As filed with the Securities and Exchange Commission on July 30, 2003March 5, 2004
Registration No. 333-104419333-               


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


AMENDMENT NO. 6 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


NETGEAR, Inc.

(Exact name of Registrant as specified in its charter)


     
Delaware 3577 77-0419172
(State or other jurisdiction of
incorporation or organization)
 (Primary Standard Industrial
Classification Code Number)
 (I.R.S. Employer
Identification Number)

NETGEAR, Inc.

4500 Great America Parkway
Santa Clara, California 95054
(408) 907-8000
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)


Patrick C.S. Lo

Chairman and Chief Executive Officer
NETGEAR, Inc.
4500 Great America Parkway
Santa Clara, California 95054
(408) 907-8000
(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

   
John T. Sheridan, Esq.
John B. Turner, Esq.
Virginia E. Rosas, Esq.
Michael Post, Esq.
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
(650) 493-9300
 Patrick A. Pohlen, Esq.
Laura I. Bushnell, Esq.
Latham & Watkins LLP
135 Commonwealth Drive
Menlo Park, California 94025
(650) 328-4600


    Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

    If any of the securities being registered on this Form are beingto be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.    o
    If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
    If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
    If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
    If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o


CALCULATION OF REGISTRATION FEE

         


Title of Each ClassAmountProposed MaximumProposed MaximumAmount of
of Securities toto beOffering PriceAggregateRegistration
be RegisteredRegistered(1)Per ShareOffering Price(2)Fee

Common Stock par value $0.001 10,350,000 shares $14.975(2) $154,991,250 $19,638


(1) Includes 1,350,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933.


    The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any statejurisdiction where the offer or sale is not permitted.

Subject to Completion, dated July 30, 2003March 5, 2004

PROSPECTUS

7,000,0009,000,000 Shares

NETGEAR LOGO

Common Stock


WeThe selling stockholders named in this prospectus are offering 7,000,000selling 9,000,000 shares of our common stock in this initial public offering. No public market currently exists for our common stock. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

Our common stock has been approved for quotationshares are quoted on the Nasdaq National Market under the symbol “NTGR,“NTGR.subject to official noticeOn March 5, 2004, the last sale price of issuance. We anticipate thatour common stock as reported on the initial public offering price will be between $10 and $12Nasdaq National Market was $14.80 per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 6.5.

         
Per ShareTotal


Public Offering Priceoffering price $   $  
Underwriting Discountdiscount $   $  
Proceeds to NETGEARthe selling stockholders (before expenses) $   $  

WeThe selling stockholders have granted the underwriters a 30-day option to purchase up to 1,050,000an aggregate of 1,350,000 additional shares of common stock aton the public offering price less the underwriting discountsame terms as set forth above to cover over-allotments.over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about                     , 2003.2004.


LEHMAN BROTHERS
  MERRILL LYNCHGOLDMAN, SACHS & CO.
  UBS INVESTMENT BANKNEEDHAM & COMPANY, INC.
PACIFIC GROWTH EQUITIES, LLC
JMP SECURITIES

                        , 20032004


(NETWORK PRODUCT PHOTOS)

[NETGEAR logo with the caption: “Small Business Networking, Ethernet Switches, Secure Virtual Private Network Firewalls, Business Wireless Local Area Network” and photographs of four small business networking products. the caption: “home networking, shared broadband internet access, telecommuting, home wireless local area network” follows, accompanied by photographs of four home networking products.]


TABLE OF CONTENTS

PROSPECTUS SUMMARY
The Offering
RISK FACTORS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
MARKET PRICE OF COMMON STOCK
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL AND SELLING STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITING
NOTICE TO CANADIAN RESIDENTS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND ADDITIONAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 13. Other Expenses of Issuance and Distribution.
Item 14. Indemnification of Officers and Directors.
Item 15. Recent Sales of Unregistered Securities.
Item 16. Exhibits and Financial Statement Schedules.
Item 17. Undertakings.SIGNATURES
SIGNATURESEXHIBIT INDEX
EXHIBIT 1.1
EXHIBIT 5.1
EXHIBIT 23.1
EXHIBIT 23.323.2
EXHIBIT 99.1


TABLE OF CONTENTS

     
Page

Prospectus Summary  1 
The Offering  3 
Risk Factors  65 
Special Note Regarding Forward-Looking Statements  1615 
Use of Proceeds  1716
Market Price of Common Stock16 
Dividend Policy  1716 
Capitalization  18
Dilution2017 
Selected Consolidated Financial Data  2218 
Management’s Discussion and Analysis of Financial Condition and Results of Operations  2520 
Business  4238 
Management  5450 
Certain Relationships and Related Transactions  6660 
Principal and Selling Stockholders  6964 
Description of Capital Stock  7267 
United States Federal Income Tax Consequences to Non-United States Holders  7670 
Shares Eligible for Future Sale  7872 
Underwriting  8074
Notice to Canadian Residents77 
Legal Matters  8479 
Experts  8479 
Where You Can Find Additional Information  8580 
Index to Consolidated Financial Statements  F-1 


     Until                     , 2003, 25 days afterYou should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy shares in any jurisdiction where such offer or any sale of shares would be unlawful. The information in this prospectus is complete and accurate only as of the date on the front cover regardless of the time of delivery of this offering, all dealers that effect transactions in our shares, whetherprospectus or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.of any sale of shares.


(This page intentionally left blank)

 


PROSPECTUS SUMMARY

     This summary highlights key aspects of the information contained elsewhere in this prospectus. This summaryprospectus and does not contain all of the information you should consider before investing in our common stock.making your investment decision. You should read this entire prospectus carefully, especiallysummary together with the risks of investingmore detailed information, including our financial statements and related notes, elsewhere in our common stock discussed under “Risk Factors.”this prospectus.

NETGEAR, Inc.

     We design, develop and market technologically advanced, branded networking products that address the specific needs of small business and home users. We supply networking products that meet the ease-of-use, quality, reliability, performance and affordability requirements of these users. Our suite of approximately 100 products enables users to share Internet access, peripherals, files, digital multimedia content and applications among multiple personal computers and other Internet-enabled devices.

     Since our inception in 1996, we have been focused solely on the networking needs of the small business, which we define as businesses with fewer than 250 employees, and home markets, and we have shipped over 1722 million units. As a result of our brand name, the implementation of our operating strategy and the growth in demand for networking products within small businesses and homes, we have achieved net revenue growth in each year since our inception, reaching $237.3$299.3 million in net revenue for 2002.2003. In 2002,2003, we had net income of $8.1$13.1 million. As a result of a deemed dividend on preferred stock of $17.9 million recorded during 2002, we had a net loss attributable to common stockholders of $9.7 million for the year. We had net income of $1.6 million for the three months ended March 30, 2003. We have operated at a net loss for threetwo of the last five years and our accumulated deficit as of March 30,December 31, 2003, was $36.8$25.3 million. Continued growth and profitability of our business will depend on many factors, including growth in demand for networking products by small business and home users.

     Our net revenue is balanced worldwide, with 63%58% of our 20022003 net revenue derived from sales in the United StatesNorth America and 37%42% derived from international sales. Our global sales channel network includes traditional retailers with over 2,8003,700 retail locations in North America, including Best Buy, CompUSA and Staples, and over 2,5003,300 international retail locations such as PC World in the United Kingdom and MediaMarkt in Germany and Austria, as well as online retailers such as Amazon.com and Buy.com. In addition, we sell our products both domesticallyin North America and internationally through direct market resellers such as CDW and MicroWarehouse,Corporation, and thousands of value added resellers. We are also increasingly selling our products through broadband service providers such as Time-Warner Cable and Telewest UK.Comcast Cable Communications. In 2002,2003, sales to our largest distributors, Ingram Micro, Inc. and Tech Data Corporation, and their affiliates, accounted for approximately 52%46% of our net revenue.

     A number of factors are driving increased demand for networking products within small businesses and homes, including the need to share information, broadband Internet access and resources among multiple users and devices. Users are also demanding the convenience and flexibility of wireless networking and are increasingly focused on the security of their network connections. Our networking products for the small business and home markets are classified into the following three categories:

     Ethernet networking products, including switches (multiple port devices used to network personal computers and peripherals); network interface cards, or network adapters, and bridges (devices that connect personal computers and other equipment to a network); and peripheral servers such as print servers (devices that manage printing on a network).

     Broadband products, including routers (intelligent devices used to connect two networks together, such as a local area network and the Internet), gateways (a router with an integrated modem for Internet access), and products that include an integrated wireless access point such as a wireless gateway.

     Wireless networking products, including access points (devices that provide a wireless link between the wired network and wireless devices), wireless network interface cards, or network adapters, and media adapters and bridges (devices that wirelessly connect personal computers, stereos, TVs and other equipment to a network).

1


     We believe that our products meet the specific needs of small business and home users and that we have the following competitive strengths:

 • Reliable, easy-to-use, affordable products. Our networking products are easy to install, use and maintain, and satisfy the budgetary requirements of small business and home users.
 
 • Broad product offering. We offer a broad range of networking products for small business and home users for use in a variety of networking environments, including traditional Ethernet cabling and wireless.
 
 • Global channel presence.We sell our products in North America, Europe, Middle-East, and Africa, or EMEA, and Asia Pacific through an extensive sales channel network, which includes traditional retailers, online retailers, direct market resellers, value added resellers and broadband service providers.
 
 • History of product innovation. We have a history of introducing new technologies to the small business and home markets. We believe our experience, market presence and global reach enable us to identify trends in product demand and rapidly introduce products to meet that demand.
 
 • Operational discipline. We work closely with our component vendors as well as our design and manufacturing partners in China and Taiwan to bring products to market quickly, minimize product costs and ensure product quality. In addition, we maintain operational discipline over product development and supply chain and channel inventory management.

     Our suite of products areis designed specifically to meet the needs of the small business and home markets, including tailored component specifications, physical characteristics, and hardware and software features.

Corporate Information

     We were incorporated in Delaware on January 8, 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 NA Inc. purchased Bay Networks, and we remained a wholly-owned subsidiary of Nortel Networks until March 2000, when we sold a portion of our capital stock to a third party. In September 2000, Nortel Networks sold a portion of its ownership interest in NETGEAR to third parties. In February 2002, Nortel Networks sold all of its remaining ownership interest to us in exchange for cash, non-cash consideration and a $20.0 million promissory note, which we intend to repay upon the completion of this offering.1996. Our principal executive offices are located at 4500 Great America Parkway, Santa Clara, California 95054, and our telephone number is (408) 907-8000. We maintain a web site at www.NETGEAR.com. The reference to our web address does not constitute incorporation by reference of the information contained at this site.

     NETGEAR is a registered trademark of ours. Other trademarks and trade names appearing in this prospectus are the property of their respective holders.


     You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy shares in any jurisdiction where such offer or any sales of shares would be unlawful. The information in this prospectus is complete and accurate only as of the date of the front cover regardless of the time of delivery of this prospectus or of any sale of shares. In this prospectus, the “Company,“company,” “NETGEAR,” “we,” “us” and “our” refer to NETGEAR, Inc., a Delaware corporation, and its consolidated subsidiaries.

2


The Offering

 
Common stock offered by NETGEARthe selling stockholders7,000,0009,000,000 shares
 
Common stock to be outstanding after this offering27,228,48029,654,777 shares
Nasdaq National Market symbol
NTGR
 
Use of proceedsWe intend to use $20.0 millionwill not receive any of the net proceeds from this offering to repay our outstanding subordinated unsecured convertible promissory note payable to Nortel Networks. We expect to use the remainder of the net proceeds for general corporate purposes, including working capital, sales and marketing expenses, research and development expenses, general and administrative expenses, capital expenditures, and possible joint ventures with, investments in, or acquisitions of businesses, products or technologies that complement our business. See “Use of Proceeds.”
Proposed Nasdaq National Market symbol
NTGRoffering.

     The number of shares of common stock that will be outstanding after this offering is based on the number of shares of common stock outstanding on March 30, 2003February 20, 2004, and excludes:

 • 6,436,8175,301,622 shares of common stock subject to stock options outstanding as of March 30, 2003,February 20, 2004, with a weighted average exercise price of $4.76$5.98 per share;
 
 • 218,750 shares of common stock subject to a warrant outstanding as of March 30, 2003, with an exercise price of $1.29 per share; and
• 956,9331,305,674 shares of common stock available for future grant or issuance under our stock plan as of March 30, 2003.February 20, 2004; and
• 500,000 shares of common stock available for future grant or issuance under our employee stock purchase plan as of February 20, 2004.

     As of February 20, 2004, the selling stockholders held 59.9% of our outstanding common stock. After giving effect to this offering and assuming no exercise of the underwriters’ over-allotment option, the selling stockholders will own approximately 29.5% of our outstanding common stock.

     Unless otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise the over-allotment option that the selling stockholders have granted them to purchase additional shares in this offering, and that all of our outstanding redeemable convertible preferred stock is converted into common stock on a 1-for-1 basis uponas described in the closing“Underwriting” section of this offering. The share and per share amounts presented in this prospectus have been retroactively restated to give effect to a 1.75-for-1 split of our capital stock to be effected prior to the completion of this offering.prospectus.

3


Summary Consolidated Financial Data

     The following tables summarize consolidated financial data regarding our business and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

                                  
Three MonthsYear Ended December 31,
Ended
(unaudited)19992000200120022003
Year Ended December 31,






March 31,March 30,
199920002001200220022003(in thousands, except per share data)






(in thousands, except per share data)
Consolidated Statement of Operations Data:
 
Consolidated Statement of Operations:
Consolidated Statement of Operations:
 
Net revenue(1)Net revenue(1) $111,856 $176,663 $192,440 $237,331 $45,528 $67,706 Net revenue(1) $111,856 $176,663 $192,440 $237,331 $299,302 
Gross profit(1) 20,591 31,132 19,645 60,215 10,777 18,471 
Gross profitGross profit 20,591 31,132 19,645 60,215 83,842 
Income (loss) from operationsIncome (loss) from operations (6,474) 4,752 (15,303) 10,612 689 3,236 Income (loss) from operations (6,474) 4,752 (15,303) 10,612 16,037 
Net income (loss)Net income (loss) (6,544) 2,654 (19,484) 8,139 537 1,612 Net income (loss) (6,544) 2,654 (19,484) 8,139 13,097 
Deemed dividend on preferred stockDeemed dividend on preferred stock  (2,601)  (17,881) (17,881)  Deemed dividend on preferred stock  (2,601)  (17,881)  
 
 
 
 
 
 
   
 
 
 
 
 
Net income (loss) attributable to common stockholders:Net income (loss) attributable to common stockholders: $(6,544) $53 $(19,484) $(9,742) $(17,344) $1,612 Net income (loss) attributable to common stockholders: $(6,544) $53 $(19,484) $(9,742) $13,097 
 
 
 
 
 
 
   
 
 
 
 
 
Net income (loss) per share attributable to common stockholders:Net income (loss) per share attributable to common stockholders: Net income (loss) per share attributable to common stockholders: 
Basic $(0.25) $0.00 $(0.66) $(0.46) $(0.72) $0.08 Basic $(0.25) $0.00 $(0.66) $(0.46) $0.55 
 
 
 
 
 
 
   
 
 
 
 
 
Diluted $(0.25) $0.00 $(0.66) $(0.46) $(0.72) $0.07 Diluted $(0.25) $0.00 $(0.66) $(0.46) $0.49 
 
 
 
 
 
 
   
 
 
 
 
 
Pro forma net income per share(2): 
Basic $0.38 $0.08 
 
 
 
Diluted $0.36 $0.07 
 
 
 


(1) On January 1, 2000, we adopted Emerging Issues Task Force, or EITF, Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products,” and as a consequence, record cooperative marketing costs as a reduction in net revenue. Prior to January 1, 2000, it was not practical for us to determine the amount of cooperative marketing costs to record as a reduction of net revenue, and such amounts were included as sales and marketing expense.
(2) Pro forma basic and diluted net income per share is presented for 2002 and three months ended March 30, 2003 to reflect per share data assuming the automatic conversion of all outstanding shares of preferred stock into common stock, which will occur upon the closing of a qualified initial public offering, as if the conversion had taken place at the beginning of the year, or at the date of issuance, if later. Basic pro forma per share data for 2002 was calculated by dividing net loss attributable to common stockholders, adding back the deemed dividend on preferred stock, by 21.1 million which is the weighted average number of shares of common stock into which the Preferred Stock outstanding during the period was convertible. Diluted pro forma net income per share data for 2002 was calculated the same as basic pro forma net income per share except that the denominator was adjusted to 22.5 million shares to include weighted average potential common shares (representing warrants and stock options) outstanding during the period. Anti-dilutive common stock options amounting to 652,428 were excluded from the weighted average shares outstanding for the diluted per share calculation. For the three months ended March 30, 2003, pro forma basic and diluted income per share did not differ from actual basic and diluted income per share.
     
December 31, 2003

(in thousands)
Consolidated Balance Sheet Data:
    
Cash, cash equivalents and short-term investments $73,605 
Working capital  130,755 
Total assets  205,146 
Total current liabilities  70,207 
Total stockholders’ equity  134,939 

4


             
March 30, 2003 (unaudited)

Pro Forma
ActualPro Formaas Adjusted



(in thousands)
Consolidated Balance Sheet Data:
            
Cash and cash equivalents $21,755  $21,755  $71,165 
Working capital  15,503   15,503   64,913 
Total assets  101,416   101,416   150,826 
Total current liabilities  82,017   82,017   68,362 
Redeemable convertible preferred stock  48,039       
Total stockholders’ equity (deficit)  (28,640)  19,399   82,464 

     Pro forma amounts give effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into common stock upon the closing of this offering.

     Pro forma as adjusted amounts give effect to the issuance and sale of shares of our common stock at an assumed initial public offering price of $11.00 per share, and the receipt and application of the net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, and the repayment of a $20.0 million note payable to Nortel Networks (which is carried at its net present value of $13.7 million) and the incurrence of a related extinguishment of debt charge of approximately $6.3 million, as set forth under “Use of Proceeds” and “Capitalization.”

Recent Developments

     The following are our unaudited results for the quarter ended June 29, 2003, however we have not finalized our financial statements for this period. When actual results of operations are finalized, it is possible that the results will vary from the amounts set forth below. For the quarter ended June 29, 2003, our net revenue was $69.0 million. For this period, our gross profit was $19.1 million, with a gross margin of 27.6%. Our income from operations for the quarter ended June 29, 2003 was $3.3 million, which included amortization of deferred stock-based compensation of $422,000.

     This information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. Please see page 33 of this prospectus for selected quarterly results of operations for the quarter ended June 30, 2002 as well as our other past eight quarters.

5


RISK FACTORS

     You should carefully consider the following information about the risks described below, together with the financial and other information contained in this prospectus, before you decide to buy our common stock.

Risks Related to Our Business and Industry

We expect our operating results to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate andor 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. As we implement our growth strategy, our expenditures may become significantly higher than our historical costs. We may not generate revenue sufficient to offset these expenditures or adjust spending in a timely manner to respond to any unanticipated decline in our revenue. If we are unable to manage our growth, we may experience significant losses on a quarterly and annual basis. As of December 31, 2002, we had an accumulated deficit of $38.4 million. Although we achieved net income of $2.7 million in 2000, we incurred a net loss of $19.5 million in 2001, before returning to profitability in 2002, with net income of $8.1 million for the year (although a deemed dividend on preferred stock resulted in a net loss attributable to common stockholders of $9.7 million for 2002). 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.impacted and the price of our stock could decline. Other factors that could affect our quarterly and annual operating results include those listed in this “Risk Factors” section of this prospectus 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 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;
 
 • increasesan increase in price protection claims, redemptions of marketing rebates, product warranty returns and reservesor allowance for doubtful accounts;
 
 • 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 aof 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 result in our being the target of a securities class action lawsuit.

6


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 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

5


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, Cisco Systems, Inc., Dell Computer Corporation, D-Link Systems, Inc., Hewlett-Packard Company, The Linksys Group (recently acquired bydivision of Cisco Systems)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 recently 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.

7


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 averageoverall 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

6


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 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, 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 toAny 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.

8


     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 telecommunications carriers, our business could be harmed.

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.

     We sell a substantial portion of our products through wholesale distributors, including Ingram Micro, Inc. and Tech Data Corporation. During 2002,2003, sales to Ingram Micro and its affiliates accounted for 32%31% of our net revenue and sales to Tech Data and its affiliates accounted for 20%15% of our net revenue. We expect that a significant portion of our net revenue will continue to come from sales to a small number of wholesale

7


distributors for the foreseeable future. In addition, because our accounts receivable are concentrated with a small group of wholesale distributors,purchasers, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow. We have no minimum purchase commitments or long-term contracts with any of these distributors. The wholesale distributorsThese purchasers could decide at any time to discontinue, decrease or delay their purchases of our products. In addition, the prices that wholesale distributorsthey pay for our products are subject to negotiation and could change at any time. If any of our major wholesale distributors reduce their level of purchases or refuse to pay the prices that we set for our products, our net revenue and operating results could be harmed. If our wholesale distributors increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demands would be compromised.

