<PAGE>   1

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                                 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 MARCH 31, 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)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      94-3208477
           (STATE OF INCORPORATION)                 (IRS EMPLOYER IDENTIFICATION NUMBER)
</TABLE>

                              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 [ ]

     32,541,651 shares of the registrant's common stock, $0.01 par value, were
outstanding as of April 30, 2001.

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<PAGE>   2

                   NUANCE COMMUNICATIONS, INC. & SUBSIDIARIES

                           FORM 10-Q, MARCH 31, 2001

                                    CONTENTS

<TABLE>
<CAPTION>
 ITEM
NUMBER                                                                 PAGE
------                                                                 ----
<S>      <C>                                                           <C>
                       PART I: FINANCIAL INFORMATION
Item 1.  Financial Statements
         Consolidated Balance Sheets:
         March 31, 2001 and December 31, 2000........................    1
         Consolidated Statements of Operations:
         Three months ended March 31, 2001 and 2000..................    2
         Consolidated Statements of Cash Flows:
         Three months ended March 31, 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........................................................   21

                        PART II: OTHER INFORMATION
Item 1.  Legal Proceedings...........................................   21
Item 6.  Exhibits and Reports on Form 8-K............................   21
SIGNATURES...........................................................   22
</TABLE>

                                        i
<PAGE>   3

                   NUANCE COMMUNICATIONS INC. & SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                               MARCH 31,     DECEMBER 31,
                                                                 2001            2000
                                                              -----------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
Current assets:
  Cash and cash equivalents.................................   $203,160        $219,047
  Short-term investments....................................      2,909           8,728
  Accounts receivable, net of allowance for doubtful
     accounts of $1,694 and $1,823, respectively............     11,229          19,106
  Prepaid expenses and other current assets.................      4,883           4,280
                                                               --------        --------
          Total current assets..............................    222,181         251,161
Property and equipment, net.................................     27,932           9,414
Intangible assets...........................................      4,739           5,217
Other assets................................................     20,642          13,546
                                                               --------        --------
          Total assets......................................   $275,494        $279,338
                                                               ========        ========

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.........................         --              12
  Accounts payable..........................................      1,931           1,649
  Accrued liabilities.......................................     16,760          12,389
  Deferred revenue..........................................     11,774          10,745
                                                               --------        --------
          Total current liabilities.........................     30,465          24,795
  Long-term debt, less current portion......................         --              32
  Other Liabilities.........................................      2,603           2,520
                                                               --------        --------
          Total liabilities.................................     33,068          27,347
                                                               --------        --------
Commitments (Note 8)
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares authorized;
  32,528,008 shares and 32,158,875 shares issued and
  outstanding,
  respectively..............................................         33              32
  Additional paid-in capital................................    319,609         316,958
  Deferred stock compensation...............................     (6,115)         (7,636)
  Accumulated other comprehensive loss......................       (117)            (16)
  Accumulated deficit.......................................    (70,984)        (57,347)
                                                               --------        --------
          Total stockholders' equity........................    242,426         251,991
                                                               --------        --------
          Total liabilities and stockholders' equity........   $275,494        $279,338
                                                               ========        ========
</TABLE>

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

                                        1
<PAGE>   4

                   NUANCE COMMUNICATIONS INC. & SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              -------------------
                                                                2001       2000
                                                              --------    -------
<S>                                                           <C>         <C>
Revenue:
  License...................................................  $  5,662    $ 6,028
  Service...................................................     5,344      1,913
                                                              --------    -------
          Total revenue.....................................    11,006      7,941
                                                              --------    -------
Cost of revenue:
  License...................................................        --         --
  Service...................................................     4,889      1,605
                                                              --------    -------
          Total cost of revenue.............................     4,889      1,605
                                                              --------    -------
  Gross profit..............................................     6,117      6,336
                                                              --------    -------
Operating expenses:
  Sales and marketing(1)....................................    11,784      6,786
  Research and development(1)...............................     5,239      4,396
  General and administrative(1).............................     3,510      1,671
  Amortization of intangibles...............................       478         --
  Non-cash compensation and other expenses..................     1,591      1,016
                                                              --------    -------
          Total operating expenses..........................    22,602     13,869
                                                              --------    -------
Loss from operations........................................   (16,485)    (7,533)
  Interest and other income, net............................     2,998        324
                                                              --------    -------
  Loss before provision for income taxes....................   (13,487)    (7,209)
  Provision for income taxes................................       150         --
                                                              --------    -------
          Net loss..........................................  $(13,637)   $(7,209)
                                                              ========    =======
Basic and diluted net loss per share........................  $  (0.43)   $ (1.97)
                                                              ========    =======
Shares used to compute basic and diluted net loss per
  share.....................................................    31,956      3,664
                                                              ========    =======
</TABLE>

