UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

x

þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2008

For the fiscal year ended December 31, 2011

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from              to             

For the transition period from             to            

Commission file number 000-50350

 

 

NETGEAR, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 77-0419172
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

350 East Plumeria Drive,


San Jose, California

 95134
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code

(408) 907-8000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.001 The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

Securities registered pursuant to 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨þ    No  x¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  xþ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  xþ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨þ Accelerated filer  x¨ Non-accelerated filer  ¨ Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  ¨    No  xþ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 27, 2008July 3, 2011 was approximately $378,612,000.$905.9 million. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq Global Select Market on June 27, 2008July 1, 2011 (the last business day of the Registrant’s most recently completed fiscal second quarter). Shares of common stock held by each executive officer and director and each entity that owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 34,376,65037,803,236 shares as of February 17, 2009.21, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s 20092012 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 

 

 


TABLE OF CONTENTS

 

      Page
  PART I  
Item 1.  Business  31
Item 1A.  Risk Factors  11
Item 1B.  Unresolved Staff Comments  2733
Item 2.  Properties  2733
Item 3.  Legal Proceedings  2733
Item 4.  Submission of Matters to a Vote of Security HoldersMine Safety Disclosures  2733
  PART II  
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  2834
Item 6.  Selected Consolidated Financial Data  3136
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations  3238
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk  4755
Item 8.  Consolidated Financial Statements and Supplementary Data  4956
Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  87109
Item 9A.  Controls and Procedures  87109
Item 9B.  Other Information  88110
  PART III  
Item 10.  Directors, Executive Officers and Corporate Governance  89111
Item 11.  Executive Compensation  89111
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  89111
Item 13.  Certain Relationships and Related Transactions, and Director Independence  89111
Item 14.  Principal AccountantAccounting Fees and Services  89111
  PART IV  
Item 15.  Exhibits and Financial Statement Schedule  90112

Signatures

  91113

Index to Exhibits

  93114


PART I

This Annual Report on Form 10-K (“Form 10-K”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 below, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” in Part I, Item 1A below, and elsewhere in this Form 10-K, including, among other things: the future growth of the smallcommercial business, retail, and homebroadband service provider markets; speed of adoption of wireless networking worldwide; our business strategies and development plans; our successful introduction of new products and technologies; future operating expenses and financing requirements; and competition and competitive factors in the smallcommercial business, retail, and homebroadband service provider markets. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-K may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. All forward-looking statements in this Form 10-K are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements. The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes contained in this Form 10-K.

 

Item 1.Business

General

We design, developare a global networking company that delivers innovative products to consumers, businesses and market networking products for home usersservice providers. In the second fiscal quarter of 2011, we made organizational changes that we believe enable us to better focus our efforts on core customer segments and for small business, which we defineallow us to be more nimble and opportunistic as a company overall. Our business with fewer than 250 employees. We are focused on satisfying the ease-of-use, quality, reliability,is now managed in three specific business units: retail, commercial, and service provider. The retail business unit consists of high performance, dependable and affordability requirements of these users. Our product offerings enable userseasy-to-use home networking, storage and digital media products to connect users with the Internet and communicate across local area networks, or LANs,their content and devices. The commercial business unit consists of business networking, storage and security solutions without the cost and complexity of Big IT. The service provider business unit consists of made-to-order and retail proven, whole home networking solutions sold to service providers for sale to their customers. Additionally, in the first fiscal quarter of 2011, we combined our North American, Central American and South American sales forces to form the Americas territory. Previously, North America was its own geographic region and the World Wide WebCentral American and share Internet access, peripherals, files, digital multimedia contentSouth American territories were categorized within the Asia Pacific (“APAC”) geographic region. Following this change, we are now organized into the following three geographic territories: Americas, Europe, Middle-East and applications among multiple networked devicesAfrica (“EMEA”) and other Internet-enabled devices. We sell our products through multiple sales channels worldwide, which includes traditional retailers, online retailers, direct market resellers, or DMRs, value added resellers, or VARs,APAC. For further detail, refer to Note 12,Segment Information, Operations by Geographic Area and broadband service providers. A discussionCustomer Concentration, in Notes to Consolidated Financial Statements in Item 8 of factors potentially affecting our operations is set forth in “Risk Factors” in Part I, Item 1AII of this Annual Report on Form 10-K.

We were incorporated in Delaware on January 8, 1996. Our principal executive offices are located at 350 East Plumeria Drive, San Jose, California 95134, and our telephone number at that location is (408) 907-8000. We file reports, proxy statementsOur website address is www.netgear.com.

In the years ended December 31, 2011, 2010, and other information with the Securities2009, we generated net revenue of $1.18 billion, $902.1 million, and Exchange Commission, or SEC, in accordance with the Exchange Act. You may read and copy our reports, proxy statements and other information filed by us at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. Our filings are also available to the public over the Internet at the SEC’s website athttp://www.sec.gov, and, as soon as practicable after such reports are filed with the SEC, free of charge through a hyperlink on our Internet website athttp://www.netgear.com.Information contained on these websites is not a part of this Form 10-K.$686.6 million, respectively.

Markets

Our goal is to be the leading provider of innovative networking products to the smallconsumer, business, and homeservice provider markets. A number of factors are driving today’s demand for networking products within small businesses and homes.these markets. As the number of computing devices, such as PCs, smart phones and tablet computers, has increased in recent years, networks networks—especially WiFi networks—are being

deployed more broadly in order to share information and resources among users and devices. This information and resource sharing occurs internally, through a local area network, or externally, via the Internet. To take advantage of complex applications, advanced communication capabilities and rich multimedia content, users are upgrading their Internet connections by deploying high-speed broadband access technologies. Users also seek the convenience and flexibility of operating their PCs, laptops, smart phones, tablet computers and related computing devices andwhile accessing their content in a more mobile, or wireless, manner. In addition, market demand for television connectivity products has increased significantly as well, where users seek to connect their televisions to the Internet and for entertainment content. Finally, as the usage of networks, including the Internet, has increased, users have become much more focused on the security of their connections and the protection of the data within their networks.

Small businessConsumers, businesses and home usersservice providers demand a complete set of wired and wireless networking and broadband products that are tailored to their specific needs and budgets and also incorporate the latest networking technologies. These users require the continual introduction of new and refined products. Small businessproducts and home users often lack extensive IT resources and technical knowledge and thereforeknowledge. Therefore, they demand ‘plug-and-play’ or easy-to-install and use products. These users seek reliable products that require little or no maintenance, and are supported by effective technical supportcustomer service and customer service.support. We believe that these users also prefer the convenience of obtaining a networking solution from a single company with whom they are familiar; as these users expand their networks, they tend to be loyal purchasers of that brand. In addition, purchasing decisions of users in the small business and homethese markets are also driven by the affordability of networking products. To provide reliable, easy-to-use products at an attractive price, we believe a successful supplier must have a company-wide focus on the unique requirements of these markets, and the operational discipline and cost-efficient company infrastructure and processes that allow for efficient product development, manufacturing and distribution.

Sales Channels

We sell our products through multiple sales channels worldwide, including traditional retailers, online retailers, wholesale distributors, DMRs, VARs,direct market resellers (“DMRs”), value-added resellers (“VARs”), and broadband service providers.

Wholesale Distribution. Our distribution channel supplies our products to retailers, e-commerce resellers, Direct Market Resellers and Value Added Resellers. We sell directly to our distributors, the largest of which are Ingram Micro, Inc. and Tech Data Corporation.

Retailers.Our retail channel primarily supplies products that are sold into the homeconsumer market. We sell directly to, or enter into consignment arrangements with, a number of our traditional retailers. The remaining traditional retailers, as well as our online retailers, are fulfilled through wholesale distributors, the largest of which are Ingram Micro, Inc. and Tech Data Corporation.distributors. We work directly with our retail channels on market development activities, such as co-advertising, in-store promotions and demonstrations, instant rebate programs, event sponsorship and sales associate training, as well as establishing “store within a store” websites and banner advertising.

DMRs and VARs.We primarily sell into the smallcommercial business marketmarketplace through an extensive network of DMRs and VARs. Our DMRs include companies such as CDW and Insight. VARs include our network of registered Powershift Partners, orand resellers who achieve prescribed quarterly sales goalsthat are not registered in our Powershift partner program. DMRs and as a resultVARs may receive sales incentives, marketing support and other program benefits from us. Our products are also resold by a large number of smaller VARs whose sales are not large enough to qualify them for our Powershift Partner program. Our DMRs and VARs generally purchase our products through our wholesale distributors, primarily Ingram Micro and Tech Data.distributors.

Broadband Service Providers.We also supply our products directly to broadband service providers in the United States and internationally, who distributeinternationally. Service providers supply our products to their small business and home subscribers.

We derive the majorityThe largest portion of our net revenuerevenues was derived from international sales. InternationalAmericas sales in the year ended December 31, 2011. The Americas sales as a percentage of net revenue decreased from 62%51.7% in 2007the year ended December 31, 2010 to 60%49.7% in 2008. The table below sets forththe year ended December 31, 2011. We have committed resources to expanding our international operations and sales channels. Accordingly, we are subject to a number of risks related to international operations such as macroeconomic and microeconomic conditions, geopolitical instability, preference for locally branded products, exchange rate fluctuations, increased difficulty in managing inventory, challenges of staffing and managing foreign operations, the effect of international sales on our tax structure, and changes in local tax laws. See Note 12,Segment Information, Operations by Geographic Area and Customer Concentration, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for further discussion of net revenues by geographic region.

Retail company Best Buy, Inc. and distributor Ingram Micro, Inc. each accounted for 10% or greater of our net revenue by major geographic region.

   2008  Percentage
Change
  2007  Percentage
Change
  2006
   (In thousands, except percentage data)

United States

  $297,641  9% $273,695  24% $220,440

EMEA

   354,058  (7)%  380,354  28%  298,234

Asia Pacific and rest of world

   91,645  24%  73,738  34%  54,896
                  
  $743,344  2% $727,787  27% $573,570
                  

Net revenues from significant customers as a percentage of our total net revenues forin the years ended December 31, 2008, 20072011, 2010 and 2006 were as follows:2009. See Note 12,Segment Information, Operations by Geographic Area and Customer Concentration, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for further details on customer concentrations.

   Year Ended December 31, 
   2008  2007  2006 

Ingram Micro, Inc.

  14% 17% 19%

Tech Data Corporation

  11% 14% 16%

Product Offerings

Our product line consists of wired and wireless devices, including devices that enable Ethernetcommercial business networking, broadband access, network connectivity, network storage and security appliances. These products are available in multiple configurations to address the needs of our customers in each geographic region in which our products are sold.

EthernetCommercial business networking.Ethernet is the most commonly used wired network protocol for connecting devices in today’s home and small-office networks. Products that enable Ethernet networkingThese products include:

 

Ethernet switches, which are multiple port devices used to network PCs and peripherals;peripherals via Ethernet wiring;

 

network interface cards, adaptersWireless controllers, which are devices used to manage and bridges, that enablecontrol multiple WiFi base stations which in turn provide WiFi connections to PCs and other equipment to be connected to a network;peripherals;

 

Internet Security Appliances, which provide Internet access through capabilities such as anti-virus and anti-spam.anti-spam; and

network attached storage, which enables file sharing among multiple PCs and other networked devices over a local area network.

Broadband Access.access.Broadband is a transmission medium capable of moving more digital content over public high speed networks than traditional low speed telephone lines. Products that enable broadband access include:

 

routers, which connect the home or office networks to the Internet via broadband modems;

 

gateways, which are routers with integrated modems, for Internet access;

 

IP telephony products, used for transmitting voice communications over a network; and

 

wireless gateways, or gateways that include an integrated wirelessMedia servers, which store files and multimedia content for access point.by PCs, laptops, smart phones and other Internet enabled devices.

Network Connectivity.connectivity.Products that enable network connectivity and resource sharing include:

 

wireless access points and range extenders, which provide a wireless link between a wired network and wireless devices;

 

wireless network interface cards and adapters, which enable devices to be connected to the network wirelessly;

 

Ethernet network interface cards and adapters, which enable devices to be connected to the network over Ethernet wiring;

media adapters, which connect non PC entertainment devices such as TVs, audio players, and game consoles to a network;

wi-fi phones, which enable users to make voice calls over the Internet;

network attached storage, which enables file sharing among multiple PCs and media adapters over a local area network; and

 

powerline adapters and bridges, which enable devices to be connected to the network over existing electrical wiring; and

Multimedia over Coax Alliance standard (“MoCA”) adapters and bridges, which enable devices to be connected to the network over existing coaxial wiring.

We design our products to meet the specific needs of both the smallconsumer, business and homeservice provider markets, tailoring various elements of the product design, including component specification, physical characteristics such as casing, design and coloration, and specific user interface features to meet the needs of these markets. We also leverage many of our technological developments, high volume manufacturing, technical support and engineering infrastructure across our markets to maximize business efficiencies.

Our products that target the small business market are generally designed with an industrial appearance, including metal cases and, for some product categories, the ability to mount the product within standard data networking racks. These products typically include higher port counts, higher data transfer rates and other performance characteristics designed to meet the needs of a smallcommercial business user. For example, we offer data transfer rates up to ten GigabitGigabits per second for our business products to meet the higher capacity requirements of business users. Some of these products are also designed to support transmission modes such as fiber optic cabling, which is common in more sophisticated business environments. Security requirements within our products for smallcommercial business broadband access include firewall, virtual private network and content threat management capabilities that allow for secure interactions between remote offices and business headquarter locations over the Internet. Our connectivity product offerings for the smallcommercial business market include enhanced security and remote configurability often required in a business setting. Our ReadyNAS® family of network attached storage products implements redundant array of independent disks data protection, enabling small businesses to store and protect critical data easily, efficiently and intelligently.

Our products for the home userconsumer and service provider markets are generally designed with pleasing visual and physical aesthetics that are more desirable in a home environment. For example, our RangeMax™ series of routers have distinctive blue antenna-indicator LEDs in a circular dome atop a sleek black or white plastic casing. Our connectivity offerings for use in the homeconsumer market are generally at a lower price than higher security and configurability wireless offerings for the small business market. Our products for facilitating broadband access in the home are available with features such as parental control capabilities and firewall security, to allow for safer, more controlled Internet usage in families with children. Our broadband products designed for the home market also contain installation software that guides a less sophisticated data networking user through the installation process with their broadband service provider, using a graphical user interface and simple point and click operations. Our connectivity product offerings for the homeconsumer market include powerline and MoCA data transmission modes, which allow home users to take advantage of their existing electrical or coaxial wiring infrastructure for transmitting data among network components.

Our vision for the home network has always been about having all devices connected to the Internet at all times. Recently, our focus has been to continue to introduce new products into what we believe are five new growth areas: First, TV connectivity products such as our new Push2TV HD edition announced jointly with Intel at the 2011 International Consumer Electronics Show; Second, network attached storage products with enhanced user interfaces, higher capacity and resilience; Third, security appliances that support more users; Fourth, DOCSIS 3.0 gateways with more integrated functions; and Fifth, the 4G/Long Term Evolution (“LTE”) related repeaters and routers. We continue to announce and introduce new products in these significant growth markets.

Competition

The smallconsumer, business and home networkingservice provider markets are intensely competitive and subject to rapid technological change. We expect competition to continue to intensify. Our principal competitors include:

 

within the small business networking market,consumer markets, companies such as 3Com Corporation, Allied Telesyn International, Buffalo, Inc., Dell Computer Corporation,Apple, Belkin, D-Link, Hewlett-Packard Company, the Linksys division of Cisco Systems, Baracuda Networks, Inc.Roku and Western Digital; and

within the business markets, companies such as Allied Telesys, Barracuda, Buffalo, Data Robotics, Dell, D-Link, Fortinet, Hewlett-Packard, Huawei, Cisco Systems, the Linksys division of Cisco Systems, QNAP Systems, Seagate Technology, SonicWALL, Inc.;Synology, WatchGuard and Western Digital; and

 

within the home networking market,service provider markets, companies such as Apple Inc., Belkin Corporation,Actiontec, ARRIS, Comtrend, D-Link, Hitron, Huawei, Motorola, Pace, Sagem, Scientific Atlanta-a Cisco company, SMC Networks, TechniColor, Ubee, Compal Broadband, ZTE and the Linksys division of Cisco Systems.ZyXEL .

Other current and potential competitors include numerous local vendors such as Siemens Corporation, Devolo, LEA and AVM in Europe, Corega International SA and Melco Inc. in Japan and TP-Link in China, and broadband equipment suppliers such as Actiontec Electronics, Inc., ARRIS Group, Inc., Comtrend Corporation, Huawei Technologies Co. Ltd., Motorola, Inc., Sagem Corporation, Scientific Atlanta—a Cisco company, Thomson Corporation and

2Wire, Inc.China. Our potential competitors also include other consumer electronics vendors, including LG Electronics, Microsoft, Panasonic, Samsung, Sony, Toshiba and telecommunications equipment vendorsVizio, who could integrate networking and streaming capabilities into their line of products, such as televisions, set top boxes and gaming consoles, and our channel customers who may decide to offer self-branded networking products. We also face competition from service providers who may bundle a free networking device with their broadband service offering, which would reduce our sales if we are not the supplier of choice to those service providers. In the service provider space, we are also facing significant and increased competition from original design manufacturers, or ODM’s, and contract manufacturers who are selling and attempting to sell their products directly to service providers around the world.

Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources. As a result, they may have more advanced technology, larger distribution channels, stronger brand names, better customer service and access to more customers than we do. For example, Hewlett-Packard has significant brand name recognition and has an advertising presence substantially greater than ours. Similarly, Cisco Systems is well recognized as a leader in providing networking products to businesses and has substantially greater financial resources than we do. Several of our competitors, such as the Linksys division of Cisco Systems and D-Link, offer a range of products that directly compete with most of our product offerings. Several of our other competitors primarily compete in a more limited manner. For example, Hewlett-Packard sells networking products primarily targeted at larger businesses or enterprises. However, the competitive environment in which we operate changes rapidly. Other large companies with significant resources could become direct competitors, either through acquiring a competitor or through internal efforts.

We believe that the principal competitive factors in the smallconsumer, business and homeservice provider markets for networking products include product breadth, size and scope of the sales channel, brand name, timeliness of new product introductions, product availability, performance, features, functionality and reliability, price, ease-of-installation, maintenance and use, and customer service and support. We believe our products are competitive in these markets based on these factors.

To remain competitive, we believe we must invest significant resources in developing new products and enhancing our current products while continuing to expand our sales channels and maintaining customer satisfaction worldwide.

Research and Development

As of December 31, 2008,2011, we had 158224 employees engaged in research and development. We believe that our success depends on our ability to develop products that meet changing user needs and to anticipate and proactively respond to evolving technology in a timely and cost-effective manner. Accordingly, we have made investments in our research and development department in order to effectively evaluate new third partythird-party technologies, develop new in-house technologies, and develop and test new products. Our research and development employees work closely with our technology and manufacturing partners to bring our products to market in a timely, high quality and cost-efficient manner.

We identify, qualify or self-develop new technologies, and we work closely with our various technology suppliers and manufacturing partners to develop products using one or more of the development methodologies described below.

ODM.Under the original design manufacturer or ODM,(“ODM”), methodology, which we use for most of our product development activities, we define the product concept and specification and performrecommend the technology selection. We then coordinate with our technology suppliers while they develop the chipsets, software and detailed circuit designs.product meeting our specification. On certain new products, one or more subsystems of the design can be done in-house and then integrated in with the remaining design pieces from the ODM. Once prototypes are completed, we work with our partners to complete the debugging and systems integration and testing. Our ODMs are responsible for conducting all of the regulatory agency approval processes required for each product. After completion of the final tests, agency approvals and product documentation, the product is released for production.

CM. Under the contract manufacturer, or CM, methodology, which we use for a limited number of products, we define the product concept and specification and develop the primary technology and software internally.

Once prototypes are completed, we work with our partners to complete the debugging and systems integration and testing. We are responsible for conducting all of the regulatory agency approval processes required for each product. After completion of the final tests, agency approvals and product documentation, the product is released for production.

IN-HOUSE DEVELOPMENT.In-House Development.Under the in-house development model, one or more subsystems of the product are designed and developed utilizing the NETGEARNEGEAR engineering team. Under this model, some of the primary technology is developed in-house. We then work closely with either an ODM or a contract manufacturer to complete the development of the entire design, perform the necessary testing, and obtain regulatory approvals before the product is released for production.

OEM. Under the original equipment manufacturer or OEM,(“OEM”), methodology, which we use for a limited number of products, we define the product specification and then purchase the product from OEM suppliers that have existing products fitting our design requirements. In some cases, once a technology supplier’s product is selected, we work with the OEM supplier to complete the cosmetic changes to fit into our mechanical and packaging design, as well as our documentation and graphical user interface or GUI,(“GUI”), standard. The OEM supplier completes regulatory approvals on our behalf. When all design verification and regulatory testing is completed, the product is released for production.

Our internal research and development efforts focus on developing and improving the usability, reliability, functionality, cost and performance of our products. Our total research and development expenses were $33.8$48.7 million in 2008, $28.12011, $40.0 million in 20072010 and $18.4$30.1 million in 2006.2009.

Manufacturing

Our primary manufacturers are Cameo Communications Inc., Delta Networks Incorporated, Hon Hai Precision Industry Co., Ltd. (more commonly known as Foxconn Corporation), SerComm Corporation, Kepro, and Unihan Corporation (which was spun out of ASUSTek Computer, Inc. in January 2008), all of which are headquartered in Taiwan. The actual manufacturing of our products occurs primarily in mainland China and Vietnam, with pilot and low-volume manufacturing in Taiwan on a select basis. We distribute our manufacturing among these key suppliers to avoid excessive concentration with a single supplier. Because substantially all of our manufacturing occurs in mainland China and Vietnam, any disruptions from natural disasters, health epidemics and political, social and economic instability would affect the ability of our ODMs to manufacture our products. In addition, our ODMs in China have continued to increase our costs of production, particularly in the recent year. These increased costs have affected our margins and ability to lower prices for our products to stay competitive. If our manufacturers or warehousing facilities are disrupted or destroyed, we would have no other readily available alternatives for manufacturing our products and our business would be significantly impacted. In addition to their responsibility for the manufacturing of our products, our manufacturers purchase all necessary parts and materials to produce complete, finished goods. To maintain quality standards for our suppliers, we have established our own product quality organization based in Hong Kong and mainland China. They are responsible for auditing and inspecting process and product quality on the premises of our ODMs CMs and OEMs.

We obtain several key components from limited or sole sources. For example, many of the semiconductors and meta materials used in our products are designed for use in our products and are obtained from sole source suppliers on a purchase order basis. In addition, some components that are used in all our products are obtained

from limited sources. These components include connector jacks, plastic casings and physical layer transceivers. We also obtain switching fabric semiconductors, which are used in our Ethernet switches and Internet gateway products, and wireless local area network chipsets, which are used in all of our wireless products, from a limited number of suppliers. Our third party manufacturers generally purchase these components on our behalf on a purchase order basis. If these sources fail to satisfy our supply requirements, our ability to meet scheduled product deliveries would be harmed and we may lose sales and experience increased component costs.

We currently outsource warehousing and distribution logistics to fourfive main third-party providers who are responsible for warehousing, distribution logistics and order fulfillment. In addition, these parties are also responsible for some configuration and re-packaging of our products including bundling components to form kits, inserting appropriate documentation, disk drive configuration, and adding power adapters. APL Logistics Americas, Ltd. in City of Industry, California serves the Americas region, Kerry Logistics Ltd. in Hong Kong serves the Asia Pacific region, and DSV Solutions B.V. and ModusLink BVB.V. in the Netherlands serve the the United StatesEMEA, region and Europe, Middle-EastAgility Logistics Pty Ltd. in Matraville, NSW, Australia which serves Australia and Africa, or EMEA, region.New Zealand.

Sales and Marketing

As of December 31, 2008,2011, we had 266357 employees engaged in sales and marketing. We work directly with our customers on market development activities, such as co-advertising, in-store promotions and demonstrations, instant rebate programs, event sponsorship and sales associate training. We also participate in major industry trade shows and marketing events. Our marketing department is comprised of our product marketing and corporate marketing groups.

Our product marketing group focuses on product strategy, product development roadmaps, the new product introduction process, product lifecycle management, demand assessment and competitive analysis. The group

works closely with our sales and research and development groups to align our product development roadmap to meet customer technology demands from a strategic perspective. The group also ensures that product development activities, product launches, channel marketing program activities, and ongoing demand and supply planning occur in a well-managed, timely basis in coordination with our development, manufacturing, and sales groups, as well as our ODM, CM, OEM and sales channel partners.

Our corporate marketing group is responsible for defining and building our corporate brand. The group focuses on defining our mission, brand promise and marketing messages on a worldwide basis. This group also defines the marketing approaches in the areas of advertising, public relations, events, channel programs and our web delivery mechanisms. These marketing messages and approaches are customized for both the smallcommercial business, home user, and homebroadband service provider markets through a variety of delivery mechanisms designed to effectively reach end-users in a cost-efficient manner.

We conduct most of our international sales and marketing operations through NETGEAR International Ltd., our wholly-owned subsidiarysubsidiaries which operatesoperate via sales and marketing subsidiaries and branch offices worldwide.

Customer Support

We design our products with “plug and play” ease of use. We respond globally to customer questions overthrough a variety of venues including phone, chat and email. Customers can also get self-help service through the phonecomprehensive knowledgebase and Internet including providing an online Knowledgebase and User Forum.the user forum on our website. Customer support is provided through a combination of a limited number of permanent employees and use of subcontracted, “out-sourcing”out-sourced resources. Our permanent employees design our technical support database and are responsible for training and managing our outsourced sub-contractors. They also handle escalations from the outsourced resources. We utilize the information gained from customers by our customer support organization to enhance our product offerings, including further simplifying the installation process.

Intellectual Property

We believe that our continued success will depend primarily on the technical expertise, speed of technology implementation, creative skills and management abilities of our officers and key employees, plus ownership of a limited but important set of copyrights, trademarks, trade secrets and patents. We primarily rely on a combination of copyright, trademark and trade secret and patent laws, nondisclosure agreements with employees, consultants and suppliers and other contractual provisions to establish, maintain and protect our proprietary rights. We hold three43 issued United States patents that expire between years 20232013 and 20252028 and 19 foreign patents that expire between 2012 and 2026. In addition, we currently have a number of pending United States and foreign patent applications related to technology and products offered by us. In addition, weWe also rely on third-party licensors for patented hardware and software license rights in technology that are incorporated into and are necessary for the operation and functionality of our products. Our success will depend in part on our continued ability to have access to these technologies.

We have trade secret rights for our products, consisting mainly of product design, technical product documentation and software. We also own, or have applied for registration of trademarks, in connection with our products in the United States and internationally, including NETGEAR, the NETGEAR logo, NETGEAR Green, the NETGEAR Green logo, NETGEAR Digital Entertainer, the NETGEAR Digital Entertainer logo, Genie, the Gear GuyGenie logo,Readyshare, Neo TV, the Neo TV logo, NETGEAR Stora, the NETGEAR Stora logo, Connect with Innovation, Everybody’s connecting, IntelliFi, ProSafe, RangeMax, ReadyNAS, Smart Wizard, ProSecure, the ProSecure logo, Push2TV, Ultraline, Proline, Liteline, Envoy Service Management System, Versalink, Wirespeed, Leaf Networks, and X-RAID in the United States and internationally.X-RAID. We have registered a number of Internet domain names that we use for electronic interaction with our customers including dissemination of product information, marketing programs, product registration, sales activities, and other commercial uses.

Seasonal Business

We have historically experienced increased net sales in our third and fourth fiscal quarters as compared to other quarters in our fiscal year due to seasonal demand of consumer markets related to the beginning of the school year and the holiday season. However, because of irregular and significant purchases from customers in other markets, such as the service provider market, this pattern has not been consistent. As such, any pattern should not be considered a reliable indicator of our future net sales or financial performance.

Backlog

We believe the actual amount of product backlog at any particular time is not a meaningful indication of our future business. Our backlog consists of products for which customer purchase orders have been received and that are scheduled or in the process of being scheduled for shipment. While we expect to fulfill the order backlog within the current year, most orders are subject to rescheduling or cancellation with little or no penalties. Because of the possibility of customer changes in product scheduling or order cancellation, our backlog as of any particular date may not be an indicator of net sales for any subsequent period. Accordingly, backlog should not be considered a reliable indicator of our ability to achieve any particular level of revenue or financial performance.

Environmental Laws

Our products and manufacturing process are subject to numerous governmental regulations, which cover both the use of various materials as well as environmental concerns. Environmental issues such as pollution and climate change have had significant legislative and regulatory efforts on a global basis, and there are expected to be additional changes to the regulations in these areas. These changes could directly increase the cost of energy which may have an impact on the way we manufacture products or utilize energy to produce our products. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials we use in our products. Other regulations in the environmental area may require us to continue to monitor and ensure

proper disposal or recycling of our products. To the best of our knowledge, we maintain compliance with all current government regulations concerning our production processes, for all locations in which we operate. Since we operate on a global basis, this is also a complex process which requires continual monitoring of regulations and an ongoing compliance process to ensure that we and our suppliers are in compliance with all existing regulations.

Employees

As of December 31, 2008,2011, we had 579791 full-time employees, with 266357 in sales, marketing and technical support, 158224 in research and development, 6596 in operations, and 90114 in finance, information systems and administration. We also utilize a number of temporary staff to supplement our workforce. We have never had a work stoppage among our employees and no personnel are represented under collective bargaining agreements. We consider our relations with our employees

Long-lived assets by geographic location are listed under Note 12, Segment Information, Operations by Geographic Area and Customer Concentration,in Notes to be good.

Website PostingConsolidated Financial Statements in Item 8 of SEC FilingsPart II of this Annual Report on Form 10-K, which information is incorporated into this Item 1 by reference.

Available Information

We file reports, proxy statements and other information with the Securities and Exchange Commission, or SEC, in accordance with the Exchange Act. You may read and copy our reports, proxy statements and other information filed by us at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. Our filings are also available to the public over the Internet at the SEC’s website athttp://www.sec.gov.

Our website provides a link to our SEC filings, which are available on the same day such filings are made. The specific location on the website where these reports can be found ishttp://investor.netgear.com/sec.cfm.sec.cfm. Our website also provides a link to Section 16 filings which are available on the same day as such filings are made. Information contained on these websites is not a part of this Form 10-K.

Executive Officers of the Registrant

The following table sets forth the names, ages and positions of our executive officers (who are subject to Section 16 of the Securities Exchange Act of 1934) as of February 17, 2009.7, 2012.

 

Name

  

Age

  

Position

Patrick C.S. Lo

  5255  Chairman and Chief Executive Officer

Christine M. Gorjanc

55Chief Financial Officer

Mark G. Merrill

  5457  Chief TechnologyTechnical Officer

Shane J. Buckley

44Senior Vice President and General Manager of Commercial Business Unit

Michael P. Clegg

51Senior Vice President and General Manager of Service Provider Business Unit

David S.G. Soares

45Senior Vice President and General Manager of Retail Business Unit

Michael F. Falcon

  5255  Senior Vice President of Worldwide Operations

Christine M. Gorjanc

52Chief Financial Officer

Andrew Kim

38Vice President, Legal and Corporate DevelopmentSupport

Charles T. Olson

  5356  Senior Vice President of Engineering

David SoaresAndrew W. Kim

  42Senior Vice President of Worldwide Sales

Michael A. Werdann

4041  Vice President, of Americas SalesLegal and Corporate Development, Corporate Secretary

Patrick C.S. Lois our co-founder and has served as our Chairman and Chief Executive Officer since March 2002. From September 1999Patrick founded NETGEAR with Mark G. Merrill with the singular vision of providing the appliances to March 2002, he served as our President,enable everyone in the world to connect to the high speed Internet for information, communication, business transactions, education, and since our inception in 1996 to September 1999, he served as Vice President and General Manager. Mr. Lo joined Bay Networks, a networking company, in August 1995 to launch a division targeting the small business and home markets and established the NETGEAR division in January 1996.entertainment. From 1983 until 1995, Mr. Lo worked at Hewlett-Packard Company, a computer and test equipment company,

where he served in various management positions in software sales, technical support, network product management, sales support and marketing in the United StatesU.S. and Asia, including asAsia. Mr. Lo was named the Asia/Pacific marketing director for Unix servers.Ernst & Young National Technology Entrepreneur of the Year in 2006. Mr. Lo received a B.S. degree in Electrical Engineeringelectrical engineering from Brown University.

Christine M. Gorjanchas served as our Chief Financial Officer since January 2008, Chief Accounting Officer from December 2006 to January 2008 and Vice President, Finance from November 2005 to December 2006. From September 1996 through November 2005, Ms. Gorjanc served as Vice President, Controller, Treasurer and Assistant Secretary for Aspect Communications Corporation, a provider of workforce and customer management solutions. From October 1988 through September 1996, Ms. Gorjanc served as the Manager of Tax for Tandem Computers, Inc., a provider of fault-tolerant computer systems. Prior to that, Ms. Gorjanc served in management positions at Xidex Corporation, a manufacturer of storage devices, and spent eight years in public accounting with a number of accounting firms. Ms. Gorjanc holds a B.A. in Accounting (with honors) from the University of Texas at El Paso and a M.S. in Taxation from Golden Gate University.

Mark G. Merrillis our co-founder and has served as our Chief Technology Officer since January 2003. From September 1999 to January 2003, he served as Vice President of Engineering and served as Director of Engineering from September 1995 to September 1999. From 1987 to 1995, Mr. Merrill worked at SynOptics Communications, a local area networking company, which later merged with Wellfleet to become Bay Networks, where his responsibilities included system design and analog implementations for SynOptics’ first 10BASE-T products. Mr. Merrill received both a B.S. degree and an M.S. degree in Electrical Engineering from Stanford University.

Michael F. FalconShane J. Buckleyhas served as our Senior Vice President and General Manager of OperationsCommercial Business since March 2006April 2011, and Senior Vice President of Operations since November 2002. From September 1999and General Manager Small/Medium Business from October 2009 to November 2002, Mr. Falcon worked at Quantum Corporation, a data technology company, where he served as Vice President of Operations and Supply Chain Management. From April 1999 to September 1999, Mr. Falcon was at Meridian Data, a storage company acquired by Quantum Corporation, where he served as Vice President of Operations. From February 1989 to April 1999, Mr. Falcon was at Silicon Valley Group, a semiconductor equipment manufacturer, where he served as Director of Operations, Strategic Planning and Supply Chain Management. Prior to that, he served in management positions at SCI Systems, an electronics manufacturer, Xerox Imaging Systems, a provider of scanning and text recognition solutions, and Plantronics, Inc., a provider of lightweight communication headsets. Mr. Falcon received a B.A. degree in Economics from the University of California, Santa Cruz and has completed coursework in the M.B.A. program at Santa Clara University.

Christine M. Gorjanchas served as our Chief Financial Officer since January 2008, as our Chief Accounting Officer since December 2006 and as our Vice President, Finance since November 2005. From September 1996 through November 2005, Ms. Gorjanc served as Vice President, Controller, Treasurer and Assistant Secretary for Aspect Communications Corporation, a provider of workforce and customer management

solutions. From October 1988 through September 1996, she served as the Manager of Tax for Tandem Computers, Inc., a provider of fault-tolerant computer systems. Prior to that, she served in management positions at Xidex Corporation, a manufacturer of storage devices, and spent eight years in public accounting with a number of accounting firms. Ms. Gorjanc holds a B.A. in Accounting (with honors) from the University of Texas at El Paso and a M.S. in Taxation from Golden Gate University.

Andrew Kimhas served as our Vice President, Legal and Corporate Development and Corporate Secretary since October 2008 and as our Associate General Counsel since March 2008.2011. Prior to joining NETGEAR,us, Mr. KimBuckley served as Special CounselPresident & CEO of Rohati Systems from November 2007 to October 2009, COO of Aviram Networks, Inc. (formerly Nevis Networks) from July 2006 to November 2007, Vice President WW Enterprise at Juniper Networks from June 2005 to April 2006, President International at Peribit Networks from February 2002 to July 2005, CEO at Conduit Software from December 2000 to February 2002, and EMEA Vice President at 3Com Corp from 1998 to 2000. Mr. Buckley holds a B.S Degree in Engineering from the Corporate and Securities Department of Wilson Sonsini Goodrich & Rosati, where he represented public and private technology companies in a wide range of matters, including mergers and acquisitions, debt and equity financing arrangements, securities law compliance and corporate governance. In between two terms at Wilson Sonsini Goodrich & Rosati, he served as Partner in the Business and Finance Department of Schwartz Cooper Chartered in Chicago, Illinois, and was an Adjunct Professor of Entrepreneurship at the IllinoisCork Institute of Technology. Mr. Kim holds a J.D. from Cornell Law School, and received a B.A. degreeTechnology in history from Yale University.Ireland.

Charles T. OlsonMichael P. Clegghas served as our Senior Vice President and General Manager of Service Provider Business since August 2005. Prior to joining NETGEAR, Mr. Clegg served as VP Engineering, sinceat Entrisphere (now part of Ericsson) from February 2003 to January 2005, and COO and CTO at Virtual Access from September 1999 to April 2002. From March 2006 and our1999 to September 1999, Mr. Clegg served as Vice President of Engineering since January 2003. From July 1978DSL Solutions at Fujitsu Telecommunications Europe which acquired the Westell Europe subsidiary, which Mr. Clegg led as Managing Director from May 1995 to January 2003,September 1999. Prior to May 1995, Mr. Olson worked at Hewlett-Packard Company, a computer and test equipment company, where heClegg served as Director of Research and Development for ProCurve networkingSenior Consultant at Scientific Generics (now Sagentia) from 1998December 1989 to 2003, as Research and Development Manager for the Enterprise Netserver division from 1997 to 1998, and, prior to that, in various other engineering management roles in Hewlett-Packard’s Unix server and personal computer product divisions.April 1994. Mr. OlsonClegg received both a B.S. degree in Electrical Engineering and an M.S. degree in Digital Systems Design from the University of California, Davis and an M.B.A. from Santa Clara University.the Witwatersrand, South Africa.

David S.G. Soareshas served as our Senior Vice President and General Manager of Retail Business Unit since April 2011, and Senior Vice President of Worldwide Sales sincefrom August 2004.2004 to March 2011. Mr. Soares joined us in January 1998, and served as Vice President of EMEA sales from December 2003 to July 2004, EMEA Managing Director from April 2000 to November 2003, United Kingdom and Nordic Regional Manager from February 1999 to March 2000 and United Kingdom Country Manager from January 1998 to January 1999. Prior to joining us, Mr. Soares was at Hayes Microcomputer Products, a manufacturer of dial-up modems.modems, where he was head of their retail, e-commerce and DMR channels in the UK. Mr. Soares attended Ridley College, Ontario Canada.

Michael A. Werdann F. Falconhas served as our Senior Vice President of Worldwide Operations and Support since January 2009, Senior Vice President of Operations from March 2006 to January 2009, and Vice President of Operations from November 2002 to March 2006. Prior to joining us, Mr. Falcon was at Quantum Corporation, where he served as Vice President of Operations and Supply Chain Management from September 1999 to

November 2002, Meridian Data (acquired by Quantum Corporation), where he served as Vice President of Operations from April 1999 to September 1999, and Silicon Valley Group, where he served as Director of Operations, Strategic Planning and Supply Chain Management from February 1989 to April 1999. Prior to February 1989, Mr. Falcon served in management positions at SCI Systems, an electronics manufacturer, Xerox Imaging Systems, a provider of scanning and text recognition solutions, and Plantronics, Inc., a provider of lightweight communication headsets. Mr. Falcon received a B.A. degree in Economics with honors from the University of California, Santa Cruz and has completed coursework in the M.B.A. program at Santa Clara University.

Charles T. Olsonhas served as our Senior Vice President of Engineering since March 2006 and our Vice President of Engineering from January 2003 to March 2006. Prior to joining NETGEAR, Mr. Olson was at Hewlett-Packard Company, from July 1978 to January 2003, where he served as Director of Research and Development for ProCurve networking from 1998 to 2003, as Research and Development Manager for the Enterprise Netserver division from 1997 to 1998, and, in various other engineering management roles in Hewlett-Packard’s Unix server and personal computer product divisions prior to 1998. Mr. Olson received a B.S. degree in Electrical Engineering from the University of California, Davis and an M.B.A. from Santa Clara University.

Andrew W. Kimhas served as our Vice President, of Americas SalesLegal and Corporate Development and Corporate Secretary since December 2003. SinceOctober 2008 and as our Associate General Counsel from March 2008 to October 2008. Prior to joining us in 1998,NETGEAR, Mr. Werdann hasKim served as our United States DirectorSpecial Counsel in the Corporate and Securities Department of Sales, E-CommerceWilson Sonsini Goodrich & Rosati, a private law firm, where he represented public and DMRprivate technology companies in a wide range of matters, including mergers and acquisitions, debt and equity financing arrangements, securities law compliance and corporate governance from December 20022000 to 2003 and 2006 to 2008. In between his two terms at Wilson Sonsini Goodrich & Rosati, Mr. Kim served as our Eastern regional sales director from October 1998 to December 2002. Prior to joining us,Partner in the Business and Finance Department of the law firm Schwartz Cooper Chartered in Chicago, Illinois, and was an Adjunct Professor of Entrepreneurship at the Illinois Institute of Technology. Mr. Werdann worked for three years at Iomega Corporation, a computer hardware company, as a sales director for the value added reseller sector. Mr. WerdannKim holds a B.S. DegreeJ.D. from Cornell Law School, and received a B.A. degree in Communicationshistory from Seton HallYale University.

 

Item 1A.Risk Factors

Investing in our common stock involves a high degree of risk. The risks described below are not exhaustive of the risks that might affect our business. Other risks, including those we currently deem immaterial, may also impact our business. Any of the following risks could materially adversely affect our business operations, results of operations and financial condition and could result in a significant decline in our stock price.

Economic conditions are likely Before deciding to materially adversely affectpurchase, hold or sell our revenue and results of operations.

Our business has been and may continue to be affected by a number of factors that are beyond our control such as general geopolitical economic and business conditions, conditions in the financial services markets, and changes in the overall demand for networking products. A severe and/or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Uncertainty about current global economic conditions could cause businesses to postpone spending in response

to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for networking products.

The current economic crisis affecting the banking system and financial markets and the current uncertainty in global economic conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit, equity, currency and fixed income markets. There could be a number of follow-on effects from these economic developments and negative economic trends on our business, including the inability of customers to obtain credit to finance purchases of our products; customer insolvencies; decreased customer confidence to make purchasing decisions; decreased customer demand; and decreased customer ability to pay their trade obligations.

If conditions in the global economy, U.S. economy or other key vertical or geographic markets remain uncertain or weaken further, such conditions could have a material adverse impact on our business, operating results and financial condition. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business and results of operations.

We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could harm our financial results and cash flows.

Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our results of operations, financial position and cash flows. Although a portion of our international sales are currently invoiced in United States dollars, we have implemented and continue to implement for certain countries both invoicing and payment in foreign currencies. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales in Europe, Japan and Australia and certain parts of Asia and non-U.S. dollar denominated operating expenses incurred throughout the world. In addition, weaknesses in foreign currencies for U.S. dollar denominated sales could adversely affect demand for our products. Conversely, a strengthening in foreign currencies against the U.S. dollar could increase foreign currency denominated costs. As a result we may attempt to renegotiate pricing of existing contracts or request payment to be made in U.S. dollars. We cannot be sure that our customers would agree to renegotiate along these lines. This could result in customers eventually terminating contracts with us or in our decision to terminate certain contracts, which would adversely affect our sales.

We implemented a hedging program in November 2008 to hedge exposures to fluctuations in foreign currency exchange rates as a response tocommon stock, you should carefully consider the risks described in this section. This section should be read in conjunction with the consolidated financial statements and accompanying notes thereto, and Management’s Discussion and Analysis of changesFinancial Condition and Results of Operations included in the value of foreign currency denominated assets and liabilities. We may enter into foreign currency forward contracts or other instruments, the majority of which mature within approximately three months. Our foreign currency forward contracts reduce, but do not eliminate, the impact of currency exchange rate movements. For example, we do not execute forward contracts in all currencies in which we conduct business. In addition, our hedging program is not currently structured to reduce the impact, due to volatile exchange rates,this Annual Report on net revenues, gross profit and operating profit. Accordingly, the use of such hedging activities may not offset more than a portion of the adverse financial effect resulting from unfavorable movements in foreign exchange rates.Form 10-K.

We expect our operating results to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.

Our operating results are difficult to predict and may fluctuate substantially from quarter-to-quarter or year-to-year for a variety of reasons, many of which are beyond our control. If our actual revenueresults were to fall below our estimates or the expectations of public market analysts or investors, our quarterly and annual results would be negatively impacted and the price of our stock could decline. Other factors that could affect our quarterly and annual operating results include those listed in the risk factors section of this report and others such as:

 

changes in the pricing policies of or the introduction of new products by us or our competitors;

changesunanticipated shift or decline in the terms ofprofit by geographical region that would adversely impact our contracts with customers or suppliers that cause us to incur additional expenses or assume additional liabilities;tax rate;

 

slow or negative growth in the networking product, personal computer, Internet infrastructure, home electronics and related technology markets, as well as decreased demand for Internet access;

operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter;

geopolitical disruption leading to delay or even stoppage of our operations in manufacturing, transportation, technical support and research and development;

delay or failure of our service provider customers to purchase at the volumes that they forecast;

foreign currency exchange rate fluctuations in the jurisdictions where we transact sales and expenditures in local currency;

 

changes in or consolidation of our sales channels and wholesale distributor relationships or failure to manage our sales channel inventory and warehousing requirements;

 

delay or failure to fulfill orders for our products on a timely basis;

 

allowance for bad debts exposure with our existing customers and new customers, particularly as we expand into new international markets;

disruptions or delays related to our new financial and enterprise resource planning systems;

 

our inability to accurately forecast product demand;

component supply constraints from our vendors;

 

unfavorable level of inventory and turns;

 

unanticipated shift in overall product mix from higher to lower margin products that would adversely impact our margins;

 

unanticipated shiftterms of our contracts with customers or decline in profitsuppliers that cause us to incur additional expenses or assume additional liabilities;

the inability to maintain stable operations by geographical region that would adversely impact our tax rate;suppliers and other parties with which we have commercial relationships;

 

delays in the introduction of new products by us or market acceptance of these products;

 

an increase in price protection claims, redemptions of marketing rebates, product warranty and stock rotation returns or allowance for doubtful accounts;

 

litigation involving patent infringement;

epidemic or widespread product failure, or unanticipated safety issues, in one or more of our products;

challenges associated with integrating acquisitions that we make;make, or with realizing value from our strategic investments in other companies;

 

operational disruptions, such as transportation delays failure to effectively manage our third party customer support partners which may result in customer complaints and/or failure of our order processing system, particularly if they occur atharm to the end of a fiscal quarter;

delay or failure of our service provider customers to purchase at the volumes that we forecast;

foreign currency exchange rate fluctuations in the jurisdictions where we transact sales and expenditures in local currency;NETGEAR brand;

 

our customers’ inability to pay for purchased goodsmonitor and ensure compliance with our anti-corruption compliance program and domestic and international anti-corruption laws and regulations, whether in a timely fashion;relation to our employees or with our suppliers or customers;

 

bad debt exposurelabor unrest at facilities managed by our third-party manufacturers;

unanticipated increase in costs, including air freight, associated with shipping and delivery of our existing customersproducts;

our failure to implement and as we expand into new international markets;maintain the appropriate internal controls over financial reporting which may result in restatements of our financial statements; and

 

any changes in accounting rules.

As a result, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance. In addition, our future operating results may fall below the expectations of public market analysts or investors. In that event, our stock price could decline significantly.

Our stock price may be volatile and your investment in our common stock could suffer a decline in value.

With the continuing uncertainty about economic conditions in Europe, the United States and abroad,elsewhere internationally, there has been significant volatility in the market price and trading volume of securities of technology and other companies, which may be unrelated to the financial performance of these companies. These broad market fluctuations may negatively affect the market price of our common stock.

Some specific factors that may have a significant effect on our common stock market price include:

 

actual or anticipated fluctuations in our operating results or our competitors’ operating results;

 

actual or anticipated changes in the growth rate of the general networking sector, our growth rates or our competitors’ growth rates;

 

conditions in the financial markets in general or changes in general economic conditions;conditions, including government efforts to stabilize currencies;

interest rate or currency exchange rate fluctuations;

 

our ability or inability to raise additional capital;

our ability to report accurate financial results in our periodic reports filed with the SEC;

disclosures of previously non-public information in connection with our segment reporting, which commenced in the second fiscal quarter of 2011; and

 

changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally.

Some of our competitors have substantially greater resources than we do, and to be competitive we may be required to lower our prices or increase our sales and marketing expenses, which could result in reduced margins and loss of market share.

We compete in a rapidly evolving and highlyfiercely competitive market, and we expect competition to continue to be intense, including price competition. Our principal competitors in the smallcommercial business market include 3Com, Allied Telesyn,Telesys, Barracuda, Buffalo, Data Robotics, Dell, D-Link, Fortinet, Hewlett-Packard, Huawei, Cisco Systems, the Linksys division of Cisco Systems, QNAP Systems, Seagate Technology, SonicWALL, Synology, WatchGuard and SonicWALL.Western Digital. Our principal competitors in the home market for networking devices and television connectivity products include Apple, Belkin, D-Link, and the Linksys division of Cisco Systems.Systems, Roku and Western Digital. Our principal competitors in the broadband service provider market include Actiontec, ARRIS, Comtrend, D-Link, Hitron, Huawei, Motorola, Pace, Sagem, Scientific Atlanta—aAtlanta-a Cisco company, ZyXEL, ThomsonSMC Networks, TechniColor, Ubee, Compal Broadband, ZTE and 2Wire.ZyXEL. Other current and potential competitors include numerous local vendors such as Devolo, SiemensLEA and AVM in Europe, Corega and Melco in Japan and TP-Link in China. Our potential competitors also include other consumer electronics vendors, including LG Electronics, Microsoft, Panasonic, Samsung, Sony, Toshiba and Vizio, who could integrate networking and streaming capabilities into their line of products, such as televisions, set top boxes and gaming consoles, and our channel customers who may decide to offer self-branded networking products. We also face competition from service providers who may bundle a free networking device with their broadband service offering, which would reduce our sales if we are not the supplier of choice to those service providers. In the service provider space, we are also facing significant and increased competition from original design manufacturers, or ODM’s, and contract manufacturers who are selling and attempting to sell their products directly to service providers around the world.

Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources. These competitors may, among other things, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers, and exert more influence on sales channels than

we can. We anticipate that current and potential competitors will also intensify their efforts to penetrate our target markets. For example, price competition has intensifiedis intense in our industry.industry in certain geographical regions and product categories. Specifically in the service provider space, many of our competitors price their products significantly below our product costs in order to gain market share. Average sales prices have declined in the past and may continue toagain decline in the future. These competitors may have more advanced technology, more extensive distribution channels, stronger brand names, greater access to shelf space in retail locations, bigger promotional budgets and larger customer bases than we do. These companies could devote more capital resources to develop, manufacture and market competing products than we could. If any of these companies are successful in competing against us, our sales could decline, our margins could be negatively impacted and we could lose market share, any of which could seriously harm our business and results of operations.

Economic conditions are likely to materially adversely affect our revenue and results of operations.

Our business has been and may continue to be affected by a number of factors that are beyond our control such as general geopolitical, economic and business conditions, conditions in the financial services markets, and changes in the overall demand for networking products. A severe and/or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Continued uncertainty about current global economic conditions could cause businesses to postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for networking products.

The recent economic problems affecting the banking system and financial markets and the recent uncertainty in global economic conditions has resulted in a number of adverse effects including tightening in the credit markets, a low level of liquidity in many financial markets, extreme volatility in credit, equity, currency and fixed income markets, instability in the stock market and high unemployment. For example, the recent challenges faced by the European Union to stabilize some of its member economies, such as Greece, Portugal, Spain, Hungary and even Italy, has had international implications affecting the stability of global financial markets and hindering economies worldwide. Should the European Union monetary policy measures be insufficient to restore confidence and stability to the financial markets, the recovery of the global economy, including the U.S. and European Union economies where we have a significant presence, could be hindered or reversed, which could have a material adverse effect on us. There could also be a number of follow-on effects from these economic developments and negative economic trends on our business, including the inability of customers to obtain credit to finance purchases of our products; customer insolvencies; decreased customer confidence to make purchasing decisions; decreased customer demand; and decreased customer ability to pay their trade obligations.

