SPEECHWORKS INTERNATIONAL INC
S-1/A, 2000-07-31
PREPACKAGED SOFTWARE
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<PAGE>


   As filed with the Securities and Exchange Commission on July 31, 2000
                                                      Registration No. 333-35164

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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                              Amendment No. 5
                                       to
                                    FORM S-1
                             REGISTRATION STATEMENT

                                     UNDER
                           THE SECURITIES ACT OF 1933

                        SPEECHWORKS INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)

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

         Delaware                    8731                    04-3239151
     (State or other          (Primary Standard           (I.R.S. Employer
     jurisdiction of      Industrial Classification    Identification Number)
     Incorporation or            Code Number)
      organization)

                        SPEECHWORKS INTERNATIONAL, INC.
                              695 Atlantic Avenue
                          Boston, Massachusetts 02111
                                 (617) 428-4444
  (Address, Including Zip Code, And Telephone Number, Including Area Code, Of
                   Registrant's Principal Executive Offices)

                              STUART R. PATTERSON
                            Chief Executive Officer
                        SpeechWorks International, Inc.
                              695 Atlantic Avenue
                          Boston, Massachusetts 02111
                                 (617) 428-4444
 (Name, Address, Including Zip Code, And Telephone Number, Including Area Code,
                             Of Agent For Service)

                                   Copies to:
                               -----------------
       Steven P. Rosenthal, Esq.                 John A. Burgess, Esq.
       Michael L. Fantozzi, Esq.                William S. Gehrke, Esq.
      Mintz, Levin, Cohn, Ferris,                  Hale and Dorr LLP
        Glovsky and Popeo, P.C.                     60 State Street
          One Financial Center                      Boston, MA 02109
            Boston, MA 02111                         (617) 526-6000
             (617) 542-6000

  Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
  If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [ ]
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [ ]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
                               -----------------

                        CALCULATION OF REGISTRATION FEE
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                  Proposed     Proposed Maximum
  Title of Each Class of       Amount to be   Maximum Offering    Aggregate          Amount of
Securities to be Registered   Registered(1)    Price Per Unit   Offering Price  Registration Fee(2)
---------------------------------------------------------------------------------------------------
<S>                          <C>              <C>              <C>              <C>
Common Stock, par value
 $.001 per share.......      5,462,500 shares      $19.00        $103,787,500         $27,400
---------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------

(1) Includes 712,500 shares that the underwriters have an option to purchase
    from SpeechWorks to cover over-allotments, if any.

(2) In accordance with Rule 457(a) under the Securities Act of 1933 we are only
    paying an additional fee of $4,630 as $22,770 was previously paid on April
    19, 2000.
                               -----------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and we are not soliciting an offer to buy      +
+these securities in any state where the offer or sale is not permitted.       +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

                 SUBJECT TO COMPLETION DATED JULY 31, 2000

PROSPECTUS

                                4,750,000 Shares

                        [SPEECHWORKS LOGO APPEARS HERE]

                                  Common Stock

   This is an initial public offering of common stock by SpeechWorks
International, Inc. SpeechWorks is selling 4,750,000 shares of common stock.
The estimated initial public offering price will be between $17.00 and $19.00
per share.

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

   Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol SPWX.

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

<TABLE>
<CAPTION>
                                                                 Per Share Total
                                                                 --------- -----
<S>                                                              <C>       <C>
Initial public offering price................................... $         $
Underwriting discounts and commissions.......................... $         $
Proceeds to SpeechWorks, before expenses........................ $         $
</TABLE>

   SpeechWorks has granted the underwriters an option for a period of 30 days
to purchase up to 712,500 additional shares of common stock.

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

         Investing in our common stock involves a high degree of risk.
                    See "Risk Factors" beginning on page 6.

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

   Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

Chase H&Q
                 J.P. Morgan & Co.

                                                      U.S. Bancorp Piper Jaffray

          , 2000
<PAGE>

     There will be a center graphic, which is a montage of images of people
speaking on telephones. The tagline below the image states: SpeechWorks brings
the web model of self-service to the telephone. The SpeechWorks logo will be
below the tagline.
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   1
Risk Factors.............................................................   6
Forward-Looking Statements...............................................  15
Use of Proceeds..........................................................  16
Dividend Policy..........................................................  16
Capitalization...........................................................  17
Dilution.................................................................  19
Selected Consolidated Financial Data.....................................  21
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  23
Business.................................................................  35
Management...............................................................  53
Principal Stockholders...................................................  60
Certain Transactions.....................................................  63
Description of Capital Stock.............................................  65
Shares Eligible for Future Sale..........................................  67
Underwriting.............................................................  69
Legal Matters............................................................  71
Experts..................................................................  71
Where You Can Find More Information......................................  71
Index to Financial Statements............................................ F-1
</TABLE>
<PAGE>

                               PROSPECTUS SUMMARY

     This summary highlights selected information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including "Risk
Factors" beginning on page 6 and our consolidated financial statements and
related notes beginning on page F-1, before making an investment decision.

                                  SpeechWorks

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

     We currently offer two speech recognition solutions for over-the-telephone
applications, the SpeechWorks 6 platform and our recently introduced SpeechSite
package. SpeechWorks 6 is a comprehensive set of software tools and core speech
recognition technologies that can be used to build state-of-the-art, speech-
activated services. With our SpeechWorks 6 platform, companies can quickly
design and deploy speech-activated applications, in multiple languages, that
enable their customers to buy travel tickets, trade mutual funds, get health
care referrals, update account records, send messages and conduct a myriad of
other transactions that extend web-based e-business to any telephone.

     SpeechSite, which is based on the SpeechWorks 6 platform, is a packaged
application that brings the web model of self-service to the telephone.
SpeechSite answers and directs telephone calls and delivers company
information. Like a website, SpeechSite can link to other services and deliver
various types of information services to callers. However, SpeechSite uses a
spoken interface rather than a visual browser.

     We complement our products with a professional services organization that
offers a range of services including application development and project
management. We have designed these services to shorten time-to-market, reduce
project implementation risk and improve our clients' competitive position. We
believe that our ability to successfully deliver an integrated solution to our
clients that includes both software and professional services provides us with
a significant competitive advantage.

     Enterprises are building speech-activated services with our products that
will automate and enhance customer service by making it easier for customers to
retrieve information and conduct transactions without waiting on hold or
speaking to an agent. Examples of phrases that can be understood by
applications enabled by our software are: "What is my checking account
balance?" and "Buy 100 shares of General Electric at the market price." These
services can improve the caller's experience and reduce the need for expensive
customer service representatives.

     Communication carriers and their partners are building speech-activated
services with our products that we believe have the potential to change the way
people use the telephone for network services. Applications have been built,
and enabled by our software, that can understand phrases such as "Call Mike
Phillips at home," and "Forward this message to Bill O'Farrell." In addition, a
new class of service providers, known as voice or speech portals, is using our
software to build applications that can understand phrases such as: "What is
the weather in Paris?" and "What was the score of the Red Sox game today?"
These services can differentiate one carrier's service offering from another
and increase the ability of carriers to attract and retain users.

                                       1
<PAGE>


     Since shipping our first products in 1996, we have received numerous
awards for our product capabilities and our industry leadership, including
Industry Week's Technology of the Year Award and Frost & Sullivan's Market
Strategy Leadership Award. To date, we have licensed SpeechWorks software to
more than 170 clients worldwide in a variety of industries including retail,
financial services, pharmaceuticals, telecommunications, technology,
distribution and travel. Our clients include Amtrak, Apple Computer, BellSouth
IntelliVentures, CellularOne, Continental Airlines, DLJ Direct, E*TRADE,
MapQuest.com, MCI WorldCom, McKessonHBOC, NetByTel.com, Nortel Networks,
Quack.com, SingTel Mobile, United Airlines and Universal Electronics.

     Our goal is to become the leading global provider of speech-activated
solutions. The key elements of our strategy are to:

   .  maintain our leadership position in the market for speech-enabled
      business solutions,

   .  extend our technology lead,

   .  leverage our professional services capabilities to accelerate
      acceptance of our speech-activated solutions,

   .  expand our international presence,

   .  expand our sales channels to drive market penetration, and

   .  build awareness of our brand.

Recent Developments

     In June 2000, we entered into a development and license agreement with
AT&T Corp. to develop and sell products that use AT&T speech technology. The
technology includes AT&T's speech software and text-to-speech software, as well
as other technology related to computer processing of the human voice. AT&T has
agreed to assist us in marketing to AT&T business units the products and
services that we develop. In return for these licenses and assistance, we
issued 1,045,158 shares of common stock to AT&T.

     In June 2000, we entered into a software license, professional services
and marketing agreement with America Online to enable America Online to develop
voice portals to its online services. In connection with this agreement,
America Online has agreed to purchase $5.0 million of our common stock in a
private placement concurrent with this offering at a purchase price per share
equal to the lesser of $12.46 and 89% of the price to the public in this
offering. In addition, we have issued America Online warrants to purchase up to
765,422 shares of our common stock at an exercise price per share equal to the
lesser of $12.46 and 89% of the price to the public in this offering.

     In June 2000, we entered into a letter of intent with Net2Phone under
which we will grant a software license and provide professional services to
Net2Phone and pursue joint marketing and promotional efforts. In connection
with this letter of intent, Net2Phone has agreed to purchase $4.0 million of
our common stock in a private placement concurrent with this offering at a
purchase price per share equal to the lesser of $12.46 and 89% of the price to
the public in this offering.

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

     Our principal executive offices are located at 695 Atlantic Avenue,
Boston, Massachusetts 02111. Our telephone number is 617-428-4444. Our primary
web site is located at www.speechworks.com. The information contained on this
web site is not a part of this prospectus. We were incorporated in
Massachusetts in May 1994 and reincorporated in Delaware in August 1995.

                                       2
<PAGE>


                                  The Offering

<TABLE>
<CAPTION>
<S>                                         <C>
Common stock offered by SpeechWorks........ 4,750,000 shares
Common stock to be outstanding after this
 offering.................................. 28,999,868 shares
Use of proceeds............................ Primarily for general corporate purposes, including
                                            working capital, sales and marketing, research and
                                            development, capital expenditures and potential
                                            strategic acquisitions or investments. See "Use of
                                            Proceeds."
Proposed Nasdaq National Market symbol..... SPWX
</TABLE>

     The share amounts in the above table are based on shares outstanding as of
June 20, 2000. The above table excludes:

   .  9,702,322 shares of common stock reserved for issuance under our stock
      option plans, of which 5,548,078 shares are issuable upon exercise of
      stock options outstanding as of June 20, 2000 with a weighted average
      exercise price of $2.88 per share,

   .  854,947 shares of common stock reserved for issuance upon the exercise
      of warrants outstanding as of June 20, 2000 with a weighted average
      exercise price of $2.35 per share,

   .  765,422 shares of common stock reserved for issuance upon the exercise
      of warrants issued to America Online on June 30, 2000 with an exercise
      price per share equal to the lesser of $12.46 and 89% of the price to
      the public in this offering, and

   .  200,000 shares of common stock reserved for issuance under our employee
      stock purchase plan.

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

     Unless otherwise indicated, all information in this prospectus:

   .  reflects the automatic conversion of all of our outstanding convertible
      preferred stock into 16,415,158 shares of common stock upon the closing
      of this offering,

   .  reflects a three-for-two stock split of shares of our common stock
      effected on January 5, 2000,

   .  reflects the issuance in private placements concurrent with this
      offering of 401,284 shares of common stock to America Online and
      321,027 shares to Net2Phone based upon an assumed initial public
      offering price of $18.00 per share, the mid-point of the range set
      forth on the cover page of this prospectus,

   .  assumes the filing of our restated certificate of incorporation and the
      adoption of our amended and restated bylaws, each as contemplated to be
      in effect as of the closing of this offering, and

   .  assumes no exercise of the underwriters' over-allotment option.

                                       3
<PAGE>

                      Summary Consolidated Financial Data

     The table below sets forth summary financial data for the periods
indicated. It is important that you read this information together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes for the
years ended December 31, 1997, 1998 and 1999 and the three-month periods ended
March 31, 1999 and 2000 beginning on page F-1. The pro forma basic and diluted
net loss per common share reflects the assumed conversion of all outstanding
convertible preferred stock into common stock upon completion of this offering
as if such conversion occurred on January 1, 1999 or, if later, the date of
original issue.

<TABLE>
<CAPTION>
                                                          Three Months Ended
                              Year Ended December 31,          March 31,
                              --------------------------  --------------------
                               1997     1998      1999      1999       2000
                              -------  -------  --------  ---------  ---------
                                 (in thousands, except per share data)
<S>                           <C>      <C>      <C>       <C>        <C>
Consolidated Statement of
 Operations Data:
Total revenue...............  $ 2,042  $ 5,850  $ 14,011  $   3,290  $   5,087
Gross profit (excluding
 stock compensation of $139,
 $5 and $93 in 1999 and the
 three month periods ended
 March 31, 1999 and 2000,
 respectively)..............    1,220    2,926     5,880      1,068      3,198
Loss from operations........   (2,880)  (5,979)  (15,739)    (2,475)    (6,107)
Net loss....................   (2,520)  (5,760)  (15,463)    (2,460)    (6,099)
Net loss attributable to
 common stockholders........   (3,053)  (6,549)  (17,367)    (2,703)    (6,699)
Basic and diluted net loss
 per common share...........  $ (0.83) $ (1.44) $  (3.28) $   (0.57) $   (1.19)
Shares used in computing
 basic and diluted net loss
 per common share...........    3,696    4,537     5,298      4,784      5,644
Pro forma basic and diluted
 net loss per common share..                    $  (0.87)            $   (0.31)
Shares used in computing pro
 forma basic and net loss
 per common share...........                      17,686                19,515
</TABLE>

     The pro forma balance sheet data give effect to:

   .  the issuance of 2,544,681 shares of series E convertible preferred
      stock on April 11, 2000 for net proceeds of $19.9 million,

   .  the issuance to AT&T of 1,045,158 shares of common stock on June 5,
      2000, and

   .  the automatic conversion upon the completion of this offering of all of
      our outstanding convertible preferred stock into a total of 16,415,158
      shares of common stock.

     The pro forma as adjusted balance sheet data further adjusts the pro forma
data to give effect to:

   .  the sale by us in this offering of 4,750,000 shares of common stock at
      an assumed initial offering price of $18.00 per share, the mid-point of
      the range set forth on the cover page of this prospectus which, after
      deducting the underwriting discounts and commissions and estimated
      offering expenses, results in net proceeds to us of $77.8 million,

   .  the issuance in private placements concurrent with this offering of
      401,284 shares of common stock to America Online and 321,027 shares of
      common stock to Net2Phone based upon an assumed initial public offering
      price of $18.00 per share for aggregate proceeds of $9.0 million, and

   .  the issuance to America Online of warrants to purchase 765,422 shares
      of common stock at an exercise price of $12.46 per share based upon an
      assumed initial public offering price of $18.00 per share.


                                       4
<PAGE>


<TABLE>
<CAPTION>
                                                          March 31, 2000
                                                     --------------------------
                                                                         Pro
                                                                Pro    Forma As
                                                     Actual    Forma   Adjusted
                                                     -------  -------  --------
                                                          (in thousands)
<S>                                                  <C>      <C>      <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................... $ 5,029  $24,959  $111,770
Working capital.....................................   5,639   25,569   112,379
Total assets........................................  17,346   48,773   135,584
Long-term debt, less current portion................     667      667       667
Redeemable convertible preferred stock..............  44,107       --        --
Accumulated deficit................................. (36,026) (41,217)  (41,217)
Total stockholders' equity (deficit)................ (34,432)  41,101   127,912
</TABLE>


                                       5
<PAGE>

                                  RISK FACTORS

     You should consider carefully the risks described below and all other
information contained in this prospectus before making an investment decision.
If any of the following risks actually occur, our business could be adversely
affected. In that event, the trading price of our common stock could decline,
and you may lose part or all of your investment.

Risks Related To Our Business

We have a history of losses and we expect to continue to incur net losses for
the forseeable future that may depress our stock price.

     We have accumulated losses of $36.0 million since our inception in May
1994 through March 31, 2000, and we expect to incur net losses for the
foreseeable future. Net losses were $5.8 million for the year ended December
31, 1998, $15.5 million for the year ended December 31, 1999 and $6.1 million
for the three-month period ended March 31, 2000. We anticipate continuing to
incur significant sales and marketing, research and development and general and
administrative expenses and, as a result, we will need to generate higher
revenues to achieve and sustain profitability. We cannot be certain we will
realize sufficient revenues to achieve profitability. Moreover, if we were to
achieve profitability, we may not be able to sustain or increase our
profitability on a quarterly or annual basis. Any additional financing that we
may require in the future may not be available at all or, if available, may be
on terms unfavorable to us. Failure to achieve or maintain profitability may
depress the market price of our common stock, and any additional financing may
dilute your ownership interest in SpeechWorks.

We expect our quarterly revenues and operating results to fluctuate. If our
quarterly operating results fail to meet the expectations of financial analysts
and investors, the trading price of our common stock may decline.

     Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:

   .  the timing of sales of our products and services, particularly in
      light of our dependence on a relatively small number of large orders,

   .  the timing of product implementations, particularly large client
      design projects,

   .  unexpected delays in introducing new products and services,

   .  increased expenses, whether related to sales and marketing, product
      development or administration,

   .  deferral of recognition of our revenue in accordance with applicable
      accounting principles due to the time required to complete projects,

   .  the mix of product license and services revenue,

   .  the mix of domestic and international sales, and

   .  costs related to possible acquisitions of technology or businesses.

     For example, in 1999 our quarterly revenues and operating results were
affected by delays in several large orders and services projects and the timing
of orders for resold hardware and facilities management services, which are
provided only on an as-requested basis, and accordingly are relatively
difficult to predict.

                                       6
<PAGE>

Because of the volatility of our quarterly results and the difficulty in
predicting our future performance, our operating results may fall below the
expectations of analysts or investors and, as a result, the price of our common
stock may decline.

Speech-activated systems are relatively new products, and our success will
depend on our ability to educate prospective clients on the commercial
viability of the products. If speech-activated systems are not accepted by our
potential clients and their customers, our business will be harmed.

     Our business would be harmed if use of speech-activated e-business
solutions does not continue to develop, or develops more slowly than we expect.
Our market is relatively new and rapidly evolving. Our future success depends
on the acceptance by current and future clients and their customers of speech-
activated services as an integral part of their businesses. The size of our
market will depend in part on consumer acceptance of automated speech systems
and the actual and perceived quality of these systems. The adoption of speech-
activated services could be hindered by the perceived costs of this new
technology, as well as the reluctance of enterprises that have invested
substantial resources in existing call centers, touch-tone-based systems or
internet-based e-business infrastructures to replace or enhance their current
systems with this new technology. Accordingly, in order to achieve commercial
acceptance, we will have to educate prospective clients, including large,
established telecommunications companies, about the uses and benefits of
speech-activated services in general and our products in particular. If these
efforts fail, or if speech-activated software platforms do not achieve broad
commercial acceptance, our business could be significantly harmed and our
revenues could decline. In addition, the continued development of new and
evolving wireless technologies using a visual web browser interface could
adversely affect the demand for speech-activated services.

We currently rely on a limited number of large orders for substantially all of
our revenues. As a result, our inability to secure additional significant
clients during a given period or the loss of one major client could cause our
quarterly results of operation to suffer. Our stock price may also be adversely
affected by unexpected quarterly revenue declines caused by delays in revenue
recognition.

     Due to the nature of our business, in any quarter we are dependent upon a
limited number of orders that are relatively large in relation to our overall
revenues. Our speech-activated products and services require significant
expenditures by our clients and typically involve lengthy sales cycles. We may
spend significant time and incur substantial expenses educating and providing
information to prospective clients. Any failure to complete a sale to a
prospective client during a quarter could result in revenues and operating
results for the quarter that are lower than expected.

     In addition, as a result of the significant time required to deliver or
perform a client order, we may be unable to recognize revenue related to a
client order until well after we receive the order. Our dependence on large
client orders and the delay in recognizing revenue relating to these orders
make it difficult to forecast quarterly operating results. This could cause our
stock price to be volatile or to decline.

If we fail to develop new products and services in the face of our industry's
rapidly evolving technology, our future operating results may be adversely
affected.

     Our growth and future operating results will depend, in part, on our
ability to keep pace with:

   .  rapidly changing speech recognition technology,

   .  evolving industry standards and practices,

   .  frequent new speech-activated service and product introductions and
      enhancements, and

   .  changing client requirements and preferences for their automated
      speech systems.

                                       7
<PAGE>

     Any delay or failure on our part in responding quickly, cost-effectively
and sufficiently to these developments could render our existing speech-
activated products and services obsolete and have an adverse effect on our
competitive position. We may have to incur substantial expenditures to modify
or adapt our speech-activated products and services to respond to technological
changes. We must stay abreast of cutting-edge technological developments and
evolving service offerings to remain competitive and increase the utility of
our speech-activated services. We must be able to incorporate new technologies
into the speech-activated e-business solutions we design and develop to address
the increasingly complex and varied needs of our client base. If we are unable,
for technological or other reasons, to develop and introduce new and enhanced
products and to respond to changing client requirements and preferences in a
timely manner, we may lose existing customers and fail to attract new
customers, which could result in a significant decline in our revenues.

Our application software may contain defects, which could result in delayed or
lost revenue, expensive corrections, liability to our clients and claims
against us.

     We design, develop and implement complex speech-activated e-business
solutions that are crucial to the operation of our clients' businesses. Defects
in the solutions we develop could result in delayed or lost revenue, adverse
client reaction and negative publicity about us or our products and services or
require expensive corrections. Also, due to the developing nature of speech
recognition technology, speech-recognition products are not currently and may
never be accurate in every instance. In addition, third party technology that
is included in our products could contain errors or defects. Clients who are
not satisfied with our products or services could bring claims against us for
substantial damages, which, even if unsuccessful, would likely be time
consuming and could result in costly litigation and payment of damages. Such
claims could have an adverse effect on our financial results and competitive
position.

Our current and potential competitors in the speech-activated e-business
solutions market, some of whom have greater resources and experience than we
do, may offer products and services that may cause demand for, and the prices
of, our products to decline.

     A number of companies have developed, or are expected to develop, products
and services that compete with our speech-activated e-business solutions.
Competitors in the speech-activated e-business solutions market include IBM,
Lernout and Hauspie Speech Products, Locus Dialogue, Lucent Technologies,
Nuance Communications, Philips Electronics and Phonetic Systems. We expect
additional competition from other companies such as Microsoft, which recently
acquired a voice interface technology company. Furthermore, we expect
consolidation in our industry, and other companies may enter our markets by
acquiring or entering into strategic relationships with our competitors.
Current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to increase
the abilities of their advanced speech and language technology products to
address the needs of our prospective customers.

     Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition or larger client bases than we
do. Our present or future competitors may be able to develop speech-activated
products and services comparable or superior to those we offer, adapt more
quickly than we do to new technologies, evolving industry trends and standards
or client requirements, or devote greater resources to the development,
promotion and sale of their products and services than we do. Accordingly, we
may not be able to compete effectively in our markets, competition may
intensify and future competition may cause demand for and the prices of our
products to decline, which could adversely affect our sales and profitability.

                                       8
<PAGE>

If the standards we have selected to support are not adopted as the standards
for speech-activated software, businesses might not use our speech-activated
software platform for delivery of applications and services, and our revenue
growth could be negatively affected.

     The market for speech-activated services software is new and emerging and
industry software standards have not yet been established. We may not be
competitive unless our products support changing industry software standards.
The emergence of industry standards other than those we have selected to
support, whether through adoption by official standards committees or
widespread usage, could require costly and time consuming redesign of our
products. If these standards become widespread and our products do not support
them, our clients and potential clients may not purchase our products, and our
revenue growth could be adversely affected. Multiple standards in the
marketplace could also make it difficult for us to design our products to
support all applicable standards, which could also result in decreased sales of
our products.

We have and intend to continue expanding our international operations. Because
of the risks involved with operating a business in foreign countries, we may
not be successful and our business could be harmed.

     Our international sales represented 2.6% of our revenue in 1999 and 13.8%
in the first quarter of 2000. We have recently expanded our direct and indirect
international sales force with the expectation of increasing international
revenues. We have limited experience in international operations and
international product and service sales, and there can be no assurance we will
be successful in growing our international business. We are subject to a
variety of risks associated with conducting business internationally, any of
which could harm our business. These risks include:

   .   difficulties and costs of staffing and managing foreign operations,

   .   difficulties in establishing and maintaining an effective
       international reseller network,

   .   the burden of complying with a wide variety of foreign laws,
       particularly with respect to intellectual property and license
       requirements,

   .   political and economic instability outside the United States,

   .   import or export licensing and product certification requirements,

   .   tariffs, duties, price controls or other restrictions on foreign
       currencies or trade barriers imposed by foreign countries,

   .   potential adverse tax consequences, including higher marginal rates,

   .   unfavorable fluctuations in currency exchange rates, and

   .   limited ability to enforce agreements, intellectual property rights
       and other rights in some foreign countries.

In order to increase our international sales, we must develop localized
versions of our products. If we are unable to do so, we may be unable to grow
our revenue and execute our business strategy.

     In order to expand our international sales, we intend to invest
significant resources to create and refine different speech recognition models
for each particular language or dialect. These speech recognition models are
required to create versions of our products that understand the local language
or dialect. If we fail to develop localized versions of our products, our
ability to address international market opportunities and to grow our business
will be limited. In addition, we are required to invest resources to develop
these versions of our products in advance of the receipt of revenues. We may be
unable to recognize revenues sufficient to render these products profitable.

                                       9
<PAGE>

Growth in our operation may strain our resources, management information
systems and controls, which may reduce our chances of achieving profitability.

     We have recently experienced significant growth. From December 31, 1998 to
June 20, 2000, our number of employees increased from 86 to 246. We intend to
continue to expand our business operations significantly in the future. We will
need to expand our management, operational, financial and human resources, as
well as management information systems and controls, to support our anticipated
future growth. If we are successful, this growth will place a strain on the
ability of our management team to execute our business plan. In addition, we
will be required to make significant investments in personnel, management
systems and resources. The expansion of these systems will place a significant
burden on our management team and our information technology staff, and these
systems may not be effective once implemented. Our status as a public company
will also place significant additional administrative burdens on our management
team. If we do not manage this growth, our business will suffer.

We rely on our intellectual property rights, and if we are unable to protect
these rights, we may face increased competition. Protection of our intellectual
property rights is uncertain and may be costly.

     Intellectual property rights are important in our industry. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality, assignment of rights to inventions, and/or license agreements
with our employees, consultants and corporate or strategic partners to protect
our intellectual property rights. These legal protections afford only limited
protection and may be time-consuming and expensive to obtain and maintain.
Further, despite our efforts, we may be unable to prevent third parties from
unauthorized use of our intellectual property. Monitoring unauthorized use of
our intellectual property is difficult, and we cannot be certain that the steps
we have taken will be effective to prevent unauthorized use.

     Litigation may be necessary to enforce our intellectual property rights
and trade secrets. These lawsuits, regardless of their success, would likely be
time consuming and expensive to resolve and would divert management's time and
attention away from our business.

We may expend significant resources to defend against claims of infringement by
third parties, and if we are not successful we may lose significant rights or
be required to enter into disadvantageous license or royalty arrangements.

     Currently, in the software industry there are frequent assertions of
patent infringement by owners of patents, and assertions of other violations of
intellectual property rights such as trademarks, copyrights, and trade secrets.
In addition, there are a large number of patents in the speech recognition
area. Although we do not believe that we are infringing on any patent rights,
the holders of patents may claim that we are doing so. If any claim was made
against us, our business could be harmed, particularly if we are unsuccessful
in defending such claim. If we are forced to defend any claim, whether it is
with or without merit or is determined in our favor, then we may face costly
litigation, diversion of technical and management personnel, delays in future
product releases or injunctions preventing us from selling our products and
services. We may also be required to enter into costly and burdensome royalty
and licensing agreements. Any royalty or licensing agreements, if required, may
not be available on terms acceptable to us, or at all.

Our products incorporate technology we license from others. Our inability to
maintain these licenses could have a material adverse effect on our business.

     Some of the technology included in or operating in conjunction with our
products is licensed by us from others. Certain of these license agreements are
for limited terms. If for any reason these license agreements terminate, we may
be required to seek alternative vendors and may be unable to obtain similar

                                       10
<PAGE>

technology on favorable terms or at all. If we are unable to obtain alternative
license agreements, we could be required to modify some features of our
products, which could adversely affect sales of our products and services.

We rely on resellers and original equipment manufacturers for a portion of our
sales. The loss of one or more significant resellers or original equipment
manufacturers could limit our ability to sustain and grow our revenues.

     In 1999, 14.8% of our sales were attributable to our resellers and
original equipment manufacturers, or OEMs, especially InterVoice-BRITE which
accounted for 10.9% of our sales in 1999. We intend to increase our sales
through resellers in the future. As a result, we are in part dependent upon the
continued success and viability of our resellers and OEMs, as well as their
continued interest in selling our products. The loss of a key reseller or OEM
or our failure to develop and sustain new reseller and OEM relationships could
limit our ability to sustain and grow our revenues.

     Our contracts with our resellers and OEMs generally do not require them to
purchase our products. Our resellers and OEMs are independent companies over
which we have limited control. Our resellers and OEMs could cease to market our
products or devote significant resources to the sale of our products. Any
failure of our resellers or OEMs to successfully market and sell our products
could result in revenues that are lower than anticipated. In addition, our
resellers and OEMs possess confidential information concerning our products and
operations. Although we have nondisclosure agreements with our resellers and
OEMs, a reseller or OEM could use our confidential information in competition
with us, which could adversely affect our competitive position and revenues.

We rely upon the continued service and performance of a relatively small number
of senior management and key technical personnel. Moreover, competition for
qualified personnel is intense. We may not be able to retain or recruit
necessary personnel, which could impact the management and development of our
business.

     Our future success depends on our retention of a small number of senior
management and key technical personnel, such as Stuart R. Patterson, our
President and Chief Executive Officer, and Michael S. Phillips, our Chief
Technology Officer and co-founder. We do not have key person life insurance
policies covering any of our employees. The loss of services of any of our
executive officers or key personnel could have a negative effect on our ability
to grow.

     We need to attract and retain managerial and highly-skilled technical
personnel for whom there is intense competition. If we are unable to attract
and retain managerial and qualified technical personnel, our results of
operations could suffer and we may never achieve profitability.

Our business will be harmed if we fail to hire or retain qualified sales
personnel, or if newly hired salespeople fail to develop the necessary sales
skills or develop these skills more slowly than we anticipate.

     Our financial success depends to a large degree on the ability of our
direct sales force to increase sales. Therefore, our ability to increase
revenue in the future depends considerably upon our success in recruiting,
training and retaining additional direct sales personnel and the success of the
direct sales force. Also, it may take a new salesperson a number of months
before he or she becomes a productive member of our direct sales force.

                                       11
<PAGE>

Risks Related To This Offering

Our share price is likely to be highly volatile because shares of our common
stock have not been publicly traded before, and this volatility may depress our
stock price and negatively impact your investment.

     Following this offering, the price for our common stock could be highly
volatile and subject to wide fluctuations in response to the following factors:

   .  quarterly variations in our operating results due to prolonged sales
      cycles, project delays and deviations between actual and expected
      sales,

   .  announcements of technical innovations, new products or services by us
      or our competitors,

   .  changes in investor perception of us or the market for our products
      and services,

   .  changes in financial estimates by securities analysts, and

   .  changes in general economic and market conditions.

     The stocks of many technology companies have experienced significant
fluctuations in trading price and volume. This fluctuation may reduce the price
of our common stock, without regard or in a manner that is disproportionate to
our operating performance. Investors may have difficulty reselling their shares
of our common stock following a period of fluctuation because of the market's
adverse reaction to such fluctuation. Declines in the market price of our
common stock could also adversely affect employee morale and retention, our
access to capital and other aspects of our business.