---------------

(1) Excludes non-cash stock-based compensation as follows:

<TABLE>
    <S>                                                           <C>         <C>
    Sales and marketing.........................................  $    591    $   217
    Research and development....................................  $    787    $   467
    General and administrative..................................  $    213    $   332
</TABLE>

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

                                        2
<PAGE>   5

                   NUANCE COMMUNICATIONS INC. & SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              -------------------
                                                                2001       2000
                                                              --------    -------
<S>                                                           <C>         <C>
Cash flows from operating activities:
  Net loss..................................................  $(13,637)   $(7,209)
  Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
     Depreciation and amortization..........................       980        474
     Amortization of intangibles............................       478         --
     Non-cash compensation and other expenses...............     1,591      1,016
     Provision for doubtful accounts........................       491         90
     Changes in operating assets and liabilities:
     Accounts receivable....................................     7,386     (1,468)
     Prepaid expenses and other assets......................      (242)      (347)
     Accounts payable.......................................       282        565
     Accrued and other liabilities..........................     4,454       (866)
     Deferred revenue.......................................     1,029       (984)
                                                              --------    -------
          Net cash provided by (used in) operating
           activities.......................................     2,812     (8,729)
                                                              --------    -------
Cash flows from investing activities:
  Purchase of marketable securities.........................        --     (8,279)
  Maturities of marketable securities.......................     5,819      4,922
  Purchases of property and equipment.......................   (19,498)    (1,647)
  Purchased technology......................................    (7,000)        --
                                                              --------    -------
          Net cash used in investing activities.............   (20,679)    (5,004)
                                                              --------    -------
Cash flows from financing activities:
  Proceeds from issuance of common stock....................        --         89
  Repurchase of common stock................................       (13)        --
  Proceeds from exercise of stock options...................     2,138      4,578
  Proceeds from exercise of Series D warrant................        --      1,000
  Repayment of borrowings...................................       (44)      (290)
                                                              --------    -------
          Net cash provided by financing activities.........     2,081      5,377
                                                              --------    -------
  Effect of exchange rate fluctuations on cash and cash
     equivalents............................................      (101)       (66)
  Net decrease in cash and cash equivalents.................   (15,887)    (8,422)
  Cash and cash equivalents, beginning of period............   219,047     18,073
                                                              --------    -------
  Cash and cash equivalents, end of period..................  $203,160    $ 9,651
                                                              ========    =======
Supplementary disclosures of cash flow information:
  Cash paid during the period for:
     Interest...............................................  $     14    $    60
     Income taxes...........................................  $      6    $    --
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>   6

                   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 month period ended March 31,
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.

 3. 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 relating to these securities
was 7,075,000 shares for the three months ended March 31, 2001 and 24,827,000
shares for the three months ended March 31, 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
                                                               MARCH 31,
                                                          -------------------
                                                            2001       2000
                                                          --------    -------
<S>                                                       <C>         <C>
Net loss................................................  $(13,637)   $(7,209)
                                                          ========    =======
Basic:
Weighted average shares of common stock outstanding.....    32,363      3,664
Less: Weighted average shares of common stock subject to
  repurchase............................................      (407)        --
                                                          --------    -------
Weighted average shares used in computing basic and
  diluted net loss per share............................    31,956      3,664
                                                          ========    =======
Basic and diluted net loss per share....................  $  (0.43)   $ (1.97)
                                                          ========    =======
</TABLE>

                                        4
<PAGE>   7
                   NUANCE COMMUNICATIONS INC. & SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 4. NON-CASH COMPENSATION AND OTHER 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 $651,000
for the three months ended March 31, 2001 and $1.0 million for the three months
ended March 31, 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 $872,000
was amortized in the three months ended March 31, 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 $68,000 related to
this warrant in the three months ended March 31, 2001.