If conditions in the global economy, including Europe and the U.S., or other key vertical or geographic markets remain uncertain or weaken further, such conditions could have a material adverse impact on our business, operating results and financial condition. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business and results of operations.

Our business is subject to the risks of international operations.

We derive a significant portion of our revenue from international operations. As a result, our financial condition and operating results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws, changes in the value of the U.S. dollar versus local currencies, and natural disasters. Margins on sales of our products in foreign countries, and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations and by international trade regulations. Additionally, certain foreign countries have complex regulatory requirements as conditions of doing business. For example, the United Kingdom Anti-Bribery Act of 2010 is broad legislation that prohibits bribery and applies to our operations

worldwide. This foreign legislation follows in the spirit of the U.S. Foreign Corrupt Practices Act and focuses additional governmental efforts on anticorruption efforts worldwide. Meeting these requirements may increase our operating expenses as we continue to expand internationally.

If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory, or lose sales from having too few products.

If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with our wholesale distributors and within our sales channels, we may incur increased and unexpected costs associated with this inventory. We generally allow wholesale distributors and traditional retailers to return a limited amount of our products in exchange for other products. Under our price protection policy, if we reduce the list price of a product, we are often required to issue a credit in an amount equal to the reduction for each of the products held in inventory by our wholesale distributors and retailers. If our wholesale distributors and retailers are unable to sell their inventory in a timely manner, we might lower the price of the products, or these parties may exchange the products for newer products. Also, during the transition from an existing product to a new replacement product, we must accurately predict the demand for the existing and the new product.

We determine production levels based on our forecasts of demand for our products. Actual demand for our products depends on many factors, which makes it difficult to forecast. We have experienced differences between our actual and our forecasted demand in the past and expect differences to arise in the future. If we improperly forecast demand for our products we could end up with too many products and be unable to sell the excess

inventory in a timely manner, if at all, or, alternatively we could end up with too few products and not be able to satisfy demand. This problem is exacerbated because we attempt to closely match inventory levels with product demand leaving limited margin for error. If these events occur, we could incur increased expenses associated with writing off excessive or obsolete inventory, lose sales, incur penalties for late delivery or have to ship products by air freight to meet immediate demand incurring incremental freight costs above the sea freight costs, a preferred method, and suffering a corresponding decline in gross margins.

Our business is subject to the risks of international operations.

We derive a significant portion of our revenue from international operations. As a result, our financial condition and operating results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries), and changes in the value of the U.S. dollar versus local currencies. Margins on sales of our products in foreign countries, and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations and by international trade regulations.

The average selling prices of our products typically decrease rapidly over the sales cycle of the product, which may negatively affect our gross margins.

Our products typically experience price erosion, a fairly rapid reduction in the average unit selling prices over their respective sales cycles. In order to sell products that have a falling average unit selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. To manage manufacturing costs, we must collaborate with our third party manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully manage the price paid for components used in our products. We must also successfully manage our freight and inventory costs to reduce overall product costs. We also need to continually introduce new products with higher sales prices and gross margins in order to maintain our overall gross margins. If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our net revenue and overall gross margin would likely decline.

We are currently involved in various litigation matters and may in the future become involved in additional litigation, including litigation regarding intellectual property rights, which could be costly and subject us to significant liability.

The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding infringement of patents, trade secrets and other intellectual property rights. In particular, leading companies in the data communications markets, some of which are competitors, have extensive patent portfolios with respect to networking technology. From time to time, third parties, including these leading companies, have asserted and may continue to assert exclusive patent, copyright, trademark and other intellectual property rights against us demanding license or royalty payments or seeking payment for damages, injunctive relief and other available legal remedies through litigation. These include third parties who claim to own patents or other intellectual property that cover industry standards that our products comply with. If we are unable to resolve these matters or obtain licenses on acceptable or commercially reasonable terms, we could be sued or we may be forced to initiate litigation to protect our rights. The cost of any necessary licenses could significantly harm our business, operating results and financial condition. Also, at any time, any of these companies, or any other third party could initiate litigation against us, or we may be forced to initiate litigation against them, which could divert management attention, be costly to defend or prosecute, prevent us from using or selling the challenged technology, require us to design around the challenged technology and cause the price of our stock to decline. In addition, third parties, some of whom are potential competitors, have initiated and may continue to initiate litigation against our manufacturers, suppliers, members of our sales channels or our service provider customers, alleging infringement of their proprietary rights with respect to existing or future products. In the event successful claims of infringement are brought by third parties, and we are unable to obtain licenses or independently develop alternative technology on a timely basis, we may be subject to indemnification

obligations, be unable to offer competitive products, or be subject to increased expenses. Finally, consumer class- action lawsuits related to the marketing and performance of our home networking products have been asserted and may in the future be asserted against us. For additional information regarding certain of the lawsuits in which we are involved, see the information set forth under Note 8 of the Notes to Consolidated Financial Statements in Part IV, Item 15 of this report, which information is incorporated into this Item 1A by reference. If we do not resolve these claims on a favorable basis, our business, operating results and financial condition could be significantly harmed.

If our products contain defects or errors, we could incur significant unexpected expenses, experience product returns and lost sales, experience product recalls, suffer damage to our brand and reputation, and be subject to product liability or other claims.

Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new versions are released. The industry standards upon which many of our products are based are also complex, experience change over time and may be interpreted in different manners. Some errors and defects may be discovered only after a product has been installed and used by the end-user. For example, in January 2008, we announced a voluntary recall of the XE103 Powerline Ethernet Adapter made for Europe and other countries using 220-240 volt power sources and sold individually or in a bundled kit. If our products contain defects or errors, or are found to be noncompliant with industry standards, we could experience decreased sales and increased product returns, loss of customers and market share, and increased service, warranty and insurance costs. In addition, our reputation and brand could be damaged, and we could face legal claims regarding our products. A product liability or other claim could result in negative publicity and harm our reputation, resulting in unexpected expenses and adversely impact our operating results. For instance, if a third party were able to successfully overcome the security measures in our products, such a person or entity could misappropriate customer data, third party data stored by our customers and other information, including intellectual property. In addition, the operations of our end user customers may be interrupted. If that happens, affected end-users or others may file actions against us alleging product liability, tort, or breach of warranty claims.

If we fail to continue to introduce new products that achieve broad market acceptance on a timely basis, we will not be able to compete effectively and we will be unable to increase or maintain net revenue and gross margins.

We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products that achieve broad market acceptance in the small business and home markets.acceptance. Our future success will depend in large part upon our ability to identify demand trends in the smallcommercial business, retail, and homeservice provider markets and quickly develop, manufacture and sell products that satisfy these demands in a cost effective manner. In order to differentiate our products from our competitors’ products, we must continue to increase our focus and capital investment in research and development, including software development. Successfully predicting demand trends is difficult, and it is very difficult to predict the effect introducing a new product will have on existing product sales. We will also need to respond effectively to new product announcements by our competitors by quickly introducing competitive products.

We have experienced delays and quality issues in releasing new products in the past, which resulted in lower quarterly net revenue than expected. In addition, we have experienced, and may in the future experience, product introductions that fall short of our projected rates of market adoption. Any future delays in product development and introduction or product introductions that do not meet broad market acceptance could result in:

 

loss of or delay in revenue and loss of market share;

 

negative publicity and damage to our reputation and brand;

 

a decline in the average selling price of our products;

adverse reactions in our sales channels, such as reduced shelf space, reduced online product visibility, or loss of sales channel; and

 

increased levels of product returns.

Throughout 2010 and 2011, we have significantly increased the rate of our new product introductions. If we cannot sustain the rapid pace of innovation, we may not be able to maintain or increase the market share of our products. In addition, if we are unable to successfully introduce new products with higher gross margins, our net revenue and overall gross margin would likely decline.

We obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements, we may lose sales and experience increased component costs.

Any shortage or delay in the supply of key product components would harm our ability to meet scheduled product deliveries. Many of the semiconductors used in our products are specifically designed for use in our products and are obtained from sole source suppliers on a purchase order basis. In addition, some components that are used in all our products are obtained from limited sources. These components include connector jacks, plastic casings and physical layer transceivers. We also obtain switching fabric semiconductors, which are used in our Ethernet switches and Internet gateway products, and wireless local area network chipsets, which are used in all of our wireless products, from a limited number of suppliers. Semiconductor suppliers have experienced and continue to experience component shortages themselves, such as with substrates used in manufacturing chipsets, which in turn adversely impact our ability to procure semiconductors from them. Our third-party manufacturers generally purchase these components on our behalf on a purchase order basis, and we do not have any contractual commitments or guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain an adequate number of that component in a timely manner. In addition, if worldwide demand for the components increases significantly, the availability of these components could be limited. Further, our suppliers may experience financial or other difficulties as a result of uncertain and weak worldwide economic conditions. It could be difficult, costly and time consuming to obtain alternative sources for these components, or to change product designs to make use of alternative components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in component availability that would have a significant impact on our ability to fulfill orders for our products.

If we are unable to obtain a sufficient supply of components, or if we experience any interruption in the supply of components, our product shipments could be reduced or delayed or our cost of obtaining these components may increase. Component shortages and delays affect our ability to meet scheduled product deliveries, damage our brand and reputation in the market, and cause us to lose sales and market share. For example, component shortages in the fourth quarter of 2009 limited our ability to supply all the worldwide demand for our products and our revenue was affected.

Another example relates to the recent record flooding in Thailand in the third quarter of 2011. Many major manufacturers of hard disk drives and their component suppliers maintain significant operations in Thailand in areas affected by the flooding. These include most, if not all, of our direct and indirect suppliers of hard disk drives for our ReadyNAS product line. All of our major direct and indirect suppliers of hard disk drives informed us that our supply chain would be constrained for an indefinite amount of time, in some cases up to six months. Some have therefore declared a force majeure event and have stated that, in addition to and because of the supply constraints, pricing for hard disk drives has and will likely continue to increase significantly until they are able to stabilize the situation. We experienced increased prices in the cost of hard disk drives and we believe those increases may continue. As a result, the Company ceased accepting any additional orders containing ReadyNAS products with hard disk drives at then current prices and all shipments of ReadyNAS products with hard disk drives were placed on hold. In addition, all sales and marketing promotions involving ReadyNAS products were and continue to be terminated indefinitely. Further, the Company declared the existence of a force majeure event under our contracts with certain customers. Accordingly, our business was harmed.

In addition, the earthquakes in Northern Japan in March 2011 and the resultant nuclear threats and tsunamis created uncertainty of supply for certain components and raw materials for our products. We have made alternative arrangements and have planned accordingly but there is no guarantee that our ancillary planning will be effective to maintain production of our products.

The average selling prices of our products typically decrease rapidly over the sales cycle of the product, which may negatively affect our net revenue and gross margins.

Our products typically experience price erosion, a fairly rapid reduction in the average unit selling prices over their respective sales cycles. In order to sell products that have a falling average unit selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. To manage manufacturing costs, we must collaborate with our third-party manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully manage the price paid for components used in our products. We must also successfully manage our freight and inventory costs to reduce overall product costs. We also need to continually introduce new products with higher sales prices and gross margins in order to maintain our overall gross margins. If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our net revenue and overall gross margin would likely decline.

Changes in tax rates, adverse changes in tax laws or exposure to additional income tax liabilities could affect our future profitability.

Factors that could materially affect our future effective tax rates include but are not limited to:

Changes in the regulatory environment;

Changes in accounting and tax standards or practices

Changes in the composition of operating income by tax jurisdiction; and

Our operating results before taxes.

We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rate has fluctuated in the past and may fluctuate in the future. Future effective tax rates could be affected by changes in the composition of earnings in countries with differing tax rates, changes in deferred tax assets and liabilities, or changes in tax laws.

We are also subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities, including state revenue agencies and foreign governments. In 2011, the IRS commenced an examination of the Company’s 2008 and 2009 tax years. While we regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the IRS and other tax authorities to determine the adequacy of our provision for income taxes, there can be no assurance that the actual outcome resulting from these examinations will not materially adversely affect our financial condition and operating results. Additionally, the IRS and other tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products and services and the use of intangible assets. Tax authorities could disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. Any such disagreements may affect our profitability.

We are subject to, and must remain in compliance with, numerous governmental regulations concerning the manufacturing and use of our products, as well as any such future regulations. Some of our customers also require that we comply with their own unique requirements relating to these matters. Any failure to comply with such regulations and requirements, and any associated unanticipated costs, may adversely affect our business, financial condition and results of operations.

We manufacture and sell products which contain electronic components, and such components may contain materials that are subject to government regulation in both the locations that we manufacture and assemble our

products, as well as the locations where we sell our products. For example, certain regulations limit the use of lead in electronic components. To the best of our knowledge, we maintain compliance with all current government regulations concerning the materials utilized in our products, for all the locations in which we operate. Since we operate on a global basis, this is a complex process which requires continual monitoring of regulations and an ongoing compliance process to ensure that we and our suppliers are in compliance with all existing regulations. There are areas where future regulations may be enacted which could increase our cost of the components that we utilize or require us to expend additional resources to ensure compliance. For example, the Securities and Exchange Commission has proposed new rules in December 2010 regarding investigation and disclosure of the use of certain “conflict materials” in our products and final rules may be forthcoming in the first half of 2012. If final rules are adopted, we contemplate that the rules may apply to our business and accordingly, we may need to expend additional resources to ensure compliance. While we do not currently know of any other proposed regulation regarding components in our products which would have a material impact on our business, if there is an unanticipated new regulation which significantly impacts our use of various components or requires more expensive components, that would have a material adverse impact on our business, financial condition and results of operations.

One area which has a large number of regulations is the environmental area. Environmental areas such as pollution and climate change have had significant legislative and regulatory efforts on a global basis, and there are expected to be additional changes to the regulations in these areas. These changes could directly increase the cost of energy which may have an impact on the way we manufacture products or utilize energy to produce our products. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials we use in our products. Other regulations in the environmental area may require us to continue to monitor and ensure proper disposal or recycling of our products. While future changes in regulations appears likely, we are currently unable to predict how any such changes will impact us and if such impacts will be material to our business. If there is a new law or regulation that significantly increases our costs of manufacturing or causes us to significantly alter the way that we manufacture our products, this would have a material adverse affect on our business, financial condition and results of operations.

In addition to government regulations, many of our customers require us to comply with their own requirements regarding manufacturing, health and safety matters, employee treatment, anti-corruption, use of materials and environmental concerns. Some customers may require us to periodically report on compliance with their unique requirements, and some customers reserve the right to audit our business for compliance. We are increasingly subject to requests for compliance with these customer requirements. For example, there has been significant focus from our customers as well as the press regarding corporate social responsibility policies. We regularly audit our manufacturers. However, any deficiencies in compliance by our manufacturers may harm our business and our brand. In addition, we may not have the resources to maintain compliance with these customer requirements and failure to comply may result in decreased sales to these customers, which may have a material adverse affect on our business, financial condition and results of operations.

We rely on a limited number of retailers and wholesale distributors for most of our sales, and if they refuse to pay our requested prices or reduce their level of purchases, our net revenue could decline.

We sell a substantial portion of our products through retailers, including Best Buy Co., Inc. and its affiliates, and wholesale distributors, including Ingram Micro, Inc. and Tech Data Corporation. We expect that a significant portion of our net revenue will continue to come from sales to a small number of retailers and wholesale distributors for the foreseeable future. In addition, because our accounts receivable are concentrated with a small group of purchasers, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow. We are also exposed to increased credit risk if any one of these limited numbers of retailers and wholesale distributors fails or becomes insolvent. We generally have no minimum purchase commitments or long-term contracts with any of these retailers or distributors. These purchasers could decide at any time to discontinue, decrease or delay their purchases of our products. These customers have a variety of suppliers to choose from and therefore can make substantial demands on us, including demands on product pricing and on contractual terms, which often results in the allocation of risk to us as the supplier. Accordingly, the prices that they pay for our products are subject to negotiation and could change at any time. Our ability to maintain strong relationships with

our principal customers is essential to our future performance. If any of our major retailers or wholesale distributors reduce their level of purchases or refuse to pay the prices that we set for our products, our net revenue and operating results could be harmed. If our retailers or wholesale distributors increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demands would be compromised.

Additionally, if there is consolidation among our customer base, certain customers may be able to command increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross margins are diminished, we could decide not to sell our products to a particular customer, which could result in a decrease in our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replacement of our products with those of our competitors and cancellations of orders, each of which would harm our operating results.

We depend on large, recurring purchases from certain significant customers, and a loss, cancellation or delay in purchases by these customers could negatively affect our revenue.

The loss of recurring orders from any of our more significant customers could cause our revenue and profitability to suffer. Our ability to attract new customers will depend on a variety of factors, including the cost-effectiveness, reliability, scalability, breadth and depth of our products. In addition, a change in the mix of our customers, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margins. During the year ended December 31, 2011, sales to Best Buy and its affiliates accounted for approximately 11% of our net revenue and sales to Ingram Micro and its affiliates accounted for approximately 10% of our net revenue. During the year ended December 31, 2010, sales to Best Buy and its affiliates accounted for approximately 15% of our net revenue and sales to Ingram Micro and its affiliates accounted for approximately 11% of our net revenue. While these customers each accounted for approximately 10% or greater than 10% of our net revenue during the year ended December 31, 2011, there is no assurance that either of them will continue to purchase our products at the same rate for any future periods.

Although our financial performance may depend on large, recurring orders from certain customers and resellers, we do not generally have binding commitments from them. For example:

our reseller agreements generally do not require substantial minimum purchases;

our customers can stop purchasing and our resellers can stop marketing our products at any time; and

our reseller agreements generally are not exclusive.

Further, our revenue may be impacted by significant one-time purchases which are not contemplated to be repeatable, such as the one-time approximately $10 million dollar order from a service provider customer in the second fiscal quarter of 2011. While such purchases are reflected in our financial statements, we do not rely on and do not forecast for continued significant one-time purchases. As a result, lack of repeatable one-time purchases will adversely affect our revenue.

Because our expenses are based on our revenue forecasts, a substantial reduction or delay in sales of our products to, or unexpected returns from, customers and resellers, or the loss of any significant customer or reseller, could harm or otherwise disrupt our business. Although our largest customers may vary from period to period, we anticipate that our operating results for any given period will continue to depend on large orders from a small number of customers.

We depend substantially on our sales channels, and our failure to maintain and expand our sales channels would result in lower sales and reduced net revenue.

To maintain and grow our market share, net revenue and brand, we must maintain and expand our sales channels. We sell our products through ourOur sales channels which consistsconsist of traditional retailers, online retailers, DMRs, VARs, and broadband

service providers. Some of these entities purchase our products through our wholesale distributors.distributor customers. We generally have no minimum purchase commitments or long-term contracts with any of these third parties.

Traditional retailers have limited shelf space and promotional budgets, and competition is intense for these resources. If the networking sector does not experience sufficient growth, retailers may choose to allocate more shelf space to other consumer product sectors. A competitor with more extensive product lines and stronger brand identity, such as Cisco Systems, may have greater bargaining power with these retailers. Any reduction in available shelf space or increased competition for such shelf space would require us to increase our marketing expenditures simply to maintain current levels of retail shelf space, which would harm our operating margin. The recent trend in the consolidation of online retailers and DMR channels has resulted in intensified competition for preferred product placement, such as product placement on an online retailer’s Internet home page. Expanding our presence in the VAR channel may be difficult and expensive. We compete with established companies that have longer operating histories and longstanding relationships with VARs that we would find highly desirable as sales channel partners. We have limited experiencealso sell products to broadband service providers. Competition for selling to broadband service providers.providers is intense. Penetrating service provider accounts typically involves a long sales cycle and the challenge of displacing incumbent suppliers with established relationships and field-deployed products. If we were unable to maintain and expand our sales channels, our growth would be limited and our business would be harmed.

We must also continuously monitor and evaluate emerging sales channels. If we fail to establish a presence in an important developing sales channel, our business could be harmed.

We depend on a limited number of third-party manufacturers for substantially all of our manufacturing needs. If these third-party manufacturers experience any delay, disruption or quality control problems in their operations, we could lose market share and our brand may suffer.

All of our products are manufactured, assembled, tested and generally packaged by a limited number of original design manufacturers (“ODMs��) and original equipment manufacturers (“OEMs”). We rely on our manufacturers to procure components and, in some cases, subcontract engineering work. Some of our products are manufactured by a single manufacturer. We do not have any long-term contracts with any of our third-party manufacturers. Some of these third-party manufacturers produce products for our competitors. Due to weak economic conditions, the viability of some of these third-party manufacturers may be at risk. Our ODM’s are increasingly refusing to work with us on certain projects, such as projects for manufacturing products for our service provider customers. Because our service providers command significant resources, including for software support, and demand extremely competitive pricing, our ODM’s are starting to refuse to engage on service provider terms. The loss of the services of any of our primary third-party manufacturers could cause a significant disruption in operations and delays in product shipments. Qualifying a new manufacturer and commencing volume production is expensive and time consuming. As we contemplate moving manufacturing into different jurisdictions, we will be subject to additional significant challenges in ensuring that quality, processes and costs, among other issues, are consistent with our expectations. For example, while we expect our manufacturers to be responsible for penalties assessed on us because of excessive failures of the products, there is no assurance that we will be able to collect such reimbursements from these manufacturers, which causes us to take on additional risk for potential failures of our products.

Our reliance on third-party manufacturers also exposes us to the following risks over which we have limited control:

unexpected increases in manufacturing and repair costs;

inability to control the quality and reliability of finished products;

inability to control delivery schedules;

potential lack of adequate capacity to manufacture all or a part of the products we require; and

potential labor unrest affecting the ability of the third-party manufacturers to produce our products.

All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our ODMs and OEMs are primarily responsible for obtaining most regulatory approvals for our products. If our ODMs and OEMs fail to obtain timely domestic or foreign regulatory approvals or certificates, we would be unable to sell our products and our sales and profitability could be reduced, our relationships with our sales channel could be harmed, and our reputation and brand would suffer.

Specifically, substantially all of our manufacturing occurs in mainland China and any disruptions from natural disasters, health epidemics and political, social and economic instability would affect the ability of our ODMs to manufacture our products. In addition, our ODM’s in China have continued to increase our costs of production, particularly in 2010 and 2011. These increased costs have affected our margins and ability to lower prices for our products to stay competitive. Recent labor unrest in China may also affect our ODMs as workers may strike and cause production delays. If our ODMs and OEMs fail to maintain good relations with their employees or contractors, and production and manufacturing of our products is affected, then we may be subject to shortages of products and quality of products delivered may be affected. Further, if our manufacturers or warehousing facilities are disrupted or destroyed, we would have no other readily available alternatives for manufacturing our products and our business would be significantly harmed.

If we lose the services of our Chairman and Chief Executive Officer, Patrick C.S. Lo, or our other key personnel, we may not be able to execute our business strategy effectively.

Our future success depends in large part upon the continued services of our key technical, sales, marketing, finance and senior management personnel. In particular, the services of Patrick C.S. Lo, our Chairman and Chief Executive Officer, who has led our company since its inception, are very important to our business. We do not maintain any key person life insurance policies. The loss of any of our senior management or other key research, development, sales or marketing personnel, particularly if lost to competitors, could harm our ability to implement our business strategy and respond to the rapidly changing needs of the commercial business, consumer, and service provider markets. While we have adopted an emergency succession plan for the short term, we have not formally adopted a long term succession plan. As a result, if we suffer the loss of services of any key executive, our long term business results may be harmed. In addition, because we do not have a formal long term succession plan, we may not be able to have the proper personnel in place to effectively execute our long term business strategy if Patrick Lo or other key personnel retire, resign or are otherwise terminated.

We are currently involved in numerous litigation matters and may in the future become involved in additional litigation, including litigation regarding intellectual property rights, which could be costly and subject us to significant liability.

The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding infringement of patents, trade secrets and other intellectual property rights. In particular, leading companies in the data communications markets, some of which are our competitors, have extensive patent portfolios with respect to networking technology. From time to time, third parties, including these leading companies, have asserted and may continue to assert exclusive patent, copyright, trademark and other intellectual property rights against us demanding license or royalty payments or seeking payment for damages, injunctive relief and other available legal remedies through litigation. These also include third-party non-practicing entities who claim to own patents or other intellectual property that cover industry standards that our products comply with. If we are unable to resolve these matters or obtain licenses on acceptable or commercially reasonable terms, we could be sued or we may be forced to initiate litigation to protect our rights. The cost of any necessary licenses could significantly harm our business, operating results and financial condition. We may also choose to join defensive patent aggregation services in order to prevent or settle litigation against such non-practicing entities and avoid the associated significant costs and uncertainties of litigation. These patent aggregation services may obtain, or have previously obtained, licenses for the alleged patent infringement claims against us and other patent assets that could be used offensively against us. The costs of such defensive patent aggregation services, while potentially lower than the costs of litigation, may be

significant as well. At any time, any of these non-practicing entities, or any other third-party could initiate litigation against us, or we may be forced to initiate litigation against them, which could divert management attention, be costly to defend or prosecute, prevent us from using or selling the challenged technology, require us to design around the challenged technology and cause the price of our stock to decline. In addition, third parties, some of whom are potential competitors, have initiated and may continue to initiate litigation against our manufacturers, suppliers, members of our sales channels or our service provider customers, alleging infringement of their proprietary rights with respect to existing or future products. In the event successful claims of infringement are brought by third parties, and we are unable to obtain licenses or independently develop alternative technology on a timely basis, we may be subject to indemnification obligations, be unable to offer competitive products, or be subject to increased expenses. Finally, consumer class-action lawsuits related to the marketing and performance of our home networking products have been asserted and may in the future be asserted against us. For additional information regarding certain of the lawsuits in which we are involved, see the information set forth under Note 9,Commitments and Contingencies,in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. If we do not resolve these claims on a favorable basis, our business, operating results and financial condition could be significantly harmed.

We will be investing increased additional in-house resources on software research and development, which could disrupt our ongoing business and present risks not originally contemplated.

We plan to continue to evolve our historically hardware-centric business model towards a model that includes more software offerings. As such, we will further evolve the focus of our organization towards the delivery of more integrated hardware and software solutions for our customers. While we have invested in software development in the past, we will be expending additional resources in this area in the future. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenue to offset liabilities assumed and expenses associated with the strategy, inadequate return on capital, and unidentified issues not discovered in our due diligence. Software development is inherently risky for a company such as ours with a historically hardware-centric business model, and accordingly, our efforts in software development may not be successful. This initiative for increased investment in software research and development may materially adversely affect the Company’s financial condition and operating results.

We may spend a proportionately greater amount on software research and development in the future. If the Company cannot proportionately decrease our cost structure in response to competitive price pressures, our gross margin and, therefore, our profitability could be adversely affected. In addition, if our software solutions, pricing and other factors are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our revenue and prospects.

Software research and development is complex. We must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products and services. We must accurately forecast mixes of software solutions and configurations that meet customer requirements, and we may not succeed at doing so within a given product’s life cycle or at all. Any delay in the development, production or marketing of a new software solution could result in us not being among the first to market, which could further harm our competitive position. In addition, our regular testing and quality control efforts may not be effective in controlling or detecting all quality issues and defects. We may be unable to determine the cause, find an appropriate solution or offer a temporary fix to address defects. Finding solutions to quality issues or defects can be expensive and may result in additional warranty, replacement and other costs, adversely affecting our profits. If new or existing customers have difficulty with our software solutions or are dissatisfied with our services, our operating margins could be adversely affected, and we could face possible claims if we fail to meet our customers’ expectations. In addition, quality issues can impair our relationships with new or existing customers and adversely affect our brand and reputation, which could adversely affect our operating results.

We are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could impact investor confidence in the reliability of our internal controls over financial reporting.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. Such report must contain among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.

During the second quarter of fiscal 2009, in connection with the restatement of our previously issued financial statements for the period ended March 29, 2009, and our assessment of our disclosure controls and procedures, management concluded that as of March 29, 2009, our disclosure controls and procedures were not effective and that we had a material weakness in internal control over financial reporting. The material weakness related to the accounting for income taxes. Specifically, we did not maintain a sufficient complement of tax personnel with the required proficiency to identify, evaluate, review, and report complex tax accounting matters. In order to remediate the material weakness, we hired additional personnel in the tax department with sufficient knowledge and experience in tax to strengthen the controls around the tax provision. We also engaged tax specialists to assist us in the preparation and review of the income tax provision. As a result of these actions, management has concluded that we have remediated the material weakness related to income taxes as of December 31, 2009.

Continued performance of the system and process documentation and evaluation needed to comply with Section 404 is both costly and challenging. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective as of the end of a fiscal year or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which may have an adverse effect on our stock price.

If our products contain defects or errors, we could incur significant unexpected expenses, experience product returns and lost sales, experience product recalls, suffer damage to our brand and reputation, and be subject to product liability or other claims.

Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new versions are released. The industry standards upon which many of our products are based are also complex, experience change over time and may be interpreted in different manners. Some errors and defects may be discovered only after a product has been installed and used by the end-user. For example, in January 2008, we announced a voluntary recall of the XE103 Powerline Ethernet Adapter made for Europe and other countries using 220-240 volt power sources and sold individually or in a bundled kit.

In addition, epidemic failure clauses are found in certain of our customer contracts, especially contracts with service providers. If invoked, these clauses may entitle the customer to return for replacement or obtain credits for products and inventory, as well as assess liquidated damage penalties and terminate an existing contract and cancel future or then current purchase orders. In such instances, we may also be obligated to cover significant costs incurred by the customer associated with the consequences of such epidemic failure, including freight and transportation required for product replacement and out-of-pocket costs for truck rolls to end user sites to collect the defective products. Costs or payments we make in connection with an epidemic failure may materially adversely affect our results of operations and financial condition. If our products contain defects or errors, or are found to be noncompliant with industry standards, we could experience decreased sales and increased product returns, loss of customers and market share, and increased service, warranty and insurance costs. In addition, our reputation and brand could be damaged, and we could face legal claims regarding our products. A product liability or other claim could result in negative publicity and harm to our reputation, resulting in unexpected

expenses and adversely impacting our operating results. For instance, if a third party were able to successfully overcome the security measures in our products, such a person or entity could misappropriate customer data, third party data stored by our customers and other information, including intellectual property. In addition, the operations of our end-user customers may be interrupted. If that happens, affected end-users or others may file actions against us alleging product liability, tort, or breach of warranty claims.

If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products and our operating expenses could increase.

We are highly dependent upon the transportation systems we use to ship our products, including surface and air freight. Our attempts to closely match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. On a quarterly basis, our shipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation network in the latter half of a quarter will likely have a more material effect on our business than at the beginning of a quarter.

The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or terrorism, natural disasters and congestion resulting from higher shipping volumes. Labor disputes among freight carriers and at ports of entry are common, particularly in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. Our international freight is regularly subjected to inspection by governmental entities. If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time would be materially adversely affected and result in delayed or lost revenue as well as customer imposed penalties. In addition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our products by air freight is greater than other methods. From time to time in the past, including in the fourth quarter of 2009, we have shipped products using extensive air freight to meet unexpected spikes in demand, shifts in demand between product categories and to bring new product introductions to market quickly. If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost of freight could severely disrupt our business and harm our operating results.

We are exposed to the credit risk of some of our customers and to credit exposures in weakened markets, which could result in material losses.

MostA substantial portion of our sales are on an open credit basis, with typical payment terms of 30 to 60 days in the United States and, because of local customs or conditions, longer in some markets outside the United States. We monitor individual customer financial viability in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts.

In the past, there have been bankruptcies amongst our customer base. Although any resulting loss has not been material to date, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. To the degree that the recent turmoil in the credit markets makes it more difficult for some customers to obtain financing, our customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.

If we fail to successfully overcome the challenges associated with profitably growing our broadband service provider sales channel, our net revenue and gross profit will be negatively impacted.

We sell a substantial portion of our products through broadband service providers worldwide. Our service provider business unit accounted for a significant portion of our growth in 2011. We face a number of challenges associated with penetrating, marketing and selling to the broadband service provider channel that differ from what we have traditionally faced with the other channels. TheseDifficulties and challenges in selling to service providers include a longer sales cycle, more stringent product testing and validation requirements, a higher level of customization demands, requirements that suppliers take on a larger share of the risk with respect to

contractual business terms, competition from established suppliers, pricing pressure resulting in lower gross margins, and irregular and unpredictable ordering habits. For example, even if we have a product which a service provider customer may wish to purchase, we may choose not to supply products to the potential service provider customer if the contract requirements, such as service level requirements, penalties, and liability provisions, are too onerous. Accordingly, our general inexperiencebusiness may be harmed and our revenues may be reduced. In addition, because our service providers command significant resources, including for software support, and demand extremely competitive pricing, our ODM’s are starting to refuse to engage on service provider terms. Accordingly, as our ODM’s increasingly decline to take orders for manufacturing our service provider products, our service provider business will be harmed.

Further, as the deployment of DOCSIS 3.0 technology by broadband service providers increases worldwide during 2011 and 2012, we anticipate competing in selling to service providers.an extremely price sensitive market and our margins may be affected. Orders from service providers generally tend to be large but sporadic, which causes our revenues from them to fluctuate and challenges our ability to accurately forecast demand from them. In particular, managing inventory and production of our products for our service provider customers is a challenge. Many of our service provider customers have irregular purchasing requirements. These customers may decide to cancel orders for customized products specific to that customer, and we may not be able to reconfigure and sell those products in other channels. In addition, these customers may issue unforecasted orders for products which we may not be able to produce in a timely manner and as such, we may not be able to accept and deliver on such unforecasted orders. In certain cases, we may commit to fixed pricefixed-price, long term purchase orders, with such orders

priced in foreign currencies which could lose value over time in the event of adverse changes in foreign exchange rates. Even if we are selected as a supplier, typically a service provider will also designate a second source supplier, which over time will reduce the aggregate orders that we receive from that service provider. For example, we have been at the forefront of developing and selling DOCSIS 3.0 products to our service provider customers in 2010 and 2011. As our competitors develop DOCSIS 3.0 products, our service provider customers may use these competitor products as an alternate source for this technology. Our service provider customers may then require us to lower our prices or they may choose to purchase more DOCSIS 3.0 products from our competitors. Accordingly, our business may be harmed and our revenues may be reduced.

If we were to lose a service provider customer for any reason, we may experience a material and immediate reduction in forecasted revenue that may cause us to be below our net revenue and operating margin guidanceexpectations for a particular period of time and therefore adversely affect our stock price. For example, many of our competitors in the service provider space aggressively price their products in order to gain market share. We may not be able to match the lower prices offered by our competitors. Many of the service provider customers will seek to purchase from the lowest cost provider, notwithstanding that our products may be higher quality or our products were previously validated for use on their proprietary network. Accordingly, we may lose customers who have lower, more aggressive pricing and our revenues may be reduced. In addition, service providers may choose to prioritize the implementation of other technologies or the roll out of other services than home networking. Weakness in orders from this industry could have a material adverse effect on our business, operating results, and financial condition. We have seen a slowdownslowdowns in capital expenditures by certain of our service provider customers in the past, and believe there may be potential for a broader slowdownsimilar slowdowns in the global service provider marketin the next few quarters.future. Any slowdown in the general economy, over capacity,supply, consolidation among service providers, regulatory developments and constraint on capital expenditures could result in reduced demand from service providers and therefore adversely affect our sales to them. If we do not successfully overcome these challenges, we will not be able to profitably grow our service provider sales channel and our growth will be slowed.

We obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements, we may lose sales and experience increased component costs.

Any shortage or delay in the supply of key product components would harm our ability to meet scheduled product deliveries. Many of the semiconductors used in our products are specifically designed for use in our products and are obtained from sole source suppliers on a purchase order basis. In addition, some components that are used in all our products are obtained from limited sources. These components include connector jacks, plastic casings and physical layer transceivers. We also obtain switching fabric semiconductors, which are used in our Ethernet switches and Internet gateway products, and wireless local area network chipsets, which are used in all of our wireless products, from a limited number of suppliers. Semiconductor suppliers have experienced and continue to experience component shortages themselves, such as with substrates used in manufacturing chipsets, which in turn adversely impact our ability to procure semiconductors from them. Our third party manufacturers generally purchase these components on our behalf on a purchase order basis, and we do not have any contractual commitments or guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain an adequate number of that component in a timely manner. In addition, if our suppliers experience financial or other difficulties or if worldwide demand for the components they provide increases significantly, the availability of these components could be limited. It could be difficult, costly and time consuming to obtain alternative sources for these components, or to change product designs to make use of alternative components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in component availability that would have a significant impact on our ability to fulfill orders for our products. If we are unable to obtain a sufficient supply of components, or if we experience any interruption in the supply of components, our product shipments could be reduced or delayed. This would affect our ability to meet scheduled product deliveries, damage our brand and reputation in the market, and cause us to lose market share.

As part of growing our business, we have made and expect to continue to make acquisitions. If we fail to successfully select, execute or integrate our acquisitions, or if stock market analysts or our stockholders do not support the acquisitions that we choose to execute, then our business and operating results could be harmed and our stock price could decline.

From time to time, we will undertake acquisitions to add new product lines and technologies, gain new sales channels or enter into new sales territories. For example, we closed our acquisition of the Customer Networking

Solutions division of Westell Technologies, Inc. in April 2011. Acquisitions involve numerous risks and challenges, including but not limited to the following:

 

integrating the companies, assets, systems, products, sales channels and personnel that we acquire;

 

growing or maintaining revenues to justify the purchase price and the increased expenses associated with acquisitions;

entering into territories or markets that we have limited or no prior experience with;

 

establishing or maintaining business relationships with customers, vendors and suppliers who may be new to us;

 

overcoming the employee, customer, vendor and supplier turnover that may occur as a result of the acquisition; and

 

diverting management’s attention from running the day to day operations of our business.business; and

potential post- closing disputes.

As part of undertaking an acquisition, we may also significantly revise our capital structure or operational budget, such as issuing common stock that would dilute the ownership percentage of our stockholders, assuming liabilities or debt, utilizing a substantial portion of our cash resources to pay for the acquisition or significantly increasing operating expenses. Our acquisitions have resulted and may in the future result in charges being taken in an individual quarter as well as future periods, which results in variability in our quarterly earnings. In addition, our effective tax rate in any particular quarter may also be impacted by acquisitions. Following the closing of an acquisition, we may also have disputes with the seller regarding contractual requirements and covenants. Any such disputes may be time consuming and distract management from other aspects of our business.

As part of the terms of acquisition, we may commit to pay additional contingent consideration if certain revenue or other performance milestones are met. We are required to evaluate the fair value of such commitments at each reporting date and adjust the amount recorded if there are changes to the fair value.

We cannot assure youensure that we will be successful in selecting, executing and integrating acquisitions. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. In addition, if stock market analysts or our stockholders do not support or believe in the value of the acquisitions that we choose to undertake, our stock price may decline.

We have recently upgradedinvest in companies for both strategic and financial reasons, but may not realize a return on our financial, demand planning and operational management systems. If we experience problems with the initial deployment and operation of these new systems, our business and operations will be adversely affected.investments in every instance.

We have recently upgradedmade, and continue to seek to make, investments in companies around the world to further our strategic objectives and support our key business initiatives. These investments may include equity or debt instruments of public or private companies, and may be non-marketable at the time of our initial investment. We do not restrict the types of companies in which we seek to invest. These companies may range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. If any company in which we invest fails, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for an equity or debt investment in a public or private company in which we have invested, we will have to write down the investment to its fair value and recognize the related write-down as an investment loss. The performance of any of these investments could result in significant impairment charges and gains (losses) on other equity investments. We must also analyze accounting and legal issues when making these investments. If we do not structure these investments properly, we may be subject to certain adverse accounting issues, such as potential consolidation of financial results.

Furthermore, if the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may seek to dispose of the investment. Our non-marketable

equity investments in private companies are not liquid, and we may not be able to dispose of these investments on favorable terms or at all. The occurrence of any of these events could harm our results. Gains or losses from equity securities could vary from expectations depending on gains or losses realized on the sale or exchange of securities and impairment charges related to debt instruments as well as equity and other investments.

We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could harm our financial results and enterprise resource planning systems. Wecash flows.

Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have invested, and will continue to invest, significant capital and human resources in their design and enhancement, which may be disruptive to our underlying business. We dependa material adverse impact on these systems in order to timely and accurately process and report key components of our results of operations, financial position and cash flows. IfAlthough a portion of our international sales are currently invoiced in United States dollars, we have implemented and continue to implement for certain countries and customers both invoicing and payment in foreign currencies. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales in Europe, Japan and Australia as well as our global operations, and non-U.S. dollar denominated operating expenses and certain assets and liabilities. In addition, weaknesses in foreign currencies for U.S. dollar denominated sales could adversely affect demand for our products. Conversely, a strengthening in foreign currencies against the systems failU.S. dollar could increase foreign currency denominated costs. As a result we may attempt to operate appropriatelyrenegotiate pricing of existing contracts or we experience any disruptions or delaysrequest payment to be made in enhancing their functionality to meet current business requirements, our ability to fulfill customer orders, bill and trackU.S. dollars. We cannot be sure that our customers fulfill contractual obligations, accurately reportwould agree to renegotiate along these lines. This could result in customers eventually terminating contracts with us or in our financialsdecision to terminate certain contracts, which would adversely affect our sales.

We implemented a hedging program in November 2008 to hedge exposures to fluctuations in foreign currency exchange rates as a response to the risks of changes in the value of foreign currency denominated assets and otherwise run our business could be adversely affected. Even ifliabilities. We may enter into foreign currency forward contracts or other instruments, the majority of which mature within approximately five months. Our foreign currency forward contracts reduce, but do not eliminate, the impact of currency exchange rate movements. For example, we do not encounter these adverse effects,execute forward contracts in all currencies in which we conduct business. In addition, in the integrationsecond fiscal quarter of 2009, we commenced implementation of a hedging program to reduce the impact of volatile exchange rates on net revenues, gross profit and operating profit for limited periods of time. However, the use of such hedging activities may only offset a portion of the new systems may be much more costly than we anticipated. If we are unable to successfully integrate the new information technology systems as planned, ouradverse financial position, results of operations and cash flows could be negatively impacted.

If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products and our operating expenses could increase.

We are highly dependent upon the transportation systems we use to ship our products, including surface and air freight. Our attempts to closely match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. On a quarterly basis, our shipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation network in the latter half of a quarter will have a more material effect on our business than at the beginning of a quarter.

The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or terrorism, natural disasters and congestion resulting from higher shipping volumes. Labor disputes among freight carriers and at ports of entry are common, especiallyunfavorable movements in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. The labor unions for the ports in the west coast of the U.S. are now engaging in contract negotiation with the port operators. If the negotiation falters and results in strikes, it will severely impact our business. Since September 11, 2001, the rate of inspection of international freight by governmental entities has substantially increased, and has become increasingly unpredictable. If our delivery times increase unexpectedly for these or any other reasons, our ability

to deliver products on time would be materially adversely affected and result in delayed or lost revenue as well as customer imposed penalties. In addition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our products by air freight is greater than other methods. From time to time in the past, we have shipped products using air freight to meet unexpected spikes in demand, shifts in demand between product categories or to bring new product introductions to market quickly. If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost of freight could severely disrupt our business and harm our operating results.

We rely on a limited number of wholesale distributors for most of our sales, and if they refuse to pay our requested prices or reduce their level of purchases, our net revenue could decline.

We sell a substantial portion of our products through wholesale distributors, including Ingram Micro, Inc. and Tech Data Corporation. During the year ended December 31, 2008, sales to Ingram Micro and its affiliates accounted for 14% of our net revenue and sales to Tech Data and its affiliates accounted for 11% of our net revenue. We expect that a significant portion of our net revenue will continue to come from sales to a small number of wholesale distributors for the foreseeable future. In addition, because our accounts receivable are concentrated with a small group of purchasers, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow. We generally have no minimum purchase commitments or long-term contracts with any of these distributors. These purchasers could decide at any time to discontinue, decrease or delay their purchases of our products. In addition, the prices that they pay for our products are subject to negotiation and could change at any time. If any of our major wholesale distributors reduce their level of purchases or refuse to pay the prices that we set for our products, our net revenue and operating results could be harmed. If our wholesale distributors increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demands would be compromised.foreign exchange rates.

If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered when determining if the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a significant decline in our expected future cash flows or a sustained, significant decline in our stock price and market capitalization.

As a result of our acquisitions, we have significant goodwill and amortizable intangible assets recorded on our balance sheet. In addition, significant negative industry or economic trends, such as those that have occurred inas a result of the last six months,recent economic downturn, including reduced estimates of future cash flows or disruptions to our business could indicate that goodwill or amortizable intangible assets might be impaired. If, in any period like the fourth quarter of 2008, our stock price decreases to the point where our market capitalization is less than our book value, this too could indicate a potential impairment and we may be required to record an impairment charge in that period. In the fourth quarter of 2008, we recorded an impairment charge of $458,000 for the net carrying value of certain intangible assets acquired in connection with the Company’s 2006 acquisition of Skipjam Corp. due to the departure of a key employee responsible for managing the asset group as well as recent economic conditions. In conducting our annual impairment test for goodwill during the fourth quarter of 2008, our fair value exceeded the carrying value of our net assets by approximately 12%. As such, no goodwill impairment loss was recorded.

Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual

results. As a result, we may incur substantial impairment charges to earnings in our financial statements should an impairment of our goodwill or amortizable intangible assets be determined resulting in an adverse impact on our results of operations.

Our income tax provision

In the second fiscal quarter of 2011, in connection with our reorganization into three specific business units (retail, commercial, and liabilityservice provider), we allocated goodwill to each business unit and evaluated those allocations for uncertain tax positionspotential impairment. No impairment existed as of the end of the second fiscal quarter of 2011. In the fourth fiscal quarter of 2011, we completed our annual impairment test of goodwill and determined no impairment existed as of December 31, 2011. We will continue to test goodwill for impairment at least annually at the business unit level. The allocation of goodwill may have greater impact for certain of the business segments, as compared to the other segments. Accordingly, the performance of a business unit may be insufficient if any taxing authorities are successful in asserting tax positions that are contrary to our positions.

Significant judgment is required to determine our provision for income taxes and liability for uncertain tax positions. In the ordinary course of our business, there may be matters for which the ultimate tax outcome is uncertain. Although we believe our approach to determining the appropriate tax treatment is reasonable, no assurance can be given that the final tax authority determination will not be materially different than that which is reflected in our income tax provision and liability for uncertain tax positions. Such differences could have a material adverse effect on our income tax provision or benefit and liability for uncertain tax positions in the period in which such determination is made and, consequently, on our results of operations for such period.

From time to time, we are audited by various federal, state and foreign authorities regarding tax matters. Our audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. As each audit is concluded, adjustments, if any, are appropriately recorded in our financial statements in the period determined. To provide for potential tax exposure, we maintain a liability for uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” (“FIN 48”). However, if these accrued liabilities and/or reserves are insufficient upon completion of any audit process, there could be an adverse impact on our financial position and results of operations.

Changes in our tax rates could affect our future results.

Our future effective tax rates areadversely affected by changes in the mixallocation of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or by changes in tax laws or their interpretation. As a result our effective tax rates are difficult to predict and may fluctuate substantially from quarter-to-quarter or year-to-year for a variety of reasons, many of which are beyond our control. If our effective tax rates were to increase significantly, our quarterly and annual results would be negatively impacted and the price of our stock could decline. Therefore, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance. In addition, our future operating results may fall below the expectations of public market analysts or investors. In that event, our stock price could decline significantly.

We depend on a limited number of third party manufacturers for substantially all of our manufacturing needs. If these third party manufacturers experience any delay, disruption or quality control problems in their operations, we could lose market share and our brand may suffer.

All of our products are manufactured, assembled, tested and generally packaged by a limited number of original design manufacturers (“ODMs”), contract manufacturers (“CMs”) and original equipment manufacturers (“OEMs”). We rely on our manufacturers to procure components and, in some cases, subcontract engineering work. Some of our products are manufactured by a single manufacturer. We do not have any long-term contracts with any of our third party manufacturers. Some of these third party manufacturers produce products for our competitors. Due to weakening economic conditions, the viability of some of these third party manufacturers may be at risk. The loss of the services of any of our primary third party manufacturers could cause a significant disruption in operations and delays in product shipments. Qualifying a new manufacturer and commencing volume production is expensive and time consuming.

Our reliance on third party manufacturers also exposes us to the following risks over which we have limited control:

unexpected increases in manufacturing and repair costs;

inability to control the quality of finished products;

inability to control delivery schedules; and

potential lack of adequate capacity to manufacture all or a part of the products we require.

All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our ODMs, CMs and OEMs are primarily responsible for obtaining most regulatory approvals for our products. If our ODMs, CMs and OEMs fail to obtain timely domestic or foreign regulatory approvals or certificates, we would be unable to sell our products and our sales and profitability could be reduced, our relationships with our sales channel could be harmed, and our reputation and brand would suffer.goodwill.

If we are unable to provide our third partythird-party manufacturers a timely and accurate forecast of our component and material requirements, we may experience delays in the manufacturing of our products and the costs of our products may increase.

We provide our third partythird-party manufacturers with a rolling forecast of demand, which they use to determine our material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and demand and supply for a component at a given time. Some of our components have long lead times, such as wireless local area network chipsets, switching fabric chips, physical layer transceivers, connector jacks and metal and plastic enclosures. If our forecasts are not timely provided or are less than our actual requirements, our third partythird-party manufacturers may be unable to manufacture products in a timely manner. If our forecasts are too high, our third partythird-party manufacturers will be unable to use the components they have purchased on our behalf. The cost of the components used in our products tends to drop rapidly as volumes increase and the technologies mature. Therefore, if our third partythird-party manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an oversupply of higher-priced components. Moreover, if they are unable to use components ordered at our direction, we will need to reimburse them for any losses they incur.

We rely upon third parties for technology that is critical to our products, and if we are unable to continue to use this technology and future technology, our ability to develop, sell, maintain and support technologically innovative products would be limited.

We rely on third parties to obtain non-exclusive patented hardware and software license rights in technologies that are incorporated into and necessary for the operation and functionality of most of our products. In these cases, because the intellectual property we license is available from third parties, barriers to entry into certain markets may be lower for potential or existing competitors than if we owned exclusive rights to the technology that we license and use. On the other hand,Moreover, if a competitor or potential competitor enters into an exclusive arrangement with any of our key third partythird-party technology providers, or if any of these providers unilaterally decide not to do business with us for any reason, our ability to develop and sell products containing that technology would be severely limited. If we are shipping products whichthat contain third partythird-party technology that we subsequently lose the right to license, then we will not be able to continue to offer or support those products. OurIn addition, these licenses often require royalty payments or other consideration to the third parties.party licensor. Our success will depend, in part, on our continued ability to have access to these technologies, and we do not know whether these third partythird-party technologies will continue to be licensed to us on commercially acceptable terms, orif at all. If we are unable to license the necessary technology, we may be forced to acquire or develop alternative technology of lower quality or performance standards. Thisstandards, which would limit and delay our ability to offer new or competitive products and increase our costs of production. As a result, our margins, market share, and operating results could be significantly harmed.

We also utilize third partythird-party software development companies to develop, customize, maintain and support software that is incorporated into our products. If these companies fail to timely deliver or continuously maintain and support the software, thatas we require of them, we may experience delays in releasing new products or difficulties with supporting existing products and customers. In addition, if these third-party licensors fail, then

we may be unable to continue to sell products that incorporate the licensed technologies in addition to being unable to continue to maintain and support these products. We do require escrow arrangements with respect to certain third-party software which entitle us to certain limited rights to the source code, in the event of certain failures by the third party, in order to maintain and support such software. However, there is no guarantee that we would be able to understand and use the source code, as we may not have the expertise to do so. We are increasingly exposed to these risks as we continue to develop and market more products containing third-party software, such as our TV connectivity, security and network attached storage products.

If the redemption rate for our end-user promotional programs is higher than we estimate, then our net revenue and gross margin will be negatively affected.

