<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
     (Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  For the fiscal year ended: December 31, 1999

                                       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: 0-27296

                     Lernout & Hauspie Speech Products N. V.
             (Exact name of registrant as specified in its charter)

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

         The Kingdom of Belgium                          Not Applicable
     (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                  Identification Number)

            52 Third Avenue
       Burlington, Massachusetts                             01803
    (Address of principal executive                        (Zip Code)
     offices in the United States)

       Registrant's telephone number, including area code: (781)203-5000

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                      Common Stock, no par value per share
                               (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of 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. [X]Yes [_]No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]

The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $4,360,592,980 at June 8, 2000. On June 8, 2000
there were 141,956,388 shares of Common Stock of the registrant issued and
outstanding.
<PAGE>

                               EXPLANATORY NOTE


     Until our acquisition of Dictaphone Corporation on May 5, 2000, we were a
foreign private issuer required to file annual reports on Form 20-F and interim
reports on Form 6-K with respect to our financial results and certain other
matters. On June 30, 2000 we filed an annual report on Form 20-F for our
fiscal year ended December 31, 1999. This annual report Form 10-K is being filed
voluntarily by us to satisfy the filing requirements that would have been
applicable to us had we not been a foreign private issuer as of December 31,
1999.

     Lernout & Hauspie Speech Products N.V. is a Belgian corporation. We prepare
our consolidated financial statements in United States dollars and in accordance
with accounting principles generally accepted in the United States ("U.S.
GAAP"). In this Report, references to "U.S. dollars" or "$" are to United States
currency, and references to "Belgian franc" or "BEF" are to Belgian currency.

     U.S. dollar amounts presented in this Report that are derived from our
consolidated financial statements are presented at the exchange rates set forth
therein. U.S. dollar amounts of the purchase price for shares of our capital
stock and the exercise price of warrants to purchase shares of our capital stock
are calculated at the exchange rate at the time of issuance of the shares or
warrants. Except as otherwise indicated, any other U.S. dollar amounts are
calculated at the exchange rate of BEF 40 per U.S. dollar.

     On April 20, 2000, we announced a two-for-one split of our common stock
which was distributed on May 12, 2000 to stockholders of record on April 28,
2000. All data related to shares and per share amounts for all periods presented
have been adjusted to reflect the stock split.

     In January 1999, we reorganized our business into three customer-focused
divisions: Speech and Language Technologies and Solutions; Speech and Language
Applications; and Speech and Language Consulting and Services. Prior to January
1999, we operated our business in four divisions: core speech technologies;
dictation technologies; translation services; and language technologies. Our
Consolidated Financial Statements for the years ended December 31, 1997 and 1998
have been restated to reflect the three division format.

     The trademarks used in this Report include our name and logo, Globalink(TM)
and its logo, Power Translator Pro(R), International CorrectSpell(TM),
International ProofReader(TM), CorrectEnglish(TM), L&H Clinical Reporter(TM),
Crime Talk Reporter, Native English(TM), Powerscribe(TM), Talking Max(TM),
RealSpeak(TM), iTranslator(TM), L&H Voice Xpress and Natural Language
Technology(TM). We share the registered trademark TruVoice(R) with AT&T. This
Report also contains the trademarks of other companies.

     We were incorporated in Belgium in December 1987. Our principal executive
offices are located in the Flanders Region of Belgium at Flanders Language
Valley 50, 8900 Ieper, Belgium, and our telephone number is (011)
32-57-22-88-88. We operate in the United States through a number of subsidiaries
with headquarters at Lernout & Hauspie Speech Products USA, Inc., 52 Third
Avenue, Burlington, Massachusetts 01803, telephone number (781) 203-5000. We
also have subsidiaries throughout the world. As used in this Report, the terms
"we", "Lernout & Hauspie" and the "Company" refer to Lernout & Hauspie Speech
Products N.V. and its subsidiaries, unless otherwise indicated or the context
otherwise requires.

                                       2
<PAGE>

                 WARNINGS REGARDING FORWARD-LOOKING STATEMENTS

     Some of the statements contained in this Report and in the documents
incorporated by reference are forward-looking made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. In essence,
forward-looking statements are predictions of future events. Although we would
not make forward-looking statements unless we believe we have a reasonable basis
for doing so, we cannot guarantee their accuracy and actual results may differ
materially from those we anticipated due to a number of uncertainties, many of
which we are not aware. We urge you to consider the risks and uncertainties
discussed under "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors" and in the other documents
filed with the Securities and Exchange Commission that we have referred you to
in evaluating our forward-looking statements.

     You should understand also that we have no plans to update our forward-
looking statements. Our forward-looking statements are accurate only as of the
date of this Report, or in the case of forward-looking statements in documents
incorporated by reference, as of the date of those documents. We identify
forward-looking statements with the words "plans," "expects," "anticipates,"
"estimates," "will," "should" and similar expressions. Examples of our forward-
looking statements may include statements related to:

     .  our plans, objectives, expectations and intentions;

     .  the timing of, availability, cost of development and functionality of
        products and solutions under development or recently introduced; and

     .  the anticipated growth rate of the market for speech and language
        technologies in general and our products and solutions in particular.

                                       3
<PAGE>

                               TABLE OF CONTENTS

                                    PART I

<TABLE>
<S>                                                                                                              <C>
Item 1.    BUSINESS..........................................................................................     5
Item 2.    PROPERTIES........................................................................................    31
Item 3.    LEGAL PROCEEDINGS.................................................................................    32
Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................    32
Item 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........................    33
Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA..............................................................    39
Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS............    43
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES..........................................................    69
Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................    70
Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............    70
Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT....................................................    71
Item 11.   EXECUTIVE COMPENSATION............................................................................    76
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................    81
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................    84
Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................    87
EXHIBIT INDEX................................................................................................    88
SIGNATURES...................................................................................................    92
</TABLE>

                                       4
<PAGE>

                                    PART I

                               Item 1. BUSINESS


Overview

     We are a leading international developer, licensor and provider of advanced
speech and language technologies, products, solutions and services. Our core
technologies include automatic speech recognition, text-to-speech, digital
speech compression, text-to-text translation and linguistic components. In 1999,
we operated our business in three customer-focused divisions:

     .    Speech and Language Technologies and Solutions;

     .    Speech and Language Applications; and

     .    Speech and Language Consulting and Services.

     Our three divisions combine products and solutions with similar sales and
marketing models.

     Speech and Language Technologies and Solutions Division. Our Technologies
and Solutions Division offers technologies that allow our customers to develop
products with a natural language interface for their end-users. Our technologies
enable products to recognize and respond to naturally spoken speech, create
speech from text and data, respond to commands with speech, and efficiently
store, transmit and replay speech. Our technologies and solutions are available
in numerous languages and for multiple computer chips and other processors,
including processors sold by Intel, Analog Devices, Hitachi, NEC, Texas
Instruments, Lucent Technologies, National Semiconductor and Thomson CST. We
license our technologies and software development tools to applications
developers, strategic partners, original equipment manufacturers, component
manufacturers and software vendors. Some of our strategic partners are
developing additional language versions for our core speech technology products.
We also sell customer specific solutions to corporate customers. Our customers
use our technologies in a broad range of applications in the following principal
markets: computers and multimedia; telecommunications; enterprise solutions;
automotive electronics; and consumer and industrial electronics.

     Speech and Language Applications Division. Our Applications Division offers
a wide range of end-user applications, including dictation software that enables
users to dictate text and generate documents by speaking naturally without
pausing between words, PC -based translation software and educational software.
Our products also permit computer users to control many computer functions with
spoken commands rather than using a mouse or keyboard. We also license our
software kits and development tools for the development of additional
applications based on our technologies and products as well as additional
language versions for our applications products. We currently offer speech and
language applications products for the general personal computer market and for
a variety of healthcare, law enforcement and legal applications.

     Speech and Language Consulting and Services Division. Our Consulting and
Services Division, recently renamed the Globalization and Internet Translation
Group, offers human and machine translation services, as well as a wide range of
speech and language-related consulting, localization, and technical and
electronic publishing services. Our translation services range from traditional
translation of general, technical and software materials to the adaptation of
these materials for different markets, languages and cultures. We have access to
extensive language databases and the services of hundreds of correspondent
linguists and translators throughout the world. Our machine translation software
translates text from one language to another and is designed to enhance the
efficiency of translation services provided by our linguists. This software also
enables us to provide Internet/intranet translation services. We recently
introduced iTranslator, an integrated translation solution that combines both
machine and human translation offered over the Internet.

Recent Developments: Creation of Separate Entities

                                       5
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     We plan to create separate entities for several of our key business areas
including the Globalization and Internet Translation Group, Healthcare
Applications and Solutions and Automotive Solutions. As a longer term plan, we
are reviewing the possibility of forming a separate entity for Enterprise and
Telephony Solutions. These entities are intended to focus our technology and
resources to the targeted market, to further expand on our position as a
technology leader in those markets, as well as in speech and language technology
overall. We also believe that the creation of these entities will help create
more transparent and easily understood business units.

     Globalization and Internet Translation. Our Globalization and Internet
Translation entity would continue the business conducted by our Globalization
and Internet Translation Division, which offers human and machine translation
services, as well as a wide range of speech and language-related consulting,
localization, and technical and electronic publishing services. In December
1999, we signed an agreement with Microsoft to make our Internet translation
services available through Microsoft's popular Office Update web site,
officeupdate.com. We began offering this service at the end of the first quarter
of 2000. The implementation of this service provides users of this web site with
quick and easy access to both our machine and human translation and
globalization services. We also recently announced our intention to provide our
own on-line translation services. We have entered into agreements with other
Internet service providers to offer our translation services through their
sites. We also plan to offer this service through our own web site and with
other Internet service providers. Services offered by our Globalization and
Internet Translation Group include:

 .    Limited free Internet machine, or gist, translations for documents up to
     one page in length;
 .    Internet machine translation for large documents;
 .    Internet machine translation with terminology management, which improves
     the quality of the translation, for large documents;
 .    Internet translation with tailored memory modules management for large
     customers;
 .    Complete Internet translation, including machine translation and human
     post-editing, for highly accurate translation; and
 .    Web site globalization, which adapts a web site's content and its
     messages to the local culture, language and market.

     We expect to make additional investments, including the acquisition of
complementary businesses, in an effort to capture a leadership position for
translation and globalization services over the Internet. We cannot assure that
we will be able to introduce any of our proposed Internet translation or
globalization services successfully.

     Healthcare Applications & Solutions. During the past year, we have been
developing and acquiring resources with a goal of creating a technology-enhanced
enterprise dictation and transcription solution for the healthcare industry.
During the third quarter of 1999, we acquired the Articulate Systems division of
Fonix Corporation. This acquisition provided us with additional resources to
create enterprise dictation and transcription solutions for the healthcare
market. In furtherance of this strategy, in December 1999 and January 2000, we
acquired OmniMed Transcription, Inc. and Linguistic Technologies, Inc., and the
southern-Florida based medical transcription business of Rodeer Systems, Inc.
OmniMed is a medical transcription company based in Madison, Wisconsin.
Linguistic Technologies, located in Edina, Minnesota, is a speech recognition
technology company focused on the medical transcription market. Linguistic
Technologies has developed advanced software designed to help make the
traditional medical transcription process more efficient. The southern Florida
medical transcription offices of Rodeer add a southeast component to our planned
enterprise dictation and transcription solution. In addition to these
acquisitions, in May 2000, we acquired Dictaphone Corporation, a leader in the
medical dictation and patient record market. We believe that our acquisition of
Dictaphone will provide us with a wide range of assets to further our healthcare
business strategies. Dictaphone's healthcare market assets include approximately
5,000 medical industry customers, approximately 100 sales representatives, a
national network of technical service representatives and a broad range of
solutions for medical industry dictation and data management. We have also
recently entered into an agreement to acquire several additional territories of
Rodeer's medical transcription business.

     We expect that the resources from these acquisitions, combined with our
existing speech products and technologies, will create a solution to improve the
overall medical dictation and transcription process and position us to take a
leadership position in the healthcare market. We plan to integrate these
businesses with our core speech and language technologies that include our
PowerScribe(R) integrated dictation solution and our natural language
technology. It is our goal to be in a position to offer an advanced,
technology-enhanced solution for the medical

                                       6
<PAGE>

market that will help healthcare organizations reduce turn-around time for
medical reports, improve clinical data capture, enhance overall quality of
patient care and reduce transcription costs, while improving transcriptionist
productivity.

     Automotive Solutions. In April 2000, together with Visteon Corporation, we
announced our intention to create a joint venture dedicated to advancing and
accelerating the speech interface in automotive applications. Under the proposed
arrangement, we would have an initial 60 percent interest in this joint venture
and Visteon would have a 40 percent interest. The purpose of the joint venture
company will be to provide a dedicated, single source of high-end, integrated
speech products and technology dedicated to the automotive industry. We expect
to launch the new joint venture company with approximately 50 employees in the
second half of 2000. However, commencement of the joint venture is subject to a
number of conditions, including the negotiation and execution of definitive
joint venture documents.

     Enterprise and Telephony Solutions. We have significantly enhanced our
telecommunications offerings and services and augmented our telephony business
group resources to meet the increasing demand for speech technology in the
telecommunications market. We recently opened one of the industry's most
comprehensive customer support and service centers designed to support
application development for telephony and the enterprise. We have a wide range
of industry leading telephony solutions with our family of text-to-speech
technologies -including our recently announced L&H RealSpeak natural sounding
text-to-speech - as well as large and small vocabulary speech recognizer engines
and dialogue systems that combine both speech recognizer and text-to-speech
technologies. These solutions are available for a variety of platforms,
languages and environments. They are targeted toward telephony developers and
vendors to voice-enable next generation call centers, interactive voice response
applications and other telephone-based services for the banking, financial
services and travel industries, among others. We believe that our wide range of
Enterprise and Telephony solutions and technologies puts us in a position to
become a leader in the voice enabled Enterprise and Telephony market. However,
we have only recently introduced many of our Enterprise and Telephony solutions,
and the market for these products is in the early stage of development.

Recent Acquisitions

     Following our formation in 1987, we initially focused on the development of
our core speech technologies. Beginning in the third quarter of 1996, we began
expanding our business through acquisitions and internal development. We have
set forth below a summary of our more significant acquisitions and acquisitions
under agreement, since January 1, 1999.

          Dictaphone Corporation. On May 5, 2000, we acquired all of the
outstanding capital stock of Dictaphone Corporation through a merger of
Dictaphone into one of our wholly-owned subsidiaries. Dictaphone Corporation,
headquartered in Stratford, Connecticut, is a leader in selected vertical
markets in the development, manufacture, marketing, service and support of
integrated voice and data management systems and software, including dictation,
voice processing, voice response, unified messaging, records management, call
center monitoring systems and communications recording. Dictaphone has two
operating segments, System Products and Services, and Contract Manufacturing.
The System Products and Services segment consists of the sale and service of
system-related products to dictation and voice management and communications
recording system customers in selected vertical markets. The Contract
Manufacturing segment consists of the manufacturing operations which provides
outside electronics manufacturing services to original equipment manufacturers
in the telecommunication, data management, computer and electronics industries.

          In connection with the merger we issued a total of approximately 9.4
million shares of our common stock in exchange for all of the outstanding shares
of Dictaphone common stock. We were also required to assume or refinance
approximately $430 million of Dictaphone debt and other obligations as more
fully described in Item 7 -"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." We will
use the purchase method to account for this acquisition.

          The shares issued in the merger initially have not been registered
under the U.S. Securities Act of 1933, and are subject to restrictions on
transfer as set forth in that Act and the rules and regulations of the U.S.
Securities and Exchange Commission. We have granted the stockholders of
Dictaphone registration rights for the shares of our

                                       7
<PAGE>

common stock which they received in the merger. Stonington Capital Appreciation
Fund 1994, L.P., which owned approximately 96% of the issued and outstanding
Dictaphone common stock, has agreed to hold approximately 3.6 million shares of
our common stock which it received in the merger for a period of two years.

          During the two year period following the merger, Stonington has
assigned certain voting rights to all the shares it acquired in the merger for
so long as it holds the shares to an entity controlled by Messrs. Jo Lernout and
Pol Hauspie by agreeing to hold the shares through this entity. In addition,
subject to conditions, we have agreed to nominate a designee of Stonington for
election as one of our directors, and entities controlled by Messrs. Lernout and
Hauspie have agreed to vote their shares to elect that nominee.

          Dragon Systems, Inc. On June 7, 2000, we acquired Dragon Systems, Inc.
through its merger with and into one of our wholly-owned subsidiaries. Dragon
Systems, headquartered in Newton, Massachusetts, is a leading supplier of speech
and language technology. Dragon Systems' product offerings include continuous
and discrete dictation products for consumer, business and professional markets,
command and control programs, vertical market add-on vocabularies for
specialized applications, such as legal and medical, customized telephony
solutions, and developers' tools.

          In connection with the merger, we issued approximately 10.01 million
shares of our common stock to Dragon stockholders in exchange for all of the
outstanding shares of Dragon common stock. In addition, we converted all
outstanding Dragon stock options into options to acquire approximately 1.65
million shares of our common stock at a weighted average exercise price of
$20.15 per share. We intend to use the purchase method to account for this
acquisition.

          The shares issued in the merger initially were not registered under
the Securities Act, and are subject to restrictions on transfer as set forth in
that Act and the rules and regulations of the U.S. Securities and Exchange
Commission. We have granted the stockholders of Dragon Systems registration
rights for the shares of our common stock which they received in the merger. The
principal stockholders of Dragon Systems have agreed not to sell approximately
4.69 million of the shares which they received in the merger for a period of
four months, and an additional 4.69 million shares for a period of one year.
These stockholders have also assigned certain voting rights to all the shares
subject to the restrictions on transfer to entities controlled by Messrs. Jo
Lernout and Pol Hauspie by agreeing to hold the shares through these entities.

          Other Significant Acquisitions.

 .    In June 1999, we acquired Brussels Translation Group N.V. for approximately
     $42 million in cash and the assumption of approximately $17 million of
     debt. We had developed Internet translation solutions for Brussels
     Translation Group for specified languages for use over the Internet and
     intranet environments.

 .    In September 1999, we acquired substantially all of the assets of the
     Articulate Systems Division of Fonix Corporation for an aggregate of
     approximately $24.0 million in cash, with an additional $4.0 million earn-
     out over two years based on performance. The assets acquired represent
     Fonix's continuous dictation and reporting business, including its
     PowerScribe(R) technology, for the medical market.

 .    In September 1999, we acquired Bumil Information & Communication, Co.,
     Ltd., a developer of interactive voice, call center and other
     telecommunications market applications, based in Seoul, South Korea. We
     purchased Bumil for approximately $25.0 million plus an additional $25.0
     million that was paid in the first quarter of the current year based upon
     performance.

 .    In November 1999, we acquired the southern-Florida based medical
     transcription business of Rodeer Systems, Inc. for approximately $6.4
     million in cash.

 .    In January 2000 we acquired OmniMed Transcription, Inc. and Linguistic
     Technologies, Inc. OmniMed is a medical transcription company based in
     Madison, Wisconsin. Linguistic Technologies, located in Edina, Minnesota,
     is a speech recognition technology company focused on the medical
     transcription market. The purchase price for the two acquisitions totaled
     approximately $38.6 million. Up to an additional $4.8 million is payable
     should the acquired businesses meet agreed upon performance criteria.

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 .    In February 2000, we acquired Elan Informatique S.A., a France-based text-
     to-speech technology provider, for approximately $5.1 million in cash. In
     addition, we will be obligated to pay up to an additional $8 million to the
     former stockholders of Elan if certain financial milestones are met by Elan
     during the years 2000 and 2001.

 .    In April 2000, we acquired Interactive Systems Inc., a Pittsburgh-based
     speech and language technology developer, for approximately $8.9 million in
     cash with a $4 million earn-out over 2 years. The assets from this
     acquisition will provide us with additional expertise with which to further
     natural language understanding, a technology that figures prominently in
     data mining, data management, audio mining, clinical language understanding
     and other processes needed for comprehensive healthcare and
     telecommunications solutions.

 .    In May 2000, we entered into an agreement to acquire additional assets of
     Rodeer Systems, Inc., consisting of Rodeer's business operations in the
     states of Arizona, Georgia, Minnesota, Oklahoma, Texas and some operations
     in California for an aggregate purchase price of approximately $25 million
     in cash.

     We intend to continue to supplement our development activities through the
acquisition or licensing of complementary businesses and technologies.

                                       9
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The Language Factory

     We have developed an "assembly line" language development methodology that
we refer to as the Language Factory. The Language Factory serves as the
foundation for many of our speech and language technologies. The Language
Factory encompasses a set of processes, software tools, databases and a
sophisticated expert system, which includes linguistic, rule-based artificial
intelligence software, designed to bring speech and language technologies and
products to market in a modular and efficient fashion. Headquartered in the
Flanders region of Belgium, we have taken advantage of the high concentration of
multilingual scientists and engineers in that region, and have combined these
resources with our expert system, signal processing technology and extensive
multilingual databases in creating our proprietary Language Factory.

     Key elements of the Language Factory include:

Linguistic Expertise, Tools and      We have developed and acquired proprietary
Linguistic Data                      development tools which, when combined with
                                     the linguistic expertise of our scientists,
                                     engineers and linguists, enable us to
                                     develop products for virtually any language
                                     and a wide range of speech applications for
                                     use on multiple hardware or software
                                     platforms. We use our proprietary DEPES
                                     (Development Environment for Pronunciation
                                     Expert Systems) software to shorten the
                                     development period for grammar rules for
                                     virtually any language. We have developed
                                     and acquired linguistic data such as
                                     lexicons and speech databases for a large
                                     range of languages. This data enables us to
                                     create our products in many languages.

Phoneme-Based Technology             We use phonemes, the sounds that make up
                                     words, and other sub-word units, rather
                                     than words as the basic recognition units
                                     for our advanced speech recognition and
                                     dictation systems. When combined with the
                                     linguistic rules derived from our text-to-
                                     speech capabilities, our use of phonemes
                                     significantly enhances our ability to
                                     develop products in new languages and with
                                     flexible vocabularies.

Comprehensive Technologies and       Our technologies cover the major areas of
Multilingual Capability              speech and language technology, including
                                     automatic speech recognition, text-to-
                                     speech, digitized speech and music
                                     compression, continuous dictation, speech
                                     enhancement, intelligent content management
                                     and machine translation. By combining these
                                     technologies with our multilingual
                                     capabilities, we believe that we offer
                                     substantial efficiencies and product
                                     differentiation to our customers and can
                                     substantially reduce the costs and delays
                                     that our customers could encounter from
                                     having to incorporate technologies and
                                     language capabilities from multiple
                                     vendors.

Multiple Platform Capability         We have designed our core speech
                                     technologies using a modular architecture
                                     developed in the Language Factory to
                                     provide our customers flexibility in
                                     selecting features and functionality. The
                                     Language Factory allows us to develop our
                                     products and port them to a wide range of
                                     hardware platforms and/or processors from
                                     multiple vendors, including digital signal
                                     processors from Motorola, Texas
                                     Instruments, Lucent Technologies, Analog
                                     Devices, Lucky Goldstar, Samsung, Winbond
                                     and Macronix, and general purpose
                                     microprocessors from Intel, Motorola,
                                     Hitachi, Zilog, Toshiba, ARM, ST Micro,
                                     National Semiconductor and NEC. We also
                                     make our speech technology products
                                     compatible with application programming
                                     interfaces of widely used software products
                                     from such organizations as Microsoft and
                                     the Enterprise Computing Telephony Forum.

                                      10
<PAGE>

Products

     We offer a wide range of speech and language technologies, solutions,
products and services. We have set forth below a description of the key
technologies, solutions, products and services offered by each of the three
divisions of our core business, exclusive of our recent acquisitions.

Speech and Language Technologies and Solutions

     Our Speech and Language Technologies and Solutions Division focuses on
licensing our core speech and language technologies:

     .    automatic speech recognition;
     .    text-to-speech;
     .    digitized speech and music compression;
     .    telephony solutions;
     .    text-to-text, referred to as machine translation;
     .    linguistic components; and
     .    development tools.

     The division also builds subsystems, modules or full applications using
combinations of these technologies, in close cooperation with our customers.

     Licensees of our technology consist primarily of applications developers,
strategic partners, original equipment manufacturers, component manufacturers
and software vendors. Our customers use our technologies to allow users
worldwide to interact through speech and natural language with a broad range of
devices and applications in four principal markets:

     .    computers and multimedia;
     .    telecommunications;
     .    automotive electronics; and
     .    consumer and industrial electronics.

     We have achieved significant advances in all major areas of our core
speech and language technologies listed above and currently offer multilingual
core speech recognition products that are speaker independent and able to
identify words spoken in natural continuous speech under a variety of acoustical
conditions and that respond with natural sounding speech, and speech synthesis
that achieves levels of naturalness and understandability approaching those of
natural speech. We also offer a wide range of linguistic components, including
spelling and grammar checking products, content finder products, and search and
summarization technologies. Some of our competitors may have developed speech
and language technology products that are comparable in performance to one or
more of our products. However, we believe that we have a competitive advantage
based on our offering of what we believe is the most complete range of
multilingual and multi-platform speech and language technologies currently
available, offering the highest level of integration of these different
technologies for a wide range of solutions.

     .    Automatic Speech Recognition Technology

     Our automatic speech recognition products offer continuous or discrete
speech and speaker independent or speaker dependent capabilities. Versions of
our automatic speech recognition products are available for each of our four
targeted markets listed above.

     The following table summarizes key information about our current automatic
speech recognition products. Manufacturers of processors on which one or more of
these products have been ported include Intel, Texas Instruments, Motorola, ST
Microelectronics, National Semiconductor, Lucent, Analog Devices, Hitachi, Lucky
Goldstar, and NEC.

                                      11
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                          Automatic Speech Recognition Technologies

--------------------------------------------------------------------------------------------------------------------------------
    Product            Key features           Languages(1)      Languages Under Development               Markets
--------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                      <C>                 <C>                              <C>
 .    Large          .   Continuous speech    .   English (US)         .    English (UK)           .     Telecommunications
     Vocabulary         recognition                                   .    German
     Engine         .   Unlimited                                     .    French
                        vocabularies                                  .    Korean
                                                                      .    Japanese
                                                                      .    Chinese (Mandarin)
                                                                      .    French
                                                                      .    Spanish
--------------------------------------------------------------------------------------------------------------------------------

 .    asr 1600       .   Continuous speech    .   English (US)                                     .     Computers and Multimedia
     Engine             recognition
                                             .   English (UK)                                     .     Automotive Electronics
                                             .   Dutch                                            .     Consumer and Industrial
                                                                                                        Electronics
                                             .   French
                                             .   German
                                             .   Italian
                                             .   Japanese
                                             .   Spanish
--------------------------------------------------------------------------------------------------------------------------------

 .    asr 1500       .   Continuous speech    .   Same as asr 1600
     Engine             recognition              plus Korean                                      .     Telecommunications
-------------------------------------------------------------------------------------------------------------------------------

 .    asr 200        .   Discrete speech      .   English (US)                                     .     Automotive Electronics
     Engine             recognition          .   French                                           .     Consumer and Industrial
                                             .   German                                                 Electronics
                                             .   Italian
                                             .   Japanese
-------------------------------------------------------------------------------------------------------------------------------

 .    asr 300        .   Discrete speech      .   English (US)         .    Spanish                .     Automotive Electronics
     Engine             recognition with                              .    Chinese                .     Consumer and Industrial
                        enhanced support for                                                            Electronics
                        digit strings
                    .   Support for          .   French
                        speaker dependent
                        user words
                                             .   German
                                             .   Korean
-------------------------------------------------------------------------------------------------------------------------------

 .   asr 100         .   Discrete speech      .   Language                                         .     Automotive Electronics
    Engine              recognition              independent                                      .     Consumer and Industrial
                    .   Support for              (under                                                 Electronics
                        speaker dependent        development)
                        words only
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Our strategic partners are developing versions of our technologies and
    products for additional languages, including Danish, Norwegian, Swedish,
    Bahassa, Russian, Belarussian, Ukrainian, Hungarian, Polish, Czech, Greek,
    Thai, Turkish, Vietnamese, Malay, Taiwanese, Armenian, Urdu, Tamil, Hindi,
    Arabic and Arabic dialects. See "Strategic Alliances-Language Development"

     Key features of our automatic speech recognition products include:

      Continuous speech recognition. Our automatic speech recognition products
have the capability of processing and recognizing a string of naturally and
continuously spoken words with no artificial pauses.

      Natural Language Technology. Our automatic speech recognition products use
our proprietary Natural Language Technology to recognize key words from
surrounding words or other sounds in continuous speech enabling users to phrase
their commands more naturally.

      Speaker independence. Our automatic speech recognition products in the
table above are speaker-independent. This means that they are capable of being
used by an unlimited number of speakers without speaker enrollment.

                                      12
<PAGE>

     High background noise tolerance. We have collected extensive databases of
speech spoken with background noises and have applied that information to refine
our software to address the challenges of noisy environments.

     Multiple channels. Our asr 1500 telecommunications products have been
ported to several digital signal processors, including those of Dialogic and
Natural Microsystems, and other general purpose processors enabling the
simultaneous processing of multiple calls. This can represent significant
savings to our customers.

     Additional features of our speech recognition products include:

     Call Center Applications. We are working with providers of call center
services to develop voice-powered solutions that automate call handling.

     Messaging and Auto-Attendant Applications. We are also developing
voice-powered solutions to improve implementation of systems in the messaging
and auto-attendant markets.

     .    Text-To-Speech

     Our text-to-speech products convert computer-readable text or data into
natural sounding speech. Versions of our text-to-speech products are available
for each of our four targeted markets.

     The following table summarizes key information about our current
text-to-speech products. Manufacturers of processors on which one or more of
these products have been ported include Intel, Texas Instruments, Analog
Devices, Advanced RISC Machines, Lucent, ST Microelectronics, National
Semiconductor, Motorola, NEC, Toshiba and Zilog.


                                Text-to-Speech

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                           Languages under
   Products            Key Features            Languages                   Development(1)                  Markets
----------------------------------------------------------------------------------------------------------------------------------
<S>              <C>                    <C>                                <C>                             <C>
 .   RealSpeak    .  Uses recorded       .   English (US)                   .  English (UK) .  Japanese     .  Telecommunication
    Engine          fragments of real   .   German                         .  Dutch        .  Portuguese   .  Computers and
                    human speech        .   French                         .                  (Brazil)        Multimedia
                                        .   Korean                         .  Italian
----------------------------------------------------------------------------------------------------------------------------------

 .   tts3000      .  Segment             .   English      .  German                                         .  All Markets
    Engine          concatenation           (US)
                                        .   English      .  Italian
                                            (UK)
                                        .   Chinese      .  Korean
                                            (Mandarin)   .  Spanish
                                                            (Castillian)
                                        .   Brazilian    .  Spanish
                                            Portuguese      (Mexican)
                                        .   Dutch        .  Japanese
                                        .   French       .  Russian
----------------------------------------------------------------------------------------------------------------------------------

 .   tts2500      .  Segment             .   English                        .  Arabic                       .  Consumer
    Engine          concatenation           (US)                                                              Electronics
                 .  Optimized for       .   Chinese
                    accurate                (Mandarin)
                    pronunciation of
                    reference lists
                    (talking
                    dictionaries)
                                        .   German
----------------------------------------------------------------------------------------------------------------------------------

 .   TruVoice     .  Formant synthesis   .   English (US)                                                   .  Telecommunication
    Engine

----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      13

<PAGE>

<TABLE>
<S>              <C>                    <C>                                <C>                             <C>
 .   Elan speech  .  Segment             .   US English,                    .  Dutch                        .  Telecommunication
    cube            concatenation       .   UK English
                 .  PSOLA time          .   Spanish
                    domain synthesis    .   German
                                        .   French
                                        .   Russian
                                        .   Brazilian Portuguese
----------------------------------------------------------------------------------------------------------------------------------

 .   Elan speech  .  Segment             .   US English                                                     .  Computers and
    engine          concatenation       .   UK English                                                        Multimedia
                    PSOLA time domain   .   Spanish
                    synthesis           .   German
                                        .   French
                                        .   Russian
                                        .   Brazilian Portuguese
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Our strategic partners are developing versions of our technologies and
    products for additional languages, including Danish, Norwegian, Swedish,
    Bahassa, Russian, Belarussian, Ukrainian, Hungarian, Polish, Czech, Thai,
    Tamil, Hindi, Greek, Turkish, Vietnamese, Urdu, Malay, Taiwanese, Armenian,
    Arabic and Arabic dialects. See "Strategic Alliances-Language Development".

     Key features of our text-to-speech products include:

      Voice quality and intelligibility. Our RealSpeak product uses pre-recorded
fragments of real human speech to convert text into speech with a human sounding
voice. We believe that RealSpeak represents a new industry standard for voice
quality and intelligibility in text-to-speech technology. We offer Elan and
other text-to-speech versions, which have a lower voice quality than our
RealSpeak, for applications that require less processing power and storage
capacity.

      Unlimited vocabulary. Most of our text-to-speech products have a virtually
unlimited vocabulary, capable of reading arbitrary texts with a high
pronunciation accuracy.

      Multiple channels. Our text-to-speech products have been ported to digital
signal processors and general purpose processors to enable simultaneous
processing of multiple calls with corresponding cost savings to our customers.

      Additional features of our text-to-speech products include:

      E-mail Preprocessing. E-mail preprocessing permits our text-to-speech
products to analyze e-mail messages and to read aloud the relevant portions of
the message.

      Transplanted Prosody Tool. Our text-to-speech products calculate prosody
in an attempt to mimic natural sounding speech. Prosody refers to the
appropriate intonation and duration of each sound. The technique of transplanted
prosody copies intonation and duration values from recorded human speech into
the original text to produce high-quality, computer-generated speech.

      Language identification. We offer an optional pre-processor that is able
to identify the language of a written text. This allows the system to select the
proper text-to-speech engine as a function of the language in the context of
multilingual applications.

      .   Digitized Speech and Music Compression

      Our digitized speech and music compression products convert speech and
music into computer code for storage, transmission and later reproduction. Our
customers use these products to compress speech and music for applications such
as digital telephone answering machines and pagers.

      The following table summarizes key information about our current digitized
speech and music compression products. Manufacturers of processors on which one
or more of these products have been ported include Intel, Analog Devices, Texas
Instruments, Motorola, Macronix, Samsung, Winbond and Power PC.

                                      14
<PAGE>

                    Digitized Speech and Music Compression

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

                                Compression
           Product              Rates (bps)           Markets
     ---------------------------------------------------------------------

         Stream Talk          650      4800    Computer and Multimedia
                              900      8000       Telecommunications
                             1100     12000     Consumer Electronics
                             1350     16000
                             2400
     ---------------------------------------------------------------------


     Key features of our speech and music compression products include:

     Wide range of compression rates and ratios. Our speech and music
compression products offer a wide range of compression rates which enables
customers to tailor the optimal playback quality for the processing and storage
capacity of their systems.

     Full-duplex functionality. Our technology can be used to enable full-duplex
(two-way) conversations.

     Ultra low bit rate technology. We have developed technology at compression
rates of less than 1,000 bits per second. These products require less storage
space and permit faster data transmission than previous generations of speech
and music compression technology.

     .  Telephony Solutions

     Telephony dialogue systems are used to allow humans to interact with
computers by using speech. Applications of these systems are numerous - from
call centers that can use these systems to improve customer service and
efficiency, to Internet service providers that want provide services such as
e-mail reading over the telephone. Over the last year, we have achieved major
advances in the field of dialogue techniques. We are developing our tools with
the goal of allowing fixed initiative dialogues (where the user is prompted by
computer speech) and the more user-friendly mixed-initiative dialogues, where
the user is allowed to take the lead of the conversation.

     Since speech recognition and text-to-speech technology is in constant
evolution, we are building our applications by using a Speech User Interface
Toolkit in order to design our telephony dialogue systems in such a way that the
existing automatic speech recognition and text-to-speech modules can be replaced
by future evolutions of these technologies. It is our goal that the applications
developed with the Speech User Interface Toolkit will be language independent,
giving users the possibility of easily deploying the same system in multiple
languages. Systems installed today include automated attendant systems, stock
quote information service, and travel information and booking systems.

     We are developing the Speech User Interface Toolkit to implement, among
others, the following modules:

     Speech To Concept (Natural Language Understanding). Speech recognition
engines convert digitized speech into text. However, this text may still not be
readily understood by a computer application. The speech-understanding module of
the Speech User Interface Toolkit would instead convert digitized continuous
speech into formatted output that is application specific, but language
independent, and is easily understood during subsequent processing.

     Concept To Speech (Natural Language Generation). We plan for the Speech
User Interface Toolkit to provide a speech generation module that takes
formatted data and converts this to speech output. This module would consist of
two components: natural language generation and speech production.

     Conversation Management. The Speech User Interface Toolkit is being
developed to manage conversation using a conversational agent. This
conversational agent is being designed to handle speech behaviors like barge-in
(the user talking while the system is speaking) and retries, and also serve as
the liaison between the user and the application. The agent will converse with
the user, until it has an acceptable response, and then communicates this

                                      15
<PAGE>

response to the application, using formatted data. The agent will also receive
information from the application and presents it to the user via the speech
generation module. The behavior of the agent will be controlled by:

     .  What it already knows, or assumes, from the user or from the application
     .  What it wants to find out
     .  Incoming events, with information from speech or from the application
     .  The dialogue description

The conversational agent is being developed to conduct communications with both
the application and the user at the same time. This way, the conversational
agent should be able to support user initiative and barge-in, time-outs for user
and application responses, and continuous conversation, even when the system
takes time to look up data in a database.

   .  Project NAK

   We have developed a prototype software for handheld devices that work in a
client server environment, such as the Internet. This software has a large
vocabulary continuous speech dictation engine and our RealSpeak text-to-speech
engine, to easily send and receive e-mail, surf the Web and conduct e-commerce
transactions. This technology, which we have code-named NAK, should allow
vendors to speech-enable a broad range of consumer devices, with the goal of
supporting the widespread adoption of speech as a user interface. NAK's open
architecture should allow for portability to the major operating systems such as
Windows CE, Linux, and Symbian. We plan to begin commercializing the NAK
technology by licensing the technology to developers as well as through
developing and distributing devices which use this technology.

   .  Machine Translation

   Machine translation technology is designed to allow users to start with text
in one language and convert the text automatically into other languages. Our
machine translation software employs linguistic, rule-based artificial
intelligence software and extensive linguistic databases, similar to the expert
software that we use to develop our speech and language technologies.

   L&H's machine translation engines are all based on the transfer model
approach. In this approach, the conversion of text from one language to another
is done in three distinct phases: analysis, transfer, and generation. During the
analysis phase, the structure and meaning of the input text is discerned,
generating an internal representation that records all relevant characteristics
of the input sentence. For example, in the phrase "I want to record a record,"
the system would discern that the word "record" was used as both a verb and noun
with two distinctly different meanings. During the transfer phase, the system
chooses an appropriate target word for each input word taking into account the
determined meaning of the word in the original text. The generation phase then
produces the target sentence, following all grammar rules, including word
ordering rules, of the target language, taking into account agreement and word
reordering phenomena. These advanced techniques improve the accuracy of the
machine translation by analyzing the context of words in a sentence and thereby
avoiding many of the mechanical errors of simple word-by-word dictionary-type
mechanical translations.

   We have set forth in the following table information about our machine
translation technology. Unless otherwise indicated, all references to languages
pairs in this Report mean that the product translates in both directions. For
example, "English/Japanese" means that the product translates English to
Japanese and Japanese to English.

                      Machine Translation Language Pairs(1)

   ------------------------------------------------------------------------
               Currently Available                   Under Development(2)
   ------------------------------------------------------------------------

      English/Arabic       English/Portuguese          Chinese/English
      English/French        English/Spanish             Korean/English
      English/German         French/German              German/Russian
     English/Italian         Italian/French            Korean/Japanese
     English/Japanese        Italian/German
                            Italian/Spanish
   ------------------------------------------------------------------------

                                      16
<PAGE>

       (1)  References to English are to U.S. English only.
       (2)  Our strategic partners are developing versions of our technologies
            and products for additional languages, including Danish, Swedish,
            Norwegian, Bahassa, Russian, Belarussian, Ukrainian, Hungarian,
            Polish, Czech, Thai, Tamil, Hindi, Greek, Turkish, Vietnamese, Urdu,
            Malay, Taiwanese, Armenian, Arabic and Arabic dialects. Some
            strategic partners are developing new language pairs from Italian,
            French, German, Mandarin, Japanese, Russian and Spanish to mainly
            Asian destination languages. See "Strategic Alliances-Language
            Development".


  .  Linguistic Components

  Our linguistic and lexical products include proofing tools, software programs
and related databases that correct errors in spelling, grammar, punctuation,
capitalization and spacing, and other mistakes in documents created by end-users
of computer applications, as well as information products such as thesauruses
and dictionaries in a searchable electronic format. We market these products
primarily through original equipment manufacturers channels. Our proofing tools
include International CorrectSpell for Windows CE, a spelling correction system
for Windows CE handheld devices, and International ProofReader, a multilingual
proofreading system that addresses errors in spelling, grammar, punctuation,
capitalization, and spacing in 22 languages and dialects as well as numerous
classes of formatting errors, writing errors and style problems in 10 of these
languages. We also offer a Java version of International ProofReader for English
only. In addition, we offer multiple versions of CorrectEnglish, a writing
system that targets the specific errors made by native speakers of Chinese,
Danish, French, German, Japanese, Norwegian, Spanish and Swedish when producing
English-language documents. We also offer our NativeEnglish writing assistant
product, an end-user version of CorrectEnglish for native speakers of French,
German and Spanish.

  .  Development Tools

  We offer a range of software development kits ("SDKs") for our automatic
speech recognition, text-to-speech and digital compression technologies for the
computer and multimedia, telecommunications, automotive and industrial
electronics and consumer electronics markets. These SDKs contain libraries,
tools, help files, documentation and support plans to enable applications
developers to develop applications incorporating our speech and language
technologies.

Speech and Language Applications

  Our Applications Division offers a wide range of end-user applications,
including applications and services for healthcare organizations designed around
the healthcare documentation process, dictation software that enables users to
dictate text and generate documents by speaking naturally without pausing
between words, PC and Internet-based translation software and educational
software.

        .   Healthcare  Applications & Solutions

        The Healthcare Applications & Solutions group provides solutions for
healthcare organizations designed around the healthcare documentation process.
Our products and services are designed to:

        .   Efficiently create healthcare documentation using dictation
        .   Reduce the cost of healthcare documentation
        .   Decrease the document creation turnaround time
        .   Increase the quality of the documentation

        Our applications and services are designed around the workflow used in
the process of creating medical documentation. Our products include technology
that aids the digital dictation and transcription process by introducing
advanced speech recognition and other natural language processing techniques.

         The Healthcare Applications & Solutions group provides or is developing
the products and solutions as outlined in the table below:

                                      17
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
        Product                          Key Features                Specialty                                Languages
------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>                                   <C>                                     <C>
 .  L&H Powerscribe For       .  Digital Dictation and              .  Radiology                            .  English (US)
    Radiology                    Transcription Workflow
                                 Platform
                              .  Integrated speech recognition
                                 converts digital audio
                                 recordings into draft text.
                              .  Real-Time physician editing
                                 allows physician to edit using
                                 voice.
------------------------------------------------------------------------------------------------------------------------------
 .  L&H Clinical Reporter     .  Real-Time medical report           .   Emergency Medicine                  .  English (US)
                                 writer using speech recognition    .   Pathology
                                 to covert speech to text.          .   Primary Care
                              .  Medical knowledge base to
                                 guide physician documentation
                                 process.
                              .  Prompted (structured) report
                                 writing as well as free-form
                                 dictation.
------------------------------------------------------------------------------------------------------------------------------
 .  L&H Internet Charting     .  Internet based digital dictation   .  All Acute Care Medical Disciplines   .  English (US)
    Service (1)                  and transcription service
                              .  Utilized speech recognition to
                                 lower labor content needed for
                                 medical documentation.
                              .  Accepts digital dictation from
                                 any source including over the
                                 phone.
                              .  Provides full service including
                                 labor as needed for editing draft
                                 documents created using speech
                                 recognition,
------------------------------------------------------------------------------------------------------------------------------
 .  Enterprise Telephony for  .  Batch Server based upon our        .  Cardiology                           .  English (US)
    Dictaphone (1)               Voice Xpress technology which      .  Emergency
                                 transcribes telephony voice        .  Orthopedics
                                 files from speech to text,         .  Pathology
                                 prepares the 1/st/ draft and       .  Primary Care
                                 assists the transcriptionist in    .  Radiology
                                 correction by aligning speech      .  General Surgery
                                 and text (bouncing ball)           .  Internal Medicine
                                                                    .  General Medicine
                                                                    .  Mental Health
                                                                    .  Neonatology
                                                                    .  Neurology
                                                                    .  Oncology
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

 (1)  Under development

     In addition to offering these technology products and solutions, our
Healthcare Applications & Solutions group offers human transcription services.
In December 1999 and January 2000, we acquired OmniMed Transcription, Inc. and
the southern-Florida based medical transcription business of Rodeer Systems,
Inc. OmniMed is a medical transcription company based in Madison, Wisconsin. We
have also recently entered into an agreement to acquire several additional
territories of Rodeer's medical transcription business. In addition to providing
conventional transcription services, it is our intent to integrate these
services with our medical transcription technology to complete the development
of the medical transcription solutions outlined in the above table.

                                      18
<PAGE>

     .  Continuous Dictation Applications

     We have developed multilingual, speaker-independent continuous dictation
software that enables users to dictate speech accurately by speaking naturally
without pausing between words. We introduced our first large vocabulary,
continuous dictation product in April 1998.

     Our advanced dictation technology and software can recognize continuous
speech at speeds of up to 140 words per minute, with vocabularies of 60,000
words or more and accuracy of up to 95% or more, all running on standard
personal computers. We offer our continuous speech products to the general
personal computer market, various specialty medical markets, as well as the law
enforcement and legal markets. Our products typically require from 32MB to 64MB
of RAM and a Pentium II or higher processor.

     The following tables contain summary information about our continuous
dictation products.



                 Continuous Dictation - Vertical Applications

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
        Product                   Key Features                                  Specialty                        Languages
-------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                                   <C>                                           <C>
 .  L&H Voice Xpress -     .  Dictation and NLP for most         .  Cardiology          .  Oncology            .  English (US)
    Medical Edition           Windows applications               .  Emergency           .  Orthopedics
                           .  64,000 word vocabulary             .  General Medicine    .  Pathology
                                                                 .  Internal Medicine   .  Primary Care
                                                                 .  Mental Health       .  Radiology
                                                                 .  Neonatology         .  Surgery (General)
                                                                 .  Neurology
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress       .  Dictation and NLP for most         .  General Practice                           .  English (US)
    - Legal Edition           Windows applications               .  Litigation
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress -     .  Dictation and NLP for most         .  Law Enforcement                            .  English (US)
    Safety Edition            Windows applications
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress       .  Software Developers Toolkit        .  All Supported Specialties                  .  English (US)
    SDK                       for development of speech                                                        .  German
                              enabled Windows and Java                                                         .  English (UK)
                              applications                                                                     .  Dutch
                                                                                                               .  French
                                                                                                               .  Spanish
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress       .  L&H VX Pro with additional         .  All Supported Specialties                  .  English (US)
    Custom Solutions          features for the value-added-
                              reseller
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress       .  Dictation and NLP                  .  Radiology                                  .  German
    - German Editions         for most Windows
                              applications
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress-      .  Dictation and NLP for most         .  Radiology                                  .  Dutch
    Dutch Editions            Windows applications               .  Pathology
                                                                 .  Legal
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H CrimeTalk          .  Police report writer               .  Law Enforcement                            .  English (US)
    Reporter                  (Windows-based)
                           .  Law enforcement knowledge
                              base
                           .  Combines multiple report
                              templates and free-form
                              commentary
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      19
<PAGE>

             Continuous Dictation - Personal Computer Applications

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
            Products                                   Key Features                                           Languages(1)
-------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                                                                <C>
 .  L&H Voice Xpress Standard            .  Compatible with most Windows applications                       .  English (US)
                                        .  Includes L&H XpressPad word processor, our Natural Language     .  English (UK)
                                           Technology and noise-canceling microphone                       .  Dutch
                                                                                                           .  German
                                                                                                           .  French
                                                                                                           .  Spanish
                                                                                                           .  Australian (2)
                                                                                                           .  Korean (2)
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress Advanced            .  Includes features of Voice Xpress Standard, plus                .  Same as above
                                           extensive Natural Language Technology capabilities
                                           for Microsoft Word
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress Professional        .  Includes all features of Voice Xpress Standard                  .  Same as above
                                           and Advanced, plus extensive Natural Language
                                           Technology capabilities for Microsoft Office 97
                                           applications and mobile dictation support
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress Mobile              .  Our mobile speech recognition solution for Microsoft            .  English (US)
   Professional                            Office                                                          .  English (UK)
                                        .  Bundled with the Olympus DS-150 Digital Recorder                .  Dutch
                                                                                                           .  German
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Voice Xpress - Personal          .  Dictation and NLP for Money and Quicken                         .  English (US)
   Finance Edition

-------------------------------------------------------------------------------------------------------------------------------
 .  SPK 3                                .  Our combined speech recognition and hand writing                .  Cantonese and
                                           application                                                        Mandarin Chinese
                                        .  Includes graphic tablet
-------------------------------------------------------------------------------------------------------------------------------
 .  L&H Now You're Talking on the Web    .  Dictation plus "Say-Links" which allows you to                  .  English (US)
                                           navigate the Web using our Voice Xpress continuous
                                           speech recognition engine
                                        .  Compatible with most Windows applications and Microsoft
                                           Office 97 applications
                                        .  Includes seven additional voice-powered accessories:
                                           TalkingText (text-to-speech application); Voice WebFinder
                                           (for the Internet); Voice AddressBook; Voice Calculator;
                                           TalkPad (for notes and memos); Voice Scheduler and Voice
                                           Clock
-------------------------------------------------------------------------------------------------------------------------------
 .  Talking Max/L&H Pi Chan              .  Interactive virtual pet parrot that lives on your PC plus       .  English (US)
                                           talking screensaver                                             .  Japanese
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Our strategic partners are developing versions of our technologies and
    products for additional languages, including Danish, Norwegian, Swedish,
    Bahassa, Russian, Belarussian, Ukrainian, Hungarian, Polish, Czech, Thai,
    Tamil, Hindi, Greek, Turkish, Vietnamese, Urdu, Malay, Taiwanese, Armenian,
    Arabic and Arabic dialects. See "Strategic Alliances-Language Development".
(2) Under development internally.

