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. Yesþx No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yeso No þx

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was ~~28,541,316~~30,259,859 as of ~~November 7, 2003.~~April 27, 2004.

PART I: FINANCIAL INFORMATION


~~Item 1.~~	*~~Financial Statements~~*

Item 1.Financial Statements

NETGEAR, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	March 28,			December 31,
	2004			2003 (1)
ASSETS
Current assets:
Cash and cash equivalents	$	77,121		$	61,215
Short-term investments		12,338			12,390
Accounts receivable, net		71,355			74,866
Receivable from related parties		875			—
Inventories		39,149			39,266
Deferred income taxes		9,056			9,056
Prepaid expenses and other current assets		5,205			4,169

Total current assets		215,099			200,962
Property and equipment, net		3,480			3,626
Goodwill, net		558			558

Total assets	$	219,137		$	205,146
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,790		$	24,480
Payable to related parties		6,251			6,412
Accrued employee compensation		5,968			3,871
Other accrued liabilities		38,488			31,299
Deferred revenue		1,539			2,380
Income taxes payable		1,039			1,765

Total current liabilities		70,075			70,207

Commitments (Note 8.)
Stockholders’ equity:
Common stock		30			28
Additional paid-in capital		173,790			164,459
Deferred stock-based compensation		(3,610	)		(4,248	)
Cumulative other comprehensive income		15			13
Accumulated deficit		(21,163	)		(25,313	)

Total stockholders’ equity		149,062			134,939

Total liabilities and stockholders’ equity	$	219,137		$	205,146

September 28, December 31,
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 75,673 $ 19,880
Accounts receivable, net 58,790 42,492
Inventories 33,430 24,774
Deferred income taxes 9,772 —
Prepaid expenses and other current assets 5,598 3,003

Total current assets 183,263 90,149
Property and equipment, net 3,302 3,144
Goodwill, net 558 558

Total assets $ 187,123 $ 93,851

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 20,673 $ 10,628
Payable to related parties 4,658 13,687
Accrued employee compensation 2,955 3,375
Other accrued liabilities 26,014 29,419
Deferred revenue 2,216 5,059
Income taxes payable 837 934
Note payable to Nortel Networks — 13,294

Total current liabilities 57,353 76,396

Commitments
Redeemable convertible preferred stock — 48,052

Stockholders’ equity (deficit):
Common stock 28 —
Additional paid-in capital 163,839 12,810
Deferred stock-based compensation (4,852 ) (4,997 )
Accumulated deficit (29,245 ) $ (38,410 )

Total stockholders’ equity (deficit) 129,770 (30,597 )

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 187,123 $ 93,851

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

~~NETGEAR INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(In thousands, except per share data)~~

Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
Net revenue $ 75,785 $ 64,362 $ 212,494 $ 165,428

Cost of revenue:
Cost of revenue 54,691 48,188 153,826 124,199
Amortization of deferred stock-based compensation 46 22 77 108

Total cost of revenue 54,737 48,210 153,903 124,307

Gross profit 21,048 16,152 58,591 41,121

Operating expenses:
Research and development 2,079 2,378 5,977 4,878
Sales and marketing 12,419 8,456 35,086 23,445
General and administrative 2,356 2,113 6,037 5,665
Amortization of deferred stock-based compensation:
Research and development 135 51 334 231
Sales and marketing 227 59 515 247
General and administrative 108 130 357 497

Total operating expenses 17,324 13,187 48,306 34,963

Income from operations 3,724 2,965 10,285 6,158
Interest income 123 32 176 98
Interest expense (170 ) (339 ) (901 ) (883 )
Extinguishment of debt (5,868 ) — (5,868 ) —
Other income (expense), net (95 ) 73 (44 ) 113

Income (loss) before income taxes (2,286 ) 2,731 3,648 5,486
Provision (benefit) for income taxes 1,664 385 (5,517 ) 771

Net income (loss) (3,950 ) 2,346 9,165 4,715
Deemed dividend on Preferred Stock — — — (17,881 )

Net income (loss) attributable to common stockholders $ (3,950 ) $ 2,346 $ 9,165 $ (13,166 )

Net income (loss) per share attributable to common stockholders:
Basic $ (0.15 ) $ 0.12 $ 0.42 $ (0.61 )

Diluted $ (0.15 ) $ 0.10 $ 0.35 $ (0.61 )

Weighted average shares outstanding for net income (loss) per share:
Basic 25,684 20,234 21,957 21,504

Diluted 25,684 22,519 25,851 21,504

(1)

The balance sheet at December 31, 2003 has been derived from the audited financial statements.

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

~~NETGEAR, INC.~~

NETGEAR INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

OPERATIONS
(In ~~thousands)~~thousands, except per share data)


	Three Months Ended
	March 28,			March 30,
	2004			2003
Net revenue	$	88,425		$	67,706

Cost of revenue:
Cost of revenue		60,899			49,246
Amortization of (benefit from) deferred stock-based compensation		42			(11	)

Total cost of revenue		60,941			49,235

Gross profit		27,484			18,471

Operating expenses:
Research and development		2,343			2,016
Sales and marketing		14,768			10,961
General and administrative		3,182			1,902
Amortization of deferred stock-based compensation:
Research and development		118			96
Sales and marketing		188			109
General and administrative		97			151

Total operating expenses		20,696			15,235

Income from operations		6,788			3,236
Interest income		223			28
Interest expense		—			(361	)
Other expense, net		(103	)		(78	)

Income before income taxes		6,908			2,825
Provision for income taxes		2,758			1,213

Net income	$	4,150		$	1,612

Net income per share:
Basic	$	0.14		$	0.08

Diluted	$	0.13		$	0.07

Weighted average shares outstanding for net income per share calculation:
Basic		29,521			20,231

Diluted		32,355			23,950

Nine Months Ended
September 28, September 29,
2003 2002
Cash flows from operating activities:

Net income $ 9,165 $ 4,715
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 1,447 998
Amortization of deferred stock-based compensation 1,283 1,084
Deferred income taxes (9,772 ) —
Accretion of note payable to Nortel Networks 838 864
Extinguishment of debt 5,868 —
Changes in assets and liabilities:
Accounts receivable (16,298 ) (22,080 )
Inventories (8,656 ) (11,445 )
Prepaid expenses and other current assets (2,595 ) (1,869 )
Accounts payable 10,045 5,976
Payable to related parties (9,029 ) 10,067
Accrued employee compensation (420 ) 1,620
Other accrued liabilities (3,405 ) 8,349
Deferred revenue (2,843 ) 10,353
Income tax payable (97 ) 752

Net cash provided by (used in) operating activities (24,469 ) 9,384

Cash flows from investing activities:

Purchase of property and equipment (1,605 ) (2,596 )

Net cash used in investing activities (1,605 ) (2,596 )

Cash flows from financing activities:

Borrowings under line of credit 17,000 47,473
Repayments under line of credit (17,000 ) (47,473 )
Repayment of note payable to Nortel Networks (20,000 ) —
Proceeds from issuance of common stock, net of issuance costs 101,809 —
Proceeds from issuance of Series C Preferred Stock — 4,700
Series C Preferred Stock issuance costs — (1,211 )
Proceeds from exercise of options 71 —
Repurchase of Preferred Stock (13 ) (4,700 )

Net cash provided by (used in) financing activities 81,867 (1,211 )

Net increase in cash and cash equivalents 55,793 5,577
Cash and cash equivalents, at beginning of period 19,880 9,152

Cash and cash equivalents, at end of period $ 75,673 $ 14,729

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

NETGEAR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Three Months Ended
	March 28,			March 30,
	2004			2003
Cash flows from operating activities:
Net income	$	4,150		$	1,612
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		613			369
Amortization of deferred stock-based compensation		445			345
Accretion of note payable to Nortel Networks		—			361
Tax benefit from exercise of options		2,758			—
Changes in assets and liabilities:
Accounts receivable		2,636			(3,681	)
Inventories		117			(2,354	)
Prepaid expenses and other current assets		(1,036	)		539
Accounts payable		(7,690	)		5,578
Payable to related parties		(161	)		2,316
Accrued employee compensation		2,097			631
Other accrued liabilities		7,189			(2,054	)
Deferred revenue		(841	)		(2,152	)
Income taxes payable		(726	)		941

Net cash provided by operating activities		9,551			2,451

Cash flows from investing activities:
Proceeds from sale of short-term investments		54			—
Purchase of property and equipment		(467	)		(563	)

Net cash used in investing activities		(413	)		(563	)

Cash flows from financing activities:
Proceeds from exercise of options		6,768			—
Repurchase of Preferred Stock		—			(13	)

Net cash provided by (used in) financing activities		6,768			(13	)

Net increase in cash and cash equivalents		15,906			1,875
Cash and cash equivalents, at beginning of period		61,215			19,880

Cash and cash equivalents, at end of period	$	77,121		$	21,755

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

NETGEAR, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.	Note 1. Organization and Basis of Presentation

NETGEAR, Inc. ~~(“NETGEAR” or the “Company”)~~ was incorporated in Delaware in January 1996. ~~The Company~~NETGEAR, Inc. together with its subsidiaries (collectively, NETGEAR” or the “Company”) designs, develops and markets networking products that address the specific needs of small businesses and homes, enabling customers to share Internet access, peripherals, files and digital content and applications among multiple personal computers. The Company’s products include Ethernet networking products, broadband products, and wireless networking products that are sold through distributors, traditional retailers, on-line retailers, direct marketing resellers, or DMRs, value added resellers, or VARs, and broadband service providers.

The accompanying unaudited interim condensed consolidated financial statements include the accounts of NETGEAR, Inc., and its wholly owned subsidiaries. They have been prepared in accordance with established guidelines for interim financial reporting and with the instructions of Form 10-Q and Article 10 of regulation S-X. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at December 31, 2003 has been derived from audited financial statements at such date. In the opinion of management, the consolidated financial statements reflect all adjustments ~~which, in~~(consisting only of normal recurring adjustments) to fairly state the ~~opinion~~Company’s financial position, results of ~~management, are necessary for a fair presentation of the results~~operations and cash flows for the period indicated. The interim periods presented. All such adjustments are normal recurring adjustments. These financial statements have been prepared in accordance with generally accepted accounting principles related to interim financial statements and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, theseconsolidated financial statements should be read in conjunction with the ~~audited~~notes to the consolidated financial statements ~~and~~included in the ~~related notes thereto~~Company’s Annual report on Form 10-K for the ~~three years~~fiscal year ended December 31, ~~2002 contained in the Company’s Amendment No. 6 of the Registration Statement on Form S-1, declared effective by the Securities and Exchange Commission on July 30,~~ 2003.

