894743--9/13/2006--NEOWARE

related topics

{product, market, service}

{personnel, key, retain}

{customer, product, revenue}

{property, intellectual, protect}

{control, financial, internal}

{operation, international, foreign}

{stock, price, share}

{system, service, information}

{acquisition, growth, future}

{provision, law, control}

{tax, income, asset}

{cost, regulation, environmental}

The success of our strategy depends on our ability to attract, retain and grow our business with large enterprise customers. Our success may depend on our ability to attract, retain and grow our business with small and medium sized customers. Because we rely on resellers and distributors, including IBM and Lenovo, to sell our products, our revenues could be negatively impacted if these companies do not continue to purchase products from us. Our business could be adversely affected if we are unable to expand and diversify our distribution channels. If we are unable to continue generating substantial revenues from international sales and effectively managing our international operations our business could be adversely affected. Our business is dependent on customer adoption of thin client devices as an alternative to personal computers, and a decrease in their rates of adoption could adversely affect our ability to increase our revenues. Our acquisition and alliance activities could disrupt our ongoing business, and we may not be able to successfully complete and integrate future acquisitions we may complete, which may materially adversely affect our growth and our operating results. Because we depend on sole source, limited source and foreign source suppliers for the design and manufacture of our thin client products and for key components in our thin client products, we are susceptible to supply shortages that could prevent us from shipping customer orders on time, if at all, and result in lost sales. In addition, our outsourcing activities for other functions may fail to reduce costs and may disrupt operations. Our ability to accurately forecast our quarterly sales is limited, although our costs are relatively fixed in the short term, and we expect our business to be affected by rapid technological change, which may adversely affect our quarterly operating results. Our gross margins can vary significantly, based upon a variety of factors. If we are unable to sustain adequate gross margins we may be unable to reduce operating expenses in the short term, resulting in losses. During the past several years, we have increased operating expenses significantly as a foundation for us to stimulate our growth and growth in our market, and we expect to increase our operating expenses during fiscal 2007, including increases needed to implement our new sales and marketing initiatives. If we do not increase revenues or appropriately manage further increases in operating expenses, our profitability will suffer. Our business may suffer if it is alleged or found that we have infringed the intellectual property rights of others. Thin client device products, like personal computers, are subject to rapid technological change due to changing operating system software and network hardware and software configurations, and our products could be rendered obsolete by new technologies. We may not be able to preserve the value of our products intellectual property because other vendors could challenge our intellectual property rights. We may not be able to effectively compete against PC and thin client providers as a result of their greater financial resources and brand awareness. Actions taken by the SCO Group (SCO) could impact the sale of our Linux products, negatively affecting sales of some of our products. In order to continue to grow our revenues, we may need to hire additional executives and personnel. We rely on the services of certain key personnel, and those persons knowledge of our business and technical expertise would be difficult to replace. If we determine that any of our goodwill or intangible assets, including technology purchased in acquisitions, are impaired, we would be required to take a charge to earnings, which could have a material adverse effect on our results of operations. We might repatriate cash from our foreign subsidiaries, which could result in additional income taxes that could negatively impact our results of operations and financial position. In addition, if foreign countries currency policies limit our ability to repatriate the needed funds, our business and results of operations could be adversely impacted. Although we have generated operating profits for the past five fiscal years, we have a prior history of losses and may experience losses in the future, which could result in the market price of our common stock declining. Because some of our products use embedded versions of Microsoft Windows as their operating system, an inability to license these operating systems on favorable terms could impair our ability to introduce new products and maintain market share. Because some of our products use Linux as their operating system as well as other open source technologies, the failure of open source developers to enhance and develop open source software that we use could impair our ability to release new products and maintain market share. If our contracts with Citrix and other vendors of software applications were terminated, our business would be materially adversely affected. Unforeseen environmental costs could impact our future earnings. Recent and proposed regulations related to equity compensation could adversely affect our ability to attract and retain key personnel and affect our operating results. In the event we are unable to satisfy regulatory requirements relating to internal controls over financial reporting, or if these internal controls are not effective, our business and financial results may suffer. Errors in our products could harm our business and our operating results. Our stock price can be volatile. The issuance of additional equity securities may have a dilutive effect on our existing stockholders and could lead to a decline in the price of our common stock. Provisions in our charter documents and Delaware law may delay or prevent acquisition of us, which could decrease the value of your shares.

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894743--9/13/2006--NEOWARE_INC