quarter ending
June 30, 2001.

RESULTS OF OPERATIONS:

The following table sets forth, for the period's indicated, the percentage of
net revenue represented by certain items in our statements of operations for the
three and nine months ended September 30, 2001 and 2000.

<TABLE>
<CAPTION>
                                           THREE MONTHS              NINE MONTHS
                                        ENDED SEPTEMBER 30,       ENDED SEPTEMBER 30,
                                        -------------------       -------------------
                                         2001         2000         2001         2000
                                        ------       ------       ------       ------
<S>                                     <C>          <C>          <C>          <C>
Revenue:
  License..............................    55%          72%          52%          73%
  Service..............................    45           28           48           27
                                         ----         ----         ----         ----
          Total revenue................   100          100          100          100
Cost of revenue:
  License..............................    --           --           --           --
  Service..............................    38           21           42           20
                                         ----         ----         ----         ----
          Total cost of revenue........    38           21           42           20
                                         ----         ----         ----         ----
Gross Margin...........................    62           79           58           80
Operating expenses:
  Sales and marketing(1)...............    96           59          102           68
  Research and development(1)..........    48           37           49           42
  General and administrative(1)........    34           17           34           20
  Amortization of intangibles..........     5           --            5           --
  Non-cash compensation expense........    19            8           16            9
  Restructuring charge and asset
    impairment.........................    --           --          182           --
                                         ----         ----         ----         ----
          Total operating expenses.....   202          121          388          139
                                         ----         ----         ----         ----
Loss from operations...................  (140)         (42)        (330)         (59)
Interest and other income, net.........    18           11           23            9
                                         ----         ----         ----         ----
Loss before provision for income
  taxes................................  (122)         (31)        (307)         (50)
Provision for income taxes.............     2            1            2            1
                                         ----         ----         ----         ----
          Net loss.....................  (124)%        (32)%       (309)%        (51)%
                                         ====         ====         ====         ====
</TABLE>

(1) Percentages are net of non-cash compensation and other non-cash expenses.


COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

                                     REVENUE

Total revenue for the three months ended September 30, 2001 was $9.2 million,
compared with $14.5 million in the three months ended September 30, 2000, a
decrease of 37%. Total revenue for the nine months ended September 30, 2001 was
$30.2 million, compared with $34.4 million in the nine months ended September
30, 2000, a decrease of 12%.

License revenue for the three months ended September 30, 2001 was $5.1 million,
compared with $10.5 million in the three months ended




                                       9
<PAGE>

September 30, 2000, a decrease of 52%. License revenue for the nine months ended
September 30, 2001 was $15.8 million, compared with $25.2 million in the nine
months ended September 30, 2000, a decrease of 37%. The decline in license
revenue was due to an uncertain economic environment that caused customers to
delay purchases in the nine months ended September 30, 2001. License revenue
represented 55% and 52% of total revenue for the three and nine months ended
September 30, 2001 and 72% and 73% of total revenue for the three and nine
months ended September 30, 2000.

Service revenue for the three months ended September 30, 2001 was $4.1 million,
compared with $4.0 million for the three months ended September 30, 2000, an
increase of 3%. Service revenue for the nine months ended September 30, 2001 was
$14.4 million, compared with $9.2 million for the nine months ended September
30, 2000, an increase of 57%. This increase in service revenue was due primarily
to growth in professional services headcount, which enabled completion of more
professional services projects. Service revenue growth has slowed as customers
scaled back project implementations in light of general economic conditions.
Service revenue represented 45% and 48% of total revenue for the three and nine
months ended September 30, 2001 and 28% and 27% of total revenue for the three
and nine months ended September 30, 2000.

                                 COST OF REVENUE

Cost of service revenue for the three months ended September 30, 2001 was $3.5
million, compared with $3.1 million in the three months ended September 30,
2000, an increase of 15%. Cost of service revenue for the nine months ended
September 30, 2001 was $12.6 million, compared with $6.8 million for the nine
months ended September 30, 2000, an increase of 86%. The increase was due to
hiring approximately 20 additional personnel in the professional services,
technical support and training groups. The service margin decreased due to a
decline in professional services utilization rates. Cost of service revenue as a
percentage of service revenue was 85% and 87% in the three and nine months ended
September 30, 2001 and 76% and 74% for the three and nine months ended September
30, 2000. We anticipate that cost of service revenue will remain relatively
constant in absolute dollars, although cost of service revenue will vary as a
percentage of service and total revenue from period to period.

                               OPERATING EXPENSES

Sales and Marketing -- Sales and marketing expenses primarily consist of
compensation and related costs for sales and marketing personnel and promotional
expenditures, including public relations, advertising, trade shows and marketing
collateral materials. Sales and marketing expenses for the three months ended
September 30, 2001 were $8.8 million, compared with $8.5 million in the three
months ended September 30, 2000, an increase of 4%. Sales and marketing expenses
for the nine months ended September 30, 2001 were $30.9 million, compared with
$23.3 million for the nine months ended September 30, 2000, an increase of 33%.
This increase was attributable to the addition of approximately 20 sales and
marketing personnel and increases in marketing costs and external consultants.
As a percentage of total revenue, sales and marketing expenses were 96% and 102%
in the three and nine months ended September 30, 2001, and 59% and 68% in the
three and nine months ended September 30, 2000. Due to the more challenging
economic environment, we anticipate that sales and marketing expenses will
remain relatively constant in absolute dollars, but will vary as a percentage of
total revenue from period to period.

