<PAGE>

================================================================================

                                ______________

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q

(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934.

    For the quarterly period ended September 30, 2001

                                      OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934.

    For the transition period from         to

                       Commission file number: 000-31097


                        SPEECHWORKS INTERNATIONAL, INC.
            (Exact Name of Registrant as Specified in Its Charter)

                 Delaware                                 04-3239151
      (State or other Jurisdiction                     (I.R.S. Employer
    of Incorporation or Organization)                 Identification No.)

                     695 Atlantic Avenue, Boston, MA 02111
              (Address of Principal Executive Offices) (Zip Code)

                                (617) 428-4444
              Registrant's Telephone Number, Including Area Code

     Indicate by check mark whether the 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|


                     APPLICABLE ONLY TO CORPORATE ISSUERS:

     As of November 6, 2001, the registrant had 32,327,012 shares of common
stock, par value $0.001 per share, outstanding.

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

                SPEECHWORKS INTERNATIONAL, INC. & SUBSIDIARIES

                                     INDEX

<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                             No.
<S>                                                                                                         <C>
Part I--Financial Information (unaudited)

     Item 1.     Consolidated Balance Sheet as of September 30, 2001 and December 31, 2000................    1

                 Consolidated Statement of Operations for the Three and Nine Months Ended September 30,
                 2001 and 2000............................................................................    2

                 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2001 and
                 2000.....................................................................................    3

                 Notes to Consolidated Financial Statements...............................................    4

     Item 2.     Management's Discussion and Analysis of Financial Condition and Results of
                 Operations...............................................................................    9

     Item 3.     Quantitative and Qualitative Disclosures about Market Risk ..............................   15

Part II--Other Information...............................................................................    16

     Item 2.     Changes in Securities and Use of Proceeds................................................   16

     Item 4.     Submission of Matters to a Vote of Security Holders......................................   16

     Item 6.     Exhibits and Reports on Form 8-K.........................................................   16

Signatures................................................................................................   17

Exhibit Index.............................................................................................   18
</TABLE>
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.
                          CONSOLIDATED BALANCE SHEET
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                              September 30,     December 31,
                                                                                                   2001             2000
                                                                                              -------------     ------------

                                                                                                   (in thousands, except
                                                                                                     share information)
<S>                                                                                           <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents...............................................................   $      43,848     $     99,203
   Marketable securities...................................................................          38,720           14,370
   Accounts receivable, net of allowance for doubtful accounts of $1,436 and $600,
      respectively.........................................................................          13,367           12,502
   Prepaid expenses and other current assets...............................................           2,927            2,488
                                                                                              -------------     ------------
      Total current assets.................................................................          98,862          128,563
Fixed assets, net..........................................................................           5,894            5,337
Intangible assets, net.....................................................................          22,888            9,581
Other assets...............................................................................           1,047              893
                                                                                              -------------     ------------
      Total assets.........................................................................   $     128,691     $    144,374
                                                                                              =============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable........................................................................   $       1,828     $        640
   Accrued compensation....................................................................           2,746            4,639
   Accrued expenses........................................................................           2,710            2,991
   Deferred revenue........................................................................           3,806            3,873
   Current portion of long-term debt.......................................................             389              500
                                                                                              -------------     ------------
      Total current liabilities............................................................          11,479           12,643
Long-term debt, net of current portion.....................................................              28              292
                                                                                              -------------     ------------
      Total liabilities....................................................................          11,507           12,935
                                                                                              -------------     ------------
Stockholders' equity:
   Preferred stock, $0.001 par value; 10,000,000 shares authorized; zero shares issued
      and outstanding......................................................................              --               --
   Common stock, $0.001 par value; 100,000,000 shares authorized; 32,297,202 and
      30,583,333 shares issued and outstanding, respectively...............................              32               31
   Additional paid-in capital..............................................................         234,422          219,519
   Deferred stock compensation.............................................................         (15,956)         (22,151)
   Accumulated other comprehensive loss....................................................             (40)              (8)
   Accumulated deficit.....................................................................        (101,274)         (65,952)
                                                                                              -------------    -------------
      Total stockholders' equity...........................................................         117,184          131,439
                                                                                              -------------    -------------
      Total liabilities and stockholders' equity...........................................   $     128,691    $     144,374
                                                                                              =============    =============
</TABLE>

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

                                       1
<PAGE>

                         SPEECHWORKS INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                             Three Months Ended           Nine Months
                                                                                September 30,          Ended September 30,
                                                                           ---------------------     ----------------------
                                                                              2001        2000          2001         2000
                                                                           ---------   ---------     ---------    ---------
                                                                                (in thousands, except per share data)
<S>                                                                        <C>         <C>           <C>          <C>
Revenues:
   Product licenses...................................................     $   6,908   $   4,853     $  18,806    $  10,236
   Professional services..............................................         3,744       3,096        11,785        7,618
   Other revenues.....................................................           848         674         2,699        1,888
   Non-cash stock compensation........................................          (288)         --          (829)          --
                                                                           ---------   ---------     ---------    ---------
      Total revenues..................................................        11,212       8,623        32,461       19,742
                                                                           ---------   ---------     ---------    ---------
Cost of revenues:
   Cost of product licenses...........................................           145          44           272          155
   Cost of professional services -- non-cash stock compensation.......           154         457           462          685
                                 -- all other expenses................         2,386       2,346         7,896        5,896
   Cost of other revenues.............................................           697         558         2,200        1,367
   Amortization of purchased technology...............................           283          --           849           --
                                                                           ---------   ---------     ---------    ---------
      Total cost of revenues..........................................         3,665       3,405        11,679        8,103
                                                                           ---------   ---------     ---------    ---------
Gross profit..........................................................         7,547       5,218        20,782       11,639
                                                                           ---------   ---------     ---------    ---------
Operating expenses:
   Selling and marketing -- non-cash stock compensation...............         1,377         900         4,166        1,352
                         -- all other expenses........................         7,048       5,793        20,320       14,065
   Research and development -- non-cash stock compensation............           140         140           420          332
                            -- all other expenses.....................         3,580       2,160        10,797        5,976
   General and administrative -- non-cash stock compensation..........           106         107           318          292
                              -- all other expenses...................         6,223       4,482        18,155       11,442
   Amortization of intangible assets..................................         1,627         958         4,881          958
                                                                           ---------   ---------     ---------    ---------
      Total operating expenses........................................        20,101      14,540        59,057       34,417
                                                                           ---------   ---------     ---------    ---------
Loss from operations..................................................       (12,554)     (9,322)      (38,275)     (22,778)
Interest income.......................................................           784       1,322         3,339        1,666
Interest expense......................................................           (10)        (28)          (38)        (104)
Other income (expenses), net..........................................          (154)         40          (325)        (123)
                                                                           ---------   ---------     ---------    ---------
Net loss before income taxes..........................................       (11,934)     (7,988)      (35,299)     (21,339)
Provision for income taxes............................................            42          --            23           --
                                                                           ---------   ---------     ---------    ---------
Net loss..............................................................       (11,976)     (7,988)      (35,322)     (21,339)
Accretion and deemed dividend on redeemable convertible
   preferred stock...................................................             --        (300)           --       (6,955)
                                                                           ---------   ---------     ---------    ---------
Net loss attributable to common stockholders..........................     $ (11,976)  $  (8,288)    $ (35,322)   $ (28,294)
                                                                           =========   =========     =========    =========
Basic and diluted net loss per common share...........................     $   (0.37)  $   (0.39)    $   (1.11)   $   (2.54)
Shares used in computing basic and diluted net loss per
   common share.......................................................        32,153      21,419        31,867       11,152
</TABLE>

