Liquidity and Capital Resources

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments primarily in money market mutual funds.

From our inception in 1998 through March 2000, we have funded our operations primarily through issuances of convertible preferred stock, which provided us with aggregate proceeds of $96.6 million. Subsequent to March 2000, we have funded our operations with a combination of cash collection from customers and additional funding through issuance of convertible preferred stock. In September 2004, we entered into a loan and security agreement with a financial institution for a credit facility not to exceed $5.0 million. This agreement was subsequently modified to increase the total availability of the

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credit facility to $7.5 million. The loan and security agreement was renewed during fiscal year 2007. The agreement requires payment of interest only on the revolving portion of the credit facility through January 2008 with payments on the term portion to be made in 36 equal monthly installments of principal and interest through July 2008. The revolving portion of the borrowings mature on January 3, 2008 and the term portion of the borrowings mature on July 19, 2008. We had borrowings at December 31, 2005, December 31, 2006 and September 30, 2007, of $2.3 million, $1.4 million and $3.8 million, respectively, under this loan and security agreement.

Our loan and security agreement includes a number of covenants and restrictions that we must comply with as long as any indebtedness remains outstanding under the credit facility. For example, our ability to incur additional indebtedness, whether senior or subordinate, is limited. We are also not permitted to pay any dividends or purchase or redeem any shares of our capital stock except in limited circumstances. In addition, we are limited on our ability to sell or otherwise dispose of our assets outside of the ordinary course of our business. To secure the indebtedness, we have granted our lender a first priority security interest in all our assets. At December 31, 2006 and September 30, 2007, we were in compliance with all loan covenants. We did not have any additional available borrowings under the agreement as of September 30, 2007. Subsequent to September 30, 2007, we entered into a binding commitment letter with a financial institution for a new credit facility. The facility includes a revolving portion consisting of the lesser of $8.5 million or up to 80% of eligible accounts receivable. The credit facility also includes a term portion of up to $6.0 million. Both the revolving and term portions of the credit facility mature 18 months from the closing date.

In June 2006, we completed the sale of our Series 1 preferred stock and received net proceeds of $9.9 million. As of September 30, 2007, we had cash and cash equivalents of $9.1 million as compared to $11.3 million and $6.9 million as of December 31, 2006 and 2005, respectively.

Cash Flows from Operating Activities

We have generally experienced negative cash flows from operations as we continue to expand our business, build our infrastructure domestically and internationally and provide cash for working capital purposes. Our cash flows from operating activities will continue to be affected by the extent to which we spend on increasing headcount in order to expand our business. The timing of hiring sales personnel in particular affects cash flows as there is a lag between the hiring of sales personnel and the generation of revenue and cash flows from sales personnel. To a lesser extent, the start up costs associated with international expansion have also negatively affected our cash flows from operations. Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash from operating activities are for personnel related expenditures, technology cost to support research and development activities and working capital including purchases of component inventories.

Cash used in operating activities decreased $1.0 million from $3.8 million in the nine months ended September 30, 2006 to $2.7 million in the nine months ended September 30, 2007 due to an increase in inventory purchases to support our higher sales volume as well as an increase in other assets, which was partially offset by a decrease in net loss.

Cash used in operating activities for the fiscal year ended December 31, 2006 was $4.4 million as compared to cash provided by operating activities during the year ended December 31, 2005 of $0.7 million. The increase in the use of cash was primarily due to a net loss in the year ended December 31, 2006 of $4.9 million resulting from decreased revenues and increased operating expenditures, in particular increased spending on personnel.

Cash provided by operating activities during the year ended December 31, 2005 was $0.7 million as compared to cash used in operating activities during the year ended December 31, 2004 of $3.6 million. The increase in cash provided by operating activities increase was primarily due to increased revenue in fiscal year 2005, resulting in net income of $2.7 million.

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Cash Flows from Investing Activities

Cash flows from investing activities primarily relate to capital expenditures to support our growth.

Cash used in investing activities increased $0.3 million in the nine months ended September 30, 2007 compared to the comparable period in fiscal year 2006 due to an increase in capital expenditures of $0.3 million. Capital expenditures in the nine months ended September 30, 2007 primarily related to leasehold improvements for newly leased space for our headquarters, increased research and development lab equipment expenditures, acquisition of computer equipment for new employees and increased software for internal use as we begin the implementation of our new accounting systems.

Cash used in investing activities for the fiscal years ended December 31, 2006 and 2005 was $0.2 million each year. The cash for these periods was used primarily for lab equipment expenditures, consisting of computer equipment and other equipment used to test our products.

Cash used for investing activities for the fiscal year ended December 31, 2005 was $0.2 million as compared to the fiscal year ended December 31, 2004 of $4,000. The increase in cash used in 2005 was due to higher capital expenditures for research and development lab equipment and other fixed asset additions to support our growth.

Cash Flows from Financing Activities

Since our inception, we have financed our operations primarily through private sales of redeemable convertible preferred stock totaling $106.9 million through September 30, 2007 and the use of our revolving credit facility and term note agreement under which we have borrowed an aggregate of $8.0 million offset by repayments totaling $4.0 million.