      .    Language Translation Applications

      We sell versions of our machine translation technology for personal
computer and Internet and network applications. The following tables contain
summary information about these translation products.

                                      20
<PAGE>

             Language Translation - Personal Computer Applications

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
           Products                                       Key Features                                       Language Pairs(1)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                                                                         <C>
 .  L&H Power Translator Pro     .  PC-based translation application                                         .  English/French
                                .  Translates text and documents in popular word processing and e-mail      .  English/German
                                   applications, including Microsoft Word, Exchange and Outlook; Corel      .  English/Italian
                                   WordPerfect; Eudora Pro; and Lotus Notes                                 .  English/Japanese
                                .  Translates Internet Web pages within Netscape Navigator (version 2.0     .  English/Portuguese
                                   or higher) and Microsoft Internet Explorer (version 3.0 or higher)       .  English/Spanish
-----------------------------------------------------------------------------------------------------------------------------------
 .  Language Assistant           .  Translation package for users working with a foreign language            .  English/French
                                .  Provides draft-quality translations of documents in word processing      .  English/German
                                   applications, including Microsoft Word and Corel WordPerfect             .  English/Italian
                                                                                                            .  English/Portuguese
                                                                                                            .  English/Spanish
-----------------------------------------------------------------------------------------------------------------------------------
 .  T1 Standard                  .  Our basic PC-based text translation software                             .  English/German
                                .  Enables translation within Microsoft Word
-----------------------------------------------------------------------------------------------------------------------------------
 .  T1 Standard Plus             .  Combines functionality of T1 Standard with enhanced reference tools      .  English/German
                                   for post-translation editing                                             .  English/Spanish
-----------------------------------------------------------------------------------------------------------------------------------
 .  T1 Professional              .  Our PC-based translator for professionals                                .  English/German
                                .  Combines functionality of T1 Standard Plus with additional memory
                                   features that enable users to save translations as reference tools
                                   for future translations
                                .  Available as an upgrade to T1 Standard or T1 Standard Plus
-----------------------------------------------------------------------------------------------------------------------------------
 .  Transphere                   .  Our PC-based translator for English/Arabic                               .  English/Arabic
-----------------------------------------------------------------------------------------------------------------------------------
 .  E-J Bank and J-E Bank        .  Our heavy duty English/Japanese Windows-based translation system         .  English/Japanese
-----------------------------------------------------------------------------------------------------------------------------------
 .  Translator 6                 .  Our heavy duty Windows-based multi-language translator for               .  Japanese to English,
                                   Japanese                                                                    French, German,
                                                                                                               Italian and Spanish
-----------------------------------------------------------------------------------------------------------------------------------
 .  Tsunami and Typhoon MT       .  PC-based English/Japanese translation software                           .  English/Japanese
                                .  Also available as Tsunami and Typhoon Notebook
-----------------------------------------------------------------------------------------------------------------------------------
 .  Other English/Japanese       .  We also offer a range of additional products relating to English
   product                         /Japanese translation, including e-mail and word processing
                                   applications, optical character recognition (OCR) software and
                                   add-on dictionaries
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Our strategic partners are developing versions of our technologies and
    products for additional languages, including Danish, Norwegian, Swedish,
    Bahassa, Russian, Belarussian, Ukrainian, Hungarian, Polish, Czech, Greek,
    Thai, Tamil, Hindi, Turkish, Vietnamese, Urdu, Malay, Taiwanese, Armenian,
    Arabic and Arabic dialects. Some strategic partners are developing new
    language pairs from Italian, French, German, Mandarin, Japanese, Russian and
    Spanish to mainly Asian destination languages. See "Strategic
    Alliances-Language Development".

                                      21
<PAGE>

           Language Translation - Internet and Network Applications

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
            Products                                        Key Features                                      Language Pairs(1)
----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                                                                       <C>
 .  L&H iTranslator Enterprise    .  Client/server translation product offering a combination of machine    .  English/French
                                    and human translation services                                         .  English/German
                                 .  Supports a web-based client, eliminating the need to install software  .  English/Italian
                                    on client machines                                                     .  English/Portuguese
                                 .  Allows any number of machine translation servers to be configured      .  English/Spanish
                                    to allow scalability                                                   .  English/Japanese
                                                                                                           .  French/German
                                                                                                           .  Italian/German
                                                                                                           .  Italian/French
                                                                                                           .  Italian/Spanish
----------------------------------------------------------------------------------------------------------------------------------
 .  L&H iTranslator Publish       .  Enables users to provide real time translation to visitors of  their   .  Same as iTranslator
                                    Web pages                                                                 Enterprise
                                 .  Integrates with iTranslator Enterprise
----------------------------------------------------------------------------------------------------------------------------------
 .  L&H iTranslator Enterprise    .  Allows integration of the iTranslator Enterprise product in a Lotus    .  Same as iTranslator
   for Notes                        Notes/Domino environment adding machine and human translation             Enterprise
                                    services to a Notes DB environment
----------------------------------------------------------------------------------------------------------------------------------
 .  L&H iTranslator Enterprise    .  Allows developers to add iTranslator Enterprise functionality for       .  Same as iTranslator
   SDK                              corporate infrastructure or custom applications                            Enterprise
----------------------------------------------------------------------------------------------------------------------------------
 .  L&H Machine Translation       .  Allows developers to add machine translation functionality for          .  English/French
   SDK                              custom application                                                      .  English/German
                                                                                                            .  English/Italian
                                                                                                            .  English/Portuguese
                                                                                                            .  English/Spanish
                                                                                                            .  English/Japanese
----------------------------------------------------------------------------------------------------------------------------------
 .  T1 Workgroup                  .  Our multi-user translation system based on our T1 Professional          .  English/German
                                    technology designed for professional translators working in small
                                    to medium-size groups
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Our strategic partners are developing versions of our technologies and
    products for additional languages, including Danish, Norwegian, Swedish,
    Bahassa, Russian, Belarussian, Ukrainian, Hungarian, Polish, Czech, Greek,
    Thai, Tamil, Hindi, Turkish, Vietnamese, Urdu, Malay, Taiwanese, Armenian,
    Arabic and Arabic dialects. Some strategic partners are developing new
    language pairs from Italian, French, German, Mandarin, Japanese, Russian and
    Spanish to mainly Asian destination languages. See "Strategic
    Alliances-Language Development"

     .   Educational Applications

     We offer a range of products that use speech and language technology for
the educational assistance market. Our Kurzweil 1000 is an advanced PC-based
reading tool for the blind and visually impaired that works with a scanner to
convert printed words into speech. It also provides the ability to edit,
annotate, index, summarize and emboss documents. Our Kurzweil 3000 product is an
advanced PC-based reading system for people with learning difficulties that
provides both an audio and a visual presentation of scanned text. It includes a
broad array of features designed to enhance people's access to the written word,
both as readers and as writers, including access to dictionaries, thesauri,
spelling checkers, and word predictors.


Speech and Language Consulting and Services

     We provide a wide range of linguistic services through our Speech and
Language Consulting and Services Division, recently renamed the Globalization
and Internet Translation Group. We believe we are one of the few companies with
a presence in most major markets in the world providing a complete range of
language solutions. In addition to the full-time staff of employees, our
Globalization and Internet Translation Group has a global network of thousands
of correspondent translators and service providers. We intend to continue
developing new solutions to help our customers reach global markets by combining
our human translation resources with our machine translation

                                      22
<PAGE>

technology. Our language solutions are generally available in a wide range of
languages, including English, Dutch, French, German, Italian, Japanese,
Portuguese and Spanish.

     Our key Globalization and Internet Translation Group services include:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                Services                                                 Features
------------------------------------------------------------------------------------------------------------------
<S>                                      <C>
 .    L&H iTranslator solutions           Our new L&H iTranslator solutions use our iTranslator machine translation
                                         technology to provide customers with translations of text documents and
                                         Web sites. We provide these solutions to business customers, Internet
                                         service providers and Internet portals worldwide either on a subscription
                                         basis through our server or by licensing the technology to the customer
                                         for use on their own intranet or web server.

------------------------------------------------------------------------------------------------------------------
 .    E-publishing                        We provide a range of multilingual, technical electronic publishing
                                         services to increase the value of information by using leading-edge
                                         technology to manage the multilingual use and publication of information.

------------------------------------------------------------------------------------------------------------------
 .    Technical writing                   We have extensive experience providing high quality technical publications
                                         across a wide range of industries, including aerospace, automotive,
                                         chemical, computer hardware, defense, medical, pharmaceuticals, software,
                                         telecommunications and utilities.

------------------------------------------------------------------------------------------------------------------
 .    Internet/intranet services          We offer consulting services to assist our customers in the implementation
                                         of Internet/intranet sites and networks, including information auditing
                                         and planning, concept screen design, development of corporate information
                                         structure, development of publishing model, site design and build,
                                         information management, and on-site staff for ongoing management.

------------------------------------------------------------------------------------------------------------------
 .    Localization                        We specialize in the adaptation of software for different markets,
                                         languages and cultures. We have performed localization into German,
                                         French, Spanish and Russian of programs such as Microsoft Word, Excel,
                                         Access, Powerpoint, SQL Server and Windows NT.

------------------------------------------------------------------------------------------------------------------
 .    Terminology management              We are experienced in assisting our customers in the multilingual use and
                                         publication of specialized technical information and terminology.

------------------------------------------------------------------------------------------------------------------
 .    Translation                         We have extensive experience providing multilingual translations of
                                         technical materials in a wide range of industries, including those in the
                                         medical and information technology fields. Our translation services are
                                         generally performed by persons with expertise in the appropriate technical
                                         field translating into their native language to avoid rewrites and ensure
                                         your time-to-market is on schedule.
------------------------------------------------------------------------------------------------------------------
</TABLE>

Customers

     In 1999, Microsoft accounted for approximately 9% of our total revenues and
28% of our Consulting and Services Division revenues. For a discussion of the
breakdown of sales and revenue into geographical markets, see Note 17 to our
consolidated financial statements. A discussion of customers of our respective
divisions is set forth below.

     Speech and Language Technologies and Solutions. We have targeted
applications developers, original equipment manufacturers, component
manufacturers and software vendors to create applications incorporating our core
speech and language technologies. Licensees of our core speech and language
technology include such industry leaders as:

      Auralog            Ericsson                        Micrografx
      Alcatel            Group Sense                     National Semiconductor
      Apple              Hitachi                         Nortel
      Active Voice       Intervoice                      Periphonics
      AOL                Information Access Company      Symantec
      Belgacom           Intel                           Swift
      BBN/GTE            Inventec                        Samsung Electronics
      Casio              Lucent                          Sun Microsystems
      Corel              Lotus                           TRO Learning
      Dialogic           Microsoft                       Visio
      Edify

                                      23
<PAGE>

     The following is a list of applications developed by our customers using
one or more of our core speech technologies in each of our four target markets:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                     Automotive and Industrial
  Computers and Multimedia          Telecommunications                     Electronics                  Consumer Electronics
------------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                              <C>                                <C>
 .  Handheld devices             .  Name dialing                  .  Hands-free car phone dialing    .  Digital answering machines
 .  Language training            .  Interactive voice software    .  Voice navigation                .  Talking personal digital
                                                                                                       assistants
 .  Talking computers            .  Automated attendants          .  Traffic data systems            .  Hand-held electronics
 .  Desktop videoconferencing    .  Unified messaging for         .  Command and control of             Dictionaries and translators
                                   voicemail, e-mail, fax           lights, wipers, etc.
 .  Command and Control          .  Personal assistants                                              .  Desktop phones
 .  Character animation          .  Internet voice
 .  Education                    .  Stock quotes
                                .  Telephone banking

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

     Our customers have also developed a variety of applications that
incorporate our linguistic components, including word processing and grammar
checking applications, web servers and document management systems, and CD ROM
and Internet-based reference products.

     Speech and Language Applications. We generally sell our personal computer
dictation, off-the-shelf translation and Kurzweil educational products through
direct sales and nonexclusive arrangements with distributors such as Ingram
Micro and Tech Data to retail outlets, including CompUSA, Computer City, Best
Buy, Staples and OfficeMax in the United States, and Dixon, Computer 2000,
Carrefour and Kaufhof in Europe. We also sell our personal computer dictation
and translation products to end-users through computer software catalogs and
value-added resellers. Customers of our medical dictation products include
end-users such as hospitals, clinics and physician practices. We sell through
value-added resellers and systems integrators to the healthcare industry.

     Speech and Language Consulting and Services. Human translation and
localization services customers include Audi, British Aerospace, British
Telecom, Compaq, General Motors, Microsoft, Novell and SAP.

Sales and Marketing

     A discussion of the sales and marketing activities of our respective
divisions is set forth below.

     Speech and Language Technologies and Solutions. We generally license our
core speech and language technologies and solutions to applications developers,
strategic partners, original equipment manufacturers, component manufacturers
and software vendors. Our sales and marketing activities for our core speech and
language technologies include direct sales calls, participation in trade shows,
publication of articles in trade journals and interaction with leading opinion
leaders through participation in industry forums.

     Speech and Language Applications. We distribute our personal computer
applications products in the United States, Canada and Europe through
nonexclusive arrangements for the retail channel. We also distribute these
products through computer software catalogs in the United States and through
value-added resellers in the United States, Canada, Australia and Europe. Our
vertical dictation products group distributes our products primarily in the
United States through a direct sales force, value-added resellers, systems
integrators and dealers in the healthcare industry.

     Speech and Language Consulting and Services. Our Consulting and Services
Division generally derives a significant portion of its business from repeat
work from existing customers and referrals from those customers and from its
correspondent contract translators located throughout the world. Sales and
marketing activities conducted include direct sales calls by members of its
professional staff, participation in trade shows, direct mailings, publication
of articles and advertising in trade journals. Our direct sales efforts may be
further supported by the sales and marketing activities conducted in selected
international territories by our international joint ventures and strategic
partners. At the end of 1999, we also started to implement a dedicated Internet
marketing strategy. As a result of these efforts, beginning in the first quarter
of 2000, our Internet translations services have become available

                                      24
<PAGE>

through Microsoft's Office Update web site. We have entered into agreements with
other Internet service providers to offer our translation services through their
sites. We also plan to offer this service through our own web site and with
other Internet service providers.

Engineering and Customer Support

     We are dedicated to providing a high level of customer support to assist in
the integration of our speech and language products into the customer's hardware
or software application. We believe that this assistance is critical to ensure
the effective integration and operation of our speech products and to reduce the
cost and time-to-market of the customers' products. Depending upon the
complexity of the products, the integration process typically requires between
one and six months. We typically charge customers a fee for providing
engineering services.

     We assist our customers in marketing and selling products incorporating our
speech technologies by providing customers with sales and technical support. We
also strive to establish close collaborative relationships with our customers to
further enhance the sale of products incorporating our technologies.

     We also offer a number of services to assist end-users of our dictation
products, including in-house and regional training programs, on-site
installation and training, ongoing maintenance programs, a support service
hot-line for end-user telephone support, a multimedia on-line tutor for new
users and extensive documentation.

     In the second half of 1999, we started establishing customer support
centers in locations around the world. Initially, we opened support centers in
Burlington, Massachusetts and in Ieper, Belgium. In January 2000, we opened
support centers in Singapore and Tokyo, and we expect to open support centers in
San Francisco, California and Seoul, South Korea during 2000. The support
centers have three primary focuses:

          .   Demonstrations - including permanent demonstration areas where we
              display our technologies and products;

          .   Training - including dedicated training areas where we offer
              comprehensive training in the use of our products to prospective
              and existing customers; and

          .   Developer support - including the opportunity for developers to
              work with our engineers to facilitate development of applications
              incorporating our technologies and products.


Strategic Alliances

         We have pursued a strategy of seeking strategic alliances to broaden
our product offerings and technology reach. The following describes our more
significant relationships.

     Microsoft. In September 1997, we entered into a strategic alliance with
Microsoft to accelerate development of speech products in multiple languages
running on Microsoft Windows(R) platforms. As part of this strategic alliance,
we entered into a Patent License Agreement with Microsoft, pursuant to which the
parties have granted certain patent licenses to each other (the "License
Agreement") and a Common Stock Purchase and Shareholders' Agreement (the
"Microsoft Purchase Agreement") among us, certain of our affiliates and
Microsoft, pursuant to which Microsoft purchased 5,800,840 shares of our common
stock at $7.7575 per share for an aggregate of approximately $45.0 million. The
purchase price per share paid by Microsoft was determined by multiplying 110% by
the average of the closing bid prices of our common stock on the Nasdaq National
Market for the 20 trading days preceding the date of purchase. In addition, in
connection with this transaction, we issued warrants to Microsoft to purchase
1,714,284 shares of common stock at an exercise price equal to $8.75 per share,
which Microsoft exercised in March 1999. The agreement further contemplates that
we may further share technologies and cooperate on future development
initiatives with Microsoft. In 1998, we continued our relationship with
Microsoft and were named as an official partner of the Microsoft Office product
line, our automatic speech recognition technology was demonstrated in connection
with the launching of Windows(R) 98, and we announced our support for Windows(R)
CE.

                                      25
<PAGE>

     Under the License Agreement, we granted Microsoft a worldwide, exclusive,
perpetual, irrevocable, fully-paid license (including the right to sublicense)
under our "Speech" patents to exercise any and all rights with respect to
Microsoft open speech platform products, including without limitation the right
to manufacture, use, distribute, sell or otherwise transfer products. "Speech"
patents include all issued patents and patent applications that are entitled to
an effective filing date within five years of the date of the License Agreement
and that claim inventions relating to technology and methodology of speech
recognition, speech understanding, and/or speech synthesis, but excluding
technology and methodology relating to natural language processing and machine
translation. We also granted Microsoft a worldwide, perpetual, irrevocable,
fully-paid license, exclusive of all parties except us, under our natural
language processing patents to make open platform products that use speech
recognition, speech understanding, and/or speech synthesis.

     Microsoft has granted us a world-wide, non-exclusive, perpetual,
irrevocable, fully-paid license under some of its Speech patents to exercise any
and all rights with respect to our embedded speech application products which
include speech for execution on special-purpose hardware devices without speech
programming interfaces to support additional software applications, including
without limitation the right to manufacture, use, distribute, sell or otherwise
transfer such products. We may grant manufacturers and distributors the right
under some of Microsoft's Speech patents to manufacture and distribute our
embedded speech application products through multiple tiers of manufacture and
distribution. Our license under the License Agreement terminates upon transfer
of all or substantially all of our assets. Microsoft may terminate our license
upon a change of control of the Company.

     In connection with Microsoft's investment, we granted Microsoft the right
to nominate a candidate for election to our Board of Directors. Mr. Bernard
Vergnes currently represents Microsoft on our Board of Directors. Following
Microsoft's exercise of its warrants in March 1999, it held an aggregate of
7,515,124 shares of our common stock, representing approximately 5.29% of our
outstanding common stock as of June 8, 2000.

     Sail Labs. In January 1999, we participated in the formation of Sail Labs
Holding N.V. (formerly Sail Labs N.V.) for the purpose of developing advanced
speech and language technologies and products. In 2000, we made several loans in
the aggregate principal amount of approximately $5.5 million to Sail Labs; these
loans are convertible at our option into capital stock of Sail Labs. Including
the capital stock which we could acquire upon the conversion of these loans, we
currently beneficially own approximately 34.8% of the outstanding capital of
Sail Labs. At the time of the formation of Sail Labs, the current President,
Chief Executive Officer and principal stockholder of Sail Labs, Peer Van
Driesten, left the Company where he had been serving as President of our former
language technologies division. We have entered into a license and development
agreement with Sail Labs pursuant to which we have licensed our existing
technology to Sail Labs on a non-exclusive basis, and Sail Labs has undertaken
long-term development projects to improve and enhance our speech and language
technologies and products. Sail Labs has the right, subject our consent, to
engage our employees in connection with the development projects that it has
undertaken pursuant to our agreement. We have the right to invoice Sail Labs for
all expenses associated with its use of our employees, including wages and
overhead expenses.

     We have non-exclusive rights to use and distribute all technology and
products developed by Sail Labs based upon our technology, and we have rights at
our option to become the exclusive licensee of any such technology or products
on a case-by-case basis. We also have the non-exclusive right to use internally
all technology and products developed or acquired independently by Sail Labs. In
addition, we have rights of first negotiation if Sail Labs wishes to license any
technology or products, including technology or products developed or acquired
independently from the agreement, to a third party. We also have the right at
any time to acquire all ownership rights in any or all technology or products
owned by Sail, including technology or products developed or acquired
independently from the agreement, subject to underlying third-party rights as
applicable. Subject to our underlying rights, Sail Labs retains title to all
technology and products that it develops pursuant to the agreement.

     We have also entered into an agreement with Microsoft pursuant to which we
have agreed, in the event that we decide not to exercise any of our rights of
first negotiation in connection with a proposed sale of any technology developed
pursuant to our agreement with Sail Labs, that we will negotiate pursuant to our
rights of first negotiation on behalf of Microsoft if Microsoft has indicated
that it is interested in acquiring any such technology.

                                      26
<PAGE>

      Sail Labs is obligated to pay us royalties on its net revenues from the
sale of all technology and products that it develops based on our technology. We
are obligated to pay Sail Labs royalties on our net revenues from the sale of
all Sail Labs technology or products that we have rights to pursuant to the
agreement.

      Sail Labs is prohibited without our consent from (i) granting any source
code licenses relating to technology or products that it develops pursuant to
the agreement, or (ii) licensing any of our technology on a stand-alone basis.
Sail Labs is also subject to limitations for a period of two years on the use of
our technology in the distribution of technology or products that are
competitive with our existing product lines. In addition, Sail Labs is required
to make available to us technology and products that it develops or owns,
including technology or products developed or acquired independently from the
agreement, at least one month prior to making any such technology or products
available to third parties.

      In connection with the license and development agreement, we also entered
into a stockholders' agreement with the other stockholders of Sail Labs. The
stockholder's agreement, among other things, contains restrictions on the
parties' transfer of Sail Labs stock, including a prohibition on transfers to
our competitors. The stockholder agreement also gives us preferential rights to
participate in future Sail Labs equity financings. In addition, we have the
right to purchase all, but not less than all, of the outstanding stock of Sail
Labs at any time at a formula price intended to approximate the fair market
value of Sail Labs at the time of exercise. We also have the right to appoint
one of the eight members of the board of directors of Sail Labs.

      Language Development. We have entered into strategic relationships to
initiate development of speech and language technologies for additional
languages, including Bahassa, Russian, Ukrainian, Belarussian, Hungarian,
Polish, Czech, Greek, Thai, Tamil, Hindi, Turkish, Vietnamese, Urdu, Malay,
Taiwanese, Armenian, Arabic and Arabic dialects. In addition, we have entered
into a strategic relationship with a number of cross language development
companies which have engaged in the development of new language pairs for
machine translation. The new language pairs have as source languages Italian,
French, German, Mandarin, Japanese, Russian and Spanish, with the destination
languages being Asian languages. We are considering entering into similar
agreements for the development of additional languages.

      Pursuant to these agreements, we have received nonrefundable up-front
license fees in connection with the license of our speech and language
technology development tools to strategic partners that are unaffiliated with us
to develop additional language versions and language pairs for our core speech
technology products. Our strategic partners also have rights, subject to our
rights described below, to develop, market and distribute products incorporating
the developed technology. In addition to one-time license fees, we have rights
to receive royalties based on our partners' net revenues from sales of products
incorporating the developed technology. We also have rights to market and
distribute products developed by our strategic partners incorporating the
developed technology, subject to our obligation to pay royalties to our
strategic partners on our net revenues from our sale of such products. Subject
to our underlying rights and our rights in jointly developed technology or
products, our strategic partners will own the technology and products developed
pursuant to these agreements.

      In September 1998, we entered into a license agreement with Nordisk
Sprakteknologi AS ("NST"), and in April 1999, we entered into a development
agreement with Voss International Language Technology AS ("VILT"). Both NST and
VILT are located in Voss, Norway. Under the development agreement with VILT, we
granted VILT a non-exclusive license to use our tools to localize our products
for the Scandinavian market. Ownership of all intellectual property rights in
the localized products will belong to us. Under the license agreement with NST,
we have granted NST a license to develop certain designated applications
incorporating the products localized by VILT.

      In the second quarter of 1999, we formed a joint-venture called GRI
Nordisk Sprakteknologi AS ("GRI"), which will be the holding company for NST and
VILT. A total amount of approximately $12.0 million has been contributed to GRI
by its partners. We have invested approximately $3 million in GRI as of April
30, 2000, representing 19.9% of its share capital. The other principal partners
are Telenor Venture AS and SND Invest AS each of which own 20% of GRI's share
capital.

                                      27
<PAGE>

     Intel. In May 1999, we entered into an agreement with Intel Atlantic Inc.
to form a new company to develop e-commerce and telephony solutions based on our
technology. The company is owned 51% by Intel and 49% by us. Intel has the right
to appoint three of five directors of the company, including the chairman, and
we have the right to appoint the remaining two directors, subject to limitations
and conditions. We have agreed to initially fund the company in an aggregate
amount of up to $10 million in the form of debt financing. Additional funding is
subject to mutual agreement of the parties.

     The parties have agreed on an annual basis to assess the appropriate
strategic options for the company, including an initial public offering. Each
party has the right to purchase the interests of the other party in the company
after three years, with Intel having the initial right to do so. Both parties
have also agreed to restrictions on transfer of the securities of the company.

     The parties have agreed to license to the company the technology needed by
the company on an ad hoc basis at commercially reasonable terms. The company is
based in Ieper, Belgium and in Santa Clara, California, and is staffed by
employees of both parties. Both parties have agreed to send or otherwise make
available full-time employees to the company. We provided the Chief Executive
Officer. The number of employees dedicated to the company will be as appropriate
to achieve the business plan of the company over time.

     In May 1999, Intel also invested $30 million with us in the form of
non-voting, non-interest bearing securities which are exchangeable on and after
November 5, 2000 for shares of our Automatically Convertible Stock held by a
trust on behalf of Intel. Each share of Automatically Convertible Stock is
currently convertible into two shares of our common stock. The purchase price
per share of approximately $33.48 paid by Intel was determined based on a method
of average of trading price of our common stock on the Nasdaq National Market
for the 10 trading days immediately preceding April 5, 1999. Intel has agreed to
certain restrictions on the transfer of our securities, including an 18-month
prohibition on transfer subject to conditions. In connection with the
investment, we granted Intel non-voting observation rights for all meetings of
our Board of Directors. We have also granted Intel registration rights with
respect to the shares of our common stock into which the securities purchased by
Intel are ultimately convertible.

     S.AI.L Trust. For a discussion of the S.AI.L Trust and related matters,
see "Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Our interests may be in conflict with the
interests of a number of entities in which our directors are involved".

     NightStorm Media. In February 2000, we joined with Saban Entertainment,
Inc., a wholly-owned subsidiary of Fox Family Worldwide, Inc., Korean Broadcast
Entertainment for Satellite and Terrestrial, Inc. and Zen Entertainment Co. Ltd.
to form NightStorm Media, a joint venture in which we intend to localize our
technologies and solutions for the Korean market and adapt them to the
educational and entertainment fields. The joint venture intends to license and
distribute these technologies in the animation broadcast and Internet arena and
to provide animation production, co-production and merchandising of Internet and
traditional broadcast content to South Korea.

     Visteon Corporation. Together with Visteon Corporation, in April 2000, we
announced our intention to create a joint venture dedicated to advancing and
accelerating the speech interface in automotive applications. Under the proposed
arrangement, we would have an initial 60 percent interest in this joint venture
and Visteon would have a 40 percent interest. The purpose of the joint venture
company will be to provide a dedicated, single source of high-end, integrated
speech products and technology dedicated to the automotive industry. We expect
to launch the new joint venture company with approximately 50 employees in the
second half of 2000. However, commencement of the joint venture is subject to a
number of conditions, including the negotiation and execution of definitive
joint venture documents.

     We intend to continue to seek strategic alliances with technology partners
that we believe will further enhance product development and marketing.

                                      28
<PAGE>

Research and Development

     We focus our research and development efforts on the development and
enhancement of our speech and language technologies and applications and
solutions based on those technologies. We believe that the timely enhancement of
our technologies and development of applications for those technologies are
essential to maintain our competitive position. Delays or difficulties
associated with our research and development efforts could materially harm our
business.

     We employ linguists and multilingual scientists and engineers with
expertise in such areas as signal processing, statistics, linguistics and
software. In addition, we subcontract with third parties to supplement our
research and development effort.

     During 1997, 1998 and 1999, our research and development expenses were
approximately $6.4 million, $25.2 million, and $50.0 million, respectively.

Competition

     Our markets are highly competitive and are characterized by continual
change and improvements in technology. Many of our competitors and potential
competitors, including Apple, IBM, Lucent Technologies, Microsoft, Motorola,
NEC, Philips and Texas Instruments, have substantially greater resources than we
do. These companies may also use our services or license our technology from us
or our competitors, such as Vocalis, Berlir or Bowne International. We also
compete with other independent speech and language technology companies, such as
Nuance and Speechworks. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the abilities of their speech and language technology
products to address the needs of our prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.

     Although several of our larger competitors have developed or are developing
speech and language technologies, these competitors generally focus their
activities on developing specific applications for particular markets. These
applications are generally offered only on hardware or software platforms
developed by that company. Most independent speech technology companies have
focused on the development of only one of the core speech and language
technologies, and most have not developed core speech and language technologies
products to the markets that we target.

     We believe that competition in speech and language technologies and
solutions markets is based on a variety of factors, including accuracy, quality,
functionality (including number of languages), ease-of-use, cost efficiency,
processing and memory requirements, and customer support.

     We experience significant competition in the applications market for our
dictation software from competitors such as IBM and Philips both of which have
introduced large vocabulary speaker-dependent continuous speech dictation
products. We believe that we compete with these companies based primarily on
price, accuracy and ease-of-use.

     We believe that competition in the machine translation market is based
primarily on accuracy, functionality, ease-of-use, price, processing and memory
requirements and customer support. Our principal competitors in this market are
Logos (in Germany), Systran (in France), Toshiba, Catena, Sharp (in the Far
East), and Transparent Language, IBM (in the U.S.).

     The human translation and translation services market is also highly
competitive and, although none of the current participants in this market has a
significant market share, we have numerous competitors with significant
resources, such as Bowne International. In this market, we compete primarily on
the basis of quality of translation, responsiveness and price. We also compete
based on our ability to offer translation services in multiple languages.

                                      29
<PAGE>

Proprietary Rights

     We rely primarily on a combination of copyright and trademark laws, trade
secrets, patents, confidentiality procedures (including, in some instances, the
encryption of certain technical information) and contractual provisions to
protect our proprietary rights. We have obtained patents and will continue to
make efforts to obtain patents, when available, in connection with our
technologies. We also seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which may afford only
limited protection. As of June 8, 2000, we had 157 United States patents
(expiring between 2000 and 2018) and 119 pending United States patent
applications, as well as 172 patents in certain foreign jurisdictions and 96
pending patent applications in other jurisdictions, principally in Europe and
Japan.

     We have granted an exclusive license for some of our patents to Microsoft
in defined areas. We have also exclusively licensed our speech and language
technology development tools to strategic partners for the development of speech
and language technologies for additional languages.

Employees

     At March 31, 2000, we had approximately 2,700 full-time employees. As a
result of the acquisition of Dictaphone, which closed in May 2000, and the
acquisition of Dragon, which closed in June 2000, we now have in excess of 5,000
full-time employees.

     Every industry sector in Belgium has its own Joint Labor Committee in which
employee and employer representatives on a national level negotiate the terms
and conditions of employment in the sector, including wages, working hours, work
rules and certain other matters. The collective bargaining agreements concluded
by the Joint Labor Committee applicable to our industry sector apply to us and
our employees. Belgian law also requires social elections to be held by the
employees of a company every four years to elect representatives for a Workers
Council and a Health and Safety Committee, provided there are candidates for the
position. These elections occurred on May 19, 2000, which was the first time
that these elections were held at the Company. The elections have been planned
in cooperation with our employees with some minor union involvement. The
majority of the representatives elected are non-unionized employees. We believe
that our relationship with our employees is good.

                                      30
<PAGE>

                              Item 2. PROPERTIES

     We lease approximately 139,000 square feet of office space in Ieper,
Belgium, where we have constructed our principal offices. In Wemmel, Belgium we
lease approximately 22,500 square feet of office space. We also own real
property located in the Flanders Region economic development district in Ieper,
where we have constructed office facilities of approximately 9,600 square feet.

     Our Speech and Language Consulting and Services Division occupies
approximately 10,800 square feet of office space in Brussels, Belgium, and
approximately 12,000 square feet of office space in Wuppertal, Germany. This
division also leases an aggregate of approximately 146,000 square feet of office
space in various other locations, including France, Germany, Spain, Sweden,
Brazil, Italy, Portugal, the Netherlands, the United Kingdom, Ireland, Finland,
Norway, Denmark, Japan, China, South Korea and the United States.

     We have leases for our United States headquarters in Burlington,
Massachusetts consisting of approximately 96,000 square feet. We lease an
additional 51,000 square feet of office space at various other locations in the
United States including sales offices in Burlingame, California; San Diego,
California and McLean, Virginia. In Montreal, Canada we have leased a 3,000
square foot office.

     We have sales offices in Toulouse and Paris, France; Dublin, Ireland;
Loughborough, United Kingdom; Singapore; Sydney, Australia; Taipei, Taiwan; Hong
Kong; Tokyo, Japan; and Seoul, South Korea. The leased office space at these
locations totals approximately 116,000 square feet, including the lease for our
Seoul, South Korean based location where we lease 61,000 square feet of office
space.

     We have established training and support centers in our offices in Ieper
(Belgium), Burlington and Burlingame (USA), and Singapore.

     As a result of the acquisition of Dictaphone, we have assumed leases for
approximately 138,000 square feet of office space which is used for Dictaphone's
headquarters in Stratford, Connecticut as well as leases for approximately 45
storage facilities and 115 office facilities worldwide. In addition, through
Dictaphone, we now own a manufacturing facility of approximately 120,000 square
feet and a customer service facility of approximately 118,000 square feet, both
in Melbourne, Florida. We also own, through Dictaphone, a 90,000 square foot
facility in Killwangen, Switzerland which is leased to a third party. No major
encumbrances exist on any of these owned properties.

     As a result of the acquisition of Dragon, we have assumed leases for
approximately 100,000 square feet of office space in various locations in
Massachusetts.

     Our leases have terms ranging from 18 months to 20 years and are at
prevailing market rental rates. We believe that our present facilities will be
adequate for our needs for the foreseeable future and that further additional
space will be available, as necessary.

                                      31
<PAGE>

                           Item 3. LEGAL PROCEEDINGS

Class Action

      In January and February 1999, plaintiffs named the Company as a defendant
in several class action lawsuits filed in the United States District Court for
the District of Massachusetts and the United States District Court for the
Eastern District of New York. Our President and Chief Executive Officer, Gaston
Bastiaens, and our Senior Vice President of Finance, Carl Dammekens, were named
as defendants in several of these suits. The lawsuits allege, in general, that
we improperly accounted for write-offs of in-process research and development in
connection with certain acquisitions. They also contend that our actions
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated under that Act. The plaintiffs filed the lawsuits on
behalf of all purchasers of our common stock during varying periods ranging from
April 1997 through December 1998. The plaintiffs seek unspecified damages,
attorneys' and experts' fees and other relief.

      In April 1999, the United States District Court for the District of
Massachusetts consolidated the class action lawsuits into one lawsuit to be
heard in that court. The plaintiffs filed an amended consolidated class action
complaint in July 1999. In the fall of 1999, we filed a Motion to Dismiss which
was argued in February 2000. The court is still considering this Motion and has
not yet issued a ruling.

      We believe that the claims are without merit and intend to defend against
them vigorously. Nevertheless, class action litigation can be expensive and time
consuming. Although we cannot make any guarantees regarding the outcome of these
actions, we believe that the outcome will not materially harm our business.

      We are a party to certain other legal proceedings that we do not believe
will materially harm our business.

          Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of security holders during the
fourth quarter of 1999.

                                      32
<PAGE>

                                    PART II

   Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                                    MATTERS

     Our common stock is listed under the symbol "LHSP" on the Nasdaq National
Market and on the European Association of Securities Dealers Automated Quotation
System ("EASDAQ"). The following table sets forth the range of high and low
sales prices on the Nasdaq National Market and on EASDAQ during 1998 and 1999.

<TABLE>
<CAPTION>
                                                                    Common Stock Price(1)
                                                        ---------------------------------------------
                                                               Nasdaq                    EASDAQ
                                                        ---------------------------------------------
                                                         High         Low          High          Low
                                                        ---------------------------------------------
<S>                                                     <C>         <C>          <C>           <C>
Fiscal Year Ended December 31, 1998
     First Quarter.............................         $23.44      $ 10.65      $23.125       $10.91
     Second Quarter............................         $34.00      $21.625      $ 32.87       $22.12
     Third Quarter.............................         $31.94      $ 15.50      $ 31.00       $16.19
     Fourth Quarter............................         $23.00      $ 14.53      $ 22.44       $14.81

Fiscal Year Ended December 31, 1999
     First Quarter.............................         $22.19      $ 12.88      $ 22.00       $13.68
     Second Quarter............................         $23.00      $ 15.25      $ 22.00       $15.25
     Third Quarter.............................         $19.69      $ 14.88      $ 19.55       $15.25
     Fourth Quarter............................         $24.78      $ 15.75      $ 24.80       $16.12
</TABLE>

(1)  All prices have been adjusted to reflect a 2-for-1 stock split which
occurred in April 1998 and a 2-for-1 stock split which occurred in April 2000.
The last reported sale price of our common stock on June 8, 2000 was $44.31 per
share on the Nasdaq National Market and $46.00 per share on EASDAQ. As of June
8, 2000, there were approximately- 1,014 holders of record of our common stock.

     There are no Belgian exchange control restrictions on investments in, or
payments on our securities. There are no special restrictions in our Restated
Articles of Association or Belgian law that limit the right of stockholders who
are not citizens or residents of Belgium to hold or vote shares of common stock.

Sales of Unregistered Securities

     On February 13 and March 1, 1999, we issued 284,642 and 6,929 shares of
common stock, respectively, to holders of an 8% Convertible Subordinated Notes
upon conversion by the holders thereof.

     On May 27/th/ and June 4/th/ 1998, L&H Capital Trust I (the "Trust") issued
in a registered offering an aggregate of $156 million in principal amount of
trust preferred income equity redeemable securities (the "PIERS"). The PIERS are
convertible into shares of the Company's common stock at a conversion price of
$28.425 per share (subject to certain adjustments in certain transactions). On
the following dates certain of the holders of the PIERS converted their PIERS
into the amount of our common stock set forth below:

                      DATE                   COMMON STOCK ISSUED
                      ----                   -------------------

                      October 20, 1999             82,894
                      November 10, 1999             1,958

     On November 30, 1999, we issued 84,934 shares of common stock to Lexitrans
pursuant to a bond refundable in shares ("BRS") issued in connection with our
acquisition of Lexitrans and pursuant to the asset purchase agreement executed
in November 1996.

     On November 30, 1999, we issued 77,830 shares of common stock to
Translingua pursuant to a BRS issued in connection with our acquisition of
Tranlingua.

                                      33
<PAGE>

     On December 30, 1999, we issued 64,020 shares of common stock to Lexitrans
pursuant to a BRS issued in connection with our acquisition of Lexitrans.

     With regard to all of the transactions mentioned above, we relied upon
Regulation S promulgated under the Securities Act, and Section 4(2) of the
Securities Act as exemptions from the registration requirements of the
Securities Act. No commissions were paid to any underwriter in connection with
the securities issued in any of the foregoing transactions.

Taxation

     The following summary is based on tax laws of the United States and Belgium
as in effect on the date of this Report, and is subject to changes in United
States and Belgian law, including changes that could have retroactive effect. It
is based on the current United States--Belgium Double Taxation Convention (the
"Convention"), signed on July 9, 1970 and modified by a protocol (the
"Protocol") signed on December 31, 1987. This summary does not take into account
or discuss the tax laws of any country other than the United States or Belgium.
Prospective purchasers of shares of common stock should consult their own tax
advisors as to the United States, Belgian and other tax consequences of the
purchase, ownership and disposition of common stock.

     This summary does not describe United States or Belgian federal estate and
gift tax considerations, nor does it describe regional, state and local tax
considerations within the United States or Belgium. Furthermore, this summary
does not address United States federal income tax or Belgian tax considerations
relevant to potential purchasers subject to taxing jurisdictions other than or
in addition to the United States, and does not address all possible categories
of securities holders, some of whom may be subject to special rules.

     This summary contains a description of the material United States federal
income tax and Belgian tax consequences of the purchase, ownership and
disposition of common stock by a beneficial owner that (i) is a resident or
corporation of the United States, (ii) is not also a resident or corporation of
Belgium and is not domiciled in Belgium, (iii) does not hold common stock in
connection with any permanent establishment or fixed base in Belgium, (iv) does
not own, and has not owned (directly, indirectly, or by attribution) at any time
10% or more of the total combined voting power of the Company, and (v) holds
common stock as a capital asset. The term "United States holder", as used in
this summary, means a beneficial owner of common stock meeting these
requirements.

Taxation of Dividends

     Belgian Income Taxes. For Belgian income tax purposes, the gross amount of
all distributions by us to our stockholders (other than the repayment of paid-in
capital carried out in accordance with Belgian Company Law) are in general taxed
as dividends. The gross amounts that we pay to redeem the shares owned by
stockholders and the distributions that we make to stockholders as a result of
our complete dissolution and liquidation, are also taxed as dividends. However,
no Belgian withholding tax is levied on such redemptions and liquidating
distributions.

     In general, a Belgian withholding tax of 25% is levied on all dividends.
For private investors which are tax resident in Belgium and for Belgian legal
entities subject to the "impot des personnes morales--rechtspersonenbelasting"
(the Regulations Regarding Nonprofit Organizations), the Belgian withholding tax
constitutes the final tax in Belgium on their dividend income.

     For Belgian resident companies and for companies with fiscal residence
outside Belgium who hold common stock through a permanent establishment of a
fixed base in Belgium, the gross dividend income must be included in their
taxable income, which is taxed at the income tax rate of 40.17%. If such a
stockholder holds common stock in an amount equal to at least 5% of our total
outstanding common stock or with an acquisition value of at least BEF 50 million
at the time of the dividend distribution, we will be entitled to an income tax
deduction of up to 95% of the gross dividend received. In addition, under
certain conditions we are entitled to credit the dividend withholding tax
against its corporate income tax liability and to claim the reimbursement of the
withholding tax that exceeds this liability.

                                      34
<PAGE>

     For Belgian resident individuals and non-profit organizations, and for
non-resident Belgian investors without Belgian establishment to which the common
stock is attributable, the dividend withholding tax will constitute the final
tax in Belgium on their Belgian source dividend income.

     According to the Convention, a United States holder may apply to Belgian
tax authorities for a refund of a part of the dividend tax that has been
withheld. If this refund request is granted, the Belgian withholding tax on such
dividends is effectively reduced to 15%. Although we do not presently
contemplate the payment of any cash dividends on common stock, we may apply to
Belgian tax authorities for a blanket exemption that would allow us to withhold
only 15% of all dividends paid to a United States holder. While we believe that
such an exemption would be granted, there can be no assurance that this will
occur.

     United States Federal Income Taxes. For United States federal income tax
purposes, the gross amount of all dividends, if any, paid with respect to common
stock out of current or accumulated earnings and profits ("E&P") to a United
States holder generally will be treated as foreign source ordinary income to
such holder, even though the United States holder generally receives only 85% of
that amount (after giving effect to the Belgian withholding tax). United States
corporations that hold common stock generally will not be entitled to the
dividends received deduction available for dividends received from United States
corporations. To the extent a distribution exceeds E&P, it will be treated first
as a return of capital to the extent of the United States holder's basis in the
stock and then as gain from the sale or exchange of a capital asset.

     For United States federal income tax purposes, the amount of any dividend
paid in Belgian francs will be the United States dollar value of the Belgian
franc at the exchange rate in effect on the date of receipt, whether or not the
Belgian franc is converted into United States dollars at that time. Gain or loss
recognized by a United States holder on a sale or exchange of the Belgian franc
will be United States source ordinary income or loss.

     The withholding tax imposed by Belgium generally is a creditable foreign
tax for United States federal income tax purposes. Therefore, the United States
holder generally will be entitled to include the amount withheld as a foreign
tax paid in computing a foreign tax credit (or in computing a deduction for
foreign income taxes paid, if the holder does not elect to use the foreign tax
credit provisions of the Internal Revenue Code of 1986, as amended (the
"Code")). The Code, however, imposes a number of limitations on the use of
foreign tax credits, based on the particular facts and circumstances of each
taxpayer. Investors should consult their tax advisors regarding the availability
and amount of the foreign tax credit.

Capital Gains

     Belgian Income Taxes. Private investors, legal entities subject to the
"impot des personnes morales--rechtspersonenbelasting" (i.e., non-profit
entities) and, provided certain conditions are met, for-profit companies
generally will not be subject to Belgian capital gains tax on the sale or other
disposition of the common stock. Therefore, United States holders generally will
not be subject to Belgian capital gains tax on the sale of the common stock.

     United States Federal Income Taxes. A United States holder who sells or
otherwise disposes of common stock will recognize gain (or loss) to the extent
its amount realized exceeds (or is exceeded by) its tax basis in such stock. Any
such gain or loss will be capital gain or loss if the U.S. holder has held the
common stock as a capital asset. Any capital gain or loss will be long-term if
the U.S. holder has held the common stock for longer than twelve months, or
short-term if the U.S. holder has held the common stock for not longer than
twelve months. Long-term capital gains recognized by individuals are taxable at
a maximum rate of 20%; a reduced rate does not apply to capital gains recognized
by corporations. Capital losses are generally deductible only against capital
gains and not against ordinary income. In the case of an individual, however,
unused capital losses in excess of capital gains may offset up to $3,000
annually of ordinary income. Individual U.S. holders may carry forward any
remaining unused capital losses to be used in succeeding tax years. The
recognition of long-term capital gains may limit the extent to which individual
U.S. holders may deduct investment interest expense.

     Capital gain recognized by a United States holder on the sale or other
disposition of common stock will be United States source gain. The source of a
loss attributable to the sale of common stock is not certain at the present
time. Under the Code, the Internal Revenue Service has authority to issue
additional regulations addressing the

                                      35
<PAGE>

treatment of losses. Regulations have not yet been issued under this authority
and may not be issued. Investors should consult their tax advisors regarding the
proper treatment of such losses.

Taxes on Stock Exchange Transactions

     Belgium. Belgian residents are subject to taxes on stock exchange
transactions ("taxe sur les operations de bourse--beurstaks") in the amount of
0.17% of the purchase price (limited to BEF 10,000 per order) for the purchase
and the sale in Belgium of the common stock through a professional intermediary
(the "Stock Exchange Tax").

     United States. United States holders are not subject to the Stock Exchange
Tax.

Passive Foreign Investment Company Considerations

     We do not believe that we are a passive foreign investment company (a
"PFIC") and do not expect to become a PFIC in the future for United States
federal income tax purposes, although we cannot assure you in this regard. This
conclusion is a factual determination made annually and, thus, subject to
change. In reaching the conclusion that we do not believe we are a PFIC, we have
valued our assets based on the price per share of the common stock. For purposes
of applying the PFIC rules to the Company, such a valuation method results in
substantial value being given to intangible assets including goodwill that are
considered neither to produce nor to be held for the production of passive
income for purposes of the PFIC rules. The IRS has neither approved nor
disapproved of this valuation method.

     In general, we will be a PFIC with respect to a United States Holder, if,
for any taxable year in which the United States Holder held common stock, either
(i) at least 75% of the gross income of the Company for the taxable year is
passive income or (ii) at least 50% of the value (determined on the basis of a
quarterly average) of the Company's assets is attributable to assets that
produce or are held for the production of passive income. For this purpose,
passive income generally includes dividends, interest, royalties, rents (other
than rents and royalties derived in the active conduce of a trade or business
and not derived from a related person), annuities and gains from assets that
produce passive income. If a foreign corporation owns at least 25% by value of
the stock of another corporation, the foreign corporation is treated for
purposes of the PFIC tests as owning its proportionate share of the assets of
the other corporation, and as receiving directly its proportionate share of the
other corporation's income. If we are classified as a PFIC in any year with
respect to which a United States person is a shareholder, it generally will
continue to be treated as a PFIC with respect to such shareholder in all
succeeding years, regardless of whether it continues to meet the income or asset
test described above, subject to certain possible shareholder elections that may
apply in certain circumstances.

     The following rules apply if we are treated as a PFIC, unless a United
States Holder makes a "QEF election" or a "mark to market election", each as
described below:

          1. Distributions that we make during a taxable year to a United States
     Holder with respect to the common stock that are "excess distributions"
     (defined generally as the excess of the amount received with respect to the
     common stock in any taxable year over 125% of the average received in the
     shorter of either the three previous years or the United States Holder's
     holding period before the taxable year) must be allocated ratably to each
     day of the United States Holder's holding period. The amounts allocated to
     the current taxable year and to taxable years prior to the first year in
     which we were classified as a PFIC are included as ordinary income in the
     United States Holder's gross income for that year. The amount allocated to
     each other prior taxable year is taxed as ordinary income at the highest
     rate in effect for the United States Holder in that prior year and the tax
     is subject to an interest charge at the rate applicable to deficiencies in
     income taxes.

          2. The entire amount of any gain realized upon the sale or other
     disposition of common stock will be treated as an excess distribution made
     in the year of sale or other disposition and as a consequence will be
     treated as ordinary income and, to the extent allocated to years prior to
     the year of sale or disposition, will be subject to the interest charge
     described above.

