VMware 2010 Annual Report Download - page 29

Table of Contents
End-users, who rely on our products and services for the interoperability of enterprise servers and applications that are critical to their
information systems, may have a greater sensitivity to product errors and security vulnerabilities than customers for software products generally.
Any security breaches could lead to interruptions, delays and data loss and protection concerns. In addition, we could face claims for product
liability, tort or breach of warranty, including claims relating to changes to our products made by our channel partners. Our contracts with
customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld and customers and channel
partners may seek indemnification from us for their losses and those of their customers. Defending a lawsuit, regardless of its merit, is costly and
time-consuming and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our
business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all; our business, financial
condition and results of operations could be adversely impacted.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
As a result, our stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our
Class A common stock.
We have complied with Section 404 of the Sarbanes-Oxley Act of 2002 by assessing, strengthening and testing our system of internal
controls. Even though we concluded our system of internal controls was effective as of December 31, 2010, we need to continue to maintain our
processes and systems and adapt them to changes as our business changes and we rearrange management responsibilities and reorganize our
business accordingly. We may seek to automate certain processes to improve efficiencies and better ensure ongoing compliance but such
automation may itself disrupt existing internal controls and introduce unintended vulnerability to error or fraud. This continuous process of
maintaining and adapting our internal controls and complying with Section 404 is expensive and time-consuming, and requires significant
management attention. We cannot be certain that our internal control measures will continue to provide adequate control over our financial
processes and reporting and ensure compliance with Section 404. Furthermore, as our business changes and as we expand through acquisitions
of other companies, our internal controls may become more complex and we will require significantly more resources to ensure our internal
controls overall remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm
identify material weaknesses, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial
statements and harm our stock price. In addition, if we are unable to continue to comply with Section 404, our non-compliance could subject us
to a variety of administrative sanctions, including the suspension or delisting of our Class A common stock from the New York Stock Exchange
and the inability of registered broker-dealers to make a market in our Class A common stock, which could reduce our stock price.
Problems with our information systems could interfere with our business, and our website may be subject to intentional disruption that could
adversely impact our operations.
We rely on our information systems and those of third parties for processing customer orders, delivery of products, providing services and
support to our customers, billing and tracking our customers, fulfilling contractual obligations, and otherwise running our business. Any
disruption in our information systems and those of the third parties upon whom we rely could have a significant impact on our business. In
addition, we continuously work to enhance our information systems. The implementation of these types of enhancements is frequently disruptive
to the underlying business of an enterprise, which may especially be the case for us due to the size and complexity of our business. Any
disruptions relating to our systems enhancements, particularly any disruptions impacting our operations during the implementation period, could
adversely affect our business in a number of respects. Even if we do not encounter these adverse effects, the implementation of these
enhancements may be much more costly than we anticipated. If we are unable to successfully implement the information systems enhancements
as planned, our financial position, results of operations, and cash flows could be negatively impacted.
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