Filed Pursuant to Rule 424(b)4
Registration No. 333-134683

11,474,528 Shares

Acme Packet, Inc.

Common Stock

        This is an initial public offering of shares of common stock of Acme Packet, Inc.

        Acme Packet is offering 8,000,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 3,474,528 shares. Acme Packet will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

        Prior to this offering, there has been no public market for the common stock. The common stock has been approved for quotation on the Nasdaq Global Market under the symbol "APKT."

        See "Risk Factors" on page 7 to read about factors you should consider before buying shares of common stock.

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

        To the extent that the underwriters sell more than 11,474,528 shares of common stock, the underwriters have the option to purchase up to an additional 1,721,179 shares from Acme Packet at the initial public offering price less the underwriting discount.

        The underwriters expect to deliver the shares against payment in New York, New York on October 18, 2006.

Prospectus dated October 12, 2006.

PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and the risk factors beginning on page 7, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms "Acme Packet," "our company," "we," "us" and "our" in this prospectus to refer to Acme Packet, Inc. and its subsidiaries.

Acme Packet

Overview

        Acme Packet is the leading provider of session border controllers, or SBCs, that enable interactive communications service providers to deliver secure and high quality interactive communications—voice, video and other real-time multimedia sessions—across defined border points where Internet Protocol networks connect, known as network borders. Interactive communications service providers, which we also refer to generally as service providers, include cable service providers, wireline and mobile wireless telecommunications service providers, information service providers and data transport service providers. The Internet Protocol, or IP, is a standardized method of transmitting information, such as interactive communications, from one device, such as a personal computer, server, IP telephone or personal digital advisor, to another device over any type of physical private or public network, including the Internet. Our Net-Net products, which consist of our hardware and proprietary software, serve as a central element in unifying the separate IP networks that comprise wireline, wireless and cable networks. Interactive communications service providers can use our products to create a premium service tier that delivers next-generation interactive communications services, such as Voice over IP, or VoIP, with the same quality assurance and security as they historically have offered for voice services over their legacy telephone networks.

        SBCs are deployed at the borders between IP networks, such as between two service providers or between a service provider and its business, residential or mobile customers. SBCs are the only network element currently capable of integrating the control of signaling messages and media flows. This capability complements the roles and functionality of routers, softswitches and data firewalls that operate within the same network.

        We began shipping our Net-Net products in 2002. Since that time, approximately 300 interactive communications service providers in over 55 countries have purchased our products. We sell our products and support services through approximately 30 distribution partners and our direct sales force.

        Our key advantages include:

•

Significant experience in service provider deployments.  We have significant experience in production deployments of SBCs, including by 21 of the 25 largest wireline, wireless and cable service providers in the world.



•

Breadth of applications and standards support.  Our products are capable of processing the most widely used real-time interactive communications sessions at wireline, wireless and cable IP network borders, and support a broad range of IP signaling transport and encryptions protocols, codecs, and addressing methods.



•

Depth of border control features.  We offer a deep set of session border control features for security, service reach maximization, service level agreement assurance, revenue and profit protection, and regulatory compliance.

1

•

Responsive service and support.  Our responsiveness to our customers' and distribution partners' new feature requirements, interoperability testing and problem resolution has been critical in deployments of our products.



•

Carrier-class platform.  Interactive communications service providers operate complex mission-critical networks that require security protection; high degrees of reliability, availability and maintainability; scalable performance and capacity; space and power saving hardware design; and comprehensive network management. Products or platforms that satisfy these requirements are known as carrier-class. We have designed our products to provide a carrier-class platform.



•

Proven interoperability.  Through deployment in approximately 300 service provider networks, we have shown that our products interoperate with key products being deployed by major vendors for next-generation communication services.

        We believe that these key advantages of our products and services, together with the deployment of our products in approximately 300 service provider networks, make Acme Packet the leading provider of SBCs.

Industry Background

        Service providers traditionally have delivered voice and data services over two separate networks: the Public Switched Telephone Network, or PSTN, and the Internet. The PSTN provides high reliability and security but is costly to operate and is limited in its ability to support high bandwidth video and other interactive multimedia services. The Internet is capable of cost-effectively transmitting any form of traffic that is IP-based, including interactive voice, video and data, but it transmits only on a best-efforts basis, because all forms of traffic have the same priority. Therefore, the Internet attempts to deliver all traffic without distinction, which can result in significantly varying degrees of service quality for the same or similar types of traffic transmissions. Internet-based services are also subject to disruptive and fraudulent behavior, including identity theft, viruses, unwanted and excessively large input data, known as SPAM, and the unauthorized use and attempts to circumvent or bypass security mechanisms associated with those services, known as hacking.

        Service providers are beginning to migrate to a single IP network architecture to serve as the foundation for their next-generation voice, video and data service offerings. In order to provide secure and high quality interactive communications on a converged IP network, service providers must be able to manage and integrate the communications flows that comprise communication sessions for applications such as interactive video and voice over IP, or VoIP, which allows the routing of voice conversations over the Internet.

        Prior to the advent of the SBC, IP network infrastructure equipment, such as softswitches, routers and data firewalls, was able to initiate and route undifferentiated data but lacked the ability to target specifically the management of interactive communication sessions. We believe that there is significant demand for SBCs that can facilitate the delivery of secure and high quality real-time interactive communications across all IP network borders. Infonetics Research, a market research and consulting firm specializing in data networking and telecommunications, predicts that the SBC market will grow from $86 million in 2005 to $571 million in 2009.

The Acme Packet Strategy

        Principal elements of our strategy include:

•

Continuing to satisfy the evolving border requirements of large service providers.  Our numerous SBC deployments in the wireline, wireless and cable networks of Tier-1 and other

2

large service providers position us to gain valuable knowledge that we can use to expand and enhance our products' features and functionality.

•

Exploiting new technologies to enhance product performance and scalability.  We will seek to leverage new technologies as they become available to increase the performance, capacity and functionality of our product family, as well as to reduce our costs.



•

Investing in quality and responsive support.  As we broaden our product platform and increase our product capabilities, we will continue to provide comprehensive service and support targeted at maximizing customer satisfaction and retention.



•

Facilitating and promoting service interconnects among our customers.  We intend to increase demand for our products by helping our customers to extend the reach of their services and, consequently, to increase the value of their services to their customers.



•

Leveraging distribution partnerships to enhance market penetration.  We will continue to invest in training and tools for our distribution partners' sales, systems engineering and support organizations, in order to improve the overall efficiency and effectiveness of these partnerships.



•

Actively contributing to architecture and standards definition processes.  We will utilize our breadth and depth of experience with SBC deployments to contribute significantly to organizations developing standards and architectures for next-generation IP networks.

Preliminary Results for the Quarter Ended September 30, 2006

        Our financial statements for the quarter ended September 30, 2006 are not yet available. Our preliminary expectations with respect to our results discussed below are based upon management estimates and are subject to quarterly review procedures and final recommendations and adjustments. Actual operating results may differ from our expectations, and those differences may be material.

        We expect total revenue to be between $21.8 million and $22.0 million in the third quarter of 2006, compared to total revenue of $6.8 million in the third quarter of 2005. We expect income from operations to be between $6.0 million and $6.5 million in the third quarter of 2006, compared to a loss from operations of $2.6 million in the third quarter of 2005.

        The foregoing discussion of our expectations regarding our results for the third quarter of 2006 is not necessarily indicative of expected future results following this offering.

Corporate Information

        We were founded in 2000 under the name Primary Networks, Inc. and changed our name to Acme Packet, Inc. in January 2001. Our principal executive offices are located at 71 Third Avenue, Burlington, Massachusetts 01803. Our telephone number is (781) 328-4400. Our website address is www.acmepacket.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock.

        "Acme Packet," "Net-Net," "Acme Packet Session Aware Networking" and other trademarks or service marks of Acme Packet appearing in this prospectus are the property of Acme Packet. This prospectus contains additional trade names, trademarks and service marks of other companies.

3

The Offering

        The number of shares of common stock to be outstanding after this offering is based on shares outstanding as of September 15, 2006 and excludes:

•

125,000 shares issuable upon the exercise of warrants outstanding as of September 15, 2006 at an exercise price of $1.39 per share;



•

1,762,956 shares issuable upon the exercise of options outstanding and vested as of September 15, 2006 at a weighted average exercise price of $0.34 per share;



•

6,712,052 shares issuable upon the exercise of options outstanding, but not vested, as of September 15, 2006 at a weighted average exercise price of $1.38 per share; and



•

607,859 shares available for future issuance as of September 15, 2006 under our stock incentive plan.

        Except as otherwise noted, all information in this prospectus reflects:

•

the conversion of all outstanding shares of preferred stock into 32,190,359 shares of common stock upon the closing of this offering;



•

no exercise by the underwriters of their over-allotment option; and



•

restatements of our charter and bylaws prior to the closing of this offering.

4

Summary Consolidated Financial Data

        The following tables summarize the consolidated financial data for our business. You should read these summary financial data in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the financial statements and related notes, all included elsewhere in this prospectus. Pro forma basic and diluted net (loss) income per common share have been calculated assuming the conversion of all outstanding preferred stock into common stock.

5

        The pro forma balance sheet data give effect to the conversion of all outstanding shares of preferred stock into common stock as of June 30, 2006. The pro forma as adjusted balance sheet data also give effect to our sale of 8,000,000 shares of common stock offered by this prospectus at the initial public offering price of $9.50 per share, after deducting the underwriting discount and estimated offering expenses payable by us.

6

RISK FACTORS

        An investment in our common stock involves a high degree of risk. In deciding whether to invest, you should carefully consider the following risk factors, as well as the other information contained in this prospectus. Any of the following risks could have a material adverse effect on our business, financial condition, results of operations and prospects and cause the value of our common stock to decline, which could cause you to lose all or part of your investment. When determining whether to buy our common stock, you should also refer to the other information in this prospectus, including the financial statements and related notes.

Risks Relating to Our Business

If the market for SBCs does not develop as we anticipate, our revenue may decline or fail to grow, which would adversely affect our operating results.

        We derive, and expect to continue to derive, all of our revenue from providing SBCs. The market for SBCs is relatively new and still evolving, and it is uncertain whether these products will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness of interactive communications service providers to continue to implement SBCs.

        Some service providers may be reluctant or unwilling to implement SBCs for a number of reasons, including failure to perceive the need for improved quality and security of interactive communications across IP borders and lack of knowledge about the potential benefits that SBCs may provide. Even if service providers recognize the need for improved quality and security of interactive communications across IP borders, they may not select SBCs such as ours because they choose to wait for the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our SBCs.

        If service providers do not perceive the benefits of SBCs, the SBC market may not continue to develop or may develop more slowly than we expect, either of which would significantly adversely affect our revenue and profitability. Because the market for SBCs is developing and the manner of its development is difficult to predict, we may make errors in predicting and reacting to relevant business trends, which could harm our operating results.

We have incurred operating losses in the past and may not be able to achieve or sustain profitability in the future.

        We have incurred significant losses in each fiscal year since inception, including net losses of $7.5 million in 2003, $7.0 million in 2004 and $35,000 in 2005. As a result of ongoing operating losses, we had an accumulated deficit of $17.0 million at June 30, 2006. We expect to continue to incur significant sales and marketing, product development, administrative, and other expenses. We have only a limited operating history on which you can base your evaluation of our business, including our ability to increase our revenue. We commenced operations in August 2000 and began recognizing revenue in 2003. We will need to generate significant revenue to maintain profitability, and we cannot be sure that we will remain profitable for any substantial period of time. If we are unable to remain profitable, the market price of our common stock will probably fall.