     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.

 5. 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.
This amount is being amortized to research and development expense over a period
of five years, and $175,000 was amortized in the three months ended March 31,
2001.

 6. 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

                                        5
<PAGE>   8
                   NUANCE COMMUNICATIONS INC. & SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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):

<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. The Company estimates that it will cost approximately
$466,000 to complete the project with significant remaining development efforts,
which are expected to be completed in the next 4 to 6 months. 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 proforma
financial information for the quarter ending March 31, 2000 due to the
immateriality of differences between actual and proforma results.

 7. 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.

                                        6
<PAGE>   9
                   NUANCE COMMUNICATIONS INC. & SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Sales of licenses and services through March 31, 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. For the three months ended March 31, 2001, Australia was the
only foreign country that accounted for more than 10% of the Company's total
revenue, accounting for 12% of total revenue.

 8. 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, including the Company's new facilities lease, 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>

     In May 2000, the Company entered into a lease for its new headquarters
facility. The lease has an eleven-year term from an expected move-in date of
August 2001, and provides for monthly 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.

 9. 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. The complaints were 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 insider trading and false and
misleading statements in violation of the federal securities laws. The
plaintiffs are seeking unspecified damages. The Company believes that the
allegations of these lawsuits 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.

10. SUBSEQUENT EVENT

     In April 2001, the Company announced a restructuring plan that would reduce
its workforce by approximately 20%. In connection with that reduction, the
Company will also record a facilities-related restructuring charge. These
charges are being recorded to align the Company's cost structure with changing
market conditions and to create a more efficient organization. They will be
recorded in the quarter ending June 30, 2001.

                                        7
<PAGE>   10

               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 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.

OVERVIEW:

     The Company develops, markets and supports 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. The
Company sells 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. The foregoing was a forward-looking statement within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act; see page 8 of this Report on Form 10-Q.

     In April 2001, we announced a restructuring plan that would reduce our
workforce by approximately 20%. In connection with that reduction, we will also
record a facilities-related restructuring charge. These charges are being
recorded to align our cost structure with changing market conditions and to
create a more efficient organization. They will be recorded in the quarter
ending June 30, 2001.

                                        8
<PAGE>   11

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 months ended March 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                                                THREE MONTHS
                                                              ENDED MARCH 31,
                                                              ----------------
                                                              2001       2000
                                                              -----      -----
<S>                                                           <C>        <C>
Revenue:
  License...................................................    51%        76%
  Service...................................................    49         24
                                                              ----        ---
          Total revenue.....................................   100        100
Cost of revenue:
  License...................................................    --         --
  Service...................................................    44         20
                                                              ----        ---
          Total cost of revenue.............................    44         20
                                                              ----        ---
Gross Margin................................................    56         80
Operating expenses:
  Sales and marketing(1)....................................   107         86
  Research and development(1)...............................    48         55
  General and administrative(1).............................    32         21
  Amortization of intangibles...............................     4         --
  Non-cash compensation and other expenses..................    15         13
                                                              ----        ---
          Total operating expenses..........................   206        175
                                                              ----        ---
Loss from operations........................................  (150)       (95)
Interest and other income, net..............................    27          4
                                                              ----        ---
Loss before provision for income taxes......................  (123)       (91)
Provision for income taxes..................................     1         --
                                                              ----        ---
          Net loss..........................................  (124)%      (91)%
                                                              ====        ===
</TABLE>

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

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 AND 2000

  Revenue

     Total revenue for the three months ended March 31, 2001 was $11.0 million,
compared with $7.9 million in the three months ended March 31, 2000, an increase
of 39%.

     License revenue for the three months ended March 31, 2001 was $5.7 million,
compared with $6.0 million in the three months ended March 31, 2000, a decrease
of 6%. The decline in license revenue was due to an uncertain economic
environment that caused customers to delay purchases. License revenue
represented 51% of total revenue for the three months ended March 31, 2001 and
76% of total revenue for the three months ended March 31, 2000.