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

                                       2
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              Nine Months Ended
                                                                                 September 30,
                                                                          --------------------------
                                                                             2001             2000
                                                                          ---------        ---------
                                                                                (in thousands)
<S>                                                                       <C>              <C>
Cash flows from operating activities:
Net loss...............................................................   $ (35,322)       $ (21,339)
Adjustments to reconcile net loss to net cash used in operating
   activities:
   Depreciation and amortization.......................................       2,202            1,373
   Amortization of intangible assets...................................       5,730              958
   Stock compensation expense..........................................       6,195            2,661
   Provision for doubtful accounts.....................................         836              190
Changes in operating assets and liabilities, net of effects of
     acquistion:
   Accounts receivable.................................................      (1,701)          (5,276)
   Prepaid expenses and other current assets...........................        (439)          (2,496)
   Other assets........................................................        (152)            (475)
   Accounts payable....................................................       1,188               25
   Accrued compensation................................................      (1,973)           2,312
   Accrued other expenses..............................................        (425)           1,319
   Deferred revenue....................................................         (67)           2,224
                                                                          ---------        ---------
        Net cash used in operating activities..........................     (23,928)         (18,524)
                                                                          ---------        ---------
Cash flows from investing activities:
   Purchases of fixed assets...........................................      (2,739)          (2,794)
   Cash paid to acquire business including acquisition costs, net of
      cash acquired....................................................      (5,379)              --
   Purchases of marketable securities..................................     (69,606)              --
   Maturities of marketable securities.................................      45,251              573
                                                                          ---------        ---------
        Net cash used in investing activities..........................     (32,469)          (2,221)
                                                                          ---------        ---------
Cash flows from financing activities:
   Principal payments on capital lease obligations.....................          --             (174)
   Principal payments on notes payable.................................        (375)            (416)
   Proceeds from issuance of preferred stock, net of issuance costs....          --           19,929
   Proceeds from sale of common stock, net of issuance costs...........          --          108,783
   Proceeds from exercise of common stock options and warrants.........       1,443              654
                                                                          ---------        ---------
        Net cash provided by financing activities......................       1,068          128,776
                                                                          ---------        ---------
   Effects of changes in exchange rates on cash........................         (26)              --
                                                                          ---------        ---------
        Net (decrease) increase in cash and cash equivalents...........     (55,355)         108,031
Cash and cash equivalents, beginning of period.........................      99,203           11,474
                                                                          ---------        ---------
Cash and cash equivalents, end of period...............................   $  43,848        $ 119,505
                                                                          =========        =========
</TABLE>

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

                                       3
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1. Basis of Presentation

     The unaudited 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 consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. The results of operations
for the three and nine month periods ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year or for
any future periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 2000 contained in the Company's 2000 Annual Report on
Form 10-K filed with the Securities and Exchange Commission.

2. Net Loss Per Share

     Basic net loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted net loss per share is computed by dividing the net
loss attributable to common stockholders by the weighted average number of
shares of common stock and potential common stock outstanding during the period,
if dilutive. There is no difference between basic and diluted net loss per share
for all periods presented since potential common shares from the conversion of
redeemable convertible preferred stock and the exercise of options and warrants
were anti-dilutive for all periods presented. The calculation of diluted net
loss per common share for the three and nine months ended September 30, 2001 and
2000 does not include 6,815,459 and 23,581,809 potential shares of common stock
equivalents, respectively, related to common stock options, common stock
warrants and redeemable convertible preferred stock.

     The pro forma net loss per common share for the three and nine months ended
September 30, 2001 and 2000 is calculated assuming the automatic conversion of
all preferred stock outstanding had occurred as of the beginning of the period
or as of the date of issuance of the preferred stock, if later. Therefore,
accretion and deemed dividends on the redeemable convertible preferred stock are
excluded from the calculation of pro forma net loss per common share.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                            Three months ended        Nine months ended
                                                                              September 30,             September 30,
                                                                            ------------------        -----------------
                                                                             2001        2000         2001         2000
                                                                            ------     -------        ------     ------
    <S>                                                                   <C>          <C>          <C>         <C>
    Actual:
    ------
    Net loss..........................................................    $ (11,976)   $  (7,988)   $ (35,322)  $ (21,339)
    Accretion and deemed dividends on redeemable convertible
       preferred stock................................................           --         (300)          --      (6,955)

    Net loss attributable to common stockholders......................    $ (11,976)   $  (8,288)   $ (35,322)  $ (28,294)
                                                                          ================================================