Operating results for the three and nine months ended September 28, 2003 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003 or for any future period. Further, the preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimates could result in a change to the estimates and impact future operating results.

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 interim 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 ~~is 13 weeks long, ending~~ends on ~~Sundays~~the Sunday closest to the calendar quarter end, with the fourth ~~fiscal~~ quarter ~~covering the remaining part of the fiscal year.~~


2.	~~Initial Public Offering~~

ending on December 31.

~~In July 2003, we completed an initial public offering whereby we sold 8,050,000 shares~~The preparation of common stock (which included underwriters’ overallotment) and received net proceeds of $101.8 million (after underwriters’ discount of $7.9 million and related offering expenses of $3.0 million). As describedfinancial statements in Note 8, during the third quarter of fiscal 2003 we used $20.0 million of the proceeds to repay debt to Nortel Networks that had a carrying value of $14.1 million. The repayment of debt resulted in recognition of a extinguishment of debt charge of $5.9 millionconformity with accounting principles generally accepted in the ~~third quarter~~United States of ~~2003 due~~America requires management to make estimates and assumptions that affect the ~~acceleration~~reported amounts of ~~interest expense equal to the unamortized discount balance~~assets and liabilities and disclosure of contingent assets and liabilities at the date of ~~repayment. The Company also used an additional $17.0 million~~the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates and operating results for the three months ended March 28, 2004 are not necessarily indicative of the ~~proceeds to repay debt on amounts drawn on~~results that may be expected for the Company’s line of credit. Immediately prior to the offering, the Company effected a split of its outstanding common stock of 1.75 shares for each share outstanding. All shares and per share calculations included in the accompanying unaudited condensed consolidated financial statements of NETGEAR have been adjusted to reflect this split.

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


3.	~~Significant Accounting Policies:~~

year ending December 31, 2004.

The Company’s significant accounting policies are disclosed in the Company’s ~~final prospectus dated July 30, 2003~~Annual Report on Form 10-K for the year ended December 31, ~~2002.~~2003. The Company’s significant accounting policies have not materially changed during the three ~~and nine~~ months ended ~~September~~March 28, ~~2003.~~


	*2004.* *2. Stock-based Compensation*

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company accounts for employee stock options under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and follows the disclosure-only provisions of SFAS No. 123. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the ~~estimated~~ fair value of the Company’s common stock and the exercise price of options to purchase that stock. For purposes of estimating the compensation cost of the Company’s option grants in accordance with SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Had compensation cost for the Company’s stock-based compensation plan been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, using the ~~assumptions outlined in the financial statements~~following assumptions; risk free interest rate of 2.68%, expected life of four years, no dividends and volatility of 52% for the ~~year~~three months ended ~~December 31, 2002,~~March 28, 2004 and the three months ended March 30, 2003, the Company’s net income ~~(loss) attributable to common shareholders~~ would have been changed to the pro forma amounts indicated (in thousands, except per share data):

Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
Net income (loss) attributable to common shareholders, as reported $ (3,950 ) $ 2,346 $ 9,165 $ (13,166 )
Add:
Employee stock-based compensation included in reported net income (loss) 516 262 1,283 1,083
Less:
Total employee stock-based compensation determined under fair value method (1,668 ) (1,614 ) (4,407 ) (4,557 )

Adjusted net income (loss) attributable to common shareholders $ (5,102 ) $ 994 $ 6,041 $ (16,640 )

Basic net income (loss) per share attributable to common stockholders:
As reported $ (0.15 ) $ 0.12 $ 0.42 $ (0.61 )

Adjusted $ (0.20 ) $ 0.05 $ 0.28 $ (0.77 )

Diluted net income (loss) per share attributable to common stockholders:
As reported $ (0.15 ) $ 0.10 $ 0.35 $ (0.61 )

Adjusted $ (0.20 ) $ 0.04 $ 0.23 $ (0.77 )


	Three Months Ended
	March 28,		March 30,
	2004		2003
Net income, as reported	$	4,150	$	1,612
Add:
Employee stock-based compensation included in reported net income		445		345


	*~~Income Taxes~~*

During the nine months ended September 28, 2003, the Company reassessed its ability to realize its deferred tax assets and determined that it is more likely than not that future tax benefits will be realized. This determination was made principally based on the cumulative profitability of the Company over the past several quarters, plus the projected current and future taxable income expected to be generated by the Company.

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	Three Months Ended
	March 28,			March 30,
	2004			2003
Less:
Total employee stock-based compensation determined under fair value method		(1,100	)		(1,378	)

Adjusted net income	$	3,495		$	579

Basic net income per share:
As reported	$	0.14		$	0.08

Adjusted	$	0.12		$	0.03

Diluted net income per share:
As reported	$	0.13		$	0.07

Adjusted	$	0.11		$	0.02

3. Product Warranties

~~Accordingly, the Company fully reversed the valuation allowance of $9,772,000 in the nine months ended September 28, 2003 to reflect the anticipated net deferred tax asset utilization.~~

~~The provision (benefit) for income taxes consists of the following (in thousands):~~

Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
Current

US federal $ 1,407 $ 109 $ 3,558 $ 219
State and local 183 191 474 383
Foreign 74 85 223 169

1,664 385 4,255 771

Deferred

US federal — — (8,460 ) —
State and local — — (1,312 ) —

— — (9,772 ) —

$ 1,664 $ 385 $ (5,517 ) $ 771


	*~~Product Warranties~~*

The Company provides for future warranty obligations upon product delivery based on the number of installed units, historical experience and the Company’s judgment regarding anticipated rates of warranty claims. Changes in the Company’s warranty liability, which is included as a component of “Other accrued liabilities” in the condensed consolidated balance sheet, during the periods are as follows (in thousands):

Nine Months
Ended Year Ended
September 28, December 31,
2003 2002
Balance as of beginning of the period $ 8,941 $ 4,720
Provision for warranty liability for sales made during the period 9,530 12,587
Settlements made during the period (9,089 ) (8,366 )

Balance as of end of the period $ 9,382 $ 8,941


	Three Months			Three Months
	Ended			Ended
	March 28,			March 30,
	2004			2003
Balance as of beginning of the period		11,959			8,941
Provision for warranty liability for sales made during the period		3,492			2,450
Settlements made during the period		(4,661	)		(3,186	)
Balance as of end of the period		10,790			8,205


	*4. Shipping and Handling Fees and Costs*

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. Shipping and handling costs associated with outbound freight are included in sales and marketing expenses and totaled ~~$1.0 million and $2.8~~$1.6 million for the three ~~and nine~~ months ended ~~September~~March 28, ~~2003, respectively,~~2004, and ~~$635,000 and $1.8 million~~$740,000 for the three ~~and nine~~ months ended ~~September 29, 2002, respectively.~~


	*~~Recent Accounting Pronouncements~~*

March 30, 2003.

5. Balance Sheet Components

In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing withAccounts receivable, net:


	March 28,			December 31,
	2004			2003
	(In thousands)
Gross accounts receivable	$	80,948		$	83,639
Less: Allowance for doubtful accounts		(1,315	)		(1,322	)
Allowance for sales returns		(4,724	)		(4,845	)
Allowance for price protection		(3,554	)		(2,606	)

		(9,593	)		(8,773	)

	$	71,355		$	74,866

Inventories:

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	March 28,		December 31,
	2004		2003
	(In thousands)
Finished goods	$	39,149	$	39,266

financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position or results of operations.


4.	~~Balance Sheet Components~~

~~Accounts receivable, net:~~

September 28, December 31,
2003 2002
(In thousands)
Gross accounts receivable $ 65,883 $ 49,780
Less: Allowance for doubtful accounts (964 ) (873 )
Reserve for sales returns (4,804 ) (3,363 )
Reserve for price protection (1,325 ) (3,052 )

(7,093 ) (7,288 )

$ 58,790 $ 42,492

~~Inventories:~~

September 28, December 31,
2003 2002
(In thousands)
Finished goods $ 33,430 $ 24,774

Other accrued liabilities:

September 28, December 31,
2003 2002
(In thousands)
Sales and marketing (rebates, co-operative marketing and other) $ 11,724 $ 13,855
Warranty obligation 9,382 8,941
Other 4,908 6,623

$ 26,014 $ 29,419


	March 28,		December 31,
	2004		2003
	(In thousands)
Sales and marketing programs	$	20,033	$	14,207
Warranty obligation		10,790		11,959
Outsourced engineering costs		1,287		1,604
Freight		1,502		937
Other		4,876		2,592

	$	38,488	$	31,299

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


5.	6. Net Income ~~(Loss)~~ Per Common Share

Immediately prior to the effective date of the Company’s initial public offering on July 30, 2003, the Company’s outstanding Preferred Stock was automatically converted into 20,228,480 shares of common stock. Prior to July 30, 2003, the holders of Series A, B and C Preferred Stock were entitled to participate in all dividends paid on common stock, as and when declared by the Board of Directors, on an as-if converted basis. In accordance with EITF Topic D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share,” the Company has included the impact of Preferred Stock in the computation of basic earnings per share using the “two class” method. Under this method, an earnings allocation formula is used to determine the amount of net income ~~(loss) attributable to common stockholders~~ to be allocated to each class of stock (the two classes being common stock and Preferred Stock). Basic net income ~~(loss) per share attributable to common stockholders~~ is calculated by dividing the amount of net income ~~(loss) attributable to common shareholders~~ that is apportioned to common stock by the weighted average number of shares of common stock outstanding during the period. In fiscal periods when there were no shares of common stock outstanding, basic net income ~~(loss)~~ per share ~~attributable to common stockholders~~ is presented as there were potential common shares outstanding during the period. This per share data is based on the net income ~~(loss)~~ which would be attributable to one share of common stock during each period, after apportioning the net income ~~(loss)~~ to reflect the participation rights of the preferred stockholders. Diluted net income ~~(loss)~~ per share is computed using the if-converted method for the preferred stock, if dilutive.

