•            our future revenues, cost of revenues, research and development
             expenses, selling, general and administrative expenses, amortization
             of intangible assets and gross margin;

• our strategy relating to our segments;

• the potential of future product releases;

• our product development plans and investments in research and development;

• future acquisitions, and anticipated benefits from acquisitions;

• international operations and localized versions of our products; and

• legal proceedings and litigation matters.

You can identify these and other forward-looking statements by the use of words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue" or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in Item 1A - "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
OVERVIEW
Business Overview
We are a leading provider of voice and language solutions for businesses and consumers around the world. Our solutions are used in healthcare, mobile, consumer, enterprise customer service, and imaging markets. We offer market-leading accuracy, natural language understanding capability, domain knowledge and implementation capabilities, built on our significant, long-term investments in research and development. Our solutions are based on our proprietary voice and language platform and are used every day by millions of people and thousands of businesses for tasks and services such as requesting information from a phone-based self-service solution, dictating medical records, searching the mobile Web by voice, entering a destination into a navigation system, or working with PDF documents. We offer our solutions to our customers in a variety of ways, including through products, hosting, professional services and maintenance and support. Our product revenues include embedded OEM royalties, traditional enterprise licensing, term-based enterprise licensing and consumer-based sales. Our hosting revenues are primarily generated through on-demand service models, comprised of hosted transaction-based pricing arrangements that typically have multi-year terms. Our hosting and maintenance and support revenues are recurring in nature as our customers need to use our products on a repeat basis to handle their needs in medical transcription, enterprise customer service and mobile connected services. Our professional services also offer a visible revenue stream, as we have a backlog of assignments that take time to complete.

We are organized in four segments; Healthcare, Mobile and Consumer, Enterprise, and Imaging. Our solutions and services address our four segments:

• Healthcare. We provide a comprehensive set of solutions and services that support the clinical documentation process from capturing the patient encounter with their physician, to improved clinical documentation, coding, compliance and

reimbursement. Our hosted and on-premise solutions provide platforms to generate and distribute clinical documentation through the use of advanced dictation and transcription features, and allow us to deliver scalable, highly productive medical transcription solutions. We offer solutions that leverage the captured information and with state-of-the-art coding, compliance and record management which streamlines health information management ("HIM") processes to drive compliance and reimbursement. Through Clinical Documentation Improvement programs, we bridge the gap between physicians and coders. These solutions will significantly streamline speed and completeness of documentation so that providers can shorten the time between the patient visit and the payment for that visit. Our solutions also enable us to accelerate future innovation to transform the way healthcare providers document patient care, through improved interface with electronic medical records and extraction of clinical information to support the billing and insurance reimbursement processes. We also offer speech recognition solutions for radiology, cardiology, pathology and related specialties, that help healthcare providers dictate, edit and sign reports without manual transcription. Trends in our healthcare business include a growing customer preference for hosted solutions, increasing interest in the use of mobile devices to access healthcare systems and records, and increasing international interest. We continue to see strong demand for transactions which involve the sale and delivery of both software and non-software related services or products. Over the last several quarters, we have signed several new contracts for our hosted solutions, and the volume processed in these services has steadily increased. We are investing to expand our product set to address these opportunities, expand our international capabilities, and reduce our time from contract signing to initiation of billable services.
• Mobile and Consumer. Our portfolio of mobile and consumer solutions and services includes an integrated suite of voice control and text-to-speech solutions, dictation applications, predictive text technologies, mobile messaging services and emerging services such as dictation, Web search and voicemail-to-text. Our suite of Dragon general purpose desktop and portable computer dictation applications increases productivity by using speech to create documents, streamline repetitive and complex tasks, input data, complete forms and automate manual transcription processes. In particular, we have focused in recent quarters on integrating our Dragon technology and brand initiatives across mobile and consumer markets. Trends in our mobile-consumer segment include device manufacturers requiring custom applications to deliver unique and differentiated products such as virtual assistants, broadening keyboard technologies to take advantage of touch screens, increasing hands-free capabilities on cell phones and automobiles to address the growing concern of distracted driving, and the adoption of our technology on a broadening scope of devices, such as televisions, set-top boxes, e-book readers and tablet computers. We continue to see strong demand for transactions which involve the sale and delivery of both software and non-software related services or products to help customers define, design and implement increasingly robust and complex custom solutions such as virtual assistants. We are investing to increase our capabilities and capacity to help device manufacturers build custom applications, to increase the capacity of our data centers, to increase the number, kinds and capacity of network services, to enable developers to access our technology, and to expand both awareness and channels for our direct-to-consumer products.

