1351285--3/10/2010--ROSETTA_STONE

related topics

{system, service, information}

{customer, product, revenue}

{regulation, government, change}

{property, intellectual, protect}

{product, market, service}

{stock, price, operating}

{product, liability, claim}

{personnel, key, retain}

{regulation, change, law}

{control, financial, internal}

{operation, international, foreign}

{provision, law, control}

{acquisition, growth, future}

{condition, economic, financial}

Our actual operating results may differ significantly from our guidance. Risks Related to Our Business Because we generate all of our revenue from language learning solutions, a decline in demand for our language learning solutions or for language learning solutions in general could cause our revenue to decline. Because a substantial portion of our revenue is generated from our consumer business, if we fail to accurately forecast consumer demand and trends in consumer preferences, our Rosetta Stone brand, sales and customer relationships may be harmed. We depend on discretionary consumer spending in the consumer segment of our business. Adverse trends in general economic conditions, including retail shopping patterns, airport traffic or consumer confidence, may compromise our ability to generate revenue. Intense competition in our industry may hinder our ability to generate revenue and may diminish our margins. Demand for paid language learning solutions such as ours could decline if effective language learning solutions become available for free. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures. Our business depends on our Rosetta Stone brand, and if we are not able to maintain and enhance our brand, our business and operating results may be harmed. We depend on search engines and other online sources to attract visitors to our websites, and if we are unable to attract these visitors and convert them into customers in a cost-effective manner, our business and financial results may be harmed. Our expansion into international markets may not succeed and imposes special risks. Our introduction of Rosetta Stone Version 4 TOTALe will increase our costs as a percentage of revenue, may not succeed and may harm our business, financial results and reputation. Our introduction of the "Rosetta Stone Mini" and/or an introductory language learning software offering may not succeed and may harm our business, financial results and reputation. Product returns could exceed our estimates, which would diminish our reported revenue. If the recognition by schools and other institutions of the value of technology-based education does not continue to grow, our ability to generate revenue from institutions could be impaired. If there are changes in the spending policies or budget priorities for government funding of colleges, universities, schools, other education providers, armed forces or government agencies, we could lose revenue. Some of our institutional business faces a lengthy and unpredictable sales cycle for our solutions, which could delay new sales. If we are unable to continually enhance our products and services and adapt them to technological changes and customer needs, including the emergence of new computing devices and more sophisticated online services, we may lose market share and revenue and our business could suffer. If we fail to manage our growth effectively, we may experience difficulty in filling purchase orders, declines in product and service quality and customer satisfaction, increased costs or disruption in our operations. Our revenue is subject to seasonal and quarterly variations, which could cause our financial results to fluctuate significantly. Because a significant portion of our sales are made to or through retailers and distributors, none of which have any obligation to sell our products, the failure or inability of these parties to sell our products effectively could hurt our revenue growth and profitability. Substantially all of our inventory is located in one warehouse facility. Any damage or disruption at this facility could cause significant financial loss, including loss of revenue and harm to our reputation. The loss of key personnel or the failure to attract and retain highly qualified personnel could compromise our ability to effectively manage our business and pursue our growth strategy. If we are unable to hire, train, motivate and retain sales personnel to staff our kiosks, or to identify suitable locations and negotiate site licenses on acceptable terms, we could lose revenue, our costs could increase and our profitability could decline. Failure to maintain the availability of the systems, networks, databases and software required to operate and deliver our internet-based products and services could damage our reputation and cause us to lose revenue. We are subject to U.S. and foreign government regulation of online services which could subject us to claims, judgments, and remedies including monetary liabilities and limitations on our business practices. We may be subject to legal liability for new web-based online services. Our possession and use of personal information presents risks and expenses that could harm our business. Unauthorized disclosure or manipulation of such data, whether through breach of our network security or otherwise, could expose us to costly litigation and damage our reputation. We are exposed to risks associated with credit card and payment fraud and with credit card processing, which could cause us to lose revenue. Any significant interruptions in the operations of our call center or third-party call centers could cause us to lose sales and disrupt our ability to process orders and deliver our solutions in a timely manner. If any of our products contain defects or errors or if new product releases or services are delayed, our reputation could be harmed, resulting in significant costs to us and impairing our ability to sell our solutions. Our sales to U.S. government agencies and armed forces subject us to special risks that could adversely affect our business. If we fail to effectively upgrade our information technology systems, we may not be able to accurately report our financial results or prevent fraud. Our software products must interoperate with computer operating systems of our customers. If we are unable to ensure that our products interoperate properly with customer systems, our business could be harmed. As our product and service offerings become more complex, our reported revenue may become less predictable. Many of our expenses are fixed and many are based, in significant part, on our expectations of our future revenue and are incurred prior to the sale of our products and services. Therefore, any significant decline in revenue for any period could have an immediate negative impact on our margins, net income and financial results for the period. We may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise capital when needed. Risks Related to Intellectual Property Rights Protection of our intellectual property is limited, and any misuse of our intellectual property by others, including software piracy, could harm our business, reputation and competitive position. Third-party use of our trademarks as keywords in internet search engine advertising programs may direct potential customers to competitors' websites, which could harm our reputation and cause us to lose sales. Our trademarks are limited in scope and geographic coverage and may not significantly distinguish us from our competition. We have not registered copyrights for all our products, which may limit our ability to enforce them. We must monitor and protect our internet domain names to preserve their value. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe on or otherwise decrease the value of our trademarks. Claims that we misuse the intellectual property of others could subject us to significant liability and disrupt our business. We do not own all of the software, other technologies and content used in our products and services. Our use of open source software could impose limitations on our ability to commercialize our products. Risks Related to Owning Our Common Stock Some of our stockholders could together exert significant influence over our company. As a public company we incur additional cost and face increased demands on our management and key employees. In prior periods, we identified material weaknesses in our internal controls that could result in material misstatements in our financial statements. Although we have remediated the weaknesses, if we do not maintain adequate internal controls over financial reporting, it could impair our ability to comply with the accounting and reporting requirements applicable to public companies. If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline. Provisions in our organizational documents and in the Delaware General Corporation Law may prevent takeover attempts that could be beneficial to our stockholders.

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1351285--3/10/2010--ROSETTA_STONE_INC