Rosetta Stone 2012 Annual Report Download - page 26

Table of Contents
In addition, we could face claims for product liability, tort or breach of warranty. Our contracts with customers contain provisions relating to
warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert
management's attention and adversely affect the market's perception of us and our products and services. In addition, if our business liability insurance
coverage proves inadequate or future coverage is unavailable on acceptable terms, or at all, we could face significant financial losses.

Government sales entail a variety of risks as evidenced by the non-renewal of our contracts with the U.S. Army and the U.S. Marine Corps in
2011. These risks include the following:
•government contracts are subject to the approval of appropriations by the United States Congress to fund the expenditures by the
agencies under these contracts. Congress often appropriates funds for government agencies on a yearly basis, even though their contracts
may call for performance over a number of years;
•our products and services are included on a General Services Administration, or GSA, schedule. The loss of the GSA schedule covering
our software products and related services could cause us to lose our ability to sell our products and services to U.S. government
customers;
•we must comply with complex federal procurement laws and regulations in connection with government contracts, which may impose
added costs on our business; and
•federal government contracts contain provisions and are subject to laws and regulations that provide government customers with rights
and remedies not typically found in commercial contracts. These rights and remedies allow government clients, among other things, to
terminate existing contracts, with short notice, for convenience, without cause, reduce or modify contracts or subcontracts, and claim
rights in products, systems, and technology produced by us.

As part of our efforts to continue improving our internal control over financial reporting, we plan to continue to upgrade our existing financial
information technology systems in order to automate several controls that are currently performed manually. We may experience difficulties in
transitioning to these upgraded systems, including loss of data and decreases in productivity, as personnel become familiar with these new systems. In
addition, our management information systems will require modification and refinement as we grow and as our business needs change, which could
prolong difficulties we experience with systems transitions, and we may not always employ the most effective systems for our purposes. If we
experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to
successfully modify our management information systems or respond to changes in our business needs, we may not be able to effectively manage our
business and we may fail to meet our reporting obligations. In addition, as a result of the automation of these manual processes, the data produced may
cause us to question the accuracy of previously reported financial results.


Our products must interoperate with our customers' computer systems, including student learning management systems of our institutional
customers. As a result, we must continually ensure that our products interoperate properly with these systems. Changes in operating systems, the
technologies we incorporate into our products or the computer systems our customers use may damage our business.
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