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

     If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with our wholesale distributors and within our sales channel, we may incur increased and unexpected costs associated with this inventory. We currently have particularly limited visibility as to the inventory levels of our international wholesale distributors and sales channel. We generally allow wholesale distributors and traditional retailers to return a limited amount of our products in exchange for other products. Under our price protection policy, if we reduce the list price of a product, we are often required to issue a credit in an amount equal to the reduction for each of the products held in inventory by our wholesale distributors and retailers. If our wholesale distributors and retailers are unable to sell their inventory in a timely manner, we might lower the price of the products, or these parties may exchange the products for newer products. If we improperly forecast demand for our products we could end up with too many products and be unable to sell the excess inventory in a timely manner, if at all, or, alternatively we could end up with too few products and not be able to satisfy demand. This problem is exacerbated because we attempt to closely match inventory levels with product demand leaving limited margin for error. If these events occur, we could incur increased expenses associated with writing off excessive or obsolete inventory or lose sales and therefore suffer declining gross margins.

9


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.

     All of our products are manufactured, assembled, tested and packaged by a limited number of original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs. In recent years, mostSubstantially all of our products have beenare manufactured by Ambit Microsystems, Cameo Communications Corporation, Delta Networks, Inc., Cameo Communications Corporation, Lite-On Technology Corporation, SerComm Corporation and Z-Com, Inc. We rely on our contract manufacturers to procure components and, in some cases, subcontract engineering work. Some of our products are manufactured by a single contract manufacturer. We do not have any long-term contracts with any of our third-party contract manufacturers. Some of these third-party contract manufacturers produce products for our competitors. The loss of the services of any of our primary third-party contract manufacturers could cause a significant disruption in operations and delays in product shipments. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming.

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

 • unexpected increases in manufacturing and repair costs;
 
 • inability to control the quality of finished products;
 
 • inability to control delivery schedules; and
 
 • potential lack of adequate capacity to manufacture all or a part of the products we require.

     All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our ODM and OEM contract manufacturers are primarily responsible for

8


obtaining most regulatory approvals for our products. If our ODMs and OEMs fail to obtain timely domestic or foreign regulatory approvals or certificates, we would be unable to sell our products and our sales and profitability could be reduced, our relationships with our sales channel could be harmed, and our reputation and brand would suffer.

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.

     We provide our third-party contract manufacturers with a rolling forecast of demand, which they use to determine our material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and demand and supply for a component at a given time. Some of our components have long lead times, such as local access network repeaters, switching fabric chips, physical layer transceivers, connector jacks and metal and plastic enclosures. If our forecasts are less than our actual requirements, our contract manufacturers may be unable to manufacture products in a timely manner. If our forecasts are too high, our contract manufacturers will be unable to use the components they have purchased on our behalf. The cost of the components used in our products tends to drop rapidly as volumes increase and the technologies mature. Therefore, if our contract manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an over supply of higher-priced components. Moreover, if they are unable to use components ordered at our direction, we will need to reimburse them for any losses they incur.

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 are highly dependent upon the transportation systems we use to ship our products, including surface and air freight. Our attempts to closely match our inventory levels to our product demand intensifiesintensify the need for our transportation systems to function effectively and without delay. The transportation network is subject

10


to disruption from a variety of causes, including labor disputes or port strikes, acts of war or terrorism and natural disasters. For example, in September 2002, a major strike disrupted ports on the West Coast, which halted the transportation of our product shipments, resulting in our inability to meet some customer orders in a timely manner. Labor disputes among freight carriers are common, especially in Europe, Middle East and Africa, or EMEA, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. Since September 11, 2001, the rate of inspection of international freight by governmental entities has substantially increased, and has become increasingly unpredictable. If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time would be materially adversely affected and result in delayed or lost revenue. In addition, if the recent increases in fuel prices were to continue, our transportation costs would likely further increase. Moreover, the cost of shipping our products by air freight is greater than other methods. From time to time in the past, we have shipped products using air freight to meet unexpected spikes in demand or to bring new product introductions to market quickly. If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost of freight could severely disrupt our business and harm our operating results.

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

     Any shortage or delay in the supply of key product components would harm our ability to meet scheduled product deliveries. Many of the semiconductors used in our products are specifically designed for use in our products and are obtained from sole source suppliers on a purchase order basis. In addition, some components that are used in all our products are obtained from limited sources. These components include connector jacks, plastic casings and physical layer transceivers. We also obtain switching fabric semiconductors, which are used in our Ethernet switches and Internet gateway products, from a limited number of suppliers. Our contract manufacturers purchase these components on our behalf on a purchase

9


order basis, and we do not have any contractual commitments or guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain an adequate number of that component in a timely manner. In addition, if our suppliers experience financial or other difficulties or if worldwide demand for the components they provide increases significantly, the availability of these components could be limited. It could be difficult, costly and time-consuming to obtain alternative sources for these components, or to change product designs to make use of alternative components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in component availability that would have a significant impact on our ability to fulfill orders for our products. If we are unable to obtain a sufficient supply of components, or if we experience any interruption in the supply of components, our product shipments could be reduced or delayed. This would affect our ability to meet scheduled product deliveries, damage our brand and reputation in the market, and cause us to lose market share.

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.

     We rely on third parties to obtain non-exclusive patented hardware and software license rights in technologies that are incorporated into and necessary for the operation and functionality of our products. Because the intellectual property we license is available from third parties, barriers to entry may be lower than if we owned exclusive rights to the technology we license and use. On the other hand, if a competitor or potential competitor enters into an exclusive arrangement with any of our key third-party technology providers, our ability to develop and sell products containing that technology would be severely limited. Our licenses often require royalty payments or other consideration to third parties. Our success will depend in part on our continued ability to have access to these technologies, and we do not know whether these third-party technologies will continue to be licensed to us on commercially reasonableacceptable terms or at all. If we are unable to license the necessary technology, we may be forced to acquire or develop alternative technology of lower quality or performance standards. This would limit and delay our ability to offer competitive products and increase our costs of production. As a result, our margins, market share, and operating results could be significantly harmed.

11


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

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

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

     The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent,infringement of patents, trade secretsecrets and other intellectual property rights. In particular, leading companies in the data communications markets, some of which are competitors, have extensive patent portfolios with respect to networking technology. From time to time, third parties,

10


including these leading companies, have asserted and may continue to assert exclusive patent, copyright, trademark and other intellectual property rights against us, and demanddemanding license or royalty payments or seeking payment forof damages, seek injunctive relief and pursue other remedies. Whileavailable legal remedies through litigation. Although there is currently no intellectual property litigation pending against us, we could become subject to lawsuits in the future in connection withand be forced to defend against claims brought by third parties who allege that we have infringedinfringement of their intellectual property rights. We are currently engaged in discussions withThese include third parties such aswho claim to own patents or other intellectual property that cover industry standards that our products comply with. From time to time we are contacted by third parties that allege we are wrongfully using their intellectual property. For example, we have been contacted by Cactus Services, Inc., CSIRO, Fujitsu, ipValue, Motorola, Network-1 Security Solutions and Vertical Networks, who areeach of which is seeking royalties or compensation from us in exchange for alleged intellectual property infringement. Several of these parties claim that we need to acquire a license to usebecause our products allegedly infringe on their technology, which they believe we are using inintellectual property by virtue of the fact that our products.products comply with various industry-wide standards. If we are unable to resolve these matters or obtain licenses on acceptable or commercially reasonable terms, we could be sued. For example, Vertical Networks has alleged thatThe cost of any necessary licenses could significantly harm our IEEE 802.3 standard compliant products, as well as somebusiness, operating results and financial condition. Also, at any time, any of our wireless products, use the subject matter of one or more claims in their patent portfolios. Although we are engaged in good faith discussions with Vertical Networks, they,these companies, or any other of these third parties,third-party could initiate litigation against us, at any time, which could divert management attention, be costly to defend, prevent us from using or selling the challenged technology, require us to design around the challenged technology and cause the price of our stock to decline. In addition, third parties, some of which are potential competitors, may initiate litigation against our manufacturers, suppliers or members of our sales channel, alleging infringement of their proprietary rights with respect to existing or future products. In the event of a successful claimclaims of infringement are brought by third parties, and our failureif we are unable to obtain commercially acceptable licenses or inability to license or independently develop alternative technology on a timely basis, we may be subject to an indemnification obligation or unable to offer competitive products, our product portfolio wouldand be limited, and we would experiencesubject to increased expenses. As a result, our business, operating results and financial condition could be significantly harmed.

12


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

     Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new versions are released. 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. Some errors and defects may be discovered only after a product has been installed and used by the end user. 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 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 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, there could be unanticipated interruptions in our business operations as a result of implementing these changes that could result in loss or delay in revenue causing an adverse effect on our financial results.

11


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

     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.China, Italy, Japan, Spain and Sweden. 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.

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

     International sales comprise a significant amount of our overall net revenue. International sales were 33% of our net revenue in 2000, 37% in each of 2001 and 2002 and 46%42% in the quarter ended March 30, 2003. 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.

     International operations are subject to a number of other risks, including:

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

     The recent outbreak of severe acute respiratory syndrome, or SARS, may have a negative impact on our operations. Our operations may be impacted by a number of SARS-related factors, including, but not limited

13


to, disruptions at our third-party manufacturers, which are primarily located in China, reduced sales in our international retail channels and increased supply chain costs. If the number of cases continues to rise or spread to other areas, our international sales and operations could be harmed.

We currently do not engage in any currency hedging transactions. Except for sales to Japan and Singapore, our foreigninternational sales are currently invoiced in United States dollars. Nonetheless, as we expand our international operations, we may alloware exploring the option of allowing both invoicing and payment in additional foreign currencies and our exposure to losses in foreign currency transactions may increase. Moreover, the costs of doing business abroad may increase as a result of adverse exchange rate fluctuations. For example, if the United States dollar declined in value relative to a local currency, we could be required to pay more for our expenditures in that market, including salaries, commissions, local operations and marketing expenses, each of which is paid in local currency. In addition, we may lose customers if exchange rate fluctuations, currency devaluations or economic crises increase the local currency price of our products or reduce our customers’ ability to purchase products.

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

     Our future success depends in large part upon the continued services of our key technical, sales, marketing and senior management personnel. In particular, the services of Patrick C.S. Lo, our Chairman and Chief Executive Officer, who has leadled our company since its inception, are very important to our business. All

12


of our executive officers or key employees are at will employees, and we do not maintain any key person life insurance policies. The loss of any of our senior management or other key research, development, sales or marketing personnel, particularly if lost to competitors, could harm our ability to implement our business strategy and respond to the rapidly changing needs of the small business and home markets.

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

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

Risks Related to this Offering

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

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

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

• actual or anticipated fluctuations in our operating results or our competitors’ operating results;
• actual or anticipated changes in 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 market analyst recommendations regarding our common stock, other comparable companies or our industry generally.

The large number of shares eligible for public sale could cause our stock price to decline.

     A small number of stockholders own a substantial number of shares of our stock. Many of our largest holders will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Moreover, substantially all of the common stock issued upon exercise of options under our stock option plans and employee stock purchase plan can be freely sold in the public market. If any of these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. Please see “Shares Eligible for Future Sale” for a description of sales that may occur in the future.

13


Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions and may result in a lower trading price for our stock than if ownership of our stock was less concentrated.

     Upon completion of this offering, our executive officers, directors and principal stockholders will beneficially own, in total, approximately 67.8%34.9% of our outstanding common stock. As a result, these stockholders, acting together, willcould have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of control could be disadvantageous to other stockholders with interests different from those of our officers, directors and principal stockholders. For example, our officers, directors and principal

14


stockholders could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders. In addition, this significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Please see “Principal Stockholders” for a more detailed description of our share ownership.

The large numberSome provisions of shares eligible for public sale after this offering could cause our stock price to decline.charter and by-laws may delay or prevent transactions that many stockholders may favor, and may have the effect of entrenching management.

     Our current stockholders hold a substantial number of sharesSome provisions of our common stockcertificate of incorporation and by-laws may discourage, delay or prevent a merger or acquisition that they will be able to sellour stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:

• 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.

     In addition, some provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us. Such provisions of Delaware law and the public market in the near future. A significant portion of these shares are held by a small number of stockholders. Sales by our current stockholders of a substantial number of shares after this offering could significantly reduce the market priceprovisions of our common stock. Moreover, aftercertificate of incorporation may have the effect of entrenching management by making it more difficult to remove directors. See the section of this offering, the holdersprospectus entitled “Description of approximately 20,228,480 shares of common stock, consisting of shares issued upon conversionCapital Stock — Certain Provisions of our preferred stock, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may fileCertificate of Incorporation and Bylaws and Delaware Anti-Takeover Law” for ourselves or other stockholders. We also intend to register all common stock that we may issue under our stock option plans and employee stock purchase plan. Once we registermore detailed information regarding these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in “Underwriting.” If any of these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. Please see “Shares Eligible for Future Sale” for a description of sales that may occur in the future.provisions.

We may apply the proceeds of this offering to uses that do not improve our operating results or increase the value of your investment.

     Upon the closing of this offering we intend to use $20.0 million to repay debt owed to Nortel Networks. We will have broad discretion in how we use the remaining proceeds from this offering, and we may spend these proceeds in ways that do not improve our operating results or increase the value of your investment. You may not have the opportunity to evaluate the economic, financial or other information on which we base our decisions regarding how to use the proceeds from this offering.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

     The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $7.99 in net tangible book value per share from the price you paid, based on the assumed initial offering price of $11.00 per share. The exercise of outstanding options and warrants will result in further dilution. For a further description of the dilution that you may experience immediately after this offering, please see “Dilution.”

1514


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This prospectus includes forward-looking statements.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. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and elsewhere in this prospectus, including, among other things:

 • the future growth of the small business and home markets;
 
 • our business strategies and development plans;
 
 • new products and technologies;
 
 • future operating expenses and financing requirements; and
 
 • competition and competitive factors in the small business and home markets.

     TheseIn light of these risks, are not exhaustive. Other sections ofuncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may include additional factors which could adversely impact our businessnot occur and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results tocould differ materially from those containedanticipated or implied in anythe forward-looking statements.

     You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

1615


USE OF PROCEEDS

     We estimate thatwill not receive any of the net proceeds from the sale of the shares of our common stock in this offering other than reimbursement of certain out-of-pocket expenses of the offering. The selling stockholders will be approximately $69.4 million or approximately $80.2 million if the underwriters exercise their over-allotment option in full, based on the assumed initial public offering price of $11.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us.

     We do not have any specific plans or proposals for the allocationreceive all of the net proceeds from this offering, other than using $20.0 millionoffering. We anticipate the selling stockholders will bear substantially all of the net proceeds from this offeringout-of-pocket expenses of the offering.

MARKET PRICE OF COMMON STOCK

Our common stock has been quoted on the Nasdaq National Market under the symbol “NTGR” since July 31, 2003. Prior to repaythat time, there was no public market for our outstanding subordinated unsecured convertible promissory note payable to Nortel Networks.common stock. The Nortel note would accrue interest at a ratefollowing table sets forth for the indicated periods the high and low sales prices of 7% per year beginningour common stock on February 7, 2005 and would become due and payable on February 7, 2009.the Nasdaq National Market.

          
HighLow


2003
        
 Third Quarter (beginning July 31, 2003) $20.90  $14.00 
 Fourth Quarter $18.73  $12.86 
2004
        
 First Quarter (through March 5, 2004) $20.09  $14.47 

     On March 5, 2004, there were approximately 58 stockholders of record.

STOCK PERFORMANCE GRAPH

     The Nortel note would accelerate and become due and payable, at Nortel’s option, upon ourfollowing graph compares the change in control, as defined in the Nortel note.cumulative total stockholder return on NETGEAR’s common stock during the period from July 31, 2003, the date on which our stock commenced trading on the Nasdaq National Market, through February 20, 2004, with the cumulative total return on the Nasdaq Market Index and the Nasdaq Computer Index. The Nortel note also becomes due and payable, to the extent provided in the Nortel note, upon equity financings such as this offering.comparison assumes reinvestment of dividends, if any.

     We expect to use the remainder of the net proceeds from this offering for general corporate purposes, including:ASSUMES $100 INVESTED ON JULY 31, 2003

ASSUMES DIVIDEND REINVESTED
THROUGH FEBRUARY 20, 2004
             
July 31, 2003December 31, 2003February 20, 2004



NETGEAR, INC $100.00  $114.21  $115.00 
NASDAQ COMPUTER INDEX $100.00  $116.78  $115.49 
NASDAQ MARKET INDEX $100.00  $115.47  $117.46 

Notes:

 A. working capital;The Index level for all series was set to 100.00 on July 31, 2003.
 B. sales and marketing expenses;
• research and development expenses;
• general and administrative expenses;
• capital expenditures; and
• possible joint ventures with, investmentsThe stock price performance shown on the table is not necessarily indicative of future performance. Information used on the graph was obtained from the Nasdaq.com website, a source management believes to be reliable, but we are not responsible for any errors or omissions in or acquisitions of businesses, products or technologies that complement our business.such information.

Although we may use a portion of the net proceeds to enter into joint ventures, investments or acquisitions with respect to businesses, products or technologies that are complementary to our business, we have no current plans in this regard. Pending such uses, we plan to invest the net proceeds in short-term investment grade, interest-bearing securities.

DIVIDEND POLICY

     We have never declared or paid cash dividends on our capital stock. Westock and we currently intend to retain future earnings, if any, to finance the operation and expansion of our business. Therefore,business and we do not anticipate paying cash dividends on our capital stock in the foreseeable future. In addition, if we were to borrow against our existing credit facility, we would be prohibited from paying cash dividends.

1716


CAPITALIZATION

     The following table summarizes our capitalization as of March 30, 2003:

• on an actual basis;
• on a pro forma basis to reflect the conversion of all outstanding shares of redeemable convertible preferred stock on a 1-for-1 basis into 20,228,480 shares of common stock upon the closing of this offering; and
• on a pro forma as adjusted basis to give effect to receipt of the net proceeds from the sale by us in this offering of 7,000,000 shares of common stock at an assumed initial public offering price of $11.00 per share, after deducting the underwriting discount and the estimated offering expenses payable by us, and the application of the net proceeds as described under “Use of Proceeds” and the repayment of the note payable to Nortel Networks as described in footnote (1) below.

December 31, 2003. You should read this table in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The following table sets forth our capitalization as of March 30, 2003:

              
As of March 30, 2003
(unaudited)

Pro Forma
ActualPro FormaAs Adjusted



(in thousands, except share
and per share data)
Cash and cash equivalents $21,755  $21,755  $71,165 
   
   
   
 
Note payable to Nortel Networks(1) $13,655  $13,655  $ 
   
   
   
 
Redeemable convertible preferred stock: $0.001 par value; shares authorized, 40,508,038 actual, 5,000,000 pro forma and pro forma as adjusted            
 Series A, shares designated: 26,250,000;
Shares issued and outstanding: 5,973,557 actual; none pro forma and pro forma as adjusted
  6,624       
 Series B, shares designated: 3,320,538;
Shares issued and outstanding: 3,320,537 actual; none pro forma and pro forma as adjusted
  14,955       
 Series C, shares designated: 10,937,500;
Shares issued and outstanding: 10,934,386 actual; none pro forma and pro forma as adjusted
  26,460       
   
   
   
 
   48,039       
   
   
   
 
Stockholders’ equity (deficit):            
 Common stock: $0.001 par value; shares authorized, 63,656,250 actual, 200,000,000 pro forma and pro forma as adjusted; shares issued and outstanding; none actual, 20,228,480 pro forma and 27,228,480 pro forma as adjusted     20   27 
 Additional paid-in capital  13,111   61,130   130,533 
 Deferred stock-based compensation  (4,953)  (4,953)  (4,953)
 Accumulated deficit  (36,798)  (36,798)  (43,143)
   
   
   
 
Total stockholders’ equity (deficit)  (28,640)  19,399   82,464 
   
   
   
 
Total capitalization $33,054  $33,054  $82,464 
   
   
   
 
      
As of December 31, 2003

(in thousands, except share
and per share data)
Cash, cash equivalents and short-term investments $73,605 
   
 
Total debt   
Preferred stock: $0.001 par value; shares authorized, 5,000,000    
Stockholders’ equity:    
 Common stock: $0.001 par value; shares authorized, 200,000,000; shares issued and outstanding, 28,618,969  28 
 Additional paid-in capital  164,459 
 Deferred stock-based compensation  (4,248)
 Cumulative other comprehensive income  13 
 Accumulated deficit  (25,313)
   
 
Total stockholders’ equity  134,939 
   
 
Total capitalization $134,939 
   
 

18



(1) The $20.0 million note payable to Nortel Networks is carried at its net present value of $13.7 million as of March 30, 2003. We expect to use $20.0 million of the net proceeds from this offering to repay the Nortel note. As a result of this $20.0 million cash payment, we will incur an extinguishment of debt charge of approximately $6.3 million in the quarter in which we make the repayment.

     The table above excludes the following shares:

 • 6,436,8176,561,693 shares of common stock subject to stock options outstanding as of March 30,December 31, 2003, with a weighted average exercise price of $4.76$5.39 per share;
 
 • 218,750 shares of common stock subject to a warrant outstanding as of March 30, 2003, with an exercise price of $1.29 per share; and
• 956,9331,396,412 shares of common stock available for future grant or issuance under our stock plan as of March 30,December 31, 2003; and
• 500,000 shares of common stock available for future grant or issuance under our employee stock purchase plan as of December 31, 2003.

     We expect to complete a 1.75-for-1 split of our capital stock prior to the completion of this offering. All share amounts have been retroactively adjusted to give effect to the stock split.

1917


DILUTION

     If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of our common stock outstanding assuming the conversion of all shares of redeemable convertible preferred stock outstanding as of March 30, 2003, into 20,228,480 shares of common stock.