From time to time we offer promotional incentives, including cash rebates, to encourage end-users to purchase certain of our products. Purchasers must follow specific and stringent guidelines to redeem these incentives or rebates. Often qualified purchasers choose not to apply for the incentives or fail to follow the required redemption guidelines, resulting in an incentive redemption rate of less than 100%. Based on historical data, we estimate an incentive redemption rate for our promotional programs. If the actual redemption rate is higher than our estimated rate, then our net revenue and gross margin will be negatively affected.

If we are unable to secure and protect our intellectual property rights, our ability to compete could be harmed.

We rely upon third parties for a substantial portion of the intellectual property that we use in our products. At the same time, we rely on a combination of copyright, trademark, patent and trade secret laws, nondisclosure agreements with employees, consultants and suppliers and other contractual provisions to establish, maintain and protect our intellectual property rights. Despite efforts to protect our intellectual property, unauthorized third parties may attempt to design around, copy aspects of our product design or obtain and use technology or other intellectual property associated with our products. For example, one of our primary intellectual property assets is the NETGEAR name, trademark and logo. We may be unable to stop third parties from adopting similar names, trademarks and logos, especiallyparticularly in those international markets where our intellectual property rights may be less protected. Furthermore, our competitors may independently develop similar technology or design around our intellectual property. Our inability to secure and protect our intellectual property rights could significantly harm our brand and business, operating results and financial condition.

Our sales and operations in international markets expose us to operational, financial and regulatory risks.

International sales comprise a significant amount of our overall net revenue. International sales were 60%52% of overall net revenue in fiscal 2008.2011 and 50% of overall net revenue in fiscal 2010. We anticipate thatcontinue to be committed to growing our international sales may grow as a percentage of net revenue. Weand while we have committed resources to expanding our international operations and sales channels, and these efforts may not be successful. International operations are subject to a number of other risks, including:

 

political and economic instability, international terrorism and anti-American sentiment, particularly in emerging markets;

potential for violations of anti-corruption laws and regulations, such as those related to bribery and fraud;

 

preference for locally branded products, and laws and business practices favoring local competition;

 

exchange rate fluctuations;

 

increased difficulty in managing inventory;

 

delayed revenue recognition;

 

less effective protection of intellectual property;

stringent consumer protection and product compliance regulations, including but not limited to the recently enacted Restriction of Hazardous Substances directive, and the Waste Electrical and Electronic Equipment directive and the recently enacted Ecodesign directive (EuP) in Europe, that may vary from country to country and that are costly to comply with;

 

difficulties and costs of staffing and managing foreign operations;

business difficulties, including potential bankruptcy or liquidation, of any of our worldwide third party logistics providers; and

 

changes in local tax laws.

We are required to comply with local environmental legislation and our customers rely on this compliance in order to sell our products. If our customers do not agree with our interpretations and requirements of new legislation, such as the European Ecodesign directive (EuP), they may cease to order our products and our revenue would be harmed.

We intend to expandare expanding and reorganizing our operations and infrastructure, which may strain our operations and increase our operating expenses.

We intend to expandare expanding and reorganizing our operations and pursuepursuing market opportunities both domestically and internationally in order to grow our sales. We expect that this attempted expansion will require enhancements to our existing management

information systems, and operational and financial controls. In addition, if we continue to grow, our expenditures will likely be significantly higher than our historical costs. We may not be able to install adequate controls in an efficient and timely manner as our business grows, and our current systems may not be adequate to support our future operations. The difficulties associated with installing and implementing new systems, procedures and controls may place a significant burden on our management, operational and financial resources. In addition, if we grow internationally, we will have to expand and enhance our communications infrastructure. In the second fiscal quarter of 2011, we reorganized our business into three business units: retail, commercial, and service provider. The Company’s reorganization into three business units may cause significant distraction to our management and employees. For example, channel and pricing conflicts may arise in certain territories as each of our business units may engage in selling activities which may benefit that business unit at the expense of another business unit. In addition, disclosures of previously non-public information in connection with our reorganization may also provide our competitors with strategic data which may put us at a competitive disadvantage and harm our business. These new disclosures about our performance may also cause our stock price to decline. If we fail to continue to improve our management information systems, procedures and financial controls or encounter unexpected difficulties during expansion and reorganization, our business could be harmed.

For example, we have invested, and will continue to invest, significant capital and human resources in the design and enhancement of our financial and enterprise resource planning systems, which may be disruptive to our underlying business. We depend on these systems in order to timely and accurately process and report key components of our results of operations, financial position and cash flows. If the systems fail to operate appropriately or we experience any disruptions or delays in enhancing their functionality to meet current business requirements, our ability to fulfill customer orders, bill and track our customers, fulfill contractual obligations, accurately report our financials and otherwise run our business could be adversely affected. Even if we do not encounter these adverse effects, the enhancement of systems may be much more costly than we anticipated. If we are unable to continue to enhance our information technology systems as planned, our financial position, results of operations and cash flows could be negatively impacted.

We have had to restate our historical financial statements.

In July 2009, we announced that we had incorrectly reported our income tax provision for the three months ended March 29, 2009 and, as a result of this error, we restated the financial statements in our quarterly report on Form 10-Q for the three months ended March 29, 2009. The restatement, which related solely to the correction of

the income tax provision for the three months ended March 29, 2009, resulted in adjustments related to income taxes in our financial statements. In our previously filed financial statements for the three months ended March 29, 2009, we incorrectly included a particular foreign entity in calculating our estimated annualized tax provision. This foreign entity should not have been included in the calculation because the anticipated losses in that entity would not give rise to tax benefits. While our overall annual tax provision was not affected for the entire year, we made an error in inter-quarter allocations of the tax provision. Material changes to our previously reported financial information occurred as a result of this error.

In connection with this restatement we identified certain control deficiencies relating to the application of applicable accounting literature related to recordation of tax expenses. These deficiencies constituted a material weakness in internal control over financial reporting as of March 29, 2009, which led to items requiring correction in our financial statements and our conclusion to restate such financial statements to correct those items. Specifically, the control deficiencies related to our failure to correctly apply the authoritative guidance for income taxes in determining the proper allocation of our annualized tax provision.

Although this material weakness had been remediated by December 31, 2009, we cannot be certain that the measures we have taken since this restatement will ensure that restatements will not occur in the future. Execution of restatements like the one described above create a significant strain on our internal resources and could cause delays in our filing of quarterly or annual financial results, increase our costs and cause management distraction. Restatements may also significantly affect our stock price in an adverse manner.

Governmental regulations of imports or exports affecting Internet security could affect our net revenue.

Any additional governmental regulation of imports or exports or failure to obtain required export approval of our encryption technologies could adversely affect our international and domestic sales. The United States and various foreign governments have imposed controls, export license requirements, and restrictions on the import or export of some technologies, especiallyparticularly encryption technology. In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys. In response to terrorist activity, governments could enact additional regulation or restriction on the use, import, or export of encryption technology. This additional regulation of encryption technology could delay or prevent the acceptance and use of encryption products and public networks for secure communications, resulting in decreased demand for our products and services. In addition, some foreign competitors are subject to less stringent controls on exporting their encryption technologies. As a result, they may be able to compete more effectively than we can in the United States and the international Internet security market.

We recently moved into a new corporate headquarters in the third quarter of 2008. If we cannot retain sub lessees for the remaining lease term of our old facilities, then we will be forced to take an additional charge related to such excess space.

We recently moved into our new corporate headquarters in the third quarter of 2008. The existing lease on our former Santa Clara corporate headquarters does not expire until the end of 2010 and the existing lease on our Fremont facility does not expire until the end of October 2009. We have subleased a portion of these facilities and taken a restructuring charge for the balance of the lease costs. If any tenant moves out or is unable to meet its obligations to us, we would have to record an additional charge associated with such excess space.

We are required to evaluate our internal control under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could impact investor confidence in the reliability of our internal controls over financial reporting.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. Such report must contain among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.

We will continue to perform the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective as of the end of a fiscal year or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which may have an adverse effect on our stock price.

We are continuing to implement our international reorganization, which is straining our resources and increasing our operating expenses.

We have been reorganizing our foreign subsidiaries and entities to better manage and optimize our international operations. Our implementation of this project requires substantial efforts by our staff and is resulting in increased staffing requirements and related expenses. Failure to successfully execute the reorganization or other factors outside of our control could negatively impact the timing and extent of any benefit we receive from the reorganization.

We depend on large, recurring purchases from certain significant customers, and a loss, cancellation or delay in purchases by these customers could negatively affect our revenue.

The loss of recurring orders from any of our more significant customers could cause our revenue and profitability to suffer. Our ability to attract new customers will depend on a variety of factors, including the cost-effectiveness, reliability, scalability, breadth and depth of our products. In addition, a change in the mix of our customers, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margins.

Although our financial performance may depend on large, recurring orders from certain customers and resellers, we do not generally have binding commitments from them. For example:

our reseller agreements generally do not require substantial minimum purchases;

our customers can stop purchasing and our resellers can stop marketing our products at any time; and

our reseller agreements generally are not exclusive and are for one-year terms, with no obligation of the resellers to renew the agreements.

Because our expenses are based on our revenue forecasts, a substantial reduction or delay in sales of our products to, or unexpected returns from, customers and resellers, or the loss of any significant customer or reseller, could harm or otherwise disrupt our business. Although our largest customers may vary from period to period, we anticipate that our operating results for any given period will continue to depend on large orders from a small number of customers.

We are required to expense equity compensation given to our employees, which could reduce our reported earnings, could significantly impact our operating results in future periods and could reduce our stock price and our ability to effectively utilize equity compensation to attract and retain employees.

We historically have used stock options as a significant component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. The Financial Accounting Standards Board has adopted changes that require companies to record a charge to earnings for employee stock option grants and other equity incentives. As a result, we have experienced a substantial increase in compensation costs, and these charges could further significantly impact our operating results in future periods. This could require us to reduce the availability and amount of equity incentives provided to employees, which may make it more difficult for us to attract, retain and motivate key personnel. Moreover, if securities analysts, institutional investors and other investors adopt financial models that include stock option expense in their primary analysis of our financial results, our stock price could decline as a result of reliance on these models with higher expense calculations. Each of these results could materially and adversely affect our business.

We are exposed to credit risk and fluctuations in the market values of our investment portfolio.

Although we have not recognized any material losses on our cash equivalents and short-term investments, future declines in their market values could have a material adverse effect on our financial condition and operating results. Given the global nature of our business, we have investments with both domesticallydomestic and

internationally. A substantial portion of international financial institutions. Accordingly, we face exposure to fluctuations in interest rates, which may limit our money market funds are insured by the U.S. Treasury’s temporary guarantee program, which expires in April 2009.investment income. If these financial institutions default on their obligations or their credit ratings are negatively impacted by liquidity issues, credit deterioration or losses, financial results, or other factors, the value of our cash equivalents and short-term investments could decline and result in a material impairment, which could have a material adverse effect on our financial condition and operating results.

Economic conditions, political events, war, terrorism, public health issues, natural disasters and other circumstances could materially adversely affect us.

Our corporate headquarters are located in Northern California and one of our warehouses is located in Southern California, both of which are regions known for seismic activity. Significantly all of our critical enterprise-wide information technology systems, including our main servers, are currently housed in colocation

facilities near our headquarters in Northern California. While we have moved our critical information technology systems in 2010 to colocation facilities in a different geographic region in the United States, our headquarters and warehouses remain susceptible to seismic activity so long as they are located in California. In addition, substantially all of our manufacturing occurs in two geographically concentrated areas in mainland China, where disruptions from natural disasters, health epidemics and political, social and economic instability may affect the region. If our manufacturers or warehousing facilities are disrupted or destroyed, we would be unable to distribute our products on a timely basis, which could harm our business. Moreover, if our computer information systems or communication systems, or those of our vendors or customers, are subject to disruptive hacker attacks or other disruptions, our business could suffer. We have not established a formal disaster recovery plan. Our back-up operations may be inadequate and our business interruption insurance may not be enough to compensate us for any losses that may occur. A significant business interruption could result in losses or damages and harm our business. For example, much of our order fulfillment process is automated and the order information is stored on our servers. If our computer systems and servers go down even for a short period at the end of a fiscal quarter, our ability to recognize revenue would be delayed until we were again able to process and ship our orders, which could cause our stock price to decline significantly.

We depend significantly on worldwide economic conditions and their impact on levels of consumer spending levels, which have recently deteriorated significantly in many countries and regions, including without limitation the United States, and may remain depressed for the foreseeable future. Factors that could influence the levels of consumer spending include increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior.

In addition, war, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a strong negative effect on us, our suppliers, logistics providers, manufacturing vendors and customers. Our business operations are subject to interruption by natural disasters, fire, power shortages, terrorist attacks, and other hostile acts, labor disputes, public health issues, and other events beyond our control. For example, labor disputes at manufacturing facilities in China occurred in 2010 and have led to workers going on strike. The recent trend of labor unrest could materially affect our third-party manufacturers’ abilities to manufacture our products. In addition, all of our major direct and indirect suppliers of hard disk drives have been affected by record flooding in Thailand in the third fiscal quarter of 2011, and they informed us that our supply chain would be constrained for an indefinite amount of time, up to six months in some cases. Some have therefore declared a force majeure event and have stated that, in addition to and because of the supply constraints, pricing for hard disk drives has and will likely continue to increase significantly until they are able to stabilize the situation. We experienced increased prices in the cost of hard disk drives and those increases may continue. As a result, the Company ceased accepting any orders containing ReadyNAS products with hard disk drives. In addition, all then current sales and marketing promotions involving ReadyNAS products were terminated indefinitely. Further, the Company declared the existence of a force majeure event under our contracts with certain customers. Accordingly, our business was harmed. Furthermore, earthquakes and resultant nuclear threats and tsunamis in Japan in March 2011 have caused some disruption to our supply of raw materials and components for our products and may impact our operating results in Japan.

Such events could decrease demand for our products, make it difficult or impossible for us to make and deliver products to our customers or to receive components from our suppliers, and create delays and inefficiencies in our supply chain. Should major public health issues, including pandemics, arise, we could be negatively affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of our manufacturing vendors and component suppliers.

If we loseSystem security risks, data protection breaches and cyber-attacks could disrupt our internal operations or information technology or networking services provided to customers, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.

Maintaining the servicessecurity of our Chairmancomputer information systems and Chief Executive Officer, Patrick C.S. Lo,communication systems is a critical issue for us and our customers. Hackers may develop and deploy viruses, worms and other malicious software programs that are designed to attack our products and systems, including our internal network, or those of our vendors or customers. Additionally, outside parties may attempt to fraudulently induce our employees or users of our products to disclose sensitive information in order to gain access to our data or our other key personnel,customers’ data. We have not established a formal business continuity plan. While we may not be able to executehave established infrastructure and geographic redundancy for our business strategy effectively.

Our future success depends in large part upon the continued services of our key technical, sales, marketing and senior management personnel. In particular, the services of Patrick C.S. Lo, our Chairman and Chief Executive Officer, who has led our company since its inception, are very important to our business. We do not maintain any key person life insurance policies. The loss of any of our senior management or other key research, development, sales or marketing personnel, particularly if lost to competitors, could harm

critical systems, our ability to implementutilize these redundant systems requires further testing and we cannot be assured that such systems are fully functional. For example, much of our order fulfillment process is automated and the order information is stored on our servers. A significant business strategyinterruption could result in losses or damages and respondharm our business. If our computer systems and servers go down at the end of a fiscal quarter, our ability to recognize revenue may be delayed until we were able to utilize back-up systems and continue to process and ship our orders. This could cause our stock price to decline significantly. Moreover, potential breaches of our security measures and the rapidly changing needsaccidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers, including the small businesspotential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and home markets.

potential liability for us, damage our brand and reputation or otherwise harm our business.

Item 1B.UnresolvedUnresolved Staff Comments

None.

 

Item 2.Properties

Our principal administrative, sales, marketing and research and development facilities currently occupy approximately 142,700 square feet in an office complex in San Jose, California, under a lease that expires in March 2018.

Our international headquarters occupy approximately 10,000 square feet in an office complex in Cork, Ireland, under a lease entered into in February 2006 and expiring in December 2026. Our international sales personnel reside inare based out of local sales offices or home offices in Austria, Australia, Brazil, Canada, China, Czech Republic, Denmark, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, New Zealand, Norway, Poland, Russia, Singapore, Spain, Sweden, Switzerland, the Netherlands, the United Arab Emirates, and the United Kingdom. We also have operations personnel using a leased facility in Hong Kong. We also maintain research and development facilities in Atlanta, Chicago, Beijing, Guangzhou, Nanjing, and Shanghai, China, and in Taipei, Taiwan. From time to time we consider various alternatives related to our long-term facilities needs. While we believe our existing facilities provide suitable space for our operations and are adequate to meet our immediate needs, it may be necessary to lease additional space to accommodate future growth. We have invested in internal capacity and strategic relationships with outside manufacturing vendors as needed to meet anticipated demand for our products.

We use third parties to provide warehousing services to us, consisting of facilities in Southern California, Australia, Hong Kong and the Netherlands.

 

Item 3.Legal Proceedings

The information set forth under the heading “Litigation and Other Legal Matters” in Note 8 of the9,Commitments and Contingencies, in Notes to Consolidated Financial Statements included in Item 8 of Part IV, Item 15II of this Annual Report on Form 10-K, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Part I, Item 1A, of this Form 10-K.Risk Factors.

 

Item 4.Submission of Matters to a Vote of Security HoldersMine Safety Disclosures

No matters were submitted to a vote of the security holders during the fourth quarter ended December 31, 2008.Not applicable.

PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock has been quoted under the symbol “NTGR” on the Nasdaq National Market from July 31, 2003 to July 1, 2006, and on the Nasdaq Global Select Market since then. Prior to that time, there was no public market for our common stock. The following table sets forth for the indicated periods the high and low intraday sales prices for our common stock on the Nasdaq markets. Such information reflects interdealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

 

Fiscal Year Ended December 31, 2007

  High  Low

Fiscal Year Ended December 31, 2010

  High   Low 

First Quarter

  $31.31  $25.00  $27.39    $20.29  

Second Quarter

   38.75   28.50   28.96     18.63  

Third Quarter

   41.33   25.85   28.18     17.44  

Fourth Quarter

   37.00   29.70   35.50     25.80  

 

Fiscal Year Ended December 31, 2008

  High  Low

First Quarter

  $34.92  $18.58

Second Quarter

   20.68   13.80

Third Quarter

   17.50   12.41

Fourth Quarter

   15.17   8.21

On February 17, 2009, there were 37 stockholders of record.

Fiscal Year Ended December 31, 2011

  High   Low 

First Quarter

  $38.00    $29.97  

Second Quarter

   44.60     30.31  

Third Quarter

   45.31     24.87  

Fourth Quarter

   38.47     23.45  

Equity Compensation Plan Information

The following table provides information as of December 31, 20082011 about our common stock that may be issued upon the exercise of options and rights granted to employees or members of our Board of Directors under all existing equity compensation plans, including the 2000 Plan (which was terminated as to new grants in May 2003), the 2003 Stock Plan, the 2006 Long Term Incentive Plan the 2006 Stand-Alone Stock Option Agreement and the 2003 Employee Stock Purchase Plan.

 

Plan Category

  Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
  Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
   Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
   Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
 
  (a) (b)  (c)   (a) (b)   (c) 

Equity compensation plans approved by security holders

  4,081,753(1) $19.82  2,682,229(2)   4,126,562(1)  $25.87     1,192,463(2) 

Equity compensation plans not approved by security holders

  68,749(3) $19.16  —      —     $—       —    
           

 

    

 

 

Total

  4,150,502  $19.81  2,682,229    4,126,562      1,192,463  
           

 

    

 

 

 

(1)Includes 1,580,422259,230 shares subject to options outstanding under the 2003 Plan, 2,501,3313,867,332 shares subject to options outstanding under the 2006 Plan and no outstanding shares under the 2003 Employee Stock Purchase Plan.
(2)Includes 160,737255,445 shares available for future issuance under the 2003 Plan, 2,345,289486,349 shares available for future issuance under the 2006 Plan and 176,203450,669 shares available for future issuance under the 2003 Employee Stock Purchase Plan.
(3)Consists of 68,749 shares outstanding under the 2006 Stand-Alone Stock Option Agreement.

Company Performance

Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price performance of our common stock shall not be deemed “filed” with the SEC or “soliciting material” under the Exchange Act and shall not be incorporated by reference into any such filings.

The following graph shows a comparison from December 31, 20032006 through December 31, 20082011 of cumulative total return for our common stock, the Nasdaq Composite Index and the Nasdaq Computer Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the Nasdaq Composite Index and the Nasdaq Computer Index assume reinvestment of dividends. We have never paid dividends on our common stock and have no present plans to do so.

 

  December 31,
2003
  December 31,
2004
  December 31,
2005
  December 31,
2006
  December 31,
2007
  December 31,
2008
  December 31,
2006
   December 31,
2007
   December 31,
2008
   December 31,
2009
   December 31,
2010
   December 31,
2011
 

NETGEAR, Inc.

  $100.00  $113.57  $120.39  $164.17  $223.08  $71.36  $100.00    $135.89    $43.47    $82.63    $128.30    $127.89  

NASDAQ Computer Index

  $100.00  $103.25  $106.09  $112.61  $137.22  $73.15  $100.00    $121.86    $64.96    $110.97    $130.32    $130.96  

NASDAQ Composite Index

  $100.00  $108.59  $110.08  $120.56  $132.39  $78.72  $100.00    $109.81    $65.29    $93.95    $109.84    $107.86  

Holders of Common Stock

On February 21, 2012, there were 28 stockholders of record.

The number of record holders is based upon the actual number of holders registered on our books at such date and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We currently intend to retain future earnings, if any, to finance the operation and expansion of our business, and we do not anticipate paying cash dividends in the foreseeable future.

Repurchase of Equity Securities by the Company

 

Period

 Total Number of
Shares
Purchased
 Average Price
Paid per
Share
 Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs

January 1, 2008-January 31, 2008

 5,448 $28.79 —   —  

February 1, 2008-February 29, 2008

 —    —   —   —  

March 1, 2008-March 31, 2008

 —    —   —   —  

April 1, 2008-April 30, 2008

 —    —   —   —  

May 1, 2008-May 31, 2008

 1,403  18.40 —   —  

June 1, 2008-June 30, 2008

 —    —   —   —  

July 1, 2008-July 31, 2008

 —    —   —   —  

August 1, 2008-August 31, 2008

 —    —   —   —  

September 1, 2008-September 30, 2008

 —    —   —   —  

October 1, 2008-October 31, 2008

 174,341  8.95 173,000 5,827,000

November 1, 2008-November 30, 2008

 995,780  10.52 995,780 4,831,220

December 1, 2008-December 31, 2008

 805  11.15 —   4,831,220
         
 1,177,777 $10.38 1,168,780 4,831,220
         

Period

  Total Number of
Shares
Purchased
   Average Price
Paid per
Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
   Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs
 

October 3, 2011-November 2, 2011

   917    $29.76     —       4,831,220  

November 3, 2011-December 2, 2011

   —       —       —       4,831,220  

December 3, 2011-December 31, 2011

   —       —       —       4,831,220  
  

 

 

   

 

 

   

 

 

   
   917    $29.76     —      
  

 

 

   

 

 

   

 

 

   

On October 21, 2008, our Board of Directors authorized management to repurchase up to 6,000,000 shares of our outstanding common stock. Under this authorization, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and our share price. During the fiscal yearyears ended December 31, 2008,2011, 2010 and 2009, we repurchased approximately 1.2 milliondid not repurchase any shares or $12.0 million of common stock under this repurchase authorization. Additionally,However, we repurchased approximately 9,00025,000 shares or $206,000$926,000 of common stock related to the lapse of restricted stock unitsRSUs during the year ended December 31, 2008.

2011.

Item 6.Selected Consolidated Financial Data

The following selected consolidated financial data are qualified in their entirety, and should be read in conjunction with, the consolidated financial statements and related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

We derived the selected consolidated statement of operations data for the years ended December 31, 2008, 20072011, 2010 and 20062009 and the selected consolidated balance sheet data as of December 31, 20082011 and 20072010 from our audited consolidated financial statements appearing elsewhere in this Form 10-K. We derived the selected consolidated statement of operations data for the years ended December 31, 20052008 and 20042007 and the selected consolidated balance sheet data as of December 31, 2006, 20052009, 2008 and 20042007 from our audited consolidated financial statements, which are not included in this Form 10-K. Historical results are not necessarily indicative of results to be expected for future periods.

 

  Year Ended December 31,   Year Ended December 31, 
  2008 2007  2006  2005 2004   2011 2010 2009 2008 2007 
  (In thousands, except per share data)   (In thousands, except per share data) 

Consolidated Statement of Operations Data:

              

Net revenue

  $743,344  $727,787  $573,570  $449,610  $383,139   $1,181,018   $902,052   $686,595   $743,344   $727,787  

Cost of revenue(2)

   502,320   485,180   379,911   297,911   260,318    811,572    602,805    480,195    502,320    485,180  
                  

 

  

 

  

 

  

 

  

 

 

Gross profit

   241,024   242,607   193,659   151,699   122,821    369,446    299,247    206,400    241,024    242,607  
                  

 

  

 

  

 

  

 

  

 

 

Operating expenses:

              

Research and development(2)

   33,773   28,070   18,443   12,837   10,316    48,699    39,972    30,056    33,773    28,070  

Sales and marketing(2)

   121,687   117,938   91,881   71,345   62,247    154,562    131,570    106,162    121,687    117,938  

General and administrative(2)

   31,733   27,220   20,905   14,559   14,905    39,423    36,220    32,727    31,733    27,220  

Restructuring

   1,929   —     —     —     —   

Restructuring and other charges

   2,094    (88  809    1,929    —    

In-process research and development

   1,800   4,100   2,900   —     —      —      —      —      1,800    4,100  

Technology license arrangements

   —      —      2,500    —      —    

Litigation reserves, net

   711   167   —     802   —      (201  211    2,080    711    167  
                  

 

  

 

  

 

  

 

  

 

 

Total operating expenses

   191,633   177,495   134,129   99,543   87,468    244,577    207,885    174,334    191,633    177,495  
                  

 

  

 

  

 

  

 

  

 

 

Income from operations

   49,391   65,112   59,530   52,156   35,353    124,869    91,362    32,066    49,391    65,112  

Interest income, net

   4,336   8,426   6,974   4,104   1,593    477    426    629    4,336    8,426  

Other income (expense), net

   (8,384)  3,298   2,495   (1,770)  (560)   (1,136  (564  (128  (8,384  3,298  
                  

 

  

 

  

 

  

 

  

 

 

Income before income taxes

   45,343   76,836   68,999   54,490   36,386    124,210    91,224    32,567    45,343    76,836  

Provision for income taxes

   27,293   30,882   27,867   20,867   12,921    32,842    40,315    23,234    27,293    30,882  
                  

 

  

 

  

 

  

 

  

 

 

Net income

  $18,050  $45,954  $41,132  $33,623  $23,465   $91,368   $50,909   $9,333   $18,050   $45,954  
                  

 

  

 

  

 

  

 

  

 

 

Net income per share:

              

Basic(1)

  $0.51  $1.32  $1.23  $1.04  $0.77   $2.46   $1.44   $0.27   $0.51   $1.32  
                  

 

  

 

  

 

  

 

  

 

 

Diluted(1)

  $0.51  $1.28  $1.19  $0.99  $0.72   $2.41   $1.41   $0.27   $0.51   $1.28  
                  

 

  

 

  

 

  

 

  

 

 

 

(1)Information regarding calculation of per share data is described in Note 5 of the6,Net Income Per Share, in Notes to Consolidated Financial Statements.Statements in Item 8 of Part II of this Annual Report on Form 10-K.
(2)Stock-based compensation expense was allocated as follows:

 

Cost of revenue

  $864  $633  $430  $147  $163

Research and development

   3,218   2,391   1,119   293   400

Sales and marketing

   3,406   3,013   1,405   375   733

General and administrative

   3,835   2,842   1,551   249   391

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).

Cost of revenue

  $999    $913    $959    $864    $633  

Research and development

   2,476     2,271     1,973     3,218     2,391  

Sales and marketing

   5,136     4,710     4,147     3,406     3,013  

General and administrative

   5,151     4,307     3,945     3,835     2,842  

 

  December 31,  December 31, 
  2008  2007  2006  2005  2004  2011   2010   2009   2008   2007 
  (In thousands)  (In thousands) 

Consolidated Balance Sheet Data:

                    

Cash, cash equivalents and short-term investments

  $203,009  $205,343  $197,465  $173,656  $141,715  $353,695    $270,737    $247,100    $203,009    $205,343  

Working capital

  $312,843  $311,082  $280,877  $230,416  $180,696  $525,268    $413,321    $339,116    $312,843    $311,082  

Total assets

  $586,209  $551,109  $437,904  $356,297  $300,238  $971,370    $780,321    $633,121    $586,209    $551,109  

Total current liabilities

  $176,505  $168,507  $143,482  $120,293  $115,044  $308,961    $254,723    $195,609    $176,505    $168,507  

Total non-current liabilities

  $23,652    $25,162    $23,359    $18,746    $11,079  

Total stockholders’ equity

  $390,958  $371,523  $294,422  $236,004  $185,194  $638,757    $500,436    $414,153    $390,958    $371,523  

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations together with the audited consolidated financial statements and notes to the financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under “Risk Factors” in Part I, Item 1A above.

Business Overview

We design, developare a global networking company that delivers innovative products to consumers, businesses and market innovativeservice providers. For consumers, we make high performance, dependable and easy-to-use home networking, storage and digital media products that addressto connect people with the specific needs of small businessInternet and home users. We define small business as a business with fewer than 250 employees. We are focused on satisfying the ease-of-use, reliability, performance and affordability requirements of these users. Our product offerings enable users to share Internet access, peripherals, files, digital multimediatheir content and applications among multiple networked devicesdevices. For businesses, we provide networking, storage and other Internet-enabled devices.security solutions without the cost and complexity of Big IT. We also supply leading service providers with retail, whole home networking solutions for their customers. Our products are built on a variety of proven technologies such as wireless, Ethernet and powerline, with a focus on reliability and ease-of-use.

Our product line consists of wired and wireless devices that enable Ethernet networking, broadband access, network connectivity, network storage and network connectivity.security appliances. These products are available in multiple configurations to address the needs of our end-users in each geographic region in which our products are sold.

We sell our networking products through multiple sales channels worldwide, including traditional retailers, online retailers, wholesale distributors, DMRs, VARs,direct market resellers (“DMRs”), value-added resellers (“VARs”), and broadband service providers. Our retail channel includes traditional retail locations domestically and internationally, such as Best Buy, Fry’s Electronics, Radio Shack, Staples, Wal-Mart, Argos (U.K.), Dixons (U.K.), PC World (U.K.), MediaMarkt (Germany, Austria), Dick Smith (Australia), JB HiFi (Australia) and FNAC (France)Elkjop (Norway). Online retailers include Amazon.com, Dell, Newegg.com and Buy.com. Our DMRs include CDW Corporation, Insight Corporation and PC Connection in domestic markets and Misco throughout Europe. In addition, we also sell our products through broadband service providers, such as multiple system operators (MSOs)(“MSOs”), DSL, and other broadband technology operators domestically and internationally. Some of these retailers and broadband service providers purchase directly from us, while others are fulfilled through wholesale distributors around the world. A substantial portion of our net revenue to date has been derived from a limited number of wholesale distributors the largest of which areand retailers, including Ingram Micro Inc. and Tech Data Corporation.Best Buy. We expect that these wholesale distributors and retailers will continue to contribute a significant percentage of our net revenue for the foreseeable future. Our service provider business has grown substantially and it is difficult to ascertain a seasonal pattern given that the business is less predictable than our other core businesses.

We have well developed channelsIn the second fiscal quarter of 2011, we made organizational changes that resulted in changes to the way in which the CODM manages and evaluates the business. Our business is now managed in three specific business units: retail, commercial, and service provider. The retail business unit consists of high performance, dependable and easy-to-use home networking, storage and digital media products to connect people with the Internet and their content and devices. The commercial business unit consists of business networking, storage and security solutions without the cost and complexity of Big IT. The service provider business unit consists of made-to-order and retail proven, whole home networking solutions sold to service provider for sale to their customers. Each business unit is managed by a Senior Vice President/General Manager. There is no change in the United StatesCODM before and Europe, Middle-Eastafter the reorganization of the segments. We believe this new structure enables us to better focus our efforts on our core customer segments and Africa, or EMEA,allows us to be more nimble and are buildingopportunistic as a strong presencecompany overall. Additionally, in the first fiscal quarter of 2011, we combined our North American, Central American and South American sales forces to form the Americas territory. Previously, North America was its own geographic region and the Central American and South American territories were categorized within the Asia Pacific and Latin American regions. We derive(“APAC”) geographic region. Following this change, we are now organized into the majority of our net revenue from international sales. International sales as a percentage of net revenue decreased from 62% in 2007 to 60% in 2008. International sales decreased from $454.1 million in 2007 to $445.7 million in 2008,following three geographic territories: Americas, Europe, Middle-East

representing a decreaseand Africa (“EMEA”) and APAC. For further detail, refer to Note 12,Segment Information, Operations by Geographic Area and Customer Concentration, in Item 8 Part II of approximately 1.8% during that period. We continue to penetrate new markets such as Brazil, Russia and Eastern Europe, India, and the Middle-East.this Annual Report on Form 10-K.

Our net revenue grew 2.1%increased 30.9% during the year ended December 31, 2008 primarily2011. The increase in net revenue was principally attributable to increased shipmentshigher sales in several of our wireless-Gproduct categories in the Americas, Europe, Middle-East and Africa (“EMEA”) and Asia Pacific (“APAC”). These include wireless-N products sold to retailers and existing service provider customers, as well as salesPowerline products, ReadyNAS products, and switch products.

Our gross margin decreased to 31.3% for the year ended December 31, 2011 from 33.2% for the year ended December 31, 2010. The decrease in gross margin was primarily attributable to a higher percentage of our ReadyNAS products,total revenue derived from sales to service providers, which generally carry lower gross margins. Operating expenses for the year ended December 31, 2011 were acquired$244.6 million, or 20.7% of net revenue, compared to $207.9 million, or 23.1% of net revenue, for the year ended December 31, 2010. This increase was primarily attributable to increases of $24.0 million in connection with our May 16, 2007 acquisitionsalary and other employee related expenses due to headcount growth, and $6.1 million in outside service costs related to increased investments in research and development projects and increased call center costs driven by greater sales volume. In addition, the increase was also attributable to a $2.2 million increase in restructuring and other charges primarily due to employee severance resulting from the reorganization into three specific business units.

Net income increased $40.5 million, or 79.5%, to $91.4 million for the year ended December 31, 2011, from $50.9 million for the year ended December 31, 2010. This increase was primarily attributable to an increase in gross profit of Infrant Technologies, Inc. (“Infrant”). We have also experienced growth in wireless-N router sales. The growth was offset by$70.2 million and a decrease in DSL gateway products sold.the provision for income tax of $7.5 million, which was partially offset by an increase in operating expenses of $36.7 million.

The smallcommercial business, consumer, and home networkingbroadband service provider markets are intensely competitive and subject to rapid technological change. We expect our competition to continue to intensify. We believe that the principal competitive factors in the small business and homethese markets for networking products include product breadth, size and scope of the sales channel, brand name, timeliness of new product introductions, product availability, performance, features, functionality and reliability, ease-of-installation, maintenance and use, and customer service and support. To remain competitive, we believe we must continue to aggressively invest resources in developing new products and enhancing our current products while continuing to expand our channels and maintaining customer satisfaction worldwide.

The current recessionary environment and overall weakness in consumer demand will negatively impact net revenue in the coming year. We expect global sales to decline as weakness in the U.S. and United Kingdom is spreading to continental Europe and Australia. We anticipate further erosion of our gross and operating margins in the first quarter of 2009 due to our foreign currency business exposure. However, we foresee our operating margin improving in the second quarter of 2009 when our local currency pricing actions have had a chance to catch up with the strength of the rising U.S. dollar and our new products will have a meaningful margin impact. In the interim, we are taking immediate actions to reduce our cost structure and improve our operating margins. In this effort, we plan to reduce the variable components of employee compensation, reduce the base compensation of executives and country managers by 10%, forego bonuses for all executives and eligible employees in 2009, as well as reduce overall headcount through natural attrition.

Our gross margin decreased to 32.4% for the year ended December 31, 2008, from 33.3% for the year ended December 31, 2007, primarily attributable to sales of products carrying lower gross margins to service providers and the impact on our foreign currency denominated revenues due to the strengthening of the U.S. dollar, as well as higher warranty costs associated with end-user warranty returns. Additionally, inventory reserves increased primarily due to selling prices of certain products, primarily attributable to the strengthening of the U.S. dollar in locations where we bill in local currencies, falling below cost. These negative margin impacts were partially mitigated by reduced air freight expenses as a result of increased on-hand inventory levels, as well as reduced marketing expenses. Operating expenses for the year ended December 31, 2008 were $191.6 million, or 25.8% of net revenue, compared to $177.5 million, or 24.4% of net revenue, for the year ended December 31, 2007. This increase was primarily attributable to higher legal fees of $3.5 million, a $3.0 million increase in salary and other employee related expenses, and a $2.2 million increase in stock based compensation.

Net income decreased $27.9 million, or 60.7%, to $18.1 million for the year ended December 31, 2008, from $46.0 million for the year ended December 31, 2007. This decrease was primarily attributable to an increase in operating expenses of $14.1 million, a decrease in other income (expense), net, of $11.7 million, and a decrease in interest income, net, of $4.1 million. These decreases in pre-tax income were offset by a decrease in provision for income taxes of $3.6 million.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires management to make assumptions, judgments and estimates that can have a significant impact on the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable

under the circumstances. Actual results could differ significantly from these estimates. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. Note 1,The Company and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. We have listed below our critical accounting policies whichthat we believe to have the greatest potential impact on our consolidated financial statements. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Revenue Recognition

Refer to Note 1,The Company and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for a discussion of our revenue recognition policies. Revenue from product sales is generally recognized at the time the product is shipped, provided that persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the related receivable is reasonably assured. Currently, for some of our customers, title passes to the customer upon delivery to the port or country of destination, upon their receipt of the product, or upon the customer’s resale of the product. At the end of each fiscal quarter, we estimate and defer revenue related to product where title has not transferred. The revenue continues to be deferred until such time that title passes to the customer. We have not made any material changes in the accounting methodology we use to estimate deferred revenue related to product where title has not transferred. We do not believe there will be a material change in the future estimates or assumptions used in our estimate of deferred revenue. We assess collectability based on a number of factors, including general economic and market conditions, past transaction history with the customer, and the creditworthiness of the customer. If we determine that collection of the corresponding receivable is not reasonably assured, then we defer the revenue until receipt of payment.

Allowances for Product Warranties, Returns due to Stock Rotation, Price Protection, Sales Incentives and Doubtful Accounts

Our standard warranty obligation to our direct customers generally provides for a right of return of any product for a full refund in the event that such product is not merchantable or is found to be damaged or defective. At the time revenue is recognized, an estimate of future warranty returns is recorded to reduce revenue in the amount of the expected credit or refund to be provided to our direct customers. At the time we record the reduction to revenue related to warranty returns, we include within cost of revenue a write-down to reduce the carrying value of such products to net realizable value. Our standard warranty obligation to end-users provides for replacement of a defective product for one or more years. Factors that affect the warranty obligation include product failure rates, material usage, and service delivery costs incurred in correcting product failures. The estimated cost associated with fulfilling the warranty obligation to end-users is recorded in cost of revenue. Because our products are manufactured by third partythird-party manufacturers, in certain cases we have recourse to the third partythird-party manufacturer for replacement or credit for the defective products. We give consideration to amounts recoverable from our third partythird-party manufacturers in determining our warranty liability. Our estimated allowances for product warranties can vary from actual results and we may have to record additional revenue reductions or charges to cost of revenue, which could materially impact our financial position and results of operations.

In addition to warranty-related returns, certain distributors and retailers generally have the right to return product for stock rotation purposes. Every quarter, stock rotation rights are generally limited to 10% of invoiced sales to the distributor or retailer in the prior quarter. Upon shipment of the product, we reduce revenue for an estimate of potential future stock rotation returns related to the current period product revenue. We analyze historical returns, channel inventory levels, current economic trends and changes in customer demand for our products when evaluating the adequacy of the allowance for sales returns, namely stock rotation returns. Our estimated allowances for returns due to stock rotation can vary from actual results and we may have to record additional revenue reductions, which could materially impact our financial position and results of operations.

Sales incentives provided to customers are accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9. Under these guidelines, weWe accrue for sales incentives as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit

received; otherwise, it is recorded as a reduction of revenues. Our estimated provisions for sales incentives can vary from actual results and we may have to record additional expenses or additional revenue reductions dependent on the classification of the sales incentive.

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularly perform credit evaluations of our customers’ financial condition and consider factors such as historical experience, credit quality, age of the accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a customer’s ability to pay. The allowance for doubtful accounts is reviewed monthlyquarterly and adjusted if necessary based on our

assessments of our customers’ ability to pay. If the financial condition of our customers should deteriorate or if actual defaults are higher than our historical experience, additional allowances may be required, which could have an adverse impact on operating expenses.

Valuation of Inventory

We value our inventory at the lower of cost or market, cost being determined using the first-in, first-out method. We continually assess the value of our inventory and will periodically write down its value for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions. On a quarterly basis, we review inventory quantities on hand and on order under non-cancelable purchase commitments, including consignment inventory, in comparison to our estimated forecast of product demand for the next nine months to determine what inventory, if any, are not saleable. Our analysis is based on the demand forecast but takes into account market conditions, product development plans, product life expectancy and other factors. Based on this analysis, we write down the affected inventory value for estimated excess and obsolescence charges. At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. As demonstrated during prior years, demand for our products can fluctuate significantly. If actual demand is lower than our forecasted demand and we fail to reduce our manufacturing accordingly, we could be required to write down additional inventory, which would have a negative effect on our gross profit.

Goodwill and intangiblesIntangibles

We apply SFAS No. 142, “Goodwill and Other Intangible Assets”the authoritative guidance for intangibles and perform an annual goodwill impairment test. Should certain events or indicators of impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur. For purposes

Refer to Note 1,The Company and Summary of impairment testing, we have determined that we have only one reporting unit.

The goodwill impairment test involvesSignificant Accounting Policies, of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for a two-step process. In the first step, we estimate our fair value and compare the fair value with the carrying valuecomplete discussion of our net assets. Ifgoodwill policies. In September 2011, the fair valueFASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 permits an entity to make a qualitative assessment of whether it is greatermore likely than the carrying value of our net assets, then no impairment results. If thenot that a reporting unit’s fair value is less than its carrying amount as a basis for determining if performing the two-step goodwill impairment test is necessary. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. We elected to adopt the updated standard for the purpose of our carrying value, then we would perform the second step and determine the fair value of the goodwill. In this second step, the amount ofgoodwill impairment is determined by comparing the implied fair value to the carrying value of the goodwilltesting in the same manner as if we were being acquired in a business combination. Specifically, we would allocate the fair value to allfourth fiscal quarter of our assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge would be recorded to earnings in the Consolidated Statements of Operations.

In addition, we would evaluate goodwill for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include the following: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in the business climate; the testing for recoverability of a significant asset group; and slower growth rates.2011.

In the fourth fiscal quarter of fiscal 2008,2011, we completed the annual impairment test of goodwill. OurWe assessed whether it was more likely than not (that is, a likelihood of more than 50%) that each reporting unit’s fair value was less than its carrying amount including goodwill by considering the following factors: macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, events affecting the reporting units, and changes in our share price. Based on these factors and the recent impairment testing in the second fiscal quarter of 2011, we determined using a combinationthat it is not more likely than not that each reporting unit’s fair value was less than its carrying amount, and therefore performing the first step of the income approach and the market approach. Under the market

approach, we utilized our own information as well as publicly available industry information to determine earnings multiples and revenue multiples that were used to value the Company. Under the income approach, we determined the fair value based on estimated future cash flows, discounted by an estimated weighted-average cost of capital, which reflects our overall level of inherent risk and the rate of return an outside investor would expect to earn. Determining our fair value is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others.

Solely for the purpose of establishing inputs for the fair value calculation, we made the following assumptions. For the income approach, a 3% growth factor was used to calculate our terminal value and the discount rate was estimated at 20%. For the market approach, we applied a control premium of 30% which seeks to give effect to the increased consideration a potential acquirer would be required to pay in order to gain sufficient ownership to set policies, direct operations and make decisions related to the Company. In conducting ourtwo-step impairment test in the fourth quarter of 2008, we determined the fair value of the Company exceeded the carrying value of our net assets by approximately 12%.for each reporting unit was unnecessary. No goodwill impairment loss was recognized in the years ended December 31, 2006, 2007,2011, 2010 or 2008.

Given2009. We do not believe it is likely that there will be a material change in the current economic environment andestimates or assumptions we use to test for impairment losses on goodwill. However, if the uncertainties regarding the impact on our business, there can be no assurance thatactual results are not consistent with our estimates andor assumptions, regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of our goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or earnings are not achieved, we may be requiredexposed to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing in the fourth quarter of 2009 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such futurean impairment charge would result or, if it does, whether such charge wouldthat could be material.

Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from twoless than one year to fiveten years. Purchased intangible assets determined to have indefinite useful lives are not amortized. Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Such conditions may include an economic downturn or a

change in the assessment of future operations. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. The carrying value of the asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment.

In the fourth quarter of 2008, a key employee responsible for managing the asset group acquired in connection with our 2006 acquisition of Skipjam Corp. departed the Company. The departure of this employee, along with the recent economic environment, resulted in our decision to reduce efforts geared at marketing the related products. As a result, we performed an impairment analysis of these long-lived assets during the fourth quarter of 2008. Based on the results of the analysis, we recorded an impairment charge within cost of revenue in the Consolidated Statements of Operations of $458,000 for the net carrying value of intangibles acquired in connection with our 2006 acquisition of Skipjam Corp. During the years ended December 31, 20072011, 2010 and 2006,2009, there were no events or changes in circumstances that indicated the carrying amount of our long-lived assets may not be recoverable from their undiscounted cash flows. Consequently, we did not perform an impairment test or record an impairment of our long-lived assets during those periods.

We will continue to evaluate the carrying value of our long-lived assets and if we determine in the future that there is a potential further impairment, we may be required to record additional charges to earnings which could affect our financial results.

Income Taxes

We account for income taxes under an asset and liability approach. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences resulting from different treatments for tax versus accounting of certain items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. As of December 31, 2008,2011, we believe that all of our deferred tax assets are recoverable; however, if there were a change in our ability to recover our deferred tax assets, we would be required to take a charge in the period in which we determined that recovery was not more likely than not.

We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” (“FIN 48”) on January 1, 2007. FIN 48 clarifies the accounting for uncertain incomeUncertain tax positionsprovisions are recognized in an enterprise’s financial statements in accordance with Statement SFAS No. 109, “Accounting for Income Taxes.” Itunder guidance that provides that a company should use a more-likely-than-not recognition threshold based on the technical merits of the income tax position taken. Income tax positions that meet the more-likely-than-not recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. As a result of adoption, we recorded a reduction in tax liability of $255,000 and a corresponding increase in retained earnings as of January 1, 2007. We include interest expense and penalties related to uncertain tax positions as additional tax expense.

Results of Operations

The following table sets forth the Consolidated Statements of Operations and the percentage change from the preceding year for the periods indicated:

 

  Year Ended December 31,  Year Ended December 31, 
  2008 Percentage
Change
 2007  Percentage
Change
 2006  2011 Percentage
Change
 2010 Percentage
Change
 2009 
  (In thousands, except percentage data)  (In thousands, except percentage data) 

Net revenue

  $743,344  2.1% $727,787  26.9% $573,570  $1,181,018    30.9 $902,052    31.4 $686,595  

Cost of revenue

   502,320  3.5%  485,180  27.7%  379,911   811,572    34.6  602,805    25.5  480,195  
                 

 

   

 

   

 

 

Gross profit

   241,024  (0.7)%  242,607  25.3%  193,659   369,446    23.5  299,247    45.0  206,400  
                 

 

   

 

   

 

 

Operating expenses:

             

Research and development

   33,773  20.3%  28,070  52.2%  18,443   48,699    21.8  39,972    33.0  30,056  

Sales and marketing

   121,687  3.2%  117,938  28.4%  91,881   154,562    17.5  131,570    23.9  106,162  

General and administrative

   31,733  16.6%  27,220  30.2%  20,905   39,423    8.8  36,220    10.7  32,727  

Restructuring

   1,929  **  —    **  —  

In-process research and development

   1,800  (56.1)%  4,100  41.4%  2,900

Restructuring and other charges

   2,094    *  (88  *  809  

Technology license arrangements

   —      *  —      (100.0%)   2,500  

Litigation reserves, net

   711  325.7%  167  **  —     (201  *  211    (89.9%)   2,080  
                 

 

   

 

   

 

 

Total operating expenses

   191,633  8.0%  177,495  32.3%  134,129   244,577    17.7  207,885    19.2  174,334  
                 

 

   

 

   

 

 

Income from operations

   49,391  (24.1)%  65,112  9.4%  59,530   124,869    36.7  91,362    184.9  32,066  

Interest income, net

   4,336  (48.5)%  8,426  20.8%  6,974   477    12.0  426    (32.3%)   629  

Other income (expense), net

   (8,384) **  3,298  32.2%  2,495   (1,136  101.4  (564  340.6  (128
                 

 

   

 

   

 

 

Income before income taxes

   45,343  (41.0)%  76,836  11.4%  68,999   124,210    36.2  91,224    180.1  32,567  

Provision for income taxes

   27,293  (11.6)%  30,882  10.8%  27,867   32,842    (18.5%)   40,315    73.5  23,234  
                 

 

   

 

   

 

 

Net income

  $18,050  (60.7)% $45,954  11.7% $41,132  $91,368    79.5 $50,909    445.5 $9,333  
                 

 

   

 

   

 

 

 

**Percentage change not meaningful as prior year basis is zero or a negative amount.meaningful.

The following table sets forth the Consolidated Statements of Operations, expressed as a percentage of net revenue, for the periods presented:

 

  Year Ended December 31,   Year Ended December 31, 
      2008         2007         2006           2011         2010         2009     

Net revenue

  100% 100% 100%   100  100  100

Cost of revenue

  67.6  66.7  66.2    68.7    66.8    69.9  
            

 

  

 

  

 

 

Gross margin

  32.4  33.3  33.8    31.3    33.2    30.1  
            

 

  

 

  

 

 

Operating expenses:

        

Research and development

  4.5  3.9  3.2    4.1    4.5    4.4  

Sales and marketing

  16.4  16.2  16.0    13.1    14.6    15.4  

General and administrative

  4.3  3.7  3.7    3.3    4.0    4.8  

Restructuring

  0.3  0.0  0.0 

In-process research and development

  0.2  0.6  0.5 

Restructuring and other charges

   0.2    0.0    0.1  

Technology license arrangements

   0.0    0.0    0.4  

Litigation reserves, net

  0.1  0.0  0.0    0.0    0.0    0.3  
            

 

  

 

  

 

 

Total operating expenses

  25.8  24.4  23.4    20.7    23.1    25.4  
            

 

  

 

  

 

 

Income from operations

  6.6  8.9  10.4    10.6    10.1    4.7  

Interest income, net

  0.6  1.2  1.2    0.0    0.1    0.1  

Other income (expense), net

  (1.1) 0.5  0.4    (0.1  (0.1  (0.1
            

 

  

 

  

 

 

Income before income taxes

  6.1  10.6  12.0    10.5    10.1    4.7  

Provision for income taxes

  3.7  4.3  4.8    2.8    4.5    3.3  
            

 

  

 

  

 

 

Net income

  2.4% 6.3% 7.2%   7.7  5.6  1.4
            

 

  

 

  

 

 

Net Revenue

 

   Year Ended December 31,
   2008  Percentage
Change
  2007  Percentage
Change
  2006
   (In thousands, except percentage data)

Net revenue

  $743,344  2.1% $727,787  26.9% $573,570
   Year Ended December 31, 
   2011   Percentage
Change
  2010   Percentage
Change
  2009 
   (In thousands, except percentage data) 

Net revenue

  $1,181,018     30.9 $902,052     31.4 $686,595  

Our net revenue consists of gross product shipments, less allowances for estimated returns for stock rotation and warranty, price protection, end-user customer rebates and other sales incentives deemed to be a reduction of net revenue per EITF Issue No. 01-9 and net changes in deferred revenue.

