Speech technology is an area where Europeans like to claim they are more than a match for their US counterparts. But the current fragile state of Europe's speech industry makes this claim increasingly difficult to justify.

More than 100 languages are spoken in Europe although the European Union recognises just 11 official tongues. At first sight, this Tower of Babel provides the ideal base for developing speech technology, compared with the (officially) monolingual US.

This, coupled with the success of mobile phones in Europe, would seem to offer ideal conditions for a modern speech technology industry focused on mass market mobile applications.

US companies have been quick to spot this and have wasted little time in establishing beachheads in the fledgling European market.

"Speech recognition is a transformational technology that has proven itself in the US and is beginning to make its mark throughout Europe," says Craig Thomson, European general manager at SpeechWorks, the US vendor of speech technology. Speechworks' European customers include Credit Lyonnais, Energis, E-Plus and Thomas Cook Travel.

Europe's speech technology market may be poised for growth but its technology companies seem ill prepared to benefit.

The financial scandal that last year led to the downfall of industry leader Lernout & Hauspie (L&H) - currently operating under bankruptcy protection - sent shockwaves through Europe's closely-knit speech community and underlined the fragility of the industry.

"It is a sad thing for the industry as it does not give the corporate world much confidence in speech technology," says Minesh Patel, technical director at Vocalis, a UK-based competitor to L&H.

Europe's other big player, Philips Speech Processing, a division of Dutch electronics giant Philips, is also facing financial problems. Philips expects to make a loss in the current quarter and recently announced up to 7,000 job losses across the group.

Philips plans to cut underperforming businesses in its troubled Consumer Electronics division, which includes the PSP business unit, although the electronics giant has not made any specific announcement regarding this activity.

PSP grew out of Philips' dictation systems business and this remains one of the company's strengths. In recent years, it has moved into sophisticated telephony-based speech recognition and in 1999 it installed what is claimed to be the world's largest voice portal for Omnitel Pronto Italia.

Nevertheless, Philips does not provide financial information on PSP so analysts have difficulty judging the success of this transformation from dictation machines to voice portals.

The other notable speech company in Europe is Vocalis, listed on the London stock exchange. Vocalis was formed in 1993 through a management buyout from Logica, the UK-based IT services company, which pioneered speech technology research in the 1980s.

"We scored some fairly significant [technology] firsts at that time," says Mr Patel, who is one of the founders of

Vocalis.

When Vocalis floated in 1996, commercial speech technology was in its infancy but analysts believed the young company would soon make its mark.

However, the company has repeatedly failed to live up to expectations and it recently warned that it would report results "materially below expectations" for the year ending March 31 2001. In the previous financial year, the company reported sales of just £2.7m and a pre-tax loss of £4.5m.

Mr Patel believes Vocalis' time will come, although he admits the company probably jumped the gun by going public in 1996. "The market was not quite ready at that time and you could argue it still is not," he says.

A recent addition to the short list of European speech technology companies is Picar, a Munich-based start-up, founded in November 2000. The company has just received E500,000 from GorillaPark, a European high-tech investment house.

Picar aims to develop speech recognition technology for mobile devices but developments are clearly at an early stage and Dirk Goldbeck, chief executive, is reluctant to give any more information about Picar's plans or potential alliances. "We are currently operating in stealth mode," he says.

The fragile state of Europe's speech technology industry today contrasts with that of two years ago. Then, speech technology seemed poised to reach a new mass market through the combination of the internet and powerful PC technology that made speech recognition practical and affordable for desktop applications. L&H perhaps did most to bring speech technology to a mass market and to the attention of the mainstream IT industry - Microsoft invested $40m in the company.

The Belgian company grew rapidly in the late 1990s and acquired rivals such as Dragon and Dictaphone. It invested $500m in creating a high-tech village, Flanders Language Valley, in Belgium in a bid to put Europe, and more specifically the Flanders region of Belgium, on the speech technology map. At its peak in mid-2000, L&H had a market capitalisation of more than $10bn and revenue running at an annual rate of almost $500m - ten times that of US rivals such as SpeechWorks or Nuance.

To many in Europe's speech technology industry, the meteoric rise of L&H seemed too good to be true and, indeed, it appears it was. Accounting regularities were uncovered last year and the founders forced to resign. They have since been charged with fraud.

The collapse of L&H has cast a long shadow over Flanders Language Valley. Although it was supposed to run at arms length from L&H, investigators suspect that investments made by the FLV Fund, an investment company listed on Nasdaq Europe, were linked to L&H executives and used to exaggerate L&H's sales. Shares in the FLV Fund and L&H are currently suspended.

Because of the stigma attached to FLV, Flanders is unlikely to live up to its once-promising future as a centre for speech technology. "It is a pity because there was a genuine attempt to get something going in Flanders," says Mr Patel of Vocalis.