Net income ~~(loss)~~ per share applicable to each class of stock (common stock and preferred stock) is as follows (in thousands, except per share data):

Three Months Ended
September 28, 2003
Common Stock Preferred Stock
Basic and diluted net loss per share:
Apportioned net loss $ (2,890 ) $ (1,060 )

Total numerator for basic and diluted net loss per share $ (2,890 ) $ (1,060 )

Weighted average basic and diluted shares outstanding 18,793 6,891

Basic and diluted net loss per share $ (0.15 ) $ (0.15 )

Three Months Ended
September 29, 2002
Common Stock Preferred Stock
Basic net income per share:
Apportioned net income $ 2,346

Total numerator for basic net income per share $ 2,346

Weighted average basic shares outstanding 20,234

Basic net income per share $ 0.12 (A) $ 0.12


	Three Months Ended		Three Months Ended
	March 28, 2004		March 30, 2003
	Common Stock		Common Stock		Preferred Stock
Basic and diluted net loss per share:
Apportioned net loss	$	4,150	$	—	$	1,612

Total numerator for basic and diluted net loss per share	$	4,150	$	—	$	1,612

Weighted average shares outstanding:
Basic		29,521		—		20,231
Options and warrants		2,834		—		3,719

Total diluted		32,355		—		23,950

Basic net income per share	$	0.14	$	0.08	$	0.08

Diluted net income per share	$	0.13	$	0.07	$	0.07

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Three Months Ended
September 29, 2002
Common Stock
Diluted net income per share:
Net income $ 2,346

Total numerator for diluted net income per share $ 2,346

Weighted average shares outstanding:
Basic —
Conversion of preferred stock 20,234
Options and warrants 2,285

Total diluted 22,519

Diluted net income per share $ 0.10

Nine Months Ended
September 28, 2003
Common Stock Preferred Stock
Basic net income per share:
Apportioned net income $ 2,590 $ 6,575

Total numerator for basic net income per share $ 2,590 $ 6,575

Weighted average basic shares outstanding 6,206 15,751

Basic net income per share $ 0.42 $ 0.42

Nine Months Ended
September 28, 2003
Common Stock
Diluted net income per share:
Net income $ 9,165

Total numerator for diluted net income per share $ 9,165

Weighted average shares outstanding:
Basic 6,206
Conversion of preferred stock 15,751
Options and warrants 3,894

Total diluted 25,851

Diluted net income per share $ 0.35

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Nine Months Ended
September 29, 2002
Common Stock Preferred Stock
Basic and diluted net income (loss) per share:
Apportioned net loss after deemed dividend to Preferred Stock $ (13,166 )
Deemed dividend to Preferred Stock 17,881

Total numerator for basic net income (loss) per share $ 4,715

Weighted average basic shares outstanding 21,504

Basic and diluted net income (loss) per share $ (0.61 )(A) $ 0.22

~~(A)~~ ~~As described above, these amounts represent the amount of net income (loss) which would be apportioned to one share of common stock.~~

Diluted net income (loss) per share attributable to common stockholders for the three months ended September 28, 2003 and nine months ended September 29, 2002 is same as basic net income (loss) per share attributable to common stockholders because the impact of including potential common shares would not be dilutive.

Anti-dilutive common stock options and warrants amounting to ~~6,640,000, 430,000,~~149,297 and none ~~and 6,102,000~~ were excluded from the weighted average shares outstanding from the ~~dilutive~~diluted per share calculation for the three months ended ~~September~~March 28, 2004 and March 30, 2003, ~~three months ended September 29, 2002, nine months ended September 28, 2003 and nine months ended September 29, 2002,~~ respectively. ~~In addition, the conversion of preferred stock into 22,504,000 shares of common stock would be anti-dilutive for the nine months ended September 29, 2002.~~


6.	7. Segment Information, Operations by Geographic Area and Significant Customers

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 maker of an organization, in order to make operating and resource allocation decisions. By this definition, the Company primarily operates in one business segment, which is the development,

marketing and sale of networking products for the small business and home markets. NETGEAR’s headquarters and most of its operations are located in the United States. The Company also conducts sales, marketing and customer service activities through sales offices in Europe, Middle-East and ~~Asia.~~Africa, or EMEA, and Asia Pacific. Geographic revenue information is ~~arrived at~~ based on ~~shipments to~~the location of the reseller or ~~distribution to each location less an estimation for the contra revenue items.~~distributor. Long-lived assets, primarily fixed assets, are reported below based on the location of the asset.

Net revenue consists of (in thousands):

Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
North America $ 46,172 $ 43,485 $ 125,651 $ 107,262
Europe 24,210 15,389 67,659 44,216
Asia Pacific and Rest of the world 5,403 5,488 19,184 13,950

$ 75,785 $ 64,362 $ 212,494 $ 165,428

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	Three Months Ended
	March 28,		March 30,
	2004		2003
North America	$	48,369	$	36,661
EMEA		31,679		24,455
Asia Pacific and rest of the world		8,377		6,590

	$	88,425	$	67,706

Long-lived assets consist of (in thousands):

September 28, December 31,
2003 2002
North America $ 3,140 $ 3,074
Europe 42 12
Asia Pacific 120 58

$ 3,302 $ 3,144


	March 28,		December 31,
	2004		2003
North America	$	3,137	$	3,260
EMEA		36		45
Asia Pacific		307		321

	$	3,480	$	3,626

Significant customers (as a percentage of revenue):

Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
Customer 2003 2002 2003 2002
A 31 % 33 % 30 % 31 %
B 13 % 16 % 15 % 21 %
All others individually less than 10% of revenue 56 % 51 % 55 % 48 %

100 % 100 % 100 % 100 %


	Three Months Ended
	March 28,			March 30,
Customer	2004			2003
A		27	%		32	%
B		18	%		20	%
All others individually less than 10% of revenue		55	%		48	%

		100	%		100	%

8. Commitments

~~7. Borrowings~~

On March 22, 2001, the Company entered into a revolving line of credit agreement that provided for a maximum line of credit of $20.0 million, which included both direct loans and letters of credit. Availability under the line of credit was based on a formula of eligible accounts receivable balances. Interest on direct borrowings was at the bank’s prime rate plus applicable margin. Borrowings were collateralized by all of the Company’s assets. In 2002, the Company signed an amendment to the credit line agreement to terminate the credit agreement effective July 28, 2002. The Company had cumulative gross borrowings of $47.5 million during the nine months ended September 29, 2002, all of which had been repaid within the same period. On average, such borrowings individually amounted to $2.3 million, and were generally repaid within a relatively short time frame as we collected accounts receivable.

On July 25, 2002, the Company entered into a revolving line of credit agreement with another bank that provides for a maximum line of credit of up to $20.0 million including amounts drawn under letters of credit. Availability under the line of credit is equal to 75% of eligible accounts receivable balances as determined in the agreement. The annualized interest rate of prime rate plus 0.75% is charged on the outstanding credit balance, calculated on a daily basis. Substantially all the Company’s assets are collateralized under the line of credit. Per the line of credit agreement, the bank can issue letters of credit up to aggregate face amount of $2.0 million. Prior to the closing of the Company’s initial public offering, the line of credit contained covenants, including but not limited to certain financial covenants based on earnings before interest, taxes, depreciation and amortization, or EBITDA, and tangible net worth, and did not allow for declaration of dividends. Subsequent to the Company’s initial public offering, the line of credit no longer contains the aforementioned covenants, but rather requires the Company to maintain a ratio of quick assets to current liabilities of at least 1.25 to 1.0, as of the last day of each calendar month. The Company is not required to maintain compensating balances, however, it is required to pay a fee of 0.25% per annum on the unused portion of the total facility and 1.50% per annum for letters of credit. During the nine months ended September 28, 2003, the Company was in compliance with all the covenants. The Company borrowed $17.0 million under the line of credit (See Note 2) during the nine months ended September 28, 2003 all of which had been repaid within the same period. The Company also utilized $746,000 of the available credit line in the form of letters of credit. The revolving line of credit expires in July 2004.

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


8.	~~Note Payable to Nortel Networks~~

In 2002, the Company entered into a Subordinated Unsecured Convertible Promissory Note Payable to Nortel Networks (the “Note”). The Note had a face amount of $20.0 million. Principal and accrued but unpaid interest were due on February 7, 2009. The promissory note was to bear interest at 7% per year, and would have begun to accrue on February 7, 2005. The promissory note was carried at its net present value of $14.1 million as of July 30, 2003. The note became due upon the completion of the Company’s initial public offering and was paid in full on August 6, 2003. As a result of this $20.0 million cash payment, the Company incurred an extinguishment of debt charge of approximately $5.9 million in the third quarter of 2003.


9.	~~Commitments~~

Guarantees and Purchase Commitments

~~The Company has~~We enter into various ~~inventory related~~inventory-related purchase agreements with ~~its~~ suppliers. ~~Under~~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 to 45 days prior to the expected shipment date. Orders are ~~noncancelable~~non-cancelable within 30 days prior to the expected shipment date. At ~~September~~March 28, ~~2003, the Company~~2004, we had ~~$25.0~~approximately $34.4 million in ~~noncancelable~~non-cancelable purchase commitments with suppliers. The Company expects to sell all products which it has committed to purchase from suppliers. The Company may also be held liable for components that are purchased for the exclusive use in the Company’s products in the event that the supplier is unable to use them, refer to risk factors.

Indemnification

During 2001, the Company entered into an agreement with a law firm with respect to legal consultative and other services in international jurisdictions. Under the agreement, the Company agreed to indemnify the law firm to the fullest extent permitted by law against claims, suits and legal and other expenses incurred by the service provider in the course of providing such services. The terms of the indemnity agreement remain in effect until modified by the parties to the agreement. The maximum amount of potential future indemnification is unlimited. To date the Company has not received any claims against this agreement and believes the fair value of the indemnification agreement is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of ~~September~~March 28, ~~2003.~~2004.

The Company also, 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 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 Director and Officer insurance that limits its exposure and enables it to recover a portion of any future amounts paid. To date the Company has not received any claims. As a result, the Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of ~~September~~March 28, ~~2003.~~2004.

In its sales agreements, the Company typically agrees to indemnify its 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 isare generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. To date the Company has neither received any claims nor paid any amounts to settle claims or defend lawsuits. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of ~~September~~March 28, ~~2003.~~2004.

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


~~10.~~	9. Related Party Transactions

Manufacturing Agreement

A substantial portion of the Company’s products are manufactured by Delta Electronics, which is associated with Delta International Holding Ltd., a shareholder of NETGEAR. Product purchases from Delta Electronics amounted to ~~$56.8~~$11.3 million for the ~~nine~~three month period ended ~~September~~March 28, ~~2003~~2004 as compared to ~~$87.6~~$30.2 million for the ~~nine~~three months ended ~~September 29, 2002.~~March 30, 2003. Payables related to these purchases amounted to ~~$4.7~~$6.3 million and ~~$13.0~~$6.4 million at ~~September~~March 28, ~~2003~~2004 and December 31, ~~2002,~~2003, respectively, and are included in payables to related parties in the accompanying balance sheets.