                                      36
<PAGE>

     The special PFIC tax rules described above will not apply to a United
States Holder if the United States Holder elects to have the Company treated as
a "qualified electing fund" (a "QEF election") and we provide certain
information to United States Holders. If we determine that we are a PFIC, we
intend to notify United States Holders and to provide any information as is
required for United States Holders to make a QEF election.

     A United States Holder that makes a QEF election will be taxable currently
on its pro rata share of the our ordinary earnings and net capital gain (at
ordinary income and capital gains rates, respectively) for each of our taxable
years, regardless of whether or not distributions are received. The United
States Holder's basis in the common stock will be increased to reflect taxed but
undistributed income. Distributions of income that had previously been taxed
will result in a corresponding reduction of basis in the common stock and will
not be taxed again as a distribution to the United States Holder.

     Alternatively, a United States Holder of common stock in a PFIC that is
treated as "marketable stock" may make a mark-to-market election. An electing
United States Holder will not be subject to the PFIC rules described above.
Instead, in general, an electing United States Holder will include in each year
as ordinary income the excess, if any, of the fair market value of the common
stock at the end of the taxable year over its adjusted basis and will be
permitted an ordinary loss in respect of the excess, if any, of the adjusted
basis of the common stock over its fair market value at the end of the taxable
year (but only to the extent of the net amount previously included in income as
a result of the mark-to-market election). The electing United States Holder's
basis in the common stock will be adjusted to reflect any such income or loss
amounts. The mark-to-market election is only available with respect to stock
traded on certain United States exchanges and other exchanges designated by the
United States Treasury. We anticipate that such election will be available to
United States Holders of the common stock.

     A United States Holder who owns common stock during any year that we are a
PFIC must file IRS Form 8621. United States holders of our common stock are
urged to consult their tax advisor concerning the United States federal income
tax consequences of holding our common stock if we are considered a PFIC.

Foreign Personal Holding Companies

     A United States Holder of stock in a Foreign Personal Holding Company
("FPHC") may be required to include in gross income his, her or its share of the
undistributed foreign personal holding company income of the FPHC. In addition,
there may be adverse estate tax consequences to such a United States Holder. A
FPHC is a foreign corporation more than 50% of which (by vote or value) is owned
by five or fewer United States persons, and which has foreign personal holding
company income that constitutes at least 50% of its gross income (60% in its
first year as a FPHC). Based on the ownership of the Company and the nature of
its operations, we do not believe that we will be a FPHC in the foreseeable
future, although we cannot assure you in this regard.

United States Information Reporting and Backup Withholding

     Dividends payable with respect to the common stock and proceeds from the
sale or exchange of the common stock may be subject to information reporting to
the Internal Revenue Service and possible U.S. backup withholding at a 31% rate.

     Backup withholding will not apply, however, to a holder who furnishes a
correct taxpayer identification number or certificate of foreign status and who
makes any other required certification or who is otherwise exempt from backup
withholding. Persons required to establish their exempt status generally must
provide such certification on IRS Form W-9 (Request for Taxpayer Identification
Number and Certification) in the case of U.S. persons or on IRS Form W-8
(Certificate of Foreign Status) in the case of non-U.S. persons. New
regulations, which are applicable to payments made after December 31, 1999, have
generally expanded the circumstances under which information reporting and
backup withholding may apply unless the holder provides the information
described above.

     Amounts withheld under backup withholding may be credited against a
holder's U.S. federal income tax liability, and a holder may obtain a refund of
any excess amounts withheld under the backup withholding rules by timely filing
the appropriate claim for refund with the Internal Revenue Service and
furnishing any required information. U.S. holders should consult their tax
advisors regarding the application of the information reporting and backup
withholding rules.

                                      37
<PAGE>

                 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data for the three months
ended March 31, 1999 and 2000 have been derived from our unaudited consolidated
financial statements.

<TABLE>
<CAPTION>
                                                                     Three Months Ended March 31,
                                                                     ----------------------------
                                                                        1999              2000
                                                                        ----              ----
                                                                     (unaudited)       (unaudited)
          <S>                                                        <C>               <C>
          Total Revenues.........................................      $70,708          $110,694
          Total Cost of Revenues.................................       20,740            25,848
          Gross Profit...........................................       49,968            84,846
          Total Operating Expenses...............................       39,029            58,124
          Operating Income ......................................       10,939            26,722
          Other Income...........................................        6,497             2,858
          Income before income taxes and minority interests......       17,436            29,580
          Taxes..................................................        5,226            12,123
          Minority Interest......................................        1,146             1,010
          Net Income.............................................      $11,064           $16,447
</TABLE>

     For the three month period ended March 31, 2000, our total consolidated
revenues increased by $40.0 million, or 57%, to $110.7 million from $70.7
million for the same period in 1999. Total cost of revenues as a percentage of
revenues decreased to 23% for the three months ended March 31, 2000 from 29%
during the same period in 1999. Total operating expenses for the three months
ended March 31, 2000 increased by $19.1 million, or 49%, to $58.1 million from
$39.0 million over the same period in 1999. The increase in total operating
expenses relates primarily to the increase in its general administrative,
marketing and sales and research and development expenses to support our growing
revenues and infrastructure. Total operating income for the three months ended
March 31, 2000 increased by $15.8 million to $26.7 million from $10.9 million
for the same period in 1999. Income before income taxes and minority interests
for the three months ended March 31, 2000 increased by $12.2 million to $29.6
million from $17.4 million for the same period in 1999. Net income for the three
months ended March 31, 2000 increased by $5.3 million to $16.4 million from
$11.1 million for the same period in 1999.

     The following selected consolidated financial data as of December 31, 1998
and 1999 and for the years ended December 31, 1997, 1998 and 1999 have been
derived from our audited consolidated financial statements together with the
notes thereto included elsewhere in this Report. The selected consolidated
financial data as of December 31, 1995, 1996 and 1997 and for the years ended
December 31, 1995 and 1996 have been derived from our audited consolidated
financial statements not included herein. The data set forth below is qualified
by reference to, and should be read in conjunction with, our consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Report.

                                      39
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                     -------------------------------------------------
                                                                     1995        1996       1997       1998       1999
                                                                     ----        ----       ----       ----       ----
                                                                           (in thousands, except per share data)
<S>                                                               <C>      <C>            <C>        <C>        <C>
Consolidated Statement of Operations Data:
Revenues(1):
   Technologies and solutions..................................   $  7,722    $ 21,622    $ 33,402   $ 82,809   $138,660
   Applications................................................         --       2,500      34,307     60,883    113,693
   Consulting and services.....................................         --       6,892      31,662     67,900     91,884
                                                                  --------    --------    --------   --------   --------
          Total revenues.......................................      7,722      31,014      99,371    211,592    344,237
                                                                  --------    --------    --------   --------   --------
Cost of Sales:
   Technologies and solutions..................................      2,493       1,518       6,716     12,826     19,634
   Applications................................................         --         989      12,797     17,895     18,988
   Consulting and services.....................................         --       4,174      19,257     38,922     55,633
                                                                  --------    --------    --------   --------   --------
          Total cost of sales..................................      2,493       6,681      38,770     69,643     94,255
Selling, general and administrative............................     11,172      12,982      26,042     59,354    101,641
Research and development, net..................................      4,920       6,700       6,393     25,165     49,621
Amortization of goodwill.......................................         --         638       6,809     19,978     32,439
Write-off of in-process research and development...............         --      11,514      33,823     79,373         --
Other operating expense........................................         --          --       1,453      1,821         --
                                                                  --------    --------    --------   --------   --------
          Total operating expenses.............................     18,585      38,515     113,290    255,334    277,956
                                                                  --------    --------    --------   --------   --------
Operating income (loss)........................................    (10,863)     (7,501)    (13,919)   (43,742)    66,281
Other expenses (income)........................................      3,112        (125)        812      1,441     (7,111)
                                                                  --------    --------    --------   --------   --------
Income (loss) before income taxes and minority interests.......    (13,975)     (7,376)    (14,731)   (45,183)    73,392
     Provision for income taxes (benefit)......................         --         579      (1,407)     5,073     27,150
     Minority interest, net of taxes...........................         --         (16)        (24)     2,422      4,500
                                                                  --------    --------    --------   --------   --------
Net income (loss)..............................................    (13,975)     (7,939)    (13,300)   (52,678)    41,742
Preferred stock embedded dividend(2)...........................         --          --         976         --         --
Net income (loss) attributable to common shareholders..........   $(13,975)   $ (7,939)   $(14,276)  $(52,678)  $ 41,742
                                                                  ========    ========    ========   ========   ========
Net income (loss) per common share
   Basic.......................................................   $  (0.44)   $  (0.13)   $  (0.20)  $  (0.52)  $   0.37
                                                                  ========    ========    ========   ========   ========
   Diluted.....................................................   $  (0.44)   $  (0.13)   $  (0.20)  $  (0.52)  $   0.35
                                                                  ========    ========    ========   ========   ========
Weighted average number of shares outstanding
   Basic.......................................................     31,406      59,599      69,863    100,469    113,110
   Diluted.....................................................     31,406      59,599      69,863    100,469    119,424
</TABLE>

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                       --------------------------------------------------
                                                                       1995        1996       1997        1998       1999
                                                                       ----        ----       ----        ----       ----
                                                                                         (in thousands)
<S>                                                                  <C>         <C>     <C>           <C>        <C>
Consolidated Balance Sheet Data:
Working capital................................................      $18,622     $18,885  $129,876     $197,057   $142,656
Total assets...................................................       32,792      79,874   272,048      571,534    693,738
Long-term debt, less current portion...........................        3,210      38,941    30,848       20,004     18,665
Shareholders' equity...........................................       18,889      16,535   208,139      315,406    417,593
</TABLE>

_______________
(1)  The following summarizes revenues generated from companies partially owned
     by us, FLV Fund, S.AI.L Trust and/or L&H Investment Company and from
     certain other related parties. Revenues for the year ended December 31,
     1996 included a total of $18,582 from Quarterdeck Corporation, Microsoft
     Corporation, NDC Europe N.V., NDC China N.V., NDC Far East N.V., NDC Voice
     Eastern Europe N.V., NDC Voice Middle East N.V., NDC Voice South America
     N.V., Keyware Technologies N.V. and Dictation Consortium N.V. Revenues for
     the year ended December 31, 1997 included a total of $34,499 from Dictation
     Consortium N.V., Keyware Technologies N.V., Speech Systems Inc., Microsoft
     Corporation ($12.9 million), Mindmaker Inc. and Xiox Corporation Inc.
     Revenues for the year ended December 31, 1998 included a total of $34,783
     from Dictation Consortium N.V., Speech Systems Inc., Microsoft Corporation
     ($25.4 million), Mindmaker Inc., Xiox Corporation Inc., Creator Ltd., FLV
     Telecom N.V., Hogadata Benelux N.V., Vasco Data Security International
     Inc., Smartmove N.V., BCB Holdings Inc., ViA Inc., Telekol Corporation,
     Speech Machines Plc., Oceania Inc., Oncuity Inc., Excalibur Technologies
     N.V. and e-DOCS.net Inc. and for the year ended December 31, 1999 included
     a total of $ 33,229 from Mindmaker, Inc., Excalibur Technologies N.V.,
     Nordisk Spraktechnologi AS, SwiftTouch Corporation, Smartmove N.V., Xiox
     Corporation, Microsoft Corporation ($30.9 million), CellPort Labs Inc.,
     Financial Architects N.V., Intel Corporation, Phonetic Topographics N.V.,
     Oceania Inc., e-DOCS.net Inc.,

                                      40
<PAGE>

     LanguageWare.net Ltd., De Wilde CBT N.V., Iris N.V., Transics N.V., EHQ
     Inc., ESL.Com Ltd. and Cegeka Healthcare Systems N.V

(2)  In June 1997, we issued 32,000 shares of our preferred stock for a total
     purchase price of $32.0 million. The preferred stock was convertible into
     common stock at the lesser of a fixed conversion price and a variable
     conversion price equal to 97% of the lowest weighted average market price
     of the common stock on any single trading day during the 20 consecutive
     trading days ending on the day immediately preceding the date of
     conversion. The value of the guaranteed contractual discount rate, which is
     additional yield to the holders of the preferred stock, was accounted for
     as an embedded dividend to the holders of the preferred stock. All shares
     of the preferred stock have been converted into common stock.

                                      41
<PAGE>

     The following table presents unaudited consolidated supplementary financial
information for the eight quarters ended December 31, 1999. In the opinion of
the Company's management, this information has been prepared on the same basis
as the Consolidated Financial Statements appearing elsewhere in this report and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial results set forth herein. Results of
operations for any previous quarter are not necessarily indicative of results
for any future period.

<TABLE>
<CAPTION>
                                                             Quarter Ended
                                 --------- ---------- ---------- -------- -------- --------- --------- ---------
                                 Mar. 31,  June 30,   Sept. 30,  Dec. 31, Mar. 31, June 30,  Sept. 30, Dec. 31,

                                   1998      1998       1998      1998     1999      1999      1999      1999
                                 ----------------------------     ------  -------   -------   -------   -------
                                                    (in thousands except for per share data)
<S>                              <C>       <C>        <C>        <C>      <C>       <C>       <C>       <C>
Consolidated Statements of Operations
Data:
Total revenues..............     $35,065   $ 44,991   $ 54,860   $76,676  $70,708   $76,015   $87,473   $110,041
Total cost of sales.........      11,942     15,175     17,930    24,596   20,740    19,297    23,970     30,248
                                 -------   --------   --------   -------  -------   -------   -------   --------
Gross Profit................      23,123     29,816     36,930    52,080   49,968    56,718    63,503     79,793
Total operating expenses....      28,070     47,806     71,570    38,245   39,029    41,188    46,676     56,808
Operating income (loss).....      (4,947)   (17,990)   (34,640)   13,835   10,939    15,530    16,827     22,985
Other income (expense)......       4,473     (1,393)    (2,457)   (2.064)   6,497     1,841     1,884     (3,111)
Income before taxes and
     minority interest......        (474)   (19,383)   (37,097)   11,771   17,436    17,371    18,711     19,874
Net income (loss)...........     $  (817)  $(20,626)  $(39,749)  $ 8,514  $11,064   $ 9,586   $10,447   $ 10,645
                                 =======   ========   ========   =======  =======   =======   =======   ========
Net income (loss) per common
share:
Basic.......................     $ (0.01)  $  (0.21)  $  (0.39)  $  0.08  $  0.10   $  0.09   $  0.09   $   0.09
                                 =======   ========   ========   =======  =======   =======   =======   ========
Diluted.....................     $ (0.01)  $  (0.21)  $  (0.39)  $  0.07  $  0.10   $  0.08   $  0.09   $   0.09
                                 =======   ========   ========   =======  =======   =======   =======   ========
</TABLE>

Exchange Rates

     The Company publishes its financial statements in U.S. dollars. The
majority of the Company's revenues are denominated in U.S. dollars, and the
majority of the Company's expenses are denominated in Belgian francs, U.S.
dollars, the Euro, as well as in a number of other currencies. The Company's
functional currency is the Belgian franc (BEF). See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations".

     The following table sets forth, for the periods indicated, the high, low,
average and end of period noon buying rates reported by the Federal Reserve Bank
of New York (the "Noon Buying Rate") expressed in BEF per $1.00. Such rates are
not used by the Company in the preparation of its Consolidated Financial
Statements.


<TABLE>
<CAPTION>
                                                             Average    End of
                                                             -------    ------
Year Ended December 31,                     High     Low     Rate(1)    Period
-----------------------                     ----     ---     ------     ------
                                                    (BEF per U.S. dollar)
<S>                                         <C>      <C>     <C>        <C>

1994....................................    36.53    30.73   33.17      31.85
1995....................................    32.14    27.94   29.28      29.43
1996....................................    32.27    29.50   31.02      31.71
1997....................................    38.82    31.70   35.90      37.10
1998....................................    38.50    33.19   36.29      34.36
1999....................................    39.90    34.80   37.82      40.08
</TABLE>

(1) The average of the Noon Buying Rates on the last business day of each month
during the relevant period.

                                      42
<PAGE>

                 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and Notes thereto included elsewhere in this Report.


Strategic Overview

     From 1994 through the middle of 1996, we were solely in the business of
developing and licensing core speech technologies. Commencing in the second half
of 1996, we started to expand our business into applications, solutions and
services. These applications, solutions and services have grown to include
dictation, machine and human translation, including Internet/intranet
translation, education, telephony, enterprise and embedded solutions, as well as
consulting and localization services. While expanding into these applications
and services, we have continued to strengthen our technology leadership in core
speech and language technologies. As a result, we believe that we offer the
broadest portfolio of speech and language technologies, including automatic
speech recognition, text-to-speech, speech and music compression, machine
translation and linguistic components. We further believe that our introduction
of breakthrough technologies, such as RealSpeak(TM) for text-to-speech, will
further strengthen our position in technology licensing and telephony solutions.

     In 1997, we began licensing our software development kits and tools to
selected developers in various areas. Since that time, we have refined and
enhanced our development kits and tools. It is now our policy to expand our
licensing of these development kits and tools to strategic partners and
applications developers for the development and commercialization of speech and
language applications in a wide range of markets and languages.

     We have further enhanced our competitive position by developing speech and
language technologies and applications for a number of languages. We have
traditionally developed these technologies and applications for twelve key
languages: American English; UK English; German; French; Italian; Spanish;
Portuguese; Dutch; Korean; Arabic; Chinese and Japanese. We believe that there
may develop a significant demand for additional language versions of our
technologies and applications in response to many factors, including the
increasing use of speech as a user interface for computers, the growth of the
Internet and the potential demand of real-time translation, and the
globalization of telecommunication.

     To address these large potential markets, beginning in the second half of
1998, we have implemented a strategy to expand the breadth of our speech and
language technologies to include a total of up to 36 languages. We have licensed
our software development kits and tools to strategic partners to develop
additional language versions of our technologies and applications. These
strategic partners take the financial risk and share in the rewards for speech
and language applications for these additional languages. During 1999 we entered
into strategic alliances for the development of Thai, Thamil, Hindi, Turkish,
Vietnamese, Urdu, Malay, Taiwanese, Arabic and Armenian languages. Beginning in
the third quarter of 1999, we further expanded our strategic alliance program by
licensing our software development kits and tools to strategic partners to
develop machine translation language pairs.


     Recently, the Far East has become a major focus of our business strategy,
and, during 1999, our revenues from the Far East increased substantially. We
began developing speech engines for Asian languages in 1995 and introduced
Korean and Japanese versions of our text-to-speech and automatic speech
recognition technologies in 1996 and 1997. Since 1997, we have continued to
develop and enhance Asian language versions of our technologies and
applications. During 1998 and 1999, we expanded our Asian language offerings to
include specific solutions for telephony, embedded, automotive, translation and
intelligent content management applications.

     We opened our research and development business center (competence center)
in Singapore in 1998. Through this competence center, during 1999, we licensed
our development tools to various Asian strategic partners for the development of
versions of our technologies and applications in additional Asian languages. We
also have expanded our business reach to Asian manufacturers of consumer,
automotive, embedded and telephony applications during 1998 and 1999.

                                      43
<PAGE>

     In September 1999, we acquired Bumil Information & Communication, Co.,
Ltd., a developer of interactive voice, call center and other telephony and
telecommunications market applications, based in Seoul, South Korea. This
acquisition provides us with increased resources to apply our core technologies
to develop telephony applications and solutions. Following this acquisition, we
accelerated the introduction of our speech and language technologies, products,
solutions and services for enterprise and telephony into the Korean market. In
the fourth quarter of 1999, by combining our technologies, products, solutions
and services with Bumil's existing business, we were able to substantially
increase our revenues in Korea. In addition to licensing our core speech
technology, our offerings in Korea include the following products and services:

 .    Client services for call centers and automated attendants (currently in use
     by banks, securities companies and other corporate customers);
 .    Client service solutions for on-line securities trading (currently in use
     in over 15 securities companies in Korea);
 .    Applications for games, toys, and consumer appliances;
 .    Voice portals and speech services for stock quotes, news and sports;
 .    Integration of speech and language technology for document management; and
 .    Application of speech and language solutions for English as a second
     language.

We intend to begin to introduce our enterprise and telephony applications,
solutions and services, including some of those listed above, to other markets,
including Japan and other countries in Asia, Europe and the Americas.

     During 1999, we also began to shift our strategy in Europe and America from
pure licensing of our speech and language technologies to the licensing of our
technologies in the context of joint development projects with our customers for
the development of speech and language applications. The goal of this shift in
strategy is to increase our revenues by structuring our licensing to achieve
greater revenue-sharing with our customers. This shift has resulted in a
reduction of our receipt of up-front license fees for these products in both
Europe and America.

     We also intend to focus on developing telephony applications and embedded
solutions for the wireless consumer and automotive electronics markets. In
addition, we intend to develop and apply our technologies to deliver corporate
solutions for Internet and e-commerce companies, as well as intranet and
client/server environments. In April 2000, together with Visteon Corporation, we
announced our intention to create a joint venture dedicated to advancing and
accelerating the speech interface in automotive applications.

     In connection with our expansion of our business into speech and language
applications, we have successfully entered the dictation, machine translation
and education markets. Our award winning Voice Xpress products have facilitated
our entry into the retail computer application market. We have also expanded our
reach into the medical dictation market. We intend to leverage our position in
this market where we believe the estimated $6 billion transcription market, as
well as the medical record market, represent a large potential area of growth
for us.

     During the past year, we have been developing and acquiring resources with
a goal of creating a technology-enhanced enterprise dictation and transcription
solution for the healthcare industry. During the third quarter of 1999, we
acquired the Articulate Systems division of Fonix Corporation. This acquisition
provided us with additional resources to create enterprise dictation and
transcription solutions for the healthcare market. In furtherance of this
strategy, in November 1999, we acquired the southern-Florida based medical
transcription business of Rodeer Systems, Inc. and in January 2000, pursuant to
agreements entered into in December 1999, we acquired OmniMed Transcription,
Inc. and Linguistic Technologies, Inc. OmniMed is a medical transcription
company based in Madison, Wisconsin. Linguistic Technologies, located in Edina,
Minnesota, is a speech recognition technology company focused on the medical
transcription market. Linguistic Technologies has developed advanced software
designed to help make the traditional medical transcription process more
efficient. The southern Florida medical transcription offices of Rodeer add a
southeast component to our planned enterprise dictation and transcription
solution. In addition to these acquisitions, in May 2000, we acquired
Dictaphone, a leader in the medical dictation and patient record market. We
believe that our acquisition of Dictaphone will provide us with a wide range of
assets to further our healthcare business strategies. Dictaphone's healthcare
market assets include approximately 5,000 medical industry customers,
approximately 100 sales representatives, a national network of technical service
representatives and a broad range of solutions for medical industry dictation
and data management. We have also recently entered into an agreement to acquire
several additional territories of Rodeer's medical transcription business.

                                      44
<PAGE>

     We have traditionally provided our translation and localization services to
large corporations in the information technology, telephony, automotive and
aerospace markets. These projects are often multi-million dollar, long-term
projects. We have recently introduced our Internet Translation service, which we
believe will enable us to further expand our existing translation services
business.

Acquisition Overview

     Following our formation in 1987, we initially focused on the development of
our core speech technologies. Beginning in the third quarter of 1996, we began
expanding our business, moving into applications, solutions and services,
through internal development and acquisitions. We have set forth below a summary
of our more significant acquisitions and acquisitions under agreement, since
January 1, 1999.

         Dictaphone Corporation

         On May 5, 2000, we acquired all of the outstanding capital stock of
Dictaphone Corporation through a merger of Dictaphone into one of our
wholly-owned subsidiaries. Dictaphone Corporation, headquartered in Stratford
Connecticut, is a leader in selected vertical markets in the development,
manufacture, marketing, service and support of integrated voice and data
management systems and software, including dictation, voice processing, voice
response, unified messaging, records management, call center monitoring systems
and communications recording. Dictaphone has two operating segments, System
Products and Services and Contract Manufacturing. The System Products and
Services segment consists of the sale and service of system-related products to
dictation and voice management and communications recording system customers in
selected vertical markets. The Contract Manufacturing segment consists of the
manufacturing operations which provides outside electronics manufacturing
services to original equipment manufacturers in the telecommunication, data
management, computer and electronics industries. During 1999, Dictaphone had
total revenues of $353.7 million and a net loss of $8.9 million.

         In connection with the merger we issued a total of approximately 9.4
million shares of our common stock in exchange for all of the outstanding shares
of Dictaphone common stock. We were also required to assume or refinance
approximately $430 million of Dictaphone debt and other obligations as more
fully described under the caption Liquidity and Capital Resources below. We will
use the purchase method to account for this acquisition.

         Dragon Systems, Inc.

         On June 7, 2000, we acquired Dragon Systems, Inc. through its merger
with and into one of our wholly-owned subsidiaries. Dragon Systems,
headquartered in Newton, Massachusetts, is a leading supplier of speech and
language technology. Dragon Systems' product offerings include continuous and
discrete dictation products for consumer, business and professional markets,
command and control programs, vertical market add-on vocabularies for
specialized applications, such as legal and medical, customized telephony
solutions, and developers' tools. During 1999, Dragon had total revenues of
$60.0 million and a net loss of $21.8 million.

         In connection with the merger we issued approximately 10.01 million
shares of our common stock to Dragon stockholders in exchange for all of the
outstanding shares of Dragon common stock. In addition, we converted all
outstanding Dragon stock options into options to acquire approximately 1.65
million shares of our common stock at a weighted average exercise price of
$20.15 per share. We will use the purchase method to account for this
acquisition.

         Other Significant Acquisitions

 .    In June 1999, we acquired Brussels Translation Group N.V. for approximately
     $42 million in cash and the assumption of approximately $17 million of
     debt. We had developed translation technology for Brussels Translation
     Group for specified languages for use over the Internet and intranet
     environments.

 .    In September 1999, we acquired substantially all of the assets of the
     Articulate Systems Division of Fonix Corporation for an aggregate of
     approximately $24.0 million in cash, with an additional $4.0 million earn-
     out

                                      45
<PAGE>

     over two years based on performance. The assets acquired represent Fonix's
     continuous dictation and reporting business, including its PowerScribe(R)
     technology, for the medical market.

 .    In September 1999, we acquired Bumil Information & Communication, Co.,
     Ltd., a developer of interactive voice, call center and other
     telecommunications market applications, based in Seoul, South Korea. We
     purchased Bumil for approximately $25.0 million plus an additional $25.0
     million that was paid in the first quarter of the current year based upon
     performance.

 .    In November 1999, we acquired the southern-Florida based medical
     transcription business of Rodeer Systems, Inc. for approximately $6.4
     million in cash.

 .    In January 2000 we acquired OmniMed Transcription, Inc. and Linguistic
     Technologies, Inc. OmniMed is a medical transcription company based in
     Madison, Wisconsin. Linguistic Technologies, located in Edina, Minnesota,
     is a speech recognition technology company focused on the medical
     transcription market. The purchase price for the three acquisitions totaled
     approximately $38.6 million. Up to an additional $4.8 million is payable
     should the acquired businesses meet agreed upon performance criteria.

 .    In February 2000, we acquired Elan Informatique S.A., a France-based
     text-to-speech technology provider, for approximately $5.1 million in cash.
     In addition, we will be obligated to pay up to an additional $8 million to
     the former stockholders of Elan if certain financial milestones are met by
     Elan during the years 2000 and 2001.

 .    In April 2000, we acquired Interactive Systems Inc., a Pittsburgh-based
     speech and language technology developer, for approximately $8.9 million in
     cash with a $4 million earn-out over 2 years. The assets from this
     acquisition will provide us with additional expertise with which to further
     natural language understanding, a technology that figures prominently in
     data mining, data management, audio mining, clinical language understanding
     and other processes needed for comprehensive healthcare and
     telecommunications solutions.

 .    In May 2000, we entered into an agreement to acquire additional assets of
     Rodeer Systems, Inc., consisting of Rodeer's business operations in the
     states of Arizona, Georgia, Minnesota, Oklahoma, Texas and some operations
     in California for an aggregate purchase price of approximately $25 million
     in cash.

     We intend to continue to supplement our development activities through the
acquisition or licensing of complementary businesses and technologies.

Financial Overview

     In January 1999, we reorganized our business into three customer-focused
divisions: Speech and Language Technologies and Solutions; Speech and Language
Applications; and Speech and Language Consulting and Services. Prior to January
1999, we operated our business in four divisions: core speech technologies;
dictation technologies; translation services; and language technologies. Our
Consolidated Financial Statements for the years ended December 31, 1997 and 1998
have been restated to reflect the three division format.

     Our speech and language technologies and solutions division focuses on
licensing our core speech and language technologies and development tools for
those technologies, and developing and selling enterprise and telephony
solutions incorporating those technologies. We derive our speech and language
technologies and solutions revenue primarily from the licensing of these
technologies and tools to applications developers, strategic partners, original
equipment manufacturers, component manufacturers and software vendors, that
incorporate our technologies in their products or products under development, as
well as by sales of custom solutions for business enterprises and
telecommunications. Payments under our license agreements include nonrefundable,
up-front license fees, including up-front minimum royalties, ongoing license
fees, engineering fees, sales of solution services, or any combination of these
payments. Nonrefundable up-front license fees are often based upon a percentage
of projected sales volume over the term of the license agreement and have
represented a majority of our core technologies and solutions revenue. We also
received nonrefundable up-front license fees in connection with the license of
our development tools to strategic partners to develop additional language
versions and language pairs for our core speech technology products. Ongoing
license fees are based upon sales of products incorporating our technologies.
Due to licenses to customers that ultimately sell products incorporating our
technologies to end-users through retail channels, we

                                      46
<PAGE>

anticipate that future revenues from our speech and language technologies and
solutions division may become seasonal, with higher revenues in the third and
fourth quarters.

     Our speech and language applications division offers a wide range of
end-user applications, as well as software development tools and kits for
customers to develop their own applications. Our end-user applications include
dictation software that enables users to dictate text and generate documents by
speaking naturally without pausing between words, PC and Internet-based
translation software and educational software. Markets addressed by these
applications include healthcare, legal, public safety and general personal
computer markets. We generally license these products through retail channels,
directly to hospitals and large institutions, and through value-added resellers.
Our speech and language applications revenue also includes nonrefundable
up-front license fees received from strategic partners in connection with the
license of our development tools to develop additional language versions and
language pairs for our applications products. We anticipate that revenue from
sales of speech and language applications to the general personal computer
market may become seasonal, with higher revenue in the third and fourth
quarters. These revenues may also fluctuate significantly depending upon the
timing and acceptance of new product releases.

     Our speech and language consulting and services division provides a wide
range of linguistic services, such as our document translation and software
localization services, including our recently introduced Internet/intranet based
machine translation services. We provide our linguistic services in various
languages to a wide range of customers, with an emphasis on the computer,
consumer product, automotive, and telecommunications industries. As a result,
these revenues may be somewhat seasonal, with lower revenues in the first and
second quarters.

     We recognize revenue from the sale of software licenses upon satisfaction
of all of the following criteria: signing of the license agreement; shipment of
our products; no significant contractual terms remaining unsatisfied; and if
applicable, receipt of a royalty report from the customer. We recognize revenues
from nonrefundable minimum license agreements upon signing of the agreements and
delivery of the technology if the nonrefundable payments are payable within 90
days, although we generally require payment obligations to be within a
significantly shorter period of time. We recognize revenues from engineering
fees, maintenance and support services, and translation services as the services
are performed. We recognize revenues related to software development contracts
based on the percentage of completion method. In all cases, we recognize revenue
only when collection of the related receivable is probable. The Belgian
government, the European Union, the government of Singapore, and the United
States have provided funding to us for research and development projects. We do
not include these amounts in revenues but rather offset the amount of funding
against gross research and development expense.

     Our lines of business have different gross profit margins and have
experienced different growth rates in total revenues. In 1999, revenues from our
technologies and solutions and our applications divisions grew at a faster rate
than revenues from our consulting and services division. The revenues for the
technologies and solutions and our applications divisions consisted mainly of
software licenses and software products, which contributed to higher gross
profit margins than those achieved in the consulting and services division. The
growth of revenues relating to consulting and services in relation to our other
businesses or other changes in the relative level of sales among our lines of
business could result in a material reduction in our overall gross profit
margins. At the end of 1999, we entered into the human medical transcription
services business. This business is a lower gross margin business, similar to
human translation. Our further expansion into the human transcription business
could also result in a material reduction in our profit margins.

     We charge all costs of establishing technological feasibility of software
products to research and development expense as incurred. Once technological
feasibility of a product is established, software development costs are
capitalized and reported at the lower of unamortized cost or net realizable
value. Capitalization of software development costs ceases and amortization
commences when the product is available for general release to customers. We
amortize software development costs over the shorter of the useful life of the
software or three years.

     Our business is conducted worldwide, primarily in Western Europe, the
United States and Asia. Our revenues, other than translation services revenue,
are primarily denominated in U.S. dollars. Translation services revenue is
primarily denominated in local currencies. We incur expenses primarily in
Belgian francs, U.S. dollars, the euro, as well as in a number of other
currencies.

                                      47
<PAGE>

     Our business will be subject to risks of currency fluctuations as well as
other risks generally associated with international sales. In 1999 we derived
approximately $151.5 million of revenues from the Far East, approximately $79.3
million from the United States and approximately $113.4 million from Europe and
other. Since 1996, we have not entered into any exchange rate hedging
transactions, although we may enter into hedge contracts in the future. Our
decision not to enter into hedging transactions has been primarily attributable
to our perception of the strength of the U.S. dollar compared to the Belgian
franc and our receipt of significant sums of Belgian francs from capital
transactions, principally the exercise of warrants which partially offset our
expenses denominated in Belgian francs. The average exchange rates used for
converting Belgian francs to U.S. dollars for our results of operations were
35.72, 36.28 and 37.81 Belgian francs per U.S. dollar for 1997, 1998 and 1999,
respectively. We cannot guarantee that the U.S. dollar will continue to be
stronger than the Belgian franc or that we will continue to raise capital in
Belgian francs. Exchange rate fluctuations whether or not we enter into hedge
transactions may materially harm our business.

Results of Operations

     The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:


<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                           1997     1998    1999
                                                                           ----     ----    ----
<S>                                                                        <C>      <C>     <C>
          Revenues:
               Technologies and Solutions..............................     34%       39%      40%
               Applications............................................     34        29       33
               Consulting and Services.................................     32        32       27
                                                                           ---       ---      ---
                    Total Revenues......................................   100       100      100
          Cost of sales:
               Technologies and Solutions...............................     7         6        6
               Applications.............................................    13         9        5
               Consulting and Services..................................    19        18       16
                                                                           ---       ---      ---
                    Total cost of sales.................................    39        33       27
          Selling, general and administrative...........................    26        28       30
          Research and development, net.................................     6        12       15
          Amortization of goodwill......................................     7         9        9
          Write off of in-process research and development..............    34        38       --
          Other operating expense.......................................     2         1       --
                                                                           ---       ---      ---
                    Total operating expense.............................   114       121       81
                                                                           ---       ---       --
          Operating income (loss).......................................   (14)      (21)      19
                                                                           ---       ---       --
</TABLE>

   1999 Compared with 1998

Revenues. Total revenues increased by 63% to approximately $344.2 million in
1999 from approximately $211.6 million in 1998. This increase was attributable
to increases in revenues of all of our divisions, primarily from the Far East
where our revenues increased substantially due to up-front license fees received
from various Asian strategic partners for the license of our development tools
for the development of versions of our technologies and applications in
additional Asian languages, as well as due to revenues generated in the Korean
market as a result of combining our technologies, products, solutions and
services with Bumil's existing business. In 1999 our revenue from the Far East
increased to $151.5 million from $9.7 million in 1998.

     Technologies and solutions revenue increased by 67% to approximately $138.7
million in 1999 from approximately $82.8 million in 1998. This increase was
primarily attributable to increases in revenue associated with the
telecommunications market, the personal computer, multimedia and embedded
markets, as well as increased revenues associated with the license of our
development tools. In 1999, our technologies and solutions revenue also included
approximately $33.7 million in nonrefundable up-front license fees from
strategic partners in connection with the license of our development tools to
develop additional language versions and language pairs for our core speech and
language technologies. This compares to approximately $10.5 million of such
revenue in 1998. These increases were partially offset by the elimination of
engineering revenue associated with the Brussels Translation

                                      48
<PAGE>

Group project. In 1998, we had approximately $9.0 million of engineering revenue
from the Brussels Translation Group included in speech and language technologies
and solutions revenue, compared to approximately $1.0 million of such revenue in
the first quarter of 1999.

     Speech and language applications revenue increased by 87% to approximately
$113.7 million in 1999 from approximately $60.9 million in 1998. This increase
was primarily attributable to increases in revenues associated with the industry
solutions and the retail and professional markets, as well as increased revenues
associated with the license of our development tools. In 1999 our applications
revenue included approximately $33.7 million in nonrefundable up-front license
fees from strategic partners in connection with the license of our development
tools to develop additional language versions and language pairs for our
applications products. This compares to approximately $10.5 million of such
revenue in 1998. These increases were partially offset by the elimination of
engineering revenue associated with the Brussels Translation Group project that
was completed in the first quarter of this year. In 1998, we had approximately
$9.0 million of engineering revenue from the Brussels Translation Group included
in speech and language applications revenue, compared to approximately $1.0
million of such revenue in the first quarter of 1999.

     Speech and language consulting and services revenue increased by 35% to
approximately $91.9 million in 1999 from approximately $67.9 million in 1998.
This increase was primarily attributable to our acquisition of additional
translation services businesses as well as internal growth. During 1999, we
began to focus on penetrating the Internet translation market. In the fourth
quarter of 1999, approximately 18% of our speech and language consulting
services revenue was attributable to Internet related business. Revenues from
Microsoft and its affiliates constituted 28% of consulting and services revenue
in 1999 and 27% in 1998.

     Cost of Sales. Total cost of revenues as a percentage of revenues decreased
to 27% in 1999 from 33% in 1998. This decrease was primarily attributable to an
improvement in margins of both our technologies and solutions, and applications
divisions, and an increase in the percentage of our revenues derived from those
divisions.

     Costs of speech and language technologies and solutions revenue as a
percentage of such revenue decreased to 14% in 1999 from 15% in 1998. Our
improvement in margins was primarily attributable to a more favorable mix of
sales of products and technologies, including increased tool licensing revenue,
which have a relatively lower cost of sales.

     Costs of speech and language applications revenue as a percentage of such
revenue decreased to 17% in 1999 from 29% in 1998. This improvement was
primarily attributable to the effect of price reductions and rebate programs for
older versions of our dictation and other applications products in 1998 upon our
introduction of new products and product enhancements and in response to
competition, and to the increased percentage of tool licensing revenue which
have a relatively lower cost of sales.

     Costs of consulting and services revenue as a percentage of such revenue
increased to 61% in 1999 from 57% in 1998. The increase was primarily
attributable to the introduction of a global management information system
called PROMIS. During the last quarter of 1999, the introduction of this system
caused a reduction in the efficiency of resources.

     Selling, General and Administrative Expense. Selling, general and
administrative expense increased 71% to approximately $101.6 million, 30% of
total revenues, in 1999 compared to approximately $59.4 million, 28% of total
revenues, in 1998. Selling and marketing expense increased to approximately
$65.8 million, 19% of total revenues, in 1999, compared to approximately $34.8
million, 16% of total revenues, in 1998. General and administrative expense
increased to approximately $35.8 million, 10% of total revenues, in 1999
compared to approximately $24.6 million, 12% of total revenues, in 1998. The
increase in marketing and sales expense was primarily attributable to increased
sales as well as our increased marketing efforts relating to our introduction
and building brand awareness for our dictation and other products in the retail
channel. The increase in general and administrative expense was primarily
attributable to inclusion of general and administrative expenses for our
acquired businesses for the periods after their acquisition, to increased
personnel and related costs to support our revenue growth.

     Research and Development Expense, Net. Net research and development expense
increased 97% to approximately $49.6 million, 15% of total revenues, in 1999
from $25.2 million, 12% of total revenues, in 1998. This

                                      49
<PAGE>

increase was primarily attributable to our increase in research and development
efforts and personnel through acquisitions and internal growth to address our
expansion in different markets, in particular the Asian markets, as well as to
support our broader product and technology portfolio partly due to our
acquisitions.

     Amortization and Write-off of Goodwill. Our amortization of goodwill
increased 62% to approximately $32.4 million, 9% of total revenues, in 1999 from
$20.0 million, 9% of total revenues, in 1998. The increase reflects goodwill
acquired by us in our acquisitions.

     Write-off of In-process Research and Development. In 1999, we did not
record any write-off of in-process research and development in connection with
our acquisitions during that period. In 1998, we recorded total charges of $79.4
million, 38% of total revenues, in connection with our acquisitions consummated
during that period. These charges represented management's assessment of the
value attributed to the research and development of the acquired businesses for
products for which technological feasibility had not yet been established. See
note 5 to our consolidated financial statements.

     Other Operating Expense. In 1999, we did not incur any other operating
expense. This compares to approximately $1.8 million of such expense in 1998.
The expenses in 1998 consisted primarily of transition expenses incurred in
connection with our acquisitions and the consolidation of our operations.

     Total Other Expenses (Income). Our other expenses (income) includes
interest income and expense, bank charges, realized and unrealized foreign
exchange gains and losses, our share in loss of unconsolidated affiliates and
debt conversion expense. We recognized net other income of approximately $7.1
million in 1999 compared to net other expense of approximately $1.4 million in
1998. This change was primarily attributable to an increase in interest income,
net of interest and other financing expenses, and a decrease in other expense,
which was partially offset by a reduction of foreign exchange gains and an
increase in share of loss of unconsolidated affiliates.

     This other income recognized in the 1999 period was primarily a result of
net interest income attributable to our cash and investment balances, and to
foreign exchange gains. Our interest income, net of interest and other financing
expenses, increased slightly to approximately $6.3 million in 1999 from
approximately $6.1 million in 1998. Our foreign exchange gains and losses have
been primarily attributable to unrealized exchange gains resulting from the
increase and decrease in the value of the U.S. dollar in relation to the Belgian
franc and all other functional currency of our non-U.S. subsidiaries,
principally the Korean won and euro, as well as the increase and decrease in our
dollar denominated assets. A significant portion of our cash and short-term
investments are denominated in U.S. dollars. Because our functional currency for
our non-U.S. operations is their local currency, we are required to recognize
unrealized foreign exchange gains with respect to our U.S. dollar denominated
assets of these operations when the value of the U.S. dollar increases in
relation to their functional currency and unrealized foreign exchange losses
when the relative value of the U.S. dollar decreases. Our foreign exchange gains
were approximately $2.5 million in 1999 compared to a loss of approximately
$81,000 in 1998.

     Our share in loss of unconsolidated affiliates decreased to approximately
$1.6 million in 1999 from approximately $6.0 million in 1998. During 1998 we and
our partner NDC reorganized our investments in OmniVoice, a joint venture formed
to develop voice paging technology applications. Under this reorganization, we
recorded a one time charge of approximately $4.1 million, which is reflected in
share in loss of unconsolidated affiliates in 1998.

     Provision for Income Taxes (Benefit). In 1999, we recognized an income tax
expense of approximately $27.1 million, compared to an income tax expense of
approximately $5.1 million in 1998. The increase in our provision for income
taxes reflects the depletion of the tax loss carry-forwards of our Belgian
parent Company, as well as tax charges for acquired businesses outside Belgium.
See note 14 to our consolidated financial statements.

     Minority Interest. Our minority interest expense net of tax benefit relates
primarily to our share of the distribution obligations under the preferred
income equity redeemable trust securities we issued in May 1998. Our minority
interest expense increased to approximately $4.5 million in 1999 compared to
approximately $2.4 million in 1998.

   1998 Compared with 1997

                                      50
<PAGE>

     Revenues.  Total revenues increased 113% to approximately $211.6 million in
1998 from approximately $99.4 million in 1997. This increase was attributable to
increases in revenues of all of our divisions.

     Technologies and solutions revenue increased by 148% to approximately $82.8
million in 1998 from approximately $33.4 million in 1997. Revenues in this
division from the telecommunications market increased to approximately $12.8
million in 1998 from approximately $3.7 million in 1997; from the personal
computer, multimedia and embedded markets increased to approximately $27.3
million in 1998 from approximately $20.3 million in 1997; and from intelligent
content management market to approximately $23.2 million in 1998 from
approximately $2.0 million in 1997. In 1998, our license revenue in this
division also included approximately $10.5 million in nonrefundable up-front
license fees from strategic partners in connection with the license of our
development tools to develop additional language versions of our core speech and
language technology products, compared to no such revenue in 1997. Our 1998
technologies and solutions revenue also included approximately $9.0 million of
engineering revenue in connection with our Dictation Consortium and Brussels
Translation Group projects, compared to $7.6 million of such revenue in 1997.

     Speech and language applications revenue increased by 77.6% to
approximately $60.9 million in 1998 from approximately $34.3 million in 1997.
Revenue from our industry solutions increased to approximately $21.5 million in
1998 from approximately $5.7 million in 1997; and revenue from the retail and
professional market increased to approximately $19.9 million in 1998 from
approximately $2.2 million in 1997. In 1998, our license revenue in this
division also included approximately $10.5 million in nonrefundable up-front
license fees from strategic partners in connection with the license of our
development tools to develop additional language versions of our core speech and
language technology products, compared to no such revenue in 1997. Our 1998
technologies and solutions revenue also included $9.0 million of engineering
revenue in connection with our Dictation Consortium and Brussels Translation
Group projects, compared to $26.3 million of such revenue in 1997.

     Consulting and services revenue increased by 114% to approximately $67.9
million in 1998 from approximately $31.7 million in 1997. This increase was
primarily attributable to our acquisition of additional translation services
businesses as well as internal growth. Revenues from Microsoft and its
affiliates constituted 27% of consulting and services revenue in 1998 and 33% in
1997.

     Cost of Sales. Cost of sales as a percentage of revenues decreased to 33%
in 1998 from 39% in 1997. This decrease was primarily attributable to an
improvement in margins of all of our divisions.

     Costs of technologies and solutions revenue as a percentage of such revenue
decreased to 15% in 1998 from 20% in 1997. Our improvement in margins for these
revenues was primarily attributable to a more favorable mix of sales of products
and technologies with relatively lower cost of sales in 1998 compared to 1997.
Core technology license revenue in 1998 included revenues relating to our
licensing of development tools to strategic partners for the development of
additional language versions of our core technologies and products, for which we
have incurred limited costs.

     Costs of speech and language applications revenue as a percentage of such
revenue decreased to 29% in 1998 from 37% in 1997. This improvement was
primarily attributable to the increased percentage of tool licensing revenue
which have a relatively lower cost of sales.

     Cost of consulting and services revenue as a percentage of such revenues
decreased to 57% in 1998 from 61% in 1997. This decrease was primarily
attributable to volume related efficiencies.

     Selling, General and Administrative Expense. Selling, general and
administrative expense increased 128% to approximately $59.4 million, 28% of
total revenues, in 1998 from approximately $26.0 million, 26% of total revenues,
in 1997. Selling and marketing expense increased to approximately $34.8 million,
16% of total revenues, in 1998 compared to approximately $12.5 million, 13% of
total revenue, in 1997. General and administrative expense increased to
approximately $24.6 million, 12% of total revenues, in 1998 compared to
approximately $13.5 million, 14% of total revenue, in 1997. The increase in
selling and marketing expense was primarily attributable to increased sales as
well as our increased marketing efforts relating to our introduction and
building brand awareness for our dictation and other products in the retail
channel. The increase in general and administrative expense was

                                      51
<PAGE>

primarily attributable to inclusion of general and administrative expenses for
our acquired businesses for the periods after their acquisition.

     Research and Development Expense, Net. Net research and development expense
increased 294% to approximately $25.2 million, 12% of total revenues, in 1998
from approximately $6.4 million, 6% of total revenues, in 1997. This increase
was primarily attributable to inclusion of research and development expenses for
our acquired businesses for the periods after their acquisition, increased
staffing and reallocation of personnel working previously under our agreement
with Dictation Consortium to research and development.

     Amortization and Write-off of Goodwill. Our amortization of goodwill
increased 193% to approximately $20.0 million, 9% of total revenues, in 1998,
from approximately $6.8 million, 7% of total revenues, in 1997. The increase
reflects goodwill acquired by us in our recent acquisitions. We periodically
evaluate goodwill to assess recoverability and any impairments that would be
recognized in operating results if a permanent impairment were to occur. As a
result of this evaluation, we wrote-off approximately $3.7 million of goodwill
in the 1998 period attributable to its acquisition, in November 1996, of
Berkeley Speech Technologies, Inc. and BeSTspeech Products, Inc.

     Write-off of In-process Research and Development. In 1998, we recorded
total charges of $79.4 million, 37.5% of total revenues, in connection with our
acquisitions consummated during that period. In 1997, we recorded total charges
of acquired in-process research and development of $33.8 million. These charges
represented management's assessment of the value attributed to the research and
development of the acquired businesses for products for which technological
feasibility had not yet been established. See note 5 to our consolidated
financial statements.

     Other Operating Expense. In 1998, our other operating expense increased to
$1.8 million from $1.4 million in 1997. These expenses primarily consisted of
transition expenses incurred in connection with our acquisitions and the
consolidation of our operations.

     Total Other Expenses (Income). Our other expenses (income) include interest
income and expense, bank charges, realized and unrealized foreign exchange gains
and losses, our share in loss of unconsolidated affiliates and debt conversion
expense. We recognized net other expense of approximately $1.4 million in 1998
compared to net other expense of approximately $812,000 in 1997. This change was
primarily attributable to a reduction of foreign exchange gains and an increase
in share of loss of unconsolidated affiliates, which was partially offset by an
increase in interest income, net of interest and other financing expenses.

     Our interest income, net of interest and other financing expenses,
increased to approximately $6.1 million in 1998, compared to a net expense of
approximately $1.2 million in 1997. The increase in net interest income was
primarily attributable to increased interest income resulting from our
investment of net proceeds received from our public offering of common stock in
September 1997 and our offering of preferred income equity redeemable trust
securities (the "PIERS") in May 1998. Prior to our September 1997 offering, we
also increased our average borrowings under our bank lines of credit. In 1998 we
recognized approximately $81,000 of foreign exchange losses compared to
approximately $4.8 million of foreign exchange gains in 1997. Our share in loss
of unconsolidated affiliates increased to approximately $6.0 million in 1998
from approximately $1.1 million in 1997. This increase was primarily
attributable to a charge of approximately $4.1 million incurred by us in 1998 in
connection with our investment in OmniVoice.