If our share price is volatile, we may become subject to securities litigation,
which is expensive and could divert our resources.

     In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Many companies in the software industry have been subject to this type of
litigation. If the market value of our common stock experiences adverse
fluctuations and we become involved in this type of litigation, regardless of
the outcome, we could incur substantial legal costs and our management's
attention could be diverted. This could cause our business and financial
results to suffer.

No public market has existed for our common stock and an active trading market
may not develop or be sustained.

     Before this offering, there has been no public market for our common
stock. We cannot assure you that an active trading market will develop or be
sustained after this offering. You may not be able to resell your common stock
at or above the initial public offering price. The initial public offering
price will be determined through negotiations between the underwriters and us
and may not be indicative of the market price for our common stock after this
offering.

The sale of a substantial number of shares of our common stock after this
offering may cause the price of our common stock to decline.

     The market price of our common stock could decline as a result of sales of
substantial amounts of common stock, including shares issued upon the exercise
of outstanding options and warrants, in the public market after the closing of
this offering. The market price could also decline as a result of the
perception that substantial sales could occur. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.

                                       12
<PAGE>


     After this offering and the concurrent issuance in private placements of
401,284 shares of common stock to America Online and 321,027 shares of common
stock to Net2Phone based upon as assumed initial public offering price of
$18.00 per share, the mid-point of the range set forth on the cover page of
this prospectus, we will have 28,999,868 shares of common stock outstanding.

     The shares of common stock outstanding upon the completion of this
offering will be available for sale in the public market as follows:

<TABLE>
<CAPTION>
 pproximateA
 Number of
  Shares                                        Description
-----------                                     -----------
 <S>          <C>
  4,710,492   After the date of this prospectus, freely tradable shares sold in this
              offering, and shares freely saleable under Rule 144(k) that are not subject to
              the 180-day lock-up.
     43,492   After 90 days from the date of the prospectus, shares saleable under Rule 144
              and not subject to the 180-day lock-up.
 18,295,118   After 180 days from the date of this prospectus, the 180-day lock-up is
              released and these shares are saleable under Rule 144, subject in some cases to
              volume limitations or Rule 144(k).
  5,950,766   At various times after 180 days from the date of this prospectus, restricted
              shares that will become saleable under Rule 144 upon being held for one year.
</TABLE>

     America Online, AT&T, Net2Phone, holders of our convertible preferred
stock and some of our warrantholders have registration rights for the shares of
common stock currently owned or to be issued to them. These registration rights
could result in sales of a significant number of shares, which could adversely
affect the trading price of our common stock.

The net tangible book value of our common stock will be less than the initial
public offering price paid by investors, and we have a large number of
outstanding options and warrants to purchase common stock with exercise prices
below the initial public offering price. Therefore, you will incur immediate
and substantial dilution in the book value of your investment and may incur
further dilution.

     If you purchase shares of common stock in this offering, you will
experience immediate and substantial dilution of $13.96 in pro forma net
tangible book value per share based on our book value as of March 31, 2000 and
an assumed initial public offering price of $18.00 per share. We also have a
large number of stock options and warrants to purchase common stock outstanding
with exercise prices significantly below the initial public offering price of
the common stock. To the extent these options and warrants are exercised, there
will be further dilution. We intend to continue to grant stock options to our
employees as part of our general compensation practices.

Our executive officers, directors and principal stockholders own a significant
percentage of our common stock and may make decisions that you do not consider
to be in your best interest.

     Immediately after this offering, our executive officers, directors and
principal stockholders will, in the aggregate, hold approximately 34.4% of our
outstanding common stock. Accordingly, these stockholders will be able to
control us through their ability to determine the outcome of the election of
our directors, amend our certificate of incorporation and bylaws and take other
actions requiring the vote or consent of stockholders, including mergers, going
private transactions and other extraordinary transactions and the terms of any
of these transactions. The ownership position of these stockholders may have
the effect of delaying, deterring or preventing a change in control or a change
in the composition of our board of directors.

                                       13
<PAGE>

Anti-takeover provisions and our right to issue preferred stock could delay or
prevent a third party acquisition of us, which could depress our stock price.

     Provisions of our charter and bylaws may make it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
control of us. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. These provisions
include:

   .  the division of the board of directors into three separate classes,

   .  prohibitions on our stockholders from acting by written consent and
      calling special meetings,

   .  procedures for advance notification of stockholder nominations and
      proposals, and

   .  the ability of the board of directors to alter our bylaws without
      stockholder approval.

     Also, upon completion of this offering, we will be subject to the
antitakeover provisions of the Delaware General Corporation Law, including
Section 203, which may deter potential acquisition bids for our company.

     In addition, our board of directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or for other corporate purposes, could have the
effect of making it more difficult for a third party to acquire a majority of
our outstanding voting stock.

We may apply the proceeds from this offering to uses that do not increase our
profits or market value.

     We have significant flexibility in applying the proceeds we receive in
this offering. Our management has broad discretion as to how to spend the
proceeds from this offering and may spend these proceeds in ways with which our
stockholders may not agree. Our management has not determined how the offering
proceeds will be allocated among various uses. Accordingly, the net proceeds
may be used for corporate purposes that do not increase our profitability or
our market value.

We do not intend to pay dividends on our common stock.

     We currently intend to retain any future earnings for funding growth and
do not anticipate paying any dividends in the foreseeable future. Therefore,
you will need to sell your shares of common stock in order to realize a return
on your investment, if any. Our credit facility currently prohibits the payment
of cash dividends on our capital stock.

                                       14
<PAGE>

                           FORWARD-LOOKING STATEMENTS

     This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ significantly
from those expressed, implied or forecasted in the forward-looking statements.
These risks and uncertainties include, among others, those described in "Risk
Factors" and elsewhere in this prospectus. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus.

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

     SpeechWorks is a registered trademark, and SpeechSite, SpeechWorks Here,
DialogModules, SMARTRecognizer, SpeechCare, SpeechSpot and the SpeechWorks logo
are trademarks of SpeechWorks International, Inc. This prospectus also contains
other trademarks, tradenames and service marks of other companies, which are
the property of their respective owners.

                                       15
<PAGE>

                                USE OF PROCEEDS

     We estimate that we will receive net proceeds of $77.8 million from the
sale of the shares of common stock in this offering, assuming an initial public
offering price of $18.00 per share, which is the mid-point of the range set
forth on the cover page of this prospectus, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that our
net proceeds will be $89.7 million.

     We currently estimate that we will use the net proceeds of this offering
as follows:

   .  15% for research and development,

   .  35% for sales and marketing,

   .  10% for capital expenditures, and

   .  40% for working capital, and other general corporate purposes.

     The amounts and timing of our actual expenditures will depend on numerous
factors, including market acceptance of our speech-activated e-business
solutions and services, the amount of cash generated by our operations and
products and services introduced by competitors. We may also use a portion of
the net proceeds to acquire or invest in businesses or technologies that are
complementary to our business. However, we have not targeted any particular
technology or business for acquisition. We have no current agreements or
commitments nor are we negotiating with any other party with respect to any
acquisitions or investments. Our management will have broad discretion
concerning the use of the net proceeds of the offering. Pending these uses, we
intend to invest the net proceeds of this offering in investment-grade,
interest-bearing securities. We believe that the net proceeds of this offering
and the concurrent private placements, together with existing cash and cash
equivalents, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months.

                                DIVIDEND POLICY

     We have not paid any cash dividends in the past and do not intend to pay
cash dividends on our common stock for the foreseeable future. Instead, we
intend to retain all earnings for use in the operation and expansion of our
business. Our credit facility currently prohibits the payment of cash dividends
on our capital stock.

                                       16
<PAGE>

                                 CAPITALIZATION

     The following table sets forth our capitalization as of March 31, 2000:

   .  on an actual basis,

   .  on a pro forma basis to give effect to the issuance of 2,544,681
      shares of our series E convertible preferred stock on April 11, 2000
      for net proceeds of $19.9 million, the issuance to AT&T of 1,045,158
      shares of common stock on June 5, 2000, the automatic conversion upon
      completion of this offering of all of our outstanding convertible
      preferred stock into a total of 16,415,158 shares of common stock, and
      the filing of our restated certificate of incorporation in connection
      with the effectiveness of this offering increasing our authorized
      shares of common stock to 100,000,000 and preferred stock to
      10,000,000, and

   .  on a pro forma as adjusted basis to further adjust the pro forma
      information to give effect to the sale by us in this offering of
      4,750,000 shares of common stock at an assumed initial public offering
      price of $18.00 per share, the mid-point of the range set forth on the
      cover page of this prospectus, after deducting the underwriting
      discounts and commissions and estimated offering expenses, the
      issuance in private placements concurrent with this offering of
      401,284 shares of common stock to America Online and 321,027 shares of
      common stock to Net2Phone based upon an assumed initial public
      offering price of $18.00 per share and the issuance to America Online
      of warrants to purchase 765,422 shares of common stock at an exercise
      price of $12.46 per share based upon an assumed initial public
      offering price of $18.00 per share, and the application of the net
      proceeds from this offering and the concurrent private placements.

     The following capitalization table excludes:

   .  9,881,236 shares of common stock reserved for issuance under our stock
      option plans, of which 4,696,769 shares were subject to outstanding
      options at March 31, 2000 with a weighted average exercise price of
      $1.73 per share,

   .  1,030,223 shares of common stock, net of cancellations, subject to
      stock options granted after March 31, 2000 and through June 20, 2000
      with a weighted average exercise price of $7.79,

   .  807,237 shares of common stock reserved for issuance upon the exercise
      of warrants outstanding as of March 31, 2000 with a weighted average
      exercise price of $2.02 per share,

   .  813,132 shares of common stock reserved for issuance upon the exercise
      of warrants issued after March 31, 2000 and through June 30, 2000 with
      a weighted average exercise price of $12.19 per share, and

   .  200,000 shares of common stock reserved for issuance under our
      employee stock purchase plan.

     This information should be read in conjunction with our consolidated
financial statements and the related notes to those statements included in this
prospectus.


                                       17
<PAGE>

<TABLE>
<CAPTION>
                                                   March 31, 2000
                                        -----------------------------------------
                                                                    Pro Forma
                                          Actual     Pro Forma     As Adjusted
                                        -----------  -----------  ---------------
                                        (in thousands, except share amounts)
<S>                                     <C>          <C>          <C>
Cash and cash equivalents.............  $     5,029      $24,959   $    111,770
                                        ===========  ===========   ============
Current portion of notes payable and
 capital lease obligations............  $       593  $       593   $        593
                                        ===========  ===========   ============
Notes payable, net of current
 portion..............................  $       667  $       667   $        667
                                        -----------  -----------   ------------
Redeemable convertible preferred
 stock, $0.001 par value:
  Series E; no shares authorized,
   issued and outstanding--actual, pro
   forma and pro forma as adjusted....           --           --             --
  Series D; 2,800,000 shares
   authorized, 2,671,389 shares issued
   and outstanding--actual; no shares
   authorized, issued and
   outstanding--pro forma and pro
   forma as adjusted..................       25,118           --             --
  Series C; 1,626,092 shares
   authorized, issued and
   outstanding--actual; no shares
   authorized, issued and
   outstanding--pro forma and pro
   forma as adjusted..................        7,664           --             --
  Series B; 2,474,500 shares
   authorized, issued and
   outstanding--actual; no shares
   authorized, issued and
   outstanding--pro forma and pro
   forma as adjusted..................        8,175           --             --
  Series A; 2,475,000 shares
   authorized, issued and
   outstanding--actual; no shares
   authorized, issued and
   outstanding--pro forma and pro
   forma as adjusted..................        3,150           --             --
                                        -----------  -----------   ------------
Total redeemable convertible preferred
 stock................................       44,107           --             --
                                        -----------  -----------   ------------
Stockholders equity (deficit):
Preferred stock, $0.001 par value; no
 shares authorized, issued or
 outstanding--actual; 10,000,000
 shares authorized, no shares issued
 and outstanding--pro forma and pro
 forma as adjusted....................           --           --             --
Common stock, $0.001 par value;
 22,000,000, 100,000,000 and
 100,000,000 shares authorized--
 actual, pro forma and pro forma as
 adjusted, respectively; 5,888,327,
 23,348,643 and 28,820,954 shares
 issued and outstanding--actual, pro
 forma and pro forma as adjusted,
 respectively.........................            6           23             29
Additional paid-in capital............        7,172       87,879        188,545
Deferred stock compensation...........       (5,584)      (5,584)       (19,445)
Accumulated deficit...................      (36,026)     (41,217)       (41,217)
                                        -----------  -----------   ------------
Total stockholders' equity (deficit)..      (34,432)      41,101        127,912
                                        -----------  -----------   ------------
Total capitalization..................  $    10,342  $    41,768   $    128,579
                                        ===========  ===========   ============
</TABLE>


                                       18
<PAGE>

                                    DILUTION

     Our pro forma net tangible book value as of March 31, 2000 was $29.6
million, or $1.27 per share of common stock. Pro forma net tangible book value
per share represents the amount of total tangible assets less total
liabilities, divided by the number of outstanding shares of common stock, after
giving effect to:

    .  the sale of our series E convertible preferred stock in April 2000,

    .  the issuance of 1,045,158 shares of common stock to AT&T in June
       2000, and

    .  the automatic conversion of all of our convertible preferred stock
       into common stock upon the completion of this offering.

After giving effect to this offering and the receipt of $77.8 million of
estimated net proceeds from this offering based upon an assumed offering price
of $18.00 per share, the mid-point of the range set forth on the cover page of
this prospectus, and the receipt of $9.0 million from the concurrent private
placements of common stock to America Online and Net2Phone, our pro forma net
tangible book value as of March 31, 2000 would have been $116.4 million, or
$4.04 per share of common stock. This represents an immediate increase in pro
forma net tangible book value of $2.77 per share to our existing stockholders,
and an immediate dilution in pro forma net tangible book value of $13.96 per
share to new investors purchasing shares in this offering. The share amounts in
the tables below are based on shares outstanding as of March 31, 2000 and
exclude:

    .  9,881,236 shares of common stock reserved for issuance under our
       stock option plans, of which 4,696,769 shares were subject to
       outstanding options at March 31, 2000 with a weighted average
       exercise price of $1.73 per share,

    .  1,030,223 shares of common stock, net of cancellations, subject to
       stock options granted after March 31, 2000 and through June 20, 2000
       with a weighted average exercise price of $7.79,

    .  807,237 shares of common stock reserved for issuance upon the
       exercise of warrants outstanding as of March 31, 2000 with a weighted
       average exercise price of $2.02 per share,

    .  813,132 shares of common stock reserved for issuance upon the
       exercise of warrants issued after March 31, 2000 and through June 30,
       2000 with a weighted average exercise price of $12.19 per share, and

    .  200,000 shares of common stock reserved for issuance under our
       employee stock purchase plan.

     The following table illustrates the per share dilution:

<TABLE>
    <S>                                                            <C>   <C>
    Assumed initial public offering price per share..............        $18.00
      Pro forma net tangible book value per share as of March 31,
       2000......................................................  $1.27
      Increase attributable to concurrent private placements.....   0.33
      Increase attributable to new investors in this offering....   2.44
                                                                   -----
    Pro forma net tangible book value per share after this offer-
     ing                                                                   4.04
                                                                         ------
    Dilution per share to new investors..........................        $13.96
                                                                         ======
</TABLE>

     If the underwriters exercise their option to purchase additional shares in
the offering, the pro forma net tangible book value per share would be $4.35
per share, the increase in pro forma net tangible book value per share to
existing stockholders would be $3.08 per share and the dilution to new
investors purchasing shares in this offering would be $13.65 per share.

                                       19
<PAGE>

     The following table summarizes as of March 31, 2000, on the pro forma
basis described above, the total number of shares of common stock purchased
from us, the total consideration paid to us and the average consideration paid
per share by existing stockholders, including for this purpose the investors
purchasing shares in the private placements concurrent with this offering, and
by new investors purchasing shares in this offering before deducting estimated
underwriting discounts and commissions and related offering expenses:

<TABLE>
<CAPTION>
                              Shares Purchased  Total Consideration   Average
                             ------------------ -------------------- Price Per
                               Number   Percent    Amount    Percent   Share
                             ---------- ------- ------------ ------- ---------
    <S>                      <C>        <C>     <C>          <C>     <C>
    Existing stockholders... 23,348,643    81%  $ 72,210,251    43%   $ 3.09
    Concurrent private
     placements to new
     investors..............    722,311     3      9,000,000     6     12.46
    New investors...........  4,750,000    16     85,500,000    51     18.00
                             ----------   ---   ------------   ---
      Total................. 28,820,954   100%  $166,710,251   100%
                             ==========   ===   ============   ===
</TABLE>

                                       20
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 have been
derived from our audited consolidated financial statements appearing elsewhere
in this prospectus. The consolidated statement of operations data for the years
ended December 31, 1995 and 1996 and the consolidated balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from our audited consolidated
financial statements not included in this prospectus. The consolidated
statement of operations data for the three months ended March 31, 1999 and 2000
and the consolidated balance sheet data as of March 31, 2000 are derived from
unaudited consolidated financial statements included elsewhere in this
prospectus. The results for these interim periods are not necessarily
indicative of the results for the entire year. There is no difference between
historical basic and diluted net loss per common share since potential shares
of common stock from the conversion of preferred stock and the exercise of
options and warrants are anti-dilutive for all periods presented. The pro forma
basic and diluted net loss into per common share reflects the automatic
conversion of all our outstanding convertible preferred stock into common stock
upon completion of this offering as if converted on January 1, 1999 or, if
later, the date of original issue.

                                       21
<PAGE>

<TABLE>
<CAPTION>
                                                                        Three Months
                                 Years Ended December 31,              Ended March 31,
                          -------------------------------------------  ----------------
                           1995    1996     1997     1998      1999     1999     2000
                          ------  -------  -------  -------  --------  -------  -------
                                   (in thousands, except per share data)
<S>                       <C>     <C>      <C>      <C>      <C>       <C>      <C>
Consolidated Statement
 of Operations Data:
Revenue:
Product license.........  $  325  $   542  $   949  $ 1,567  $  3,680  $   341  $ 2,607
Professional services...      65      172      982    2,873     5,944    1,099    2,158
Other revenue...........      13      137      111    1,410     4,387    1,850      322
                          ------  -------  -------  -------  --------  -------  -------
Total revenue...........     403      851    2,042    5,850    14,011    3,290    5,087
                          ------  -------  -------  -------  --------  -------  -------
Cost of revenue:
Cost of product
 licenses...............     212      166       54       52       153        9       45
Cost of professional
 services (excluding
 stock compensation of
 $139, $5 and $93 in
 1999 and the three
 month periods ended
 March 31, 1999 and
 2000, respectively)....      65      218      678    1,982     4,991      974    1,694
Cost of other revenue...      13       65       90      890     2,987    1,239      150
                          ------  -------  -------  -------  --------  -------  -------
Total cost of revenue
 (excluding stock
 compensation of $139,
 $5 and $93 in 1999 and
 the three month periods
 ended March 31, 1999
 and 2000,
 respectively)..........     290      449      822    2,924     8,131    2,222    1,889
                          ------  -------  -------  -------  --------  -------  -------
Gross profit (excluding
 stock compensation of
 $139, $5 and $93 in
 1999 and the three
 month periods ended
 March 31, 1999 and
 2000, respectively)....     113      402    1,220    2,926     5,880    1,068    3,198
                          ------  -------  -------  -------  --------  -------  -------
Operating expenses:
Selling and marketing
 (excluding stock
 compensation of $225,
 $2 and $193 in 1999 and
 the three month periods
 ended March 31, 1999
 and 2000,
 respectively)..........      72      387    1,074    3,867     9,254    1,547    3,794
Research and development
 (excluding stock
 compensation of $97, $2
 and $72 in 1999 and the
 three month periods
 ended March 31, 1999
 and 2000,
 respectively)..........     275      942    1,969    1,881     5,164      898    1,810
General and
 administrative
 (excluding stock
 compensation of $47, $3
 and $35 in 1999 and the
 three month periods
 ended March 31, 1999
 and 2000,
 respectively)..........     263      507    1,057    3,157     6,693    1,086    3,308
Stock compensation......      --       --       --       --       508       12      393
                          ------  -------  -------  -------  --------  -------  -------
Total operating
 expenses...............     610    1,836    4,100    8,905    21,619    3,543    9,305
                          ------  -------  -------  -------  --------  -------  -------
Loss from operations....    (497)  (1,434)  (2,880)  (5,979)  (15,739)  (2,475)  (6,107)
Interest and other
 income (expense), net..      37       99      360      219       276       15        8
                          ------  -------  -------  -------  --------  -------  -------
Net loss................    (460)  (1,335)  (2,520)  (5,760)  (15,463)  (2,460)  (6,099)
Accretion on redeemable
 convertible preferred
 stock..................    (203)    (532)    (533)    (789)   (1,904)    (243)    (600)
                          ------  -------  -------  -------  --------  -------  -------
Net loss attributable to
 common stockholders....  $ (663) $(1,867) $(3,053) $(6,549) $(17,367) $(2,703) $(6,699)
                          ======  =======  =======  =======  ========  =======  =======
Basic and diluted net
 loss per common share..  $(0.18) $ (0.51) $ (0.83) $ (1.44) $  (3.28) $ (0.57) $ (1.19)
Shares used in computing
 basic and diluted net
 loss per common share..   3,612    3,695    3,696    4,537     5,298    4,784    5,644
Pro forma basic and
 diluted net loss per
 common share
 (unaudited)............                                     $  (0.87)          $ (0.31)
Shares used in computing
 pro forma basic and
 diluted net loss per
 common share
 (unaudited)............                                       17,686            19,515
</TABLE>

<TABLE>
<CAPTION>
                                       December 31,
                         ---------------------------------------------
                                                                        March 31,
                          1995     1996     1997      1998      1999      2000
                         -------  -------  -------  --------  --------  ---------
                                           (in thousands)
<S>                      <C>      <C>      <C>      <C>       <C>       <C>
Consolidated Balance
 Sheet Data:
Cash and cash
 equivalents............ $   717  $ 1,008  $   426  $  4,486  $ 11,474  $  5,029
Working capital.........   1,702    4,897    4,764     5,156    12,133     5,639
Total assets............   2,000    5,786    6,437     9,162    20,566    17,346
Long-term debt, net of
 current portion........      --      199      414       161       833       667
Redeemable convertible
 preferred stock........   2,173    6,942    9,974    17,749    43,507    44,107
Total stockholders'
 equity (deficit).......    (315)  (1,881)  (4,948)  (11,457)  (28,248)  (34,432)
</TABLE>

                                       22
<PAGE>

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

     You should read the following discussion in conjunction with our
consolidated financial statements and the related notes that are included in
this prospectus.

Overview

     SpeechWorks is a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services over any telephone. We currently offer two
speech recognition solutions for over-the-telephone applications, SpeechWorks 6
and our recently introduced SpeechSite. We complement our products with a
professional services organization that offers a range of services including
application development and project management.

     Revenue. We derive our revenue from three sources. We sell product
licenses, either directly to clients or through third-party distribution
channels. To support the sale, installation and operation of our products, we
also provide professional services, consisting of developing custom software
applications, user interface design consulting, training, maintenance and
technical support. We resell hardware products made by third parties, including
products such as voice-processing equipment that run our software, as well as
facilities management services that are provided by third-party call-centers.
We expect the resale component of our total revenues to decrease as a
percentage of our total revenues over time. We only resell hardware or
facilities management services when clients expressly request that we do so and
therefore, such revenue is considered other revenue.

     We recognize revenue from the licensing of software in three ways,
provided that no significant obligations remain, evidence of the arrangement
exists, the fees are fixed or determinable, and collectibility is probable:

   .  When we license our software and do not provide any professional
      services, we recognize the license revenue when we ship the software
      to the client provided that no significant obligations remain.

   .  When original equipment manufacturers, or OEM's, license our software,
      we receive a royalty. We recognize the revenue from these royalties
      upon delivery to the third party when such information is available,
      or when we are notified by the OEM of the sale.

   .  When we license software in connection with custom software
      applications developed by us, we recognize the revenue over the life
      of the development project, concurrent with the related services fees
      as described below.

     We recognize the revenue from professional services in three ways,
provided that evidence of the arrangement exists, the fees are fixed or
determinable and collectibility is probable. When we provide professional
services for a fixed fee, we recognize revenue from the fees for such services
and any related software licenses as we complete the project using the
percentage of completion method. We determine the percentage of the project
that we have completed by comparing the labor hours we have incurred to date to
our estimate of the total labor hours required to complete the project. When we
provide services on a time and materials basis, we recognize revenue as we
perform the services. When we provide support and maintenance services, we
recognize the revenue ratably over the term of the related contracts, typically
one year.

     When we resell hardware, we recognize the revenue when we deliver the
hardware. We recognize the revenue from resold facilities management services
in the period that the services are provided.

     We market our products and services primarily in North America, Europe,
and AsiaPacific. We sell our products and professional services to our clients
through our direct sales force, value-added resellers and OEMs. We currently
have relationships with 36 value-added resellers and OEMs. We are aggressively

                                       23
<PAGE>

expanding both our direct sales force and our reseller and OEM relationships.
Sales to our resellers and OEMs accounted for 9.7% of our total revenue for
1998, 14.8% of our total revenue for 1999 and 17.0% of our total revenue for
the first quarter of 2000. We expect that revenue derived from sales to
resellers and OEMs will continue to increase as a percentage of our total
revenue for the foreseeable future as we focus on and expand our distribution
channels.

     In 1999, United Airlines represented 33.7% of our total revenue and
InterVoice-BRITE represented 10.9% of our total revenue. In the first quarter
of 2000, NextLink represented 16.8% of our total revenue.

     We began selling our products and services to clients outside the United
States in 1999, and these sales accounted for 2.6% of our total revenue for
1999 and 13.8% of our total revenue for the first quarter of 2000. We expect
the portion of our total revenue derived from sales to clients outside the
United States to increase as we expand our international sales efforts and
distribution channels.

     Cost of revenue. Our cost of revenue consists of the cost of our product
licenses, cost of professional services and cost of resold hardware and
services. Cost of product licenses consists of a royalty that we pay to
Massachusetts Institute of Technology, or MIT, that is equal to a percentage of
our product license revenue. This percentage was 3.3% in 1998, 4.2% in 1999 and
1.7% in the first quarter of 2000. Our license with MIT provides that the
royalty decreases to 1% of our product license revenue once our cumulative
product license revenue exceeds $6 million. Cost of professional services
revenue consists of our direct labor and related benefits costs, taxes and
project-specific travel expenses. Cost of resold hardware and facilities
management services consists of the cost of third-party hardware which we
resell and payments to the third-party providers of outsourced facilities
management services.

     Operating expenses. Our selling and marketing expenses consist primarily
of compensation and related expenses, sales commissions and travel expenses,
along with other marketing expenses, including advertising, trade shows, public
relations, direct mail campaigns, seminars and other promotional expenses. Our
research and development expenses consist primarily of compensation and related
expenses for our personnel and, to a lesser extent, independent contractors,
who work on new products, enhancements to existing products and the
implementation of our products in new languages. Our general and administrative
expenses consist primarily of compensation for our administrative, financial
and information technology personnel, occupancy and overhead expense, and
company-wide professional fees, including recruiting, legal and accounting
fees, as well as bad debts. Our stock compensation expenses result from noncash
charges for options issued with exercise prices that are less than the fair
market value of our common stock on the date of grant.

     Interest and other income (expense), net. We receive interest income by
investing the proceeds that we raised in our prior equity financings. Interest
expense is generated primarily from amounts we owe under our line of credit and
capital lease lines of credit.

     Income taxes. Due to our operating losses, we have recorded no provision
or benefit for income taxes for any period since our inception. As of December
31, 1999, we had $23.4 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2011. Our use of these net
operating losses may be limited in future periods.

Recent Developments

     On May 31, 2000, we issued to a series E preferred investor a warrant to
purchase 47,710 shares of common stock at an exercise price of $7.86 per share.
The warrant is exercisable on or before May 31, 2002. The fair value ascribed
to this warrant upon its issuance, utilizing the Black-Scholes valuation model,
was $330,630.

     On June 5, 2000, we entered into a development and license agreement with
AT&T to develop and sell products that use AT&T speech technology. Under the
agreement, we received development and

                                       24
<PAGE>

distribution licenses to AT&T speech technology and certain other intellectual
property. In connection with this agreement, we issued 1,045,158 shares of
common stock to AT&T with a fair value of $11.00 per share. The technology
license and intellectual property rights acquired will be recorded as
intangible assets based on the total fair value of the common stock of $11.5
million, and will be amortized over the expected economic life of the related
products to be commercialized.

     On June 29, 2000, we entered into a letter of intent with Net2Phone under
which we will grant a software license and provide professional services to
Net2Phone and pursue joint marketing and promotional efforts. Net2Phone has
agreed to purchase $4.0 million of our common stock in a private placement
concurrent with the initial public offering at a purchase price equal to the
lesser of $12.46 per share and 89% of the price to the public in the offering.
We will record a non-cash charge equal to the difference between the price to
the public in this offering and the price to Net2Phone. Assuming an initial
public offering price of $18.00 per share, the amount of this non-cash charge
will be $1.8 million, which will be amortized against revenue over the expected
three-year term of the agreement.

     On June 30, 2000, we entered into a three-year agreement with America
Online that encompasses a number of business arrangements. America Online will
pay us license, professional services and maintenance and support fees. America
Online will have the option annually to terminate the agreement, and may also
extend the agreement for up to three additional one-year terms. Under the
agreement, America Online has agreed to purchase $5.0 million of our common
stock in a private placement concurrent with the initial public offering at a
purchase price per share equal to the lesser of $12.46 and 89% of the price to
the public in this offering. We will record a non-cash charge equal to the
difference between the price to the public in this offering and the price to
America Online. Assuming an initial public offering price of $18.00 per share,
the amount of this non-cash charge will be $2.2 million, which will be
amortized against revenue over the expected three-year term of the agreement.
In order to encourage America Online's marketing of the voice portal and our
speech recognition services, thereby supporting our marketing efforts, we
issued America Online a warrant to purchase up to 765,422 shares of our common
stock at an exercise price equal to the lesser of $12.46 per share and 89% of
the price to the public in this offering. These warrants are exercisable upon
the earlier of America Online achieving specified voice portal user milestones
or June 30, 2002. The value ascribed to this warrant upon its issuance,
utilizing the Black-Scholes valuation model was $9.9 million, which will be
amortized to sales and marketing expenses over the expected three-year term of
the agreement. This amortization will commence upon completion of the initial
public offering, the date at which the exercise price of the warrants will be
fixed. Assumptions used in the Black-Scholes computation included the
following: fair value of our common stock of $18.00 per share; exercise price
of $12.46 per share; risk free interest rate of return of 6.2%; volatility of
100%; expected term of 3 years; and no dividend yield.

                                       25
<PAGE>

Results Of Operations

     The following table sets forth consolidated financial data for the periods
indicated as a percentage of our total revenue.
<TABLE>
<CAPTION>
                                                              Three Months
                                                                  Ended
                                Year Ended December 31,         March 31,
                                ---------------------------   ---------------
                                 1997      1998      1999      1999     2000
                                -------   -------   -------   ------   ------
<S>                             <C>       <C>       <C>       <C>      <C>
Revenue:
  Product licenses............       47%       27%       27%     10%       51%
  Professional services.......       48        49        42      34        43
  Other revenue...............        5        24        31      56         6
                                -------   -------   -------   -----    ------
  Total revenue...............      100%      100%      100%    100%      100%
                                =======   =======   =======   =====    ======
Cost of revenue:
  Cost of product licenses....        3%        1%        1%      0%        1%
  Cost of professional
   services...................       33        34        36      30        33
  Cost of other revenue.......        4        15        21      38         3
                                -------   -------   -------   -----    ------
  Total cost of revenue.......       40        50        58      68        37
                                -------   -------   -------   -----    ------
  Gross profit ...............       60        50        42      32        63
                                -------   -------   -------   -----    ------
Operating expenses:
  Selling and marketing.......       53        66        66      47        75
  Research and development....       96        32        37      27        35
  General and administrative..       52        54        48      33        65
  Stock compensation..........        0         0         3       0         8
                                -------   -------   -------   -----    ------
  Total operating expenses....      201       152       154     107       183
                                -------   -------   -------   -----    ------
Loss from operations..........     (141)     (102)     (112)    (75)     (120)
Interest and other income (ex-
 pense), net..................       18         4         2       0         0
                                -------   -------   -------   -----    ------
Net loss......................     (123)%     (98)%    (110)%   (75)%    (120)%
                                =======   =======   =======   =====    ======
</TABLE>

Comparison of the Three Months Ended March 31, 1999 and 2000

     Total revenue. Our total revenue increased by 54.6% from $3.3 million in
the first quarter of 1999 to $5.1 million in the first quarter of 2000. Revenue
from international sales was $718,000 for the quarter ended March 31, 2000.
There were no international sales during the first quarter of 1999.