    Weighted average shares used in computing basic and diluted
       net loss per common share......................................       32,153       21,419       31,867      11,152
    Basic and diluted net loss per common share.......................    $   (0.37)   $   (0.39)   $   (1.11)  $   (2.54)

    Pro forma:
    ---------
    Net loss..........................................................    $ (11,976)   $  (7,988)   $ (35,322)  $ (21,339)
                                                                          ================================================

    Shares used above.................................................       32,153       21,419       31,867      11,152

    Pro forma adjustment to reflect the weighted average effect of
       assumed conversion of redeemable convertible preferred stock...           --        6,245           --      12,053

                                                                          ------------------------------------------------
    Weighted average shares used in computing pro forma basic and
       diluted net loss per common share..............................       32,153       27,664       31,867      23,205
                                                                          ================================================

    Pro forma basic and diluted net loss per common share.............    $   (0.37)   $   (0.29)   $   (1.11)  $   (0.92)
</TABLE>

3. Comprehensive Loss

     For the three and nine months ended September 30, 2001, total comprehensive
loss was as follows (in thousands):

<TABLE>
<CAPTION>
                                                       Three months   Nine months
                                                           ended        ended
                                                       September 30, September 30,
                                                           2001          2001
                                                       --------------------------
          <S>                                          <C>            <C>
          Net loss                                       $ (11,976)    $ (35,322)
                                                         ---------     ---------

          Other comprehensive income (loss):
            Unrealized loss on investments                     (15)           (5)
            Foreign currency translation adjustment             20           (27)
                                                         ---------     ---------

          Total other comprehensive income (loss)                5           (32)
                                                         ---------     ---------

               Total comprehensive loss                  $ (11,971)    $ (35,354)
                                                         =========     =========
</TABLE>

     For the three and nine months ended September 30, 2000, the Company
did not have any items qualifying as other comprehensive income (loss);
accordingly, comprehensive loss equaled net loss.

                                       5
<PAGE>

4. Acquisitions

     On January 5, 2001, the Company acquired all of the outstanding capital
stock of Eloquent Technology, Inc. ("ETI"), a supplier of speech synthesis, or
text-to-speech technology. In connection with the acquisition, the Company paid
$5.25 million in cash and issued 299,873 shares of its common stock valued at
$13.5 million. Additionally, the Company incurred acquisition-related costs of
$132,000, which are included in the total purchase price for accounting
purposes. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the fair market values of the acquired assets and
assumed liabilities have been included in the Company's financial statements as
of the acquisition date, and the results of operations of ETI have been included
in the Company's financial statements thereafter. The purchase price of $18.8
million has been allocated to net tangible assets and liabilities acquired of
($196,000), completed technology of $5.6 million and goodwill of $13.4 million.
Goodwill represents the amount by which the total purchase price exceeded the
fair value of acquired net tangible and intangible assets on the acquisition
date. The intangible assets are being amortized on a straight-line basis through
December 2005, resulting in amortization expense during the three month period
ended September 30, 2001 of $669,000 for goodwill and $283,000 for completed
technology, and for the nine month period ended September 30, 2001 of $2,007,000
for goodwill and $849,000 for completed technology.

     The Company's pro forma statement of operations for periods prior to the
acquisition reflecting the Company and ETI on a combined basis would not differ
materially from the Company's reported results.

     In connection with this acquisition, the Company assumed the terms of a
development and royalty agreement between ETI and IBM. Under this agreement, IBM
funded development of certain of ETI's products, and the Company is obligated to
pay royalties of between 10% and 12% of revenue received from such funded
products. Total maximum royalties payable under the term of this agreement are
$5.0 million.


5. Deferred Stock Compensation

     In connection with the sale of common stock in private placements to
America Online ("AOL") and Net2Phone, concurrent with the Company's initial
public offering, the Company recorded deferred stock compensation within
stockholders' equity of $5.4 million. This amount represents the difference
between the price of the common stock of the Company sold in the public offering
of $20.00 per share and the $12.46 per share price paid by AOL and Net2Phone.
This amount is presented as a reduction of stockholders' equity and is being
amortized to the statement of operations over the three-year term of the
concurrently entered revenue-producing arrangements. In each quarterly reporting
period, such amortization is reflected as a reduction of revenues from AOL and
Net2Phone; to the extent that the amortization exceeds such revenues, the
residual is reflected in operating expenses as selling and marketing non-cash
compensation expense. The Company recognized revenue from AOL and Net2Phone for
the three and nine month periods ended September 30, 2001 and, accordingly, the
related amortization of $288,000 and $829,000, respectively, was recorded as a
non-cash stock compensation charge which reduced revenue. Amortization of
deferred stock compensation for AOL and Net2Phone for the three and nine month
periods ended September 30, 2001 of $165,000 and $532,000, respectively, which
was in excess of revenue recognized, was recorded as selling and marketing non-
cash stock compensation expense.

                                       6
<PAGE>

6. Intangible Assets

     The following table summarizes intangible assets (in thousands):

<TABLE>
<CAPTION>
                                                                      September 30,  December 31,
                                                                           2001          2000
                                                                      -------------  ------------
          <S>                                                         <C>            <C>
          Acquired intellectual property and collaborative rights....      $ 11,497      $ 11,497
          Purchased technology.......................................         5,653            --
          Goodwill...................................................        13,384            --
                                                                      -------------  ------------
                                                                             30,534        11,497
          Less - accumulated amortization ...........................         7,646         1,916
                                                                      -------------  ------------
                                                                           $ 22,888      $  9,581
                                                                      =============  ============
</TABLE>

     See note 4 "Acquisitions" for information on the intangible assets the
Company acquired relating to its purchase of ETI.