     Provision for Income Taxes (Benefit). In 1998 we recognized an income tax
expense of approximately $5.1 million, as compared to an income tax benefit of
approximately $1.4 million in 1997. The increase in our provision for income
taxes reflects tax charges for acquired businesses outside of Belgium.

     Minority Interest. Our minority interest expense net of tax benefit relates
primarily to our share of the distribution obligations under the preferred
income equity redeemable trust securities we issued in May 1998. Our minority
interest expense increased to approximately $2.4 million in 1998 compared to
$24,000 of income in 1997.

Liquidity and Capital Resources

                                      52
<PAGE>

     For the last three years we have funded our operations primarily through
sales of securities, cash flow from operating activities and bank borrowings. At
December 31, 1999, we had working capital of approximately $142.7 million,
including approximately $130.6 million in cash and cash equivalents and
marketable securities.

     As of December 31, 1999, we had the following notes payable, credit
facilities and long-term debt outstanding in the aggregate amount of $42.9
million, including current installments of $24.2 million. The notes payable,
credit facilities and bank loans bear interest at varying rates, which ranged
from 5.5% to 13.0% at December 31, 1999.

 .    Convertible note payable to Linguex S.A. of $4.9 million. This note was
     converted into 92,301 shares of our common stock on January 27, 2000.
 .    An aggregate of approximately $10.5 million of notes payable to several
     Korean banks maturing in 2000 with interest yield percentages ranging from
     9.30% to 13.0%.
 .    An aggregate of $20.7 million in borrowing capacity under credit facilities
     with Bank Artesia and Bank BACOB. Bank Artesia and Bank BACOB merged in
     1999. At December 31, 1999, the Company had $3.1 million outstanding under
     these credit facilities, which have expiration dates ranging from June 30,
     2000 through February 28, 2001.
 .    Convertible Subordinated Notes due November 15, 2001 in the aggregate
     principal amount of $3.6 million. These notes are convertible into shares
     of our common stock at a conversion price of approximately $5.1256 per
     share, subject to adjustment for stock splits and other circumstances.
 .    Non-transferable bond issued in connection with the acquisition of GMS in
     the amount of approximately $2.3 million. The bond is payable on demand on
     or after May 2000.
 .    Bank Artesia loans in the total outstanding principle amount of
     approximately $3.1 million. These notes are due on June 30, 2000.
 .    General Bank loan in the outstanding principle amount of approximately
     $651,000. The loan is payable in monthly installments through June 2009.
     The loan is secured by a mortgage on the Mendez headquarters building.
 .    BFG Bank AG loan, in the outstanding principal amount of approximately $2.6
     million. The loan is payable in semi-annual installments through March 31,
     2007. The loan is secured by a mortgage on real estate owned by us in
     Wuppertal, Germany.
 .    Artesia Leasing & renting capital lease in the amount of approximately $8.2
     million for our headquarters building.
 .    Other obligations, including obligations under capital leases in the total
     amount of approximately $6.6 million.

In addition to these obligations, as of December 31, 1999, we were committed to
pay up to a maximum amount of approximately $9.7 million in connection with our
acquisitions, over periods extending up to two years based upon the performance
of the acquired businesses.


     In May and June 1998, L&H Capital Trust I issued an aggregate of $156
million in principal amount of trust preferred income equity redeemable
securities ("PIERS") and an aggregate of $4,824,800 of common securities. We
hold all of the common securities. The sole asset of the Trust is an aggregate
of $160,824,800 in principal amount of our 4.75% convertible subordinated
debentures due in 2008. The terms and interest payments on these debentures
correspond to the terms and dividend payments on the trust preferred income
equity securities. We may elect to defer interest payments on the debentures for
a period up to 20 consecutive quarters, causing distributions on the trust
preferred income equity securities to be deferred as well. The trust preferred
income equity securities are convertible into shares of our Common Stock. In
case of a deferral, interest and distributions will continue to accrue, along
with quarterly compounding interest on the deferred amounts. We may redeem all
or a portion of the debentures after July 1, 2002 for cash or common stock,
requiring an equal amount of trust preferred income equity securities to be
redeemed plus accrued and unpaid distributions. As of December 31, 1999, there
were $146.7 million PIERS outstanding.

     In 1999, our operating activities provided approximately $69.2 million of
cash. Our non-cash expenses included approximately $32.4 million of amortization
of goodwill, $7.3 million of amortization of other intangibles including
software development costs, and $7.1 million of depreciation. An increase in
accrued expenses net of a decrease in accounts payable also provided $2.3
million of cash. Our uses of cash included an increase in accounts receivable by
approximately $30.2 million. The increase in accounts receivable was primarily
attributable to our increased revenues.

                                      53
<PAGE>

     In 1999, our investing activities used approximately $156.2 million of
cash, including approximately $111.6 million for acquisitions, approximately
$24.8 million for the acquisition of licenses and software development costs
capitalized, approximately $10.5 million in additions to property and equipment,
and approximately $6.0 million of investments in associated companies.

     On May 5, 2000, we acquired Dictaphone Corporation. In connection with that
acquisition we were required to assume or refinance approximately $430 million
of Dictaphone debt and other obligations. Dresdner Bank Luxembourg S.A.,
Deutsche Bank N.V., Artesia Banking Corporation N.V., KBC Bank N.V. and Fortis
Bank N.V. collectively provided a total of $430 million in financing in
connection with the acquisition. The acquisition financing consisted of a $200
million short-term debt facility due March 31, 2001 which bears interest at
LIBOR plus 100 basis points and a $230 million five year declining balance
facility which bears interest at LIBOR plus 175 basis points. In addition,
Deutsche Bank has provided an ongoing $20 million revolving credit facility to
Dictaphone which bears interest at LIBOR plus 125 basis points. These credit
facilities are unsecured and contain financial and other covenants, including a
covenant not to borrow any additional amounts under our existing credit
facilities. Borrowings under the five year facility will be for renewable terms
of up to six months and therefore may be required to be accounted for as short
term debt.

     Initial funding of $200 million under the short term facility and $30
million under the five year facility was used to repay Dictaphone's existing
bank debt, to satisfy other obligations in connection with the acquisition and
to cover closing costs. The remaining committed amount will be available to
cover the $200 million of Dictaphone's senior subordinated notes, should they be
put to the company within 90 days of the closing by the noteholders at 101% of
par, as permitted by the terms of the notes. These notes are also redeemable by
Dictaphone at a declining rate beginning at 105.875% of par commencing in August
2000.

     In June 2000, we acquired Dragon Systems, Inc. in an all stock transaction.
In connection with that acquisition, we repaid a $3 million term loan on behalf
of Dragon.

     Since December 31, 1999 through June 8, 2000, we acquired additional
businesses, other than Dictaphone and Dragon, for a total purchase price of
approximately $69 million, consisting of approximately $64 million in cash and
the issuance of approximately 104,000 shares of common stock. In addition, we
are required to pay up to an additional $23 million for these acquisitions if
performance targets are met. In May 2000, we entered into an agreement to
acquire additional assets of Rodeer Systems, Inc. for an aggregate purchase
price of approximately $25 million in cash.

     In 1999, our financing activities provided us approximately $29.3 million
of cash, primarily attributable to approximately $57.7 million from the sale of
common stock, including approximately $15.0 million from the investment by
Microsoft and approximately $28.0 million from the investment by Intel. These
sources of cash were partially offset by a total of approximately $32.1 million
in repayment of our long term debt and capital lease obligations.

     We are a defendant in a consolidated class action lawsuit which alleges, in
general, that we improperly accounted for write-offs of in-process research and
development in connection with certain acquisitions. The lawsuit contends that
the Company `s actions violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the "34 Act") and Rule 10b-5 promulgated under the 34 Act.
Plaintiffs filed these lawsuits on behalf of all purchasers of the Company's
common stock during varying periods which range from as early as April 28, 1997
through December 4, 1998. These plaintiffs seek unspecified compensatory
damages, attorneys' and experts' fees and other relief. We believe that the
claims are groundless and are vigorously defending ourselves. Nevertheless,
class action litigation can be expensive and time consuming. Although we cannot
make any guarantees regarding the outcome of these actions, we believe that the
outcome will not have a material adverse effect on our business, financial
condition or results of operations.

     We believe that our existing resources, including our new bank lines of
credit, and the anticipated cash generated from operations, will be sufficient
to fund our planned operations for at least the next 12 months. However, we
intend to seek additional sources of cash during the year to increase our
financial flexibility or to fund acquisitions. The sufficiency of our resources
to fund working capital needs is subject to known and unknown risks,

                                      54
<PAGE>

uncertainties and other factors which may materially harm our business,
including without limitation the risk factors set forth in this Report.

Acquired In-Process Technology

     We incurred in-process research and development charges totaling
approximately $79.4 million in 1998 and $33.8 million in 1997. These charges
related primarily to our acquisitions of GMS, Kurzweil Applied Intelligence,
AppTek, Dictation Consortium, Globalink and TikSoft. We determined these
valuations giving explicit consideration to the Securities and Exchange
Commission's views on purchased in-process research and development as set forth
in its September 9, 1998 letter to the American Institute of Certified Public
Accountants SEC Regulations Committee (the "AICPA Letter"). These valuations
were further based upon appraisals prepared by an independent appraiser
experienced in evaluating in-process research and development. A description of
our valuation methodology used and a comparison of our actual results through
December 31, 1998, and assumptions used in those valuations for our acquisitions
of GMS, Kurzweil Applied Intelligence, AppTek, Dictation Consortium, Globalink
and TikSoft are set forth below.

     Our assumptions in determining the value of acquired in-process projects
included the following:

     (1)  Projected net revenues and cash flows from the projects prepared by us
and management of the seller.

     (2)  The expected duration of the revenue streams from the acquired
projects, which ranged from two to seven years.

     (3)  A percentage of completion for each project estimated by considering a
number of factors, including (a) the costs invested to date relative to the
expected total cost of the development effort and (b) the amount of progress
completed as of the transaction date relative to the overall technological
achievements required to complete the project. The technological achievements
were generally addressed by our technical representatives and those of the
seller.

     (4)  A discount rate was used to discount to present value the cash flows
associated with the respective in-process projects. Discounting the net cash
flows back to their present value was based on the weighted average cost of
capital (WACC). The WACC calculation produces the average required rate of
return of an investment in an operating enterprise, based on various required
rates of return from investments in various areas of that enterprise. The WACC
which we assumed for the acquisitions as corporate business enterprises ranged
from 18% to 22%. The discount rates which we used in discounting the net cash
flows from acquired in-process technology ranged from 22% to 35%. These discount
rates are higher than the WACC due to the inherent uncertainties in the
estimates described above, including the uncertainty surrounding the successful
development of the purchased in-process technology, the useful life of such
technology, the profitability levels of such technology, and the uncertainty of
technological advances that are unknown at a given time.

     The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally related to the
completion of all planning, designing, coding and testing activities that are
necessary to establish that we are able to produce the product to meet its
design requirements, including functions, features and technical performance
requirements. At the time of the acquisitions, we expected that additional costs
and time would be required to complete these development projects. However, at
such time we could not assure that we would achieve technical or commercial
viability with respect to these or any other of the products under development.
Furthermore, future developments by our competitors, changes in technology,
changes in other products and services, or other developments may cause us to
alter or abandon these plans. Our failure to complete the development of the
acquired development projects in a timely manner or within budget, or to
successfully commercialize these projects if developed, could materially harm
our business.

     Since the acquisitions, we have used the acquired in-process technology to
develop new products, which have or are expected to become part of our product
lines when completed. However, we are constantly reviewing the allocation of our
research and development resources to respond to the ever changing market and
technology developments, as well as developments of our own internally developed
and acquired evolving technology portfolio. In reaction to these changing
dynamics, in addition to completing many of our acquired research and
development

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<PAGE>

projects, we have combined acquired research and development projects with other
of our development activities, and we have delayed or terminated other projects.
Our acquired in-process research and development projects were primarily
attributable to machine translation and dictation and other continuous speech
recognition projects.

     Our research and development activities for our acquired machine
translation projects have been affected by a shift in our focus from developing
a broad range of applications using machine translation to developing a
comprehensive machine translation Internet translation solution for a broad
range of language pairs. This change in focus was affected by the proliferation
of the use of the Internet, and in particular the projected growth of Internet
use by non-English speakers. In addition, advances in computer technology have
enabled personal computers to perform functions that previously required more
powerful centralized computers. We believe that these advances made some of our
acquired server-based machine translation applications projects less desirable.
As a result of our changed focus, we were able to successfully implement
translation services over the Microsoft Internet network in the first quarter of
the current fiscal year, but have discontinued or delayed projects involving
separate applications of our machine translation technology. Our estimates of
our expenditures incurred in completing our acquired in-process machine
translation projects are consistent with our initial expectations. However,
there has been an initial shortfall in revenues from our assumptions used in
valuing our acquired in-process machine translation technology, which we
attribute primarily to delays associated with our refocus on Internet
translation. If we are not successful in implementing our Internet translation
projects, we may be unable to realize the value assigned to this in-process
technology. In addition, the value of the other acquired intangible assets
associated with this technology may also become impaired.

     We have completed our in-process research and development projects relating
to dictation and continuous speech recognition engines. These completed projects
form a technology base for our growing business and opportunities in this field.
Both the cost and revenue we have received from these projects have been
consistent with initial estimates. However, we cannot assure that in future
periods actual results will not deviate from our initial assumptions.

Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that
derivative instruments be recognized as either assets or liabilities in the
consolidated balance sheet based on their fair values. Changes in the fair
values of such derivative instruments will be recorded either in results of
operations or in other comprehensive income, depending on the intended use of
the derivative instrument. The initial application of SFAS will be reported as
the effect of a change in accounting principle. SFAS 133, as amended, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We will adopt the requirements of SFAS 133 in our financial statements for the
year ending December 31, 2001. We have not yet determined the effect that the
adoption of SFAS 133 will have on our financial position, results of operations
or liquidity.

     On March 31, 2000, the FASB issued FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation--An Interpretation of APB
Opinion No. 25 ("FIN 44"). FIN 44 provides guidance for issues that have arisen
in applying Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. FIN 44 applies prospectively to new awards, exchanges of
awards in a business combination, modifications to outstanding awards, and
changes in grantee status that occur on or after July 1, 2000. We have not yet
determined the effect that the provisions of FIN 44 will have on our financial
position, results of operations or liquidity.

Year 2000 Readiness

     We did not experience any material difficulties related to the Year 2000
problem on December 31, 1999 and have not experienced any such difficulties that
we are aware of since that date. In addition, our operations have not, to date,
been adversely affected by any difficulties experienced by any of its suppliers
or customers in connection with the Year 2000 problem. We intend to continue to
monitor our systems for potential difficulties through the remainder of this
year.

Risk Factors

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<PAGE>

                          Risks Related to our Business

Our business could be harmed if we do not successfully manage the integration of
businesses that we acquire.

     As part of our business strategy, we have in the past and expect to
continue to acquire other businesses and technologies. Acquisitions involve a
number of risks, including:

     .    the difficulty of integrating the operations and personnel of the
          acquired businesses;
     .    the potential disruption of our ongoing business and distraction of
          management;
     .    the difficulty in incorporating acquired technology and rights
          into our products and technology;
     .    unanticipated expenses and delays relating to completing acquired
          development projects and technology integration;
     .    the management of geographically remote units;
     .    the maintenance of uniform standards, controls, procedures and
          policies;
     .    the impairment of relationships with employees and customers as a
          result of any integration of new management personnel;
     .    risks of entering markets or types of businesses in which we have
          either limited or no direct experience;
     .    the potential loss of key employees of the
          acquired companies; and
     .    potential unknown liabilities or other difficulties
          associated with acquired businesses.

     We have recently acquired Dictaphone and Dragon; these significant
acquisitions will require substantial integration and management efforts. As a
result of these and other risks, we may not realize anticipated benefits from
the acquisitions. Failure to achieve these benefits could materially harm our
business.

Our operating results may be harmed by the manner in which we are required to
account for our acquisitions.

     We are currently required to account for acquisitions under the purchase
method. This approach has resulted and may continue to result in a significant
amount of goodwill and other intangible assets which create substantial ongoing
amortization charges to our income over the useful lives of the assets acquired.
Moreover, the inability to achieve expected results during the anticipated
useful life of acquired goodwill could result in unanticipated charges to income
and significant losses. For example, in 1998 we wrote off all of the goodwill
acquired from Berkeley Speech Technologies, Inc. as a result of our inability to
complete Berkeley's product line. As of December 31, 1999, we had approximately
$411 million of goodwill, as a result of our acquisitions.

Our business could be harmed by acquisitions we complete in the future.

     We may not be able to identify and acquire suitable acquisition candidates
on reasonable terms, if at all. Acquisitions may involve expending significant
funds, incurring additional debt or the issuance of additional securities, which
may materially harm our business and dilute our stockholders. If we expend
significant funds or incur additional debt, our ability to obtain financing for
working capital or other purposes could decline and we may be more vulnerable to
economic down-turns and competitive pressures.

We may have difficulty managing our growing number of employees, our new
divisions and our planned new entities.

     We have experienced a period of rapid growth. From December 31, 1997
through December 31, 1999, the total number of our employees grew from
approximately 1,100 to almost 1,900, and, following our recent acquisitions of
Dictaphone, Dragon and companies in the transcription business, the total number
of our employees now exceeds 5,000. In addition, since September 1996, through
acquisitions and internal growth, we added three new divisions (dictation
technologies, translation services and language technologies) to our core speech
technologies division. In January 1999, we reorganized these divisions into our
present three division corporate structure. During 1999, we announced plans to
create separate entities for several of our key business areas: Globalization
and Internet Translation and Healthcare Applications & Solutions, as well as
Enterprise and Telephony Solutions and Automotive Solutions. We also continue to
review our business structure. Our changing business will require considerable
investment of our management resources. Our failure to manage our growing and
changing business effectively

                                      57
<PAGE>

could result in an interruption or loss of momentum that could materially harm
our business. To help manage our changing business, we intend to strengthen:

     .    management;
     .    financial and operational controls; and
     .    operational, financial and management information systems.

Any delay or failure to successfully implement these improvements could
materially harm our business.

We may not be able to sustain our recent profitability.

     Although we have been able to achieve profitability for fiscal year 1999,
we have had a history of substantial losses and may not be able to sustain our
recent profitability. In 1997 and 1998, write-offs of in-process research and
development associated with acquisitions completed in those periods adversely
impacted our net income. Through December 31, 1999, we had accumulated net
losses of approximately $107.9 million, including net losses of approximately
$13.3 million in 1997, $52.7 million in 1998 and a net income of $41.7 million
in 1999. Expenses during these periods included write-offs of acquired
in-process research and development of approximately $33.8 million in 1997, and
$79.4 million in 1998. We intend to continue to acquire businesses, products and
technologies. Future acquisitions may result in additional significant acquired
in-process research and development write-offs, significant amortization of
goodwill and other charges related to acquisitions. Future operating results
could also be materially harmed by many other factors, both known and unknown,
including those risk factors described below.

We depend upon the continued services of our executive officers and key research
and development personnel with expertise in speech and language technologies and
with multilingual skills.

     The loss of any of our executive officers or key research and development
personnel could have a material adverse effect on our business and prospects.
Our success will also depend upon our ability to attract and retain other
qualified managerial and technical personnel. Competition for personnel,
particularly software engineers, speech scientists and linguists, is intense. We
may not be able to attract and retain personnel necessary for the development of
our business. We do not have any key man life insurance for any of our officers
or other key personnel.

The speech and language technologies industry is relatively new, and a market
for our products may never fully develop.

     Because the speech and language technologies industry is relatively new and
rapidly evolving, it is difficult to accurately predict demand and market
acceptance for our recently introduced products and products under development.
Increased acceptance of our products and technologies will depend upon:

     .    the development of our targeted markets;
     .    the performance and price of our products, our customers' and their
          competitors' products;
     .    customer service; and
     .    customer reaction to those products.

The development of the speech and language technologies markets also will depend
upon:

     .    the growth of third party applications incorporating our products and
          technologies;
     .    the demand for new applications;
     .    the ability of our products and technologies to meet and adapt to
          these needs; and
     .    continuing price and performance improvements in hardware technology
          that we expect to reduce the cost and increase the performance of
          products incorporating our products and technologies.

These markets may not develop further and our products may not achieve market
acceptance.

We must adapt to rapid changes in technology and customer requirements to remain
competitive.

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<PAGE>

     The market for our products has been characterized by:

     .    rapid technological change;
     .    frequent product introductions; and
     .    evolving customer requirements.

     We believe that these trends will continue into the foreseeable future. Our
success will depend, in part, upon our ability to:

     .    enhance our existing products;
     .    develop successfully new products that meet increasing customer
          requirements; and
     .    gain market acceptance.

     To achieve these goals, we will need to continue to make substantial
investments in product development and marketing. We may not:

     .    have sufficient resources to make these investments;
     .    be successful in developing product enhancements or new products on a
          timely basis, if at all; or
     .    be able to market successfully these enhancements and new
          products once developed.

Further, our products may be rendered obsolete or uncompetitive by new industry
standards or changing technology.

To succeed we must develop and integrate new products and enhance the
performance of existing products on a timely basis and within budget.

     Developing and applying our technology has required, and will continue to
require, substantial technical innovations. Once we have developed, acquired or
licensed a technology, we must adapt that technology to meet the specific
requirements of the application in which it is to be integrated. The adaptation
process can be time-consuming and costly to both us and our customers. The
quality and resulting market acceptance of the end product may depend, to a
substantial extent, upon the success of this adaptation. We may not be
successful in developing new products, integrating new technologies, or
enhancing the performance of our existing products on a timely basis or within
budget, if at all.

Our business could be harmed if our products contain undetected errors or
defects or do not meet customer specifications.

     We are continuously developing new products and technologies and improving
our existing products and technologies. Newly introduced products and
technologies can contain undetected errors or defects. In addition, these
products or technologies may not meet their performance specifications under all
conditions or for all applications. If, despite our internal testing and testing
by our customers, any of our products or technologies contain errors or defects
or any of our products or technologies fail to meet customer specifications,
then we may be required to enhance or improve those products or technologies. We
may not be able to do so on a timely basis, if at all, and may only be able to
do so at considerable expense. Although we maintain general liability insurance,
including coverage for errors and omissions, we cannot guarantee that the
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. Despite the existence of the
insurance, any significant reliability problems could result in adverse customer
reaction and negative publicity and could materially harm our business.

We face significant competition which could result in decreased demand for our
products or services.

     We may not be able to compete successfully. A number of companies have
developed, or are expected to develop, products that compete or will compete
with our products. Many of these competitors and potential competitors have
substantially greater resources than we do. Competitors in the speech and
language technologies markets include:

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<PAGE>

     .    Apple Computer, Inc.;
     .    Bowne International, Inc.;
     .    IBM;
     .    Lucent Technologies;
     .    Microsoft Corporation;
     .    Motorola;
     .    NEC Corp.;
     .    Nuance;
     .    Philips Electronics N.V.;
     .    SpeechWorks International, Inc.;
     .    Systran Corp.; and
     .    Texas Instruments Incorporated.

IBM and Philips have introduced dictation products which compete directly with
our dictation products. We also compete with other smaller companies which have
developed advanced speech and language technology products. 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. Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.

     The translation services market is also highly competitive. Although none
of the current participants in this market has a significant market share, we
have numerous competitors with significant resources (such as Bowne
International).

Our quarterly technologies revenue may fluctuate significantly because a
significant portion of these revenues has been attributable to up-front
payments.

     A significant portion of our technologies revenue have been attributable to
up-front revenue, including up-front license fees from strategic partners for
the licensing of development tools for the development of additional language
versions and language translation pairs for our products. We recognized this
revenue upon execution of license agreements or upon acceptance by our customers
of our technology under these agreements. This revenue may significantly
fluctuate each quarter. These potential fluctuations will depend upon the
number, size and nature of license agreements into which we enter. We expect
that ongoing license revenue from sales of products incorporating our
technology, as well as sales of our own products, will also fluctuate each
quarter. The fluctuations will be based on a number of factors, including:

     .    the size and timing of individual license transactions by our
          customers;
     .    the potential for delay or deferral of customer implementation of our
          technology;
     .    the timing of our introduction of new products or product
          enhancements;
     .    the timing of our competitors' introduction of new products or product
          enhancements;
     .    seasonality of technology purchases; and
     .    other general economic conditions.

Our revenues from our consumer products for the personal computer market may be
seasonal with lower revenues in our first two quarters and higher revenues in
the fourth quarter, and may further fluctuate significantly based upon the
timing of new product introductions.

     We recently introduced consumer products for the personal computer market,
including continuous dictation products.  Our revenues from sales in this market
may be seasonal with higher revenues in the fourth quarter.  Our revenues from
these products can also vary significantly depending upon the timing of new
product introductions.

Our revenues from the consulting and services division may be seasonal with
higher revenues in the third and fourth quarters.

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<PAGE>

     Our consulting and services division derives significant revenue from the
computer, consumer, telephony and automotive industries. These revenues, which
tend to track the product release cycles of these industries, are somewhat
seasonal, with comparatively higher revenues in the third and fourth quarters.

We have significant fixed costs which are not easily reduced if revenues fall
below expectations.

     A high percentage of our operating expenses is relatively fixed. We likely
will not be able to reduce spending to compensate for adverse fluctuations in
revenues. Accordingly, shortfalls in revenues are likely to materially adversely
affect our operating results.

Our business may be harmed by changes in the relative level of revenues among
our lines of business which have significantly different profit margins.

     Changes in the relative level of revenues among our lines of business could
materially adversely affect our gross profit margins and other results of
operations. Our lines of business have different profit margins. For the year
ended December 31, 1999, gross profit margins in our three divisions were as
follows:

                      Division                               Gross Profit Margin
                      --------                               -------------------
               Technologies and
                solutions                                           85.8%
               Applications                                         83.2%
               Consulting and Services                              39.4%

The growth of translation services revenues in relation to our other businesses
would result in a reduction in our overall gross profit margins.

Our international business operations expose us to difficulties in coordinating
our international activities and dealing with multiple regulatory environments,
as well as to risks of international political and economic conditions.

     Our worldwide business may be materially adversely affected by:

     .    difficulties in staffing and managing operations in multiple locations
          in many countries;
     .    greater difficulties in trade accounts receivable collection;
     .    possibly adverse tax consequences;
     .    governmental currency controls;
     .    changes in various regulatory requirements;
     .    political and economic changes and disruptions;
     .    export/import controls; and
     .    tariff regulations.

     In addition, a significant portion of our executive offices and our
research and development operations are located in Belgium. Therefore, our
operations and the market price of the common stock may also be affected by
adverse economic conditions in Belgium. Likewise, we have recently substantially
increased our revenues in Korea and elsewhere in the Far East. Our operations
and our ability to continue to generate significant revenues in Korea and the
Far East may be affected by adverse economic conditions or political instability
in Korea or other countries in the Far East, as well as other external business
risks.

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<PAGE>

Fluctuations in the exchange rates, in relation to the U.S. dollar, of our
functional currency, the Belgian franc, the Euro and the other foreign
currencies in which we conduct our business may harm our operating results.

     We generate sales primarily in U.S. dollars and incur expenses in a number
of currencies; principally in the U.S. dollar, the Belgian franc, the Euro and
other currencies. Fluctuations in the value of the Belgian franc, U.S. dollar
and foreign currencies have caused, and are likely to continue to cause, amounts
translated into U.S. dollars to fluctuate in comparison with previous periods.
In particular, an increase in the value of the Belgian franc in relation to the
U.S. dollar would likely increase our expenses relative to U.S. dollar sales and
could materially harm our business. Because our functional currency for our
Belgian operations is the Belgian franc, we recognize unrealized foreign
exchange gains with respect to our assets denominated in U.S. dollars when the
value of the U.S. dollar increases in relation to the Belgian franc. Conversely,
we recognize unrealized foreign exchange losses when the relative value of the
U.S. dollar decreases.

     Since 1996, we have not entered into any exchange rate hedging
transactions. We may, however, enter into hedging contracts in the future. Our
decision not to enter into hedging transactions has been primarily attributable
to:

     .    our perception of the strength of the U.S. dollar compared to the
          Belgian franc; and
     .    our receipt of substantial sums of Belgian francs from capital
          transactions, principally the exercise of warrants.

     We cannot guarantee that the U.S. dollar will continue to be stronger than
the Belgian franc or that we will continue to receive revenues denominated in
Belgian francs or raise capital in Belgian francs. Exchange rate fluctuations,
whether or not we enter into hedge transactions, may materially harm our
business.

We rely on our customers, some of whom are our competitors, to develop
applications for our products, market products incorporating our technology and
generate license revenues for us.

     Many of our core speech products are licensed primarily to applications
developers, original equipment manufacturers, component manufacturers and
software vendors which incorporate our technology into applications developed by
them and sold to end-users. The success of these licensed products depends to a
substantial degree on the efforts of others in developing and marketing products
incorporating our technology. Our customers often require several months to
integrate our technologies into their products. Although we have entered into
numerous license agreements with customers, to date we have received significant
recurring license revenues from only a limited number of customers. Products
incorporating our technology will not necessarily be successfully implemented or
marketed by our customers.

     Our customers, such as Microsoft, have also developed or acquired products
or technologies that compete with our technology. These customers may give
higher priority to the sale of these competitive products or technologies. Few
of our customers have any exclusive purchase obligations under their license
agreements with us.

Changes in our relationship with Microsoft, one of our largest customers and a
strategic partner, could harm our business.

     An adverse change in our relationship with Microsoft could have a material
adverse effect on our business. On September 11, 1997, we announced a strategic
alliance with Microsoft to accelerate development of speech products in multiple
languages running on Microsoft Windows platforms. As part of this strategic
alliance, Microsoft now holds 7,515,124 shares of our common stock which
represented approximately 5.29% of our outstanding common stock on June 8, 2000.
Microsoft has also exercised its registration rights with respect to the shares
of common stock purchased under the Microsoft purchase agreement and issuable
under the warrants. Microsoft's representative, Bernard Vergnes, was elected to
our Board of Directors in May 1998 pursuant to Microsoft's right under the
purchase agreement to cause one Microsoft nominee to be elected to the Board of
Directors. In addition, we entered into a license agreement with Microsoft under
which we granted Microsoft exclusive licenses of patent rights, in defined
areas, and received a non-exclusive cross license of Microsoft patent rights.
Microsoft has the right to terminate the license if L&H Holding N.V. transfers
its control over L&H to a third party as a result of L&H Holding's transfer of
our common stock.

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<PAGE>

     The relationship with Microsoft may preclude or limit our ability to enter
into similar license arrangements or relationships with others. Sales to
Microsoft accounted for 12% of our total revenues in 1998 and 9% of our total
revenues in 1999. Microsoft has also entered into nonexclusive license
agreements with us for many of our core speech technologies. A reduction of
revenues from Microsoft could have a material adverse effect upon our business
and prospects.

We may be overly dependent on our strategic partners, and the manner in which we
have structured these partnerships, including our exclusive licensing of
technology, could harm our business.

     We are dependent on our strategic partners in connection with our
research and development efforts. Our agreements with our strategic partners may
include an exclusive license of our technology for the development of specified
technologies or products. For example, we are relying primarily on strategic
partners for the development of our technologies in new languages, including
Thai, Thamil, Hindi, Vietnamese, Urdu, Malay, Taiwanese, Arabic, Armenian,
Russian, Ukrainian, Polish, Czech, Greek, Bahassa, Turkish, and various
Scandinavian languages. Similarly we are relying primarily on strategic partners
to develop machine translation language pairs outside our core language groups.
Pursuant to the agreements relating to these ventures, we have exclusively
licensed our technology to our strategic partners. Our strategic partners also
have exclusive rights to develop, market and distribute products incorporating
the developed technology for specified languages. Further, subject to our
underlying rights and our rights in jointly developed technology or products,
our strategic partners will own the technology and products developed pursuant
to these agreements.

     We have also entered into a non-exclusive license and development agreement
with Sail Labs to support the long-term development of advanced speech and
language technologies and products based on our technologies.

     We generally have limited or no control over the operations of our
strategic ventures, including with respect to the amount and timing of resources
that our strategic partners devote to these ventures. As a result, our strategic
partners may not perform their obligations as expected. In addition, in the
event that our strategic relationships are terminated, we may not be able to
continue to maintain or develop strategic relationships or to replace strategic
partners. Further, some of our partners are newly formed companies and do not
have any history of operations or development or commercialization of speech or
language technologies or products. Therefore, we cannot assure that our
strategic partnerships will be successful. If our strategic partnerships are
terminated or otherwise fail to meet our expectations, we may not be able to
sustain or grow our business as expected which may materially harm our business.

     In addition, in cases where we have exclusively licensed rights or
technology, we may be precluded from developing products and technology
internally. We may also be precluded from owning or controlling developments to
and new products based on our technology, which may materially harm our
business. Further, our strategic partners may become competitors, which may lead
to conflicts of interest. We cannot assure you that we will be able to compete
successfully, if at all, with our strategic partners or that any conflicts with
our strategic partners will be resolved in our favor, which may also materially
harm our business.

We may be unable to adequately protect our proprietary technology.

     We rely primarily on a combination of copyright and trademark laws, trade
secrets, patents, confidentiality procedures and contractual provisions to
protect our proprietary rights. Existing copyright laws afford only limited
protection. We have obtained patents and will continue to make efforts to obtain
patents, when available, in connection with our technologies. We seek to protect
our software and other written materials under trade secret and copyright laws,
which afford only limited protection.

     Our pending patent applications or any future applications may not be
approved. Any patents may not provide us with competitive advantages and may be
challenged by third parties. Others may have filed, and in the future may file,
patent applications that are similar or identical to ours. To determine the
priority of inventions, we may have to participate in interference proceedings
declared by the United States Patent and Trademark Office or similar authorities
in other countries. These proceedings could result in substantial cost to us.
Such patent applications may have priority over our filed patent applications.

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<PAGE>

     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. We have a significant international presence and
the laws of some foreign countries, including the laws of Belgium, may not
protect our proprietary rights to the extent of the laws of the United States.
Our means of protecting our proprietary rights may not be adequate.

Our operations or products could infringe upon the intellectual property rights
of others.

     Others may assert that our technology and products infringe their patents
or other intellectual property rights. Any such assertion, if resolved adversely
to us, may require us to enter into royalty or licensing arrangements and may
materially harm our business.

Our obligations under our preferred income equity redeemable securities and our
debt facilities could prevent us from obtaining additional financing and harm
our liquidity.

     In June 1998, we completed the sale of $156 million of 4.75% preferred
income equity redeemable trust securities. In connection with the sale of these
securities, we incurred both distribution obligations and $156 million in
redemption obligations; approximately $125 million in principal amount of these
securities were still outstanding as of May 31, 2000.

     In May 2000 we entered into various financing arrangements in connection
with the acquisition of Dictaphone, including a $200 million short-term facility
due March 31, 2001 and a five year declining balance facility of $230 million
which will be available to repay $200 million in senior subordinated notes of
Dictaphone which may be put to the company within 90 days of the closing by the
noteholders at 101% of par, pursuant to the terms of the notes. An aggregate of
$230 million is currently outstanding under these facilities.

     These outstanding securities and our outstanding indebtedness could
adversely affect our ability to obtain additional financing for acquisitions,
working capital or other purposes. They could also make us more vulnerable to
economic downturns and competitive pressures. Our obligations under these
securities and debt facilities could also adversely affect our liquidity. In the
event of a cash shortfall, we could be forced to reduce other expenditures to be
able to meet our requirements with respect to these securities and our debt
facilities. Our ability to meet these obligations will be dependent upon our
future performance, which will be subject to financial, business and other
factors affecting our operations. Many of these factors are beyond our control.
If we are unable to generate sufficient cash flow from operations in the future
to meet our obligations under these securities and to service our debt, we may
be required to refinance all or a portion of these obligations or obtain
additional financing.

Our operating results could be harmed by our high balances of accounts
receivable, some of which we may not be able to collect.

     We have historically had high balances of accounts receivable. These
balances are high because a significant portion of our revenues had been
attributable to nonrefundable, up-front license fees that generally have payment
terms of up to 90 days. As of December 31, 1999, we had accounts receivable of
$104 million, net of an allowance for doubtful accounts of $9.3 million. We
maintain credit procedures to evaluate the creditworthiness of prospective
customers and employ personnel specifically for the purpose of monitoring and
collecting accounts receivable. Despite adherence to these procedures, we may
not be able to collect these receivables when they become payable and may
further reduce the length of deferral of payment of up-front fees.

An unfavorable outcome or prolonged litigation in class action lawsuits filed
against us, alleging that we improperly accounted for write-offs of in-process
research and development, could harm our business.

     We are a defendant in a consolidated class action lawsuit which alleges, in
general, that we improperly accounted for write-offs of in-process research and
development. Plaintiffs filed these lawsuits on behalf of all purchasers of our
common stock during varying periods that range from as early as April 28, 1997
through December 4, 1998. We believe that the claims are groundless and we are
vigorously defending ourselves. Nevertheless, class action litigation can be
extremely expensive and time consuming. Furthermore, we cannot make any
guarantees regarding the outcome of these actions. An unfavorable outcome or
prolonged litigation in this lawsuit could materially harm our business.

                                      64
<PAGE>

Because our founding stockholders have rights to control Lernout & Hauspie,
decisions may be made by them that are detrimental to your interests.

     As of June 7, 2000, Messrs. Jo Lernout and Pol Hauspie, the founders,
Co-Chairmen and Managing Directors of Lernout & Hauspie, controlled 43,667,208
shares of common stock (including outstanding rights to acquire common stock)
through various controlled entities (including (i) 9,064,329 shares of our
common stock which were issued as consideration for the Dictaphone merger
because the Stonington Fund has assigned certain voting rights to all the shares
it acquired in the merger for so long as it holds the shares by agreeing to hold
the shares through an entity controlled by Messrs. Lernout and Hauspie, (ii)
9,807,489 shares of our common stock which were issued to the principal
stockholders of Dragon as consideration for the Dragon merger because these
stockholders have assigned certain voting rights to all the shares they acquired
in the merger for so long as they hold the shares by agreeing to hold the shares
through entities controlled by Messrs. Lernout and Hauspie, and (iii) the
securities acquired by Intel Atlantic which are exchangeable at any time into
shares of our Automatically Convertible Stock held by a trust on behalf of
Intel, as to which the voting rights, which are equivalent to the voting rights
of 1,791,864 shares of our common stock, are controlled by Messrs. Lernout &
Hauspie). As of that date, these shares represented approximately 30.24% of our
outstanding shares of common stock.

     Members of the L&H Holding Control Group have entered into forward sale
contracts with unaffiliated investment funds that require the members to
transfer, on August 31, 2001, or an earlier date on the occurrence of a default,
shares of common stock based upon the fair market value of the shares on the
date of transfer. Under our restated articles of incorporation for so long as
the L&H Holding Control Group owns at least 10% of our common stock, L&H Holding
N.V., an entity controlled by Messrs. Lernout and Hauspie, has the right to
nominate for election nine of our 17 directors. Accordingly, L&H Holding N.V. is
able to control our Board of Directors and the direction of our affairs. In
addition, by reason of L&H Holding Control Group's stock ownership, Messrs.
Lernout and Hauspie are able to exert substantial influence over other actions
requiring stockholders' approval, including amendments to our restated articles
of incorporation, mergers, sales of assets or other business acquisitions or
dispositions. The L&H Holding Control Group agreed not to approve, propose or
vote with respect to any capital increase of Lernout & Hauspie by way of a
rights offering to existing Lernout & Hauspie stockholders on a preemptive basis
or any resolution to pay a cash dividend on common stock, without the consent of
the purchasers in the forward sales.

     The interest of Messrs. Lernout and Hauspie in ensuring that the L&H
Holding Control Group maintains a 10% equity interest could cause Messrs.
Lernout and Hauspie to cause us to take actions that may not be in your best
interests, such as declining opportunities to acquire businesses or raise funds
through issuances of our equity.

Our interests may be in conflict with the interests of a number of entities in
which our directors are involved; these conflicts could harm our business.

     In 1995, the Government of Flanders, together with Lernout & Hauspie and
others, created the Flanders Language Valley V.Z.W., a not-for-profit entity,
designed to foster the establishment and growth of enterprises near our
headquarters in Flanders that seek to develop and commercialize products based
upon advanced speech and language technology. Messrs. Lernout and Hauspie have
been active promoters of the foundation but do not have any beneficial interest
in the assets of the foundation. At the time of the formation of the foundation,
a group of private investors formed the FLV Fund, a for-profit limited
partnership, to invest in high technology based companies that specialize in
speech- and language-based products. In connection with its investment in
Lernout & Hauspie, Microsoft has invested approximately $3.0 million in the FLV
Fund. The FLV Fund is now publicly traded on EASDAQ.

     Lessius Management Consulting, N.V., Gewestelijke Investeringsmaatschappij
Vlaanderen N.V. ("GIMV") and S.A.I.L Trust V.Z.W. each hold a one-third interest
in the Flanders Language Valley Fund Management N.V., the manager of the FLV
Fund (the "FLV Fund Manager"). Lessius Management Consulting, N.V. is a
subsidiary of a Belgian-based investment bank, Lessius N.V. GIMV is one of our
stockholders and has rights under our restated articles of incorporation to
nominate one of our directors. S.A.I.L Trust V.Z.W. is a not-for-profit
foundation formed in May 1998 by Messrs. Lernout and Hauspie and Mr. Fernand
Cloet, one of our directors. The purpose of this foundation is to further
support the economic development and to assist in the financing of the
infrastructure and the

                                      65
<PAGE>

enhancement of the educational system of the Flanders Language Valley region.
Messrs. Lernout and Hauspie have advised us that they do not have a beneficial
interest in the assets of this foundation. Messrs. Lernout and Hauspie have used
a portion of the purchase price received on their forward sales of common stock
by the L&H Holding Control Group to provide initial funding for this foundation
and may provide additional funding to the foundation in the future. In April
1999, we provided a short-term bridge loan of approximately $1.6 million to an
affiliate of the foundation to support ongoing development and construction
projects in the Flanders region of Belgium so as to avoid possible delays in the
construction schedules; this loan was repaid in full in December 1999.

     Messrs. Cloet, one of our current directors, and Philip Vermeulen, one of
our former directors, currently serve as two of the nine directors of the FLV
Fund Manager. Mr. Vermeulen also serves as an officer of the FLV Fund Manager.
Messrs. Lernout and Hauspie served as directors of the FLV Fund Manager from its
inception until their resignation on May 30, 1997. Pursuant to contractual
rights obtained in May 1998 to nominate five members for election to the Board
of Directors of the FLV Fund Manager, the S.AI.L Trust nominated two of the 10
members of the Board of Directors of the FLV Fund Manager, including its current
chairman and Mr. Vermeulen. The stockholders of the FLV Fund Manager may
increase the number of directors serving on the FLV Fund Manager's board from 10
to 15. Messrs. Lernout and Hauspie have indicated that although they do not plan
to rejoin the Board of Directors of the FLV Fund Manager, they intend to spend a
portion of their time on the activities of the FLV Fund.

     In October 1998, Messrs. Lernout and Hauspie formed L&H Investment Company
N.V. Messrs. Lernout and Hauspie beneficially own a controlling interest in and
are co-chairmen of L&H Investment Company. Another one of our directors, Mr.
Francis Vanderhoydonck, also serves as President and Managing Director of L&H
Investment Company. The principal purpose of L&H Investment Company is to invest
in high technology based companies that specialize in speech- and language-based
products. We do not have any interest as a stockholder, director or otherwise in
L&H Investment Company.

     We have contractual rights with companies in which the FLV Fund and L&H
Investment Company have invested. In addition, the companies in which either the
FLV Fund or L&H Investment Company may invest in the future are likely to have
contractual relations with us or may be our competitors. As a result of the
conflicts of interest that may arise as a result of these overlapping
relationships, including for example, the influence Messrs. Lernout, Hauspie and
Cloet have over the Boards of Directors of these entities, our directors may
make decisions on behalf of us involving the FLV Fund, L&H Investment Company or
companies supported by them that are not in the best interest of us or our
stockholders. Companies funded in part by the FLV Fund and L&H Investment
Company accounted for approximately 3.7% of our revenues in 1998 and 0.3% of our
revenues in 1999.

     The coordinated laws of commercial companies of Belgium do not permit
Messrs.  Lernout, Hauspie and Cloet or any other member of Lernout & Hauspie or
the FLV Management N.V.'s Board of Directors to participate in deliberations and
decision making with respect to matters in which these individuals have a direct
or indirect conflict of interest with Lernout & Hauspie or FLV Management N.V.

        Risks Related to Our Common Stock and Our Belgian Incorporation

Provisions of our charter and contracts and of Belgian law may discourage
takeover offers and may limit the price that investors would be willing to pay
for our common stock.

     Laws and documents contain provisions that may discourage bids for Lernout
& Hauspie. These include:

     .    our restated articles of incorporation;
     .    Belgian company law;
     .    other provisions of Belgian law; and
     .    our contractual arrangements which contain rights adverse to us if
          there is a change of control.

     These laws and arrangements could discourage advantageous offers for our
business or common stock and limit the price that investors might be willing to
pay in the future for shares of the common stock. Our restated articles of
incorporation contain provisions permitting specified entities to nominate
members of the maximum 17 member Board of Directors of Lernout & Hauspie as
follows:

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<PAGE>

     .    L&H Holding N.V............................................  9 Members
     .    GIMV.......................................................  1 Member
     .    Microsoft..................................................  1 Member

     Microsoft may terminate our rights under our license agreement with it upon
a change in control of Lernout & Hauspie. Our Board of Directors is permitted to
issue preferred stock upon terms it deems appropriate without the prior approval
of the holders of the common stock. Our ability to issue preferred stock in such
a manner could enable our Board of Directors to prevent changes in our
management or control. Belgian company law and other Belgian laws provide that
takeover bids must be made for all outstanding voting securities of Lernout &
Hauspie and are subject to the supervision and approval of the Commission for
Banking and Finance in Belgium. In some instances, takeover bids must be
approved by the competent Belgian and European antitrust authorities.

Our incorporation in Belgium causes us to be governed by Belgian law which
provides for different and in some cases more limited stockholder rights than
the laws of jurisdictions in the United States.

     We are a Belgian corporation and our corporate affairs are governed by our
restated articles of incorporation and Belgian company law. Although provisions
of Belgian company law resemble various provisions of the corporation laws of a
number of states of the United States, principles of law relating to such
matters as:

     .    the validity of corporate procedures;
     .    the fiduciary duties of management; and
     .    the rights of our stockholders

may differ from those that would apply if we were incorporated in a jurisdiction
within the United States. For example, there is no statutory right of appraisal
under Belgian law with respect to mergers, and the right for stockholders of a
Belgian corporation to sue derivatively, on the corporation's behalf, is
limited.

     In addition, a provision of Belgian company law which recently became
applicable to us restricts our ability to sell shares of our stock for a cash
purchase price which is lower than the average price of our stock for the thirty
days prior to issuance of the new shares unless we also offer to sell shares at
such price to our existing stockholders. This restriction could inhibit our
ability to raise capital in the future.

You may be unable to serve legal process or enforce judgments against us and our
directors and officers.

     We are a Belgian corporation and a substantial portion of our assets are
located in Belgium. Most of our officers and directors and our independent
auditors are not residents of the United States. Furthermore, all or a
substantial portion of the assets of these persons are located outside the
United States. As a result, you may not be able to effect service of process
within the United States upon these persons or to enforce any judgments of
United States courts upon these people or us predicated upon the civil liability
provisions of the securities or other laws of the United States. We have been
advised by our Belgian legal counsel, Loeff Claeys Verbeke, that civil
liabilities under the securities and other laws of the United States may not be
enforceable in original actions instituted in Belgium, or in actions instituted
in Belgium to enforce judgments of United States courts. Actions for enforcement
of judgments of United States courts might be successful only if the Belgian
court confirms the substantive correctness of the judgment of the United States
court, and is satisfied:

     .    that the judgment is not contrary to the principles of public policy
          in Belgium or rules of Belgian public law;
     .    that the judgment did not violate the rights of the defendant;
     .    that the judgment is not subject to further appeal under United States
          law;
     .    that the United States court did not accept its jurisdiction solely on
          the basis of the nationality of the plaintiff; and
     .    as to the authenticity of the text of the judgment submitted to it.

                                      67
<PAGE>

The volatility of our stock price could adversely affect your investment in our
stock.

     The market price of the common stock has been, and may continue to be,
highly volatile. We believe that a variety of factors could cause the price of
the common stock to fluctuate, perhaps substantially, including:

     .    announcements of developments related to our business;
     .    quarterly fluctuations in our actual or anticipated operating results
          and order levels;
     .    general conditions in the worldwide economy;
     .    announcements of technological innovations;
     .    new products or product enhancements by us or ourcompetitors;
     .    developments in patents or other intellectual property rights and
          litigation; and
     .    developments in our relationships with our customers and suppliers.

In addition, in recent years the stock market in general and the markets for
shares of small capitalization and "high-tech" companies in particular, have
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Any such fluctuations in the future
could adversely affect the market price of the common stock and the market price
of the common stock may decline.

                                      68
<PAGE>

               Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
                               ABOUT MARKET RISK


      The principal market risks (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which we are exposed are:

     .    interest rates on debt; and

     .    foreign exchange rates.

     The following risk management discussion and the estimated amounts
generated from the analytical techniques are forward-looking statements of
market risk assuming certain market conditions occur. Actual results in the
future may differ materially from these projected results due to actual
developments in the global financial markets. The analysis methods that we use
to assess and mitigate the risks discussed above should not be considered
projections of future events or losses.

Interest Rates

     We centrally manage our debt and overall financing strategies using a
combination of short-term and long-term debt with either fixed or variable
interest rates. We generally do not hedge our exposure to interest rate
fluctuations through the use of derivative instruments.