~~Other Related Party Transactions~~Receivable From Shareholders

~~As consideration for services received~~The receivable from related parties represents receivables from the Company’s shareholders primarily as a result of a secondary offering completed in ~~relation~~April of 2004 as filed with the Securities and Exchange Commission on Registration Statement on Form S-1. The selling stockholders who participated in the secondary offering agreed in principle to ~~the issuance of Series C Preferred Stock,~~reimburse the Company ~~in March of 2002, issued a warrant to one of its shareholders to purchase 218,750 shares of common stock. The warrant was fully exercisable on~~for all reasonable expenses associated with the ~~day of grant. At the time~~offering. As such the Company ~~determined~~has recorded a receivable from related parties as of March 28, 2004 in the fair value of the warrant using Black-Scholes option pricing model using the following assumptions: exercise price — $1.29 per share, estimated fair value of the common stock — $6.24, volatility — 71%, dividend rate — 0%, risk free interest rate — 4.30%. The fair value of the warrant of $622,000 was recorded against the proceeds of Series C Preferred Stock. Prior to the effective date of the initial public offering, the warrant was exercised in a cashless exercise involving the simultaneous exercise of the warrant and the surrender of some of the shares of common stock issued as payment for the exercise price. As such, a net of 198,593 shares of common stock were issued pursuant to the terms of the warrant.

accompanying balance sheets.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This report contains 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. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Other Factors Affecting Operating Results” and “Liquidity and Capital Resources” below. All forward-looking statements in this document 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 unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “NETGEAR” refer to NETGEAR, Inc. and its subsidiaries.

Overview

We design, develop and market technologically advanced, branded networking products that address the specific needs of small business and home users. We supply innovative networking products that meet the ease-of-use, quality, reliability, performance and affordability requirements of these users. From our inception in January 1996 until May 1996, our operating activities related primarily to research and development, developing relationships with outsourced design, manufacturing and technical support partners, testing prototype designs, staffing a sales and marketing organization and establishing relationships with distributors and resellers. We began product shipments during the quarter ended June 30, 1996, and recorded net revenue of $4.0 million in 1996. In

2003, our net revenue was $299.3 million and our net income was $13.1 million.

We were incorporated in January 1996 as a wholly owned subsidiary of Bay Networks, Inc. to focus exclusively on providing networking solutions for small businesses and homes. In August 1998, Nortel Networks purchased Bay Networks, including its wholly owned subsidiary NETGEAR. We remained a wholly owned subsidiary of Nortel Networks until March 2000 when we sold a portion of our capital stock to Pequot Private Equity Fund II, L.P. as part of a joint effort by us and Nortel Networks to reduce Nortel Networks’ ownership interest in us. In September 2000, Nortel Networks sold a portion of its ownership interest in us to Shamrock Holdings of California, Inc., which is a related party to Shamrock Capital Growth Fund, L.P.; Blue Ridge Limited Partnership and an affiliated fund; Halyard Capital Fund, LP; The Abernathy Group Institutional HSN Fund, L.P. and an affiliated fund; and Delta International Holding Ltd. In February 2002, Nortel Networks sold its remaining ownership interest in NETGEAR to us in exchange for cash, non-cash consideration, and a $20.0 million promissory note. In July 2003 we completed our initial public offering of common stock. We sold 8,050,000 shares of common stock at an offering price of $14.00 per share. We received net proceeds of approximately $101.8 million after deducting the underwriting discount and offering expenses payable by us. A portion of the proceeds has been used to fully repay the $20.0 million promissory note.

Our extensive product line currently includes ~~approximately~~over 100 different products. These products are available in multiple configurations to address the needs of our customers in each geographic region in which our products are sold. Our products are grouped into three major segments within the small business and home markets: Ethernet networking products, broadband products and wireless networking products. Ethernet networking products include switches, network interface cards, or NICs, and print servers. Broadband products include routers and gateways. Wireless networking products include wireless access points, wireless NICs and ~~wireless NICs. Wireless routers are included in our broadband product category. We expect that wireless features will permeate the other two categories.~~media adapters. Since we originally launched our business in 1996 with the shipment of Ethernet networking products and a single broadband product, we have continually introduced new products in response to market demand. For example, in ~~2002,~~2003, we introduced approximately 4048 new ~~products and have introduced 36 new products in the nine months ended September 28, 2003.~~products.

Our products are sold through multiple sales channels worldwide, including traditional retailers, online retailers, direct market resellers, or DMRs, value added resellers, or VARs, and, ~~recently,~~ broadband service providers. Our retail channel includes traditional retail locations domestically and internationally, ~~and online retailers,~~ such as ~~Amazon.com and Buy.com. In the United States we sell directly to~~ Best Buy, Circuit City, CompUSA, Costco, Fry’s Electronics, Staples, Office Depot, MediaMarkt (Germany, Austria), PC World (U.K.) and ~~Micro Center.~~FNAC (France). Online retailers include Amazon.com and Buy.com. Our direct market resellers include CDW Corporation and PC Connection. We have over 8,000 VARs in North America, and more than 3,000 internationally. In ~~the~~addition, we also sell our products through broadband service ~~provider space we have sold products to Time~~ providers, such as Time—Warner Cable ~~in the United States, Telewest in the United Kingdom~~ and ~~recently~~ Comcast in ~~the United States. The remaining traditional~~domestic markets and Telstra in Australia and Tele Denmark. Some of these retailers ~~as well as our online retailers, DMRs~~ and ~~VARs~~resellers purchase directly from us while most are fulfilled through approximately ~~65 wholesale distributors. These~~67 wholesale distributors ~~are located in~~around the ~~United States, the United Kingdom, France, Germany, Japan and Canada and approximately 30 other countries.~~world. A substantial portion of our net revenue to date has been derived from a limited number of wholesale distributors, the largest of which are Ingram Micro, Inc. and Tech Data Corporation. We expect that these wholesale distributors will continue to contribute a significant percentage of our net revenue for the foreseeable future.

~~International sales as a~~Results of Operations

The following table sets forth the consolidated statements of operations and the percentage ~~of net revenue grew from 32%~~change for the three months ended March 28, 2004 with the comparable reporting period in the quarter ended September 29, 2002 to 39% in the quarter ended September 28, 2003 and from 35% in the nine months ended September 29, 2002 to 41% in the nine months ended September 28, 2003. Sales in Europe grew from $44.2 million in the nine months ended September 29, 2002 to $67.7 million in the nine months ended September 28, 2003, representing an increase of approximately 53%.preceding year.


	Three Months Ended
	March 28,		Percentage			March 30,
	2004		Change			2003
Net revenue	$	88,425		30.6	%	$	67,706

Cost of revenue:
Cost of revenue		60,899		23.7			49,246
Amortization of (benefit from )deferred stock-based compensation		42		*			(11	)

Total Cost of revenue		60,941		23.8			49,235

Gross profit		27,484		48.8			18,471

Our financial condition and results of operations have been and are likely to continue to be affected by seasonal patterns. In the past, we have experienced higher net revenue during the second half of the year, with our highest net revenue during the year-end holiday season. Absent other factors, we would therefore expect11

higher net revenue in the third and fourth quarter of each calendar year. To the extent our retail sales increase as a percentage of our net revenue, we expect to experience seasonally higher sales as a percentage of net revenue in the fourth quarter.


	Three Months Ended
	March 28,			Percentage			March 30,
	2004			Change			2003
Operating expenses:
Research and development		2,343			16.2			2,016
Sales and marketing		14,768			34.7			10,961
General and administrative		3,182			67.3			1,902
Amortization of deferred stock-based compensation:
Research and development		118			22.9			96
Sales and marketing		188			72.5			109
General and administrative		97			(35.8	)		151

Total operating expenses		20,696			35.8			15,235

Income from operations		6,788			109.8			3,236
Interest income		223			696.4			28
Interest expense		—			*			(361	)
Other expense, net		(103	)		32.1			(78	)

Income before income taxes		6,908			144.5			2,825
Provision for income taxes		2,758			127.4			1,213

Net income	$	4,150			157.4	%	$	1,612

Percentage change not meaningful as prior period basis is a negative amount.

The small business and home networking markets are characterized by intense competition and technological advances. As a result, we continue to expect to experience rapid erosion of average selling prices over the course of the lifecycle of our products due to competitive pricing pressures. We also participate in various marketing promotions with our resellers. The timeliness and effectiveness of these promotions can have an impact to our net revenue. Marketing programs include rebate promotions which are accounted for as contra revenue and the contra revenue adjustment is based upon management’s estimates of units sold through and redemption rates. Variances to these estimates could impact our net revenue. In order to maintain our gross margins, it is necessary to offset average sales price erosion by proactively negotiating with component suppliers and contract manufacturers to reduce unit costs of incoming inventory. We also expect to continue to introduce new products and broaden our geographic and channel reach. These efforts require significant investment in advance of expected incremental revenue, which could impact our profitability. In addition, our international expansion exposes us to additional risks related to foreign currency fluctuations.

~~Results of Operations~~

The following table sets forth the condensed consolidated statements of operations, expressed as a percentage of net revenue, for the periods indicated:

Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %

Cost of revenue 72.2 74.9 72.4 75.1

Gross margin 27.8 25.1 27.6 24.9

Operating expenses:
Research and development 2.7 3.7 2.8 2.9
Sales and marketing 16.4 13.1 16.5 14.2
General and administrative 3.1 3.3 2.8 3.4
Amortization of deferred stock-based compensation
Research and development 0.2 0.1 0.2 0.2
Sales and marketing 0.3 0.1 0.3 0.2
General and administrative 0.2 0.2 0.2 0.3

Total operating expenses 22.9 20.5 22.8 21.2

Income from operations 4.9 4.6 4.8 3.7
Interest income 0.2 0.0 0.1 0.0
Interest expense (0.2 ) (0.5 ) (0.4 ) (0.5 )
Extinguishment of debt (7.8 ) 0.0 (2.8 ) 0.0
Other income (expense), net (0.1 ) 0.1 0.0 0.1

Income (loss) before taxes (3.0 ) 4.2 1.7 3.3
Provision (benefit) for income taxes 2.2 0.6 (2.6 ) 0.4

Net income (loss) (5.2 )% 3.6 % 4.3 % 2.9 %


	Three Months Ended
	March 28,			March 30,
	2004			2003
Net revenue		100.0	%		100.0	%

Cost of revenue		68.9			72.7

Gross margin		31.1			27.3

Operating expenses:
Research and development		2.6			3.0
Sales and marketing		16.7			16.2
General and administrative		3.6			2.8
Amortization of deferred stock-based compensation Research and development		0.1			0.1
Sales and marketing		0.2			0.2
General and administrative		0.2			0.2

Total operating expenses		23.4			22.5

Income from operations		7.7			4.8
Interest income		0.2			—
Interest expense		—			(0.5	)
Other expense, net		(0.1	)		(0.1	)

Income before taxes		7.8			4.2
Provision for income taxes		3.1			1.8

Net income		4.7	%		2.4	%
						��

Quarter Ended ~~September~~March 28, ~~2003~~2004 Compared to Quarter Ended ~~September 29, 2002~~March 30, 2003.