     Service revenue for the three months ended March 31, 2001 was $5.3 million,
compared with $1.9 for the three months ended March 31, 2000, an increase of
179%. This increase in service revenue was due primarily to growth in license
revenue in the year 2000. Service revenue represented 49% of total revenue for
the three months ended March 31, 2001 and 24% of total revenue for the three
months ended March 31, 2000.

  Cost of Revenue

     Cost of service revenue for the three months ended March 31, 2001 was $4.9
million, compared with $1.6 million in the three months ended March 31, 2000, an
increase of 205%. The increase was due to hiring approximately 80 additional
personnel in the professional services, technical support and training groups.
Cost

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of service revenue as a percentage of service revenue was 91% in the three
months ended March 31, 2001 and 84% for the three months ended March 31, 2000.
We anticipate that cost of service revenue will decrease 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
March 31, 2001 were $11.8 million, compared with $6.8 million in the three
months ended March 31, 2000, and increase of 74%. This increase was attributable
to the addition of approximately 70 sales and marketing personnel, an increase
in our allowance for bad debt and increases in marketing costs and external
consultants. As a percentage of total revenue, sales and marketing expenses were
107% in the three months ended March 31, 2001, and 86% in the three months ended
March 31, 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
March 31, 2001 were $5.2 million, compared with $4.4 million in the three months
ended March 31, 2000, an increase of 19%. This increase was attributable to the
addition of approximately 30 personnel associated with product development
activities. As a percentage of total revenue, research and development expenses
were 48% in the three months ended March 31, 2001, and 55% in the three months
ended March 31, 2000. Due to the more challenging economic environment, we
expect to moderate our investments in research and development and 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 March 31, 2001 were $3.5
million, compared with $1.7 million in the three months ended March 31, 2000, an
increase of 110%. The increase was largely due to the addition of approximately
20 administrative personnel and increased legal and professional fees. The
additional expenses enhanced the Company's administrative infrastructure to
strengthen controls and accommodate growth. As a percentage of total revenue,
general and administrative expenses were 32% in the three months ended March 31,
2001 and 21% in the three months ended March 31, 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 for the three months
ended March 31, 2001. There was no amortization of intangibles for the three
months ended March 31, 2000.

     Non-Cash Compensation -- 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

                                        10
<PAGE>   13

$651,000 for the three months ended March 31, 2001 and $1.0 million for the
three months ended March 31, 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 $872,000
was amortized in the three months ended March 31, 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 $68,000 related to
this warrant in the three months ended March 31, 2001.

     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.

  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 $3.0 million in the three months ended March 31, 2001 and $324,000 in
the three months ended March 31, 2000, an increase of 825%. 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

     We have incurred operating losses for all periods from inception through
March 31, 2001 and therefore have not recorded a provision for federal income
taxes for any period through March 31, 2001. We recorded income tax expense
relating to foreign taxes for the periods ended March 31, 2001 and 2000 of
$150,000 and none, respectively.

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, the Company raised approximately $80 million through the
completion of its initial public offering of common stock. On October 2, 2000,
the Company raised approximately $144 million through the completion of its
follow-on public offering. As of March 31, 2001, we had cash and cash
equivalents aggregating $203.2 million and short-term investments totaling $2.9
million.

     Our operating activities generated cash of $2.8 million for the three
months ended March 31, 2001, and used cash of $8.7 million during the three
months ended March 31, 2000. This positive operating cash flow in the three
months ended March 31, 2001 resulted principally from a decrease in accounts
receivable and an increase in accrued liabilities, largely offset by our net
loss. The negative operating cash flow in the three months ended March 31, 2000
was largely the result of our net loss.

     Investing activities used cash of $20.7 million during the three months
ended March 31, 2001, and $5.0 million during the three months ended March 31,
2000. Our use of cash in investing activities for the three months ended March
31, 2001 resulted primarily from additions to property and equipment and
purchased technology, partially offset by maturities of short-term securities.
The use of cash for the three months ended March 31, 2000 resulted from the net
purchases of short-term investments and additions to property and equipment. We
plan to spend approximately $7 million in capital expenditures during the rest
of 2001 relating to our new headquarter's facility.