Research and Development -- Research and development expenses primarily consist
of compensation and related costs for research and development personnel and
contractors. Research and development expenses for the three months ended
September 30, 2001 were $4.4 million, compared with $5.3 million in the three
months ended September 30, 2000, a decrease of 17%. Research and development
expenses for the nine months ended September 30, 2001 were $14.7 million,
compared with $14.4 million in the nine months ended September 30, 2000, an
increase of 2%. The decrease in research and development expenses from the three
months ended September 30, 2000 to the three months ended September 30, 2001 was
primarily the result of the decrease of approximately five research and
development personnel and the reduced use of external consultants. As a
percentage of total revenue, research and development expenses were 48% and 49%
in the three and nine months ended September 30, 2001, and 37% and 42% in the
three and nine months ended September 30, 2000. Due to the more challenging
economic environment, we anticipate that research and development expenses will
remain relatively constant in absolute dollars, but will vary as a percentage of
total revenue from period to period.

General and Administrative -- General and administrative expenses primarily
consist of compensation and related costs for administrative personnel, legal
services, accounting services and other general corporate expenses. General and
administrative expenses for the three months ended September 30, 2001 were $3.1
million, compared with $2.5 million in the three months ended September 30,
2000, an increase of 23%. General and administrative expenses for the nine
months ended September 30, 2001 were $10.3 million, compared with $6.8 million
in the nine months ended September 30, 2000, an increase of 51%. The increase
was largely due to the addition of approximately 10 administrative personnel and
increased legal and professional fees. The additional expenses enhanced our
administrative infrastructure to strengthen controls and accommodate growth. As
a percentage of total revenue, general and administrative expenses were 34% in
both the three and nine months ended September 30, 2001 and 17% and 20% in the
three and nine months ended September 30, 2000. Due to the more challenging
economic environment, we expect that general and administrative expenses will
remain relatively constant in absolute dollars, however, we expect that these
expenses will vary as a percentage of total revenue from period to period.

Amortization of Intangibles -- Goodwill and other acquired intangible assets of
$5.5 million were recorded in connection with the acquisition of SpeechFront in
November 2000 and are being amortized over their useful lives of 18 to 36
months. Amortization of intangibles was $478,000 and $1.4 million for the three
and nine months ended September 30, 2001. There was no amortization of
intangibles for the three and nine months ended September 30, 2000.




                                       10
<PAGE>

Non-Cash Compensation -- In connection with the grant of certain stock options
to employees through March 31, 2000, we recorded deferred stock compensation
within stockholders' equity of $8.7 million, representing the difference between
the estimated fair value of the common stock for accounting purposes and the
option exercise price of these options at the date of grant. Such amount is
presented as a reduction of stockholders' equity and is being amortized over the
vesting period of the applicable options using an accelerated method of
amortization. Under the accelerated method, each vested tranche of options is
accounted for as a separate option grant awarded for past services. Accordingly,
the compensation expense is recognized over the period during which the services
will be provided; however, the method results in a front-loading of the
compensation expense. We recorded amortization of deferred compensation of
$592,000 and $1.8 million for the three and nine months ended September 30, 2001
and $1.1 million and $3.3 million for the three and nine months ended September
30, 2000, relating to approximately 3,152,000 options with a weighted average
exercise price of $8.58.

In connection with the SpeechFront acquisition, we recorded deferred
compensation of $4.1 million. This amount is part of the purchase agreement and
is payable to the founders in common stock, approximately 38,710 shares, and
contingent upon their continued employment. Approximately $871,000 and $2.6
million were amortized in the three and nine months ended September 30, 2001
related to these deferred compensation amounts.

In December 2000, we issued to a customer a warrant to purchase 100,000 shares
of common stock at an exercise price of $138.50 per share subject to certain
anti-dilution adjustments. The warrant is exercisable at the option of the
holder, in whole or part, at any time between January 17, 2001 and August 2002.
In January 2001, we valued the warrant at $526,000, utilizing the Black-Scholes
valuation model using the following assumptions; risk-free interest rate of 5.5%
expected dividend yields of zero, expected life of 1.5 years, and expected
volatility of 80%. We amortized $84,000 and $236,000 related to this warrant in
the three and nine months ended September 30, 2001. In the nine months ended
September 30, 2001, we received an invoice for $72,000 from this customer and
reduced the warrant expense for the period by this amount. In the three months
ended September 30, 2001, we did not receive any invoices from this customer and
warrant expense was not reduced for this period.

In July 2001, an employee was terminated effective September 2001. The employee
was allowed to continue to vest in their stock options which resulted in a pre
tax non-cash compensation charge of $216,000 in accordance with the FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation.

We expect to amortize $5.8 million, $1.8 million and $500,000 of non-cash
compensation and other non-cash expenses in 2001, 2002 and 2003, respectively.

Restructuring Charge and Asset Impairment - For the nine months ended September
30, 2001, we recorded a restructuring charge of $34.1 million for the lease loss
and severance costs and an asset impairment charge of $20.9 million. In April
2001, our Board of Directors approved a restructuring plan that would align our
expenses with revised anticipated demand and create a more efficient
organization.

In conjunction with the restructuring plan, we decided not to occupy a new
leased facility. Our decision has resulted in a lease loss of $32.6 million,
comprised of a sublease loss, broker commissions and other facility costs, and
an asset impairment charge of $20.9 million. To determine the sublease loss, the
loss after our cost recovery efforts from subleasing the building, certain
assumptions were made related to the (1) time period over which the building
will remain vacant (2) sublease terms (3) sublease rates. The lease loss is an
estimate under SFAS No. 5 Accounting for Contingencies and represents the low
end of the range and will be adjusted in the future upon triggering events
(change in estimate of time to sublease, actual sublease rates, etc.). We have
estimated that the high end of the lease loss could be $55 million if operating
lease rental rates continue to decrease in these markets or should it take
longer than expected to find a suitable tenant to sublease the facility.