     On June 5, 2000, the Company entered into a development and license
agreement with AT&T Corp. to develop and sell products that use AT&T speech
technology. Pursuant to this agreement, in exchange for 1,045,158 shares of the
Company's common stock, the Company received development and distribution
licenses to AT&T's speech software, text-to-speech software and certain other
technology related to computer processing of the human voice. In addition, the
parties agreed to collaborate in certain marketing efforts and additional
technology development. In connection with this agreement, the Company recorded
$11,497,000 of acquired intellectual property and collaborative rights, equal to
the fair market value of the common stock issued, which is being amortized over
a three-year period. Amortization expense for the acquired intellectual property
and collaborative rights was $958,000 and $2,874,000 for the three and nine
month periods ended September 30, 2001, respectively, resulting in accumulated
amortization of $4,790,000 at September 30, 2001.

7. Segment Reporting

     The Company operates in a single segment and has no organizational
structure dictated by product lines, geography or customer type.

8. Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141
requires use of the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminated the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements. SFAS 142 is effective for the
Company on January 1, 2002 and requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangible assets into goodwill,
the reassessment of the useful lives of existing recognized intangible assets,
the reclassification of certain intangible assets out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test within six months from the date
of adoption. The Company is currently assessing and has not yet determined the
impact of SFAS 142 on its financial position and results of operations.

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). The objectives of SFAS 144 are to address significant
issues relating to the implementation of FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), and to develop a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS 144 supersedes SFAS
121; however, it retains the fundamental provisions of SFAS 121 for (1) the
recognition and measurement of the impairment of long-lived assets to be held
and used and (2) the measurement of long-

                                       7
<PAGE>

lived assets to be disposed of by sale. SFAS 144 supersedes the accounting and
reporting provisions of Accounting Principles Board No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), for segments of a business to be disposed of. However,
SFAS 144 retains APB 30's requirement that entities report discontinued
operations separately from continuing operations and extends that reporting
requirement to "a component of an entity" that either has been disposed of or is
classified as "held for sale." SFAS 144 also amends the guidance of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a temporarily controlled subsidiary. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, including interim periods, and, generally, its provisions are
to be applied prospectively. The Company is currently assessing and has not yet
determined the impact of SFAS 144 on its financial position or results of
operations.

                                       8
<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q. 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. Important
factors that could cause future results to differ materially from such
expectations include: the timing of sales of the Company's products and
services; market acceptance of the Company's speech-activated systems; the
Company's reliance on a limited number of large orders for much of its revenue;
uncertainties related to current economic, political and national security
conditions; the Company's ability to develop new products and services in the
face of rapidly evolving technology; the Company's ability to effectively
integrate operations of any acquired companies; the uncertainties related to the
Company's planned international operations; the Company's ability to manage
growth of its business; the Company's ability to protect its intellectual
property; the Company's reliance on resellers and original equipment
manufacturers for a significant portion of its sales; the Company's ability to
respond to competitive developments; and the Company's reliance on attracting,
retaining and motivating key technical and management personnel. These and other
important factors are detailed in the Company's filings with the Securities and
Exchange Commission. As a result of these and other important factors, there can
be no assurances that the Company will not experience material fluctuations in
future operating results on a quarterly or annual basis.

Overview

     We are a leading provider of software products and professional services
that enable enterprises, communications carriers and portals to offer automated,
speech-activated services over any telephone. With our speech recognition
solutions, consumers can direct their own calls, obtain information and conduct
transactions automatically, simply by speaking naturally over any telephone,
anytime. Our solutions are designed to help businesses build sustainable
customer relationships over the telephone, provide improved and cost-effective
customer service systems, increase the returns on their internet-related
investments and capitalize on a variety of new business opportunities.

     We currently offer two speech recognition solutions for over-the-telephone
applications, the SpeechWorks 6.5 platform and our OpenSpeech product line.
SpeechWorks 6.5 is a comprehensive set of software tools and core speech
recognition technologies that can be used to build state-of-the-art, speech-
activated services. With our SpeechWorks 6.5 platform, companies can quickly
design and deploy speech-activated applications, in multiple languages, that
enable their customers to buy travel tickets, trade stocks, update account
information, get health care referrals, update account records, send messages
and conduct a myriad of other transactions that extend web-based e-business to
any telephone.

     The OpenSpeech product line is a comprehensive set of software tools and
core speech recognition technologies that can be used to build state-of-the-art,
speech-activated services and is optimized for VoiceXML, the new industry
standard for speech. Benefits include: open, standards-based architecture for
ease of integration and investment protection, VoiceXML support and performance
and accuracy enhancements, particularly in wireless environments.

     SpeechSite, a packaged application based on the SpeechWorks 6.5 platform,
brings the web model of self-service to the telephone. SpeechSite answers and
directs telephone calls and delivers company information. Like a website,
SpeechSite can link to other services and deliver various types of information
to callers. However, SpeechSite uses a spoken interface rather than a visual
browser.

     In addition to these speech recognition solutions, we offer two text-to-
speech, or speech synthesis technologies, with our Speechify and ETI-Eloquence
products. Using Speechify or ETI-Eloquence, portals and carriers can allow their
callers to

                                       9
<PAGE>

hear dynamically-generated text, such as e-mails and news updates, read to them
by a computer in a natural-sounding voice.

     SpeechSecure is a speaker verification technology that provides enhanced
security and convenience to callers who access personal information and conduct
commerce over the telephone. The product recognizes and verifies an ID or
account number as a caller speaks, eliminating the need to remember a separate
password.

     We complement all of our products with a professional services organization
that offers a range of services including application development, user-
interface design consulting, project management, post-contract support and
training. We offer these services to shorten our customers time-to-market,
reduce project implementation risk and improve our clients' competitive
position. We believe that our ability to successfully deliver an integrated
solution to our clients that includes both software and professional services
provides us with an important competitive advantage.

     We also resell hardware products made by third parties, including products
such as voice-processing equipment that run our software, as well as facilities
management services that are provided by third-party call centers. We only
resell hardware or facilities management services when clients expressly request
that we do so and therefore, such revenue is considered other revenue.

Results of Operations

     The following table sets forth consolidated financial data for the periods
indicated as a percentage of our total revenues.