Net Revenue

Net revenue increased ~~$11.4~~$20.7 million, or ~~18%~~30.6%, to ~~$75.8~~$88.4 million for the quarter ended ~~September~~March 28, ~~2003,~~2004, from ~~$64.4~~$67.7 million for the quarter ended ~~September 29, 2002.~~March 30, 2003. The increase in revenue was attributable to increased gross shipments of our ~~Ethernet switching,~~ broadband and wireless products, ~~which were reduced~~partially offset by provisions made ~~for potential sales returns for certain inventory in our distributor and retail channels. In addition, the increase in revenue was further reduced by provision~~ for rebates and cooperative marketing programs associated with increased retail product ~~sales.~~sales, price protection and sales returns. Net revenue for the three months ended March 28, 2004 included a net benefit of $1.4 million due to a $1.9 million reduction in requirements for warranty obligations, partially offset by a $450,000 increase in provisions for expected end-user rebates. The benefit from the reduction in required warranty obligations resulted from a change in the estimate of the time taken to receive the returns from customers, which is used to compute the warranty returns obligation. However, there was minimal impact on the gross margin because the gross profit from the net revenue increase was offset by an increase in estimated costs to repair or liquidate inventory relating to warranty returns.

In the quarter ended ~~September 29, 2002~~March 28, 2004 revenue generated within ~~the United States~~North America, EMEA and Asia Pacific was ~~67.6% of~~54.7%, 35.8% and 9.5%, respectively. The comparable net revenue ~~as compared to 60.9% in~~for the quarter ended ~~September 28, 2003. Revenue generated within~~March 30, 2003 was 54.2%, 36.1% and 9.7%, respectively. The increase in net revenue over the ~~United States grew 6.2% in~~prior year comparable quarter for each region was 31.9%, 29.5% and 27.1%, respectively. The geographic mix of consolidated net revenue remained relatively constant over the quarter ended September 28, 2003, from the quarter ended September 29, 2002, while revenue generated in EMEA grew 57.3% and revenue generated in Asia Pacific decreased 1.5% during this period, primarily due to a loss of market share in Japan.prior comparable quarter.

Cost of Revenue and Gross Margin

Cost of revenue increased ~~$6.5~~$11.7 million, or ~~14%~~24%, to ~~$54.7~~$60.9 million for the quarter ended ~~September~~March 28, ~~2003,~~2004, from ~~$48.2~~$49.2 million for the quarter ended ~~September 29, 2002.~~March 30, 2003. In addition, our gross margin improved to ~~27.8%~~31.1% for the quarter ended ~~September~~March 28, ~~2003,~~2004, from ~~25.1%~~27.3% for the quarter ended ~~September 29, 2002.~~March 30, 2003. This improvement in gross margin of ~~2.7%~~3.8% was due primarily to ~~lower~~a favorable shift in product ~~costs~~mix, especially of newer products which often carry higher gross margins, as ~~a result~~well as due to operational efficiency and supply chain management programs that reduced in-bound freight costs. We also took advantage of ~~lower pricing~~rebates and prompt payment discounts from our ~~vendors,~~suppliers, which increased $1.1 million, to a ~~reduction~~benefit of $1.2 million in the ~~amount~~three months ended March 28, 2004 from a benefit of ~~in-bound air freight expense~~$108,000 in the three months ended March 30, 2003, and ~~a reduction in provision for excess and obsolete inventory as compared with the same period in 2002.~~contributed to our margin growth. These improvements in gross margin were partially offset by an increase in cooperative marketing costs and end-user rebates and additional provisions to write down inventory resulting from anticipated warranty returns. Cooperative marketing costs and end-user rebates are recorded as ~~contra revenue, which negatively impacted gross margin by 2.8%.~~a reduction in net revenue.

Operating Expenses

Research and Development

Research and development expenses ~~decreased $299,000,~~increased $327,000, or ~~13%~~16%, to ~~$2.1~~$2.3 million for the quarter ended ~~September~~March 28, ~~2003,~~2004, from ~~$2.4~~$2.0 million for the quarter ended ~~September 29, 2002.~~March 30, 2003. The ~~decrease~~increase was primarily due to ~~a reduction of $593,000 in product development costs, partially offset by an increase in~~higher employee related costs for new and existing employees of ~~$181,000.~~$186,000. As of March 28, 2004 we had research and development related headcount of 30 employees as compared to 28 as of March 30, 2003. The ~~quarter ended September 29, 2002 included initial~~increase was also due to additional general overhead costs of $92,000 as well as increased product ~~certification~~development costs ~~relating to the broadband service provider segment.~~of $54,000.

Sales and Marketing

Sales and marketing expenses increased ~~$4.0~~$3.8 million, or ~~47%~~35%, to ~~$12.4~~$14.8 million for the quarter ended ~~September~~March 28, ~~2003,~~2004, from ~~$8.5~~$11.0 million for the quarter ended ~~September 29, 2002. This~~March 30, 2003. Of this increase, $1.6 million was ~~primarily~~ due to increased sales volume, product promotion, advertising, ~~and~~ outside technical support expenses ~~aggregating~~and increased operating costs in international locations due to ~~$2.5 million, increased~~the weakening of the U.S. dollar in relation to the Euro and the British pound. In addition, salary and related expenses for additional sales and marketing personnel increased by $1.1 million, as a result of ~~$759,000,~~headcount growth from 87 employees as of March 30, 2003 to 118 as of March 28, 2004, especially due to expansion in certain regions such as China, and ~~an increase in~~ freight out charges increased by $819,000 in support of ~~$410,000.~~higher revenue.

General and Administrative

General and administrative expenses increased ~~$243,000,~~$1.3 million, or ~~12%~~67%, to ~~$2.4~~$3.2 million for the quarter ended ~~September~~March 28, ~~2003,~~2004, from ~~$2.1~~$1.9 million for the quarter ended ~~September 29, 2002.~~March 30, 2003. This increase was primarily due to increased director and officer insurance costs of ~~$208,000 and~~$330,000, fees for professional services, composed of systems consulting and accounting and legal, ~~fees,~~including costs associated with Sarbanes-Oxley 404 compliance, aggregating ~~$376,000 which were slightly offset by a decrease~~$580,000 and an increase in employee related costs of ~~$131,000 and a reduction in other expenses~~$307,000, including employment taxes resulting from the exercise of ~~$180,000, which primarily consists of a decrease in bad debt expenses.~~

stock options.

Amortization of Deferred Stock-based Compensation

During the quarter ended ~~September~~March 28, ~~2003,~~2004, we recorded charges of ~~$46,000~~$42,000 in cost of revenue, ~~$135,000~~$118,000 in research and development expenses, ~~$227,000~~$188,000 in sales and marketing expenses, and ~~$108,000~~$97,000 in general and administrative expenses related to amortization of deferred stock-based compensation. During the quarter ended ~~September 29, 2002,~~March 30, 2003, we recorded ~~amortization~~a recovery of ~~deferred stock-based compensation~~$11,000 in cost of revenue, and charges of ~~$22,000, $51,000~~$96,000 in research and development expenses, ~~$59,000~~$109,000 in sales and marketing expenses, and ~~$130,000~~$151,000 in general and administrative ~~expenses.~~expenses related to the amortization of deferred stock-based compensation. The remaining balance of $3.6 million will continue to be amortized on a straight line basis until 2007.

Interest Income, Interest Expense and Other ~~Income (Expense),~~Expense, Net

The aggregate of interest income, interest expense, and other expense, net amounted to net other income ~~(expense), net decreased $92,000, to a net expense~~ of ~~$142,000~~$120,000 for the quarter ended ~~September~~March 28, ~~2003, from a~~2004, compared to net expense of ~~$234,000~~$411,000 for the quarter ended ~~September 29, 2002.~~March 30, 2003. This ~~decrease~~change was primarily due to a decrease of ~~$169,000~~$361,000 in imputed interest expense associated with the Nortel Networks note, following the repayment of the note in August 2003, and having earned ~~$123,000~~$223,000 in interest income from the investment of IPO proceeds for the ~~third~~first quarter of ~~2003, as compared to $32,000 for the third quarter of 2002.~~2004. This was partially offset by an increase in foreign exchange losses.

~~Extinguishment of Debt~~

During the third quarter of 2003, we used $20.0 million of the proceeds, from the initial public offering, to repay debt that had a carrying value of $14.1 million. The repayment of debt resulted in recognition of an extinguishment of debt charge of $5.9 million in the third quarter of 2003 due to the acceleration of interest expense equal to the unamortized discount balance at the date of repayment.

Provision for Income Taxes

Provision for income taxes increased ~~$1.3~~$1.5 million, to ~~$1.7~~$2.8 million for the quarter ended ~~September~~March 28, ~~2003,~~2004, from ~~$385,000~~$1.2 million for the quarter ended ~~September 29, 2002.~~March 30, 2003. The effective tax rate for the quarter ended ~~September~~March 28, ~~2003~~2004 was approximately ~~73% which was higher than our statutory tax~~40% as compared to an effective rate of ~~approximately (40%) primarily due to the $5.9 million charge for extinguishment of debt, which is treated as a permanent non-deductible difference for tax purposes. The effective tax rate~~43% for the quarter ended September 29, 2002 was approximately 14% because of the change in the valuation allowance on deferred tax assets of $1.1 million, arising from, among other factors, the utilization of net operating loss tax carryforwards (NOL’s).

March 30, 2003.

Net Income ~~(Loss)~~

Net income ~~(loss) decreased $6.3~~increased $2.5 million, to ~~a loss of ($4.0)~~$4.2 million for the quarter ended ~~September~~March 28, ~~2003~~2004 from ~~income of $2.3~~$1.6 million for the quarter ended September 29, 2002. This decrease was due to a charge for the extinguishment of debt, related to a note payable to Nortel Networks, of $5.9 million, an increase in operating expenses of $4.1 million and an increase in provision for income taxes of $1.3 million. This was offset by an increase in gross profit of $4.9 million.