We recorded $1.5 million in costs associated with severance and related
benefits. We reduced our headcount by approximately 80 employees, with
reductions ranging between 10% and 20% across all functional areas and affecting
several locations. We expect to save an estimated $8.0 million annually of
salary and related benefits as a result of this reduction in headcount. In
addition, the real estate restructuring plan is lowering facilities expenses
which would have been incurred had we occupied the new leased facility.

Total cash outlay for the restructuring plan is expected to be $34.1 million,
with $31.4 million accrued at September 30, 2001 and $2.7 million paid out
through September 30, 2001. We expect $8.9 million of the lease loss to be paid
out over the next twelve months, and the remaining $22.3 million to be paid out
over the remaining life of the lease of approximately 10 years. We expect the
remaining $200,000 of employee severance and related benefits accrual to be paid
out by March 31, 2002.

                         INTEREST AND OTHER INCOME, NET

Interest and other income, net, consists primarily of interest earned on cash
and cash equivalents and short-term investments. Interest and other income, net
was $1.7 million in the three months ended September 30, 2001 and $1.5 million
in the three months ended September 30, 2000, an increase of 10%. Interest and
other income, net was $7.0 million in the nine months ended September 30, 2001
and $3.0 million in the nine months ended September 30, 2000, an increase of
131%. The increase was due to higher interest income, which was earned on the
cash received from our initial public offering and follow-on public offering in
2000.

                           PROVISION FOR INCOME TAXES




                                       11
<PAGE>

We have incurred operating losses for all periods from inception through
September 30, 2001 and therefore have not recorded a provision for federal
income taxes for any period through September 30, 2001. We recorded income tax
expense relating to foreign taxes of $218,000 and $521,000 for the three and
nine month periods ended September 30, 2001, respectively, and $85,000 and
$231,000 for the three and nine months ended September 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

From inception to our initial public offering, we financed our operations
primarily from private sales of convertible preferred stock totaling $70.0
million through March 31, 2000 and, to a lesser extent, from bank financing. On
April 18, 2000, we raised approximately $80.3 million through the completion of
its initial public offering of common stock. On October 2, 2000, we raised
approximately $144.0 million through the completion of its follow-on public
offering. As of September 30, 2001, we had cash and cash equivalents aggregating
$184.2 million.

Our operating activities used cash of $17.1 million for the nine months ended
September 30, 2001, and used cash of $15.2 million during the nine months ended
September 30, 2000. This negative operating cash flow in the nine months ended
September 30, 2001 resulted principally from our net loss, partially offset by a
decrease in accounts receivable and an increase in the restructuring accrual and
the tenant improvement asset impairment. The negative operating cash flow in the
nine months ended September 30, 2000 resulted principally from our net losses
and increases in accounts receivable, prepaid expenses and other assets. These
factors were partially offset by increases in accrued liabilities, deferred
revenue and non-cash compensation and other expenses.

Investing activities used cash of $23.1 million during the nine months ended
September 30, 2001, and $6.5 million during the nine months ended September 30,
2000. Our use of cash in investing activities for the nine months ended
September 30, 2001 resulted from additions to property and equipment and
purchased technology, partially offset by maturities of short-term securities.
The use of cash for the nine months ended September 30, 2000 resulted from the
net purchases of short-term investments, a long-term investment and additions to
property and equipment, partially offset by the maturities of short-term
securities. We plan to spend less than $500,000 in capital expenditures during
the rest of 2001.

Our financing activities generated cash of $5.5 million during the nine months
ended September 30, 2001, and $85.0 million for the nine months ended September
30, 2000. The generation of cash for the nine months ended September 30, 2001
was primarily the result of proceeds from the exercise of employee stock options
and employee stock purchase plan contributions from employees. The generation of
cash for the nine months ended September 30, 2000 was largely the result of
proceeds from the completion of our initial public offering.

Our capital requirements depend on numerous factors. Through fiscal year 2001,
we will be holding headcount relatively constant. We believe that our current
cash and cash equivalents and our borrowing capacity will be sufficient to fund
our activities for the next 12 months. Thereafter, we may need to raise
additional funds in order to fund more rapid expansion, including increases in
employees; to develop new or enhance existing products or services; to respond
to competitive pressures; to pay litigation costs in excess of our insurance
policy, or to acquire or invest in complementary businesses, technologies,
services or products. Additional funding may not be available on favorable terms
or at all. In addition, we may, from time to time, evaluate potential
acquisitions of other businesses, products and technologies. We may also
consider additional equity or debt financing, which could be dilutive to
existing investors.

                       FACTORS THAT AFFECT FUTURE RESULTS

WE HAVE A HISTORY OF LOSSES. WE EXPECT TO CONTINUE TO INCUR LOSSES AND WE MAY
NOT ACHIEVE OR MAINTAIN PROFITABILITY.

We have incurred losses since our inception, including a loss of approximately
$11.4 million in the three months ended September 30, 2001. As of September 30,
2001, we had an accumulated deficit of approximately $150.5 million. We expect
to have net losses and negative cash flow for at least the next 12 months. We
expect to spend significant amounts to enhance our products and technologies and
expand international sales and operations. As a result, we will need to generate
significant additional revenue to achieve profitability. Even if we achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.

OUR ABILITY TO ACCURATELY FORECAST OUR QUARTERLY SALES IS LIMITED, OUR COSTS ARE
RELATIVELY FIXED IN THE SHORT TERM AND WE EXPECT OUR BUSINESS TO BE AFFECTED BY
SEASONALITY. AS A RESULT, OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.