<TABLE>
<CAPTION>
                                                                             Three months ended        Nine months ended
                                                                                September 30,            September 30,
                                                                            ---------------------     -------------------
                                                                              2001         2000         2001       2000
                                                                            --------     --------     --------   --------
    <S>                                                                     <C>          <C>          <C>        <C>
    Revenues:
       Product licenses....................................................       62%          56%          58%        52%
       Professional services...............................................       33           36           36         39
       Other revenues......................................................        8            8            8          9
       Non-cash stock compensation.........................................       (3)          --           (2)        --
                                                                            --------     --------     --------   --------
       Total revenues......................................................      100%         100%         100%       100%
                                                                            ========     ========     ========   ========

    Cost of revenues:
       Cost of product licenses............................................        1%           1%           1%         1%
       Cost of professional services -- non-cash stock compensation........        2            5            1          3
                                     -- all other expenses.................       21           27           24         30
       Cost of other revenues..............................................        6            6            7          7
       Amortization of purchased technology................................        3           --            3         --
                                                                            --------     --------     --------   --------
       Total cost of revenues..............................................       33           39           36         41
                                                                            --------     --------     --------   --------
          Gross profit.....................................................       67           61           64         59
                                                                            --------     --------     --------   --------
    Operating expenses:
       Selling and marketing -- non-cash stock compensation................       12           11           13          7
                             -- all other expenses.........................       63           67           63         71
       Research and development -- non-cash stock compensation.............        1            2            1          2
                                -- all other expenses......................       32           25           33         30
       General and administrative -- non-cash stock compensation...........        1            1            1          1
                                  -- all other expenses....................       56           52           56         58
       Amortization of intangible assets...................................       14           11           15          5
                                                                            --------     --------     --------   --------
       Total operating expenses............................................      179          169          182        174
                                                                            --------     --------     --------   --------
    Loss from operations...................................................     (112)        (108)        (118)      (115)
    Interest and other income, net.........................................        5           15            9          7
                                                                            --------     --------     --------   --------
    Net loss before income taxes...........................................     (107)         (93)        (109)      (108)
    Provision for income taxes.............................................       --           --           --         --
                                                                            --------     --------     --------   --------
    Net loss...............................................................     (107)%        (93)%       (109)%     (108)%
                                                                            ========     ========     ========   ========
</TABLE>

                                       10
<PAGE>

Comparison of the Three and Nine Months Ended September 30, 2001 and 2000

     Total revenues. Our total revenues, including non-cash stock compensation,
increased by 30.0% to $11.2 million for the three month period ended September
30, 2001 from $8.6 million for the same period in 2000. For the nine month
period ended September 30, 2001 our total revenues, including non-cash stock
compensation, increased 64.4% to $32.5 million from $19.7 million for the same
period last year. International revenues decreased by 11.4% to $863,000 for the
three month period ended September 30, 2001 from $974,000 in the same period in
2000. For the nine month period ended September 30, 2001, our international
revenues increased 18.2% to $3.2 million from $2.7 million for the same period
last year. International revenues represented 7.7% and 11.3% of total revenues
for the three months ended September 30, 2001 and 2000, respectively, and
represented 9.9% and 13.8% of total revenues for the nine months ended September
30, 2001 and 2000, respectively.

     Revenues from product licenses. Revenues from the licensing of proprietary
software increased 42.3% to $6.9 million for the three month period ended
September 30, 2001 from $4.9 million in the same period in 2000. For the nine
month period ended September 30, 2001, revenues from the product licenses
increased 83.7% to $18.8 million from $10.2 million in the same period in 2000.
This growth in product license revenues resulted from growing market acceptance
of our speech activated and text-to-speech solutions by enterprises, carriers
and portals, our expanded sales and marketing efforts, and the improved
productivity of our distribution channels, primarily OEMs. We expect that
revenues from product licenses will continue to represent more than 50% of our
total revenues in the future.

     Revenues from professional services. Revenues from fees we receive for
professional services increased 20.9% to $3.7 million in the three months ended
September 30, 2001 from $3.1 million in the same period in 2000. For the nine
month period ended September 30, 2001, revenues from professional services
increased 54.7% to $11.8 million from $7.6 million in the same period in 2000.
The growth in revenues from professional services resulted primarily from the
increased demand for custom speech applications from existing and new clients
and increased maintenance revenues from an expanding installed license base.

     Other revenues. Revenues from fees we receive pursuant to the resale of
hardware or facilities management services was $848,000 for the three month
period ended September 30, 2001 compared to $674,000 for the same period in
2000. For the nine month period ended September 30, 2001, other revenues totaled
$2.7 million compared to $1.9 million for the same period in 2000. Other
revenues accounted for 7.6% of total revenues for the three month period ended
September 30, 2001 and 7.8% of total revenues for the same period in 2000. For
the nine month period ended September 30, 2001, other revenues accounted for
8.3% of total revenues and 9.6% of total revenues for the same period in 2000.
The increase in other revenues reflects increased hardware platforms purchased
directly from us as part of overall client projects during 2001 compared to the
same periods in 2000. The decrease in other revenues as a percentage of total
revenues is a result of the higher growth experienced in the sale of product
licenses. We anticipate that other revenues will continue to decline as a
percentage of total revenues in the future.

     Non-cash stock compensation offset to revenues. In connection with the sale
of common stock in private placements to AOL and Net2Phone, concurrent with our
initial public offering, we recorded deferred stock compensation, within
stockholders' equity, of $5.4 million. This amount represents the difference
between the price of our common stock sold in our public offering of $20.00 per
share and the $12.46 per share price paid by AOL and Net2Phone. This amount is
presented as a reduction of stockholders' equity and is being amortized to the
statement of operations over the three-year term of the concurrently entered
revenue-producing arrangements. In each quarterly reporting period, such
amortization is reflected as a reduction of revenues from AOL and Net2Phone; to
the extent that the amortization exceeds such revenues, the residual is
reflected in operating expenses as selling and marketing non-cash compensation
expense. We recognized revenue from AOL and Net2Phone for the three and nine
month periods ended September 30, 2001 and, accordingly, the related
amortization of $288,000 and $829,000, respectively, was recorded as a non-cash
stock compensation charge which reduced revenue. Amortization of deferred stock
compensation for AOL and Net2Phone for the three and nine month periods ended
September 30, 2001, of $165,000 and $532,000, respectively, which was in excess
of revenue recognized, was recorded as selling and marketing non-cash stock
compensation expense.