The unpredictability of our quarterly results may adversely affect the trading price of our common stock.

        If our quarterly revenue, earnings or other operating results fall below the expectations of securities analysts or investors, the price of our common stock could fall substantially. Our operating results can vary significantly from quarter to quarter due to a number of factors, many of

7

which are outside of our control. Generally, a service providers' purchases of communications equipment have been unpredictable and clustered, rather than steady and predictable, as service providers frequently build out and update their communications networks in stages. In addition, the following factors, among others, can contribute to the unpredictability of our operating results:

•

fluctuations in demand for our products, and the timing and size of customer orders;



•

the length and variability of the sales and deployment cycles for our products, and the corresponding timing of recognizing revenue;



•

new product introductions and enhancements by our competitors and us;



•

changes in our pricing policies or the pricing policies of our competitors;



•

changes in our third-party manufacturing costs or in the prices of components and materials used in our products;



•

our ability to develop, introduce and deploy new products and product enhancements that meet customer requirements in a timely manner;



•

our ability to obtain sufficient supplies of limited source components or materials;



•

our ability to attain and maintain production volumes and quality levels for our products; and



•

general economic conditions, as well as those specific to the communications, networking and related industries.

        As with other communications equipment suppliers, we may recognize a substantial portion of our revenue in a given quarter from sales booked and shipped in the last month of that quarter. As a result, a delay in customer orders is likely to result in a delay in shipments and recognition of revenue beyond the end of a given quarter. Since a relatively small number of customers may account for a substantial portion of our revenue in any quarter, any such delay in an order from a customer could have a material adverse effect on our revenue for that quarter.

        Our operating expenses are largely based on our anticipated organizational and revenue growth. Most of our expenses, such as employee compensation, are relatively fixed in the short term. As a result, any shortfall in revenue in relation to our expectations, whether for the reasons set forth above, the reasons identified below or any other reason, could cause significant changes in our operating results from quarter to quarter and could result in increased quarterly losses.

        We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarters, our operating results will be below the expectations of securities analysts and investors. In this event, the price of our common stock may decrease substantially.

We depend on a limited number of customers for a substantial portion of our revenue in any fiscal period, and the loss of, or a significant shortfall in orders from, key customers could significantly reduce our revenue.

        We derive a substantial portion of our total revenue in any fiscal period from a limited number of customers as a result of the nature of our target market and the relatively early stage of our development. During any given fiscal quarter, a small number of customers may account for a significant percentage of our revenue. For example, three customers accounted for 72% of our total revenue in 2003, three customers accounted for 39% of our total revenue in 2004, four customers accounted for 51% of our total revenue in 2005 and three customers accounted for 38% of our total revenue for the six months ended June 30, 2006. Additionally, we do not have and we do not enter into long-term purchase contracts with our customers, and have no contractual arrangements to

8

ensure future sales of our products to our existing customers. Our inability to generate anticipated revenue from our key existing or targeted customers, or a significant shortfall in sales to them, would significantly reduce our revenue and adversely affect our business. Our operating results in the foreseeable future will continue to depend on our ability to effect sales to existing and other large customers.

Our revenue growth may be constrained by our product concentration and lack of revenue diversification.

        We have derived all of our revenue to date from sales of our SBCs, and we expect that our SBCs will account for substantially all of our total revenue for the foreseeable future. Continued market acceptance of these products is critical to our future success. As a result, our business, operating results, financial condition and cash flows could be adversely affected by:

•

any decline in demand for our existing products;



•

the failure of our existing products to achieve continued market acceptance;



•

the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our existing products;



•

technological innovations or new standards that our existing products do not address; and



•

our inability to release enhanced versions of our existing products on a timely basis.

The long and variable sales and deployment cycles for our products may cause our operating results to vary materially, which could result in a significant unexpected revenue shortfall in any given quarter.

        Our products have lengthy sales cycles, which typically extend from six to twelve months and may take up to two years. A customer's decision to purchase our products often involves a significant commitment of its resources and a product evaluation and qualification process that can vary significantly in length. The length of our sales cycles also varies depending on the type of customer to which we are selling, the product being sold and the type of network in which our product will be utilized. We may incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale.

        Even after making the decision to purchase our products, our customers may deploy our products slowly. Timing of deployment can vary widely among customers. The length of a customer's deployment period may directly affect the timing of any subsequent purchase of additional products by that customer.

        As a result of the lengthy and uncertain sales and deployment cycles for our products, it is difficult for us to predict the quarter in which our customers may purchase additional products or features from us, and our operating results may vary significantly from quarter to quarter, which may negatively affect our operating results for any given quarter.

Our revenue growth will be limited if we are unable to continue to sell our products to large interactive communications service providers.

        Our future success depends in part on our ability to sell our products to large interactive communications service providers operating complex networks that serve large numbers of subscribers and transport high volumes of traffic. The communications industry historically has been dominated by a relatively small number of service providers. While deregulation and other market forces have led to an increasing number of service providers in recent years, large service providers continue to constitute a significant portion of the market for communications equipment. If

9

we fail to sell additional SBCs to our large customers or to expand our customer base to include additional customers that deploy our products in large-scale networks serving significant numbers of subscribers, our revenue growth will be limited.

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that could result in increased cost of sales and decreased revenues and could adversely affect our operating results.

        Many of our customers are large interactive communications service providers that have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may require us to develop additional features and require penalties for performance obligations, such as delivery, outages and response time. As we seek to sell more products to large service providers, we may be required to agree to additional performance-based terms and conditions, which may affect the timing of revenue recognition and may adversely affect our operating results.

Future interpretations of existing accounting standards could adversely affect our operating results.

        Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, or AICPA, the SEC and various other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

        For example, we recognize our product software license revenue in accordance with AICPA Statement of Position, or SOP, 97-2, Software Revenue Recognition, and related amendments and interpretations contained in SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions. The AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements. Future interpretations of existing accounting standards, including SOP 97-2 and SOP 98-9, or changes in our business practices could result in future changes in our revenue recognition accounting policies that have a material adverse effect on our results of operations. We may be required to delay revenue recognition into future periods, which could adversely affect our operating results. In the future we may have to defer recognition for license fees due to several factors, including whether a transaction involves:

•

software arrangements that include undelivered elements for which we do not have vendor specific objective evidence of fair value;



•

requirements that we deliver services for significant enhancements and modifications to customize our software for a particular customer; or



•

material acceptance criteria.

        Because of these factors and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our software arrangements in order to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we sometimes accept terms and conditions that do not permit revenue recognition at the time of delivery.

10

        In December 2004, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share Based Payment. SFAS No. 123(R) requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in the consolidated financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment arrangements. In January 2005, the SEC issued Staff Accounting Bulletin No. 107, which provides supplemental implementation guidance for SFAS No. 123(R). We have selected the Black-Scholes option-pricing model as the most appropriate fair-value method for our awards and are recognizing compensation costs on a straight-line basis over our awards' vesting periods. We adopted SFAS No. 123(R) on January 1, 2006, and in the first six months of fiscal 2006 recognized stock-based compensation expense of $146,000.

If the migration to an IP network architecture for real-time interactive communications does not continue, the SBC market may not expand as predicted, and our ability to obtain new customers may decrease and our revenue will decrease.

        We derive our revenue by providing SBCs to interactive communications service providers seeking to deliver premium interactive communications over IP networks. Our success depends on the continued migration of service providers' networks to a single IP network architecture. The migration of voice traffic from the PSTN to IP networks is in its early stages, and the continued migration to IP networks depends on a number of factors outside of our control. Among other things, existing networks include switches and other equipment that may have estimated useful lives of twenty or more years and therefore may continue to operate reliably for a lengthy period of time. Other factors that may delay the migration to IP networks include service providers' concerns regarding initial capital outlay requirements, available capacity on legacy networks, competitive and regulatory issues, and the implementation of an enhanced services business model. As a result, service providers may defer investing in products, such as ours, that are designed to migrate interactive communications to IP networks. If the migration to IP networks does not occur for these or other reasons, or if it occurs more slowly than we expect, the SBC market may not expand as predicted, if at all, and we will not be able to gain new customers. In addition, even if there is a successful migration to an IP network for interactive communications, new unforseen technologies may render the SBC unnecessary. As a result, our sales and revenues will decrease and our operating results will be harmed.

If functionality similar to that offered by our SBCs is added to existing network infrastructure elements, organizations may decide against adding our SBCs to their network which would cause the market for standalone SBC systems to decrease resulting in fewer customers for and decreased sales of standalone SBC systems.

        Other providers of network infrastructure elements are offering or proposing to offer functionality aimed at addressing the problems addressed by our products. The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our products in infrastructure elements that are already generally accepted as necessary components of network architecture may cause the market not to grow as predicted, which would have an adverse effect on our ability to market and sell certain of our products. Furthermore, even if the functionality offered by other network infrastructure elements is more limited than our products, a significant number of customers may elect to accept such limited functionality in lieu of adding additional equipment from an additional vendor, which could also have a material adverse effect on the market for standalone SBC systems. Many organizations have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of network infrastructure elements, which may make them reluctant to add new components to their networks, particularly from new vendors. In addition, an organization's existing

11

vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match because we currently offer only a single line of products and may have fewer financial resources than some of our competitors. If organizations are reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, the market for our products may prove smaller than predicted and our business, operating results and financial condition will be adversely affected.

The market for SBCs is competitive and continually evolving, and if we are not able to compete effectively, we may not be able to continue to expand our business as expected and our business may suffer.

        Although relatively new, the market for SBCs is competitive and continually evolving. We expect competition to persist and intensify in the future as the SBC market grows and new and existing competitors devote considerable resources to introducing and enhancing products. Our primary competitors generally consist of start-up vendors, such as Newport Networks and NexTone, and more established network equipment and component companies, such as Ditech Networks, through its acquisition of Jasomi, Juniper Networks, through its acquisition of Kagoor, and AudioCodes, through its acquisition of Netrake. In addition, we compete with some of the companies with which we have distribution partnerships, such as Sonus Networks. We compete on the basis of customer traction and experience in interactive communications service provider networks, breadth of applications and standards support, depth of border control features, demonstrated ability of products to interoperate with key communications infrastructure elements, comprehensive service support, and price.

        Networking and telecommunications equipment suppliers without competitive solutions today, such as Cisco Systems, may introduce solutions in the future, either through internal development or acquisition. These additional competitors may include some of our distribution partners. Any new entrant would be likely to devote significant sales and marketing resources to establish its position in the SBC market and may be willing to price its products at a discount or bundle its products with other equipment or services in an attempt to rapidly gain market share. New product introductions or new market entrants could cause service providers to delay purchase decisions or reopen bidding processes. If new product enhancements and introductions are superior to ours, and we are unable to make comparable enhancements to our products, our competitive advantage would be compromised and the condition of our business would be harmed.

        We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage. Our competitors may have more extensive customer bases and broader customer relationships than we do, including relationships with our potential customers. In addition, these companies may have longer operating histories and greater name recognition than we do. These competitors may be in a position to respond more quickly than we do to new or emerging technologies or changes in customer requirements or may foresee the course of market developments more accurately than we do. As a result, we may experience price reductions for our products, order cancellations and increased expenses. Accordingly, our business may not grow as expected and our business may suffer.