Our quarterly operating results have varied significantly in the past and we
expect that they will vary significantly from quarter to quarter in the future.
On March 15, 2001, we announced our revised expectations for our first quarter
financial results based upon our then-current outlook, including a revenue
shortfall and a larger than expected net loss for the quarter due to general
economic conditions which have led customers and customer prospects to postpone
capital investment in Nuance products and service offerings based on Nuance
products. On April 19, 2001, we announced that the trends seen in the first
quarter were expected to continue in the second quarter as a result of a
continuing weak economic environment. We are not certain when the economic
environment will improve. These quarterly variations are caused by a number of
factors, including:

-  general economic downturn and delays or cancellations in orders by customers
   who are reducing spending;





                                       12
<PAGE>

-  delays in customer orders due to the complex nature of large telephony
   systems and the associated implementation projects;

-  timing of product deployments and completion of project phases, particularly
   for large orders;

-  delays in recognition of software license revenue in accordance with
   applicable accounting principles;

-  our ability to develop, introduce, ship and support new and enhanced
   products, such as our voice browser and new versions of our software
   platform, that respond to changing technology trends in a timely manner and
   our ability to manage product transitions;

-  the amount and timing of increases in expenses associated with our growth;
   and

-  the utilization rate of our professional services personnel.

Due to these factors, and because the market for our voice interface software
platform is new and rapidly evolving, our ability to accurately forecast our
quarterly sales is limited. In addition, most of our costs are for personnel and
facilities, which are relatively fixed in the short term. If we have a shortfall
in revenue in relation to our expenses, we may be unable to reduce our expenses
quickly enough to avoid lower quarterly operating results. We do not know
whether our business will grow rapidly enough to absorb the costs of these
employees and facilities. As a result, our quarterly operating results could
fluctuate significantly and unexpectedly from quarter to quarter.

In addition, we expect to experience seasonality in the sales of our products.
For example, we anticipate that sales may be lower in the first quarter of each
year due to patterns in the capital budgeting and purchasing cycles of our
current and prospective customers. We also expect that sales may decline during
summer months. These seasonal variations in our sales may lead to fluctuations
in our quarterly operating results. Because we have limited operating results,
it is difficult for us to evaluate the degree to which this seasonality may
affect our business.

WE ARE CURRENTLY ENGAGED IN A SECURITIES CLASS ACTION LITIGATION, WHICH, IF IT
RESULTS IN AN UNFAVORABLE RESOLUTION, COULD ADVERSELY AFFECT OUR BUSINESS,
RESULTS OF OPERATIONS OR FINANCIAL CONDITION.

We have been sued in various shareholder lawsuits in federal district court in
California and New York (see Note 10:Litigation). We believe that the
allegations against us are without merit and intend to defend the litigation
vigorously. An unfavorable resolution of the lawsuits could have a material
adverse effect on our business, results of operations, or financial condition.

OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS OUTSIDE OF OUR CONTROL.

Since our initial public offering on April 13, 2000, our stock price has been
extremely volatile. During that time, the stock market in general, and The
Nasdaq National Market and the securities of technology companies in particular,
has experienced extreme price and trading volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of individual companies. The following factors, among others, could
cause our stock price to fluctuate:

-  actual or anticipated variations in operating results;

-  announcements of operating results and business conditions by our customers
   and suppliers;

-  announcements by our competitors relating to new customers, technological
   innovation or new services;

-  economic developments in our industry as a whole; and

-  general market conditions.

These broad market fluctuations may materially adversely affect our stock price,
regardless of our operating results. Our stock price may fluctuate due to
variations in our operating results. For example, on March 15, 2001, we
announced our revised expectations for our first-quarter revenues based upon our
then-current outlook. As a result, the trading price of our common stock
declined rapidly and significantly.

VOICE INTERFACE SOFTWARE MAY NOT ACHIEVE WIDESPREAD ACCEPTANCE BY BUSINESSES AND
TELECOMMUNICATIONS CARRIERS, WHICH COULD LIMIT OUR ABILITY TO GROW OUR BUSINESS.

The market for voice interface software is relatively new and rapidly evolving.
Our ability to increase revenue in the future depends on the acceptance by both
our customers and their end users of voice interface software. The adoption of
voice interface software could be hindered by the perceived costs of this new
technology, as well as the reluctance of enterprises that have invested
substantial resources in existing call centers or touch-tone-based systems to
replace their current systems with this new technology. Accordingly, in order to
achieve commercial acceptance, we will have to educate prospective customers,
including large, established telecommunications companies, about the uses and
benefits of voice interface software in general and our products in particular.
If these efforts fail, or if voice interface software platforms do not achieve
commercial acceptance, our business could be harmed.




                                       13
<PAGE>

The continued development of the market for our products also will depend upon
the following factors:

-  widespread deployment of voice interface applications by third parties, which
   is driven by consumer demand for services having a voice user interface;

-  demand for new uses and applications of voice interface technology, including
   adoption of voice user interfaces by companies that operate web sites;

-  adoption of industry standards for voice interface and related technologies;
   and

-  continuing improvements in hardware technology that may reduce the costs of
   voice interface software solutions.

Our products can have a long sales and implementation cycle and, as a result,
our quarterly operating results may fluctuate.

The sales cycles for our products have typically ranged from three to twelve
months, depending on the size and complexity of the order, the amount of
services to be provided by us and whether the sale is made directly by us or
indirectly through a value added reseller, a voice application service provider
or a systems integrator.

Purchase of our products requires a significant expenditure by a customer.
Accordingly, the decision to purchase our products typically requires
significant pre-purchase evaluation. We may spend significant time educating and
providing information to prospective customers regarding the use and benefits of
our products. During this evaluation period, we may expend substantial sales,
marketing and management resources.