     Assuming December 31, 1999 variable rate debt levels of approximately $3.4
million, a one-point change in interest rates would impact net interest expense
by approximately $20,000. This sensitivity analysis does not take into account
the possibility that gains from one category may or may not be offset by losses
from another category. Fixed rate debt outstanding at December 31, 1999 with a
carrying value of $23.8 million has been excluded from the above interest
expense sensitivity analysis. The carrying value of the fixed rate debt is
comparable to the fair value. Assuming December 31, 1999 fixed rate debt levels,
a one-point change in interest rates would impact the interest expense by
approximately $220,000.

Foreign Exchange

     Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically affect
economic growth, inflation, interest rates, governmental actions and other
factors.

     The sensitivity analysis presented below does not take into account the
possibility that rates of the currencies of different countries can move in
opposite directions and that gains from one category may or may not be offset by
losses from another category.

     The non U.S. dollar operations constitute approximately 26% of our
consolidated revenues and approximately 51% of our consolidated operating
expenses. As currency exchange rates change, translation of the income
statements of our international businesses into U.S. dollars (our reporting
currency) affects year-over-year comparability of operating results. We do not
generally enter into hedges to minimize volatility of reported results.

     Changes in currency exchange rates that would have the largest impact on
translating our non-U.S. dollar operating profit include the Belgian franc,
German mark and the British pound.

     We estimate that a 10% change in the U.S. dollar foreign exchange rates
would impact reported operating profit for the year ended December 31, 1999 by
approximately $5.0 million. This is after adjusting for unusual impairment and
other items.

                                      69
<PAGE>

              Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated Financial Statements and Supplementary Data of the Company are
listed under Part IV, Item 14, in this report.


           Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

                                      70
<PAGE>

                                    PART III

          Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Our officers and members of our Board of Directors as of the date of filing
of this Report are as follows:

<TABLE>
<CAPTION>
                 Name                     Age                        Position
   ----------------------------------     ---     ---------------------------------------------
<S>                                       <C>    <C>
Jo Lernout..............................  52     Co-Chairman of the Board and Managing Director
Pol Hauspie.............................  48     Co-Chairman of the Board and Managing Director
Gaston Bastiaens........................  53     President, Chief Executive Officer and Director
Nico Willaert...........................  49     Vice Chairman and Managing Director
Carl Dammekens..........................  38     Senior Vice President of Finance and Chief
                                                 Financial Officer

Ellen Spooren...........................  40     Senior Vice President of Marketing and Corporate
                                                 Communications
Dr. Bert Van Coile......................  41     Senior Vice President of Corporate Research and
                                                 Development

Florita Mendez..........................  46     Senior Corporate Vice President and President, Speech
                                                 and Language Consulting and Services Division

John H. Duerden.........................  59     Chief Operating Officer and President of Lernout &
                                                 Hauspie Industries
Joseph D. Skrzypczak....................  42     Chief Operating Officer and Chief Financial Officer
                                                 of Dictaphone Corporation
John Seo................................  34     President of L&H Enterprise and Telephony Solutions
                                                 Division
Dirk Cauwelier (2)......................  43     Director
Fernand Cloet (1).......................  49     Director
Jan Coene...............................  42     Director
Marc G.H. De Pauw (2)...................  46     Director
Hubert Detremmerie......................  70     Director
Albert J. Fitzgibbons III...............  54     Director
Roel Pieper.............................  44     Vice Chairman
RVD Securities N.V. represented by
Erwin Vandendriessche (1)(2)(3).........  40     Director
Alex Vieux..............................  42     Director
Gerard van Acker........................  56     Director
Bernard Vergnes (1).....................  54     Director
Francis Vanderhoydonck(1)...............  41     Director
</TABLE>
___________________
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Corporations may serve as directors of Belgian companies.

     Jo Lernout, a co-founder of the Company, has served as a Managing Director
since its organization in December 1987, as President from January 1994 until
October 1996, as Co-Chairman of the Board since October 1996, as a member of the
Office of the Chief Executive since February 1996 and as Co-Chairman in the
Office of the Chief Executive since October 1996. Prior to founding the Company,
Mr. Lernout served in various capacities for Wang Laboratories, including as
national commercial director of Wang Belgium from 1985 to 1987 and as a sales
manager for office automation from 1979 to 1984. Mr. Lernout served as a
director of Flanders Language Valley Fund Management N.V. from 1996 to 1997. Mr.
Lernout has indicated that although he does not intend to rejoin the Board of
Directors of Flanders Language Valley Fund Management, he does intend to spend a
portion of his time on activities relating to the FLV Fund.

                                      71
<PAGE>

     Pol Hauspie, a co-founder of the Company, has served as a Managing Director
since its organization in December 1987, as its Chairman from January 1994 until
October 1996, and as Co-Chairman of the Board since October 1996, as a member of
the Office of the Chief Executive since February 1996 and as Co-Chairman in the
Office of the Chief Executive since October 1996. In 1977, Mr. Hauspie founded
HPP Computer Center ("HPP"), a developer and marketer of software for
accountants and financial advisors, and served as its president until selling
HPP in 1987. Mr. Hauspie served as a director of Flanders Language Valley Fund
Management N.V. from 1996 to 1997. Mr. Hauspie has indicated that although he
does not intend to rejoin the Board of Directors of Flanders Language Valley
Fund Management, he does intend to spend a portion of his time on activities
relating to the FLV Fund.

     Gaston Bastiaens joined the Company in September 1996 as President, and
became Chief Executive Officer in May 1997 and Director in June 2000. Mr.
Bastiaens served as President and Chief Executive Officer of Quarterdeck
Corporation, a software utilities and Internet applications company, from
January 1995 until September 1996 and as a director of Quarterdeck Corporation
from February 1995 to September 1996. During 1994, Mr. Bastiaens served as
President and Chief Executive Officer of Paragraph Communications, Inc., a
company he co-founded to develop software products for the desktop and wireless
communications markets. From 1992 to 1994, Mr. Bastiaens was Vice President and
General Manager of the Personal Electronics Division of Apple Computer and was
responsible for developing new business based on Apple Computer's core computing
and software technologies. Mr. Bastiaens started his career at Philips
Electronics in 1971, where he held several senior management positions through
1992 including manager of the Philips compact disk project. Mr. Bastiaens also
served as a director for the Limburg Investment Company in Belgium from 1986
until 1992.

     Nico Willaert joined the Company as a director in September 1992, has
served as a Managing Director since April 1993 and as Vice-Chairman since
January 1994. From 1972 to 1991, Mr. Willaert served in various positions with
Pauwels N.V., a manufacturer of power plant equipment. From 1989 through 1991,
he served as general manager of Pauwels Contracting, and from 1972 through 1989
his positions included director special projects, export sales manager, director
Far East and project coordinator for Pauwels International.

     Carl Dammekens joined the Company in 1990 as Corporate Controller and has
served as Senior Vice President of Finance since October 1993 and as Acting
Chief Financial Officer since April 1996. Prior to joining the Company, Mr.
Dammekens was an accountant with Price Waterhouse in Brussels.

     Ellen Spooren joined the Company as Vice President of Corporate
Communications in October 1996 and currently serves as Senior Vice President of
Marketing and Corporate Communications. Ms. Spooren served Quarterdeck
Corporation from August 1995 to December 1995 first as Senior Director of
Corporate Communications and then from December 1995 to September 1996 as Vice
President--Corporate Communications. Prior to joining Quarterdeck, Ms. Spooren
was European communication director for Tektronix, Inc. in Munich, Germany until
1995. From 1992 to 1994, she was Business Development Manager for Apple
Computer, Inc. in Paris, France and Cupertino, California. From 1985 to 1992,
Ms. Spooren worked for Philips Electronics in the Netherlands as External
Relations Manager.

     Dr. Bert Van Coile joined the Company in 1989 as Research and Development
Manager for Text-to-Speech and currently serves as Senior Vice President of
Corporate Research and Development. From 1981 until joining the Company, Dr. Van
Coile served in various positions at the Department of Electronics and
Information Systems with the University of Ghent.

     Florita Mendez joined the Company as President of the Translation Division
with the acquisition of Mendez Translation in September 1996 and has served as
Senior Vice President of the Company since January 1997. Ms. Mendez became
President of the Speech and Language Consulting and Services Division in January
1999. Ms. Mendez served Mendez Translations as its Chief Executive Officer from
September 1979 to 1996 and as a Managing Director and its President from 1980
until the merger of Mendez with the Company in 1996.

     John Duerden was appointed Chief Operating Officer and President of Lernout
& Hauspie Industries upon our acquisition of Dictaphone Corporation in May 2000.
Prior to that, Mr. Duerden served as the Chairman, Chief Executive Officer and
President of Dictaphone since August 1995. Prior to joining Dictaphone, Mr.
Duerden held various positions with Reebok International Limited, most recently
as Joint President and Chief Operations Officer

                                      72
<PAGE>

of the Reebok Brands division from October 1994 to February 1995 and including
serving as a Director of Reebok International Limited from June 1991 until April
1995. Mr. Duerden has been a limited partner of Stonington Partners, L.P. since
February 1997. Mr. Duerden is a director of Sunglass Hut International, Inc.

     Joseph D. Skrzypczak has served as the Chief Operating Officer and Chief
Financial Officer of Dictaphone Corporation since October 1998. Since August
1995, Mr. Skrzypczak served as a Director of Dictaphone Corporation and since
May 1994, he held various executive positions with Dictaphone Corporation. Mr.
Skrzypczak is a Certified Public Accountant.

     John Seo has recently been appointed as the President of the L&H Enterprise
and Telephony Division of the Company. Mr. Seo previously was the founder and
President of BUMIL Information and Communication Inc., which was acquired by us
in September 1999. Prior to founding BUMIL in 1992, he was a director of the
Strategic Planning Department for LG Electronics.

     Dirk Cauwelier has served as a director of the Company since May 1997. Mr.
Cauwelier has worked as an attorney in private practice based in Poperinge,
Belgium since 1982.

     Fernand Cloet has served as a director of the Company since 1992. Mr. Cloet
was the founder and managing director of Cloet Animal Feed Mills until 1990 and
has served as the managing director of Tack N.V., a wood construction concern,
since 1990. Mr. Cloet is also a director of Flanders Language Valley Fund
Management N.V. and of the FLV Fund.

     Jan Coene has served as a director of the Company since May 1997. Since
1984, Mr. Coene has served the ABB Group, an engineering services provider, in
various capacities and is currently the President of ABB Service Worldwide.

     Marc G.H. De Pauw has served as a director of the Company since June 1995.
Since September 1994, Mr. De Pauw has been the general manager of National
Investment Corporation, an industrial holding company controlled by Ackermans &
van Haren N.V., a holding company quoted on the Brussels Stock Exchange. He
served as the director of National Investment Corporation from 1985 to 1994. Mr.
De Pauw is a professor of public finance at Erasmus University in Brussels.

     Hubert Detremmerie has served as a director of the Company since March
1995. From 1955 until his retirement in March 1995, Mr. Detremmerie served BACOB
Bank in various capacities, most recently as chairman of its managing board. Mr.
Detremmerie serves as a member of the Advisory Board to the Ministry of Finance
for Financial Institutions and Markets, the Council of Labor, the King Boudewijn
Foundation, and the National Counsel for the Cooperation Among Labor, Business
and Government.

     Albert J. Fitzgibbons III was elected to the Board of Directors in June
2000, pursuant to his nomination by Stonington Holdings. Since 1993, Mr.
Fitzgibbons has been a Partner and a Director of Stonington Partners, Inc., a
private investment firm and since 1994 he has been a Partner and a Director of
Stonington Partners, Inc. II, the general partner of Stonington Partners, L.P.,
the general partner of Stonington Capital Appreciation Fund 1994, L.P which held
approximately 96% of the outstanding capital stock of Dictaphone Corporation
until its acquisition by the Company on May 5, 2000. Mr. Fitzgibbons has also
been a Director of Merrill Lynch Capital Partners, Inc., a private investment
firm associated with Merrill Lynch & Co., since 1988. Mr. Fitzgibbons is also a
Director of Burns International Services Corporation, Merisel, Inc. and United
Artists Theatre Circuit, Inc.

     Roel Pieper was elected as Vice Chairman of the Board of Directors in June
2000. Mr. Pieper serves as a part-time employee to the Company. Since 1999, Mr.
Pieper has been a General Partner of Insight Capital Partners, an investment
firm in New York focussed on e-commerce and e-business opportunities both in the
U.S. and in Europe. Prior to that, Mr. Pieper served for one year as Executive
Vice President of Royal Philips Electronics N.V., where he was also a member of
the board of directors. From 1996 to 1998, Mr. Pieper served as President and
CEO of Tandem Computers until Tandem was acquired by Compaq Computer
Corporation. Mr. Pieper was Senior Vice President, responsible for worldwide
sales and marketing, at Compaq for six months prior to joining Royal Philips.
From 1993 to 1996 Mr. Pieper served as President and CEO of UB Networks, a
subsidiary of Tandem Computers. Mr. Pieper also serves on the Board of Directors
of Computer Associates, General Magic, RingRosa and Quokka Sports.

                                      73
<PAGE>

     Erwin Vandendriessche served as a director of the Company from 1990 to
1994, in his individual capacity and, since January 1994, as the representative
of RVD Securities N.V., a financial advisory company. Mr. Vandendriessche
currently serves as Director of Finance and Business Development of European
Datacomm N.V., a satellite telecommunications provider. Prior to joining that
company, he was the Chief Financial Officer of ICOS Vision Systems Corporation
N.V. from 1997 to August 1999. He previously has served as a Vice President,
head of corporate finance, in the corporate finance department of Rabobank
Belgie, a branch of Rabobank Nederland and, prior to that, was in the corporate
finance department at Indosuez Bank Belgie N.V.

     Alex Vieux has served as a director of the Company since May 1997. Mr.
Vieux is the chairman of DASAR Inc. an information technology exhibition
production company, which he founded in 1989. Mr. Vieux serves on the board of
directors of Tandem Computer and as a special advisor to the French Minister of
Industry. Formerly a business correspondent in the United States for the French
daily, Le Monde, from 1985 to 1991, he taught economics at the Universite de
Paris-La Sorbonne from 1981 to 1984 and worked as a consultant for Andersen
Consulting from 1982 to 1985.

     Gerard van Acker has served as a director of the Company since May 1998.
Mr. van Acker was a former lecturer at Free University of Brussels (V.U.B.) and
special lecturer on financial and economic law at PHIBA (Antwerp, Belgium). Mr.
van Acker worked as Chief of Staff to the Chairman of the National Council for
Economic Affairs (1969-1972), First Deputy to the Bureau of Planning of Belgium
(1972-1978), Chief of Staff of the Vice Prime Minister and Minister for Economic
Affairs of Belgium (1978-1980). Since 1980 he has served as President-C.E.O. of
G.I.M.V. (Investment Company for Flanders). Mr. van Acker serves as a member of
the Board of Directors for Barco, Covas International, Pauwels Group, Telenet,
Domus Flandria, F.L.V.F.

     Bernard Vergnes has served as a director of the Company since May 1998. Mr.
Vergnes was named in July 1997 to the position of Chairman--Microsoft Europe.
Prior to taking on the role of Chairman, Mr. Vergnes lead Microsoft's European
operations as President from 1990 to 1997. Mr. Vergnes joined Microsoft in 1983
as General Manager and founder of the French subsidiary, was promoted to
Vice-President, Europe, in 1990, and to President of Microsoft Europe and Senior
Vice President, Microsoft corporation, in 1992.

     Francis Vanderhoydonck has served as a director of the Company since May
1999. Mr. Vanderhoydonck has served as President and Managing Director of L&H
Investment Company N.V. since its inception in 1998. Prior to joining Lernout &
Hauspie Investment Company, Mr. Vanderhoydonck served at Generale Bank since
1986 where he was head of Corporate & Investment Banking from 1995 to 1998. Mr.
Vanderhoydonck was an assistant professor at the University of Brussels from
1981 to 1985. Mr. Vanderhoydonck serves as a non-executive director at Ubizen
N.V. and The Capital Markets Company, as well as several of the companies in L&H
Investment Company's portfolio.

     Our officers serve at the discretion of the Board of Directors. All of our
directors have been elected to serve until the 2001 Annual Meeting of
Stockholders and are serving for terms ranging from one to six years.

     Our Restated Articles of Incorporation currently provide that there shall
be a maximum of 17 directors on our Board of Directors consisting of:

     (i)      nine directors elected from candidates nominated thereto by "L&H
              Holding N.V.", an entity controlled by Messrs. Jo Lernout and Pol
              Hauspie, managing directors of the Company as long as entities
              controlled by Messrs. Lernout and Hauspie (the "L&H Holding
              Control Group") hold, directly or indirectly, at least 10% of the
              outstanding shares of the Company;

     (ii)     one director elected from a list of candidates proposed by GIMV as
              long as it owns at least 3.33% of the outstanding shares of our
              common stock;

     (iii)    one director elected from a list of candidates nominated by
              Microsoft, so long as Microsoft continues to beneficially own
              directly or indirectly 3,867,224 shares of Common Stock; and

     (iv)     three directors elected from candidates proposed by any
              stockholder.

                                      74
<PAGE>

     If the percentage ownership of the L&H Holding Control Group drops below
10% of the shares of our common stock, then L&H Holding would have the right to
nominate candidates for the appointment of one director for each block of one
and one-half percent which the L&H Holding Control group owns.

     The following directors were elected pursuant to the designation of L&H
Holding, Luxembourg International Finance ("LIF") and GIMV, respectively, in
accordance with our Restated Articles of Association as follows: L&H Holding--Jo
Lernout, Pol Hauspie, Nico Willaert, Fernand Cloet, Marc G.H. De Pauw, Hubert
Detremmerie, Dirk Cauwelier and Francis Vanderhoydonck (elected in 1999);
LIF--RVD Securities N.V.; GIMV--Gerard Van Acker (re-elected in 1999). LIF no
longer has the right to designate nominees for election to the Board of
Directors. Albert J. Fitzgibbons III was elected to the Board pursuant to the
nomination of Stonington Holdings which has the contractual rights to nominate
one director, for whom the L&H Holding Control Group has agreed to vote, for a
five year period so long as Stonington or its affiliates owns at least 55% of
the shares acquired by it in the Dictaphone merger.

     Our stockholders recently approved modifications to our Restated Articles
of Incorporation which, among other things, increased the number of our
directors from 14 to 17 and provided that the Chief Executive Officer will
automatically be nominated for appointment as director by the Board of Directors
itself.

     The Board of Directors has an Audit Committee and a Compensation Committee.
The functions performed by the Audit Committee include reviewing the scope of
internal controls and reviewing the implementation by management of
recommendations made by the statutory auditor. The Compensation Committee
determines salaries, grants and awards under incentive plans, benefits and
overall compensation for our officers.

Citizenship of Officers and Directors; No Family Relationships

     All of our directors are Belgian citizens, except Alex Vieux and Bernard
Vergnes, who are French citizens, Roel Pieper, who is a Dutch citizen and Albert
Fitzgibbons, who is a U.S. citizen. There are no family relationships among any
of our directors.

Key Employees

     The following individuals are our key employees as of the date of filing of
this Report:

     Gary Blenis serves as the President of Worldwide Customer Support
Operations of the Company. Mr. Blenis joined the Company in April 1998 as Senior
Director of Services and Quality for the Dictation Division. In June 1999 he was
promoted to Corporate Vice President of Operations. Prior to his tenure at the
Company, Mr. Blenis was employed by Cisco Systems, Motorola Inc. and Digital
Equipment Corporation in similar capacities.

     Patrick De Schrijver has recently been appointed the President of our
Automotive Systems Division. Mr. De Schrijver joined the Company in January 1991
as Corporate Counsel and served as Vice President Legal-Belgium from October
1993 to January 1999 when he became Senior Vice President and President of the
Speech and Language Technologies and Solutions Division. From 1989 to 1991, Mr.
De Schrijver served as legal and tax advisor with the accounting firm of BDO
Binder.

     Ronald A. Elwell has recently been appointed President of Call Recording
Systems for the Company. Since October 1998, Mr. Elwell has served as Senior
Vice President and General Manager, Communications Recording Systems and
International Operations of Dictaphone Corporation until its acquisition by the
Company in May 2000. Mr. Elwell first joined Dictaphone Corporation in 1983,
where he has held various positions, including Senior Vice President and General
Manager, Communications Recording Systems from October 1997 to October 1998.

     Allan Forsey joined the Company in August 1999 as Senior Vice President of
Finance and Strategic Planning. Prior to joining the Company, Mr. Forsey was the
Vice President of Finance for The Learning Company from March 1997 to August
1999. Prior to his tenure at The Learning Company, Mr. Forsey was with Colgate
Palmolive Company for eight years where he held several key positions in
finance. Mr. Forsey is a Chartered Accountant.

                                      75
<PAGE>

     Daniel P. Hart has recently been appointed Senior Vice President and
General Counsel of the Company. Since October 1997, Mr. Hart has served as
Senior Vice President and General Counsel of Dictaphone Corporation until its
acquisition by the Company in May 2000. Mr. Hart served as Vice President,
General Counsel of Dictaphone Corporation from November 1995 to October 1997.

     Robert G. Schwager has recently been appointed President of Healthcare
Solutions for the Company. Since October 1998, Mr. Schwager has served as Senior
Vice President and General Manager, Voice Systems of Dictaphone Corporation
until its acquisition by the Company in May 2000. Mr. Schwager first joined
Dictaphone Corporation in 1983, where he has held various positions, including
Senior Vice President and General Manager, Integrated Health Systems from
October 1997 to October 1998 and Vice President and General Manager, Integrated
Health Systems from August 1997 to October 1997.

     John Shagoury has recently been appointed the President of the Applications
Division of the Company. Since June 1998, Mr. Shagoury served as the Chief
Operating Officer of Dragon Systems, and since December 1998 he served as the
President and a Director of Dragon, until its acquisition by the Company in June
2000. Prior to joining Dragon, Mr. Shagoury served in various positions at
Corporate Software & Technology,Inc., most recently as President, North America.

     Anatoly Tikhman joined the Company as President of Dictation in September
1998 and has served as President of the Transcription Services Division (iChart)
since its inception in January 1999. Prior to joining the Company, Mr. Tikhman
founded and served as president and chief executive officer of several
technology-related companies, including TikSoft LLC, a developer and marketer of
speech and language technology products that the Company acquired in September
1998. Mr. Tikhman also previously served as president and chief executive
officer of Vertisoft Systems, a leading software utility provider. Vertisoft
products included the DoubleDisk, Zip-It, Remove-It, Fix-It and Partition-It.

     Bert Vermeiren joined the Company as Corporate Vice President of Human
Resources in September 1998. Prior to joining L&H, Mr. Vermeiren was Human
Resources Manager at IBM Computer Corporation, in charge of the Human Resources
Department in its Belgian and Luxembourg based operations.


                        Item 11. EXECUTIVE COMPENSATION

     In 1999, the aggregate cash compensation that we paid or accrued for our
officers as a group (twelve persons) was approximately $3.25 million, including
certain automobile benefits and approximately $4,000 in contributions to our
401(k) plan on behalf of officers based in the United States.


Executive Compensation

Summary Compensation Table

         The following table sets forth information concerning the compensation
during the last three fiscal years of our Chief Executive Officer and our four
other most highly compensated executive officers whose annual salary and bonus
exceeded $100,000 for services in all capacities to us during the last fiscal
year (the "named executive officers").

                                      76
<PAGE>

<TABLE>
<CAPTION>
                                            Annual Compensation                                  Long-Term Compensation
                                            -------------------                                  ----------------------
Name and                      Fiscal                                Other Annual        Securities Underlying       All Other
Principal Position             Year   Salary ($)     Bonus ($)    Compensation ($)(1)        Options  (#)        Compensation ($)(2)
-----------------------       -----   -----------------------------------------------   --------------------------------------------
<S>                           <C>     <C>            <C>          <C>                   <C>                      <C>
Gaston Bastiaens              1999      $250,558      $150,000            --                    --                    $2,000
President and CE.             1998      $258,816      $150,000            --                    --                    $2,000
                              1997      $251,865      $150,000            --                    --                      --

Jo Lernout                    1999      $425,000         --            $93,635                  --                      --
Co-Chairman of the            1998         (4)           --            $76,081                  --                      --
Board and Managing Director   1997         (4)           --            $48,440                  --                      --

Pol Hauspie                   1999      $425,000(3)      --            $63,702                  --                      --
Co-Chairman of the            1998         (4)           --            $57,934                  --                      --
Board and Managing Director   1997         (4)           --            $38,604                  --                      --

Nico Willaert                 1999      $425,000         --            $41,560                  --                      --
Vice Chairman and             1998         (4)           --            $42,023                  --                      --
Managing Director             1997         (4)           --            $26,024                  --                      --

Anatoly Tikhman(5)            1999      $210,000      $105,000            --                    --                      --
Senior Corporate              1998      $ 54,156         --               --              650,000 shares                --
Vice President and            1997         --            --               --                    --                      --
President, Speech and
Language Applications
Division
</TABLE>

------------------
(1)  The amounts reported in this column consist of the total cost to the
     Company of a car and driver which the Company provides for the use of each
     of Messrs. Lernout and Hauspie, and a car provided for the use of Mr.
     Willaert, although, in each case, this transportation is primarily used for
     Company business.
(2)  The amounts reported in this column consist of employer contributions to
     the Company's Section 401(k) retirement plan.
(3)  This amount was paid to Sarabo N.V., an entity owned by Mr. Hauspie which
     provided management services to us pursuant to a Services Agreement.
(4)  In 1997 and 1998 we paid $1,200,000 and $900,000, respectively, to Oldco
     NV, an entity owned by LEHA, for management services and financing and
     strategic financial management services provided by Messrs. Lernout,
     Hauspie and Willaert through Oldco. Oldco NV provided these services to us
     pursuant to a Management Agreement which expired in October 1998.
(5)  Mr. Tikhman joined L&H on September 9, 1998.

There were no stock options granted to our named executive officers during the
fiscal year ended December 31, 1999.


Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values

     The following table sets forth certain information regarding the
exercise of stock options during the fiscal year ended December 31, 1999 and the
fiscal year-end value of unexercised options for our named executive officers.


                                      77
<PAGE>

<TABLE>
<CAPTION>
                                                                    Number of
                                                               Securities Underlying           Value of Unexercised
                                                                Unexercised Options           In-the-Money Options at
                         Shares Acquired        Value          at Fiscal Year-End  (#)        Fiscal Year-End ($)(1)
Name                     on Exercise (#)     Realized ($)    Exercisable / Unexercisable     Exercisable/Unexercisable
---------                ---------------     ------------    ----------------------------    -------------------------
<S>                      <C>                 <C>             <C>                             <C>
Gaston Bastiaens                 --              --              1,080,000  /   --             $20,583,612  /  $0-
Jo Lernout                       --              --              --         /   --             --           /  --
Pol Hauspie                      --              --              --         /   --             --           /  --
Nico Willaert                    --              --              --         /   --             --           /  --
Anatoly Tikhman                  --              --                438,500  /   211,500         $3,935,538  /  $1,898,213
</TABLE>

-------------------
(1) Based upon the $23.125 closing market price of our common stock as reported
on the Nasdaq National Market on December 31, 1999 minus the respective option
exercise price.

Employment Agreements

     In September 1996 we entered into an Employment Agreement with Gaston
Bastiaens, the President and Chief Executive Officer of the Company. The
Agreement provides that Mr. Bastiaens will be entitled to a minimum base salary
of $250,000 per year, plus a target bonus of $150,000 per year, to be based upon
his achievements under the Company's Management by Objective Plan, as then in
effect. He shall also be entitled to participate in all benefit programs as may
from time to time be available to the Company's U.S. employees. In addition,
upon entering into the Agreement, we granted Mr. Bastiaens an option to purchase
1,200,000 shares of common stock of the Company. The Agreement is terminable by
either party upon 30 days' written notice, provided, however, if Mr. Bastiaens's
employment is terminated by the Company without cause, he will be entitled to
continue to receive his base salary and medical benefits for a one year period.
The Agreement also prohibits Mr. Bastiaens from competing with the Company
during the term of his employment and for a period of two years thereafter.

     In September 1998 we entered into an Employment Agreement with Anatoly
Tikhman, currently President of the Transcription Services Division (iChart) of
the Company. The Agreement provides that Mr. Tikhman will be entitled to a
minimum base salary of $210,000 per year, plus a target bonus of $105,000 per
year, to be based upon his achievements under the Company's Management by
Objective Plan, as then in effect. He shall also be entitled to participate in
all benefit programs as may from time to time be available to the Company's U.S.
employees. In addition, upon entering into the Agreement, we granted Mr. Tikhman
an option to purchase 650,000 shares of common stock of the Company. If Mr.
Tikhman's employment is terminated during the first two years of his employment
by him for cause or by the Company without cause, he will be entitled to receive
the salary, bonus and other compensation which would have been paid to him
during the remainder of the term as a severance payment. Following the first two
years of his employment, the Agreement is terminable by either party upon 30
days' written notice. The Agreement also contains assignment of employee
inventions and non-disclosure provisions and prohibits Mr. Tikhman from
competing with the Company during the term of his employment and for a period of
two years thereafter or one year in the case of his termination by the Company
without cause.

Services Agreement

     The services of our Co-Chairman and Managing Director, Pol Hauspie, are
provided under a Services Agreement, dated January 1999, between the Company and
Sarabo N.V., which is controlled by Mr. Hauspie. Under the terms of the Services
Agreement, Sarabo, through Mr. Hauspie, provides management services to the
Company for an indefinite term. In 1999, we paid approximately $425,000 to
Sarabo under the Services Agreement. We do not pay any additional compensation
to Mr. Hauspie other than reimbursement of expenses and the use of Company cars.

Compensation Committee Interlocks and Insider Participation

     Decisions regarding executive compensation are made by the Compensation
Committee of our Board of Directors, which is composed of Fernand Cloet, RVD
Securities N.V., represented by Erwin Vandendriessche, Bernard Vergnes and
Francis Vanderhoydonck. The Compensation Committee also administers our
Management by

                                      78
<PAGE>

Objective Plan, our stock option plans and our 401(k) Plan. None of the members
of the Compensation Committee has ever been an officer or employee of L&H or any
of our subsidiaries.

Stock Plans

     1993 Restricted Stock Purchase Plan. In August 1993, we adopted the 1993
Restricted Stock Purchase Plan (the "1993 Plan"). Under the 1993 Plan, our U.S.
subsidiary, Lernout & Hauspie Speech Products USA, Inc., is authorized to sell
up to 3,300,000 shares of its nonvoting Class B common stock (the "U.S. Class B
Stock") to our employees, advisors and consultants, including officers and
directors. Participants are required to pay us a portion of the fair market
value of the shares upon issuance and the balance of the purchase price is
payable pursuant to a nonrecourse promissory note. The shares of U.S. Class B
Stock sold under the 1993 Plan are sold through and held by a trust (the "1993
Plan Trust"). Upon the vesting and receipt by the 1993 Plan Trust of payment in
full for shares of U.S. Class B Stock, the 1993 Plan Trust exchanges such shares
of U.S. Class B Stock for an equal number of shares of our common stock, which
are then distributed to participants.

     We had made grants under the 1993 Plan covering 3,300,000 shares of common
stock (net of terminations) with exercise prices ranging from $0.62 to $2.50 per
share. The grants vested at varying vesting rates and generally had to be
exercised or forfeited not more than five years from the date of grant. As of
June 20, 2000, all options issued under the 1993 Plan which were not yet
exercised have expired and no options remain to be granted.

     1994 Time Accelerated Restricted Stock Option Plan. In January 1994, we
adopted the 1994 Time Accelerated Restricted Stock Option Plan (the "TARSOP ").
A total of 6,060,000 shares of common stock are authorized to be issued under
the TARSOP.

     As of June 20, 2000, we had granted options under the TARSOP to purchase a
total of 6,060,000 shares of common stock (net of terminations) to certain of
our executive officers and key employees at a price of $1.75 per share with a
vesting schedule of four to ten years. The vesting schedule is based upon our
achieving certain performance objectives periodically set by our Compensation
Committee. As of June 20, 2000, options issued under the TARSOP covering 771,274
shares remained outstanding.

     The options under the TARSOP have been issued to a Netherlands foundation
(the "Foundation") formed for the purpose of administering the TARSOP. The
Foundation holds and exercises the TARSOP options at the instructions and for
the benefit of the TARSOP participants in accordance with the terms of the award
and the TARSOP.

     1995 Restricted Stock Option Plan. In September 1995, we adopted the 1995
Restricted Stock Option Plan (the "1995 Plan"). The 1995 Plan is administered by
our Compensation Committee. Under the 1995 Plan, we are authorized to issue
options to purchase up to an aggregate of 6,000,000 shares of common stock. The
terms of the options, including the exercise period, vesting schedule and
restrictions on transfer, including restrictions on transfer of the underlying
shares, are subject to the discretion of the Compensation Committee. At the
discretion of the Compensation Committee, options under the 1995 Plan may be
issued to the Foundation or similar entity formed for the purpose of holding the
options on behalf of the participants in the 1995 Plan. As of June 20, 2000, we
had granted options to purchase 6,000,000 shares of common stock under the 1995
Plan, of which options to purchase 1,908,384 shares remained outstanding as of
that date.

     1997 Restricted Stock Option Plan. In April 1997, we adopted the 1997
Restricted Stock Option Plan (the "1997 Plan"). The 1997 Plan is administered by
our Compensation Committee. Under the 1997 Plan, we are authorized to issue
options to purchase up to an aggregate of 4,800,000 shares of common stock. The
terms of the options, including the exercise period, vesting schedule and
restrictions on transfer, including restrictions on transfer of the underlying
shares, are subject to the discretion of the Compensation Committee. At the
discretion of the Compensation Committee, options under the 1997 Plan may be
issued to the Foundation or similar entity formed for the purpose of holding the
options on behalf of the participants in the 1997 Plan. As of June 20, 2000, we
had granted options to purchase 4,800,000 shares of common stock under the 1997
Plan, of which options to purchase 2,195,341 shares remained outstanding as of
that date.

     1998 Option Plan for Employees of Acquired Companies. In March 1998, our
Board of Directors adopted a stock option plan for employees of certain
companies acquired by the Company. This plan is administered by our

                                      79
<PAGE>

Compensation Committee. Under this plan, we are authorized to issue options to
purchase up to an aggregate of 2,630,000 shares of common stock. At the
discretion of the Compensation Committee, options under this plan may be issued
to the Foundation or similar entity formed for the purpose of holding the
options on behalf of the participants in this plan. As of June 20, 2000, we had
granted options to purchase 2,343,934 shares of common stock to employees of our
subsidiaries under this plan, of which options to purchase 1,788,542 shares
remained outstanding as of that date.

     1998 Restricted Stock Option Plan. Our stockholders approved the 1998
Restricted Stock Option Plan in May 1998. The plan is administered by our
Compensation Committee. Under this plan, we are authorized to issue options to
purchase up to an aggregate of 3,000,000 shares of common stock. The terms of
the options, including the exercise period, vesting schedule and restrictions on
transfer, would include restrictions on transfer of the underlying shares, are
subject to the discretion of the Compensation Committee. At the discretion of
the Compensation Committee, options under this plan may be issued to the
Foundation or similar entity formed for the purpose of holding the options on
behalf of the participants in this plan. As of June 20, 2000, we had granted
options to purchase 3,000,000 shares of common stock under the 1998 Plan, of
which options to purchase 2,306,349 shares remained outstanding as of that date.

     1999 Restricted Stock Option Plan. In May 1999, our Board of Directors
adopted a stock option plan for employees of certain companies acquired by the
Company. This plan is administered by our Compensation Committee. Under this
plan, we are authorized to issue options to purchase up to an aggregate of
2,800,000 shares of common stock. At the discretion of the Compensation
Committee, options under this plan may be issued to the Foundation or similar
entity formed for the purpose of holding the options on behalf of the
participants in this plan. As of June 20, 2000, we had granted options to
purchase 2,800,000 shares of common stock to employees of our subsidiaries under
this plan, of which options to purchase 2,180,927 shares remained outstanding as
of that date.

     2000 Stock Option Plan for Employees of Acquired Companies. On May 5, 2000,
our Board of Directors adopted a stock option plan for employees of certain
companies acquired by the Company. This plan is administered by our Compensation
Committee. Under this plan, we are authorized to issue options to purchase up to
an aggregate of 3,394,000 shares of common stock. At the discretion of the
Compensation Committee, options under this plan may be issued to the Foundation
or similar entity formed for the purpose of holding the options on behalf of the
participants in this plan. As of June 20, 2000, we had granted options to
purchase 2,254,000 shares of common stock to employees of our subsidiaries under
this plan, of which options to purchase 1,090,000 shares remained outstanding as
of that date.

     2000 Restricted Stock Option Plan. In June 2000, our stockholders approved
the 2000 Restricted Stock Option Plan. This plan is administered by our
Compensation Committee. Under this plan, we are authorized to issue options to
purchase up to an aggregate of 3,000,000 shares of common stock. At the
discretion of the Compensation Committee, options under this plan may be issued
to the Foundation or similar entity formed for the purpose of holding the
options on behalf of the participants in this plan. As of June 20, 2000, we had
not yet granted any options under this plan.

     Dragon Stock Option Plans. On June 7, 2000, we acquired Dragon Systems,
Inc. through its merger with and into one of our wholly-owned subsidiaries. In
connection with the acquisition, we converted the outstanding options granted to
the Dragon Systems employees into options to acquire our common stock with a
weighted average exercise price of $20.15 per share. Our Board of Directors
adopted the 1994 Dragon Rollover Stock Option Plan, the 1999 Dragon Rollover
Stock Incentive Plan and the UK Dragon Rollover Company Share Option Plan under
which these outstanding options had been issued. These plans are administered by
our Compensation Committee. As of June 20, 2000, options to purchase 1,647,113
shares of our common stock remained outstanding under these plans. We do not
intend to grant additional options to purchase shares of common stock under
these plans in the future.


Outstanding Options

         At June 20, 2000, we had outstanding options to purchase an aggregate
of 14,047,930 shares of common stock. Of the outstanding options at June 20,
2000, options to purchase 13,887,930 shares were outstanding under the 1993
Plan, the TARSOP, 1995 Plan, the 1997 Plan, the 1998 Option Plan for Acquired
Companies, the 1998

                                      80
<PAGE>

Plan, the 1999 Plan, the 2000 Option Plan for Acquired Companies, the 2000 Plan
and the Dragon Stock Option Plans (the "Plans") and are exercisable at prices
ranging from $1.258 to $59.058 per share. Other than options issued under the
Plans, there were 160,000 outstanding stock options which were issued on March
20, 1998, expire on March 19, 2003 and have an exercise price of $6.91.


Limitation of Officers' and Directors' Liability; Indemnification Agreements

     Under Belgian law, directors and the statutory auditor may be liable for
damages to us, a trustee in bankruptcy and third parties in case of improper
performance of their duties, violation of our Restated Articles of Association
or the Companies Act, or tortious misconduct. Under certain circumstances,
directors may also be criminally liable. One or more stockholders holding at
least one percent of our common stock (approximately 1,410,000 shares) or
holding shares representing a fractional value in our capital of at least BEF
50.0 million can, under certain conditions provided in the Companies Act, sue
the directors and the statutory auditor derivatively on behalf of us.

     A simple majority of the stockholders at a duly convened stockholders
meeting may discharge directors and the statutory auditor from liability to us
relating to the performance of their respective duties after the presentation of
a management report and the annual accounts by our directors and presentation of
the statutory auditors' report to our stockholders. This discharge prohibits
stockholders from bringing derivative suits on behalf of us on such grounds. A
general discharge of director or auditor liability does not relieve such persons
from liability to third parties or for violations of the Companies Act or the
Restated Articles of Association. Violations of the Restated Articles of
Association may only be discharged if specifically identified by the
stockholders. Notwithstanding a general discharge, directors and auditors may be
held liable for willful misconduct and fraud in the performance of their duties
for us.

     Our Restated Articles of Association include provisions permitting us to
indemnify our directors and officers to the fullest extent permitted by Belgian
law. We plan to enter into an indemnification agreement with each of our
directors, future directors and certain of our officers. Generally, each
indemnification agreement attempts to provide the maximum protection permitted
by Belgian law with respect to the indemnification of the director or officer.
The indemnification agreements will provide that we will pay certain amounts
incurred by a director or officer in connection with any civil or criminal
action or proceeding (excluding actions by us or in our name) i.e. derivative
suits) where the individual's involvement is by reason of the fact that he is or
was a director of officer. Such amounts include, to the maximum extent permitted
by law, attorneys fees, judgments, civil or criminal fines, settlement amounts
and other expenses customarily incurred in connection with legal proceedings.
Under the indemnification agreements, a director or officer will not receive
indemnification if he is found not to have acted in good faith in the reasonable
belief that his action was in our best interest.

     We also maintain directors' and officers' liability insurance.


     Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


         The following table sets forth information as of June 8, 2000 with
respect to the beneficial ownership of our common stock of each director, each
named executive officer in the Summary Compensation Table under "Compensation of
Directors and Officers -- Executive Compensation," below, all executive officers
and directors as a group, and each person known by us to be the beneficial owner
of 5% or more of our common stock. This information is based upon information
received from or on behalf of the named individuals.

<TABLE>
<CAPTION>
                                                  Beneficial Ownership (1)
                                                  ------------------------
   Name of Beneficial Owner             Number of Shares         Percent of Common Shares
   ------------------------             ----------------         ------------------------
   <S>                                  <C>                      <C>
</TABLE>

                                      81
<PAGE>

<TABLE>
<S>                                        <C>                           <C>
Pol Hauspie (2)                            43,667,068                    30.24%
c/o Lernout & Hauspie Speech
Products N.V.
Flanders Language Valley 50
8900 Ieper
Belgium

Jo Lernout (2)                             43,667,208                    30.24%
c/o Lernout & Hauspie Speech
Products N.V.
Flanders Language Valley 50
8900 Ieper
Belgium

L & H Holding Control Group (2)            43,667,208                    30.24%
c/o Lernout & Hauspie Speech
Products N.V.
Flanders Language Valley 50
8900 Ieper
Belgium

Stonington Holdings, L.L.C. (3)             9,064,329                     6.39%
c/o Stonington Partners, Inc.
767 Fifth Avenue, 48th Floor
New York, NY 10153

Albert J. Fitzgibbons III (4)               9,064,329                     6.39%
c/o Stonington Partners, Inc.
767 Fifth Avenue, 48th Floor
New York, NY 10153

Microsoft Corporation                       7,515,124                     5.29%
One Microsoft Way
Redmond, WA 98052

Dirk Cauwelier (5)                              3,780                       *
Fernand Cloet                                     140                       *
Jan Coene                                          --                      --
Marc G. H. De Pauw                                 --                      --
Hubert Detremmerie                                400                       *

Roel Pieper                                   100,000                       *
R.V.D. Securities (6)                          15,000                       *
Alex Vieux (7)                                160,000                       *
Gerard van Acker                                   --                      --
Bernard Vergnes                                    --                      --
Francis Vanderhoydonck                             --                      --

Gaston Bastiaens(8)                         1,231,000                       *
Nico Willaert                                      --                      --
Anatoly Tikhman (9)                            88,500                       *

All directors and executive officers       46,664,973                    31.80%
as a group (23 persons)(2)(10)
</TABLE>

                                      82
<PAGE>

_____________________________

*Less than one percent.

(1)  Unless otherwise noted, to our knowledge each person identified possesses
     sole voting and investment power with respect to the shares listed.

(2)  Jo Lernout and Pol Hauspie, Managing Directors of the Company, control the
     L&H Holding Control Group which is comprised of LEHA, a Netherlands
     foundation, L&H Holding N.V., Oldco N.V., L&H Investment Company N.V., and
     L&H Holding III S.A. L&H Holding beneficially owns (i) 12,744,000 shares of
     common stock and (ii) 650,262 shares of common stock issuable upon
     conversion of the Convertible Subordinated Notes owned by it. Oldco
     beneficially owns 6,303,588 shares of common stock. Holding III
     beneficially owns 3,305,396 shares of common stock. Messrs. Lernout and
     Hauspie each hold 140 shares personally. The holdings of each of Messrs.
     Lernout and Hauspie and the L&H Holding Control Group also include (i)
     9,064,329 shares of our common stock which were issued as consideration for
     the Dictaphone merger because the Stonington Fund has assigned certain
     voting rights to all the shares it acquired in the merger for so long as it
     holds the shares by agreeing to hold the shares through an entity
     controlled by Messrs. Lernout and Hauspie, (ii) 9,807,489 shares of our
     common stock which were issued to the principal stockholders of Dragon as
     consideration for the Dragon merger because these stockholders have
     assigned certain voting rights to all the shares they acquired in the
     merger for so long as they hold the shares by agreeing to hold the shares
     through entities controlled by Messrs. Lernout and Hauspie, and (iii) the
     securities acquired by Intel Atlantic which are exchangeable on and after
     November 5, 2000 into shares of our Automatically Convertible Stock held by
     a trust on behalf of Intel, as to which the voting rights, which are
     equivalent to the voting rights of 1,791,864 shares of our common stock,
     are controlled by Messrs. Lernout & Hauspie, which securities they are
     deemed to beneficially own. Members of the L&H Holding Control Group have
     entered into forward sale contracts with unaffiliated investment funds that
     require them to transfer, on August 31, 2001 (or an earlier date on the
     occurrence of certain events), a certain number of shares of common stock,
     ranging from 2,909,092 to 9,600,000 shares, depending upon the fair market
     value of the shares on the date of transfer. L&H Holding has pledged
     660,000 shares of common stock to secure certain indebtedness. Oldco and
     Holding III have pledged 9,600,000 shares to secure their forward sales
     obligations.

(3)  Stonington Holdings, L.L.C. is an entity in which the Stonington Fund is
     the sole Class A Member and which is controlled by Messrs. Lernout and
     Hauspie as described in footnote (2) above.

(4)  Mr. Fitzgibbons's holdings consist of 9,064,329 shares of our common stock
     held by Stonington Holdings, LLC. Mr. Fitzgibbons is a limited partner of
     Stonington Partners, L.P., and a director of Stonington Partners, Inc. II,
     the general partner of Stonington Partners, L.P., the general partner of
     the Stonington Fund which is the sole Class A Member of Stonington
     Holdings. Mr. Fitzgibbons disclaims beneficial ownership of the shares held
     by Stonington Holdings.

(5)  Mr. Cauwelier's holdings include 3,600 shares of common stock held jointly
     with two other individuals.

(6)  These shares are held by Mr. Erwin Vandendriessche, the representative of
     RVD Securities on the Board of Directors.

(7)  Mr. Vieux holdings consist of currently exercisable options to purchase
     160,000 shares of common stock.

                                      83
<PAGE>

(8)  Mr. Bastiaens' holdings include currently exercisable options to purchase
     1,080,000 shares of common stock. Mr. Bastiaens' holdings do not include
     shares held by Holding III, a corporation of which he is a 27.7%
     stockholder. Mr. Bastiaens disclaims beneficial ownership of the shares
     held by Holding III.

(9)  Mr. Tikhman's holdings consist of currently exercisable options to purchase
     88,500 shares of common stock.

(10) Includes options to purchase 2,343,316 shares of common stock issued
     pursuant to our employee stock option plans at exercise prices ranging from
     $1.258 to $59.058 per share which are currently exercisable or exercisable
     within 60 days from June 8, 2000.


            Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

L&H Holding Control Group

     Messrs. Jo Lernout and Pol Hauspie, individually and through the L&H
Holding Control Group, as of June 8, 2000, beneficially own 43,667,208 shares or
approximately 30.24% of the outstanding shares of our common stock. The L&H
Holding Control Group owns 23,003,526 shares of common stock controlled by
Messrs. Lernout and Hauspie through corporations controlled by Messrs. Lernout
and Hauspie and LEHA, a Netherlands foundation ("LEHA"), consisting of L&H
Holding N.V., Oldco N.V., L&H Investment Company N.V. and L&H Holding III S.A.
The L&H Holding Control Group is also deemed to beneficially own (i) 9,064,329
shares of our common stock which were issued as consideration for the Dictaphone
merger because the Stonington Fund has assigned certain voting rights to all the
shares it acquired in the merger for so long as it holds the shares by agreeing
to hold the shares through an entity controlled by Messrs. Lernout and Hauspie,
(ii) 9,807,489 shares of our common stock which were issued to the principal
stockholders of Dragon as consideration for the Dragon merger because these
stockholders have assigned certain voting rights to all the shares they acquired
in the merger for so long as they hold the shares by agreeing to hold the shares
through entities controlled by Messrs. Lernout and Hauspie, and (iii) the
securities acquired by Intel Atlantic which are exchangeable at any time into
shares of our Automatically Convertible Stock held by a trust on behalf of
Intel, as to which the voting rights, which are equivalent to the voting rights
of 1,791,864 shares of our common stock, are controlled by Messrs. Lernout &
Hauspie. Pursuant to our Restated Articles of Association, so long as the L&H
Holding Control Group holds at least 10% of our outstanding voting stock, L&H
Holding has the right to nominate a list of candidates for nine of our 17
Directors. Members of the L&H Holding Control Group have entered into forward
sale contracts with unaffiliated investment funds that require them to transfer,
on August 31, 2001 (or an earlier date on the occurrence of certain events), a
certain number of shares of common stock, ranging from 2,909,092 to 9,600,000
shares, depending upon the fair market value of the shares on the date of
transfer.

     In connection with the forward sale contracts entered into by certain
members of the L&H Holding Control Group, we agreed to provide the purchasers of
those shares certain shelf registration rights at the expense of the L&H Holding
Control Group. In addition, the L&H Holding Control Group agreed not to approve,
propose or vote with respect to (i) any capital increase of the Company by way
of a rights offering to our existing shareholders on a pre-emptive basis or (ii)
any resolution to pay a cash dividend on the common stock, without the consent
of the purchasers.

     In connection with certain of our financing transactions, in 1995 L&H
Holding, GIMV and Messrs. Jo Lernout, Pol Hauspie and Nico Willaert became
parties to an Amended and Restated Stockholders Agreement (the "Stockholders
Agreement") which grants the parties certain registration rights and imposes
certain voting requirements regarding the election of directors. Most of the
other rights of the parties under the Stockholders Agreement have been
incorporated in our Restated Articles of Association.

