<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, 2000

                                       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>
<CAPTION>
<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  [ ]

  31,955,297 shares of the registrant's common stock, $0.01 par value, were
outstanding as of November 13, 2000.

================================================================================
<PAGE>

                  NUANCE COMMUNICATIONS, INC. & SUBSIDIARIES

                         FORM 10-Q, September 30, 2000
                               ________________

                                   CONTENTS

<TABLE>
<CAPTION>
Item Number                                                                Page
-----------                                                                ----
<S>      <C>                                                               <C>

                     PART I: FINANCIAL INFORMATION

Item 1. Financial Statements
         Condensed Consolidated Statements of Operations:
           Three and nine months ended September 30, 2000 and 1999........   3
         Condensed Consolidated Balance Sheets:
           September 30, 2000 and December 31, 1999.......................   4
         Condensed Consolidated Statements of Cash Flows:
           Nine months ended September 30, 2000 and 1999..................   5
         Notes to Condensed Consolidated Financial Statements.............   6

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.................................................  21

Item 2. Changes in Securities.............................................  21

Item 6. Exhibits and Reports on Form 8-K..................................  21

SIGNATURES................................................................  22
EXHIBIT INDEX.............................................................  23
</TABLE>

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                         Three Months Ended    Nine Months Ended
                                                            September 30,        September 30,
                                                         ------------------    --------------------
                                                           2000       1999       2000        1999
                                                         -------    -------    --------    --------
<S>                                                      <C>        <C>        <C>         <C>
Revenue:
 License..............................................   $10,465    $ 2,678    $ 25,185    $  9,610
 Service..............................................     3,995      1,684       9,219       4,258
                                                         -------    -------    --------    --------
 Total revenue........................................    14,460      4,362      34,404      13,868
                                                         -------    -------    --------    --------
Cost of revenue:
 License..............................................        40          -          53           -
 Service..............................................     3,055      1,259       6,780       3,831
                                                         -------    -------    --------    --------
 Total cost of revenue................................     3,095      1,259       6,833       3,831
                                                         -------    -------    --------    --------
Gross profit..........................................    11,365      3,103      27,571      10,037
                                                         -------    -------    --------    --------
Operating expenses:
Sales and marketing, net of $243 and $703 of
 noncash compensation expense for the three and
 nine months ended September 30, 2000, respectively...     8,493      4,902      23,332      11,221
Research and development, net of $523 and $1,513 of
 noncash compensation expense for the three and
 nine months ended September 30, 2000, respectively...     5,283      3,077      14,406       7,753
General and administrative, net of $372 and $1,076
 of noncash compensation expense for the three and
 nine months ended September 30, 2000, respectively...     2,502        859       6,800       2,389
Noncash compensation expense..........................     1,138          -       3,292           -
                                                         -------    -------    --------    --------
 Total operating expenses.............................    17,416      8,838      47,830      21,363
                                                         -------    -------    --------    --------
Loss from operations..................................    (6,051)    (5,735)    (20,259)    (11,326)
Interest and other income, net........................     1,529         70       3,007         337
                                                         -------    -------    --------    --------
Loss before provision for income taxes................    (4,522)    (5,665)    (17,252)    (10,989)
Provision for income taxes............................        85          -         231           -
                                                         -------    -------    --------    --------
 Net loss.............................................   $(4,607)   $(5,665)   $(17,483)   $(10,989)
                                                         =======    =======    ========    ========
Basic and diluted net loss per share..................   $ (0.15)   $ (1.90)   $ (0.88)    $  (3.85)
                                                         =======    =======    ========    ========
Shares used to compute basic and diluted net loss
per share.............................................    29,797      2,978      19,799       2,854
                                                         =======    =======    ========    ========
Pro forma basic and diluted net loss per share........   $ (0.15)   $ (0.31)   $  (0.64)   $  (0.61)
                                                         =======    =======    ========    ========
Shares used to compute pro forma basic and diluted
net loss per share....................................    29,797     18,204      27,357      18,080
                                                         =======    =======    ========    ========

</TABLE>


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

                                       3
<PAGE>

                  NUANCE COMMUNICATIONS, INC. & SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     (in thousands, except share amounts)
<TABLE>
<CAPTION>
                                                    September 30,  December 31,
                                                    -------------  ------------
                                                        2000           1999
                                                      --------       --------
                                                     (unaudited)
<S>                                                    <C>            <C>
  Assets
Current assets:
Cash and cash equivalents..........................  $ 81,454         $18,073
Short-term investments.............................    12,116          23,353
Accounts receivable, net of allowance for
 doubtful accounts of $958 and $571,
 respectively......................................    12,555           5,349
Receivable from underwriter........................   144,091               -
Prepaid expenses and other current assets..........     4,389           3,027
                                                     --------         -------
 Total current assets..............................   254,605          49,802
Property and equipment, net........................     8,946           4,276
Other assets.......................................    11,975             101
                                                     --------         -------
 Total assets......................................  $275,526         $54,179
                                                     ========         =======
  Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt............................  $    278         $ 1,043
Accounts payable...................................     2,512           3,024
Accrued liabilities................................    12,554           7,034
Deferred revenue...................................     7,073           4,794
                                                     --------         -------
 Total current liabilities.........................    22,417          15,895
Long-term debt, less current portion...............         -           1,333
                                                     --------         -------
 Total liabilities.................................    22,417          17,228
                                                     --------         -------
Commitments