In addition, during any quarter we may receive a number of orders that are large
relative to our total revenues for that quarter or subsequent quarters.

After purchase, it may take substantial time and resources to implement our
software and to integrate it with our customers' existing systems. If we are
performing services that are essential to the functionality of the software, in
connection with its implementation, we recognize software revenue based on the
percentage completed using contract accounting. In cases where the contract
specifies milestones or acceptance criteria, we may not be able to recognize
either software or service revenue until these conditions are met. We have in
the past and may in the future experience unexpected delays in recognizing
revenue. Consequently, the length of our sales and implementation cycles and the
varying order amounts for our products make it difficult to predict the quarter
in which revenue recognition may occur and may cause license and services
revenue and operating results to vary significantly from period to period.

OUR FAILURE TO RESPOND TO RAPID CHANGE IN THE MARKET FOR VOICE INTERFACE
SOFTWARE COULD CAUSE US TO LOSE REVENUE AND HARM OUR BUSINESS.

The voice interface software industry is relatively new and rapidly evolving.
Our success will depend substantially upon our ability to enhance our existing
products and to develop and introduce, on a timely and cost-effective basis, new
products and features that meet changing end-user requirements and incorporate
technological advancements. If we are unable to develop new products and
enhanced functionalities or technologies to adapt to these changes, or if we
cannot offset a decline in revenue from existing products with sales of new
products, our business would suffer.

Commercial acceptance of our products and technologies will depend, among other
things, on:

-  the ability of our products and technologies to meet and adapt to the needs
   of our target markets;

-  the performance and price of our products and our competitors' products; and

-  our ability to deliver customer service directly and through our resellers.

WE ARE EXPOSED TO GENERAL ECONOMIC CONDITIONS.

As a result of recent unfavorable economic conditions and reduced capital
spending, it is possible that our sales will decline. If the economic conditions
in the United States worsen or if a wider or global economic slowdown occurs, we
may experience a material adverse impact on our business, operating results and
financial condition.

OUR PRODUCTS ARE NOT 100% ACCURATE AND WE COULD BE SUBJECT TO CLAIMS RELATED TO
THE PERFORMANCE OF OUR PRODUCTS. ANY CLAIMS, WHETHER SUCCESSFUL OR UNSUCCESSFUL,
COULD RESULT IN SIGNIFICANT COSTS AND COULD DAMAGE OUR REPUTATION.

Speech recognition, natural language understanding and authentication
technologies, including our own, are not 100% accurate. Our customers, including
several financial institutions, use our products to provide important services
to their customers, including transferring funds to accounts and buying and
selling securities. Any misrecognition of voice commands or incorrect
authentication of a user's voice in connection with these financial or other
transactions could result in claims against us or our customers for losses
incurred. Although our contracts typically




                                       14
<PAGE>

contain provisions designed to limit our exposure to liability claims, a claim
brought against us for misrecognition or incorrect authentication, even if
unsuccessful, could be time-consuming, divert management's attention, result in
costly litigation and harm our reputation. Moreover, existing or future laws or
unfavorable judicial decisions could limit the enforceability of the limitation
of liability, disclaimer of warranty or other protective provisions contained in
our contracts.

ANY SOFTWARE DEFECTS IN OUR PRODUCTS COULD HARM OUR BUSINESS AND RESULT IN
LITIGATION.

Complex software products such as ours may contain errors, defects and bugs.
With the planned release of any product, we may discover these errors, defects
and bugs and, as a result, our products may take longer than expected to
develop. In addition, we may discover that remedies for errors or bugs may be
technologically unfeasible. Delivery of products with undetected production
defects or reliability, quality, or compatibility problems could damage our
reputation. Errors, defects or bugs could also cause interruptions, delays or a
cessation of sales to our customers. We could be required to expend significant
capital and other resources to remedy these problems. In addition, customers
whose businesses are disrupted by these errors, defects and bugs could bring
claims against us which, even if unsuccessful, would likely be time-consuming
and could result in costly litigation and payment of damages.

OUR CURRENT AND POTENTIAL COMPETITORS, SOME OF WHOM HAVE GREATER RESOURCES AND
EXPERIENCE THAN WE DO, MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAY CAUSE
DEMAND FOR, AND THE PRICES OF, OUR PRODUCTS TO DECLINE.

A number of companies have developed, or are expected to develop, products that
compete with our products. Competitors in the voice interface software market
include IBM, ITT Industries, Lernout and Hauspie Speech Products, Locus
Dialogue, Lucent Technologies, Microsoft, Philips Electronics, SpeechWorks
International, T-NETIX, Veritel and Vocalis. We expect additional competition
from other companies, our competitors may combine with each other, and other
companies may enter our markets by acquiring or entering into strategic
relationships with our competitors. Current and potential competitors have
established, or may establish, cooperative relationships among themselves or
with third parties to increase the abilities of their advanced speech and
language technology products to address the needs of our prospective customers.

Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, product development and marketing
resources, greater name recognition and larger customer bases than we do. Our
present or future competitors may be able to develop products comparable or
superior to those we offer, adapt more quickly than we do to new technologies,
evolving industry trends and standards or customer requirements, or devote
greater resources to the development, promotion and sale of their products than
we do. Accordingly, we may not be able to compete effectively in our markets,
competition may intensify and future competition may harm our business.

WE DEPEND ON RESELLERS FOR A SIGNIFICANT PORTION OF OUR SALES. THE LOSS OF A KEY
RESELLER, OR THEIR INABILITY TO RESELL OUR PRODUCTS AND SERVICES, WOULD LIMIT
OUR ABILITY TO SUSTAIN AND GROW OUR REVENUE.