Strategic Alliance with Microsoft

     On September 10, 1997, the Company and Microsoft Corporation ("Microsoft")
entered into a strategic alliance to accelerate development of speech products
in multiple languages running on Microsoft Windows platforms. See

                                      84
<PAGE>

"Description of Business -- Strategic Alliances". Mr. Bernard Vergnes represents
Microsoft on the Company's Board of Directors. At June 8, 2000, Microsoft held
7,515,124 shares (approximately 5.29%) of our common stock.

     In the event that Microsoft wishes to sell (in one or more related
transactions during a 12-month period) more than 200,000 shares of our common
stock to any corporation the primary business of which is computer hardware or
software in a transaction or transactions effected other than through the Nasdaq
National Market or EASDAQ, the Company or its nominee has a right of first
refusal (subject to certain conditions) to purchase such shares at the minimum
price for which Microsoft is willing to transfer the shares to a third party.

     Microsoft is also a significant customer of the Company; in 1999, we
received approximately $30.9 million in revenues from Microsoft.

Services Agreement with Sarabo N.V.

     Since January 1999, we have had a Services Agreement with Sarabo N.V., an
entity owned by Pol Hauspie. Under the Agreement, Sarabo N.V. provided
management services to us. We paid Sarabo N.V. $425,000 for the year ended
December 31, 1999, for services rendered under this agreement. Mr. Hauspie
received no other compensation for his services to the Company, other than
reimbursement of expenses and the use of Company cars.


L&H Investment Company

     In October 1998, Messrs. Lernout and Hauspie formed L&H Investment Company
N.V., the principal purpose of which was to invest in high technology based
companies that specialize in speech and language-based products. Messrs. Lernout
and Hauspie beneficially own a controlling interest in, and are co-chairmen of,
L&H Investment Company. Another one of our directors, Mr. Francis
Vanderhoydonck, also serves as President and a Managing Director of L&H
Investment Company. We do not have any interest as a stockholder, director or
otherwise in L&H Investment Company. In 1999 we recognized a total of $611,000
in revenue from companies in which L&H Investment Company had an investment. The
following sets forth transactions since January 1, 1999 and involving more than
$60,000 between us and companies in which L&H Investment Company had more than a
10% interest or between us and L&H Investment Company.

     E-DOCS.net. Applied Voice Recognition, Inc., d/b/a e-DOCS.net, is a
Texas-based voice recognition and document management company that has licensed
technology from us. In 1999, e-DOCS paid us $300,000 under this license, leaving
a $350,000 balance due under the license agreement. From December 1998 through
March 1999, L&H Investment Company invested a total of $5.0 million in e-DOCS
preferred stock and warrants to purchase e-DOCS common stock. In May 1999, L&H
Investment Company loaned e-DOCS $1.5 million, and in November 1999, we loaned
e-DOCS $2.0 million. Both loans were secured by substantially all of the assets
of e-DOCS other than accounts receivable. During 1999, we entered into an
agreement with e-DOCS under which e-DOCS agreed to provide us with data and
medical context development. We offset the amount due to e-DOCS under this
agreement against the $350,000 balance due under our license to e-DOCS. From
February 1999 to December 1999, Mr. Jo Lernout, one of our directors, and a
Managing Director of L&H Investment Company served as directors of e-DOCS.

     In January 2000, we assigned to L&H Investment Company our $2.0 million
loan to e-DOCS. e-DOCS then sold certain of its transcription assets and a
warrant to buy 800,000 shares of e-DOCS common stock at $0.37 per share to
Lonestar Medical Transcription USA, Inc., a wholly-owned subsidiary of L&H
Investment Company, in exchange for cancellation of both loans then held by L&H
Investment Company, L&H Investment Company's preferred stock and warrants in
e-DOCS and the payment of approximately $800,000. The $800,000 payment, which
was loaned by us to Lonestar, was for third party accounts receivable and
certain costs relating to the acquired business. At the time of the purchase we
also amended our license agreement with e-DOCS to provide e-DOCS with an updated
version of our medical dictation software. Shortly after this transaction, L&H
Investment Company transferred all of the stock of Lonestar to us for $5.5
million, which represents $7.5 million less the $2.0 million loan we assigned to
L&H Investment Company. We received a fairness opinion from an investment banker
with respect to the purchase price for Lonestar. In February and April, 2000 we
paid L&H Investment Company a total of $2.1

                                      85
<PAGE>

million of the $5.5 million we owed to it in connection with the e-DOCS
transaction. As a result, the net amount owed by us to L&H Investment Company is
$3.4 million.

     Speech Machines Plc. Speech Machines Plc, is a U.K.-based speech technology
company that licensed technology from us. We own 2,255,000 shares of convertible
cumulative redeemable preferred stock from Speech Machines, which we acquired in
1998. In January and April 1999, L&H Investment Company invested a total of
approximately $3.1 million in Speech Machines. Two of our directors, Jo Lernout
and Francis Vanderhoydonck served as directors of Speech Machines from September
1998 and April 1999, respectively through December 1999. In September 1998 we
entered into an Authorized Reseller Agreement with Speech Machines, which
appointed us as its exclusive distributor in the North America to hospitals,
hospital groups and medical transcription companies of Speech Machines'
Internet-based transcription service. The agreement required us to pay a minimum
of $1.0 million during the first year. We amended this agreement in January
1999. The amendment increased the amount we were required to pay to Speech
Machines during the first year to $1.25 million, including a $700,000 payment
due in June 1999. In July 1999, we paid $700,000 to Speech Machines under this
agreement. Speech Machines paid us $360,000 during 1999 with respect to an
outstanding 1998 receivable for its license of our technology.

     SwiftTouch Corporation. SwiftTouch Corporation, formerly known as
OmniContract, is a U.S. based company which provides an Internet-based contact
management system. In May 1999, L&H Investment Company invested $3.0 million in
preferred stock and a warrant to purchase additional preferred stock of
SwiftTouch, giving it more than a 10% equity interest in SwiftTouch. In March
1999, we entered into an End-User License Agreement with SwiftTouch pursuant to
which SwiftTouch licensed our technology. This Agreement was amended in June
1999 to add additional software to the license. In June 1999, we received the
minimum royalty payment of $500,000 due under the Agreement from SwiftTouch.

     Other Transactions. Beginning in January 2000, we have used the part-time
services of several directors and consultants of L&H Investment Company. These
individuals have performed financial, accounting and strategic planning services
for us. One of these individuals, Francis Vanderhoydonck, is a director of the
Company. We reimburse L&H Investment Company for a proportion of the
compensation L&H Investment Company is required to pay to these individuals
based upon the time spent by these individuals on L&H projects. For the first
quarter of 2000, we accrued $220,000 for these services.


Certain Other Transactions

     As discussed in Item 7 under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors--Our
interests may be in conflict with the interests of a number of entities in which
our directors are involved - these conflicts could harm our business", there are
relationships between the FLV Fund and some of our directors, including Messrs.
Lernout and Hauspie, that could lead to conflicts of interest. However, neither
Messrs. Lernout and Hauspie nor any other director or executive officer of
Lernout and Hauspie is an executive officer or beneficial owner of 10% of the
stock of FLV Fund. Moreover, Messrs. Lernout and Hauspie have advised us that
they do not own any of the outstanding capital stock of the FLV Fund.

     In April 1999, we provided a short term bridge loan of approximately $1.6
million to FLV Campus N.V., an affiliate of the S.A.I.L. Trust and an entity for
which one of our directors, Fernand Cloet, serves as a director. The purpose of
the loan was to support ongoing development and construction projects in the
Flanders region of Belgium so as to avoid construction delays. The loan was
repaid in December 1999. For a discussion of the S.A.I.L Trust and related
matters, see "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Our interests may be in
conflict with the interests of a number of entities in which our directors are
involved - these conflicts could harm our business".

     In July 1999, we loaned $1.5 million to Florita Mendez, the Senior
Corporate Vice President and President of the Speech and Language Consulting and
Services Division of the Company. Ms. Mendez repaid this loan, including the 6%
interest accrued on the principal amount, in November 1999.

                                      86
<PAGE>

                                    PART IV

     Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      1.    Financial Statements


                                                        Page
                                                        ----
Independent Auditors' Report.........................    F-2

Consolidated Balance Sheets..........................    F-3

Consolidated Statements of Operations................    F-4

Consolidated Statements of Shareholders' Equity......    F-5

Consolidated Statements of Cash Flows................    F-6

Consolidated Statements of Comprehensive Loss........    F-8

Notes to Consolidated Financial Statements...........    F-9


         2     Financial Statement Schedules

     All financial statement schedules are omitted as the information required
is inapplicable or the information is presented in the financial statements or
the related notes.

                                      87
<PAGE>

      (b) Reports on Form 8-K.

          During the fiscal quarter ended December 31, 1999, we were a foreign
private issuer, and therefore, were not required to report on Form 8-K. Instead,
we were required to report on Form 6-K. Consequently, we filed the following
reports on Form 6-K during the fiscal quarter ended December 31, 1999:

               1.   On November 1, 1999, we filed a Form 6-K/A-2 amending
                    our 6-K/A filing dated September 9, 1999 concerning
                    certain unaudited pro forma financial information for
                    the 1999 Second Quarter.

               2.   On November 4, 1999, we filed a Form 6-K concerning our
                    1999 Third Quarter results.

               3.   On December 23, 1999, we filed a Form 6-K concerning
                    certain unaudited pro forma financial information for
                    the 1999 Third Quarter.

      (c) The following exhibits are filed as part of this Annual Report on Form
10-K:

Exhibit
Number
-------

2.01        Agreement and Plan of Merger, dated as of March 7, 2000, by and
            among the Registrant, Dark Acquisition Corp. and Dictaphone
            Corporation (filed as Exhibit 2.01 to the Current Report on Form 8-K
            of the Registrant filed on May 22, 2000).
2.02        Asset Purchase Agreement, dated as of May 19, 1999, between the
            Registrant, Fonix Corporation and Fonix/ASI Corporation.*
2.03        Stock Purchase Agreement, dated as of September 9, 1999, by and
            among the Registrant, Bumil Information and Communication Co., Ltd.
            and Ju-Chul Seo, for the purchase of Bumil Information and
            Communication Co., Ltd.*
2.04        Assets For Cash Purchase Agreement, dated as of December 22, 1999,
            and amended on January 20, 2000, between the Registrant and OmniMed
            Transcription, Inc., certain principal stockholders of OmniMed
            Transcription, Inc. and L&H Medical Transcription USA, Inc.*
2.05        Asset Purchase Agreement, dated as of May 23, 2000, between the
            Registrant and Rodeer Systems, Inc.*
2.06        Agreement and Plan of Merger, dated as of March 27, 2000, and
            Amendment No. 1 dated May 25, 2000 between the Registrant, Dragon
            Systems, Inc., L&H Holdings USA, Inc. and certain Principal
            Stockholders of Dragon Systems, Inc. (filed as Exhibit 2.1 and 2.2
            to the Current Report on Form 8-K of the Registrant filed on June
            22, 2000) (the "June 22, 2000 8-K").*
2.07        Agreement and Plan of Merger, dated July 20, 1998, between the
            Registrant, Beach Acquisition Corporation and Globalink, Inc. (filed
            as Exhibit 1 to the Registrant's Amendment No. 1 to its Form 13-D
            filed August 3, 1998 with respect to Globalink, Inc.).
2.08        Agreement for the acquisition of Dictation Consortium, dated May 29,
            1998 (filed as Exhibit 2.16 to the Registrant's Form F-3 filed
            August 19, 1998 (Registration No. 333-9306)).**
2.09        Agreement for the acquisition of Brussels Translation Group N.V.
            dated June 23, 1999 (filed as Exhibit 2.20 to the Registrant's Form
            20-F for the year ended December 31, 1998 (the "1998 Form 20-F")).**
3.01        Restated Articles of Association of Registrant.* **
4.01        Specimen Registered Certificate of Common Stock (filed as Exhibit
            4.01 to the Registrant's Registration Statement on Form F-1, filed
            November 30, 1995 (Registration No. 33-97928) (the "1995 Form
            F-1")).
4.02        Specimen Bearer Certificate of Common Stock (filed as Exhibit 4.02
            to the 1995 Form F-1).

                                      88
<PAGE>

Exhibit
Number
------

4.03      Description of Capital Stock (included in the Registrant's Restated
          Articles of Association in Exhibit 3.01).
4.04      Indenture, dated as of November 20, 1996, between the Registrant and
          United States Trust Company of New York, including form of Note (filed
          as Exhibit 4.05 to the Registrant's Registration Statement on Form F-
          3, filed February 18, 1997 (Registration No. 333-6468) (the "1997 Form
          F-3")).
4.05      Specimen Form of Note (filed as part of Exhibit 4.04 to the
          Registrant's 1997 Form F-3).
4.06      Registration Rights Agreement, dated as of November 10, 1996, among
          the Registrant, Lehman Brothers, Inc., Hambrecht & Quist, Cow
          Agreement and Plan of Merger, dated as of March 7, 2000, by and among
          the Registrant, Dark Acquisition Corp. and Dictaphone en & Company and
          Banque Indosuez (filed as Exhibit 4.07 to the Registrant's 1997 Form
          F-3).
4.07      Share Purchase Agreement between Gesellschaft fur Multilinguale
          Systeme GmbH and the Registrant (filed as Exhibit 4.11 to the
          Registrant's Registration Statement on Form F-4, filed May 30, 1997
          (Registration No. 333-6982) (the "1997 Form F-4").
4.08      Warrant Agreement between the Registrant and Shoreline Pacific (filed
          as Exhibit 4.16 to the Registrant's Registration Statement on Form F-
          3, filed July 21, 1997 (Registration No. 333-7292)).
4.09      Subscription Agreement between the Registrant and Intel Atlantic, Inc.
          (See Exhibit 10.20)
4.10      Registration Rights Agreement, dated April 14, 1998, relating to sale
          of Common Stock by L&H Holding Control Group (filed as Exhibit 4.23 to
          the Registrant's Form 20-F for the year ended December 31, 1997).
4.11      Guarantee Agreement, dated May 27, 1998, between the Registrant and
          Wilmington Trust Company (filed as Exhibit 4.24 to the Registrant's
          Form F-3, filed June 9, 1998 (Registration No. 333-8922) (the "1998
          Form F-3")).
4.12      Multiple Series Indenture, dated May 27, 1998, between the Registrant
          and Wilmington Trust Company (filed as Exhibit 4.25 to the 1998 Form
          F-3).
4.13      First Supplemental Indenture, dated May 27, 1998, between the
          Registrant and Wilmington Trust Company (filed as Exhibit 4.26 to the
          1998 Form F-3).
4.14      Registration Rights Agreement, dated May 27, 1998 (filed as Exhibit
          4.27 to the 1998 Form F-3).
4.15      Amended and Restated Declaration of Trust of the Registrant's Delaware
          Trust, dated May 27, 1998 (filed as Exhibit 4.28 to the 1998 Form
          F-3).
4.16      Registration Rights Agreement, dated July 17, 1998, relating to sale
          of Common Stock by L&H Holding Control Group (filed as Exhibit 2 to
          the Registrant's Form 6-K filed September 28, 1998).
4.17      Registration Rights Agreement, dated as of May 5, 2000, by and among
          the Registrant, Stonington Holdings, LLC, Mellon Bank, N.A., as
          Trustee for the Bell Atlantic Master Trust, Merrill Lynch KECALP, L.P.
          1994, John Duerden, Robert G. Schwager, Joseph Skrzypczak, Ronald
          Elwell, Thomas Hodge, Daniel Hart and Egon Jungheim (filed as Exhibit
          4.1 to the Registrant's Amendment to its Current Report on Form 8-K/A
          filed on May 25, 2000).
4.18      Stockholders' Agreement, dated as of May 5, 2000, by and among the
          Registrant, Stonington Holdings, LLC, LEHA, L&H Holding N.V., L&H
          Holding III, Oldco N.V. and L&H Investment Company (filed as Exhibit
          4.2 to the Current Report on Form 8-K of the Registrant filed on May
          22, 2000).
4.19      Registration Rights Agreement, dated as of June 7, 2000, by and among
          the Registrant, L&H Holdings USA, Inc., Dragon Systems, Inc., Janet M.
          Baker and Seagate Technologies, Inc. on behalf of the Principal
          Stockholders of Dragon Systems, Inc. (filed as Exhibit 4.1 to the June
          22, 2000 8-K).

                                      89
<PAGE>

Exhibit
Number
------

4.20      Stockholders' Agreement, dated as of June 7, 2000, by and between the
          Registrant, LEHA, L&H Holding N.V., L&H Holding III, Oldco N.V., L&H
          Investment Company, JK Baker LLC, JM Baker LLC, Seagate LLC, Roth
          Special LLC, CFB Gilbert LLC, RGB Rumpole LLC, James K. Baker, Janet
          M. Baker, Robert Roth, Seagate Technology, Inc., The Paul G. Bamberg
          Trust, The Cherry F. Bamberg Trust (filed as Exhibit 4.2 to the June
          22, 2000 8-K).
10.01     Services Agreement between Sarabo NV and the Registrant.* ***
10.02     Revolving Credit Facility, dated May 2, 2000, by and among the
          Registrant, Artesia Banking Corporation N.V., KBC Bank NV, Fortis Bank
          N.V., Deutsche Bank N.V. and Dresdner Bank Luxembourg S.A.*
10.03     Letter agreement, dated May 5, 2000, from Deutsche Bank to Dark
          Acquisition Corp.*
10.04     Form of Indemnification Agreement for directors and officers of the
          Registrant (filed as Exhibit 10.11 to the 1995 Form F-1).
10.05     Agreement between Rijksuniversiteit Gent and the Registrant, as
          amended (filed as Exhibit 10.23 to the 1995 Form F-1).**
10.06     1993 Restricted Stock Option Plan, as amended (filed as Exhibit 10.24
          to the 1995 Form F-1).***
10.07     1995 Restricted Stock Option Plan (filed as Exhibit 10.25 to the 1995
          Form F-1).***
10.08     1994 Time Accelerated Restricted Stock Option Plan (filed as Exhibit
          10.26 to the 1995 Form F-1).***
10.09     Amended and Restated Stockholders Agreement among the Registrant and
          certain other parties (filed as Exhibit 10.27 to the 1995 Form F-1).
10.10     License and Development Agreement between the Registrant and Sail Labs
          (filed as Exhibit 10.29 to the Registrant's 1998 Form 20-F).
10.11     Sail Labs Stockholders' Agreement (filed as Exhibit 10.30 to the
          Registrant's 1998 Form 20-F).
10.12     Software Development and Commercialization Agreement between the
          Brussels Translation Group N.V. and the Registrant (filed as Exhibit
          10.36 to the 1997 Form F-4).
10.13     License Agreement between the Brussels Translation Group N.V. and the
          Registrant (filed as Exhibit 10.37 to the 1997 Form F-4).**
10.14     1997 Restricted Stock Option Plan (filed as Exhibit 10.39 to the 1997
          Form F-4).***
10.15     Form of Patent License Agreement between the Registrant and Microsoft
          Corporation (filed as Exhibit 1 to the Registrant's Form 6-K filed
          September 11, 1997).
10.16     Form of Common Stock Purchase and Shareholder's Agreement between the
          Registrant, LEHA, Jo Lernout, Pol Hauspie and Microsoft Corporation
          (filed as Exhibit 2 to the Registrant's Form 6-K filed September 11,
          1997).
10.17     1998 Restricted Stock Option Plan (filed as Exhibit 99.5 to the
          Registrant's Registration Statement on Form S-8, filed June 11, 1998
          (Registration No. 333-8940) (the "1998 Form S-8")).***
10.18     1998 Stock Option Plan for Employees of Acquired Companies (filed as
          Exhibit 99.4 to the 1998 Form S-8).***
10.19     1999 Restricted Stock Option Plan (filed as Exhibit 99.06 to the
          Registrant's Registration Statement on Form S-8 filed June 30,
          1999).***
10.20     Subscription Agreement between the Registrant and Intel Atlantic, Inc.
          (See Exhibit 4.09) (filed as Exhibit 10.45 to the Registrant's 1998
          Form 20-F).
10.21     Subscription and Shareholders Agreement between the Registrant and
          Intel Atlantic, Inc. (filed as Exhibit 10.46 to the Registrant's 1998
          Form 20-F).
10.22     2000 Stock Option Plan for Employees of Acquired Companies (filed as
          Exhibit 99.07 to the Registrant's Registration Statement on Form S-8,
          filed May 18, 2000).***
10.23     1994 Dragon Rollover Stock Option Plan (filed as Exhibit 99.1 to the
          Registrant's Registration Statement on Form S-8, filed June 14, 2000
          (the "2000 Form S-8").***
10.24     1999 Dragon Rollover Stock Incentive Plan (filed as Exhibit 99.2 to
          the 2000 Form S-8).***

                                      90
<PAGE>

Exhibit
Number
------

10.25     U.K. Dragon Rollover Company Share Option Plan (filed as Exhibit 99.3
          to the 2000 Form S-8).***
10.26     2000 Restricted Stock Option Plan (filed as Exhibit 99.4 to the 2000
          Form S-8).***
10.27     Executive Officer Employment Agreement* ***
10.28     Executive Officer Employment Agreement* ***
10.29     Executive Officer Employment Agreement* ***
10.30     Executive Officer Employment Agreement* ***
10.31     Executive Officer Employment Agreement* ***
10.32     Executive Officer Employment Agreement* ***
11.01     Statement Re: Computation of Per Share Earnings.*
21.01     Subsidiaries of the Registrant.*
23.01     Consent of Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren.+
27.01     Financial Data Schedule+

______________
+      Filed herewith.
*      Filed previously as an exhibit of the same number to the Registrant's
       Annual Report on Form 20-F for the period ended December 31, 1999 and
       incorporated herein by reference.
**     Translated in full or summary version; the original language version is
       on file with the Registrant and is available upon request.
***    This Exhibit is a compensatory plan or arrangement in which one or more
       executive officers or directors of the Company is a participant.

                                      91
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

                                    LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.


                                    By: ____________________________________
                                    Name:  Gaston Bastiaens
                                    Title: President and Chief Executive Officer

Date:  June 27, 2000


         Pursuant to the requirements and the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated

<TABLE>
<CAPTION>
Signature                                     Capacity                                       Date
---------                                     --------                                       ----
<S>                                           <C>                                            <C>
                                              President, Chief Executive Officer, Director   June __, 2000
______________________________________
Gaston Bastiaens                              (Principal Executive Officer)



                                              Senior Vice President of Finance and Chief     June __, 2000
______________________________________
Carl Dammekens                                Financial Officer (Principal Accounting and
                                              Financial Officer)


                                              Co-Chairman of the Board and Managing          June __, 2000
______________________________________
Jo Lernout                                    Director


                                              Co-Chairman of the Board and Managing          June __, 2000
______________________________________
Pol Hauspie                                   Director


                                              Vice Chairman and Managing Director            June __, 2000
______________________________________
Nico Willaert


                                              Director                                       June __, 2000
______________________________________
Dirk Cauwelier


                                              Director                                       June __, 2000
______________________________________
Fernand Cloet
</TABLE>

                                      92
<PAGE>

<TABLE>
<CAPTION>
Signature                                     Capacity            Date
---------                                     --------            ----
<S>                                           <C>                 <C>
                                              Director            June __, 2000
______________________________________
Jan Coene


                                              Director            June __, 2000
______________________________________
Marc G.H. De Pauw


 /s/ Hubert Detremmerie                       Director            June __, 2000
______________________________________
Hubert Detremmerie


                                              Director            June __, 2000
______________________________________
Albert J. Fitzgibbons III


                                              Vice Chairman       June __, 2000
______________________________________
Roel Pieper


                                              Director            June __, 2000
______________________________________
RVD Securities N.V. represented by Erwin
Vandendriessche


                                              Director            June __, 2000
______________________________________
Alex Vieux


                                              Director            June __, 2000
______________________________________
Gerard van Acker


                                              Director            June __, 2000
______________________________________
Bernard Vergnes


                                              Director            June __, 2000
______________________________________
Francis Vanderhoydonck
</TABLE>
                                      93
<PAGE>

            LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                                                      Page
                                                                                                                     -----
<S>                                                                                                               <C>
Independent Auditors' Report......................................................................................      F-2
Consolidated Balance Sheets.......................................................................................      F-3
Consolidated Statements of Operations.............................................................................      F-4
Consolidated Statements of Shareholders' Equity...................................................................      F-5
Consolidated Statements of Cash Flows.............................................................................      F-6
Consolidated Statements of Comprehensive Income (Loss)............................................................      F-8
Notes to Consolidated Financial Statements........................................................................      F-9
</TABLE>

                                      F-1
<PAGE>

            LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

                         INDEPENDENT AUDITORS' REPORT



The Board of Directors and Shareholders
Lernout & Hauspie Speech Products N.V.:

  We have audited the accompanying consolidated balance sheets of Lernout &
Hauspie Speech Products N.V. and subsidiaries (the Company) as of December 31,
1998 and December 31, 1999, and the related consolidated statements of
operations, shareholders' equity, cash flows and comprehensive income (loss) for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lernout &
Hauspie Speech Products N.V. and subsidiaries as of December 31, 1998 and
December 31, 1999, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States.


Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren



Brussels, Belgium
April 27, 2000

                                      F-2
<PAGE>

            LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                         ----------------------
                                                                                            1998         1999
                                                                                         ---------     --------
<S>                                                                                     <C>          <C>
Assets
Current assets:
  Cash and cash equivalents (note 2)..................................................   $ 188,464    $ 125,730
  Marketable securities (note                                                                  965        4,900
   1f)...................................................................
  Accounts receivable, net of allowance for doubtful accounts of $5,330 and  $9,314
   at December 31, 1998 and 1999, respectively (notes 7 and 18).......................      81,212      104,020
  Value added tax and other receivables...............................................       2,312        2,616
  Inventory (note 3)..................................................................       2,649        3,700
  Prepaid expenses and other current assets...........................................       8,347       12,498
                                                                                         ---------    ---------
       Total current assets...........................................................     283,949      253,464
                                                                                         ---------    ---------
Deferred tax asset (note 14)..........................................................       4,507        7,435
Property and equipment, net of accumulated depreciation (notes 4 and 10)..............      23,298       33,688
Investments (note 6)..................................................................      12,103       14,433
Intangibles, net of amortization (notes 5 and 11).....................................     245,467      379,031
Software development costs, net of amortization (note 1m).............................       2,210        5,687
                                                                                         ---------    ---------
       Total assets...................................................................     571,534      693,738
                                                                                         =========    =========
Liabilities and shareholders' equity
Current liabilities:
   Notes payable (note 8).............................................................   $   6,652    $  15,724
   Current portion of long-term debt (note 9).........................................      17,653        8,490
   Accounts payable...................................................................      22,684       19,582
   Accrued expenses (note 12).........................................................      37,149       64,032
   Deferred revenue...................................................................       2,754        2,980
                                                                                         ---------    ---------
       Total current liabilities......................................................      86,892      110,808
                                                                                         ---------    ---------
Long-term debt, less current portion (note 9).........................................      20,004       18,665
                                                                                         ---------    ---------
       Total liabilities..............................................................     106,896      129,473
                                                                                         ---------    ---------
Minority interest (note 1q)...........................................................           9            -
Company-obligated mandatorily redeemable security of subsidiary trust holding solely
 parent convertible subordinated debentures (note 1r)    .............................     149,223      146,672
Commitments and contingencies (notes 5 and 16)........................................
Shareholders' equity (note 13):
   Common shares, no par value: 108,744 and 114,415 shares issued and outstanding at
    December 31, 1998 and 1999, respectively..........................................     111,911      113,498
  Common shares, no par value: 896 shares automatically convertible stock  issued and
   outstanding at December 31, 1999...................................................          -           494
   Additional paid-in capital.........................................................     353,838      421,466
   Accumulated deficit................................................................    (149,640)    (107,898)
   Accumulated other comprehensive loss...............................................        (703)      (9,967)
                                                                                         ---------    ---------
       Total shareholders' equity.....................................................     315,406      417,593
                                                                                         ---------    ---------
       Total liabilities and shareholders' equity.....................................   $ 571,534      693,738
                                                                                         =========    =========
</TABLE>

The following summarizes accounts receivable, from companies partially owned by
the Company, FLV Fund, S.AI.L Trust and/or L&H Investment Company and from
certain other related parties (see note 15). Accounts receivable at December 31,
1998 included a total of $6,135 from Speech Systems Inc., Microsoft Corporation,
Mindmaker Inc., Xiox Corporation Inc., Creator Ltd., FLV Telecom N.V., Hogadata
Benelux N.V., Vasco Data Security International Inc., Smartmove N.V., BCB
Holdings Inc., ViA Inc., Telekol Corporation, Speech Machines Plc., Oceania
Inc., Oncuity Inc., Excalibur Technologies N.V. and e-DOCS.net Inc., and
accounts receivable at December 31, 1999 included a total of $10,695 from
Microsoft Corporation, LanguageWare.net Ltd., CellPort Labs Inc., Xiox
Corporation, Smartmove N.V., EHQ Inc., Iris N.V., Transics N.V., Phonetic
Topographics N.V., De Wilde CBT N.V., Intel Corporation, Nordisk Spraktechnologi
AS, e-DOCS.net Inc., Speech Systems Inc., Hogadata Benelux N.V., BCB Voice
Systems Inc., ESL.com Ltd., Telekol Corporation, Financial Architects N.V.,
Vasco Data  Security International  Inc, Cegeka Healthcare Systems N.V.,
Computer Voice Dictation Solutions Inc., iSAIL Solutions N.V. and Sail Labs N.V.

        See accompanying notes to the consolidated financial statements.

                                      F-3
<PAGE>

            LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                  Years ended December 31,
                                                                        -------------------------------------------
                                                                            1997           1998            1999
                                                                        --------------  ------------  -------------
<S>                                                                  <C>            <C>             <C>
Revenues (notes 15, 17, 18 and 19):
 Technologies and Solutions..........................................  $     33,402    $     82,809    $    138,660
 Applications........................................................        34,307          60,883         113,693
 Consulting and Services.............................................        31,662          67,900          91,884
                                                                       ------------    ------------    ------------
    Total revenues...................................................        99,371         211,592         344,237
                                                                       ------------    ------------    ------------
Cost of sales:
 Technologies and Solutions..........................................         6,716          12,826          19,634
 Applications........................................................        12,797          17,895          18,988
 Consulting and Services.............................................        19,257          38,922          55,633
                                                                       ------------    ------------    ------------
    Total cost of sales..............................................        38,770          69,643          94,255
                                                                       ------------    ------------    ------------
Selling, general and administrative..................................        26,042          59,354         101,641
Research and development, net (note 1m)..............................         6,393          25,165          49,621
Amortization of goodwill and other business acquisition intangibles..         6,809          19,978          32,439
Write off of in-process research and development (note 5)............        33,823          79,373               -
Other operating expense..............................................         1,453           1,821               -
                                                                       ------------    ------------    ------------
    Total operating expenses.........................................       113,290         255,334         277,956
                                                                       ------------    ------------    ------------
Operating income (loss)..............................................       (13,919)        (43,742)         66,281
Other expenses (income):
 Interest and other financing expenses...............................         3,562           1,736           1,684
 Interest income.....................................................        (2,388)         (7,844)         (7,949)
 Foreign exchange gains and losses, net..............................        (4,829)             81          (2,479)
 Share in loss of unconsolidated affiliates..........................         1,141           5,969           1,633
 Debt conversion expense.............................................           932             891               -
 Other expense.......................................................         2,394             608               -
                                                                       ------------    ------------    ------------
    Total other expenses (income)....................................           812           1,441          (7,111)
                                                                       ------------    ------------    ------------
Income (loss) before income taxes and minority interests.............       (14,731)        (45,183)         73,392
Provision (benefit) for income taxes (note 14).......................        (1,407)          5,073          27,150
                                                                       ------------    ------------    ------------
Income (loss) before minority interest (net of tax benefit (note 14))       (13,324)        (50,256)         46,242
   Minority interest, net of taxes...................................           (24)          2,422           4,500
                                                                       ------------    ------------    ------------
Net income (loss)....................................................       (13,300)        (52,678)         41,742
Preferred stock embedded dividend....................................           976               -               -
                                                                       ------------    ------------    ------------
Net income (loss) attributable to common shareholders................  $    (14,276)   $    (52,678)   $     41,742
                                                                       ============    ============    ============
Basic net income (loss) per common share.............................        $(0.20)         $(0.52)          $0.37
                                                                       ============    ============    ============
Diluted net income (loss) per common share...........................        $(0.20)         $(0.52)          $0.35
                                                                       ============    ============    ============
Basic weighted average number of shares outstanding..................    69,863,056     100,469,190     113,109,456
Diluted weighted average number of shares outstanding................    69,863,056     100,469,190     119,423,724
</TABLE>

The following summarizes revenues generated from companies partially owned by
the Company, FLV Fund, S.AI.L Trust and/or LHIC and from certain other related
parties (see note 15). Revenues for the year ended December 31, 1997 included a
total of $34,499 from Dictation Consortium N.V., Keyware Technologies N.V.,
Speech Systems Inc., Microsoft Corporation ($12.9 million), Mindmaker Inc. and
Xiox Corporation Inc. Revenues for the year ended December 31, 1998 included a
total of $34,783 from Dictation Consortium N.V., Speech Systems Inc., Microsoft
Corporation ($25.4 million), Mindmaker Inc., Xiox Corporation Inc., Creator
Ltd., FLV Telecom N.V., Hogadata Benelux N.V., Vasco Data Security International
Inc., Smartmove N.V., BCB Holdings Inc., ViA Inc., Telekol Corporation, Speech
Machines Plc., Oceania Inc., Oncuity Inc., Excalibur Technologies N.V. and e-
DOCS.net Inc. and for the year ended December 31, 1999 included a total of $
33,229 from Mindmaker, Inc., Excalibur Technologies N.V., Nordisk
Spraktechnologi AS, SwiftTouch Corporation, Smartmove N.V., Xiox Corporation,
Microsoft Corporation ($30.9 million), CellPort Labs Inc., Financial Architects
N.V., Intel Corporation,  Phonetic Topographics N.V., Oceania Inc., e-DOCS.net
Inc., LanguageWare.net Ltd., De Wilde CBT N.V., Iris N.V., Transics N.V., EHQ
Inc., ESL.Com Ltd. and Cegeka Healthcare Systems N.V.

        See accompanying notes to the consolidated financial statements.

                                      F-4
<PAGE>

<TABLE>
<CAPTION>

                                                    LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

                                                        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                                              (in thousands except share amounts)

                                                                                  Automatically
                                                            Common Shares          Convertible       Preferred Shares
                                                       ----------------------   ------------------   -----------------
                                                          Shares     Amount      Shares    Amount    Shares    Amount
                                                       ----------   ---------   --------  --------   ------   --------
<S>                                                    <C>           <C>        <C>       <C>       <C>      <C>
Balance at December 31, 1996......................      61,807,300  $  97,785           -  $     -         -  $      -
Sale of common stock..............................      22,747,836      6,655           -        -         -         -
Sale of preferred stock...........................               -          -           -        -    64,000     1,651
Issuance of common stock for acquisitions.........       3,234,176        963           -        -         -         -
Conversion of preferred stock.....................       2,988,148      1,000           -        -  (38,760)   (1,000)
Fair value of options granted.....................               -          -           -        -         -         -
Conversion of convertible bonds...................       1,419,136        413           -        -         -         -
Unrealized loss on marketable securities..........               -          -           -        -         -         -
Translation adjustment............................               -          -           -        -         -         -
Net loss..........................................               -          -           -        -         -         -
                                                     -------------  ---------  ----------  -------  --------  --------
Balance at December 31, 1997......................      92,196,596  $ 106,816           -  $     -    25,240  $    651
                                                     -------------  ---------  ----------  -------  --------  --------
Sale of common stock..............................       9,454,004      2,797           -        -         -         -
Issuance of common stock for acquisitions.........       5,219,094      1,615           -        -         -         -
Conversion of preferred into common stock.........       1,771,562        651           -        -  (25,240)     (651)
Conversion of Convertible Debt....................          98,922         31           -        -         -         -
Conversion of PIERS (see note 1r).................           3,516          1           -        -         -         -
Translation adjustment............................               -          -           -        -         -         -
Net loss..........................................               -          -           -        -         -         -
                                                     -------------  ---------  ----------  -------  --------  --------
Balance at December 31, 1998......................     108,743,694  $ 111,911           -  $     -         -  $      -
                                                     -------------  ---------  ----------  -------  --------  --------
Sale of common stock (note 13)....................       5,098,420      1,429           -        -         -         -
Sale of automatically convertible stock...........               -          -     895,932      494         -         -
Issuance of common stock for acquisitions.........         197,354         56           -        -         -         -
Conversion of Convertible Debt....................         289,032         79           -        -         -         -
Conversion of PIERS (see note 1r).................          86,234         23           -        -         -         -
Tax benefit on stock options......................               -          -           -        -         -         -
Translation adjustment............................               -          -           -        -         -         -
Net income........................................               -          -           -        -         -         -
                                                     -------------  ---------  ----------  -------  --------  --------
Balance at December 31, 1999......................   1,144,414,734   $113,498     859,932  $   494         -  $      -
                                                     ============== =========  ==========  =======  ========  ========
</TABLE>

<TABLE>
<CAPTION>
                                                                   Additional   Accumulated other
                                                       Accumulated   paid-in      comprehensive   Shareholders
                                                         Deficit     capital         income           equity
                                                       -----------  ----------  -----------------  ------------
<S>                                                  <C>          <C>         <C>                <C>
Balance at December 31, 1996......................    $  (82,686)   $  8,236         $ (6,800)      $ 16,535
Sale of common stock..............................             -     141,125                -        147,780
Sale of preferred stock...........................          (976)     29,606                -         30,281
Issuance of common stock for acquisitions.........             -      19,375                -         20,338
Conversion of preferred stock.....................             -           -                -              -
Fair value of options granted.....................             -       3,473                -          3,473
Conversion of convertible bonds...................             -       4,502                -          4,915
Unrealized loss on marketable securities..........             -           -               (5)            (5)
Translation adjustment............................             -           -           (1,878)        (1,878)
Net loss..........................................      (13,300)           -                -        (13,300)
                                                        -------    ---------         --------       --------
Balance at December 31, 1997......................    $ (96,962)   $ 206,317         $ (8,683)      $208,139
                                                        -------    ---------         --------       --------
Sale of common stock..............................             -      33,221                -         36,018
Issuance of common stock for acquisitions.........             -     111,562                -        113,177
Conversion of preferred into common stock.........             -           -                -              -
Conversion of Convertible Debt....................             -       2,738                -          2,769
Conversion of PIERS (see note 1r).................             -           -                -              1
Translation adjustment............................             -           -            7,980          7,980
Net loss..........................................      (52,678)           -                -        (52,678)
                                                        -------    ---------         --------       --------
Balance at December 31, 1998......................    $(149,640)   $ 353,838         $   (703)      $315,406
                                                        -------    ---------         --------       --------
Sale of common stock (note 13)....................             -      28,234                -         29,663
Sale of automatically convertible stock...........             -      28,155                -         28,649
Issuance of common stock for acquisitions.........             -       3,429                -          3,485
Conversion of Convertible Debt....................             -       4,803                -          4,882
Conversion of PIERS (see note 1r).................             -       2,202                -          2,225
Tax benefit on stock options......................             -         805                -            805
Translation adjustment............................             -           -           (9,264)        (9,264)
Net income........................................        41,742           -                -         41,742
                                                        --------    ---------        --------       --------
Balance at December 31, 1999......................    $ (107,898)  $  421,466        $ (9,967)      $417,593
                                                        ========    =========        ========       ========
</TABLE>

       See accompanying notes to the consolidated financial statements.
<PAGE>

            LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                     Years ended December 31,
                                                                               -----------------------------------
                                                                                  1997         1998         1999
                                                                               ----------   ----------   ---------
<S>                                                                         <C>          <C>          <C>
Cash flows from operating activities:
Net income (loss).....................................................          $(13,300)   $ (52,678)   $  41,742
Adjustments to reconcile net income (loss) to net cash provided by
 operating activities:
  Write-off of in process research & development......................            33,823       79,373            -
  Depreciation........................................................             2,463        4,467        7,062
Amortization of goodwill and other business acquisition intangibles...             6,809       19,978       32,439
Amortization of other intangibles, including software development costs
                                                                                     492        2,040        7,308
  Deferred taxes......................................................            (2,429)       2,786        5,152
  Gain on sale of investment..........................................                 -            -         (163)
  Stock compensation expense..........................................             1,800            -            -
  Share in loss of unconsolidated affiliates..........................             1,141        5,969        1,633
  Loss (gain) on sale of property and equipment.......................               182            -          402
  Changes in operating assets and liabilities:
    Accounts receivable, net..........................................           (13,020)     (42,295)     (30,212)
    Inventories, net..................................................              (679)        (557)         706
    Prepaid expenses and other current assets.........................            (1,895)      (1,042)         930
    Deferred financing costs..........................................                 -          837            -
    Accounts payable..................................................             2,384        3,936       (3,504)
    Accrued expenses..................................................            (2,042)     (13,443)       5,798
    Deferred revenue..................................................               922        3,601          (67)
                                                                               ---------    ---------    ---------
  Net cash  provided by operating activities..........................            16,651       12,972       69,226
                                                                               ---------    ---------    ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (notes 1b and 5)......           (63,801)     (69,761)    (111,626)
Licenses and software development costs capitalized...................            (6,867)     (13,835)     (24,805)
Additions to property and equipment...................................            (4,457)      (7,564)     (10,545)
Investments in and loans provided to unconsolidated joint ventures....            (2,259)           -            -
Investments in and loans provided to associated companies                         (3,893)     (11,762)      (6,013)
Proceeds from (purchases of) marketable securities....................               960           97       (3,931)
Proceeds from sale of property and equipment..........................                 -            -          719
                                                                               ---------    ---------    ---------
  Net cash used by investing activities...............................           (80,317)    (102,825)    (156,201)
                                                                               ---------    ---------    ---------
Cash flows from financing activities:
Proceeds from notes payable to banks..................................            20,350            -       10,906
Repayment of notes payable to banks...................................           (27,874)      (2,306)      (9,101)
Repayments of long-term debt and capital lease obligations............            (1,204)     (22,247)     (32,111)
Proceeds from long-term debt..........................................               360            -        1,891
Proceeds from company-obligated mandatorily redeemable security of
 subsidiary trust holding solely parent convertible subordinated
 debentures...........................................................                 -      150,563            -
Proceeds from issuance of common and preferred shares.................           178,062       24,033       57,749
                                                                               ---------    ---------    ---------
  Net cash provided by financing activities...........................           169,694      150,043       29,334
                                                                               ---------    ---------    ---------
Effect of exchange rate changes on cash and cash equivalents..........            (5,896)         452       (5,093)
                                                                               ---------    ---------    ---------
Increase (decrease) in cash and cash equivalents......................           100,132       60,642      (62,734)
Cash and cash equivalents at beginning of year........................            27,690      127,822      188,464
                                                                               ---------    ---------    ---------
Cash, cash equivalents at end of year.................................          $127,822    $ 188,464    $ 125,730
                                                                               =========    =========    =========
</TABLE>

                                      F-6
<PAGE>

            LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                                (in thousands)
<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                                      ----------------------------------
                                                                          1997       1998       1999
                                                                      -----------  ---------  ----------
<S>                                                                 <C>        <C>        <C>
Supplemental disclosure of cash flow information:
 Cash paid during the year for interest..............................    $ 3,581   $  3,818    $ 8,383
                                                                         =======   ========    =======
 Cash paid during the year for income taxes..........................    $ 1,840   $  2,849    $14,086
                                                                         =======   ========    =======
 Noncash investing and financing transactions:
  Conversion of convertible bonds to common shares...................    $ 4,915   $  2,769    $ 7,107
                                                                         =======   ========    =======
  Issuance of common shares for acquisitions.........................    $20,338   $113,177    $ 3,485
                                                                         =======   ========    =======
  Issuance of convertible debt on acquisition of subsidiaries........    $ 7,833   $      -    $ 4,901
                                                                         =======   ========    =======
</TABLE>



        See accompanying notes to the consolidated financial statements

                                      F-7
<PAGE>

            LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                             Years ended December 31,
                                                                        -----------------------------------
                                                                           1997         1998        1999
                                                                        -----------  ----------  -----------
<S>                                                                     <C>          <C>          <C>
  Net income (loss)...................................................   $(13,300)    $(52,678)    $41,742
  Foreign currency translation adjustment............................      (1,878)       7,980      (9,264)
  Unrealized loss on marketable securities...........................          (5)           -           -
                                                                         --------     --------    --------
Total................................................................    $(15,183)    $(44,698)    $32,478
                                                                         ========     ========    ========
</TABLE>
        See accompanying notes to the consolidated financial statements

                                      F-8
<PAGE>

            LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 1997, 1998 and 1999

(1)   Nature of Business and Significant Accounting Policies

 (a) Nature of Business

  Lernout & Hauspie Speech Products N.V. and subsidiaries ("the Company")
operates in the following businesses:

   Speech and Language Technologies and Solutions Division.  The Technologies
and Solutions Division offers technologies that allow the Company's customers to
develop products with a natural language interface for their end-users.  The
Company's technologies enable products to recognize and respond to naturally
spoken speech, create speech from text and data, respond to commands with
speech, and efficiently store, transmit and replay speech. The Company's
technologies and solutions are available in numerous languages and for multiple
computer chips and other processors, including processors sold by Intel, Analog
Devices, Hitachi, NEC, Texas Instruments, Lucent Technologies and National
Semiconductor.  The Company licenses its technologies and software development
tools to applications developers, strategic partners, original equipment
manufacturers, component manufacturers and software vendors.  The Company also
sells solutions to corporate customers. The Company's customers use these
technologies in a broad range of applications in four principal markets:
computers and multimedia; telecommunications; automotive electronics; and
consumer and industrial electronics.

  Speech and Language Applications Division.  The Applications Division offers a
wide range of end-user applications, including dictation software that enables
users to dictate text and generate documents by speaking naturally without
pausing between words, PC -based translation software and educational software.
The Company's products also permit computer users to control many computer
functions with spoken commands rather than using a mouse or keyboard. The
Company currently offers dictation products for the general personal computer
market and for a variety of healthcare, law enforcement and legal applications.
The Company also licenses its software development kits and tools for the
development of additional applications based on the Company's technologies and
products.


   Speech and Language Consulting and Services Division.  The Consulting and
Services Division offers human and machine translation services, as well as a
wide range of speech and language-related consulting, localization, and
technical and electronic publishing services.  The Company's translation
services range from traditional translation of general, technical and software
materials to the adaptation of these materials for different markets, languages
and cultures.  The Company has access to extensive language databases and the
services of hundreds of correspondent linguists and translators throughout the
world.  The Company's machine translation software translates text from one
language to another and is designed to enhance the efficiency of translation
services provided by the Company's linguists.  This software also enables the
Company to provide Internet/intranet translation services.

 (b) Basis of Presentation

  The consolidated financial statements include the accounts of the Company and
those of its majority owned subsidiaries. As of December 31, 1999, the Company
owned 99.2% of the share capital of the U.S. subsidiary, Lernout & Hauspie
Speech Products USA, Inc. (the Company holds 100% of the voting stock). The
Company's 85% owned Chinese joint venture is included in the consolidated
financial statements from 1996, the year of incorporation until March 1999, date
of the end of the Chinese joint venture.   Until March 1999, the Company had a
50 percent equity investment in the Japanese joint venture, L&H Japan KK.  Until
that date, this investment was included under the equity method.  At the end of
March 1999, the Company acquired the remaining shares of L&H Japan KK.  Since
then, L&H Japan KK is fully consolidated.

  The investments in Omnivoice Corporation and Asiaworks Pte. Ltd. (November
1998) in which the Company holds 49 % and 49.5 % ownership interests,
respectively, are included under the equity method.

                                      F-9
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


   As of May 16, 1997, the Company acquired 100% of the outstanding common
shares of Gesellschaft fur Multilinguale Systeme GmbH ("GMS"). As of June 27,
1997, the Company acquired 100% of the outstanding common shares of Kurzweil
Applied Intelligence Inc. ("Kurzweil"). The Company acquired 100% of the
outstanding common shares of the following businesses: ASAP Traduzzioni (July
1997), EMTI and C&L Servicios (August 31, 1997); and Trantex, Wordwork and
Kermit (October and December 1997). The financial statements of these companies
have been included in the consolidated financial statements of the Company as
from the date of acquisition.

   During the year ended December 31, 1998, the Company acquired 100% of the
outstanding common shares of the following businesses:  Applications Technology,
Inc. (March 1998); Dictation Consortium N.V. (June 1998); the Kamejima Group and
NeocorTech LLC (July 1998); the Heitmann Group (August 1998); Globalink, Inc.
(September 1998); Kurzweil Educational Systems, Inc. (September 1998); and
TikSoft LLC (September 1998).  The financial statements of these businesses have
been included in the consolidated financial statements of the Company as from
the date of acquisition.

   During the year ended December 31, 1999, the Company acquired 100% of the
outstanding shares of the following businesses: Brussels Translation Group N.V.
(June 1999), Flanders Dialogue Company N.V. (June 1999), World Tech Corporation
(September 1999), Bumil Information & Communications, Co. Ltd. (September 1999),
Infodata AS (September 1999) and Linguex S.A. (December 1999).  The financial
statements of these businesses have been included in the consolidated financial
statements of the Company as from the date of acquisition.

  The Company also holds minority investments in De Wilde-Buyck N.V. and Voxtron
Asia Pte. Ltd. These investments have been accounted for using the equity
method. Due to the operating results of these entities, the Company's
investments in both entities have been reduced to zero.

  Other equity investments of less than 20% are stated at cost.

  All significant intercompany balances and transactions have been eliminated in
consolidation.

  The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. They reflect
adjustments made for U.S. reporting purposes to the Company's Belgian statutory
accounts, which have been prepared using different accounting principles.