                                       11
<PAGE>

     Cost of product licenses revenues. Cost of product licenses revenues
increased by 229.5% to $145,000 for the three months ended September 30, 2001
from $44,000 for the same period in 2000. For the nine-month period ended
September 30, 2001, the cost of product licenses revenues increased 75.5% to
$272,000 from $155,000 for the same period in 2000. This cost represented 2.1%
and 1.0% of product licenses revenues for the three months ended September 30,
2001 and 2000, respectively, and 1.4% and 1.5% of product licenses revenues for
the nine months ended September 30, 2001 and 2000, respectively. The increase in
cost of product licenses revenues results from both the increased sale of
product licenses and the inclusion of royalties owed to IBM for the sale of
certain ETI-Eloquence products. The increase in the percentage of related
revenues reflects the higher royalty rate owed to IBM, compared to the royalty
rate owed to MIT. We expect the royalty rate owed to MIT to remain at its
current level until the next cumulative product sales milestone is achieved, at
which time the rate will decrease, while the overall royalty rate increases as
we sell additional ETI-Eloquence products.

     Cost of professional services revenues. Cost of professional services
revenues increased 1.7% to $2.4 million for the three months ended September 30,
2001 from $2.3 million for the same period in 2000. For the nine months ended
September 30, 2001, cost of professional services revenues increased 33.9% to
$7.9 million from $5.9 million for the same period in 2000. The increase was due
primarily to the hiring of additional project managers, developers, user
interface designers, speech scientists and technical support staff to expand our
professional services organization. The cost represented 63.7% and 75.8% of
professional services revenues for the three months ended September 30, 2001 and
2000, respectively. For the nine months ended September 30, 2001 and 2000, this
cost represented 67.0% and 77.4% of professional services revenues,
respectively. The lower cost of professional services as a percentage of related
revenues reflects more efficient delivery and a higher component of maintenance
revenues which have higher margins.

     Cost of other revenues. Cost of other revenues increased 24.9% to $697,000
for the three months ended September 30, 2001 from $558,000 for the same period
in 2000. For the nine months ended September 30, 2001, cost of other revenues
increased 60.9% to $2.2 million from $1.4 million for the same period in 2000.
The cost of other revenues as a percentage of other revenues decreased to 82.2%
for the three months ended September 30, 2001 from 82.8% for the same period in
2000. For the nine months ended September 30, 2001 cost of other revenues as a
percentage of other revenues increased to 81.5% from 72.4% for the same period
in 2000. This increase in cost of other revenues as a percentage of related
revenues for the nine months ended September 30, 2001 reflects a narrowing of
the available premium for reselling hardware and facilities management services.

     Amortization of purchased technology. In connection with our acquisition of
ETI on January 5, 2001, we acquired completed technology valued at $5.6 million,
which we are incorporating with our products and will continue to sell to third
parties. During the three and nine months ended September 30, 2001, amortization
of purchased technology of $283,000 and $849,000, respectively, was recorded as
a cost of revenues.

     Total operating expenses. Our total operating expenses increased 38.2% to
$20.1 million for the three months ended September 30, 2001 from $14.5 million
for the same period in 2000. For the nine months ended September 30, 2001,
operating expenses increased 71.6% to $59.1 million from $34.4 million for the
same period in 2000. These increases occurred in all categories of operating
expenses as we grew our organization. Total headcount grew to 406 as of
September 30, 2001, compared to headcount of 280 as of September 30, 2000. As a
percentage of total revenues, our operating expenses were 179.3% for the three
months ended September 30, 2001 and 168.6% for the same period in 2000. For the
nine month period ended September 30, 2001, operating expenses were 181.9% of
total revenues compared to 174.3% for the same period in 2000. Total operating
expenses include certain non-cash charges which are also included for the three
and nine months ended September 30, 2001 and 2000 as discussed below.

     Selling and marketing. Selling and marketing expenses consist primarily of
salaries, commissions and related travel costs for selling and marketing
personnel, along with spending on marketing activities, including
advertisements, tradeshows, public relations activities and educational
seminars. These expenses increased 21.7% to $7.0 million for the three months
ended September 30, 2001 from $5.8 million for the same period in 2000. For the
nine month period ended September 30, 2001, selling and marketing expenses
increased 44.5% to $20.3 million from $14.1 million for the same period in 2000.
Selling and marketing expenses, as a percentage of total revenues, were 62.9%
for the three months ended September 30, 2001 and 67.2% for the same period in
2000. For the nine month period ended September 30, 2001, these expenses as a
percentage of total revenues were 62.6% compared to 71.2% for the same period in
2000. The absolute dollar

                                       12
<PAGE>

increases in selling and marketing expenses resulted primarily from our
investment in sales and marketing personnel and marketing programs. The number
of sales personnel in North America increased from 38 to 55, and the number of
employees in marketing increased from 23 to 30 at September 30, 2000 and 2001,
respectively. In addition, the cost of engineers devoted to technical sales
support, recorded as a selling expense, has increased steadily as more sales
engineers have been added to support the growth in the sales organization.

     Research and development. Research and development expenses consist
primarily of labor costs and related travel for personnel involved in new
product development and enhancements and the cost of outside consultants used
for certain development projects. These expenses increased by 65.7% to $3.6
million for the three month period ended September 30, 2001 from $2.2 million
for the same period in 2000. For the nine months ended September 30, 2001,
research and development expenses increased 80.7% to $10.8 million from $6.0
million for the same period of 2000. Research and development expenses as a
percentage of total revenues increased to 31.9% for the three months ended
September 30, 2001 from 25.0% for the same period in 2000. For the nine month
period ended September 30, 2001, these expenses as a percentage of total
revenues increased to 33.3% from 30.3% for the same period in 2000. The overall
increase was driven by the increased hiring of software developers, quality
assurance and testing personnel and speech scientists to develop and enhance our
products and the increased usage of outside consultants on certain development
projects. The number of personnel involved in research and development increased
from 80 at September 30, 2000 to 124 at September 30, 2001.