~~Nine Months Ended September 28, 2003 Compared to Nine Months Ended September 29, 2002~~


	*~~Net Revenue~~*

Net revenue increased $47.1 million, or 29%, to $212.5 million for the nine months ended September 28, 2003, from $165.4 million for the nine months ended September 29, 2002. The increase in revenue was attributable to increased gross shipments of our Ethernet switching, broadband and wireless products, which were reduced by provisions made for potential sales returns for certain inventory in our distributor and retail channels. In addition, the increase in revenue was further offset by provision for rebates, and cooperative marketing programs associated with increased retail product sales and provision for price protection. In the nine months ended September 29, 2002 revenue generated within the United States was 64.8% of net revenue, as compared to 59.1% in the nine months ended September 28,March 30, 2003. ~~Revenue generated within the United~~

States grew 17.1% in the nine months ended September 28, 2003, from the nine months ended September 29, 2002, while revenue generated in EMEA grew 53.0% and revenue generated in Asia Pacific grew 37.5% during this period.


	*~~Cost of Revenue and Gross Margin~~*

Cost of revenue increased $29.6 million, or 24%, to $153.9 million for the nine months ended September 28, 2003, from $124.3 million for the nine months ended September 29, 2002. In addition, our gross margin improved to 27.6% for the nine months ended September 28, 2003, from 24.9% for the nine months ended September 29, 2002. This improvement in gross margin of 2.7% was due primarily to lower product costs as a result of lower pricing from our vendors, a reduction in the amount of in-bound air freight expense and a reduction in provision for excess and obsolete inventory as compared with the same period in 2002. These improvements in gross margin were partially offset by an increase in cooperative marketing costs, recorded as contra revenue.


	*~~Operating Expenses~~*


	*~~Research and Development~~*

Research and development expenses increased $1.1 million, or 23%, to $6.0 million for the nine months ended September 28, 2003, from $4.9 million for the nine months ended September 29, 2002. This increase was primarily due to increase of $1.4 million in headcount and salaries for existing employees.


	*~~Sales and Marketing~~*

Sales and marketing expenses increased $11.6 million, or 50%, to $35.1 million for the nine months ended September 28, 2003, from $23.4 million for the nine months ended September 29, 2002. This increase was primarily due to increased sales volume, product promotion, advertising and outside technical support expenses aggregating $6.9 million, increased salary and related expenses for additional sales and marketing personnel and increased compensation for existing personnel aggregating $2.9 million and an increase in freight out charges of $929,000.


	*~~General and Administrative~~*

General and administrative expenses increased $372,000, or 7%, to $6.0 million for the nine months ended September 28, 2003, from $5.7 million for the nine months ended September 29, 2002. This increase was primarily due to increased director and officer insurance of $208,000 and professional services, composed of systems consulting and accounting and legal fees, aggregating $449,000, increased salary and related expenses of $108,000 for additional employees, offset by a reduction in bad debt expenses of $376,000.


	*~~Amortization of Deferred Stock-based Compensation~~*

During the nine months ended September 28, 2003, we recorded charges of $77,000 in cost of revenue, $334,000 in research and development expenses, $515,000 in sales and marketing expenses, and $357,000 in general and administrative expenses related to amortization of deferred stock-based compensation. During the nine months ended September 29, 2002, we recorded amortization of deferred stock-based compensation in cost of revenue of $108,000, $231,000 in research and development expenses, $247,000 in sales and marketing expenses, and $497,000 in general and administrative expenses.


	*~~Interest Income, Interest Expense and Other Income (Expense), Net~~*

The aggregate of interest income, interest expense, and other income (expense), net increased $97,000, to a net expense of $769,000 for the nine months ended September 28, 2003, from a net expense of $672,000 for the nine months ended September 29, 2002. This increase was primarily due to an increase of $157,000 in foreign exchange loss.


	*~~Extinguishment of Debt~~*

During the third quarter of 2003 we used $20.0 million of the proceeds, from the initial public offering, to repay debt that had a carrying value of $14.1 million. The repayment of debt resulted in recognition of an extinguishment of debt charge of $5.9 million in the third quarter of 2003 due to the acceleration of interest expense equal to the unamortized discount balance at the date of repayment.


	*~~Provision (Benefit) for Income Taxes~~*

We recorded a benefit for income taxes of $5.5 million for the nine months ended September 28, 2003, compared to a provision for income taxes of $771,000 for the nine months ended September 29, 2002. The principal reason for the income tax benefit recorded was the reversal of the valuation allowance against our deferred tax assets of $9.8 million during the second quarter of 2003. The valuation allowance was reversed because we determined that it is more likely than not that certain future tax benefits will be realized as a result of current and future income. This determination was principally based on our cumulative profitability over the past several quarters, plus the projected current and future taxable income expected to be generated by us. This benefit was partially offset by an increase in taxable income due to the $5.9 million charge for extinguishment of debt, which is treated as a permanent non-deductible difference for tax purposes. The nine month period ended September 29, 2002 included a benefit associated with the change in valuation allowance on deferred tax assets of $2.2 million, arising from, among other factors, the utilization of net operating loss tax carryforwards (NOL’s).


	*~~Net Income~~*

~~Net Income increased $4.5 million, to $9.2 million for the nine months ended September 28, 2003 from $4.7 million for the nine months ended September 29, 2002.~~ This increase was due to an increase in gross profit of ~~$17.5 million, a decrease in provision for income taxes of $6.3~~$9.0 million, offset by ~~a charge for the extinguishment of debt, related to a note payable to Nortel Networks, of $5.9 million and~~ an increase in operating expenses of ~~$13.3~~$5.5 million and an increase in the provision for income taxes of $1.5 million.

Liquidity and Capital Resources

~~In July 2003,~~As of March 28, 2004 we ~~completed an initial public offering which raised $101.8 million in net proceeds,~~had cash, cash equivalents and ~~we used $20.0~~short-term investments totaling $89.5 million. Short term investments accounted for $12.3 million of the proceeds to repay an outstanding note payable to Nortel Networks. The note payable to Nortel Networks arose as part of our repurchase of Series A preferred stock from Nortel Networks completed on February 7, 2002, when we entered into a subordinated unsecured convertible promissory note payable to Nortel Networks Limited. The promissory note was carried at its net present value of $14.1 million as of July 30, 2003. The note became due on upon the completion of our initial public offering and was paid in full on August 6, 2003. As a result of this $20.0 million cash payment, we incurred an extinguishment of debt charge of approximately $5.9 million in the third quarter of 2003. Additionally, we repaid borrowings totaling $17.0 million under our line of credit on August 5, 2003. No amount was outstanding under the line of credit as of September 28, 2003.balance.

Our cash balance increased from ~~$19.9~~$61.2 million as of December 31, ~~2002,~~2003, to ~~$75.7~~$77.1 million as of ~~September~~March 28, ~~2003.~~2004. Operating activities during the ~~nine~~three months ended ~~September~~March 28, ~~2003 used~~2004 generated cash of ~~$24.5~~$9.6 million primarily ~~for~~from working capital needs. Inventory increased during the nine months ended September 28, 2003 by $8.7 million due to longer transit periods as more product was shipped from our manufacturers to our distribution centers by sea rather than by air.capital. Accounts receivable ~~increased~~decreased by ~~$16.3~~$2.6 million during the ~~nine~~three months ended ~~September~~March 28, ~~2003.~~2004. Our days sales outstanding ~~increased~~decreased from 5881 days as of ~~September 29, 2002~~December 31, 2003 to 71 days as of ~~September~~March 28, 2003. This increase was attributable primarily to an increase in the amount of our net revenues occurring during the last month of the quarter ended September 28, 2003 compared to the last month of the quarter ended September 29, 2002.2004. The combined ~~increase~~decrease in accounts payable and payables to related parties of ~~$1.0~~$7.9 million was offset ~~the cash needs.~~by an increase in other accrued liabilities of $7.2 million. Investing activities for this period used ~~$1.6~~$413,000 million due primarily to purchases of property and equipment. Financing

activities for this period provided cash of ~~$81.9~~$6.8 million ~~primarily~~ due to proceeds from ~~our initial public offering offset by repayments~~the exercise of ~~a note payable~~stock options.

Inventory remained relatively constant at $39.1 at March 28, 2004 as compared to ~~Nortel Networks and borrowings under our line~~$39.3 as of ~~credit.~~

December 31, 2003. In the quarter ended March ~~2001,~~28, 2004 we ~~entered into a $20.0 million revolving line~~experienced inventory turns of ~~credit, which was terminated on September 29, 2002. As of September 28, 2003, letters of credit~~approximately 6.2 times, down slightly from 6.3 times in the aggregate amount of $10,000 were outstanding with this bank. On July 25, 2002, we entered into a revolving line of credit agreement with another bank that provides for a maximum line of credit of $20.0 million, which includes direct loans, letters of credit, foreign exchange contracts, and corporate credit cards. Availability under this line of credit is based on a formula of eligible accounts receivable balances. Direct borrowings bear interest at the bank’s prime rate plus 75 basis points. Borrowings are collateralized by all of our assets. Prior to our initial public offering, the credit line contained covenants, including but not limited to certain financial covenants based on earnings before interest, taxes, depreciation and amortization, or EBITDA, and tangible net worth, and did not allow for declaration of dividends. Subsequent to our initial public offering, the line of credit no longer contains the aforementioned covenants, but rather requires us to maintain a ratio of quick assets to current liabilities of at least 1.25 to 1.0, as of the last day of each calendar month. We are not required to maintain compensating balances, however, we are required to pay a fee of 0.25% per annum on the unused portion of the total facility and 1.50% per annum for letters of credit. During the nine monthsquarter ended September 28, 2003, we borrowed amounts under this line of credit for working capital purposes in the amount of $17.0 million, none of which remained outstanding at the end of the period. Letters of credit in the aggregate amount of $746,000 were outstanding, leaving approximately $19.3 million available for borrowing under this line of credit.December 31, 2003.