In 1998, 31% of our revenue was achieved by indirect sales through resellers.
The percentage of revenue through indirect sales increased to 56% in 1999, to
72% in 2000 and to 74% in the nine months ended September 30, 2001. We intend to
continue to rely on resellers for a substantial portion of our sales in the
future. As a result, we are dependent upon the continued viability and financial
stability of our resellers, as well as upon their continued interest and success
in selling our products. The loss of a key reseller or our failure to develop
new and viable reseller relationships could limit our ability to sustain and
grow our revenue. Significant expansion of our internal sales force to replace
the loss of a key reseller would require increased management attention and
higher expenditures.

Our contracts with resellers generally do not require a reseller to purchase our
products. We cannot guarantee that any of our resellers will continue to market
our products or devote significant resources to doing so. In addition, we may,
from time to time, terminate some of our relationships with resellers. Any
termination could have a negative impact on our business and result in
threatened or actual litigation. Finally, these resellers possess confidential
information concerning our products, product release schedules and sales,
marketing and reseller operations. Although we have nondisclosure agreements
with our resellers, we cannot guarantee that any reseller would not use our
confidential information in competition with us or otherwise. If our resellers
do not successfully market and sell our products for these or any other reasons,
our sales could be adversely affected and our revenue could decline.

WE DEPEND ON A LIMITED NUMBER OF CUSTOMER ORDERS FOR A SUBSTANTIAL PORTION OF
OUR REVENUE DURING ANY GIVEN PERIOD. THE LOSS OF, OR DELAYS IN, A KEY ORDER
COULD SUBSTANTIALLY REDUCE OUR REVENUE IN ANY GIVEN PERIOD AND HARM OUR
BUSINESS.

We derive a significant portion of our revenue in each period from a limited
number of customers. For example, in the three months ending September 30, 2001,
five customers made up 42% of our total revenue, and one of those customers,
acting as a reseller, accounted for approximately 12% of our total revenue.

We expect that a limited number of customers and customer orders will continue
to account for a substantial portion of our revenue in a given period.
Generally, customers who make large purchases from us are not expected to make
subsequent, equally large purchases in the short term. As a result, if we do not
acquire a major customer, if a contract is delayed, cancelled or deferred, or if
an anticipated sale is not made, our business could be harmed.





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<PAGE>
SALES TO CUSTOMERS OUTSIDE THE UNITED STATES ACCOUNT FOR A SIGNIFICANT PORTION
OF OUR REVENUE, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.

International sales represented approximately 18% of our revenue in 1998, 21% in
1999, 47% in 2000 and 41% in the nine months ended September 30, 2001, and we
anticipate that revenue from markets outside the United States will continue to
represent a significant portion of our total future revenue. We are subject to a
variety of risks associated with conducting business internationally, any of
which could harm our business. These risks include:

-  difficulties and costs of staffing and managing foreign operations;

-  the difficulty in establishing and maintaining an effective international
   reseller network;

-  the burden of complying with a wide variety of foreign laws, particularly
   with respect to intellectual property and license requirements;

-  political and economic instability outside the United States;

-  import or export licensing and product certification requirements;

-  tariffs, duties, price controls or other restrictions on foreign currencies
   or trade barriers imposed by foreign countries;

-  potential adverse tax consequences, including higher marginal rates;

-  unfavorable fluctuations in currency exchange rates; and

-  limited ability to enforce agreements, intellectual property rights and other
   rights in some foreign countries.

IN ORDER TO INCREASE OUR INTERNATIONAL SALES, WE MUST DEVELOP LOCALIZED VERSIONS
OF OUR PRODUCTS. IF WE ARE UNABLE TO DO SO, WE MAY BE UNABLE TO GROW OUR REVENUE
AND EXECUTE OUR BUSINESS STRATEGY.

We intend to expand our international sales, which requires us to invest
significant resources to create and refine different language models for each
particular language or dialect. These language models are required to create
versions of our products that allow end users to speak the local language or
dialect and be understood and authenticated. If we fail to develop localized
versions of our products, our ability to address international market
opportunities and to grow our business will be limited.

IF THE STANDARDS WE HAVE SELECTED TO SUPPORT ARE NOT ADOPTED AS THE STANDARDS
FOR VOICE INTERFACE SOFTWARE, BUSINESSES MIGHT NOT USE OUR VOICE INTERFACE
SOFTWARE PLATFORM FOR DELIVERY OF APPLICATIONS AND SERVICES.

The market for voice interface software is new and emerging and industry
standards have not been established yet. We may not be competitive unless our
products support changing industry standards. The emergence of industry
standards, whether through adoption by official standards committees or
widespread usage, could require costly and time-consuming redesign of our
products. If these standards become widespread and our products do not support
them, our customers and potential customers may not purchase our products.
Multiple standards in the marketplace could also make it difficult for us to
ensure that our products will support all applicable standards, which could in
turn result in decreased sales of our products.

Our V-Builder applications-building tool, our Voice Web Server software and our
Voyager browser application are each designed to work with the recently emerged
VoiceXML standard. If VoiceXML is not widely accepted by our target customers,
then sales of our products could decline and our business would be harmed. In
that case, we may find it necessary to redesign our existing products or design
new products that are compatible with standards that replace VoiceXML. This
design or redesign could be costly and time-consuming.

ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY COULD HARM OUR
ABILITY TO COMPETE.

Our future success and ability to compete depends in part upon our proprietary
technology and our trademarks, which we attempt to protect with a combination of
patent, copyright, trademark and trade secret laws, as well as with our
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and may be time-consuming and expensive to obtain
and/or maintain. Further, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property.