     General and administrative. General and administrative expenses consist of
labor costs and related travel for personnel involved in supporting the
financial, legal, recruiting and system administration infrastructure, all
occupancy related and corporate overhead costs including costs associated with
being a public company. These expenses increased 38.8% to $6.2 million for the
three month period ended September 30, 2001 from $4.5 million for the same
period in 2000. For the nine month period ended September 30, 2001, general and
administrative expenses increased 58.7% to $18.2 million from $11.4 million for
the same period in 2000. General and administrative expenses as a percentage of
total revenues increased to 55.5% for the three months ended September 30, 2001
from 52.0% for the same period in 2000. For the nine month period ended
September 30, 2001, these expenses as a percentage of total revenues decreased
to 55.9% from 58.0% for the same period in 2000. The absolute dollar increase
was primarily due to additional infrastructure necessary to support our growing
operations, an increase in professional services fees incurred to support our
growth, increased recruiting costs, increased provisions for doubtful accounts
and the addition of a member to the executive management team.

     Non-cash stock compensation. Non-cash stock compensation charges are being
recorded as identified components of professional services costs, selling and
marketing expenses, research and development expenses and general and
administrative expenses. In connection with the grant of certain options to
employees through June 30, 2000, we recorded deferred stock compensation within
stockholders' equity of $10.7 million, representing the difference between the
estimated fair market value of the common stock for accounting purposes and the
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. We recorded amortization of deferred stock
compensation of $677,000 for the three months ended September 30, 2001 and
$678,000 for the same period for 2000. For the nine month period ended September
30, 2001, amortization of non-cash stock compensation charges were $2.0 million
compared to $1.7 million for the same period in 2000. We expect the amortization
of deferred stock compensation relating to employee stock options to be
approximately $2.7 million per year through 2002 and decreasing thereafter
through 2004. Selling and marketing expenses - non-cash stock compensation
charges in the three and nine month periods ended September 30, 2001 also
include non-cash stock compensation of $935,000 and $2.8 million, respectively,
related to warrants issued to AOL, which is being recognized as selling and
marketing expense over the related three-year marketing agreement. Additionally,
sales and marketing expenses--non-cash stock compensation charges for the three
and nine month periods ended September 30, 2001 include $165,000 and $532,000,
respectively, of expense associated with common stock issued to AOL and
Net2Phone at below fair market value on the date of grant as further described
above in non-cash stock compensation offset to revenues.

     Amortization of intangible assets. On June 5, 2000, we entered into a
development and license agreement with AT&T Corp. to develop and sell products
that use AT&T speech technology. Pursuant to this agreement, in exchange for
1,045,158 shares of our common stock, we received development and distribution
licenses to AT&T's speech software, text-to-speech software and certain other
technology related to computer processing of the human voice. In addition, the
parties

                                       13
<PAGE>

agreed to collaborate in certain marketing efforts and additional technology
development. In connection with this agreement, we recorded $11.5 million for
the acquired intellectual property and collaborative rights, equal to the fair
market value of the common stock issued, which is being amortized over a three-
year period. Amortization expense for the acquired intellectual property and
collaborative rights for the three and nine months ended September 30, 2001 was
$958,000 and $2.9 million, respectively.

     In connection with the acquisition of ETI, we recorded $13.4 million of
goodwill. For the three and nine months ended, September 30, 2001, amortization
of intangible assets also includes ETI related goodwill amortization expense of
$669,000 and $2.0 million, respectively.

     Interest and other income, net. Interest income was $784,000 for the three
months ended September 30, 2001 and $1.3 million for the same period in 2000.
Interest expense was $10,000 for the three months ended September 30, 2001 and
$28,000 for the same period in 2000. For the nine month period ended September
30, 2001, interest income was $3.3 million compared to $1.7 million for the same
period in 2000. For the nine month period ended September 30, 2001, interest
expense was $38,000 compared to $104,000 for the same period in 2000. The
decrease in interest income for the three months ended September 30, 2001
compared to the year earlier period was due to lower cash balances available for
investing along with lower average interest rates earned on these investments.
The increase in interest income for the nine months ended September 30, 2001
compared to the same period in 2000 was due to higher cash balances available
for investing as a result of the initial public offering proceeds being invested
for the full nine months ended September 30, 2001. The decrease in interest
expense for the three and nine month periods ended September 30, 2001 is
primarily due to decreases in debt payable under our line of credit and capital
equipment leases. Other expenses include other non-operating costs including
foreign currency transaction gains and losses.

     Provision for income taxes. The provision for income taxes of $42,000 and
$23,000 for the three and nine month periods ending September 30, 2001,
respectively, which represents income taxes in foreign jurisdictions.

Liquidity and Capital Resources

     From inception through July 31, 2000, we funded our operations primarily
through private placements of convertible preferred stock totaling $60.0 million
and, to a lesser extent, through bank borrowings and capital equipment lease
financing. In August 2000, we raised approximately $109.0 million through the
completion of our initial public offering of common stock and the concurrent
private placements of common stock with AOL and Net2Phone. As of September 30,
2001, we had cash and cash equivalents of $43.8 million, marketable securities
of $38.7 million and $515,000 available under our revolving line of credit,
which expires on November 30, 2001.  Our operating activities resulted in net
cash  outflows of $23.9 million for the nine months ended September 30, 2001
and $18.5 million for the same period in 2000. The operating cash outflows for
these periods resulted primarily from our significant investment in research
and development, sales and marketing and infrastructure.

