According to the Company’s Form 10-K for the fiscal year ended December 31, 2003, in April 2003, in response to the Company’s motion to dismiss, certain of the plaintiffs’ claims were dismissed with prejudice. However, plaintiffs were permitted to file a further amended complaint with respect to several remaining claims. In November 2003, a settlement and dismissal of the action was approved by the Court. The settlement was funded entirely by the defendants’ insurers in August and September 2003.

As stated in the Notice of Pendency and Proposed Settlement, the parties reached an agreement-in-principle to settle the action. The proposed settlement creates a fund in the amount of $11,000,000 in cash (the "Settlement Fund") and will include interest that accrues on the fund prior to distribution. Depending on the number of eligible shares purchased by Settlement Class Members who elect to participate in the settlement and when those shares were purchased and sold, the estimated average recovery per share will be approximately $0.92 before deduction of Court-approved fees and expenses.

If the settlement is approved by the Court, counsel for the plaintiffs will apply to the Court for attorneys' fees of 30% of the Settlement Fund and reimbursement of out-of-pocket expenses not to exceed $250,000 to be paid from the Settlement Fund. If the amount requested is approved by the Court, the average cost per share will be $0.29.

The original complaint charges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint alleges the Nuance and certain of its officers and directors disseminated materially false and misleading statements concerning, among other things, the Company's revenue growth and improved profitability, while concealing material adverse information concerning the declining demand for the Company's products and services. As a result, Nuance stock traded at artificially inflated prices throughout the Class Period. During the time that defendants touted the Company's historical and anticipated growth and improved profitability, Company insiders sold more that $15 million in Nuance stock.

The complaint further alleges that on March 15, 2001, Nuance announced that its First Quarter 2001 performance was not on track, that revenue was shrinking, and that a loss three times the size of that which was previously expected was forthcoming. Following the Company's announcement, the price of the Company's stock fell over 40%.

Nuance attributes the revenue shortfall primarily to general economic conditions, which have led customers and customer prospects to postpone capital investment in Nuance products and service offerings based on Nuance products. The company believes its visibility is limited for both the second quarter and full-year results.