VMware 2007 Annual Report Download - page 25

Table of Contents
statements will not be prevented or detected. The material weakness resulted from a lack of adequate internal controls to ensure the timely
identification and accumulation of costs once a project reaches technological feasibility under applicable accounting standards. Our historical
consolidated financial statements reflect adjustments to properly state our capitalized software development costs for the periods included
therein. Our independent registered public accounting firm was not engaged to audit the effectiveness of our internal control over financial
reporting as of December 31, 2006. If such an evaluation had been performed, additional material weaknesses may have been identified. Our
independent registered public accounting firm was also not engaged to audit the effectiveness of our internal control over financial reporting as
of December 31, 2007. If such an evaluation had been performed, material weaknesses may have been identified.
We have remediated the material weakness found in our internal controls as of December 31, 2006 by implementing additional formal
policies, procedures and processes, hiring additional accounting personnel and increasing management review and oversight over the financial
statement close process. Under Section 404 of the Sarbanes-Oxley Act of 2002 and the current rules of the SEC, our management and
independent registered public accounting firm will be required to evaluate and report on the effectiveness of our internal control over financial
reporting as of December 31, 2008. If additional material weaknesses in our internal controls are discovered in the future, we may fail to meet
our future reporting obligations, our financial statements may contain material misstatements and the price of our common stock may decline.
If we fail to implement and 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 common stock.
We are preparing for compliance with Section 404 by remediating the previously identified material weakness in our internal controls and
by assessing, strengthening and testing our system of internal controls. In particular, we believe we will need to increase the number of our
accounting personnel and improve our processes and systems to ensure timely and accurate reporting of our financial results in accordance with
reporting obligations as a stand-alone public company. However, the continuous process of strengthening our internal controls and complying
with Section 404 is expensive and time-
consuming, and requires significant management attention. We cannot be certain that these measures will
remediate the existing material weakness or implement adequate control over our financial processes and reporting. In addition, we have
identified certain processes that need to be automated in order to ensure that we have effective internal control over financial reporting. If we are
not able to automate these processes in a timely fashion, we will not be able to ensure compliance. Furthermore, as we grow our business, our
internal controls will 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 additional
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, future non-compliance with Section 404 could subject us to a variety of administrative sanctions, including the
suspension or delisting of our common stock from the New York Stock Exchange and the inability of registered broker-
dealers to make a market
in our common stock, which could further reduce our stock price.
Problems with our information systems could interfere with our business and 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 are in the process of enhancing 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 businesses.
Any disruptions relating to our systems enhancements, particularly any disruptions
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