3Ware 2002 Annual Report Download - page 36

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is
provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an
understanding of our financial condition, changes in our financial condition and results of operations. The
MD&A is organized as follows:
•Caution concerning forward-looking statements. This section discusses how certain forward-looking
statements made by us throughout the MD&A are based on management’s present expectations about
future events and are inherently susceptible to uncertainty and changes in circumstances.
•Critical accounting policies. This section discusses those accounting policies that are both considered
important to our financial condition and operating results and require significant judgment and estimates
on the part of management in their application. In addition, all of our accounting policies, including the
critical accounting policies, are summarized in Note 1 to the accompanying consolidated financial
statements.
•Results of operations. This section provides an analysis of our results of operations for all three years
presented in the accompanying consolidated statements of operations. In addition, a brief description is
provided of transactions and events that impact the comparability of the results being analyzed.
•Financial condition and liquidity. This section provides an analysis of our cash position and cash
flows, as well as a discussion of our financing arrangements.
•Market risk. This section discusses our exposure to potential loss arising from adverse changes in
interest rates, foreign currency exchange rates and changes in the market value of investments.
Caution Concerning Forward-Looking Statements
The following discussion of the financial condition and results of our operations should be read in
conjunction with the consolidated financial statements and notes thereto included elsewhere in our Annual
Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.
Our actual results may differ materially from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those described in the section entitled “Risk Factors”. Readers are
cautioned not to place undue reliance on these forward-looking statements, which reflect our present expectations
and analysis and are inherently susceptible to uncertainty and changes in circumstances. We assume no
obligation to update these forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
Critical Accounting Policies
The U.S. Securities and Exchange Commission (“SEC”) recently issued Financial Reporting Release
No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR 60”), suggesting
companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60,
the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a
company’s financial condition and operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.
Based on this definition, our most critical accounting policies include: inventory valuation, which affects our cost
of revenues and gross margin; the valuation of purchased intangibles and goodwill, which affects our
amortization and write-offs of goodwill and other intangibles; the valuation of strategic equity investments,
which affects our other income and expense; and valuation of deferred income taxes, which affects our income
tax expense and benefit. We also have other key accounting policies, such as our policies for revenue
recognition, including the deferral of a portion of revenues on sales to distributors, and allowance for bad debt.
The methods, estimates and judgments we use in applying these most critical accounting policies have a
significant impact on the results we report in our financial statements.
31