 (c) Use of Estimates

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


 (d) Revenue Recognition

  The Company recognizes revenue from the sale of its software licenses upon
satisfaction of all of the following criteria: signing of the license agreement,
shipment of the products, when no contractual terms remain unsatisfied and, if
applicable, when a royalty report is received from the customer.  The Company
generally receives, on a quarterly basis, royalty reports from each customer who
has signed a license contract.  The reports detail the number of units or
products that the customer shipped during that period.  The number of units
multiplied by the applicable contractual rate per unit is the amount that the
Company records as revenue.  Before recording this revenue, the Company
determines that all significant obligations have been satisfied and that
collection of the receivable is probable.  Generally, invoices under these
arrangements are payable within 90 days.  Under certain contracts the Company
allows distributors to return products subject to their replacement by the same
amount of merchandise for stock balancing purposes.  Certain returns are allowed
through distributors selling to the retail consumer markets, by their end users.
With respect to each distributor of the Company with return privileges, the
Company's price to the distributor is fixed at the date of sale, the distributor
is obligated to pay the Company within 90 days, the payment obligation is not
contingent on resale of the product, title has passed to the distributor, the
distributor has economic substance, the Company does not have significant
obligations for future performance, and the amount of returns can be reasonably
estimated.  End user returns are

                                      F-10
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

monitored monthly and a historic return rate is determined and applied as a
reserve against revenues derived from end users at the time of revenue
recognition.

  The Company from time to time enters into nonrefundable minimum royalty
agreements with customers.  Under these arrangements the Company delivers its
technologies or products to the customer contemporaneously with the execution of
the agreement.  Revenue from nonrefundable minimum royalty agreements is
recognized upon satisfaction of all of the following criteria: signing of the
license agreement; no additional significant production, modification or
customization of the software is required; delivery has occurred; the fee is
fixed and determinable and; collection is probable. For arrangements that
include multiple elements, the fee is allocated to the various elements based on
vendor specific objective evidence of fair value.

Revenues from engineering fees and maintenance and support services are
recognized as the services are performed.

Revenue derived from translation services is recognized as the work is
performed.

Revenues related to software development contracts is recognized based on the
percentage of completion method.

In all such cases, the Company only recognizes revenue when collection of the
related receivable is probable.


 (e) Cash and Cash Equivalents

  The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.


 (f) Marketable securities

  Marketable securities as of December 31, 1999 consist of readily marketable
equity securities the Company has determined to be available for sale.
Marketable equity securities are stated at fair market value. As of December 31,
1998 and December 31, 1999 there was no unrealized gain or loss on these
marketables securities. Future unrealized gains and losses, if any, will be
reflected in a separate component of Shareholders' equity.  When the securities
are sold any realized gains or losses will be  recorded on the specific
identification method.


 (g) Inventory

  Inventory is stated at lower of cost or market value. Cost is determined on a
first-in, first-out basis.  The Company periodically receives sell-through
reports from its distributors in order to manage its channel inventory.


 (h) Deferred Financing Costs

  Deferred financing costs include issuance costs for convertible bond offerings
which are amortized over the term of the related debt. Upon conversion, any
unamortized cost related to the bonds converted is deducted from shareholders'
equity.


 (i) Depreciation and Amortization

  Property and equipment are stated at cost. Property and equipment held under
capital leases is stated at the present value of minimum lease payments at the
inception of the lease. The Company provides for depreciation of machinery and
equipment using the straight-line method over the estimated useful lives of the
respective assets, which range from three to seven years. Property and equipment
held under capital leases is amortized on a straight-line method over the
shorter of the estimated useful live or the lease term.

  When assets are retired or otherwise disposed, the related costs and
accumulated depreciation from the respective accounts and any gain or loss on
disposal is included in the result of operations. Maintenance and repair costs
are expensed as incurred.

                                      F-11
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 (j) Foreign Currency Translation

  The Company considers the Belgian franc ("BEF") and the local currencies of
its subsidiaries to be the functional currencies of their respective operations.
The reporting currency of the Company is the U.S. dollar. Accordingly, all
amounts included in the consolidated financial statements have been translated
into U.S. dollars.

  All assets and liabilities of its non-US operations are translated into U.S.
dollars using the exchange rates in effect on reporting dates for assets and
liabilities. Income and expenses are translated at average rates in effect for
the periods presented. The cumulative currency translation adjustment is
reflected as a separate component of shareholders' equity on the consolidated
balance sheet.

  Foreign currency transaction gains and losses are included in the consolidated
results of operations for the periods presented.


 (k) Goodwill

  Goodwill resulting from business acquisitions consists of the excess of the
acquisition cost over the fair value of the net assets of businesses acquired.

  The Company amortizes goodwill on a straight line basis over the estimated
economic lives which range from 3 to 20 years.

  The Company periodically evaluates goodwill to assess recoverability; any
impairments would be recognized in operating results if the estimated future
cash flows from the related operations were less than the carrying amount of the
assets. The Company believes that no material impairment of goodwill exists at
December 31, 1999.


 (l) Software Development Costs

  The Company charges all costs of establishing technological feasibility of
software products to research and development expense as incurred. Thereafter,
software development costs are capitalized and reported at the lower of
unamortized cost or net realizable value. Capitalization of software development
costs ceases and amortization commences when the product is available for
general release to customers.

  The total gross amounts of software development costs capitalized during the
years ended December 31, 1997, 1998 and 1999 were $1.6 million, $1.3 million and
$4.8 million respectively. These costs are amortized over the shorter of their
useful life or three years.

  As a result of the 1997 acquisitions of Kurzweil, GMS and the purchase of
certain assets of Centigram, the Company recorded charges of  $33.8 million
against the in-process research and development activities of these companies.
As a result of the acquisitions of Applications Technology, Inc., linguistic
divisions of Novell, Inc. and Inso Corporation, Accent Software International
Ltd., Dictation Consortium N.V., Ailogic Corporation, Neocortech LLC, Kurzweil
Educational Systems, Inc., Globalink, Inc., TikSoft LLC, and Asiaworks Pte Ltd.
the Company recorded charges of $79.4 million in 1998 against the in-process
research and development activities of these companies.  The Company recorded no
in-process research and development charges in 1999.  These charges represented
management's assessment of the value attributed to each company's research and
development activities for products for which technological feasibility had not
yet been established.


 (m) Research and Development Costs

  Research and development costs are charged to expense in the period incurred.
The Belgian government, the European Union, the Government of Singapore and the
U.S. Government provide nonrefundable financial support for certain research and
development costs which is used to offset gross research and development
expenses. This financial support is recorded when collection from the respective
authorities is probable and after the expenses have been incurred. The Company
incurred research and development expenses as follows (in thousands):

                                      F-12
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

<TABLE>
<CAPTION>
                                                                            Years ended December 31,
                                                                         ------------------------------
                                                                           1997       1998       1999
                                                                         ---------   -------  ---------
<S>                                                                      <C>        <C>        <C>
Research and development expense, net of funding......................    $ 6,393    $25,165    $49,621
Government funding....................................................      2,064      1,949      1,778
                                                                          -------    -------    -------
Gross research and development expense................................    $ 8,457    $27,114    $51,399
Capitalized software development costs................................      1,559      1,259      4,753
                                                                          -------    -------    -------
Total research and development expenditures...........................    $10,016    $28,373    $56,152
                                                                          =======    =======    =======
</TABLE>

 (n) Licenses and Other Intangibles

  Licenses and other intangibles are stated at cost. Amortization is charged on
a straight line basis over the shorter of the estimated useful life or 3 years.


 (o) Income Taxes

  The Company accounts for deferred income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.


 (p) Net Income (loss) Per Share

  All earnings per share information presented has been calculated in accordance
with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share".  Under SFAS 128, basic net income (loss) per common share is computed by
dividing net income (loss) available to common stockholders by the weighted-
average number of common shares outstanding for the period.  Diluted net income
(loss) per common share is computed using the weighted-average number of
potential common shares which were outstanding during the period in accordance
with the treasury stock method.


 (q) Minority Interests

  At December 31, 1998 and 1999 respectively, the Company owned 95.9% and 99.2%
of Lernout & Hauspie Speech Products USA Inc. The remaining shares are held
pursuant to the Company's Restricted Stock Purchase Plan (see note 13).

Until the end of March 1999, the Company owned 85% of a joint venture in China.
The joint venture has incurred losses from its operations and the Company's 85%
share amounted to $136,000,  $104,000  and $51,000 for the years ended December
31, 1997 and 1998 and the three months ended March 31, 1999 respectively.


  (r) Company-obligated mandatorily redeemable security of subsidiary trust
holding solely parent convertible subordinated debentures

   On May 27 and June 4, 1998, L&H Capital Trust I (the "Trust"), issued an
aggregate of $156 million in principal amount of trust preferred income equity
redeemable securities ("PIERS") and an aggregate of $4,824,800 of common
securities. The Company holds all of the common securities. The sole asset of
the Trust is an aggregate of $160,824,800 in principal amount of 4.75%
convertible subordinated debentures due in 2008, issued by the Company. The
terms and interest payments on these debentures correspond to the terms and
dividend payments on the trust preferred income equity securities. These
payments are reflected as minority interest in the Consolidated Statement of
Operations and are tax deductible by the Company. The Company may elect to defer
interest payments on the debentures for a

                                      F-13
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

period up to 20 consecutive quarters, causing distributions on the trust
preferred income equity securities to be deferred as well. The trust preferred
income equity securities are convertible into shares of the Company's Common
Stock at a conversion price of $28.425 per share (subject to adjustment in
certain transactions).

   In case of a deferral, interest and distributions will continue to accrue,
along with quarterly compounding interest on the deferred amounts.  The Company
may redeem all or a portion of the debentures after July 1, 2002, requiring an
equal amount of trust preferred income equity securities to be redeemed at face
value plus accrued and unpaid distributions.  The guarantee with respect to the
Trust, when taken together with the Company's obligations under the related
debentures and indenture and the applicable trust declaration, provides a full
and unconditional guarantee of amounts due on the outstanding trust preferred
income equity securities.


 (s) Stock Splits

  In September 1995, the Board of Directors approved a one-for-two reverse split
of common stock which was approved by the shareholders on October 27, 1995. In
April 1998 and in April 2000, the Company effected a two-for-one split of its
common shares. All data related to shares and per share amounts for all periods
presented have been adjusted to reflect the effect of the stock splits.


 (t) New Accounting Pronouncements

  In the first quarter of 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) No. 98-1, "Accounting for Costs
of Computer Software Developed or Obtained for Internal Use", which requires
that certain internal and external costs to develop or obtain software for
internal use be expensed or capitalised when incurred.  Generally, costs
incurred during the preliminary project stage and post-implementation /operation
stages must be expensed.  The Statement  is effective for fiscal years beginning
after December 15, 1998 and can be adopted early for 1998 as of January 1, 1998.
The Company adopted SOP 98-1 effective with the year ended December 31, 1999,
which did not have a material impact on its consolidated financial position or
results of operations.

   In the first quarter of 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs
of Start-up Activities", which requires that the cost of start-up activities be
expensed as incurred. The Statement will amend provisions of a number of
existing SOPs and audit and accounting guides. The Statement will be effective
for fiscal years beginning after December 15, 1998. The Company adopted SOP 98-5
effective with the year ended December 31, 1999, which did not have a material
impact on its consolidated financial position or results of operations.

   During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and for hedging activities. This Statement  will be
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company has not yet determined the effects the Statement will have on its
financial position or results of its operations.

   In the first quarter of 2000, the Financial Accounting Standards Board issued
FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" (FIN 44) which provides
guidance for issues that have arisen in applying  APB Opinion  No. 25,
Accounting for Stock Issued to Employees.  FIN 44 applies prospectively to new
awards, exchanges of awards in a business combination, modifications to
outstanding awards, and changes in grantee status that occur on or after July 1,
2000, except for the provisions related to repricings and the definition of an
employee which apply to awards issued after December 15, 1998.  The provisions
related to modifications to fixed stock option awards to add a reload feature
are effective for awards modified after January 12, 2000.  The Company has not
yet determined the effects the Statement will have on its financial position or
results of its operations.


 (u) Year 2000

   During 1999, the Company was engaged in the inventory, assessment and
implementation of the Year 2000 issues related to non-compliant information
technology systems or non-information technology systems used internally.  As of
April 27, 2000, the Company has not identified any Year 2000 failures in its
computer programs and has not become aware of any Year 2000

                                      F-14
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

problems relating to products sold by it that would have a material effect on
its business, results of operations or financial condition.


 (v) Risks and Uncertainties

Products and Markets

  The Company operates in an environment which is characterized by rapid
technological development, evolving industry standards, changing customer
requirements, frequent new product introductions and enhancements and relatively
short product life cycles. The Company expects that its ability to maintain and
expand its current level of revenues in the future will depend upon, among other
things, its success in developing and marketing, in a timely manner, current and
new generation products and services. Failure to do so may adversely affect the
Company's results of operations and financial condition.


Customer Concentration

  The Company markets and sells its speech technology related products to a
broad base of customers including original equipment manufacturers (OEMs),
component manufacturers and software vendors.

  Sales to Microsoft Corporation accounted for approximately 13% of 1997, 12% of
1998 and 9 % of 1999 total revenues and for approximately  33% of 1997, 27% of
1998 and 28 % of 1999 Consulting & Services revenue. Other information on major
customers is included in note 18.

  Sales to Dictation Consortium NV accounted for approximately  19% of 1997, 0%
of 1998 and 0 % of 1999 total revenues and for approximately 55% of 1997, 1% of
1998 and 0 % of 1999 Applications revenue.

  Sales to Brussels Translation Group N.V. accounted for approximately 15% of
1997, 9% of 1998 and 1% of 1999 total revenues, for approximately 23% of 1997,
11% of 1998 and 1% of 1999 Technologies & Solutions revenue and for
approximately 22% of 1997, 15% of 1998 and 1% of 1999 Applications revenue.


International Operations

  The Company derives more than half of its revenues and operating results from
non-U.S. sales. However, none of the Company's significant non-Belgian foreign
operations is located in those countries that have highly inflationary
economies.

  Revenues and earnings could be impacted by changes in foreign exchange rates.
The operations of the Company may be affected by adverse economic and political
conditions in Korea and those in the Far East in general.


Concentration of Credit Risks

  The Company sells products to customers located throughout the world.  The
Company generally does not require collateral.  The Company maintains credit
procedures to evaluate the credit worthiness of prospective customers and
employs personnel specifically for the purpose of monitoring and collecting
accounts receivable.  Issues regarding customer accounts are immediately brought
to the attention of management for resolution.


(2)   Cash and Cash Equivalents

  At December 31, 1998 and December 31, 1999, the Company had approximately
$162.3 million and $67.7 million, respectively, in short term deposit accounts
with several banks of which $3.6 million and $1.7 million, respectively, were
denominated in BEF.

  The deposited amounts, the maturity dates and the related interest yield
percentages are as follows (amounts in thousands):

                                      F-15
<PAGE>

                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

<TABLE>
<CAPTION>
                                                                                                 Yearly
                                                                                                Interest
At December 31, 1998:                                          Amount       Maturity Date       Yield (%)
-----------------------------------------------------------   ---------   -----------------   -----------
<S>                                                           <C>         <C>                  <C>
Bank A.....................................................    $155,978   January 1-11, 1999   3.18-6.00
Bank B.....................................................       2,200    January 12, 1999         5.50
Bank C.....................................................       2,459    January 4, 1999          3.63
Bank D.....................................................       1,363    January 4, 1999     3.00-7.00
Bank E.....................................................         347    January 4, 1999          3.22
                                                               --------
                                                               $162,347
Cash at bank...............................................      26,117
                                                               --------
Total cash and cash equivalents............................    $188,464
                                                               ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                                       Yearly
                                                                                                      Interest
At December 31, 1999:                                        Amount          Maturity Date          Yield (%)
-----------------------------------------------------------  ----------   ----------------------   ------------
<S>                                                         <C>         <C>                        <C>
Bank A.....................................................    $ 11,300       January 4, 2000         4.25-7.4
Bank E.....................................................       1,743       January 5, 2000             3.00
Bank F.....................................................      24,435       March 6-30, 2000       7.16-8.00
Bank G.....................................................      26,054   January 4-March 25, 2000   6.50-7.00
Bank H.....................................................       4,139       January 3, 2000             5.25
                                                               --------
                                                               $ 67,671
Cash at bank...............................................      58,059
                                                               --------
Total cash and cash equivalents............................    $125,730
                                                               ========
</TABLE>


  At December 31, 1998 and 1999, the Company held marketable equity securities
amounting to $ 965,375 and $ 4,899,639, respectively. The securities are stated
at fair market value.


(3)   Inventory

  Inventory consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                   ------------------
                                                                                     1998      1999
                                                                                   --------   -------
<S>                                                                                 <C>       <C>
Supplies.........................................................................    $  776    $1,524
Finished goods...................................................................     1,873     2,176
                                                                                     ------    ------
                                                                                     $2,649    $3,700
                                                                                     ======    ======
</TABLE>


(4)   Property and Equipment

  Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                   ---------------------
                                                                                      1998        1999

<S>                                                                              <C>         <C>
Land and building................................................................   $ 10,775    $ 19,356
Machinery and equipment..........................................................     33,999      40,246
                                                                                    --------    --------
</TABLE>

                                      F-16
<PAGE>

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

<TABLE>
<CAPTION>

<S>                                                                                 <C>        <C>
                                                                                      44,774      59,602
Less accumulated depreciation....................................................    (21,476)    (25,914)
                                                                                    --------    --------
                                                                                    $ 23,298    $ 33,688
                                                                                    ========    ========
</TABLE>


(5)   Business Acquisitions

   During 1997, 1998 and 1999, the Company acquired the entities described
below, which were accounted for by the purchase method of accounting:

   On May 16, 1997, the Company acquired 100% of the issued and outstanding
shares of GMS, a company incorporated under the laws of Germany.  The Company
paid approximately $8.5 million in cash, net of cash received in the
acquisition. In addition to the amount paid at the closing of the transaction,
the Company issued one global bond of approximately $2.8 million refundable in
shares of the Company (see note 9), and issued 672,492 shares of common stock
for a total value of approximately $3.7 million.  The purchase price has been
allocated to the assets purchased and the liabilities assumed based upon the
fair value on the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................               $(2,998)
   Property and equipment.................................................................................                   492
   Goodwill...............................................................................................                 9,735
   Deferred tax asset.....................................................................................                 1,300
   In-process research and development....................................................................                 7,027
                                                                                                                         -------
                                                                                                                         $15,556
                                                                                                                         =======
</TABLE>



  On June 26, 1997, the Company acquired 100% of the issued and outstanding
shares of Kurzweil.  The Company paid approximately $41.3 million in cash, net
of cash received in the acquisition.  In addition, the Company issued 1,841,484
shares of common stock having a value of $11.5 million and 430,128 warrants with
exercise prices averaging $4.03 and having a fair value of $1.7 million.  The
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the fair value on the date of acquisition, as follows (in
thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................               $(3,517)
   Property and equipment.................................................................................                   614
   Goodwill...............................................................................................                34,074
   Other assets...........................................................................................                 1,622
   In-process research and development....................................................................                26,100
   Software development costs.............................................................................                   697
Liabilities assumed.......................................................................................                (3,472)
                                                                                                                         -------
                                                                                                                         $56,118
                                                                                                                         =======
</TABLE>



   On June 27, 1997, the Company acquired from Centigram, a Delaware corporation
with its principal headquarters in San Jose, California all of the assets and
technology related to its text-to-speech division.  In consideration of this
acquisition, the Company issued an automatically convertible bond (ACO) for an
amount of $4.9 million. This ACO was converted into 720,200 shares of common
stock of the Company on July 29, 1997. Costs of the acquisition were
approximately $481,000 and have been included in the purchase price.  The
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the fair value on the date of acquisition, as follows (in
thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Goodwill...............................................................................................                $4,708
   In-process research and development....................................................................                   696
                                                                                                                          ------
</TABLE>

                                      F-17
<PAGE>

                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

<TABLE>
<S>                                                                                                               <C>
                                                                                                                          $5,404
                                                                                                                         =======
</TABLE>



  The Company acquired 100% of the issued and outstanding shares of EMTI (August
1997), ASAP and Kermit (July and December 1997), C&L Servicios (August 1997) and
Trantex and Wordwork (October and December 1997). The Company paid approximately
$10.3 million in cash, net of cash received in the transactions. In addition,
the Company is committed to pay up to an additional $6.7 million for these
business acquisitions made in 1997. During 1999, the Company paid approximately
$3.0 million to certain acquired companies as they reached the minimum
financial targets. The final consideration will become payable in 2000 if the
acquired companies reach certain minimum financial targets.  The purchase price
has been allocated to the assets purchased and the liabilities assumed based
upon the fair value on the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................   $   187
   Property and equipment.................................................................................     1,557
   Goodwill...............................................................................................    13,854
   Other assets...........................................................................................        47
Liabilities assumed.......................................................................................   $  (256)
                                                                                                             -------
                                                                                                             $15,389
                                                                                                             =======
</TABLE>




  In March 1998, the Company acquired Applications Technology, Inc. ("Apptek").
The Company paid approximately $12.2 million in cash, net of cash received in
the acquisition.  In addition, the Company issued 58,652 shares of Common Stock
having a value of $2.2 million.  During 1999, the Company paid approximately
$2.2 million in cash to Apptek as the performance targets were reached.  The
final consideration of $1.2 million will become payable in 2000 if the financial
targets are reached. The purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the fair value on the date of
acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................               $   588
   Property and equipment.................................................................................                    35
   Goodwill...............................................................................................                 9,030
   In-process research and development....................................................................                 7,529
                                                                                                                         -------
                                                                                                                         $17,182
                                                                                                                         =======
</TABLE>



  In April 1998, the Company acquired the linguistic components divisions of
Novell, Inc. and Inso Corporation ("Inso").  The Company, in exchange for
Novell's linguistic division, agreed to pay Novell Inc. a portion of future
royalties, if any, derived from the assets acquired from Novell Inc. until April
2003.  No other consideration was paid to Novell, Inc.  The Company paid
approximately $9.75 million in cash for the acquisition of the linguistic
components division of Inso.  In addition, the Company issued a note to Inso in
the principal amount of $9.75 million payable on or before June 30 1998.  Inso
converted the note into 377,370 shares of Common Stock of the Company. The
purchase price has been allocated to the assets purchased based upon the fair
value on the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Goodwill...............................................................................................               $16,788
   In-process research and development....................................................................                 4,300
                                                                                                                         -------
                                                                                                                         $21,088
                                                                                                                         =======
</TABLE>

                                      F-18
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

  In May 1998, the Company purchased 23.4% of LanguageWare.net Ltd. (prior to
October 1999 called Accent Software International Ltd.).  The Company paid
approximately $4 million in cash for the acquisition. The purchase price has
been allocated to the assets purchased based upon the fair value on the date of
acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Goodwill...............................................................................................                $2,972
   In-process research and development....................................................................                 1,081
                                                                                                                          ------
                                                                                                                          $4,053
                                                                                                                          ======
</TABLE>



  In June 1998, the Company acquired 100% of the outstanding shares of Dictation
Consortium N.V.  The Company paid approximately $26.9 million in cash, net of
cash received in the acquisition.  The purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair value on the
date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................              $    145
   Goodwill...............................................................................................                21,681
   In-process research and development....................................................................                21,500
Liabilities assumed.......................................................................................               (14,010)
                                                                                                                        --------
                                                                                                                        $ 29,316
                                                                                                                        ========
</TABLE>



  In June 1998, the Company purchased Localization and Consulting Services
International LLC.  The Company paid approximately $500,000 in cash for the
acquisition. The purchase price has been allocated to the assets purchased based
upon the fair value on the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................                  $ (8)
   Property and equipment.................................................................................                    14
   Goodwill...............................................................................................                   494
                                                                                                                            ----
                                                                                                                            $500
                                                                                                                            ====
</TABLE>



  In July 1998, the Company acquired Ailogic Corporation and NeocorTech, both
providers of machine translation technologies for Asian languages.  The Company
paid approximately $4.4 million in cash, net of cash received in the
acquisition. The purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the fair value on the date of acquisition, as
follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................                $2,588
   Property and equipment.................................................................................                    22
   Goodwill...............................................................................................                 3,239
   In-process research and development....................................................................                   883
                                                                                                                          ------
                                                                                                                          $6,732
                                                                                                                          ======
</TABLE>



  In  August 1998, the Company acquired the Heitmann Group, a German translation
services provider and language technologies developer and supplier.  The Company
issued a note in the principal amount of $15 million, covering the purchase
price and the repayment of $4.3 million of loans.  The Heitmann Group converted
the note into 690,280 shares of Common Stock of the Company. The purchase price
has been allocated to the assets purchased and the liabilities assumed based
upon the fair value on the date of acquisition, as follows (in thousands):

                                      F-19
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                                          <C>
Assets acquired:
   Working capital........................................................................................              $ (1,110)
   Property and equipment.................................................................................                10,561
   Goodwill...............................................................................................                35,451
Liabilities assumed.......................................................................................               (33,120)
                                                                                                                        --------
                                                                                                                        $ 11,782
                                                                                                                        ========
</TABLE>



  In September 1998, the Company acquired Kurzweil Educational Systems, Inc., a
designer, producer and licenser of educational software systems for reading
assistance.  The Company issued 906,368 shares of Common Stock for a total value
of approximately $20 million.  The purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair value on the
date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................               $  (397)
   Property and equipment.................................................................................                    67
   Goodwill...............................................................................................                18,882
   Other assets...........................................................................................                    11
   In-process research and development....................................................................                 2,730
                                                                                                                         -------
                                                                                                                         $21,293
                                                                                                                         =======
</TABLE>



  In September 1998, the Company acquired Globalink, Inc., a provider of
advanced translation software products and professional translation services.
The Company issued  3,041,206 shares of Common Stock for a total value of
approximately $63.5 million.  The purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair value on the
date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                          <C>
   Working capital........................................................................................               $(5,204)
   Property and equipment.................................................................................                   101
   Goodwill...............................................................................................                46,953
   In-process research and development....................................................................                28,200
Liabilities assumed  .....................................................................................                (2,320)
                                                                                                                         -------
                                                                                                                         $67,730
                                                                                                                         =======
</TABLE>



  In September 1998, the Company acquired 100% of TikSoft LLC.  The Company paid
approximately $5.9 million in cash, net of cash received in the acquisition.  In
addition, the Company issued a note in the principal amount of $6.0 million.
The note issued was convertible into shares of the Company's Common Stock
pursuant to a formula based upon the Company's market price.  In December 1998,
the Company agreed to redeem the note for cash in an amount equal to the then
current outstanding balance.  The purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair value on the
date of acquisition, as follows (in thousands):

                                      F-20
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                   <C>
   Working capital........................................................................................               $(1,601)
   Property and equipment.................................................................................                     2
   Goodwill...............................................................................................                   966
   In-process research and development....................................................................                12,800
                                                                                                                         -------
                                                                                                                         $12,167
                                                                                                                         =======
</TABLE>

  In November 1998, the Company invested 49.5 % in Asiaworks Pte Ltd.  The
Company paid approximately $5 million in cash. The purchase price has been
allocated to the assets purchased based upon the fair value on the date of
acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                      <C>
   Goodwill...............................................................................................               $ 5,204
   In-process research and development....................................................................                   350
                                                                                                                         -------
                                                                                                                         $ 5,554
                                                                                                                         =======
</TABLE>

  In June 1999, the Company acquired Brussels Translation Group N.V.  The
Company paid approximately $41 million in cash, net of cash received in the
acquisition.  Immediately after the acquisition the Company paid off the debt to
the banks for approximately $17 million. The purchase price has been allocated
to the assets purchased and the liabilities assumed based upon the fair value on
the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                    <C>
   Working capital........................................................................................              $ (2,737)
   Goodwill...............................................................................................                62,311
Liabilities assumed  .....................................................................................               (16,998)
                                                                                                                        --------
                                                                                                                        $ 42,576
                                                                                                                        ========
</TABLE>

  In June 1999, the Company acquired Flanders Dialogue Company  N.V.  The
Company paid approximately $3 million in cash, net of cash received in the
acquisition.  Immediately after the acquisition the Company paid off the debt in
Flanders Dialogue Company  N.V.  for approximately $2.4 million. The purchase
price has been allocated to the assets purchased and the liabilities assumed
based upon the fair value on the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                      <C>
   Working capital........................................................................................               $   772
   Property and equipment.................................................................................                    66
   Goodwill...............................................................................................                 5,569
Liabilities assumed  .....................................................................................                (2,363)
                                                                                                                         -------
                                                                                                                         $ 4,044
                                                                                                                         =======
</TABLE>

  In August 1999, the Company acquired certain assets from International
Microcomputer Software, Inc.  The Company paid approximately $1.8 million in
cash. The purchase price has been allocated to the assets purchased and the
liabilities assumed based upon the fair value on the date of acquisition, as
follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                      <C>
   Goodwill...............................................................................................               $ 1,770
                                                                                                                         -------
                                                                                                                         $ 1,770
                                                                                                                         =======
</TABLE>

                                      F-21
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  In September 1999, pursuant to an asset purchase agreement dated May 19, 1999,
between the Company and Fonix Corporation, the Company purchased substantially
all the assets of Fonix's Articulate Division based in Woburn, Massachusetts.
The Company acquired Fonix's Articulate Division for approximately $23.8 million
in cash, with an additional earn-out of up to $4 million spread over two years
based upon performance. The purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the fair value on the date of
acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                    <C>
   Working capital........................................................................................               $  (515)
   Property and equipment.................................................................................                   137
   Goodwill...............................................................................................                25,378
Liabilities assumed  .....................................................................................                   (49)
                                                                                                                         -------
                                                                                                                         $24,951
                                                                                                                         =======
</TABLE>

  In September 1999, the Company acquired World Tech Corporation.  The Company
paid approximately $600,000 in cash. The purchase price has been allocated to
the assets purchased and the liabilities assumed based upon the fair value on
the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                       <C>
   Working capital........................................................................................               $   216
   Property and equipment.................................................................................                    75
   Goodwill...............................................................................................                   467
Liabilities assumed  .....................................................................................                  (154)
                                                                                                                         -------
                                                                                                                         $   604
                                                                                                                         =======
</TABLE>

  In September 1999, the Company acquired Bumil Information & Communications,
Co. Ltd.  The Company paid approximately $24.6 million in cash, net of cash
received in the acquisition, with up to an additional $25 million earn-out to be
paid in January 2000, based upon performance. The $25 million earn-out was paid
by the Company in January 2000 as targets were met.  The purchase price has been
allocated to the assets purchased and the liabilities assumed based upon the
fair value on the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                    <C>
   Working capital........................................................................................               $   589
   Property and equipment.................................................................................                   927
   Goodwill...............................................................................................                50,222
Liabilities assumed  .....................................................................................                (1,083)
                                                                                                                         -------
                                                                                                                         $50,655
                                                                                                                         =======
</TABLE>

  In September 1999, the Company acquired Infodata AS.  The Company paid
approximately $1.1 million in cash, net of cash received in the acquisition. The
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the fair value on the date of acquisition, as follows (in
thousands):

                                      F-22
<PAGE>

            NOTED TO CONSOLIDATED FIANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                    <C>
   Working capital........................................................................................               $   327
   Property and equipment.................................................................................                    51
   Goodwill...............................................................................................                   894
                                                                                                                         -------
                                                                                                                         $ 1,272
                                                                                                                         =======
</TABLE>

  In October 1999, pursuant to an asset purchase agreement dated August 6, 1999,
between the Company and Milestone Group Holdings Limited, the Company purchased
substantially all of the Computer Aided Medical Supplies assets of Milestone's.
The Company paid approximately $3 million in cash.  In addition, the Company is
committed to pay up to an additional earn-out of up to $3.3 million based upon
certain criteria and performance.  The purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair value on the
date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                      <C>
   Property and equipment.................................................................................               $    14
   Goodwill...............................................................................................                 2,990
                                                                                                                         -------
                                                                                                                         $ 3,004
                                                                                                                         =======
</TABLE>

  In November 1999, the Company acquired certain assets from American
Transcriber Corporation of Florida, Inc. and Rodeer Systems, Inc.  The Company
paid approximately $6.4 million in cash.  The purchase price has been allocated
to the assets purchased and the liabilities assumed based upon the fair value on
the date of acquisition, as follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                      <C>
   Working capital........................................................................................               $   478
   Property and equipment.................................................................................                   317
   Goodwill................................................................................................                5,812
                                                                                                                         -------
                                                                                                                         $ 6,607
                                                                                                                         =======
</TABLE>

  In December 1999, the Company acquired Linguex S.A.  The Company  issued a
note in the principal amount of $4.9 million.  On the 41st day after the
effective date of the issuance of the note, this note was automatically
converted into 184,602 shares of the Company's Common Stock pursuant to a
formula based upon the Company's market price.  In addition, the Company is
committed to pay up to an additional earn-out of up to $1.2 million based upon
performance.  The purchase price has been allocated to the assets and the
liabilities assumed based upon the fair value on the date of acquisition, as
follows (in thousands):

<TABLE>
<CAPTION>
Assets acquired:
<S>                                                                                                                      <C>
   Working capital........................................................................................               $   (46)
   Property and equipment.................................................................................                   202
   Goodwill................................................................................................                4,752
                                                                                                                         -------
                                                                                                                         $ 4,908
                                                                                                                         =======
</TABLE>

  At December 31, 1999, the Company reduced the goodwill with approximately $
9.5 million acquired tax benefits, which were previously included in the
valuation allowances from several business acquisitions.

                                      F-23
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Pro forma results of operations

  The following unaudited pro forma combined results of operations present
financial information as if the acquisitions had occurred at the beginning of
each fiscal year. In preparing the pro forma data, adjustments have been made
for the amortization of goodwill and the interest expense related to the debt
used to finance a portion of the purchase price. The pro forma information is
provided for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred had
the acquisitions been made as of those dates nor is it necessarily indicative of
results of operations which may occur in the future (in thousands except per
share data):

<TABLE>
<CAPTION>
                                                                       December 31,
                                                              ------------------------------
                                                               1997         1998        1999
                                                              ------       ------      -----
<S>                                                         <C>           <C>          <C>
Revenues.................................................    $120,338     $251,740     $356,306
Net income (loss)........................................    $(24,122)    $(92,036)    $ 31,260
Net income (loss) per common share.......................    $  (0.69)    $  (0.92)    $   0.26
</TABLE>


The 1997, 1998 and 1999 amounts include $33.8 million, $79.4 million and $0 in
write offs of in-process research and development, respectively. In the
consolidated financial statements these amounts were charged to earnings.


(6) Investments

    Investments in unconsolidated affiliates consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                       ---------------------
                                                                                        1998           1999
                                                                                       -----          ------
<S>                                                                                     <C>          <C>
Investments in joint ventures accounted for using the equity method (see note 1b)..    $   457       $   300
Long term funding provided to joint ventures, net..................................      2,182           151
Equity investments at cost and other (see note 15).................................      9,464        13,982
                                                                                       -------       -------
                                                                                       $12,103       $14,433
                                                                                       =======       =======
</TABLE>

  During 1999, the Company has ended the joint efforts with the Chinese and
Egyptian partners.  Also, the Japanese joint venture has become a fully owned
subsidiary of the Company (see note 1(b)).  For the years ended December 31,
1997 and 1998, the Company's share of the losses from operations in the Japanese
joint venture totaled approximately $115,000 and $280,000 respectively.

  In July 1999, the Company entered into a new business venture in Hong Kong to
promote English learning as a second language in the People's Republic of China
through the use of internet and handheld electronic devises.  The Company has a
19% ownership in the Hong Kong joint venture.

  In July 1999, the Company and Intel Atlantic, Inc. formed an entity under the
name iSAIL Solutions to develop e-commerce and telephony solutions (see note
15).  The Company has a 49% ownership in this joint venture.

  In October 1999, the Company entered into a joint venture agreement to build
dialogue applications allowing users to communicate with a computer over the
telephone and, in the future, dialogue applications on the Internet.  The
Company has 19.9% ownership in the Spanish joint venture.

   At December 31, 1997 the Company had a 49% interest in OmniVoice (formerly
known as NDC Voice Corporation).  The Company has recognized as a charge to
income its share of losses of OmniVoice in 1996 and 1997 totaling approximately
$145,000 and $909,000 respectively.  During the year ended December 31, 1998 the
Company and its partner NDC Corporation reorganized their investments in
OmniVoice.  Under this reorganization, the Company recorded a one-time non-cash
charge of $4.1 million, which is reflected in share in loss of unconsolidated
affiliates.

                                      F-24
<PAGE>

            NOTES TO CONSOLIDATED FINANCAIL STATEMENTS--(Continued)

(7)  Accounts Receivable

     Included in accounts receivable are unbilled amounts for nonrefundable
minimum royalties payable within a maximum of twelve months (see note 1(d)) and
for engineering contracts accounted for under the percentage of completion
method where the amounts are not billed until milestones are reached or the
contracts have been completed. At December 31, 1998 and 1999, $26,350,000 and
$9,873,000, respectively were unbilled. Net unbilled amounts for nonrefundable
minimum royalties and other upfront revenues were $22,476,000 and $5,984,000 at
December 31, 1998 and 1999, respectively. Net unbilled amounts for engineering
contracts were $3,874,000 and $3,889,000 at December 31, 1998 and 1999,
respectively.

     The following table summarizes the allowance for doubtful accounts:

<TABLE>
<CAPTION>
                                                               Balance at       Additions         Amounts          Balance at
                                                               beginning           to             written          the end of
                                                               of period        Allowance           off            the period
                                                               ---------        ---------         -------          ----------
Years ended December 31 :
<S>                                                            <C>              <C>               <C>                <C>
  1997.....................................................     1,305            1,063              (326)              2,042
  1998.....................................................     2,042            4,617            (1,329)              5,330
  1999......................................................    5,330            5,511            (1,527)              9,314
</TABLE>

(8)  Notes payable and credit facilities

     At December 31, 1998, the Company had a convertible note payable to Tiksoft
LLC (see note 5) of $6 million.

     At December 31, 1999, the Company had a convertible note payable to Linguex
S.A. of $4.9 million (see note 5) and approximately $10.5 million of notes
payables to several Korean banks.  All notes payables with Korean banks mature
in the year 2000 and the related interest yield percentages range from 9.30% to
13%. The Korean notes payable are personally guaranteed by the President of L&H
Korea and by deposits of the Company.

     At December 31, 1998 and December 31, 1999, the Company had an aggregate of
$32.4 million and $20.7 million in borrowing capacity under credit facilities
with Bank Artesia and Bank BACOB. The Bank BACOB merged into Bank Artesia in
1999. At December 31, 1998 and December 31, 1999, the Company has used $13.0
million and $3.1 million of these credit facilities.

     At December 31, 1999 the Company's credit facilities with the Bank Artesia
are as follows:

     The Bank Artesia facility consists of a BEF 120 million (approximately $3
million) credit facility. The facility is available for consecutive periods of
up to six months. This facility will be reduced by approximately BEF 60 million
on December 31 of each of the years 1999 through 2000. Amounts drawn from the
facility bear interest at BIBOR plus 1.5% per year. Unused amounts held
available by the bank bear interest at 1% per year.

     The Bank Artesia facility also consists of a BEF 260 million (approximately
$6.5 million) long-term facility. The facility can only be used to finance up to
a maximum of 50% of the cost of potential acquisitions. The facility is
available as a rollover facility for consecutive periods of up to six months.
This facility expires on February 28, 2001 and will be reduced by two equal
installments on each of February 28, 2000 and 2001. This rollover facility bears
interest at LIBOR plus 1% per year. Unused amounts bear interest at 0.5% per
year.

     The Bank Artesia facility also consists of two long-term facilities of BEF
225 million (each approximately $5.6 million). These facilities can only be used
to finance the development of dictation software. These facilities are available
as rollover facilities for consecutive periods of up to six months. These
facilities expire on June 30, 2000 and have been reduced by two equal
installments of $1.2 million on December 31, 1998 and June 30, 1999 and by
another installment of $1.6 million on

                                      F-25
<PAGE>

December 31, 1999 and the remaining balance will be fully repaid by June 30,
2000. These rollover facilities bear interest at a cap strike price of 8% and a
floating rate option of BIBOR- 3 months.

     The Bank Artesia facilities are secured by a pledge of certain assets of
the Company.

(9)  Long-term Debt

     Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                                 ------------------------
                                                                                                   1998             1999
                                                                                                 -------          -------
<S>                                                                                              <C>              <C>
Convertible Subordinated Notes (the "Notes") due 2001, bearing interest at 8% per year
 payable semiannually in arrears on May 15 and November 15, commencing on May 15, 1997; the
 Notes are convertible into shares of the Company's common stock, no par value, on or after
 January 19, 1997 and prior to redemption at maturity, at a conversion price of $5.1256 per
 share (equal to a conversion rate of 195.10 shares per $1,000 principal amount of the
 Notes), subject to adjustment under certain circumstances. During 1998 and 1999,  13,934
 and 2,159  notes converted into common stock (see note 13).................................     $  5,792         $  3,633

Non-transferable subordinated Bonds Refundable in Shares ("BRS") of the Company's common
 stock, 10,000 units issued in connection with the acquisition of Mendez in September 1996,
 due August 1998 for BRS Category A (6,900 units) and August 1999 for BRS Category B (3,100
 units), bearing interest at 1.5% per year, payable annually on August 30, commencing on
 August 30, 1997. Each unit  has been converted into the Company's common shares of no par
 value equal to the nominal value of each BRS divided by the weighted average stock
 exchange price of such share on the NASDAQ during 90 trading days ending one day before
 reimbursement..............................................................................     $  1,243         $      -

Non-transferable subordinated Bonds Refundable in Shares ("BRS") of the Company's common
 stock, due November 30, 1999 and December 30, 1999; 10,000 units with nominal value of BEF
 10,000 per unit, issuable in connection with the acquisition of Lexitrans in November 1996
 bearing an annual interest of 1.5% per year, payable on November 30 and December 30
 commencing on November 30 and December 30, 1997 respectively. Each unit  has been
 converted into a number of the Company's common shares of no par value equal to the
 nominal value of each BRS divided by the weighted average stock exchange prices of such
 shares on the NASDAQ during 90 trading days before reimbursement...........................     $  3,048         $      -

Non-transferable subordinated Bonds Refundable in Shares of the Company's common stock,
 ("BRS"), due on November 30, 1999; 5,040 units of BEF 10,000 each, in connection with the
 acquisition of Translingua in November 1996, bearing an annual interest of 1.5% payable on
 November 30, commencing on November 30, 1997. Each unit  has been converted into a number
 of the Company's common shares of no par value equal to the nominal value of each BRS
 divided by the weighted average stock exchange price of such shares on the NASDAQ during
 90 trading days before reimbursement.......................................................     $  1,301         $      -

Non-transferable bond issued in May 1997 in connection with the acquisitionof GMS.  The
 bond, denominated in DEM and bearing an annual gross interest of 3%, is for a maximum
 period of three years redeemable thereafter at the option of the Company or the seller of
 GMS. The bond entitles the holder to one global warrant, exercisable 30 banking days after
 May 2000 and giving the right to subscribe to 48,000 shares of common stock of the
 Company. On August 26, 1999, the holder of the non-transferable bond agreed, as
 compensation for the granting of a bank guarantee by the Company in favor of the holder,
 to renounce the annual gross interest of 3 % as from the date of the non-transferable bond
 was originally granted.....................................................................     $  2,983         $  2,311
</TABLE>

                                      F-26
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<S>                                                                                            <C>               <C>
Bank Artesia loan, denominated in BEF, bearing interest at cap strike price of 8% and a
 floating rate option of BIBOR-3months, payable in 4 installments. Two equal installments
 of $1.2 million on December 31, 1998 and June 30, 1999 and by two equal installments of
 $1.6 million on December 31, 1999 and June 30, 2000. The facility  is secured by a pledge
 of certain assets of the Company...........................................................     $  6,508         $  1,556

Bank Artesia loan, denominated in BEF, bearing interest at cap strike price of 8% and a
 floating rate option of BIBOR-3months, payable in 4 installments. Two equal installments
 of $1.2 million on December 31, 1998 and June 30, 1999 and by two equal installments of
 $1.6 million on December 31, 1999 and June 30, 2000. The facility  is secured by a pledge
 of certain assets of the  Company..........................................................     $  6,508         $  1,556

Generale Bank Investment Loans of BEF 35 million in total for acquisition of Mendez
 headquarters building in Brussels, bearing a yearly interest of 7.7%; the loan is payable
 in 180 monthly installments. The loans are secured by a mortgage on the building...........     $    815         $    651

BFG Bank AG loan, denominated in DEM, bearing interest at 5.5% payable in 16 semi-annual
 installments. The installments of DEM 343 thousand are due on September 30, 1999 through
 March 31, 2007. The loan is secured by a land charge on the real estate in Oberdornen
 90-92, Wuppertal...........................................................................     $  3,013         $  2,648

Artesia Leasing & Renting capital lease of BEF 329 million for the new headquarters
 building in Belgium, bearing a fixed yearly interest of 6.42 % subject to change at the
 earliest after 15 years; the  lease is payable in 80 quarterly installments.                    $      -         $  8,191

Other, including obligations under capital leases...........................................     $  6,446         $  6,609
                                                                                                 --------         --------
Total long-term debt........................................................................       37,657           27,155

Less current installments...................................................................      (17,653)         ( 8,490)
                                                                                                 --------         --------
                                                                                                 $ 20,004         $ 18,665
                                                                                                 ========         ========
</TABLE>

  The aggregate maturities of long-term debt, including obligations under
capital leases for each of the subsequent years ending December 31, are as
follows (in thousands):

<TABLE>
<S>                                                                                                            <C>
2000......................................................................................................        $ 8,490
2001......................................................................................................          6,918
2002......................................................................................................          1,256
2003......................................................................................................            932
2004......................................................................................................            809
Thereafter................................................................................................          8,750
                                                                                                                  -------
   Total..................................................................................................        $27,155
                                                                                                                  =======
</TABLE>

                                      F-27
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(10)   Leases

  The Company is committed under various capital leases for  its headquarters
building in Ieper, Belgium and for computer and other equipment which expire
during varying periods between 3 to 20 years (see note 9). The gross amount of
capital leases included in property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                     -----------------------
                                                                                      1998             1999
                                                                                     ------           ------
<S>                                                                                 <C>               <C>
Property and equipment...........................................................   $ 3,094          $10,645
Less accumulated depreciation....................................................    (1,291)          (1,283)
                                                                                    -------          -------
                                                                                    $ 1,803          $ 9,362
                                                                                    =======          =======
</TABLE>


  The Company has entered into certain noncancelable operating leases, primarily
for office premises and automobiles that generally expire over the next three to
five years. Total rental expense for operating leases for the years ending
December 31, 1997, 1998, and 1999 amounted to approximately $2,752,000,
$3,601,000 and $6,182,000 respectively. Obligations under operating leases are
as follows (in thousands):

<TABLE>
<S>                                                                                                                      <C>
2000......................................................................................................               $ 6,299
2001......................................................................................................                 5,297
2002......................................................................................................                 4,530
2003......................................................................................................                 3,701
2004......................................................................................................                 3,287
                                                                                                                         -------
   Total..................................................................................................               $23,114
                                                                                                                         =======
</TABLE>

(11)  Intangibles

      Intangibles, net of amortization include the following (in thousands):

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                     ----------------------
                                                                                      1998           1999
                                                                                      -----          -----
<S>                                                                                 <C>             <C>
Goodwill and other business acquisition intangibles..............................    $255,585     $410,732
Licenses.........................................................................       9,844       22,316
Prepaid royalties................................................................       6,490        6,014
Patents..........................................................................         395        1,026
Acquired voice technology........................................................       5,213        4,488
Other intangibles................................................................         108        1,214
                                                                                     --------     --------
                                                                                      277,635      445,790
Accumulated amortization.........................................................     (32,168)     (66,759)
                                                                                     --------     --------
                                                                                     $245,467     $379,031
                                                                                     ========     ========
</TABLE>

                                      F-28
<PAGE>

(12)   Accrued Expenses

       Accrued expenses consist of the following (in thousands):


<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                     ---------------------
                                                                                      1998           1999
                                                                                     -------       -------
<S>                                                                                 <C>            <C>
Accrued payroll, related taxes and value added taxes.............................    $10,637       $ 9,219
Accrued income tax payable.......................................................      4,319        12,940
Accrued interest expenses........................................................      2,278         1,933
Accrued fees.....................................................................        564           523
Accrued legal expense............................................................      2,160            -
Accrued warranty and returns expense.............................................      2,753         1,302
Accrued consideration for specific companies acquired (note 5)...................      5,627        27,105
Other accrued expenses...........................................................      8,811        11,010
                                                                                     -------       -------
                                                                                     $37,149       $64,032
                                                                                     =======       =======
</TABLE>

(13)  Shareholders' Equity

      The Company has the following shares outstanding at:

<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                         --------------------------
<S>                                                                                      <C>                <C>
                                                                                           1998              1999
                                                                                         --------          --------

Common shares....................................................................        108,743,694    114,414,734
                                                                                         ===========    ===========
Automatically Convertible Stock..................................................                  -        895,932
                                                                                         ===========    ===========
</TABLE>

 Recent Stock Transactions

  During 1999, 2,159 of the 8% Subordinated Convertible Notes issued in November
1996 were converted  into 421,206  shares of common stock.

  During 1999 49,026 4.75% Preferred Income Equity Redeemable Shares were
converted into 86,234 shares of common stock.

   During 1999 18,140 Bonds Reimbursable in Shares, issued in 1996 and 1997
within the framework of various acquisitions, were converted into 289,032 shares
of common stock.

  During 1999, 2,914,930 warrants were converted into  2,914,930 shares of
common stock.

  During 1999, the Company issued  197,354 shares of common stock as earn-out
payments within the framework of several acquisitions in 1997.

  In March 1999,  Microsoft Corporation converted 1,714,284 warrants into
1,714,284 shares of  common stock.

  On April 12, 1999, Medquist, Inc. converted 48,000 warrants into 48,000 shares
of common stock.

  On May 5, 1999, the Company, Intel Atlantic Inc. ("Intel"), and Stichting
Administratiekantoor L&H-ACS, a Dutch Trust Foundation ( the "Trust") entered
into a Securities Subscription Agreement, pursuant to which Intel invested $30
million in the Company via the Trust. The Trust subscribed to 895,932 shares of
Automatically Convertible Stock at a price of $33.484684  per

                                      F-29
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


share (the "Purchase Price"), whereby the Trust holds the Automatically
Convertible Stock in trust and on behalf of Intel and exercises the voting
rights and all other rights attached to the Automatically Convertible Stock. In
exchange for the acquisition and the holding in trust of the Automatically
Convertible Stock, the Trust issued to Intel the Trust Foundation Certificates,
exchangeable on and after November 5, 2000 into shares of Automatically
Convertible Stock or upon conversion thereof, into shares of common stock of the
Company.