Although we have filed multiple U.S. patent applications, we have currently only
been issued a small number of patents. There is no guarantee that more patents
will be issued with respect to our current or future patent applications. Any
patents that are issued to us could be invalidated, circumvented or challenged.
If challenged, our patents might not be upheld or their claims could be
narrowed. Our intellectual property may




                                       16
<PAGE>

not be adequate to provide us with competitive advantage or to prevent
competitors from entering the markets for our products.

Additionally, our competitors could independently develop non-infringing
technologies that are competitive with, equivalent to, and/or superior to our
technology. Monitoring infringement and/or misappropriation of intellectual
property can be difficult, and there is no guarantee that we would detect any
infringement or misappropriation of our proprietary rights. Even if we do detect
infringement or misappropriation of our proprietary rights, litigation to
enforce these rights could cause us to divert financial and other resources away
from our business operations. Further, we license our products internationally,
and the laws of some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the United States.

THIRD PARTIES COULD OBTAIN LICENSES FROM SRI INTERNATIONAL RELATING TO VOICE
INTERFACE TECHNOLOGIES AND DEVELOP TECHNOLOGIES TO COMPETE WITH OUR PRODUCTS,
WHICH COULD CAUSE OUR SALES TO DECLINE.

Upon our incorporation in 1994, we received a license from SRI International to
a number of patents and other proprietary rights, including rights in software,
relating to voice interface technologies developed by SRI International. This
license was exclusive until December 1999, when we chose to allow the
exclusivity to lapse. As a result, SRI International may license these patents
and proprietary rights to our competitors. If a license from SRI International
were to enable third parties to enter the markets for our products and services
or to compete more effectively, we could lose market share and our business
could suffer.

OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS.

The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of intellectual property rights. Although we attempt to avoid
infringing known proprietary rights of third parties we may be subject to legal
proceedings and claims for alleged infringement by us or our licensees of
third-party proprietary rights, such as patents, trade secrets, trademarks or
copyrights, from time to time in the ordinary course of business. Any claims
relating to the infringement of third-party proprietary rights, even if not
successful or meritorious, could result in costly litigation, divert resources
and management's attention or require us to enter into royalty or license
agreements which are not advantageous to us. In addition, parties making these
claims may be able to obtain injunctions, which could prevent us from selling
our products. Furthermore, former employers of our employees may assert that
these employees have improperly disclosed confidential or proprietary
information to us. Any of these results could harm our business. We may be
increasingly subject to infringement claims as the number of, and number of
features of, our products grow.

IF WE ARE UNABLE TO HIRE AND RETAIN SELECT PERSONNEL, OUR BUSINESS COULD BE
HARMED.

We intend to hire select personnel during the remainder of the year. Competition
for these individuals can be intense, and we may not be able to attract,
assimilate, or retain additional highly qualified personnel in the future. The
failure to attract, integrate, motivate and retain these employees could harm
our business. The decline in the value of our common stock may also make it more
difficult to retain our employees.

WE RELY ON THE SERVICES OF OUR KEY PERSONNEL, WHOSE KNOWLEDGE OF OUR BUSINESS
AND TECHNICAL EXPERTISE WOULD BE DIFFICULT TO REPLACE.

We rely upon the continued service and performance of a relatively small number
of key technical and senior management personnel. Our future success depends on
our retention of these key employees, such as Ronald Croen, our Chief Executive
Officer. None of our key technical or senior management personnel are bound by
employment agreements, and, as a result, any of these employees could leave with
little or no prior notice. If we lose any of our key technical and senior
management personnel, our business could be harmed. We do not have key person
life insurance policies covering any of our employees.

CERTAIN STOCKHOLDERS MAY DISAGREE WITH HOW NUANCE USES THE PROCEEDS FROM ITS
PUBLIC OFFERINGS.

Management retains broad discretion over the use of proceeds from the Company's
April 2000 initial public offering and September 2000 secondary public offering.
Stockholders may not deem these uses desirable and our use of the proceeds may
not yield a significant return or any return at all. Because of the number and
variability of factors that determine our use of the net proceeds from these
offerings, we cannot guarantee that these uses will not vary substantially from
our currently planned uses.

OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS WHICH MAY DELAY OR
PREVENT A CHANGE OF CONTROL OF NUANCE.

Provisions of our charter and bylaws may make it more difficult for a third
party to acquire, or discourage a third party from attempting to acquire,
control of Nuance. These provisions could limit the price that investors might
be willing to pay in the future for shares of our common stock. These provisions
include:

-  the division of the board of directors into three separate classes;




                                       17
<PAGE>

-  the elimination of cumulative voting in the election of directors;

-  prohibitions on our stockholders from acting by written consent and calling
   special meetings;

-  procedures for advance notification of stockholder nominations and proposals;
   and

-  the ability of the board of directors to alter our bylaws without stockholder
   approval.

In addition, our board of directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The issuance of preferred stock,
while providing flexibility in connection with possible financings or
acquisitions or other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock.

Since the completion of our initial public offering on April 13, 2000, we have
been subject to the antitakeover provisions of the Delaware General Corporation
Law, including Section 203, which may deter potential acquisition bids for our
company. Under Delaware law, a corporation may opt out of Section 203. We do not
intend to opt out of the provisions of Section 203.

WE MAY INCUR A VARIETY OF COSTS TO ENGAGE IN FUTURE ACQUISITIONS OF COMPANIES,
PRODUCTS OR TECHNOLOGIES, AND THE ANTICIPATED BENEFITS OF THOSE ACQUISITIONS MAY
NEVER BE REALIZED.

As a part of our business strategy, we may make acquisitions of, or significant
investments in, complementary companies, products or technologies.