     Revenue from product licenses. Revenue from the sale of software licenses
increased 664.5% from $341,000 in the first quarter of 1999 to $2.6 million for
the same period in 2000. The increase in software revenue resulted from a
growing market acceptance of our speech-activated e-business solutions, our
expanded sales and marketing efforts and the improved productivity of our
distribution channels, primarily OEMs. We expect that revenue from product
licenses will represent more than 50% of our total revenue in the future.

     Revenue from professional services. Revenue from fees we receive for
professional services increased 96.4% from $1.1 million in the first quarter of
1999 to $2.2 million for the same period in 2000. The growth in revenue from
professional services resulted primarily from the increased demand for custom
speech applications from existing and new clients.

     Other revenue. Other revenue accounted for 56.2% of total revenue in the
first quarter of 1999, compared to 6.3% of revenue for the same period in 2000.
Other revenue in the first quarter of 1999 consisted primarily of resold
hardware to one client. There were no significant sales of hardware during the
first quarter of 2000. The other revenue during the first quarter of 2000 was
comprised of resold facilities management for one client. We anticipate that
resold hardware and facilities management revenue will decline significantly as
a percentage of total revenue in the future.

     Cost of product licenses revenue. Cost of product licenses revenue
increased with product license sales from $9,000 in the first quarter of 1999
to $45,000 in 2000. This cost represented 2.6% of product license revenue in
the first quarter of 1999, compared to 1.7% of product license revenue for the
same

                                       26
<PAGE>

period in 2000. The decrease in percentage of revenue during 2000 reflects the
reduction in the MIT royalty percentage based on achieving the second milestone
of cumulative product license sales.

     Cost of professional services revenue. Cost of professional services
revenue increased 73.9% from $974,000 in the first quarter of 1999 to $1.7
million in the first quarter of 2000. The increase is due primarily to the
hiring of additional project managers, developers, user interface designers,
speech scientists and technical support staff to expand our professional
services organization. This cost represented 88.6% of professional services
revenue in the first quarter of 1999 and 78.5% for the same period in 2000. The
lower cost of professional services as a percent of related revenue in 2000
reflects improvements in margins as certain lower-margin projects were
completed and replaced with higher-margin projects.

     Cost of other revenue. Cost of resold hardware and resold facilities
management services decreased 87.9% from $1.2 million in the first quarter of
1999 to $150,000 during the same period in 2000. The cost of other revenue as a
percentage of other revenue decreased from 67.0% in the first quarter of 1999
to 46.6% during the first quarter of 2000. The lower cost of other revenue as a
percent of related revenue in 2000 reflects the higher margin earned on a new
resold services contract.

     Total operating expenses. Our total operating expenses increased 162.6%
from $3.5 million during the first quarter of 1999 to $9.3 million during the
same period of 2000. These increases occurred in all categories of operating
expense as we grew our organization to a total headcount of 211 as of March 31,
2000, compared to a headcount of 104 as of March 31, 1999. As a percentage of
revenue, our operating expenses were 107.7% for the first quarter of 1999
compared to 182.9% during the same period in 2000.

     Selling and marketing expenses. Selling and marketing expenses increased
145.2% from $1.5 million during the first quarter of 1999 to $3.8 million
during the same quarter in 2000. Selling and marketing expenses as a percentage
of revenue increased from 47.0% to 74.6%. The increases in selling and
marketing expenses from the first quarter of 1999 to the first quarter of 2000
resulted primarily from our investment in sales and marketing personnel. During
this period, the number of sales representatives in North America increased
from 16 to 26 and the number of employees in marketing increased from eight to
15. In addition, the cost of engineers devoted to technical sales support,
recorded as a selling expense, has increased steadily with increased sales. The
increase in selling and marketing expenses also reflects higher commissions
associated with higher sales and increased marketing activities, including
advertisements, tradeshows, public relations activities and educational
seminars during these periods.

     Research and development expenses. Research and development expenses
increased by 101.6% from $898,000 during the first quarter of 1999 to $1.8
million during the same period in 2000. Research and development expenses as a
percentage of revenue increased from 27.3% during the first quarter of 1999 to
35.6% during the same period in 2000. The increase in research and development
expenses from the first quarter of 1999 to the first quarter of 2000 was driven
by the increased hiring of software developers, quality assurance and testing
personnel and speech scientists to develop and enhance our products. The number
of personnel involved in research and development increased from 24 as of March
31, 1999 to 57 as of March 31, 2000.

     General and administrative expenses. General and administrative expenses
increased 204.6% from $1.1 million during the first quarter of 1999 to $3.3
million during the same period in 2000. General and administrative expenses as
a percentage of revenue increased from 33.0% during the first quarter of 1999
to 65.0% for the same period in 2000. The increase in general and
administrative expenses from the first quarter of 1999 to the first quarter of
2000 was primarily due to additional infrastructure necessary to support our
growing operations in the United States and internationally, an increase in
professional services fees incurred to support our growth and increased
recruiting costs.

     Stock compensation. In connection with the grant of stock options during
the three months ended March 31, 2000, we recorded deferred stock compensation
charges of $1.1 million. We expect to record additional deferred compensation
charges of $4.1 million during the remainder of 2000. Stock compensation
charges represent the difference between the deemed fair value for financial
reporting purposes of our

                                       27
<PAGE>

common stock on the date of grant and the exercise price of options granted to
employees to acquire our common stock during this period, multiplied by the
number of option shares. Deferred stock compensation is amortized to expense
ratably over the vesting period of the options granted, which is typically four
years. We recorded amortization of deferred stock compensation of $12,000
during the first quarter of 1999 and $393,000 during the same period in 2000.
We expect the amortization of deferred stock compensation to be approximately
$2.6 million per year through 2002 and decreasing thereafter through 2004.

     Interest and other income (expense), net. Interest income was $37,000
during the first quarter of 1999 and $91,000 during the same period in 2000.
Interest expense was $13,000 during the first quarter of 1999 and $36,000
during the same period of 2000. The increase in interest income from 1999 to
2000 was the result of higher cash balances available for investing during 2000
as a result of the series D redeemable convertible preferred stock proceeds
received during the quarter ended June 30, 1999. The increase in interest
expense is primarily due to increases in debt payable under our line of credit
and capital equipment leases. Other expenses include other non-operating costs.

Comparison of Years Ended December 31, 1997, 1998 and 1999

     Total revenue. Our total revenue increased by 186.5% from $2.0 million in
1997 to $5.9 million in 1998 and increased 139.5% to $14.0 million in 1999.
Revenue from international sales commenced in 1999 with total revenue of
$362,000. We had no revenue from international sales prior to 1999.

     Revenue from product licenses. Revenue from the sale of software licenses
increased 65.1% from $949,000 in 1997 to $1.57 million in 1998 and increased
134.8% to $3.7 million in 1999. This growth in software revenue from 1997 to
1999 resulted from increased sales volume reflecting growing market acceptance
of our solutions, our expanded sales and marketing efforts and the improved
productivity of our distribution channels, primarily OEMs. We expect that
revenue from product licenses will represent more than 50% of our total revenue
in the future.

     Revenue from professional services. Revenue from fees we receive for
professional services increased 192.6% from $982,000 in 1997 to $2.9 million in
1998 and increased 106.9% to $5.9 million in 1999. The growth in revenue from
professional services resulted primarily from the increased demand for custom
speech applications from existing and new clients over these years.

     Other revenue. Other revenue accounted for 5.4% of total revenue in 1997,
24.1% of total revenue in 1998 and 31.3% of total revenue in 1999. The increase
in other revenue resulted primarily from several clients which requested that
we also provide the hardware to host our software products sold to them. We
anticipate that resold hardware and facilities management revenue will decline
significantly as a percentage of total revenue in the future.

     Cost of product licenses revenue. Cost of product licenses revenue
decreased 3.7% from $54,000 in 1997 to $52,000 in 1998 and increased 194.2% to
$153,000 in 1999. This cost represented 5.7% of product license revenue in
1997, 3.3% in 1998 and 4.2% in 1999. The decrease in amount from 1997 to 1998
resulted from a reduction in the MIT royalty percentage based on achieving the
first milestone of cumulative product license sales. The increase from 1998 to
1999 resulted from increased product license sales. Also, in 1999, cost of
product licenses revenue included a $60,000 payment to a client as a royalty
for our resale of an application originally developed for that client.

     Cost of professional services revenue. Cost of professional services
revenue increased 192.3% from $678,000 in 1997 to $2.0 million in 1998 and
increased 151.8% to $5.0 million in 1999. The increases from 1997 to 1999 are
due primarily to the hiring of additional project managers, developers, user
interface designers, speech scientists and technical support staff to expand
our professional services organization. This cost represented 69.0% of
professional services revenue in 1997, 69.0% in 1998 and 84.0% in 1999.
The higher cost of professional services as a percent of related revenue in
1999 reflects costs associated with significant hiring in anticipation of
revenue growth in late 1999 and 2000 and client delays on several large fixed-
fee projects.

                                       28
<PAGE>

     Cost of other revenue. Cost of resold hardware and resold facilities
management services increased 888.9% from $90,000 in 1997 to $890,000 in 1998
and increased 235.6% to $3.0 million in 1999. The cost of other revenue as a
percent of other revenue decreased from 81.1% in 1997 to 63.1% in 1998,
reflecting our increased reseller's discount at higher volume levels, and
increased to 68.1% in 1999, reflecting the weighted average impact of lower
margin on resold facilities management services being sold to one client under
a special arrangement.

     Total operating expenses. Our total operating expenses increased 117.2%
from $4.1 million in 1997 to $8.9 million in 1998 and increased 142.8% to $21.6
million in 1999. These increases occurred in all categories of operating
expense over the three-year period as we grew our organization. These
investments included the addition of 50 employees in 1998 and 112 employees in
1999. As a percentage of total revenue, our operating expenses were 200.8% in
1997, 152.2% in 1998 and 154.3% in 1999.

     Selling and marketing expenses. Selling and marketing expenses increased
260.1% from $1.1 million in 1997 to $3.9 million in 1998 and increased 139.3%
to $9.3 million in 1999. The increases in selling and marketing expenses from
1997 to 1999 resulted primarily from our investment in sales and marketing
personnel. This investment included additional North American field sales
offices in 1997, 1998 and 1999. During this period, the number of sales
representatives in North America increased from two to 16. In addition, the
costs associated with time spent by engineers on technical sales support is
reflected as a selling expense, and such time has increased steadily with
increased sales. The increase in selling and marketing expenses also reflects
increased marketing activities, including advertisements, tradeshows, public
relations activities and educational seminars during these years.

     Research and development expenses. Research and development expenses
decreased by 4.5% from $2.0 million in 1997 to $1.9 million in 1998 and
increased 174.5% to $5.2 million in 1999. The modest decrease in research and
development expenses from 1997 to 1998 reflected the temporary movement of
engineering resources into professional services to deliver client projects.
The increase from 1998 to 1999 was driven by the increased hiring of software
developers, quality assurance and testing personnel and speech scientists to
develop and enhance our products.

     General and administrative expenses. General and administrative expenses
increased 198.7% from $1.1 million in 1997 to $3.2 million in 1998 and
increased 112.0% to $6.7 million in 1999. The increases from 1997 to 1999 were
primarily due to additional infrastructure necessary to support our growing
operations in the United States and internationally, as well as the addition of
senior level management to lead our growth and increased recruiting costs.

     Stock compensation. In connection with the grant of stock options during
the year ended December 31, 1999, we recorded deferred stock compensation
charges of $5.4 million. Stock compensation charges represent the difference
between the deemed fair value for financial reporting purposes of our common
stock on the date of grant and the exercise price of options granted to
employees to acquire our common stock during this period, multiplied by the
number of option shares. We expect to record additional deferred stock
compensation charges of approximately $5.2 million during 2000, including $1.1
million of charges in the first quarter of 2000. Deferred stock compensation is
amortized to expense ratably over the vesting period of the options granted,
which is typically four years. During 1999, we recorded amortization of
deferred stock compensation of $508,000. No deferred stock compensation was
recorded during the years ended December 31, 1997 and 1998. We will continue to
amortize the deferred stock compensation over the next four years as options
granted at below the deemed fair value of our common stock continue to vest.

     Interest and other income (expense), net. Interest income was $349,000 in
1997, $299,000 in 1998 and $549,000 in 1999. Interest expense was $49,000 in
1997, $72,000 in 1998 and $113,000 in 1999. The decrease in interest income
from 1997 to 1998 was the result of decreasing cash balances due to cash being
used to fund operations. The increase in interest income from 1998 to 1999 is a
result of net increasing cash balances, due to the preferred stock financing
raised in early 1999, partially offset by cash being used to fund operations.
The increase in interest expense is primarily due to increases in debt payable
under our line of credit and capital equipment leases. Other expenses include
other non-operating costs.

                                       29
<PAGE>

Quarterly Results of Operations

     The following table sets forth unaudited quarterly consolidated statement
of operations data for each of the nine quarters in the period ended March 31,
2000. In the opinion of management, the unaudited interim financial results
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of our results of operations for those
periods. The quarterly data should be read in conjunction with the consolidated
financial statements and related notes thereto appearing elsewhere in this
prospectus. The results of operations for any quarter are not necessarily
indicative of the results of operations for any future period.

<TABLE>
<CAPTION>
                                                           Three Months Ended
                           ---------------------------------------------------------------------------------------
                           Mar. 31,  June 30, Sept. 30, Dec. 31,  Mar. 31,  June 30,  Sept. 30, Dec. 31,  Mar. 31,
                             1998      1998     1998      1998      1999      1999      1999      1999      2000
                           --------  -------- --------- --------  --------  --------  --------- --------  --------
                                                             (in thousands)
 <S>                       <C>       <C>      <C>       <C>       <C>       <C>       <C>       <C>       <C>
 Revenue:
   Product licenses......  $   132    $  678   $   407  $   350   $   341   $ 1,053    $   733  $ 1,553   $ 2,607
   Professional
    services.............      434       692       626    1,121     1,099     1,637      1,303    1,905     2,158
   Other revenue.........       24         7         9    1,370     1,850     1,114        522      901       322
                           -------    ------   -------  -------   -------   -------    -------  -------   -------
 Total revenue...........      590     1,377     1,042    2,841     3,290     3,804      2,558    4,359     5,087
                           -------    ------   -------  -------   -------   -------    -------  -------   -------
 Cost of revenue:
   Cost of product
    licenses.............        6        26        20       --         9        32         19       93        45
   Cost of professional
    services.............      382       406       555      639       974     1,265      1,312    1,440     1,694
   Cost of other
    revenue..............       (2)        3         2      887     1,239       814        215      719       150
                           -------    ------   -------  -------   -------   -------    -------  -------   -------
 Total cost of revenue...      386       435       577    1,526     2,222     2,111      1,546    2,252     1,889
                           -------    ------   -------  -------   -------   -------    -------  -------   -------
 Gross profit............      204       942       465    1,315     1,068     1,693      1,012    2,107     3,198
                           -------    ------   -------  -------   -------   -------    -------  -------   -------
 Operating expenses:
   Selling and
    marketing............      549       675     1,088    1,555     1,547     2,135      1,913    3,659     3,794
   Research and
    development..........      408       422       520      531       898       965      1,447    1,854     1,810
   General and
    administrative.......      431       544       942    1,240     1,086     1,338      1,504    2,765     3,308
   Stock compensation....       --        --        --       --        12        42        129      325       393
                           -------    ------   -------  -------   -------   -------    -------  -------   -------
 Total operating ex-
  penses.................    1,388     1,641     2,550    3,326     3,543     4,480      4,993    8,603     9,305
                           -------    ------   -------  -------   -------   -------    -------  -------   -------
 Loss from operations....   (1,184)     (699)   (2,085)  (2,011)   (2,475)   (2,787)    (3,981)  (6,496)   (6,107)
 Interest and other
  income (expense), net..       37        60        79       43        15       107        193      (39)        8
                           -------    ------   -------  -------   -------   -------    -------  -------   -------
 Net loss................  $(1,147)   $ (639)  $(2,006) $(1,968)  $(2,460)  $(2,680)   $(3,788) $(6,535)  $(6,099)
                           =======    ======   =======  =======   =======   =======    =======  =======   =======
</TABLE>

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                          Three Months Ended
                          ----------------------------------------------------------------------------------
                          Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
                            1998     1998     1998      1998     1999     1999     1999      1999     2000
                          -------- -------- --------- -------- -------- -------- --------- -------- --------
                                                 (as a percentage of total revenues)
<S>                       <C>      <C>      <C>       <C>      <C>      <C>      <C>       <C>      <C>
Revenue:
  Product licenses......      22%     49%       39%      12%      10%      28%       29%       36%      51%
  Professional
   services.............      74      50        60       40       34       43        51        44       43
  Other revenue.........       4       1         1       48       56       29        20        20        6
                            ----     ---      ----      ---      ---      ---      ----      ----     ----
Total revenue...........     100%    100%      100%     100%     100%     100%      100%      100%     100%
                            ====     ===      ====      ===      ===      ===      ====      ====     ====

Cost of revenue:
  Cost of product
   licenses.............       1%      2%        2%      --%      --%       1%        1%        2%       1%
  Cost of professional
   services.............      64      30        53       23       30       33        51        33       33
  Cost of other
   revenue..............      --      --        --       31       38       21         8        17        3
                            ----     ---      ----      ---      ---      ---      ----      ----     ----
Total cost of revenue...      65      32        55       54       68       55        60        52       37
                            ----     ---      ----      ---      ---      ---      ----      ----     ----
Gross profit............      35      68        45       46       32       45        40        48       63
                            ----     ---      ----      ---      ---      ---      ----      ----     ----
Operating expenses:
  Selling and
   marketing............      93      49       105       55       47       56        75        84       75
  Research and
   development..........      69      31        50       19       27       26        57        43       35
  General and
   administrative.......      73      39        90       44       33       35        59        63       65
  Stock compensation....      --      --        --       --       --        1         5         7        8
                            ----     ---      ----      ---      ---      ---      ----      ----     ----
Total operating
 expenses...............     235     119       245      118      107      118       196       197      183
                            ----     ---      ----      ---      ---      ---      ----      ----     ----
Loss from operations....    (200)    (51)     (200)     (72)     (75)     (73)     (156)     (149)    (120)
Interest and other
 income (expense, net)..       6       4         8        2       --        3         8        (1)      --
                            ----     ---      ----      ---      ---      ---      ----      ----     ----
Net loss................    (194)%   (47)%    (192)%    (70)%    (75)%    (70)%    (148)%    (150)%   (120)%
                            ====     ===      ====      ===      ===      ===      ====      ====     ====
</TABLE>

     Our revenue and operating results are difficult to forecast and will
fluctuate. We believe that period-to-period results will not necessarily be
meaningful. As a result, you should not rely on them as an indication of our
future performance.

     Product license revenue. Our revenue from product licenses has fluctuated
from quarter to quarter. The variability in product license revenue in the past
has been driven primarily by large orders from resellers, OEM's, or follow-on
orders from existing clients which are unpredictable. We expect this
variability to continue for the foreseeable future.

     Professional services revenue. Our professional services revenue has
fluctuated from quarter to quarter primarily as a result of the uneven nature
of project-oriented work.

     Other Revenue. Our other revenue has fluctuated from quarter to quarter.
Since reselling hardware and facilities management services is only done at the
request of customers, it is difficult to predict when such orders will be
received.

     Cost of Product Licenses. Cost of product license revenue has fluctuated
from quarter to quarter with product license revenues. In addition to changes
due solely to the amount of product license revenue, the percentage of product
license revenue due to MIT in the form of royalties has decreased over time.
Our license with MIT provides that the royalty decreases to 1% of our product
license revenues once our cumulative product license revenues exceed $6
million. We expect to reach this cumulative milestone in 2000.

                                       31
<PAGE>

     Cost of professional services. Cost of professional services revenue has
generally increased steadily quarter to quarter during the last nine quarters,
mainly due to the addition of new employees devoted to professional services.
We expect professional services revenue to continue to fluctuate for the
foreseeable future.

     Cost of other revenue. Cost of other revenue has fluctuated from quarter
to quarter with other revenue. As the percentage of our business represented by
resales decreases in the future, this source of variability should be reduced.

     Operating expenses. Our total operating expenses have increased in each of
the last eight quarters. We have increased our spending in every functional
area of the organization as we have steadily added employees in our services
organization, research and development, sales, marketing, and administration.
We anticipate that our operating expenses will increase for the foreseeable
future as we continue to invest in our sales and marketing efforts to build
market and brand awareness, enlarge our North American and international client
base, invest in research and development critical to maintaining our
technological leadership, and expand our administrative infrastructure to
support our growth. Our investments in these activities could significantly
precede any revenue generated by the increased spending. If we do not
experience significantly increased revenue from these efforts, our business
could be adversely affected.

Liquidity and Capital Resources

     Since 1995, we have funded our operations primarily through the private
placement of convertible preferred stock totaling $40.0 million through March
31, 2000, and to a lesser extent, through bank borrowings and capital equipment
lease financing. As of March 31, 2000, we had cash and cash equivalents of $5.0
million and $1.3 million available under our revolving line of credit. Our
operating activities resulted in net cash outflows of $2.3 million in 1997,
$6.4 million in 1998, $14.6 million in 1999 and $5.1 million in the three
months ended March 31, 2000. The operating cash outflows for these periods
resulted primarily from our significant investment in research and development,
sales and marketing and infrastructure.

     To date, our investing activities have consisted primarily of purchases
and maturities of short-term investments and capital expenditures for property
and equipment, including $479,000 of capital expenditures in 1997, $926,000 in
1998, $3.1 million in 1999 and $1.2 million in the three months ended March 31,
2000. The significant increase in our capital expenditures in 1999 was the
result of building our infrastructure and expanding operations into new
locations in the United States, Canada, Singapore, the United Kingdom and
Mexico. These capital expenditures have consisted primarily of computer
hardware, software and furniture and fixtures for our growing employee base. We
anticipate that investment in capital equipment will continue, though not at
the rate of increase seen between 1998 and 1999. Total investing activities
used cash of $1.1 million in 1997, generated net cash of $3.7 million in 1998,
used cash of $3.5 million in 1999 and used cash of $1.2 million in the three
months ended March 31, 2000.

     At June 20, 2000, following an amendment to our bank agreement, we had
$2.0 million available under our revolving line of credit. The revolving line
of credit expires on May 31, 2001.

     We had an equipment line of credit which we converted into a term loan in
the amount of $1.5 million. The term loan bears interest at an annual rate of
prime plus 0.75% (9.2% at March 31, 2000), and principal and interest under the
term loan are payable in 36 monthly installments through September 2002.

     Our financing activities generated cash of $2.9 million, $6.7 million and
$25.0 million in 1997, 1998 and 1999, respectively, and used cash of $134,000
in the three months ended March 31, 2000. Of these financing activities, the
issuance of convertible preferred stock and common stock generated net proceeds
of $2.5 million, $6.9 million, $23.8 million and $122,000 in the same
respective periods. We had proceeds from bank borrowings of $0.0, $0.0, $1.5
million and $0.0 during the same respective years. Repayment of bank borrowings
and capital leases during the same periods was $126,000, $222,000, $398,000 and
$257,000 during 1997, 1998, 1999 and the three months ended March 31, 2000,
respectively.

                                       32
<PAGE>

     On April 11, 2000, we closed an additional round of private financing in
which we raised net proceeds of $19.9 million through the issuance of our
series E convertible preferred stock. Unless otherwise indicated, the cash and
equity impact of this transaction is not reflected in this prospectus since the
closing occurred after March 31, 2000. Because the deemed fair market value of
our common stock for financial reporting purposes was greater than the issuance
price of the series E convertible preferred stock, we will record a beneficial
conversion feature of $5.2 million on the series E convertible preferred stock,
which will be treated as a preferred stock dividend as of the date of issue.

     On May 31, 2000, we issued to a series E investor a warrant to purchase
47,710 shares of common stock at an exercise price of $7.86 per share. The
warrant is exercisable on or before May 31, 2002.

     Pursuant to the Net2Phone agreement, Net2Phone has agreed to purchase $4.0
million of our common stock in a private placement concurrent with the initial
public offering at a purchase price equal to the lesser of $12.46 per share and
89% of the price to the public in this offering.

     Pursuant to the America Online agreement, America Online has agreed to
purchase $5.0 million of our common stock in a private placement concurrent
with the initial public offering at a purchase price equal to the lesser of
$12.46 per share and 89% of the price to the public in this offering. We also
issued America Online a warrant to purchase up to 765,422 shares of our common
stock at an exercise price equal to the lesser of $12.46 and 89% of the price
to the public in this offering. These warrants are exercisable upon the earlier
of America Online achieving specified voice portal user minute milestones or
two years.

     We believe that the net proceeds of this offering and the concurrent
private placements, together with existing cash and cash equivalents, will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months. See "Use of Proceeds" for more information
regarding our use of proceeds.

     We may need to raise additional funds in order to fund more rapid
expansion, including significant increases in personnel and office facilities,
to develop new or enhance existing products or respond to competitive
pressures. We cannot assure you that additional financing will be available at
all or that, if available, will be on terms favorable to us or that any
additional financing will not dilute your ownership interest in SpeechWorks.

Recent Accounting Pronouncements

     In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in SOP 98-9. Under the residual method, revenue is recognized as
follows:

   .  the total fair value of undelivered elements, as indicated by vendor
      specific objective evidence, is deferred and subsequently recognized
      in accordance with the relevant sections of SOP 97-2, and

   .  the difference between the total arrangement fee and the amount
      deferred for the undelivered elements is recognized as revenue related
      to the delivered elements.

     SOP 98-9 is effective for transactions entered into during years beginning
after March 15, 1999 which is year 2000 for us, although early adoption is
permitted. We have adopted SOP 98-9.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133,
as recently amended by

                                       33
<PAGE>

SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," is effective for
fiscal years beginning after June 15, 2000. Because we do not currently hold
any derivative instruments and do not currently engage in hedging activities,
the adoption of SFAS No. 133 will not have a material impact on our financial
position or operating results.

     In March 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"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 will
become effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. We do
not expect the application of FIN 44 to have a material impact on our financial
position or results of operations.

Quantitative and Qualitative Disclosures about Market Risk

     A portion of our business is conducted outside the United States through
our foreign subsidiaries and branches. We have foreign currency exposure
related to our operations in international markets where we transact business
in foreign currencies and accordingly are subject to exposure from adverse
movements in foreign currency exchange rates. Our foreign subsidiaries maintain
their accounting records in their local currencies. Consequently, changes in
currency exchange rates may impact the translation of foreign statements of
operations into U.S. dollars, which may in turn affect our consolidated
statements of operations. Our functional currency is the U.S. dollar for all of
our foreign subsidiaries and branches, and therefore, translation gains and
losses are included as a component of net income or loss. Substantially all of
our revenues are invoiced and collected in U.S. dollars.

                                       34
<PAGE>

                                    BUSINESS

                                    Overview

     SpeechWorks is a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services over any telephone. With our speech
recognition solutions, consumers can direct their own calls, obtain information
and conduct transactions automatically, simply by speaking naturally over any
telephone, anytime. We currently offer two speech recognition solutions for
over-the-telephone applications, the SpeechWorks 6 platform and our recently
introduced SpeechSite package. We complement our products with a professional
services organization that offers a range of services including application
development and project management.

     Since shipping our first products in 1996, we have received numerous
awards for our product capabilities and our industry leadership, including
Industry Week's Technology of the Year Award and Frost & Sullivan's Market
Strategy Leadership Award. To date, we have licensed SpeechWorks software to
more than 170 clients worldwide in a variety of industries including retail,
financial services, pharmaceuticals, telecommunications, technology,
distribution and travel. Our clients include Amtrak, Apple Computer, BellSouth
IntelliVentures, CellularOne, Continental Airlines, DLJ Direct, E*TRADE,
MapQuest.com, MCI WorldCom, McKessonHBOC, NetByTel.com, Nortel Networks,
Quack.com, SingTel Mobile, United Airlines and Universal Electronics.

                              Industry Background

     Businesses and consumers today share a common vision of e-business as a
means of communicating information and completing transactions anywhere,
anytime, through any communications device. This vision has been fueled by the
growth of the internet and the recent rapid growth in wireless communications
technologies and services. In order to take advantage of these communications
channels and to reach the widest population possible, businesses have made
significant investments in their e-business infrastructures. Businesses are now
seeking to maximize the return on their e-business investments, improve their
customer service responsiveness, and capitalize on the substantial growth of
the wireless telephone network as a new distribution channel.

The Internet and e-Business

     In the past decade, the internet has emerged as a global communications
network and channel for business and has fundamentally changed the way
consumers and businesses obtain information, communicate, purchase goods and
transact business. Many businesses now define their strategy and assess their
ability to compete based on the quality and diversity of the information,
products or services they offer online. Increasingly, consumers are retrieving
information from online databases and buying goods and services - tickets,
stocks, books - without going to a business in person or even speaking with a
customer service representative over the telephone. International Data
Corporation, or IDC, estimates that the internet will continue to grow as a
medium for commerce, with over $1.6 trillion in sales being initiated over the
internet by the end of 2003.

The Telephone and e-Business

     Despite the internet's growing acceptance, the telephone network is more
widely and readily accessible. Telephones are simple to operate and use the
most natural form of communication, the human voice. IDC estimates that in 1999
there were over 932 million telephone lines installed worldwide as compared to
approximately 240 million internet users worldwide. IDC also estimates that in
the same year there were over 427 million wireless telephone subscribers
worldwide and projects this number will grow to over one billion subscribers
worldwide by 2003.

                                       35
<PAGE>

     To manage the growth in telephone-based interactions, businesses have made
significant investments in customer service infrastructures such as call
centers staffed with customer service representatives. IDC estimates that
worldwide spending on customer relationship management services, which includes
expenditures on call centers, exceeded $40 billion in 1999. The Gartner Group
estimates that approximately 70% of call center costs are allocated to labor
and personnel.

     In addition, new technologies are being used, primarily by communications
service providers, to provide internet information services such as e-mail,
news, stock quotes, weather and sports information to wireless subscribers.
With these technologies, businesses are looking to extend access to their e-
business infrastructure to cellular telephones and other wireless handheld
devices such as personal digital assistants.

Need for Enhanced Access to e-Business

     The growth of the internet as a global medium for communications and
commerce has been driven, in part, by the increased availability of personal
computers and easy to use, visual web browser interfaces. Access to the
internet over a personal computer is limited because consumers must have access
to a computer and a working internet connection. Further, using a web browser
on a personal computer can be difficult and slow. Wireless access to the
internet over cellular telephones and other handheld devices has the potential
to resolve the mobility and internet connectivity issues presented by internet
access over a personal computer. However, while the number of these devices has
increased in recent years, display screens on these devices are small and the
ability to input information using portable keyboards is constrained, limiting
the usability and convenience of this solution. Therefore, the goal of anytime,
anywhere access to a wide variety of information services has not yet been
fully realized.