If we do not timely deliver new and enhanced products that respond to customer requirements and technological changes, interactive communications service providers may not buy our products and our revenue may decline.

        To achieve market acceptance for our products, we must effectively anticipate, and adapt in a timely manner to, customer requirements and must offer products that meet changing customer demands. Prospective customers may require product features and capabilities that our current products do not have. For example, our most recent introduction of a new product, the Net-

12

Net 9000 Series, may not adequately respond to new customer demands, and, therefore, demand for our products may decrease or may fail to increase to the extent contemplated by our business plan. If we fail to develop products that satisfy customer requirements, our ability to create or increase demand for our products will be harmed, and we may lose current and prospective customers.

        The market for SBCs is characterized by rapid technological change, frequent new product introductions and evolving industry requirements. We may be unable to respond quickly or effectively to these developments. We may experience difficulties with software development, hardware design, manufacturing or marketing that could delay or prevent our development, introduction or implementation of new products and enhancements. The introduction of new products by competitors, the emergence of new industry standards, or the development of entirely new technologies to replace existing product offerings could render our existing or future products obsolete. If our products become technologically obsolete, customers may purchase solutions from our competitors and we may be unable to sell our products in the marketplace and generate revenue.

If our products do not interoperate with our customers' existing networks, the demand for our products will decrease and our operating results will be harmed.

        Our products must interface with our customers' existing networks, each of which may have different specifications. An unanticipated lack of interoperability may result in significant support and repair costs and harm our relations with customers. If our products do not interoperate with those of our customers' networks, installations could be delayed or orders for our products could be cancelled, which would result in losses of revenue and customers that could significantly impair our business and operating results.

We rely on many distribution partners to assist in selling our products, and if we do not develop and manage these relationships effectively, our ability to generate revenue and control expenses will be adversely affected.

        At June 30, 2006, we had approximately 30 distribution partners. Our success is highly dependent upon our ability to continue to establish and maintain successful relationships with these distribution partners from whom, collectively, we derive a significant portion of our revenue. Revenue derived through distribution partners accounted for 83% of our total revenue in 2003, 55% of our total revenue in 2004, 52% of our total revenue in 2005, and 43% of our total revenue in the six months ended June 30, 2006. Although we have entered into contracts with each of our distribution partners, our contractual arrangements are not exclusive and do not obligate our distribution partners to order, purchase or distribute any fixed or minimum quantities of our products. Accordingly, our distribution partners, at their sole discretion, may choose to purchase SBCs from our competitors rather than from us. Under our contracts with our distribution partners, our distribution partners generally order products from us by submitting purchase orders that describe, among other things, the type and quantities of our products desired, delivery date and other delivery terms applicable to the ordered products. Accordingly, our ability to sell our products and generate significant revenue through our distribution partners is highly dependent on the continued desire and willingness of our distribution partners to purchase and distribute our products and on the continued cooperation between us and our distribution partners. Some of our distribution partners may develop competitive products in the future or may already have other product offerings that they may choose to offer and support in lieu of our products. Divergence in strategy, change in focus, competitive product offerings, potential contract defaults, and changes in ownership or management of a distribution partner may interfere with our ability to market, license, implement or support our products with that party, which in turn could harm our business. Some of

13

our competitors may have stronger relationships with our distribution partners than we do, and we have limited control, if any, as to whether those partners implement our products rather than our competitors' products or whether they devote resources to market and support our competitors' products rather than our offerings.

        Moreover, if we are unable to leverage our sales and support resources through our distribution partner relationships, we may need to hire and train additional qualified sales and engineering personnel. We cannot assure you, however, that we will be able to hire additional qualified sales and engineering personnel in these circumstances, and our failure to do so may restrict our ability to generate revenue or implement our products on a timely basis. Even if we are successful in hiring additional qualified sales and engineering personnel, we will incur additional costs and our operating results, including our gross margin, may be adversely affected.

Our international operations expose us to additional business risks, and failure to manage these risks may adversely affect our revenue generated in foreign countries, and our overall operating results.

        We have employees in Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, Italy, Japan, Korea, Malaysia, Mexico, Peru, Spain and the United Kingdom. In the coming years, we may find that the success of our business may depend, in part, on our ability to expand further into international markets. Any continued expansion into international markets will require significant resources and management attention and will subject us to new regulatory, economic and political risks. Given our limited experience in international markets, we cannot be sure that any further international expansion will be successful. In addition, we will face new risks in doing business internationally. These risks could reduce demand for our products, lower the prices at which we can sell our products or otherwise have an adverse effect on our operating results. Among the risks we believe are most likely to affect us are:

•

our ability to comply with differing technical standards and certification requirements outside North America;



•

difficulties and costs of staffing and managing foreign operations;



•

greater difficulty collecting accounts receivable and longer payment cycles;



•

unexpected changes in regulatory requirements;



•

reduced protection for intellectual property rights in some countries;



•

new and different sources of competition;



•

fluctuations in currency exchange rates;



•

adverse tax consequences; and



•

political and economic instability and terrorism.

Because we derive all of our revenue from interactive communications service providers, our operating results will suffer if the interactive communications industry experiences an economic downturn.

        We derive all of our revenue from the communications industry. Our future success depends upon the continued demand for communications equipment by interactive communications service providers. The communications industry is cyclical and reactive to general economic conditions. In the recent past, worldwide economic downturns, pricing pressures and deregulation have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have been causing delays and reductions in capital and operating expenditures by many interactive

14

communications service providers. These delays and reductions, in turn, have been reducing demand for communications products like ours. A continuation or subsequent recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in the communications industry, could harm our operating results in the future.

The loss of key personnel or an inability to attract and retain additional personnel may impair our ability to grow our business.

        We are highly dependent upon the continued service and performance of our senior management team and key technical, marketing and production personnel, including our founders, Andrew D. Ory, who is also our President and Chief Executive Officer, and Patrick MeLampy, who is also our Chief Technology Officer. Neither of these officers is a party to an employment agreement with us, and either of them therefore may terminate employment with us at any time with no advance notice. The replacement of either of these two officers likely would involve significant time and costs, and the loss of either of these officers may significantly delay or prevent the achievement of our business objectives.

        We face intense competition for qualified individuals from numerous technology, marketing, financial services, manufacturing and e-commerce companies. For example, our competitors may be able attract and retain a more qualified engineering team by offering more competitive compensation packages. If we are unable to attract new engineers and retain our current engineers, we may not be able to develop and service our products at the same levels as our competitors and we may, therefore, lose potential customers and sales penetration in certain markets. Our failure to attract and retain suitably qualified individuals could have an adverse effect on our ability to implement our business plan and as a result, our ability to compete effectively in the SBC market would decrease, our operating results would suffer and our revenues would decrease.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to public company compliance initiatives. If we are unable to absorb these increased costs or maintain management focus on development and sales of our product offerings and services, we may not be able to achieve our business plan.

        As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Market, have imposed a variety of new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations will make it more difficult and expensive for us to obtain director and officer liability insurance, and we will be required to incur substantial costs to maintain the same or similar coverage.

        In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, commencing in fiscal 2007, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls

15

over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources.

        The increased costs associated with operating as a public company may decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management's attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed and our reputation may be damaged.

        We significantly expanded our operations in 2005 and the first six months of 2006. For example, during the period from December 31, 2004 through June 30, 2006, we increased the number of our employees and full-time independent contractors by 107%, from 104 to 215, and we opened new sales offices in Japan and Spain. In addition, our total operating expenses for the year ended December 31, 2005 increased by 58% as compared to the fiscal year ended December 31, 2004, and for the six months ended June 30, 2006 were 55% higher than for the six months ended June 30, 2005. We anticipate that further expansion of our infrastructure and headcount will be required to achieve planned expansion of our product offerings, projected increases in our customer base and anticipated growth in the number of product deployments. Our rapid growth has placed, and will continue to place, a significant strain on our administrative and operational infrastructure. Our ability to manage our operations and growth will require us to continue to refine our operational, financial and management controls, human resource policies, and reporting systems and procedures.

        We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. If we are unable to manage future expansion, our ability to provide high quality products and services could be harmed, which would damage our reputation and brand and substantially harm our business and results of operations.

Our ability to compete and the success of our business could be jeopardized if we are unable to protect our intellectual property adequately.

        Our success depends to a degree upon the protection of our software, hardware designs and other proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, and confidentiality provisions in agreements with employees, distribution partners, consultants and customers to protect our intellectual property rights. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce our rights adequately against these parties. In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to

16

compete effectively could be harmed. For example, if a competitor were to gain use of certain of our proprietary technology, it might be able to manufacture similarly designed and equipped SBCs at a reduced cost, which would result in a decrease in demand for our products. Furthermore, we have adopted a strategy of seeking limited patent protection both in the United States and in foreign countries with respect to the technologies used in or relating to our products. Others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may need to license these technologies and we may not be able to obtain licenses on reasonable terms, if at all, thereby causing great harm to our business. In addition, if we resort to legal proceedings to enforce our intellectual property rights, the proceedings could become burdensome and expensive, even if we were to prevail.

Claims by other parties that we infringe upon their proprietary technology could force us to redesign our products or to incur significant costs.

        We may become involved in litigation as a result of allegations that we infringe upon intellectual property rights of others. Any parties asserting that our products infringe upon their proprietary rights would force us to defend ourselves, and possibly our customers, distribution partners or contract manufacturers, against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

•

stop selling, incorporating or using our products that use the challenged intellectual property;



•

obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all;



•

redesign those products that use any allegedly infringing technology; or



•

refund deposits and other amounts.

Any lawsuits regarding intellectual property rights, regardless of their success, could be time-consuming, could be expensive to resolve, and would divert our management's time and attention.

Compliance with regulations and standards applicable to our products may be time consuming, difficult and costly, and if we fail to comply, our product sales will decrease.

        In order to achieve and maintain market acceptance, our products must continue to meet a significant number of regulations and standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission and Underwriters Laboratories.

        As these regulations and standards evolve, and if new regulations or standards are implemented, we will be required to modify our products or develop and support new versions of our products, and this will increase our costs. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay introduction of our products, which could harm our business. User uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover, distribution partners or customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products to address these requirements and any regulatory changes could have a material adverse effect on our business, financial condition and operating results.

17

Regulations affecting IP networks could reduce demand for our products.

        Laws and regulations governing the Internet and electronic commerce are emerging but remain largely unsettled, even in the areas where there has been some legislative action. Regulations may focus on, among other things, assessing access or settlement charges, or imposing tariffs or regulations based on the characteristics and quality of products, either of which could restrict our business or increase our cost of doing business. Government regulatory policies are likely to continue to have a major impact on the pricing of existing and new network services and, therefore, are expected to affect demand for those services and the communications products, including our products, supporting those services.

        Any changes to existing laws or the adoption of new regulations by federal or state regulatory authorities or any legal challenges to existing laws or regulations affecting IP networks could materially adversely affect the market for our products. In addition, the convergence of the PSTN and IP networks could become subject to governmental regulation, including the imposition of access fees or other tariffs, that adversely affects the market for services and equipment, including our products, for interactive communications across IP networks. User uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover, distribution partners or customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products or address any regulatory changes could have a material adverse effect on our business, financial condition or operating results.