• Enterprise. We deliver a portfolio of customer service business intelligence and authentication solutions that are designed to help companies better support, understand and communicate with their customers. Our solutions include the use of technologies such as speech recognition, natural language understanding, text-to-speech, biometric voice recognition and analytics to automate caller identification and authorization, call steering, completion of tasks such as updates, purchases and information retrieval, and automated outbound notifications. Our solutions improve the customer experience, increase the use of self-service and enable new revenue opportunities. In addition, we offer solutions that can meet customer care needs through direct interaction with thin-client applications on cell phones, enabling customers to very quickly retrieve relevant information. Trends in our enterprise business include increasing interest in the use of mobile applications to access customer care systems and records, increasing interest in coordinating actions and data across customer care channels, and the ability of a broader set of hardware providers and systems integrators to serve the market. We are investing to expand our product set to address these opportunities, to increase efficiency of our hosted applications, expand our capabilities and capacity to help customers build custom applications, and broaden our relationships with new hardware and systems integrator partners serving the market.

• Imaging. Our imaging solutions offer optical character recognition technology to deliver highly accurate document scanning and storage. We provide networked print management and comprehensive PDF applications designed specifically for business users. In addition, we offer applications that combine network scanning, network print management and PDF creation to quickly enable distribution of documents to users' desktops or to enterprise applications. Our host of services includes software development toolkits for independent software vendors. The imaging market is evolving to include more networked solutions, mobile access to networked solutions, and multi-function devices. We are investing to improve mobile access to our networked products, expand our distribution channels and embedding relationships, and expand our language coverage.

We leverage our global professional services organization and our extensive network of partners to design and deploy innovative solutions for businesses and organizations around the globe. We market and sell our products directly through a dedicated

sales force and through our e-commerce website and also through a global network of resellers, including system integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers and distributors.

We have built a world-class portfolio of intellectual property, technologies, applications and solutions through both internal development and acquisitions. We expect to continue to pursue opportunities to broaden these assets and expand our customer base through acquisitions.

Confronted by dramatic increases in electronic information, consumers, business personnel and healthcare professionals must use a variety of resources to retrieve information, transcribe patient records, conduct transactions and perform other job-related functions. We believe that the power of our solutions can transform the way people use the Internet, telecommunications systems, electronic medical records, wireless and mobile networks and related corporate infrastructure to conduct business.

Strategy

In fiscal 2013, we will continue to focus on growth by providing market-leading, value-added solutions for our customers and partners through a broad set of technologies, service offerings and channel capabilities. We will also continue to focus on operating efficiencies, expense discipline and acquisition synergies to improve gross margins and operating margins. We intend to pursue growth through the following key elements of our strategy:

• Extend Technology Leadership. Our solutions are recognized as among the best in their respective categories. We intend to leverage our global research and development organization and broad portfolio of technologies, applications and intellectual property to foster technological innovation and maintain customer preference for our solutions. We also intend to invest in our engineering resources and seek new technological advancements that further expand the addressable markets for our solutions.

• Broaden Expertise in Vertical Markets. Businesses are increasingly turning to Nuance for comprehensive solutions rather than for a single technology product. We intend to broaden our expertise and capabilities to deliver targeted solutions for a range of industries including mobile device manufacturers, healthcare, telecommunications, financial services and government administration. We also intend to expand our global sales and professional services capabilities to help our customers and partners design, integrate and deploy innovative solutions.

• Increase Subscription and Transaction Based Recurring Revenue. We intend to increase our subscription and transaction based offerings in our segments. The expansion of our subscription or transaction based solutions will enable us to deliver applications that our customers use on a repeat basis, and pay for on a per use basis, providing us with the opportunity to enjoy the benefits of recurring revenue streams.

