VMware 2007 Annual Report Download - page 24

Table of Contents
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage
these and other risks associated with our international operations. We expect a significant portion of our growth to occur in foreign countries
which can add to the difficulties in establishing and maintaining adequate management systems and internal controls over financial reporting and
increase challenges in managing an organization operating in various countries.
Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales.
Our products are highly technical and may contain errors, which could cause harm to our reputation and adversely affect our business.
Our products are highly technical and complex and, when deployed, have contained and may contain errors, defects or security
vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by customers. Any errors, defects
or security vulnerabilities discovered in our products after commercial release could result in loss of revenue or delay in revenue recognition,
loss of customers and increased service and warranty cost, any of which could adversely affect our business, operating results and financial
condition. Undiscovered vulnerabilities in our products could expose them to hackers or other unscrupulous third parties who develop and
deploy viruses, worms, and other malicious software programs that could attack our products. Actual or perceived security vulnerabilities in our
products could harm our reputation and lead some customers to return products, to reduce or delay future purchases or use competitive products.
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. 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, operating results and financial condition could be adversely impacted.
Our independent registered public accounting firm identified a material weakness in the design and operation of our internal controls as of
December 31, 2006, which we remediated in 2007. We cannot assure you that material weaknesses will not exist or be identified in future
periods.
Our independent registered public accounting firm reported to our board of directors a material weakness in the design and operation of our
internal controls as of December 31, 2006 related to the capitalization of software development costs. A material weakness is defined by the
standards issued by the Public Company Accounting Oversight Board as a more than remote likelihood that a material misstatement of the
annual or interim financial
20
•
economic or political instability and security concerns in countries that are important to our international sales and operations;
•
the overlap of different tax structures or changes in international tax laws;
•
increased exposure to foreign currency exchange rate risk;
•
reduced protection for intellectual property rights, including reduced protection from software piracy in some countries; and
•
difficulties in transferring funds from certain countries; and
•
difficulties in maintaining appropriate controls relating to revenue recognition practices.