Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements concerning our plans, objectives, expectations and intentions, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

Business overview

We are a provider of mobile communication solutions focused on addressing critical communication challenges facing hospitals today. We help our customers improve patient safety and satisfaction, and increase hospital efficiency and productivity through our Voice Communication, Secure Messaging, and Care Transition solutions. Our Voice Communication solution, which includes a lightweight, wearable, voice-controlled communication badge and a software platform, enables users to connect instantly with other hospital staff simply by saying the name, function or group name of the desired recipient. Our Secure Messaging solution securely delivers text messages and alerts directly to and from smartphones, replacing legacy pagers. Our Care Transition solution is a hosted voice and text based software application that captures, manages and monitors patient information when responsibility for the patient is transferred or "handed-off" from one caregiver to another, or when the patient is discharged from the hospital.

At the core of our Voice Communication solution is a patent-protected software platform that we introduced in 2002. We have significantly enhanced and added features and functionality to this solution through ongoing development based on frequent interactions with our customers. Our software platform is built upon a scalable architecture and recognizes more than 100 voice commands. Users can instantly communicate with others using the Vocera communication badge, or through Vocera Connect client applications available for BlackBerry, iPhone and Android smartphones, as well as Cisco wireless IP phones and other mobile devices. Our Voice Communication solution can also be integrated with nurse call and other clinical systems to immediately and efficiently alert hospital workers to patient needs. We have shipped over 400,000 communication badges to our customers.

We outsource the manufacturing of our products. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain manufacturing operations. We work closely with our contract manufacturer, SMTC Corporation, and key suppliers to manage the procurement, quality and cost of components. We seek to maintain an optimal level of finished goods inventory to meet our forecast sales and unanticipated shifts in sales volume and mix. To date, substantially all of our revenue has been derived from sales of our Voice Communication solution, including product maintenance and related services. Revenue grew 28.0% from $57.8 million for the nine months ended September 30, 2011 to $74.0 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2012, we recorded net income of $2.1 million.
Our diverse customer base ranges from large hospital systems to small local hospitals, as well as other healthcare facilities and customers in non-healthcare markets. We have very low customer revenue concentrations. For 2011, our largest end customer represented only 2.8% of revenue. While we have international customers in other English speaking countries such as Canada,

the United Kingdom and Australia, most of our customers are located in the United States. International customers represented 11.4% and 8.2% of our revenue for the nine months ended September 30, 2012 and September 30, 2011, respectively. We are developing plans to expand our presence in other English speaking markets and enter non-English speaking markets.
We qualify as an "emerging growth company" pursuant to the provisions of the JOBS Act, enacted on April 5, 2012. Section 102 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we have chosen to "opt out" of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. The decision to opt out of the extended transition period is irrevocable. Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the final prospectus for our public offering filed pursuant to Rule 424(b) under the Securities Act with the Securities and Exchange Commission on September 7, 2012.
Components of operating results

Revenue. We generate revenue from the sale of products and services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

Revenue is comprised of the following:

• Product. Our solutions include both hardware and software. We refer to hardware revenue as device revenue, which includes revenue from sales of our communication badges, badge accessories, including batteries, battery chargers, lanyards, clips and other ancillary badge components, and our Vocera smartphone. Software revenue is derived primarily from the sale of perpetual licenses to our Voice Communication solution. We derive additional software revenue from the sale of term licenses which can be renewed on a subscription basis. Product revenue is generally recognized upon shipment of hardware and perpetual licenses and, in the case of term licenses, ratably over the applicable term.

• Service. We receive service revenue from sales of software maintenance, extended warranties and professional services. Software maintenance is typically invoiced annually in advance, recorded as deferred revenue and recognized as revenue ratably over the service period. Our professional services revenue is based on both time and materials, and fixed price contracts, and is recognized as the services are provided. Extended warranties are invoiced in advance, recorded as deferred revenue and recognized ratably over the extended warranty period.

Cost of revenue. Cost of revenue is comprised of the following:

• Cost of product. Cost of product is comprised primarily of materials costs, software license costs, warranty and manufacturing overhead for test engineering, material requirements planning and our shipping and receiving functions. Cost of product also includes facility costs, information technology costs and write-offs for excess and obsolete inventory, as well as depreciation and amortization expenses. As we introduce new products, we expect material costs will increase as a percent of revenue for a period of time.