• Expand Global Presence. We intend to further expand our international resources to better serve our global customers and partners and to leverage opportunities in emerging markets such as Asia and Latin America. We continue to add regional executives and sales employees in different geographic regions to better address demand for voice and language based solutions and services.

• Pursue Strategic Acquisitions and Partnerships. We have selectively pursued strategic acquisitions to expand our technology, solutions and resources to complement our organic growth. We have also formed key partnerships with other important companies in our markets of interest, and intend to continue to do so in the future where it will enhance the value of our business. We have proven experience in integrating businesses and technologies and in delivering enhanced value to our customers, partners, employees and shareholders. We intend to continue to pursue acquisitions that enhance our solutions, serve specific vertical markets and strengthen our technology portfolio.

Key Metrics
In evaluating the financial condition and operating performance of our business, management focuses on revenue, net income, gross margins, operating margins and cash flow from operations. A summary of these key financial metrics for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, is as follows:
• Total revenue increased by $101.6 million to $462.3 million;

• Net income decreased by $31.4 million to a loss of $22.1 million;

• Gross margins decreased by 2.1 percentage points to 60.5%;

• Operating margins decreased by 1.8 percentage points to 1.3%; and

• Cash provided by operating activities increased by $33.4 million to $122.9 million.

In addition to the above key financial metrics, we also focus on certain non-financial performance indicators. A summary of these key non-financial performance indicators as of and for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, is as follows:
• Annualized line run-rate in our on-demand healthcare solutions increased 29% to approximately 5.1 billion lines per year. The annualized line run-rate is determined using billed equivalent line counts in a given quarter, multiplied by four; and

•            Estimated three-year value of on-demand contracts increased 56% to
             approximately $2.1 billion. We determine this value as of the end of
             the period reported, by using our best estimate of all anticipated
             future revenue streams under signed on-demand contracts then in
             place, whether or not they are guaranteed through a minimum
             commitment clause. Our best estimate is based on estimates used in
             evaluating the contracts and determining sales compensation,
             adjusted for changes in estimated launch dates, actual volumes
             achieved and other factors deemed relevant. For contracts with an
             expiration date beyond three years, we include only the value
             expected within three years. For other contracts, we assume renewal
             consistent with historic renewal rates unless there is a known
             cancellation. Contracts are generally priced by volume of usage and
             typically have no or low minimum commitments. Actual revenue could
             vary from our estimates due to factors such as cancellations,
             non-renewals or volume fluctuations.

                             RESULTS OF OPERATIONS
Total Revenues
The following tables show total revenues by product type and by geographic
location, based on the location of our customers, in dollars and percentage
change (dollars in millions):
                                                       Three Months Ended
                                                          December 31,          Dollar     Percent
                                                        2012         2011       Change      Change
Product and licensing                                $   197.9     $ 164.7     $  33.2       20.2 %
Professional services and hosting                        200.3       139.6        60.7       43.5 %
Maintenance and support                                   64.1        56.3         7.8       13.9 %
Total Revenues                                       $   462.3     $ 360.6     $ 101.7       28.2 %
United States                                        $   340.3     $ 276.4     $  63.9       23.1 %
International                                            122.0        84.2        37.8       44.9 %
Total Revenues                                       $   462.3     $ 360.6     $ 101.7       28.2 %

The geographic split for the three months ended December 31, 2012, was 74% of total revenues in the United States and 26% internationally, compared to 77% of total revenues in the United States and 23% internationally for the same period last year. The increase in the proportion of revenue generated internationally was primarily driven by growth in our embedded business for automotive and handsets in our Mobile and Consumer segment. Product and Licensing Revenue
Product and licensing revenue primarily consists of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and as a percentage of total revenues (dollars in millions):

                                                      Three Months Ended December
                                                                  31,                 Dollar     Percent
                                                         2012             2011        Change     Change
Product and licensing revenue                        $   197.9         $   164.7     $  33.2      20.2%
As a percentage of total revenue                          42.8 %            45.7 %

The increase in product and licensing revenue for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, consisted of a $14.2 million increase in Mobile and Consumer revenue driven by a $10.8 million increase in sales of our embedded solutions. Healthcare product and licensing revenue increased $8.2 million driven by sales of our computer-assisted coding solutions from our recent acquisition. Enterprise product and licensing revenue increased $7.4 million due to strong demand for our on-premise solutions.