We lease office space and equipment under ~~noncancelable~~non-cancelable operating leases with various expiration dates through ~~March 2006.~~January 2009. The terms of the facility lease 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 enter into various inventory-related purchase agreements with suppliers. ~~Under~~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 to 45 days prior to the expected shipment date. Orders are ~~noncancelable~~non-cancelable within 30 days prior to the expected shipment date. At ~~September~~March 28, ~~2003,~~2004, we had ~~$25.0~~approximately $34.4 million in ~~noncancelable~~non-cancelable purchase commitments with suppliers. ~~We expect to sell all products which it has committed to purchase from suppliers.~~

Contractual Obligations and Off-Balance Sheet Arrangements

The following table describes our commitments to settle contractual obligations and off-balance sheet arrangements in cash as of ~~September~~March 28, ~~2003~~2004 (in thousands):

Less than 1-3
Contractual Obligations 1 Year Years Total
Operating leases $ 1,116 $ 486 $ 1,602
Purchase obligations 25,002 25,002

$ 26,118 $ 486 $ 26,604


	Less than		1-3		3-5
Contractual Obligations	1 Year		Years		Years		Total
Operating leases	$	848	$	233	$	170	$	1,251
Purchase obligations		34,439						34,439

	$	35,287	$	233	$	170	$	35,690

Based on our current plans and market conditions, we believe that our existing cash and our credit facility will be sufficient to satisfy our anticipated cash requirements for the next twelve months. ~~However, we~~We currently have a revolving line of credit agreement with a bank that allows the Company to borrow up to a maximum of $20.0 million, including amounts drawn under letters of credit, although this agreement is set to expire in July of 2004. 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 reasonable terms, which could have a negative effect on our business and results of operations. While we do not have any specific proposals for the allocation of the net proceeds from the closing of our initial public offering on July 31, 2003 other than the repayment of our note payable to Nortel Networks, which was paid on August 6, 2003, in the future we may fund possible joint ventures, investments or acquisitions complementary to our business. Currently we are maintaining a large portion of the remaining proceeds in short-term investment accounts.

Critical Accounting Policies and Estimates

For a description of what we believe to be the critical accounting policies that affect our more significant ~~judgements~~judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report on Form ~~S-1 (Registration No. 333-104419) declared effective by~~10-K for the ~~Securities Exchange Commission on July 30,~~year ended December 31, 2003. There have been no changes in our critical accounting policies since December 31, ~~2002.~~2003.

~~Board Committees~~Risk Factors Affecting Future Results

In connection with our initial public offering, we have reconstituted our audit and compensation committees. Our audit committee currently consists of A. Timothy Godwin, Linwood A. Lacy, Jr. and Stephen D. Royer. Our compensation committee currently consists of Ralph E. Faison, Gerald A. Poch and Gregory J. Rossmann.

~~Factors That May Affect Future Operating Results~~

~~You should carefully consider the risks described below.~~ The risks ~~and uncertainties~~ described below are not the only ones ~~facing us.~~we face. Additional risks ~~and uncertainties~~ not presently known to us or that we currently ~~deem immaterial~~believe are not material may also impair our business operations. ~~If any of the following risks actually occur,~~

Risks Related to Our Business and Industry

We expect our ~~business,~~operating results ~~of operations~~to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or ~~cash flows could be adversely affected. In those cases, the trading price of our common stock could decline, and you may lose all or part of your investment.~~


	*~~We expect our operating results to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate and~~ 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. ~~Factors~~If our actual revenue 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:~~include those listed in this risk factors section of this Form 10-Q and others such as:

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

• changes in the terms of our contracts with customers or suppliers;
• 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;

• changes in or consolidation of our sales ~~channel~~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;

• our inability to accurately forecast our contract manufacturing needs;

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

• ~~increases~~ an increase in price protection claims, redemptions of marketing rebates, product warranty returns ~~and reserves~~or allowance for doubtful accounts;

• ~~our inability to estimate rebate volumes and redemption rates;~~
• operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter; and

• seasonal patterns ~~including a~~of higher ~~concentration of~~ sales during the second half of our fiscal ~~year.~~year, particularly retail-related sales in our fourth quarter.

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 this event, our stock price could decline ~~significantly, which could cause you to lose part or all of your investment.~~significantly.

Our future success is dependent on the acceptance of networking products in the small business and home markets into which we sell substantially all of our products. If the acceptance of networking

products in these markets does not continue to grow, we will be unable to increase or sustain our net revenue, and our business will be severely harmed.

We believe that growth in the small business market will depend, in significant part, on the growth of the number of personal computers purchased by these end users and the demand for sharing data intensive applications, such as large graphic files. We believe that acceptance of networking products in the home will depend upon the availability of affordable broadband Internet access and increased demand for wireless products. Unless these markets continue to grow, our business will be unable to expand, which could cause the value of ~~our stock~~your investment to decline. Moreover, if networking functions are integrated more directly into personal computers and other Internet-enabled devices, such as electronic games or personal video recorders, and these devices do not rely upon external network-enabling devices, sales of our products could suffer. In addition, if the small business or home markets experience a recession or other cyclical effects that diminish or delay networking expenditures, our business growth and profits would be severely limited, and our business could be more severely harmed than those companies that primarily sell to large business customers.


	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 advertising expenditures or other expenses, which could result in reduced margins and loss of market share.

We compete in a rapidly evolving and highly competitive market, and we expect competition to intensify. Our principal competitors in the small business market include 3Com Corporation, Allied Telesyn International, Dell Computer Corporation, D-Link Systems, Inc., Hewlett-Packard Company, the Linksys division of Cisco Systems and Nortel Networks. Our principal competitors in the home market include Belkin Corporation, D-Link, the Linksys division of Cisco Systems and Microsoft Corporation. Other current and potential competitors include numerous local vendors such as Corega International SA and Melco, Inc./ Buffalo Technology in Japan and TP-Link in China. Our potential competitors also include consumer electronics vendors who could integrate networking capabilities into their line of products.

Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources, including Cisco Systems and Microsoft. 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 the sales channel than we can. In June 2003, Cisco Systems acquired The Linksys Group, a major competitor of ours. ~~In particular,~~ Cisco Systems has substantial resources that it may direct to developing or purchasing advanced technology, which might be superior to ours. In addition, it may direct substantial resources to expand its Linksys division’s distribution channel and to increase its advertising expenditures or otherwise use its resources to successfully compete. Any of these actions could cause us to materially increase our expenses, and could result in our being unable to successfully compete, which would harm our results of operations. We anticipate that current and potential competitors will also intensify their efforts to penetrate our target markets. 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.

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


	*~~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 selling prices over their respective sales cycles. In order to sell products that have a falling average 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 ~~average~~overall gross margin would likely decline.


	If we fail to continue to introduce new products and product enhancements 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 and product enhancements that achieve broad market acceptance in the small business and home markets. Our future success will depend in large part upon our ability to identify demand trends in the small business and home markets and quickly develop, manufacture and sell products that satisfy these demands in a ~~cost-effective~~cost effective manner. 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 in releasing new products and product enhancements in the past, which resulted in lower quarterly net revenue than expected. For example, in 2000, we introduced a proprietary wireless networking solution. Later, we decided to re-design our products to be compliant with the 802.11 standard promulgated by the Institute of Electrical and Electronic Engineers. As a result, we introduced our wireless local area networking, or LAN, 802.11b products in the first quarter of 2001, ~~nine~~six months behind some of our competitors. In addition, we have experienced unanticipated delays in product introductions beyond announced release dates. ~~Also, we announced in the second quarter of 2001 that our Gigabit manageable switches would be available in 2001. These products were actually made available in the fourth quarter of 2002 due to~~Any future delays ~~in porting software to a new central processing unit. Delays~~ in product development and introduction could result in:

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

• negative publicity and damage to our reputation and brand;

• decline in the average selling price of our products; and

• adverse reactions in our sales channel, such as reduced shelf space or reduced online product visibility.


	*We depend substantially on our sales channel, and our failure to maintain and expand our sales channel 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 channel. We sell our products through our sales channel, which consists of traditional retailers, on-line retailers, direct market resellers, or DMRs, value added resellers, or VARs, and, recently, broadband service providers. These entities typically purchase our products through our wholesale distributors. We sell to small businesses primarily through DMRs, VARs and retail locations, and we sell to our home users primarily through retail locations, online retailers and broadband service providers. We 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. A competitor with more extensive product lines and stronger brand identity, such as Microsoft or Cisco Systems, may have greater bargaining power with these retailers. The competition for retail shelf space may increase, which would require us to increase our marketing expenditures simply to maintain current levels of retail shelf space. 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 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. If we were unable to maintain and expand our sales channel, 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, such as selling networking products through broadband service providers such as cable operators and

Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new versions are released. Some errors and defects may be discovered only after a product has been installed and used by the end user. For example, in the quarter ended September 29, 2002, we recalled some of our 48 port 10/100 Mbps Ethernet switches due to an intermittent connectivity issue with a connector. In addition, we have recently received returns of a limited number of our Wall Plug Ethernet Bridge products. We have initiated testing of this product to determine if a manufacturing process change is appropriate, in which case we would consider a recall of units of this product. We believe that any recall of the product would not have a material impact on our financial statements, and we believe we may be entitled to indemnification from our third-party manufacturers for any such action.

If our products contain defects or errors, 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 successful product liability or other claim could result in negative publicity and further harm our reputation, result in unexpected expenses and adversely impact our operating results.

We intend to implement an international restructuring, which may strain our resources and increase our operating expenses.

By the end of 2004, we plan to reorganize our foreign subsidiaries and entities to manage and optimize our international operations. Our implementation of this project will require substantial efforts by our staff and could result in increased staffing requirements and related expenses. Failure to successfully execute the restructuring or other factors outside of our control could negatively impact the timing and extent of any benefit we receive from the restructuring. The restructuring will also require us to amend a number of our customer and supplier agreements, which will require the consent of our third-party customers and suppliers. In addition, ~~our reputation and brand~~there could be ~~damaged if~~unanticipated interruptions in our ~~products do not perform~~business operations as ~~we anticipate because~~a result of ~~a product defect,~~implementing these changes that could result in loss or ~~even absent any defect. For example, we have recently been~~delay in ~~discussions with a public university regarding several of~~revenue causing an adverse effect on our ~~products that use a public NTP server that it hosts. The university has requested that we reimburse it for certain expenses that it believes are related~~financial results.

We intend to expand our ~~products. Regardless of any legal liability, we~~operations and infrastructure, which may ~~elect to make reasonable payments or take other actions that we deem appropriate to protect~~strain our ~~reputation~~operations and ~~brand. Such unexpected expenses could reduce our margins and harm~~increase our operating ~~results.~~

We intend to expand our operations and pursue market opportunities domestically and internationally to grow our sales. For example, we are intensifying our efforts to sell our products in China. We expect that this expansion will strain our existing management information systems, and operational and financial controls. In addition, as 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 these new systems, procedures and controls may place a significant burden on our management, operational and financial resources. In addition, as we grow internationally, we will have to expand and enhance our communications infrastructure. If we fail to continue to improve our management information systems, procedures and financial controls or encounter unexpected difficulties during expansion, our business could be harmed.