     Access to businesses and information over the telephone is somewhat easier
than access over the internet because of the greater availability of landline
and wireless telephones. Although businesses have made significant investments
in staffed call centers, consumers are frequently required to wait on hold for
extended periods due to the lack of call center capacity or are unable to speak
to a customer service representative due to the high cost of having customer
service representatives available around the clock. Businesses have attempted
to alleviate this problem by automating call center services using touch-tone
technologies. However, the range of services that can be automated using touch-
tone is limited, and the interface itself can be frustrating for users. Touch-
tone menus can be difficult to follow and callers often choose to dial "0" to
wait for a human operator or hang up rather than use such a system.

Speech-Activated Solutions for e-Business

     To conduct e-business in a truly mobile, device-independent fashion, the
ability to communicate and conduct transactions in a hands-free manner is
essential. Speech recognition technology allows businesses to leverage their
investment in their e-business infrastructure to offer their customers quick
and easy access to information and services over the most readily available
communications device, the telephone. For example, businesses can offer their
customers the ability to obtain information and complete transactions using
words and natural sentences such as:

 "I'd like to transfer $5,000 from my checking account to my savings account."

           "Is the 5 o'clock flight from New York to Boston on time?"

                     "When will my shipment be delivered?"

     Speech recognition technology allows callers who would otherwise have to
wait for a live call center agent to be serviced automatically and those who
might otherwise be frustrated by having to choose from many touch-tone options
to speak directly to the e-business application. Speech recognition technology
also provides a key differentiator for companies seeking to provide a
convenient, flexible and robust interface for customers to conduct internet
transactions through a medium other than a personal computer or personal
digital assistant.

                                       36
<PAGE>

     Although basic speech recognition technology has existed for decades, it
has not been widely used in telephone applications due to a number of technical
and commercial limitations. In order to provide high-quality speech-activated
services to callers, businesses require a solution that:

   .  recognizes a large vocabulary with low error rates,

   .  allows users to speak in natural phrases or sentences and to interrupt
      when they are ready,

   .  provides high-level development and operations tools that are
      integrated in accepted platforms,

   .  includes professional services to assist in one or more phases of the
      deployment lifecycle, and

   .  is sufficiently cost-effective and scalable that it promises an
      attractive return on investment.

                            The SpeechWorks Solution

     SpeechWorks is a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services. Complementing the self-service model of
e-business, our speech recognition solutions, including the packaged solution
known as SpeechSite, let consumers direct their own calls, obtain information
and complete transactions automatically, simply by speaking naturally over any
telephone, anytime. Our speech recognition technology enables our clients to
extend the reach of their e-business solutions beyond the web and beyond
screen-based interfaces to anyone with access to a wireless or landline
telephone.

     Enterprises are building speech-activated services with our products that
will automate and enhance customer service by making it easier for customers to
retrieve information and conduct transactions without waiting on hold or
speaking to an agent. Examples of phrases that can be understood by
applications enabled by our software are: "What is my checking account
balance?" and "Buy 100 shares of General Electric at the market price." These
services can improve the caller's experience and save expensive customer
service representative time.

     Communication carriers and their partners are building speech-activated
services with our products that we believe have the potential to change the way
people use the telephone for network services. Applications have been built,
and enabled by our software, that can understand phrases such as "Call Mike
Phillips at home," and "Forward this message to Bill O'Farrell." In addition, a
new class of service providers known as voice or speech portals, is using our
software to build applications that can understand phrases such as: "What is
the weather in Paris?" and "What was the score of the Red Sox game today?"
These services can differentiate one carrier's service offering from another
and increase the ability of carriers to attract and retain users.

                                       37
<PAGE>

          Examples of Speech-Activated Services Enabled by SpeechWorks


<TABLE>
<CAPTION>
                                                            Network Services
                                Customer Services            Provided by a
                            Provided by an Enterprise    Communications Carrier

--------------------------------------------------------------------------------
   <S>                     <C>                          <C>
   Information Retrieval   Price quotes                 Weather
                           Order/account status/update  Traffic
                           Product information          Horoscopes
                           Directions                   News and sports

--------------------------------------------------------------------------------
   Communications          Automated attendant/operator Speech-activated dialing
    Management             Internal call routing        Network call routing
                           Voice/unified messaging      Voice portals

--------------------------------------------------------------------------------
   Transaction Processing  Flight booking               Call completion
                           Restaurant reservations      Cellular bill payment
                           Product purchase or sale     Hosted services
</TABLE>


     We complement our products with a professional services organization that
offers a range of services including application development and project
management. We have designed these services to shorten time-to-market, reduce
project implementation risk and improve our clients' competitive position. We
are focused on developing and extending our products and services to provide
our clients with a comprehensive means for building, managing and delivering
sophisticated e-business applications and services that can be accessed over
the telephone.

     Our solutions are designed to provide the following benefits to our
clients:

     Increased revenues. Companies that implement speech recognition solutions
can use the additional, ubiquitous access to their online services to
differentiate their e-business offering from their competition and thereby
increase customer loyalty and reduce customer turnover. Many e-business
applications that were difficult to use with touch-tone technology, such as
stock trading and flight booking, can be more readily provided over the
telephone with our speech solutions. Online brokerages, for example, have used
our products to extend their automated services to new users who are not online
and to enable existing online subscribers to conduct trades when they are
unable to access the web with an internet browser. Increased automation of
incoming calls can free up call center agents to take on cross-selling and
other revenue-generating activities. Using our products, communications
carriers can offer new, revenue-generating services to wireless or landline
telephone users, such as speech-activated dialing and voice access to instant
messaging and information or voice portals.

     Increased customer satisfaction and retention. Our speech-activated
services provide our clients' customers with a variety of services that are
accessible from any telephone, 24 hours-a-day, seven days-a-week. A caller is
generally not required to wait on hold or navigate complex touch-tone menus.
Our clients can personalize an application's dialog to match their callers'
needs, for example "Would you like to ticket your regular trip to Chicago, Mrs.
Jones?" Our speech-activated solutions also include barge-in technology that
enables callers to interrupt an application with responses or new queries,
thereby completing the transaction more efficiently. Customers that are
becoming accustomed to accessing account or other information on the web can
now benefit from easy telephone access to the same information or services.
Customers are ultimately given more control if they can choose how - web
browser, mobile device, or telephone - and when to retrieve information or
conduct transactions.

                                       38
<PAGE>

     Lower operational costs. Our clients can decrease their telephone expense
by shortening the average customer call length and by answering common customer
questions with a speech application rather than requiring callers to hold for a
live agent or employee. Speech-enabled call routing, such as that provided by
our recently launched SpeechSite product, can increase customer service
efficiency by classifying call types and collecting pertinent information prior
to transferring calls to an appropriate representative. This means that the
same number of customer service representatives are able to answer a higher
volume of calls. We believe that off-loading repetitive calls to a speech
application and routing the more challenging transactions to highly trained
customer service representatives can also increase employee job satisfaction
and decrease staff turnover. Our solutions can support multiple languages on a
single system, thereby reducing the number of platforms and telephone numbers
required. We believe our efficient speech recognition engine and our single
system architecture obviate the need for dedicated recognition servers which
results in a lower total cost of ownership than many other alternative
architectures.

     Superior technology and architecture. Our recognition technology allows
our clients' applications to recognize spoken words and phrases based in part
on a self-learning feedback loop that can be configured to automatically adapt
the system to user characteristics such as accents and pronunciations. Natural
language processing capabilities allow callers to speak in complete phrases and
sentences and can be configured to provide hints that alert novice or first-
time users to these capabilities. Taking advantage of dramatic increases in
host processing power, SpeechWorks offers speech recognition solutions that
operate in one integrated system and do not require a separate and potentially
costly server in order to function. These elements of our technology,
integration and architecture enable our clients to develop and deploy speech-
activated applications reliably and cost-effectively.

     High level tools for rapid time to market. We offer high-level building
blocks, known as DialogModules, that make it easy for developers to build
speech applications with proven and consistent call flows and user interfaces.
The availability of DialogModules tailored for specific situations gives our
clients the ability to more easily create and maintain applications and achieve
significant reductions in development cycle time and cost per deployed
application. DialogModules have been tightly integrated into well-known
toolkits from leading vendors such as InterVoice-BRITE, Aspect Communications,
Comverse Technology, Lucent Technologies and Intel so that developers can
become effective quickly. SpeechWorks also offers operations and tuning tools
that enable our clients to evaluate and improve deployed applications, based on
actual caller experiences, quickly and easily.

     High quality professional services. We complement our products with a high
quality professional services organization that offers a wide range of
services. Our professional services organization supports our partners and our
clients with business and systems consulting, project management and
application development assistance. We have designed these professional
services to shorten time-to-market, reduce project implementation risk and
improve our clients' competitive position. We believe that our ability to
successfully deliver an integrated solution to our clients provides us with a
significant competitive advantage in the market for speech-activated solutions
for e-business.

                            The SpeechWorks Strategy

     Our goal is to become the leading global provider of speech-activated
solutions for e-business. The key elements of our strategy are to:

     Maintain market leadership. Our industry-leading solutions for speech-
enabled applications allow enterprises to build and rapidly deploy speech-
activated services. The SpeechWorks platform allows businesses to develop
applications quickly and efficiently while maintaining a consistent user
interface design, thereby increasing caller satisfaction rates and
strengthening customer loyalty. The SpeechSite package includes easily
deployed, enterprise applications that enable businesses of any size to
transform the way that they respond to incoming telephone calls. We intend to
maintain our leadership position by

                                       39
<PAGE>

enhancing our existing products and developing a variety of new products and
services that make it easy for businesses to use speech recognition technology
to improve customer satisfaction, generate new revenue opportunities and reduce
operational costs.

     Extend technology lead. We have focused our research and development
efforts on tightly integrated e-business solutions that are reliable, scalable
and flexible. We currently have four U.S. patents, 13 U.S. patents pending and
eight international patents pending. We have also recently entered into an
agreement with AT&T to license certain core speech recognition and speech
synthesis technology. By investing in advanced research and development, we
continually improve recognition accuracy, cost-effectiveness and ease of use.
We continue to devote significant resources to technical innovation and plan to
improve the usability of our tools and technologies and to customize our
applications to meet specific client needs. Concurrently, we evaluate emerging
technologies and industry standards and update our technology in response to
changes in the market. We believe that these efforts will allow us to
anticipate and accommodate changing client needs.

     Leverage professional services capabilities. We have established
successful relationships with our clients and partners by advising and
assisting them in the development and deployment of speech-activated
applications. We offer our clients and partners ongoing training in our speech
application development lifecycle and access to the resources in our rapid
prototyping center. We intend to continue our focus on shortening development
lifecycles and making it easy for new clients and partners to become educated
and effective users of our speech-activated solutions. In addition, we offer
high-quality professional services capabilities through third-party alliances.
By offering our clients a full range of professional services, we believe we
can accelerate acceptance of our speech-activated solutions for e-business and
create opportunities to sell new or enhanced products to clients.

     Expand international presence. We currently have more than 45 non-U.S.
based clients and partners in Europe, Asia, and Latin America. Our SpeechWorks
platform currently supports the following languages and dialects: Australian
English, Brazilian Portuguese, Canadian French, Cantonese, European French,
German, Japanese, Korean, Latin American Spanish, Mandarin, Singapore English,
U.K. English and U.S. English. We have opened sales and development offices in
England, Singapore, Mexico and Canada and we have sales representatives in
France, Germany and Australia. We intend to continue our expansion in those
regions where businesses and other institutional clients value the addition of
speech access to their e-business services.

     Expand sales channels to drive market penetration. We currently have 34
sales representatives and have established 55 partner relationships in 12
countries. We are working to increase client adoption of our solutions by
expanding our direct sales force and our indirect sales channels through
additional relationships and strategic alliances with key systems integrators,
value-added resellers and original equipment manufacturers. We believe that by
establishing and strengthening relationships with our key partners around the
world, we can target a broader client base and accelerate adoption of our
solutions.

     Build brand awareness. We plan to expand awareness of SpeechWorks as a
leading provider of speech-enabled e-business solutions. We have implemented
several "SpeechWorks Here" programs to brand our solution as the enabler behind
our clients' speech-activated, e-business efforts. We use a variety of
strategic marketing programs including advertising, trade shows and web
seminars. We intend to continue to expand our traditional and online marketing
activities to build awareness of our brand.

                                    Products

     We offer two speech recognition products for over-the-telephone
applications:

   .  SpeechWorks 6, a comprehensive set of software tools and core speech
      recognition technology that can be used to build state-of-the-art,
      speech-activated services, and

   .  SpeechSite, a packaged application that answers and directs telephone
      calls and delivers company information.

                                       40
<PAGE>




                              [CHART APPEARS HERE]


     SpeechWorks 6. SpeechWorks 6 is the current release of our software
platform for developing and deploying customized speech applications in a
variety of languages. SpeechWorks 6 runs on Windows NT- and UNIX-based
operating systems and supports multiple telephony interfaces.

     SpeechWorks 6 includes our:

   .  SMARTRecognizer core recognition engine,

   .  DialogModule building blocks,

   .  natural language tools for building and maintaining grammars,
      vocabularies and pronunciations, and

   .  operations and tuning tools for monitoring and improving deployed
      applications.

     SMARTRecognizer. The SMARTRecognizer provides advanced technology for
speech recognition over the telephone. It can recognize more than 65,000
different words or phrases at a time, including customized vocabularies. It can
also recognize complete phrases and sentences such as, "I'd like to transfer
$500 from checking to savings today." The SMARTRecognizer can understand
different speakers without user training and it supports continuous speech,
allowing callers to speak at a normal rate without pausing between words.

     DialogModules. DialogModules are pre-packaged software building blocks
that enable our clients to build speech applications quickly and easily. Each
DialogModule performs a particular task within an application, ranging from
simple tasks such as capturing a yes/no response or a telephone number from a
caller, to more complex tasks such as selecting an item from a large vocabulary
list. DialogModules include pre-built grammars, user interface design, call
flow and error recovery routines to provide developers with easily configurable
functionality. To further aid the development of speech applications,
SpeechWorks DialogModules have been integrated as graphical icons in a number
of application development toolkits provided by our distribution partners.

     Natural language tools. Natural language tools include a vocabulary editor
that enables developers to generate and maintain large vocabulary lists of
words that are recognized at specific times during a call. Developers can add
new words by typing them in or pointing to a text database. SpeechWorks 6
generates the pronunciations automatically using either its built-in dictionary
of 250,000 words or by following

                                       41
<PAGE>

standard phonetic rules. The vocabulary editor also allows the developer to
specify synonyms and alternative pronunciations for each of the vocabulary
items. A grammar editor enables developers to build and test complex natural
language grammars. Another SpeechWorks tool, the pronunciation editor, allows
the developer to edit pronunciations of each vocabulary item.

     Operations and tuning tools. Operations and tuning tools enable developers
to review application performance data in an easily understood graphical form.
These tuning tools provide detailed reports regarding recognition performance
and user interface effectiveness, peak usage times and call duration, execution
results for DialogModules and potential problem areas.

     SpeechWorks 6 includes patented barge-in technology that enables callers
to interrupt an application with responses or new queries.

     We released SpeechWorks 6.5 in June 2000. SpeechWorks 6.5 offers
improvements in recognition accuracy and performance and additional features,
including plug-n-play DialogModules and additional languages, an Address
DialogModule, a Verification DialogModule and natural language enhancements.
Plug-n-play DialogModules and languages provide additional flexibility for
adding new DialogModules and languages. The Address DialogModule encapsulates
mechanisms for interacting with a caller to solicit and recognize U.S.
residential, post office box and rural route addresses. The Verification
DialogModule supports integration with third-party speaker verification
algorithms to perform authentication of callers by matching their voices to
previously enrolled "voiceprints" or templates. The natural language
enhancements provide capabilities for handling more complex natural language
grammars through improved modeling and more detailed confidence score
interpretation.

     SpeechSite. Our recently launched SpeechSite product is a packaged
application solution that is built on our SpeechWorks 6 platform and is
designed to bring the web model of self-service to the telephone. SpeechSite
can provide callers with a wide variety of company information, direct calls
and support custom built transactions using spoken words.

     We offer SpeechSite as a turnkey solution using content supplied by our
client. Our pre-packaged SpeechSite applications are designed to be deployed
and fully functional in less than two weeks. Our SpeechSite solution includes
all required hardware, software and professional services, including
configuration of the system, professional recordings of corporate information,
and implementation and training at the client's facility.

     The hardware platform for a SpeechSite currently consists of a Dell PC
running Windows NT utilizing Intel's Dialogic cards. SpeechSite software
consists of two major components: a SpeechSite engine and a SpeechSite
administration function. The SpeechSite engine is responsible for executing the
speech interface and connecting with the telephony system, while the SpeechSite
administration component is responsible for all configurations, reporting and
monitoring interfaces. In addition, SpeechSite uses Artisoft's Visual Voice Pro
as well as other complementary applications to provide enhanced features and
functionality. These complementary applications include text-to-speech software
from Lucent and WinFax Pro and pcAnywhere from Symantec.

     Open Speech Web. We recently launched an initiative called the Open Speech
Web which we believe will be the next phase in the evolution of speech
services. The Open Speech Web will connect a variety of speech services,
including portals, enterprise SpeechSites and directory services allowing
callers to freely navigate among speech-enabled services. To enable the Open
Speech Web, we developed a VoiceXML standards-based browser, the SpeechWorks
Speech Browser, and standards-based linking technology, the SpeechLink, both of
which are in beta testing. VoiceXML is a language for building speech
applications. Both the SpeechWorks Speech Browser and SpeechLink will be made
available as open source code. Our SpeechWorks Speech Browser is intended for
use by platform providers, service bureaus and telecommunications companies
that want to add VoiceXML services to existing platforms or to create new
VoiceXML-based solutions. SpeechLinks can be used to interconnect speech
services based on other vendors' technology to those based on our technology.

                                       42
<PAGE>

     SpeechSpot. SpeechSpot is a speech-based advertising placement program
which is designed to develop a revenue stream comparable to the banner
advertisement revenue available to internet sites. We are currently conducting
SpeechSpot research and concept testing and are designing and developing
support for SpeechSpot placements in three client applications. We intend to
create a SpeechSpot DialogModule to facilitate the delivery of SpeechSpot
placements in future client applications.

                         Solutions and Support Services

     We recognize that many clients want more than a software-only solution.
Consequently, we offer our clients a range of consulting and implementation
services through our solution services group as well as a rapid prototyping
center to help clients get started. These solution services are provided by
staff located in Boston, New York and San Francisco as well as in our
international centers of excellence in Canada, Mexico, the United Kingdom and
Singapore. We provide dedicated teams of professionals who follow our speech
application development lifecycle to help our clients and partners get their
speech applications working as quickly as possible and achieve maximum caller
satisfaction.

     Rapid prototyping center. We offer a rapid prototyping center that allows
potential clients to explore quickly and cost effectively the capabilities of
over-the-telephone, speech-activated applications. In our rapid prototyping
center, clients can experiment with speech recognition technology, user
interfaces and the tools required to build speech-activated services. An
application prototype helps potential clients experience real-world caller
interactions and can serve as the foundation for a full-scale production
system.

     Speech application development lifecycle. We have created a proprietary
speech application development lifecycle, or SADL, which is a disciplined
project management process to ensure successful implementation of our
solutions. Our lifecycle approach is based on three primary phases:
specification, development and deployment. In the specification phase, we
assess the functional, design and integration requirements of the system and
prepare a preliminary user interface specification. During the development and
deployment phases, developers are trained to pay particular attention to the
iterative testing and tuning of the application's user interface. In addition,
this approach supports parallel development of database and telephony system
integration requirements ensuring efficient and timely deployments. We believe
that our speech application development lifecycle has been an important reason
for our success with major client deployments to date.

     User interface design. We employ a team of user interface engineers and
human factors experts who study how people interact with computers to design
the most effective interface for a client's specific application. This team
follows a three-phase process: research, design and testing. In the research
phase, our engineers seek to understand the needs and desires of our clients
and their callers. In order to help make a callers' experience effective and
enjoyable, in the design phase, our engineers consider the implications that
our interface design may have on callers by taking into account call flow,
functionality, and the application's personality. Then our interface engineers
conduct usability tests and periodically monitor and improve call flow,
prompts, and recognition accuracy.

     Training. We offer training programs that provide clients with a review of
our products and services and an introduction to the process of building speech
applications. Our lectures and interactive workshops provide instruction on
embedding our software in a production-quality, runtime environment and
developing state-of-the-art natural language recognition capabilities.

     Maintenance and support. We also offer our clients and partners a range of
maintenance and support programs. These support programs include telephone and
e-mail support, web access to knowledge databases, technical support, software
patches and upgrades, and varying service level options. Application
consulting, user interface design and tuning services are also available to our
clients and partners.

     SpeechCare. We provide our SpeechSite clients with a technical support and
services package, SpeechCare, which consists of three services: voice prompt
recording and management, operations and technical support, and software
maintenance, patches and updates.

                                       43
<PAGE>

                                   Technology

     We have developed and/or enhanced and extended distinguishing technologies
in our products. These include:

   .  Segment-based statistical models. Our recognition system is based on
      work on segmental systems performed for many years at MIT and other
      research groups. The segmental approach, unlike the frame-based,
      Hidden Markov Model approach, is able to take into account the entire
      phonetic segment. This allows our product to better account for the
      static and dynamic properties of individual speech sounds which
      increases accuracy and reduces the overall amount of computation
      needed for a given recognition task.

   .  Barge-in. Barge-in technology allows callers to interrupt the outgoing
      prompts by speaking over them and allows our recognizer to understand
      what the user said when interrupting. We have developed patented
      technologies to provide state-of-the-art barge-in performance. We
      believe that clients using our technology were the first to support
      barge-in functionality in large scale, production applications.

   .  Dynamic vocabularies. Many traditional speech recognition engines
      require that the recognition vocabulary be defined and compiled at
      application development time. However, there are many applications
      where the necessary vocabulary must be generated while the application
      is running. We have therefore engineered our speech recognition engine
      to allow rapid, dynamic updates of recognition vocabularies.

   .  Automatic adaptation. We have incorporated a process to support
      automatic adaptation of the recognition models of our engine. The
      result is that, through a fully automated process, the SpeechWorks
      engine is able to reduce error rates by 30-60% over time as it is used
      for some applications.

     Platform integration. A key factor in the success of our products has been
the tight integration of these products on many of the leading interactive
voice response, or IVR, platforms. These platforms consist of a combination of
hardware and software, and provide robust scalable environments for building
speech applications. On some platforms, our DialogModules are used to write
applications directly in code, such as C, Java and Visual Basic. On platforms
with existing application development environments, the DialogModules are
integrated into the development environments to allow seamless development of
speech applications within the framework of the existing platform environment.

     Software architecture. Our products are built using well-defined layers of
functionality with module interfaces. These layers are built using a
combination of C and C++. DialogModules can be utilized through a number of
standard interface technologies, such as Microsoft's Component Object Module.
Platform integration is accomplished through a number of well-defined
application programming interfaces, or APIs, along with software that can be
replaced to match the needed functionality of a particular platform.

     Standards. We have been helping to drive evolving standards in a number of
areas in the telephone-based speech recognition industry. This includes
participation in the Enterprise Computer Telephony Forum, or ECTF, to define
the S.100 and S.300 APIs for speech recognition along with driving development
of standards for Dialog Application Components in the ECTF architecture. We
have also been an active participant in the World Wide Web Consortium, or W3C,
Voice Browser working group, which is developing standards for speech
applications and interfaces using web-based programming methods.

                           Recent Strategic Alliances

AT&T

     In June 2000, we entered into a development and license agreement with
AT&T to develop and sell products that use AT&T speech technology. The
technology includes AT&T speech software and text-to-

                                       44
<PAGE>

speech software, as well as certain other technology related to computer
processing of the human voice, including large vocabulary recognition, natural
language understanding and dialog management. AT&T has agreed to assist us in
marketing to AT&T business units the products and services that we develop. Our
license is royalty-free and non-exclusive. In return for these licenses and
assistance, we have issued to AT&T 1,045,158 shares of our common stock with
accompanying registration rights, as described in "Description of Capital
Stock--Registration Rights." We are also licensing to AT&T, on a non-exclusive
basis, the right to use the integrated speech recognition products for internal
research and development purposes, as well as to market commercial services to
third parties. We have agreed to sell the integrated speech recognition
products to AT&T at privileged pricing. We have also agreed to specific
personnel allocation commitments to develop integrated speech products which
incorporate AT&T speech technology.

  The term of the agreement is for five years. The agreement may be terminated
prior to the expiration of the term if either we or AT&T declares bankruptcy or
breaches, and fails to cure, a material term of the agreement. Further, AT&T
may terminate the agreement at any time after December 5, 2000 upon sixty days
prior written notice to us. If the agreement is terminated, we will retain the
technology license that we received from AT&T. Additionally, unless we
terminate the agreement because of a violation by AT&T, AT&T will retain the
licenses it received from us relating to the integrated speech recognition
products. Following termination, AT&T retains the right to purchase our
products and services, as well as the integrated speech products, at privileged
pricing.

  If we are acquired by a specified AT&T competitor, the source code to the
integrated speech recognition products will be released to AT&T to support
existing deployments. Moreover, the acquirer will be required to pay to AT&T a
supplemental license fee as follows:

   .  if the transaction occurs prior to June 5, 2002, an amount equal to
      the lesser of 5% of our then fair market value and $25 million, and

   .  if the transaction occurs after June 5, 2002, an amount equal to the
      lesser of 3% of our then fair market value and $15 million.

America Online

     In June 2000, we entered into a software license, professional services
and marketing agreement with America Online in which we have agreed to license
software and support the development and deployment of voice portals to America
Online's online services. Under the agreement, we will receive license,
professional services and maintenance and support fees. We will also be
entitled to fees if America Online and its affiliates receive certain levels of
revenue from their voice portals, not to exceed specified amounts. The
agreement has a three year term. However, America Online has the option to
terminate the agreement effective on the first or second anniversary. If we are
acquired by an America Online competitor, America Online may terminate the
agreement without being obligated to pay any additional license fees and will
be able to deploy an unlimited number of ports. In addition, America Online
will be entitled to receive a refund of the license fees paid to us, and we
will be required to provide five engineers for one year to assist America
Online with the transition of the voice portals off our software. If we are
acquired and following such acquisition the acquirer does not maintain and
support our products, then America Online will be able to deploy an unlimited
number of ports without further payment and will be entitled to a refund of the
license fees paid to us. America Online may elect to extend the agreement for
up to three additional one-year terms for an extension fee.

     In connection with this agreement, America Online has agreed to purchase
$5.0 million of our common stock in a private placement concurrent with this
offering at a purchase price per share equal to the lesser of $12.46 or 89% of
the price to the public in this offering. In order to encourage America Online
to market the voice portal and our speech recognition software and services, we
have issued America Online a warrant to purchase 765,422 shares of our common
stock at an exercise price per share equal to the lesser of $12.46 or 89% of
the price to the public in this offering. These warrants will become
exercisable upon the earlier of America Online achieving specified voice portal
user milestones or June 30, 2002.


                                       45
<PAGE>

     America Online has also agreed to the following provisions which we
believe will support our marketing efforts and encourage the adoption of our
technology:

   .  America Online will grant two year licenses for our software to third
      parties who make their content available through one or more of
      America Online's voice portals and America Online will receive a
      portion of a discounted license fee for those licensees who extend
      their license or subsequently expand their speech activated services,
      through the America Online voice portals or other voice portals, with
      direct licenses with us for our software,

   .  America Online may work with us to seek opportunities for the resale
      of America Online content that is bundled for resale with our
      products. If we agree to pursue these opportunities, we will pay a
      royalty fee to America Online for this content, and

   .  America Online has agreed to place the SpeechWorks' logo on select
      America Online web pages relevant to the voice portals.

     We have granted America Online registration rights that are described in
"Description of Capital Stock--Registration Rights."

Net2Phone

     In June 2000, we entered into a letter of intent with Net2Phone under
which we will grant a software license and provide professional services to
Net2Phone and pursue joint marketing and promotional efforts. We have agreed to
negotiate in good faith the terms of a definitive license agreement
incorporating these and other terms by July 21, 2000. However, there can be no
assurance that we will be able to enter a definitive agreement on terms
acceptable to us, if at all. In connection with this letter of intent,
Net2Phone has agreed to acquire $4.0 million of our common stock in a private
placement concurrent with this offering at a purchase price per share equal to
the lesser of $12.46 and 89% of the price to the public in the offering. In
addition, we have granted Net2Phone registration rights that are described in
"Description of Capital Stock--Registration Rights."

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<PAGE>

                                    Clients

     Our clients comprise a diverse international group of organizations in a
variety of fields. The following is a representative list of our clients who
have purchased over $50,000 of our software and/or services either directly
from us or through our resellers.

<TABLE>
<S>  <C>
                                          Finance/Banking

            Communications                CIBC

                                          CitiGroup
            BellSouth IntelliVentures     First Union National Bank
            CellularOne

            E-Plus
            MCI WorldCom                  Travel
            NEXTLINK Interactive

            SingTel Mobile                AirTran Airways

                                          Amtrak
                                          Continental Airlines
            Technology/Manufacturing      United Airlines


            Apple Computer
            Aspect Communications         Pharmaceuticals
            CTL, Inc.

            Dialogic Corporation, an      McKessonHBOC
            Intel Company

            InterVoice-BRITE              Speech Portals
            MAXXAR Corporation

            Nortel Networks               AudioPoint, Inc.
            Universal Electronics         HeyAnita.com

                                          Quack.com

            Finance/Brokerage

                                          Speech Application Service
            Bidwell & Company             Providers
            DLJ Direct

            E*TRADE                       everypath.com
            Hyundai Securities            NetByTel.com
            Singapore Stock Exchange      Price Interactive
             IT Solutions                 !hey Software

            StockTrade
            TD Waterhouse                 Insurance


                                          The Guardian Life
            Dot.coms                       Insurance of America

            Anyday.com
            foodline.com                  Retail

            MapQuest.com
            Synapse.com                   Stop & Shop, an AHOLD/USA
            XYPOINT Corporation            Company

</TABLE>

                                       47
<PAGE>

     We intend to expand our client base by, among other things, adding new
distribution and development partners and leveraging their capabilities to sell
and deploy our products, increasing our co-marketing activities with our
partners, increasing the size of our direct sales force and increasing our
market and brand awareness.

Case Studies

 United Airlines Flight Information
 1.800.824.6200

     Company Description: United Airlines is the largest air carrier in the
world and the largest majority employee-owned company, offering nearly 2,400
flights a day to 138 destinations in 26 countries and two U.S. territories.
United is also an industry innovator with breakthroughs such as E-Ticket
Service, United Connection, Airport Gate Reader, United Shuttle, and now its
two speech-activated systems.

     The Challenge: As a leader in travel technology, United Airlines wanted to
upgrade its Flight Information System with a self-service system to better
serve its customers.

     The Solution: Within five months of the project start date, United
replaced its automated touch-tone system with a new speech recognition
application that provides callers with fast access to valuable flight
information, such as departure and arrival times, through its toll-free flight
information telephone number. The system allows people to call United anytime
and speak naturally into a telephone to check the status and gate information
of any of United's nearly 2,400 daily flights. The system receives more than
80,000 calls on a typical high-traffic day. After a brief introduction, the
automated attendant will say, "Please say the United flight number," and if the
caller responds, "I don't know it," the automated operator will break down the
inquiry into smaller pieces the caller can answer such as arrival and departure
cities. The system seeks out and works with the information the caller has.

 MapQuest.com

     Company Description: MapQuest.com is a leader in online, voice and
wireless destination information solutions and digital mapping services.
MapQuest.com provides mapping, proximity searching, real-time traffic reporting
and directions to the end user anytime, anywhere. MapQuest.com licenses its
technology to more than 1,100 business partners. Through these licensing
agreements, MapQuest.com helps businesses integrate maps and driving directions
into their internet, intranet, call centers, voice and wireless applications
for improved marketing and customer service functions.