Stockholders' Equity:
Convertible preferred stock, $.001 par
 value, 5,000,000 shares authorized; none
 and 19,725,986 shares issued and
 outstanding, respectively.........................         -              20
Common stock, $.001 par value, 250,000,000
 shares authorized;
 31,742,050 and 3,240,349 shares issued
 and outstanding, respectively.....................        32               3
Additional paid-in capital.........................   307,771          76,415
Deferred stock compensation........................    (3,338)         (5,614)
Accumulated deficit................................   (51,356)        (33,873)
                                                     --------        --------
 Total stockholders' equity........................   253,109          36,951
                                                     --------        --------
 Total liabilities and stockholders'
  equity...........................................  $275,526        $ 54,179
                                                     ========        ========

</TABLE>

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

                                       4
<PAGE>

                  NUANCE COMMUNICATIONS, INC. & SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)
                                (in thousands)
<TABLE>
<CAPTION>
                                                             Nine Months Ended
                                                                September 30,
                                                            ----------------------
                                                              2000          1999
                                                            --------      --------
<S>                                                         <C>           <C>
Cash flows from operating activities:
Net loss................................................     $(17,483)    $(10,989)
Adjustments to reconcile net loss to net cash
 used in operating activities:
 Depreciation and amortization..........................        1,762          775
 Noncash compensation expense...........................        3,292           --
 Provision for doubtful accounts........................          387          161
 Fair value of common stock options and
  warrants..............................................           --          167
 Changes in operating assets and liabilities:
  Accounts receivable...................................       (7,593)      (2,434)
  Prepaid expenses and other assets.....................       (2,814)        (383)
  Accounts payable......................................         (512)         549
  Accrued liabilities...................................        5,520        2,021
  Deferred revenue......................................        2,279        1,008
                                                             --------     --------
  Net cash used in operating activities.................      (15,162)      (9,125)
                                                             --------     --------
Cash flows from investing activities:
Purchase of marketable securities.......................      (19,485)     (18,286)
Purchase of long-term investment........................      (11,273)          --
Maturities of marketable securities.....................       30,722       28,121
Purchases of property and equipment.....................       (6,432)      (2,185)
                                                             --------     --------
  Net cash (used in) provided by investing activities...       (6,468)       7,650
                                                             --------     --------
Cash flows from financing activities:
Proceeds from issuance of common stock..................       80,341           --
Proceeds from exercise of stock options.................        5,813          160
Proceeds from exercise of Series D warrant..............        1,000           --
Repurchase of common stock..............................           (8)          --
Proceeds from borrowings................................            -        1,295
Repayment of borrowings.................................       (2,098)          --
                                                             --------     --------
  Net cash provided by financing activities.............       85,048        1,455
                                                             --------     --------

Effect of exchange rate fluctuations....................          (37)          --

Net increase (decrease)in cash and cash equivalents.....       63,381          (20)
Cash and cash equivalents, beginning of period..........       18,073        1,642
                                                             --------     --------
Cash and cash equivalents, end of period................     $ 81,454     $  1,622
                                                             ========     ========

</TABLE>

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

                                       5
<PAGE>

                  NUANCE COMMUNICATIONS, INC. & SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

   The unaudited condensed consolidated financial statements have been prepared
by the Company in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X. The condensed 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, 2000 are not
necessarily indicative of the results to be expected for the full year or for
any future periods.  The accompanying condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements contained in the Company's Prospectus on Form S-1 filed with the
Securities and Exchange Commission on September 26, 2000.  Certain
reclassifications have been made to the prior period balances to conform to the
current year presentation.

2. Revenue Recognition

   The Company's revenue is derived from two sources, licenses and services.
Services include consulting, software maintenance and support, and training.

   The Company's license revenue consists of license fees for its voice
interface software products. This license fee is calculated using two variables:
the computation power required to run the Company's platform and the maximum
number of simultaneous end-user connections to an application running on the
platform.

   License revenue is recognized when:

   .   evidence of an arrangement exists;

   .   delivery has occurred;

   .   the fee is fixed and determinable; and

   .   collection is probable.