Investors participating in this offering will incur immediate, substantial dilution. Our pro forma net tangible book value was $18.8 million, or $0.93 per share of common stock, after giving effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock upon the completion of this offering. Assuming the sale by us of 7,000,000 shares of common stock offered in this offering at an assumed initial public offering price of $11.00 per share, and after deducting the underwriting discount and estimated offering expenses, and assuming the repayment of a note payable to Nortel Networks, our pro forma as adjusted net tangible book value as of March 30, 2003, would have been $81.9 million, or $3.01 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $2.08 per share of common stock to our existing stockholders and an immediate dilution of $7.99 per share to the new investors purchasing shares in this offering. The following table illustrates this per share dilution:

          
Assumed initial public offering price per share     $11.00 
 Pro forma net tangible book value per share as of March 30, 2003 $0.93     
 Increase in pro forma net tangible book value per share attributable to this offering  2.08     
   
     
Pro forma as adjusted net tangible book value per share after the offering      3.01 
       
 
Dilution per share to new investors     $7.99 
       
 

The following table sets forth on a pro forma as adjusted basis, as of March 30, 2003, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing holders of common stock and by the new investors, after deducting the underwriting discount and estimated offering expenses payable by us (dollars in thousands, except per share amounts).

                     
Shares PurchasedTotal Consideration


Average Price
NumberPercentAmountPercentPer Share





Existing stockholders  20,228,480   74% $48,039   41% $2.37 
New investors  7,000,000   26   69,410   59   9.92 
   
   
   
   
     
Total  27,228,480   100.0% $117,449   100.0%    
   
   
   
   
     

     If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to 72% of the total number of shares of common stock to be outstanding after this offering; and the number of shares of common stock held by the new investors will be increased to 8,050,000 shares or 28% of the total number of shares of common stock outstanding after this offering. See “Principal Stockholders.”

     The discussion and tables above assume no exercise of the underwriters’ over-allotment option, the outstanding warrant or any outstanding stock options. As of March 30, 2003, there were 6,436,817 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $4.76 per share, and 956,933 shares available for future grant or issuance under our 2000 Stock Plan. As of March 30, 2003, there were also 218,750 shares of common stock issuable upon exercise of a warrant with an exercise price of $1.29 per share. In April 2003, our board of directors approved a new 2003 Stock Plan under which they reserved 750,000 shares for future grant or issuance and a 2003 Employee Stock Purchase

20


Plan under which they reserved 500,000 shares for future issuance. To the extent that these options and warrants are exercised, there will be further dilution to new investors.

     Following the completion of this offering, we intend to repay in full the $20.0 million subordinated unsecured convertible promissory note we issued to Nortel Networks using a portion of the proceeds from this offering. Moreover, under the terms of the Nortel note, Nortel Networks may require us to repay the note upon the completion of this offering. If we do not repay the $20.0 million promissory note, then for the two-year period following the completion of this offering Nortel Networks may convert any outstanding amounts owing under the note into shares of our common stock at the public offering price of the shares sold in this offering.

21


SELECTED CONSOLIDATED FINANCIAL DATA

     SelectedThe following selected consolidated financial data for the period from January 1, 1998 to August 31, 1998 is referred to as the “Predecessor Company” information. On August 31, 1998, Nortel Networks NA Inc. acquired Bay Networks, Inc., including its ownership interestshould be read in NETGEAR,conjunction with our consolidated financial statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in a transaction that was accounted for using the purchase method. The selected financial data after August 31, 1998 includes the financial statement impact of recording fair value adjustments arising from the acquisition of Bay Networks.this prospectus.

     The consolidated statements of operations data for NETGEAR and its Predecessor Company for the period from January 1, 1998 to August 31, 1998, the period from September 1, 1998 to December 31, 1998 and the yearyears ended December 31, 1999,2001, 2002 and 2003 and the consolidated balance sheet data as of December 31, 1998, 19992002 and 20002003 are derived from audited consolidated financial statements not included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2000, 20011999 and 20022000, and the consolidated balance sheet data as of December 31, 20011999, 2000 and 20022001 are derived from audited consolidated financial statements not included elsewhere in this prospectus. Deloitte & Touche LLP performed the audit of the consolidated financial statements for the year ended December 31, 2000. PricewaterhouseCoopers LLP performed the audits of the consolidated financial statements as of December 31, 2001, 2002 and 20022003 and for the years then ended.

The consolidated statementaudits of operations data for the three months ended March 31, 2002 and March 30, 2003, and the consolidated balance sheet data as of March 30, 2003, are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated statementsof December 31, 1999 and have included, in our opinion, all adjustments, consisting only of normal2000 and recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. The historical results are not necessarily indicative of the results to be expected in any future period, and the results for the three monthsyears then ended March 30, 2003 are not necessarily indicative of results to be expected for the full fiscal year or any other period.

22


were performed by another independent accountant.

                               
Predecessor
Company

Three Months Ended
(unaudited)                  
January 1,September 1,
1998 to1998 toYear Ended December 31,Year Ended December 31,
August 31,December 31,
March 31,March 30,
1998199819992000200120022002200319992000200120022003













(in thousands, except per share data)(in thousands, except per share data)
Consolidated Statement of Operations Data:
Consolidated Statement of Operations Data:
 
Consolidated Statement of Operations Data:
 
Net revenue(1)Net revenue(1) $32,801 $25,099 $111,856 $176,663 $192,440 $237,331 $45,528 $67,706 Net revenue(1) $111,856 $176,663 $192,440 $237,331 $299,302 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Cost of revenue:Cost of revenue: Cost of revenue: 
Cost of revenue 25,696 20,830 91,265 145,531 172,795 176,972 34,685 49,246 Cost of revenue 91,265 145,531 172,795 176,972 215,332 
Amortization (recovery) of deferred stock-based compensation      144 66 (11)Amortization of deferred stock-based compensation    144 128 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 Total cost of revenue 25,696 20,830 91,265 145,531 172,795 177,116 34,751 49,235  Total cost of revenue 91,265 145,531 172,795 177,116 215,460 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Gross profitGross profit 7,105 4,269 20,591 31,132 19,645 60,215 10,777 18,471 Gross profit 20,591 31,132 19,645 60,215 83,842 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Operating expenses:Operating expenses: Operating expenses: 
Research and development 1,175 676 2,641 3,319 4,432 7,359 894 2,016 Research and development 2,641 3,319 4,432 7,359 8,220 
Sales and marketing(1) 8,081 5,104 20,320 18,309 24,267 32,622 7,180 10,961 Sales and marketing(1) 20,320 18,309 24,267 32,622 48,963 
General and administrative 2,374 918 3,769 4,417 5,914 8,103 1,528 1,902 General and administrative 3,769 4,417 5,914 8,103 8,977 
Goodwill amortization  112 335 335 335    Goodwill amortization 335 335 335   
Amortization of deferred stock-based compensation: Amortization of deferred stock-based compensation: 
 Research and development      306 143 96  Research and development    306 454 
 Sales and marketing      346 143 109  Sales and marketing    346 715 
 General and administrative      867 200 151  General and administrative    867 476 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 Total operating expenses 11,630 6,810 27,065 26,380 34,948 49,603 10,088 15,235  Total operating expenses 27,065 26,380 34,948 49,603 67,805 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Income (loss) from operationsIncome (loss) from operations (4,525) (2,541) (6,474) 4,752 (15,303) 10,612 689 3,236 Income (loss) from operations (6,474) 4,752 (15,303) 10,612 16,037 
Interest incomeInterest income    1,092 308 119 21 28 Interest income  1,092 308 119 364 
Interest expenseInterest expense     (939) (1,240) (18) (361)Interest expense   (939) (1,240) (901)
Extinguishment of debtExtinguishment of debt     (5,868)
Other expense, netOther expense, net (25) (152) (70) (1,322) (478) (19) (68) (78)Other expense, net (70) (1,322) (478) (19) (59)
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Income (loss) before taxesIncome (loss) before taxes (4,550) (2,693) (6,544) 4,522 (16,412) 9,472 624 2,825 Income (loss) before taxes (6,544) 4,522 (16,412) 9,472 9,573 
Provision for income taxes    1,868 3,072 1,333 87 1,213 
Provision (benefit) for income taxesProvision (benefit) for income taxes  1,868 3,072 1,333 (3,524)
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Net income (loss)Net income (loss) (4,550) (2,693) (6,544) 2,654 (19,484) 8,139 537 1,612 Net income (loss) (6,544) 2,654 (19,484) 8,139 13,097 
Deemed dividend on preferred stockDeemed dividend on preferred stock    (2,601)  (17,881) (17,881)  Deemed dividend on preferred stock  (2,601)  (17,881)  
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Net income (loss) attributable to common stockholders: $(4,550) $(2,693) $(6,544) $53 $(19,484) $(9,742) $(17,344) $1,612 
Net income (loss) attributable to common stockholdersNet income (loss) attributable to common stockholders $(6,544) $53 $(19,484) $(9,742) $13,097 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Net income (loss) per share attributable to common stockholders:Net income (loss) per share attributable to common stockholders: Net income (loss) per share attributable to common stockholders: 
Basic(2) $(0.17) $(0.10) $(0.25) $0.00 $(0.66) $(0.46) $(0.72) $0.08 Basic(2) $(0.25) $0.00 $(0.66) $(0.46) $0.55 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Diluted(2) $(0.17) $(0.10) $(0.25) $0.00 $(0.66) $(0.46) $(0.72) $0.07 Diluted(2) $(0.25) $0.00 $(0.66) $(0.46) $0.49 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Pro forma net income per share (unaudited): 
Basic(3) $0.38 $0.08 
 
 
 
Diluted(3) $0.36 $0.07 
 
 
 


(1) On January 1, 2000, we adopted Emerging Issues Task Force, or EITF, Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products,” and as a

18


consequence, record cooperative marketing costs as a reduction in net revenue. Prior to January 1, 2000, it was not practical for us to determine the amount of cooperative marketing costs to record as a reduction of net revenue, and such amounts were included as sales and marketing expense.
 
(2) Information regarding calculation of per share data is described in Note 4 to the consolidated financial statements.

23


(3) Pro forma basic and diluted net income per share is presented for 2002 and three months ended March 30, 2003 to reflect per share data assuming the automatic conversion of all outstanding shares of preferred stock into common stock, which will occur upon the closing of a qualified initial public offering, as if the conversion had taken place at the beginning of the year, or at the date of issuance, if later. Basic pro forma per share data for 2002 was calculated by dividing net loss attributable to common stockholders, adding back the deemed dividend on preferred stock, by 21.1 million which is the weighted average number of shares of common stock into which the preferred stock outstanding during the period was convertible. Diluted pro forma net income per share data for 2002 was calculated the same as basic pro forma net income per share except that the denominator was adjusted to 22.5 million shares to include weighted average potential common shares (representing warrants and stock options) outstanding during the period. Anti-dilutive common stock options amounting to 652,428 were excluded from the weighted average shares outstanding for the diluted per share calculation. For the three months ended March 30, 2003, pro forma basic and diluted income per share did not differ from actual basic and diluted income per share.

               
                  
Year Ended December 31,
December 31,March 30,


19992000200120022003
199819992000200120022003










(unaudited)(in thousands)
Consolidated Balance Sheet Data:
  
Cash and cash equivalents $1,313 $10,427 $6,447 $9,152 $19,880 $21,755 
Cash, cash equivalents and short-term investments $10,427 $6,447 $9,152 $19,880 $73,605 
Working capital 6,649 22,989 36,253 16,179 13,753 15,503  22,989 36,253 16,179 13,753 130,755 
Total assets 32,618 62,220 112,142 62,902 93,851 101,416  62,220 112,142 62,902 93,851 205,146 
Total current liabilities 23,862 37,635 73,946 44,891 76,396 82,017  37,635 73,946 44,891 76,396 70,207 
Redeemable convertible preferred stock   44,078 44,078 48,052 48,039   44,078 44,078 48,052  
Total stockholders’ equity (deficit) 8,567 24,129 (6,583) (26,067) (30,597) (28,640) 24,129 (6,583) (26,067) (30,597) 134,939 

2419


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     TheYou should read the following discussion should be read in conjunctionof our financial condition and results of operations together with ourthe audited consolidated financial statements and notes to the related notes that appearfinancial statements included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. ActualThe forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results andcould differ materially from the timing of events may differ significantly from those projected in suchresults contemplated by these forward-looking statements due to a number of factors, including those set forthdiscussed in the sectionsections of this prospectus entitled “Risk Factors” and elsewhere in this prospectus.“Special Note Regarding Forward-Looking Statements.”

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 2002,2003, our net revenue was $237.3$299.3 million and our net income was $8.1 million. In the first quarter of 2003, our net revenue was $67.7 million and our net income was $1.6$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, whichnote. In July 2003 we intendcompleted 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 upon the completion of this offering.$20.0 million promissory note.

     Our extensive product line currently includes approximately 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.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.

     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. We sell directly to Best Buy, Circuit City, CompUSA, Costco, Fry’s Electronics, Staples, Office Depot, MediaMarkt (Germany, Austria), PC World (U.K.) and Staples. The remaining traditionalFNAC (France). Online retailers include Amazon.com and Buy.com. Our direct market

20


resellers include CDW Corporation and PC Connection. We have over 8,000 VARs in North America, and more than 3,000 internationally. In addition, we also sell our products through broadband service providers, such as well as our onlineTime–Warner Cable and Comcast in domestic markets and Telstra in Australia and Tele Denmark. Some of these retailers DMRs and VARsresellers purchase directly from us while most are fulfilled through approximately 65 wholesale distributors. These67 wholesale distributors are located inaround 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

25


wholesale distributors, the largest of which are Ingram Micro Inc., and Tech Data. The table below sets forth the percentage of net revenue derived from these major wholesale distributors, and their affiliates, in 2000, 2001, 2002 and the first quarter of 2002 and 2003.Data Corporation. We expect that these wholesale distributors will continue to contribute a significant percentage of our net revenue for the foreseeable future.

The table below sets forth the percentage of net revenue derived from these major wholesale distributors for the years ended December 31, 2001, 2002 and 2003, respectively.

                      
Year EndedThree Months Ended
December 31,

March 31,March 30,
20002001200220022003





Ingram Micro, Inc.  33%  36%  32%  30%  32%
Tech Data Corporation  20   23   20   28   20 
   
   
   
   
   
 
 Total  53%  59%  52%  58%  52%
   
   
   
   
   
 
              
Year Ended
December 31,

200120022003



Ingram Micro  36%  32%  31%
Tech Data  23   20   15 
   
   
   
 
 Total  59%  52%  46%
   
   
   
 

     We derive a substantial portion of our net revenue from international sales. International sales as a percentage of net revenue grew from 33% in 2000 to 37% in each of 2001 and 2002 and 44% and 46%to 42% in the first quarter of 2002 and 2003. Sales in EuropeEMEA grew from $38.9 million in 2000 to $68.0 million in 2002 to $99.4 million in 2003, representing an increase of approximately 75%46% during that period. In addition, we are targeting emerging andWe continue to penetrate growing markets such as China, where in 2002 we opened three sales officesItaly, Japan, Spain and began shipping products.Sweden. The table below sets forth our net revenue by major geographic region.

                      
Three Months Ended
Year Ended December 31,

March 31,March 30,
20002001200220022003





(in thousands)
United States $118,422  $121,688  $150,096  $25,279  $36,661 
Europe  38,935   52,977   68,006   15,951   24,455 
Asia Pacific  17,899   16,294   18,053   4,065   6,436 
Rest of the world  1,407   1,481   1,176   233   154 
   
   
   
   
   
 
 Total $176,663  $192,440  $237,331  $45,528  $67,706 
   
   
   
   
   
 
                      
Year Ended December 31,

PercentagePercentage
2001Change2002Change2003





(in thousands)
North America $121,688   23%  $150,096   15%  $172,885 
EMEA  52,977   28%   68,006   46%   99,422 
Asia Pacific and rest of world  17,775   8%   19,229   40%   26,995 
   
   
   
   
   
 
 Total $192,440   23%  $237,331   26%  $299,302 
   
   
   
   
   
 

     Our net revenue consists of gross product shipments, less allowances for estimated returns for stock rotation and warranty, price protection, customer rebates, and cooperative marketing expenses and net changes in deferred revenue. Revenue from product sales is generally recognized at the time the product is shipped, provided that persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the sales price is fixed or determinable and collectibility of the related receivable is reasonably assured. Currently, for our international customers, title passes upon delivery to the port of destination. For select retailers to whom we sell directly, title passes upon their receipt of product. At the end of each quarter, we estimate and defer revenue related to the product in-transit to international customers and retail customers that purchase directly from us based upon title passage, and distributor and reseller channel inventory that we deemestimate may be returned to be in excess of our expected end-user sales levels. Currently, for our international customers, title passes upon delivery to the port of destination. For our retailers to whom we sell directly, title passes uponus under their receipt of product.stock rotation rights.

     Prior to the year ended December 31, 2001, we recognized revenue on shipments to domestic distributors upon resale by those distributors, and on shipment to international distributors upon cash collection. Beginning in 2001, we had sufficient historical evidence with respect to returns and cash collections to enable us to recognize revenue in accordance with our current policy as described above and in Note 1 to the consolidated financial statements. Our net revenue for the year ended December 31, 2001 reflects the one-time effect of this change, resulting in additional net revenue of $21.0 million in the quarter ended March 31, 2001, offset partially by provisions for returns for stock rotation and warranty and price protection of $9.4 million.

21


     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 our fiscalthe year, with our highest net revenue during the year-end holiday season. Absent other factors, we would therefore expect higher net revenue in the third and fourth quarter of each calendar year. To the extent our

26


retail sales increase as a percentage of our net revenue, we expect to experience seasonally higher salesnet revenue as a percentage of annual net revenue in the third and fourth quarters.

     TheIntense competition and technological advances characterize the small business and home networking markets are characterized by intense competition and technological advances.markets. As a result, we expect to experience rapid erosion of average selling prices over the course of the lifecycle of our products due to competitive pricing pressures. In order to maintain our margins, it is necessary to offset average sales price erosion by proactively negotiating continuously 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 up front investment in advance of incremental revenue, which could impact our margins. In addition, our international expansion will expose us to additional risks related to foreign currency fluctuations.

     Cost of revenue consists primarily of the following: the cost of finished products from our third-party contract manufacturers; overhead costs including purchasing, product planning, inventory control, warehousing and distribution logistics; and freight, warranty and inventory costs. We outsource our manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product costs and gross margin. Our gross margin is affected by other factors, including changes in net revenues due to average salesselling prices, marketing expenses such as promotional activities and rebate redemptions, and changes in our cost of goods sold due to fluctuations in warranty and overhead costs, prices paid for components and freight and increases in excess or obsolete inventory caused by fluctuations in manufacturing volumes and transitions from older to newer products.

     Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, tooling, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets and other consulting fees and product certification fees paid to third parties. Research and development expenses are recognized as they are incurred. We have invested in building our research and development organization to allow us to introduce innovative and easy to use products. For example, in 2002, we more than doubled the number of employees focused on research and development. We expect to continue to hire a significant number ofadd additional employees in our research and development department. We believe that research and development expenses will increase in absolute dollars in the future but expect it to remain relatively stable as a percentage of net revenue as we expand into new hardware and software networking product technologies and enhance the ease-of-use of our products and broaden our core competencies.

     Sales and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, personnel expenses for sales and marketing staff, product marketing expenses and technical support expenses. We believe that maintaining and building brand awareness is key to both net revenue growth and maintaining our gross margin. We also believe that maintaining widely available and high quality technical support is key to building and maintaining brand awareness. Accordingly, we expect sales and marketing expenses to increase in absolute dollars in the future, related to the planned growth of our business.

     General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, human resources and management information systems personnel, professional fees, bad debt provision, and other corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional expenses related to the growth of our business and continued operations as a public company.

     Goodwill amortization relates to goodwill recorded in connection with Nortel Networks’ purchase of Bay Networks in August 1998. In connection with ourUpon adoption of Statement of Financial Accounting Standards, or SFAS, No. 142, we discontinued amortizing goodwill in the year ended December 31, 2002.

     During the yearyears ended December 31, 2002 and 2003 we recorded deferred stock-based compensation of $6.7 million and $1.0 million, respectively, in connection with stock options granted with exercise prices

22


below the deemed fair value of our common stock on the date of grant. We are amortizing this deferred stock-based compensation over the four-year vesting period of the stock options and such amounts are allocated to the respective operating expense categories based upon individual employee departments.

27


     Interest income represents amounts earned on our cash, cash equivalents and cash equivalent deposits.short-term investments. Interest expense consists of interest paid on loans, and beginning in February 2002, includesincluded imputed interest associated with a note payable to Nortel Networks. The note hashad a principal amount of $20.0 million, with principal and accrued but unpaid interest due on February 7, 2009. Interest on the note, at 7% per year, startswas due to accruestart accruing on February 7, 2005. We carry thisThe note was carried at its “then” present value and arewe were accreting its carrying value to reflect its imputed interest. We intend to useused approximately $20.0 million of the net proceeds from thisits initial public offering in August 2003 to fully repay thisthe note. As a result of this $20.0 million cash payment, we will incurincurred an extinguishment of debt charge of approximately $6.3$5.9 million in the quarter ended September 28, 2003 when the note was repaid in which we make the repayment.full.

     Other expense, net, primarily represents gains and losses on transactions denominated in foreign currency transactionscurrencies and in 2000, included direct costs associated with an equity financing transaction that was not completed.other miscellaneous expenses.