  Each share of Automatically Convertible Stock will automatically convert into
a number of fully paid shares of common stock of the Company determined by
dividing the Purchase Price by the Conversion Price whereby the Conversion Price
is determined as the lower of (i) the fair market value of the common stock or
(ii) the Purchase  Price whereby the Conversion Price may not be lower than 75%
of the Purchase Price.

  At December 31, 1998 and December 31, 1999, each of the Company's outstanding
common shares had the right to one vote and had equal dividend rights, and each
of the Company's outstanding automatically convertible shares had the right to
two votes and had dividend rights equivalent to two common shares.


 Dividends

  Dividends are declared and are payable in BEF.   At December 31, 1998 and
1999, Lernout & Hauspie Speech Products N.V. had $32.7 million and $44.8
million, respectively, available for distribution.

  Under Belgian accounting principles, at December 31, 1997, 1998 and 1999,
Lernout & Hauspie Speech Products NV 's amounts of accounting profits were
approximately $12.3 million, $23.9 million and $14.1 million and the amounts of
share capital were approximately $27.4 million, $33.8 million and $31.1 million.
The Lernout & Hauspie Speech Products NV 's retained earnings include an amount
of approximately $2.2 million that represents a legal reserve established in
accordance with Belgian legislation. This reserve is not available for
distribution.


 1993 Restricted Stock Purchase Plan

  In August 1993, the Company adopted the 1993 Restricted Stock Purchase Plan
(the "1993 Plan") in order to provide long-term incentives and rewards to the
Company's employees, officers, directors, advisors and consultants. A total of
4,000,000 shares of Class B, non-voting, $0.01 par common shares of the
Company's subsidiary Lernout & Hauspie Speech Products USA, Inc. ("USA Class B
shares") have been reserved for issuance under the 1993 Plan. Under the Plan,
selected participants are offered the opportunity to purchase USA Class B shares
for an amount not less than the fair market value of the restricted shares. The
participant is required to pay $0.01 per share upon issuance and the balance of
the purchase price is payable pursuant to a promissory note payable on or before
the fifth anniversary of the date of issuance. The USA Class B shares are sold
through a trust. Upon the vesting and receipt by the trust of payment in full
for any of the USA Class B shares issued under the Plan, the Trustee will
exchange such USA Class B shares for an equal number of the Company's common
shares.

  Each participant under the Plan entered into a Restricted Stock Purchase
Agreement. Under the terms of most of these agreements, 25% of the shares vested
in June 1996, and an additional 6.25% of the shares vest every three months
thereafter, subject to the Company's right to accelerate.

  In September 1993, in conjunction with the issuance of the USA Class B shares,
the Company issued warrants to the Trust to purchase a total of 2,800,000 of the
Company's Class A common shares at exercise prices ranging from $0.62 to $2.50
per share. In June 1995, the Company issued warrants to the Trust to purchase
500,000 of the Company's Class A common shares at $1.75 per share. The warrants
can be exercised subject to the Plan's vesting requirements and not more than
five years from the date of issuance.

  In April 1996, the Company amended the 1993 Plan to reduce the total number of
shares that may be issued thereunder from 4,000,000 shares to 3,200,000 shares.

  At December 31, 1999, no options remain to be granted by the Company.

 1994 Time Accelerated Restricted Stock Option Plan

                                      F-30
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  In January 1994, the Company adopted the 1994 Time Accelerated Restricted
Stock Option Plan (the "TARSOP"). A total of 6,060,000 common shares have been
authorized for issuance under the TARSOP. On June 13, 1995, the Company issued
options for the purchase of 6,060,000 shares to the Company's officers and key
employees at a price of $1.75 per share with a vesting schedule of four to ten
years. The vesting schedule is based upon the Company achieving certain
performance objectives periodically set by the Compensation Committee of the
Board of Directors.

  The options will be exercised through a Dutch foundation that was formed in
1995 for the purpose of administering the TARSOP. The foundation holds and
exercises the TARSOP warrants for the benefit of the TARSOP participants.

  At December 31, 1999, 78,000 options remain to be granted by the Company.


 1995 Restricted Stock Option Plan

  In September 1995, the Company adopted the 1995 Restricted Stock Option Plan
(the "1995 Plan"). Under the 1995 Plan, the Company is authorized to issue
options to purchase up to 2,000,000 shares of common stock with a vesting period
of ten years. In April 1996, the number of options to purchase common stock was
increased from 2,000,000 shares to 2,800,000 shares.

  On June 21, 1996, the Company issued options for the purchase of 1,400,000
shares under the 1995 Plan. The exercise price is equal to the value expressed
in BEF of the stock exchange quoted share price on the day preceding the day of
granting.

  In November 1996 and December 1996, the Company increased the number of shares
authorized for issuance pursuant to options granted under the 1995 Plan by an
additional 400,000 shares and 2,800,000 shares respectively. As a result, the
total number of shares authorized for issuance under the 1995 Plan was 6,000,000
at December 31, 1996.

  On February 25, 1997, the Company issued options for the purchase of 4,600,000
shares under the 1995 Plan. The exercise price is equal to the value expressed
in BEF of the stock exchange quoted share price on the day preceding the day of
granting.

   At December 31, 1999, 41,268 options remain to be granted by the Company.


 1997 Restricted Stock Option Plan

  In April 1997, the Company adopted the 1997 Restricted Stock Option Plan (the
"1997 Plan"). Under the 1997 Plan, the Company is authorized to issue options
to purchase up to 4,800,000 shares of common stock. The exercise price is equal
to the counter value expressed in BEF of the stock exchange quoted share price
on the day preceding the day of granting. The terms of the options, including
the exercise period, vesting schedule and restrictions on transfer, including
restrictions on transfer of the underlying shares, are subject to the discretion
of the Compensation Committee of the Company.

  At December 31, 1999, 178,656 options remain to be granted by the Company.

 1998 Option Plan for Employees of Acquired Companies

  In March and September 1998, the Company adopted a stock option plan for
employees of certain companies acquired by the Company.  Under this Plan, the
Company is authorized to issue options to purchase up to an aggregate of
2,630,000 shares of common stock.  The exercise price is equal to the counter
value expressed in BEF of the stock exchange quoted share price on the day
preceding the day of granting. The terms of the options, including the exercise
period, vesting schedule and restrictions on transfer, including restrictions on
transfer of the underlying shares, are subject to the discretion of the
Compensation Committee of the Company.

  At December 31, 1999, 419,722 options remain to be granted by the Company.

 1998 Restricted Stock Option Plan

                                      F-31
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  In May 1998, the Company adopted the 1998 Restricted Stock Option Plan (the
"1998 Plan").  Under the 1998 Plan, the Company is authorized to issue options
to purchase up to 3,000,000 shares of common stock. The exercise price is equal
to the counter value expressed in BEF of the stock exchange quoted share price
on the day preceding the day of granting. The terms of the options, including
the exercise period, vesting schedule and restrictions on transfer, including
restrictions on transfer of the underlying shares, are subject to the discretion
of the Compensation Committee of the Company.

  On October 18, 1998 the Compensation Committee of the Company decided to lower
the exercise prices of part of the options granted under the 1998 Plan to
reflect the then current share value.

  At December 31, 1999, 268,848 options remain to be granted by the Company.


 1999 Restricted Stock Option Plan

  In May 1999, the Company adopted the 1999 Restricted Stock Option Plan (the
"1999 Plan"). Under the 1999 Plan, the Company is authorized to issue options
to purchase up to 2,800,000 shares of common stock. On May 25, 1999, the Company
issued options for the purchase of 2,800,000 shares under the 1999 Plan.  The
exercise price is equal to the counter value expressed in BEF of the stock
exchange quoted share price on the day of granting. The terms of the options,
including the exercise period, vesting schedule and restrictions on transfer,
including restrictions on transfer of the underlying shares, are subject to the
discretion of the Compensation Committee of the Company.

  At December 31, 1999, no options remain to be granted by the Company.


 Outstanding Warrants and Options

  At December 31, 1999, the Company had outstanding warrants and options to
purchase an aggregate of 15,764,766 shares of common stock. Of the warrants and
options outstanding at December 31, 1999, warrants and options to purchase
14,452,766  shares were outstanding under the 1993 Plan, the TARSOP, the 1995
Plan, the 1997 Plan, the 1998 Plan and the 1999 Plan. The table set forth below
contains certain information relating to the outstanding warrants and options of
the Company at December 31, 1999 except for warrants and options issued under
the 1993 Plan, the TARSOP, the 1995 Plan, the 1997 Plan, the 1998 Plan and the
1999 Plan.

<TABLE>
<CAPTION>
       Number of Shares           Date of Issuance       Expiration Date         Exercise Price
----------------------------    --------------------     ---------------      -------------------
<S>                              <C>                     <C>                  <C>
           160,000                    03/20/1998            03/19/2003                   $6.91
            72,000                    05/27/1998            05/26/2003              BEF 363.63
         1,080,000                    06/11/1999            06/10/2004                       -
         ---------
         1,312,000
         =========
</TABLE>


 FAS 123 Disclosure

  In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
(SFAS No. 123), which encouraged the use of a fair value based method of
accounting for compensation expense associated with stock options and similar
plans. However, SFAS No. 123 permits the continued use of the intrinsic value
based method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, but requires additional disclosures,
including pro forma calculations of net earnings and earnings per share as if
the fair value method of accounting prescribed by SFAS No. 123 had been applied
in, 1997, 1998 and 1999. The pro forma data presented below is not
representative of the effects on reported amounts for future years since SFAS
No. 123 does not apply to awards prior to 1995 and additional awards are
expected in the future.

<TABLE>
<CAPTION>

                                                                  As Reported                                   Pro Forma
                                                     -------------------------------------    --------------------------------------

<S>                                                   <C>            <C>             <C>         <C>          <C>             <C>

                                                      1997           1998            1999         1997          1998           1999
                                                     -------------------------------------    --------------------------------------

</TABLE>

                                      F-32
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
<S>                                              <C>           <C>            <C>          <C>          <C>             <C>
Net income (loss) attributable to common
 shareholders (in thousands)...................  $   (14,276)  $    (52,678)  $     41,742  $   (18,503)  $    (64,109) $     22,227

Net income (loss) per common share.............  $     (0.20)  $      (0.52)  $       0.35  $     (0.26)  $      (0.64) $       0.19

Average shares outstanding.....................   69,863,056    100,469,190    119,423,724   69,863,056    100,469,190   119,423,724

Average fair value of grants during the year...                                             $      3.11   $       6.88  $       8.72

Black-Scholes option pricing model assumptions:
     Risk-free interest
     rate......................................                                                       5%            3%            5%

     Expected life (years).....................                                                       5             5             5
     Volatility................................                                                  Op  25%           60%           60%

</TABLE>

<TABLE>
<CAPTION>
                                      Options outstanding                                  Options Exercisable
                      ----------------------------------------------------     ----------------------------------------------------
                          Number       Weighted-Average                            Number
     Range of          Outstanding        Remaining       Weighted-Average       Exercisable                  Weighted-Average
  Exercise Prices      at 12/31/99     Contractual Life    Exercise Price        at 12/31/99                    Exercise Price
 ------------------    -----------    -----------------   ---------------      --------------                 ---------------------
                     (in thousands)                                             (in thousands)
<S>                   <C>              <C>                <C>                  <C>                            <C>
$ 0.62 -  3.47             964                4.40             $ 1.79                 946                             $ 1.78
$ 3.47 - 5.58            3,254                6.40             $ 4.07               2,554                             $ 4.06
$ 5.58 - 6.71              902                7.70             $ 6.44                 454                             $ 6.47
$ 6.71 - 11.14           1,148                7.80             $10.54                 526                             $10.58
$ 11.14 - 14.15          4,796                8.60             $14.13               1,412                             $14.13
$ 14.15 - 19.73          2,570                9.20             $16.62                  98                             $16.07
                        ------                                                      -----
                        13,634                                                      5,990
                        ======                                                      =====
</TABLE>

A summary of the activity in the plans, including the number of shares and the
weighted average exercise price, follows:

<TABLE>
<CAPTION>
                                                          1997                           1998                          1999
                                                   -------------------------  --------------------------  --------------------------

                                                                 Exercise                      Exercise                     Exercise

Summary                                             Shares        Price         Shares           Price      Shares            Price
-------------------------------------------        -------------------------  --------------------------  --------------------------

                                                   (in thousands)             (in thousands)              (in thousands)

<S>                                             <C>              <C>           <C>             <C>             <C>              <C>
Outstanding at beginning of year                        5,862       $1.54          12,682      $ 1.96          12,924       $ 4.63
Granted                                                10,310       $4.60           5,238      $12.85           4,638       $15.57
Exercised                                              (3,248)      $2.02          (4,788)     $ 3.21          (2,874)      $ 5.20
Forfeited                                                (242)      $4.23            (208)     $ 7.10          (1,054)      $10.38
                                                       ------                      ------                      ------
Outstanding at end of year                             12,682                      12,924                      13,634
                                                       ======                      ======                      ======

Options exercisable at year-end                         4,602                       4,272                       5,990
</TABLE>


(14)  Income Taxes

      Income tax expense (benefit) consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                                   ---------------------------
                                                   1997        1998       1999
                                                   -----       ------     ----
<S>                                                <C>         <C>        <C>
Current taxes :
Belgium.......................................     $    -      $   -    $ 4,354
Foreign.......................................      1,022       2,287    17,644
                                                   ------      ------   -------
                                                    1,022       2,287    21,998
                                                   ------      ------   -------
Charge-in-lieu
</TABLE>

                                      F-33
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
<S>                                                 <C>         <C>       <C>
Belgium.......................................          -          30       851
Foreign.......................................          -       1,647     7,229
                                                   ------      ------    ------
                                                        -       1,677     8,080
                                                   ------      ------    ------
Deferred taxes (benefit)
Belgium.......................................    (3,991)       1,109   (2,928)
Foreign.......................................      1,562           -         -
                                                   ------      ------    ------
                                                  (2,429)       1,109   (2,928)
Tax expense before minority interest..........    (1,407)       5,073    27,150
                                                   ------      ------    ------
Tax benefit reflected in minority
 interest.....................................          -     (1,625)   (3,024)
                                                   ------      ------    ------
Total tax expense (benefit)...................   $(1,407)     $ 3,448   $24,126
                                                   ======      ======    ======
</TABLE>

  The Company's headquarters are located in an employment zone in the Flanders
Region of Belgium. As a result, the Company was exempted from Belgian corporate
income tax through December 31, 1998. In addition, after that date, the Company
will be permitted to carry forward its Belgian accumulated taxable losses for an
indefinite period of time. As of December 31, 1997, 1998 and 1999, the amount of
these losses was approximately $44.2 million, $17.1 million and $0 million
respectively.

  The US subsidiaries of the company have approximately $112.2 million of US
federal net operating loss carryforwards which will expire during the years 2000
through 2019. The utilization of the acquired net operating loss carryforwards
is subject to annual limitations as a result of the change in ownership of the
entities that generated these losses, and it is expected that at least $18.9
million of the net operating loss will expire unused. In addition, the tax
benefits of approximately $64.9 million and $47.4  million of the total amount
of net operating loss carryforwards will be recorded as decreases to goodwill
and increases to paid-in capital, respectively, when realized or when the
valuation allowances are removed. The Company also has research and development
tax credit carryforwards for federal income tax purposes of approximately $1.4
million which are available to reduce future federal income taxes, if any,
through 2012.

  The US subsidiaries of the Company also have $56.3 million of state net
operating loss carryforwards available to offset future taxable income for state
tax purposes. These net operating loss carryforwards will expire during the
years 2000 through 2004. The tax benefits of $17.7 million and $38.7 million of
the state net operating loss carryforwards will be recorded as decreases to
goodwill and increases to paid-in capital, respectively, when realized.

  As of December 31, 1999 the Company's subsidiary in Ireland had tax losses of
approximately $3.0 million which can be carried forward indefinitely.

  As of December 31, 1999 the Company's subsidiaries in Germany had corporate
income tax losses and trade tax losses of approximately $30.1 million and $14.1
million respectively which can be carried forward indefinitely. The tax benefits
of acquired net operating loss carryforwards will be recorded as decreases to
goodwill when realized.

  Income tax expense differs from the amount computed using the statutory
Belgian income tax rate as follows (in thousands):


 Effective Rate Reconciliation

<TABLE>
<CAPTION>
                                                                                Years ended December 31,
                                                                        -------------------------------------
                                                                         1997            1998           1999
                                                                        ----------    ----------     ----------
<S>                                                                    <C>            <C>             <C>
Profit (loss) before income taxes...................................   $(14,731)       $(45,183)       $73,392
Belgian statutory rate..............................................      40.17%          40.17%         40,17%
Income tax benefit at Belgian statutory rate........................     (5,917)        (18,150)        29,481
Losses for which no tax benefit was provided........................        360               -              -
Amortization of goodwill............................................      1,470           5,817         11,244
Write-off of in-process research and development which is not
 deductible.........................................................     13,587          24,973             -
</TABLE>

                                      F-34
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
<S>                                                                       <C>           <C>           <C>
Write-off of goodwill...............................................          -          1,488             -
Non deductible expenses.............................................      1,100            750           621
Untaxed Belgian income..............................................      (511)              -             -
Effect of lower tax rates in subsidiaries...........................      (162)              -       (4,070)
Benefit of net operating loss carry forwards and government grants..    (7,451)        (7,288)       (7,525)
Loss from unconsolidated affiliate not benefited....................          -          1,657             -
Change in valuation allowance.......................................    (3,891)        (4,551)       (2,928)
Other combined......................................................          8            377           327
Provision (benefit) for income taxes................................   $(1,407)       $  5,073       $27,150
</TABLE>


  The tax effects of temporary differences that give rise to significant
portions of these deferred tax assets and liabilities at December 31, 1998 and
1999, are presented below:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                      ------------------------
                                                                                       1998             1999
                                                                                      --------         -------
                                                                                          (in thousands)
<S>                                                                                  <C>                <C>
Deferred tax assets:
   Accounts receivable related principally to allowance for doubtful accounts....    $  5,739         $  5,100
   Inventory, primarily reserves not currently deductible........................       4,817            1,520
   Accrued expenses and reserves not currently deductible........................       3,563            6,196
   Tax operating loss carry forward..............................................      50,253           54,945
   Tax credit carryforwards, including research credits..........................       1,620           11,776
   Capitalized research and development..........................................       7,529           27,200
   Fixed assets (depreciation and step-up basis of assets in Germany)............         853            5,283
   Other.........................................................................           -              177
                                                                                      -------          -------
       Total gross deferred tax assets...........................................      74,374          112,197
       Valuation allowance.......................................................    $(63,663)        $(92,746)
                                                                                      -------          -------
       Net deferred tax assets...................................................      10,711           19,451
Deferred tax liabilities:
  Unrealized exchange gains......................................................           -           (4,231)
   Licenses, principally due to depreciation.....................................        (864)          (2,568)
   Fixed assets (depreciation)...................................................        (607)            (411)
   Business acquisitions transaction costs.......................................      (4,733)          (4,782)
  Other..........................................................................           -              (24)
                                                                                       ------           ------
       Total gross deferred tax liabilities......................................      (6,204)         (12,016)
                                                                                       ------           ------
Deferred tax assets after valuation allowance less deferred tax liabilities (Net
 deferred tax assets)............................................................    $  4,507         $  7,435
                                                                                      =======          =======
</TABLE>

  During 1999, the Company increased the valuation allowance by $29.1 million to
reflect management's current estimate of the expected utilization of net
operating loss carry forwards and reversal of certain temporary differences.


(15) Related Party Transactions

 Strategic Alliance with Microsoft Corporation

     On September 10, 1997, the Company and Microsoft Corporation ("Microsoft"
entered into a strategic alliance to accelerate development of speech products
in multiple languages running on Microsoft Windows platforms. As part of this
strategic alliance, the Company and Microsoft entered into a Patent License
Agreement dated September 10, 1997, pursuant to which the Company and Microsoft
have granted certain patent licenses to each other (the "License Agreement")
and a Common Stock Purchase and Shareholders' Agreement (the "Microsoft
Purchase Agreement") dated September 10, 1997 among the Company, certain
affiliates of the Company and Microsoft, pursuant to which Microsoft agreed to
purchase 5,800,840 shares of the Company's common stock for an aggregate
purchase price of approximately $45 million ($7.7575 per share).  In addition,
each

                                      F-35
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of Microsoft and Messrs. Lernout and Hauspie agreed to certain limitations
on its or his ability to dispose of its or his capital stock in the Company.
Mr. Bernard Vergnes represents Microsoft in the Company's Board of Directors.

  Pursuant to the Microsoft Purchase Agreement, the Company has agreed to submit
to the shareholders for approval a capital increase to permit it to issue to
Microsoft warrants to purchase 1,714,284 shares of common stock at an exercise
price equal to $8.75 per share within six months following the date of the
Microsoft Purchase Agreement if, in the reasonable opinion of the Company,
Microsoft has created new business opportunities in connection with the
strategic alliance between the Company and Microsoft. In the event that the
Company fails to obtain shareholder approval for the issuance of the warrants,
Messrs. Lernout and Hauspie have agreed to provide Microsoft with financial
instruments of equal value. In December 1997, the Board of Directors of the
Company determined that Microsoft's performance under the Purchase Agreement was
complete and the Company committed to issue the warrants.  Therefore an expense
of approximately $1.8 million was recorded in December 1997.  The amount of
expense charged to income was based on the fair value of the warrants issued,
determined using an option pricing model.  In March 1999, Microsoft converted
the 1,714,284 warrants into 1,714,284 shares of common stock of the Company.

  At December 31, 1998 and 1999, respectively, Microsoft held 5,800,840
(approximately 5%) and 7,515,124 (approximately 7%) of common stock of the
Company.

  Microsoft is also a significant customer of the Company (see note 1 (v)).


  Strategic Alliance with Intel Atlantic Inc.

  On May 5, 1999, the Company and Intel Atlantic Inc. ("Intel") entered into a
Subscription and Shareholders Agreement to set up jointly a business entity to
develop e-commerce and telephony solutions using the Company's speech and
language technologies.

  On July 13, 1999, the entity was formed under the name iSAIL Solutions N.V.,
51% owned by Intel and 49% by the Company.  Intel has appointed three of the
five directors of iSAIL Solutions, and the Company has appointed the remaining
two directors.

  As described in note 13, on May 5, 1999, Intel also completed its investment
of $30 million in the Company.  Via a trust foundation, Intel Atlantic Inc.
subscribed to 895,932 shares of Automatically Convertible Stock at a price of
$33.484684 per share.

  In 1999, the Company recognized $72,000 of revenue from Intel Corporation.


 Management and Financial Services Fees with Oldco N.V.

  The Company had a Management Services Agreement and a Financial Services
Agreement with Oldco N.V. (prior to August 1996, called L&H Holding N.V.), a
major shareholder of the Company. Both agreements were for five-year terms
ending on December 31, 1997, which have been extended at that date until the
winding-up of Oldco N.V. as per October 15, 1998. Under the agreements, Oldco
N.V., through the three managing directors of the Company, provided management
services to the Company as well as services related to financing and strategic
financial management. At September 30, 1998, the Company paid a total of
approximately $105,500 per month under both agreements. Under the terms of these
agreements, payments are denominated in Belgian francs. No additional
compensation is paid by the Company to each managing director other than
reimbursement of expenses and the use of company cars. The Company paid Oldco
N.V. $1.2 million, $0.9 million and $0 million for the years ended December 31,
1997, 1998 and 1999, respectively, for services rendered under these agreements.

  Both at December 31, 1998 and December 31, 1999, there were no payables
outstanding under the Management and Financial Services Agreements to Oldco N.V.


 Management Agreement with Sarabo N.V.

  Since January 1999, the Company has a Management Agreement with Sarabo N.V.
Under the Agreement, Sarabo N.V. through one of the managing directors of the
Company, provided management services to the Company.  At December 31, 1999,

                                      F-36
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the Company paid approximately $35,400 per month under this agreement. Under the
terms of this agreement, payments are denominated in Belgian francs. The Company
paid Sarabo N.V. $0.4 million for the year ended December 31, 1999, for services
rendered under this agreement.

  At December 31, 1999, there were no payables outstanding under this Agreement.

  The Company paid a total  remuneration of approximately $70,800 per month  for
the two other managing directors.

  No additional compensation is paid by the Company to  any managing director
other than reimbursement of expenses and the use of company cars.


 Stock Transactions with Oldco and L&H Holding

  At December 31, 1998 and December 31, 1999, Oldco N.V. (prior to August 1996
called L&H Holding N.V.) held 6,303,588 shares of the Company's common stock.

  During 1996, a new legal entity was incorporated under the name L&H Holding
N.V. At December 31, 1998 and December 31, 1999, the new L&H Holding N.V. held
12,744,000 shares of the outstanding common stock of the Company. In November
1996, L&H Holding N.V. also purchased $3.3 million in principal amount of the
1996 Notes.

  Sales to Mindmaker Inc., Excalibur Technologies N.V., SwiftTouch Corporation,
Smartmove N.V., Xiox Corporation, CellPort Labs, Inc., Financial Architects
N.V., Phonetic Topographics N.V., Oceania Inc., e-DOCS.net Inc.,
LanguageWare.net Ltd., Transics N.V., EHQ Inc., Cegeka Healthcare Systems N.V.,
Dictation Consortium N.V., Speech Systems Inc., Creator Ltd., FLV Telecom N.V.,
Hogadata Benelux N.V., Vasco Data Security International Inc., BCB Voice Systems
Inc., ViA Inc., Telekol Corporation, Speech Machines Plc. and Oncuity Inc.

  The Company has recorded revenue in 1998 and 1999 from agreements with
Mindmaker Inc., Excalibur Technologies N.V., SwiftTouch Corporation, Smartmove
N.V., Xiox Corporation, CellPort Labs, Inc., Financial Architects N.V., Phonetic
Topographics N.V., Oceania Inc., e-DOCS.net Inc., LanguageWare.net Ltd.,
Transics N.V., EHQ Inc., Cegeka Healthcare Systems N.V., Dictation Consortium
N.V., Speech Systems Inc., Creator Ltd., FLV Telecom N.V., Hogadata Benelux
N.V., Vasco Data Security International Inc., BCB Voice Systems Inc., ViA Inc.,
Telekol Corporation, Speech Machines Plc. and Oncuity Inc.  All of these
companies are partly owned by Flanders Language Valley Fund C.V.A. ("FLV Fund"),
S.AI.L. Trust V.Z.W. ("S.AI.L. Trust") and/or L&H Investment Company N.V.
("LHIC").

  FLV Fund is a venture capital fund, focused on high technology based companies
that specialize in speech and language based products.  FLV Fund completed its
initial public offering on EASDAQ in June 1998.  Flanders Language Valley
Management N.V. ("FLV Management") has authority over all management decisions
on behalf of FLV Fund. Since 1998, the shares of FLV Management are held by
Lessius Management Consulting, GIMV and S.AI.L. Trust, each holding 33% of the
shares.  As at December 31, 1999, two directors of the Company presently serve
as two of the ten members of the Board of Directors of FLV Management.  Under
Belgian Law, these two directors are not permitted to participate in decisions
of the Board of Directors of the Company or FLV Management in transactions
involving both these companies, unless they disclose their conflict of interest
to the Board of Directors and cause certain reporting obligations to be complied
with by the Board of Directors and the Company's statutory auditor.

  S.AI.L. Trust (prior to September 1999 called Stichting Flanders Language
Valley V.Z.W.), a not-for-profit entity, was formed in May 1998 to further
support the economic development and to assist in the financing of the
infrastructure of the Flanders Language Valley region.  Projects to be supported
by this trust include the construction of office and educational facilities in
the Flanders Language Valley region dedicated to supporting and training speech
and linguistic engineers, support of international education to train qualified
personnel in the wide range of disciplines required by the speech and language
technologies industries, and the provision of business advisory services to
start-up companies in these industries.  Messrs. Lernout and Hauspie have
advised the Company that they do not have and do not intend to have a beneficial
interest in the assets of this trust.

  LHIC, formed in October 1998, serves as an entity focused on long term and
strategic investments in information technology  companies, with a strong
emphasis on speech, artificial intelligence and language related technologies,
products and services.  LHIC has initially been structured as L&H Holding's
parent company and is fully owned by Messrs. Lernout and

                                      F-37
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Hauspie. As at December 31, 1999, three directors of the Company presently serve
as three of the six members of the Board of Directors of LHIC. Under Belgian
Law, these three directors are not permitted to participate in decisions of the
Board of Directors of the Company or LHIC in transactions involving both these
companies, unless they disclose their conflict of interest to the Board of
Directors and cause certain reporting obligations to be complied with by the
Board of Directors and the Company's statutory auditor.


 GIMV

  In November 1992, GIMV loaned to the Company $1.5 million that was converted
into 668,000 Class C common shares in October 1994. In addition, on March 31,
1994, in consideration of additional loans totaling $1.7 million made to the
Company, the Company issued to GIMV warrants to purchase 411,932 Class C common
shares at an exercise price of $3.57 per share (converted into 438,576 warrants
to purchase common stock upon the closing of the Company's IPO). The warrants
expired on March 31, 1998 and have been converted into 438,576 shares of common
stock of the Company. The loans were repaid in full in September 1994. Through
December 31, 1995, GIMV converted 500 convertible bonds into 77,460 Class A1
common shares. Upon the closing of the Company's IPO, all Class A1 and C common
shares held by GIMV were converted into common shares of the Company. Both at
December 31, 1998, and December 31, 1999 GIMV held 2,835,056 shares
(approximately 3%) of common stock of the Company.


  Investment in Mindmaker Inc. (prior to November 1998 called Associative
Cognition Inc. and prior to August 1998 called Associative Computing Inc.
("ACI"))

  During 1997, the Company acquired for cash 638,700 shares of Series B
Preferred Stock of Mindmaker for a total consideration of $3.5 million.  Both at
December 31, 1998 and 1999, respectively, the purchased shares represented 10%
of the outstanding stock of Mindmaker on an as converted basis.  The investment
is carried at cost.  A company representative is one of the seven members of the
Board of Directors of Mindmaker. In 1998 and 1999, respectively, the Company
recognized revenue from Mindmaker in an amount of $1,050,000 and $50,000.


 Investment in BCB Voice Systems Inc.

  In 1998, BCB Voice Systems issued and delivered to the Company, a non-interest
bearing convertible note in the principal amount of $1,600,000, convertible in
1998 into 909,090 common shares of BCB Voice Systems.  The contribution of the
note to the capital of the Company resulted in the issuance of 53,334 common
shares of the Company to BCB Holdings.  Both at December 31, 1998 and 1999 the
Company held 909,090 shares of BCB Voice Systems, representing 16% and 12%
respectively of the outstanding stock of BCB Voice Systems. The investment is
carried at cost.  On February 5, 1999, the Company guaranteed an amount of
$750,000 Convertible Debentures issued by BCB Voice Systems to TrustCapital
Partners N.V. and a $750,000 operating line of credit of BCB Voice Systems with
the National Bank of Canada and received in consideration therefor an aggregate
of 750,000 warrants to purchase 750,000 common shares at an exercise price of
$0.711 per share.  The warrants expire on or before February 5, 2001.  As from
the date of the investment until December 31, 1998,  the Company recognized
revenue from BCB Voice Systems in an amount of $500,000.


 Investment in Speech Machines Plc

  In 1998, the Company acquired for cash 2,255,000 Series B Convertible
Cumulative Redeemable Preference Shares of Speech Machines for a total
consideration of $3.9 million.  At December 31, 1998 and 1999, respectively, the
purchased shares represented 18% and 13% of the outstanding stock of Speech
Machines on an as converted basis.  The investment is carried at cost.  On
September 29, 1998 Speech Machines and the Company also entered into an
Authorized Reseller Agreement, which has been amended on January 15, 1999.
Under this Agreement, the Company shall pay revenues to Speech Machines of not
less than $1,250,000.  In 1998 the Company recognized revenue from Speech
Machines in an amount of $819,181.  No revenue was recognized during 1999.

  Investment in LanguageWare.net Ltd. (prior to October 1999 called Accent
Software International Ltd.)

                                      F-38
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)

  In 1998, the Company acquired 4,000 shares of Series C Preferred Stock of
LanguageWare.net for a total consideration of $4 million in cash.  At December
31, 1998 and 1999, respectively, the purchased shares represented 23% and 20% of
the outstanding stock of LanguageWare.net on an as converted basis. In 1999, the
Company recognized revenue from LanguageWare.net in an amount of $35,000.

 Loan agreement with Vasco Data Security International, Inc.

  In 1998, the Company entered into an interest bearing loan agreement, at prime
rate +1% (9.5% at December 31,1998), with Vasco Data Security International.
The Company loaned to Vasco Data Security International $3 million.  All
outstanding principal and interest was due and payable in full on January 4,
1999 and have been paid in full in April 1999. In 1998 the Company recognized
revenue from Vasco Data Security International in an amount of $1,700,000.  No
revenue was recognized in 1999.

 Investment in Sail Labs Holding N.V. (prior to April 1999 called Sail Labs
N.V.)

  On January 27, 1999, the Company participated in the formation of Sail Labs
Holding N.V. for the purpose of developing advanced speech and language
technologies and products.  After several capital increases, the Company held
275,000 shares of Sail Labs Holding, representing 19.9% of the outstanding
stock of Sail Labs Holding.  On March 23, 1999, the Company has entered into a
license and development agreement with Sail Labs Holding pursuant to which the
Company has licensed the Company's existing technology to Sail Labs Holding on a
non-exclusive basis and Sail Labs Holding has undertaken long-term development
projects to improve and enhance the Company's speech and language technologies
and products.  Sail Labs Holding has the right, subject to the Company's
consent, to engage the Company's employees in connection with the development
projects that it has undertaken pursuant to the agreement.  The Company has the
right to invoice Sail Labs Holding for all expenses associated with its use of
the Company's employees, including wages and overhead expenses.  In 1999, the
Company invoiced an amount of $2,140,597 to Sail Labs Holding.

 Investment in ESL.com Limited

   On June 11, 1999, Lernout & Hauspie Asia Pte. Ltd., a wholly owned subsidiary
of Lernout & Hauspie Speech Products N.V., Group Sense Limited and Huajian
Electronic Corporation Limited formed a new business venture in Hong Kong, named
ESL.com Limited, to promote English learning as a second language in the
People's Republic of China through the use of internet and handheld electronic
devices.  At December 31, 1999, Lernout & Hauspie Asia Pte. Ltd., Group Sense
Limited and Huajian Electronic Corporation respectively held 19%, 51% and 30% of
ESL.com Limited.  In 1999, the Company recognized revenue from ESL.com Limited
in an amount of $1,000,000.

(16)  Commitments and Contingencies

 Contingent Considerations Payable for Acquisitions

      The Company is committed to pay the previous shareholders of acquired
companies a maximum amount of approximately $9.7  million if certain financial
performance targets of profitability are reached by these companies (see note
5).


 Class Action Lawsuit

  The Company is a named party in a consolidated class action lawsuit which
alleges, in general, that the Company improperly accounted for write-offs of in-
process research and development in connection with certain acquisitions. The
lawsuit contends that the Company's actions violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 (the "34 Act") and Rule 10b-5 promulgated
under the 34 Act. Plaintiffs filed these lawsuits on behalf of all purchasers of
the Company's common stock during varying periods which range from as early as
April 28, 1997 through December 4, 1998. These plaintiffs seek: (1) unspecified
compensatory damages; (2) attorneys' and experts' fees; and (3) other relief.

                                      F-39
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  The Company believes that the claims are groundless and the Company is
vigorously defending itself. Nevertheless, class action litigation can be
expensive and time consuming. Although the Company cannot make any guarantees
regarding the outcome of these actions, it believes that the outcome will not
have material adverse effect on the Company's business, financial condition or
results of operations.

(17)  Segment Information

  The following table summarizes financial information by geographic area (in
thousands):

 Revenues by Destination

<TABLE>
<CAPTION>
                                                             Years ended December 31,
                                           ------------------------------------------------------------
                                               1997                     1998                    1999
                                           ---------------       ---------------         --------------
<S>                                        <C>                   <C>                     <C>
United States........................           $26,524                $ 79,695                $ 79,286
Belgium..............................            40,375                  58,930                  34,343
Europe, other........................            25,709                  63,315                  79,079
Singapore............................                 -                      29                  80,297
Korea................................             1,645                     245                  62,874
Far East, other......................             5,118                   9,378                   8,358
                                                -------                --------                --------
                                                $99,371                $211,592                $344,237
                                                =======                ========                ========
</TABLE>

 Long-lived Assets

<TABLE>
<CAPTION>
                                                             Years ended December 31,
                                               ----------------------------------------------------------
                                                   1997                      1998                  1999
                                               ------------              ------------           ---------
<S>                                            <C>                   <C>                     <C>
United States........................             $ 52,273                $117,115                $128,032
Belgium..............................               18,477                  57,772                 141,115
Europe, other........................               31,442                  97,659                 101,782
Singapore............................                    -                   5,434                   5,169
Korea................................                    -                       -                  52,471
Far East, other......................                2,954                   5,098                   4,269
                                                  --------                --------                --------
                                                  $105,146                $283,078                $432,838
                                                  ========                ========                ========
</TABLE>

  The following tables summarize financial information by business unit (in
thousands):

 1997

<TABLE>
<CAPTION>
                                               Technologies                               Consulting
                                                     &                                        &
                                                 Solutions           Applications          Services               Total
                                             ----------------        ------------         ----------            -----------
<S>                                          <C>                     <C>                  <C>                   <C>
Revenues..................................            $33,402            $ 34,307             $31,662           $ 99,371
Depreciation and amortization.............             (3,281)             (3,241)             (3,242)            (9,764)
Write off of in-process research and
 development..............................             (7,723)            (26,100)                  -            (33,823)

Segment profit (loss).....................             15,677              (7,824)              9,162             17,015
Segment assets............................             37,559              41,400              48,334            127,293
</TABLE>

                                      F-40
<PAGE>

<TABLE>
<CAPTION>
<S>                                                    <C>                  <C>                  <C>               <C>
Capital expenditures......................              3,156                 803                 498              4,457
</TABLE>


 1998

<TABLE>
<CAPTION>
                                               Technologies                             Consulting
                                                    &                                       &
                                                Solutions         Applications           Services             Total
                                               -----------       -------------           ---------            -----
<S>                                          <C>                 <C>                 <C>                 <C>
Revenues..................................           $ 82,809            $ 60,883            $ 67,900           $211,592
Depreciation and amortization.............           (10,131)            (12,286)             (4,068)           (26,485)
Write off of in-process research and
 development..............................           (12,910)            (66,463)                   -           (79,373)

Segment profit (loss).....................           (47,032)            (35,850)              24,910             36,092
Segment assets............................             92,651             151,318             108,218            352,187
Capital expenditures......................              2,929               2,850               1,785              7,564
</TABLE>


 1999

<TABLE>
<CAPTION>
                                               Technologies                                Consulting
                                                     &                                         &
                                                 Solutions            Applications          Services             Total
                                               -------------          ------------         ----------           -------
<S>                                            <C>                    <C>                  <C>                  <C>
Revenues..................................           $138,660            $113,693            $ 91,884           $344,237
Depreciation and amortization.............            (18,533)            (21,838)             (6,437)           (46,808)
Segment profit (loss).....................            100,492              72,867              29,814            203,173
Segment assets............................            255,540             157,347             109,538            522,425
Capital expenditures......................              6,075               2,036               2,434             10,545
</TABLE>


 Reconciliation of Segment Information

<TABLE>
<CAPTION>
                                                                      Years ended December, 31
                                                       ----------------------------------------------------
                                                       1997                   1998                     1999
                                                       ----                   ----                     ----
Profit and loss statement
<S>                                                    <C>                    <C>                     <C>
 Total profit (loss) for reportable segments.          $ 17,015               $ 36,092                $203,172
 Unallocated amounts :
  Transition expense.........................              (695)                (1,821)                      -
  General and administrative.................           (23,086)               (52,848)                (87,270)
  Research and development...................             6,393)               (25,165)                (49,621)
  Litigation.................................              (757)                     -                       -
  Other income (expense).....................              (815)                (1,441)                  7,111
                                                        -------                -------                --------
Loss before income taxes and minority
 interest....................................          $(14,731)              $(45,183)               $ 73,392
                                                        =======                =======                 =======
</TABLE>

<TABLE>
<CAPTION>
                                                                     Years ended December 31,
                                                       --------------------------------------------------
                                                       1997                  1998                    1999
                                                       ----                  -----                   ----

Assets :
<S>                                                    <C>                  <C>                    <C>
Total assets for reportable segments.........         $127,293              $352,187                 $522,425
 Unallocated amounts :
</TABLE>

                                      F-41
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<S>                                                       <C>                     <C>                       <C>
  Cash.......................................              127,822                188,464                   125,730
  Marketable securities......................                    -                    965                     4,900
  Other current assets.......................                5,244                 13,308                    18,814
  Deferred financing costs...................                  823                      -                         -
  Investments................................                6,875                 12,103                    14,433
  Deferred tax assets........................                3,991                  4,507                     7,435
                                                           -------                -------                   -------
Total assets.................................             $272,048               $571,534                  $693,737
                                                           =======                =======                   =======
</TABLE>

(18)  Major Customers (see note 1v)

  The following table summarizes sales to major customers (sales in excess of
10% for the year) as a percentage of total sales:

<TABLE>
<CAPTION>
                                                                      Years ended December 31,
                                                         --------------------------------------------------
                                                         1997                   1998                   1999
                                                         -------              ---------              ------
<S>                                                      <C>                      <C>                   <C>
Customer A...................................              19%                    -                      -
Customer B...................................              13%                   12%                     9%
Customer C...................................              15%                    9%                     1%
</TABLE>


(19)  Engineering Revenues

  The following is a table of engineering revenues and cost of engineering
revenues included in the various businesses (in thousands).

<TABLE>
<CAPTION>
                                                                    Years ended December 31,
                                                        --------------------------------------------------
                                                        1997                   1998                   1999
                                                        ----                   ----                   ----
Revenues :
<S>                                                   <C>                      <C>                   <C>
      Technologies & Solutions...........              $ 8,164                $12,446                 4,811
      Applications.......................               23,896                  9,330                 1,000
      Consulting & Services..............                    -                      -                     -
                                                        ------                 ------                 -----
                                                       $32,060                 21,776                 5,811
                                                        ======                 ======                 =====
Cost of sales
      Technologies & Solutions...........              $ 3,269                $ 6,894                $3,416
      Applications.......................              $10,785                  3,117                   744
      Consulting & Services..............                    -                      -                     -
                                                        ------                 ------                 -----
                                                       $14,054                $10,011                $4,160
                                                        ------                 ------                 -----
Gross profit                                           $18,006                $11,765                $1,651
                                                        ======                 ======                 =====
</TABLE>

(20)  Subsequent Events (unaudited)

     On January 19, 2000, the Company issued 29,490 shares within the framework
of an asset purchase agreement entered into with Colette Consulting Group.

     On January 19, 2000, the Company acquired the assets of Omni-Med
Transcription Inc. The Company paid $10 million in cash and $14 million through
a promissory note, payable in each case on April 3, 2000. In addition, the
Company is committed to pay up to an additional $6 million for this business
acquisition. The additional consideration will become payable if certain
financial targets are met in 1999 and 2000.

                                      F-42
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  On January 27, 2000 the Company issued 1,142,856 shares of common stock at a
purchase price of $26.25 per share to an institutional investor.

  On January 27, 2000 the Company acquired  Linguistic Technologies, Inc.
("LTI") through the merger of LTI with a wholly-owned subsidiary of the Company.
The Company paid  approximately $9.5 million in cash for LTI, of which $1
million  is being held in escrow to secure LTI's  indemnification obligations
under the merger agreement. In addition, the Company will be obliged to pay up
to an additional  $2.75 million to the former shareholders of LTI if certain
milestones are met by LTI before April 27, 2001.

  On February 1, 2000, the Company issued 1,142,858 shares of common stock at a
purchase price of $26.25 per share to an institutional investor.

  On February 18, 2000 the Company acquired Elan Informatique S.A. ("ELAN").
The Company paid $5.1 million in cash.  In addition the Company will be obliged
to pay up an additional $8 million to the former shareholders of ELAN if certain
milestones for the business years 2000 and 2001 are met by ELAN.

  On March 31, 2000, the Company issued 720,000 shares of common stock at a
purchase price of $55.75 per share to an institutional investor.

  On April 3, 2000, the Company issued 500,000 shares of common stock at a
purchase price of $56.50 per share to an institutional investor.

  In April 2000, the Company acquired Interactive Systems Inc., a Pittsburgh-
based speech and language technology developer, for approximately $8.9 million
in cash with a $4 million earn-out over 2 years.

  In May 2000, the Company entered into an agreement to acquire additional
assets of Rodeer Systems, Inc., consisting of Rodeer's business operations in
the states of Arizona, Georgia, Minnesota, Oklahoma, Texas and some operations
in California for an aggregate purchase price of approximately $25 million in
cash.

 Acquisition of Dictaphone Corporation

  On May 5, 2000, the Company acquired all of the outstanding capital stock of
Dictaphone Corporation through a merger of Dictaphone into one of its wholly-
owned subsidiaries. Dictaphone Corporation, headquartered in Stratford
Connecticut, is a leader in selected vertical markets in the development,
manufacture, marketing, service and support of integrated voice and data
management systems and software, including dictation, voice processing, voice
response, unified messaging, records management, call center monitoring systems
and communications recording.  Dictaphone has two operating segments, System
Products and Services and Contract Manufacturing.  The System Products and
Services segment consists of the sale and service of system-related products to
dictation and voice management and communications recording system customers in
selected vertical markets.  The Contract Manufacturing segment consists of the
manufacturing operations which provides outside electronics manufacturing
services to original equipment manufacturers in the telecommunication, data
management, computer and electronics industries.

  In connection with the merger the Company issued a total of approximately 9.4
million shares of its common stock in exchange for all of the outstanding shares
of Dictaphone common stock. The Company was also required to assume or refinance
approximately $430 million of Dictaphone debt and other obligations. The Company
will use the purchase method to account for this acquisition.

  The shares issued in the merger initially have not been registered under the
U.S. Securities Act, and are subject to restrictions on transfer as set forth in
that Act and the rules and regulations of the U.S. Securities and Exchange
Commission. The Company has granted the stockholders of Dictaphone registration
rights for the shares of common stock which they received in the merger.
Stonington Capital Appreciation Fund 1994, L.P., which owned approximately 96%
of the issued and outstanding Dictaphone common stock, has agreed to hold
approximately 3.6 million shares of common stock which it received in the merger
for a period of two years.

  During the two year period following the merger, Stonington has assigned
certain voting rights to all the shares it acquired in the merger for so long as
it holds the shares by agreeing to hold the shares through an entity controlled
by Messrs. Jo Lernout and Pol Hauspie. In addition, subject to conditions, the
Company has agreed to nominate a designee of Stonington for election as

                                      F-43
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

one of its directors, and entities controlled by Messrs. Lernout and Hauspie
have agreed to vote their shares to elect that nominee.

  In connection with the Dictaphone acquisition, the Company was required to
assume or refinance approximately $430 million of Dictaphone debt and other
obligations.  Dresdner Bank Luxembourg S.A., Deutsche Bank N.V., Artesia Banking
Corporation N.V., KBC Bank N.V. and Fortis Bank N.V. collectively provided a
total of $430 million in financing in connection with the acquisition.  The
acquisition financing consisted of a $200 million short-term debt facility due
March 31, 2001 which bears interest at LIBOR plus 100 basis points and a $230
million five year declining balance facility which bears interest at LIBOR plus
175 basis points.  In addition, Deutsche Bank has provided an ongoing $20
million revolving credit facility to Dictaphone which bears interest  at LIBOR
plus 125 basis points.  These credit facilities are unsecured and contain
financial and other covenants, including a covenant that the Company not borrow
any additional amounts under its existing credit facilities.  Borrowings under
the five year facility will be for renewable terms of up to six months and
therefore may be required to be accounted for as short term debt.

  Initial funding of $200 million under the short term facility and $30 million
under the five year facility was used to repay Dictaphone's existing bank debt,
to satisfy other obligations in connection with the acquisition and to cover
closing costs.  The remaining committed amount will be available to cover the
$200 million of Dictaphone's senior subordinated notes, should they be put to
the Company within 90 days of the closing by the noteholders at 101% of par, as
permitted by the terms of the notes. These notes are also redeemable by
Dictaphone at a declining rate beginning at 105.875% of par commencing in August
2000.

 Acquisition of Dragon Systems

  On June 7, 2000, the Company acquired Dragon Systems, Inc. through its merger
with and into one of its wholly-owned subsidiaries.  Dragon Systems,
headquartered in Newton, Massachusetts, is a leading supplier of speech and
language technology. Dragon Systems' product offerings include continuous and
discrete dictation products for consumer, business and professional markets,
command and control programs, vertical market add-on vocabularies for
specialized applications, such as legal and medical, customized telephony
solutions, and developers' tools.

  In connection with the merger, the Company issued approximately 10.01 million
shares of common stock to Dragon stockholders in exchange for all of the
outstanding shares of Dragon common stock.  In addition, the Company converted
all outstanding Dragon stock options into options to acquire approximately 1.65
million shares of its common stock at a weighted average exercise price of
$20.15 per share.  The Company intends to use the purchase method to account for
this acquisition.

  The shares issued in the merger initially were not registered under the U.S.
Securities Act, and are subject to restrictions on transfer as set forth in that
Act and the rules and regulations of the U.S. Securities and Exchange
Commission. The Company has granted the stockholders of Dragon Systems
registration rights for the shares of common stock which they received in the
merger.  Principal Stockholders of Dragon Systems have agreed not to sell
approximately 4.69 million of the shares which they received in the merger for a
period of four months, and approximately 4.69 million shares for a period of one
year.  These stockholders have also assigned voting rights to all the shares
subject to the restrictions on transfer to entities controlled by Messrs. Jo
Lernout and Pol Hauspie.

                                      F-44