   The timing of license revenue recognition is affected by whether the Company
performs consulting services in the arrangement and the nature of those
services. In the majority of cases, the Company either performs no consulting
services at all or performs standard implementation services that are not
essential to the functionality of the software. In these cases, the Company
recognizes license revenue either upon issuance of the permanent software
license key (which enables the software to be operated) or on system acceptance,
if the customer has established acceptance criteria (which occurs only in a
small minority of cases). In those contracts having acceptance criteria,
criteria typically consist of a demonstration to the customer that, upon
implementation, the software performs in accordance with specified system
parameters, such as recognition accuracy or call completion rates. When the
Company performs consulting services that are essential to the functionality of
the software, both license and consulting revenue are recognized over time based
on the percentage of the consulting services that have been completed. Invoicing
for license fees is triggered by the issuance of the permanent license key and
the Company's standard payment terms are net 30 days from invoicing.

   License revenue from value-added resellers and original equipment
manufacturers is recognized when product has been solid through to an end user
and such sell-through has been reported to the Company.

   Service revenue consists of revenue from providing consulting, training,
maintenance updates and technical support. Training service revenue is
recognized as services are performed. Consulting service contracts are bid
either on a fixed-fee or a time and materials basis. For a fixed-fee contract,
the Company recognizes service revenue on a percentage of completion basis in
accordance with Statement of Position ("SOP") 81-1 "Accounting for Performance
of Construction-Type and Certain Production-Type Contracts." For time and
materials contracts, the Company recognizes service revenue as services are
performed in accordance with SOP 81-1. Losses on service contracts, if any,
are recognized as soon as such losses become known. Revenue from maintenance
updates and technical support is recognized ratably over the term of the
applicable agreement.

   In December 1998, the AICPA issued SOP 98-9, "Modification of SOP No. 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." SOP No.
98-9 amends SOP 97-2 to require an entity to recognize revenue for multiple
element arrangements by means of the "residual method" when:

   .   vendor-specific evidence of fair value exists for all of the undelivered
       elements that are not accounted for by means of long-term contract
       accounting;

   .   vendor-specific evidence of fair value does not exist for one or more of
       the delivered elements; and

   .   all revenue recognition criteria of SOP No. 97-2, other than the
       requirement for vendor-specific evidence of the fair value of each
       delivered element, are satisfied.

   The adoption of SOP 98-9 in fiscal 1999 did not have a significant effect on
the Company's financial position or results of operations.

   Many of the Company's arrangements include multiple elements. The Company
follows the residual method when accounting for multiple element arrangements.
The Company has established vendor-specific objective evidence of fair value for
all undelivered elements, including consulting services and maintenance updates
and technical support, based on vendor-specific objective evidence of fair value
as determined by the price charged for the individual elements when they are
sold separately. However, vendor-specific objective evidence of fair value has
not been established for the license component (i.e. the delivered element).
Revenue for the undelivered elements of a contract are allocated based on the
vendor-specific objective evidence of fair value. To the extent that a discount
exists on any of the elements, the Company follows the residual method and
attributes that discount entirely to the delivered elements.

   Cost of license revenue consists primarily of license fees payable on
third-party software products. Cost of service revenue consists of compensation
and related overhead costs for employees engaged in consulting, training and
maintenance for our customers.

3. Recent Accounting Pronouncements

   In June 1998, the FASB issued 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
will be 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, management does not believe that the adoption of these statements
will have a material impact on the Company's financial position or results of
operations.

   In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and amended it in March and June 2000 with respect to the effective date.
The Company will adopt SAB 101 in the fourth quarter of 2000 and does not
believe there will be any material impact.

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, which
includes shares of common stock issued upon the conversion of convertible
preferred stock following the closing of the Company's initial public offering.
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 5,857,000 for the three
months ended September 30, 2000 and 11,892,000 for the nine months ended
September 30, 2000. The total number of shares excluded from diluted net loss
per share was 19,287,000 for the three months ended September 30, 1999 and
16,734,000 for the nine months ended September 30, 1999.

   Pro forma basic net loss per share has been calculated assuming the
conversion of convertible preferred stock into an equivalent number of common
shares, as if the shares had converted on the dates of their issuance.