20082011 Net Revenue Compared to 20072010 Net Revenue

Net revenue increased $15.5$278.9 million, or 2.1%30.9%, to $743.3$1.2 billion for the year ended December 31, 2011, from $902.1 million for the year ended December 31, 2008, from $727.8 million for the year ended December 31, 2007. We experienced lower net revenue in the second half of the year due to the economic downturn and the rapid strengthening of the U.S. dollar. The increase in total year revenue was attributable to higher sales in several of our product categories. These include wireless-G products sold to existing service provider customers and the full year sales of our ReadyNAS products, which were acquired in connection with our acquisition of Infrant in May 2007, as well as growth in wireless-N router sales. The growth was partially offset by a decrease in DSL gateway products sold.

Sales incentives that are classified as contra-revenue grew at a slower rate than overall gross sales, which further contributed to the increased net revenue.

For the year ended December 31, 2008 revenue generated in the United States, EMEA and Asia Pacific and rest of world was 40.1%, 47.6% and 12.3%, respectively. The comparable net revenue for the year ended December 31, 2007 was 37.6%, 52.3% and 10.1%, respectively. The change in net revenue over the prior year for each region amounted to an 8.7% increase, a 6.9% decrease, and a 24.3% increase, respectively.

2007 Net Revenue Compared to 2006 Net Revenue

Net revenue increased $154.2 million, or 26.9%, to $727.8 million for the year ended December 31, 2007, from $573.6 million for the year ended December 31, 2006. We continued to experience our seasonal pattern of higher net revenues in the second half of the year. The increase in revenue was attributable to higher sales in several of our product categories. These include DSL gateway and cable gateway products sold to new and existing service provider customers and stronger worldwide switch sales, the launch of our ReadyNAS products, which were acquired in connection with our acquisition of Infrant, and a full year of wireless-N router sales.

Sales incentives that are classified as contra-revenue grew at a slower rate than overall gross sales, which further contributed to the increased net revenue. This favorable net revenue impact was partially offset by an increase in sales returns compared to historical return rates.

For the year ended December 31, 2007 revenue generated in the United States, EMEA and Asia Pacific and rest of world was 37.6%, 52.3% and 10.1%, respectively. The comparable net revenue for the year ended December 31, 2006 was 38.4%, 52.0% and 9.6%, respectively.2010. The increase in net revenue overwas due to strong growth in our retail and commercial product lines, and exceptional growth in service provider revenue. Refer to the discussion of segment information for additional discussion of net revenue by business unit.

In the first quarter of 2011, in order to achieve operational efficiencies, we combined our North American, Central American and South American sales forces to form the Americas territory. Previously North America was its own geographic region and the Central American and South American territories were categorized within the Asia Pacific geographic region. Following this change, we are organized into the following three geographic territories: Americas, EMEA and Asia Pacific. We have reclassified the disclosure of net revenue by geography for prior yearperiods to conform to the current period’s presentation. The change did not result in material differences from what was previously reported. Net revenue by geography comprises gross revenue less such items as marketing incentives paid to customers, sales returns and price protection.

Net revenue by geographic location is as follows:

   Twelve Months Ended 
   December 31,
2011
  Percentage
Change
  December 31,
2010
 
   (In thousands, except percentage data) 

Americas

  $587,056    25.8 $466,542  

Percentage of net revenue

   49.7%    51.7% 

Europe, Middle-East and Africa

  $477,713    40.4 $340,249  

Percentage of net revenue

   40.4%    37.7% 

Asia Pacific

  $116,249    22.0 $95,261  

Percentage of net revenue

   9.8%    10.6% 

2010 Net Revenue Compared to 2009 Net Revenue

We experienced very strong net revenue growth from 2009 to 2010. The increase in net revenue was primarily due to exceptional growth in our retail and commercial product lines, while service provider revenue was down slightly. Refer to the discussion in theSegment Information section for each region was 24.2%, 27.5% and 34.3%, respectively.additional discussion of net revenue by business unit.

Net revenue by geographic location is as follows:

   Twelve Months Ended 
   December 31,
2010
  Percentage
Change
  December 31,
2009
 
   (In thousands, except percentage data) 

Americas

  $466,542    46.4 $318,573  

Percentage of net revenue

   51.7%    46.4% 

Europe, Middle-East and Africa

  $340,249    16.4 $292,340  

Percentage of net revenue

   37.7%    42.6% 

Asia Pacific

  $95,261    25.9 $75,682  

Percentage of net revenue

   10.6%    11.0% 

Cost of Revenue and Gross Margin

 

  Year Ended December 31,   Year Ended December 31, 
  2008 Percentage
Change
 2007 Percentage
Change
 2006   2011 Percentage
Change
 2010 Percentage
Change
 2009 
  (In thousands, except percentage data)   (In thousands, except percentage data) 

Cost of revenue

  $502,320  3.5% $485,180  27.7% $379,911   $811,572    34.6 $602,805    25.5 $480,195  

Gross margin percentage

   32.4%   33.3%   33.8%   31.3%    33.2%    30.1% 

Cost of revenue consists primarily of the following: the cost of finished products from our third partythird-party manufacturers; overhead costs including purchasing, product planning, inventory control, warehousing and distribution logistics; inbound freight; warranty costs associated with returned goods; write-downs for excess and obsolete inventory; and amortization expense of certain acquired intangibles. We outsource our manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product costs and gross margin. Our gross margin can be affected by a number of factors, including fluctuation in foreign exchange rates, sales returns, changes in net revenues due to changes in average selling prices, end-user customer rebates and other sales incentives, and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, warranty and overhead costs, inbound freight, conversion costs, and charges for excess or obsolete inventory.

20082011 Cost of Revenue and Gross Margin Compared to 20072010 Cost of Revenue and Gross Margin

Cost of revenue increased $17.1$208.8 million, or 3.5%34.6%, to $502.3$811.6 million for the year ended December 31, 2008,2011, from $485.2$602.8 million for the year ended December 31, 2007.2010. Our gross margin decreased to 32.4%31.3% for the year ended December 31, 2008,2011, from 33.3%33.2% for the year ended December 31, 2007.2010.

The decrease in gross margin was primarily attributable to salesa higher percentage of products carrying lower gross marginsour total revenue derived from sales to service providers, andwhich generally carry lower gross margins. For the impact on our foreign currency denominated revenues due to the strengthening of the U.S. dollar, as well as higher warranty costs associated with end-user warranty returns. Additionally, inventory reserves increased primarily due to selling price declines of certain products. These declines were primarily attributable to the strengthening of the U.S. dollar in locations where we bill in local currencies. These negative margin impacts were partially mitigated by reduced air freight expenses as a result of increased on-hand inventory levels which allowed us to minimize the amount of higher cost air freight expense, as well as reduced marketing expenses.

Additionally, stock-based compensation expense increased $231,000 to $864,000 for the yearyears ended December 31, 2008,2011 and 2010, the sales from $633,000 for the year ended December 31, 2007.service providers represented 31% and 20% of net revenue, respectively.

20072010 Cost of Revenue and Gross Margin Compared to 20062009 Cost of Revenue and Gross Margin

Cost of revenue increased $105.3$122.6 million, or 27.7%25.5%, to $485.2$602.8 million for the year ended December 31, 2007,2010, from $379.9$480.2 million for the year ended December 31, 2006.2009. Our gross margin decreasedincreased to 33.3%33.2% for the year ended December 31, 2007,2010, from 33.8%30.1% for the year ended December 31, 2006.2009.

The decreaseincrease in gross margin percentage was primarily attributable to a higher warranty costs associated with end-user warranty returns as well as amortization expense related to certain intangible assets acquired in connection withpercentage of our total revenue coming from higher sales of retail and commercial business products, which generally carry higher gross margins. For the Infrant acquisition. We amortized an additional $3.1 million in intangibles related to our recent acquisitions in the yearyears ended December 31, 2007 as compared to2010 and 2009, the year ended December 31, 2006. We also sold through the entire $3.5 million in inventory acquiredsales from Infrant, which was recorded at fair value under purchase accounting guidelines. Of this $3.5 million, $1.3 millionservice providers represented a charge for the step-up to fair value in connection with the acquisition purchase accounting. We also experienced increased sales20% and 27% of products carrying lower gross margins to service providers.net revenue, respectively.

These negative margin impacts were partially mitigated by certain gross margin improvements. Our gross margin was impacted by our sales incentives that are recorded as a reduction in revenue which grew at a relatively slower rate than overall net revenue. We experienced decreased price protection claims, as well as relatively lower inbound freight during the year, as we were able to continue to shift the mix of inbound shipments from our suppliers from more costly air freight to lower cost sea freight due to better supply chain planning.

Additionally, stock-based compensation expense increased $203,000 to $633,000 for the year ended December 31, 2007, from $430,000 for the year ended December 31, 2006.

Operating Expenses

Research and Development Expense

 

  Year Ended December 31,   Year Ended December 31, 
  2008 Percentage
Change
 2007 Percentage
Change
 2006   2011 Percentage
Change
 2010 Percentage
Change
 2009 
  (In thousands, except percentage data)   (In thousands, except percentage data) 

Research and development expense

  $33,773  20.3% $28,070  52.2% $18,443   $48,699    21.8 $39,972    33.0 $30,056  

Percentage of net revenue

   4.5%   3.9%   3.2%   4.1%    4.5%    4.4% 

Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, prototypes and other consulting fees. Research and development expenses are recognized as they are incurred. We have invested in building our research and development organization to enhance our ability to introduce innovative and easy to useeasy-to-use products. In the future, we believe that research and development expenses will increase in absolute dollars as we expand into new networking product technologies and broaden our core competencies.

20082011 Research and Development Expense Compared to 20072010 Research and Development Expense

Research and development expenses increased $5.7$8.7 million, or 20.3%21.8%, to $33.8$48.7 million for the year ended December 31, 2008,2011, from $28.1$40.0 million for the year ended December 31, 2007.2010. The increase was primarily dueattributable to increased salary,costs of $5.5 million related to an increase in payroll and other employee expenses of $3.6 million primarily due to incremental headcount expenses related to the acquisition of Infrant in May 2007, which was partially offsetdriven by a decrease in employee performance compensation of $1.7 million. Employeeadditional headcount. Research and development headcount increased by 37%46 employees to 158224 employees as ofat December 31, 2008 as2011 compared to 115178 employees as ofat December 31, 2007, primarily due2010. Furthermore, the increase was attributable to new employees obtained from the acquisitionhigher outside service costs of certain assets of CP Secure International Holding Limited (“CP Secure”) in December 2008. The increase in research and development expense was also due to an increase in

non-recurring engineering of $1.3$2.5 million, primarily due to incremental product development projects, as well as an increase in costs allocated to research and development from other functional expense categories of $1.4 million primarily resulting from increased facilities costs primarily related to our new corporate headquarters in San Jose, California. Additionally, stock-based compensation expense increased $827,000 to $3.2 million for the year ended December 31, 2008, from $2.4 million for the year ended December 31, 2007.research and development projects.

20072010 Research and Development Expense Compared to 20062009 Research and Development Expense

Research and development expenses increased $9.7$9.9 million, or 52.2%33.0%, to $28.1$40.0 million for the year ended December 31, 2007,2010, from $18.4$30.1 million for the year ended December 31, 2006.2009. The increase was primarily dueattributable to higher salaryincreased costs of $7.2 million related to an increase in payroll and related payrollother employee expenses of $4.8 millionprincipally resulting from increased variable compensation, as well as increased overall research and development headcount growth, including $292,000 of retention bonuses for certain employees associated with the acquisition of SkipJam Corp. (“SkipJam”)headcount. Research and $1.7 million related to higher headcount from the Infrant acquisition. Employeedevelopment headcount increased by 85%29 employees to 115178 employees as ofat December 31, 2007 as2010, compared to 62149 employees as ofat December 31, 2006, in part due to 26 employees obtained from the acquisition of Infrant. Other employee expenses increased by $800,000 due to contractor conversions in our China Engineering Center and recruiting costs. Rent expense increased $643,000 due to the expansion of our China Engineering Center. Furthermore, information technology infrastructure costs allocated to research and development increased $982,000 as a result of additional investments in software and systems in 2007 as well as relatively higher headcount which drove a higher allocation percentage to research and development. Additionally, stock-based2009. We note there was minimal variable compensation expense increased $1.3 million to $2.4 million forin the year ended December 31, 2009. Also included in the $9.9 million was an increase of $646,000 due to acquisition-related contingent compensation related to our May 2007 from $1.1 million foracquisition of Infrant Technologies, Inc. earned during the year ended December 31, 2006.2010 that did not occur during the year ended December 31, 2009. Furthermore, the increase was attributable to higher outside service costs of $1.2 million, primarily related to our increased research and development projects.

Sales and Marketing Expense

 

  Year Ended December 31,   Year Ended December 31, 
  2008 Percentage
Change
 2007 Percentage
Change
 2006   2011 Percentage
Change
 2010 Percentage
Change
 2009 
  (In thousands, except percentage data)   (In thousands, except percentage data) 

Sales and marketing expense

  $121,687  3.2% $117,938  28.4% $91,881   $154,562    17.5 $131,570    23.9 $106,162  

Percentage of net revenue

   16.4%   16.2%   16.0%   13.1%    14.6%    15.4% 

Sales and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, product marketing expenses, outbound freight costs, personnel expenses for sales and marketing staff and technical support expenses. In 2009 we believe sales and marketing expense will decrease as we implement cost savings efforts.

20082011 Sales and Marketing Expense Compared to 20072010 Sales and Marketing Expense

Sales and marketing expenses increased $3.8$23.0 million, or 3.2%17.5%, to $121.7$154.6 million for the year ended December 31, 2008,2011, from $117.9$131.6 million for the year ended December 31, 2007.2010. Of this increase, $2.8$13.8 million was attributablerelated to increased salary, relatedan increase in payroll and other employee expenses as a result ofprimarily attributable to increased overall sales and marketing related headcount growth, which was partially offset by a decrease in employee performance compensation of $1.7 million. Employeeheadcount. Sales and marketing headcount increased from 260by 54 employees as ofto 357 employees at December 31, 20072011 compared to 266303 employees as ofat December 31, 2008. Most2010. Further, $7.2 million of ourthe increase in headcount occurred in connection with our expansion in EMEA and Asia Pacific. Furthermore, outbound freight increased $1.0 million, reflecting our higher unit volume sales, and costs allocated to sales and marketing from other functional expense categories increased $1.8 millionwas due to marketing costs resulting from increased facilitiesmarketing campaigns, and call center and freight costs, primarily related to our new corporate headquarters in San Jose, California. These increases were partially offset by lower advertising and promotion expenses.resulting from greater sales volumes.

20072010 Sales and Marketing Expense Compared to 20062009 Sales and Marketing Expense

Sales and marketing expenses increased $26.0$25.4 million, or 28.4%23.9%, to $117.9$131.6 million for the year ended December 31, 2007,2010, from $91.9$106.2 million for the year ended December 31, 2006.2009. Of this increase, $9.7$15.1 million was

related to an increase in payroll and other employee expenses primarily attributable to increased overall sales and marketing headcount, increased variable compensation and an increase in travel expenses. Sales and marketing headcount increased by 35 employees to 303 employees at December 31, 2010, compared to 268 employees at December 31, 2009. Additionally, marketing expenses and other outside service costs increased by $6.8 million due to increased salary and payroll related expenses, including sales commissions, as a result of sales and marketing related headcount growth and increased commissions due to the revenue growth. Employee headcount increased from 207 employees as of December 31, 2006 to 260 employees as of December 31, 2007. More specifically, 47 of the 53 incremental employees related to expansion in EMEA and Asia Pacific. Outside service fees related to customer service and technical support increased by $3.8 million, in support of higher call volumes. We also incurred a $1.9 million increase in advertising and promotion expenses related to our expansion of marketing activities into new geographic regions. Outbound freight increased $3.2 million, reflecting our higher sales volume. Travel and entertainment increased $1.7 million and rent increased by $873,000 due to the higher headcount and expansion into new countries. Marketing costs classified as operating expenses remained relatively constant, as the majority of incremental marketing expenses related to rebates and other items classified as contra-revenue. Furthermore, information technology infrastructure costs allocated to sales and marketing increased $1.9 million as a result of additional investments in software and systems in 2007 as well as relatively higher headcount which drove a higher allocation percentage to sales and marketing. Additionally, stock-based compensation expense increased $1.6 million to $3.0 million for the year ended December 31, 2007, from $1.4 million for the year ended December 31, 2006.campaigns.

General and Administrative Expense

 

  Year Ended December 31,   Year Ended December 31, 
  2008 Percentage
Change
 2007 Percentage
Change
 2006   2011 Percentage
Change
 2010 Percentage
Change
 2009 
  (In thousands, except percentage data)   (In thousands, except percentage data) 

General and administrative expense

  $31,733  16.6% $27,220  30.2% $20,905   $39,423    8.8 $36,220    10.7 $32,727  

Percentage of net revenue

   4.3%   3.7%   3.7%   3.3%    4.0%    4.8% 

General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, human resources, professional fees, allowance for doubtful accounts and other corporate expenses. In 2009 we expect general and administrative costs to increase slightly as compared to the year ended December 31, 2008.

20082011 General and Administrative Expense Compared to 20072010 General and Administrative Expense

General and administrative expenses increased $4.5$3.2 million, or 16.6%8.8%, to $31.7$39.4 million for the year ended December 31, 2008,2011, from $27.2$36.2 million for the year ended December 31, 2007.2010. The increase was primarily due to higher outside professional services, due to higher legal consulting expenses of $3.5 million. Furthermore, stock-based compensation expense increased approximately $1.0 million to $3.8 million for the year ended December 31, 2008, from $2.8 million for the year ended December 31, 2007. Overall general and administrative compensation costs were flat, as the increasesan increase in salary, related payroll and other employee expenses were offsetprimarily attributable to increased headcount. General and administrative headcount increased by a decrease in employee performance compensation.16 employees to 114 employees at December 31, 2011 compared to 98 employees at December 31, 2010.

20072010 General and Administrative Expense Compared to 20062009 General and Administrative Expense

General and administrative expenses increased $6.3$3.5 million, or 30.2%10.7%, to $27.2$36.2 million for the year ended December 31, 2007,2010, from $20.9$32.7 million for the year ended December 31, 2006. Employee headcount increased by 17%2009. Of this amount, $6.1 million was related to 77 employees as of December 31, 2007 compared to 66 employees as of December 31, 2006. We also incurred a $3.1 million increase in fees for outside professional services, due to higher accounting, tax, legal and IT consulting expenses. Software and hardware maintenance increased by $644,000 primarily due to our new enterprise resource planning system. We experienced an increase in depreciation expense of $731,000 as comparedpayroll and other employee expenses primarily attributable to the previous year due to the continued investment in our finance and operations systems. Additionally, stock-basedincreased variable compensation. We note there was minimal variable compensation expense increased approximately $1.2 million to $2.8 million forin the year ended December 31, 2007, from $1.62009. Partially offsetting this increase was a $2.4 million decrease in fees for outside legal and other professional services primarily attributable to decreased legal patent defense costs.

Restructuring and Other Charges

Restructuring and other charges increased $2.2 million, to an expense of $2.1 million during the year ended December 31, 2006. Offsetting these increases were higher IT and facilities allocations2011, from a benefit of $88,000 for year ended December 31, 2010. Of the $2.2 million increase, we incurred $1.6 million in restructuring costs for employee severance related to research and development as well as sales and marketing due to relatively higher headcount growth in those areas.the reorganization into three

Restructuring

Duringspecific business units during the year ended December 31, 2011. In addition, we incurred $464,000 in transition services in connection with the acquisition of the Customer Networking Solutions division of Westell Technologies, Inc. during the year ended December 31, 2011. For a further discussion of our restructuring expenses, please see Note 4,Restructuring and Other Charges, of the Notes to Consolidated Financial Statements.

In July 2008, we expensed $965,000 related to the termination of employment of approximately 35 individuals on November 12, 2008. Additionally, we expensed $964,000 related to excess facilities we ceased to useusing buildings leased in Santa Clara and Fremont, California, dueand consolidated all personnel and operations from those locations to our relocation to a new corporate headquarters in San Jose, California. The last of these operating leases expired in December 2010. During the year ended December 31, 2010, we realized a benefit of $88,000 related to these facilities in Santa Clara and Fremont due to lower than expected common area maintenance fees. During the year ended December 31, 2009, we expensed $809,000 related to these excess facilities. For a detailed discussion of our restructuring expenses, please see Note 4, of theRestructuring and Other Charges,in Notes to Consolidated Financial Statements.Statements in Item 8 of Part II of this Annual Report on Form 10-K.

Technology License Arrangements

We did not incur any restructuring expense duringexpenses related to technology license arrangements in the yearyears ended December 31, 2007 or 2006.

In-process Research2011 and Development2010.

During the year ended December 31, 2008,2009, we entered into a $2.5 million arrangement to license software technologies that we may integrate into certain future products. At that time, we had not yet established the technological feasibility of these products, and we did not believe the software had an alternative future use. As such, we expensed $1.8the entire technology license arrangement amount of $2.5 million for in-process research and development (“in-process R&D”) related to intangible assets purchased in our acquisition of certain assets of CP Secure. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition. The in-process R&D was expensed upon acquisition because technological feasibility had not been established and no future alternative uses exist. We acquired two in-process R&D projects, both of which involved improvements to threat management characteristics of future products.

To date, there have been no significant differences between the actual and estimated results of the in-process R&D projects. We estimate that we will incur costs of approximately $870,000 to complete the projects, of which approximately $120,000 was incurred through December 31, 2008. We expect to complete and begin benefiting from these projects in mid-2009.

During the year ended December 31, 2007, we expensed $4.1 million for in-process R&D related to intangible assets purchased in our acquisition of Infrant. The in-process R&D was expensed upon acquisition because technological feasibility had not been established and no future alternative uses exist. We acquired three in-process R&D projects. Two projects involve development of new products in the ReadyNAS desktop product category, and one project involves development of a higher end version of a product currently selling in the ReadyNAS rack mount product category. We expect to incur costs of approximately $1.6 million to complete the projects, of which approximately $1.4 million was incurred through December 31, 2008. We completed two projects in mid-2008, and we expect to complete and begin benefiting from the final project contemplated at the date of acquisition in the middle of the year ending December 31, 2009.

During the year ended December 31, 2006, we expensed $2.9 million for in-process R&D related to intangible assets purchased in our acquisition of SkipJam. The in-process R&D was expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist. We acquired only one in-process R&D project, which is related to the development of a multimedia product that had not reached technological feasibility and had no alternative use. We incurred costs of approximately $725,000 to complete the project, of which approximately $575,000 was incurred through December 31, 2006 and an additional $150,000 was incurred during the year ended December 31, 2007. We completed the project in February 2007.

Litigation Reserves and Payments

During the year ended December 31, 2011, we recorded a litigation reserve benefit of $201,000 for estimated costs related to the settlement of potential lawsuits or lawsuits already filed against us. For a detailed discussion of our litigation matters, please see Note 9,Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

During the year ended December 31, 2008,2010, we recorded a litigation reserve expense of $211,000 for estimated costs related to the settlement of potential lawsuits or lawsuits already filed against us.

During the year ended December 31, 2009, we recorded net litigation reserves expense of $711,000.$2.1 million. This expense was primarily comprised of $575,000$2.6 million in estimated costs related to the settlement of various lawsuits filed against us. Additionally, we incurred $109,000 for costsus, which includes $2.1 million related to a one-time settlement payment made to the Commonwealth Scientific and Industrial Research Organization (“CSIRO”) and $350,000 related to a one-time settlement of the patent-infringement lawsuit filed by Hybrid Patents,payment made to Network-1 Security Solutions, Inc. (“Hybrid”Network-1”) against Charter Communications, Inc. (“Charter”) where we assumed the defense of the litigation after receiving a request for indemnification from Charter and an expense of $85,000 for costs related to the settlement of the patent-infringement lawsuit filed by Linex Technologies, Inc. against us.. These expenses were offset by a reduction in previously accrued legal settlement costs of $58,000. For$500,000 due to a detailed discussion ofsummary judgment ruling in our litigation matters, please see Note 8 of the Notes to Consolidated Financial Statements.

During the year ended December 31, 2007, we recorded an expense of $167,000 for costs related to the settlement of theSercoNet v. NETGEAR lawsuit. There were no litigation reserves recorded in the year ended December 31, 2006.favor on another case.

Interest Income and Other Income (Expense)

 

  Year Ended December 31,  Year Ended December 31, 
  2008 2007  2006  2011 2010 2009 
  (In thousands)  (In thousands) 

Interest income and other income (expense)

         

Interest income, net

  $4,336  $8,426  $6,974  $477   $426   $629  

Other income (expense), net

   (8,384)  3,298   2,495   (1,136  (564  (128
           

 

  

 

  

 

 

Total interest income and other income (expense)

  $(4,048) $11,724  $9,469  $(659 $(138 $501  
           

 

 ��

 

  

 

 

Interest income represents amounts earned on our cash, cash equivalents and short-term investments.

Other income (expense), net, primarily represents gains and losses on transactions denominated in foreign currencies and other miscellaneous expenses.

20082011 Interest Income and Other Income (Expense) Compared to 20072010 Interest Income and Other Income (Expense)

The aggregate of interestInterest income interest expense, other income, and other expense amountedincreased $51,000, or 12.0%, to net other expense of $4.0 million$477,000 for the year ended December 31, 2008, compared to net other income of $11.7 million2011, from $426,000 for the year ended December 31, 2007.2010. The decrease is partially due to a $4.1 million decreaseincrease in interest income which is a resultwas primarily attributable to an increase in our average balance of a decrease in interest rates on our cash, cash equivalents, and short-term investments balances during the year. We also recorded a net foreign exchange loss of $8.4 million dueyear ended December 31, 2011, as compared to the continued strengthening of the U.S. dollar against the euro, the British pound, the Australian dollar and the Japanese yen during 2008,year ended December 31, 2010, which was a reversalpartially offset by falling interest rates.

Other expense, net, increased $572,000 to expense of $1.1 million for year ended December 31, 2011, from expense of $564,000 for year ended December 31, 2010. Our foreign currency hedging program reduced volatility associated with hedged currency exchange rate movements during the weakening U.S. dollar trend experiencedyear ended December 31, 2011. The expense of $1.1 million mainly related to forward points for hedged currency. For details of our hedging program and related foreign currency contracts, please see Note 5,Derivative Financial Instruments, in 2007.Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

20072010 Interest Income and Other Income (Expense) Compared to 20062009 Interest Income and Other Income (Expense)

The aggregate of interestInterest income interest expense, other income, and other expense amounteddecreased $203,000, or 32.3%, to net other income of $11.7 million$426,000 for the year ended December 31, 2007, compared to $9.5 million2010, from $629,000 for the year ended December 31, 2006.2009. The increase is partially due to a $1.4 million increasedecrease in interest income whichwas primarily attributable to a decrease in the average interest rate earned in the year ended December 31, 2010, as compared to the year ended December 31, 2009.

Other expense, net, increased $436,000 to expense of $564,000 for year ended December 31, 2010, from expense of $128,000 for year ended December 31, 2009. Our foreign currency hedging program reduced volatility associated with hedged currency exchange rate movements during the year ended December 31, 2010. The expense of $564,000 is a resultprimarily related to exposures in currencies that are not included in our hedging program. For details of our increased cash balances. The interest rate we earnedhedging program and related foreign currency contracts, please see Note 5,Derivative Financial Instruments,in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on our cash balances decreased during the year. Other income (expense), net, increased by $803,000. The net foreign exchange gain of $3.3 million was due to the continued weakening of the U.S. dollar against the euro, the British pound, the Australian dollar and the Japanese yen during 2007.Form 10-K.

Provision for Income Taxes

20082011 Provision for Income Taxes Compared to 20072010 Provision for Income Taxes

Provision for income taxes decreased $3.6$7.5 million, resulting in a provision of $27.3$32.8 million for the year ended December 31, 2008,2011, compared to a provision of $30.9$40.3 million for the year ended December 31, 2007.2010. The effective tax rate increased from 40.2%decreased to 26.4% for the year ended December 31, 2007 to 60.2%2011 from 44.2% for the year ended December 31, 2008.2010. The effective tax rate for both periods differed from the statutory rate of approximately35% due to state taxes, other non-deductible expenses, and tax credits. Non-deductible expenses in the year ended December 31, 2010 included certain stock based compensation. For the year ended December 31, 2011, tax on earnings from foreign operations reduced the effective tax rate by 9.5 percentage points compared to an increase of 5.1 percentage points for 2010. The tax rate benefit of earnings from foreign operations in 2011 resulted from improvements in profitability of international operations located in tax jurisdictions with rates below 35%. In 2011, state income taxes increased the effective tax rate by 1.5 percentage points compared to an increase of 4.2 percentage points for 2010. The lower impact of state taxes in 2011 compared to 2010 was primarily due to a legislation that was effective as of January 1, 2011 that provided for a more favorable methodology for computing the amount of income subject to tax in California.

2010 Provision for Income Taxes Compared to 2009 Provision for Income Taxes

Provision for income taxes increased $17.1 million, resulting in a provision of $40.3 million for the year ended December 31, 2010, compared to a provision of $23.2 million for the year ended December 31, 2009. The effective tax rate decreased to 44.2 % for the year ended December 31, 2010 from 71.3% for the year ended December 31, 2009. The effective tax rate for both periods differed from the statutory rate of 35% due to non-deductible stock-based compensation, state taxes, other non-deductible expenses, and tax credits. In 2008, there was no rate effect from in-process R&D expensed in connection with the acquisition of CP Secure since such in-process R&D was deductible for tax purposes. In 2007, the acquisition of Infrant resulted in

non-deductible in-process R&D expense which resulted in an increase in the effective tax rate. Additionally, in 2008 compared to 2007,2010 tax attributable to foreign operations increased the effective tax rate by 19.45.1 percentage points. Thispoints compared to an increase of 28.4 percentage points for 2009. In both years, this was primarily caused by the tax effect of non-deductible losses in foreign jurisdictions where no benefit cancould be claimedclaimed. The unfavorable rate impact of foreign operations was lower in 2010 compared with 2009 because of improvements in both international and increases in earnings in countries with rates higher than 35%.worldwide earnings.

2007 Provision forNet Income Taxes Compared to 2006 Provision for Income Taxes

Provision forNet income taxes increased $3.0$40.5 million resulting in a provision of $30.9to $91.4 million for the year ended December 31, 2007,2011, from a provision of $27.9$50.9 million for the year ended December 31, 2006. The effective tax rate remained unchanged and was approximately 40% for the years ended December 31, 2007 and December 31, 2006. The effective tax rate for both periods differed from our statutory rate of approximately 35% due to non-deductible stock-based compensation, non-deductible charges pertaining to in-process research and development as a result of our recent acquisitions, state taxes, other non-deductible expenses, and tax credits.

Net Income

Net income decreased $27.9 million, or 60.7%, to $18.1 million for the year ended December 31, 2008, from $46.0 million for the year ended December 31, 2007. This decrease was primarily attributable to an increase in operating expenses of $14.1 million, a decrease in other income (expense), net, of $11.7 million, and a decrease in interest income, net, of $4.1 million. These decreases in pre-tax income were offset by a decrease in provision for income taxes of $3.6 million.

Net income increased $4.9 million, or 11.7%, to $46.0 million for the year ended December 31, 2007, from $41.1 million for the year ended December 31, 2006.2010. This increase was primarily attributable to an increase in gross profit of $48.9 million, an increase in interest income of $1.4$70.2 million and ana decrease in provision for income taxes of $7.5 million. This increase in other income of $803,000. These increases werewas partially offset by an increase in operating expenses of $43.4$36.7 million.

Net income increased $41.6 million to $50.9 million for the year ended December 31, 2010, from $9.3 million for the year ended December 31, 2009. This increase was primarily attributable to an increase in gross profit of $92.8 million. This increase was partially offset by an increase in operating expenses of $33.6 million and an increase in the provision for income taxes of $3.0$17.1 million.

Segment Information

A description of our products and services, as well as segment financial data, for each segment can be found in Note 12,Segment Information, Operations by Geographic Area and Customer Concentration, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. Future changes to our organizational structure or business may result in changes to the reportable segments disclosed.

Segment contribution income includes all product line segment net revenues less the related cost of sales, research and development, and sales and marketing costs. Contribution income is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated indirect costs include corporate costs, such as corporate research and development, general and administrative costs, stock-based compensation expenses, amortization of intangibles, acquisition-related integration costs, restructuring costs, litigation reserves, and interest and other income (expense), net. A reconciliation of segment contribution income to income before income taxes can be found in Note 12,Segment Information, Operations by Geographic Area and Customer Concentration, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

Retail

   Year Ended December 31, 
   2011  Percent
Change
  2010  Percent
Change
  2009 
   ( in thousands, except percentage data) 

Net revenue

  $481,795    10.6 $435,484    50.8 $288,728  

Contribution income

   81,589    13.5  71,862    188.6  24,901  

Contribution margin

   16.9%    16.5%    8.6% 

2011 Net Retail Revenue and Contribution Income Compared to 2010 Retail Net Revenue and Contribution Income

We experienced strong net revenue growth in the retail business unit from 2010 to 2011. The increase was mainly driven by a 34.5% increase in the revenue from our home wireless-N product line due to consumers transitioning from wireless-G to wireless-N technology. We also experienced strong growth in contribution income. The increase in contribution income was primarily due to revenue growth and an increase in gross margin, which was mainly driven by a decrease in freight costs due to a favorable shift from air to sea freight. Net revenue increased by 10.6% and retail-related gross profit increased by 15.0% over the same period. The impact of the increase in gross profit was partially offset by an increase in retail-related operating expenses, which increased by 16.7% over the same period.

2010 Net Retail Revenue and Contribution Income Compared to 2009 Net Retail Revenue and Contribution Income

We experienced exceptional net revenue growth in the retail business unit from 2009 to 2010. The increase was driven by an increase in consumer demand across almost all of our product lines. In particular, revenue from our home wireless-N product line increased by 167.6% due to consumers transitioning from wireless-G to wireless-N technology. We also experienced exceptional growth in contribution income. The increase in contribution income was primarily due to revenue growth, while the increase in operating expenses was moderate. Net revenue increased by 50.8%, while retail-related operating expenses increased by only 11.1% over the same period.

Commercial

   Year Ended December 31, 
   2011  Percent
Change
  2010  Percent
Change
  2009 
   ( in thousands, except percentage data) 

Net revenue

  $331,439    16.5 $284,539    35.5 $209,953  

Contribution income

   74,746    18.6  63,021    45.7  43,255  

Contribution margin

   22.6%    22.1%    20.6% 

2011 Net Commercial Revenue and Contribution Income Compared to 2010 Commercial Net Revenue and Contribution Income

We experienced strong net revenue growth in the commercial business unit from 2010 to 2011. The increase was driven by an increase in demand across our product lines. In particular, revenue from our network storage product line and switch products increased by 15.1% and 18.6%, respectively. We also experienced strong growth in contribution income. The increase in contribution income was primarily due to revenue growth, while the increase in operating expenses was moderate. Net revenue increased by 16.5%, while commercial-related operating expenses increased by only 13.0% over the same period.

2010 Net Commercial Revenue and Contribution Income Compared to 2009 Commercial Net Revenue and Contribution Income

We experienced exceptional net revenue growth in the commercial business unit from 2009 to 2010. The increase was driven by an increase in demand across all of our product lines. In particular, revenue from our network storage product line and switch products increased by 51.3% and 34.1%, respectively. We also experienced exceptional growth in contribution income. The increase in contribution income was primarily due to revenue growth and a slight increase in gross margin, which was driven by favorable product mix and a decrease in freight costs. Commercial-related operating expenses increased in line with the increase in gross profit.

Service Provider

   Year Ended December 31, 
   2011  Percent
Change
  2010  Percent
Change
  2009 
   ( in thousands, except percentage data) 

Net revenue

  $367,784    102.0 $182,029    (3.1%)  $187,914  

Contribution income

   32,797    133.8  14,026    (28.8%)   19,697  

Contribution margin

   8.9%    7.7%    10.5% 

2011 Net Service Provider Revenue and Contribution Income Compared to 2010 Service Provider Net Revenue and Contribution Income

We experienced exceptional net revenue growth in the service provider unit from 2010 to 2011. The increase was primarily driven by the adoption of Docsis 3.0 products. We also experienced exceptional growth in contribution income. The increase in contribution income was primarily due to revenue growth, while the increase in operating expenses was moderate. Net revenue increased by 102.0%, while service-provider-related operating expenses increased by only 48.1%, due to an increase in research and development and sales and marketing, over the same period.

2010 Net Service Provider Revenue and Contribution Income Compared to 2009 Service Provider Net Revenue and Contribution Income

Net revenue in the service provider business unit was down slightly from 2009 to 2010, as service provider customers paused in anticipation of adopting Docsis 3.0. Contribution income also decreased from 2009 to 2010. The decrease in contribution income was primarily due to the decrease in revenue and an increase in service-provider-related operating expenses. Net revenue decreased by 3.1%, while service-provider-related operating expenses increased by 20.2%, driven primarily by an increase in research and development spending.

Liquidity and Capital Resources

As of December 31, 20082011, we had cash, cash equivalents and short-term investments totaling $203.0$353.7 million.

Our cash and cash equivalents balance increased from $167.5$126.2 million as of December 31, 20072010 to $192.8$208.9 million as of December 31, 2008.2011. Our short-term investments, which represent the investment of funds available for current operations, decreasedincreased from $37.8$144.6 million as of December 31, 20072010 to $10.2$144.8 million as of December 31, 2008,2011, as we shifted assets from Treasuries to low risk money market funds to Treasuries with higher returns. Operating activities during the year ended December 31, 20082011, generated cash of $47.5$96.0 million. Investing activities during the year ended December 31, 20082011 used $12.5$46.9 million, which includes the net proceeds from the salepurchases of short-term investments of $27.5$1.2 million, offset primarily by payments excluding cash acquired, made in connection with thebusiness acquisitions of Infrant and certain assets of CP Secure of $24.6$37.5 million, primarily the Westell acquisition, and purchases of property and equipment amounting to $15.4of $8.2 million. During the year ended December 31, 2008,2011, financing activities used $9.7provided $33.6 million, primarily due to the repurchase and retirement of 1.2 million shares of our common stock for $12.2 million offset in part by the issuance of our common stock upon exercise of stock options and our employee stock purchase program, as well as the excess tax benefit from exerciseexercises and cancellations of stock options.

Our days sales outstanding increaseddecreased from 7378 days as of December 31, 20072010 to 8176 days as of December 31, 2008.2011.

Our accounts payable increased from $55.3$89.2 million at December 31, 20072010 to $60.1$117.3 million at December 31, 20082011 primarily as a result of inventory growth and timing of payments.

Inventory increased by $29.2$36.3 million from $83.0$127.4 million at December 31, 20072010 to $112.2$163.7 million at December 31, 2008 in part due to a decline in sales.2011. Ending inventory turns decreased from 6.55.6 turns in the quarterthree months ended December 31, 2007,2010, to 4.05.2 turns in the quarterthree months ended December 31, 2008.2011. This decrease is primarily attributable to our increased inventory levels to support current and expected demand levels for our products, and an increase in deferred revenue from December 31, 2010 to December 31, 2011.

We enter into foreign currency forward-exchange contracts, which typically mature in three to five months, to hedge a portion of our exposure to foreign currency fluctuations of foreign currency-denominated revenue, costs of revenue, certain operating expenses, receivables, payables, and cash balances. We record on the consolidated balance sheet at each reporting period the fair value of our forward-exchange contracts and record any fair value adjustments in our Consolidated Statements of Operations.Operations and in our Consolidated Balance Sheets. Gains and losses associated with currency rate changes on hedge contracts that are non-designated under the authoritative guidance for derivatives and hedging are recorded within other income (expense), net, offsetting foreign exchange gains and losses on our monetary assets and liabilities. Gains and losses associated with currency rate changes on hedge contracts that are designated cash flow hedges under the authoritative guidance for derivatives and hedging are recorded within cumulative other comprehensive income until the related revenue, costs of revenue, or expenses are recognized.

OnIn October 21, 2008, the Board of Directors approved plansauthorized management to purchaserepurchase up to 6,000,000 shares of our outstanding common stock instock. Under this authorization, the open market. Duringtiming and actual number of shares subject to repurchase are at the year ended December 31, 2008, we purchased approximately 1.2 million sharesdiscretion of our common stock in the open market for cashmanagement and are contingent on a number of $12.2 million. As of December 31, 2008, we were authorized to purchase up to an additional 4.8 million shares under the share repurchase plan. See Note 9 of the Notes to Consolidated Financial Statements for a discussion of the accounting for our common stock repurchases. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on various factors, including, but not limited to, such factors as levels of cash generation from operations, cash requirements for acquisitions and currentthe price of our common stock. We did not repurchase any shares under this authorization during the years ended December 31, 2011, 2010 or 2009.

We also repurchase shares to help administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving RSUs throughout the year. We repurchased approximately 25,000 shares, or $926,000 of common stock price.to facilitate tax withholdings for RSUs during the year ended December 31, 2011. Similarly, during the years ended December 31, 2010 and December 31, 2009, we repurchased approximately 32,000 shares and 22,000 shares, respectively, or $736,000 and $282,000 of our common stock, respectively, to help facilitate tax withholding for RSUs. These shares were retired upon repurchase.

Based on our current plans and market conditions, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to satisfy our anticipated cash requirements for the foreseeable future. However, we cannot be certain that our planned levels of revenue, costs and expenses will be achieved. If our operating results fail to meet our expectations or if we fail to manage our inventory, accounts receivable or other assets, we could be required to seek additional funding through public or private financings or other arrangements. In addition, as we continue to expand our product offerings, channels and geographic presence, we may require additional working capital. In such event, adequate funds may not be available when needed or may not be available on favorable or commercially acceptable terms, which could have a negative effect on our business and results of operations.

Backlog

As of December 31, 2008,2011, we had a backlog of approximately $37.7$128.5 million, compared to approximately $37.8$82.4 million as of December 31, 2007.2010, primarily due to product demand required in the future. Our backlog consists of products for which customer purchase orders have been received and whichthat are scheduled or in the process of being scheduled for shipment. While we expect to fulfill the order backlog within the current year, most orders are subject to rescheduling or cancellation with little or no penalties. Because of the possibility of customer changes in product scheduling or order cancellation, our backlog as of any particular date may not be an indicator of net sales for any succeeding period.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

The following table describes our commitments to settle non-cancelable lease and purchase commitments as of December 31, 2008.2011.

 

  Less Than
1 Year
  1-3
Years
  3-5
Years
  More Than
5 Years
  Total  Less Than
1 Year
   1-3
Years
   3-5
Years
   More Than
5 Years
   Total 
  (In thousands)  (In thousands) 

Operating leases, net of sublease payments

  $5,589  $7,922  $16,716  $6,176  $36,403

Operating leases

  $6,349    $9,753    $7,539    $6,071    $29,712  

Purchase obligations

  $26,777  $—    $—    $—    $26,777  $139,411    $—      $—      $—      $139,411  
                 

 

   

 

   

 

   

 

   

 

 
  $32,366  $7,922  $16,716  $6,176  $63,180  $145,760    $9,753    $7,539    $6,071    $169,123  
                 

 

   

 

   

 

   

 

   

 

 

We lease office space, cars and equipment under non-cancelable operating leases with various expiration dates through December 2026. Rent expense was $6.3$7.0 million for the year ended December 31, 2008, $3.42011, $6.4 million for the year ended December 31, 2007,2010, and $2.2$6.2 million for the year ended December 31, 2006.2009. The terms of some of the office leases provide for rental payments on a graduated scale. We recognize rent expense

on a straight-line basis over the lease period, and have accrued for rent expense incurred but not paid. We have also accrued for the expected loss on certain facilities we do not intend to sublease. The amounts presented are consistent with contractual terms and are not expected to differ significantly, unless a substantial change in our headcount needs requires us to exit an office facility early or expand our occupied space.

We enter into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of the orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31-4531 to 45 days prior to the expected shipment date. Orders are not cancelable within 30 days prior to the expected shipment date. At December 31, 2008,2011, we had $26.8$139.4 million in non-cancelable purchase commitments with suppliers. We expect to sell all products for which we have committed purchases from suppliers.

We adopted FIN 48 on January 1, 2007. As of December 31, 20082011 and December 31, 2007,2010, we had $14.5$18.7 million and $10.0$19.8 million, respectively, of total gross unrecognized tax benefits and related interest. The timing of any payments whichthat could result from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the timing of payment cannot be estimated. We do not expect a significantThe possible reduction in liabilities for uncertain tax payment related to these obligations to occur withinpositions in multiple jurisdictions in the next 12 months.months is approximately $1.0 million, excluding the interest, penalties and the effect of any related deferred tax assets or liabilities.

Off-Balance Sheet Arrangements

As of December 31, 2008,2011, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Recent Accounting Pronouncements

See Note 1,The Company and Summary of theSignificant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, which are hereby incorporated by reference into this Part II, Item 7.reference.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We do not use derivative financial instruments in our investment portfolio. We have an investment portfolio of fixed income securities that are classified as “available-for-sale“available-for-sale” securities. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in highly rated short-term securities. Additionally, our investment policy generally limits the amount of credit exposure to any one issuer. Our investment policy requires investments to be rated triple-A with the objective of minimizing the potential risk of principal loss. Due to the short duration and conservative nature of our investment portfolio, a movement of 10% by market interest rates would not have a material impact on our operating results and the total value of the portfolio over the next fiscal year. We monitor our interest rate and credit risks, including our credit exposure to specific rating categories and to individual issuers. There were no impairment charges on our investments during fiscal 2008.2011.

Foreign Currency Transaction Risk

In the second quarter of 2005 we began toWe invoice some of our international customers in foreign currencies including, but not limited to, the Australian dollar, British pound, euro, and Japanese yen. As the customers that are currently invoiced in local currency become a larger percentage of our business, or to the extent we begin to bill additional customers in foreign currencies, the impact of fluctuations in foreign exchange rates could have a more significant impact on our results of operations. For those customers in our international markets that we continue to sell to in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore reduce the demand for our products. Such a decline in the demand for our products could reduce sales and negatively impact our operating results. Certain operating expenses of our foreign operations require payment in the local currencies.

We are exposed to risks associated with foreign exchange rate fluctuations due to our international sales and operating activities. These exposures may change over time as business practices evolve and could negatively impact our operating results and financial condition. We began using foreign currency forward contract derivatives in the fourth quarter of 2008 to partially offset our business exposure to foreign exchange risk on our foreign currency denominated assets and liabilities. Additionally, in the second quarter of 2009 we began entering into certain foreign currency forward contracts that have been designated as cash flow hedges under the authoritative guidance for derivatives and hedging to partially offset our business exposure to foreign exchange risk on portions of our anticipated foreign currency revenue, costs of revenue, and certain operating expenses. The objective of these foreign currency forward contracts is to reduce the impact of currency exchange rate movements on our operating results by offsetting gains and losses on the forward contracts with increases or decreases in foreign currency transactions. The contracts are marked-to-market on a monthly basis with gains and losses included in other income (expense), net in the Consolidated Statements of Operations.Operations, and in cumulative other comprehensive income on the Consolidated Balance Sheets. We do not use foreign currency contracts for speculative or trading purposes. Hedging of our balance sheet and anticipated cash flow exposures may not always be effective to protect us against currency exchange rate fluctuations. In addition, we do not fully hedge our balance sheet and anticipated cash flow exposures, leaving us at risk to foreign exchange gains and losses on the unhedgedun-hedged exposures. Furthermore, our hedging program is not currently structured to reduce the impact, due to volatile exchange rates, on net revenues, gross profit and operating profit. Accordingly, ifIf there waswere an adverse movement in exchange rates, we might suffer significant losses. See Note 35,Derivative Financial Instruments, of the Notes to Consolidated Financial Statements for additional disclosure on our foreign currency contracts, which are hereby incorporated by reference into this Part II, Item 7A.

As of December 31, 2008,2011, we had net assets in various local currencies. A hypothetical 10% movement in foreign exchange rates would result in an after taxafter-tax positive or negative impact of $98,000$232,000 to net income, net of our hedged position, at December 31, 2008.2011. Actual future gains and losses associated with our foreign currency exposures and positions may differ materially from the sensitivity analyses performed as of December 31, 20082011 due to the inherent limitations associated with predicting the foreign currency exchange rates, and our actual exposures and positions. For the year ended December 31, 2008, 30%2011, 13% of total net revenue was denominated in a currency other than the U.S. dollar.

Item 8.Consolidated Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of NETGEAR, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a)15(a) (1) present fairly, in all material respects, the financial position of NETGEAR, Inc. and its subsidiaries at December 31, 20082011 and December 31, 2007,2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20082011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2011, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management��sManagement’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 of the Notes to Consolidated Financial Statements, the Company changed the manner in which it accounts for fair value measurement of financial assets and liabilities in 2008 and the manner in which it accounts for uncertain tax positions in 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/    PricewaterhouseCoopers LLP

San Jose, CaliforniaCA

March 3, 2009February 29, 2012

NETGEAR, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

  December 31,  December 31, 
  2008  2007  2011   2010 
ASSETS        

Current assets:

        

Cash and cash equivalents

  $192,839  $167,495  $208,898    $126,173  

Short-term investments

   10,170   37,848   144,797     144,564  

Accounts receivable, net

   138,275   157,765   261,307     226,731  

Inventories

   112,240   83,023   163,724     127,394  

Deferred income taxes

   13,129   13,091   23,088     19,332  

Prepaid expenses and other current assets

   22,695   20,367   32,415     23,850  
        

 

   

 

 

Total current assets

   489,348   479,589   834,229     668,044  

Property and equipment, net

   20,292   11,205   15,884     17,503  

Intangibles, net

   13,311   16,319   20,956     6,241  

Goodwill

   61,400   41,985   85,944     74,198  

Other non-current assets

   1,858   2,011   14,357     14,335  
        

 

   

 

 

Total assets

  $586,209  $551,109  $971,370    $780,321  
        

 

   

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY        

Current liabilities:

        

Accounts payable

  $60,073  $55,333  $117,285    $89,155  

Accrued employee compensation

   7,177   16,085   26,896     24,130  

Other accrued liabilities

   87,747   89,470   120,480     110,413  

Deferred revenue

   21,508   7,619   40,093     27,538  

Income taxes payable

   4,207     3,487  
        

 

   

 

 

Total current liabilities

   176,505   168,507   308,961     254,723  

Deferred income tax liability

   15   2,626

Non-current income taxes payable

   12,357   8,272   18,657     19,719  

Other non-current liabilities

   6,374   181   4,995     5,443  
        

 

   

 

 

Total liabilities

   195,251   179,586   332,613     279,885  

Commitments and contingencies (Note 8)

    

Commitments and contingencies (Note 9)

    

Stockholders’ equity:

        

Preferred stock: $0.001 par value; 5,000,000 shares authorized in 2008 and 2007; none outstanding in 2008 or 2007

   —     —  

Common stock: $0.001 par value; 200,000,000 shares authorized in 2008 and 2007; shares issued and outstanding: 34,280,539 in 2008 and 35,243,586 in 2007

   34   35

Preferred stock: $0.001 par value; 5,000,000 shares authorized; none issued or outstanding.

   —       —    

Common stock: $0.001 par value; 200,000,000 shares authorized; shares issued and outstanding: 37,646,872 and 36,173,406 at December 31, 2011 and 2010, respectively.

   38     36  

Additional paid-in capital

   266,070   252,421   364,243     316,108  

Cumulative other comprehensive income

   67   101   23     281  

Retained earnings

   124,787   118,966   274,453     184,011  
        

 

   

 

 

Total stockholders’ equity

   390,958   371,523   638,757     500,436  
        

 

   

 

 

Total liabilities and stockholders’ equity

  $586,209  $551,109  $971,370    $780,321  
        

 

   

 

 

The accompanying notes are an integral part of these consolidated financial statements.

NETGEAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

  Year Ended December 31,  Year Ended December 31, 
  2008 2007  2006  2011 2010 2009 

Net revenue

  $743,344  $727,787  $573,570  $1,181,018   $902,052   $686,595  

Cost of revenue

   502,320   485,180   379,911   811,572    602,805    480,195  
           

 

  

 

  

 

 

Gross profit

   241,024   242,607   193,659   369,446    299,247    206,400  
           

 

  

 

  

 

 

Operating expenses:

         

Research and development

   33,773   28,070   18,443   48,699    39,972    30,056  

Sales and marketing

   121,687   117,938   91,881   154,562    131,570    106,162  

General and administrative

   31,733   27,220   20,905   39,423    36,220    32,727  

Restructuring

   1,929   —     —  

In-process research and development

   1,800   4,100   2,900

Restructuring and other charges

   2,094    (88  809  

Technology license arrangements

   —      —      2,500  

Litigation reserves, net

   711   167   —     (201  211    2,080  
           

 

  

 

  

 

 

Total operating expenses

   191,633   177,495   134,129   244,577    207,885    174,334  
           

 

  

 

  

 

 

Income from operations

   49,391   65,112   59,530   124,869    91,362    32,066  

Interest income, net

   4,336   8,426   6,974   477    426    629  

Other income (expense), net

   (8,384)  3,298   2,495   (1,136  (564  (128
           

 

  

 

  

 

 

Income before income taxes

   45,343   76,836   68,999   124,210    91,224    32,567  

Provision for income taxes

   27,293   30,882   27,867   32,842    40,315    23,234  
           

 

  

 

  

 

 

Net income

  $18,050  $45,954  $41,132  $91,368   $50,909   $9,333  
           

 

  

 

  

 

 

Net income per share:

         

Basic

  $0.51  $1.32  $1.23  $2.46   $1.44   $0.27  
           

 

  

 

  

 

 

Diluted

  $0.51  $1.28  $1.19  $2.41   $1.41   $0.27  
           

 

  

 

  

 

 

Weighted average shares outstanding used to compute net income per share:

         

Basic

   35,212   34,809   33,381   37,121    35,385    34,485  
           

 

  

 

  

 

 

Diluted

   35,619   35,839   34,553   37,932    36,124    34,848  
           

 

  

 

  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

NETGEAR, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2006, 2007 and 2008

(In thousands)

 

 Common Stock Paid-In
Capital
  Stock-Based
Compensation
  Comprehensive
Income (Loss)
  Retained
Earnings
  Total   Common Stock   Additional
Paid-In
Capital
   Cumulative
Other
Comprehensive
Income (Loss)
  Retained
Earnings
  Total 
 Shares Amount   Shares Amount    

Balance at December 31, 2005

 32,964  $33  $204,754  $(468) $(90) $31,775  $236,004 

Balance at December 31, 2008

   34,280   $34    $266,070    $67   $124,787   $390,958  
  

 

  

 

   

 

   

 

  

 

  

 

 

Comprehensive income:

                

Unrealized gain on short-term investments, net of tax

 —     —     —     —     85   —     85 

Net income

 —     —     —     —     —     41,132   41,132 
         

Total comprehensive income

 —     —     —     —     —     —     41,217 
         

Reversal of deferred stock-based compensation

 —     —     (468)  468   —     —     —   

Stock-based compensation expense

 —     —     4,505   —     —     —     4,505 

Issuance of common stock under stock-based compensation plans

 997   1   8,532   —     —     —     8,533 

Tax benefit from exercise of stock options

 —     —     4,163   —     —     —     4,163 
                     

Balance at December 31, 2006

 33,961   34   221,486   —     (5)  72,907   294,422 

Cumulative adjustment resulting from adoption of FIN 48

 —     —     —     —     —     255   255 

Comprehensive income:

       

Unrealized gain on short-term investments, net of tax

 —     —     —     —     106   —     106 

Change in unrealized gains and losses on available-for-sale securities, net of tax

   —      —       —       (63  —      (63

Change in unrealized gains and losses on derivatives, net of tax

   —      —       —       20    —      20  

Net income

 —     —     —     —     —     45,954   45,954    —      —       —       —      9,333    9,333  
                  

 

 

Total comprehensive income

 —     —     —     —     —     —     46,060           9,290  
                  

 

 

Stock-based compensation expense

 —     —     8,879   —     —     —     8,879    —      —       11,059     —      —      11,059  

Purchase and retirement of common stock

 (5)  —     —     —     —     (150)  (150)   (21  —       —       —      (282  (282

Issuance of common stock under stock-based compensation plans

 1,288   1   13,692   —     —     —     13,693    474    1     2,991     —      —      2,992  

Tax benefit from exercise of stock options

 —     —     8,364   —     —     —     8,364 

Tax benefit from exercises and cancellations of stock options

   —      —       136     —      —      136  
                       

 

  

 

   

 

   

 

  

 

  

 

 

Balance at December 31, 2007

 35,244   35   252,421   —     101   118,966   371,523 

Balance at December 31, 2009

   34,733    35     280,256     24    133,838    414,153  
  

 

  

 

   

 

   

 

  

 

  

 

 

Comprehensive income:

                

Unrealized loss on short-term investments, net of tax

 —     —     —     —     (34)  —     (34)

Change in unrealized gains and losses on available-for-sale securities, net of tax

   —      —       —       4    —      4  

Change in unrealized gains and losses on derivatives, net of tax

   —      —       —       253    —      253  

Net income

 —     —     —     —     —     18,050   18,050    —      —       —       —      50,909    50,909  
                  

 

 

Total comprehensive income

 —     —     —     —     —     —     18,016           51,166  
                  

 

 

Stock-based compensation expense

 —     —     11,206   —     —     —     11,206    —      —       12,177     —      —      12,177  

Purchase and retirement of common stock

 (1,178)  (1)  —     —     —     (12,229)  (12,230)   (32  —       —       —      (736  (736

Issuance of common stock under stock-based compensation plans

 214   —     2,362   —     —     —     2,362    1,472    1     20,116     —      —      20,117  

Tax benefit from exercise of stock options

 —     —     81   —     —     —     81 

Tax benefit from exercises and cancellations of stock options

   —      —       3,559     —      —      3,559  
                       

 

  

 

   

 

   

 

  

 

  

 

 

Balance at December 31, 2008

 34,280  $34  $266,070  $—    $67  $124,787  $390,958 

Balance at December 31, 2010

   36,173    36     316,108     281    184,011    500,436  
                       

 

  

 

   

 

   

 

  

 

  

 

 

Comprehensive income:

         

Change in unrealized gains and losses on available-for-sale securities, net of tax

   —      —       —       9    —      9  

Change in unrealized gains and losses on derivatives, net of tax

   —      —       —       (267  —      (267

Net income

   —      —       —       —      91,368    91,368  
         

 

 

Total comprehensive income

          91,110  
         

 

 

Stock-based compensation expense

   —      —       13,727     —      —      13,727  

Purchase and retirement of common stock

   (25  —       —       —      (926  (926

Issuance of common stock under stock-based compensation plans

   1,499    2     30,889     —      —      30,891  

Tax benefit from exercises and cancellations of stock options

   —      —       3,519     —      —      3,519  
  

 

  

 

   

 

   

 

  

 

  

 

 

Balance at December 31, 2011

   37,647   $38    $364,243    $23   $274,453   $638,757  
  

 

  

 

   

 

   

 

  

 

  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

NETGEAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

  Year Ended December 31,   Year Ended December 31, 
  2008 2007 2006   2011 2010 2009 

Cash flows from operating activities:

        

Net income

  $18,050  $45,954  $41,132   $91,368   $50,909   $9,333  

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

   13,261   12,685   7,078    14,735    13,439    12,360  

Purchase premium amortization (discount accretion) on investments

   56   (1,044)  (1,835)   986    468    (4

Non-cash stock-based compensation

   11,323   8,879   4,505    13,762    12,201    11,024  

Income tax benefit associated with stock option exercises

   81   8,364   4,163 

Income tax benefit associated with stock option exercises and cancellations

   3,519    3,559    136  

Excess tax benefit from stock-based compensation

   (143)  (7,053)  (3,806)   (3,672  (3,470  (869

Deferred income taxes

   (2,029)  (1,044)  (3,252)   (4,621  (8,435  (4,865

Changes in assets and liabilities, net of effect of acquisitions:

        

Accounts receivable

   19,490   (36,962)  (15,332)   (34,576  (63,878  (24,578

Inventories

   (29,135)  (1,588)  (26,059)   (30,039  (36,804  21,650  

Prepaid expenses and other assets

   (2,175)  (6,346)  (6,582)   (7,935  (3,220  103  

Accounts payable

   4,740   14,818   906    28,131    20,074    9,008  

Accrued employee compensation

   (8,908)  3,886   4,060    2,765    13,090    3,863  

Other accrued liabilities

   4,942   12,659   9,497    9,374    21,794    (272

Deferred revenue

   13,889   (616)  3,911    12,555    5,432    598  

Income taxes payable

   4,085   781   4,682    (342  1,192    10,610  
            

 

  

 

  

 

 

Net cash provided by operating activities

   47,527   53,373   23,068    96,010    26,351    48,097  
            

 

  

 

  

 

 

Cash flows from investing activities:

        

Purchases of short-term investments

   (10,133)  (75,670)  (173,191)   (228,871  (185,128  (89,827

Proceeds from sale of short-term investments

   37,700   148,765   149,036    227,669    115,000    25,000  

Purchase of property and equipment

   (15,390)  (9,839)  (5,918)   (8,211  (8,720  (3,945

Payments made in connection with business acquisitions, net of cash acquired

   (24,635)  (57,466)  (7,600)

Loans issued, net of loan repaid

   —      (102  —    

Payments for patents

   —      (1,270  —    

Cost method investment

   —      (3,009  —    

Payments made in connection with business acquisitions

   (37,509  (12,000  (3,539
            

 

  

 

  

 

 

Net cash provided by (used in) investing activities

   (12,458)  5,790   (37,673)

Net cash used in investing activities

   (46,922  (95,229  (72,311
            

 

  

 

  

 

 

Cash flows from financing activities:

        

Purchase and retirement of common stock

   (12,229)  (150)  —      (926  (738  (282

Proceeds from exercise of stock options

   1,008   12,487   7,433    29,139    18,915    1,861  

Proceeds from issuance of common stock under employee stock purchase plan

   1,353   1,206   1,100    1,752    1,202    1,129  

Excess tax benefit from stock-based compensation

   143   7,053   3,806    3,672    3,470    869  
            

 

  

 

  

 

 

Net cash provided by (used in) financing activities

   (9,725)  20,596   12,339 

Net cash provided by financing activities

   33,637    22,849    3,577  
            

 

  

 

  

 

 

Net increase (decrease) in cash and cash equivalents

   25,344   79,759   (2,266)   82,725    (46,029  (20,637

Cash and cash equivalents, at beginning of period

   167,495   87,736   90,002    126,173    172,202    192,839  
            

 

  

 

  

 

 

Cash and cash equivalents, at end of period

  $192,839  $167,495  $87,736   $208,898   $126,173   $172,202  
            

 

  

 

  

 

 

Supplemental cash flow information:

        

Cash paid for income taxes

  $25,177  $25,349  $22,284   $34,365   $44,083   $14,401  
            

 

  

 

  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—The Company and Summary of Significant Accounting Policies:Policies

The Company

NETGEAR, Inc. (“NETGEAR” or the “Company”) was incorporated in Delaware in January 1996. The Company designs, developsis a global networking company that delivers innovative products to consumers, businesses and markets networking products for small business, whichservice providers. For consumers, the Company defines as a businessmakes high performance, dependable and easy-to-use home networking, storage and digital media products to connect people with fewer than 250 employees,the Internet and home users.their content and devices. For businesses, the Company provides networking, storage and security solutions without the cost and complexity of Big IT. The Company focuses on satisfying the ease-of-use, quality, reliability, performancealso supplies leading service providers with made-to-order and affordability requirements of these users.retail proven, whole home networking solutions for their customers. The Company’s product offerings enable users to share Internet access, peripherals, files, digital multimedia contentproducts are built on a variety of proven technologies such as wireless, Ethernet and applications among multiple networked devicespowerline, with a focus on reliability and other Internet-enabled devices.ease-of-use. The Company sells products primarily through a global sales channel network, which includes traditional retailers, online retailers, wholesale distributors, direct market resellers or DMRs,(“DMRs”), value added resellers or VARs,(“VARs”), and broadband service providers.

Basis of presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in the consolidation of these subsidiaries. Certain reclassifications have been made to prior period reported amounts to conform to current year presentation.

Fiscal periods

The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Reclassifications

In the first quarter of 2011, in order to achieve operational efficiencies, the Company combined its North American, Central American and South American sales forces to form the Americas territory. Previously North America was its own geographic region and the Central American and South American territories were categorized within the Asia Pacific (“APAC”) geographic region. Following this change, the Company is organized into the following three geographic territories: Americas, Europe, Middle-East and Africa (“EMEA”) and APAC. the Company has reclassified its disclosure of net revenue by geography for prior periods to conform to the current period’s presentation. The change did not result in material differences from what was previously reported.

Cash and cash equivalents

The Company considers all highly liquid investments with aan original maturity at the time of purchase of three months or less to be cash equivalents. The Company deposits cash and cash equivalents with high credit quality financial institutions.

Short-term investments

Short-term investments compriseare comprised of marketable securities that consist of government securities with an original maturity or a remaining maturity at the time of purchase, of greater than three months and no more than twelve12 months. All marketable securities are held in the Company’s name with one high quality financial institution, which acts as the Company’s custodian and investment manager. All of the Company’s marketable securities are classified as available-for-sale securities in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting For Certain Investments in Debt and Equity Securities”the authoritative guidance for investments and are carried at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity.

Certain risks and uncertainties

The Company’s products are concentrated in the networking industry, which is characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. The success of the Company depends on management’s ability to anticipate and/or to respond quickly and adequately to technological developments in its industry, changes in customer requirements, or changes in regulatory requirements or industry standards. Any significant delays in the development or introduction of products could have a material adverse effect on the Company’s business and operating results.

The Company relies on a limited number of third parties to manufacture all of its products. If any of the Company’s third partythird-party manufacturers cannot or will not manufacture its products in required volumes, on a cost-effective basis, in a timely manner, or at all, the Company will have to secure additional manufacturing capacity. Any interruption or delay in manufacturing could have a material adverse effect on the Company’s business and operating results.

Derivative financial instruments

The Company uses foreign currency forward contracts to hedgemanage the exposures to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses, and on certain existing foreign currency denominated assets and liabilities. Foreign currency forward contracts generally mature within threefive months of inception. Under its foreign currency risk management strategy, the Company utilizes derivative instruments to reduce the impact of currency exchange rate movements on the Company’s operating results by offsetting gains and losses on the forward contracts with increases or decreases in foreign currency transactions. These exposuresThe company does not use derivative financial instruments for speculative purposes.

The Company accounts for its derivative instruments as either assets or liabilities and records them at fair value. Derivatives that are monitorednot defined as hedges in the authoritative guidance for derivatives and managed byhedging must be adjusted to fair value through earnings. For derivative instruments that hedge the Companyexposure to variability in expected future cash flows that are designated as an integral partcash flow hedges, the effective portion of its overall risk management program which focusesthe gain or loss on the unpredictabilityderivative instrument is reported as a component of foreign currency marketscumulative other comprehensive income in stockholders’ equity and seeksreclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to reduce the potentially adverse effects that the volatility of these markets may haveexpected future cash flows on its operating results. The Company does not designate these foreign currency forward contractshedged transactions. For derivatives designated as hedging instruments and, as such, records thecash flow hedges, changes in the fairtime value are excluded from the assessment of these derivativeshedge effectiveness and are recognized in earnings in accordance with SFAS No. 52, “Foreign Currency Translation.”earnings.

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. The Company believes that there is minimal credit risk associated with the investment of its cash and cash equivalents and short-term investments, due to the restrictions placed on the type of investment that can be entered into under the Company’s investment policy. The Company’s short-term investments consist of investment-grade securities, and the Company’s cash and investments are held and managed by recognized financial institutions.

The Company’s customers are primarily distributors as well as retailers and broadband service providers who sell or distribute the products to a large group of end-users. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company regularly performs credit evaluations of the Company’s customers’ financial condition and considers factors such as historical experience, credit quality, age of the accounts receivable balances, and geographic or country-specific risks and current economic conditions that may affect customers’ ability to pay, and, generally, requires no collateral from its customers. The Company secures credit insurance for certain customers in international and domestic markets.

As of December 31, 2011, Best Buy, Inc. represented greater than 10% of the Company’s total accounts receivable. As of December 31, 2010, Best Buy, Inc. and Wal-Mart Stores, Inc. each represented greater than 10% of the Company’s total accounts receivable.

The Company is exposed to credit loss in the event of nonperformance by counterparties to the foreign currency forward contracts used to mitigate the effect of foreign currency exchange rate changes. The Company believes the counterparties for its outstanding contracts are large, financially sound institutions and thus, the Company does not anticipate nonperformance by these counterparties. However, given the recent, unprecedented turbulence in the financial markets, the failure of additional counterparties is possible.

The following table summarizes the percentage of the Company’s total accounts receivable represented by customers with balances in excess of 10% of its total accounts receivable as of December 31, 2008 and 2007.

   December 31, 
       2008          2007     

Best Buy Co., Inc.

  18% 19%

Ingram Micro, Inc.

  12% 11%

Fair value measurements

The carrying amounts of the Company’s financial instruments, including cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their fair values due to their short maturities. Foreign currency forward contracts are recorded at fair value based on observable market data. See Note 1213,Fair Value of Financial Instruments,of the Notes to Consolidated Financial Statements for disclosures regarding fair value measurements in accordance with SFAS No. 157, Fair Value Measurements (“SFAS 157”).the authoritative guidance for fair value measurements and disclosures.

Cost method investments and loans receivable

As of December 31, 2011, the Company has $3.0 million in cost method investments classified within other non-current assets. The Company measures its cost method investments and loans receivable at fair value quarterly; however, they are recorded at fair value only when an impairment charge is recognized. No impairment charges have been recognized related to the Company’s cost method investments and loans receivable in the years ended December 31, 2011 and 2010.

In the second fiscal quarter of 2010, the Company made a $3.0 million loan to a third party that was classified within prepaid and other current assets. The loan was repaid in the fourth fiscal quarter of 2010. Additionally, the Company made a $3.0 million cost method investment that was classified within other non-current assets in the fourth fiscal quarter of 2010.

Allowance for doubtful accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company regularly performs credit evaluations of its customers’ financial condition and considers factors such as historical experience, credit quality, age of the accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a customer’s ability to pay. The allowance for doubtful accounts is reviewed quarterly and adjusted if necessary based on the Company’s assessments of its customers’ ability to pay. If the financial condition of the Company’s customers should deteriorate or if actual defaults are higher than the Company’s historical experience, additional allowances may be required, which could have an adverse impact on operating expenses.

Inventories

Inventories consist primarily of finished goods which are valued at the lower of cost or market, with cost being determined using the first-in, first-out method. The Company writes down its inventories based on estimated excess and obsolete inventories determined primarily by future demand forecasts. At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

Property and equipment, net

Property and equipment are stated at historical cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Computer equipment

  2 years

Furniture and fixtures

  5 years

Software

  2-5 years

Machinery and equipment

  2-3 years

Leasehold improvements

  Shorter of the lease term or 5 years

The Company accounts for impairment of property and equipment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The carrying value of the asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment. Charges related to the impairment of property and equipment were not material in the years ended December 31, 2008, 20072011, 2010 and 2006.2009.

Goodwill

The Company applies SFAS No. 142, “Goodwill and Other Intangible Assets” and performs an annual goodwill impairment test in the fourth quarter of each year. Should certain events or indicators of impairment occur between annual impairment tests, the Company will perform the impairment test as those events or indicators occur. For purposes of impairment testing, the Company has determined that it has only one reporting unit.

The goodwill impairment test involves a two-step process. In the first step, the Company estimates the Company’s fair value and compares the fair value with the carrying value of the Company’s net assets. If the fair

value is greater than the carrying value of the Company’s net assets, then no impairment results. If the fair value is less than its carrying value, then the Company would perform the second step and determine the fair value of the goodwill. In this second step, the amount of impairment is determined by comparing the implied fair value to the carrying value of the goodwill in the same manner as if the Company was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the Company’s assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge would be recorded to earnings in the Consolidated Statements of Operations.

In addition, the Company would evaluate goodwill for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include the following: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse change in the business climate; the testing for recoverability of a significant asset group; and slower growth rates. The Company assesses goodwill impairment at the reporting unit level.

In the fourthsecond fiscal quarter of fiscal 2008,2011, the Company completedperformed a goodwill impairment assessment as a result of its change in reportable segments. Refer to Note 12,Segment Information, Operations by Geographic Area and Customer Concentration, of the annual impairment testNotes to Consolidated Financial Statements for additional information regarding the change in segment reporting. The company allocated goodwill to each segment based on their relative fair values. The Company then compared the fair value of goodwill.the new reporting units to the reporting unit’s carrying value and determined that goodwill was not impaired since the estimated fair values of each of the reporting units exceeded the carrying values. The Company’s fair value of the new business units was determined using an income approach and a combination ofmarket approach which were weighted equally. Under the income approach, and the market approach.fair value of an asset is based on the value of the estimated cash flows that the asset can be expected to generate in the future. These estimated future cash flows were discounted at rates ranging from 13 to 15 percent to arrive at their respective fair values. Under the market approach, the Company utilized information regarding the Company as well as publicly available industry information to determine earnings multiples and revenue multiples that were used to value the Company. Under the income approach, the Company determined the fair value of the unit is based on estimated future cash flows, discounted by an estimated weighted-average costanalysis of capital, which reflectsfinancial data for publicly traded companies engaged in the Company’s overall levelsame or similar lines of inherent riskbusiness.

In September 2011, the FASB issued ASU 2011-08, “Intangibles—Goodwill and the rateOther (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 permits an entity to make a qualitative assessment of return an outside investor would expect to earn. Determining the Company’swhether it is more likely than not that a reporting unit’s fair value is judgmental in natureless than its carrying amount as a basis for

determining if performing the two-step goodwill impairment test is necessary. ASU 2011-08 is effective for annual and requiresinterim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. The Company elected to adopt the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others.

Solelyupdated standard for the purpose of establishing inputs for the fair value calculation, the Company made the following assumptions. For the income approach, a 3% growth factor was used to calculate the Company’s terminal valueits goodwill impairment testing, and the discount rate was estimated at 20%. For the market approach, the Company applied a control premiumas such performed its annual impairment test of 30% which seeks to give effect to the increased consideration a potential acquirer would be required to pay in order to gain sufficient ownership to set policies, direct operations and make decisions related to the Company. In conducting its impairment testgoodwill in the fourth fiscal quarter of 2008,2011. The Company assessed whether it was more likely than not (that is, a likelihood of more than 50%) that each reporting unit’s fair value was less than its carrying amount including goodwill by considering the following factors: macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, events affecting the reporting units, and changes in the Company’s share price. Based on these factors and the recent impairment testing in the second fiscal quarter of 2011, the Company determined itsthat it is not more likely than not that each reporting unit’s fair value exceededwas less than its carrying amount, and therefore performing the carrying valuefirst step of its net assets by approximately 12%. the two-step impairment test for each reporting unit was unnecessary.

No goodwill impairment loss was recognized in the years ended December 31, 2006, 2007,2011, 2010 or 2008.

Given the current economic environment and the uncertainties regarding the impact on the Company’s business, there can be no assurance that the Company’s estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the Company’s goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue or earnings are not achieved, the Company may be required to record goodwill impairment charges in future periods, whether in connection with the Company’s next annual impairment testing in the fourth quarter of 2009 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.2009.

Long-lived assets

Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from twoless than one year to fiveten years. Purchased intangible assets determined to have indefinite useful lives are not amortized. Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”recoverable. Such conditions may include an economic downturn or a change

in the assessment of future operations. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the aggregate undiscounted cash flows are less than the carrying value of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. The carrying value of the asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment.

In the fourth quarter of 2008, a key employee responsible for managing the asset group acquired in connection with the Company’s 2006 acquisition of Skipjam Corp. departed the Company. The departure of this employee, along with the recent economic environment, resulted in the Company’s decision to reduce efforts geared at marketing the related products. As a result, the Company performed an impairment analysis of these long-lived assets during the fourth quarter of 2008. Based on the results of the analysis, the Company recorded an impairment charge, which was classified in cost of revenue in the Consolidated Statements of Operations, of $458,000 for the net carrying value of intangibles acquired in connection with the Company’s 2006 acquisition of Skipjam Corp. During the years ended December 31, 20072011, 2010 and 2006,2009, there were no events or changes in circumstances that indicated the carrying amount of the Company’s long-lived assets may not be recoverable from their undiscounted cash flows. Consequently, the Company did not perform an impairment test or record an impairment of its long-lived assets during those periods.

The Company will continue to evaluate the carrying value of its long-lived assets and if it determines in the future that there is a potential further impairment, the Company may be required to record additional charges to earnings which could affect the Company’s financial results.

Product warranties

The Company provides for estimated future warranty obligations at the time revenue is recognized. The Company’s standard warranty obligation to its direct customers generally provides for a right of return of any product for a full refund in the event that such product is not merchantable or is found to be damaged or defective. At the time revenue is recognized, an estimate of future warranty returns is recorded to reduce revenue in the amount of the expected credit or refund to be provided to its direct customers. At the time the Company records the reduction to revenue related to warranty returns, the Company includes within cost of revenue a write-down to reduce the carrying value of such products to net realizable value. The Company’s standard warranty obligation to its end-users provides for replacement of a defective product for one or more years. Factors that affect the warranty obligation include product failure rates, material usage, and service delivery costs incurred in correcting product failures. The estimated cost associated with fulfilling the Company’s warranty

obligation to end-users is recorded in cost of revenue. Because the Company’s products are manufactured by third partythird-party manufacturers, in certain cases the Company has recourse to the third partythird-party manufacturer for replacement or credit for the defective products. The Company gives consideration to amounts recoverable from its third partythird-party manufacturers in determining its warranty liability. Changes in the Company’s warranty liability, which is included as a component of “Other accrued liabilities” in the consolidated balance sheets, are as follows (in thousands):

 

   Year Ended December 31, 
         2008              2007       

Balance as of beginning of the period

  $27,557  $21,299 

Provision for warranty liability made during the period

   46,449   45,400 

Warranty obligation assumed in acquisition

   82   432 

Settlements made during the period

   (45,481)  (39,574)
         

Balance at end of period

  $28,607  $27,557 
         

   Year Ended December 31, 
           2011                  2010         

Balance as of beginning of the period

  $40,513   $30,610  

Provision for warranty liability made during the period

   60,285    61,854  

Settlements made during the period

   (55,952  (51,951
  

 

 

  

 

 

 

Balance at end of period

  $44,846   $40,513  
  

 

 

  

 

 

 

Revenue recognition

Revenue from product sales is generally recognized at the time the product is shipped provided that persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the related receivable is reasonably assured. Currently, for some of the Company’s customers, title passes to the customer upon delivery to the port or country of destination, upon their receipt of the product, or upon the customer’s resale of the product. At the end of each fiscal quarter, the Company estimates and defers revenue related to product where title has not transferred. The revenue continues to be deferred until such time that title passes to the customer. The Company assesses collectability based on a number of factors, including general economic and market conditions, past transaction history with the customer, and the creditworthiness of the customer. If the Company determines that collection of the fee is not reasonably assured, then the Company defers the fee and recognizes revenue upon receipt of payment.

In additionOctober 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). The guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) is unavailable. Concurrently to warranty-related returns, certainissuing ASU 2009-13, the FASB also issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements”. ASU 2009-14 excludes software that is contained on a tangible product from the scope of software revenue guidance if the software is essential to the tangible product’s functionality. The Company elected to early adopt these standards at the beginning of its first quarter of fiscal year 2010 on a prospective basis for applicable transactions originating or materially modified after January 1, 2010.

The Company has an insignificant amount of product offerings with multiple elements. The Company’s multiple-element product offerings include networking hardware with embedded software, various software subscription services, and support, which are considered separate units of accounting. In general, the networking hardware with embedded software is delivered up front, while the subscription services and support are delivered over the subscription and support period. The Company allocates revenue to the software deliverables and the non-software deliverables (including software deliverables which function together with hardware deliverables to provide the product’s essential functionality) based upon their relative selling price. Revenue allocated to each unit of accounting is then recognized when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the related receivable is reasonably assured.

When applying the relative selling price method, the Company determines the selling price for each deliverable using VSOE of fair value of the deliverable, or when VSOE of fair value unavailable, its best

estimate of selling price (“ESP”), as the Company has determined it is unable to establish TPE of selling price for the deliverables. In determining VSOE, the Company requires that a substantial majority of the selling prices for a deliverable sold on a stand-alone basis fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical stand-alone transactions falling within+15% of the median price. The Company determines ESP for a deliverable by considering multiple factors including, but not limited to, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The objective of ESP is to determine the price at which the Company would transact a sale if the deliverable were sold on a stand-alone basis. The determination of ESP is made through consultation with and formal approval by the Company’s management, taking into consideration the go-to-market strategy.

The adoption of the new revenue recognition accounting standards did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows for the year ended December 31, 2011 and 2010. The new accounting standards for revenue recognition if applied in the same manner to the year ended December 31, 2009 would not have had a material impact on total net revenues for that fiscal year.

Certain distributors and retailers generally have the right to return product for stock rotation purposes. Every quarter, stock rotation rights are generally limited to 10% of invoiced sales to the distributor or retailer in the prior quarter. Upon shipment of the product, the Company reduces revenue for an estimate of potential future product warranty and stock rotation returns related to the current period product revenue. Management analyzes historical returns, channel inventory levels, current economic trends and changes in customer demand for the Company’s products when evaluating the adequacy of the allowance for sales returns, namely warranty and stock rotation returns. Revenue on shipments is also reduced for estimated price protection and sales incentives deemed to be contra-revenue under Emerging Issues Task Force (“EITF”) Issue No. 01-9.the authoritative guidance for revenue recognition.

Sales incentives

Sales incentives provided to customers are accounted for in accordance with EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products”. Under these guidelines, theThe Company accrues for sales incentives as a marketing expense if it receives an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is recorded as a reduction to revenues. As a consequence, the Company records a substantial portion of its channel marketing costs as a reduction of revenue.

The Company records estimated reductions to revenues for sales incentives at the later of when the related revenue is recognized or when the program is offered to the customer or end consumer.

Shipping and handling fees and costs

In September 2000, the EITF issued EITF Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs.” EITF Issue No. 00-10 requires shipping and handling fees billed to customers to be classified as revenue and shipping and handling costs to be either classified as cost of revenue or disclosed in the Notes to Consolidated Financial Statements. The Company includes shipping and handling fees billed to customers in net revenue. Shipping and handling costs associated with inbound freight are included in cost of revenue. In cases where the Company gives a freight allowance to the customer for their own inbound freight costs, such costs are appropriately recorded as a reduction in net revenue. Shipping and handling costs associated with outbound freight are included in sales and marketing expenses and totaled $12.5$13.9 million, $11.6$11.4 million and $8.3$11.0 million in the years ended December 31, 2008, 20072011, 2010 and 20062009 respectively.

Research and development

Costs incurred in the research and development of new products are charged to expense as incurred.

Technology license arrangements

The Company expenses the licensing of software technologies intended to be integrated into certain future products if those products have not yet reached technological feasibility and the licensed software does not have alternative future use.

The Company did not incur any expenses related to technology license arrangements in the years ended December 31, 2011 and 2010.

During the year ended December 31, 2009, the Company entered into a $2.5 million arrangement to license certain software technologies that the Company may integrate into certain future products. At that time, the Company had not yet established the technological feasibility of these products, and the Company did not believe the software had an alternative future use. As such, the Company expensed the entire technology license arrangement amount of $2.5 million in the year ended December 31, 2009.

Advertising costs

Advertising costs are expensed as incurred. Total advertising and promotional expenses were $17.0$21.7 million, $17.4$19.3 million, and $15.3$14.4 million in the years ended December 31, 2008, 20072011, 2010 and 2006,2009, respectively.

Income taxes

The Company accounts for income taxes under an asset and liability approach. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences resulting from different treatment for tax versus accounting for certain items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must then assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not more likely than not, the Company must establish a valuation allowance.

As discussed in Note 7, effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). In the ordinary course of business there is inherent uncertainty in assessing the Company’s income tax positions. The Company assesses its tax positions and records benefits for all years subject to examination based on management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recorded in the financial statements. Where applicable, associated interest and penalties have also been recognized as a component of income tax expense.

Computation of net income per share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options and awards. Potentially dilutive shares are excluded from the computation of diluted net income per share when their effect is anti-dilutive.

Stock-based compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”),the updated authoritative guidance for stock compensation, using the modified prospective transition method. Under this transition method, stock-based compensation expense for the yearsyear ended December 31, 2008, 2007 and 20062009 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accountingthe authoritative guidance for Stock-Based Compensation” (“SFAS 123”).stock compensation. Stock-based compensation expense for all stock-based compensation awards granted on or after January 1, 2006 is based on the grant-date fair value estimated in

accordance with the provisions of SFAS 123R.the updated authoritative guidance for stock compensation. The valuation provisions of SFAS 123R also apply to grants that are modified after January 1, 2006. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years. The Company will recognize an excess benefit from stock-based compensation in equity based on the difference between tax expense computed with consideration of the windfall deduction and without consideration of the windfall deduction. In addition, the Company accounts for the indirect effects of stock-based compensation on the research tax credit and the foreign tax credit in the income statement. See Note 911,Employee Benefit Plans, of the Notes to Consolidated Financial Statements for a further discussion on stock-based compensation.

Comprehensive income

Under SFAS No. 130, “Reporting Comprehensive Income,”income consists of net income and other gains and losses affecting stockholder’s equity that the Company is requiredexcluded from net income, including gains and losses related to display comprehensive incomefair value of short-term investments and its components. The Company has displayed its comprehensive incomethe effective portion of cash flow hedges that were outstanding as part of the Consolidated Statementsend of Stockholders’ Equity.the year.

Foreign currency translation

The Company’s functional currency is the U.S. dollar for all of its international subsidiaries. Foreign currency transactions of international subsidiaries are re-measured into U.S. dollars at the end-of-period

exchange rates for monetary assets and liabilities, and historical exchange rates for nonmonetarynon-monetary assets. Expenses are re-measured at average exchange rates in effect during each period, except for expenses related to non-monetary assets, which are re-measured at historical exchange rates. Revenue is re-measured at average exchange rates in effect during each period. Gains and losses arising from foreign currency transactions are included in nettotal comprehensive income and were a net lossgain of $7.2 million$131,000 for the year ended December 31, 2008, and2011, a net gainsloss of $3.3 million and $2.5 million$130,000 for the yearsyear ended December 31, 20072010 and 2006, respectively.a net gain of $954,000 for the year ended December 31, 2009.

Recent accounting pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other existing accounting pronouncements that require or permit fair value measurements, as the FASB previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. Effective January 1, 2008, the Company adopted SFAS 157 as it relates to financial assets and liabilities recognized at fair value on a recurring basis. Additional disclosures required by SFAS 157 are included in Note 12.

In February 2007,December 2010, the FASB issued SFAS No. 159, “TheASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU 2010-29 specifies that, for material business combinations when comparative financial statements are presented, revenue and earnings of the combined entity should be disclosed as though the business combination had occurred as of the beginning of the comparable prior annual reporting period. ASU 2010-29 also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for the Company for business combinations with an acquisition date on or after January 1, 2011. Since the adoption of the update to the authoritative guidance for consolidation only requires additional disclosures, the adoption did not impact the Company’s consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Option for Financial AssetsMeasurement and Financial Liabilities—Including an amendment of FASB Statement No. 115,” (“SFAS 159”)Disclosure Requirements in U.S. GAAP and IFRSs”, which permits entities to elect to measure many financial instruments and certain other items atamends current fair value that are not currently requiredmeasurement and disclosure guidance to be measured at fair value. This electionconverge with International Financial Reporting Standards (“IFRS”) and provides increased transparency around valuation inputs and investment categorization. ASU 2011-04 is irrevocable. SFAS 159 was effective prospectively for the Company in the first quarter of fiscal 2008.2012. ASU 2011-04 will only impact the Company’s “Level 3” disclosures. The Company hasadoption is not electedexpected to apply the fair value option to any of its financial instruments.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) and SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 141R will have a material impact on future business combinations by the Company as it establishes principles and requirements for how the Company: (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R requires contingent consideration to be recognized at its fair value on the acquisition date and the recognition of in-process research and development as an indefinite-lived intangible asset until the development is complete, after which time the related capitalized costs would be amortized over the expected useful life. If the in-process research and development is subsequently abandoned prior to completion, the associated capitalized costs would be expensed in such period. SFAS 141R also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for fiscal years beginning after December 15, 2008. The Company will assess the impact of SFAS 141R if and when future acquisitions occur. The Company does not expect that the adoption of SFAS 160 will have an impact on the consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which delays the effective date of SFAS 157 until January 1, 2009 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and liabilities assumed in a business combination. The Company does not expect that the adoption of the remainder of SFAS 157 will have an impact on the consolidated financial statements.

In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 (“SFAS 133”) “Accounting for Derivative Instruments and Hedging Activities” and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect that the adoption of SFAS 161 will have an impact on the consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company will assess the impact of FSP 142-3 if and when future acquisitions occur.

In September 2008, the FASB issued FSP No. 133-1 and FASB Interpretation No. 45-4 (“FSP SFAS 133-1 and FIN 45-4”), “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161”. FSP SFAS 133-1 and FIN 45-4 amends SFAS 133 to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. FSP SFAS 133-1 and FIN 45-4 also amend FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others”, to require additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. FSP SFAS 133-1 and FIN 45-4 also clarifies the effective date in SFAS 161. Disclosures required by SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of FSP SFAS 133-1 and FIN 45-4 did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In October 2008,June 2011, the FASB issued FSP No. 157-3, “DeterminingASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the Fair Valuecurrent option to report other comprehensive income and its components in the statement of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the applicationchanges in equity. ASU 2011-05 allows two presentation alternatives: present items of SFAS 157net income and other comprehensive income (1) in a market that is not active and addresses application issues suchone continuous statement, referred to as the usestatement of internal assumptions when relevant observable data does not exist, the usecomprehensive income or

(2) in two separate, but consecutive, statements of observable market information when the market is not activenet income and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3other comprehensive income. ASU 2011-05 is effective for all periods presented in accordance with SFAS 157. The guidance in FSP 157-3 is effective immediately and did not have an impact on the Company upon adoption. See Note 12 for information and related disclosures regarding the Company’s fair value measurements.

In December 2008, the FASB issued FASB Staff Position (“FSP”) No. 140-4 and FIN 46R-8 (“FSP 140-4 and FIN 46R-8”), “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP 140-4 and FIN 46R-8 require additional disclosures about transfers of financial assets and involvement with variable interest entities. The requirements apply to transferors, sponsors, servicers, primary beneficiaries and holders of significant variable interests in a variable interest entity or qualifying special purpose entity. Disclosures required by FSP 140-4 and FIN 46R-8 are effectiveprospectively for the Company in the first quarter of fiscal 2009. Because FSP 140-4 and FIN 46R-82012. In December 2011, the FASB issued ASU 2011-12, which defers the ASU 2011-05 requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The amendments in ASU 2011-12 are effective at the same time as the amendments in Update 2011-05. All other requirements of ASU 2011-05 are not affected by ASU 2011-12. The Company is currently evaluating which presentation alternative it will utilize. Since the adoption of the authoritative guidance only requirerequires additional disclosures, the adoption will not impact the Company’s consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued ASU 2011-08, “Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. The Company has elected to early adopt ASU 2011-08 in the fourth quarter of fiscal year 2011. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Note 2—Business Acquisitions:Acquisitions

Westell Technologies, Inc.

On April 15, 2011, the Company completed the acquisition of certain intellectual property and other assets of the Customer Networking Solutions division of Westell Technologies, Inc. (“Westell”) at a purchase price of $37.0 million in cash. The acquisition included inventories, property and equipment, intangible assets, and liabilities that existed at the closing date, including employee bonuses and product warranties. The acquisition qualifies as a business combination and was accounted for using the acquisition method of accounting. The Company believes the acquisition will bolster its service provider revenue growth and strengthen its market position among U.S. telecommunications operators.

The results of Westell’s operations have been included in the consolidated financial statements since the date of acquisition. The historical results of operations of Westell prior to the acquisition were not material to the Company’s results of operations.

In accordance with the acquisition method of accounting for business combinations, the Company allocated the total purchase price to identifiable intangible assets based on each element’s estimated fair value. Acquisition costs were expensed as incurred, and were immaterial for this transaction. Purchased intangibles will be amortized on a straight-line basis over their respective estimated useful lives. Goodwill was recorded based on the residual purchase price after allocating the purchase price to the fair market value of assets acquired and liabilities assumed. Goodwill arises as a result of, among other factors, future unidentified new products and new technologies as well as the implicit value of future cost savings as a result of the combining of entities. The Company may adjust the preliminary purchase price allocation after obtaining more information regarding, among other things, liabilities assumed, and revisions of preliminary estimates.

The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date (in thousands):

Inventories

  $6,290  

Property and equipment, net

   119  

Intangibles, net

   19,500  

Current liabilities

   (646

Goodwill

   11,746  
  

 

 

 

Total consideration

  $37,009  
  

 

 

 

Of the $11.7 million of goodwill recorded on the acquisition of Westell, approximately $10.6 million and $11.7 million is deductible for U.S. federal and state income tax purposes, respectively.

A total of $15.7 million of the $19.5 million in acquired intangible assets was designated as customer contracts and related relationships. The value was calculated based on the present value of the future estimated cash flows derived from projections of future operations attributable to existing customer contracts and related relationships and discounted at 19.0%. This $15.7 million is being amortized over its estimated useful life of eight years.

A total of $3.7 million of the $19.5 million in acquired intangible assets was designated as core technology. The value was calculated based on the present value of the future estimated cash flows derived from estimated savings attributable to the core technology and discounted at 16.0%. This $3.7 million is being amortized over its estimated useful life of four years.

A total of $100,000 of the $19.5 million in acquired intangible assets was designated as order backlog. The value was calculated based on an estimate of order backlog using the expected cash flow for the orders and discounted at 3.3%. This $100,000 has been fully amortized as of the three months ended October 2, 2011.

Leaf Networks, LLC

On January 15, 2010, the Company completed the acquisition of certain intellectual property and other assets of Leaf Networks, LLC (“Leaf”), a developer of virtual networking software. The acquisition qualified as a business acquisition and was accounted for using the purchase method of accounting. The Company believes the acquisition will accelerate the Company’s continuing networking technology research and development initiatives. The aggregate purchase price was $2.1 million, of which $2.0 million was paid in cash in the first quarter of 2010 and $100,000 was paid in the three months ended April 3, 2011.

Additionally, the acquisition agreement specified that Leaf shareholders may receive a total additional payout of up to $900,000 in cash over the three years following the closing of the acquisition if developed products pass certain acceptance criteria. During the first quarter of 2010, the Company determined that the present value of the $900,000 potential additional payout was approximately $800,000. For each subsequent quarter, the Company measured at fair value for each reporting period and recorded a liability. The Company paid $400,000 for the first portion of this additional payout in the three months ended April 3, 2011. As of December 31, 2011, the Company had determined the remaining acceptance criteria for the final $500,000 portion of the eligible additional payout were nearing completion, and is carrying a liability for the entire $500,000.

The results of Leaf’s operations have been included in the consolidated financial statements since the date of acquisition. The historical results of operations of Leaf prior to the acquisition were not material to the Company’s results of operations.

In accordance with the acquisition method of accounting for business combinations, the Company allocated the total purchase price to identifiable intangible assets based on each element’s estimated fair value. Acquisition costs were expensed as incurred, and were immaterial for this transaction. Purchased intangibles, representing the existing technology acquired from Leaf, will be amortized on a straight-line basis over their respective estimated useful lives. Goodwill was recorded based on the residual purchase price after allocating the purchase price to the fair market value of intangible assets acquired. Goodwill arose as a result of the $800,000 present valuation of the $900,000 potential additional payout, plus $100,000 in additional payment consideration. The allocation of the purchase price was as follows (in thousands):

Intangibles, net

  $2,000  

Goodwill

   900  
  

 

 

 

Total purchase price allocation

  $2,900  
  

 

 

 

Of the $900,000 of goodwill recorded on the acquisition of Leaf, approximately $471,000 and $900,000 was deductible for federal and state income tax purposes, respectively.

The $2.0 million in acquired intangible assets was designated as existing technology. The value was calculated based on the present value of the future estimated cash flows derived from projections of future revenue attributable to existing technology. This $2.0 million will be amortized over its estimated useful life of seven years.

CP Secure International Holding Limited

On December 18, 2008, the Company completed the acquisition of certain intellectual property and other assets of CP Secure International Holding Limited (“CP Secure”), a privately-held provider of integrated network security solutions. The acquisition qualified as a business acquisition and has been accounted for using the purchase method of accounting. The Company intends to incorporate CP Secure’s integrated platform into the Company’s products to provide organizations with enhanced protection for their network, web access and email traffic. The aggregate purchase price was $14$14.0 million, paid in cash. Under the terms of the acquisition agreement, CP Secure shareholders may receivereceived a total additional payout of up to $3.5 million in cash over the five years following closure of the acquisition ifas developed products passpassed certain acceptance criteria. AnyThis additional payout is expected to bewas earned and paid in the year ended December 31, 2009, and was accounted for as additional purchase price and is expected to be recorded as ana $3.5 million increase into goodwill.

The results of CP Secure’s operations have been included in the consolidated financial statements since the date of acquisition. The historical results of operations of CP Secure prior to the acquisition were not material to the Company’s results of operations.

The accompanying consolidated financial statements reflect a purchase price of approximately $14.6 million, consisting of cash, and other costs directly related to the acquisition as follows (in thousands):

 

Purchase price

  $14,000  

Direct acquisition costs

   635  
  

 

 

 

Total consideration

  $14,635  
  

 

 

 

In accordance with the purchase method of accounting, the Company allocated the total purchase price to tangible assets, liabilities and identifiable intangible assets based on their estimated fair values. Purchased intangibles are amortized on a straight-line basis over their respective estimated useful lives. Goodwill was recorded based on the residual purchase price after allocating the purchase price to the fair market value of tangible and intangible assets acquired less liabilities assumed. Goodwill arises as a result of, among other factors, future unidentified new products and new technologies as well as the implicit value of future cost savings as a result of the combining of entities. The allocation of the purchase price isin December 2008 was as follows (in thousands):

 

  Fair Value on
December 18, 2008
 

Inventories

   82   $82  

Property and equipment, net

   49    49  

Intangibles, net

   3,900    3,900  

Goodwill

   10,686    10,686  

Other accrued liabilities

   (82)   (82
      

 

 

Total purchase price allocation

  $14,635   $14,635  
      

 

 

Of the $10.7 million of goodwill recorded on the acquisition of CP Secure, $4.5$5.3 million and $10.7 million is deductible for federal and state income tax purposes, respectively. Of the $3.5 million additional payout recorded as goodwill in the year ended December 31, 2009, $1.7 million and $3.5 million are deductible for federal and state income tax purposes, respectively.

A total of $1.8 million of the $3.9 million in acquired intangible assets was designated as in-process research and development (“in-process R&D”).development. In-process R&Dresearch and development was expensed upon acquisition because technological feasibility hashad not been established and no future alternative uses exist.existed. The Company acquired two in-process R&Dresearch and development projects, which involve improvements to threat management characteristics of future products. These two projects required further research and development to determine technical feasibility and commercial viability. The fair value assigned to in-process R&Dresearch and development was determined using the income approach, under which the Company considered the importance of products under development to the Company’s overall development

plans, estimated the costs to develop the purchased in-process R&Dresearch and development into commercially viable products, estimated the resulting net cash flows from the products when completed and discounted the net cash flows to their present values. The Company used a 32% discount rate in the present value calculations, which was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the products’ development and success as well as the products’ stage of completion. The estimates used in valuing in-process R&Dresearch and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may vary from the projected results. The Company incurred costs of approximately $1.2 million to complete the projects, of which approximately $120,000 was incurred during the year ended December 31, 2008 and an additional $1.1 million was incurred during the year ended December 31, 2009. The Company completed one project in the beginning of the year ended December 31, 2009 and the final project at the end of the year ended December 31, 2009.

A total of $1.2 million of the $3.9 million in acquired intangible assets was designated as existing technology. The value was calculated based on the present value of the future estimated cash flows derived from projections of future revenue attributable to existing technology. This $1.2 million will beis being amortized over its estimated useful life of three years.

A total of $900,000 of the $3.9 million in acquired intangible assets was designated as core technology. The value was calculated based on the present value of the future estimated cash flows derived from estimated royalty savings attributable to the core technology. This $900,000 will beis being amortized over its estimated useful life of five years.

Infrant Technologies, Inc.

On May 16, 2007, the Company completed the acquisition of 100% of the outstanding shares of Infrant Technologies, Inc. (“Infrant”), a developer of network attached storage products. The Company believes the acquisition will accelerate the Company’s participation in the expanding market for network attached storage. The aggregate purchase price was $60 million, paid in cash. Under the terms of the acquisition agreement, Infrant shareholders may receivereceived a total additional payout of up to $20 million in cash over the three years following closure of the acquisition ifas specific revenue targets are reached, of whichwere reached. $10 million was paid in November 2008. Any additional payout will primarily be accounted for as additional purchase price2008 and will be recorded as$10 million was paid in April 2010.

The November 2008 payment of $10 million resulted in an increase in goodwill.goodwill of $8.7 million, the recognition of compensation expense of $650,000, and a reduction in taxes payable of $620,000.

The April 2010 payment of $10 million resulted in an increase in goodwill of $8.5 million, the recognition of compensation expense of $677,000, and a reduction in taxes payable of $869,000. The Company had accrued for $113,000 of this $677,000 in compensation expense in the year ended December 31, 2009.

The results of Infrant’s operations have been included in the consolidated financial statements since the date of acquisition. The historical results of Infrant prior to the acquisition were not material to the Company’s results of operations.

The accompanying consolidated financial statements reflect an initial purchase price of approximately $60.3 million, consisting of cash, and other costs directly related to the acquisition as follows (in thousands):

 

Purchase price

  $60,000  

Direct acquisition costs

   254  
  

 

 

 

Total consideration

  $60,254  
  

 

 

 

In accordance with the purchase method of accounting, the Company allocated the total purchase price to tangible assets, liabilities and identifiable intangible assets based on their estimated fair values. Goodwill was recorded based on the residual purchase price after allocating the purchase price to the fair market value of tangible and intangible assets acquired less liabilities assumed. Purchased intangibles are amortized on a straight-line basis over their respective estimated useful lives. Goodwill arises as a result of, among other factors, future unidentified new products and new technologies as well as the implicit value of future cost savings as a result of the combining of entities. The total allocation of the purchase price isin 2007 was as follows (in thousands):

 

  Fair Value on
May 16, 2007
 

Cash and cash equivalents

  $2,787   $2,787  

Accounts receivable

   1,202    1,202  

Inventories

   3,504    3,504  

Deferred income taxes

   667    667  

Prepaid expenses and other current assets

   36    36  

Property and equipment

   128    128  

Intangibles

   22,700    22,700  

Goodwill

   38,185    38,185  

Accounts payable

   (697)   (697

Accrued employee compensation

   (396)   (396

Other accrued liabilities

   (1,048)   (1,048

Deferred income tax liability

   (6,814)   (6,814
      

 

 

Total purchase price allocation

  $60,254   $60,254  
      

 

 

TheNone of the goodwill of $38.2 million recorded on the acquisition ofrecognized related to Infrant is not deductible for income tax purposes.