We are subject to environmental and occupational health and safety regulations that may increase our costs of operations or limit our activities.

        We are subject to environmental and occupational health and safety regulations relating to matters such as reductions in the use of harmful substances, comprehensive risk management in manufacturing activities and final products, the use of lead-free soldering, and the recycling of products and packaging materials. The European Parliament and the Counsel of the European Union have published directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment. These directives generally require electronics producers to bear the cost of collection, treatment, recovery and safe disposal of past and future products from end-users and to ensure that new electrical and electronic equipment does not contain specified hazardous substances. While the cost of these directives to us cannot be determined before regulations are adopted in individual member states of the European Union, it may be substantial and may divert resources, which could detract from our ability to develop new products. We may not be able to comply in all cases with applicable environmental and other regulations, and if we do not, we may incur remediation costs or we may not be able to offer our products for sale in certain countries, which could adversely affect our results.

Because our products are sophisticated and designed to be deployed in complex environments, they may have errors or defects that we find only after deployment, which could result in a loss of customers and adversely affect our reputation, future sales and operating results.

        Products as complex as ours may contain undetected errors that result in product failures. Our products can be fully tested only when deployed in large networks with high volumes of traffic. Our customers may discover errors or defects in the software or hardware, or the products may not

18

operate as expected. If we are unable to fix errors or other performance problems identified after deployment of our products, we could experience:

•

a loss of, or delay in, revenue;



•

a loss of customers and market share;



•

a failure to attract new customers or achieve market acceptance for our products;



•

increased service, support and warranty costs and a diversion of development resources; and



•

costly and time-consuming legal actions by our customers and injury to our reputation.

Any of these results could have a material adverse effect on our business and operating results.

Our dependence on outside contractors for critical manufacturing services could result in product delivery delays, damage our customer relations and adversely affect our operating results.

        We outsource the manufacturing of our Net-Net products. We subcontract all of the manufacturing of our Net-Net 4000 series of products and a portion of our Net-Net 9000 series of products to Jabil Circuit, Inc. Tyco Electronics manufactures a portion of our Net-Net 9000 series. We recently provided initial purchase orders to Benchmark Electronics for the manufacture of our Net-Net 4000 series products. We do not have a written agreement with any of these manufacturers. We submit purchase orders to these manufacturers that describe, among other things, the type and quantities of our products or components to be manufactured by the applicable manufacturer and the delivery date and other delivery terms applicable to the products or components. Our manufacturers do not have any written contractual obligation to accept any purchase order that we submit for the manufacture of any of our products or components. If one of our manufacturers accepts in writing a purchase order submitted by us, the manufacturer is legally obligated to manufacture the product or component covered by such purchase order and we are obligated to purchase and take delivery of such product or component. Our reliance on outside manufacturers involves a number of potential risks, including the absence of adequate capacity, the unavailability of, or interruptions in access to, necessary manufacturing processes, and reduced control over delivery schedules. In addition, we cannot be certain or provide any assurance that our manufacturers will accept all of our purchase orders, or any of them, and agree to manufacture and supply any or all of our manufacturing requirements for our products or any components. If our manufacturers are unable or unwilling to continue manufacturing our products and components in required volumes, we will have to identify one or more acceptable alternative manufacturers. The use of new manufacturers may cause significant interruptions in supply if the new manufacturers have difficulty manufacturing products to our specifications. Moreover, the introduction of Tyco Electronics or other new manufacturers may increase the variance in the quality of our products.

Certain component parts used in the manufacture of our products are sourced from single or limited sources. If our contract manufacturers are unable to obtain these components on a timely basis, we will not be able to meet our customers' product delivery requirements, which could harm our reputation and adversely affect our operating results.

        Certain key components used in the manufacture of our products are sourced from single or, in some cases, limited sources. For example, the third parties that we hire to manufacture our products, or contract manufacturers, purchase through electronics distributors various types of network processors, traffic managers, microprocessors and network search engines. Specifically, Applied Micro Circuits Corporation, Broadcom Corporation, Freescale Semiconductor, Inc. and Integrated Device Technology, Inc., are presently the sole sources for these particular components.

19

We do not have a written agreement with any of these component manufacturers to guarantee the supply of the key components used in our products, and we do not require any of our contract manufacturers to have a written agreement with any of these component manufacturers. We have entered into arrangements under which electronics distributors have agreed to establish and maintain at least three months' inventory of certain key components, and, at the request of our contract manufacturers, to supply all or a portion of the key components held pursuant to this arrangement to our contract manufacturers for use in the manufacture of our products. Our contractual arrangements with the electronics distributors do not provide for these electronics distributors to enter into any contract with any component manufacturer to guarantee the supply of these key components. Our contract manufacturers provide forecasts to the electronics distributors of our contract manufacturers' requirements of the key components. These electronics distributors use the forecasts to source these key components from time to time, to the extent that the key components are available from the applicable component manufacturers, with the objective of maintaining at all times at least three months' supply of the key components available for delivery to our contract manufacturers. When our contract manufacturers require certain key components for use in the manufacture of our products, we direct them to issue purchase orders to the applicable electronics distributor and, if the applicable electronics distributor has the requested quantities of these key components available, it will accept the purchase order issued by our contract manufacturers and supply the quantities of the key components covered by the purchase order. Despite these arrangements, we cannot be certain or provide any assurance that the component manufacturers will accept all of the purchase orders, or any of them, issued by the electronics distributors and agree to supply any or all of the quantities requested. Accordingly, we cannot be certain or provide any assurance that these electronics distributors will have at all times at least three months' supply of these key components or any quantities of the key components in inventory or that our contract manufacturers will be able to source their requirements of the key components from other sources in the event that the electronics distributors cannot meet our contract manufacturers' requirements. Additionally, if our contract manufacturers underestimate our component requirements, they may not have an adequate supply, which could interrupt manufacturing of our products and result in delays in shipments and revenue. If any of our sole or limited source suppliers experience capacity constraints, work stoppages or other reductions or disruptions in output, they may not be able to meet, or may choose not to meet, our delivery schedules. Also our suppliers may:

•

enter into exclusive arrangements with our competitors;



•

be acquired by our competitors;



•

stop selling their products or components to us at commercially reasonable prices;



•

refuse to sell their products or components to us at any price; or



•

be unable to obtain or have difficulty obtaining components for their products from their suppliers.

        If our supply of any key components is disrupted, we may be unable to deliver our products to our customers on a timely basis, which could result in lost or delayed revenue, injury to our reputation, increased manufacturing costs and exposure to claims by our customers. Even if alternate suppliers are available, we may have difficulty identifying them in a timely manner, we may incur significant additional expense in changing suppliers, and we may experience difficulties or delays in the manufacturing of our products. For example, we have customized some of our hardware products to accommodate the design of some key components, and the loss of the sole supplier of a key customized component could require that we redesign related components to accommodate replacement components. Any failure to meet our customers' delivery requirements could harm our reputation and decrease our revenue.

20

Product liability claims related to our customers' networks could result in substantial costs.

        Our products are critical to the business operations of our customers. If one of our products fails, interactive communications service provider may assert a claim for substantial damages against us, regardless of our responsibility for the failure. Our product liability insurance may not cover claims brought against us. Product liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any product liability claims, whether or not successful, could seriously damage our reputation and our business.

We may undertake acquisitions to further expand our business, which may pose risks to our business and dilute the ownership of our existing stockholders.

        Our business and our customer base have been built through organic growth. While we do not have any present plans to acquire businesses, technologies or services, we may enter into such arrangements in the future in order to expand our capabilities, enter new markets, or increase our market share. We do not have any experience making significant acquisitions. Integrating any newly acquired businesses, technologies or services is likely to be expensive and time consuming. To finance any acquisitions, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us, and, in the case of equity financings, would result in dilution to our stockholders. If we do complete any acquisitions, we may be unable to operate the acquired businesses profitably or otherwise implement our strategy successfully. If we are unable to integrate any newly acquired entities, technologies or services effectively, our business and results of operations will suffer. The time and expense associated with finding suitable and compatible businesses, technologies or services could also disrupt our ongoing business and divert our management's attention. Future acquisitions by us could also result in large and immediate write-offs or assumptions of debt and contingent liabilities, any of which could substantially harm our business and results of operations.

We may need additional capital in the future, which may not be available to us, and if it is available, may dilute your ownership of our common stock.

        We may need to raise additional funds through public or private debt or equity financings in order to:

•

fund ongoing operations;



•

take advantage of opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses;



•

develop new products; or



•

respond to competitive pressures.

        Any additional capital raised through the sale of equity may dilute your percentage ownership of our common stock. Capital raised through debt financing would require us to make periodic interest payments and may impose potentially restrictive covenants on the conduct of our business. Furthermore, additional financings may not be available on terms favorable to us, or at all. A failure to obtain additional funding could prevent us from making expenditures that may be required to grow or maintain our operations.

21

Risks Relating to this Offering and Ownership of Our Common Stock

No public market for our common stock currently exists, and an active trading market may not develop or be sustained to provide adequate liquidity to purchasers in this offering.

        Prior to this offering, there has been no public market for our common stock. An active trading market for our common stock may not develop or be sustained following this offering. The initial public offering price for our common stock was determined through negotiations with the underwriters and may not bear any relationship to the market price at which shares of our common stock will trade after this offering.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

        The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. If there are substantial sales of our common stock, the price of our common stock could decline.

        The price of our common stock could decline if there are substantial sales of our common stock and if there is a large number of shares of our common stock available for sale. After this offering, we will have 56,591,193 outstanding shares of common stock based on the number of shares outstanding as of June 30, 2006. This includes 11,474,528 shares being sold in this offering, all of which may be resold in the public market immediately following this offering. The remaining 45,116,665 shares, or approximately 80% of our outstanding shares after this offering, are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold in the near future as set forth below.

        After this offering, the holders of an aggregate of 26,961,039 shares of our common stock as of June 30, 2006 will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register the issuance of all shares of common stock that we have issued and may issue under our employee option and purchase plans. Once we register the issuance of these shares, they can be freely sold in the public market upon issuance, subject to lock-up agreements.

22

        Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

Insiders will continue to have substantial control over Acme Packet after this offering and could delay or prevent a change in corporate control.

        After this offering, our directors, executive officers and principal stockholders, together with their affiliates, will beneficially own, in the aggregate, approximately 66% of our outstanding shares of common stock based on the number of shares outstanding as of June 30, 2006. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, amalgamation, consolidation or sale of all or substantially all of our assets. In addition, these persons, acting together, may have the ability to control the management and affairs of our company. Accordingly, even though such transactions may be in the best interests of other stockholders, this concentration of ownership may harm the market price of our common stock by:

•

delaying, deferring or preventing a change in control of our company;



•

impeding a merger, amalgamation, consolidation, takeover or other business combination involving our company; or



•

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

We have broad discretion in the use of our net proceeds from this offering and may not use them effectively.

        We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including financing our growth (including payment of increased levels of expenditures), developing new products, and funding capital expenditures, acquisitions and investments. For example, if we were to expand our operations more rapidly than our current plans, a greater portion of the net proceeds from this offering would likely be used for the construction and expansion of facilities, working capital and other capital expenditures. Our stockholders may not agree with the manner in which our management chooses to allocate and spend our net proceeds. The failure by our management to apply these funds effectively could have a material adverse effect on our business. Pending their use, we may invest our net proceeds from this offering in a manner that does not produce income or that loses value.