     During the nine month period ended September 30, 2001, our investing
activities included the payment of $5.4 million for the acquisition of ETI,
including acquisition-related costs incurred. Other investing activities for the
nine month period ended September 30, 2001 included the purchase of marketable
securities of $69.6 million and the redemption of maturing marketable securities
of $45.3 million. Capital expenditures for property and equipment were $2.7
million for the nine month period ended September 30, 2001 and $2.8 million for
the same period in 2000. Our capital expenditures for the nine month period
ended September 30, 2001 included building our infrastructure and expanding
operations into new locations in the United States, Canada, and the United
Kingdom. These capital expenditures consisted primarily of computer hardware,
software and furniture and fixtures for our growing employee base. Total
investing activities used cash of $8.1 million, excluding marketable securities
investments which used $24.4 million, for the nine month period ended September
30, 2001 and used cash of $2.8 million for the same period in 2000.

     We had an equipment line of credit which we converted into a term loan in
the amount of $1.5 million. The term loan bears interest at an annual rate of
prime plus 0.75% (6.75% at September 30, 2001), and principal and interest under
the term loan are payable in 36 monthly installments through September 2002. As
of September 30, 2001, $417,000 was outstanding under this facility.

                                       14
<PAGE>

     Our financing activities generated cash of $1.1 million and $128.8 million
for the nine months ended September 30, 2001 and 2000, respectively. The
issuance of common stock through stock option and warrant exercises generated
net proceeds of $1.4 million and $654,000, for the nine months ended September
30, 2001 and 2000, respectively. Repayment of bank borrowings and capital leases
was $375,000 and $590,000 during the nine months ended September 30, 2001 and
2000, respectively. During the nine months ended September 30, 2000, the
issuance of common stock through our initial public offering and concurrent
private placements, net of issuance costs generated cash proceeds of $108.8
million.  The issuance of preferred stock generated $19.9 million, net of
issuance costs.

     On October 21, 2001 we signed a definitive Asset Purchase Agreement (the
"Agreement") with Lernout & Hauspie Speech Products N.V. ("L&H NV"), L&H
Holdings USA, Inc. ("L&H USA") and certain other subsidiaries of L&H USA
(collectively, "L&H") to acquire certain business and technology assets (the
"SLT Assets") of L&H's Speech and Language Technologies business (the
"Transaction").  On October 30, 2001, the U.S. Bankruptcy Court for the District
of Delaware issued an Order "Approving Bidding Procedures, Break-Up Fee, Expense
Reimbursement Exclusivity Provision, and Form and Manner of Notice Thereof with
Respect to the Proposed Sale of Assets Relating to the L&H Group's Speech and
Language Technologies Business" under which we were approved as the "stalking
horse" for the subject assets.  The consummation of the Transaction is subject
to applicable bankruptcy procedures (including competing bids, if any, that will
potentially result in an auction of the SLT Assets to be held on November 26,
2001) and certain closing conditions.  In the event the Transaction is
consummated on the terms set forth in the Agreement, the consideration to be
paid for the SLT Assets will be $10M cash and 339,720 shares of our common
stock.

     We believe that our existing cash, cash equivalents and marketable
securities will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. In the event we
require additional financing, we believe that we would be able to obtain such
funding, however, there can be no assurances that we would be successful in
doing so or that we could do so on terms favorable to us.

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141
requires use of the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminated the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements. SFAS 142 is effective for the
Company on January 1, 2002 and requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangible assets into goodwill,
the reassessment of the useful lives of existing recognized intangible assets,
the reclassification of certain intangible assets out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test within six months from the date
of adoption. The Company is currently assessing and has not yet determined the
impact of SFAS 142 on its financial position and results of operations.

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). The objectives of SFAS 144 are to address significant
issues relating to the implementation of FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), and to develop a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS 144 supersedes SFAS
121; however, it retains the fundamental provisions of SFAS 121 for (1) the
recognition and measurement of the impairment of long-lived assets to be held
and used and (2) the measurement of long-lived assets to be disposed of by sale.
SFAS 144 supersedes the accounting and reporting provisions of Accounting
Principles Board No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"), for segments of a
business to be disposed of. However, SFAS 144 retains APB 30's requirement that
entities report discontinued operations separately from continuing operations
and extends that reporting requirement to "a component of an entity" that either
has been disposed of or is classified as "held for sale." SFAS 144 also amends
the guidance of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a temporarily
controlled subsidiary. SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, including interim periods, and,
generally, its provisions are to be applied prospectively. The Company is
currently assessing and has not yet determined the impact of SFAS 144 on its
financial position or results of operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     A portion of our business is conducted outside the United States through
our foreign subsidiaries and branches. We have foreign currency exposure related
to our operations in international markets where we transact business in foreign
currencies and accordingly, are subject to exposure from adverse movements in
foreign currency exchange rates. The functional currency of our foreign
subsidiaries is the local currency. Substantially all of our revenues are
invoiced and collected in U.S. dollars. Assets and liabilities of foreign
subsidiaries which are denominated in foreign currencies are remeasured into
U.S. dollars at rates of exchange in effect at the end of the period. Revenues
and expense amounts

                                       15
<PAGE>

are remeasured using the average exchange rates for the period. Net unrealized
gains and losses resulting from foreign currency remeasurement are included in
other comprehensive income (loss), which is a separate component of
stockholders' equity. Net realized gains and losses resulting from foreign
currency transactions are included in the consolidated statement of operations
as other income or expense.

PART II. OTHER INFORMATION

Items 1, 3, 4 AND 5 NOT APPLICABLE.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

     On July 31, 2000, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File no. 333-35164) effective.
There has been no material change with respect to the Company's use of proceeds
from its initial public offering from the information discussed in its Quarterly
Report on Form 10-Q for the period ended June 30, 2001.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 99     Cautionary Statements Regarding Forward-Looking Information.

(b) Reports on Form 8-K

     None

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                                  SIGNATURES

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

                                             SPEECHWORKS INTERNATIONAL, INC.


Date: November 14, 2001                           By: /s/ Richard J. Westelman
                                             Richard J. Westelman
                                             Chief Financial Officer
                                             (Chief Accounting Officer)

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                        SPEECHWORKS INTERNATIONAL, INC.
                                 EXHIBIT INDEX

Exhibit
-------

Exhibit 99     Cautionary Statements Regarding Forward-Looking Information.


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