A total of $4.1 million of the $22.7 million in acquired intangible assets was designated as in-process R&D.research and development. In-process R&Dresearch and development was expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist. The Company acquired three in-process R&Dresearch and development projects. Two projects involve development of new products in the ReadyNAS desktop product category, and one project involves development of a higher end version of a product currently selling in the ReadyNAS rack mount product category. These three projects required further research and development to determine technical feasibility and commercial viability. The fair value assigned to in-process R&Dresearch and development was determined using the income approach, under which the Company considered the importance of products under development to the Company’s overall development plans, estimated the costs to develop the purchased in-process R&Dresearch and development into commercially viable products, estimated the resulting net cash flows from the products when completed and discounted the net cash flows to their present values. The Company used discount rates ranging from 36% to 38% in the present value calculations, which was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the products’ development and success as well as the products’ stage of completion. The estimates used in valuing in-process R&Dresearch and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may vary from the projected results. The Company incurred costs of approximately $1.6 million to complete the projects, of which approximately $1.4 million was incurred during the year ended December 31, 2008 and an additional $200,000

was incurred during the year ended December 31, 2009. The Company completed two projects in the middle of the year ended December 31, 2008 and the final project in the middle of the year ended December 31, 2009.

A total of $10.8 million of the $22.7 million in acquired intangible assets was designated as existing technology. The value was calculated based on the present value of the future estimated cash flows derived from projections of future revenue attributable to existing technology. This $10.8 million will beis being amortized over its estimated useful life of four years.

A total of $5.2 million of the $22.7 million in acquired intangible assets was designated as core technology. The value was calculated based on the present value of the future estimated cash flows derived from estimated royalty savings attributable to the core technology. This $5.2 million will beis being amortized over its estimated useful life of four years.

A total of $2.6 million of the $22.7 million in acquired intangible assets was designated as trademarks. The value was calculated based on the present value of the future estimated cash flows derived from estimated royalty savings attributable to use of the trademarks. This $2.6 million will beis being amortized over its estimated useful life of six years.

In November 2008, the Company made an additional $10 million payment in connection with the Company’s 2007 acquisition of Infrant in connection with the achievement of certain revenue targets. This resulted in an increase in goodwill of $8.7 million, the recognition of compensation expense of $650,000, and a reduction in taxes payable of $620,000.

Skipjam Corp.

On August 1, 2006, the Company completed the acquisition of SkipJam Corp. (“SkipJam”), a developer of networkable media devices for home entertainment and control. The Company believes the acquisition enhances its strategically important digital home entertainment and control business by strengthening the Company’s ability to expand its multimedia product portfolio. The aggregate purchase price was $7.6 million, paid in cash.

The results of SkipJam’s operations have been included in the consolidated financial statements since the date of acquisition. The historical results of SkipJam prior to the acquisition were not material to the Company’s results of operations.

The accompanying consolidated financial statements reflect total consideration of approximately $7.7 million, consisting of cash, and other costs directly related to the acquisition as follows (in thousands):

Purchase price

  $7,600

Direct acquisition costs

   133
    

Total consideration

  $7,733
    

In accordance with the purchase method of accounting, the Company allocated the total purchase price to tangible assets, liabilities and identifiable intangible assets based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. Purchased intangibles are amortized on a straight-line basis over their respective useful lives. The total allocation of the purchase price is as follows (in thousands):

   Fair Value on
August 1, 2006

Prepaid expenses and other current assets

  $6

Intangibles

   4,000

Goodwill

   3,243

Non-current deferred income taxes

   484
    

Total purchase price allocation

  $7,733
    

$2.9 million of the $4.0 million in acquired intangible assets was designated as in-process research and development (“in-process R&D”). In-process R&D was expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist. The Company acquired only one in-process R&D project, which is related to the development of a multimedia product that had not reached technological feasibility and had no alternative use.

The fair value assigned to in-process R&D was determined using the income approach, under which the Company considered the importance of products under development to the Company’s overall development plans, estimated the costs to develop the purchased in-process R&D into commercially viable products, estimated the resulting net cash flows from the products when completed and discounted the net cash flows to their present

values. The Company used a discount rate of 35% in the present value calculations, which was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the products’ development and success as well as the products’ stage of completion. The estimates used in valuing in-process R&D were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may vary from the projected results. The Company incurred costs of approximately $725,000 to complete the project, of which approximately $575,000 was incurred through December 31, 2006 and the remainder was incurred in 2007. The Company completed the project in February 2007.

$1.0 million of the $4.0 million in acquired intangible assets was designated as core technology. The value was calculated based on the present value of the future estimated cash flows derived from estimated royalty savings attributable to the core technology. This $1.0 million was originally intended to be amortized over its four year useful life. In the fourth quarter of 2008, the Company determined that this intangible asset was impaired, and recorded an impairment charge within cost of revenue in the Consolidated Statements of Operations of $458,000 for the net carrying value of the intangible. For further discussion of the Company’s intangibles impairment analysis, please see Note 1.

The remaining acquired intangible assets consist of non-competition agreements of $100,000, with a two year useful life. None of the goodwill recorded as part of the SkipJam acquisition will be deductible for income tax purposes.

As part of the acquisition, the Company has also agreed to pay up to $1.4 million in cash contingent on the continued employment of certain SkipJam employees with the Company. These payments were recorded as compensation expense over a two-year period.

Note 3—Balance Sheet Components (in thousands):

Available-for-sale short-term investments consist of the following:

 

   December 31,
   2008  2007
   Cost  Unrealized
Gain
  Estimated
Fair Value
  Cost  Unrealized
Gain
  Estimated
Fair Value

U.S. Treasury bills and notes

  $10,061  $109  $10,170  $37,683  $165  $37,848
                        

Derivative financial instruments:

The Company uses derivatives to mitigate its business exposure to foreign exchange risk. Foreign currency forward contracts are used to offset the foreign exchange risk on certain existing assets and liabilities. The Company records all derivatives on the balance sheet at fair value. All forward contracts mature within three months.

The following table shows the outstanding forward contracts at December 31, 2008 (in thousands):

   December 31, 2008 
   Currency  Local Currency
Contract Amount
  Currency  Contracted
Amount
  Fair Market
Value at
December 31,
2008
 

Forward contracts to sell

          

Australian dollar

  AUD  12,353  USD  $8,253  ($178)

euro

  EUR  25,101  USD  $32,449  ($2,611)

British pound

  GBP  11,609  USD  $18,096  $1,444 

Japanese yen

  JPY  447,929  USD  $4,492  ($436)

These forward contracts are the Company’s only derivative instruments. The Company accounts for forward contracts in accordance with SFAS No. 52, “Foreign Currency Translation.” The Company realized net gains of $616,000 upon settlement of forward contracts during the year ended December 31, 2008.

The Company did not enter into any forward contracts in the year ended December 31, 2007.

  As of December 31, 
  2011  2010 
  Cost  Unrealized
Gain
  Unrealized
Loss
  Estimated
Fair Value
  Cost  Unrealized
Gain
  Unrealized
Loss
  Estimated
Fair Value
 

U.S. Treasuries

 $144,673   $34   $(4 $144,703   $144,551   $17   $(4 $144,564  

Certificates of Deposits

  94    —      —      94    —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $144,767   $34   $(4 $144,797   $144,551   $17   $(4 $144,564  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Accounts receivable and related allowances consist of the following:

 

   December 31, 
   2008 2007    As of December 31, 
   (In thousands)    2011 2010 

Gross accounts receivable

Gross accounts receivable

  $153,333  $169,986 

Gross accounts receivable

  $279,932   $241,632  
           

 

  

 

 

Less:

 

Allowance for doubtful accounts

   (1,918)  (2,307) 

Allowance for doubtful accounts

   (1,335  (1,481
 Allowance for sales returns   (9,710)  (9,417) 

Allowance for sales returns

   (13,360  (10,273
 Allowance for price protection   (3,430)  (497) 

Allowance for price protection

   (3,930  (3,147
           

 

  

 

 
 Total allowances   (15,058)  (12,221) 

Total allowances

   (18,625  (14,901
           

 

  

 

 

Accounts receivable, net

Accounts receivable, net

  $138,275  $157,765 

Accounts receivable, net

  $261,307   $226,731  
           

 

  

 

 

Inventories consist of the following:

 

  December 31,
  2008  2007  As of December 31, 
  (In thousands)  2011   2010 

Raw materials

  $639  $496  $4,676    $1,591  

Finished goods

   111,601   82,527   159,048     125,803  
        

 

   

 

 

Total

  $112,240  $83,023  $163,724    $127,394  
        

 

   

 

 

Property and equipment, net consists of the following:

 

  December 31,   As of December 31, 
  2008 2007   2011 2010 

Computer equipment

  $6,101  $7,798   $7,109   $6,057  

Furniture, fixtures and leasehold improvements

   8,734   2,699    9,757    9,450  

Software

   18,083   10,237    19,974    18,553  

Machinery

   8,923   7,075 

Machinery and equipment

   21,797    17,465  

Construction in progress

   158   3,305    662    30  
         

 

  

 

 
   41,999   31,114    59,299    51,555  

Less: Accumulated depreciation and amortization

   (21,707)  (19,909)   (43,415  (34,052
         

 

  

 

 
  $20,292  $11,205   $15,884   $17,503  
         

 

  

 

 

Depreciation and amortization expense pertaining to property and equipment in 2008, 20072011, 2010 and 20062009 was $6.3$9.9 million, $5.3$8.1 million and $4.0$7.3 million, respectively.

Goodwill

Activity related to goodwill consisted of the following:

 

   Year Ended December 31,
   2008  2007

Balance as of beginning of the period

  $41,985  $3,800

Additions related to earn-out payments

   8,729   —  

Additions related to acquisitions

   10,686   38,185
        

Balance at end of period

  $61,400  $41,985
        

   

                New Segments                

 
   Old
Segment
  Retail   Commercial   Service
Provider
   Total 

Goodwill at December 31, 2009

  $64,908   $—      $—      $—      $64,908  

Additions related to earn-out payments

   8,474    —       —       —       8,474  

Net additions related to acquisitions

   816    —       —       —       816  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at December 31, 2010

   74,198    —       —       —       74,198  

Relative fair value approach

   (74,198  33,546     32,043     8,609     —    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at April 4, 2011

   —      33,546     32,043     8,609     74,198  

Net additions related to acquisitions

   —      —       —       11,746     11,746  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at December 31, 2011

  $—     $33,546    $32,043    $20,355    $85,944  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

During 2008,2011, the Company recorded $10.7$11.7 million of goodwill related toassociated with the acquisition of CP Secure. The company alsothe Customer Networking Solutions division of Westell Technologies, Inc. (“Westell”). During 2010, the Company recorded $8.7$8.5 million of goodwill approximately $650,000 in compensation expense, and an approximate $620,000 reduction in taxes payable associated with a $10 million earn-out payment made in connection with the Company’s 2007 acquisition of Infrant. During 2007,The Company also recorded $900,000 of goodwill associated with the CompanyCompany’s 2010 acquisition of Leaf, and recorded $38.2 million ofan $84,000 reduction in goodwill related to the acquisition of Infrant.

Intangibles, net, consist of the following:

  December 31,
2007

Cost
 December 31,
2007

Net
 Additions Amortization
Expense
 Impairment
Charge
 December 31,
2008

Net
 Weighted
Average
Amortization
Period
(Years)

Core technology

 $6,200 $4,979 $900 $1,488 $458 $3,933 1.37

Existing technology

  10,800  9,000  1,200  2,700  —    7,500 3.57

Trademarks

  2,600  2,311  —    433  —    1,878 2.17

Non-compete agreements

  100  29  —    29  —    —   —  
                    

Total intangible assets

 $19,700 $16,319 $2,100 $4,650 $458 $13,311 2.72
                    

   December 31,
2006

Cost
  December 31,
2006

Net
  Additions  Amortization
Expense
  December 31,
2007

Net
  Weighted
Average
Amortization
Period
(Years)

Core technology

  $1,000  $896  $5,200  $1,117  $4,979  1.62

Existing technology

   —     —     10,800   1,800   9,000  1.67

Trademarks

   —     —     2,600   289   2,311  2.67

Non-compete agreements

   100   79   —     50   29  0.30
                       

Total intangible assets

  $1,100  $975  $18,600  $3,256  $16,319  1.79
                       

Amortization expense related to intangibles in 2008, 2007 and 2006 was $4.7 million, $3.3 million, and $125,000, respectively.

In 2008 the Company recorded an impairment charge within cost of revenue in the Consolidated Statements of Operations of $458,000 for the net carrying value of intangibles acquired duringtaxes associated with the Company’s 2006 acquisition of Skipjam Corp. RecoverabilityRefer to Note 2,Business Acquisitions, for additional information regarding the Company’s acquisitions.

There were no impairments to goodwill in the years ended December 31, 2011, 2010, and 2009. Refer to Note 1,The Company and Summary of Significant Accounting Policies, for additional information regarding the Company’s goodwill impairment assessment.

Intangibles, net

   December 31,
2010
Cost
   December 31,
2010
Net
   Additions   Amortization
Expense
   December 31,
2011
Net
   Weighted
Average
Amortization
Period
Remaining
(Years)
 

Core technology

  $7,100    $973    $3,700    $1,230    $3,443     1.60  

Existing technology

   14,000     3,038     —       1,586     1,452     2.54  

Trademarks

   2,600     1,011     —       433     578     0.67  

Patents

   1,270     1,219     —       128     1,091     4.25  

Customer contracts and relationships

   —       —       15,700     1,308     14,392     3.67  

Backlog

   —       —       100     100     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total intangible assets

  $24,970    $6,241    $19,500    $4,785    $20,956     3.20  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

   December 31,
2009
Cost
   December 31,
2009
Net
   Additions   Amortization
Expense
   December 31,
2010
Net
   Weighted
Average
Amortization
Period
Remaining
(Years)
 

Core technology

  $7,100    $2,453    $—      $1,480    $973     0.92  

Existing technology

   12,000     4,400     2,000     3,362     3,038     1.86  

Trademarks

   2,600     1,445     —       434     1,011     1.17  

Patents

   —       —       1,270     51     1,219     4.75  

Non-compete agreements

   100     —       —       —       —       0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total intangible assets

  $21,800    $8,298    $3,270    $5,327    $6,241     2.17  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Amortization expense related to intangibles in the years ended December 31, 2011, 2010 and 2009 was assessed in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” based on undiscounted estimated future net cash flows,$4.8 million, $5.3 million and the impairment charge was based on fair value using discounted cash flows.$5.0 million, respectively. No such impairment charges were recorded in prior years.the years ended December 31, 2011, 2010 or 2009.

Estimated amortization expense related to intangibles for each of the next five years and thereafter is as follows (in thousands):

 

Year Ending December 31,

       

2009

  $5,013

2010

   5,013

2011

   2,347

2012

   613  $3,915  

2013

   325   3,626  

Thereafter

   —  

2014

   3,301  

2015

   2,685  

2016

   2,377  

2017 and thereafter

   5,052  
     

 

 

Total expected amortization expense

  $13,311  $20,956  
     

 

 

Other non-current assets

   As of December 31, 
   2011   2010 

Non-current deferred income taxes

  $7,977    $7,112  

Cost method investment

   3,009     3,009  

Other

   3,371     4,214  
  

 

 

   

 

 

 

Other non-current assets

  $14,357    $14,335  
  

 

 

   

 

 

 

Other accrued liabilities consist of the following:

 

  December 31,
  2008  2007  As of December 31, 
  (In thousands)  2011   2010 

Sales and marketing programs

  $33,584  $39,796  $44,394    $37,020  

Warranty obligation

   28,607   27,557   44,846     40,513  

Freight

   3,546   4,728   7,940     7,174  

Other

   22,010   17,389   23,300     25,706  
        

 

   

 

 

Other accrued liabilities

  $87,747  $89,470  $120,480    $110,413  
        

 

   

 

 

Note 4—Restructuring:Restructuring and Other Charges

The Company accounts for its restructuring plans under SFAS No. 146, “Accountingthe authoritative guidance for Costs Associated with Exitexit or Disposal Activities” (“SFAS 146”).disposal activities. The Company presents expenses related to restructuring and other charges as a separate line item in its Consolidated Statements of Operations.

OnIn April 2011, the Company incurred $1.6 million in restructuring costs for employee severance related to the reorganization into three specific business units. Refer to Note 12,Segment Information, Operations by Geographic Area and Customer Concentration for additional information regarding the reorganization into business units. In addition, the Company incurred $464,000 in transition services in connection with the acquisition of the Customer Networking Solutions division of Westell Technologies, Inc. Refer to Note 2,Business Acquisitions for additional information regarding the Westell acquisition.

The following is a summary of the accrued restructuring charges:

   Accrued
Restructuring and
Other Charges at
December 31,
2010
   Additions   Cash
Payments
  Accrued
Restructuring and
Other Charges at
December 31,
2011
 
   (In thousands) 

Reorganization in business units

  $—      $1,630    $(1,630 $—    

Westell acquisition transition costs

   —       464     (464  —    
  

 

 

   

 

 

   

 

 

  

 

 

 

Current portion

  $—      $2,094    $(2,094 $—    
  

 

 

   

 

 

   

 

 

  

 

 

 

In July 25, 2008, the Company ceased using buildings leased in Santa Clara and Fremont, California, and consolidated all personnel and operations from those locations to aits new corporate headquarters in San Jose, California. The Company expects to sublease the majoritylast of the formerly occupied Santa Clara space through the end of thethese operating lease, which extends toleases expired in December 2010. However, payments from sublessee arrangements will not completely offset the payments of $3.5 million due under the original leases. The Company recognized $964,000 in expenses related to future lease payments on the vacated facilities in the year ended December 31, 2008.

The following is a summary of the accrued restructuring charges related to ceasing use of certain buildings:

 

  Accrued
Restructuring
Charges at
December 31,
2007
  Initial
Accrual
Recognition
  Adjustment
to Initial
Accrual
Recognition
 Ongoing
Exit
Expense
  Present
Value
Accretion
  Cash
Payments
 Accrued
Restructuring
Charges at
December 31,
2008
  Accrued
Restructuring
Charges at
December 31,
2009
   Adjustment
to Accrual
Recognition
 Present
Value
Accretion
   Cash
Payments
 Accrued
Restructuring
Charges at
December 31,
2010
 
  (In thousands)  (In thousands) 

Abandonment of excess leased facilities

  $  —    $955  $(21) $12  $18  $(610) $354  $516    $(103 $15    $(428 $—    

Current portion

  $—            $264  $516        $—    

Long-term portion

  $—            $90  $—          $—    

Additionally, on November 12, 2008,Note 5—Derivative Financial Instruments

The Company’s subsidiaries have had and will continue to have material future cash flows, including revenue and expenses, that are denominated in currencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company’s functional currency and other currencies in which the Company terminatedtransacts will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the employment of approximately 35 individuals.Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Company recognized $965,000enters into foreign currency forward contracts in expensesAustralian dollars, British pounds, Euros, and Japanese yen to manage the exposures to foreign exchange risk related to this restructuringexpected future cash flows on certain forecasted revenue, costs of revenue, operating expenses, and on certain existing assets and liabilities. The Company does not enter into derivatives transactions for trading or speculative purposes.

Cash flow hedges

To help manage the exposure of gross and operating margins to fluctuations in foreign currency exchange rates, the Company hedges a portion of its anticipated foreign currency revenue, costs of revenue, and certain operating expenses. These hedges are designated at the inception of the hedge relationship as cash flow hedges under the authoritative guidance for derivatives and hedging. Effectiveness is tested at least quarterly both prospectively and retrospectively using regression analysis to ensure that the hedge relationship has been effective and is likely to remain effective in the future. The Company typically hedges portions of its anticipated foreign currency exposure for three to five months. The Company enters into about five forward contracts per quarter with an average size of about $6 million USD equivalent related to its cash flow hedge program.

The Company expects to reclass to earnings all of the amounts recorded in other comprehensive income associated with its cash flow hedges over the next 12 months. Other comprehensive income associated with cash flow hedges of foreign currency revenue is recognized as a component of net revenue in the same period as the related revenue is recognized. Other comprehensive income associated with cash flow hedges of foreign currency costs of revenue and operating expenses are recognized as a component of cost of revenue and operating expense in the same period as the costs of revenue and operating expenses are recognized, respectively.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. Deferred gains and losses in other comprehensive income associated with such derivative instruments are reclassified immediately into earnings through other income and expense. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings unless they are re-designated as hedges of other transactions. The Company did not recognize any material net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the years ended December 31, 2011, 2010, and 2009.

Non-designated hedges

The Company enters into non-designated hedges under the authoritative guidance for derivatives and hedging to manage the exposure of non-functional currency monetary assets and liabilities held on its financial statements to fluctuations in foreign currency exchange rates, as well as to reduce volatility in other income and expense. The non-designated hedges are generally expected to offset the changes in value of its net non-functional currency asset and liability position resulting from foreign exchange rate fluctuations. Foreign currency denominated accounts receivable and payable are hedged with non-designated hedges when the related anticipated foreign revenue and expenses are recognized in the Company’s financial statements. The Company also hedges certain non-functional currency monetary assets and liabilities which may not be incorporated into the cash flow hedge program. The Company adjusts its non-designated hedges monthly and enters into about 11 non-designated derivatives per quarter. The average size of its non-designated hedges is about $2 million USD equivalent and these hedges range from one to five months in duration.

The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, immateriality, accounting considerations, and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheet at fair value. The effective portions of cash flow hedges are recorded in other comprehensive income until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portions of its designated hedges are adjusted to fair value through earnings in “Other income (expense), net.”

The Company’s foreign currency forward contracts do not contain any credit-risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions. In addition, the derivative contracts are limited to a time period of less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.

The fair values of the Company’s derivative instruments and the line items on the Consolidated Balance Sheets to which they were recorded as of December 31, 2011 and December 31, 2010 are summarized as follows:

Derivative Assets

  Balance
Sheet
Location
   Fair Value at
December 31,
2011
   Balance
Sheet
Location
   Fair Value at
December 31,
2010
 
   (In thousands) 

Derivative assets not designated as hedging instruments

   
 
Prepaid expenses and
other current assets
  
  
  $1,196     
 
Prepaid expenses and
other current assets
  
  
  $1,381  

Derivative assets designated as hedging instruments

   
 
Prepaid expenses and
other current assets
  
  
   41     
 
Prepaid expenses and
other current assets
  
  
   8  
    

 

 

     

 

 

 

Total

    $1,237      $1,389  
    

 

 

     

 

 

 

Derivative Liabilities

  Balance
Sheet
Location
   Fair Value at
December 31,
2011
  Balance
Sheet
Location
   Fair Value at
December 31,
2010
 
   (In thousands) 

Derivative liabilities not designated as hedging instruments

   Other accrued liabilities    $(654  Other accrued liabilities    $(770

Derivative liabilities designated as hedging instruments

   Other accrued liabilities     (69  Other accrued liabilities     (19
    

 

 

    

 

 

 

Total

    $(723   $(789
    

 

 

    

 

 

 

For details of the Company’s fair value measurements, please see Note 13,Fair Value of Financial Instruments.

      Year ended 
      December 31, 2011  December 31, 2010 

Derivatives Not Designated as Hedging
Instruments

  

Location of Gains or (Losses)
Recognized in Income on
Derivative

  Amount of Gains or
(Losses) Recognized in
Income on Derivative
  Amount of Gains or
(Losses) Recognized in
Income on Derivative
 
      (In thousands) 

Foreign currency forward contracts

  Other income (expense), net  $(957 $(172

The effects of the Company’s derivative instruments on other comprehensive income and the Consolidated Statement of Operations for the year ended December 31, 2008, of which $94,000 is accrued2011 and not yet paid as of December 31, 2008. 2010 are summarized as follows:

Derivatives Designated as
Hedging Instruments

 Year ended December 31, 2011 
  Gain or (Loss)
Recognized in
OCI-Effective
Portion (a)
  Location of Gain
or (Loss)
Reclassified from
OCI into
Income-Effective
Portion
 Gain or (Loss)
Reclassified
from OCI into
Income-Effective
Portion (a)
  Location of Gain or (Loss)
Recognized in Income and
Excluded from
Effectiveness Testing
 Amount of Gain or
(Loss) Recognized in
Income and
Excluded from
Effectiveness Testing
 
  (In thousands) 

Cash flow hedges:

   

Foreign currency forward contracts

 $542   Net revenue $967   Other income (expense), net $(310

Foreign currency forward contracts

  —     Cost of revenue  (4 Other income (expense), net  —    

Foreign currency forward contracts

  —     Operating expenses  (154 Other income (expense), net  —    
 

 

 

   

 

 

   

 

 

 

Total

 $542    $809    $(310
 

 

 

   

 

 

   

 

 

 

Derivatives Designated as
Hedging Instruments

 Year ended December 31, 2010 
  Gain or (Loss)
Recognized in
OCI-Effective
Portion (a)
  Location of Gain
or (Loss)
Reclassified from
OCI into
Income-Effective
Portion
 Gain or (Loss)
Reclassified
from OCI into
Income-Effective
Portion (a)
  Location of Gain or (Loss)
Recognized in Income and
Excluded from
Effectiveness Testing
 Amount of Gain or
(Loss) Recognized in
Income and
Excluded from
Effectiveness Testing
 
  (In thousands) 

Cash flow hedges:

   

Foreign currency forward contracts

 $2,257   Net revenue $2,755   Other income (expense), net $(261

Foreign currency forward contracts

  —     Cost of revenue  (27 Other income (expense), net  —    

Foreign currency forward contracts

  —     Operating expenses  (724 Other income (expense), net  —    
 

 

 

   

 

 

   

 

 

 

Total

 $2,257    $2,004    $(261
 

 

 

   

 

 

   

 

 

 

Derivatives Designated as
Hedging Instruments

 Year ended December 31, 2009 
  Gain or (Loss)
Recognized in
OCI-Effective
Portion (a)
  Location of Gain
or (Loss)
Reclassified from
OCI into
Income-Effective
Portion
 Gain or (Loss)
Reclassified
from OCI into
Income-Effective
Portion (a)
  Location of Gain or (Loss)
Recognized in Income and
Excluded from
Effectiveness Testing
 Amount of Gain or
(Loss) Recognized in
Income and
Excluded from
Effectiveness Testing
 
  (In thousands) 

Cash flow hedges:

   

Foreign currency forward contracts

 $(499 Net revenue $(707 Other income (expense), net $(85

Foreign currency forward contracts

  —     Cost of revenue  15   Other income (expense), net  —    

Foreign currency forward contracts

  —     Operating expenses  173   Other income (expense), net  —    
 

 

 

   

 

 

   

 

 

 

Total

 $(499  $(519  $(85
 

 

 

   

 

 

   

 

 

 

(a) Refer to Note 10,Stockholder’s Equity, which summarizes the activity in other comprehensive income related to derivatives.

The Company expectsdid not recognize any net gain or loss related to pay the $94,000 inineffective portion of cash flow hedges during the first quarter ofyear ended December 31, 2011, 2010 or 2009.

Note 5—6—Net Income Per Share:Share

Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period.

Potentially dilutive common shares include outstanding stock options and unvested restricted stock awards, which are reflected in diluted net income per share by application of the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of stock-based compensation cost for future services that the Company has not yet recognized, and the amount of tax benefit that would be recorded in additional paid-in capital upon exercise are assumed to be used to repurchase shares.

Net income per share for the years ended December 31, 2008, 2007,2011, 2010 and 20062009 are as follows (in thousands, except per share data):

 

  Year Ended December 31,  Year Ended December 31, 
  2008  2007  2006  2011   2010   2009 

Net income

  $18,050  $45,954  $41,132  $91,368    $50,909    $9,333  
           

 

   

 

   

 

 

Weighted average shares outstanding:

            

Basic

   35,212   34,809   33,381   37,121     35,385     34,485  

Options and awards

   407   1,030   1,172   811     739     363  
           

 

   

 

   

 

 

Total diluted shares

   35,619   35,839   34,553  $37,932    $36,124    $34,848  
           

 

   

 

   

 

 

Basic net income per share

  $0.51  $1.32  $1.23  $2.46    $1.44    $0.27  
           

 

   

 

   

 

 

Diluted net income per share

  $0.51  $1.28  $1.19  $2.41    $1.41    $0.27  
           

 

   

 

   

 

 

Anti-dilutive common stock options totaling 3,231,105, 1,162,953,2,001,300, 3,251,861 and 675,9533,614,698 were excluded from the weighted average shares outstanding for the diluted per share calculation for 2008, 20072011, 2010 and 2006,2009, respectively.

Note 6—7—Other Income (Expense), Net:Net

Other income (expense), net consisted of the following (in thousands):

 

  Year Ended December 31,  Year Ended December 31, 
  2008 2007  2006  2011 2010 2009 

Foreign currency transaction gains (losses), net

  ($7,219) $3,298  $2,495  $131   ($130 $954  

Foreign currency contract gains (losses), net

   (1,165)  —     —     (1,267  (434  (1,082
           

 

  

 

  

 

 

Total

  ($8,384) $3,298  $2,495  ($1,136 ($564 ($128
           

 

  

 

  

 

 

Note 7—8—Income Taxes:Taxes

Income before income taxes consists of the following (in thousands):

 

  Year Ended December 31,  Year Ended December 31, 
  2008 2007  2006  2011   2010 2009 

United States

  $54,222  $48,715  $52,501  $79,318    $95,291   $38,943  

International

   (8,879)  28,121   16,498   44,892     (4,067  (6,376
           

 

   

 

  

 

 

Total

  $45,343  $76,836  $68,999  $124,210    $91,224   $32,567  
           

 

   

 

  

 

 

The provision for income taxes consists of the following (in thousands):

 

  Year Ended December 31,   Year Ended December 31, 
  2008 2007 2006   2011 2010 2009 

Current:

        

U.S. Federal

  $21,451  $25,722  $21,362   $27,415   $37,954   $23,718  

State

   2,959   4,138   2,965    3,319    5,654    2,270  

Foreign

   5,541   2,509   6,719    6,760    4,947    2,749  
            

 

  

 

  

 

 
   29,951   32,369   31,046    37,494    48,555    28,737  
            

 

  

 

  

 

 

Deferred:

        

U.S. Federal

   (1,750)  (2,709)  (780)   (3,151  (8,928  (4,951

State

   (908)  (928)  100    (713  643    (469

Foreign

   —     2,150   (2,499)   (788  45    (83
            

 

  

 

  

 

 
   (2,658)  (1,487)  (3,179)   (4,652  (8,240  (5,503
            

 

  

 

  

 

 

Total

  $27,293  $30,882  $27,867   $32,842   $40,315   $23,234  
            

 

  

 

  

 

 

Net deferred tax assets consist of the following (in thousands):

 

  Year Ended December 31,   Year Ended December 31, 
      2008         2007               2011                 2010         

Deferred Tax Assets:

      

Accruals and allowances

  $12,216  $12,928   $22,329   $18,453  

Net operating loss carryforwards

   343   607    326    351  

Depreciation and amortization

   —     1,286 

Stock-based compensation

   4,103   1,960    6,304    5,982  

Deferred rent

   2,878   —      2,138    2,313  

Deferred revenue

   695   —      411    286  

Tax credit carryforwards

   686   —      1,433    1,732  

Acquired intangible assets

   566    —    

Other

   250   544    256    593  
  

 

  

 

 
          33,763    29,710  
   21,171   17,325   

 

  

 

 

Deferred Tax Liabilities:

      

Acquired intangible assets

   (4,246)  (6,615)   —      (258

Depreciation and amortization

   (3,811)  —      (2,698  (2,969

Unremitted earnings of foreign subsidiaries

   —     (29)   —      (39

Other

   —     (216)
  

 

  

 

 
   (2,698  (3,266
         

 

  

 

 

Net deferred tax assets

  $13,114  $10,465    31,065    26,444  
         

 

  

 

 

Current portion

  $13,129  $13,091    23,088   $19,332  

Non-current portion

   (15)  (2,626)   7,977    7,112  
         

 

  

 

 

Net deferred tax assets

  $13,114  $10,465   $31,065   $26,444  
         

 

  

 

 

Management’s judgment is required in determining the Company’s provision for income taxes, its deferred tax assets and any valuation allowance recorded against its deferred tax assets. In management’s judgment it is more likely than not that such assets will be realized in the future as of December 31, 2008,2011, and as such no valuation allowance has been recorded against the Company’s deferred tax assets.

The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:

 

  Year Ended December 31,   Year Ended December 31, 
      2008         2007         2006           2011         2010         2009     

Tax at federal statutory rate

  35.0% 35.0% 35.0%   35.0  35.0  35.0

State, net of federal benefit

  3.7  3.7  2.8    1.5    4.2    3.1  

Impact of international operations

  19.4  (0.6) —      (9.5  5.1    28.4  

Stock-based compensation

  2.8  1.4  0.8    0.0    0.7    4.0  

In-process research and development

  —    1.9  1.4 

Tax credits

  (1.9) (0.9) (0.6)   (0.7  (0.7  (1.7

Permanent and other items

  1.2  (0.3) 1.0 

Others

   0.1    (0.1  2.5  
            

 

  

 

  

 

 

Provision for income taxes

  60.2% 40.2% 40.4%   26.4  44.2  71.3
            

 

  

 

  

 

 

Income tax benefits in the amount of $81,000, $8.4$3.5 million, $3.6 million and $4.2 million$136,000 related to the exercise of stock options were credited to additional paid-in capital during the years ended December 31, 2008, 20072011, 2010 and 2006,2009, respectively. As a result of changes in fair value of available for sale securities, income tax expense of $11,000$8,000, $3,000 and $64,000$40,000 was recorded in comprehensive income related to the year ended December 31, 20082011, December 31, 2010, and December 31, 2007,2009, respectively.

TheAs of December 31, 2011, the Company has $335,000$574,000 and $2.6$1.4 million of acquired federal and state net operating losses from its acquisitionsloss carry forwards as well as $310,000 of SkipJam and Infrant, respectively, as of December 31, 2008. UseCalifornia tax credits carryforwards. All of these losses and $111,000 of these credits are subject to annual limitationusage limitations under Internal Revenue Code Section 382. Additionally, the Company has state tax credit carryforwards of $507,000 as of December 31, 2008 that resulted from limitations on use imposed by the State of California. The federal losses and credits expire in different years beginning in fiscal 2021. The state loss begins to expire in fiscal 2021.2015. The state tax credit carryforward has no expiration.expiration

The Company files income tax returns in the U.S. federal jurisdiction, various state and local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations for years before 2004.2007. In 2011, the IRS commenced an examination of the Company’s 2008 and 2009 tax years. The Company has limited audit activity in various states and foreign jurisdictions. CurrentlyDue to the uncertain nature of ongoing tax audits, the Company does not expect a material change in unrecognizedhas recorded its liability for uncertain tax benefits to occur duringpositions as part of its long-term liability as payments cannot be anticipated over the next 12 months. The existing tax positions of the Company continue to generate an increase in the liability for uncertain tax positions. The liability for uncertain tax positions may be reduced for liabilities that are settled with taxing authorities or on which the statute of limitations could expire without assessment from tax authorities. The possible reduction in liabilities for uncertain tax positions resulting from the expiration of statutes of limitation in multiple jurisdictions in the next 12 months is approximately $1.0 million, excluding the interest, penalties and the effect of any related deferred tax assets or liabilities.

The Company adopted the provisions of FIN 48 on January 1, 2007.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows (in millions)thousands):

 

Federal, State, and
Foreign Tax

Gross UTB Balance at January 1, 2007

$3,428

Additions based on tax positions related to the current year

6,147

Additions for tax positions of prior years

—  

Reductions for tax positions of prior years

—  

Settlements

(6)

Reductions due to lapse of applicable statutes

(233)

Gross UTB Balance at December 31, 2007

$9,336

Additions based on tax positions related to the current year

3,940

Additions for tax positions of prior years

658

Reductions for tax positions of prior years

(140)

Settlements

—  

Reductions due to lapse of applicable statutes

(503)

Gross UTB Balance at December 31, 2008

$13,291

   Federal,
State, and
Foreign Tax
 

Gross UTB Balance at January 1, 2009

  $13,291  

Additions based on tax positions related to the current year

   3,608  

Additions for tax positions of prior years

   184  

Reductions for tax positions of prior years

   (1

Reductions due to lapse of applicable statutes

   (581
  

 

 

 

Gross UTB Balance at December 31, 2009

   16,501  
  

 

 

 

Additions based on tax positions related to the current year

   3,371  

Additions for tax positions of prior years

   409  

Settlements

   (47

Reductions for tax positions of prior years

   (1,805

Reductions due to lapse of applicable statutes

   3  
  

 

 

 

Gross UTB Balance at December 31, 2010

   18,432  
  

 

 

 

Additions based on tax positions related to the current year

   1,795  

Additions for tax positions of prior years

   1,015  

Settlements

   (179

Reductions for tax positions of prior years

   (2

Reductions due to lapse of applicable statutes

   (3,699

Adjustments due to foreign exchange rate movement

   (27
  

 

 

 

Gross UTB Balance at December 31, 2011

  $17,335  
  

 

 

 

The total amount of net unrecognized tax benefits that, if recognized would affect the effective tax rate as of December 31, 20082011 is $11.5$15.5 million. The ending net UTB results from adjusting the gross balance at December 31, 20072011 for items such as U.S. federal state and foreignstate deferred tax, foreign tax credits, interest, and deductible taxes. The net UTB is included as a component of non-current income taxes payable within the consolidated balance sheet.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2011, December 31, 2010 and December 31, 2009, total interest and penalties expensed were $30,000, $262,000 and $354,000, respectively. As of December 31, 20072011 and December 31, 2008,2010, accrued interest and penalties on a gross basis was $643,000$1.9 million and $1.2$1.8 million, respectively. No penalties have been accrued. Included in accrued interest are amounts related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest, the disallowanceimpact of the shorter deductibility periodany uncertain tax benefits related to temporary differences would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The Company has recognized a deferred tax benefit related to excess foreign tax credits of $202,000 related to unremitted earnings of certain foreign sales subsidiaries. With the exception of those foreign sales subsidiaries for which deferred tax has been provided, the Company intends to indefinitely reinvest foreign earnings. These earnings were approximately $22.8$40.2 million and $28.0$10.1 million as of December 31, 20082011 and December 31, 2007,2010, respectively. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested.

Note 8—9—Commitments and Contingencies:Contingencies

Leases

The Company leases office space, cars and equipment under non-cancelable operating leases with various expiration dates through December 2026. Rent expense in the years ended, December 31, 2011, 2010 and 2009 was $7.0 million, $6.4 million and $6.2 million, respectively. The terms of some of the Company’s office leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.

Future minimum lease payments under non-cancelable operating leases are as follows (in thousands):

Year Ending December 31,

    

2012

  $6,349  

2013

   5,268  

2014

   4,486  

2015

   3,981  

2016

   3,558  

Thereafter

   6,070  
  

 

 

 

Total minimum lease payments

  $29,712  
  

 

 

 

Employment Agreements

The Company has signed various employment agreements with key executives pursuant to which, if their employment is terminated without cause, such employees are entitled to receive their base salary (and commission or bonus, as applicable) for 52 weeks (for the Chief Executive Officer), 39 weeks (for the Senior Vice President of Worldwide Operations and Support) and up to 26 weeks (for other key executives). Such employees will also continue to have stock options vest for up to a one-year period following such termination without cause. If a termination without cause or resignation for good reason occurs within one year of a change in control, such employees are entitled to full acceleration (for the Chief Executive Officer) and up to two years acceleration (for other key executives) of any unvested portion of his or her stock options.

Purchase Obligations

The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. At December 31, 2011, the Company had $139.4 million in non-cancelable purchase commitments with suppliers. The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers. Such losses have not been material to date.

Guarantees and Indemnifications

The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a Director and Officer Insurance Policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2011.

In its sales agreements, the Company typically agrees to indemnify its direct customers, distributors and resellers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights

of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. The Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2011.

Litigation and Other Legal Matters

NETGEAR v. CSIRO

In May 2005, the Company filed a complaint for declaratory relief against the Commonwealth Scientific and Industrial Research Organization (“CSIRO”), in the San Jose division of the United States District Court, Northern District of California. The complaint alleges that the claims of CSIRO’s U.S. Patent No. 5,487,069 are invalid and not infringed by any of the Company’s products. CSIRO had asserted that the Company’s wireless networking products implementing the IEEE 802.11a, 802.11g, and 802.11n wireless LAN standards infringe its patent. In July 2006, the United States Court of Appeals for the Federal Circuit affirmed the District Court’s decision to deny CSIRO’s motion to dismiss the action under the Foreign Sovereign Immunities Act. In September 2006, the Federal Circuit denied CSIRO’s request for a rehearing en banc. CSIRO filed a response to the complaint in September 2006. In December 2006, the District Court granted CSIRO’s motion to transfer the case to the Eastern District of Texas, where CSIRO had brought and won a similar lawsuit against Buffalo Technology (USA), Inc., which Buffalo recently appealed and which has been partially remanded to the District Court. The District Court consolidated this action with three related actions involving other companies (such as Buffalo) accused of infringing CSIRO’s patent. The case is now in the final stages of discovery. The Company attended a court-mandated mediation in November 2007 but failed to resolve the litigation. The District Court held a June 26, 2008 claim construction hearing. On August 14, 2008, the District Court issued a claim construction order and denied a motion for summary judgment of invalidity. In December 2008, the parties filed numerous motions for summary judgment concerning, among other things, infringement, validity, and other affirmative defenses. The District Court has scheduled an April 13, 2009 jury trial regarding all liability issues for the four consolidated cases. Beginning in June of 2009, the District Court will hold the first in a series of damages trials. The Company’s case will be heard in the second trial in this series, which will likely commence sometime during the third or fourth quarter of 2009.

Linex Technologies v. NETGEAR

In June 2007, a lawsuit was filed against the Company by Linex Technologies, Inc. (“Linex”), a patent-holding company organized under the laws of Delaware, in the U.S. District Court, Eastern District of Texas. Linex alleged that the Company infringed U.S. Patent No. 6,757,322. Linex had accused certain of the

Company’s wireless networking products incorporating multiple input/multiple output (MIMO) technology of infringement. Linex had also sued 14 other technology companies alleging similar claims of patent infringement. In December 2008, the Company agreed to settle the litigation with Linex. Without admitting any patent infringement, wrongdoing or violation of law and to avoid the distraction and expense of continued litigation, the Company agreed to a fully paid perpetual license and a covenant not to sue with respect to the ‘322 patent and related patents. The terms of the settlement agreement are confidential. Based on the historical and estimated projected future unit sales of the Company’s products that were alleged to infringe the asserted patents, the Company allocated a portion of the settlement cost towards product shipments prior to the settlement, which the Company recorded as a litigation settlement expense in the year ended December 31, 2008. Additionally, the Company allocated the balance of the settlement cost to prepaid royalties which is being recognized as a component of cost of revenue over the period that the related products are sold.

Wi-Lan Inc. v. NETGEAR

In October 2007, a lawsuit was filed against the Company by Wi-Lan Inc. (“Wi-Lan”), a patent-holding company existing under the laws of Canada, in the U.S. District Court, Eastern District of Texas. Wi-Lan allegesalleged that the Company infringesinfringed U.S. Patent Nos. 5,282,222, RE37,802 and 5,956,323. Wi-Lan has accused the Company’sCompany of infringement with respect to its wireless networking products compliant with the IEEE 802.11 standards and ADSL products compliant with the ITU G.992 standards of infringement.ITUG.992 standards. Wi-Lan has also sued 21 other technology companies alleging similar claims of patent infringement. The Company filed its answer to the lawsuit in the first quarter of 2008. This action is now inA claim construction hearing took place for the discovery phase.‘222 and ‘802 Patents on March 11, 2010, and on May 11, 2010, the Court issued its order interpreting the claims of these patents (claim construction order). The District Court has scheduled aclaim construction hearing on the ‘323 patent occurred on September 1, 2010, and the Court subsequently issued its claim construction hearing,order for this patent. The Court ordered that infringement of the RE37,802 and 5,282,222 (Wi-Fi) patents would be tried first, as to all defendants, and infringement of the 5,956,323 (DSL) patent would be addressed in a January 4,second trial. Shortly before the beginning of the first trial, the Company and Wi-Lan entered into settlement discussions. Without admitting any wrongdoing or violation of law and to avoid the distraction and expense of continued litigation and the uncertainty of a jury verdict on the merits, the Company and Wi-Lan signed a binding release agreement in which the Company agreed to make a one-time lump sum payment to be paid by May 15, 2011 jury trial.in consideration for mutual general releases. In the agreement, each party agreed to release the other party from all claims, known or unknown, under any of the ‘222, ‘802 and ‘323 Patents with respect to the manufacture, use, sale, etc. of products by the Company. Each party agreed to bear its own costs and attorneys’ fees. The Company made the required one-time lump sum payment that was due by May 15, 2011. This arrangement is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. The Court has dismissed all claims between Wi-Lan and the Company, including all claims presented by Wi-Lan’s complaint and all of the Company’s counterclaims, and neither of the scheduled trials between Wi-Lan and the Company will occur. This litigation matter is now concluded.

Fujitsu et. al v. NETGEAR

In December 2007, a lawsuit was filed against the Company by Fujitsu Limited, LG Electronics, Inc. and U.S. Philips Corporation in the U.S. District Court, Western District of Wisconsin. The plaintiffs allege that the Company infringes U.S. Patent Nos. 6,018,642, 6,469,993 and 4,975,952. The plaintiffs accuse the Company’s wireless networking products compliant with the IEEE 802.11 standards of infringement. The Company filed its answer to the lawsuit in the first quarter of 2008. This action is in the final stages of discovery. The District Court held a claim construction hearing on August 15, 2008. On September 10, 2008, the District Court issued a claim construction order. In February 2009, the parties filed numerous motions for summary judgment concerning, among other things, non-infringement, invalidity, and other affirmative defenses. In September 2009, the District Court granted the Company’s motion for summary judgment of non-infringement of the three patents-in-suit. The District Court has rescheduleddetermined that the juryCompany’s compliance with the 802.11 standard did not necessarily infringe the patents-in-suit and that the plaintiffs did not provide adequate evidence regarding the function of the Company’s products to put the issue of infringement before a jury. In light of the District Court’s determination that the patents-in-suit were not infringed, the District Court declined to address the Company’s summary judgment claims of the invalidity of the patents in question. On December 23, 2009, the Plaintiffs filed two briefs with the Federal Circuit appealing the District Court’s summary judgment rulings. On December 30, 2009, the District Court ordered litigation costs in the amount $175,000 to be reimbursed to the Company, which were never collected or recognized. The Company’s opposition brief to the Plaintiff’s appeal was submitted on February 18, 2010. The Federal Circuit heard oral arguments on the Plaintiffs’ appeal on June 7, 2010. On September 20, 2010, the Federal Circuit

issued a unanimous ruling that made three separate findings. It affirmed a summary judgment ruling from the District Court that the Company did not infringe the claims of a Fujitsu patent related to wireless communications technology. In addition, the Court affirmed a summary judgment ruling that the Company did not infringe the claims of an LG Electronics Inc. patent also related to wireless communications technology. Further, the court affirmed the lower court’s ruling that the Company did not infringe a Philips patent for a method of transmitting data messages in a communications network, except for four products. For those four products, the Court ruled that Philips produced sufficient evidence of direct infringement, so that an infringement trial for these four products could proceed. On October 19, 2010, plaintiff LG Electronics submitted a petition for rehearing to take placethe Federal Circuit requesting that the Federal Circuit’s decision be set aside with respect to LG Electronics’ asserted patent and that a rehearing be granted. The Federal Circuit denied LG Electronics’ petition for a rehearing on August 24, 2009.November 2, 2010, letting stand its September 20, 2010 order affirming the District Court’s decision to grant the Company summary judgment of noninfringement on the patent asserted by LG Electronics. Subsequent to the Federal Circuit ruling, the parties began settlement discussions with respect to the four remaining products accused of infringing the Philips patent. On March 8, 2011, the District Court approved the settlement agreement between Philips and the Company. This arrangement is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows. This litigation matter is now concluded.

OptimumPath, L.L.C. v. NETGEAR

In January 2008, a lawsuit was filed against the Company by OptimumPath, L.L.C (“OptimumPath”), a patent-holding company existing under the laws of the State of South Carolina, in the U.S. District Court, for the District of South Carolina. OptimumPath allegesclaims that the Company infringes U.S. Patent No. 7,035,281. OptimumPath has claimed thatcertain of the Company’s wireless networking products infringe on OptimumPath’s patents.U.S. Patent No. 7,035,281. OptimumPath has also sued six other technology companies alleging similar claims of patent infringement. The Company filed its answer to the lawsuit in the second quarter of 2008. Several defendants, including the Company, jointly filed a request forinter partesreexamination of the OptimumPath patent with the United States Patent and Trademark Office (the “USPTO”) on October 13, 2008. On January 12, 2009, a reexamination was ordered with respect to claims 1-3 and 8-10 of the patent, but denied with respect to claims 4-7 and 11-32 of the patent. On February 4, 2009, the defendants jointly filed a petition to challenge the denial of reexamination of claims 4-7 and 11-32. In March 2009, the District Court granted defendants’ motion to transfer the case to the U.S. District Court, Northern District of California. In July 2009, the petition to challenge the denial of reexamination of claims 4-7 and 11-32 was denied. The Company and OptimumPath attended a Court-ordered mediation on September 22, 2009 but were unable to make progress towards settlement. The Company and other defendants filed a combined claim construction/summary judgment brief on December 23, 2010. OptimumPath responded on January 20, 2011, and the defendants replied on February 3, 2011. The oral arguments on claim construction and the summary judgment motion were made on February 17, 2011. On April 12, 2011, the District Court granted defendants’ motion for summary judgment on OptimumPath’s claim for literal infringement and defendants’ motion to preclude OptimumPath’s infringement claims based on the doctrine of equivalents. The Court also found that the accused devices did not infringe under the doctrine of equivalents. The Court also granted defendants’ motion for summary judgment that asserted claims 1, 2, 6, and 9 through 13 of the ‘281 patent were invalidated by various prior art. The pretrial conference and trial dates were vacated. OptimumPath filed its notice of appeal to the Federal Circuit of the District Court’s rulings on May 18, 2011. On May 23, 2011, the District Court entered the defendants’ joint request for costs in the amount of $102,554.00, which have not yet been collected or recognized. On June 29, 2011, the Federal Circuit docketed the appeal. OptimumPath submitted its opening brief in its appeal to the Federal Circuit on October 21, 2011, the defendants’ answering brief was submitted on December 2, 2011, and OptimumPath’s reply brief was submitted on December 16, 2011. The next step is the oral argument on the briefing before the Court of Appeals for the Federal Circuit, scheduled for March 5, 2012.

Ruckus Wireless v. NETGEAR

In May 2008, a lawsuit was filed against the Company by Ruckus Wireless (“Ruckus”), a developer of Wi-Fi technology, in the U.S. District Court, Northern District of California. Ruckus alleges that the Company

infringes U.S. Patent Nos. 7,358,912 (‘912 Patent) and 7,193,562 (‘562 Patent) in the course of deploying Wi-Fi antenna array technology in its WPN824 RangeMax wireless router. Ruckus also sued Rayspan Corporation alleging similar claims of patent infringement. The Company filed its answer to the lawsuit in the third quarter of 2008. The Company and Rayspan Corporation jointly filed a request forinter partes reexamination of the Ruckus patents with the USPTO on September 4, 2008. The Court issued a stay of the litigation while the reexaminations proceeded in the USPTO. On November 28, 2008, a reexamination was ordered with respect to claims 11-17 of the ‘562 Patent, but denied with respect to claims 1-10 and 18-36. On December 17, 2008, the defendants jointly filed a petition to challenge the denial of reexamination of claims 1-10 and 18-36 of the ‘562 Patent. In July 2009, the petition was denied, and the remaining claims 11-17 were confirmed. The Company is appealing the confirmation of claims 11-17. On December 2, 2008, reexamination was granted with regard to the ‘912 Patent. In early October 2009, the Company received an Action Closing Prosecution in the reexamination of the ‘912 Patent. All the claims of the ‘912 Patent, with the exception of the unchallenged claims 7 and 8, were finally rejected by the USPTO. On October 30, 2009, Ruckus submitted an “after-final” amendment in the ‘912 Patent reexamination proceeding. The Company’s comments to Ruckus’ “after-final” amendment were submitted on November 30, 2009. On December 1, 2009, the Court found that bifurcating the ‘562 Patent from the ‘912 Patent and commencing litigation on the ‘562 Patent while the USPTO reexamination process and appeals are still pending would be an inefficient use of the Court’s resources. Accordingly, the Court ruled that the litigation stay should remain in effect. On September 12, 2010, the Company filed the rebuttal brief in its appeals of the USPTO’s rulings during the reexamination of the ‘562 Patent, and the Company requested an oral hearing with the Board of Appeals at the USPTO to discuss this brief. On September 13, 2010, Ruckus filed a notice of appeal of the ‘912 Patent to appeal the adverse rulings it received from the USPTO in the reexamination of this patent. The Company filed a respondent’s brief in the ‘912 Patent case on January 24, 2011. An oral hearing in the ‘562 case was set for February 1, 2011, but the Company decided to cancel it and let the USPTO decide the ‘562 case based solely on the previously submitted papers. On May 13, 2011, the USPTO indicated that the Company was successful in its appeal of the examiner’s previous decision to allow claims 11-17 in the ‘562 reexamination, and the USPTO Board of Appeals reversed the examiner’s decision and declared those claims invalid. On June 13, 2011, Ruckus submitted a request for rehearing by the Board of Appeals of its decision to reject claims 11-17 of the ‘562 Patent. On September 28, 2011, the Board of Patent Appeals and Interferences denied Ruckus’s request for a rehearing in the ‘562 Patent reexamination case. Ruckus did not timely file a notice of appeal to the Court of Appeals for the Federal Circuit appealing the USPTO’s cancellation of claims 11-17 of the ‘562 patent. Therefore, a reexamination certificate will issue with claims 11-17 cancelled and claims 1-10 and 18-36 confirmed.