• Cost of service. Cost of service is comprised primarily of employee wages, benefits and related personnel expenses of our technical support team, our professional consulting personnel and our training teams. Cost of service also includes facility and information technology costs. We expect our cost of service will increase as we continue to invest in support services to meet the needs of our customer base.

Operating expenses. Operating expenses are comprised of the following:

• Research and development. Research and development expenses consist primarily of employee wages, benefits and related personnel expenses, hardware materials and consultant fees and expenses related to the design, development, testing and enhancements of our solutions. We intend to continue to invest in improving the functionality of our solutions and the development of new solutions. As a result, we expect research and development expense to increase for the foreseeable future.

• Sales and marketing. Sales and marketing expenses consist primarily of employee wages, benefits and related personnel expenses, as well as trade shows, marketing and public relations programs and advertising. Sales commissions are earned when an order is received from a customer and, as a result, in some cases these commissions are expensed in an earlier period than the period in which the related revenue is recognized. Historically, our bookings have tended to peak in the fourth quarter of each year driving higher sales commissions, and to be lowest in the first quarter. We intend to continue to expand our direct sales force for the foreseeable future and, accordingly, expect sales and marketing expenses to increase.

• General and administrative. General and administrative expenses consist primarily of employee wages, benefits and related personnel expenses, consulting, audit fees, legal fees and other general corporate expenses. We expect general and administrative expense to increase for the foreseeable future due to the significant costs we expect to incur as we continue to build and maintain the infrastructure necessary to comply with the regulatory requirements of being a public company and as we add personnel to support our growth.

Interest income, interest expense and other income (expense), net.

• Interest income. Interest income consists primarily of interest income earned on our cash and cash equivalent balances. Our interest income will vary each reporting period depending on our average cash and cash equivalent balances during the period and market interest rates.

• Interest expense. Interest expense includes interest expense related to debt and financing obligations resulting from our credit facility and security agreement, which was paid in full on April 3, 2012. We expect interest expense to fluctuate in the future with changes in our borrowings.

• Other income (expense), net. Other income (expense), net consisted primarily of a stipend for market research regarding the industry in which our company operates that we provided to a market research firm, and the change in the fair value of our convertible preferred stock warrants. Our convertible preferred stock warrants were classified as liabilities and, as such, were marked-to-market at each balance sheet date with the corresponding gain or loss from the adjustment recorded as other income (expense), net. Upon the consummation of the initial public offering, on April 2, 2012, these warrants converted into warrants to purchase common stock and are no longer marked-to-market. Other income (expense), net also includes any foreign exchange gains and losses.

Provision for income taxes. We are subject to income taxes in the countries where we sell our solutions. Historically, we have primarily been subject to taxation in the United States because we have sold the majority of our solutions to customers in the United States. We anticipate that in the future as we expand our sale of solutions to customers outside the United States, we will become subject to taxation based on the foreign statutory rates in the countries where these sales took place and our effective tax rate could fluctuate accordingly. Currently, each of our international subsidiaries is operating under cost plus agreements where the U.S. parent company reimburses the international subsidiary for its costs plus a reasonable profit.

Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Changes in valuation allowances are reflected as component of provision for income taxes.

Results of Operations

The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods.

                                 Three months ended September 30,          Nine months ended September 30,
(in thousands)                       2012                 2011                2012                 2011
Consolidated statement of
operations data:                                                (unaudited)
Revenue
 Product                      $        16,851       $        13,087     $       47,643       $       36,648
 Service                                9,117                 7,314             26,322               21,149
   Total revenue                       25,968                20,401             73,965               57,797
Cost of revenues
 Product                                5,237                 4,290             16,138               11,968
 Service                                3,743                 3,861             11,134               10,569
   Total cost of revenues               8,980                 8,151             27,272               22,537
Gross profit                           16,988                12,250             46,693               35,260
Operating expenses:
 Research and development               3,043                 2,379              8,248                6,970
 Sales and marketing                    8,532                 7,542             24,064               20,717
 General and administrative             3,745                 3,197             10,449                8,278
   Total operating expenses            15,320                13,118             42,761               35,965
Income (loss) from operations           1,668                  (868 )            3,932                 (705 )
Interest income                            60                     5                 86                   13
Interest expense                            -                  (112 )              (74 )               (234 )
Other income (expense)                     50                   132             (1,442 )             (1,085 )
Income (loss) before income
taxes                                   1,778                  (843 )            2,502               (2,011 )
Provision for income taxes                (41 )                 (57 )             (420 )               (231 )
Net income (loss)             $         1,737       $          (900 )   $        2,082       $       (2,242 )

