1110903--12/14/2006--NETWORK_ENGINES

related topics

{product, market, service}

{customer, product, revenue}

{system, service, information}

{stock, price, operating}

{property, intellectual, protect}

{personnel, key, retain}

{control, financial, internal}

{loss, insurance, financial}

{operation, international, foreign}

{interest, director, officer}

{stock, price, share}

{provision, law, control}

{cost, operation, labor}

{product, candidate, development}

Risks of dependence on one strategic partner. We derive a significant portion of our revenues from sales of server appliances directly to EMC and our revenues may decline significantly if this customer cancels or delays purchases of our products, terminates its relationship with us, or exercises certain of its contractual rights. Risks related to business strategy. Our future success is dependent upon our ability to generate significant revenues from server appliance development relationships. Market acceptance and demand of Microsoft s ISA Server software will depend on Microsoft s decision to prioritize and concentrate its marketing efforts for this software, and on the success of Microsoft s ISA Server software. If we are unable to effectively leverage our relationship with Microsoft to establish new relationships with independent software vendors and other systems integrators our revenues and operating results may be adversely affected. We may not be able to effectively commercialize our appliances if we cannot continue to license or integrate third-party applications that are essential for the functionality of these appliances. If we are unable to grow our international revenues and successfully overcome the risks inherent in international business activities, the growth of our business may be limited. Our business could be harmed if we fail to adequately integrate new technologies into our server appliance products or if we invest in technologies that do not result in the desired effects on our current and/or future product offerings. Risks related to the server appliance, data storage and network security markets. If server appliances are not increasingly adopted as a solution to meet a significant portion of companies network security and data storage application needs, the market for server appliances may not grow, which could negatively impact our revenues. The products that we sell are subject to rapid technological change and our sales will suffer if these products are rendered obsolete by new technologies. Risks related to financial results. We have a history of losses and may continue to experience losses in the future, which could cause the market price of our common stock to decline. If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price. Our quarterly revenues and operating results may fluctuate seasonally, which could result in decreased revenue from quarter to quarter, which in turn could cause the market price of our common stock to decline. Our quarterly revenues and operating results may also fluctuate for reasons other than seasonality, which could cause our operating results to fall below expectations and thus impact the market price of our common stock. If the products and services that we sell become more commoditized and competition in the server appliance, data storage and network security markets continues to increase, then our gross profit as a percentage of net revenues may decrease and our operating results may suffer. Competition in the server appliance market is significant and if we fail to compete effectively, our financial results will suffer. Risks related to marketing and sales efforts and customer service. We need to effectively manage our sales and marketing operations to increase market awareness and sales of our products and to promote our brand recognition. If we fail to do so, our growth will be limited. If we are unable to effectively manage our customer service and support activities, we may not be able to retain our existing customers or attract new customers. Risks related to product manufacturing. Our dependence on sole source and limited source suppliers for key server appliance components makes us susceptible to supply shortages and potential quality issues that could prevent us from shipping customer orders on time, if at all, and could result in lost sales and customers. If our server appliance products fail to perform properly and conform to specifications, our customers may demand refunds, assert claims for damages or terminate existing relationships with us and our reputation and operating results may suffer materially. Our future server appliance revenue growth may be limited by our ability to expand production capacity. If we do not accurately forecast our server appliance materials requirements, our business and operating results could be adversely affected. Risks related to product dependence on intellectual property. Our reliance upon contractual provisions, domestic patent, copyright and trade secret laws and applied- for patents to protect our proprietary rights may not be sufficient to protect our intellectual property. Our operating results would suffer if we, our ISV or network equipment customers, or other third-party software providers from whom we license technology, were subject to an infringement claim that resulted in protracted litigation, the award of significant damages against us or the payment of substantial ongoing royalties. Other risks related to our business. If we fail to retain and attract appropriate levels of qualified employees and members of senior management, we may not be able to successfully execute our business strategy. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which could have a negative market reaction. Class action lawsuits have been filed against us, our board of directors, our former chairman and certain of our executive officers and other lawsuits may be instituted against us from time to time. If the site of our manufacturing operations were to experience a significant disruption in its operations, it would have a material adverse effect on our financial condition and results of our operations. The market price for our common stock may be particularly volatile, and our stockholders may be unable to resell their shares at a profit. We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the market price of our common stock.

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1110903--12/14/2006--NETWORK_ENGINES_INC