On November 4, 2009, Ruckus filed a new complaint in the U.S. District Court, Northern District of California alleging the Company and Rayspan Corporation infringe a patent that is related to the patents previously asserted against the Company and Rayspan Corporation by Ruckus, as discussed above. This newly asserted patent is U.S. Patent No. 7,525,486 entitled “Increased wireless coverage patterns.” As with the previous Ruckus action, the WPN824 RangeMax wireless router is the alleged infringing device. The Company challenged the sufficiency of Ruckus’s complaint in this new action and moved to dismiss the complaint. Ruckus opposed this motion. The Court partially agreed with the Company’s motion and ordered Ruckus to submit a new complaint, which Ruckus did. The initial case management conference occurred on February 11, 2010. On March 25, 2010, the Court ordered a stay until the completion of the ‘562 Patent’s reexamination proceedings in the first Ruckus lawsuit against the Company and Rayspan. The Court instructed the parties to submit status reports to the Court every six months, apprising the Court of the status of the pending reexamination proceedings in the USPTO. Upon final exhaustion of all pending reexamination proceedings of the ‘562 Patent, including any appeals, the Court ordered the parties to jointly submit to the Court a letter indicating that all appeals have been exhausted and requesting a further case management conference. The case remains stayed.

On November 19, 2010, the Company filed suit against Ruckus in the U.S. District Court, District of Delaware for infringement of four of the Company’s patents. The Company alleges that Ruckus’s manufacture, use, sale or offers for sale within the United States or importation into the United States of products, including wireless communication products, infringe United States Patent Nos. 5,812,531, 6,621,454, 7,263,143, and

5,507,035, all owned by the Company. The Company granted Ruckus an extension to file its answer to the Company’s suit, and on January 11, 2011, Ruckus filed a motion to dismiss the Company’s suit based on insufficient pleadings. The Company filed its response to Ruckus’s motion on January 31, 2011. In addition, on May 6, 2011, Ruckus filed a motion to transfer venue to the Northern District of California. The Court denied Ruckus’ motion to transfer the case to the Northern District of California and granted the Company leave to file an amended complaint rather than address the Ruckus motion to dismiss based on insufficient pleadings. The Company filed the proposed amended complaint. Nevertheless, Ruckus filed a second motion to dismiss based on insufficient pleadings by the Company. The Company has filed its opposition to Ruckus’s motion, and the Court has not yet ruled on the motion.

Northpeak Wireless, LLC v. NETGEAR

In October 2008, a lawsuit was filed against the Company and 30 other companies by Northpeak Wireless, LLC (“Northpeak”) in the U.S. District Court, Northern District of Alabama. Northpeak alleges that the Company’s 802.11b compatible products infringe certain claims of U.S. Patent Nos. 4,977,577 and 5,987,058. The Company filed its answer to the lawsuit in the fourth quarter of 2008. On January 21, 2009, the District Court granted a motion to transfer the case to the U.S. District Court, Northern District of California. In August 2009, the parties stipulated to a litigation stay pending a reexamination request to the USPTO on the asserted patents. The reexaminations of the patents are proceeding. In March 2011, the USPTO confirmed the validity of the asserted claims of the ‘577 patent over certain prior art references. In April 2011, the USPTO issued a final office action rejecting both asserted claims of the ‘058 patent as being obvious in light of the prior art. The case remains stayed by stipulation, and no trial date has been set.

WIAV Networks, LLC v. NETGEAR

In July 2009, a lawsuit was filed against the Company and over 50 other companies by WIAV Networks, LLC (“WIAV”) in the U.S. District Court, Eastern District of Texas. WIAV alleges that the Company and the other defendants infringe U.S. Patent Nos. 6,480,497 and 5,400,338. WIAV alleges that the Company’s wireless networking devices, including various routers and gateways, infringe upon WIAV’s patents. The Company filed its answer to the lawsuit in October 2009 and asserted that WIAV’s patents were both invalid and not infringed upon by the Company. In March 2010, the Company and its co-defendants filed a motion to transfer the case to the U.S. District Court, Northern District of California. WIAV opposed the motion. On June 3, 2010, the Court heard the defendants’ motion to transfer the case from the Eastern District of Texas to the Northern District of California. The Court took the motion under consideration, and on July 15, 2010, the Court ruled that it would transfer the case to the U.S. District Court, Northern District of California. Discovery has not commenced. On August 31, 2010, the U.S. District Court, Northern District of California ordered WIAV to demonstrate why the Court should not dismiss all but the first named defendant from the lawsuit. The parties briefed and argued this issue before the Court. In response, the Court dismissed without prejudice all the defendants from the case except Hewlett-Packard Company.

PACid Group, LLC v. NETGEAR

In July 2009, a lawsuit was filed against the Company and 30 other companies by The PACid Group, LLC (“PACid”) in the U.S. District Court, Eastern District of Texas. PACid alleges that the Company and the other defendants infringe U.S. Patent Nos. 5,963,646 (‘646 Patent) and 6,049,612 (‘612 Patent). PACid alleges that certain unnamed NETGEAR products that use encryption methods infringe upon PACid’s patents. The Company filed its answer to the lawsuit in September 2009 and asserted that PACid’s patents were both invalid and not infringed by the Company. Discovery has not yet commenced. Most of the Company’s chipset suppliers have settled out of the lawsuit and obtained a license to the plaintiff’s asserted patents. Because most of the accused infringement occurred in the chipset, this settlement by the chipset suppliers limits the claims the plaintiff has against the Company. On March 7, 2011, the Company attended a status conference. On May 17, 2011, the Court held another status conference. At this conference, the Company indicated to the Court that a small percentage of

the relevant products have non-licensed chip sets. The Court ordered that within 21 days of the status conference PACid shall produce all license agreements it has entered into; within 30 days of the status conference, all defendants shall produce a declaration on sales data; and within 14 days from that defendant production, PACid shall dismiss without prejudice the appropriate defendants. The parties complied with the order, and PACid did not dismiss the Company. On August 23, 2011, at mediation between the Company and PACid, a settlement of this lawsuit was reached. Without admitting any wrongdoing or violation of law and to avoid the distraction and expense of continued litigation and the uncertainty of a jury verdict on the merits, the Company and PACid signed a binding release agreement in which the Company agreed to make a one-time lump sum payment in consideration for mutual general releases. In the agreement, each party agreed to release the other party from all claims, known or unknown, under any of the ‘646 and ‘612 Patents with respect to the manufacture, use, sale, etc. of products by the Company. Each party agreed to bear its own costs and attorneys’ fees. The Company has made the required one-time lump sum payment. This arrangement is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows. The Court has dismissed all claims between PACid and the Company, including all claims presented by PACid’s complaint and all of the Company’s counterclaims, and the trial in this matter will not occur. This litigation matter is now concluded.

MPH Technologies Oy v. NETGEAR

On February 4, 2010, the Company was sued by MPH Technologies Oy (“MPH”) for infringement of U.S. patent 7,346,926 entitled “Method for Sending Messages Over Secure Mobile Communication Links.” MPH alleges that the Company’s VPN Client Software, Dual WAN gigabit SSL VPN Firewall, ProSafe Dual WAN VPN Firewall with 8-port 10/100 Switch, ProSafe VPN Firewall with 8-port 10/100 Switch, ProSafe VPN Firewall 8 with 8-Port 10/100 Switch, ProSafe VPN Firewall 8 with 4-Port 10/100 Mbps Switch, ProSafe 802 11 g Wireless ADSL Modem VPN Firewall Router, ProSafe Wireless-N VPN Firewall, and ProSafe 802 11 wireless VPN Firewall 8 with 8-port 10/100 Mbps Switch infringe claims of the ‘926 Patent. On May 17, 2010, the defendants jointly filed a motion to transfer the case to the U.S. District Court, Northern District of California. In addition, the Company filed its answer, affirmative defenses, and counterclaims on that day. On June 9, 2010, the plaintiff filed its answer to the Company’s invalidity counterclaim and its response to the defendants’ motion to transfer. On June 23, 2010, the defendants filed their joint reply to plaintiff’s response to the defendants’ motion to transfer venue. On July 16, 2010, the Court issued an order transferring the case to the Northern District of California. On September 10, 2010, the Company amended its answer to the complaint. The initial scheduling conference occurred on December 2, 2010. In response to this conference, the Court ordered that the Plaintiff must file its opening claim construction brief no later than May 17, 2011 and that defendants must file their responsive claim construction briefs no later than May 31, 2011. The Court also ordered that a claim construction hearing take place on June 22, 2011. The Company and plaintiff signed a settlement agreement on May 15, 2011. In the agreement, the Company agreed to pay a one-time lump sum payment and grant MPH certain other patent rights in return for each party agreeing to release the other party from all claims, known or unknown, under the patent in suit and related patents with respect to the manufacture, use, sale, etc. of products by the Company. The Company received a fully paid, worldwide, perpetual license to the patent in suit and all foreign counterparts and related patents. This arrangement is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. On May 16, 2011, the Court dismissed the case with prejudice, with each party to bear its own attorneys’ fees and costs. The Company has since made the lump sum payment to MPH, and this litigation matter is now concluded.

Ericsson v. NETGEAR

On September 14, 2010, Ericsson Inc. and Telefonaktiebolaget LM Ericsson filed a patent infringement lawsuit against the Company and defendants D-Link Corporation, D-Link Systems, Inc., Acer, Inc., Acer America Corporation, and Gateway, Inc. in the U.S. District Court, Eastern District of Texas alleging that the defendants infringe certain Ericsson patents. The Company has been accused of infringing eight U.S. patents: 5,790,516; 6,330,435; 6,424,625; 6,519,223; 6,772,215; 5,987,019; 6,466,568; and 5,771,468. Ericsson generally

alleges that the Company and the other defendants have infringed and continue to infringe the Ericsson patents through the defendants’ IEEE 802.11-compliant products. In addition, Ericsson alleges that the Company has infringed, and continues to infringe, the claimed methods and apparatuses of the ‘468 Patent through the Company’s PCMCIA routers. The Company filed its answer to the Ericsson complaint on December 17, 2010 where it asserted the affirmative defenses of noninfringement and invalidity of the asserted patents. On March 1, 2011, the defendants filed a motion to transfer venue to the District Court for the Northern District of California and their memorandum of law in support thereof. On March 21, 2011, Ericsson filed is opposition to the motion, and on April 1, 2011, defendants filed their reply to Ericsson’s opposition to the motion to transfer. On June 8, 2011, Ericsson filed an amended complaint that added Dell, Toshiba and Belkin as defendants. At the status conference held on Jun 9, 2011, the Court set a Markman hearing for June 28, 2012 and trial for June 3, 2013. On June 14, 2011, Ericsson submitted its infringement contentions against the Company. On September 29, 2011, the Court denied the defendants motion to transfer venue to the Northern District of California. Discovery is ongoing. The parties are now approaching the Markman hearing, and the schedule is as follows: March 9, 2012—exchange of proposed constructions of claim terms; April 9, 2012—Joint Claim Construction Statement filing deadline; May 4, 2012—Ericsson’s Markman brief; May 16, 2012—Tutorials due; June 1, 2012—Defendants Markman brief; June 15—Ericsson’s Reply Markman brief; and June 28, 2012—Markman hearing.

Fujitsu v. NETGEAR

On September 3, 2010, Fujitsu filed a complaint against the Company, Belkin International, Inc., Belkin, Inc., D?Link Corporation, D?Link Systems, Inc., ZyXEL Communications Corporation, and Zyxel Communications, Inc in the U.S. District Court, Northern District of California alleging that certain of the Company’s products infringe upon Fujitsu’s U.S. patent Re. 36,769 patent (‘769 Patent) through various cards and interface devices within the Company’s products. The Company answered the complaint denying the allegations of infringement and claiming that the asserted patent is invalid. In addition, the Company filed a motion to disqualify counsel for Fujitsu. The Company’s disqualification motion was argued before the Court on December 16, 2010, and on December 22, 2010, the Court granted the Company’s motion and disqualified counsel for Fujitsu. In response, Fujitsu requested a stipulation from all parties to reset the case management conference and scheduled hearing dates for the motions to dismiss. The initial case management conference was held on March 18, 2011. A claim construction hearing was held on October 14, 2011. On February 3, 2012, the Court issued its claim construction order based on the claim construction hearing. The parties are currently participating in the discovery process. Expert reports and accompanying discovery opens May 4, 2012 and closes June 8, 2012. Dispositive motions are due June 28, 2012, and trial is set to commence on November 26, 2012.

Data Network Storage, LLC v. NETGEAR

In April 2009, a lawsuit was filed against the Company and 14 other companies by Data Network Storage, LLC (“DNS”) in the U.S. District Court for the Southern District of California. DNS alleges that the Company and the other third parties infringe U.S. Patent No. 6,098,128. In particular, DNS is alleging that several of the Company’s ReadyNAS products infringe upon DNS’s patents. The Company filed its answer to the lawsuit in July 2009 and asserted that DNS’s patents were both invalid and had not been infringed upon by the Company. In September 2009, at a Court-sanctioned early neutral evaluation, the parties were unable to reach an agreement on a settlement, and discovery continued. On January 27, 2010, the Court denied co-defendant Fujitsu America, Inc.’s motion to stay the litigation, and the Company submitted its invalidity contentions on February 1, 2010. The Company and the plaintiff entered into settlement discussions in early March. Without admitting any wrongdoing or violation of law and to avoid the distraction and expense of continued litigation and the uncertainty of a jury verdict on the merits, the Company agreed to make a one-time lump sum payment in consideration for a fully paid and perpetual license to, and a covenant not to sue on, the ‘128 patent and the plaintiff’s entire portfolio of U.S. patents, related patents, and foreign counterparts. The Company has made the required one-time lump sum payment, and the lawsuit by DNS against the Company was dismissed with prejudice on April 23, 2010. This arrangement did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows for the year ended December 31, 2010.

NETGEAR v. CSIRO

In May 2005, the Company filed a complaint for declaratory relief against the Commonwealth Scientific and Industrial Research Organization (“CSIRO”), in the San Jose division of the United States District Court, Northern District of California. The complaint alleged that the claims of CSIRO’s U.S. Patent No. 5,487,069 are invalid and not infringed by any of Company’s products. CSIRO had asserted that the Company’s wireless networking products implementing the IEEE 802.11a, 802.11g, and 802.11n wireless LAN standards infringe this patent. In July 2006, the United States Court of Appeals for the Federal Circuit affirmed the District Court’s decision to deny CSIRO’s motion to dismiss the action under the Foreign Sovereign Immunities Act. In September 2006, the Federal Circuit denied CSIRO’s request for a rehearingen banc. CSIRO filed a response to the complaint in September 2006. In December 2006, the District Court granted CSIRO’s motion to transfer the case to the Eastern District of Texas, where CSIRO had brought and won a similar lawsuit against Buffalo Technology (USA), Inc., which Buffalo appealed and which was partially remanded to the District Court. The District Court consolidated this action with three related actions involving other companies (such as Buffalo) accused of infringing CSIRO’s patent. The Company attended a Court-mandated mediation in November 2007 but failed to resolve the litigation. The District Court held a June 26, 2008 claim construction hearing. On August 14, 2008, the District Court issued a claim construction order and denied a motion for summary judgment of invalidity. In December 2008, the parties filed numerous motions for summary judgment concerning, among other things, infringement, validity, and other affirmative defenses. The District Court commenced a jury trial on April 13, 2009 regarding all liability issues for the four consolidated cases. On April 20, 2009, the Company and CSIRO executed a Memorandum of Understanding (“MOU”) setting forth the terms of a settlement and license agreement between the Company and CSIRO. Without admitting any wrongdoing or violation of law and to avoid the distraction and expense of continued litigation and the uncertainty of a jury verdict on the merits, the Company agreed to make a one-time lump sum payment in consideration for a fully paid perpetual license and a covenant not to sue with respect to the ‘069 patent and all foreign counterparts and related patents. Based on the historical and estimated projected future unit sales of the Company’s products that were alleged to infringe the asserted patent, the Company allocated a portion of the settlement cost towards product shipments prior to the settlement, which the Company recorded as a litigation settlement expense of $2.4 million, which was primarily recognized in the three months ended March 29, 2009. Additionally, the Company allocated $2.6 million of the settlement cost to prepaid royalties which will be recognized as a component of cost of revenue as the related products are sold. Of this $2.6 million, $413,000 and $551,000 were amortized and expensed in the year ended December 31, 2009 and December 31, 2010, respectively. Additionally, $551,000 was amortized and expensed in the year ended December 31, 2011.

Finoc, LLC v. NETGEAR

In February 2009, a lawsuit was filed against the Company and 14 other companies by Finoc Design Consulting OY (“Finoc”) in the U.S. District Court for the Eastern District of Texas. Finoc alleged that the Company’s wireless DSL gateway products infringe U.S. Patent No. 6,850,560. In June 2009, without admitting any patent infringement, wrongdoing or violation of law and to avoid the distraction and expense of continued litigation, the Company agreed to make a one-time lump sum payment of $82,500 in consideration for a fully paid perpetual license to the patent in suit as well as a dismissal with prejudice by Finoc. Based on the historical and estimated projected future unit sales of the Company’s products that were alleged to infringe the asserted patents, the Company allocated a portion of the settlement cost towards product shipments prior to the settlement, which the Company recorded as a litigation settlement expense in the three months ended June 28, 2009. Additionally, the Company allocated the balance of the settlement cost to prepaid royalties, which will be recognized as a component of cost of revenue as the related products are sold.

Network-1 Security Solutions, Inc. v. NETGEAR

In February 2008, a lawsuit was filed against the Company by Network-1 Security Solutions, Inc. (“Network-1”), a patent-holding company existing under the laws of the State of Delaware, in the U.S. District Court for the Eastern District of Texas. Network-1 alleges that the Company infringes U.S. Patent No. 6,218,930. Network-1 has alleged that the Company’s power over Ethernet (“PoE”) products infringe their patent.infringed

its U.S. Patent No. 6,218,930. Network-1 has also sued six other companies alleging similar claims of patent infringement. The Company filed its answer in the second quarter of 2008. TheIn May 2009, without admitting any patent infringement, wrongdoing or violation of law and to avoid the distraction and expense of continued litigation, the Company agreed to make a one-time lump sum payment of $350,000, which the Company recorded as a litigation settlement in fiscal 2009, in consideration for a license to the patent in suit as well as a dismissal with prejudice of the lawsuit. Under the license, the Company will pay future running royalties on certain of its PoE products which will be recognized as a component of cost of revenue as the related products are sold.

Chalumeau Power Systems v. NETGEAR.

On June 28, 2011, Chalumeau Power Systems LLC (“Chalumeau”) filed a complaint against several technology companies—including the Company, Cisco Systems Inc., Hewlett-Packard Co., D-Link, and Avaya Inc. —in the U.S. District Court, District of Delaware alleging infringement of a patent for a remote device detection method. The patent number is U.S. Patent No. 5,991,885 (‘885 Patent) and is entitled “Method and apparatus for detecting the presence of a remote device and providing power thereto.” Chalumeau claimed that the defendants have all made or sold devices that make use of infringing PoE technology, which allows electrical power and data to pass safely on Ethernet cabling. The Company answered Chalumeau’s complaint on September 1, 2011, and asserted various defenses and counterclaims, including those of noninfringement and invalidity of the ‘885 Patent. In October 2011, a settlement of this lawsuit was reached between Chalumeau and the Company through a third-party intermediary. Without admitting any wrongdoing or violation of law and to avoid the distraction and expense of continued litigation and the uncertainty of a jury verdict on the merits, the Company and Chalumeau signed a binding release agreement in which both parties agreed to mutual general releases from all claims, known or unknown, under the ‘885 Patent and its foreign counterparts with respect to the manufacture, use, sale, etc. of products by the Company. The Court has scheduled a December 3, 2009 claim construction hearingsince dismissed Chalumeau’s claims for relief against the Company and a July 6, 2010 jury trial.the Company’s counterclaims for relief against Chalumeau, with prejudice and with all attorneys’ fees, costs and expenses levied against the party incurring the same.

Fenner Investments Ltd.Powerline Innovations, LLC v. NETGEAR

In February 2008, a lawsuit was filed againstOn August 6, 2011 the Company, by Fenner Investments, Ltd. (“Fenner”), a patent-holding company existing under the laws of the State of Texas,along with 16 other companies, was sued in the U.S. District Court, for the Eastern District of Texas. Fenner alleges that the Company infringesTexas, Tyler Division for patent infringement by a non-practicing entity called Powerline Innovations, LLC (“Powerline Innovations”). This is a single patent case, involving U.S. Patent No. 7,145,906 entitled “Packet Switching Node” and U.S. Patent No. 5,842,2245,471,190, entitled “Method and Apparatus for Source Filtering Data Packets Between Networks of Differing Media”. Fenner has also sued six other companies alleging similar claims of patent infringement. The CompanyResource Allocation in a Communication Network System.” On the same day that it filed its answer in the second quarter of 2008. The District Court had scheduled a February 19, 2009 claim construction hearing and an October 13, 2009 jury trial, but the claim construction hearing has since been rescheduled for April 2009. The Company attended a court-mandated mediation in February 2009 but failed to resolve the litigation. This action is in the discovery phase.

Ruckus Wireless v. NETGEAR

In May 2008, a lawsuit was filedsuit against the Company by Ruckus Wirelessand 16 other companies, Powerline Innovations sued 14 additional companies in a separate suit in U.S. District Court, Eastern District of Texas for infringement of the same patent. The complaint against the Company alleges that it infringes the 5,471,190 patent based on the Company’s use of methods for establishing control relationships between plural devices and names the Company’s Powerline AV Ethernet Adapter, Model XAV101, as an accused infringing product. The Company answered the plaintiff’s complaint on December 12, 2011, and asserted that it has not infringed the patent in suit and that the patent in suit is invalid. In addition, the Company asserted various affirmative defenses. Powerline Innovations has not yet served all the parties. The Court will likely not set an initial status conference before service is completed.

Summit Data Systems LLC v. NETGEAR.

On September 1, 2010, a non-practicing entity, Summit Data Systems LLC (“Ruckus”Summit Data Systems”), a developer of Wi-Fi technology,sued the Company and seven other companies in the U.S. District Court, for the Northern District of California. Ruckus alleges that the Company infringes Delaware alleging infringement of two patents—U.S. Patent Nos. 7,358,912No. 7,392,291 (‘291 Patent), entitled Architecture for Providing Block-Level Access over a Computer Network and 7,193,562U.S. Patent No. 7,428,581 (‘581 Patent), entitled Architecture for Providing Block-Level Access over a Computer Network. The ‘581 Patent is a continuation of the ‘291 Patent. The Company’s ReadyNAS and NVX products were listed by the plaintiff in the course of deploying Wi-Fi antenna array technology in its complaint as accused infringing

products. The Company filed its answeranswered the complaint on November 1, 2010, asserting that the patents are not infringed and invalid. Subsequently, the Company participated in discovery, and trial for this matter was scheduled for March 2013. In October 2011, a settlement of this lawsuit was reached between Summit Data Systems and the third quarterCompany through a third-party intermediary. Without admitting any wrongdoing or violation of 2008. Ruckus also sued Rayspan Corporation alleging similar claimslaw and to avoid the distraction and expense of patent infringement. Thecontinued litigation and the uncertainty of a jury verdict on the merits, the Company and Rayspan Corporation jointly filedSummit Data Systems signed a request for inter partes reexamination of the Ruckus patents with the USPTO on September 4, 2008. On December 2, 2008, reexamination was grantedbinding release agreement in which both parties agreed to mutual general releases from all claims, of U.S.known or unknown, under the ‘291 Patent No. 7,358,912. On November 28, 2008, a reexamination was orderedand ‘581 Patents and certain other patents and applications assigned to Summit Data Systems with respect to the manufacture, use, sale, etc. of products by the Company. The Court has since dismissed Summit Data Systems’s claims 11-17 of U.S. Patent No. 7,193,562, but denied with respect to claims 1-10 and 18-36. On December 17, 2008, the defendants jointly filed a petition to challenge the denial of reexamination of claims 1-10 and 18-36 of U.S. Patent No. 7,193,562.

EZ4Media, Inc. v. NETGEAR

In June 2008, a lawsuit was filedfor relief against the Company by EZ4Media, Inc. (“EZ4Media”)and the Company’s counterclaims for relief against Summit Data Systems, with prejudice and with all attorneys’ fees, costs and expenses levied against the party incurring the same.

NETGEAR v. Innovatio IP Ventures LLC.

On November 16, 2011, the Company filed a declaratory judgment action in the U.S.District of Delaware for non-infringement and invalidity of 17 WiFi-related patents brought in the approximately 15 actions throughout the United States by Innovatio IP Ventures LLC (“Innovatio”) against end user customers of the Company and other companies. Shortly after filing the declaratory judgment action, the Company filed a response supporting Cisco Systems, Inc.’s and Motorola Solutions, Inc.’s Motion to Transfer for Coordinated Pretrial Proceedings Pursuant to 28 U.S.C. § 1407 that was before the United States Judicial Panel on Multidistrict Litigation (“JPML”). The pending motion to transfer would serve to consolidate all of the Innovatio lawsuits — including NETGEAR’s pending declaratory judgment action in Delaware—and transfer them to a single court for coordinated pretrial proceedings. On December 28, 2011, the JPML issued an order transferring the Innovatio actions throughout the United States, including the Company’s declaratory judgment action, to the United States District Court for the Northern District of Illinois. EZ4Media alleges thatThus, the Company’s digital media receivers infringe U.S. Patent Nos. 7,142,934, 7,142,935, 7,167,765declaratory judgment action and 7,130,616. EZ4Media has also sued eightapproximately 15 other companies alleging similar claims of patent infringement. The Company filed its answer and counterclaimscases will now proceed in the third quarterNorthern District of 2008.Illinois in a consolidated fashion. The Court has set a status conference date for the consolidated cases of March 27, 2012.

Northpeak Wireless, LLCHarris Corporation v. NETGEARNETGEAR.

In October 2008, a lawsuit was filed againstOn November 26, 2011, Harris Corporation (“Harris”) sued the Company and thirty other companies by Northpeak Wireless, LLC (“Northpeak”) in the U.S. District Court, for the NorthernMiddle District of Alabama. Northpeak allegesFlorida alleging that the Company willfully infringes six of Harris’s patents—U.S. Patent Nos. 4,977,5776,504,515, 7,916,684, 5,787,177, 5,974,149, 6,189,104, and 5,987,058.6,397,336. The Company obtained an extension until February 20, 2012 to answer the complaint and is reviewing the complaint and patents. It appears that Harris is attempting to read four of the patents (the ‘177, ‘149, ‘104, and ‘336 Patents) on the Company’s ProSecure UTM series of products. The other two patents (the ‘515 and ‘684 Patents) allegedly read on certain of the Company’s access points and wireless routers and gateways with multiple antennas. Harris filed an amended complaint on February 17, 2012 that removed its answer ininitial allegations of willful infringement by the fourth quarterCompany and also removed the allegations of 2008. On January 21, 2009,direct infringement against the Court granted a motion to transferCompany for U.S. Patent No. 7,916,684, leaving only indirect infringement allegations for the case‘684 Patent. The Company’s answer to the U.S. District Court for the Northern District of California. The Court has not yet set a trial date.amended complaint is due on March 2, 2012.

IP Indemnification Claims

In addition, in its sales agreements, the Company typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties.Parties, subject to customary carve outs. The terms of these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties.

In December 2005, the Company received a request for indemnification from Charter Communications, Inc. (“Charter”), a direct customer, related to a lawsuit filed in the U.S. District Court, Eastern District of Texas, by Hybrid Patents, Inc. (“Hybrid”), a patent holding company. Hybrid alleged that Charter infringed U.S. Patent Nos. 5,586,121, 5,818,845, 6,104,727 and Re. 35,774. Hybrid alleged that products implementing the Data Over Cable Service Interface Specification (“DOCSIS”) standard, which are supplied to Charter by, among others, the Company, infringed these patents. In the third quarter of 2006, the Company together with a number of other equipment suppliers to Charter assumed the defense of the litigation. In the second quarter of 2007, a jury found that the Hybrid patents were not infringed by Charter. Hybrid filed similar lawsuits in the same jurisdiction against Comcast Corporation, Comcast of Dallas, LP, Time Warner Cable, Inc. and Cox Communications, Inc., all of whom are also customers of the Company. In May 2008, the Company, together with several co-defendants, agreed to settle the litigation as part of a group settlement with Hybrid. Without admitting any patent infringement, wrongdoing or violation of law and to avoid the distraction and expense of continued litigation, the Company agreed to make a one-time payment of $450,000 for its portion of the settlement, in exchange for a fully paid perpetual license to all Hybrid patents, including those asserted in the lawsuit. Based on the historical and estimated projected future unit sales of the Company’s products that were alleged to infringe the asserted patents, the Company allocated $109,000 of the settlement cost towards product shipments prior to the settlement, which the Company recorded as a litigation settlement expense in the three months ended March 30, 2008. Additionally, the Company allocated $341,000 of the settlement cost to prepaid royalties which is being recognized as a component of cost of revenue as the related products are sold.

In June 2006, the Company received a request for indemnification from Charter and Charter Communications Operating, LLC, related to a lawsuit filed in the U.S. District Court, Eastern District of Texas, by Rembrandt Technologies, L.P. (“Rembrandt”), a patent-holding company. Rembrandt alleges that Charter infringes U.S. Patent Nos. 5,243,627, 5,852,631, 5,719,858 and 4,937,819. Rembrandt alleges that products implementing the DOCSIS standard, which are supplied to Charter by, among others, the Company, infringe these patents. Rembrandt has also filed a similar lawsuit in the same jurisdiction against Comcast Corporation, Comcast Cable Communications, LLC and Comcast of Plano, LP. Rembrandt alleged that products implementing the DOCSIS standard, which are supplied to Charter, Comcast Corporation, Comcast Cable Communications, LLC and Comcast of Plano, LP by, among others, the Company, infringe various patents held by Rembrandt. In June 2007, the Judicial Panel on Multidistrict Litigation ordered these and other similar patent cases brought by Rembrandt consolidated and transferred to the U.S. District Court for the District of Delaware. In November 2007, the Company along with Motorola, Inc., Cisco Systems, Inc., Scientific-Atlanta, Inc., ARRIS Group, Inc., Thomson, Inc. and Ambit Microsystems, Inc. filed a complaint for declaratory judgment in the U.S. District Court for the District of Delaware against Rembrandt, seeking a declaration that Rembrandt’s allegedeight asserted Rembrandt patents asserted in the transferred cases are either invalid or not infringed. The action is currently in the discovery phase. The District Court held a claim construction hearing on August 5, 2008, and has scheduled a September 9, 2009 jury trial.2008. On November 29, 2008, the District Court issued its claim construction order. After the District Court’s order, Rembrandt agreed to drop three patents from the case, leaving five patents at issue. The District Court has scheduledheld a mediation foron March 3-4, 2009.2009 but the parties were unable to reach a resolution. On July 21, 2009, Rembrandt delivered to the Company and other parties an executed covenant not to sue on any of the eight patents originally in the suit, contending that the execution of the covenant divests the District Court of jurisdiction or renders moot the remaining claims and counterclaims in the action. On July 31, 2009, Rembrandt filed a motion to dismiss the litigation. While Rembrandt’s motion was pending, the defendants filed motions for summary judgment, motions for sanctions, and responses to Rembrandt’s motion to dismiss. In early October 2009, the District Court suspended all further dates for the case while it reviewed the pending motions and case status. On October��23, 2009, the Court ordered Rembrandt to supplement the covenant not to sue to include any products or services that comply with DOCSIS 1.0, 1.1, 2.0 or 3 and dismissed Rembrandt’s various infringement claims on the eight patents with prejudice. The Court gave Rembrandt five days to withdraw its motion to dismiss the litigation if it found the Court’s conditions on dismissal to be unacceptable. Rembrandt did not withdraw its motion to dismiss the litigation, and on October 30, 2009, Rembrandt executed a covenant not to sue on any of the eight patents in the case and any products or services that comply with DOCSIS 1.0, 1.1, 2.0 or 3. The Company and its co-defendants moved for attorneys’ fees to be paid by Rembrandt. Rembrandt opposed the motion. On July 8, 2011, the Court denied the defendant’s unopposed motion for summary judgment of noninfringement of the one patent remaining in the case, the ‘627 Patent. This ruling did not affect the Company since that patent was not asserted against the Company, other than postponing the Company’s possible recovery of attorneys’ fees. On July 13, 2011, the Court dismissed without prejudice the defendants’ joint motion for fees because the motion is now not ripe given the Court’s denial of the motion for summary judgment of noninfringement of the ‘627 Patent. The Company is now reviewing its options for recovering attorneys’ fees.

All of the above described claims against the Company, or filed by the Company, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources. Were an unfavorable outcome to occur, there exists the possibility it would have a material adverse impact on the Company’s financial position and results of operations for the period in which the unfavorable outcome occurs or becomes probable. In addition, the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including litigation related to intellectual property and employment matters.

Based on currently available information, the Company does not believe that the ultimate outcomes of any unresolved matters, individually and in the aggregate, are likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations within the next twelve12 months. However, litigation is subject to inherent uncertainties, and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position and results of operations or liquidity for the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.

Environmental Regulation

The European Union (“EU”) has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods, including home and smallcommercial business networking products, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for the individual member states of the EU to enacttranspose the directive into law in their respective countries was August 13, 2004 (such legislation, together with the directive, the “WEEE Legislation”). Producers participating in the market arewere financially responsible for implementing these responsibilities under the WEEE Legislation beginning in August 13, 2005. Similar WEEE Legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China, India, Australia and Japan. The Company adopted FSP SFAS No. 143-1, “Accountingthe authoritative guidance for Electronic Equipment Waste Obligations”,asset retirement and environmental obligations in the third quarter of fiscal 2005 and has determined that its effect did not have a material impact on itsthe Company’s consolidated results of operations and financial position for fiscal 2006, 2007, or 2008.the full year ended December 31, 2011. The Company is continuing to evaluate the impact of the WEEE Legislation and similar legislation in other jurisdictions as individual countries issue their implementation guidance.

Additionally, the EU has enacted the Restriction of Hazardous Substances Directive (“RoHS Legislation”). The, the REACH Directive and the Battery Directive. EU RoHS Legislation, along with similar legislation in China, prohibits the use ofrequires manufacturers to ensure certain substances, including polybrominated biphenyls (“PBD”), polybrominated diphenyl ethers (“PBDE”), mercury, cadmium, hexavalent chromium and lead (except for allowed exempted materials and applications), are below specified maximum concentration values in certain products put on the market after July 1, 2006. The REACH Directive similarly requires manufacturers to ensure the published list of substances of very high concern in certain products are below specified maximum concentration values. The Battery Directive prohibits use of certain types of battery technology in certain products. The Company believes it has met the requirements of the RoHS Legislation.Legislation, the REACH Directive and the Battery Directive.

Additionally, the EU has enacted the Energy Using Product (“EuP”) Directive, which requires manufacturers of certain products to meet minimum energy efficiency limits. These limits are documented in EuP implementing measures issued for specific types of equipment and document minimum power supply efficiencies and may include required equipment standby modes which also reduce energy consumption. The Company believes it has met the requirements of the applicable EuP implementing measures.

Note 10—Stockholders’ Equity

Employment AgreementsCommon Stock Repurchase Programs

In October 21, 2008, the Company’s Board of Directors authorized management to repurchase up to 6,000,000 shares of the Company’s outstanding common stock. Under this authorization, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of the Company’s common stock. The Company has signed various employment agreements with key executives pursuant to which if their employment is terminated without cause, the employees are entitled to receive their base salary (and commission or bonus, as applicable) for 52 weeks for the Chief Executive Officer and up to 26 weeks for other key executives. Such employees will continue to have stock options vest for up to a one year period following the termination. If the termination, without cause, occurs within one year of a change in control, the officer is entitled to two years acceleration ofdid not repurchase any unvested portion of his or her stock options.

Leases

The Company leases office space, cars and equipmentshares under non-cancelable operating leases with various expiration dates through December 2026. Rent expense inthis authorization during the years ended December 31, 2008, 2007 and 2006 was $6.3 million, $3.4 million, and $2.2 million, respectively. The terms of some of the Company’s office leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.

Future minimum lease payments under non-cancelable operating leases, net of sublease payments, are as follows (in thousands):

Year Ending December 31,

   

2009

  $5,589

2010

   4,398

2011

   3,524

2012

   3,169

2013

   3,254

Thereafter

   16,468
    

Total minimum lease payments

  $36,402
    

Guarantees and Indemnifications2011, 2010 or 2009.

The Company has entered into various inventory-related purchase agreements with suppliers. Generally,repurchased approximately 25,000 shares, or $926,000 of common stock under these agreements, 50%a repurchase program to help administratively facilitate the withholding and subsequent remittance of orders are cancelable by giving notice 46 to 60 days prior to the expected

shipment datepersonal income and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. At December 31, 2008, the Company had $26.8 million in non-cancelable purchase commitments with suppliers. The Company establishes a loss liabilitypayroll taxes for all products it does not expect to sell for which it has committed purchases from suppliers. Such losses have not been material to date.

The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a Director and Officer Insurance Policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2008.

In its sales agreements, the Company typically agrees to indemnify its direct customers, distributors and resellers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. The Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2008.

Note 9—Stockholder’s Equity:

At December 31, 2008, the Company had five stock-based employee compensation plans as described below. The total compensation expense related to these plans was approximately $11.3 million forindividuals receiving RSUs during the year ended December 31, 2008.2011. Similarly, during the years ended December 31, 2010 and December 31, 2009, the Company repurchased approximately 32,000 shares and 22,000 shares, respectively, or $736,000 and $282,000 of common stock, respectively, under the same program to help facilitate tax withholding for RSUs.

These shares were retired upon repurchase. The Company’s policy related to repurchases of its common stock is to charge the excess of cost over par value to retained earnings. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

Comprehensive Income and Cumulative Other Comprehensive Income, Net

The following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock awards, and the Employee Stock Purchase Plan included in the Company’s Consolidated Statementsactivity for each component of Operations (in thousands):

   Year Ended December 31,
   2008  2007  2006

Cost of revenue

   864   633   430

Research and development

   3,218   2,391   1,119

Sales and marketing

   3,406   3,013   1,405

General and administrative

   3,835   2,842   1,551
            
  $11,323  $8,879  $4,505
            

The Company recognizes these compensation costsother comprehensive income, net of the estimated forfeitures on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years.

Total stock-based compensation cost capitalized in inventory was less than $250,000 in each ofrelated taxes, for the years ended December 31, 2008, 2007,2011, December 31, 2010, and 2006.December 31, 2009, (in thousands):

As

   Year ended December 31, 
   2011  2010   2009 

Net income

  $91,368   $50,909    $9,333  

Unrealized gains (losses) on derivative instruments

   (267  253     20  

Unrealized gains (losses) on available-for-sale securities

   9    4     (63
  

 

 

  

 

 

   

 

 

 

Total comprehensive income

  $91,110   $51,166    $9,290  
  

 

 

  

 

 

   

 

 

 

The following table sets forth the components of cumulative other comprehensive income, net of related taxes, as of December 31, 2008, the Company has the following share-based compensation plans:2011 and December 31, 2010 (in thousands):

   As of
December 31,
 
   2011   2010 

Net unrealized gains on derivative instruments

  $6    $273  

Net unrealized gains on available-for-sale securities

   17     8  
  

 

 

   

 

 

 

Total cumulative other comprehensive income, net of taxes

  $23    $281  
  

 

 

   

 

 

 

Note 11—Employee Benefit Plans

2000 Stock Option Plan

In April 2000, the Company adopted the 2000 Stock Option Plan (the “2000 Plan”). The 2000 Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under

the 2000 Plan may be either incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”). ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. A total of 7,350,000 shares of Common Stock have been reserved for issuance under the 2000 Plan.

Options under the 2000 Plan may be granted for periods of up to ten years, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. To date, options granted generally vest over four years.

As discussed below, in April 2003, all remaining shares reserved but not issued under the 2000 Plan were transferred to the 2003 Stock Plan.

2003 Stock Plan

In April 2003, the Company adopted the 2003 Stock Plan (the “2003 Plan”). The 2003 Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the 2003 Plan may be either ISOs or NSOs. ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. The Company has reserved 750,000 shares of Common Stock plus any shares which were reserved but not issued under the 2000 Plan as of the date of the approval of the 2003 Plan. The number of shares which were reserved but not issued under the 2000 Plan that were transferred to the Company’s 2003 Plan were 615,290, which when

combined with the shares reserved for the Company’s 2003 Plan total 1,365,290 shares reserved under the Company’s 2003 Plan as of the date of transfer. Any options cancelled under either the 2000 Plan or the 2003 Plan are returned to the pool available for grant. As of December 31, 2008, 160,7372011, 255,445 shares were reserved for future grants under the Company’s 2003 Plan.

Options under the 2003 Plan may be granted for periods of up to ten years, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. To date, options granted generally vest over four years, with the first tranche vesting at the end of twelve12 months and the remaining shares underlying the option vesting monthly over the remaining three years. In fiscal 2005, certain options granted under the 2003 Plan immediately vested and were exercisable on the date of grant, and the shares underlying such options were subject to a resale restriction which expires at a rate of 25% per year.

2006 Long Term Incentive Plan

In April 2006, the Company adopted the 2006 Long Term Incentive Plan (the “2006 Plan”), which was approved by the Company’s stockholders at the 2006 Annual Meeting of Stockholders on May 23, 2006. The 2006 Plan provides for the granting of stock options, stock appreciation rights, restricted stock, performance awards and other stock awards, to eligible directors, employees and consultants of the Company. Upon the adoption of the 2006 Plan, the Company reserved 2,500,000 shares of common stock for issuance under the 2006 Plan. In June 2008, the Company adopted amendments to the 2006 Plan which increased the number of shares of the Company’s common stock that may be issued under the 2006 plan by an additional 2,500,000 shares. In July 2010, the Company adopted amendments to the 2006 Plan which increased the number of shares of the Company’s common stock that may be issued under the 2006 plan by an additional 1,500,000 shares. As of December 31, 2008, 2,345,2892011, 486,349 shares were reserved for future grants under the 2006 Plan.

Options granted under the 2006 Plan may be either ISOs or NSOs. ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. Options may be granted for periods of up to ten years, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. Options granted under the 2006 Plan generally vest over four years, with the first tranche vesting at the end of twelve12 months and the remaining shares underlying the option vesting monthly over the remaining three years.

Stock appreciation rights may be granted under the 2006 Plan subject to the terms specified by the plan administrator, provided that the term of any such right may not exceed ten (10) years from the date of grant. The exercise price generally cannot be less than the fair market value of the Company’s common stock on the date the stock appreciation right is granted.

Restricted stock awards may be granted under the 2006 Plan subject to the terms specified by the plan administrator. The period over which any restricted award may fully vest is generally no less than three (3) years. Restricted stock awards are nonvestednon-vested stock awards that may include grants of restricted stock or grants of restricted stock units.units (“RSUs”). Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. During that period, ownership of the shares cannot be transferred. Restricted stock has the same voting rights as other common stock and is considered to be currently issued and outstanding. Restricted stock unitsRSUs do not have the voting rights of common stock, and the shares underlying the restricted stock unitsRSUs are not considered issued and outstanding. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

Performance awards may be in the form of performance shares or performance units. A performance share means an award denominated in shares of Company common stock and a performance unit means an award denominated in units having a dollar value or other currency, as determined by the plan administrator. The plan administrator will determine the number of performance awards that will be granted and will establish the performance goals and other conditions for payment of such performance awards. The period of measuring the achievement of performance goals will be a minimum of twelve (12) months.

Other stock-based awards may be granted under the 2006 Plan subject to the terms specified by the plan administrator. Other stock-based awards may include dividend equivalents, restricted stock awards, or amounts which are equivalent to all or a portion of any federal, state, local, domestic or foreign taxes relating to an award, and may be payable in shares, cash, other securities or any other form of property as the plan administrator may determine.

In the event of a change in control of the Company, all awards under the 2006 Plan vest in full and all outstanding performance shares and performance units will be paid out upon transfer.

Any shares of common stock subject to an award that is forfeited, settled in cash, expires or is otherwise settled without the issuance of shares shall again be available for awards under the 2006 Plan. Additionally, any shares that are tendered by a participant of the 2006 Plan or retained by the Company as full or partial payment to the Company for the purchase of an award or to satisfy tax withholding obligations in connection with an award shall no longer again be made available for issuance under the 2006 Plan.

The number of “full value equity awards” (as defined below) that may be granted will be limited to no more than ten percent (10%) of the shares issuable under the 2006 Plan. For these purposes, a “full value equity award” is any award pursuant to the 2006 Plan, other than options, stock appreciation rights or other awards which are based solely on an increase in value of the Company’s common stock following the date of grant.

2006 Stand-Alone Stock Option Agreement

In August 2006, the Company reserved for and granted a 300,000 share NSO in connection with the hiring of a key executive.

EmployeeCommon Stock Purchase PlanRepurchase Programs

The Company sponsors an Employee Stock Purchase Plan (the “ESPP”), pursuantIn October 21, 2008, the Company’s Board of Directors authorized management to which eligible employees may contributerepurchase up to 10%6,000,000 shares of compensation,the Company’s outstanding common stock. Under this authorization, the timing and actual number of shares subject to certain income limits, to purchase sharesrepurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of the Company’s common stock. Prior to January 1, 2006, employees were able to purchase stock semi-annually at a

price equal to 85% of the fair market value at certain plan-defined dates. As of January 1, 2006, theThe Company changed the ESPP such that employees will purchase stock semi-annually at a price equal to 85% of the fair market value on the purchase date. Since the price of thedid not repurchase any shares is now determined at the purchase date and there is no longer a look-back period, the Company recognizes the expense based on the 15% discount at purchase. Forunder this authorization during the years ended December 31, 2008, 2007,2011, 2010 or 2009.

The Company repurchased approximately 25,000 shares, or $926,000 of common stock under a repurchase program to help administratively facilitate the withholding and 2006, ESPP compensation expense was $250,000, $232,000subsequent remittance of personal income and $206,000, respectively.payroll taxes for individuals receiving RSUs during the year ended December 31, 2011. Similarly, during the years ended December 31, 2010 and December 31, 2009, the Company repurchased approximately 32,000 shares and 22,000 shares, respectively, or $736,000 and $282,000 of common stock, respectively, under the same program to help facilitate tax withholding for RSUs.

These shares were retired upon repurchase. The Company’s policy related to repurchases of its common stock is to charge the excess of cost over par value to retained earnings. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

ValuationComprehensive Income and Expense Information Under SFAS 123RCumulative Other Comprehensive Income, Net

The fair valuefollowing table sets forth the activity for each component of each option award is estimated on the dateother comprehensive income, net of grant using the Black-Scholes-Merton option valuation model and the weighted average assumptions in the following table. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk free interest rate is based on the implied yield currently available on U.S. Treasury securities with an equivalent remaining term. Expected volatility is based on a combination of the historical volatility of the Company’s stock as well as the historical volatility of certain of the Company’s industry peers’ stock. The Company estimated the forfeiture raterelated taxes, for the years ended December 31, 2008, 2007, and 2006 based on its historical experience.

   Stock Options 
   Year Ended December 31, 
   2008  2007  2006 

Expected life (in years)

   4.3   4.5   4.9 

Risk-free interest rate

   3.02%  4.48%  4.75%

Expected volatility

   49%  53%  59%

Dividend yield

   —     —     —   

Weighted average fair value of grants

  $9.57  $15.36  $11.85 

Stock options activity under the stock option plans during the years ended2011, December 31, 2006, 2007,2010, and 2008 were as follows (share data inDecember 31, 2009, (in thousands):

 

   Outstanding Options
   Number of
Shares
  Weighted Average
Exercise Price

December 31, 2005

  3,674  $10.49

Granted

  1,390   21.84

Exercised

  (997)  8.56

Cancelled

  (133)  16.60

December 31, 2006

  3,934  $14.79

Granted

  951   32.40

Exercised

  (1,237)  11.07

Cancelled

  (224)  23.22

December 31, 2007

  3,424  $20.47

Granted

  1,018   23.02

Exercised

  (157)  15.01

Cancelled

  (369)  24.22

December 31, 2008

  3,916  $21.00
   Year ended December 31, 
   2011  2010   2009 

Net income

  $91,368   $50,909    $9,333  

Unrealized gains (losses) on derivative instruments

   (267  253     20  

Unrealized gains (losses) on available-for-sale securities

   9    4     (63
  

 

 

  

 

 

   

 

 

 

Total comprehensive income

  $91,110   $51,166    $9,290  
  

 

 

  

 

 

   

 

 

 

The following table sets forth the components of cumulative other comprehensive income, net of related taxes, as of December 31, 2011 and December 31, 2010 (in thousands):

   As of
December 31,
 
   2011   2010 

Net unrealized gains on derivative instruments

  $6    $273  

Net unrealized gains on available-for-sale securities

   17     8  
  

 

 

   

 

 

 

Total cumulative other comprehensive income, net of taxes

  $23    $281  
  

 

 

   

 

 

 

Information regardingNote 11—Employee Benefit Plans

2000 Stock Option Plan

In April 2000, the Company adopted the 2000 Stock Option Plan (the “2000 Plan”). The 2000 Plan provides for the granting of stock options outstanding at December 31, 2008, 2007,to employees and 2006 is summarized below.consultants of the Company. Options granted under the 2000 Plan may be either incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”). ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. A total of 7,350,000 shares of Common Stock have been reserved for issuance under the 2000 Plan.

   Number of
Shares
(thousands)
  Weighted Average
Exercise Price
  Weighted
Average
Remaining
Contractual Life
  Aggregate
Intrinsic Value
(thousands)

As of December 31, 2008

        

Shares outstanding

  3,916  $21.00  6.99  $3,410

Shares vested and expected to vest

  3,820  $20.87  6.95  $3,406

Shares exercisable

  2,272  $17.39  5.75  $3,353

As of December 31, 2007

        

Shares outstanding

  3,424  $20.47  7.45  $52,424

Shares vested and expected to vest

  3,333  $20.28  7.41  $51,656

Shares exercisable

  1,744  $13.80  6.00  $38,134

As of December 31, 2006

        

Shares outstanding

  3,934  $14.79  7.13  $45,148

Shares vested and expected to vest

  3,844  $14.64  7.08  $44,650

Shares exercisable

  2,387  $10.86  5.72  $36,732

The aggregate intrinsic values inOptions under the table above represent the total pre-tax intrinsic values (the difference between the Company’s closing stock price on the last trading day2000 Plan may be granted for periods of 2008, 2007, and 2006 andup to ten years, provided, however, that (i) the exercise price multipliedof an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. To date, options granted generally vest over four years.

As discussed below, in April 2003, all remaining shares reserved but not issued under the 2000 Plan were transferred to the 2003 Stock Plan.