     Our businessWe incurred net losses in each year from our inception in 1996 through 1999 as we invested in building our research and development capabilities, our sales channels and staff, and our operations and financial infrastructure. We incurred an accumulated a deficit of $24.6 million during this time period. In 2000 we earned net income of $2.7 million primarily due to growth in revenue of $64.8 million. In 2001 we incurred a net loss of $19.5 million primarily due to excess inventory levels brought about by the overall weak economic conditions in the networking markets we serve. We were again profitable in 2002, with net income of $8.1 million, due to increased revenue and improved gross margins. In the first quarter of 2003 we had net income of $1.6 million.$13.1 million and our net revenue increased 26% compared with 2002. In addition, our gross margins increased 2.6% year over year. We believe our future results will be dependent upon the overall economic conditions in the markets we serve, the competitive environment in which we operate, and our ability to successfully implement our strategy, among other things. For additional information on factors that will affect our future performance, see “Risk Factors” beginning on page 6.5.

23


Results of Operations

The following table sets forth the consolidated statements of operations and the percentage change from the preceding year for the periods indicated:

                        
Year Ended December 31,

PercentagePercentage
2001Change2002Change2003





Net revenue $192,440   23.3% $237,331   26.1% $299,302 
Cost of revenue:                    
 Cost of revenue  172,795   2.4   176,972   21.7   215,332 
 Amortization of deferred stock-based compensation        144   (11.1)  128 
   
   
   
   
   
 
 Total Cost of revenue  172,795   2.5   177,116   21.6   215,460 
   
   
   
   
   
 
Gross profit  19,645   206.5   60,215   39.2   83,842 
   
   
   
   
   
 
Operating expenses:                    
 Research and development  4,432   66.0   7,359   11.7   8,220 
 Sales and marketing  24,267   34.4   32,622   50.1   48,963 
 General and administrative  5,914   37.0   8,103   10.8   8,977 
 Goodwill amortization  335   (100.0)         
 Amortization of deferred stock-based compensation:                    
  Research and development        306   48.4   454 
  Sales and marketing        346   106.6   715 
  General and administrative        867   (45.1)  476 
   
   
   
   
   
 
   Total operating expenses  34,948   41.9   49,603   36.7   67,805 
   
   
   
   
   
 
Income (loss) from operations  (15,303)  *   10,612   51.1   16,037 
Extinguishment of debt              (5,868)
Other income (expense), net  (1,109)  *   (1,140)  *   (596)
   
   
   
   
   
 
Income (loss) before income taxes  (16,412)  *   9,472   1.1   9,573 
Provision (benefit) for income taxes  3,072   (56.6)  1,333   (364.4)  (3,524)
   
   
   
   
   
 
Net income (loss) $(19,484)  *  $8,139   60.9% $13,097 
   
   
   
   
   
 

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

24


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

                      
         
Three Months Ended
Year Ended December 31,
Year Ended December 31,

March 31,March 30,
20002001200220022003200120022003








Net revenueNet revenue 100.0% 100.0% 100.0% 100.0% 100.0%Net revenue 100.0% 100.0% 100.0%
 
 
 
 
 
   
 
 
 
Cost of revenue:Cost of revenue: Cost of revenue: 
Cost of revenue 82.4 89.8 74.6 76.2 72.7 Cost of revenue 89.8 74.6 72.0 
Amortization (recovery) of deferred stock-based compensation   0.0 0.1 (0.0)Amortization of deferred stock-based compensation  0.0 0.0 
 
 
 
 
 
   
 
 
 
 Total cost of revenue 82.4 89.8 74.6 76.3 72.7  Total cost of revenue 89.8 74.6 72.0 
 
 
 
 
 
   
 
 
 
Gross marginGross margin 17.6 10.2 25.4 23.7 27.3 Gross margin 10.2 25.4 28.0 
 
 
 
 
 
   
 
 
 
Operating expenses: 
Operating expenses: 
Research and development 1.9 2.3 3.1 2.0 3.0 Research and development 2.3 3.1 2.7 
Sales and marketing 10.3 12.6 13.8 15.8 16.2 Sales and marketing 12.6 13.8 16.4 
General and administrative 2.5 3.1 3.4 3.4 2.8 General and administrative 3.1 3.4 3.0 
Goodwill amortization 0.2 0.2    Goodwill amortization 0.2   
Amortization of deferred stock-based compensation: Amortization of deferred stock-based compensation: 
 Research and development   0.1 0.3 0.1  Research and development  0.1 0.1 
 Sales and marketing   0.1 0.3 0.2  Sales and marketing  0.1 0.2 
 General and administrative   0.4 0.4 0.2  General and administrative  0.4 0.2 
 
 
 
 
 
   
 
 
 
 Total operating expenses 14.9 18.2 20.9 22.2 22.5  Total operating expenses 18.2 20.9 22.6 
 
 
 
 
 
   
 
 
 
Income (loss) from operationsIncome (loss) from operations 2.7 (8.0) 4.5 1.5 4.8 Income (loss) from operations (8.0) 4.5 5.4 
Extinguishment of debtExtinguishment of debt   (2.0)
Other income (expense), netOther income (expense), net (0.1) (0.5) (0.5) (0.1) (0.6)Other income (expense), net (0.5) (0.5) (0.2)
 
 
 
 
 
   
 
 
 
Income (loss) before taxesIncome (loss) before taxes 2.6 (8.5) 4.0 1.4 4.2 Income (loss) before taxes (8.5) 4.0 3.2 
Provision for income taxes 1.1 1.6 0.6 0.2 1.8 
Provision (benefit) for income taxesProvision (benefit) for income taxes 1.6 0.6 (1.2)
 
 
 
 
 
   
 
 
 
Net income (loss)Net income (loss) 1.5% (10.1)% 3.4% 1.2% 2.4%Net income (loss) (10.1)% 3.4% 4.4%
 
 
 
 
 
   
 
 
 

28


Quarter ended March 30, 2003 Compared to Quarter Ended March

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

          Net Revenue

     Net revenue increased $22.2$62.0 million, or 49%26%, to $67.7$299.3 million for the quarteryear ended March 30,December 31, 2003, from $45.5$237.3 million for the quarteryear ended MarchDecember 31, 2002. This increase was primarily due to an increase in gross shipments of $22.2 million associated primarily with broadbandour existing products and wireless products.to the introduction of various new products that were favorably received by customers. In addition, our channel inventories were reduced, resultingparticular, net revenue in the recognition of $5.2EMEA region grew by $31.4 million, in net revenue that had been deferred in prior periods. These increases in net revenue wereor 46%, year over year. This increase was partially offset by ana $14.1 million increase in rebates and cooperative marketing costs, primarily in North America, associated with increased retail product salessales. Net revenue for the years ended December 31, 2002 and 2003 was reduced for cooperative marketing expenses in the amount of $3.5$15.4 million and an increase in returns and price protection of $1.7 million.$23.5 million, respectively, deemed to be sales incentives under Emerging Issues Task Force (“EITF”) 01-9.

          Cost of Revenue and Gross Margin

     Cost of revenue increased $14.5$38.3 million, or 42%22%, to $49.2$215.5 million for the quarteryear ended March 30,December 31, 2003 from $34.8$177.1 million for the quarteryear ended MarchDecember 31, 2002. In addition, ourOur gross margin improved to 27.3%28.0% for the quarteryear ended March 30,December 31, 2003, from 23.7%25.4% for the quarteryear ended MarchDecember 31, 2002. This improvement in gross margin of 3.6% was due primarily to the operational efficiency programs we implemented that led to a reduction in the average material cost per product of 3.7%, a volume increase of 1.2% that leveraged our fixed cost base, and a reduction in inventory revaluation cost of 2.4%. ThisThe improvement in gross margin was partially offsetprimarily due to a favorable shift in product mix, especially of newer products which often carry higher gross margins, as well as due to operational efficiency and supply chain management programs

25


that reduced inbound freight costs by an increase in cooperative marketing costs of 2.4%,$2.1 million and an increase in freight expenses of 1.4%.excess and obsolete inventory charges by approximately $4.4 million. Furthermore, we were able to negotiate better pricing with our contract manufacturers and chip vendors due to increased volumes.

          Operating Expenses

     Research and development. Research and development expenses increased $1.1 million,$861,000, or 126%,12% to $2.0$8.2 million for the quarteryear ended March 30,December 31, 2003, from $894,000$7.4 million for the quarteryear ended MarchDecember 31, 2002. ThisThe increase was primarily due to increase of $670,000 inincreased headcount and salariessalary increases for existing employees and an increaseof $1.3 million, general overhead increases of approximately $336,000 offset by $830,000 in payments to suppliers of $274,000.lower product development costs, which include product certification costs.

     Sales and marketing.Sales and marketing expenses increased $3.8$16.3 million or 53%,50% to $11.0$49.0 million for the quarteryear ended March 30,December 31, 2003, from $7.2$32.6 million for the quarteryear ended MarchDecember 31, 2002. This increase was primarily due to (i) $3.9 million in increased expenses related to the addition of sales and marketing personnel and salary increases for existing employees; (ii) increased sales volume, product promotion, advertising and outside technical support expenses of $2.2 million$9.8 million; and increased salary(iii) freight out charges of $1.5 million. Furthermore, we incurred additional costs associated with entering new and related expenses for additional salesexpanding our presence in markets such as China, Italy, Japan, Spain and marketing personnel and increased compensation for existing personnel of $1.1 million.Sweden.

     General and administrative.General and administrative expenses increased $374,000,$874,000, or 24%,11% to $1.9$9.0 million for the quarteryear ended March 30,December 31, 2003, from $1.5$8.1 million for the quarteryear ended MarchDecember 31, 2002. The increase was primarily attributable to an increase in cost associated with operating as a public company, including increased directors and officers insurance of $550,000 and professional services of $478,000, comprised of systems consulting, accounting and legal fees. This increase was primarily due to increased accounting and legal fees of $284,000, and increased salary and relatedoffset by reduced payroll expenses of $177,000 for additional employees and increased compensation expenses for existing personnel, offset byapproximately $220,000 mainly as a reduction in bad debt allowanceresult of $175,000.lower bonus payments.

     Goodwill amortization.Goodwill amortization expenses wereexpense was zero in bothfor the quarteryear ended March 30,December 31, 2003 and 2002. There was no impairment charge that management believed necessary in the quarteryears ended MarchDecember 31, 2002 due to the discontinuation of goodwill amortization under SFAS 142 adopted on January 1, 2002.and 2003.

     Amortization of deferred stock-based compensation. During the quarteryear ended March 30,December 31, 2003, we recorded a recovery of $11,000 in cost of revenue, and charges of $96,000 in research and development expenses, $109,000 in sales and marketing expenses, and $151,000 in general and administrative expenses related to amortization of deferred stock-based compensation. If an employee forfeits an option award due to termination of employment, any compensation expense previously recognized with the forfeited award is reversed to income and recorded as a recovery on amortization of deferred stock-based compensation. During the quarter ended March 31, 2002, we recorded amortization of deferred stock-based compensation of $128,000 in cost of revenue, of $66,000, $143,000$454,000 in research and development expenses, $143,000$715,000 in sales and marketing expenses, and $200,000$476,000 in general and administrative expenses. This compared to $144,000 in cost of revenue, $306,000 in research and development expenses, $346,000 in sales and marketing expenses and $867,000 in general and administrative expenses in the year ended December 31, 2002. The remaining balance of deferred stock-based compensation of $4.2 million will continue to be amortized on a straight line basis until 2007.

29


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

     OtherThe aggregate of interest income, interest expense, and other income (expense), net, increased $346,000,decreased $544,000, to $411,000a net expense of $596,000 for the quarteryear ended March 30,December 31, 2003, from $65,000a net expense of $1.1 million for the quarteryear ended MarchDecember 31, 2002. This increasedecrease was primarilyattributable to increased interest income of $245,000 due to an increase of $361,000 in imputedthe average cash balance. Additionally, interest associated withexpense was reduced by $339,000 following the repayment of the Nortel note.Note.

          Extinguishment of Debt

     During the year ended December 31, 2003 we used $20.0 million of the initial public offering proceeds, to repay debt that had a carrying value of $14.1 million. The repayment of debt resulted in the 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 discounted balance at the date of repayment.

26


          Provision (Benefit) for Income Taxes

     ProvisionWe recorded a benefit for income taxes increased $1.1 million, to $1.2of $3.5 million for the quarteryear ended March 30,December 31, 2003, from $87,000compared to a provision for income taxes of $1.3 million for the quarteryear ended MarchDecember 31, 2002. This increase occurredbenefit was primarily due to a changethe reversal of the valuation allowance against our deferred tax assets of $9.8 million recorded in the effectivesecond quarter of 2003. The valuation allowance was reversed because we determined that it is more likely than not that certain future tax rate primarilybenefits will be realized. This benefit was partially offset by an increase in tax of $2.6 million for debt extinguishment, which is treated as a resultpermanent non-deductible expense for tax purposes. The year ended December 31, 2002 included a benefit associated with the change to valuation allowance on deferred tax assets of $3.8 million, arising from, among other factors, the utilization of net operating losses in the prior year.loss tax carry forwards.

          Net Income

     Net Incomeincome increased $1.1$5.0 million, to $1.6$13.1 million for the quarteryear ended March 30,December 31, 2003 from $537,000$8.1 million for the quarteryear ended March 30,December 31, 2002. This increase was due to an increase in gross profit of $7.7$23.6 million, a benefit in the income tax provision of $4.9 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 $5.1 million, an increase in provision for income taxes of $1.1 million and an increase in interest expense of $343,000.

$18.2 million.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

          Net Revenue

     Net revenue increased $44.9 million, or 23%, to $237.3 million for the year ended December 31, 2002, from $192.4 million for the year ended December 31, 2001. This increase was primarily due to an increase in gross shipments associated with the introduction of new wireless LAN and broadband gateway products such as our 802.11b Wireless PC Card NIC and our Cable/ DSL Web Safe Gateway during 2002, partially offset by an increase in rebates and cooperative marketing costs of $9.2 million associated with increased retail product sales of $8.8 million.sales. Net revenue for years ended December 31, 2001 and 2002 was reduced for cooperative marketing expenses in the amount of $10.3 million and $15.4 million, respectively, deemed to be sales incentives under Emerging Issues Task Force Issue (“EITF”) 01-9. The adoption of EITF Issue 01-9 did not have an impact on net income because there was a corresponding reduction in sales and marketing expenses.

          Cost of Revenue and Gross Margin

     Cost of revenue increased $4.3 million, or 2%, to $177.1 million for the year ended December 31, 2002 from $172.8 million for the year ended December 31, 2001. However, our gross margin improved to 25.4% for the year ended December 31, 2002, from 10.2% for the year ended December 31, 2001. This improvement in gross margin was due primarily to operational efficiency programs we implemented that led to a reduction in both the average material cost per product and the level of price protection expenses paid to our channel partners. This improvement in gross margin was partially offset by an increase in air freight expenses.

          Operating Expenses

     Research and development.Research and development expenses increased $2.9 million, or 66%, to $7.4 million for the year ended December 31, 2002, from $4.4 million for the year ended December 31, 2001. This increase was primarily due to increased headcount and salary increases for existing employees of $1.8 million, an increase in payments to supplierscosts associated with outsourced engineering of $1.3 million, and an increase in certification expenses paid to third parties of $440,000$440,000. These increases were offset by the absence in 2002 of a reduction in a one-time charge of $645,000 associated with the discontinuation of a product development project recognized in prior year of $645,000.2001.

     Sales and marketing.Sales and marketing expenses increased $8.4 million, or 34%, to $32.6 million for the year ended December 31, 2002, from $24.3 million for the year ended December 31, 2001. This increase was primarily due to increased salary and related expenses for additional sales and marketing

27


personnel and increased compensation for existing personnel of $4.8 million, and increased product promotion, advertising and outside technical support expenses of $3.6 million.

30


     General and administrative.General and administrative expenses increased $2.2 million, or 37%, to $8.1 million for the year ended December 31, 2002, from $5.9 million for the year ended December 31, 2001. This increase was primarily due to increased salary expenses of $1.6 million for additional employees and increased compensation expenses for existing personnel, and $285,000 related to depreciation expense and bad debt allowance.

     Goodwill amortization.Goodwill amortization expenses decreased to zero for the year ended December 31, 2002, from $335,000 for the year ended December 31, 2001 due to the discontinuation of goodwill accounting treatmentamortization under SFAS 142 oneffective January 1, 2002.

     Amortization of deferred stock-based compensation.During the year ended December 31, 2002, we recorded amortization of deferred stock-based compensation in cost of revenue of $144,000, $306,000 in research and development expenses, $346,000 in sales and marketing expenses, and $867,000 in general and administrative expenses. The remaining balance of deferred stock-based compensation of $5.0 million is expected to be amortized in future periods as follows: $1.5 million in 2003, $1.7 million in 2004, $1.3 million in 2005 and $500,000 in 2006.

Other Income (Expense), Net

     Other expense, net remained approximately the same at $1.1 million for both the yearyears ended December 31, 2002 and the year ended December 31, 2001. During these periods, an increase in interest expense of $301,000 primarily due to imputed interest associated with the Nortel note payable offset by a reduction in foreign exchange losses of $441,000$470,000 due to a decline in the value of the Japanese yen and other foreign currencies as compared to the United States dollar.

          Provision for Income Taxes

     Provision for income taxes decreased by $1.7 million from $3.1 million for the year ended December 31, 2001 to $1.3 million for the year ended December 31, 2002. This decrease occurred because we were able to reduce taxable income by utilizing almost all of our approximately $7.7 million of federal net operating loss carryforwards.carry forwards.

          Net Income (Loss)

     Net income was $8.1 million in 2002 versus a net loss of $19.5 million in 2001. This improvement of $27.6 million was due to an increase in gross profit of $40.6 million, offset by an increase in operating expenses of $14.7 million. Net income was also higher in 2002 due to a reduction in provision for income taxes of $1.7 million.

     Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

          Net Revenue

     Net revenue increased $15.8 million, or 9%, to $192.4 million for the year ended December 31, 2001, from $176.7 million for the year ended December 31, 2000. This increase was primarily due to our ability to recognize $20.1 million of revenue as a result of our change in methodology of recognizing net revenue described in “Overview” above, partially offset by provisions for returns for stock rotation and warranty and price protection of $9.4 million. In addition, our net revenue increased as a result of the introduction of new broadband gateway products such as our Cable/ DSL Web Safe Router during 2001. Net revenue for years ended December 31, 2000 and 2001 was reduced for cooperative marketing expenses in the amount of $10.1 million and $10.3 million, respectively, deemed to be sales incentives under EITF 01-9. The adoption of EITF Issue 01-9 did not have an impact on net income because there was a corresponding reduction in sales and marketing expenses.

31


Cost of Revenue and Gross Margin

Cost of revenue increased $27.3 million, or 19%, to $172.8 million for the year ended December 31, 2001 from $145.5 million for the year ended December 31, 2000. However, our gross margin declined to 10.2% for the year ended December 31, 2001 from 17.6% for the year ended December 31, 2000. This decline in gross margin was due primarily to reductions in average selling prices, increased price protection claims and charges related to excess and obsolete inventory, as we made a significant effort to reduce excess inventory levels during the year.

Operating Expenses

Research and development.Research and development expenses increased $1.1 million, or 34%, to $4.4 million for the year ended December 31, 2001, from $3.3 million for the year ended December 31, 2000. This increase was primarily due to a one-time charge of $645,000 associated with the discontinuation of a product development project, an increase in payments to suppliers for design services, tooling, safety and regulatory testing of $265,000, and an increase in salary and related expenses of $208,000 due to additional headcount and salary increases for existing employees.

Sales and marketing.Sales and marketing expenses increased $6.0 million, or 33%, to $24.3 million for the year ended December 31, 2001, from $18.3 million for the year ended December 31, 2000. This increase was primarily due to increased product promotion, advertising and outside technical support expenses of $4.8 million, and an increase in salary and related expenses for additional sales and marketing personnel and increased compensation expenses for existing personnel of $1.1 million.

General and administrative.General and administrative expenses increased $1.5 million, or 34%, to $5.9 million for the year ended December 31, 2001, from $4.4 million for the year ended December 31, 2000. This increase was primarily the result of increased salary expenses of $1.1 million for additional employees and increased compensation expenses for existing personnel, and an increase of $284,000 for bad debt allowance.

Goodwill amortization.Goodwill amortization expenses remained constant at $335,000 for both the year ended December 31, 2001 and the year ended December 31, 2000.

Other Income (Expense), Net

Other expense, net increased from $230,000 in 2000 to $1.1 million in 2001. The increase was primarily due to growth in interest expense of $939,000 related to borrowings under our line of credit, a reduction in interest income of $784,000, and an increase in foreign exchange losses of $309,000 offset by a reduction in expenses of $1.2 million recorded in 2000 relating to an equity financing transaction that was not completed.

Provision for Income Taxes

     We recorded a provision for income taxes in 2001 to provide a full valuation allowance against our net deferred tax assets because we believe that it is more likely than not that the deferred tax assets will not be utilized.

          Net Income (Loss)

     Net loss was $19.5 million in 2001 versus net income of $2.7 million in 2000. This decrease of $22.2 million was due to a reduction in gross profit of $11.5 million, an increase in operating expenses of $8.6 million, an increase in other expense of $879,000, and an increase in provision for income taxes of $1.2 million.

3228


Selected Quarterly Results

     The following tables set forth our unaudited consolidated results of operations for each of our last nineeight quarters in dollars and as a percentage of our net revenue. In the opinion of our management, this unaudited quarterly information has been prepared on a basis consistent with our audited financial statements and includes all adjustments, consisting of normal and recurring adjustments, that management considers necessary for a fair presentation of the data. These quarterly results are not necessarily indicative of future quarterly patterns or future patterns or results. This information should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus.