     The Challenge: MapQuest.com wanted to expand its market reach beyond the
desktop by offering access to its internet-based destination information and
services to consumers by the telephone.

     The Solution: The 1-800-MapQuest application will use SpeechWorks'
platform to provide callers with access to MapQuest driving directions by
dialing a toll-free number and talking over the telephone. The service will
prompt callers to provide their locations and destinations by saying, "Where
are you coming from?" and "Where are you going?" The system will transmit the
callers' spoken answers to the on-line MapQuest.com engine and provide an audio
response. The user will be able to control the output with voice commands such
as "repeat" and "next." Other MapQuest services to be extended through the
toll-free number will include Real-time Traffic Reports and a Biz Locator.
Using SpeechWorks, MapQuest.com will leverage its online web engine through
another channel of access - the telephone.

 BellSouth IntelliVentures
 1.404.633.TALK

     Company Description: BellSouth is a $25 billion communications services
company that provides telecommunications, wireless communications, cable and
digital TV, directory advertising and publishing, and internet and data
services to more than 37 million customers in 19 countries worldwide. BellSouth
IntelliVentures produces new, multimedia products for BellSouth, including The
Real Yellow Pages ONLINE, The Real White Pages ONLINE, BellSouth AdReach
Service and BellSouth Info by Voice.


                                       48
<PAGE>

     The Challenge: In an effort to expand its leadership position in the
highly competitive telecommunications market, BellSouth wanted to enhance its
local information service offerings by providing callers with a variety of
automated information, 24 hours-a-day, seven days-a-week, over the telephone
but without relying on touch-tone input.

     The Solution: BellSouth worked with SpeechWorks to create a public
information service known as Info By Voice, or IBV, in Atlanta. IBV is the
first local speech portal implemented by a major U.S. telecommunications
carrier and, was based in part on experience gained in BellSouth's first voice-
activated link system which was just deployed, using SpeechWorks' technology,
as a trial in Florida in 1997. Callers can speak naturally over the telephone
in complete phrases and sentences to request a variety of information such as
news, sports, weather, stock quotes, horoscopes, and various yellow page
restaurant listings. For example, a caller can say: "What's the weather in
Atlanta?" and the system will respond with the up-to-date weather report.

 E*TRADE
 1.800.STOCKS1

     Company Description: E*TRADE, a leading provider of online investing
services, allows independent investors to trade stocks, options and mutual
funds at low commission rates. E*TRADE also provides portfolio tracking, news
and real-time market commentary.

     The Challenge: E*TRADE wanted to expand its market by extending its
internet-based transaction services to any user of a telephone.

     The Solution: Based in part on SpeechWorks technology, E*TRADE deployed
the first, fully speech-enabled telephone investing service, TELE*MASTER, in
1997. TELE*MASTER allows E*TRADE customers to obtain information and make
transactions from a telephone. The system supports quotes and trading for
stocks, options and mutual funds and understands statements such as, "Buy 100
shares at a limit price of $100, good for the day." TELE*MASTER offers advanced
speech access to a wide range of E*TRADE services, providing many of the same
functions and offers much of the same information as is found on E*TRADE's web
site.

 foodline.com
 1.212.222.MENU

     Company Description: foodline.com is an internet and telephone service
devoted exclusively to restaurant information, reviews and reservations in New
York City and Boston. At foodline.com, people can make reservations online in
real-time after they have searched for restaurants by name, cuisine, location,
price range or special features such as HotSpots. foodline.com also offers the
first and only speech-activated telephone restaurant guide to more than 2,000
New York City restaurants.

     The Challenge: foodline.com wanted to complement its web service by
expanding its market reach to all users of a telephone.

     The Solution: foodline.com engaged SpeechWorks to develop a speech-
activated restaurant service. Initially launched in New York City on 212-222-
MENU, foodline.com helps callers search for restaurants 24 hours-a-day, seven
days-a-week over the telephone using such criteria as location, cuisine or
price range. In addition, callers may ask to hear reviews, obtain addresses and
be transferred directly to a restaurant to make reservations. "Do you know the
name of the restaurant?" is the first question the automated attendant will ask
the caller. If the caller responds "no," the automated attendant will offer
categories of restaurants from which the caller may choose to hear critiques
and other information.


                                       49
<PAGE>

                              Sales and Marketing

Sales

     We sell our products and services both directly through a sales force and
indirectly through third-party value added resellers and system integrators.

     Direct Sales Force. We have a direct sales force in the United States
which consists of three vice presidents, four regional sales directors, seven
sales engineers, and 25 sales representatives located in nine states. This
sales force represents our products and services to enterprises, channel
partners and communications carriers in North America. We support the sales
efforts of our value added resellers and system integrators around the world
with an international direct sales force which consists of one vice president
and three general managers located in Europe, Mexico and Asia Pacific. We also
have sales representatives in the United Kingdom, Germany, France, Mexico,
Singapore and Australia. The Canadian market is currently supported from our
headquarters in Boston.

     Resellers. We have a network of 36 resellers located in the United States,
Canada, South Africa, United Kingdom, France, Germany, South Korea, Australia,
Singapore and other countries that distribute and implement our solutions
around the globe. Our value added resellers and system integrators have
experience in interactive voice response platforms, system integration of
communication applications or hosting expertise for interactive voice response
applications. Our resellers increase our coverage of global markets and fulfill
the diverse application and service opportunities for our software and
services.

Marketing

     Our marketing strategy is focused on building brand awareness of
SpeechWorks as a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services. In March 2000, our marketing efforts were
formally recognized with a Marketing Leadership Award and designation as U.S.
market share leader in the telephony-based speech technology industry by the
Frost & Sullivan research firm. The Marketing Leadership Award acknowledges
leadership in marketing campaigns, educational programs and customer programs
like the SpeechWorks Here Guarantee, which we believe is the industry's first
results assurance program for customers.

     Our strategic advertising campaigns use both traditional and online media.
Our print advertising focuses on targeted trade and business publications,
including e-business, telecommunications and other categories. We conduct both
live seminars and web seminars and participate in a number of trade shows and
other industry events. We also provide speakers from our company to represent
us at a number of industry forums.

     Our marketing strategy also includes aggressive public relations efforts
designed to convey our message to appropriate audiences. We reinforce this
through our ongoing communications with a number of key industry analysts and
press representatives.

                                  Competition

     A number of companies have developed, or are expected to develop, products
that compete with our products. Competitors in the speech recognition software
market include IBM, Lernout and Hauspie Speech Products, Locus Dialogue, Lucent
Technologies, Nuance Communications, Philips Electronics and Phonetic Systems.
We expect additional competition from other companies such as Microsoft, which
has recently made investments in and acquired a speech recognition technology
company. Furthermore, our competitors may combine with each other, and other
companies may enter our markets by acquiring or entering into strategic
relationships with our competitors. Current and potential competitors have
established, or may establish, cooperative relationships among themselves or
with third parties to increase the abilities of their advanced speech and
language technology products to address the needs of our prospective clients.

                                       50
<PAGE>

     We believe that the principal competitive factors affecting our market
include the breadth and depth of solutions, product quality and performance,
core technology, product scalability and reliability, product features, client
service, the ability to implement solutions, the value of a given solution, the
creation of a base of referenceable clients and the strength and breadth of
reseller and developer relationships. Although we believe that our solutions
currently compete favorably with respect to these factors, particularly with
respect to product quality and performance, our market is relatively new and is
evolving rapidly.

                            Research and Development

     We have made substantial investments in research and development through
both internal development and technology licenses. The majority of our research
and development activity has been directed towards feature extensions to our
family of products. This development consists primarily of adding new
competitive product features and additional tools and products as we expand
into new markets.

     Our research and development expenditures for 1997, 1998, 1999 and the
first quarter of 2000 were $2.0 million, $1.9 million, $5.2 million and $1.8
million, respectively. We expect that we will continue to commit significant
resources to research and development in the future. All research and
development expenses have been expensed as incurred.

     The market for our products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing client requirements. The
introduction of products incorporating new technologies and the emergence of
new industry standards could render existing products obsolete and
unmarketable. Our future success will depend in part on our ability to
anticipate changes, enhance our current products, develop and introduce new
products that keep pace with technological advancements and address the
increasingly sophisticated needs of our clients.

               Intellectual Property and Other Proprietary Rights

     We regard our patents, copyrights, service marks, trademarks, trade
secrets and other intellectual property as important to our success. We rely on
a combination of patent, trademark and copyright law, trade secret protection
and confidentiality and/or license agreements with our employees, consultants,
clients, partners and others to protect our proprietary rights. All of our
employees have executed confidentiality and assignment of invention agreements.
Prior to disclosing confidential information to third parties, we generally
require them to sign confidentiality or other agreements restricting the use
and disclosure of our confidential information.

     To date we have obtained four issued U.S. patents, and have 13 pending
U.S. patent applications, two pending patent applications under the Patent
Cooperation Treaty, two pending patent applications in the European Patent
Office, and one pending patent application in each of Australia, Canada, China,
and Singapore. Additionally, we pursue registration of our key trademarks and
service marks in the U.S. and, in many cases, internationally. However,
effective trademark, service mark, copyright and trade secret protection may
not be available or sought by us in every country in which our products and
services are sold.

     We license software technology from MIT under a nonexclusive license
agreement. This license agreement will terminate upon the expiration of MIT's
copyrights related to such technology. We do not anticipate that this will
restrict our ability to use or license the software technology or any
derivative works in any way. We also license technology from AT&T. See "Recent
Strategic Alliances--AT&T." We currently own a number of internet domain names,
including speechworks.com.

                                       51
<PAGE>

                                   Employees

     As of June 20, 2000, we had 246 employees worldwide, including 63 in
research and development, 81 in service and support, 70 in sales and marketing
and 32 in finance and administration. We have not experienced any work
stoppages and consider our relations with our employees to be good.

                                   Facilities

     Our principal offices are located at 695 Atlantic Avenue, in Boston,
Massachusetts, where we lease approximately 53,600 square feet under leases
that expires in September 2004. We also maintain regional sales and development
offices in New York, San Francisco, Montreal (Canada), Puebla (Mexico),
Singapore and Staines (England), as well as regional sales offices in Chicago,
Atlanta, and Dallas. The leases for the regional offices are short-term. We
believe that our existing facilities are adequate for our current needs.

                               Legal Proceedings

     We are not engaged in any legal proceeding that we expect to have a
material adverse effect on our business.

                                       52
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

     The following table sets forth certain information concerning our
directors and executive officers:

<TABLE>
<CAPTION>
Name                         Age Position
----                         --- --------
<S>                          <C> <C>
Stuart R. Patterson ........  43 President, Chief Executive Officer and Director
Richard J. Westelman........  42 Chief Financial Officer
Mark A. Holthouse...........  45 Senior Vice President of Operations
Michael S. Phillips.........  38 Chief Technology Officer and Director
William Ledingham...........  38 Vice President of Product Development
Joseph Murphy...............  44 Vice President of Sales
Stephen Adams...............  50 Vice President of International
Steven Chambers.............  37 Vice President of Worldwide Marketing
Rick Olin...................  43 Vice President and General Counsel
William J. O'Farrell .......  38 Chairman of the Board
Axel Bichara ...............  36 Director
Richard Burnes .............  59 Director
Robert Finch................  42 Director
John C. Freker, Jr..........  42 Director
</TABLE>

----------

     Stuart R. Patterson has served as our President since September 1997, our
Chief Executive Officer since May 1998 and as a director since May 1998. Prior
to joining us, from May 1997 to September 1997, he served on the board of BBG
New Media, Inc., a developer of high-end web sites, which was bought by Think
New Ideas, Inc., now AnswerThink Consulting Group, in September 1997. From May
1996 to March 1997, he served as Vice President and Line of Business Manager at
Voxware, Inc., a developer of digital speech and audio technologies and
solutions. Previously, from August 1994 to May 1996, he served on the Advisory
Board of Voxware. From September 1987 to April 1996, he co-founded and served
as the chief executive officer of Vicorp Interactive Systems, Inc., a developer
of large-scale voice and data applications based on open systems tools and
platforms.

     Richard J. Westelman has served as our Chief Financial Officer since
August 1998. Prior to joining us, from June 1996 to August 1998, he served as
Chief Financial Officer and Director of Dove Associates, a strategy consulting
firm. From January 1994 to June 1996, he served as Chief Financial Officer of
Vicorp Interactive Systems, Inc.

     Mark A. Holthouse has served as our Senior Vice President of Operations
since March 1996. In 1987, he co-founded Vicorp Interactive Systems, Inc., a
developer of large-scale voice and data applications based on open systems
tools and platforms. He served as Managing Director of Technology and
Operations of Vicorp from April 1987 to March 1996.

     Michael S. Phillips co-founded SpeechWorks and has served as our Chief
Technology Officer since September 1994 and as a director since May 1994. From
May 1987 to August 1994, he served as a research scientist in the Spoken
Language Systems Group at the Massachusetts Institute of Technology, a non-
profit think-tank dedicated to the development of a conversational interface
between computers and human spoken words.

     William Ledingham has served as our Vice President of Product Development
since July 1995. From 1989 to 1994, he held a number of marketing management
positions at Stratus Computer.

     Joseph Murphy has served as our Vice President of Sales since August 1999.
From July 1998 to August 1999, he was Vice President of Sales at Rubric, Inc.,
a web-based marketing vendor. From

                                       53
<PAGE>

August 1996 to June 1998, he was Director of Sales at Genesys
Telecommunications, Inc., a computer telephony integration and enterprise
interaction management software company. From January 1995 to April 1996, he
served as Vice President of Worldwide Sales for GeoTel Communications, a
software company.

     Stephen Adams has served as our Vice President of International since
October 1998. From August 1997 to October 1998, he served as Vice President of
Worldwide Sales at Gradient Technologies, Inc., a provider of security services
for network computing. From March 1996 to August 1997, he served as Vice
President of International Sales at Segue Software, Inc., a company
specializing in the development of management and testing of electronic
business applications software. From April 1993 to March 1996, he served as
Director of International Sales at Rational Software Corporation, a software
development company.

     Steven Chambers has served as our Vice President of Worldwide Marketing
since September 1999. From October 1998 to July 1999, he served as Vice
President of Marketing at Arbortext, Inc., an XML-based information solutions
company. From October 1997 to October 1998, he was the Vice President of
Marketing for VDOnet, a company specializing in streaming media over the
internet. From November 1991 to October 1997, he served as Vice President of
Worldwide Marketing at PictureTel Corporation, a visual communications company.

     Rick Olin joined us in March 1999 and has served as our General Counsel
since January 2000. From October 1996 until February 1999, he was Deputy Legal
Counsel at Open Market, Inc., an internet commerce software company. From May
1995 until September 1996, he was Vice President and General Counsel of Long
Term Care Services, Inc., a regional health care company. Prior to that he was
an attorney at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

     William J. O'Farrell co-founded SpeechWorks and has served as our Chairman
of the Board since May 1994. Mr. O'Farrell also served as our Chief Executive
Officer from May 1994 to May 1998. Since March 1999, Mr. O'Farrell has served
as Chairman of the Board and Chief Executive Officer of OpenAir.com (formerly
TimeBills.com), an online time and expense tracking and invoicing service
company.

     Axel Bichara has served as director of SpeechWorks since August 1995. Mr.
Bichara joined Atlas Venture, a venture capital firm, in 1993 and is currently
a Senior Principal.

     Richard Burnes has served as director of SpeechWorks since October 1997.
Since November 1970, Mr. Burnes has served as General Partner of Charles River
Ventures of which he is a co-founder.

     Robert Finch has served as a director of SpeechWorks since April 2000.
Since February 2000, Mr. Finch has served as Vice President, Operations for
BroadBand Office, Inc., a provider of technology and communications solutions
to businesses. From 1988 through February 2000, he served in a variety of vice
president-level engineering, operations and corporate development roles for MCI
WorldCom and predecessor companies including LDDS WorldCom and Advanced
Telecommunications Corporation. Most recently, Mr. Finch served as Vice
President, Strategic Development from January 1998 to February 2000.

     John C. Freker, Jr. has served as a director of SpeechWorks since April
2000. Mr. Freker became Executive Vice President of Convergys Corporation in
October 1999. From November 1997 through October 1999, he was President of the
Custom Solutions Group of Convergys. Prior to November 1997, Mr. Freker was
President of the Custom Services Division of Matrixx Marketing, a predecessor
of Convergys and a subsidiary of Cincinnati Bell.

Classified Board of Directors

     Our board of directors is divided into three classes as nearly equal in
number as possible. Each year the stockholders elect the members of one of the
three classes to a three-year term of office. Messrs. Finch and Freker serve in
the class whose term expires in 2001; Messrs. Bichara and Burnes serve in the
class whose term expires in 2002; and Messrs. Patterson, Phillips, and
O'Farrell serve in the class whose term expires in 2003.

                                       54
<PAGE>

Committees of the Board of Directors

     Our board of directors has a compensation committee, which reviews,
approves and makes recommendations concerning salaries and incentive
compensation for our employees and consultants, establishes and approves
salaries and incentive compensation for our executive officers, and administers
our stock plans. The compensation committee also administers and reviews
general policies relating to compensation and employee benefits. As of the
closing of this offering, the members of the compensation committee will be
Messrs. O'Farrell and Burnes. Our board of directors also has an audit
committee, which oversees the engagement of our independent public accountants
and reviews the results and scope of annual audits and other services provided
by our independent public accountants. The members of the audit committee are
Messrs. Burnes, Bichara and Freker.

Compensation of Directors

     Our directors do not receive an annual retainer or any fees for attending
regular meetings of the board of directors. Non-employee directors are
reimbursed for travel costs and other reasonable out-of-pocket expenses
incurred in connection with attending meetings of the board of directors or any
committee thereof. In addition, non-employee directors are eligible to receive
grants of non-qualified stock options under our stock option plan, and we have
granted to each of Messrs. Freker and Finch options to purchase 30,000 shares
of our common stock in exchange for each of them agreeing to join our board of
directors. In the future, we may grant additional such options to non-employee
directors as an incentive to join or remain on our board of directors.

Compensation Committee Interlocks and Insider Participation

     None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee.

Executive Compensation

     Summary Compensation. The following table sets forth the total
compensation paid or accrued during the year ended December 31, 1999 to our
chief executive officer and our four other most highly compensated executive
officers who earned more than $100,000 during the year ended December 31, 1999,
who we refer to as our named executive officers.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                   Long-Term
                                                                  Compensation
                                       Annual Compensation           Awards
                                --------------------------------- ------------
                                                                   Securities
                                                   Other Annual    Underlying
Name and Principal Position      Salary   Bonus  Compensation (1) Options (#)
---------------------------     -------- ------- ---------------- ------------
<S>                             <C>      <C>     <C>              <C>
Stuart R. Patterson............ $172,500 $42,000      $   --         75,000
 President and Chief Executive
 Officer
Richard J. Westelman...........  157,500  12,750          --         45,000
 Chief Financial Officer
Mark A. Holthouse..............  156,250  30,000       2,809         45,000
 Senior Vice President of
 Operations
Michael S. Phillips............  143,750  20,000       1,694         45,000
 Chief Technology Officer
William Ledingham..............  126,500  20,000       1,909         30,000
 Vice President, Product
 Development
</TABLE>
------------------
(1) Represents life insurance and long-term disability insurance premiums.

                                       55
<PAGE>

                             Option Grants in 1999

     The following table contains information as to stock options granted
during the year ended December 31, 1999 to each of the named executive
officers. Each of the option grants listed below vests equally over 36 months
from the date of grant. In accordance with the rules of the Securities and
Exchange Commission, or SEC, also shown below are hypothetical gains that could
be achieved for the respective options if exercised immediately prior to the
end of the option term, assuming that the stock price on the date of grant
appreciates at the specified annual rates of appreciation, compounded annually
over the term of the options. The assumed annual rates of compounded stock
price appreciation are mandated by the rules of the SEC and do not represent an
estimate or projection of our future common stock prices. Actual gains, if any,
on stock option exercises will depend on the future performance of our common
stock.

     The potential realizable value in the table below is calculated based on
the ten-year term of each option at the time of grant. The potential realizable
values at 5% and 10% appreciation are calculated by:

   .  multiplying the number of shares of common stock under the option by
      the assumed initial public offering price of $18.00 per share,

   .  assuming that the aggregate stock value derived from that calculation
      compounds at the annual 5% or 10% rate shown in the table until the
      expiration of the options, and

   .  subtracting from that result the aggregate option exercise price.

     Percentages shown under "Percent of Total Options Granted to Employees"
are based on an aggregate of 2,795,000 options granted to our employees under
our stock option plans during 1999.

<TABLE>
<CAPTION>
                                                                    Potential Realizable
                                                                      Value at Assumed
                         Number of  Percent of Exercise             Annual Rates of Stock
                           Shares     Total    or Base             Price Appreciation for
                         Underlying  Options    Price                    Option Term
                          Options   Granted to   Per    Expiration ----------------------- ---
Name                      Granted   Employees   Share      Date        5%          10%
----                     ---------- ---------- -------- ---------- ----------- -----------
<S>                      <C>        <C>        <C>      <C>        <C>         <C>         <C>
Stuart R. Patterson.....   75,000      2.7%     $4.13     4/1/09   $ 1,889,258 $ 3,191,802
Richard J. Westelman....   45,000      1.6       4.13     4/1/09     1,133,555   1,915,081
Mark A. Holthouse.......   45,000      1.6       4.13     4/1/09     1,133,555   1,915,081
Michael S. Phillips.....   45,000      1.6       4.13     4/1/09     1,133,555   1,915,081
William Ledingham.......   30,000      1.1       4.13     4/1/09       755,703   1,276,721
</TABLE>

     For information relating to the acceleration of options granted to the
named executive officers, see "Change of Control Agreements."

         Aggregate Option Exercises in 1999 and Year-End Option Values

     The following table sets forth certain information with respect to option
exercises and the total value of options held by each named executive officer
as of December 31, 1999. Because there was no public trading market for the
common stock as of December 31, 1999, the value realized upon the exercise of
options and the value of the unexercised in-the-money options at year-end have
been calculated on the basis of the assumed initial public offering price of
$18.00 per share minus the applicable per share exercise price.

<TABLE>
<CAPTION>
                                               Number of Securities    Value of Unexercised In-
                          Shares              Underlying Unexercised     the-Money Options at
                         Acquired               Options at Year-End            Year-End
                            on      Value    ------------------------- -------------------------
Name                     Exercise  Realized  Exercisable Unexercisable Exercisable Unexercisable
----                     -------- ---------- ----------- ------------- ----------- -------------
<S>                      <C>      <C>        <C>         <C>           <C>         <C>
Stuart R. Patterson.....      --  $        0   417,447      370,053    $7,311,705   $6,316,057
Richard J. Westelman....      --           0    73,750      151,250     1,243,649    2,500,306
Mark A. Holthouse....... 137,813   2,480,634    10,000       35,000       138,670      485,345
Michael S. Phillips.....      --           0    10,000       35,000       138,670      485,345
William Ledingham....... 139,515   2,511,270     6,666       23,334        92,437      323,573
</TABLE>


                                       56
<PAGE>

Employment Agreement

     On September 2, 1997, we entered into an employment agreement with Mr.
Patterson, our President and Chief Executive Officer. The employment agreement
provides for an initial term of three years. Under the terms of the agreement,
Mr. Patterson is entitled to receive an annual base salary of $150,000, which
has been adjusted to $172,500, and is eligible to receive an annual performance
bonus of up to $50,000. Additionally, we granted Mr. Patterson options to
purchase up to 712,500 shares of our common stock at an exercise price of $0.33
per share. 25% of these options vest after one year and the remainder vest
equally over the following 36 months. These options are subject to vesting upon
change of control as described below. Also under the agreement, we must pay for
up to $1,000,000 in life insurance and long-term disability insurance for Mr.
Patterson. If Mr. Patterson is terminated without cause or if we fail to enter
into a new employment agreement with Mr. Patterson by September 2, 2000, we
must pay Mr. Patterson a $75,000 severance payment. Mr. Patterson's employment
agreement also contains one year post termination non-compete and non-
solicitation provisions.

     On June 21, 2000, we entered into an employment agreement with Mr.
Westelman, our Vice President of Finance and Administration and Chief Financial
Officer, to employ him on an at-will basis. Mr. Westelman is entitled to
receive an annual base salary of $163,800 and is eligible to receive an annual
performance bonus of up to $40,000. Additionally, Mr. Westelman will also
receive a retention bonus of $40,000 upon the earlier of the closing of this
offering or September 30, 2000, provided he has not terminated his employment
on or prior to that date. If Mr. Westelman is terminated without cause, we must
pay him his base salary for a period of 12 months, all outstanding options
previously granted to him will become immediately exercisable and we must pay
his health insurance premiums for the earlier of 12 months or until he becomes
eligible for another comparable plan. If we request that Mr. Westelman assume a
new position or title after 90 days following the closing of this offering or
December 31, 2000, whichever comes earlier, and he does not agree to that new
position or title, he will be deemed terminated without cause. If Mr. Westelman
terminates his employment after December 31, 2000, we must pay Mr. Westelman
his base salary for six months, 50% of all outstanding options previously
granted to him will become immediately exercisable and we must pay his health
insurance premiums for the earlier of six months or until he becomes eligible
for another comparable plan. We have also agreed to make a one year recourse
loan to Mr. Westelman for up to $426,000 at the prime rate, payable quarterly,
so that he may exercise his current stock options if he is terminated without
cause.

Change of Control Agreements

     We have entered into an agreement with each of the named executive
officers, pursuant to which 50% of his unvested options to purchase our common
stock will vest and become immediately exercisable upon the effective date of
an acquisition or merger involving SpeechWorks in which we are not the
surviving company.

Stock Plans

     Amended and Restated 1995 Stock Option Plan. Our Amended and Restated 1995
Stock Option Plan was approved by our board of directors and our stockholders
in December 1997. Under this plan we may grant incentive stock options,
nonqualified stock options and restricted and unrestricted stock awards. As of
June 20, 2000, options to purchase a total of 4,663,001 shares of common stock
are outstanding under this plan and 2,372,689 shares have been issued pursuant
to options granted under this plan. The Company ceased granting awards under
this plan as of May 22, 2000.

                                       57
<PAGE>


     2000 Employee, Director and Consultant Stock Plan. Our 2000 Employee,
Director and Consultant Stock Plan was approved by our board of directors in
April 2000 and by our stockholders in May 2000. Under this plan we may grant
incentive stock options, nonqualified stock options and restricted and
unrestricted stock grants. As of June 20, 2000, a total of 4,999,584 shares of
common stock have been reserved for issuance under this plan. Any shares of
common stock that are represented by stock grants that have been issued under
our Amended and Restated 1995 Stock Option Plan that are forfeited, expire or
are cancelled will also be issuable under our 2000 Employee, Director and
Consultant Stock Plan. As of June 20, 2000, 416 shares have been issued
pursuant to options granted under this plan, 885,077 shares are subject to
outstanding options and 4,114,507 shares are available for future grant.

     The compensation committee will determine the terms of stock awards
granted pursuant to the 2000 Employee, Director and Consultant Stock Plan,
including:

   .  the determination of which employees, directors and consultants will
      be granted stock awards,

   .  the exercise price or purchase price and the number of shares subject
      to each stock award,

   .  the vesting schedule for options or restricted stock,

   .  the termination or cancellation provisions applicable to stock awards,
      and

   .  the conditions relating to our right to reacquire shares subject to
      stock awards.

     Upon completion of this offering, each of these stock plans will continue
to be administered by our compensation committee. The maximum term of options
granted under our plans is ten years. If we are acquired, the compensation
committee will provide that outstanding options under our plans shall be:

   .  assumed by the successor or acquiring company,

   .  exercised within a specified number of days or the options will
      terminate, or

   .  terminated in exchange for a cash payment equal to the value of the
      option at the time we are acquired.

     If we are acquired, the compensation committee may also provide that all
outstanding options and restricted stock grants fully vest.

     2000 Employee Stock Purchase Plan. In May 2000, our board of directors and
stockholders adopted the 2000 Employee Stock Purchase Plan, which will become
effective upon the completion of this offering. The purchase plan authorizes
the issuance of up to a total of 200,000 shares of common stock to
participating employees.

     The 2000 Employee Stock Purchase Plan is administered by our board's
compensation committee. All employees working 20 hours or more per week for
more than five months in any calendar year, who have been continuously employed
by SpeechWorks for at least three months as of the offering date are eligible
to participate. Any employee who would own more than 5% of our stock,
immediately after the grant, under the plan may not participate in the 2000
Employee Stock Purchase Plan. To participate, an employee authorizes a
deduction from his or her pay, not to exceed $21,250 per year, beginning on the
first day of a designated six-month offering period. On the last day of each
offering period, each outstanding option granted under the plan is
automatically exercised using funds withheld from each employee's compensation
as of that date. Under the terms of the purchase plan, the price at which the
stock is purchased is equal to 85% of the closing price of our common stock on
either the first day or the last day of a designated offering period, whichever
is lower. A participating employee may withdraw from the 2000 Employee Stock
Purchase Plan at any time prior to the exercise date of the offering period.


                                       58
<PAGE>

Limitation of Directors' Liability and Indemnification

     The Delaware General Corporation Law authorizes corporations to limit or
eliminate, subject to certain conditions, the personal liability of directors
to corporations and their stockholders for monetary damages for breach of their
fiduciary duties. Our certificate of incorporation limits the liability of our
directors to the fullest extent permitted by Delaware law.

     Our certificate of incorporation and bylaws also provide that we will
indemnify any of our directors and officers who, by reason of the fact that he
or she is one of our officers or directors, is involved in a legal proceeding
of any nature. We will repay certain expenses incurred by a director or officer
in connection with any civil or criminal action or proceeding, specifically
including actions by us or in our name. Such indemnifiable expenses include, to
the maximum extent permitted by law, attorney's fees, judgments, civil or
criminal fines, settlement amounts and other expenses customarily incurred in
connection with legal proceedings. A director or officer will not receive
indemnification if he or she is found not to have acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, our best
interest. In addition, we intend to obtain directors' and officers' insurance
providing indemnification for our directors and officers for certain
liabilities, including liabilities under the Securities Act of 1933.

     Such limitation of liability and indemnification does not affect the
availability of equitable remedies. In addition, we have been advised that in
the opinion of the SEC, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is therefore unenforceable.

     There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.

                                       59
<PAGE>

                            PRINCIPAL STOCKHOLDERS

    The following table sets forth information with respect to the beneficial
ownership of our outstanding shares of common stock as of June 20, 2000 by:

   .  the named executive officers,

   .  each of our directors,

   .  all of our current directors and executive officers as a group, and

   .  each stockholder known by us to own beneficially more than 5% of our
      common stock.

Beneficial ownership is determined in accordance with the rules of the SEC and
includes voting or investment power with respect to the securities.

    Shares of common stock that may be acquired by an individual or group
within 60 days of June 20, 2000, pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person shown in the table. Except as indicated in footnotes to this table, we
believe that the stockholders named in this table have sole voting and
investment power with respect to all shares of common stock shown to be
beneficially owned by them based on information provided to us by such
stockholders. Percentage of ownership is based on 23,527,557 shares of common
stock outstanding on June 20, 2000 and 28,999,868 shares of common stock
outstanding after the completion of this offering and the concurrent private
placements of shares of common stock to America Online and Net2Phone. The
address for each stockholder who beneficially owns more than 5% of our common
stock, other than a director or executive officer, is listed below. The
address for any director or executive officer who beneficially owns more than
5% of our common stock is: c/o SpeechWorks International, Inc., 695 Atlantic
Avenue, Boston, Massachusetts 02111.

    The following table assumes the conversion of all outstanding shares of
our convertible preferred stock.