2003 Stock Plan

In April 2003, the Company adopted the 2003 Stock Plan (the “2003 Plan”). The 2003 Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the 2003 Plan may be either ISOs or NSOs. ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. The Company has reserved 750,000 shares of Common Stock plus any shares which were reserved but not issued under the 2000 Plan as of the date of the approval of the 2003 Plan. The number of shares which were reserved but not issued under the 2000 Plan that were transferred to the Company’s 2003 Plan were 615,290, which when

combined with the shares reserved for the Company’s 2003 Plan total 1,365,290 shares reserved under the Company’s 2003 Plan as of the date of transfer. Any options cancelled under either the 2000 Plan or the 2003 Plan are returned to the pool available for grant. As of December 31, 2011, 255,445 shares were reserved for future grants under the Company’s 2003 Plan.

Options under the 2003 Plan may be granted for periods of up to ten years, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. To date, options granted generally vest over four years, with the first tranche vesting at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years. In fiscal 2005, certain options granted under the 2003 Plan immediately vested and were exercisable on the date of grant, and the shares underlying such options were subject to a resale restriction which expires at a rate of 25% per year.

2006 Long Term Incentive Plan

In April 2006, the Company adopted the 2006 Long Term Incentive Plan (the “2006 Plan”), which was approved by the Company’s stockholders at the 2006 Annual Meeting of Stockholders on May 23, 2006. The 2006 Plan provides for the granting of stock options, stock appreciation rights, restricted stock, performance awards and other stock awards, to eligible directors, employees and consultants of the Company. Upon the adoption of the 2006 Plan, the Company reserved 2,500,000 shares of common stock for issuance under the 2006 Plan. In June 2008, the Company adopted amendments to the 2006 Plan which increased the number of shares of the Company’s common stock that may be issued under the 2006 plan by an additional 2,500,000 shares. In July 2010, the Company adopted amendments to the 2006 Plan which increased the number of shares of the Company’s common stock that may be issued under the 2006 plan by an additional 1,500,000 shares. As of December 31, 2011, 486,349 shares were reserved for future grants under the 2006 Plan.

Options granted under the 2006 Plan may be either ISOs or NSOs. ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. Options may be granted for periods of up to ten years, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. Options granted under the 2006 Plan generally vest over four years, with the first tranche vesting at the end of 12 months and the remaining shares underlying the in-the-money options) that would have been receivedoption vesting monthly over the remaining three years.

Stock appreciation rights may be granted under the 2006 Plan subject to the terms specified by the option holders had all option holders exercised their options on December 31, 2008, December 31, 2007, and December 31, 2006. This amount changes based onplan administrator, provided that the term of any such right may not exceed ten (10) years from the date of grant. The exercise price generally cannot be less than the fair market value of the Company’s stock. Total intrinsic value of options exercised forcommon stock on the year ended December 31, 2008, 2007 and 2006 was $1.2 million, $25.7 million, and $15.3 million, respectively.

The total fair value of options vested duringdate the years ended December 31, 2008, 2007, and 2006 was $9.1 million, $6.4 million, and $3.0 million, respectively.

As of December 31, 2008, $14.2 million of total unrecognized compensation cost related to stock optionsappreciation right is expected to be recognized over a weighted-average period of 1.28 years.

Cash received from option exercises and purchases under the ESPP for the years ended December 31, 2008, 2007 and 2006 was $2.4 million, $13.7 million, and $8.5 million, respectively.granted.

Restricted stock units asawards may be granted under the 2006 Plan subject to the terms specified by the plan administrator. The period over which any restricted award may fully vest is generally no less than three (3) years. Restricted stock awards are non-vested stock awards that may include grants of December 31, 2008, 2007, and 2006, and changes during the years ended December 31, 2008, 2007, and 2006 were as follows (share data in thousands):

   2008  2007  2006
   Shares  Weighted
Average
Grant Date
Fair Value
  Shares  Weighted
Average
Grant Date
Fair Value
  Shares  Weighted
Average
Grant Date
Fair Value
   In thousands     In thousands     In thousands   

Restricted stock units outstanding at beginning of year

  149  $27.67  114  $22.52  —    $—  

Restricted stock units granted

  153   24.86  101   29.84  114   22.52

Restricted stock units vested

  (58)  28.93  (51)  22.59  —     —  

Restricted stock units cancelled

  (9)  27.32  (15)  20.35  —     —  
               

Restricted stock units outstanding at end of year

  235  $25.55  149  $27.67  114  $22.52
               

Total intrinsic valuerestricted stock or grants of restricted stock units vested during(“RSUs”). Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the years ended December 31, 2008release of the restrictions. During that period, ownership of the shares cannot be transferred. Restricted stock has the same voting rights as other common stock and 2007 was $1.2 millionis considered to be currently issued and $1.7 million. Nooutstanding. RSUs do not have the voting rights of common stock, and the shares underlying the RSUs are not considered issued and outstanding. The Company expenses the cost of the restricted stock units vestedawards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

Performance awards may be in the year ended December 31, 2006.form of performance shares or performance units. A performance share means an award denominated in shares of Company common stock and a performance unit means an award denominated in units having a dollar value or other currency, as determined by the plan administrator. The plan administrator will determine the number of performance awards that will be granted and will establish the performance goals and other conditions for payment of such performance awards. The period of measuring the achievement of performance goals will be a minimum of twelve (12) months.

Other stock-based awards may be granted under the 2006 Plan subject to the terms specified by the plan administrator. Other stock-based awards may include dividend equivalents, restricted stock awards, or amounts which are equivalent to all or a portion of any federal, state, local, domestic or foreign taxes relating to an award, and may be payable in shares, cash, other securities or any other form of property as the plan administrator may determine.

In the event of a change in control of the Company, all awards under the 2006 Plan vest in full and all outstanding performance shares and performance units will be paid out upon transfer.

Any shares of common stock subject to an award that is forfeited, settled in cash, expires or is otherwise settled without the issuance of shares shall again be available for awards under the 2006 Plan. Additionally, any shares that are tendered by a participant of the 2006 Plan or retained by the Company as full or partial payment to the Company for the purchase of an award or to satisfy tax withholding obligations in connection with an award shall no longer again be made available for issuance under the 2006 Plan.

The total fairnumber of “full value equity awards” (as defined below) that may be granted will be limited to no more than ten percent (10%) of the shares issuable under the 2006 Plan. For these purposes, a “full value equity award” is any award pursuant to the 2006 Plan, other than options, stock appreciation rights or other awards which are based solely on an increase in value of restrictedthe Company’s common stock units vested duringfollowing the year ended December 31, 2008 and 2007 was $1.7 million and $1.2 million, respectively. No restricted stock units vested in the year ended December 31, 2006.

Asdate of December 31, 2008, $3.3 million of total unrecognized compensation cost related to non-vested restricted stock units is expected to be recognized over a weighted-average period of 1.17 years.

Total fair value of stock-based compensation awards expensed for the years ended December 31, 2008, 2007, and 2006 was $8.5 million, $6.6 million, and $3.4 million, respectively, net of tax. The actual excess tax benefit recognized for the tax deduction arising from the exercise of stock-based compensation awards for the years ended December 31, 2008, 2007, and 2006 totaled $81,000, $8.4 million, and $4.2 million, respectively.grant.

Common Stock Repurchase Programs

In October 21, 2008, the Company’s Board of Directors authorized management to repurchase up to 6,000,000 shares of the Company’s outstanding common stock. Under this authorization, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of the Company’s common stock. DuringThe Company did not repurchase any shares under this authorization during the fiscal yearyears ended December 31, 2008, the2011, 2010 or 2009.

The Company repurchased approximately 1.2 million25,000 shares, or $12.0 million of common stock under this repurchase authorization.

In addition, the Company repurchased approximately 9,000 shares, or $206,000$926,000 of common stock under a repurchase program to help administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving restricted stock unitsRSUs during the year ended December 31, 2008.2011. Similarly, during the yearyears ended December 31, 2007,2010 and December 31, 2009, the Company repurchased approximately 5,00032,000 shares and 22,000 shares, respectively, or $150,000$736,000 and $282,000 of common stock, respectively, under the same program to help facilitate tax withholding for restricted stock units. During the year ended December 31, 2006, the Company did not repurchase any common stock.RSUs.

These shares were retired upon repurchase. The Company’s policy related to repurchases of its common stock is to charge the excess of cost over par value to retained earnings. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

Comprehensive Income and Cumulative Other Comprehensive Income, Net

The following table sets forth the activity for each component of other comprehensive income, net of related taxes, for the years ended December 31, 2011, December 31, 2010, and December 31, 2009, (in thousands):

   Year ended December 31, 
   2011  2010   2009 

Net income

  $91,368   $50,909    $9,333  

Unrealized gains (losses) on derivative instruments

   (267  253     20  

Unrealized gains (losses) on available-for-sale securities

   9    4     (63
  

 

 

  

 

 

   

 

 

 

Total comprehensive income

  $91,110   $51,166    $9,290  
  

 

 

  

 

 

   

 

 

 

The following table sets forth the components of cumulative other comprehensive income, net of related taxes, as of December 31, 2011 and December 31, 2010 (in thousands):

   As of
December 31,
 
   2011   2010 

Net unrealized gains on derivative instruments

  $6    $273  

Net unrealized gains on available-for-sale securities

   17     8  
  

 

 

   

 

 

 

Total cumulative other comprehensive income, net of taxes

  $23    $281  
  

 

 

   

 

 

 

Note 10—11—Employee Benefit Plans

2000 Stock Option Plan

In April 2000, the Company adopted the 2000 Stock Option Plan (the “2000 Plan”). The 2000 Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the 2000 Plan may be either incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”). ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. A total of 7,350,000 shares of Common Stock have been reserved for issuance under the 2000 Plan.

Options under the 2000 Plan may be granted for periods of up to ten years, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. To date, options granted generally vest over four years.

As discussed below, in April 2003, all remaining shares reserved but not issued under the 2000 Plan were transferred to the 2003 Stock Plan.

2003 Stock Plan

In April 2003, the Company adopted the 2003 Stock Plan (the “2003 Plan”). The 2003 Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the 2003 Plan may be either ISOs or NSOs. ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. The Company has reserved 750,000 shares of Common Stock plus any shares which were reserved but not issued under the 2000 Plan as of the date of the approval of the 2003 Plan. The number of shares which were reserved but not issued under the 2000 Plan that were transferred to the Company’s 2003 Plan were 615,290, which when

combined with the shares reserved for the Company’s 2003 Plan total 1,365,290 shares reserved under the Company’s 2003 Plan as of the date of transfer. Any options cancelled under either the 2000 Plan or the 2003 Plan are returned to the pool available for grant. As of December 31, 2011, 255,445 shares were reserved for future grants under the Company’s 2003 Plan.

Options under the 2003 Plan may be granted for periods of up to ten years, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. To date, options granted generally vest over four years, with the first tranche vesting at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years. In fiscal 2005, certain options granted under the 2003 Plan immediately vested and were exercisable on the date of grant, and the shares underlying such options were subject to a resale restriction which expires at a rate of 25% per year.

2006 Long Term Incentive Plan

In April 2006, the Company adopted the 2006 Long Term Incentive Plan (the “2006 Plan”), which was approved by the Company’s stockholders at the 2006 Annual Meeting of Stockholders on May 23, 2006. The 2006 Plan provides for the granting of stock options, stock appreciation rights, restricted stock, performance awards and other stock awards, to eligible directors, employees and consultants of the Company. Upon the adoption of the 2006 Plan, the Company reserved 2,500,000 shares of common stock for issuance under the 2006 Plan. In June 2008, the Company adopted amendments to the 2006 Plan which increased the number of shares of the Company’s common stock that may be issued under the 2006 plan by an additional 2,500,000 shares. In July 2010, the Company adopted amendments to the 2006 Plan which increased the number of shares of the Company’s common stock that may be issued under the 2006 plan by an additional 1,500,000 shares. As of December 31, 2011, 486,349 shares were reserved for future grants under the 2006 Plan.

Options granted under the 2006 Plan may be either ISOs or NSOs. ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. Options may be granted for periods of up to ten years, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the underlying stock on the date of grant and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the underlying stock on the date of grant. Options granted under the 2006 Plan generally vest over four years, with the first tranche vesting at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years.

Stock appreciation rights may be granted under the 2006 Plan subject to the terms specified by the plan administrator, provided that the term of any such right may not exceed ten (10) years from the date of grant. The exercise price generally cannot be less than the fair market value of the Company’s common stock on the date the stock appreciation right is granted.

Restricted stock awards may be granted under the 2006 Plan subject to the terms specified by the plan administrator. The period over which any restricted award may fully vest is generally no less than three (3) years. Restricted stock awards are non-vested stock awards that may include grants of restricted stock or grants of restricted stock units (“RSUs”). Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. During that period, ownership of the shares cannot be transferred. Restricted stock has the same voting rights as other common stock and is considered to be currently issued and outstanding. RSUs do not have the voting rights of common stock, and the shares underlying the RSUs are not considered issued and outstanding. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

Performance awards may be in the form of performance shares or performance units. A performance share means an award denominated in shares of Company common stock and a performance unit means an award denominated in units having a dollar value or other currency, as determined by the plan administrator. The plan administrator will determine the number of performance awards that will be granted and will establish the performance goals and other conditions for payment of such performance awards. The period of measuring the achievement of performance goals will be a minimum of twelve (12) months.

Other stock-based awards may be granted under the 2006 Plan subject to the terms specified by the plan administrator. Other stock-based awards may include dividend equivalents, restricted stock awards, or amounts which are equivalent to all or a portion of any federal, state, local, domestic or foreign taxes relating to an award, and may be payable in shares, cash, other securities or any other form of property as the plan administrator may determine.

In the event of a change in control of the Company, all awards under the 2006 Plan vest in full and all outstanding performance shares and performance units will be paid out upon transfer.

Any shares of common stock subject to an award that is forfeited, settled in cash, expires or is otherwise settled without the issuance of shares shall again be available for awards under the 2006 Plan. Additionally, any shares that are tendered by a participant of the 2006 Plan or retained by the Company as full or partial payment to the Company for the purchase of an award or to satisfy tax withholding obligations in connection with an award shall no longer again be made available for issuance under the 2006 Plan.

The number of “full value equity awards” (as defined below) that may be granted will be limited to no more than ten percent (10%) of the shares issuable under the 2006 Plan. For these purposes, a “full value equity award” is any award pursuant to the 2006 Plan, other than options, stock appreciation rights or other awards which are based solely on an increase in value of the Company’s common stock following the date of grant.

Employee Stock Purchase Plan

The Company sponsors an Employee Stock Purchase Plan (the “ESPP”), pursuant to which eligible employees may contribute up to 10% of compensation, subject to certain income limits, to purchase shares of the Company’s common stock. Employees may purchase stock semi-annually at a price equal to 85% of the fair market value on the purchase date. Since the price of the shares is determined at the purchase date, the Company recognizes expense based on the 15% discount at purchase. For the years ended December 31, 2011, 2010 and 2009, ESPP compensation expense was $354,000, $236,000 and $184,000, respectively. As of December 31, 2011, 450,669 shares were reserved for future grants under the ESPP.

Option Activity

Stock options activity under the stock option plans during the years ended December 31, 2011, 2010, and 2009 were as follows:

   Outstanding Options 
   Number of
Shares
  Weighted Average
Exercise Price Per
Share
   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value
 
   (In thousands)  (In dollars)   (In years)   (In thousands) 

December 31, 2008

   3,916   $21.00      

Granted

   1,526    14.72      

Exercised

   (370  8.07      

Cancelled

   (452  21.19      
  

 

 

      

December 31, 2009

   4,620   $19.94      

Granted

   1,368    26.03      

Exercised

   (1,339  15.02      

Cancelled

   (282  21.80      
  

 

 

      

December 31, 2010

   4,367   $23.24      

Granted

   1,290    34.58      

Exercised

   (1,381  22.37      

Cancelled

   (326  25.90      
  

 

 

      

December 31, 2011

   3,950   $27.03     7.65    $28,672  
  

 

 

      

As of December 31, 2011:

       

Vested and expected to vest

   3,648   $26.86     7.56    $26,982  

Exercisable Options

   1,690   $24.42     6.20    $15,994  

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic values (the difference between the Company’s closing stock price on the last trading day of 2011, 2010, and 2009 and the exercise price, multiplied by the number of shares underlying the in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011, December 31, 2010, and December 31, 2009. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the year ended December 31, 2011, 2010 and 2009 was $21.8 million, $16.9 million and $3.4 million, respectively.

The total fair value of options vested during the years ended December 31, 2011, 2010 and 2009 was $9.8 million, $9.1 million and $9.0 million, respectively.

The following table summarizes significant ranges of outstanding and exercisable stock options as of December 31, 2011:

   Year ended December 31, 2011 
   Options Outstanding   Options Exercisable 

Range of Exercise Prices

  Shares
Outstanding
   Weighted-
Average
Remaining
Contractual
Life
   Weighted-
Average
Exercise
Price Per
Share
   Shares
Exercisable
   Weighted-
Average
Exercise
Price Per
Share
 
   (In thousands)   (In years)   (In dollars)   (In thousands)   (In dollars) 

$0.00 - 10.00

   7     1.01    $6.29     7    $6.29  

10.01 - 20.00

   726     6.32     13.66     450     13.95  

20.01 - 30.00

   1,533     7.19     24.70     857     25.64  

30.01 - 40.00

   1,684     8.66     34.99     376     34.51  
  

 

 

       

 

 

   

Total

   3,950     7.65    $27.03     1,690    $24.42  
  

 

 

       

 

 

   

RSU Activity

RSU activity under during the years ended December 31, 2011, 2010, and 2009 were as follows:

   Outstanding RSUs 
   Number of
Shares
  Weighted
Average Grant
Date Fair
Value Per
Share
   Weighted Average
Remaining
Contractual Term
   Aggregate
Intrinsic Value
 
   (In thousands)  (In dollars)   (In years)   (In thousands) 

December 31, 2008

   235   $25.55      

RSUs granted

   171    12.24      

RSUs vested

   (104  23.43      

RSUs cancelled

   (15  19.36      
  

 

 

      

December 31, 2009

   287    18.71      

RSUs granted

   48    22.73      

RSUs vested

   (133  19.30      

RSUs cancelled

   (3  11.41      
  

 

 

      

December 31, 2010

   199    19.40      

RSUs granted

   113    34.78      

RSUs vested

   (118  21.64      

RSUs cancelled

   (17  18.38      
  

 

 

      

December 31, 2011

   177   $27.86     1.60    $5,939  
  

 

 

      

Total intrinsic value of RSUs vested during the years ended December 31, 2011, 2010 and 2009 was $4.4 million, $3.1 million and $1.4 million, respectively. The total fair value of RSUs vested during the years ended December 31, 2011, 2010 and 2009 was $2.6 million, $2.6 million and $2.4 million, respectively.

Valuation and Expense Information

The fair value of each option award granted under the Company’s ESPP equals the 15% discount at purchase. The fair value of each restricted stock unit under all share-based compensation plans equals the fair value of NETGEAR stock on the date of the grant. The fair value of each option award granted under all other share-based compensation plans is estimated on the date of grant using the Black-Scholes-Merton option valuation model and the weighted average assumptions in the following table. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk free interest rate is based on the implied yield currently available on U.S. Treasury securities with an equivalent remaining term. Expected volatility is based on a combination of the historical volatility of the Company’s stock as well as the historical volatility of certain of the Company’s industry peers’ stock. The Company estimated the forfeiture rate for the years ended December 31, 2011, 2010 and 2009 based on its historical experience.

   Stock Options Granted Under non-ESPP Plans 
   Year Ended December 31, 
           2011                  2010                  2009         

Expected life (in years)

   4.4    4.4    4.4  

Risk-free interest rate

   1.63  1.74  1.73

Expected volatility

   50.31  49.87  50.48

Dividend yield

   —      —      —    

The weighted average estimated fair value of options granted during the years ended December 31, 2011, 2010 and 2009 including options granted under the ESPP and not including restricted stock units, were $14.29, $10.80 and $6.10, respectively.

The following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock awards, and the Employee Stock Purchase Plan included in the Company’s Consolidated Statements of Operations (in thousands):

   Year Ended December 31, 
   2011   2010   2009 

Cost of revenue

  $999    $913    $959  

Research and development

   2,476     2,271     1,973  

Sales and marketing

   5,136     4,710     4,147  

General and administrative

   5,151     4,307     3,945  
  

 

 

   

 

 

   

 

 

 
  $13,762    $12,201    $11,024  
  

 

 

   

 

 

   

 

 

 

The Company recognizes these compensation costs net of the estimated forfeitures on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years.

Total stock-based compensation cost capitalized in inventory was less than $250,000 in each of the years ended December 31, 2011, 2010 and 2009.

As of December 31, 2011, $21.8 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.45 years. As of December 31, 2011, $2.5 million of total unrecognized compensation cost related to non-vested RSUs is expected to be recognized over a weighted-average period of 1.17 years.

401k

In April 2000, the Company adopted the NETGEAR 401(k) Plan to which employees may contribute up to 100% of salary subject to the legal maximum. Beginning on January 1, 2009 for the first three pay periods of 2009 only, which ended on January 30, 2009, the Company contributed an amount equal to 100% of the employee contributions up to a maximum of $7,000, for employees that remained active with the company through December 31, 2009. No match was offered in 2010 and 2011. The Company expensed zero, zero and $508,000 related to the NETGEAR 401(k) Plan in the years ended December 31, 2011, 2010, and 2009, respectively.

Note 12—Segment Information, Operations by Geographic Area and Customer Concentration:Concentration

Operating segments are components of an enterprise about which separate financial information is available and is regularly evaluated by management, namely the chief operating decision makerChief Operating Decision Maker (“CODM”) of an organization, in order to makedetermine operating and resource allocation decisions. By this definition, the Company operatesoperated in one business segment through the first fiscal quarter of 2011, which comprisescomprised the development, marketing and sale of networking products for the smallcommercial business and home markets.

In the second fiscal quarter of 2011, the Company made organizational changes that resulted in changes to the way in which the CODM manages and evaluates the business. The Company’s primary headquartersbusiness is now managed in three specific business units: retail, commercial, and service provider. The retail business unit consists of high performance, dependable and easy-to-use home networking, storage and digital media products to connect people with the Internet and their content and devices. The commercial business unit consists of business networking, storage and security solutions without the cost and complexity of Big IT. The service provider business unit consists of made-to-order and retail proven, whole home networking solutions sold to service providers for sale to their customers. Each business unit is managed by a significant portionSenior Vice President/General Manager. There is no change in the CODM before and after the reorganization of the segments.

The Company believes this new structure enables it to better focus its operationsefforts on the Company’s core customer segments and allows it to be more nimble and opportunistic as a company overall. The business units are locateddetermined in accordance with how management views and evaluates the Company’s business and based on the criteria as outlined in the authoritative guidance. As a result, beginning in the second fiscal quarter of 2011, the Company changed its segment reporting accordingly, and revised its prior period presentation to conform to the new segments.

The results of the reportable segments are derived directly from the Company’s management reporting system. The results are based on the Company’s method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. Management measures the performance of each segment based on several metrics, including contribution income. Refer to the reconciliation of segment information to the Company’s consolidated totals below to see the reconciliation of segment data to earnings prepared in conformity with accounting principles generally accepted in the United States.

Asset data is not reviewed by the Company’s CODM at the segment level and therefore is not presented. Discrete financial information on individual products and services within the respective segments is not reviewed by the Company’s CODM, and therefore a separate disclosure of similar classes of products and services below the segment level is not presented. Financial information for each reportable segment and a reconciliation of segment contribution income to income before income taxes is as follows (in thousands, except percentage data):

   Year Ended December 31, 
   2011  2010  2009 

Net revenues:

    

Retail

  $481,795   $435,484   $288,728  

Commercial

   331,439    284,539    209,953  

Service Provider

   367,784    182,029    187,914  
  

 

 

  

 

 

  

 

 

 

Total net revenues

   1,181,018    902,052    686,595  
  

 

 

  

 

 

  

 

 

 

Contribution income:

    

Retail

  $81,589   $71,862   $24,901  

Retail contribution margin

   16.9  16.5  8.6

Commercial

   74,746    63,021    43,255  

Commercial contribution margin

   22.6  22.1  20.6

Service Provider

   32,797    14,026    19,697  

Service Provider contribution margin

   8.9  7.7  10.5
  

 

 

  

 

 

  

 

 

 

Total segment contribution income

   189,132    148,909    87,853  

Corporate and unallocated costs

   (43,301  (39,244  (34,248

Amortization of intangible assets

   (4,658  (5,293  (5,013

Stock-based compensation expense

   (13,762  (12,201  (11,024

Restructuring and other charges

   (2,094  88    (809

Technology license agreements

   —      —      (2,500

Acquisition related compensation

   (40  (686  (113

Impact to cost of sales from acquisition accounting adjustments to inventory

   (609  —      —    

Litigation reserves, net

   201    (211  (2,080

Interest income

   477    426    629  

Other income (expense), net

   (1,136  (564  (128
  

 

 

  

 

 

  

 

 

 

Income before income taxes

  $124,210   $91,224   $32,567  
  

 

 

  

 

 

  

 

 

 

Segment contribution income includes all product line segment revenues less the related cost of sales, research and development and sales and marketing costs. Contribution income is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to

segments because they are separately managed at the corporate level. These unallocated indirect costs include corporate costs, such as corporate research and development, general and administrative costs, stock-based compensation expenses, amortization of intangibles, acquisition-related integration costs, restructuring costs, litigation reserves and interest and other income (expense), net.

In the first fiscal quarter of 2011, in order to achieve operational efficiencies, the Company combined its North American, Central American and South American sales forces to form the Americas territory. Previously, North America was its own geographic region and the Central American and South American territories were categorized within the Asia Pacific geographic region. Following this change, the Company is organized into the following three geographic territories: Americas, EMEA and Asia Pacific. The Company also conducts sales, marketing and customer service activities through several small sales officeshas reclassified the disclosure of net revenue by geography for prior periods to conform to the current period’s presentation. The change did not result in Europe, Middle-East and Africa (“EMEA”) and Asia as well as outsourced distribution centers.

For reporting purposes revenue is attributed to each geography based on the geographic location of the customer.material differences from what was previously reported. Net revenue by geography comprises gross revenue less such items as end-user customer rebates and other sales incentives deemed to be a reduction of net revenue per EITF Issue No. 01-9,the authoritative guidance for revenue recognition, sales returns and price protection, which reduce gross revenue.

Geographic information

Netprotection. For reporting purposes revenue is attributed to each geographic region based on the location of the customer. The following table shows net revenue by geographic location is as followsgeography for the periods indicated (in thousands):

 

  Year Ended December 31,  Year Ended December 31, 
  2008  2007  2006  2011   2010   2009 

United States

  $297,641  $273,695  $220,440  $570,143    $454,179    $310,937  

Americas (excluding U.S.)

   16,913     12,363     7,636  

United Kingdom

   120,994   183,341   151,026   165,522     100,357     92,663  

EMEA (excluding UK)

   233,064   197,013   147,208

Asia Pacific and rest of the world

   91,645   73,738   54,896

EMEA (excluding U.K.)

   312,191     239,892     199,677  

Asia Pacific

   116,249     95,261     75,682  
           

 

   

 

   

 

 

Total net revenue

  $1,181,018    $902,052    $686,595  
  $743,344  $727,787  $573,570  

 

   

 

   

 

 
         

Long-lived assets, comprising fixed assets, are reported based on the location of the asset. Long-lived assets by geographic location are as follows (in thousands):

 

  Year Ended December 31,  Year Ended December 31, 
        2008              2007                2011                   2010         

United States

  $17,632  $9,459  $9,901    $11,808  

Americas (excluding U.S.)

   44     22  

EMEA

   434   578   331     205  

Asia Pacific and rest of the world

   2,226   1,168

China

   4,909     4,848  

Asia Pacific (excluding China)

   699     620  
        

 

   

 

 
  $20,292  $11,205  $15,884    $17,503  
        

 

   

 

 

Customer concentration (as a percentage of net revenue):

 

   Year Ended December 31, 
       2008          2007          2006     

Ingram Micro, Inc.

  14% 17% 19%

Tech Data Corporation

  11% 14% 16%

All others individually less than 10% of revenue

  75% 69% 65%
          
  100% 100% 100%
          
   Year Ended December 31, 
       2011          2010          2009     

Best Buy Co., Inc. and Affiliates

   11  15  11

Ingram Micro, Inc. and Affiliates

   10  11  11

All others individually less than 10% of revenue

   79  74  78
  

 

 

  

 

 

  

 

 

 
   100  100  100
  

 

 

  

 

 

  

 

 

 

Note 11—Employee Benefit Plan:

In April 2000, the Company adopted the NETGEAR 401(k) Plan to which employees may contribute up to 100% of salary subject to the legal maximum. Through December 31, 2007, the Company contributed an amount equal to 50% of the employee contributions up to a maximum of $1,500 per calendar year per employee. Beginning on January 1, 2008 through December 31, 2008, the Company contributed an amount equal to 100% of the employee contributions up to a maximum of $7,000 per calendar year per employee. The Company expensed $1.3 million, $698,000 and $473,000 related to the NETGEAR 401(k) Plan in the years ended December 31, 2008, 2007 and 2006, respectively.

Note 12—13—Fair Value of Financial Instruments:Instruments

The Company adopted SFAS 157 effective January 1, 2008 fordetermines the fair values of its financial assets and liabilities measured on a recurring basis. SFAS 157 applies to all financial assets and financial liabilities that are being measured and reportedinstruments based on a fair value basis. Although there was no impact for adoptionhierarchy, which requires an entity to maximize the use of SFAS 157observable inputs and minimize the use of unobservable inputs when

measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the consolidated financial statements, the Company is now required to provide additional disclosures as part of its financial statements. In accordance with FSP 157-2, the Company deferred adoption of SFAS 157 as it relates to non-financial assets and liabilities except those measured at fair value in the financial statements on a recurring

basis. SFAS 157 establishes a framework for measuringmeasurement. The fair value and expands disclosure abouthierarchy prioritizes the inputs into three levels that may be used to measure fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following three categories:value:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table summarizestables summarize the valuation of the Company’s financial assets and liabilitiesinstruments by the above SFAS 157 categories as of December 31, 2008:2011 and December 31, 2010:

 

   As of December 31, 2008
    Total  Quoted market
prices in active
markets
(Level 1)
  Significant other
observable inputs
(Level 2)
  Significant
unobservable inputs
(Level 3)

Assets

        

Cash equivalents

  $122,232  $122,232  $—    $  —  

Available-for-sale
securities(1)

   10,170   10,170   —     —  

Foreign currency forward contracts

   1,494   —     1,494   —  
                

Total

  $133,896  $132,402  $1,494  $—  
                
   As of December 31, 2011 
   Total   Quoted market
prices in active
markets
(Level 1)
   Significant other
observable inputs
(Level 2)
   Significant
unobservable inputs
(Level 3)
 

Cash equivalents—money market funds

  $24,844    $24,844    $—      $—    

Available-for-sale securities—Treasuries(1)

   144,703     144,703     —       —    

Available-for-sale securities—Certificates of Deposit(1)

   94     94     —       —    

Foreign currency forward contracts(2)

   1,237     —       1,237     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $170,878    $169,641    $1,237    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)Included in short-term investments on the Company’s consolidated balance sheet.
(2)Included in prepaid expenses and other current assets on the Company’s consolidated balance sheet.

 

   As of December 31, 2008
    Total  Quoted market
prices in active
markets
(Level 1)
  Significant other
observable
inputs (Level 2)
  Significant
unobservable inputs
(Level 3)

Liabilities

      

Foreign currency forward contracts

  $(3,274) $  —    $(3,274) $  —  
                

Total

  $(3,274) $—    $(3,274) $—  
                
   As of December 31, 2011 
   Total  Quoted market
prices in active
markets
(Level 1)
   Significant other
observable inputs
(Level 2)
  Significant
unobservable inputs
(Level 3)
 

Foreign currency forward contracts(3)

  $(723 $—      $(723 $—    
  

 

 

  

 

 

   

 

 

  

 

 

 

Total

  $(723 $—      $(723 $—    
  

 

 

  

 

 

   

 

 

  

 

 

 

(3)Included in other accrued liabilities on the Company’s consolidated balance sheet.

   As of December 31, 2010 
   Total   Quoted market
prices in active
markets
(Level 1)
   Significant other
observable inputs
(Level 2)
   Significant
unobservable inputs
(Level 3)
 

Cash equivalents—money market funds

  $77,795    $77,795    $—      $—    

Available-for-sale securities—Treasuries(1)

   144,564     144,564     —       —    

Foreign currency forward contracts(2)

   1,389     —       1,389     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $223,748    $222,359    $1,389    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)Included in short-term investments on the Company’s consolidated balance sheet.
(2)Included in prepaid expenses and other current assets on the Company’s consolidated balance sheet.

   As of December 31, 2010 
   Total  Quoted market
prices in active
markets
(Level 1)
   Significant other
observable inputs
(Level 2)
  Significant
unobservable inputs
(Level 3)
 

Foreign currency forward contracts(3)

  $(789 $—      $(789 $—    
  

 

 

  

 

 

   

 

 

  

 

 

 

Total

  $(789 $—      $(789 $—    
  

 

 

  

 

 

   

 

 

  

 

 

 

(3)Included in other accrued liabilities on the Company’s consolidated balance sheet.

The Company’s investments in cash equivalents and available-for-saleavailable for sale securities are recorded atclassified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. All of the Company’sThe Company enters into foreign currency forward contracts are with only those counterparties that have long-term credit ratings of double-A.A+/A2 or higher. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments. At December 31, 2008,2011 and December 31, 2010, the adjustment for non-performance risk did not have a material impact on the fair value of the Company’s foreign currency forward contracts.

The carrying value of nonfinancialnon-financial assets and liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair value due to their short maturities.

QUARTERLY FINANCIAL DATA

(In thousands, except per share amounts)

(Unaudited)

The following table presents unaudited quarterly financial information for each of the Company’s last eight quarters. This information has been derived from the Company’s unaudited financial statements and has been prepared on the same basis as the audited Consolidated Financial Statements appearing elsewhere in this Form 10-K. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to state fairly the quarterly results.

 

   March 30,
2008
  June 29,
2008
  September 28,
2008
  December 31,
2008
 

Net revenue

  $198,154  $204,464  $179,367  $161,359 

Gross profit

  $63,863  $66,409  $62,293  $48,459 

Provision for income taxes

  $7,862  $8,718  $7,929  $2,784 

Net income

  $11,226  $11,064  $3,103  $(7,343)

Net income per share—basic

  $0.32  $0.31  $0.09  $(0.21)

Net income per share—diluted

  $0.31  $0.31  $0.09  $(0.21)

  April 1,
2007
  July 1,
2007
  September 30,
2007
  December 31,
2007
  April 3,
2011
   July 3,
2011
   October 2,
2011
   December 31,
2011
 

Net revenue

  $173,572  $164,275  $191,681  $198,259  $278,823    $291,240    $301,800    $309,155  

Gross profit

  $60,030  $55,954  $63,778  $62,845  $87,786    $90,377    $96,310    $94,973  

Provision for income taxes

  $7,756  $6,784  $8,796  $7,546  $9,142    $6,742    $6,178    $10,780  

Net income

  $14,021  $6,133  $13,266  $12,534  $21,189    $20,597    $26,747    $22,835  

Net income per share—basic

  $0.41  $0.18  $0.38  $0.36  $0.58  �� $0.56    $0.71    $0.61  

Net income per share—diluted

  $0.40  $0.17  $0.37  $0.35  $0.57    $0.54    $0.70    $0.60  
  March 28,
2010
   June 27,
2010
   October 3,
2010
   December 31,
2010
 

Net revenue

  $211,555    $195,949    $236,017    $258,531  

Gross profit

  $72,824    $69,562    $75,707    $81,154  

Provision for income taxes

  $9,856    $10,567    $8,435    $11,457  

Net income

  $13,727    $10,465    $13,095    $13,622  

Net income per share—basic

  $0.39    $0.30    $0.37    $0.38  

Net income per share—diluted

  $0.38    $0.29    $0.36    $0.37  

 

Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

 

Item 9A.Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008.2011. In making this assessment, our management used the criteria established inInternal Control—Integrated Framework,, issued by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment using those criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.2011. The effectiveness of our internal control over financial reporting as of December 31, 20082011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 20082011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of our management (including our Chief Executive Officer and Chief Financial Officer), our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Item 9B.Other Information

None.

PART III

Certain information required by Part III is incorporated herein by reference from our proxy statement related to our 20092012 Annual Meeting of Stockholders, which we intend to file no later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

Item 10.Directors, Executive Officers and Corporate Governance

The information required by this Item concerning our directors, and executive officers and standing committees is incorporated by reference to the sections of our Proxy Statement under the headings “Election of Directors,” “Board and Committee Meetings,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and to the information contained in the section captioned “Executive Officers of the Registrant” included under Part I Item 1 of this Form 10-K.

We have adopted a Code of Ethics that applies to our Chief Executive Officer and senior financial officers, as required by the SEC. The current version of our Code of Ethics can be found on our Internet site at http://www.netgear.com. Additional information required by this Item regarding our Code of Ethics is incorporated by reference to the information contained in the section captioned “Corporate Governance Policies and Practices” in our Proxy Statement.

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Ethics by posting such information on our website at http://www.netgear.com within four business days following the date of such amendment or waiver.

 

Item 11.Executive Compensation

The information required by this Item is incorporated by reference to the sections of our Proxy Statement under the headings “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Report of the Compensation Committee of the Board of Directors.”

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item regarding equity compensation plans is incorporated by reference to the section entitled “Equity Compensation Plan Information” set forth in Item 5 of this Form 10-K.

The additional information required by this Item is incorporated by reference to the information contained in the section captioned “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement.

 

Item 13.Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference to the information contained in the section captioned “Election of Directors” and “Related Party Transactions” in our Proxy Statement.

 

Item 14.Principal AccountantAccounting Fees and Services

The information required by this Item related to audit fees and services is incorporated by reference to the information contained in the section captioned “Ratification of Appointment of Independent Registered Public Accounting Firm” appearing in our Proxy Statement.

PART IV

 

Item 15.Exhibits and Financial Statement Schedule

(a) The following documents are filed as part of this report:

(1) Financial Statements.

 

   Page

Report of Independent Registered Public Accounting Firm

  4956

Consolidated Balance Sheets as of December 31, 20082011 and 20072010

  5057

Consolidated Statements of Operations for the three years ended December 31, 2008, 20072011, 2010 and 20062009

  5158

Consolidated Statements of Stockholders’ Equity for the three years ended December  31, 2008, 20072011, 2010 and 20062009

  5259

Consolidated Statements of Cash Flows for the three years ended December 31, 2008, 20072011, 2010 and 20062009

  5360

Notes to Consolidated Financial Statements

  5461

Quarterly Financial Data (unaudited)

  87109

Management’s Report on Internal Control Over Financial Reporting

  87109

(2) Financial Statement Schedule.

The following financial statement schedule of NETGEAR, Inc. for the fiscal years ended December 31, 2008, 20072011, 2010 and 20062009 is filed as part of this Form 10-K and should be read in conjunction with the Consolidated Financial Statements of NETGEAR, Inc.

Schedule II—Valuation and Qualifying Accounts

(In thousands)

 

   Balance at
Beginning
of Year
  Additions  Deductions  Balance at
End of
Year

Allowance for doubtful accounts:

       

Year ended December 31, 2008

  2,307  43  (432) 1,918

Year ended December 31, 2007

  1,727  966  (386) 2,307

Year ended December 31, 2006

  1,295  648  (216) 1,727

Allowance for sales returns and product warranty:

       

Year ended December 31, 2008

  36,974  69,748  (68,405) 38,317

Year ended December 31, 2007

  29,428  62,982  (55,436) 36,974

Year ended December 31, 2006

  17,830  61,558  (49,960) 29,428

Allowance for price protection:

       

Year ended December 31, 2008

  497  7,489  (4,556) 3,430

Year ended December 31, 2007

  3,194  5,297  (7,994) 497

Year ended December 31, 2006

  1,456  9,517  (7,779) 3,194
   Balance at
Beginning
of Year
   Additions  Deductions  Balance
at End of
Year
 

Allowance for doubtful accounts:

      

Year ended December 31, 2011

  $1,481    $(21 $(125 $1,335  

Year ended December 31, 2010

   2,038     (202  (355  1,481  

Year ended December 31, 2009

   1,918     217    (97  2,038  

Allowance for sales returns and product warranty:

      

Year ended December 31, 2011

   50,786     86,310    (78,890  58,206  

Year ended December 31, 2010

   42,603     78,280    (70,097  50,786  

Year ended December 31, 2009

   38,317     67,340    (63,054  42,603  

Allowance for price protection:

      

Year ended December 31, 2011

   3,147     15,688    (14,905  3,930  

Year ended December 31, 2010

   1,545     13,011    (11,409  3,147  

Year ended December 31, 2009

   3,430     6,563    (8,448  1,545  

(3) Exhibits.The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 4th29th day of March 2009.February 2012.

 

NETGEAR, INC.

Inc.
Registrant

/s/    PATRICK C.S. LO        

Patrick C.S. Lo

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Patrick C.S. Lo and Christine M. Gorjanc, and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

Signature

  

Title

 

Date

/s/S/    PATRICK C.S. LO        

Patrick C.S. Lo

  

Chairman of the Board and

Chief Executive Officer

(Principal Executive Officer)

 March 4, 2009February 29, 2012

/s/S/    CHRISTINE M. GORJANC        

Christine M. Gorjanc

  

Chief Financial Officer

(Principal Financial and Accounting

Officer)

 March 4, 2009February 29, 2012

/s/S/    JOCELYN CARTER--MMILLERILLER        

Jocelyn Carter-Miller

  Director March 4, 2009February 29, 2012

/s/S/    RALPH E. FAISON        

Ralph E. Faison

  Director March 4, 2009February 29, 2012

/s/S/    A. TIMOTHY GODWIN        

A. Timothy Godwin

  Director March 4, 2009February 29, 2012

/s/S/    JEF GRAHAM        

Jef Graham

DirectorFebruary 29, 2012

/S/    LINWOOD A. Lacy, JR.LACY, JR.        

Linwood A. Lacy, Jr.

  Director March 4, 2009

/s/    George G. C. Parker        

George G. C. Parker

DirectorMarch 4, 2009

Signature

Title

Date

February 29, 2012

/s/S/    GREGORY J. ROSSMANN        

Gregory J. Rossmann

  Director March 4, 2009February 29, 2012

/s/S/    BARBARA V. SCHERER        

Barbara V. Scherer

DirectorFebruary 29, 2012

/S/    JULIE A. SHIMER        

Julie A. Shimer

  Director March 4, 2009February 29, 2012

INDEX TO EXHIBITS

 

Exhibit

Number

 

Description

  2.1** Asset Purchase Agreement, dated as of September 22, 2008, by and among CP Secure International Holding Limited, the stockholders thereof and the registrant(1)
  3.3 Amended and Restated Certificate of Incorporation of the registrant(2)
  3.5 Amended and Restated Bylaws of the registrant(2)
  4.1 Form of registrant’s common stock certificate(2)
10.1 Form of Indemnification Agreement for directors and officers(2)
10.2# 2000 Stock Option Plan and forms of agreements thereunder(2)
10.3# 2003 Stock Plan and forms of agreements thereunder(2)
10.4# 2003 Employee Stock Purchase Plan(2)
10.5# Offer Letter, dated December 3, 1999, between the registrant and Patrick C.S. Lo(2)
10.7#Employment Agreement, dated August 10, 2001, between the registrant and Jonathan R. Mather(2)
10.8# Offer Letter, dated December 9, 1999, between the registrant and Mark G. Merrill(2)
10.9# Employment Agreement, dated November 4, 2002, between the registrant and Michael F. Falcon(2)
10.10# Employment Agreement, dated January 6, 2003, between the registrant and Charles T. Olson(2)
10.11#Employment Agreement, dated October 18, 2004, between the registrant and Albert Y. Liu(3)
10.12# Employment Agreement, dated November 16, 2005, between the registrant and Christine M. Gorjanc(4)
10.13Standard Office Lease, dated December 3, 2001, between the registrant and Dell Associates II-A, and First Amendment to Standard Office Lease, dated March 21, 2002(2)
10.13.1Second Amendment to Lease, dated June 30, 2004, between the registrant and Dell Associates II-A(5)Gorjanc(3)
10.14* Distributor Agreement, dated March 1, 1997, between the registrant and Tech Data Product Management, Inc.(2)
10.15* Distributor Agreement, dated March 1, 1996, between the registrant and Ingram Micro Inc., as amended by Amendment dated October 1, 1996 and Amendment No. 2 dated July 15, 1998(2)
10.24* Warehousing Agreement, dated July 5, 2001, between the registrant and APL, Logistics Americas, Ltd.(2)
10.25* Distribution Operation Agreement, dated April 27, 2001, between the registrant and DSV Solutions B.V. (formerly Furness Logistics BV)(2)
10.26* Distribution Operation Agreement, dated December 1, 2001, between the registrant and Kerry Logistics (Hong Kong) Limited(2)
10.30#Employment Agreement, dated November 3, 2003, between the registrant and Michael Werdann(6)
10.31#Severance Agreement and Release, effective as of November 12, 2004, between the registrant and Christopher Marshall(7)
10.32Settlement Agreement and Release for Zilberman v. NETGEAR, Civil Action CV021230, effective as of November 22, 2005(8)

Exhibit

Number

Description

10.33# 2006 Long Term Incentive Plan and forms of agreements thereunder(9)thereunder(4)
10.34 Agreement and Plan of Merger, dated as of July 26, 2006, by and among the registrant, SKJM Holdings Corporation, SkipJam Corp., Michael Spilo, Jonathan Daub, Francis Refol, Dennis Aldover and Zhicheng Qiu(10)
10.35#Separation Agreement and Release, dated as of April 26, 2006, by and between the registrant and Jonathan R. Mather(11)
10.36#Employment Agreement, dated September 5, 2006, between the registrant and Deborah A. Williams(12)
10.38#Relocation Agreement, dated September 5, 2006, between the registrant and Deborah A. Williams(13)
10.39#Employment Agreement, dated September 7, 2006, between the registrant and Thomas Holt(14)
10.40#Relocation Agreement, dated September 7, 2006, between the registrant and Thomas Holt(15)Qiu(5)
10.41** Agreement and Plan of Merger, dated as of May 2, 2007, by and among the registrant, NAS Holdings Corporation, Infrant Technologies, Inc., certain Infrant shareholders thereof, and Paul Tien as the Holders Representative(16)
10.42#NETGEAR, Inc. 2007 Bonus Plan(17)
10.43#Separation Agreement and Release, dated as of August 29, 2007, by and between the registrant and Deborah A. Williams(18)Representative(6)
10.44 Office Lease, dated as of September 25, 2007, by and between the registrant and BRE/Plumeria, LLC(19)LLC(7)
10.45 First Amendment to Office Lease, dated as of April 23, 2008, by and between the registrant and BRE/Plumeria, LLC(20)
LLC(8)
10.46# Amended and Restated 2006 Long-Term Incentive Plan(21)Plan(9)
10.47# NETGEAR, Inc. Executive Bonus Plan(22)
10.49#Amendment to Employment Agreement, dated December 29, 2008, between the registrant and Michael F. Falcon
10.50#Amendment to Employment Agreement, dated December 31, 2008, between the registrant and Christine Gorjanc
10.51#Amendment to Offer Letter, dated December 23, 2008, between the registrant and Patrick Lo
10.52#Amendment to Offer Letter, dated December 28, 2008, between the registrant and Mark Merrill
10.53#Amendment to Employment Agreement, dated December 24, 2008, between the registrant and Chuck Olson
10.54#Amendment to Employment Agreement, dated December 30, 2008, between the registrant and Michael Werdann
10.55#Amendment to Employment Agreement, dated December 29, 2008, between the registrant and Thomas Holt
21.1List of subsidiaries and affiliates
23.1Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting FirmPlan(9)

Exhibit

Number

 

Description

  10.49#Amendment to Employment Agreement, dated December 29, 2008, between the registrant and Michael F. Falcon(10)
  10.50#Amendment to Employment Agreement, dated December 31, 2008, between the registrant and Christine Gorjanc(10)
  10.51#Amendment to Offer Letter, dated December 23, 2008, between the registrant and Patrick Lo(10)
  10.52#Amendment to Offer Letter, dated December 28, 2008, between the registrant and Mark Merrill(10)
  10.53#Amendment to Employment Agreement, dated December 24, 2008, between the registrant and Chuck Olson(10)
  10.54#Amendment to Employment Agreement, dated December 30, 2008, between the registrant and Michael Werdann(10)
  10.55#Amendment #2 to Employment Agreement, dated September 21, 2009, between the registrant and Christine Gorjanc(11)
  10.56#Change of Control and Severance Agreement dated March 31, 2011 by and between NETGEAR, Inc. and David Soares(12)
  21.1List of subsidiaries and affiliates
  23.1Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
24.1 Power of Attorney (included on signature page)
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101***XBRL Interactive Data Files

 

#Indicates management contract or compensatory plan or arrangement.
*Confidential treatment has been granted as to certain portions of this Exhibit.
**Registrant hereby agrees to furnish a copy of the omitted schedules and exhibits to the Securities and Exchange Commission upon its request.
***XBRL Interactive Data Files with detailed tagging will be filed by amendment to this Annual Report on Form 10-K within 30 days of the filing date of this Annual Report on Form 10-K, as permitted by Rule 405(a)(2) of Regulation S-T.

(1)Incorporated by reference to the exhibit bearing the same number filed with the Registrant’s Current Report on Form 8-K filed on September 23, 2008 with the Securities and Exchange Commission.
(2)Incorporated by reference to an exhibit filed with the Registrant’s Registration Statement on Form S-1 (Registration Statement 333-104419), which the Securities and Exchange Commission declared effective on July 30, 2003.
(3)Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q filed on November 17, 2004 with the Securities and Exchange Commission.
(4)Incorporated by reference to Exhibit 10.32 of the Registrant’s Current Report on Form 8-K filed on November 22, 2005 with the Securities and Exchange Commission.
(5)Incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q filed on November 17, 2004 with the Securities and Exchange Commission.
(6)Incorporated by reference to Exhibit 10.11 of the Registrant’s Annual Report on Form 10-K filed on March 5, 2004 with the Securities and Exchange Commission.
(7)Incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q filed on November 17, 2004 with the Securities and Exchange Commission.
(8)Incorporated by reference to Exhibit 10.33 of the Registrant’s Current Report on Form 8-K filed on November 25, 2005 with the Securities and Exchange Commission.
(9)(4)Incorporated by reference to the copy included in the Registrant’s Proxy Statement for the 2006 Annual Meeting of Stockholders filed on April 21, 2006 with the Securities and Exchange Commission.
(10)(5)Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on July 27, 2006 with the Securities and Exchange Commission.
(11)Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on April 26, 2006 with the Securities and Exchange Commission.
(12)Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on September 11, 2006 with the Securities and Exchange Commission.
(13)Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on September 11, 2006 with the Securities and Exchange Commission.
(14)Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K filed on September 11, 2006 with the Securities and Exchange Commission.
(15)Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K filed on September 11, 2006 with the Securities and Exchange Commission.
(16)(6)Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on May 3, 2007 with the Securities and Exchange Commission.
(17)Incorporated by reference to Exhibit 2.2 of the Registrant’s Current Report on Form 8-K filed on May 3, 2007 with the Securities and Exchange Commission.

(18)Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 30, 2007 with the Securities and Exchange Commission.
(19)(7)Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 27, 2007 with the Securities and Exchange Commission.
(20)(8)Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed on May 9, 2008 with the Securities and Exchange Commission.
(21)(9)Incorporated by reference to the copy included in the Registrant’s Proxy Statement for the 2008 Annual Meeting of Stockholders filed on April 28, 2008 with the Securities and Exchange Commission.
(22)(10)Incorporated by reference to the copy included in the Registrant’s Proxy Statement for the 2008 Annual Meeting of StockholdersReport on Form 10-K filed on April 28, 2008March 4, 2009 with the Securities and Exchange Commission.
(11)Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 21, 2009 with the Securities and Exchange Commission.
(12)Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 4, 2011 with the Securities and Exchange Commission.

 

96116