                           
                                 
Three Months Ended (unaudited)
Three Months Ended(1) (unaudited)


March 31,June 30,Sept 30,Dec 31,March 31,June 30,Sept 29,Dec 31,March 30,March 31,June 30,Sept 29,Dec 31,March 30,June 29,Sept 28,Dec 31,
20012001200120012002200220022002200320022002200220022003200320032003

















(in thousands)(in thousands, except per share data)
Net revenueNet revenue $61,354 $44,411 $43,773 $42,902 $45,528 $55,538 $64,362 $71,903 $67,706 Net revenue $45,528 $55,538 $64,362 $71,903 $67,706 $69,003 $75,785 $86,808 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Cost of revenue:Cost of revenue: Cost of revenue: 
Cost of revenue 53,539 45,268 38,350 35,638 34,685 41,326 48,188 52,773 49,246 Cost of revenue 34,685 41,326 48,188 52,773 49,246 49,889 54,691 61,506 
Amortization (recovery) of deferred stock-based compensation     66 20 22 36 (11)Amortization (recovery) of deferred stock-based compensation 66 20 22 36 (11) 42 46 51 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 Total cost of revenue 53,539 45,268 38,350 35,638 34,751 41,346 48,210 52,809 49,235  Total cost of revenue 34,751 41,346 48,210 52,809 49,235 49,931 54,737 61,557 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Gross profit (loss) 7,815 (857) 5,423 7,264 10,777 14,192 16,152 19,094 18,471 
Gross profitGross profit 10,777 14,192 16,152 19,094 18,471 19,072 21,048 25,251 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Operating expenses:Operating expenses: Operating expenses: 
Research and development 952 1,655 907 918 894 1,606 2,378 2,481 2,016 Research and development 894 1,606 2,378 2,481 2,016 1,882 2,079 2,243 
Sales and marketing 5,657 6,257 5,613 6,740 7,180 7,809 8,456 9,177 10,961 Sales and marketing 7,180 7,809 8,456 9,177 10,961 11,706 12,419 13,877 
General and administrative 897 1,645 1,444 1,928 1,528 2,024 2,113 2,438 1,902 General and administrative 1,528 2,024 2,113 2,438 1,902 1,779 2,356 2,940 
Goodwill amortization 84 84 84 83      Amortization of deferred stock-based compensation: 
Amortization of deferred stock-based compensation: 
 Research and development     143 37 51 75 96  Research and development 143 37 51 75 96 103 135 120 
 Sales and marketing     143 45 59 99 109  Sales and marketing 143 45 59 99 109 179 227 200 
 General and administrative     200 167 130 370 151  General and administrative 200 167 130 370 151 98 108 119 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 Total operating expenses 7,590 9,641 8,048 9,669 10,088 11,688 13,187 14,640 15,235  Total operating expenses 10,088 11,688 13,187 14,640 15,235 15,747 17,324 19,499 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Income (loss) from operations 225 (10,498) (2,625) (2,405) 689 2,504 2,965 4,454 3,236 
Income from operationsIncome from operations 689 2,504 2,965 4,454 3,236 3,325 3,724 5,752 
Extinguishment of debtExtinguishment of debt       (5,868)  
Other income (expense), netOther income (expense), net (13) (689) (142) (265) (65) (373) (234) (468) (411)Other income (expense), net (65) (373) (234) (468) (411) (217) (142) 174 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Income (loss) before taxesIncome (loss) before taxes 212 (11,187) (2,767) (2,670) 624 2,131 2,731 3,986 2,825 Income (loss) before taxes 624 2,131 2,731 3,986 2,825 3,108 (2,286) 5,926 
Provision for income taxes 3,072    87 299 385 562 1,213 
Provision for (benefit from) income taxesProvision for (benefit from) income taxes 87 299 385 562 1,213 (8,395) 1,664 1,994 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Net income (loss)Net income (loss) (2,860) (11,187) (2,767) (2,670) 537 1,832 2,346 3,424 1,612 Net income (loss) 537 1,832 2,346 3,424 1,612 11,503 (3,950) 3,932 
Deemed dividend on Preferred StockDeemed dividend on Preferred Stock     (17,881)     Deemed dividend on Preferred Stock (17,881)        
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholdersNet income (loss) attributable to common stockholders $(2,860) $(11,187) $(2,767) $(2,670) $(17,344) $1,832 $2,346 $3,424 $1,612 Net income (loss) attributable to common stockholders $(17,344) $1,832 $2,346 $3,424 $1,612 $11,503 $(3,950) $3,932 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders:Net income (loss) per share attributable to common stockholders: Net income (loss) per share attributable to common stockholders: 
Basic $(0.10) $(0.38) $(0.09) $(0.09) $(0.72) $0.09 $0.12 $0.17 $0.08 
Diluted $(0.10) $(0.38) $(0.09) $(0.09) $(0.72) $0.09 $0.10 $0.15 $0.07 
BasicBasic $(0.72) $0.09 $0.12 $0.17 $0.08 $0.57 $(0.15) $0.14 
DilutedDiluted $(0.72) $0.09 $0.10 $0.15 $0.07 $0.48 $(0.15) $0.12 

(1) Our fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. Effective January 1, 2002, we began reporting our 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 on Sundays closest to the calendar quarter end, with the fourth quarter covering the remaining part of the fiscal year. Because the adoption of the fiscal quarter method resulted in only a change of few days in the financial reporting periods, we have determined that fiscal 2002 and 2003 quarterly financial information is sufficiently comparable to the corresponding fiscal 2001 quarterly financial information, as originally reported, in terms of seasonality and other factors.

3329


                                                                 
As a Percentage of Net RevenueAs a Percentage of Net Revenue


March 31,June 30,Sept 30,Dec 31,March 31,June 30,Sept 29,Dec 31,March 30,March 31,June 30,Sept 29,Dec 31,March 30,June 29,Sept 28,Dec 31,
20012001200120012002200220022002200320022002200220022003200320032003

















Net revenueNet revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Net revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Cost of revenue:Cost of revenue: Cost of revenue: 
Cost of revenue 87.3 101.9 87.6 83.1 76.2 74.4 74.9 73.4 72.7 Cost of revenue 76.2 74.4 74.9 73.4 72.7 72.3 72.2 70.9 
Amortization (recovery) of deferred stock-based compensationAmortization (recovery) of deferred stock-based compensation 0.1 0.0 0.0 0.0 (0.0) 0.1 0.0 0.0 
Amortization (recovery) of deferred stock-based compensation     0.1 0.0 0.0 0.0 (0.0)  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Total cost of revenue 76.3 74.4 74.9 73.4 72.7 72.4 72.2 70.9 
 Total cost of revenue 87.3 101.9 87.6 83.1 76.3 74.4 74.9 73.4 72.7   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin (loss) 12.7 (1.9) 12.4 16.9 23.7 25.6 25.1 26.6 27.3 
Gross marginGross margin 23.7 25.6 25.1 26.6 27.3 27.6 27.8 29.1 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Operating expenses:Operating expenses: Operating expenses: 
Research and development 1.6 3.7 2.1 2.1 2.0 2.9 3.7 3.5 3.0 Research and development 2.0 2.9 3.7 3.5 3.0 2.7 2.7 2.6 
Sales and marketing 9.2 14.1 12.8 15.7 15.8 14.1 13.1 12.8 16.2 Sales and marketing 15.8 14.1 13.1 12.8 16.2 17.0 16.4 16.0 
General and administrative 1.5 3.7 3.3 4.5 3.4 3.6 3.3 3.4 2.8 General and administrative 3.4 3.6 3.3 3.4 2.8 2.6 3.1 3.4 
Goodwill amortization 0.1 0.2 0.2 0.2      Goodwill amortization         
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Amortization of deferred stock-based compensation Amortization of deferred stock-based compensation 
 Research and development     0.3 0.1 0.1 0.1 0.1  Research and development 0.3 0.1 0.1 0.1 0.1 0.1 0.2 0.2 
 Sales and marketing     0.3 0.1 0.1 0.1 0.2  Sales and marketing 0.3 0.1 0.1 0.1 0.2 0.3 0.3 0.2 
 General and administrative     0.4 0.3 0.2 0.5 0.2  General and administrative 0.4 0.3 0.2 0.5 0.2 0.1 0.2 0.1 
 Total operating expenses 12.4 21.7 18.4 22.5 22.2 21.1 20.5 20.4 22.5  Total operating expenses 22.2 21.1 20.5 20.4 22.5 22.8 22.9 22.5 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Income (loss) from operations 0.3 (23.6) (6.0) (5.6) 1.5 4.5 4.6 6.2 4.8 
Income from operationsIncome from operations 1.5 4.5 4.6 6.2 4.8 4.8 4.9 6.6 
Extinguishment of debtExtinguishment of debt       (7.8)  
Other income (expense), netOther income (expense), net  (1.6) (0.3) (0.6) (0.1) (0.7) (0.4) (0.6) (0.6)Other income (expense), net (0.1) (0.7) (0.4) (0.6) (0.6) (0.3) (0.1) 0.2 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Income (loss) before taxesIncome (loss) before taxes 0.3 (25.2) (6.3) (6.2) 1.4 3.8 4.2 5.6 4.2 Income (loss) before taxes 1.4 3.8 4.2 5.6 4.2 4.5 (3.0) 6.8 
Provision for income taxes 5.0    0.2 0.5 0.6 0.8 1.8 
Provision for (benefit from) income taxesProvision for (benefit from) income taxes 0.2 0.5 0.6 0.8 1.8 (12.2) 2.2 2.3 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Net income (loss)Net income (loss) (4.7)% (25.2)% (6.3)% (6.2)% 1.2% 3.3% 3.6% 4.8% 2.4%Net income (loss) 1.2% 3.3% 3.6% 4.8% 2.4% 16.7% (5.2)% 4.5%
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 

     Our net revenue for theincreased sequentially in each quarter ended March 31, 2001, reflects the one-time impact of our change in methodology of recognizing net revenue, as described in “Overview” above. We were able to recognize $21.0 million as net revenue in the quarter ended March 31, 2001, which was partially offset by the recording of provisions for returns for stock rotation and warranty and price protection of $9.4 million. Our net revenue exhibited little or no growth from the quarter ended June 30, 2001 throughbetween the quarter ended March 31, 2002 due primarily to weaker industry conditions as a result of the continued economic downturn. However, our net revenue increased in the three subsequent quarters beginning inand the quarter ended JuneDecember 31, 2003, except for the quarter ended March 30, 20022003. The revenue growth was primarily due to the introduction of new products developmentthat gained rapid market acceptance, the addition of ournew retail channels, geographic expansionoutlets and increasing penetration of the EMEA market. The sequential decrease in Europe, and increased sales and marketing efforts. Our net revenue declined in the quarter ended March 30, 2003 was due to geo-political instability, timing of introduction of products by both us and our competitors, and traditional seasonal demand patterns.

     GrossOur gross margin as a percentage of net revenue was 12.7% forhas increased sequentially in each quarter between the quarter ended March 31, 2001,2002 and reflected the impact of our change in revenue recognition described above. Gross loss as a percentage of net revenue was 1.9% for the quarter ended June 30, 2001. This gross loss was primarily due to declining average selling prices, price protection charges and excess and obsolete inventory charges. In addition, our gross margin in the quarter ended MarchDecember 31, 2001 was positively impacted by the one-time effect of our change in methodology of recognizing revenue. Since that time, our gross margin has increased in each of the subsequent quarters, with the exception of2003, except for a slight decline in the quarter ended September 29, 2002, which2002. The increase in gross margin was due to increased cooperative marketing costs and price protection. This general quarterly improvement has beenprimarily due to our ability to decrease product costs faster than the decline in average selling prices and reduce warranty costs,the introduction of new products which often carry higher gross margins, partially offset by increases infrom inbound freight costs.

34


The amounts of research and development, sales and marketing and general and administrative expenses as a percentage of net revenuedecrease in gross margin for the quarter ended March 31, 2001 were lower thanSeptember 29, 2002 was due primarily to increased cooperative marketing costs and price protection in subsequent quarters due to the one-time impact of our change in methodology of recognizing net revenue, as described above.that quarter.

     The amount of research and development expenses declined in the quarter ended September 30, 2001 due to a one-time charge associated with the discontinuation of a product development project recognized in the prior quarter. These expenses increased in the subsequent four quarters from the three months ended March 31, 2002, primarily due to additional headcount and salary increases for existing employees, as well as increases in payments to suppliers for design services and certification expenses paid to third parties,parties. Research and development expenses declined slightly in the quartertwo quarters ended March 30, 2003 and June 29, 2003 due to reduced certification expenses and a reduction in payments to suppliers for design services. For the two quarters ended September 28, 2003 and December 31, 2003 the expenses again increased due to increased headcount and costs associated with the introduction of new products.

30


     The amount of sales and marketing expenses also declined slightly in the three months ended September 30, 2001 due to a drop in technical support expense. The amount of these expenses increased in each of the subsequenteight quarters starting with the quarter ended March 31, 2002, due to increased product promotion, advertising and outside service expenses associated with growth in revenues, and an increase in salary expenses for additional sales and marketing personnel, and increased compensation expenses for existing personnel, but declined as a percentage of net revenue in the quarter ended March 31, 2002.personnel. Sales and marketing expenses grew as a percentage of net revenue in the quarterquarters ended March 30, 2003 and June 29, 2003 due to increases in headcount and technical support relating to geographic expansion as well as the timing and channel mix of marketing expenditures.

     The amount of general and administrative expenses have remained relatively constant during the quarters indicated above with a slight increase in recent quarters due to additional headcount depreciation expenseand the associated costs that the company has to bear with installation of new enterprise reporting systems, as well as related support expenses, such as legal, facilities and other outside services. General and administrative expenses decreased in the quarter ended March 30, 2003 due to lower bonus accruals.becoming public.

Liquidity and Capital Resources

     We began 2001 with $6.4 million in cash and ended 2001 with a cash balance of $9.2 million. We began 2002 with $9.2 million in cash and ended 2002 with a cash balance of $19.9 million. As of December 31, 2002 and March 30, 2003 we had outstanding letterscash, cash equivalents and short-term investments totaling $73.6 million. Short term investments accounted for $12.4 million of credit in the aggregate amount of $756,000 and had the ability to borrow approximately $19.6 million under our existing $20.0 million line of credit with Comerica Bank-California.this balance.

     Our cash balance increased from $19.9 million as of December 31, 2002 to $21.8$61.2 million as of March 30,December 31, 2003. Operating activities during the three monthsyear ended March 30,December 31, 2003 provided cash of $2.6used $26.4 million, primarily for working capital to support the increase in our net revenue. Investing activities during the year ended December 31, 2003 used $14.9 million for the purchase of short-term investments and property and equipment. During the year ended December 31, 2003, financing activities provided $82.6 million, primarily resulting from working capital.the issuance of common stock in our initial public offering, partially offset by the repayment of a line of credit and the Nortel Note.

     Our days sales outstanding increased from 5155 days as of MarchDecember 31, 2002 to 6181 days as of March 30,December 31, 2003. This increase was attributable primarily to an increasechannel mix in the amountfourth quarter of 2003 moving more towards retail, which generally has longer payment terms.

     Our accounts payable and payable to related parties, in aggregate, increased from $24.3 million at December 31, 2002 to $30.9 million at December 31, 2003. The increase of $6.6 million is due to the timing of inventory receipts. The shift of amounts payable between related party and third party accounts payable of approximately $7.3 million is due to the diversification of our net revenues occurring during the last monthcontracting manufacturing base to more vendors.

     Inventory grew by $14.5 million from $24.8 million at December 31, 2002 to $39.3 million at December 31, 2003, to support increased product shipments to customers. The primary areas of growth were finished goods at $6.7 million and in-transit inventory at $7.3 million. In the quarter ended March 30,December 31, 2003 compared to the last monthwe experienced inventory turns of approximately 6.3 times, down from approximately 8.5 times in the quarter ended MarchDecember 31, 2002. This was partially offset by cash used for the purchase of property and equipment.

     Our cash balance increased from $9.2 million as of December 31, 2001 to $19.9 million as of December 31, 2002. Operating activities during 2002 provided cash of $15.2 million primarily from a net income of $8.1 million, non-cash items of $4.2 million and contribution from working capital of $2.8 million. Our days sales outstanding increased from 40 days as of December 31, 2001 to 55 days as of December 31, 2002. This increase was attributable primarily to an increase in the amount of our net revenues occurring during the last month of the quarter ended December 31, 2002 compared to the last month of the quarter ended December 31, 2001. Investing activities for this period used $3.2 million due to purchases of property and equipment. Financing activities for this period used cash of $1.2 million primarily due to issuance costs of $1.2 million associated with the repurchase of our Series A preferred stock of $4.7 million offset by proceeds from the issuance of our Series C preferred stock of $3.5 million. In addition, our financing activities for this period included borrowings under our line of credit. We borrowed under our line of credit on 21 separate occasions during the quarter ended March 31, 2002 principally to fund our daily working capital requirements. 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. The

35


average outstanding borrowings during this period amounted to $1.1 million, and as of March 31, 2002 we had an insignificant amount outstanding.
stock.

     Our cash balance increased from $6.4 million as of December 31, 2000, to $9.2 million as of December 31, 2001. Operating activities during 2001 provided cash of $3.8 million primarily from a decrease in deferred income taxes of $3.5 million, non cash items of $1.2 million and contribution from working capital of $18.6 million, partially offset by a net loss of $19.5 million. Investing activities for this period used $1.1 million due to purchases of property and equipment. Financing activities provided no net cash since the bank line of credit was utilized and subsequently repaid within the year.

     In March 2001, we entered into a $20.0 million revolving line of credit with Bank of America, which was terminated on June 28, 2002. Borrowings under this line of credit bore interest at either a prime rate or LIBOR plus between 2.25% and 2.75% depending on our financial performance and were collateralized by substantially all of our assets. In March 2001, we drew down $12.0 million of this line of credit. We used approximately $6.0 million of this initial drawdown to pay outstanding obligations to Celestica Asia who served as our primary third-party warehousing and logistics provider. The remaining amounts borrowed were used for working capital. The $12.0 million draw on the line of credit was completely repaid by December 31, 2001. As of March 30, 2003, letters of credit in the aggregate amount of $360,000 were outstanding with Bank of America.

     As part of our repurchase of Series A preferred stock from Nortel Networks completed on February 7, 2002, we entered into a subordinated unsecured convertible promissory note payable to Nortel Networks Limited. The Nortel note has a principal amount of $20.0 million. Principal and accrued but unpaid interest are due on February 7, 2009. The promissory note bears interest at 7% per year, and begins to accrue on February 7, 2005. The entire $20.0 million balance remained payable as of March 30, 2003. The promissory note is carried at its net present value of $13.7 million as of March 30, 2003. We intend to use a portion of the proceeds of this offering to repay in full the promissory note. As a result of this $20.0 million cash payment, we will incur an extinguishment of debt charge of approximately $6.3 million in the quarter in which we make the payment. For more information concerning this note, please see Note 8 to the consolidated financial statements.

     On July 25, 2002, we entered intohave a revolving line of credit agreement with Comerica Bank-California 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 the Company’sour assets. The credit line contains covenants, including but not limited to certain financial covenants based on earnings before interest, taxes, depreciation and amortization,

31


or EBITDA, and tangible net worth, and does not allow for declaration of dividends. We are not required to maintain compensationcompensating balances, however, we are required to keep 50% of total deposits in Comerica accounts and 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 2002 we borrowed amounts under this line of credit for working capital purposes. As of March 30,December 31, 2003, all amounts borrowed under this credit line had been repaid, but letters of credit in the aggregate amount of $396,000$350,000 were outstanding, leaving approximately $19.6 million available for borrowing under this line of credit.

     After repayment of the Nortel note, we intend to use proceeds of this offering for general corporate purposes. As our net revenue grows and as we continue to invest in building our business, we expect growth in our operating expenses and working capital requirements for the foreseeable future. We believe that our cash on hand, cash flows from operations, amounts available under our bank line of credit and the net proceeds from the sale of common stock in this offering will be sufficient to meet our working capital requirements for the next 12 months.

     We lease office space and equipment under noncancelable operating leases with various expiration dates through December 2004. Rent expense was $1.8 million for the year ended December 31, 2000, $1.2 million for the year ended December 31, 2001 and $959,000 for the year ended December 31, 2002. The terms of

36


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 these agreements, orders are cancelable by giving notice 30 to 60 days prior to the expected shipment date and payment of a 5% cancellation fee. Orders are noncancelable within 30 days prior to the expected shipment date. At March 30, 2003, we had approximately $16.8 million in noncancelable purchase commitments with suppliers and $22.8 million subject to the 5% cancellation fees. We expect to sell all products which we have committed to purchase from suppliers.

The following table describes our commitments to settle contractual obligations in cash as of December 31, 2002.

                     
Payments Due By Period

Less than1-33-5More than
1 yearyearsyears5 yearsTotal





Note payable to Nortel Networks          $25,600  $25,600 
Operating leases $1,047  $634         1,681 
Purchase obligations  38,359            38,359 
   
   
   
   
   
 
  $39,406  $634  $  $25,600  $65,640 
   
   
   
   
   
 

     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 at least the next twelve months. However, we cannot be certain that our planned levels of revenue, costs and expenses will be achieved. If our operating results fail to meet our expectations or if we fail to manage our inventory, accounts receivable or other assets, we could be required to seek additional funding through public or private financings or other arrangements. In addition, as we continue to expand our product offerings, channels and geographic presence, we may require additional working capital. In such event, adequate funds may not be available when needed or may not be available on favorable or commercially reasonableacceptable 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 this offering other than to repay our note payable to Nortel Networks, in the future we may fund possible joint ventures, investments or acquisitions complementary to our business.