<TABLE>
<CAPTION>
                                                          Percentage
                                                      Beneficially Owned
                                                      ----------------------
                                    Number of Shares  Prior to       After
Beneficial Owner                   Beneficially Owned Offering     Offering
----------------                   ------------------ ---------    ---------
<S>                                <C>                <C>          <C>
Five Percent Stockholders:
Atlas Venture Fund II, L.P. (1)...     2,723,031             11.6%        9.4%
 222 Berkeley Street
 Boston, MA 02116
Charles River Partnership VII
 (2)..............................     2,723,031             11.6         9.4
 1000 Winter Street, Suite 3300
 Waltham, MA 02154
Bank of America Ventures (3)......     2,510,472             10.7         8.7
 950 Tower Lane, Suite 700
 Foster City, CA 94404
QuestMark Partners, L.P. (4)......     2,364,216             10.0         8.2
 One South Street, Suite 800
 Baltimore, MD 21202
</TABLE>


                                      60
<PAGE>

<TABLE>
<CAPTION>
                                                          Percentage
                                                      Beneficially Owned
                                                      ----------------------
                                    Number of Shares  Prior to       After
Beneficial Owner                   Beneficially Owned Offering     Offering
----------------                   ------------------ ---------    ---------
<S>                                <C>                <C>          <C>
Directors and Executive Officers:
Stuart R. Patterson (5)..........         555,988             2.3%         1.9%
William J. O'Farrell (6).........       1,156,817             4.9          4.0
Michael S. Phillips (7)..........       1,626,181             6.9          5.6
Axel Bichara (8).................       2,723,031            11.6          9.4
Richard Burnes (9)...............       2,723,031            11.6          9.4
Robert Finch (10)................           6,000               *            *
John Freker (11).................           6,000               *            *
Richard J. Westelman (12)........         110,938               *            *
Mark A. Holthouse (13)...........         985,711             4.2          3.4
William Ledingham (14)...........         690,497             2.9          2.4
All Executive Officers and
 Directors as a Group (14
 persons) (15)...................      10,731,023            44.2         36.1
</TABLE>
------------------
 *   Represents beneficial ownership of less than 1% of the shares of common
     stock.
(1)  Atlas Venture Associates II, L.P. is the general partner of Atlas Venture
     Fund II, L.P. The general partners of Atlas Venture Associates II, L.P.
     are Christopher Spray, Barry Fidelman and Jean-Francois Formela, who share
     voting and dispositive power over the shares owned by Atlas Venture Fund
     II, L.P. Each of Messrs. Spray, Fidelman and Formela disclaims beneficial
     ownership of these shares, except to the extent of his pecuniary interest
     in these shares.
(2)  Charles River VII GP Limited Partnership is the general partner of Charles
     River Partnership VII. The general partners of Charles River VII GP
     Limited Partnership are Richard Burnes, Michael J. Zak and Ted R.
     Dintersmith, who share voting and dispositive power over the shares owned
     by Charles River Partnership VIII. Each of Messrs. Burnes, Zak and
     Dintersmith disclaims beneficial ownership of these shares, except to the
     extent of his pecuniary interest in these shares.
(3)  Includes 251,045 shares of common stock owned by BA Venture Partners III,
     ("BA Ventures"), a venture capital investment affiliate of Bank of America
     Corporation. Bank of America Ventures is a wholly owned subsidiary of Bank
     of America Corporation, which is a publicly traded company and is listed
     on the New York Stock Exchange.
(4)  QuestMark Advisers, LLC is the general partner of QuestMark Partners, L.P.
     Thomas Hitchner, an authorized representative of QuestMark Advisers, LLC,
     has voting and dispositive power over the shares owned by QuestMark
     Partners, L.P. and disclaims beneficial ownership of these shares, except
     to the extent of his pecuniary interest in these shares.
(5)  Includes 530,988 shares of common stock subject to options held by Mr.
     Patterson that are exercisable within 60 days of June 20, 2000. Does not
     include an additional 281,512 shares of common stock subject to options
     held by Mr. Patterson that are not exercisable within 60 days of June 20,
     2000.
(6)  Includes 7,500 shares of common stock held by Mr. O'Farrell's wife.
     Excludes 200,000 shares of common stock owned by trusts for the benefit of
     Mr. O'Farrell's children.
(7)  Includes 20,000 shares of common stock subject to options held by Mr.
     Phillips that are exercisable within 60 days of June 20, 2000. Does not
     include an additional 25,000 shares of common stock subject to options
     held by Mr. Phillips that are not exercisable within 60 days of June 20,
     2000.
(8)  Consists of 2,723,031 shares of common stock owned by Atlas Venture Fund
     II, L.P. The general partner of Atlas Venture Fund II, L.P. is Atlas
     Venture Associates II, L.P., which has sole voting and investment power
     with respect to these shares. See footnote (1) above. Mr. Bichara is a
     limited partner of Atlas Venture Associates II, L.P. and expressly
     disclaims ownership of these shares, except to the extent of his pecuniary
     interest therein.

                                       61
<PAGE>

(9)  Consists of 2,723,031 shares of common stock owned by Charles River
     Partnership VII. Charles River VII GP Limited Partnership is the general
     partner of Charles River Partnership VII and has sole voting and
     investment power with request to these shares. See footnote (2) above. Mr.
     Burnes is a general partner of Charles River VII GP Limited Partnership
     and expressly disclaims ownership of these shares, except to the extent of
     his pecuniary interest therein.
(10)  Consists of 6,000 shares of common stock subject to options held by Mr.
      Finch that are exercisable within 60 days of June 20, 2000. Does not
      include an additional 24,000 shares of common stock subject to options
      held by Mr. Finch that are not exercisable within 60 days of June 20,
      2000.
(11)  Consists of 6,000 shares of common stock subject to options held by Mr.
      Freker that are exercisable within 60 days of June 20, 2000. Does not
      include an additional 24,000 shares of common stock subject to options
      held by Mr. Freker that are not exercisable within 60 days of June 20,
      2000.
(12)  Consists of 101,938 shares of common stock subject to options held by Mr.
      Westelman that are exercisable within 60 days of June 20, 2000. Does not
      include an additional 129,062 shares of common stock subject to options
      held by Mr. Westelman that are not exercisable within 60 days of June 20,
      2000.
(13)  Includes 20,000 shares of common stock subject to options held by Mr.
      Holthouse that are exercisable within 60 days of June 20, 2000. Does not
      include an additional 24,000 shares of common stock subject to options
      held by Mr. Holthouse that are not exercisable within 60 days of June 20,
      2000.
(14)  Includes 4,582 shares of common stock subject to options held by Mr.
      Ledingham that are exercisable within 60 days of June 20, 2000. Does not
      include an additional 35,418 shares of common stock subject to options
      held by Mr. Ledingham that are not exercisable within 60 days of June 20,
      2000.
(15)  Includes 5,000 shares of common stock subject to options held by Mr.
      Adams that are exercisable within 60 days of June 20, 2000, 26,780 shares
      of common stock subject to options held by Mr. Olin that are exercisable
      within 60 days of June 20, 2000, 34,062 shares of common stock subject to
      options held by Mr. Murphy that are exercisable within 60 days of June
      20, 2000 and 2,499 shares of common stock subject to options held by Mr.
      Chambers that are exercisable within 60 days of June 20, 2000. See also
      footnotes (5) through (14) above.

                                       62
<PAGE>

                              CERTAIN TRANSACTIONS

Preferred Stock Investments

     During the last three years and through June 20, 2000, we have issued
convertible preferred shares in private placement transactions as follows:

   .  2,474,500 shares of series B convertible preferred stock at $2.75 per
      share on September 30, 1996, February 14, 1997 and April 22, 1998, for
      an aggregate purchase price of $6,804,875,

   .  1,626,092 shares of series C convertible preferred stock at $4.25 per
      share on May 8, July 28 and August 12, 1998 and January 9, 1999, for
      an aggregate purchase price of $6,910,891,

   .  2,671,389 shares of series D convertible preferred stock at $8.92 per
      share on April 29, June 21 and June 29, 1999, for an aggregate
      purchase price of $23,828,790, and

   .  2,544,681 shares of series E convertible preferred stock at $7.86 per
      share on April 11, 2000, for an aggregate purchase price of
      $20,001,193.

     Each share of our series B, series C and series D convertible preferred
stock will automatically convert into 1.5 shares of our common stock upon the
closing of this offering. Each share of our series E convertible preferred
stock will automatically convert into one share of our common stock upon the
closing of this offering.

     The following table summarizes the shares of convertible preferred stock
purchased in private placement transactions during the last three years and
through June 20, 2000 by our stockholders who beneficially own more than 5% of
our common stock:

<TABLE>
<CAPTION>
                            Shares of Shares of Shares of Shares of
                            Series B  Series C  Series D  Series E   Value of
                            Preferred Preferred Preferred Preferred  Preferred
Investor                      Stock     Stock     Stock     Stock    Stock (1)
--------                    --------- --------- --------- --------- -----------
<S>                         <C>       <C>       <C>       <C>       <C>
Atlas Venture Fund II,
 L.P......................   363,636   141,176    162,334  203,562  $15,672,744
Charles River Partnership
 VII......................   363,636   141,176    162,334  203,562   15,672,744
Bank of America Ventures
 (2)......................   909,091   352,941    378,112   50,255   29,141,468
QuestMark Partners, L.P...        --        --  1,457,399  178,177   29,440,368
</TABLE>
------------------

(1) Based on an assumed initial public offering price of $18.00 per share, the
    mid-point of the range set forth on the cover page of this prospectus.
(2) Includes 90,909 shares of series B preferred stock, 35,294 shares of series
    C preferred stock, 37,810 shares of series D preferred stock and 5,025
    shares of series E preferred stock purchased by BA Ventures, a venture
    capital investment affiliate of Bank of America Corporation.

     We believe that the terms of these private placement transactions are no
less favorable to us than terms we could have obtained from a disinterested
third party.

MIT License Agreement

     We have entered into a nonexclusive software license agreement with MIT,
pursuant to which we pay royalties to MIT. Under MIT's policies, 8.3% of the
royalties on specified technologies paid by us to MIT are paid to Michael S.
Phillips, one of our founders and our chief technology officer, due to his
affiliation with the Spoken Language Systems Group at MIT at the time that the
license agreement was entered into. Royalties paid by MIT to Mr. Phillips
pursuant to this agreement for the years ending December 31, 1997, 1998, 1999
and the first quarter of 2000 were $3,726, $3,903, $7,056 and $0, respectively.
We believe that the terms of this license agreement are no less favorable to us
than terms we could have obtained from a disinterested third party.

                                       63
<PAGE>

Directors

     One of our directors, Richard Burnes, is a General Partner of Charles
River Ventures. Axel Bichara, another of our directors, is a Senior Principal
of Atlas Venture. Each of Messrs. Burnes and Bichara was elected to our board
of directors pursuant to our stockholders agreement. The stockholders agreement
will terminate upon the closing of this offering.

Registration Rights

     We have granted registration rights to AT&T, America Online, Net2Phone,
some of our warrantholders and the holders of our convertible preferred stock.
See "Description of Capital Stock-Registration Rights." We believe that the
terms of this registration rights agreement are no less favorable to us than
terms we could have obtained from a disinterested third party.

                                       64
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

     We are authorized to issue 100,000,000 shares of common stock, $0.001 par
value per share, and 10,000,000 shares of preferred stock, $0.001 par value per
share. Upon completion of this offering and the concurrent private placements
of shares of common stock to America Online and Net2Phone, there will be
28,999,868 shares of common stock and no shares of preferred stock outstanding.
As of June 20, 2000, we had 23,527,557 shares of common stock outstanding held
of record by 129 stockholders. In addition, as of June 20, 2000 there were
outstanding options and warrants to purchase 6,403,025 shares of common stock.

Common Stock

     Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
our board of directors out of funds legally available for dividend payments.
All outstanding shares of common stock are fully paid and nonassessable, and
the holders of common stock have no preferences or rights of conversion,
exchange or pre-emption. In the event of any liquidation, dissolution or
winding-up of our affairs, holders of common stock will be entitled to share
ratably in our assets that are remaining after payment or provision for payment
of all of our debts and obligations and after liquidation payments to holders
of outstanding shares of preferred stock, if any.

Preferred Stock

     Our board of directors has the authority, without further stockholder
authorization, to issue from time to time shares of preferred stock in one or
more series and to fix the terms, limitations, relative rights and preferences
and variations of each series. Although we have no present plans to issue any
shares of preferred stock, the issuance of shares of preferred stock, or the
issuance of rights to purchase such shares, could decrease the amount of
earnings and assets available for distribution to the holders of common stock,
could adversely affect the rights and powers, including voting rights, of the
common stock, and could have the effect of delaying, deterring or preventing a
change in control of SpeechWorks or an unsolicited acquisition proposal. The
preferred stock, if issued, could have priority over the common stock with
respect to dividends and other distributions, including the distribution of
assets upon liquidation.

Registration Rights

     The following registration rights are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit
the number of shares included in any offering under certain circumstances. We
are obligated to pay the costs associated with all registrations.

     Demand Rights. At any time at least six months after completion of this
offering, AT&T, America Online, Net2Phone, our stockholders that previously
held our convertible preferred stock prior to this offering and some of our
warrantholders are entitled to demand that we register up to 22,467,636 of
their shares. These demand rights may be exercised on two occasions upon
initiation by holders of at least 37.5% of these shares of common stock. If
these stockholders request us to register less than all of their shares of
common stock held at that time, then we are only required to register their
shares if the anticipated aggregate offering price exceeds $5,000,000.

     Beginning one year after the date of this prospectus, stockholders with
registration rights may require us to file additional registration statements
on Form S-3, subject to conditions and limitations.

     Piggyback Rights. AT&T, America Online, Net2Phone, our stockholders that
previously held our convertible preferred stock prior to this offering and some
of our warrantholders also have piggyback registration rights for an aggregate
of 22,467,636 shares covering future offerings by us. These piggyback rights
mean that the holders may include any shares of common stock that they hold in
registration statements that we file. These stockholders and warrantholders
have waived their piggyback registration rights with respect to this offering
or such rights do not apply to this offering.

                                       65
<PAGE>

Delaware Law and Certain Charter and By-law Provisions

     The provisions of Delaware law and of our certificate of incorporation and
bylaws discussed below could discourage or make it more difficult to accomplish
a proxy contest or other change in our management or the acquisition of control
by a holder of a substantial amount of our voting stock. It is possible that
these provisions could make it more difficult to accomplish, or could deter,
transactions that stockholders may otherwise consider to be in their best
interests or the best interests of SpeechWorks.

     Delaware Statutory Business Combinations Provision. We are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporations
Law. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another prescribed exception applies. For purposes of
Section 203, a "business combination" is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and, subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's voting stock.

     Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our bylaws provide that, for nominations to the board
of directors or for other business to be properly brought by a stockholder
before a meeting of stockholders, the stockholder must first have given timely
notice of the proposal in writing to our Secretary. For an annual meeting, a
stockholder's notice generally must be delivered not less than 45 days nor more
than 75 days prior to the anniversary of the mailing date of the proxy
statement for the previous year's annual meeting. For a special meeting, the
notice must generally be delivered not earlier than 90 days prior to the
special meeting nor later than the later of 60 days prior to the special
meeting or ten days following the day on which public announcement of the
meeting is first made. Detailed requirements as to the form of the notice and
information required in the notice are specified in the bylaws. If it is
determined that business was not properly brought before a meeting in
accordance with our by-law provisions, such business will not be conducted at
the meeting.

     Special Meetings of Stockholders. Special meetings of the stockholders may
be called only by our board of directors pursuant to a resolution adopted by a
majority of the total number of directors.

     No Stockholder Action by Written Consent. Our certificate of incorporation
does not permit our stockholders to act by written consent. As a result, any
action to be effected by our stockholders must be effected at a duly called
annual or special meeting of the stockholders.

     Super-Majority Stockholder Vote required for Certain Actions. The Delaware
General Corporation Law provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or bylaws, unless the corporation's
certificate of incorporation or bylaws, as the case may be, requires a greater
percentage. Our certificate of incorporation requires the affirmative vote of
the holders of at least 80% of our outstanding voting stock to amend or repeal
any of the provisions discussed in this section of this prospectus entitled
"Delaware Law and Certain Charter and By-law Provisions" or to reduce the
number of authorized shares of common stock or preferred stock. This 80%
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any preferred stock that might
then be outstanding. A 80% vote is also required for any amendment to, or
repeal of, our bylaws by the stockholders. Our bylaws may be amended or
repealed by a simple majority vote of the board of directors.

Transfer Agent and Registrar

     The transfer agent and registrar for the common stock will be American
Stock Transfer & Trust Company.

                                       66
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

     Prior to this offering, there has not been any public market for our
common stock, and no prediction can be made as to the effect, if any, that
sales of shares of common stock or the availability of shares of common stock
for sale will have on the market price of the common stock prevailing from time
to time. Nevertheless, sales of substantial amounts of common stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of our common stock and could impair our future ability
to raise capital through the sale of our equity securities.

     Summary of Shares Eligible for Future Sale. Upon the completion of this
offering, we will have a total of 28,999,868 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of options or warrants outstanding at June 20, 2000. Of the
outstanding shares, 4,500,000 of the shares sold in this offering will be
freely tradable, except that any shares purchased by our "affiliates", as that
term is defined in Rule 144 promulgated under the Securities Act, may be sold
only in compliance with the limitations described below. The remaining shares
of common stock will be deemed "restricted securities" as defined under Rule
144 and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. Our directors, executive officers and substantially all of our
other stockholders, holding 24,003,798 total shares, have agreed that they will
not sell, directly or indirectly, any shares of common stock without the prior
written consent of Chase Securities Inc. for a period of 180 days from the date
of this prospectus. However, Chase Securities Inc. may, in its sole discretion,
and at any time or from time to time, without notice, release all or any
portion of the securities subject to the lock-up agreements.

     The shares of common stock outstanding upon the completion of this
offering will be available for sale in the public market as follows:

<TABLE>
<CAPTION>
 pproximateA
 Number of
  Shares                                        Description
-----------                                     -----------
 <S>          <C>
   4,710,492  After the date of this prospectus, freely tradable shares sold in this
              offering, and shares freely saleable under Rule 144(k) that are not subject to
              the 180-day lock-up.
      43,492  After 90 days from the date of this prospectus, shares saleable under Rule 144
              and not subject to the 180-day lock-up.
  18,295,118  After 180 days from the date of this prospectus, the 180-day lock-up is
              released and these shares are saleable as registered shares or under Rule 144,
              subject in some cases to volume limitations or Rule 144(k).
   5,950,766  At various times after 180 days from the date of this prospectus, restricted
              shares that will become saleable under Rule 144 upon being held for one year.
</TABLE>

     Rule 144. In general, under Rule 144, as currently in effect, commencing
90 days after the date of this prospectus, a person, including an affiliate of
ours, who has beneficially owned shares for at least one year is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of:

   .  1% of the then outstanding shares of common stock, approximately
      289,999 shares immediately after this offering, or

   .  the average weekly trading volume in the common stock during the four
      calendar weeks preceding the date on which notice of such sale is
      filed. In addition, a person who is not deemed to have been an
      affiliate of ours at any time during the 90 days preceding the sale
      and who has beneficially owned the shares proposed to be sold for at
      least two years would be entitled to sell those shares freely under
      Rule 144(k) without regard to the volume limitation described above.

                                       67
<PAGE>

     Registration of Option Shares. As of June 20, 2000, options to purchase a
total of 5,548,078 shares of common stock were outstanding, of which 1,423,969
were exercisable. Upon the completion of this offering, we intend to file a
registration statement to register the 9,702,322 shares of common stock
reserved for issuance under our stock plans. That registration statement will
become effective immediately upon filing. Accordingly, shares covered by that
registration statement, other than shares held by our affiliates, will be
available for immediate resale in the open market, subject to applicable option
vesting requirements. Holders of options to purchase 5,402,869 shares of common
stock have entered into 180-day lock-up agreements.

     Issuance of Additional Shares. We have agreed not to sell or otherwise
dispose of any shares of common stock during the 180-day period following the
date of the prospectus, except we may issue, and grant options to purchase,
shares of common stock under our stock plans.

                                       68
<PAGE>

                                  UNDERWRITING

     Chase Securities Inc., J.P. Morgan Securities Inc., and U.S. Bancorp Piper
Jaffray Inc. are the representatives of the underwriters. Subject to the terms
and conditions of the underwriting agreement, the underwriters named below,
through their representatives, have severally agreed to purchase from us the
following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
                                                                        Number
      Name                                                             of Shares
      ----                                                             ---------
      <S>                                                              <C>
      Chase Securities Inc. ..........................................
      J.P. Morgan Securities Inc. ....................................
      U.S. Bancorp Piper Jaffray Inc. ................................

                                                                       ---------
       Total.......................................................... 4,750,000
                                                                       =========
</TABLE>

     The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the common shares
offered by us if they purchase any shares.

     The following table shows the per share and total underwriting discounts
and commissions we will pay to the underwriters. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option to purchase additional shares.

                     Underwriting Discounts and Commissions

<TABLE>
<CAPTION>
                                                      Without          With
                                                   Over-Allotment Over-Allotment
                                                      Exercise       Exercise
                                                   -------------- --------------
      <S>                                          <C>            <C>
      Per Share ..................................      $              $
      Total.......................................      $              $
</TABLE>

     We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $1.7 million.

     The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at that price less a concession not in
excess of $   per share. The underwriters may allow and such dealers may re-
allow a concession not in excess of $   per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the underwriters. The representatives have
advised us that the underwriters do not intend to confirm discretionary sales
in excess of 5% of the shares of common stock offered in this offering.

     We have granted to the underwriters a 30-day option to purchase up to
712,500 additional shares of common stock at the initial public offering price,
less the underwriting discount set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased
by it shown in the above table bears to the total number of shares of common
stock offered hereby. We will be obligated, pursuant to this option, to sell
shares to the underwriters to the extent the options are exercised. The
underwriters may exercise these options only to cover over-allotments made in
connection with the sale of shares of common stock offered by us.

     The offering of the shares is made for delivery when, as and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation
or modification of the offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.

                                       69
<PAGE>

     We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of these liabilities.

     Substantially all of our security holders and all of our executive
officers and directors have agreed or will agree prior to completion of this
offering, that they will not, without the prior written consent of Chase
Securities Inc., offer, sell or otherwise dispose of any shares of capital
stock, options or warrants to acquire shares of capital stock or securities
exchangeable for or convertible into shares of capital stock owned by them for
a period of 180 days following the date of this prospectus. We have agreed that
we will not, without the prior written consent of Chase Securities Inc., offer,
sell or otherwise dispose of any shares of capital stock, options or warrants
to acquire shares of capital stock or securities exchangeable for or
convertible into shares of capital stock for a period of 180 days following the
date of this prospectus, except that we may issue shares upon the exercise of
options and warrants granted prior to the date hereof. We may also grant
additional options or other awards under our stock option plans. Without the
prior written consent of Chase Securities Inc., any additional options granted
shall not be exercisable during this 180-day period.

     The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common shares at levels above those which might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids. A
stabilizing bid means the placing of any bid or effecting of any purchase, for
the purpose of pegging, fixing or maintaining the price of the shares of common
stock. A syndicate covering transaction means the placing of any bid on behalf
of the underwriting syndicate or the effecting of any purchase to reduce a
short position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from
a syndicate member in connection with the offering when common shares sold by
the syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.

     Prior to this offering, there has been no public market for our common
shares. The initial public offering price for the common shares will be
determined by negotiations among us and the representatives. Among the factors
to be considered in determining the initial public offering price will be
prevailing market and economic conditions, our revenue and earnings, market
valuations of other companies engaged in activities similar to our business
operations and our management. The estimated initial public offering price
range set forth on the cover of this preliminary prospectus is subject to
change as a result of market conditions or other factors.

     At our request, the underwriters have reserved at the initial public
offering price 250,000 shares of common stock to be sold in this offering to
Citicorp Strategic Technology Corp., an indirect wholly owned subsidiary of
Citigroup Inc. This investor has expressed an interest in purchasing these
shares, which will be subject to a 180-day lock-up agreement this investor has
entered into with the underwriters. There can be no assurance that any of these
reserved shares will be purchased. The number of shares available for sale to
the general public in this offering will be reduced by the number of reserved
shares sold. Any reserved shares not so purchased will be offered for sale to
the general public on the same basis as the other shares offered hereby.

     In addition, at our request, the underwriters have reserved up to 450,000
shares of common stock for sale at the initial public offering price to our
directors, business associates and related persons. The number of common shares
available for sale to the general public will be reduced if such persons
purchase the reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered hereby.

     In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions

                                       70
<PAGE>

in our common shares on the Nasdaq National Market in accordance with Rule 103
of Regulation M under the Securities Exchange Act of 1934, as amended. In
general, a passive market maker must display its bid at a price not in excess
of the highest independent bid of such security; if all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.

     Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol SPWX.

                                 LEGAL MATTERS

     The validity of the shares of common stock offered hereby will be passed
upon for SpeechWorks by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts. Attorneys of Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. collectively own 12,784 shares of our common stock and Mintz Levin
Investments LLC owns 19,175 shares of our common stock. Certain matters will be
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.

                                    EXPERTS

     The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

                      WHERE YOU CAN FIND MORE INFORMATION

     This prospectus is part of a registration statement that we filed with the
SEC and contains the information required to be included herein by the rules of
the SEC. For further information pertaining to us and our common stock,
reference is made to such registration statement and the exhibits and schedules
to the registration statement.

     You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC
at prescribed rates from the Public Reference Room of the SEC at such address,
and at the SEC's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048, and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. In addition, registration statements and
certain other filings made with the SEC electronically are publicly available
through the SEC's web site at www.sec.gov. The registration statement,
including all exhibits and amendments to the registration statement, has been
filed electronically with the SEC.


                                       71
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Accountants........................................  F-2

Consolidated Balance Sheet as of December 31, 1998 and 1999 and March 31,
 2000....................................................................  F-3

Consolidated Statement of Operations for the years ended December 31,
 1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000..  F-4

Consolidated Statement of Changes in Redeemable Convertible Preferred
 Stock and Stockholders' Equity (Deficit) for the years ended December
 31, 1997, 1998 and 1999 and the three months ended March 31, 2000.......  F-5

Consolidated Statement of Cash Flows for the years ended December 31,
 1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000..  F-7

Notes to Consolidated Financial Statements...............................  F-8
</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of SpeechWorks International, Inc.:

     In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in redeemable
convertible preferred stock and stockholders' equity (deficit), and of cash
flows present fairly, in all material respects, the financial position of
SpeechWorks International, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
February 4, 2000, except for the first two paragraphs of
  Note 14 for which the date is April 14, 2000

                                      F-2
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                     Pro Forma
                                        December 31,                 March 31,
                                      ------------------  March 31,    2000
                                        1998      1999       2000    (Note 2)
                                      --------  --------  ---------  ---------
                                                              (unaudited)
                                        (in thousands, except share data)
<S>                                   <C>       <C>       <C>        <C>
ASSETS
Current assets:
 Cash and cash equivalents........... $  4,486  $ 11,474  $  5,029   $  5,029
 Short-term investments..............       --        --        --         --
 Accounts receivable, net of
  allowance for doubtful accounts of
  $75, $60 and $60 at December 31,
  1998 and 1999 and
  March 31, 2000, respectively.......    3,002     4,097     6,563      6,563
 Prepaid expenses and other current
  assets.............................      177       463       478        478
 Restricted investments..............      200       573       573        573
                                      --------  --------  --------   --------
  Total current assets...............    7,865    16,607    12,643     12,643
Fixed assets, net....................    1,093     3,408     4,205      4,205
Other assets.........................      204       551       498        498
                                      --------  --------  --------   --------
  Total assets....................... $  9,162  $ 20,566  $ 17,346   $ 17,346
                                      ========  ========  ========   ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
 STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
 Accounts payable.................... $  1,402  $    845  $    768   $    768
 Accrued expenses....................      810     2,092     2,645      2,645
 Deferred revenue....................      244       854     2,998      2,998
 Current portion of capital lease
  obligations........................      253       183        93         93
 Current portion of notes payable....       --       500       500        500
                                      --------  --------  --------   --------
  Total current liabilities..........    2,709     4,474     7,004      7,004
Capital lease obligations, net of
 current portion.....................      161        --        --         --
Notes payable, net of current
 portion.............................       --       833       667        667
                                      --------  --------  --------   --------
  Total liabilities..................    2,870     5,307     7,671      7,671
                                      --------  --------  --------   --------
Commitments (Note 9)
Redeemable convertible preferred
 stock:
 Redeemable convertible preferred
  stock, $0.001 par value; 7,049,500,
  9,375,592, 9,375,592 and 0 shares
  authorized; 6,569,710, 9,246,989,
  9,246,989 and 0 shares issued and
  outstanding, at December 31, 1998
  and 1999, March 31, 2000
  (unaudited) and pro forma March 31,
  2000 (unaudited), respectively.....   17,749    43,507    44,107         --
                                      --------  --------  --------   --------
Stockholders' equity (deficit):
 Common stock, $0.001 par value;
  16,000,000, 22,000,000, 22,000,000
  and 100,000,000 shares authorized;
  4,784,280, 5,584,775, 5,888,327 and
  19,758,804 shares issued and
  outstanding, at December 31, 1998
  and 1999, March 31, 2000
  (unaudited) and pro forma March 31,
  2000 (unaudited), respectively.....        5         6         6         20
Additional paid-in capital...........      486     5,978     7,172     51,265
Deferred stock compensation..........       --    (4,905)   (5,584)    (5,584)
Notes receivable from stockholders...      (12)       --        --         --
Accumulated deficit..................  (11,936)  (29,327)  (36,026)   (36,026)
                                      --------  --------  --------   --------
  Total stockholders' equity
   (deficit).........................  (11,457)  (28,248)  (34,432)     9,675
                                      --------  --------  --------   --------
  Total liabilities, redeemable
   convertible preferred stock and
   stockholders' equity (deficit).... $  9,162  $ 20,566  $ 17,346   $ 17,346
                                      ========  ========  ========   ========
</TABLE>

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

                                      F-3
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                Three  Months
                                   Year Ended December 31,     Ended March 31,
                                   --------------------------  ----------------
                                    1997     1998      1999     1999     2000
                                   -------  -------  --------  -------  -------
                                                                 (unaudited)
                                    (in thousands, except per share data)
<S>                                <C>      <C>      <C>       <C>      <C>
Revenue:
 Product licenses................  $   949  $ 1,567  $  3,680  $   341  $ 2,607
 Professional services...........      982    2,873     5,944    1,099    2,158
 Other revenue...................      111    1,410     4,387    1,850      322
                                   -------  -------  --------  -------  -------
  Total revenue..................    2,042    5,850    14,011    3,290    5,087
                                   -------  -------  --------  -------  -------
Cost of revenue:
 Cost of product licenses........       54       52       153        9       45
 Cost of professional services
  (excluding stock compensation
  of $139, $5 and $93 in 1999 and
  the three month periods ended
  March 31, 1999 and 2000,
  respectively)..................      678    1,982     4,991      974    1,694
 Cost of other revenue...........       90      890     2,987    1,239      150
                                   -------  -------  --------  -------  -------
  Total cost of revenue
   (excluding stock compensation
   of $139, $5 and $93 in 1999
   and the three month periods
   ended March 31, 1999 and 2000,
   respectively).................      822    2,924     8,131    2,222    1,889
                                   -------  -------  --------  -------  -------
Gross profit (excluding stock
 compensation of $139, $5 and $93
 in 1999 and the three month
 periods ended March 31, 1999 and
 2000, respectively).............    1,220    2,926     5,880    1,068    3,198
                                   -------  -------  --------  -------  -------
Operating expenses:
 Selling and marketing (excluding
  stock compensation of $225, $2
  and $193 in 1999 and the three
  month periods ended March 31,
  1999 and 2000, respectively)...    1,074    3,867     9,254    1,547    3,794
 Research and development
  (excluding stock compensation
  of $97, $2 and $72 in 1999 and
  the three month periods ended
  March 31, 1999 and 2000,
  respectively)..................    1,969    1,881     5,164      898    1,810
 General and administrative
  (excluding stock compensation
  of $47, $3 and $35 in 1999 and
  the three month periods ended
  March 31, 1999 and 2000,
  respectively)..................    1,057    3,157     6,693    1,086    3,308
 Stock compensation..............       --       --       508       12      393
                                   -------  -------  --------  -------  -------
  Total operating expenses.......    4,100    8,905    21,619    3,543    9,305
                                   -------  -------  --------  -------  -------
  Loss from operations...........   (2,880)  (5,979)  (15,739)  (2,475)  (6,107)
Interest income..................      349      299       549       37       91
Interest expense.................      (49)     (72)     (113)     (13)     (36)
Other income (expense), net......       60       (8)     (160)      (9)     (47)
                                   -------  -------  --------  -------  -------
Net loss.........................   (2,520)  (5,760)  (15,463)  (2,460)  (6,099)
Accretion on redeemable
 convertible preferred stock.....     (533)    (789)   (1,904)    (243)    (600)
                                   -------  -------  --------  -------  -------
Net loss attributable to common
 stockholders....................  $(3,053) $(6,549) $(17,367) $(2,703) $(6,699)
                                   =======  =======  ========  =======  =======
Basic and diluted net loss per
 common share....................  $ (0.83) $ (1.44) $  (3.28) $ (0.57) $ (1.19)
Shares used in computing basic
 and diluted net loss per common
 share...........................    3,696    4,537     5,298    4,784    5,644
Pro forma basic and diluted net
 loss per common share
 (unaudited).....................                    $  (0.87)          $ (0.31)
Shares used in computing pro
 forma basic and diluted net loss
 per common share (unaudited)....                      17,686            19,515
</TABLE>