Our corporate documents and Delaware law will make a takeover of our company more difficult, which may limit the market price of our common stock.

        Our restated charter and bylaws and Section 203 of the Delaware General Corporation Law will contain provisions that might enable our management to resist a takeover of our company. These provisions might discourage, delay or prevent a change in the control of our company or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some provisions in our restated charter and bylaws may deter third parties from acquiring us, which may limit the market price of our common stock and may not be in the best interests of our stockholders. These include:

•

a classified board of directors;

23

•

the ability of the board of directors to issue undesignated shares without stockholder approval, which could be used to institute a "poison pill" that would work to dilute the share ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by the board;



•

limitations on the removal of directors; and



•

advance notice requirements for election to the board and for proposing matters that can be acted upon at stockholder meetings.

Purchasers in this offering will suffer immediate and substantial dilution.

        If you purchase shares of common stock in this offering, the value of your shares based on our actual book value will immediately be less than the offering price you paid. This effect is known as dilution. If the underwriters exercise their over-allotment option or if previously granted warrants or options are exercised, additional dilution will occur. As of June 30, 2006, warrants and options to purchase 8,296,307 shares of common stock at a weighted average exercise price of $0.94 per share were outstanding.

If our earlier involvement in and hyperlinking to four articles previously posted on our website, or any other publicity regarding our company or this offering during the waiting period were held to violate Section 5 of the Securities Act, we could be required to repurchase shares sold in this offering.

        We participated in and hyperlinked to a June 7, 2006 NewTelephony.com article entitled "Acme Packet's Ory on Preparing to Go Public" and an August 2006 TIA PulseOnline Member Spotlight about our company, and we hyperlinked to a June 5, 2006 NetworkingPipeline.com blog article entitled "A VoIP IPO That Actually Makes Sense," and a June 6, 2006 Datamonitor.com article entitled "SBC Vendor Acme Seeks $85m in IPO."

        These articles included information regarding this offering and our company. The NewTelephony.com article included quotes from Andrew D. Ory, our President and Chief Executive Officer, regarding this offering and our reasons for conducting the offering and the TIA PulseOnline member spotlight included quotes from Mr. Ory regarding the development of our company and our business strategy. Neither the NetworkingPipeline.com blog entry nor the Datamonitor.com article included any quotes from us or our employees, but both provided information and commentary on this offering. While these articles included some of the factual statements about us disclosed in this prospectus, they presented these statements in isolation, did not disclose many of the related risks and uncertainties described in this prospectus and provided commentary expressing the authors' opinions of our company and this offering. Notwithstanding our earlier hyperlinking to the articles the commentary expressed therein reflected the opinions of the authors and should not be attributed to us.

        You should carefully evaluate all of the information in this prospectus, including the risks described in this section and throughout this prospectus. We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees. You should only rely on the information contained in this prospectus in making your investment decision.

        It is uncertain whether our involvement or our participation in publicity related activities could be held to violate Section 5 of the Securities Act. If so, we could be required to repurchase the shares sold to purchasers in this offering at the original purchase price for a period of one year following the date of the violation. We would contest vigorously any claim that such a violation of the Securities Act had occurred.

24

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains, in addition to historical information, forward-looking statements. We may, in some cases, use words such as "project," "believe," "anticipate," "plan," "expect," "estimate," "intend," "continue," "should," "would," "could," "potentially," "will," "may" or similar words and expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this prospectus may include statements about:

•

our ability to attract and retain customers;



•

our financial performance;



•

our development activities;



•

the advantages of our technology as compared to that of others;



•

our ability to establish and maintain intellectual property rights;



•

our ability to retain and hire necessary employees and appropriately staff our operations;



•

our spending of our proceeds from this offering; and



•

our cash needs.

        The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include our financial performance, our ability to attract and retain customers, our development activities and those factors we discuss in this prospectus under the caption "Risk Factors." You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. These risk factors are not exhaustive and other sections of this prospectus may include additional factors which could adversely impact our business and financial performance.

25

USE OF PROCEEDS

        We estimate that our net proceeds from our sale of 8,000,000 shares of common stock in this offering will be approximately $68.5 million, at the initial public offering price of $9.50 per share, and after deducting the underwriting discount and estimated offering expenses payable by us. At the public offering price of $9.50 per share, the selling stockholders will receive $30.7 million from their sale of our common stock in this offering, after deducting the underwriting discount. If the underwriters exercise their option to purchase additional shares, we estimate that we will receive an additional $15.2 million in net proceeds at the initial public offering price of $9.50 per share.

        We intend to use our net proceeds of this offering for working capital and other general corporate purposes, which may include financing our growth (including payment of increased levels of expenditures), developing new products, and funding capital expenditures, acquisitions and investments. We have not yet determined with any certainty the manner in which we will allocate these net proceeds. Management will retain broad discretion in the allocation and use of our net proceeds of this offering. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments, and the rate of growth, if any, of our business. For example, if we were to expand our operations more rapidly than anticipated by our current plans, a greater portion of the proceeds would likely be used for the construction and expansion of facilities, working capital and other capital expenditures. Alternatively, if we were to engage in an acquisition that contained a significant cash component, some or all of the proceeds might be used for that purpose.

        Although we may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We cannot assure you that we will make any acquisitions or investments in the future.

        Pending specific utilization of the net proceeds as described above, we intend to invest the net proceeds of the offering in short-term investment grade and U.S. government securities.

DIVIDEND POLICY

        We have never paid or declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, and other factors the board deems relevant.

26

CAPITALIZATION

        The following table sets forth our capitalization as of June 30, 2006:

•

on an actual basis;



•

on a pro forma basis to reflect the conversion of all outstanding preferred stock into common stock upon the closing of this offering; and



•

on a pro forma as adjusted basis to reflect (1) the conversion of all outstanding preferred stock into common stock upon the closing of this offering, (2) the filing of our restated charter immediately prior to the closing of this offering, and (3) our issuance and sale of 8,000,000 shares of common stock in this offering at the initial public offering price of $9.50 per share, after deducting the underwriting discount and estimated offering expenses payable by us.

        You should read the information below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere in this prospectus.

        The preceding table excludes:

•

125,000 shares issuable upon the exercise of outstanding and vested warrants as of June 30, 2006 at the exercise price of $1.39 per share;



•

8,171,307 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2006 at a weighted average exercise price of $0.94 per share, of which options to purchase 1,682,444 shares were exercisable as of June 30, 2006 at a weighted average exercise price of $0.33 per share; and



•

1,027,859 shares of common stock available for future issuance as of June 30, 2006 under our stock incentive plan.

27

DILUTION

        The pro forma net tangible book value of our common stock as of June 30, 2006 was approximately $29.2 million, or $0.60 per share. Pro forma net tangible book value per share represents our total pro forma tangible assets less total pro forma liabilities, divided by the pro forma number of shares of common stock outstanding as of June 30, 2006, in each case after giving effect to the conversion of all outstanding preferred stock into common stock.

        After giving effect to our issuance and sale of 8,000,000 shares of common stock in this offering at the initial public offering price of $9.50 per share, after deducting the underwriting discount and estimated offering expenses payable by us, the pro forma as adjusted net tangible book value of our common stock as of June 30, 2006 would have been $97.7 million, or $1.73 per share. This represents an immediate increase in net tangible book value to existing stockholders of $1.13 per share. The initial public offering price per share significantly exceeds the net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $7.77 per share. The following table illustrates this per share dilution to the new investors purchasing shares of common stock in this offering:

        If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share after the offering would be $1.94 per share, the increase in net tangible book value per share to existing stockholders would be $1.34 per share and the dilution to new investors purchasing shares of common stock in this offering would be $7.56 per share.

        The following table summarizes, on a pro forma basis as of June 30, 2006, giving effect to the conversion of all outstanding preferred stock into common stock, the differences between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering. The calculation below is based on the initial public offering price of $9.50 per share, before the deduction of the underwriting discount and estimated offering expenses payable by us:

        The tables above assume no exercise of warrants or options to purchase shares of common stock outstanding as of June 30, 2006. At June 30, 2006, there were 8,296,307 shares of common stock issuable upon exercise of outstanding warrants and options at a weighted average exercise price of $0.94 per share. In addition, the table above excludes 1,027,859 shares of common stock reserved for future issuance under our option plan at June 30, 2006.

        If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to 9,721,179, or 16.7% of the total number of shares of common stock outstanding after this offering.

28

SELECTED CONSOLIDATED FINANCIAL DATA

        You should read the following selected consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and related notes, and the other financial information included in this prospectus.

        We derived the consolidated financial data for the years ended December 31, 2003, 2004 and 2005 and as of December 31, 2004 and 2005 from our consolidated financial statements, which have been audited by Ernst & Young LLP, and are included elsewhere in this prospectus. We derived the consolidated financial data for the years ended December 31, 2001 and 2002 and as of December 31, 2001, 2002 and 2003 from audited financial statements which are not included in this prospectus. We derived the consolidated financial data for the six months ended June 30, 2005 and 2006 and as of June 30, 2006 from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of our management, the unaudited consolidated financial statements have been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the financial information set forth in those statements. Historical results are not necessarily indicative of the results to be expected in future periods.

        Pro forma basic and diluted net (loss) income per common share have been calculated assuming the conversion of all outstanding shares of preferred stock into 32,190,359 shares of common stock. See note 2 to the financial statements for an explanation of the method used to determine the number of shares used in computing historical and pro forma basic and diluted net (loss) income per common share.

29

30

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

        The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those identified below, in "Risk Factors" and elsewhere in this prospectus.

Overview

Background

        We were founded in 2000 by experienced communications industry executives with a deep knowledge of communications signaling. They believed this expertise could be used to create a product to improve the quality and security of session-based communications over Internet Protocol, or IP, networks. The IP is a standardized method of transmitting information, such as interactive communications, from one device, such as a personal computer, server, IP telephone or personal digital advisor, to another device over any type of physical private or public network, including the Internet. This belief has driven the development of our Net-Net family of session border controllers, or SBCs. Today we are the leading provider of SBCs that enable service providers to deliver secure and high quality interactive communications—voice, video and other real-time multimedia sessions—across IP network borders. Approximately 300 service providers in over 55 countries have deployed our products. We sell our products and support services through our direct sales force and approximately 30 distribution partners, including many of the largest networking and telecommunications equipment vendors throughout the world.

        The market for SBCs is relatively new and its growth depends on a number of factors, including the continued migration to an IP network architecture for interactive real-time communications and the inability of existing network infrastructure to provide the functionality of SBCs. Even if there is a successful migration to an IP network for interactive communications, new unforeseen technologies may render the SBC unnecessary. In addition, if functionality similar to that offered by our SBCs is added to the existing network infrastructure elements, organizations may decide against adding SBCs to their networks, which would significantly limit the market for standalone SBC systems. If for any reason the SBC market is not sustainable, our results of operations will materially be harmed because we expect to generate all of our revenue from the sale of SBCs and the provision of related services for the foreseeable future.