Backlog

     As of March 30,December 31, 2003, we had a backlog of approximately $10.8 million. Our order backlog$11.5 million compared to approximately $9.9 million as of MarchDecember 31, 2002 was approximately $8.8 million.2002. Our backlog consists of products for which customer purchase orders have been received and which are scheduled or in the process of being scheduled for shipment. While we expect to fulfill the order backlog within the current fiscal year, most orders are subject to rescheduling or cancellation with little or no penalties. Because of the possibility of customer changes in product scheduling or order cancellation, our backlog as of any particular date may not be an indicator of net sales for any succeeding period.

Contractual Obligations and Off-Balance Sheet Arrangements

The following table describes our commitments to settle contractual obligations in cash and our off-balance sheet arrangements as of December 31, 2003.

                     
Payments Due By Period

Less than1-33-5More than
1 yearyearsyears5 yearsTotal





(in thousands)
Operating leases $1,033  $179        $1,212 
Non-cancelable purchase obligations  27,528            27,528 
   
   
   
   
   
 
  $28,561  $179        $28,740 
   
   
   
   
   
 

     We lease office space and equipment under non-cancelable operating leases with various expiration dates through March 2006. Rent expense was $1.2 million for the year ended December 31, 2001, $959,000 for the year ended December 31, 2002 and $1.1 million for the year ended December 31, 2003. 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. 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 cancellable by giving notice 31-45 days prior to the expected shipment date. Orders are non cancellable within 30 days prior to the expected shipment date. At December 31, 2003, we had approximately $27.5 million in non-cancelable purchase commitments with suppliers.

32


International Restructuring

     By the end of 2004, we plan to reorganize our foreign subsidiaries and entities to manage and optimize our international operations. This project will require us to form and develop new corporate entities and implement intercompany charging structures in our sales order, purchase order, inventory, accounts receivable, accounts payable and other modules. We plan to reconfigure our management information systems in order to support these new foreign and other corporate entities. As part of the restructuring, we must amend a number of our customer and supplier agreements, which will require the consent of our third-party customers and suppliers. The restructuring will require substantial efforts by our staff as we modify our organizational structure and add personnel to support new business processes and reporting between us and these new entities. Therefore, the restructuring will result in increased staffing requirements and related expenses. In addition, we may be unable to implement successfully the changes required to support and obtain the benefits of the new structure. We cannot assure you that the restructuring will not cause unanticipated interruptions to our business operations that result in loss or delay in revenue causing a material adverse effect on our financial results. Failure to successfully execute the restructuring or other factors outside our control could negatively impact the timing and extent of any benefit we receive from the restructuring. See “Risk Factors — We intend to implement an international restructuring, which may strain our resources and increase our operating expenses.”

Critical Accounting Policies and Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial statements including those related to sales returns and allowances; bad debt; inventory reserves; vendor rebates and deferred taxes. We base our estimates on historical experience, underlying run rates and various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates. The following are critical judgments, assumptions, and estimates used in the preparation of the consolidated financial statements.

37


 
Revenue Recognition

     Revenue from product sales is generally recognized at the time the product is shipped, provided that persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Currently, for our international customers, title passes upon delivery to the port of destination and for select retailers in the United States to whom we sell directly title passes upon their receipt of product. At the end of each quarter, we estimate and defer revenue related to the product that is in-transit to international customers and retail customers in the United States that purchase direct from us based upon title passage. We use an estimated number of days based on historical transit periods for different geographies to estimate the amount of revenue to be deferred. Currently, for our international customers, title passes upon delivery to the port of destination, and for our retailers to whom we sell directly, title passes upon their receipt of product. In addition, we monitor distributor and reseller channel inventory levels to identify any excess inventory in the channel. We estimatechannel that normal inventory in the channel may range upbe subject to eight weeks of demand on handstock rotation rights for distributors and 12 weeks of demand on hand for resellers. Revenue related to channel inventory in excess of these amounts is deferred. Weeks of demand on hand are estimated based on historical sell through rates.US customers only. Gross revenue is reduced for estimated returns for stock rotation and warranty, price protection programs, customer rebates and cooperative marketing expenses deemed to be a sales incentive under Emerging Issues Task Force, or EITF, Issue 01-9, to derive net revenue.

     At the time of each sales transaction, we assess whether collection of the receivable is reasonably assured. We assess collectibility and creditworthiness of our customer’s based on a number of factors, including past transaction history withhistory; independent reports from recognized credit rating bureaus, financial statements of the customer and the creditworthinesswhere appropriate, interviews and discussions held with senior financial management of the customer. We do not request collateral from our customers. If we determine that collection is not reasonably assured, we defer revenue until receipt of cash.

33


     Material differences may result in the amount and timing of our revenue for any period if our management made different judgments and estimates.

     Prior to January 1, 2001, revenue on shipments to domestic distributors was deferred until resale to end usersend-users because we could not reasonably estimate the amount of future returns. Revenue on all shipments to international distributors was recognized upon cash collection, as the Companycompany had not established a history of collection with foreign distributors. In 2001, we determined that we had accumulated sufficient historical evidence with respect to returns and cash collections with our distributors to enable us to make reasonable estimates for all shipments on andor after January 1, 2001.

 
ReservesAllowances for Returns fordue to Stock Rotation and Warranty, Price Protection Programs, Other Sales Incentives and Doubtful Accounts

     Management makes estimates of potential future product returns, and price protection claims and other sales incentives related to current period revenue. Such estimates are based on historical returns or claims rates, channel inventory levels, current economic trends and changes in customer demand and acceptance of our products. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments and estimates.

     We evaluate our ability to collect our receivables based on a combination of factors. We regularly analyze our significant customer accounts, and, when we become aware of a specific customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, we record a specific reserveallowance for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record reservesallowances for bad debt for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer, macroeconomic considerations and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted.

     As of December 31, 2002,2003, we have provided allowances for a total of $873,000$1.3 million for doubtful accounts, $3.1$2.6 million for price protection, and $12.3$4.8 million for sales returns. After applying these allowances to our gross accounts receivable balance of $49.8$83.6 million, we had $33.6$74.9 million in net accounts receivable outstanding as of December 31, 2002.

38


2003.

 
Valuation of Inventory

     We value our inventory at the lower of cost or market, cost being determined using the actual cost of our inventory or its current estimated market value.first-in, first-out method. We continually assess the value of our inventory and will periodically write down its value for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions. On a quarterly basis, we review inventory quantities on hand and on order, under non-cancellablenon-cancelable purchase commitments, in comparison to our estimated forecast of product demand for the next twelvenine months. As demonstrated during 2001, 2002 and 2003 demand for our products can fluctuate significantly. If actual demand is lower than our forecasted demand we could be required to record additional inventory write-downs, which would have a negative effect on our gross margin.

 
Income Taxes

     As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue,accruals and allowances not currently deductible for tax and accounting purposes. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.

     Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a

34


full valuation allowance as of December 31, 2001 and 2002, because, based on the available evidence, we believebelieved at that time it iswas more likely than not that we willwould not be able to utilize all of our deferred tax assets in the future. Deferred tax assets, net ofDuring the year ended December 31, 2003 we reversed $9.8 million from the valuation allowance were zero as of December 31, 2001 and 2002.because in management’s judgment it is more likely than not that such assets will be realized in the future.

     Stock-based Compensation

     Our stock-based employee compensation plans are described more fully in Note 10 to the consolidated financial statements. We account for those plans under the recognition and measurement principles of Accounting Principles Board, or APB, Opinion No. 25 and related interpretations. We amortize stock-based compensation using the straight-line method over the vesting periods of the related options, which are generally four years.

     We have recorded deferred stock-based compensation representing the difference between the deemed fair value of our common stock for accounting purposes and the option exercise price. We determined the deemed fair value of our common stock based upon several factors, including a valuation report from an independent appraiser, trends in the broad market for technology stocks and the expected valuation we would obtain in an initial public offering. We recorded deferred stock-based compensation of $6.7 million and $1.0 million for stock options granted to employees during the yearyears ended December 31, 2002, and we2003, respectively. We amortized $1.7 million and $1.8 million of this amount in the yearyears ended December 31, 2002.2002 and 2003, respectively. Had different assumptions or criteria been used to determine the deemed fair value of our common stock, materially different amounts of stock-based compensation could have been reported.

     Pro forma information regarding net income (loss) and net income (loss) per share is required in order to show our net income (loss) as if we had accounted for employee stock options under the fair value method of SFAS No. 123, as amended by SFAS No. 148. This information is contained in Note 1 to our consolidated financial statements. The fair value of options and shares issued pursuant to our option plans at the grant date were estimated using the Black-Scholes option-pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. We use projected volatility rates, which are based upon historical volatility rates experienced by comparable public companies. Because our employee stock options have characteristics significantly different from those of publicly traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our stock options.

39


     The effects of applying pro forma disclosures of net income (loss) and net income (loss) per share are not likely to be representative of the pro forma effects on net income and earnings per share in the future years for the following reasons: (1) the number of future shares to be issued under these plans is not known and (2) the assumptions used to determine the fair value can vary significantly.

Quantitative and Qualitative Disclosure Regarding Market Risk

     The primary objective ofWe do not use derivative financial instruments in our investment activities is to preserve principal while at the same time maximizing theportfolio. We have an investment portfolio of fixed income we receive from our investments without significantly increasing risk. Some of the securities that we may invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with aare classified as “available-for-sale securities.” These securities, like all fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments in 2002 was less than one year. Due to the short-term nature of these investments, we believe we currently have no material exposureincome instruments, are subject to interest rate risk arising fromand will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in short-term securities. Due to the short duration and conservative nature of our investments.

     Inflation hasinvestment portfolio a movement of 10% by market interest rates would not hadhave a significantmaterial impact on our operations duringoperating results and the periods presented.total value of the portfolio over the next fiscal year.

     We transact business in various foreign countries. All foreign currency cash flow requirements are met using spotexposed to risks associated with foreign exchange transactions.rate fluctuations due to our international manufacturing and sales activities. We currently dogenerally have not hedge anyhedged currency exposures. These exposures may change over time as business practices evolve and could negatively impact our operating results and financial

35


condition. All of our local currency cash flows, however we maysales are denominated in U.S. dollars. An increase in the future reviewvalue of the potentialU.S. dollar relative to foreign currencies could make our products more expensive and therefore reduce the demand for hedging local currency cash flows.our products. Such a decline in the demand could reduce sales and/or result in operating losses.

Related Party Transactions

     For a description of our related party transactions, see “Certain Relationships and Related Transactions.”

Recent Accounting Pronouncements

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity to be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of SFAS 146 to have a material impact on the our financial position, results of operations or cash flows.

     In November 2002, the FASB issued FASB Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002. Our guarantees issued before December 15, 2002, which would have been disclosed in accordance with disclosure requirements of FIN 45, were not material.

     In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will applyapplies to revenue arrangements entered into in fiscalreporting periods beginning after June 15, 2003. We do not expect theThe adoption of EITF No.Issue 00-21 todid not have a material impact on ourthe financial position, results of operations or cash flows.flows of the company.

     In December 2002,2003, the Financial Accounting Standards Board (“FASB”) issued a revision to Interpretation number 46, “Consolidation of variable interest entities, and interpretation of ARB Opinion No. 51 (FIN 46R).” FIN 46R clarifies the application of ARB 51 “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders. FIN 46R requires the consolidation of these entities, known as variable interest entities (“VIE’s”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.

     Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the interpretation for public companies to the end of the first reporting period ending after March 15, 2004, except that all public companies must at a minimum apply the unmodified provisions of the interpretation to entities that were previously considered “special-purpose entities” in practice and under the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary changeliterature prior to the fair value based methodissuance of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosuresFIN 46R by the end of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148

40


requires disclosure of the pro forma effect in interim financial statements. The alternative methods of SFAS No. 148 are effective for fiscal yearsfirst reporting period ending after December 15, 2002.2003.

     Among the scope expectations, companies are not required to apply FIN 46R to an entity that meets the criteria to be considered a “business” as defined in the interpretation unless one or more of four named conditions exist. FIN 46R applies immediately to a VIE created or acquired after January 31, 2003. The disclosure provision of SFAS No. 148 is effective for interim periods beginning after December 15, 2002. The Company follows APB 25company does not have any interests in accounting for its employee stock options. TheVIE’s and the adoption of this standard didFIN 46R is not expected to have a material effectimpact on ourthe company’s financial position, or results of operations.

operations or cash flows.

Change in Auditors

     Deloitte & Touche LLP previously served as our independent accountants as well as the independent accountants for our prior parent Nortel Networks. In February 2002, concurrent with Nortel Networks selling its remaining ownership of our capital stock, we changed from Deloitte & Touche to PricewaterhouseCoopers LLP as our independent auditors. Our board of directors approved the decision to change accountants.

     In connection with the audit of the fiscal year ended December 31, 2000, we had no disagreements with Deloitte & Touche LLP on any matter of accounting principles or practices, financial statements disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused Deloitte & Touche LLP to make reference in connection with their opinion to the subject matter of the disagreement.

36


     The audit report of Deloitte & Touche LLP on our consolidated financial statements for the year ended December 31, 2000, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

41Principal Accountant Fees and Services

     Total fees billed by PricewaterhouseCoopers LLP for the audits of our financial statements and other services during the year ended December 31, 2003 amounted to $1,105,000. Of this amount, $873,000 was related to professional services provided as part of our initial public offering.

     The aggregate fees for tax compliance and tax advisory services billed by PricewaterhouseCoopers LLP during the year ended December 31, 2003 were $313,000.

     During the year ended December 31, 2003, PricewaterhouseCoopers LLP rendered no other services for us.

37


BUSINESS

General

     We design, develop and market technologically advanced, branded networking products that address the specific needs of the small business, which we define as a business with fewer than 250 employees, and home users. We supply innovative networking products that meet the ease-of-use, quality, reliability, performance and affordability requirements of these users. Our broad suite of approximately 100 products enables users to share Internet access, peripherals, files, digital multimedia content and applications among multiple personal computers, or PCs, and other Internet-enabled devices. Our products are grouped into three major segments within the small business and home markets: Ethernet networking products, broadband products and wireless networking products, with each product group including a combination of switches, adapters, and wired and wireless routers and gateways. We sell our products primarily through a global sales channel network, which includes traditional retailers with over 5,0007,100 locations worldwide, online retailers, direct market resellers, or DMRs, value added resellers, or VARs, and broadband service providers.

Industry Background

     A number of factors are driving today’s increasing demand for networking products within small businesses and homes. As the number of computing devices, such as PCs, has increased in recent years, networks are being deployed in order to share information and resources among users and devices. This information and resource sharing occurs internally, through a local area network, or LAN, or externally, via the Internet. To take advantage of complex applications, advanced communication capabilities and rich multimedia content, users are upgrading their Internet connections by deploying high-speed broadband access technologies. Users are also demandingseek the convenience and flexibility of operating their PCs, laptops and related computing devices in a more mobile, or wireless, manner. Finally, as the usage of networks, including the Internet, has increased, users have become much more focused on the security of their connections and the protection of the data within their networks.

     The number of PCs within small businesses and homes is increasing. Theincreasing due to the increased affordability and capabilities of these devices are driving smalldevices. Small businesses and homes to deployare deploying multiple PCs within these environments. According to International Data Corporation, or IDC, at the end of 2002, 69% of U.S. businesses with less than 100 employees have multiple PCs, while only 32% have deployed networks. As the number of PCs has grown and users have become more familiar with and dependent upon their capabilities, users are demandingseeking networks that enable them to share devices (printers and storage), access data and rich content (pictures, music and video files), leverage collaborative applications (email and instant messaging) and share Internet access. Furthermore, home users desire the ability to play digital audio and video content stored on a PC or the Internet, on consumer electronic devices like stereos, home theatres and TVs. In addition, demand is growing for the ability to make low cost, feature-rich telephone calls using Internet protocol, a technology known as voice-over-IP.

     As small business and home users increasingly need to access and interact with bandwidth intensive files and applications, they are demanding an upgrade from dial-up connections to broadband connections, using cable or digital subscriber line, or DSL, modems, which enable Internet access at speeds up to 20 times faster than dial-up modems. Broadband Internet access services have become increasingly affordable and available, thereby fueling penetration of these services. According to IDC, the number of DSL and cable modem broadband Internet connections worldwide is expected to increase from 58.6 million in 2002 to 183.9 million in 2006, reflecting a compound annual growth rate of 33%. Increasingly, networking products are being deployed within small businesses and homes in order to share these high-speed Internet connections among multiple users and devices.

     As wireless technologies have become more prevalent, cost-efficient and easy-to-use and install, small business and home users increasingly value the flexibility to wirelessly access and interact with their networks, including the Internet. For small businesses or homes, wireless LANs provide mobility for users and can be an affordable alternative to a wired network. Users are also able to utilize their notebook computers to access networks from a variety of locations, including their homes, offices and various other ‘hot

38


‘hot spot’ locations, such as airports, cafes and university campuses. The adoption of industry standards for wireless LAN communications has helped spur the proliferation of a variety of wireless products for both the small business and home markets. Cahners’ In-Stat/ MDR estimates that the total number of worldwide

42


shipments of wireless LAN equipment, including both network interface cards, or NICs, and access points and digital media adapters, will grow from 18.449.0 million in 20022003 to 75.0123.8 million in 2006, reflecting a compound annual growth rate of 42%36%.

     With the proliferation of networks, maintaining the security of information and protecting the privacy of communication becomes essential to both small business and home users alike. Unlike the private dedicated communication networks of past decades, which were relatively secure from intruders, the Internet and networks connected to it are increasingly susceptible to security threats. In recent years, there has been a heightened awareness of the need to protect against breaches of network security. Accordingly, there has been an increase in the demand for security related products, or the integration of security features into networking products such as Internet routers and wireless networking equipment, to protect information on networks and to limit the usage of networks only to authorized individuals.

Networking products for the small business and home markets are primarily classified into three broad categories:

          Ethernet networking products, including switches (multiple port devices used to network PCs and peripherals), NICs or network adapters, and bridges (devices that connect PCs and other equipment to a network), and peripheral servers such as print servers (devices that manage printing on a network).

          Broadband products, including routers (intelligent devices used to connect two networks together, such as a local area network and the Internet), gateways (a router with an integrated modem for Internet access), and products that include an integrated wireless access point such as a wireless gateway.

          Wireless networking products, including access points (devices that provide a wireless link between the wired network and wireless devices) and wireless NICs or network adapters, and media adapters and bridges (devices that wirelessly connect PCs, stereos, TVs and other equipment to a network).

     A typical small business network consistscan consist of:

 • multiple PCs;
 
 • peripherals such as printers and storage devices;
 
 • a network connection device such as a router, which often includes security functionality;
 
 • a NICwired or wireless network adapter for each personal computer; and
 
 • a central network controller such as a switch.

     A typical home network consistscan consist of:

 • one or more PCs;PCs and possibly consumer electronic devices to be networked;
 
 • peripherals such as printers and scanners;
 
 • Internet access devices such as a router or a gateway;
• a wired or wireless network adapter for each personal computer; and
 
 • a NIC for each personal computer.“bridge”, or a media adapter, that connects consumer electronic device such as game consoles, TVs, stereos, and telephones.

     Within both the small business and home markets, devices are typically linked together through Ethernet cables or, increasingly, wireless connections. In-home power lines can also be used to transmit data among components to form a home network.

     Small business and home users demand a complete set of wired and wireless networking and broadband solutions that are tailored to their specific needs and budgets and also incorporate the latest networking technologies. These users require the continual introduction of new and refined products. Small business and home users often lack extensive IT resources and technical knowledge and therefore demand ‘plug-and-play’

39


or easy-to-install and use solutions. These users demand reliable products that require little or no maintenance, and are supported by effective technical support and customer service. We believe that these users also prefer the convenience of obtaining a networking solution from a single vendorcompany with whom they are familiar, andfamiliar; as theythese users expand their networks, they tend to be loyal purchasers of that vendor.brand. In addition,

43


purchasing decisions of users in the small business and home markets are also driven by the affordability of networking products. To provide reliable, easy-to-use products at an attractive price, we believe a successful vendorsupplier must have a company-wide focus on the unique requirements of this market and the operational discipline and cost-efficient company infrastructure and processes that allow for efficient product development, manufacturing and distribution.

Our Strategy

     Our objective is to be the leading provider of innovative networking products that address the needs of the small business and home markets. The following are key elements of our strategy:

     Be first to market with innovative products.We believe that our experience in the small business and home markets, along with our access to technology road maps through our relationships with leading semiconductor and software companies, enable us to quickly introduce innovative products to the market. We intend to strengthen current relationships and forge new relationships with emerging suppliers of software and semiconductor technology. We intend to continue to invest in internal research and development activities designed to enhance our products to satisfy the wide range of evolving networking requirements in small businesses and homes. We plan to further broaden our product portfolio into new areas that will complement our current product offerings while leveraging our brand, channel presence and operational efficiency. For example, we believe our recent introduction of managed Ethernet switches for small businesses addresses108 Mbps 802.11g wireless products address an important market opportunity.