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

                                       6
<PAGE>

<TABLE>
<CAPTION>
                                                    Three Months Ended         Nine Months Ended
                                                        September 30,            September 30,
                                                    -------------------      ---------------------
                                                       2000       1999          2000        1999
                                                    ---------   -------      ---------   ---------
<S>                                                 <C>         <C>          <C>         <C>
Net loss...........................................   $(4,607)   $(5,665)     $(17,483)   $(10,989)
                                                      =======    =======      ========    ========
Basic:
Weighted average shares of common stock
 outstanding.......................................    30,554      2,981        20,353       2,900
Less: Weighted average shares of common stock
 subject to repurchase.............................      (757)        (2)         (554)        (46)
                                                      -------    -------      --------    --------
Weighted average shares used in computing basic
 and diluted net loss per share....................    29,797      2,979        19,799       2,854
                                                      =======    =======      ========    ========
Basic and diluted net loss per share...............   $ (0.15)   $ (1.90)     $  (0.88)   $  (3.85)
                                                      =======    =======      ========    ========
Net loss...........................................   $(4,607)   $(5,665)     $(17,483)   $(10,989)
                                                      =======    =======      ========    ========
Pro forma:
Shares used above..................................    29,797      2,979        19,799       2,854
Pro forma adjustment to reflect weighted average
  effect of assumed conversion of convertible
  preferred stock..................................         -     15,225         7,558      15,226
                                                      -------    -------      --------    --------
Weighted average shares used in computing pro
  forma basic and diluted net loss per share.......    29,797     18,204        27,357      18,080
                                                      =======    =======      ========    ========
Pro forma basic and diluted net loss per share.....   $ (0.15)   $ (0.31)     $  (0.64)   $  (0.61)
                                                      =======    =======      ========    ========
</TABLE>

5. Deferred Stock 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 for the three and nine months ended September 30, 2000 of $1.1
million and $3.3 million, respectively. This deferred compensation related to
3,152,000 options with a weighted average exercise price of $8.58 granted
through March 31, 2000.

6. 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 condensed consolidated statements of operations. The Company does
not track operating expenses nor derive net profit or loss based on these
segments.

   Sales of licenses and services through September 30, 2000 occurred through
partners 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. Additionally, long-lived assets in locations other than
Menlo Park are not significant.

   International revenues are based on the country in which the end-user is
located. The following is a summary of license and service revenue by geographic
region for the three and nine month periods ended September 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                     Three Months Ended            Nine Months Ended
                                                        September 30,                 September 30,
                                                    ---------------------         ---------------------
                                                       2000       1999              2000        1999
                                                    ---------   ---------         ---------   ---------
<S>                                                 <C>         <C>               <C>         <C>

License revenue
 Americas                                           $ 5,776.4   $ 2,317.2        $16,239.3    $ 8,848.2
 Europe                                               1,742.9       202.1          4,916.3        567.2
 Asia                                                 2,945.7       158.7          4,029.4        194.6
                                                    ---------   ---------        ----------   ---------
     Total                                          $10,465     $ 2,678          $25,185      $ 9,610
                                                    =========   =========        ==========   =========
Service revenue
 Americas                                           $ 2,460.6   $ 1,330.0        $ 6,465.7    $ 3,364.0
 Europe                                                 911.1       210.0          1,715.7        537.0
 Asia                                                   623.3       144.0          1,037.6        357.0
                                                    ---------   ---------        ----------   ---------
     Total                                          $ 3,995     $ 1,684          $ 9,219      $ 4,258
                                                    =========   =========        ==========   =========
</TABLE>

7. Public Offerings

   On April 13, 2000, the Company commenced its initial public offering of 5.2
million shares of common stock.  The offering raised approximately $80 million,
net of offering expenses, for the Company.  Upon the closing of the offering,
19,925,986 shares of preferred stock were converted into common stock.

  On September 27, 2000, in a secondary offering, the Company sold 1,256,793
shares and selling shareholders sold 1,743,207 shares of our common stock.  The
offering raised approximately $144.1 million for the Company, net of offering
costs, and is intended to be used for general corporate purposes, including
working capital and capital expenditures, and

                                       7
<PAGE>

strategic investments. The proceeds from this offering were not received until
October 2, 2000 and therefore have been recorded as a receivable from
underwriter in the accompanying balance sheet.

8.   Subsequent Event

   On November 10, 2000, the Company acquired Speechfront, a privately-held
Canadian company, for total consideration of $10.5 million cash and shares of
Nuance stock. Speechfront is a developer of voice instant messaging systems.

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

  The following discussion should be read in conjunction with the condensed
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.

Results of Operations:

   The following table sets forth, for the periods indicated, the percentage of
net revenue represented by certain items in our statements of operations for the
three and nine months ended September 30, 2000 and 1999.

Overview:

  We develop, market and support a voice interface software platform that makes
the content and services of enterprises, telecommunications networks and the
Internet accessible from any telephone.  We were incorporated in July 1994 and
began operations in October 1994.  Prior to 1996, our revenue was derived from
technical consulting services.  In 1996, we deployed the first version of our
voice interface software platform and began to generate software license
revenue.  Today, we offer a range of voice interface software products.  To
support the sale, deployment and operation of our products, we also provide a
number of services that include consulting, training, maintenance updates and
technical support.