        From 2000 to 2002, we raised an aggregate of $19.9 million through the issuance of preferred stock in a series of financings, the proceeds of which we invested in expanding our research and development organization, building our sales force, and initiating our marketing and administrative operations. We began shipping our Net-Net 4000 in the second half of 2002 and we first recognized revenue in 2003. In 2004, we introduced our Net-Net PAC, a single logical SBC composed of multiple systems, and our quality of service feature set. We also introduced our Net-Net Element Management System, or Net-Net EMS, a network element management application for our Net-Net family of SBCs designed to enable service providers to rapidly deploy and effectively manage single or multiple Net-Net SBCs. In 2005, we introduced our Net-Net 9000 and support for IP Multimedia Subsystem, commonly referred to as IMS. IMS provides an architectural functional blueprint for building networks capable of delivering IP-based voice, video and multimedia services to subscribers. In 2005, we also introduced features such as: signaling protection hardware; policy server interface support; support of law enforcement agencies' electronic surveillance of circuit and packet-mode communications as authorized by judicial or administrative order, known as lawful

31

intercept; the ability to change data from one format to another, known as transcoding, and an architecture that allows for multi-processor signaling pipelining, in which multiple processors perform discrete independent tasks in order to maximize performance. We recorded revenue of $3.3 million in 2003, $16.0 million in 2004, $36.1 million in 2005 and $38.1 million in the six months ended June 30, 2006.

        Our headquarters are located in Burlington, Massachusetts. We maintain sales offices in Burlington, Massachusetts; Madrid, Spain and Tokyo, Japan. We also have sales personnel in Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, Italy, Korea, Malaysia, Mexico, Peru and the United Kingdom and throughout the United States. We expect to continue to add personnel in the United States and internationally to provide additional geographic sales and technical support coverage.

Revenue

        We derive product revenue from the sale of our Net-Net hardware and the licensing of our Net-Net software. We generally recognize product revenue at the time of product delivery, provided all other revenue recognition criteria have been met, pursuant to the requirements of Statement of Position, or SOP, 97-2, Software Revenue Recognition, as amended by SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions. For arrangements that include customer acceptance or other material non-standard terms, we defer revenue recognition until after delivery, and all other criteria for revenue recognition have been met.

        We generate maintenance, support and service revenue from (a) maintenance associated with software licenses, (b) technical support services for our product software, (c) hardware repair and maintenance services, (d) implementation, training and consulting services, and (e) reimbursable travel and other out-of-pocket expenses paid to us by our customers.

        We offer our products and services indirectly through distribution partners and directly through our sales force. Our distribution partners include networking and telecommunications equipment vendors throughout the world. Our distribution partners generally purchase our products after they have received a purchase order from their customers and do not maintain an inventory of our products in anticipation of sales to their customers. Generally, the pricing offered to our distribution partners will be lower than to our direct customers.

        The product configuration, which reflects the mix of session capacity and requested features, determines the price for each SBC sold. Customers can purchase our SBCs in either a standalone or high availability configuration and can license our software in various configurations, depending on the customers' requirements for session capacity, feature groups and protocols. The product software configuration mix will have a direct impact on the average selling price of the system sold. As the market continues to develop and grow, we expect to experience increased price pressure on our products and services.

        We believe that our revenue and results of operations may vary significantly from quarter to quarter as a result of long sales and deployment cycles, variations in customer ordering patterns, and the application of complex revenue recognition rules to certain transactions. Some of our arrangements with customers include clauses under which we may be subject to penalties for failure to meet specified performance obligations. We have not incurred any such penalties to date.

Cost of Revenue

        Cost of product revenue primarily consists of payments to third party manufacturers for purchased materials and services, salaries and benefits related to personnel, provision for inventory obsolescence, and related overhead.

32

        Cost of maintenance, support and service revenue consists primarily of (a) salaries and benefits related to professional services and technical support personnel, (b) billable and non-billable travel, lodging, and other out-of-pocket expenses, (c) related overhead, and (d) contract manufacturer services for repairs and warranty services.

Gross Profit

        Our gross profit has been, and will be, affected by many factors, including (a) the demand for our products and services, (b) the average selling price of our products, which in turn depends in part on the mix of product configurations sold, (c) new product introductions, (d) the mix of sales channels through which our products are sold, and (e) the volume and costs of manufacturing of our hardware products.

Operating Expenses

        Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories. We grew from 104 employees and full-time independent contractors at December 31, 2004 to 215 employees and full-time independent contractors at June 30, 2006. We expect to continue to hire significant numbers of new employees to support our growth.

        Sales and marketing expense consists primarily of (a) salaries and related personnel costs, (b) commissions, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs such as trade shows, and (e) other related overhead. Commissions are recorded as expense when earned by the employee. We expect absolute dollar increases in sales and marketing expense for the foreseeable future as we further increase the number of sales professionals and, to a lesser extent, increase our marketing activities with the intent to grow our revenue. We expect sales and marketing expense to decrease as a percentage of total revenue, however, as we leverage our current sales and marketing personnel as well as our distribution partnerships.

        Research and development expense consists primarily of (a) salaries and related personnel costs, (b) payments to suppliers for design and consulting services, (c) prototype and equipment costs relating to the design and development of new products and enhancement of existing products, (d) quality assurance and testing, and (e) other related overhead. To date, all of our research and development expense has been expensed as incurred. We intend to continue to invest significantly in our research and development efforts, which we believe are essential to maintaining our competitive position. We expect research and development expense to increase in absolute dollars for the foreseeable future and to increase as a percentage of total revenue for the remainder of 2006. However, we anticipate that research and development expense will decrease as a percentage of total revenue in the long term.

        General and administrative expense consists primarily of (a) salaries and personnel costs related to our executive, finance, human resource and information technology organizations, (b) facilities expenses, (c) accounting and legal professional fees, and (d) other related overhead. We expect general and administrative expense to continue to increase in absolute dollars and as a percentage of total revenue for the foreseeable future as we invest in infrastructure to support continued growth and incur additional expenses related to being a publicly traded company, including increased audit and legal fees, costs of compliance with securities and other regulations, investor relations expense, and higher insurance premiums.

Stock-Based Compensation

        Cost of revenue and operating expenses include stock-based compensation expense to the extent the fair value of our common stock exceeds the exercise price of stock options granted to

33

employees on the date of grant. Effective in the first quarter of fiscal 2006, we adopted the requirements of Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share Based Payment. SFAS No. 123(R) addresses all forms of shared-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123(R) requires us to expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value. We continue to evaluate the effect that the adoption of SFAS No. 123(R) will have on our financial position and results of operations. We currently expect that our adoption of SFAS No. 123(R) will adversely affect our operating results to some extent in future periods. For the six months ended June 30, 2006, we recorded expense of $146,000 in connection with share-based payment awards. A future expense of non-vested options of $1.9 million is expected to be recognized over a weighted-average period of 3.83 years. The adoption of SFAS No. 123(R) will have no effect on our financial position or cash flow for any period.

Other Income (Expense), Net

        Other income (expense) primarily consists of interest income earned on cash balances. We historically have invested our cash in money market funds. Other income (expense) also includes interest expense on our debt facilities and gains (losses) from foreign currency translation adjustments of our foreign subsidiaries. The functional currency of our foreign operations in Europe and Asia is the U.S. dollar. Accordingly, all assets and liabilities of these foreign subsidiaries are remeasured into U.S. dollars using the exchange rates in effect at the balance sheet date. Revenue and expenses of these foreign subsidiaries are remeasured into U.S. dollars at the average rates in effect during the year. Any differences resulting from the remeasurement of assets, liabilities and operations of the European and Asian subsidiaries are recorded within other income (expense).

Application of Critical Accounting Policies and Use of Estimates

        Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this prospectus.

        We believe that of our significant accounting policies, which are described in note 2 to the financial statements included in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

        We recognize revenue in accordance with SOP 97-2, as amended by SOP 98-9, and Emerging Issues Task Force, or EITF, Issue No. 03-5, Applicability of AICPA Statement of Position 97-2 to Nonsoftware Deliverables in an Arrangement Containing More-Than-Incidental Software. We have determined that the software element of our product is "more than incidental" to the products as a whole. As a result, in accordance with EITF Issue No. 03-5, we are required to recognize revenue under SOP 97-2 and SOP 98-9.

34

        In all of our arrangements, we do not recognize any revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and we deem collection to be probable. In making these judgments, we evaluate these criteria as follows:

•

Evidence of an arrangement.  We consider a non-cancelable agreement signed by the customer and us to be representative of pervasive evidence of an arrangement.



•

Delivery has occurred.  We consider delivery to have occurred when product has been delivered to the customer and no post-delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved.



•

Fees are fixed or determinable.  We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment, we recognize revenue when the right to a refund or adjustment lapses. If offered payment terms exceed our normal terms, we recognize revenue as the amounts become due and payable or upon the receipt of cash.



•

Collection is deemed probable.  We conduct a credit review for all transactions at the inception of an arrangement to determine the creditworthiness of the customer. Collection is deemed probable if, based upon our evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, revenue is deferred and recognized upon the receipt of cash.

        A substantial percentage of our revenue is generated by multiple-element arrangements, such as products, maintenance, professional services and training. When arrangements include multiple elements, we allocate the total fee among the various elements using the residual method. Under the residual method, revenue is recognized when vendor-specific objective evidence, or VSOE, of fair value exists for all of the undelivered elements of the arrangement, but does not exist for one or more of the delivered elements of the arrangement. Each arrangement requires us to analyze the individual elements in the transaction and to estimate the fair value of each undelivered element, which typically includes maintenance and services. Revenue is allocated to each of the undelivered elements based on its respective fair value, with the fair value determined by the price charged when that element is sold separately.

        Maintenance and support services include telephone support, return and repair services, and unspecified rights to product upgrades and enhancements, and are recognized ratably over the term of the service period, which is generally 12 months. Maintenance and support revenue generally is deferred until the related product has been accepted and all other revenue recognition criteria have been met. Professional services and training revenue is recognized as the related service is performed.

        Our products and services are distributed indirectly through distribution partners and directly through our sales force. Revenue arrangements with distribution partners are recognized when the above criteria are met and only when we receive evidence that the distribution partner has an order from an end-user customer. We typically do not offer contractual rights of return, stock balancing or price protection to our distribution partners, and actual product returns from them have been insignificant to date. As a result, we do not maintain reserves for product returns and related allowances.

Allowance for Doubtful Accounts

        We offset gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our

35

existing accounts receivable. We review our allowance for doubtful accounts on a regular basis, and all past due balances are reviewed individually for collectibility. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions for allowance for doubtful accounts are recorded in general and administrative expense. If our historical collection experience does not reflect our future ability to collect outstanding accounts receivables, our future provision for doubtful accounts could be materially affected. To date, we have not incurred any significant write-offs of accounts receivable and have not been required to revise any of our assumptions or estimates used in determining our allowance for doubtful accounts. As of June 30, 2006, the allowance for doubtful accounts was $510,000.

Stock-Based Compensation

        Through December 31, 2005, we accounted for our stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the deemed fair value of our common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted.

        Through December 31, 2005, we accounted for stock-based compensation expense for non-employees using the fair value method prescribed by SFAS No. 123 and the Black-Scholes option-pricing model, and recorded the fair value, for financial reporting purposes, of non-employee stock options as an expense over either the vesting term of the option or the service period.