     Expand and enhance our sales channels.We believe that the most effective way to sell networking products to the small business and home markets is through a diverse worldwide set of traditional retailers, online retailers, DMRs, VARs and broadband service providers. We plan to expand relationships with our retail network, and continue to add new resellers, such as general merchandise retailers like Costco, whichresellers. For example, in 2003 we began selling our products in North America at such retailers as Microcenter and Office Depot and at international retailers such as Legend Group (China) and PC Specialist (Germany). In addition, we have recently entered into an agreement with Softbank BB Corp. for the fourth quarterexclusive distribution of 2002.our products in Japan. Similarly, we intend to continue to work closely with the VAR channel, both in terms ofby expanding the number of our relationships as well as developing products specifically addressing their customers’ needs. We are increasingly developing and enhancing relationships with broadband service providers in North America and internationally and have, as an example, begun reselling our products through Time-Warner Cable and Telewest UK.Comcast in the United States, Telstra in Australia and Tele Denmark. We intend to continue these initiatives and expect to pursue similar relationships with broadband service providers in the future.

     Extend our geographic presence.We believe that one of our most significant competitive advantages is our global presence. We derive substantial revenue from each of the North American, EuropeanEMEA and Asia Pacific markets. In 2002, 37%2003, 42% of our net revenue was generated from international sales. We view several international markets as opportunities for continued significant growth for our business. We have recently entered the Chinese market in China by setting upestablishing sales offices and establishing a presence withwhich serve the local retailers and VARs. We intend to continue to expand our geographic presence by targeting emerging and growing markets, such as China and India, either through direct investment or teaming with existing local companies. In addition, we plan to leverage our success in European countries, such as Italy, that are experiencing growing demand for networking products. From time to time, we may also consider acquisitions, strategic alliances or joint ventures to increase our penetration in identified markets.

     Expand our marketing initiatives.NETGEAR is one of the most widely recognized brands in the small business and home networking markets, known for affordable, reliable and easy-to-use products. We believe that the purchasing decisions of small business and home users are influenced by brand recognition. Consequently, we have made significant investments to establish the NETGEAR brand, our GearGuy logo and

40


the consistent and recognizable design of our products. We intend to continue building our brand identity through product design, packaging, public relations, advertising campaigns and other marketing efforts.

     Enhance operational efficiencies. We believe one of the keys to our success in operating a profitable business within the small business and home networking markets has been our ability to control operational costs while continuing to provide first-to-market, innovative products. We have implemented processes to manage product development efficiency, inventory and channel costs, and overall operating expenses. We plan to continue to invest in personnel, technology and processes to enhance our operational discipline and

44


efficiencies with respect to product development, manufacturing, demand assessment and supply chain and channel inventory management. By focusing on operational efficiencies, we intend to continue to meet the demands of our target markets for affordable, high quality products while maintaining a profitable business model.

Products

     Our extensive product line currently includes approximately 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 Ethernet networking products have historically generated a majority of our net revenue. However, in recent periods, the percentage of our net revenue attributable to broadband and wireless networking products has increased. Our products target the following three major segments within the small business and home markets:

 • Ethernet networking products, including switches, NICs or adapters, bridges and print servers;
 
 • broadband products, including wired and wireless routers and gateways; and
 
 • wireless networking products, including access points, wireless NICs or adapters, and media adapters and bridges.

4541


     The following table identifies our principal products as of May 30,December 31, 2003:

     

SMALL BUSINESSHOME


ETHERNET
NETWORKING
PRODUCTS
 Switches
• 10/100 megabits per second (Mbps) using copper cables
• 10/100/1000 Mbps using copper or fiber cables
• 10/100/1000 Mbps Stackable using copper or fiber cables
• 10/100/1000 Mbps Managed using copper or fiber cables
• 10/100 Mbps Managed Layer 3 Power over Ethernet using copper or fiber cables
• 10/100/1000 Mbps Managed Layer 3 using copper or fiber cables
 Switches
• 10/100 Mbps Platinum Series using copper cables

Bridges
• 14Mbps14 Mbps Wall-Plugged Ethernet Bridge
ETHERNET
NETWORKING
PRODUCTS
 NICs
• 10/100 Mbps Peripheral Component Interconnect (PCI) NIC
• 10/100 Mbps PC Card NIC
• 10/100 Mbps Ethernet Universal Serial Bus (USB) NIC
• 1000 Mbps PCI NIC
 NICs
• 10/100 Mbps PCI NIC
• 10/100 Mbps PC cardCard NIC
• 10/100 Mbps Ethernet USB NIC
• 10/100/1000 Mbps PCI NIC
  Servers Servers
  • Print Servers • Print Servers


BROADBAND
PRODUCTS
 Routers
• Ethernet Cable/DSL Web Safe Router with Printer Server
• Ethernet Cable/ DSL ProSafe Firewall Router
• Ethernet Cable/ DSL ProSafe Virtual Private Network (VPN) Firewall Router
• ProSafe 802.11g Wireless 802.11b ProSafe Firewall Routerwith USB Print Server
• ProSafe Dual Band Wireless 802.11b802.11a/b/g Wireless VPN Firewall
 ProSafe VPN Firewall Router
• Wireless 802.11a Cable/ DSL High-Speed Router
• Wireless 802.11b ProSafe VPN Security Firewall Routerclient software
 Routers/Gateways
• Ethernet Cable Modem
• Ethernet DSL Modem with USB Port
• Ethernet Cable Modem Gateway
• Ethernet DSL Modem Gateway
• Ethernet Cable/DSL Web Safe Router
• Wireless 802.11b802.11g DSL Modem Gateway
• Wireless 802.11b Cable/DSL Router
• Wireless 802.11b Cable Modem Gateway
• Wireless 802.11g Cable Modem Gateway
• Wireless 802.11g Cable/DSL Router
• Wireless 108 Mbps 802.11g Cable/DSL Router
• Wireless 108 Mbps 802.11g Cable/DSL Router with disc sharing controller
BROADBAND
PRODUCTS

  Access Points Access PointsBridges

WIRELESS
NETWORKING
PRODUCTS
 • 802.11a Access Point
• 802.11a/bProSafe 802.11g Wireless Access Point
• Power Over Ethernet Adapter18 dBi Patch Panel Directional Antenna
• 802.11b Wireless ProSafe Access Point5 dBi Omni-directional Antenna
NICs
• 802.11a802.11a/g Dual Band Wireless PCI NIC
• 802.11a Wireless PC Card NIC
• 802.11a/b Wireless PC Card NIC
• 802.11a/g Dual Band Wireless PC Card NIC
 • 802.11b Access PointWireless Bridge
• 802.11g Access PointWireless Bridge
Bridges
• 802.11b Wireless Bridge for home audio devices, or Digital Music Player

NICs
• 802.11b Wireless USB NIC
• 802.11b Wireless PCI NIC
• 802.11b Wireless PC Card NIC
• 802.11b Compact Flash NIC
• 802.11b Wireless Digital Music Player
• 802.11g Wireless USB NIC
• 802.11g Wireless PC Card NIC
• 108 Mbps 802.11g Wireless PC/PC Card NIC
• 108 Mbps 802.11g Wireless PCI NIC
WIRELESS
NETWORKING
PRODUCTS

42


     We customize our products to meet the specific needs of both the small business and home markets, tailoring various elements of the product design, including component specification, physical characteristics such as casing, design and coloration, and specific hardware and software features to meet the needs of these markets. However, we leverage many of our technological developments, high volume manufacturing, technical support and engineering infrastructure across both markets to maximize business efficiencies.

46


     Our small business products are designed with an industrial look and feel,appearance, including metal cases, and for some product categories, the ability to mount the product within standard data networking racks. These products typically include higher port counts, higher data transfer rates and other performance characteristics designed to meet the needs of a small business user. For example, we offer data transfer rates up to one Gigabit per second for our business products to meet the higher capacity requirements of business users. These products are also designed to support transmission modes such as fiber optic cabling, which is common in more sophisticated business environments. Security requirements within our broadband products include firewall and virtual private network capabilities that allow for secure interactions between remote offices and business headquarter locations. Our wireless product offerings for the small business market include higher transfer rates as well as enhanced security capabilities often required in a business setting.

     Our current development efforts for Ethernet networking products for the small business market include expanding our network management capabilities such as Layer 3 managed switching functionality, as well as offering higher port counts and densities for Fast Ethernet and Gigabit products to support the needs of growing small business customers. For our broadband products in the small business market, we plan to continue enhancing the capabilities of our routers with advanced firewall and virtual private network capabilities and to permit voice calls over the Internet. We expect that these capabilities will be offered in both traditional copper cabling as well as wireless connectivity modes including 802.11b, dual-mode 802.11a/b802.11b/g and tri-mode 802.11a/b/g. Developments in the wireless networking product area include additional 802.11g802.11b/g and tri-mode 802.11a/b/g and 802.11a/b capabilities for access points and NICs, offering advanced speeds, security and backward compatibility.

     Our home products are designed with pleasing visual and physical aesthetics that are more desirable in a home environment. For example, products featuring our Platinum series physical designs have a silver/gray coloring and lighter plastic casings to appeal to home users. Our Ethernet products for the home market use a lower cost electrical component design and contain lower port counts to meet the increased price sensitivity and specific data networking requirements of home consumers. Our wireless offerings in the home support sufficient data transfer rates for most home user applications, but at a lower price than higher capacity wireless offerings for the small business market. Our broadband products are available with features such as parental control capabilities and firewall security, to allow for safer, more controlled Internet usage in families with children. Our broadband products designed for the home market also contain advanced installation software that guides a less sophisticated data networking user through the installation process with their broadband service provider, using a graphical user interface and simple point and click operations. Our home product offerings include wall-plug data transmission modes which allow home users to take advantage of their existing electrical wiring infrastructure for transmitting data among network components.

     We are developing a substantial number of new product offerings for the home market. Our current development efforts for Ethernet networking products include expanding our product lines using in-home power lines to form a network, low cost Gigabit Ethernet NICs, and engineering redesigns to allow for price and cost reductions in our switch line. For our broadband products, we plan to expand our portfolio of wired and wireless gateways with integrated asynchronous DSL and cable modem capabilities, with enhanced ease-of-setup installation and ease-of-use capabilities. We expect these capabilities will be offered in both traditional copper cabling as well as 802.11b, and 802.11g wireless connectivity modes. Our development efforts in the wireless networking product area include aexpanding our line of 802.11g access points, routers and gateways, NICs and bridges with faster speeds, expanded range and enhanced security. Other developments include a USB disk attachable 108 Mbps 802.11g wireless router to wirelessly share files or remote access while away from home and our recently announced wireless digital music player for streaming digital music from PCs or from the Internet to play on traditional analog stereos in the home.

43


Competitive Strengths

     Since our inception in 1996, we have been solely focused on the networking needs of the small business and home markets. We provide a broad family of innovative networking products and have shipped over 1722 million units worldwide. Over the course of the past seven years, we have built a significant market share in several of the geographic and product markets we serve. We believe that the NETGEAR brand name is widely recognized for quality products that meet the networking needs of small business and home users worldwide.

47


     Reliable, Easy-to-Use, Affordable Products.We design quality products, perform rigorous technology evaluation and conduct significant product testing, which we believe allow us to achieve a high degree of customer satisfaction and a low rate of product returns and defects. Our networking products are easy to install, use and maintain and minimize the need for users to perform hardware or software configuration. For example, our proprietary, Internet browser-based ‘Smart Wizard’ application provides users with simple graphical step-by-step installation instructions, including the automatic detection of their Internet connection type in order to automatically configure their routers or gateways. We also provide comprehensive technical support and customer service. Our products satisfy the budgetary requirements of small businesses and home users.

     Broad Product Offering.We offer an extensive range of networking products to users within the small business and home markets, including routers, gateways, access points, switches and NICs. Our product line includes approximately 100 products that are available in multiple configurations to serve the geographic region in which they are sold. Our products are designed for a variety of networking environments, including traditional Ethernet cabling and wireless as well as emerging in-home electrical wiring communication. We offer broadband products for a wide range of connection types, such as DSL and cable modems. Our wireless products include wireless LAN and security functionality to address the increasing mobility and security requirements of users. We believe users in the small business and home markets prefer to purchase all of their networking products from one vendor. We therefore believe the breadth of our product line represents a competitive strength due to our ability to meet a wide range of their networking needs.

     Extensive Global Channel Presence.We sell our products in North America, EuropeEMEA and Asia Pacific through an extensive network of sales channels. Our net revenue is well balanced worldwide, with 63%58% of our net revenue in 20022003 being derived from sales in the United StatesNorth America and 37%42% derived from international sales. Our worldwide channel presence enables our end-user customers to purchase our products with the same ease with which they purchase personal computers and software. We currently sell products through traditional retailers with more than 2,8003,700 retail locations in North America, including Best Buy, Circuit City, CompUSA, Costco, Fry’s Electronics, MicroCenter, Office Depot and Staples domestically, and 2,500over 3,300 international retail locations, such as MediaMarkt (Germany, Austria) and PC World (UK) in Europe, and Harris (Australia) in Asia Pacific. Our broad product offering and sales volume enables us to command substantial shelf space at our traditional retailers worldwide, which we believe is a significant competitive advantage in our target markets. We also sell through online stores such as Amazon.com and Buy.com. We have a significant DMR presence, in both catalog sales and direct marketing channels, including relationships with CDW and PC ConnectionsConnection domestically and Misco Global MicroWarehouse and Insight Direct both domestically and internationally. We have relationships with thousands of VARs worldwide, including over 5,0008,000 domestically and more than 1,5003,000 internationally, which participate in our Powershift Partner program. This program provides incentives and training to select members who meet quarterly sales goals. In addition, we recently began selling our products through broadband service providers such as Time-Warner Cable and Telewest UK.Comcast domestically, and Telstra in Australia and Tele Denmark.

     History of Product Innovation.The product requirements of small business and home networking users are continually changing with the rapid adoption of new technologies. We believe that our experience, market presence, and global reach enable us to identify trends in product demand and rapidly introduce products to meet that demand. Our maincorporate headquarters are basedlocated in Santa Clara in the heart of the Silicon Valley andValley. From this location we team with a number of leading semiconductor and software companies in order to offer products that incorporate emerging technologies. In addition, our internal research and development efforts focus on designing products that meet the requirements of both the small business and home markets. We believe that the combination of our demand assessment capabilities and our technology collaborations often provides us with

44


a time-to-market advantage. We have a history of beingwere the first company to introduce a number of new technologies to the small business and home markets including unmanaged Gigabit Ethernet switches, Cable/ DSL routers, wireless routers and gateways with high security capabilities and 802.11a/b/g wireless NICs.Wireless NICs and 108 Mbps 802.11g Wireless NICs, Routers and Routers with USB attachable storage. In 2002,2003, we introduced 4048 new products.

     Operational Discipline. We utilize our management team’s significant experience in the networking, computer and retail industries to maintain tight operational discipline over product development and supply chain and channel inventory management. This has resulted in reduced manufacturing lead times, warranty

48


costs, price protection expenses and channel inventory. Once we have identified a promising new networking technology, we work closely with our component vendors and original design manufacturermanufacturing partners, or ODMs, in China and Taiwan to bring our products to market quickly, minimize product costs and ensure product quality. We have implemented several operational efficiency initiatives, including refining our supply chain management by introducing computerized monitoring of inventory levels and end-user purchases for many of our domestic resellers. We have also introduced a sophisticatedan enhanced demand assessment process, which allows us to work with our resellers to closely monitor demand for specific product offerings.

Sales Channels

     Our products are sold through multiple sales channels worldwide, including traditional retailers, online retailers, DMRs, VARs and, recently, broadband service providers. We sell our products through more than 5,0007,100 traditional retail locations, including domestic and international stores and online retailers, such as Amazon.com Systemax and Buy.com. Our retail channel primarily supplies products that are sold into the home market. We sell directly to Best Buy, Circuit City, Costco, Fry’s Electronics, Micro Center, Office Depot and Staples. The remaining traditional retailers, as well as our online retailers, are fulfilled through approximately 6567 wholesale distributors, the largest of which are Ingram Micro and Tech Data. These wholesale distributors are located in the United States, the United Kingdom, France, Germany, Japan and Canada and approximately 30 other countries. We work directly with our retail channels on market development activities, such as co-advertising, in-store promotions and demonstrations, event sponsorship and sales associate training as well as establishing “store within a store” websites and banner advertising.

     We primarily sell our small business products through an extensive network of DMRs and VARs. Our DMRs include companies such as CDW and Insight. VARs include over 5,0008,000 registered Powershift Partners in the United States and more than 1,5003,000 Powershift Partners internationally. Our Powershift Partners are resellers who achieve prescribed quarterly sales goals and as a result may receive sales incentives, which can be used to offset marketing costs or marketing development funding. In addition, our Powershift Partners receive other sales tools, including select products available as demonstration units at an additional discount from our standard list price, exclusive promotions and rebates, monthly e-mails and newsletters with technical, marketing and sales updates, training and seminars, and co-marketing funds. In addition, ourOur products are also resold by a large number of smaller VARs whose sales are not large enough to qualify them for our Powershift Partner program. Our DMRs and VARs purchase our products through our wholesale distributors, primarily Ingram Micro and Tech Data. We earn revenue upon the sale of products to distributors and earn no additional revenue upon the resale of our products.

The top five resellers of our products by dollar value as of December 31, 2002,2003, in each category, are set forth in alphabetical order in the table below:

       
Retail

Domestic StoresInternational StoresOnline RetailersDMRs




• Best Buy*
• Circuit City*
• CompUSA
• Fry’s Electronics*
• Staples*
 • FNAC (France)
• Future Shops (Canada)
• 4sure.com• CDW
• Circuit City*
• MediaMarkt (Germany, Austria)
• Amazon.com• Insight
• CompUSA
• PC World (UK)
• Buy.com• MicroWarehouse
• Fry’s Electronics*
• Saturn (Germany, Austria)
 • Dabs.com4sure.com
• Misco
Amazon.com
• Staples*
Buy.com
• Surcouf (France)
Dabs.com
• Systemax
 • CDW
• Dustin
• Insight
• Misco
• PC Connection

These customers buypurchase our products directly from us. The remaining customers on this list buy their products through our wholesale distributors.

45


    We are currently developing and enhancing relationships with broadband service providers in North America and internationally and have recently signed agreements with Time-Warner Cable and Telewest UKComcast to distribute our products to their subscribers.

49


Research and Development

     As of March 30,December 31, 2003, we had 2830 employees engaged in research and development. We believe that our success depends on our ability to develop products that meet the changing user needs and to anticipate and proactively respond to evolving technology in a timely and cost-effective basis. Accordingly, we have made investments in our research and development department in order to effectively evaluate new technologies and develop new products. Our research and development employees work closely with our manufacturing partners to bring our products to market in a timely, high quality and cost-efficient manner.

     We identify and qualify new technologies, and we work closely with our various technology suppliers and manufacturing partners to develop products using one of two manufacturing methodologies as described below.

     ODM. Under the ODM methodology, which we use for most of our product development activities, we define the product concept and specification and perform the technology selection and component qualification.selection. We then workcoordinate with our technology suppliers towhile they develop the chipsets, software drivers and detailed circuit designs. If additional software is required, we either develop the software in-house, subcontract the development of the software, or purchase it from a third-party vendor. Once prototypes are completed, we work with our ODMs to complete the debugging and systems integration and testing. Our ODMs conduct all of the agency approval processes for electrical safety and electromagnetic interference. After completion of the final tests, agency approvals and product documentation, the product is released for production.

     OEM. Under the OEM methodology, which we use for a limited number of products, we define the product specification and then purchase the product from OEM suppliers that have existing products fitting our design requirements. Once a technology supplier’s product is selected, we work with the OEM supplier to complete the cosmetic changes to fit into our mechanical and packaging design, as well as our documentation standard. If software is involved, the look and feel of the software is modified by the OEM supplier to meet our standards. The OEM supplier completes regulatory approvals on our behalf. When all design verification and regulatory testing is completed, the product is released for production.

     Our internal research and development efforts focus on improving the industrial design of our products and enhancing their ease-of-use through the development of software such as our proprietary ‘Smart Wizard’ application. Our total research and development expenses were $3.3 million in 2000, $4.4 million in 2001, and $7.7 million in 2002.2002 and $8.7 million in 2003.

Manufacturing

     Our primary manufacturing contractors are Delta Networks,Ambit Microsystems (recently acquired by Foxconn), Cameo Communications Inc., Lite-On Group,Delta Electronics, SerComm Corporation and Z-Com, Inc., all of which are headquartered in Taiwan. Most of theThe actual manufacturing of our products occurs both in Taiwan and mainland China. We allocate a substantial majority ofdistribute our manufacturing among these key suppliers to avoid excessive concentration with a single supplier. Delta Electronics which is associated with Delta International Holding Ltd., one of our stockholders. Please see “Certain Relationships and Related Transactions” for a further discussion of this relationship. In addition to their responsibility for the manufacturing of our products, our manufacturers purchase all necessary parts and materials to produce complete, finished goods. To maintain quality standards for our suppliers, we have established our own product testing and quality organization based in Hong Kong, which is responsible for auditing and inspecting product quality on the premises of our subcontractors.

     Through our ODM and OEM suppliers, we indirectly purchase several key components from limited sources. Many of the semiconductors used in our products are specifically designed for use in these products and are obtained from sole source suppliers on a purchase order basis. In addition,We obtain other key components, we obtain from limited sources aresuch as connector jacks, plastic casings, physical layer transceivers which are used in all of our products, and switching fabric semiconductors, which are used in our Ethernet switches and Internet gateway products.from limited sources.