Comparison of the three and nine months ended September 30, 2011 and 2012

Revenue:
                               Three months ended September 30,                                     Nine months ended September 30,
                       2012                    2011                 Change                 2012                    2011                  Change
(in thousands)   Amount   % Revenue      Amount   % Revenue     Amount      %        Amount   % Revenue      Amount   % Revenue      Amount      %
Revenue
Product        $ 16,851       64.9 %   $ 13,087       64.1 %   $ 3,764    28.8 %   $ 47,643       64.4 %   $ 36,648       63.4 %   $ 10,995    30.0 %
Service           9,117       35.1 %      7,314       35.9 %     1,803    24.7 %     26,322       35.6 %     21,149       36.6 %      5,173    24.5 %
Total revenue  $ 25,968      100.0 %   $ 20,401      100.0 %   $ 5,567    27.3 %   $ 73,965      100.0 %   $ 57,797      100.0 %   $ 16,168    28.0 %

Total revenue increased $5.6 million, or 27.3%, from the three months ended September 30, 2011 to the three months ended September 30, 2012. Total revenue increased $16.2 million, or 28.0%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. We achieved these growth rates in revenues in the three and nine month periods ended September 30, 2012, from the comparable prior year periods, notwithstanding a lower volume than we had expected of orders in the third quarter of 2012. This lower quarterly order volume was largely due to delays in the issuance of government orders which we are continuing to pursue.
Three months ended September 30, 2011 compared to three months ended September 30, 2012
Product revenue increased $3.8 million, or 28.8% from the three months ended September 30, 2011 to the three months ended September 30, 2012. Device revenue increased $2.6 million, or 27.6%, and software revenue increased $1.1 million, or 31.8%. The increase in device revenue, which relates entirely to our Voice Communication solution, was driven primarily by existing

customers expanding deployments within their facilities to new departments and users, new customers making initial purchases, and customers replacing badges and related accessories.
A portion of the increase in device revenue was due to higher average selling prices as a result of lower discounts and a change in mix, as customers purchase the B3000 badge, which has a higher list price than the B2000 badge. The list prices for our products did not change substantially in the three months ended September 30, 2012. The increase in software revenue was a result of an increase in sales of Voice Communication software licenses to new and existing customers. Service revenue increased $1.8 million, or 24.7% from the three months ended September 30, 2011 to the three months ended September 30, 2012. Software maintenance and support revenue increased $1.2 million, or 20.8%, and professional services and training revenue increased $0.7 million, or 36.7%. An increase of $0.9 million in software maintenance and support revenue was primarily a result of a larger customer base. The increase in professional services and training revenue included $0.4 million as a result of an increase in professional services related to our ExperiaHealth services, which are focused on helping customers improve the patient experience.
Nine months ended September 30, 2011 compared to nine months ended September 30, 2012
Product revenue increased $11.0 million, or 30.0%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. Device revenue increased $8.0 million, or 29.6%, and software revenue increased $3.0 million, or 31.1%. The increase in device revenue, which related entirely to our Voice Communication solution, was driven primarily by an increase in unit sales of badges and related accessories from new customers making initial purchases, existing customers expanding deployments within their facilities to new departments and users, and customers replacing badges. A portion of the increase in device revenue was a result of higher average selling prices for our communications badge as customers purchased the B3000 badge, which has a higher list price than the B2000 badge. The list prices for our products did not change substantially in the nine months ended September 30, 2012. The increase in software revenue was a result of an increase in sales of Voice Communication software licenses to new and existing customers.
Service revenue increased $5.2 million, or 24.5% from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. Software maintenance and support revenue increased $3.5 million, or 22.0%, and professional services and training revenue increased $1.7 million, or 31.6%. An increase of $2.9 million in software maintenance and support revenue was primarily a result of a larger customer base with the remaining increase resulting from an increase in extended warranty contracts related to our communications badge. The increase in professional services and training revenue included $1.0 million as a result of an increase in professional services related to our ExperiaHealth services, with the remaining increase due to an increase in the number of customer deployments for our Voice Communication solution.
Cost of revenue:

                       Three months ended September 30,                    Nine months ended September 30,
                  2012          2011               Change              2012        2011             Change
                 Amount        Amount        Amount        %          Amount      Amount       Amount        %
Cost of
revenue
Product       $    5,237    $    4,290     $     947      22.1  %   $  16,138   $ 11,968     $  4,170       34.8 %
Service            3,743         3,861          (118 )    (3.1 )%      11,134     10,569          565        5.3 %
Total cost of
revenue       $    8,980    $    8,151     $     829      10.2  %   $  27,272   $ 22,537     $  4,735       21.0 %

Gross margin
Product             68.9 %        67.2 %         1.7 %                   66.1 %     67.3 %       (1.2 )%
Service             58.9 %        47.2 %        11.7 %                   57.7 %     50.0 %        7.7  %
Total gross
margin              65.4 %        60.0 %         5.4 %                   63.1 %     61.0 %        2.1  %

Three months ended September 30, 2011 compared to three months ended September 30, 2012
Cost of product revenue increased $0.9 million, or 22.1%, from the three months ended September 30, 2011 to the three months ended September 30, 2012. The increase in cost of product revenue was primarily due to higher unit shipments and the change in product mix from B2000 badges to B3000 badges. This was offset by a decrease in warranty expenses of $0.3 million due to

lower anticipated product return rates. Gross margin as a percentage of product revenue increased in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 as we incurred lower manufacturing costs for the B3000 badges and Voice Software license sales increased to new and existing customers.
Cost of service revenue decreased $0.1 million, or 3.1%, from the three months ended September 30, 2011 to the three months ended September 30, 2012. Gross margin as a percentage of revenue increased for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 due to higher utilization of our services personnel.
Nine months ended September 30, 2011 compared to nine months ended September 30, 2012
Cost of product revenue increased $4.2 million, or 34.8%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. The increase in cost of product revenue was primarily due to higher unit shipments and the change in product mix from B2000 badges to B3000 badges. This was offset by a decrease in warranty expenses of $0.4 million due to lower anticipated product return rates. Gross margin as a percentage of product revenue decreased in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, due to the higher cost of the B3000 badge, which was released in October 2011. The higher badge costs were partially offset by higher margins from an increase in software revenue.
Cost of service revenue increased $0.6 million, or 5.3%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. This increase was primarily due to a $0.7 million increase in employee wages and other personnel costs in our services organization to support growth in customer deployments and technical support. Gross margin as a percentage of service revenue increased for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due to higher utilization of our services personnel.
Operating expenses:

                               Three months ended September 30,                                     Nine months ended September 30,
                       2012                    2011                 Change                 2012                    2011                 Change
                 Amount   % Revenue      Amount   % Revenue     Amount      %        Amount   % Revenue      Amount   % Revenue     Amount      %
Operating
expenses:
Research and
development    $  3,043       11.7 %   $  2,379       11.7 %   $   664    27.9 %   $  8,248       11.2 %   $  6,970       12.1 %   $ 1,278    18.3 %
Sales and
marketing         8,532       32.9 %      7,542       37.0 %       990    13.1 %     24,064       32.5 %     20,717       35.8 %     3,347    16.2 %
General and
administrative    3,745       14.4 %      3,197       15.7 %       548    17.1 %     10,449       14.1 %      8,278       14.3 %     2,171    26.2 %
Total
operating
expenses       $ 15,320       59.0 %   $ 13,118       64.3 %   $ 2,202    16.8 %   $ 42,761       57.8 %   $ 35,965       62.2 %   $ 6,796    18.9 %

Three months ended September 30, 2011 compared to three months ended September 30, 2012

Research and development expense. Research and development expense increased $0.7 million, or 27.9%, from the three months ended September 30, 2011 to three months ended September 30, 2012. This increase was primarily due to higher employee wages and other personnel costs associated with an increase in headcount from 47 as of September 30, 2011 to 55 as of September 30, 2012, and higher stock-based compensation expense. This was offset by lower consulting expenses associated with the B3000 development program.

Sales and marketing expense. Sales and marketing expense increased $1.0 million, or 13.1%, from the three months ended September 30, 2011 to the three months ended September 30, 2012. This increase was primarily due to a $1.0 million increase in employee wages and other personnel costs associated with an increase in headcount from 104 as of September 30, 2011, to 132 as of September 30, 2012. General and administrative expense. General and administrative expense increased $0.5 million, or 17.1%, from the three months ended September 30, 2011 to the three months ended September 30, 2012. This increase was due to a $0.3 million increase in employee wages and other personnel costs, a $0.3 million increase in bonuses due to an amendment to the executive compensation plan and expansion of . . .