For instance, in November 2000 we acquired SpeechFront, a Canadian company, and
in February 2001, we acquired non-exclusive Intellectual Property Rights from a
third-party. Any future acquisitions would be accompanied by risks such as:

-  difficulties in assimilating the operations and personnel of acquired
   companies;

-  diversion of our management's attention from ongoing business concerns;

-  our potential inability to maximize our financial and strategic position
   through the successful incorporation of acquired technology and rights into
   our products and services;

-  additional expense associated with amortization of acquired assets;

-  maintenance of uniform standards, controls, procedures and policies; and

-  impairment of existing relationships with employees, suppliers and customers
   as a result of the integration of new management personnel.

We cannot guarantee that we will be able to successfully integrate any business,
products, technologies or personnel that we might acquire in the future, and our
failure to do so could harm our business.

INFORMATION THAT WE MAY PROVIDE TO INVESTORS FROM TIME TO TIME IS ACCURATE ONLY
AS OF THE DATE WE DISSEMINATE IT, AND WE UNDERTAKE NO OBLIGATION TO UPDATE THE
INFORMATION.

From time to time, we may publicly disseminate forward-looking information or
guidance in compliance with Regulation FD promulgated by the Securities and
Exchange Commission. This information or guidance represents our outlook only as
of the date that we disseminated it, and we undertake no obligation to provide
updates to this information or guidance in our filings with the Securities and
Exchange Commission or otherwise.

OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE
OF AN EARTHQUAKE OR OTHER NATURAL DISASTER COULD CAUSE DAMAGE TO OUR FACILITIES
AND EQUIPMENT, WHICH COULD REQUIRE US TO CURTAIL OR CEASE OPERATIONS.

Our facilities are located in the San Francisco Bay Area near known earthquake
fault zones and are vulnerable to damage from earthquakes. In October 1989, a
major earthquake that caused significant property damage and a number of
fatalities struck this area. We are also vulnerable to damage from other types
of disasters, including fire, floods, power loss, communications failures and
similar events. If any disaster were to occur, our ability to operate our
business at our facilities could be seriously, or potentially completely,
impaired. The insurance we maintain may not be adequate to cover our losses
resulting from disasters or other business interruptions.

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.




                                       18
<PAGE>

California is in the midst of an energy crisis that could disrupt our operations
and increase our expenses. In the event of an acute power shortage, that is,
when power reserves for the State of California fall below 1.5%, California has
on some occasions implemented, and may in the future continue to implement,
rolling blackouts throughout California. We currently do not have backup
generators or alternate sources of power in the event of a blackout, and our
current insurance does not provide coverage for any damages we, or our
customers, may suffer as a result of any interruption in our power supply. If
blackouts interrupt our power supply, we would be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and results of
operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the risk factors section of this Quarterly
Report on Form 10-Q.

                       FOREIGN CURRENCY EXCHANGE RATE RISK

To date, all of our recognized revenues have been denominated in U.S. dollars
and primarily from customers in the United States, and our exposure to foreign
currency exchange rate changes has been immaterial. We expect, however, that
future product license and services revenues may also be derived from
international markets and may be denominated in the currency of the applicable
market. As a result, our operating results may become subject to significant
fluctuations based upon changes in the exchange rates of certain currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales denominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations, and when appropriate, may use financial
hedging techniques to minimize the effect of these fluctuations, we cannot
assure you that exchange rate fluctuations will not adversely affect our
financial results in the future.

                               INTEREST RATE RISK

As of September 30, 2001, we had cash and cash equivalents of $184.2 million.
Any decline in interest rates over time would reduce our interest income from
our cash and cash equivalents and short-term investments. Based upon our balance
of cash and cash equivalents at September 30, 2001, a decrease in interest rates
of 0.5% would cause a corresponding decrease in our annual interest income by
approximately $920,000.

                           PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS:

In March 2001, the first of a number of stockholder complaints was filed in the
United States District Court for the Northern District of California against the
Company and certain of its officers. Those lawsuits have been consolidated and
an amended complaint has been filed on behalf of a purported class of people who
purchased our stock during the period January 31, 2001 through March 15, 2001,
alleging false and misleading statements and insider trading in violation of the
federal securities laws. The plaintiffs are seeking unspecified damages. We
believe that these allegations are without merit and intend to defend the
litigation vigorously. An unfavorable resolution of this litigation could have a
material adverse effect on our business, results of operations, or financial
condition.

In June and July 2001, putative shareholder derivative actions were filed in
California state court alleging breaches of fiduciary duty and insider trading
by various of our directors and officers. While we are named as a nominal
defendant, the lawsuits do not appear to seek any recovery against us.
Proceedings in these actions have been stayed.

In August 2001, the first of a number of complaints was filed in federal
district court for the Southern District of New York on behalf of a purported
class of persons who purchased the Company's stock between April 12, 2000 and
December 6, 2000. The complaint generally alleges that various investment bank
underwriters engaged in improper and undisclosed activities related to the
allocation of shares in our initial public offering of securities. The
complaints bring claims for violation of several provisions of the federal
securities laws against those underwriters, and also against us and some of our
directors and officers. Similar lawsuits concerning more than 180 other
companies' initial public offerings have been filed this year. We believe that
the allegations against us are without merit and intend to defend the litigation
vigorously.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

(a) No exhibits were filed during the quarter.

(b) No reports on Form 8-K were filed during the quarter.





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<PAGE>
                                   SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                       NUANCE COMMUNICATIONS


Date: November 14, 2001                By:  /s/       GRAHAM SMITH
                                          ------------------------------------
                                                      Graham Smith
                                           Vice President and Chief Financial
                                           Officer (Principal Financial and
                                                   Accounting Officer)



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