Cash flows provided by financing activities decreased $8.2 million from the nine months ended September 30, 2006 to the nine months ended September 30, 2007. For the nine months ended September 30,2006, cash provided by financing activities of $9.2 million was primarily related to the sale of 5,943,346 shares of our Series 1 preferred stock in June 2006 for net proceeds of $9.9 million, which was offset by payments toward the term loan portion of our revolving credit facility of $0.6 million. For the nine months ended September 30, 2007, cash provided by financing activities of $1.1 million was related to the borrowing of an additional $3.0 million on our revolving line of credit facility and note term agreement. This was offset by payments toward the term loan portion of our revolving credit facility of $0.6 million coupled with costs related to our initial public offering of $1.3 million.

Cash flows provided by financing activities increased $9.0 million in the fiscal year ended December 31, 2006 compared to the fiscal year ended December 31, 2005, primarily related to the sale of 5,943,346 shares of our Series 1 preferred stock in June 2006 for net proceeds of $9.9 million. For the year ended December 31, 2006, payments towards our revolving credit facility and term note agreement totaled $0.8 million.

Cash flows provided by financing activities decreased in the year ended December 31, 2005 compared to 2004 from $2.2 million to $37,000 due to higher repayments in 2005 as compared to 2004, on the term loan portion of the credit facility and term note agreement we entered with a financial institutional in September 2004.

We believe that our existing cash balances at September 30, 2007, together with our availability on the newly committed revolving credit facility and cash generated by operations will be sufficient to fund our operating requirements for at least 12 months. In addition to the net proceeds from this offering, we may need to raise additional capital or incur additional indebtedness to continue to fund our operations in the future. Our future capital requirements will depend on many factors, including our revenue

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growth, the expansion of our sales and marketing activities, the timing and extent of expansion into new geographic locations, the timing of new product introductions and the continuing market acceptance of our products. Although we currently are not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, nor do we have any undisclosed material transactions or commitments involving related persons or entities.

Internal Control Over Financial Reporting

In connection with the audit of our consolidated financial statements for the year ended December 31, 2006, our independent registered public accounting firm noted in their report to our audit committee that due to a rudimentary accounting and inventory control system infrastructure, inadequate personnel and need for additional technical accounting, that we have material weaknesses in our internal control over financial reporting as of December 31, 2006 that could, if not remedied, affect our ability to record, process and report financial data. These material weaknesses and significant deficiencies resulted in a number of audit adjustments to our consolidated financial statements for the year ended December 31, 2006 that were noted during the course of the audit.

We have actively taken steps intended to remedy these material weaknesses. These steps include the implementation of our new ERP system in June 2007 that provides for inventory tracking, costing and reserve analysis. In preparing to be a public reporting company, we recently hired additional personnel for our finance organization, including two accounting personnel, a controller for our United States operations and a controller for China operations. We are also actively recruiting a financial reporting manager, a financial planning and analysis manager, a cost accounting manager and additional corporate accountants. Pending the hiring and integration of these persons, we have retained the services of a financial accounting firm to provide us the additional technical accounting expertise and resources. To further address the material weakness related to the rudimentary accounting and inventory control system we are also in the process of implementing additional control procedures and training programs for affected personnel.

We will not be able to assess whether the steps we are taking will fully remedy the material weaknesses in our internal control over financial reporting identified by our auditors until we have fully implemented them and a sufficient time passes in order to evaluate their effectiveness.

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Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , or SFAS No. 157, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, the FASB has proposed to delay the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. The comment period for this proposal ends January 16, 2008. We are currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment of FASB Statement No. 115 , or SFAS No. 159, which allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to measure at fair value will be recognized in earnings. SFAS No. 159 also establishes additional disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted provided that the entity also adopts SFAS No. 157. We are currently evaluating the impact on our consolidated financial statements of adopting SFAS No. 159.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 . FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes , and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Our adoption of the provisions of FIN 48 on January 1, 2007 did not have a material impact on our consolidated financial statements.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

To date, the foreign currency exchange rate effect on our cash and cash equivalents has been minimal. As we fund our international operations, our cash and cash equivalents could be affected by changes in exchange rates.

We apply SFAS No. 52, Foreign Currency Translation , with respect to our international operations, which is primarily research and development. We have remeasured our accounts denominated in non-United States currency using the United States dollar as the functional currency. We remeasure all monetary assets and liabilities at the current exchange rate at the end of the period, non-monetary assets and liabilities at historical exchange rates and revenue and expenses at average exchange rates in effect during the period. Foreign currency gains and losses were minimal for fiscal years 2004, 2005 and 2006 and for the nine months ended September 30, 2007. Since July 2005, the value of the Renminbi has not been pegged solely to the United States dollar. Instead, the Renminbi is reported to track a basket of currencies determined by the People’s Bank of China.

Interest Rate Sensitivity

We had unrestricted cash of $6.9 million, $11.3 million and $9.1 million at December 31, 2005, December 31, 2006 and September 30, 2007, respectively. The majority of these funds are invested in money market funds and are held for working capital purposes. We do not enter into investments for

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trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these cash equivalents as a result of changes in interest rates. Declines in interest rate, however, will reduce future interest income.

We are exposed to short-term fluctuations in interest rates as our line of credit agreement has a variable interest rate. A sharp increase in interest rates would have an adverse effect on our interest expense.

At September 30, 2007, the principal amount of debt outstanding under our line of credit and term note agreement was $3.8 million. Assuming the principal amount of debt remains constant at the September 30, 2007 amount, a 1.0% increase or decrease in underlying interest rates will increase or decrease interest expense by $38,000 annually and therefore increase or decrease our future earnings or losses accordingly.

We do not use any derivatives or similar instruments to manage our interest rate risk.

Effects of Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.

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