  Our license revenue consists of license fees for our voice interface software
products. Historically, this license fee has been calculated using the two
variables: the computation power required to run our platform and the maximum
number of simultaneous end-user connections to an application running on our
platform. During the quarter ending September 30, 2000, we began implementing a
new pricing model for the license fees for our software platform. Under this new
pricing model, the license fee is calculated using two variables, one of which
is the maximum number of simultaneous end-user connections to an application
running on the platform, consistent with our prior method. However, the second
variable of the license fee is now based on the value attributed to the
functional use of the software. A pricing reserve was established during the
second quarter associated with the implementation of this new pricing model to
the Company's value-added resellers. This new pricing model for value-added
resellers was resolved during the third quarter.

License revenue is recognized when:

        .  evidence of an arrangement exists;

        .  delivery has occurred;

        .  the fee is fixed and determinable; and

        .  collection is probable.

The timing of license revenue recognition is affected by whether we perform
consulting services in the arrangement, and the nature of those services. In the
majority of cases, we either perform no consulting services or we perform
standard implementation services that are not essential to the functionality of
the software. In these cases, we recognize license revenue either upon issuance
of the permanent software license key (which enables the software to be
operated) or on system acceptance, if the customer has established acceptance
criteria (which occurs only in a small minority of cases). In those contracts
having acceptance criteria, criteria typically consist of a demonstration to the
customer that, upon implementation, the software performs in accordance with
specified system parameters, such as recognition accuracy or call completion
rates. When we perform consulting services that are essential to the
functionality of the software, we recognize both license and consulting revenue
over time based on the percentage of the consulting services that have been
completed.

  Service revenue consists of revenue from providing consulting, training,
maintenance updates and technical support.  Our consulting service contracts are
bid either on a fixed-fee basis or on a time-and-materials basis.  For a
fixed-fee contract, we recognize revenue using the percentage of completion
method.  For time-and-materials contracts, we recognize revenue as services are
performed.  Training service revenue is recognized as services are performed.
Losses on consulting and training service contracts, if any, are recognized as
soon as such losses become known.  Revenue from maintenance updates and
technical support is recognized ratably over the terms of the applicable
agreement.

<TABLE>
<CAPTION>
                                               Three Months            Nine Months
                                            Ended September 30,     Ended September 30,
                                            -------------------     ------------------
                                             2000         1999       2000       1999
                                             ----        -----       ----       ----
<S>                                         <C>          <C>         <C>        <C>
Revenue:
 License.................................      72%          61%        73%        69%
 Service.................................      28           39         27         31
                                             ----        -----       ----       ----
  Total revenue..........................     100          100        100        100
Cost of revenue:
 License.................................       -            -          -          -
 Service.................................      21           29         20         28
                                             ----        -----       ----       ----
  Total cost of revenue..................      21           29         20         28
                                             ----        -----       ----       ----
Gross Margin.............................      79           71         80         72
Operating expenses:......................
 Sales and marketing.....................      59          112         68         81
 Research and development................      37           71         42         56
 General and administrative..............      17           20         20         17
 Noncash compensation expense............       8            -          9          -
                                             ----        -----       ----       ----
  Total operating expenses                    121          203        139        154
                                             ----        -----       ----       ----
   Loss from operations                       (42)        (132)       (59)       (82)
Interest and other income, net                 11            2          9          3
                                             ----        -----       ----       ----
Loss before provision for income taxes        (31)        (130)       (50)       (79)
Provision for income taxes...............       1            -          1          -
                                             ----        -----       ----       ----
   Net loss..............................    (32)%       (130)%      (51)%      (79)%
                                             ====        =====       ====       ====
</TABLE>

                                       8
<PAGE>

Comparison of the Three and Nine Months Ended September 30, 2000 and 1999

 Revenue

   Total revenue increased from $4.4 million in the three months ended September
30, 1999 to $14.5 million in the three months ended September 30, 2000, an
increase of 231%.  Total revenue increased from $13.9 million in the nine months
ended September 30, 1999 to $34.4 million in the nine months ended September 30,
2000, an increase of 148%.

   License revenue increased from $2.7 million in the three months ended
September 30, 1999 to $10.5 million in the three months ended September 30,
2000, an increase of 291%, and from $9.6 million in the nine months ended
September 30, 1999 to $25.2 million in the nine months ended September 30, 2000,
an increase of 162%. This increase in license revenue was due to an increased
acceptance of our products in the marketplace. License revenue represented 61%
and 69% of total revenue for the three and nine months ended September 30, 1999,
respectively, and 72% and 73% of total revenue for the three and nine months
ended September 30, 2000, respectively.

   Service revenue increased from $1.7 million for the three months ended
September 30, 1999 to $4.0 million in the three months ended September 30, 2000,
an increase of 137%, and from $4.3 million for the nine months ended September
30, 1999 to $9.2 million in the nine months ended September 30, 2000, an
increase of 117%. This increase in service revenue was due primarily to growth
in license revenue, the installed base of our voice interface software platform
and related system design, support and training activities. In addition,
approximately $360,000 of our service revenue increase during the quarter was
the result of subcontract work done by one of our European partners. Service
revenue represented 39% and 31% of total revenue for the three and nine months
ended September 30, 1999, respectively, and 28% and 27% of total revenue for the
three and nine months ended September 30, 2000, respectively.