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

                                      F-4
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

  CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
                       AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                             Series D      Series C      Series B      Series A
                            Redeemable    Redeemable    Redeemable    Redeemable
                           Convertible    Convertible   Convertible   Convertible     Total
                            Preferred      Preferred     Preferred     Preferred   Redeemable
                              Stock          Stock         Stock         Stock     Convertible
                          -------------- ------------- ------------- -------------  Preferred
                          Shares Amount  Shares Amount Shares Amount Shares Amount    Stock
                          ------ ------- ------ ------ ------ ------ ------ ------ -----------
                                                     (in thousands)
<S>                       <C>    <C>     <C>    <C>    <C>    <C>    <C>    <C>    <C>
Balance at December 31,
 1996...................     --  $    --    --  $   -- 1,533  $4,274 2,475  $2,667   $ 6,941
Issuance of preferred
 stock, including
 related issuance costs
 of $15.................                                 909   2,500                   2,500
Accrual of cumulative
 dividends on redeemable
 convertible preferred
 stock..................                                         384           149       533
Net loss................
                          -----  ------- -----  ------ -----  ------ -----  ------   -------
Balance at December 31,
 1997...................     --       --    --      -- 2,442   7,158 2,475   2,816     9,974
Issuance of preferred
 stock..................                                  33     100                     100
Issuance of preferred
 stock, including
 related issuance costs
 of $85.................                 1,620   6,886                                 6,886
Exercise of employee
 stock options..........
Repayment of notes
 receivable from
 stockholders...........
Issuance of common stock
 in exchange for
 services...............
Accrual of cumulative
 dividends on redeemable
 convertible preferred
 stock..................                           234           407           148       789
Net loss................
                          -----  ------- -----  ------ -----  ------ -----  ------   -------
Balance at December 31,
 1998...................     --       -- 1,620   7,120 2,475   7,665 2,475   2,964    17,749
Issuance of preferred
 stock..................                     6      25                                    25
Issuance of preferred
 stock, including
 related issuance costs
 of $24.................  2,671   23,829                                              23,829
Exercise of employee
 stock options..........
Repayment of notes
 receivable from
 stockholders...........
Accrual of cumulative
 dividends on redeemable
 convertible preferred
 stock..................             932           415           408           149     1,904
Deferred compensation
 related to employee
 stock option grants....
Amortization of deferred
 stock compensation.....
Net loss................
                          -----  ------- -----  ------ -----  ------ -----  ------   -------
Balance at December 31,
 1999...................  2,671  $24,761 1,626  $7,560 2,475  $8,073 2,475  $3,113   $43,507
Exercise of employee
 stock options
 (unaudited)............
Accrual of cumulative
 dividends on redeemable
 convertible preferred
 stock (unaudited)......             357           104           102            37       600
Deferred compensation
 related to employee
 stock option grants
 (unaudited)............
Amortization of deferred
 stock compensation
 (unaudited)............
Net loss (unaudited)....
                          -----  ------- -----  ------ -----  ------ -----  ------   -------
Balance as of March 31,
 2000 (unaudited).......  2,671  $25,118 1,626  $7,664 2,475  $8,175 2,475  $3,150   $44,107
                          =====  ======= =====  ====== =====  ====== =====  ======   =======
</TABLE>

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

                                      F-5
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

  CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
        AND STOCKHOLDERS' EQUITY (DEFICIT), continued from previous page

<TABLE>
<CAPTION>
                          Common Stock                            Notes                     Total
                          ------------ Additional   Deferred    Receivable              Stockholders'
                                  Par   Paid-In      Stock         From     Accumulated    Equity
                          Shares Value  Capital   Compensation Stockholders   Deficit     (Deficit)
                          ------ ----- ---------- ------------ ------------ ----------- -------------
                                                        (in thousands)
<S>                       <C>    <C>   <C>        <C>          <C>          <C>         <C>
Balance at December 31,
 1996...................  3,696   $ 4    $  350     $    --        $ --      $ (2,234)    $ (1,880)
Issuance of preferred
 stock, including
 related issuance costs
 of $15.................                                                          (15)         (15)
Accrual of cumulative
 dividends on redeemable
 convertible preferred
 stock..................                                                         (533)        (533)
Net loss................                                                       (2,520)      (2,520)
                          -----   ---    ------     -------        ----      --------     --------
Balance at December 31,
 1997...................  3,696     4       350          --          --        (5,302)      (4,948)
Issuance of preferred
 stock..................                                                                        --
Issuance of preferred
 stock, including
 related issuance costs
 of $85.................                                                          (85)         (85)
Exercise of employee
 stock options..........    987     1        69                     (28)                        42
Repayment of notes
 receivable from
 stockholders...........                                             16                         16
Issuance of common stock
 in exchange for
 services...............    101    --        67                                                 67
Accrual of cumulative
 dividends on redeemable
 convertible preferred
 stock..................                                                         (789)        (789)
Net loss................                                                       (5,760)      (5,760)
                          -----   ---    ------     -------        ----      --------     --------
Balance at December 31,
 1998...................  4,784     5       486          --         (12)      (11,936)     (11,457)
Issuance of preferred
 stock..................                                                                        --
Issuance of preferred
 stock, including
 related issuance costs
 of $24.................                                                          (24)         (24)
Exercise of employee
 stock options..........    801     1        79                                                 80
Repayment of notes
 receivable from
 stockholders...........                                             12                         12
Accrual of cumulative
 dividends on redeemable
 convertible preferred
 stock..................                                                       (1,904)      (1,904)
Deferred compensation
 related to employee
 stock option grants....                  5,413      (5,413)                                    --
Amortization of deferred
 stock compensation.....                                508                                    508
Net loss................                                                      (15,463)     (15,463)
                          -----   ---    ------     -------        ----      --------     --------
Balance at December 31,
 1999...................  5,585   $ 6    $5,978     $(4,905)       $ --      $(29,327)    $(28,248)
Exercise of employee
 stock options
 (unaudited)............    304     0       122                                                122
Accrual of cumulative
 dividends on redeemable
 convertible preferred
 stock (unaudited)......                                                         (600)        (600)
Deferred compensation
 related to employee
 stock option grants
 (unaudited)............                  1,072      (1,072)                                    --
Amortization of deferred
 stock compensation
 (unaudited)............                                393                                    393
Net loss (unaudited)....                                                       (6,099)      (6,099)
                          -----   ---    ------     -------        ----      --------     --------
Balance as of March 31,
 2000 (unaudited).......  5,589   $ 6    $7,172     $(5,584)       $ --      $(36,026)    $(34,432)
                          =====   ===    ======     =======        ====      ========     ========
</TABLE>

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

                                      F-6
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                Three Months
                                   Year Ended December 31,     Ended March 31,
                                   --------------------------  ----------------
                                    1997     1998      1999     1999     2000
                                   -------  -------  --------  -------  -------
                                                                 (unaudited)
                                                (in thousands)
<S>                                <C>      <C>      <C>       <C>      <C>
Cash flows from operating
 activities:
 Net loss........................  $(2,520) $(5,760) $(15,463) $(2,460) $(6,099)
 Adjustment to reconcile net loss
  to net cash used in operating
  activities:
 Depreciation and amortization...      243      466       785      130      376
 Stock compensation expense......       --       --       508       12      393
 Common stock issued in exchange
  for services...................       --       67        --       --       --
 Amortization of interest
  income.........................      (24)      --        --       --       --
 Provision for doubtful
  accounts.......................       --       75       (15)      --       --
 Gain on sale/leaseback
  transaction....................      (43)      --        --       --       --
 Translation (gains) losses,
  net............................       --       --         4       --       --
 Changes in operating assets and
  liabilities:
  Accounts receivable............     (279)  (2,641)   (1,080)      35   (2,466)
  Prepaid expenses and other
   current assets................        6     (141)     (286)    (112)     (15)
  Other assets...................      (35)    (161)     (347)     (10)      53
  Accounts payable...............       68    1,137      (557)     473      (77)
  Accrued expenses...............      209      499     1,282       74      553
  Deferred revenue...............       35       44       610       47    2,144
                                   -------  -------  --------  -------  -------
   Net cash used in operating
    activities...................   (2,340)  (6,415)  (14,559)  (1,811)  (5,138)
                                   -------  -------  --------  -------  -------
Cash flows from investing
 activities:
 Purchases of fixed assets.......     (479)    (926)   (3,100)    (605)  (1,173)
 Purchases of restricted
  investments....................       --       --      (573)      --       --
 Purchases of short-term
  investments....................   (6,549)  (1,378)       --       --       --
 Maturities of short-term
  investments....................    5,928    6,042       200       --       --
                                   -------  -------  --------  -------  -------
   Net cash (used in) provided by
    investing activities.........   (1,100)   3,738    (3,473)    (605)  (1,173)
                                   -------  -------  --------  -------  -------
Cash flows from financing
 activities:
 Proceeds from sale/leaseback
  transactions...................      500       --        --       --       --
 Principal payments on capital
  lease obligations..............     (126)    (222)     (231)     (60)     (90)
 Proceeds from notes payable.....       --       --     1,500      787       --
 Principal payments on notes
  payable........................       --       --      (167)      --     (166)
 Proceeds from issuance of
  preferred stock, net of
  issuance costs.................    2,485    6,901    23,830       25
 Proceeds from issuance of common
  stock..........................       --       42        80       --      122
 Repayment of notes receivable
  from stockholders..............       --       16        12       --       --
                                   -------  -------  --------  -------  -------
   Net cash provided by (used in)
    financing activities.........    2,859    6,737    25,024      752     (134)
                                   -------  -------  --------  -------  -------
 Effects of changes in exchange
  rates on cash..................       --       --        (4)      --       --
                                   -------  -------  --------  -------  -------
   Net (decrease) increase in
    cash and cash equivalents....     (581)   4,060     6,988   (1,664)  (6,445)
Cash and cash equivalents,
 beginning of period.............    1,007      426     4,486    4,486   11,474
                                   -------  -------  --------  -------  -------
Cash and cash equivalents, ending
 of period.......................  $   426  $ 4,486  $ 11,474  $ 2,822  $ 5,029
                                   =======  =======  ========  =======  =======
Supplemental disclosure of cash
 flow information:
 Cash paid for interest..........  $    41  $    72  $    113  $    13  $    35
                                   =======  =======  ========  =======  =======
</TABLE>

Supplemental disclosure of non-cash investing and financing activities:

During 1997, the Company sold fixed assets with a net book value of $458,000 to
a leasing company for cash proceeds of $500,000 and subsequently reacquired
those assets under a capital lease.

During 1998, the Company issued 280,000 shares of its common stock to employees
upon the exercise of stock options in exchange for notes receivable totaling
$28,000.

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

                                      F-7
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business

     SpeechWorks International, Inc. (the "Company") was incorporated in May
1994 and began operations in September 1994 under the name Applied Language
Technologies, Inc. In October 1998, the Company's stockholders voted to change
its name to SpeechWorks International, Inc. The Company is engaged in the
development and marketing of speech recognition software and interactive
systems using speech understanding software, and related products and services.
Principal markets include both domestic and international companies. The
Company operates in one reportable segment.

2. Summary of Significant Accounting Policies

Principles of Consolidation

     The consolidated financial statements reflect the operations of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.

Unaudited Interim Financial Information

     The interim consolidated financial data as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods. The results for interim periods are not
necessarily indicative of the results for the entire year.

Cash and Cash Equivalents

     The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are classified as available for sale. The Company invests excess
cash primarily in U.S. Treasury securities and money market funds of major
financial institutions. These investments are subject to minimal credit and
market risk.

     The Company's cash equivalents at December 31, 1997 include $414,400 in
money market funds. At December 31, 1998, the Company's cash equivalents
included $935,000 and $3,469,000 in money market funds and U.S. Treasury
securities, respectively. At December 31, 1999, the Company's cash equivalents
included $6,444,000 and $3,061,000 in money market funds and U.S. Treasury
securities, respectively.

Short-Term Investments

     The Company's short-term investments at December 31, 1997 and 1998 were
comprised of U.S. Treasury securities which matured within one year of the
respective balance sheet date. These securities were classified as available-
for-sale and were stated at cost plus accrued interest, which approximated fair
market value. Gross unrealized gains and losses on such securities as of
December 31, 1997 and 1998, and realized gains and losses on sales of such
securities for the years ended December 31, 1997, 1998 and 1999 were not
significant.

Concentration of Credit Risk and Major Customers

     Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily comprised of trade accounts
receivable. Management believes its credit policies reflect normal industry
terms and business risk. The Company does not anticipate nonperformance by the
counterparties and, accordingly, does not require collateral.

     At December 31, 1997, 30%, 25%, 11%, 11% and 10% of the Company's accounts
receivable were due from five customers. At December 31, 1998, 59% and 14% of
the Company's accounts receivable were due from two customers. At December 31,
1999, 21%, 17%, 11% and 10% of the Company's accounts receivable were due from
four customers.

                                      F-8
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

     Revenue from three customers represented 27%, 26% and 15% of total revenue
during the year ended December 31, 1997. Revenue from two customers represented
32% and 13% of total revenue during the year ended December 31, 1998. Revenue
from two customers represented 34% and 11% of total revenue during the year
ended December 31, 1999.

Fair Value of Financial Instruments

     Financial instruments, including cash, cash equivalents, accounts
receivable, accounts payable and accrued expenses are carried in the
consolidated financial statements at amounts that approximated their fair value
as of December 31, 1997, 1998 and 1999.

Fixed Assets

     Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Fixed assets held under capital
leases are stated at the lower of the fair market value of the related asset or
the present value of the minimum lease payments at the inception of the lease
and are amortized on a straight-line basis over either the life of the related
asset or the term of the lease.

Revenue Recognition

     The Company recognizes revenue in accordance with Statement of Position
97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position 98-9. Revenue from the sale of licenses to end users, value-added
resellers and system integrators to use the Company's software products is
recognized upon delivery, provided that no significant obligations remain,
evidence of the arrangement exists, the fees are fixed or determinable, and
collectibility is probable. Revenue from royalties on sales of the Company's
products by OEMs to third parties is recognized upon delivery to the third
party when such information is available, or when notified by the reseller that
such royalties are due as a result of a sale, provided that collectibility is
probable. Arrangements for the sale of software licenses sold without
professional services may or may not include maintenance and support services.

     Professional services revenue primarily consists of fees for custom
development services, consulting services, and support and maintenance services
provided to end users, value-added resellers, system integrators and OEMs.
Revenue relating to the development of custom software applications and
nonrecurring platform development work for third parties, including fees for
licenses to use the Company's software products in the related development
effort and thereafter in conjunction with the delivered custom application, as
well as revenue relating to consulting services provided on a fixed-fee basis
are recognized using the percentage-of-completion method of accounting,
provided that collection of the related receivable is probable. In applying
this method, the Company measures each project's percentage-of-completion by
the ratio of labor hours incurred to date to estimated total labor hours to
complete the project. This method is used because management considers expended
labor hours to be the best available measure of progress on these projects.
Adjustments to contract estimates are made in the periods in which the facts
requiring such revisions become known. When the estimate indicates a loss, such
loss is provided for in its entirety. When services are provided on a time and
materials basis, revenue is recognized as the services are rendered. Revenue
related to maintenance and support arrangements is recognized ratably over the
contract period. The Company does not consider professional services, other
than the development of custom software applications, to be essential to the
functionality of the other elements of its software arrangements. These other
professional services are limited and primarily include training and
feasibility studies.

                                      F-9
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


     Other revenue primarily consists of hardware sales and other resold
services provided to end users. Resold hardware revenue is recognized upon
delivery provided that collectibility is probable and no significant post-
delivery obligations remain relating to the sale.

     The Company's sales frequently include, under one contract, software
licenses, related professional services and a maintenance and support
arrangement. The total contract value is attributed first to the maintenance
and support arrangement based on its fair value, equal to its stated list price
as a fixed percentage of the related software product's price. The remainder of
the total contract value is then attributed to the software license and related
professional services, with the effect that discounts inherent in the total
contract value are attributed to the software license and related professional
services.

     Under its maintenance and support arrangements, the Company offers
unspecified upgrades and enhancements on software products only on a when-and-
if-available basis. The Company does not contract in advance for specified
upgrades, enhancements or additional software products. The Company offers no
rights of return to its customers.

Research and Development and Capitalized Software Development Costs

     Costs incurred in the research and development of new software products
and enhancements to existing products, other than certain software development
costs that qualify for capitalization, are expensed as incurred. Software
development costs incurred subsequent to the establishment of technological
feasibility, but prior to general release of the product, are capitalized and
amortized to cost of software license revenues over the estimated useful life
of the related products. As of December 31, 1998 and 1999, costs eligible for
capitalization were not material.

Accounting for Stock Compensation

     The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation expense is recorded for options
issued to employees in fixed amounts to the extent that the fixed exercise
prices are less than the fair market value of the Company's common stock at the
date of grant. The Company follows the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" (Note 8). All stock-based awards to nonemployees are accounted
for at their fair value in accordance with SFAS No. 123 and related
interpretations.

Advertising Expense

     The Company expenses advertising costs as incurred. During the years ended
December 31, 1997, 1998 and 1999, advertising expense totaled $48,000, $407,000
and $1,334,000, respectively.

Income Taxes

     Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. A valuation allowance against deferred tax assets is recorded if,
based upon the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. The Company does
not provide for U.S. income taxes on the undistributed earnings of its foreign
subsidiaries, which the Company considers to be permanent investments.

                                      F-10
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


Comprehensive Income

     SFAS No. 130, "Reporting Comprehensive Income," requires the reporting of
comprehensive income (loss) in addition to net income (loss). For the years
ended December 31, 1997, 1998 and 1999, the Company had no other comprehensive
income items which were material to its financial position or results of
operations. Accordingly, the adoption of SFAS No. 130 had no impact on the
Company's consolidated financial statements.

Foreign Currency Translation

     The Company's functional currency is the U.S. dollar for all of its
subsidiaries. Substantially all of the Company's revenues are invoiced and
collected in U.S. dollars. Assets and liabilities of foreign subsidiaries which
are denominated in foreign currencies are remeasured into U.S. dollars at rates
of exchange in effect at the end of the year. Revenue and expense amounts are
remeasured using an average of exchange rates in effect during the period. Net
realized and unrealized gains and losses resulting from foreign currency
remeasurement are included in the consolidated statement of operations as other
income or expense.

Net Loss Per Common Share--Historical

     The Company computes net loss per common share in accordance with SFAS 128
"Earnings per Share." Under the provisions of SFAS 128, basic net loss per
common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding. There
is no difference between basic and diluted net loss per share since potential
common shares from the conversion of redeemable convertible preferred stock and
the exercise of options and warrants were antidilutive for all periods
presented. The calculation of diluted net loss per common share for the year
ended December 31, 1997 does not include 3,296,356, 777,237 and 7,375,500
potential shares of common stock equivalents related to common stock options,
common stock warrants and redeemable convertible preferred stock, respectively.
The calculation of diluted net loss per common share for the year ended
December 31, 1998 does not include 3,396,882, 807,237 and 9,854,565 potential
shares of common stock equivalents related to common stock options, common
stock warrants and redeemable convertible preferred stock, respectively. The
calculation of diluted net loss per common share for the year ended December
31, 1999 does not include 4,836,202, 807,237 and 13,870,477 potential shares of
common stock equivalents, related to common stock options, common stock
warrants and redeemable convertible preferred stock, respectively.

Unaudited Pro Forma Net Loss Per Common Share

     The unaudited pro forma net loss per common share for the year ended
December 31, 1999 is calculated assuming the automatic conversion of all
preferred stock outstanding had occurred as of the beginning of the year or as
of the date of issuance of the preferred stock, if later. Therefore, accretion
on the redeemable convertible preferred stock is excluded from the calculation
of pro forma net loss per common share. The redeemable convertible preferred
stock automatically converts into one and one half shares of common stock upon
the completion of the Company's initial public offering (Note 6).

Unaudited Pro Forma Balance Sheet

     Under the terms of the Company's redeemable convertible preferred stock
(Note 6), all shares of such preferred stock will automatically convert into
common stock upon completion of the Company's initial public offering of common
stock. The unaudited pro forma balance sheet reflects the conversion of the
outstanding shares of redeemable convertible preferred stock into 13,870,477
shares of common stock, as if the conversion had occurred on December 31, 1999.
In addition, the unaudited pro forma balance sheet

                                      F-11
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

reflects the filing of an amended certificate of incorporation in connection
with the effectiveness of the registration statement for the Company's initial
public offering, wherein the total authorized shares of common stock will be
increased to 100,000,000. The amended certificate of incorporation also will
authorize 10,000,000 shares of undesignated preferred stock.

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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Components particularly subject to estimation include
estimates of costs to complete custom software development arrangements and
fair values of the Company's equity instruments. Actual results could differ
from those estimates and would impact future results of operations and cash
flows.

Recent Accounting Pronouncements

     In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in SOP 98-9. Under the residual method, revenue is recognized as
follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference
between the total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the delivered elements. SOP 98-9
is effective for transactions entered into during years beginning after March
15, 1999 (year 2000 for the Company), however, early adoption is permitted. The
Company has adopted SOP 98-9.

     In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133, as recently amended by SFAS
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. Because the Company does not currently hold any
derivative instruments and does not currently engage in hedging activities, it
expects the adoption of SFAS No. 133 will not have a material impact on its
financial position or operating results.

     In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 will
become effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
its financial position or results of operations.

                                      F-12
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


3. Accounts Receivable

Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   1998   1999
                                                                  ------ ------
                                                                       (in
                                                                   thousands)
<S>                                                               <C>    <C>
Accounts receivable.............................................. $2,415 $2,723
Unbilled accounts receivable.....................................    662  1,434
                                                                  ------ ------
                                                                   3,077  4,157
Less--allowance for doubtful accounts............................     75     60
                                                                  ------ ------
                                                                  $3,002 $4,097
                                                                  ====== ======
</TABLE>

     Unbilled accounts receivable are revenues earned under percentage of
completion accounting that have not yet been billed under the terms of the
arrangement.

4. Fixed Assets

Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                        Estimated
                                                         useful   December 31,
                                                          life    -------------
                                                         (years)   1998   1999
                                                        --------- ------ ------
                                                                       (in
                                                                   thousands)
<S>                                                     <C>       <C>    <C>
Computer and office equipment..........................      3    $  606 $3,157
Computer and office equipment under capital leases.....      3       765    765
Furniture and fixtures.................................      5       410    959
Furniture and fixtures under capital leases............      5        35     35
                                                                  ------ ------
                                                                   1,816  4,916
Less--accumulated depreciation and amortization........              723  1,508
                                                                  ------ ------
                                                                  $1,093 $3,408
                                                                  ====== ======

</TABLE>

Depreciation and amortization expense for the years ended December 31, 1997,
1998 and 1999 was $243,000, $466,000 and $785,000, respectively, of which
$156,000 related to fixed assets under capital leases in 1997, and $262,000
related to fixed assets under capital leases for 1998 and 1999. Assets under
capital leases collateralize the related lease obligations.

5. Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   -------------
                                                                    1998   1999
                                                                   ------ ------
                                                                        (in
                                                                    thousands)
<S>                                                                <C>    <C>
Accrued compensation.............................................. $  499 $1,104
Accrued other.....................................................    311    988
                                                                   ------ ------
                                                                   $  810 $2,092
                                                                   ====== ======
</TABLE>

                                      F-13
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


6. Redeemable Convertible Preferred Stock

Redeemable convertible preferred stock, $0.001 par value, consists of the
following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ---------------
                                                                1998    1999
                                                               ------- -------
                                                               (in thousands)
     <S>                                                       <C>     <C>
     Series D; 0 and 2,800,000 shares authorized; 0 and
      2,671,389 shares issued and outstanding at December 31,
      1998 and 1999, respectively............................  $    -- $24,761
     Series C; 1,626,092 shares authorized; 1,620,210 and
      1,626,092 shares issued and outstanding at December 31,
      1998 and 1999, respectively............................    7,120   7,560
     Series B; 2,474,500 shares authorized, issued and
      outstanding at December 31, 1998 and 1999,
      respectively...........................................    7,665   8,073
     Series A; 2,475,000 shares authorized, issued and
      outstanding at December 31, 1998 and 1999,
      respectively...........................................    2,964   3,113
                                                               ------- -------
                                                               $17,749 $43,507
                                                               ======= =======
</TABLE>

     The Series D redeemable convertible preferred stock (the "Series D
preferred stock"), the Series C redeemable convertible preferred stock (the
"Series C preferred stock"), the Series B redeemable convertible preferred
stock (the "Series B preferred stock") and the Series A redeemable convertible
preferred stock (the "Series A preferred stock") are hereinafter referred to
collectively as the "redeemable preferred stock." At December 31, 1999, the
redeemable preferred stock had the following characteristics:

Conversion Rights

     Each share of redeemable preferred stock is convertible, at the option of
the holder, into one and one-half shares of common stock of the Company,
subject to certain anti-dilution adjustments. The redeemable preferred stock
will automatically convert into common stock upon the closing of a qualified
initial public offering under which net proceeds equal or exceed $30,000,000.
Additionally, the Series D preferred stock carries a provision in which the
stockholders' conversion rate can be adjusted. If the Company receives proceeds
from an initial public offering or acquisition below a pre-determined amount,
the Series D will convert at a rate higher than one and one-half shares of
common stock for one share of Series D, subject to a formula.

Dividend Rights

     The holders of the redeemable preferred stock are entitled to receive
dividends at a rate of 6% per annum in preference to the common stockholders.
These dividends are cumulative and accrue on a daily basis from the date of
issuance whether or not declared. Cumulative unpaid dividends on the redeemable
preferred stock of $932,000, $649,000, $1,257,000 and $638,000 have been
charged to accumulated deficit and are included in the carrying value of the
Series D, Series C, Series B and Series A preferred stock, respectively, at
December 31, 1999.

Voting Rights

     The holders of redeemable preferred stock generally vote together with the
holders of common stock on all matters and are entitled to one vote for each
share of common stock into which the redeemable preferred stock is convertible.

                                      F-14
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


Liquidation Rights

     In the event of liquidation, dissolution, merger, sale or winding up of
the Company, the holders of the Series D preferred stock are entitled to
receive, prior to and in preference to any distribution to the holders of the
Series C preferred stock, Series B preferred stock, Series A preferred stock
and common stock, $8.92 per share, subject to certain anti-dilution
adjustments, plus any accrued but unpaid dividends.

     Upon the payment of all required liquidating amounts to the Series D
preferred stockholders, the holders of Series C preferred stock are entitled to
receive, prior to and in preference to any distribution to the holders of the
Series B preferred stock, Series A preferred stock and common stock, $4.25 per
share, subject to certain anti-dilution adjustments, plus any accrued but
unpaid dividends.

     Upon the payment of all required liquidating amounts to the Series C
preferred stockholders, the holders of the Series B preferred stock are
entitled to receive, prior to and in preference to the holders of the Series A
preferred stock and common stock, $2.75 per share, subject to certain anti-
dilution adjustments, plus any accrued but unpaid dividends.

     Upon the payment of all required liquidating amounts to the Series B
preferred stockholders, the holders of the Series A preferred stock are
entitled to receive, prior to and in preference to the holders of common stock,
$1.00 per share, subject to certain anti-dilution adjustments, plus any accrued
but unpaid dividends. Any net assets remaining after the payment of
preferential amounts to the holders of the redeemable preferred stock shall be
shared ratably by the Series A preferred stockholders and common stockholders.

Redemption Rights

     At any time on or after March 31, 2002, subject to their majority vote as
a single class, holders of outstanding shares of each series of redeemable
preferred stock shall have the right to cause the Company to redeem such shares
in one-third increments over a three-year period at the respective original
issue price per share plus any accrued but unpaid dividends.

7. Common Stock

     Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are not
entitled to receive dividends unless declared by the Board of Directors. Any
such dividends would be subject to the preferential dividend rights of the
preferred stockholders.

Stock Split

     In January 2000, the Company effected a three-for-two stock split of all
common stock. In accordance with the terms of the redeemable preferred stock
agreements, conversion rights to all series of redeemable preferred stock were
increased. After the stock split, each share of redeemable preferred stock is
convertible into one and one half shares of common stock. All common stock
share amounts in these consolidated financial statements have been restated to
reflect this stock split.

Right of First Refusal

     At December 31, 1999, the Company's outstanding common stock is subject to
certain restrictions as to sale or transfer. The Company and its stockholders
are entitled to a right of first refusal to purchase shares offered for sale at
the offer price.

                                      F-15
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


Warrants

     In connection with a leasing agreement entered in 1996, the Company issued
a warrant to purchase 36,000 shares of its common stock at a price of $0.67 per
share. The warrant is subject to certain anti-dilution adjustments and may be
exercised, in whole or in part, on or before October 2002. The value ascribed
to this warrant upon its issuance, utilizing the Black-Scholes valuation model,
was not significant.

     In January 1997, the Company issued to a customer a warrant to purchase
741,237 shares of the Company's common stock at a price of $2.05 per share,
subject to certain anti-dilution adjustments. This warrant may be exercised at
the option of the holder, in whole or in part, at any time on or before January
2002, subject to a maximum of three exercises. However, the Company retains the
right to call this warrant in connection with an initial public offering,
provided 45 days advance notice is given to the warrant holder, at a redemption
price equal to 500% of the unexercised warrant shares multiplied by the
exercise price upon the closing of the initial public offering. At any time,
the Company may, at its option, except as noted above, redeem the warrant at a
redemption price equal to 200% of the market value of this warrant. The value
ascribed to this warrant upon its issuance, utilizing the Black-Scholes
valuation model, was not significant.

     In November 1998, in connection with the acquisition of the name
"SpeechWorks," the Company issued a warrant to an unrelated third party to
purchase 30,000 shares of the Company's common stock at a price of $2.83 per
share, subject to certain anti-dilution adjustments. This warrant may be
exercised at the option of the holder, in whole or in part, at any time on or
before November 2003. The value ascribed to this warrant upon its issuance,
utilizing the Black-Scholes valuation model, was not significant.

Reserved Shares

     At December 31, 1999, the Company had 19,862,033 shares of its common
stock reserved for issuance upon exercise of options issued or issuable under
the Company's stock option plans, upon conversion of authorized redeemable
convertible preferred stock and upon exercise of common stock warrants.