International sales comprise a significant amount of our overall net revenue. International sales were ~~33% of our net revenue~~42% in ~~2000, 37% in each of 2001~~2003 and ~~2002, and 41%~~45% in the ~~nine~~three months ended ~~September~~March 28, ~~2003.~~2004. We anticipate that international sales may grow as a percentage of net revenue. We have committed resources to expanding our international operations and sales channels and these efforts may not be successful. International sales are subject to a number of risks. For example, we recognize revenue from our international sales when our products reach the country of destination. As a result, if these products are delayed in transit, we are unable to recognize revenue.


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

	•		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; and

	•		difficulties and costs of staffing and managing foreign operations.

Evaluation of disclosure controls and procedures.Our management evaluated, with the participation of our chief executive officer and our chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we

Changes in internal control over financial reporting.There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are aware that any system of controls, however well designed and operated, can only provide reasonable, and not absolute, assurance that the objectives of the system are met, and that maintenance of disclosure controls and procedures is an ongoing process that may change over time.

We are not currently a party to any material legal proceedings. We may be subject to various claims and legal actions arising in the ordinary course of business from time to time.

The Securities and Exchange Commission declared our first registration statement, which we filed on Form S-1 (Registration No. 333-104419) under the Securities Act of 1933 in connection with the initial public offering of our common stock, effective on July 30, 2003. Under this registration statement, we registered 7,000,000 shares of our common stock, and another 1,050,000 shares subject to the underwriters’ over-allotment option. All 8,050,000 shares of common stock registered under the registration, including the 1,050,000 shares of common stock covered by the over-allotment option, were sold at a price to the public of $14.00 per share. All of the shares of common stock were sold by us and there were no selling stockholders in the offering. The offering closed on August 5, 2003. The managing underwriters were Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and UBS Securities LLC.

The offering did not terminate until after the sale of all of the securities registered on the Registration Statement. The aggregate gross proceeds from the shares of common stock sold by us were $112.7 million. The aggregate net proceeds to us from the offering were approximately $101.8 million after deducting an aggregate of $7.9 million in underwriting discounts and commissions paid to the underwriters and an estimated $3.0 million in other expenses incurred in connection with the offering. We used $20.0 million of the net proceeds of the offering to repay in full the subordinated unsecured convertible promissory note payable to Nortel Networks. We have also used $17.0 million of the net proceeds to repay debt on amounts drawn on our line of credit. We invested the remaining net proceeds in short-term, investment-grade, interest bearing instruments, pending their use to fund working capital and capital expenditures.

Report on Form 8-K ~~furnished on September 9, 2003~~filed February 17, 2004 under Item 7 and Item 12, ~~(Results~~for the purpose of ~~Operations and Financial Condition), regarding~~furnishing our financial results for the fiscal quarter ended ~~June 29,~~December 31, 2003.

Report on Form 8-K filed January 26, 2004 under Item 5, Item 7 and Item 9, regarding our intention to file a registration statement on behalf of certain selling stockholders.

Report on Form 8-K filed January 26, 2004 under Item 7 and Item 12, for the purpose of furnishing our financial results for the fiscal quarter ended December 31, 2003.


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


		For the quarterly period ended ~~September~~March 28, ~~2003.~~2004.

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


		For the transition period from to


Delaware		~~77-0419172~~
(State or other jurisdiction of incorporation or organization)		77-0419172 (IRS Employer Identification No.)

4500 Great America Parkway, Santa Clara, California		~~95054~~ ~~(Zip Code)~~
(Address of principal executive offices)		95054 (Zip Code)

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

	*~~The large number of shares eligible for future public sale could cause~~•*		actual or anticipated changes in our growth rates or our competitors’ growth rates;

	•		conditions in the financial markets in general or changes in general economic conditions;

	•		our ability to raise additional capital; and

	•		changes in stock ~~price to decline.~~market analyst recommendations regarding our common stock, other comparable companies or our industry generally.


Exhibit
Number		Description

	31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	~~31.2~~
31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	~~32.1~~
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~~and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


		NETGEAR, INC.
		Registrant


		/s/ JONATHAN R. MATHER

		Jonathan R. Mather
		Executive Vice President and Chief Financial Officer


			September 28,			December 31,
			2003			2002

ASSETS
Current assets:
	Cash and cash equivalents		$	75,673		$	19,880
	Accounts receivable, net			58,790			42,492
	Inventories			33,430			24,774
	Deferred income taxes			9,772			—
	Prepaid expenses and other current assets			5,598			3,003

		Total current assets		183,263			90,149
	Property and equipment, net			3,302			3,144
	Goodwill, net			558			558

		Total assets	$	187,123		$	93,851

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	20,673		$	10,628
	Payable to related parties			4,658			13,687
	Accrued employee compensation			2,955			3,375
	Other accrued liabilities			26,014			29,419
	Deferred revenue			2,216			5,059
	Income taxes payable			837			934
	Note payable to Nortel Networks			—			13,294

		Total current liabilities		57,353			76,396

Commitments
Redeemable convertible preferred stock				—			48,052

Stockholders’ equity (deficit):
	Common stock			28			—
	Additional paid-in capital			163,839			12,810
	Deferred stock-based compensation			(4,852	)		(4,997	)
	Accumulated deficit			(29,245	)	$	(38,410	)

		Total stockholders’ equity (deficit)		129,770			(30,597	)

		Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	187,123		$	93,851



				Three Months Ended						Nine Months Ended

				September 28,			September 29,			September 28,			September 29,
				2003			2002			2003			2002

Net revenue				$	75,785		$	64,362		$	212,494		$	165,428

Cost of revenue:
	Cost of revenue				54,691			48,188			153,826			124,199
	Amortization of deferred stock-based compensation				46			22			77			108

		Total cost of revenue			54,737			48,210			153,903			124,307

Gross profit					21,048			16,152			58,591			41,121

Operating expenses:
	Research and development				2,079			2,378			5,977			4,878
	Sales and marketing				12,419			8,456			35,086			23,445
	General and administrative				2,356			2,113			6,037			5,665
	Amortization of deferred stock-based compensation:
		Research and development			135			51			334			231
		Sales and marketing			227			59			515			247
		General and administrative			108			130			357			497

			Total operating expenses		17,324			13,187			48,306			34,963

Income from operations					3,724			2,965			10,285			6,158
Interest income					123			32			176			98
Interest expense					(170	)		(339	)		(901	)		(883	)
Extinguishment of debt					(5,868	)		—			(5,868	)		—
Other income (expense), net					(95	)		73			(44	)		113

Income (loss) before income taxes					(2,286	)		2,731			3,648			5,486
Provision (benefit) for income taxes					1,664			385			(5,517	)		771

Net income (loss)					(3,950	)		2,346			9,165			4,715
Deemed dividend on Preferred Stock					—			—			—			(17,881	)

Net income (loss) attributable to common stockholders				$	(3,950	)	$	2,346		$	9,165		$	(13,166	)

Net income (loss) per share attributable to common stockholders:
	Basic			$	(0.15	)	$	0.12		$	0.42		$	(0.61	)

	Diluted			$	(0.15	)	$	0.10		$	0.35		$	(0.61	)

Weighted average shares outstanding for net income (loss) per share:
	Basic				25,684			20,234			21,957			21,504

	Diluted				25,684			22,519			25,851			21,504


	Nine Months
	Ended			Year Ended
	September 28,			December 31,
	2003			2002

Balance as of beginning of the period	$	8,941		$	4,720
Provision for warranty liability for sales made during the period		9,530			12,587
Settlements made during the period		(9,089	)		(8,366	)

Balance as of end of the period	$	9,382		$	8,941



		Three Months Ended
		September 28, 2003

		Common Stock			Preferred Stock

Basic and diluted net loss per share:
	Apportioned net loss	$	(2,890	)	$	(1,060	)

	Total numerator for basic and diluted net loss per share	$	(2,890	)	$	(1,060	)

	Weighted average basic and diluted shares outstanding		18,793			6,891

Basic and diluted net loss per share		$	(0.15	)	$	(0.15	)



		Three Months Ended
		September 29, 2002

		Common Stock			Preferred Stock

Basic net income per share:
	Apportioned net income				$	2,346

	Total numerator for basic net income per share				$	2,346

	Weighted average basic shares outstanding					20,234

Basic net income per share		$	0.12	(A)	$	0.12


~~(A)~~	~~As described above, these amounts represent the amount of net income (loss) which would be apportioned to one share of common stock.~~


	Less than		1-3
Contractual Obligations	1 Year		Years		Total

Operating leases	$	1,116	$	486	$	1,602
Purchase obligations		25,002				25,002

	$	26,118	$	486	$	26,604


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

	•		changes in the terms of our contracts with customers or suppliers;

	•		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;

	•		changes in or consolidation of our sales ~~channel~~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;

	•		our inability to accurately forecast our contract manufacturing needs;

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

•	~~increases~~	an increase in price protection claims, redemptions of marketing rebates, product warranty returns ~~and reserves~~or allowance for doubtful accounts;

•	~~our inability to estimate rebate volumes and redemption rates;~~

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

•		seasonal patterns ~~including a~~of higher ~~concentration of~~ sales during the second half of our fiscal ~~year.~~year, particularly retail-related sales in our fourth quarter.


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

	•		negative publicity and damage to our reputation and brand;

	•		decline in the average selling price of our products; and

	•		adverse reactions in our sales channel, such as reduced shelf space or reduced online product visibility.


	We rely on a limited number of wholesale distributors and direct customers 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.


	*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.*


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


	•		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.


	If we are unable to provide our third-party contract manufacturers an 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.


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


	*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.*


	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 sell technologically advanced products would be limited.


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


	*We could become subject to litigation, including litigation regarding intellectual property rights, which could be costly and subject us to significant liability.*


	*~~We intend to expand our operations and infrastructure, which may strain our operations and increase our operating~~ expenses.*


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


	~~If we lose the services of our chairman and chief executive officer,~~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.


	*Natural disasters, mischievous actions or terrorist attacks could delay our ability to receive or ship our products, or otherwise disrupt our business.*

	•		authorization of the issuance of “blank check” preferred stock without the need for stockholder approval;

	•		elimination of the ability of stockholders to call special meetings of stockholders or act by written consent; and

	•		advance notice requirements for proposing matters that can be acted on by stockholders at stockholder meetings.


~~Item 2.~~	~~Changes in Securities and Use of Proceeds~~ *Item 6.Exhibits and Reports onForm 8-K*.