 Cost of Revenue

   Cost of service revenue increased from $1.3 million in the three months ended
September 30, 1999 to $3.1 million in the three months ended September 30, 2000,
an increase of 143%, and from $3.8 million in the nine months ended September
30, 1999 to $6.8 million in the nine months ended September 30, 2000, an
increase of 77%. This increase was due to hiring additional personnel in the
professional services, technical support and training groups. In addition,
approximately $400,000 of our service revenue increase during the quarter was
the result of subcontract work done by one of our European partners.  Cost of
service revenue as a percentage of service revenue was 75% and 90% for the three
and nine months ended September 30, 1999, respectively, and 76% and 74% for the
three and nine months ended September 30, 2000, respectively.  We anticipate
that cost of service revenue will increase 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 consist of compensation and
related costs for sales and marketing personnel and promotional expenditures,
including public relations, advertising, trade shows and marketing materials.
Sales and marketing expenses increased from $4.9 million in the three months
ended September 30, 1999, to $8.5 million in the three months ended September
30, 2000, an increase of 73%.  Sales and marketing expenses increased from $11.2
million in the nine months ended September 30, 1999 to $23.3 million in the nine
months ended September 30, 2000, an increase of 108%. This increase was
attributable to the addition of approximately 40 sales and marketing personnel
which added approximately $8.7 million in expense, an increase in sales
commissions associated with the growth in revenue which added approximately $2.7
million to expenses and higher marketing costs due to expanded promotional
activities which added approximately $700,000 in expenses. As a percentage of
total revenue, sales and marketing expenses were 112% and 81% in the three and
nine months ended September 30, 1999, respectively, and 59% and 68% in the three
and nine months ended September 30, 2000, respectively. We expect to continue to
increase our marketing and promotional efforts and hire additional sales

                                       9
<PAGE>

personnel. Accordingly, we anticipate that sales and marketing expenses will
increase in absolute dollars, but will vary as a percentage of total revenue
from period to period.

   Research and Development. Research and development expenses consist of
compensation and related costs for research and development personnel and
contractors. Research and development expenses increased from $3.1 million in
the three months ended September 30, 1999, to $5.3 million in the three months
ended September 30, 2000, an increase of 72%.  Research and development expenses
increased from $7.8 million in the nine months ended September 30, 1999 to $14.4
million in the nine months ended September 30, 2000, an increase of 86%.  This
increase was attributable to the addition of approximately 40 personnel
associated with product development activities, which added approximately $5.7
million in expenses, and the costs of technical contractors, which added
approximately $900,000 in expenses.  As a percentage of total revenue, research
and development expenses were 71% and 56% in the three and nine months ended
September 30, 1999, respectively, and 37% and 42% in the three and nine months
ended September 30, 2000, respectively. We expect to continue to make
substantial investments in research and development and anticipate that research
and development expenses will continue to increase in absolute dollars, but will
vary as a percentage of total revenue from period to period.

   General and Administrative. General and administrative expenses consist of
compensation and related costs for administrative personnel, legal services,
accounting services and other general corporate expenses. General and
administrative expenses increased from $859,000 in the three months ended
September 30, 1999, to $2.5 million in the three months ended September 30,
2000, an increase of 191%.  General and administrative expenses increased from
$2.4 million in the nine months ended September 30, 1999 to $6.8 million in the
nine months ended September 30, 2000, an increase of 185%.  The increase was due
to the addition of approximately 30 administrative personnel, which added
approximately $3.0 million in expenses, increased facility costs, which added
approximately $700,000 in expenses, and costs associated with our new status as
a public company, including insurance, accounting and legal fees, which added
approximately $700,000 in expenses.  As a percentage of total revenue, general
and administrative expenses were 20% and 17% in the three and nine months ended
September 30, 1999, respectively, and 17% and 20% in the three and nine months
ended September 30, 2000, respectively. We expect that general and
administrative expenses will increase in absolute dollars as we continue to add
personnel and incur additional costs related to the anticipated growth of our
business. However, we expect that these expenses will vary as a percentage of
total revenue from period to period.

   Non-cash compensation. Non-cash compensation expenses consist of compensation
charges related to stock options granted to employees between September 1999 and
February 2000. The compensation expense was $1.1 million in the three months
ended September 30, 2000 and $3.3 million in the nine months ended September 30,
2000. This expense is being recognized over the vesting period of the stock
options.

