Rosetta Stone 2010 Annual Report Download - page 26

Table of Contents
If there are changes in the spending policies or budget priorities for government funding of colleges, universities, schools, other education providers,
armed forces or government agencies, we could lose revenue.
Many of our institutional customers are colleges, universities, primary and secondary schools, other education providers, armed forces and government
agencies that depend substantially on government funding. Accordingly, any general decrease, delay or change in federal, state or local funding for colleges,
universities, primary and secondary schools, or other education providers or for armed forces or government agencies that use our products and services could
cause our current and potential customers to reduce their purchases of our products and services, to exercise their right to terminate licenses, or to decide not
to renew licenses, any of which could cause us to lose revenue. In addition, a specific reduction in governmental funding support for products such as ours
would also cause us to lose revenue and could hurt our overall gross margins.
Some of our institutional business faces a lengthy and unpredictable sales cycle for our solutions, which could delay new sales.
We face a lengthy sales cycle between our initial contact with some potential institutional customers and the signing of license agreements with these
customers. As a result of this lengthy sales cycle, we have only a limited ability to forecast the timing of such institutional sales. A delay in or failure to
complete license transactions could cause us to lose revenue, and could cause our financial results to vary significantly from quarter to quarter. Our sales cycle
varies widely, reflecting differences in our potential institutional customers' decision-making processes, procurement requirements and budget cycles, and is
subject to significant risks over which we have little or no control, including:
customers' budgetary constraints and priorities;
the timing of our customers' budget cycles;
the need by some customers for lengthy evaluations that often include both their administrators and faculties; and
the length and timing of customers' approval processes.
If we are unable to continually enhance our products and services and adapt them to technological changes and customer needs, including the emergence
of new computing devices and more sophisticated online services, we may lose market share and revenue and our business could suffer.
We need to anticipate, develop and introduce new products, services and applications on a timely and cost-effective basis that keeps pace with
technological developments and changing customer needs. For example, the number of individuals who access the internet through devices other than a
personal computer, such as tablet computers, personal digital assistants, mobile telephones, televisions and set-top box devices, has increased dramatically,
and this trend is likely to continue. Our traditional products and services were designed for high resolution, graphical environments such as those available on
desktop and laptop computers. The lower resolution, functionality and memory associated with alternative devices currently available may make the use of
our products and services through such devices difficult. In addition, our products and services may not work or be viewable on these devices because each
manufacturer or distributor may establish unique technical standards for such devices. With the exception of the recently released TOTALe Mobile
Companion and Rosetta Stone Discover, we have no experience to date in operating versions of our products and services developed or optimized for users of
alternative devices, and new devices and new platforms are continually being released. Accordingly, it is difficult to predict the problems we may encounter
in developing versions of our products and services for use on these alternative devices, and we may need to devote significant resources to the creation,
support and maintenance of such versions. If we fail to develop or sell products and services that respond to these or other technological developments and
changing customer needs cost effectively, we may lose market share and revenue and our business could suffer.
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