8. Stock Option Plans

     During August 1995, the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"). The 1995 Plan provides for the grant of incentive stock options
("ISOs") as well as non-qualified options to employees, directors and other
individuals providing services to the Company. The Board of Directors
determines the term of each option, exercise price, number of shares for which
each option is granted, whether restrictions will be imposed on the shares
subject to options and the rate at which each option is exercisable.
The exercise price for ISOs cannot be less than the fair market value per share
of the underlying common stock on the date granted. The exercise price for ISOs
granted to holders of more than 10% of the voting stock of the Company cannot
be less than 110% of the fair market value per share of the underlying common
stock on the grant date. The term of ISOs cannot exceed ten years. The term of
ISOs granted to holders of more than 10% of the voting stock of the Company
cannot exceed five years. A maximum of 5,184,319 shares of common stock have
been reserved for issuance upon the exercise of options granted under the 1995
Plan.

                                      F-16
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


     A summary of the status of options granted under the Company's stock
option plan as of December 31, 1997, 1998 and 1999 and changes during the years
then ended is presented below:

<TABLE>
<CAPTION>
                                    1997                     1998                     1999
                          ------------------------ ------------------------ ------------------------
                                         Weighted-                Weighted-                Weighted-
                            Number of     average    Number of     average    Number of     average
                              shares     exercise      shares     exercise      shares     exercise
                          (in thousands)   price   (in thousands)   price   (in thousands)   price
                          -------------- --------- -------------- --------- -------------- ---------
<S>                       <C>            <C>       <C>            <C>       <C>            <C>
Outstanding at beginning
 of year................      2,292        $0.07       3,296        $0.15       3,397        $0.35
  Granted...............      1,005         0.35       1,150         0.69       2,795         2.51
  Exercised.............         --           --        (987)        0.07        (801)        0.10
  Canceled..............         (1)        0.07         (62)        0.19        (555)        1.47
                              -----                    -----                    -----
Outstanding at end of
 year...................      3,296        $0.15       3,397        $0.36       4,836        $1.51
                              =====                    =====                    =====
Options exercisable at
 end of year............      1,406        $0.10       1,265        $0.17       1,423        $0.51
Weighted average fair
 value of options
 granted during the
 year...................                   $0.11                    $0.21                    $0.65
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
                                            Options outstanding      Options exercisable
                                         ------------------------- -----------------------
                                         Weighted average Weighted                Weighted
                              Number        remaining     average      Number     average
                           outstanding   contractual life exercise  exercisable   exercise
Range of exercise prices  (in thousands)    (in years)     price   (in thousands)  price
------------------------  -------------- ---------------- -------- -------------- --------
<S>                       <C>            <C>              <C>      <C>            <C>
      $0.067--0.33            1,369            6.73        $0.22         970       $0.19
       0.43--0.83             1,407            8.68         0.73         381        0.65
       1.50--2.17             1,160            9.61         2.01           2        2.17
       4.00--4.00               630            9.80         4.00          10        4.00
       4.13--4.13               270            9.25         4.13          60        4.13
                              -----                                    -----
     $0.067--$4.13            4,836            8.53        $1.51       1,423       $0.51
                              =====                                    =====
</TABLE>

     Under APB Opinion No. 25, no compensation expense was recognized for the
years ended December 31, 1997 and 1998, and compensation expense of $508,000
was recognized for option grants made during the year ended December 31, 1999.
Had compensation expense for these awards been determined based on the fair
value at the date of grant consistent with the method prescribed by
SFAS No. 123, the Company's net loss attributable to common stockholders and
net loss per common share for the years ended December 31, 1997, 1998 and 1999
would have increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                        1997                 1998                 1999
                 -------------------  -------------------  -------------------
                               Net                  Net                  Net
                   Net loss    loss     Net loss    loss     Net loss    loss
                 attributable  per    attributable  per    attributable  per
                  to common   common   to common   common   to common   common
                 stockholders share   stockholders share   stockholders share
                 ------------ ------  ------------ ------  ------------ ------
                            (in thousands, excpet per share data)
<S>              <C>          <C>     <C>          <C>     <C>          <C>
As reported.....   $(3,053)   $(0.83)   $(6,549)   $(1.44)  $ (17,367)  $(3.28)
Pro forma.......    (3,089)    (0.84)    (6,664)    (1.47)    (17,719)   (3.34)
</TABLE>

                                      F-17
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


     For this purpose, the fair value of options at the date of grant was
estimated using the minimum value method with the following weighted-average
assumptions for 1997, 1998 and 1999: risk-free interest rates of 4.2% to 5.6%,
5.7% to 6.2% and 4.25% to 6.0%, respectively; no dividend yields or volatility
factors; and weighted-average expected life of the options of 5 years, 5 years
and 7.53 years, respectively. However, because the determination of the fair
value of all options granted after the Company becomes a publicly-traded entity
will include an expected volatility factor, because most options vest over
periods of up to four years and because additional option grants are expected
to be made subsequent to December 31, 1999, the pro forma effects of applying
the fair value method may be materially different in future years.

9. Commitments

Operating Leases

     The Company leases its primary office space under noncancelable operating
leases which expire through September 30, 2004. Under the terms of the lease
relating to its main facility, the Company is required to maintain an
irrevocable standby letter of credit stating the lessor as the beneficiary. The
letter of credit must be in the amount of $160,000 through December 31, 1999,
with such amount being reduced by $40,000 each succeeding year through the
expiration of the lease.

     During 1999, the Company leased additional office space under a
noncancelable operating lease which expires in 2004. Under the terms of the
lease, the Company is required to maintain an irrevocable letter of credit
stating the lessor as beneficiary. The letter of credit must be in the amount
of $413,500 through September 2001, with such amount reduced by $100,000 after
September 2001 and an additional $100,000 after September 2002.

     During 1999, the Company leased office space in Montreal, Canada under a
noncancelable operating lease which expires in 2010. Under the terms of the
lease, the Company is required to maintain an irrevocable letter of credit
stating the lessor as beneficiary. The letter of credit must be in the amount
of $240,000 through November 2009, with such amount reduced by $24,000 each
succeeding year through expiration of the lease.

     Rent expense under operating leases was $170,800, $488,000 and $1,050,000
for the years ended December 31, 1997, 1998 and 1999, respectively.

Capital Leases

     In 1996 and 1997, the Company entered into equipment lease agreements with
a leasing company. At December 31, 1998 and 1999, the Company had no remaining
availability under either of these capital lease agreements.

                                      F-18
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


Future minimum lease obligations under capital and operating leases as of
December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                               Capital Operating
   Year                                                        leases   leases
   ----                                                        ------- ---------
                                                                (in thousands)
   <S>                                                         <C>     <C>
   2000.......................................................  $193    $ 1,605
   2001.......................................................    --      1,801
   2002.......................................................    --      2,207
   2003.......................................................    --      2,267
   2004.......................................................    --      1,657
   Thereafter.................................................    --        583
                                                                ----    -------
     Total minimum lease payments.............................   193    $10,120
                                                                        =======
   Less--amount representing interest.........................    10
                                                                ----
     Present value of minimum lease payments..................  $183
                                                                ====
</TABLE>

Royalty Agreement

     In August 1994, the Company entered into a license agreement last amended
in July 1996 under which the Company obtained a nonexclusive right to use
certain software technology through the term of the licensor's copyrights on
such technology. In exchange, the Company is required to pay royalties on net
sales of licensed product. These royalties begin at 5% of licensed product
sales and decrease as a percentage of sales based on cumulative life to date
sales. In addition, the Company is required to pay annual minimum royalties
totaling $90,000 and $80,000 for the years ended December 31, 1999 and 2000,
respectively, and $50,000 annually thereafter. Any payments that exceed these
minimums can be used to offset future royalties payable under the agreement.
Under the amended agreement, the Company recorded royalty expense totaling
$54,000, $52,000 and $93,000 during the years ended December 31, 1997, 1998 and
1999, respectively. Also, in 1999, cost of product license revenue included a
$60,000 payment to a client as a royalty for our resale of an application
originally developed for that client.

10. Notes Payable and Line of Credit

     In March 1999, the Company entered into an equipment financing agreement
with a bank. Under this agreement, the Company entered into two lines of credit
under which the Company obtained the right to draw down up to $1,500,000 to
finance purchases of fixed assets. Borrowings under these lines are
collateralized by the fixed assets purchased and bear interest at an annual
rate of prime plus 0.75% (8.50% at December 31, 1999) which is payable monthly.
Borrowings made between March 1999 and May 1999 and between June 1999 and
November 1999 converted into term loans on May 31, 1999 and November 30, 1999,
respectively, at which point monthly payments of principal plus interest are
due over a period of 36 months. During 1999, the Company borrowed the entire
$1,500,000 available under these lines. At December 31, 1999, $1,333,000 was
outstanding under the resulting notes payable; maturing $500,000 in 2000,
$500,000 in 2001 and $333,000 in 2002. Under the financing agreement, the
Company is obligated to comply with certain financial covenants; the Company
was in full compliance with these covenants at December 31, 1999.

     Also in March 1999, the Company entered into a $750,000 revolving line of
credit with the same bank. A loan modification in November 1999 increased the
line of credit to $1,300,000. Amounts available for borrowing are based upon
certain eligible accounts receivable. Borrowings under the revolving line of
credit bear interest at the bank's prime rate plus 0.5% (8.50% at December 31,
1999), and all outstanding borrowings are due March 30, 2000. At December 31,
1999, no amounts were outstanding under the revolving line of credit and
$1,060,000 was available for borrowing.

                                      F-19
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


11. Segment Reporting

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

     The following table presents total revenue and long-lived assets,
excluding intangible assets, information by geographic area as of and for the
years ended December 31, 1997, 1998 and 1999:

<TABLE>
<CAPTION>
                                            Total Revenue     Long-Lived Assets
                                        --------------------- ------------------
                                         1997   1998   1999   1997  1998   1999
                                        ------ ------ ------- ---- ------ ------
                                                     (in thousands)
<S>                                     <C>    <C>    <C>     <C>  <C>    <C>
Domestic............................... $2,042 $5,850 $13,649 $675 $1,268 $3,499
International..........................     --     --     362   --     29    460
                                        ------ ------ ------- ---- ------ ------
                                        $2,042 $5,850 $14,011 $675 $1,297 $3,959
                                        ====== ====== ======= ==== ====== ======
</TABLE>

     International revenue is based on the location of the customer.

12. Income Taxes

     The Company is a cash basis taxpayer for federal and state income tax
purposes. As a result of taxable losses generated, the Company has not recorded
any provisions for income taxes for the years ended December 31, 1997, 1998 and
1999. The following is a reconciliation between the amount of the Company's
income taxes utilizing the U.S. federal statutory rate and the Company's actual
provision for income taxes for the years ended December 31, 1997, 1998 and
1999:

<TABLE>
<CAPTION>
                                                           December 31,
                                                      ------------------------
                                                       1997    1998     1999
                                                      ------  -------  -------
                                                          (in thousands)
<S>                                                   <C>     <C>      <C>
At U.S. federal statutory rate....................... $ (857) $(1,958) $(5,328)
State taxes, net of federal effect...................   (156)    (386)  (1,045)
Effect of change in valuation allowance..............  1,060    2,431    6,416
Other................................................    (47)     (87)     (43)
                                                      ------  -------  -------
Provision for income taxes........................... $   --  $    --  $    --
                                                      ======  =======  =======
</TABLE>

     The Company's net deferred tax assets consist of the following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                               1998      1999
                                                              -------  --------
                                                               (in thousands)
<S>                                                           <C>      <C>
Deferred tax assets:
  Net operating loss carryforwards........................... $ 4,080  $  9,524
  Tax credit carryforwards...................................     250       638
  Accrual to cash adjustment.................................      --       364
  Other......................................................       2        30
                                                              -------  --------
Gross deferred tax assets....................................   4,332    10,556
Deferred tax asset valuation allowance.......................  (4,140)  (10,556)
                                                              -------  --------
  Net deferred tax asset.....................................     192        --
Deferred tax liabilities:
  Accrual to cash adjustment.................................    (192)       --
                                                              -------  --------
    Total net deferred tax asset............................. $    --  $     --
                                                              =======  ========
</TABLE>

                                      F-20
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


     At December 31, 1999 and 1998, the Company provided a valuation allowance
for the full amount of its net deferred tax assets since, based on the weight
of available evidence, management cannot conclude that it is more likely than
not that these future benefits will be realized.

     At December 31, 1999, the Company has federal and state net operating loss
carryforwards of $23,400,000 and $22,800,000, respectively, available to reduce
future income, which expire beginning in 2011 and 2001, respectively. The
Company also has federal and state research and development credit
carryforwards of $352,000 and $365,000, respectively, available to reduce
future income tax liabilities, which expire beginning in 2013.

     The Company also has non-US loss carryforwards and tax credits of
$2,200,000 and $45,000 that begin to expire in 2007 and 2010, respectively.
Under the Internal Revenue Code, certain substantial changes in the Company's
ownership could result in an annual limitation on the amount of net operating
loss and tax credit carryforwards which can be utilized in future years to
offset future taxable income and tax liabilities.

13. 401(k) Savings Plan

     The Company has established a retirement savings plan under Section 401(k)
of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees of the Company who meet minimum age and service
requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the 401(k) Plan may
be made at the discretion of the Board of Directors. The Company has not made
any contributions to the 401(k) Plan through December 31, 1999.

14 . Subsequent Events

     On April 11, 2000, the Company sold 2,544,681 shares of its Series E
redeemable convertible preferred stock (the "Series E preferred stock") for net
proceeds of $19,930,000. The rights and preferences of the Series E preferred
stock are substantially the same as those of the Series A preferred stock,
Series B preferred stock and Series C preferred stock as described in Note 5,
except that the Series E preferred stock is convertible into common stock on a
one for one basis. In the event of any liquidation, dissolution or winding-up
of the Company, the holders of Series E preferred stock have a liquidation
preference above the Series A preferred stock, Series B preferred stock, Series
C preferred stock, Series D preferred stock and common stock, and are entitled
to receive $7.86 per share. Because the deemed fair value of the Company's
common stock for financial reporting purposes was greater than the conversion
price of the Series E preferred stock, in accordance with EITF 98-5, the
Company will record a beneficial conversion feature of $5.2 million on the
Series E preferred stock, which will be treated as a preferred stock dividend
as of the date of issue, thus increasing the net loss attributable to common
stockholders.

     In April 2000, the Company's Board of Directors approved the 2000
Employee, Director and Consultant Stock Plan. A total of 5,000,000 shares of
common stock have been reserved for issuance under this plan. This plan was
approved by the Company's stockholders in May 2000 (unaudited).

     (Unaudited) -- In May 2000, the Company's Board of Directors and
stockholders approved the 2000 Employee Stock Purchase Plan, which will become
effective upon completion of the Company's initial public offering. The plan
authorizes the issuance of up to a total of 200,000 shares of common stock to
participating employees.

                                      F-21
<PAGE>

                        SPEECHWORKS INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


     (Unaudited) -- On May 31, 2000, the Company issued to a Series E preferred
investor a warrant to purchase 47,710 shares of common stock at an exercise
price of $7.86 per share. The warrant is exercisable on or before May 2002. The
fair value ascribed to this warrant upon its issuance, utilizing the Black-
Scholes valuation model, was $330,630.

     (Unaudited) -- Effective June 1, 2000, the Company modified its revolving
line of credit as described in Note 10, to increase available borrowings from
$1,300,000 to $2,000,000. The revolving line of credit expires on May 31, 2001.

     (Unaudited) -- On June 5, 2000, the Company entered into a development and
license agreement with AT&T Corp. to develop and sell products that use AT&T
speech technology. Pursuant to the agreement, the Company received development
and distribution licenses to AT&T speech technology. In connection with this
agreement, the Company issued 1,045,158 shares of common stock to AT&T with a
fair value of $11.00 per share. The technology license and intellectual
property rights acquired will be recorded as intangible assets based on the
total fair value of the common stock of $11.5 million, and will be amortized
over the expected economic life of the related products to be commercialized.

     (Unaudited) -- On June 29, 2000, the Company entered into a letter of
intent with Net2Phone under which the Company will grant a software license and
provide professional services to Net2Phone and pursue joint marketing and
promotional efforts. The Company also entered into an agreement with Net2Phone
whereby Net2Phone has agreed to purchase $4.0 million of common stock in a
private placement concurrent with an initial public offering at a purchase
price equal to the lesser of $12.46 per share and 89% of the price to the
public in the offering. The Company will record a non-cash charge equal to the
difference between the price to the public and the price to Net2Phone. Assuming
an initial public offering price of $18.00 per share, the amount of this non-
cash charge will be $1.8 million, which will be amortized against revenue over
the expected three-year term of the agreement.

     (Unaudited) -- On June 30, 2000, the Company entered into a three-year
agreement with America Online that encompasses a number of business
arrangements. America Online will pay the Company license, professional
services and maintenance and support fees. America Online will have the option
annually to terminate the agreement, and may also extend the agreement for up
to three additional one-year terms. Under the agreement, America Online has
also agreed to purchase $5.0 million of common stock in a private placement
concurrent with an initial public offering at a purchase price equal to the
lesser of $12.46 per share and 89% of the price to the public in the offering.
The Company will record a non-cash charge equal to the difference between the
price to the public and the price to AOL. Assuming an initial public offering
price of $18.00 per share, the amount of this non-cash charge will be $2.2
million, which will be amortized against revenue over the expected three-year
term of agreement. In order to encourage America Online's marketing of the
voice portal and speech recognition services, thereby supporting the Company's
marketing efforts, the Company issued America Online a warrant to purchase up
to 765,422 shares of the Company's common stock at an exercise price equal to
the lesser of $12.46 per share and 89% of the price to the public in the
offering. These warrants are exercisable upon the earlier of two years or in
three equal tranches upon America Online achieving specified voice portal user
minute milestones. In accordance with EITF 96-18, the value ascribed to this
warrant upon its issuance, utilizing the Black-Scholes valuation model and
assuming an initial public offering price of $18.00 per share, was
$11.2 million, which will be amortized to sales and marketing expense over the
expected three-year term of the agreement. This amortization will commence upon
completion of the initial public offering, the date at which the exercise price
of the warrants will be fixed. Assumptions used in the Black-Scholes
computation included the following: fair value of the Company's common stock of
$18.00 per share; exercise price of $12.46 per share; risk free interest rate
of return of 6.2%; volatility of 100%; expected term of 5 years; and no
dividend yield.

                                      F-22
<PAGE>

     This page will feature SpeechWorks' logo.
<PAGE>

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

                                4,750,000 Shares



                                  Common Stock

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

                                   PROSPECTUS

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

                                   Chase H&Q

                               J.P. Morgan & Co.

                           U.S. Bancorp Piper Jaffray

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

                                         , 2000

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

     You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

     No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common shares or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.

     Until       , 2000, all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

     The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:

<TABLE>
   <S>                                                               <C>
   SEC registration fee............................................. $   27,400
   Nasdaq National Market listing fee...............................     95,000
   NASD filing fee..................................................     10,379
   Printing and engraving fees......................................    200,000
   Legal fees and expenses..........................................    600,000
   Accounting fees and expenses.....................................    315,000
   Blue sky fees and expenses.......................................     10,000
   Transfer agent and registrar fees................................      2,000
   Miscellaneous....................................................    444,116
                                                                     ----------
   Total............................................................ $1,703,895
</TABLE>


     All of the above figures, except the SEC registration fee, NASD filing fee
and Nasdaq National Market listing fee, are estimates.

Item 14. Indemnification of Directors and Officers.

     Our certificate of incorporation provides that we shall indemnify to the
fullest extent authorized by the Delaware General Corporation Law, each person
who is involved in any litigation or other proceeding because such person is or
was a director or officer of SpeechWorks or is or was serving as an officer or
director of another entity at our request, against all expense, loss or
liability reasonably incurred or suffered in connection therewith. Our
certificate of incorporation provides that the right to indemnification
includes the right to be paid expenses incurred in defending any proceeding in
advance of its final disposition, provided, however, that such advance payment
will only be made upon delivery to us of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If we do not
pay a proper claim for indemnification in full within 60 days after we receive
a written claim for such indemnification, the certificate of incorporation and
our bylaws authorize the claimant to bring an action against us and prescribe
what constitutes a defense to such action.

     Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any director or officer of the corporation against expenses,
including attorney's fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding brought by reason of the fact that such person is or was a director
or officer of the corporation, if such person acted in good faith and in a
manner that he reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if he or she had no reason to believe his or her conduct was
unlawful. In a derivative action, such as one brought by or on behalf of the
corporation, indemnification may be provided only for expenses actually and
reasonably incurred by any director or officer in connection with the defense
or settlement of such an action or suit if such person acted in good faith and
in a manner that he or she reasonably believed to be in, or not opposed to, the
best interests of the corporation, except that no indemnification shall be
provided if such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
or suit was brought shall determine that the defendant is fairly and reasonably
entitled to indemnity for such expenses despite such adjudication of liability.

                                      II-1
<PAGE>

     Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
Article Tenth of our certificate of incorporation eliminates the liability of a
director to us or our stockholders for monetary damages for such a breach of
fiduciary duty as a director, except for liabilities arising:

   .  from any breach of the director's duty of loyalty to us or our
      stockholders,

   .  from acts or omissions not in good faith or which involve intentional
      misconduct or a knowing violation of law,

   .  under Section 174 of the Delaware General Corporation Law, and

   .  from any transaction from which the director derived an improper
      personal benefit.

     We carry insurance policies insuring our directors and officers against
certain liabilities that they may incur in their capacity as directors and
officers.

     Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the underwriters of
SpeechWorks, our directors and officers who sign the Registration Statement and
persons who control SpeechWorks, under certain circumstances.

Item 15. Recent Sales of Unregistered Securities.

     In the three years preceding the filing of this Registration Statement, we
have sold the following securities that were not registered under the
Securities Act as summarized below. The share information provided below
reflects the three-for-two split of the common stock effected on January 5,
2000. Upon completion of this offering our outstanding securities will
automatically convert as follows:

   .  each share of series A Convertible Participating Preferred Stock will
      convert into 1.5 shares of common stock;

   .  each share of series B Convertible Preferred Stock will convert into
      1.5 shares of common stock;

   .  each share of series C Convertible Preferred Stock will convert into
      1.5 shares of common stock;

   .  each share of series D Convertible Preferred Stock will convert into
      1.5 shares of common stock; and

   .  each share of series E Convertible Preferred Stock will convert into
      one share of common stock.

 (a)Issuances of Capital Stock and Warrants

     On September 30, 1996, February 14, 1997 and April 22, 1998 we issued and
sold a total of 2,474,500 shares of series B convertible preferred stock to
nine investors at a price per share of $2.75 in a private placement for total
proceeds of $6,804,875.

     On May 8, July 28 and August 12, 1998 and January 9, 1999, we issued and
sold a total of 1,626,092 shares of series C convertible preferred stock to 12
investors at a price per share of $4.25 in a private placement for total
proceeds of $6,910,891.

     On November 8, 1998, we issued a warrant to purchase 30,000 shares of
common stock to SoundWorks USA, Inc. in connection with our acquisition of the
"speechworks.com" domain name.

     On April 29, June 21 and June 29, 1999, we issued and sold a total of
2,671,389 shares of series D convertible preferred stock to 10 investors at a
price per share of $8.92 in a private placement for total proceeds of
$23,828,790.

     On January 5, 2000, we effected a three-for two stock split of our
outstanding common stock in which each two outstanding shares of common stock
were split into three shares of common stock.

                                      II-2
<PAGE>

     On April 11, 2000, we issued and sold a total of 2,544,681 shares of
series E convertible preferred stock to 17 investors at a price per share of
$7.86 in a private placement for total proceeds of $20,001,193.

     On May 31, 2000, we issued a warrant to purchase 47,710 shares of common
stock at an exercise price of $7.86 per share to one of our series E investors.

     On June 5, 2000, we issued 1,045,158 shares of common stock to AT&T Corp.
in a private placement in connection with the execution of a development and
license agreement with AT&T.

     On June 28, 2000, we agreed to sell $4,000,000 of our common stock to
Net2Phone in a private placement concurrent with this offering at a price per
share equal to the lesser of $12.46 and 89% of the price per share at which the
common stock is sold in this offering.

     On June 30, 2000, we issued to America Online, Inc. a warrant to purchase
765,442 shares of common stock at an exercise price per share equal to the
lesser of $12.46 and 89% of the price per share at which the common stock is
sold in this offering in connection with the execution of a software license
and professional services agreement with America Online. We have also agreed to
sell $5,000,000 of our common stock to America Online in a private placement
concurrent with this offering at a price per share equal to the lesser of
$12.46 and 89% of the price per share at which the common stock is sold in this
offering.

 (b)Certain Grants and Exercises of Stock Options

     As of June 20, 2000 we have issued options to purchase a total of
5,548,078 shares of common stock under our stock plans, 1,423,969 of which are
currently exercisable, at a weighted average exercise price of $2.88 per share.
As of June 20, 2000, 2,372,689 options pursuant to the foregoing have been
exercised.

     The sale and issuance of the above securities were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and instruments issued in such transactions.
All recipients had adequate access to information about us.

                                      II-3
<PAGE>

Item 16. Exhibits and Financial Statement Schedules.

 (a)Exhibits

<TABLE>
<CAPTION>
Exhibit
Number                               Description of Exhibit
-------                              ----------------------
<S>      <C>
 **1.1   Form of Underwriting Agreement
 **3.1   Restated Certificate of Incorporation of SpeechWorks International, Inc.
 **3.2   Restated Certificate of Incorporation of SpeechWorks International, Inc. to be
         filed prior to completion of the offering
 **3.3   Bylaws of SpeechWorks International, Inc.
 **3.4   Amended and Restated Bylaws of SpeechWorks International, Inc. to be effective
         upon completion of the offering
 **4.1   Form of Common Stock Certificate
   5.1   Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with respect to
         the legality of securities being registered
 +10.1   License Agreement, dated August 3, 1994, between the Registrant and
         Massachusetts Institute of Technology, as amended
**10.2   Fourth Amended and Restated Registration Rights Agreement, dated as of April
         11, 2000, among the Registrant and the investors party thereto
**10.3   Lease Agreement, dated February 21, 1997, between the Registrant and Landman
         Omnibus V Limited Partnership
**10.4   Sublease Agreement, dated April 1, 1998, between the Registrant and Exchange
         Applications, Inc.
**10.5   Amended and Restated 1995 Stock Option Plan
**10.6   2000 Employee, Director and Consultant Stock Plan
**10.7   2000 Employee Stock Purchase Plan
**10.8   Employment Agreement, dated September 2, 1997, between the Registrant and
         Stuart R. Patterson
**10.9   Form of Incentive Stock Option Agreement entered into by the named executive
         officers
**10.10  Employment Agreement, dated June 21, 2000, between Registrant and Richard J.
         Westelman
 +10.11  Development and License Agreement, dated June 5, 2000 between the Registrant
         and AT&T Corp.
**10.12  First Amendment to the Fourth Amended and Restated Registration Rights
         Agreement
**10.13  Second Amendment to the Fourth Amended and Restated Registration Rights
         Agreement
 +10.14  Software License and Professional Services Agreement, dated June 30, 2000,
         between America Online, Inc. and the Registrant.
 +10.15  Letter of Intent, dated June 29, 2000 between Net2Phone, Inc. and the
         Registrant
**21.1   Subsidiaries
  23.1   Consent of PricewaterhouseCoopers LLP
  23.2   Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see Exhibit 5.1)
**24.1   Powers of Attorney (See page II-5)
**27.1   Financial Data Schedule
</TABLE>

** Previously filed

+ Confidential treatment requested as to certain portions, which portions are
  omitted and filed separately with the commission.

                                      II-4
<PAGE>

 (b)Financial Statement Schedules

     Financial Statement Schedules are omitted because the information required
thereby is either not applicable or is included in our consolidated financial
statements or notes to those consolidated financial statements.

Item 17. Undertakings

     The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.

     Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities, other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

     The undersigned registrant hereby undertakes that:

   (1) For purposes of determining any liability under the Securities Act of
       1933, the information omitted from the form of prospectus filed as
       part of this Registration statement in reliance upon Rule 430A and
       contained in a form of prospectus filed by the registrant pursuant to
       Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
       deemed to be part of this Registration statement as of the time it
       was declared effective.

   (2) For the purpose of determining any liability under the Securities Act
       of 1933, each post-effective amendment that contains a form of
       prospectus shall be deemed to be a new registration statement
       relating to the securities offered therein, and the offering of such
       securities at that time shall be deemed to be the initial bona fide
       offering thereof.

                                      II-5
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has duly caused this Amendment to be signed on
its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts, on July 31, 2000.

                                         SPEECHWORKS INTERNATIONAL, INC.

                                         By:      *
                                           ------------------------------------
                                            Stuart R. Patterson
                                          Chief Executive Officer

     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.

<TABLE>
<CAPTION>
     Signature                 Title                   Date
     ---------                 -----                   ----

<S>                  <C>                        <C>
         *           Chief Executive Officer,      July 31, 2000
 ___________________  President and Director
 Stuart R. Patterson  (principal executive
                      officer)

         *           Chief Financial Officer       July 31, 2000
 ___________________  (principal financial and
     Richard J.       accounting officer)
      Westelman

         *           Chief Technology Officer      July 31, 2000
 ___________________  and Director
 Michael S. Phillips

         *           Chairman of the Board         July 31, 2000
 ___________________
     William J.
      O'Farrell

         *           Director                      July 31, 2000
 ___________________
    Axel Bichara

         *           Director                      July 31, 2000
 ___________________
   Richard Burnes

         *           Director                      July 31, 2000
 ___________________
    Robert Finch

         *           Director                      July 31, 2000
 ___________________
 John C. Freker, Jr.
</TABLE>


*By:       /s/ Rick Olin
  --------------------------------
              Rick Olin
          Attorney-in-fact

                                     II-6
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number                               Description of Exhibit
-------                              ----------------------
<S>      <C>
 **1.1   Form of Underwriting Agreement
 **3.1   Restated Certificate of Incorporation of SpeechWorks International, Inc.
 **3.2   Restated Certificate of Incorporation of SpeechWorks International, Inc. to be
         filed prior to completion of the offering
 **3.3   Bylaws of SpeechWorks International, Inc.
 **3.4   Amended and Restated Bylaws of SpeechWorks International, Inc. to be effective
         upon completion of the offering
 **4.1   Form of Common Stock Certificate
   5.1   Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with respect to
         the legality of securities being registered
 +10.1   License Agreement, dated August 3, 1994, between the Registrant and
         Massachusetts Institute of Technology, as amended
**10.2   Fourth Amended and Restated Registration Rights Agreement, dated as of April
         11, 2000, among the Registrant and the investors party thereto
**10.3   Lease Agreement, dated February 21, 1997, between the Registrant and Landman
         Omnibus V Limited Partnership
**10.4   Sublease Agreement, dated April 1, 1998, between the Registrant and Exchange
         Applications, Inc.
**10.5   Amended and Restated 1995 Stock Option Plan
**10.6   2000 Employee, Director and Consultant Stock Plan
**10.7   2000 Employee Stock Purchase Plan
**10.8   Employment Agreement, dated September 2, 1997, between the Registrant and
         Stuart R. Patterson
**10.9   Form of Incentive Stock Option Agreement entered into by the named executive
         officers
**10.10  Employment Agreement, dated June 21, 2000, between Registrant and Richard J.
         Westelman
 +10.11  Development and License Agreement, dated June 5, 2000 between the Registrant
         and AT&T Corp.
**10.12  First Amendment to the Fourth Amended and Restated Registration Rights
         Agreement
**10.13  Second Amendment to the Fourth Amended and Restated Registration Rights
         Agreement
 +10.14  Software License and Professional Services Agreement, dated June 30, 2000,
         between America Online, Inc. and the Registrant.
 +10.15  Letter of Intent, dated June 29, 2000 between Net2Phone, Inc. and the
         Registrant
**21.1   Subsidiaries
  23.1   Consent of PricewaterhouseCoopers LLP
  23.2   Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see Exhibit 5.1)
**24.1   Powers of Attorney (See page II-5)
**27.1   Financial Data Schedule
</TABLE>

** Previously filed

+ Confidential treatment requested as to certain portions, which portions are
  omitted and filed separately with the commission.



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