  Interest and Other Income, Net

   Interest and other income, net, consists of interest earned on cash and
short-term investments, offset by interest expense related to a note payable.
Interest and other income, net was $70,000 in the three months ended September
30, 1999 and $1.5 million in the three months ended September 30, 2000. Interest
and other income, net, was $337,000 in the nine months ended September 30, 1999
and $3.0 million in the nine months ended September 30, 2000.  The increase was
due to interest income earned on higher average cash balances, primarily the
result of cash proceeds raised in the Company's initial public offering in April
2000.

   Provision for Income Taxes.  Our provision for income taxes of $85,000 and
$231,000 for the three and nine months ended September 30, 2000, respectively,
relates to income tax liabilities in certain foreign jurisdictions.

Liquidity and Capital Resources

   From inception through March 31, 2000, we financed our operations primarily
from private sales of convertible preferred stock totaling $70.0 million and, to
a lesser extent, from bank financing. In April 2000, we raised approximately $80
million through the completion of our initial public offering of common stock.
As of September 30, 2000, we had cash and cash equivalents aggregating $81.5
million and short-term investments totaling $12.1 million. On October 2, 2000,
we received cash proceeds, net of the offering costs, of approximately $144.1
million upon the closing of our secondary public offering.

                                       10
<PAGE>

   Our operating activities used cash of $15.2 million for the nine months ended
September 30, 2000, and $9.1 million during the nine months ended September 30,
1999. This negative operating cash flow in the nine months ended September 30,
2000 resulted principally from our net losses as we invested in all areas of our
business.  The cash flow during the period was also impacted by increases in
accounts receivable and prepaid expenses and other assets.  These factors were
partially offset by increases in accrued liabilities and deferred revenue.  The
negative operating cash flow for the nine months ended September 30, 1999, was
primarily caused by our net loss and an increase in accounts receivable,
partially offset by an increase in accrued liabilities and deferred revenue.

   Investing activities used cash of $6.5 million during the nine months ended
September 30, 2000, and provided cash of $7.7 million during the nine months
ended September 30, 1999.  The use of cash during the nine-month period ended
September 30, 2000, was due to the Company investing $11.3 million in long-term
time deposits held by a major bank as security for letters of credit on newly
signed facility leases and additions to fixed assets.  These factors were
partially offset by net proceeds received from marketable securities.

   Our financing activities generated cash of $85.0 during the nine months ended
September 30, 2000, and $1.5 million for the nine months ended September 30,
1999. The cash provided by financing activities for the nine months ended
September 30, 2000 was primarily the result of proceeds from the Company's
initial public offering and the exercise of employee stock options.  This amount
was slightly offset by the repayment of the Company's term loan with Silicon
Valley Bank.  The cash generated by financing activities for the nine months
ended September 30, 1999 was a result of proceeds received from the Company's
term loan with Silicon Valley bank and the exercise of stock options.

   Our Canadian subsidiary carries a revolving line of credit under which it can
borrow up to $600,000 in Canadian dollars. The revolving line of credit, secured
by a letter of credit from our primary bank, bears interest at the lender's
prime rate plus .5% per annum (8.0% at September 30, 2000). The line of credit
remains in effect as long as the underlying letter of credit remains in place.
As of September 30, 2000, there was a $278,000 U.S. dollar balance outstanding
against this line of credit and $122,000 U.S. dollar was available for borrowing
under this line.

   On November 10, 2000, the Company acquired Speechfront, a privately-held
Canadian company, for total consideration of $10.5 million in both cash and
shares of Nuance stock. Speechfront is a developer of voice instant messaging
systems.

   Our capital requirements depend on numerous factors. We expect to devote
substantial resources to continue our research and development efforts, expand
our sales, support, marketing and product development organizations, establish
additional facilities worldwide and build the infrastructure necessary to
support our growth. We have experienced substantial increases in our
expenditures since our inception consistent with growth in our operations and
personnel, and we anticipate that our expenditures will continue to increase in
the future. We believe that the proceeds from our initial and secondary public
offerings, together with our current cash and cash equivalents and our borrowing
capacity, will be sufficient to fund our activities for at least the next 24
months.  In addition, we will continue to evaluate acquisitions of other
businesses, products or 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 $17.5 million in the nine months ended September 30, 2000. As of
September 30, 2000, we have an accumulated deficit of approximately $51.4
million. We expect to have net losses and negative cash flow for at least the
next 15 months. We expect to spend significant amounts to enhance our products
and technologies, expand international sales and operations and fund research
and development. 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.

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

                                       11
<PAGE>

to provide updates to this information or guidance in our filings with the
Securities and Exchange Commission or otherwise.

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.

   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 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.
These quarterly variations are caused by a number of factors, including:

 .  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

                                       12
<PAGE>

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.

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 or 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 significant professional services in connection with the
implementation, we do not recognize software revenue until after system
acceptance or deployment. In cases where the contract specifies milestones or
acceptance criteria, we may not be able to recognize services 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

                                       13
<PAGE>

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

Our products are not 100% accurate at recognizing speech 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
Dialog, Lucent Technologies, Microsoft, Philips Electronics, SpeechWorks
International and T-NETIX. We expect additional competition from other companies
such as Microsoft, who has recently made investments in, and acquired, voice
interface technology companies. Furthermore, 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.