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<PAGE>   14

     Our financing activities generated cash of $2.1 million during the three
months ended March 31, 2001, and $5.4 million for the three months ended March
31, 2000. The generation of cash was largely the result of proceeds from the
exercise of stock options for both the three months ended March 31, 2001 and
2000.

     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, our short-term investments, 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 and office facilities; 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 $13.6 million in the three months ended March 31, 2001. As of
March 31, 2001, we had an accumulated deficit of approximately $71.0 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. The foregoing was a forward-looking statement within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act; see page 8 of this Report on Form 10-Q. 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;

     - 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;

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<PAGE>   15

     - 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 LAWSUIT, WHICH, IF IT
RESULTS IN AN UNFAVORABLE RESOLUTION, COULD ADVERSELY AFFECT OUR BUSINESS,
RESULTS OF OPERATIONS OR FINANCIAL CONDITION.

     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
us and certain of our officers. The complaints were filed on behalf of a
purported class of people who purchased our stock during the period January 31,
2001 through March 15, 2001, alleging insider trading and false and misleading
statements in violation of the federal securities laws. The plaintiffs are
seeking unspecified damages. We believe that the allegations of these lawsuits
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.

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

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<PAGE>   16

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.

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

     - 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.

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<PAGE>   17

     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.

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 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.

                                        15
<PAGE>   18

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 three months ended March 31, 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. 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 March 31,
2001, five customers made up 51% of our total revenue, and one of those
customers, acting as a reseller, accounted for approximately 24% 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.

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 47% in the three months ended March 31, 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;

                                        16
<PAGE>   19

     - 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.

WE MAY ENCOUNTER DIFFICULTIES IN MANAGING OUR GROWTH, WHICH COULD PREVENT US
FROM EXECUTING OUR BUSINESS STRATEGY.

     Our rapid growth has placed, and continues to place, a significant strain
on our resources. To accommodate this growth, we must implement or upgrade a
variety of operational and financial systems, procedures and controls, including
the improvement of our accounting and other internal management systems. We have
had to hire additional employees to accommodate this growth in business and
product development activity. This has resulted in increased responsibilities
for our management. Our systems, procedures and controls may not be adequate to
support our operations. If we fail to improve our operational, financial and
management information systems, or to hire, train, motivate or manage our
employees, our business could be harmed.

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 one patent. There is no guarantee that more patents will be
issued with respect to our current or future patent applications.

                                        17
<PAGE>   20

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 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 TECHNICAL, SALES AND MARKETING AND
OPERATIONAL PERSONNEL, OUR BUSINESS COULD BE HARMED.

     We intend to hire additional personnel, including software engineers, sales
and marketing personnel and operational personnel. 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

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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.

SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER NUANCE AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS.

     As of March 1, 2001, our executive officers and directors, their affiliates
and other current principal stockholders together control approximately 25% of
our outstanding common stock. As a result, these stockholders, if they act
together, are able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change in control of Nuance, even when a change in control may be in the best
interests of other stockholders. Moreover, the interests of this concentration
of ownership may not always coincide with our interests or the interests of
other stockholders and, accordingly, these controlling stockholders could cause
us to enter into transactions or agreements which we would not otherwise
consider.

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;

     - 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

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SpeechFront, a Canadian company, and in February 2000, 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.

     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.

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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 March 31, 2001, we had cash and cash equivalents and short-term
investments of $206.1 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 and short-term
investments at March 31, 2001, a decrease in interest rates of 0.5% would cause
a corresponding decrease in our annual interest income by approximately $1.0
million.

                           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
us and certain of our officers. The complaints were filed on behalf of a
purported class of people who purchased our stock during the period January 31,
2001 through March 15, 2001, alleging insider trading and false and misleading
statements in violation of the federal securities laws. The plaintiffs are
seeking unspecified damages. We believe that the allegations of these lawsuits
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.

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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                                   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: May 15, 2001                        By:       /s/ GRAHAM SMITH
                                            ------------------------------------
                                                        Graham Smith
                                             Vice President and Chief Financial
                                                           Officer
                                            (Principal Financial and Accounting
                                                           Officer)

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