        In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R), which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. We adopted SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) requires nonpublic companies that used the minimum value method in SFAS No. 123 for either recognition or pro forma disclosures to apply SFAS No. 123(R) using the prospective-transition method. As such, we will continue to apply APB Opinion No. 25 in future periods to equity awards outstanding at the date of SFAS No. 123(R)'s adoption that were measured using the minimum value method. In accordance with SFAS No. 123(R), we will recognize the compensation cost of stock-based awards on a straight-line basis over the vesting period of the award. Effective with the adoption of SFAS No. 123(R), we have elected to use the Black-Scholes option pricing model to determine the weighted-average fair value of stock options granted.

        As there was no public market for our common stock prior to this offering, we have determined the volatility for options granted in 2006 based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies. The expected volatility for options granted during the six months ended June 30, 2006 was 83.98%. The expected life of options has been determined utilizing the "simplified" method as prescribed by the SEC's Staff Accounting Bulletin No. 107, Share-Based Payment. The expected life of options granted during the six months ended June 30, 2006 was 6.25 years. For the six months ended June 30, 2006, the weighted-average risk free interest rate used was 4.82%. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was our historical policy under

36

SFAS No. 123. As a result, we applied an estimated forfeiture rate of 11.25% in the six months ended June 30, 2006 in determining the expense recorded in our consolidated statement of operations.

        For the six months ended June 30, 2006, we recorded expense of $146,000 in connection with stock-based awards. A future expense of non-vested stock options of $1.9 million is expected to be recognized over a weighted-average period of 3.83 years. The adoption of SFAS No. 123(R) will have no effect on our financial position or cash flow for any period.

        Prior to this offering there was no public market for our common stock, and, in connection with our issuance of stock options and restricted stock awards, our board of directors, with input from management, determined the fair value of our common stock. The board exercised judgment in determining the estimated fair value of our common stock on the date of grant based on several factors, including the liquidation preferences, dividend rights and voting control attributable to our then-outstanding convertible preferred stock and, primarily, the likelihood of achieving a liquidity event such as an initial public offering or sale of our company. In the absence of a public trading market for our common stock, the board considered objective and subjective factors in determining the fair value of our common stock. In addition, in certain instances, our board engaged Orchard Partners, Inc., an unrelated third-party valuation specialist, that we refer to as the valuation specialist, to assist management in preparing valuation reports for stock options and restricted stock awards granted by the board. Based upon our internal peer company analyses and based on several arm's-length transactions involving our common stock supportive of the results produced by this valuation methodology, we believe the methodology used was reasonable.

        In connection with the preparation of our financial statements for the year ended December 31, 2005 and in preparing for the initial public offering of our common stock, we examined the valuations of our common stock during the 18-month period ended June 30, 2006, in light of the Practice Aid of the American Institute of Certified Public Accountants entitled Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In January 2006, we engaged the valuation specialist to provide a contemporaneous appraisal of the fair value of our common stock as of December 23, 2005. The resulting report provides the valuation specialist's opinion that the fair value of our common stock was approximately $1.00 as of December 23, 2005. In separate contemporaneous reports, the valuation specialist has provided its opinion that the fair value of our common stock was approximately $1.91 as of March 15, 2006 and $3.40 as of May 15, 2006. We believe that the valuation methodologies that we used prior to this offering were consistent with the Practice Aid.

        During the years ended December 31, 2003, 2004 and 2005 and the six months ended June 30, 2006, we granted stock options and restricted stock awards to employees to purchase a total of 9,023,527 shares of common stock at exercise or purchase prices ranging from $0.20 to $3.40 per share.

        From our inception through December 31, 2002, we were considered a development stage company. We did not recognize any revenues during this period and incurred cumulative operating losses of $13.8 million. During 2003, we recognized revenues of $3.3 million and incurred an operating loss of $7.5 million. During 2001, 2002 and 2003, we granted stock options and restricted stock awards to purchase shares of our common stock at an exercise or purchase price of $0.20 per share, the estimated fair value of a share of our common stock. This fair value was determined by our board using the market approach, taking into consideration the issuance price and associated liquidation preferences and rights of our Series B convertible preferred stock, as well as the high degree of uncertainty surrounding our future prospects and markets. The sales price of our Series B convertible preferred stock remained constant at $1.39 per share in several transactions from January 3, 2001 through February 3, 2003. Each share of the Series B convertible preferred

37

stock is convertible into common stock on a 1-for-1 basis and holds a liquidation preference of $1.39 per share and participates with the common stock until it receives an additional $1.39 per share, for a maximum potential liquidation preference of $2.78. Given the size of the liquidation preference, the values assigned to stock-based awards at this time were deemed to be fair value.

        In May 2004, we finalized the negotiations of the terms of our Series C preferred stock with our investors. The Series C convertible preferred stock financing was completed in June 2004, culminating with an issuance price of $1.87 per share. Based upon this issue price, our board increased the estimated fair value of our common stock by 50% to $0.30 per share. The fair value was determined by our board using the market approach, taking into consideration the issuance price and associated liquidation preferences and rights of the Series C convertible preferred stock, as well as the high degree of uncertainty surrounding our future prospects and markets. Each share of Series C convertible preferred stock is convertible into common stock on a 1-for-1 basis and holds a liquidation preference of $1.87 per share and participates with the common stock until it receives an additional $1.87 per share, for a maximum potential liquidation preference of $3.74. Given the size of the liquidation preference, the values assigned to stock-based awards at this time were deemed to be fair value.

        On November 16, 2004, our board, taking into consideration our results of operations for the nine months ended September 30, 2004 as compared to our operating plan, determined that the then current estimated fair value of our common stock and, as such, the exercise price of the options granted to purchase shares of our common stock, should be increased to $0.50 per share. Although our results during this time were favorable when compared against our operating plan, we continued to operate at a loss and continued to utilize cash on hand to fund operations, contributing to continued uncertainty as to our future prospects.

        The valuation specialist provided a retrospective valuation of our common stock as of December 31, 2004. The retrospective valuation determined a fair value for our common stock using the market approach. Under the market approach, the appraisal report considered the pricing of the Series C convertible preferred stock, the guideline public method, the guideline transaction method, our financial performance through December 31, 2004 and management's forecast for the year ending December 31, 2005, which projected a loss for 2005 and anticipated utilizing cash on hand to fund future operations.

        The retrospective valuation allocated value between our common and preferred stock using the weighted-probability expected return method. Four scenarios for gaining shareholder liquidity were considered under this methodology: (a) completion of an initial public offering, (b) sale to a strategic acquirer, (c) remaining private, and (d) liquidation at a price at or below the liquidation preference. In December 2004, the completion of an initial public offering was weighted as the least likely scenario. This weighting took into account market conditions, our financial performance and the fact that there had been no discussion with any investment banks of a potential public offering. The most heavily weighted scenario was that of liquidation at a price at or below the liquidation preference.

        Based on the retrospective valuation, the value of our common stock, before applying a discount for lack of marketability, which we refer to as the indicated value, was $0.93 per share. This value was equal to 50% of the Series C convertible preferred stock original issuance price of $1.87 per share. In determining the fair value of our common stock, our valuation specialist applied a discount for lack of marketability to reflect the fact that there is no established trading market for our stock. Our valuation specialist determined the size of the discount for lack of marketability by using as a starting point the average discount for lack of marketability applicable to shares of restricted stock issued by publicly traded companies, which various published studies have calculated to be approximately 20%, and adjusting such average discount to reflect those factors

38

that make our common stock even less marketable than shares of restricted stock of public companies. These factors included the following: the prospects and timeframe for an initial public offering of our stock or a sale of our company; existing contractual restrictions on the transferability of our common stock; the perceived risk of the enterprise; the concentration of ownership of our stock among our venture capital investors; the difficulty of valuing the enterprise and our common stock; and lack of dividends. Our valuation specialist assessed these factors and their impact in further reducing the marketability of our common stock. For purposes of the valuation, the retrospective valuation took into account a 40% discount for lack of marketability, resulting in a fair value of approximately $0.55 per share. In making this assessment, the most important factor weighted by our valuation specialist was that in December 2004 the prospects for either an initial public offering or a sale of our company within the next two years were very limited.

        During the year ended December 31, 2005 and the six months ended June 30, 2006, we granted stock-based awards, consisting of stock options and restricted stock awards with exercise or purchase prices as follows:

(a)

Fair value as determined in a contemporaneous valuation by our board of directors.

(b)

Fair value as determined in a contemporaneous valuation by an unrelated valuation specialist.

(c)

Subsequently reassessed in preparation of our initial public offering to be $1.27, $1.27, $1.40 and $2.36 for the stock-based awards granted on December 14, 2005, December 23, 2005, February 7, 2006 and March 22, 2006, respectively.

        On January 19, 2005, the board, taking into consideration our results of operations for the year ended December 31, 2004 as compared to both our operating plan and operating forecast for 2005, determined that the then-current fair value of our common stock was $0.55 per share. Accordingly, the exercise price for stock options to purchase shares of our common stock was also increased. Although our results for the year ended December 31, 2004 were favorable when compared to our operating plan, we continued to operate in a loss position, and continued to use cash to fund operations. The retrospective valuation report as of December 31, 2004 prepared by the valuation specialist corroborated the fair value determined by the board at the time of grant.

39

        On March 16, 2005, the board granted stock options to purchase shares of our common stock at an exercise price of $0.55 per share that represented no increase in the fair value of our common stock. At that time, the first quarter of 2005 had not been completed and the board determined that no other events had occurred since the last increase in fair value that warranted any changes.

        On May 18, 2005, the board, taking into consideration our first quarter 2005 operating results, including increased revenues and quarterly profitability, increased the fair value of our common stock to $0.65 per share. Our financial results had been favorable when compared to our operating plan. Also affecting the board's assessment at this time was the acquisition of a strategic competitor at a published acquisition value.

        On each of June 29, August 16, and September 21, 2005, the board continued to grant stock options and restricted stock awards to purchase shares of our common stock at an exercise or purchase price of $0.65 per share, the fair value of our common stock determined by the board. Our financial results for the second quarter of 2005 reflected decreased revenue from the first quarter and a quarterly operating loss. In addition, the board determined that there were no other significant events that had occurred during this period that would have given rise to an increase in the fair value of our common stock.

        On both November 16, 2005 and November 23, 2005, the board determined the fair value of our common stock to be $0.85 per share, representing an increase from the previous valuation. In determining the fair value of our common stock, the board considered both the strength of our forecasted operating results for the fourth quarter of 2005, as well as the fact that we experienced decreased revenues and increased losses in the second quarter.

        On both December 14, 2005 and December 23, 2005, the board determined the fair value of our common stock to be $1.00 per share. The board considered, among other factors, the pricing of the Series C convertible preferred stock, our projected financial performance through December 31, 2005 and management's operating forecast through December 31, 2007.

        On both December 14, 2005 and December 23, 2005, the board granted stock options to purchase shares of our common stock at an exercise price of $1.00 per share. Two major shareholders received stock option grants at 110% of the estimated fair value of $1.00 per share.

        In January 2006, we engaged the valuation specialist to perform a contemporaneous valuation of our common stock as of December 23, 2005. The appraisal of our common stock was performed using the income and market approaches. Under the income approach, the valuation applied the discounted cash flow method. Future values were converted to present value using a discount rate of 28%, which was derived using the capital asset pricing model. Terminal value was calculated using a two-stage Gordon growth model. Under the market approach, the valuation considered the pricing of our Series C convertible preferred stock, the guideline public method and the guideline transaction method.