                                       14
<PAGE>

We depend on resellers for a significant portion of our sales. The loss of a
key reseller 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 and to
68% for the nine months ended September 30, 2000. 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 quarter from a limited
number of customers. For example, in the three months ended September 30, 2000,
five customers made up 50% of our total revenue, and one of those customers
exceeded 10% 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 revenue could be adversely affected.

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 and 48% in the nine months ended September 30, 2000. We are subject to a
variety of ris ks 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;

                                       15
<PAGE>

   .  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
insure that our products will support all applicable standards, which could in
turn result in decreased sales of our products.

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. 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.

                                       16
<PAGE>

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 continue to hire a significant number of additional personnel,
including software engineers, sales and marketing personnel and operational
personnel. Competition for these individuals is intense, especially in the San
Francisco Bay Area where we are headquartered, 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.

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

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<PAGE>

not have key person life insurance policies covering any of our employees.

Our stock price is extremely volatile.

    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. These broad market fluctuations may
materially adversely affect our stock price, regardless of our operating
results.

Certain stockholders may disagree with how Nuance uses the proceeds from its
public offerings.

    Management will retain 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 the offering, 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.

    Since our secondary public offering on September 27, 2000, our executive
officers and directors, their affiliates and other current principal
stockholders together control approximately 42% 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.

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    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.
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.

Future sales of our common stock could cause the price of our shares to decline.


    Our common stock began trading on the Nasdaq National Market on April 13,
2000.  However, to date there have been a limited number of shares trading in
the public market.  Some of our current stockholders own restricted securities
which will become available for sale in the future.  188,889 shares will be
available for sale in the public market beginning on December 14, 2000 and
19,413,438 shares will be available for sale beginning on December 26, 2000.
Sales of a substantial number of shares of our common stock could cause our
stock price to fall.  In addition, the sale of shares by our stockholders
could impair our ability to raise capital through the sale of additional
stock.

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.

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

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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, 2000, we had cash and cash equivalents of $81.5 million
which consisted of cash and highly liquid short-term investments. Any decline in
interest rates over time would reduce our interest income from our short-term
investments. Based upon our balance of cash and cash equivalents, a decrease in
interest rates of 0.5% would cause a corresponding decrease in our annual
interest income by approximately $0.3 million. As of September 30, 2000, we had
short-term debt outstanding in the amount of $278,000 at an interest rate of
8.0%.

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<PAGE>

                   NUANCE COMMUNICATIONS INC. & SUBSIDIARIES

                         FORM 10-Q, September 30, 2000

                           PART II: OTHER INFORMATION

Item 1. Legal Proceedings:

  We are not currently a party to any legal proceedings.

Item 2.  Changes in Securities:

  The effective date of our registration statement on Form S-1 filed under the
  Securities Act of 1933 (No. 333-45128) relating to a public offering of our
  common stock, was September 26, 2000.  A total of 1,256,793 shares of our
  common stock were sold by us to an underwriting syndicate led by Goldman,
  Sachs & Co., Credit Suisse First Boston, Thomas Weisel Partners LLC and Wit
  Soundview.  The offering commenced on September 27, 2000 and closed on October
  2, 2000.

  On October 27, 2000, the Registrant issued 31,021 shares of common stock at
  a per share price of $0.96 to Phoenix Leasing Incorporated, upon the net
  exercise of an outstanding warrant.

Item 3.  Defaults Upon Senior Securities

 None

Item 4.  Submission of Matters to a Vote of Security Holders

 None

Item 5.  Other Information

 None

Item 6. Exhibits and Reports on Form 8-K:

(a)  Exhibits. The exhibits listed in the accompanying Exhibit Index are filed
     or incorporated by reference as part of this Report.

(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


                                       /s/ Graham Smith
Date: November 13, 2000           By: _________________________________
                                           Graham Smith
                                     Vice President and Chief
                                     Financial Officer

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                                 EXHIBIT INDEX

Exhibit
Number                             Exhibit Title


3.1   Amended and Restated Articles of Incorporation of Registrant, as
      currently in effect.(1)
3.2   Form of Certificate of Incorporation of Registrant, to be in effect
      upon the reincorporation of Registrant into Delaware.(1)
4.1   Form of Registrant's Common Stock Certificate.(1)
4.2   Amended and Restated Investors' Rights Agreement, dated as of October
      1, 1999, among the Registrant and the parties named therein.(1)
27.1  Financial Data Schedule.
--------------------------------------------------------------------------------
(1)   Incorporated by reference from the Registrant's Registration Statement on
Form S-1 filed with the Commission on February 4, 2000.

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