Professional Services and Hosting Revenue Professional services revenue primarily consists of consulting, implementation and training services for customers. Hosting revenue primarily relates to delivering hosted services, such as medical transcription, automated customer care applications, voice message transcription, and mobile search and transcription, over a specified term. The following table shows professional services and hosting revenue, in dollars and as a percentage of total revenues (dollars in millions):

                                                     Three Months Ended December
                                                                 31,                 Dollar     Percent
                                                        2012             2011        Change     Change
Professional services and hosting revenue           $   200.3         $   139.6     $  60.7      43.5%
As a percentage of total revenue                         43.3 %            38.7 %

The increase in professional services and hosting revenue for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, consisted of a $49.0 million increase in Healthcare revenue primarily driven by transactional volume growth in our on-demand solutions, of which $37.3 million was due to our fiscal 2012 and 2013 acquisitions. Mobile and Consumer professional services and hosting revenue increased $10.3 million, primarily attributable to a $5.8 million increase driven by transactional volume growth in our connected mobile services and a $4.9 million increase in professional services to support the implementation of our embedded automotive and handset solutions.
Maintenance and Support Revenue
Maintenance and support revenue primarily consists of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars and as a percentage of total revenues (dollars in millions):

                                                        Three Months Ended December 31,         Dollar     Percent
                                                           2012                  2011           Change     Change
Maintenance and Support revenue                     $         64.1         $         56.3     $    7.8      13.9%
As a percentage of total revenue                              13.9 %                 15.6 %

The increase in maintenance and support revenue for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, consisted of a $2.7 million increase in Enterprise revenue driven by continued strength in renewals and strong on-premise license sales and a $2.5 million increase in Healthcare revenue contributed by our Dragon Medical solutions.

Costs and Expenses
Cost of Product and Licensing Revenue
Cost of product and licensing revenue primarily consists of material and
fulfillment costs, manufacturing and operations costs and third-party royalty
expenses. The following table shows cost of product and licensing revenue, in
dollars and as a percentage of product and licensing revenue (dollars in
millions):
                                                        Three Months Ended December 31,         Dollar     Percent
                                                           2012                  2011           Change      Change
Cost of product and licensing revenue               $         26.3         $         18.8     $    7.5       39.9 %
As a percentage of product and licensing revenue              13.3 %                 11.4 %

The increase in cost of product and licensing revenue for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, was primarily due to a $5.9 million increase in Healthcare cost of product and licensing revenue driven by our fiscal 2012 and 2013 acquisitions resulting in part in a 1.9 percentage point decrease in our gross margin. Cost of Professional Services and Hosting Revenue Cost of professional services and hosting revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the hardware, infrastructure and communications fees that support our hosting solutions. The

following table shows cost of professional services and hosting revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions):

                                                     Three Months Ended December 31,     Dollar     Percent
                                                        2012               2011          Change     Change
Cost of professional services and hosting revenue   $   125.2         $        90.2     $  35.0      38.8%
As a percentage of professional services and
hosting revenue                                          62.5 %                64.6 %

The increase in the cost of professional services and hosting revenue for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, was due to a $33.7 million increase in Healthcare costs driven primarily by growth in our on-demand solutions, including the impact from our fiscal 2012 and 2013 acquisitions. Gross margin increased 2.1 percentage points primarily driven by a 3.2 percentage point increase in gross margin due to improved efficiencies and increased automation, as well as a 1.4 percentage point improvement in gross margin due to a $2.0 million decrease in stock-based compensation expense. These increases were offset by a decrease in gross margin of 2.6 percentage points resulting from our fiscal 2012 and 2013 acquisitions.

Given the continued mix shift towards our professional services and hosting revenue driven primarily by our Healthcare business, our total gross margin decreased 2.1 percentage points and we expect this trend to continue in fiscal 2013.

Cost of Maintenance and Support Revenue
Cost of maintenance and support revenue primarily consists of compensation for
product support personnel and overhead. The following table shows cost of
maintenance and support revenue, in dollars and as a percentage of maintenance
. . .