        The valuation report allocated value between our common stock and preferred stock using the weighted-probability expected return method. For the future liquidity events, a liquidity date of March 31, 2007 was assumed. The most likely liquidity event was assumed to be an initial public offering, which was assigned a probability weight of 35%.

        The indicated value for our common stock was determined by the valuation specialist to be $1.69 per share. The indicated value was equal to 90% of the price of our Series C convertible preferred stock of $1.87 per share, which included an assumption of marketability. In determining the fair value of our common stock, our valuation specialist applied a discount for lack of marketability to reflect the fact that there is no established trading market for our stock. Our valuation specialist determined the size of the discount for lack of marketability by using as a

40

starting point the average discount for lack of marketability applicable to shares of restricted stock issued by publicly traded companies, which various published studies have calculated to be approximately 20%, and adjusting such average discount to reflect those factors that make our common stock even less marketable than shares of restricted stock of public companies. These factors included the following: the prospects and timeframe for an initial public offering of our stock or a sale of our company; existing contractual restrictions on the transferability of our common stock; the perceived risk of the enterprise; the concentration of ownership of our stock among our venture capital investors; the difficulty of valuing the enterprise and our common stock; and lack of dividends. Our valuation specialist assessed these factors and their impact in further reducing the marketability of our common stock. A 40% discount for lack of marketability was applied by the valuation specialist, resulting in a fair value of approximately $1.00 per share, corroborating the fair value determined by the board on December 23, 2005.

        On February 7, 2006, the board determined the fair value of our common stock to be $1.10 per share. Among other factors, the board took into account the pricing of the Series C convertible preferred stock, our financial performance through December 31, 2005, management's operating forecast through December 31, 2007 and the likelihood of completing an initial public offering. On February 7, 2006, the board issued stock options to purchase shares of our common stock at an exercise price of $1.10 per share. Subsequently, in February 2006, we met with representatives from several investment banking firms to begin substantive discussions relative to the prospects and timing of an initial public offering.

        The fair value of our common stock as of March 15, 2006 was based on a contemporaneous valuation appraisal performed by the valuation specialist. In its contemporaneous appraisal as of March 15, 2006, the valuation specialist allocated value between our common stock and preferred stock considering the weighted-probability expected return method using the four major liquidity scenarios. The most likely liquidity event was assumed to be an initial public offering, which was assigned a probability weight of 50%. The indicated value of our common stock, before applying a discount for lack of marketability, was determined to be $2.95 per share. This value was equal to 158% of the price for our Series C convertible preferred stock of $1.87, which includes an assumption of marketability. A 35% discount for lack of marketability was applied resulting in a fair value of approximately $1.91 per share. On March 22, 2006, the board issued stock options to purchase shares of our common stock at an exercise price of $1.91 per share.

        As a result of discussions with the Staff of the SEC in connection with the preparation for this offering, we reassessed the discount for lack of marketability used in determining the fair value of our common stock as of December 23, 2005 and March 15, 2006 to be 25% and 20%, respectively, and reassessed the fair value of our common stock as of December 23, 2005 and March 15, 2006 to be $1.27 per share and $2.36 per share, respectively. Having reassessed the fair value of our common stock as of December 23, 2005 to be $1.27 per share, we also reassessed the fair value of our common stock as of December 14, 2005 to be $1.27 per share, and the fair value of our common stock as of February 7, 2006 to be $1.40 per share which represented an increase in value of 10% from December 2005. In addition, having reassessed the fair value of our common stock as of March 15, 2006 to be $2.36 per share, we also reassessed the fair value of our common stock as of March 22, 2006 to be $2.36 per share.

        Based on these reassessments, we will recognize compensation expense of $821,000 to reflect the difference between the reassessed fair value of our common stock and the grant price for the stock-based awards granted on December 14, 2005 and December 23, 2005 and an amount equal to the difference between the value calculated using the Black-Scholes option pricing model with the initial assessment of fair value of common stock and the value calculated using the Black-Scholes option pricing model with the reassessed fair value of our common stock for the stock-based awards granted on February 7, 2006 and March 22, 2006. The compensation expense will be

41

recognized over the vesting schedule of the awards commencing in the three months ending September 30, 2006.

        The fair value of our common stock as of May 15, 2006 was based on a contemporaneous valuation appraisal performed by the valuation specialist. The valuation took into account our performance in the first quarter of 2006 and our revised forecast for the fiscal years ended December 31, 2006 and 2007. In the first quarter of 2006, we recorded revenues in excess of our operating plan and achieved quarterly profitability.

        Value was allocated between our common stock and preferred stock using the weighted-probability expected return method considering the four major liquidity scenarios. The most likely liquidity event was assumed to be an initial public offering, which was assigned a probability weight of 60%. The indicated value of our common stock was $3.99 per share. This value was equal to 213% of the price for our Series C convertible preferred stock of $1.87 per share and 57% of the midpoint of the initial price range of this offering filed with the SEC on September 22, 2006, which includes an assumption of marketability. A 15% discount for lack of marketability was applied resulting in a fair value of approximately $3.40 per share.

        On May 16 and June 1, 2006, the board issued options to purchase shares of our common stock at an exercise price of $3.40 per share which is 49% of the midpoint of the initial price range for this offering. In addition, the board determined that no significant events had occurred between May 15 and June 1, 2006 that would have given rise to an increase in the fair value of our common stock.

        After giving effect to the reassessments described above, we reassessed the fair value of our common stock on February 7, 2006 to be $1.40, representing 20% of the mid-point of the initial estimated price range for this offering filed with the SEC on September 22, 2006. The primary factors contributing to the difference between the fair market value of our common stock as of those grant dates and the mid-point of the initial estimated price range for this offering filed with the SEC on September 22, 2006 include:

•

We continued to execute our business model, which resulted in total revenues increasing 124% in the three months ended March 31, 2006 compared to the three months ended March 31, 2005 and 132% in the three months ended June 30, 2006 compared to the three months ended June 30, 2005. We experienced revenue growth both in the United States and Canada and internationally, as well as through both our direct sales force and our indirect sales channels.



•

We achieved our third consecutive quarter of profitability in the quarter ended June 30, 2006.



•

We generated $21.4 million of net cash from operating activities during the six months ended June 30, 2006, consisting of $8.7 million in the three months ended March 31, 2006 and $12.7 million in the three months ended June 30, 2006.



•

Upon successful completion of an initial public offering, enterprises typically experience a further reduction in their cost of capital. A reduction in the cost of capital increases enterprise value.



•

The completion of an initial public offering would reduce limitations on the ability of holders to transfer the equity securities.

Inventory

        We recognize inventory losses based on obsolescence and levels in excess of forecasted demand. In these cases, inventory is written down to estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory

42

valuation are estimates related to economic trends, future demand for our products and technical obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in the cost of revenue in the period the revision is made. To date, we have not been required to revise any of our assumptions or estimates used in determining our inventory valuations.

        When products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria required by SOP 97-2, we also defer the related inventory costs for the delivered items.

Product Warranties

        Substantially all of our products are covered by a standard warranty of 90 days for software and one year for hardware. In the event of a failure of hardware or software covered by this warranty, we must repair or replace the hardware or software or, if those remedies are insufficient, provide a refund. Our customers typically purchase maintenance and support contracts, which encompass our warranty obligations. Our warranty reserve reflects estimated material and labor costs for potential or actual product issues in our installed base that are not covered under maintenance contracts but for which we expect to incur an obligation. Our estimates of anticipated rates of warranty claims and costs are primarily based on historical information and future forecasts. We periodically assess the adequacy of the warranty allowance and adjust the amount as necessary. To date, we have not been required to revise any of our assumptions or estimates used in determining our warranty allowance. If the historical data we use to calculate the adequacy of the warranty allowance is not indicative of future requirements, additional warranty reserves may be required.

        Some of our arrangements with customers include clauses whereby we may be subject to penalties for failure to meet certain performance obligations. We have not incurred any such penalties to date.

Research and Development Expense for Software Products

        Research and development expense includes costs incurred to develop intellectual property. The costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. We have determined that technological feasibility is established at the time a working model of software is completed. Because we believe our current process for developing software will be essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

Income Taxes

        We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which is the asset and liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates.

        As of December 31, 2005, we had U.S. federal net operating loss carry forwards for income tax purposes of $20.1 million that expire beginning in 2020 and state net operating loss carry forwards of $20.1 million that expire beginning in the period from 2006 through 2010. We also had U.S. federal research and development tax credits of $831,000 that expire beginning in 2021 and state research and development credits of $719,000 that expire beginning in 2015. The Internal Revenue

43

Code contains provisions that limit the net operating losses and tax credit carry forwards available to be used in any given year in the event of certain circumstances, including significant changes in ownership interests, as defined.

        During the six months ended June 30, 2006, we recorded a provision for U.S. federal alternative minimum taxes and utilized a portion of our net operating loss carryforwards to offset the taxable income for that period.

        Due to the uncertainty surrounding the realization of deferred tax assets through future taxable income, we provided a full valuation allowance and no benefit was recognized for the remaining net operating loss and other deferred tax assets. Accordingly, deferred tax asset valuation allowances were established as of December 31, 2003, 2004 and 2005 and June 30, 2006 to reflect these uncertainties.

Preliminary Results for the Three Months Ended September 30, 2006

        Our financial statements for the quarter ended September 30, 2006 are not yet available. Our preliminary expectations with respect to our results discussed below are based upon management estimates and are subject to quarterly review procedures and final recommendations and adjustments. Actual operating results may differ from our expectations, and those differences may be material.

        We expect total revenue to be between $21.8 million and $22.0 million in the third quarter of 2006, compared to total revenue of $6.8 million in the third quarter of 2005. We expect income from operations to be between $6.0 million and $6.5 million in the third quarter of 2006, after taking into account stock-compensation expense for previously granted stock options and restricted stock awards, compared to a loss from operations of $2.6 million in the third quarter of 2005.

        The foregoing discussion of our expectations regarding our results for the third quarter of 2006 is not necessarily indicative of expected future results following this offering.

44

Results of Operations

Comparison of Six Months Ended June 30, 2005 and 2006

Revenue

        The $18.6 million increase in product revenue was a result of an increase in the number of systems sold in the six months ended June 30, 2006, which reflected the growth in the worldwide market for our products. Revenues from United States and Canadian customers increased at a rate greater than the overall product revenue increase as a result of several large deployments of our products to certain of our United States and Canadian customers. We also experienced increased product revenue provided through both our direct and indirect channels. Direct product revenues, of which a higher portion is attributed to our United States and Canadian customers, increased at a rate greater than the overall product revenue growth as a result of the large-scale deployments to our United States and Canadian customers noted above. Indirect distribution channels generate a higher percentage of our revenue internationally than in the United States and Canada. Direct product revenues increased $11.8 million, of which $11.0 million was attributable to United States and Canadian customers and $811,000 was attributable to international customers. Indirect product revenues increased $6.7 million, of which $2.5 million was attributable to United States and Canadian customers and $4.2 million was attributable to international customers. As indicated in the section entitled "Business—Distribution Partners," we intend to continue to provide our sales fulfillment indirectly through our distribution partners.

        The $2.8 million increase in maintenance, support and service revenue was attributable primarily to the $2.0 million increase in maintenance and support fees associated with the growth in our installed product base and, to a lesser extent, the $804,000 increase in installation and training revenue, including reimbursable travel expenses.

45

Cost of Revenue and Gross Profit