     We currently outsource warehousing and distribution logistics to three third party logistics providers who are responsible for warehousing, customer order fulfillment and distribution of products. In addition, these parties are also responsible for some final packaging of our products including bundling components to form

5046


kits, and inserting appropriate documentation and power adapters. APL Logistics Americas Ltd in Walnut, California serves the Americas region, Kerry Logistics Ltd in Hong Kong is our logistics provider serving the Asia Pacific region, and Furness Logistics BV in the Netherlands serves the Europe, Middle East and AfricaEMEA regions.

Sales and Marketing

     As of March 30,December 31, 2003, we had 6485 employees in our sales department and 1514 employees in our marketing department. We work directly with our resellers on market development activities, such as co-advertising, in-store promotions and demonstrations, event sponsorship and sales associate training. We also participate in major industry trade shows and marketing events. Our marketing department is comprised of our product marketing and corporate marketing groups.

     Our product marketing group focuses on product strategy, product development roadmaps, the new product introduction process, product lifecycle management, demand assessment and competitive analysis. The group works closely with our sales and research and development groups to align our product development roadmap to meet key channel technology requirements from a strategic perspective. The group also ensures that product development activities, product launches, channel marketing program activities, and ongoing demand and supply planning occur in a well-managed, timely basis in coordination with our development, manufacturing, and sales groups, as well as our ODM, OEM and sales channel partners.

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

     The needs of our small business and home customers differ, and therefore our marketing initiatives for each of these segments are distinct. In the small business market, we have focused on emphasizing our product line expansion, such as our introduction of an 802.11a/b/g dual band tri-mode wireless adapter,a 24 port smart switch with gigabit ports, performance and reliability, and on channel development, while in the home market we have emphasized our wireless offerings, ease-of-use and aesthetics. In both markets, we have focused on developing the NETGEAR brand name, expanding our advertising programs and increasing public awareness through high visibility in the technical and popular press.

     We conduct much of our international sales and marketing operations through NETGEAR International, Inc., our domestic subsidiary, as well as through NETGEAR Deutschland GmbH, a German company and wholly-owned subsidiary of NETGEAR International, Inc.

Technical Support

     As of March 30, 2003, we employed eight persons in ourWe provide technical support function.to our customers through a combination of limited permanent employees and an extensive use of subcontracted, “outsourcing” resources. Although we design our products to require minimal technical support, if an end user is in need of support,a customer requires assistance, we provide free, high-quality technical supportadvice worldwide over the phone and Internet. We use approximately 175 people, whose services we contract for through third parties, to provide technical support for our products. We currently subcontract first and second level technical support for our products, and as of December 31, 2003 we are utilizing 279 part-time and full-time individuals to third parties.answer customers’ technical questions. First level technical support represents the first team member a customer will reach with questions,questions; and, typically, these individuals are able to answer routine technical questions. If they are unable to answerresolve the question,issue, the first level support member will forward the questioncustomer to our more highly trained second level support team, who are more experienced and have a greater level of technical expertise.group. The most difficult or unique questions are forwarded to NETGEAR employees who provideemployees. This eight person in-house staff provides the most sophisticated support when customer issues require escalation.

     In addition to providing third level technical support.support, these internal NETGEAR employees design our technical support database and are responsible for training and managing our outsourced sub-contractors.

47


We utilize the information gained from customers by our technical support organization to enhance our current and future products.

     In the United States, Canada,North America, the United Kingdom and Australia, the first and second level technical support is provided 24 hours a day, 7 days a week, 365 days a year on toll-free lines. Local language support is also available during local business hours in China, France, Germany, Italy, Japan, Korea, Spain and Sweden. In addition to providing third level technical support, internal NETGEAR employees design our technical support database and are responsible for training and

51


managing the third-party operations. We use the feedback from our technical support organization to enhance our current and future products.

Competition

     The small business and home networking markets are intensely competitive and subject to rapid technological change. We expect competition to continue to intensify. We estimate that we have approximately ten principal competitors, as well as numerous smaller competitors and potential competitors. Our principal competitors include:

 • within the small business networking market, companies such as 3Com, Allied Telesyn, The Linksys division of Cisco Systems/Linksys,Systems, Dell Computer, D-Link, Hewlett-Packard and Nortel Networks; and
 
 • within the home networking market, companies such as Belkin Corporation, D-Link, Cisco/The Linksys division of Cisco Systems and Microsoft.

     Other current competitors include numerous local vendors such as Correga and Melco/ Buffalo Technology in Japan and TP-Link in China. Our potential competitors 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. As a result, they may have more advanced technology, larger distribution channels, stronger brand names, better customer service and access to more customers than we do. For example, Dell Computer has significant brand name recognition and has an advertising presence substantially greater than ours. Similarly, Cisco Systems is well recognized as a leader in providing networking solutions to businesses and has substantially greater financial resources than we do. Several of our competitors, such as Linksys division of Cisco Systems and D-Link, offer a range of products that directly compete with most of our product offerings. Several of our other competitors primarily compete in a more limited manner. For example, Hewlett-Packard and Cisco Systems sellsells networking products primarily targeted at larger businesses or enterprises. However, the competitive environment in which we operate changes rapidly. For example, Cisco Systems recently acquired Linksys. Cisco Systems has substantial resources that it may use to expand the Linksys business. Because Cisco Systems has a large international business, it may be able to negotiate more favorable terms with manufacturers and the resale channel and other third parties. Other large companies with significant resources could become direct competitors, either through acquiring a competitor or through internal efforts.

     We believe that the principal competitive factors in the small business and home markets for networking products are:

 • product breadth;
 
 • size and scope of the sales channel;
 
 • brand name;
 
 • timeliness of new product introductions;
 
 • product performance, features, functionality and reliability;
 
 • price;
 
 • ease-of-installation, maintenance and use; and
 
 • customer service and support.

     We believe that we compete favorably in each of these categories. To remain competitive, we believe we must invest significant resources in developing new products, enhancing our current products, expanding our sales channels and maintaining customer satisfaction worldwide.

5248


Intellectual Property

     We believe that our continued success will depend primarily on the technical expertise, speed of technology implementation, creative skills and management abilities of our officers and key employees, plus ownership of a limited but important set of copyrights, trademarks, trade secrets and patents. We primarily rely on a combination of copyright, trademark and trade secret and patent laws, nondisclosure agreements with employees, consultants and suppliers and other contractual provisions to establish, maintain and protect our proprietary rights. We also hold onean issued United States design patent relating to our home product industrial design, and one provisional patent in thecurrently have at least five pending United States relatingpatent applications related to our automatic installation program, the ‘Smart Wizard.’

technology and products offered by us. In addition, we rely on third-party licensors for patented hardware and software license rights in technology that are incorporated into and are necessary for the operation and functionality of our products. We typically retain limited exclusivity over intellectual property we jointly develop with our OEM and ODM manufacturers. Our success will depend in part on our continued ability to have access to these technologies.

     We have trade secret rights for our products, consisting mainly of product design, technical product documentation and software. We also own and use distinctive trademarks on or in connection with our products, including NETGEAR, the GearGuy logo, FirstGear, ProSafe and Web Safe. NETGEAR is a trademark registered in Argentina, Australia, Brazil, Canada, the European Union, Japan, New Zealand and the United States. We have obtained or applied for registration for the “Everybody’s Connecting” trademark in Australia, the European Union, Japan, Korea and the United States. We have registered several Internet domain names that we use for electronic interaction with our customers including dissemination of product information, marketing programs, product registration, sales activities, and other commercial uses.

Employees

     As of March 30,December 31, 2003, we had 178207 employees, with 87107 in sales, marketing and technical support, 2830 in research and development, 3539 in operations, and 2831 in finance, information systems and administration. We have never had a work stoppage among our employees and no personnel are represented under collective bargaining agreements. We consider our relations with our employees to be good.

     TriNet Employer Group, Inc. provides human resource services to NETGEAR and our employees including payroll, employee relations and certain employee benefit plans. TriNet is an employer services company contracted by us to perform certain employer responsibilities on our behalf, and TriNet is the employer of record for payroll, benefits and other functions involving our employment related administration. Our agreement with TriNet is terminable by either party with 9030 days notice.

FacilitiesProperties

     Our principal administrative, sales, marketing and research and development facilities occupy approximately 56,000 square feet in an office complex in Santa Clara, California, under a lease that expires in December 2004. Several of our domestic sales employees perform their duties using leases of individual offices. Our international sales personnel reside in local sales offices in Great Britain,Australia, China, France, Germany, France, Sweden, Italy, Spain, Japan, Korea, AustraliaSpain, Sweden, and China.the United Kingdom. We also have operations personnel using a facility in Hong Kong, which is subleased from our third party logistics provider, Kerry Logistics. We believe our existing facilities are adequate for our current needs.

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

Legal Proceedings

     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.

5349


MANAGEMENT

Directors and Executive Officers and Directors

     The following table sets forth the names, ages and positions of our directors and executive officers and directors as of June 29, 2003.March 1, 2004.

       
NameAgePosition



Patrick C.S. Lo  4647  Chairman and Chief Executive Officer
Raymond P. Robidoux  5354  President
Jonathan R. Mather  5253  Executive Vice President and Chief Financial Officer
Mark G. Merrill  4849  Chief Technology Officer
Leslie A. AdamsMichael F. Falcon  48  Vice President of MarketingOperations
Michael F. FalconChristopher C. Marshall  47  Vice President of OperationsFinance
Charles T. Olson  4748  Vice President of Engineering
Timothy M. Brown(1)David Soares  2937Vice President of Europe, Middle East and Africa Sales
Michael A. Werdann35Vice President of North American Sales
Ralph E. Faison(1)45Director
A. Timothy Godwin(2)54  Director
Linwood A. Lacy, Jr.(2)  58  Director
Gerald A. Poch(2)Poch(1)  5657  Director
Gregory J. Rossmann(3)Rossmann(1)  42  Director
Stephen D. Royer(2)(3)  3839  Director
Ralph E. Faison44Director Nominee (effective upon completion of this offering)
A. Timothy Godwin53Director Nominee (effective upon completion of this offering)


(1) Mr. Brown has announced his intention to resign as a director effective uponMessrs. Ralph E. Faison, Gerald A. Poch and Gregory D. Rossmann are members of the completion of this offering.compensation committee.
 
(2) Messrs. A. Timothy Godwin, Linwood A. Lacy, PochJr. and Stephen D. Royer are members of the audit committee.
(3) Messrs. Rossmann and Royer are members of the compensation committee.

     Patrick C.S. Lohas served as our Chairman and Chief Executive Officer since March 2002. From September 1999 to March 2002, he served as our President, and since our inception in 1996 to September 1999, he served as Vice President and General Manager. Mr. Lo joined Bay Networks, a networking company, in August 1995 to launch a division targeting the small business and home markets and established the NETGEAR division in January 1996. From 1983 until 1995, Mr. Lo worked at Hewlett-Packard Company, a computer and test equipment company, where he served in various management positions in software sales, technical support, network product management, sales support and marketing in the United States and Asia, most recently as the Asia/Pacific marketing director for Unix servers. Mr. Lo received a B.S. degree in Electrical Engineering from Brown University.

     Raymond P. Robidouxhas served as our President since July 2002. From July 2001 to May 2002, Mr. Robidoux worked at Quantum Corporation, a data technology company, where he served as senior vice president and general manager of the networked attached storage division. From March 1997 to March 2001, Mr. Robidoux was at Compaq Computer, a computer and test equipment company, where he served as vice president of its North America consumer business group, focused on sales, marketing and service, from March 1999 to March 2001, and as vice president of business planning and operations from March 1997 to February 1999. Prior to that, he held various management positions in the computer hardware industry, including sales, marketing and product development. Mr. Robidoux received a B.S. degree in Aerospace Engineering from California State Polytechnic University and an M.B.A. from Pepperdine University.

     Jonathan R. Matherhas served as our Executive Vice President and Chief Financial Officer since October 2003 and served as our Vice President and Chief Financial Officer since August 2001. From July 1995 to March 2001, Mr. Mather worked at Applause Inc., a consumer products company, where he served

50


as president and chief executive officer from 1998 to 2001, as chief financial officer and chief

54


operating officer from 1997 to 1998 and as chief financial officer from 1995 to 1997. From 1985 to 1995, Mr. Mather was at Home Fashions Inc., a consumer products company, where he served as chief financial officer from 1992 to 1995, and as vice president, finance of an operating division, Louverdrape, from 1988 to 1992. Prior to that, he spent more than two years at the semiconductor division of Harris Corporation, a communications equipment company, where he served as the finance manager of the offshore manufacturing division. He has also worked in public accounting for four years with Coopers & Lybrand (now part of PricewaterhouseCoopers LLP) and for two years with Ernst & Young. Mr. Mather is a certified management accountant (CMA) and is also a chartered accountant from the Institute of Chartered Accountants in Sri Lanka, where Mr. Mather received his undergraduate B.A. degree equivalent. Mr. Mather received an M.B.A. from Cornell University, New York.

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

     Leslie A. Adamshas served as our Vice President of Marketing since October 2002. From October 1995 to October 2002, Ms. Adams worked at Compaq Computer, a computer and test equipment company, where she served as Vice President of Marketing services and integration after Compaq’s merger with Hewlett-Packard Company and, prior to that, as vice president of volume marketing and vice president of its Americas consumer business group. Prior to that, Ms. Adams spent seven years at AT&T Consumer Products in several marketing director roles, including international business director, and five years at AT&T Information Systems in computer systems and small business systems management roles. Ms. Adams received a B.A. degree in Physics and English from Bucknell University and an M.B.A. from The Wharton School of the University of Pennsylvania.

Michael F. Falconhas served as our Vice President of Operations since November 2002. From September 1999 to November 2002, Mr. Falcon worked at Quantum Corporation, a data technology company, where he served as Vice President of Operations and supply chain management. From April 1999 to September 1999, Mr. Falcon was at Meridian Data, a storage company acquired by Quantum Corporation, where he served as vice president of operations. From February 1989 to April 1999, Mr. Falcon was at Silicon Valley Group, a semiconductor equipment manufacturer, where he served as director of operations, strategic planning and supply chain management. Prior to that, he served in management positions at SCI Systems, an electronics manufacturer, Xerox Imaging Systems, a provider of scanning and text recognition solutions, and Plantronics, Inc., a provider of lightweight communication headsets. Mr. Falcon received a B.A. degree in Economics from the University of California, Santa Cruz and has completed coursework in the M.B.A. program at Santa Clara University.

     Christopher C. Marshallhas served as our Vice President of Finance since November 2003. From January 2000 to June 2003, Mr. Marshall served as Vice President Finance and Chief Accounting Officer at BackWeb Technologies Ltd., a publicly-traded company that is a provider of offline Web software. From October 1998 to November 1999, Mr. Marshall served as Vice President Finance and corporate controller at Supercom Inc., a PC assembly and distribution company. Prior to joining Supercom, from August 1997 to October 1998 Mr. Marshall served as controller for S-Vision, a company focused on lighting technology research for scientific applications. Mr. Marshall has also served over twelve years in various financial management positions at Intel Corp. Mr. Marshall earned a B.Sc. at University College, Cardiff, U.K. a M.B.A. at London Business School and a M.A. at University College London. Mr. Marshall is a Fellow of the Institute of Chartered Accountants.

Charles T. Olsonhas served as our Vice President of Engineering since January 2003. From July 1978 to January 2003, Mr. Olson worked at Hewlett-Packard Company, a computer and test equipment company, where he served as director of research and development for ProCurve networking from 1998 to 2003, as research and development manager for the Enterprise Netserver division from 1997 to 1998, and, prior to that, in various other engineering management roles in Hewlett-Packard’s Unix server and personal computer product divisions. Mr. Olson received a B.S. degree in Electrical Engineering from the University of California, Davis and an M.B.A. from Santa Clara University.

     Timothy M. BrownDavid Soareshas served as our Vice President of Europe, Middle East and Africa (EMEA) Sales since December 2003. Mr. Soares joined us in January 1998, and served as EMEA Managing Director from April 2000 to November 2003, United Kingdom and Nordic Regional Manager from February 1999 to March 2000 and United Kingdom Country Manager from January 1998 to January 1999. Prior to joining us, Mr. Soares

51


was at Hayes Microcomputer Products, a manufacturer of dial-up modems. Mr. Soares attended Ridley College, Ontario Canada.

Michael A Werdannhas served as our Vice President of American Sales since December 2003. Since joining us in 1998, Mr. Werdann has served as our United States Director of Sales, E-Commerce and DMR from December 2002 to 2003 and as our Eastern regional sales director from October 1998 to December 2002. Prior to joining us, Mr. Werdann worked for three years at Iomega Corporation, a computer hardware company, as a sales director for the value added reseller sector. Mr. Werdann holds a B.S. Degree in Communications from Seton Hall University.

Ralph E. Faisonhas served as one of our directors since August 2003. From February 2002. From April 20002003 to the present, Mr. BrownFaison has served as Vice Presidentchief executive officer of Harris Nesbitt Corp., which is associated withAndrew Corporation, a public company and a manufacturer of communications equipment and systems, and from June 2002 to the Halyard Capital Fund, LP. From May 1998 to April 2000,present, Mr. BrownFaison has also served as an associate in the Media & Telecommunications Grouppresident and a director of CIBC World Markets Corp., an investment bank.Andrew Corporation. From August 1996June 2002 to May 1998,February 2003, Mr. BrownFaison served as an analystchief operating officer of Andrew Corporation. From June 2001 to June 2002, Mr. Faison served as president and chief executive officer of Celiant Corporation, a manufacturer of power amplifiers and wireless radio frequency systems, which was acquired by Andrew Corporation in June 2002. From October 1997 to June 2001, Mr. Faison was vice president of the New Ventures Group at UBS Securities LLC, an investment bank.Lucent Technologies, a communications service provider, and from 1995 to 1997, he was vice president of advertising and brand management at Lucent Technologies. Prior to joining Lucent, Mr. BrownFaison held various positions at AT&T, a voice and data communications company, including as vice president and general manager of AT&T’s wireless business unit and manufacturing vice president for its consumer products unit in Bangkok, Thailand. He is a member of the board of directors of WatchMark Corporation, a telecommunications company and a member of the board of directors of The Chicago Executives Club. Mr. Faison received a B.A. degree in marketing from Georgia State University and a M.S. degree in management as a Sloan Fellow from Stanford University.

55


A. Timothy Godwinhas served as one of our directors since August 2003. From July 1989 to January 1997, Mr. Godwin worked at Tech Data Corporation, an information technology products distributor, in various capacities including serving as a member of its board of directors, vice chairman focusing on worldwide finance and administration, president and chief operating officer, chief financial officer and senior vice president of finance. From 1974 to June 1989, Mr. Godwin was employed by Price Waterhouse (now part of PricewaterhouseCoopers LLP), most recently as an audit partner from July 1987 to June 1989. Mr. Godwin is a Certified Public Accountant and received a B.S. degree in EconomicsAccounting from The Wharton School of the University of Pennsylvania. Mr. Brown has announced his intention to resign as a director effective upon completion of this offering.
West Florida.

     Linwood A. Lacy, Jr.has served as one of our directors since September 2002. From July 1998 to July 2001, Mr. Lacy served as chairman of 4Sure.com, a direct marketer of computer and technology products. From October 1996 to October 1997, Mr. Lacy served as president and chief executive officer of Micro Warehouse Incorporated, a micro computer direct-marketing company. From 1985 to May 1996, he served as the co-chairman and chief executive officer of Ingram Micro, Inc., a microcomputer products distributor and a then wholly-owned subsidiary of Ingram Industries Inc. From April 1996 to May 1996, Mr. Lacy served as vice chairman of Ingram Industries Inc.; from June 1995 to April 1996, he served as its president and chief executive officer; and from December 1993 to June 1995, he served as its president. Mr. Lacy is a director of EarthLink, Inc., a public company, as well as a director of several private companies, including Ingram Industries Inc. Mr. Lacy received both a B.S. degree in Chemical Engineering and an M.B.A from the University of Virginia.

     Gerald A. Pochhas served as one of our directors since March 2000. From January 2000 to the present, Mr. Poch has served as a Managing Director of Pequot Capital Management, Inc. and co-head of Pequot Ventures. Since August 1998, Mr. Poch has been one of the leaders of the venture capital team responsible for the growth and strategic direction of the group. From August 1996 to June 1998, he was the chairman, president and chief executive officer of G.E. Capital Information Technology Solutions, Inc., a technology solutions provider. Prior to that, he served as co-founder, co-chairman and co-president of AmeriData Technologies, Inc. (the predecessor company of G.E. Capital Information Technology Solutions, Inc.), a value-addedvalue-

52


added reseller and systems integrator of hardware and software systems. Mr. Poch is a director of BriteSmile, Inc., Analex Corp. and Andrew Corporation, bothwhich are public companies, as well as a director of several private companies. Mr. Poch received a B.S. degree from the University of Connecticut and a J.D. degreecum laudefrom Boston University Law School.

     Gregory J. Rossmannhas served as one of our directors since February 2002. From April 2000 to the present, Mr. Rossmann has served as a General Partner of Pequot Capital Management, Inc.’s venture and private equity investment funds.Private Equity Fund II LP. From April 1994 to April 2000, Mr. Rossmann served as Managing Director and partner at Broadview International, an investment banking firm. From June 1991 to April 1994, he worked at Dynatech Corporation, a technology holding company, where he served as manager of new business development. Prior to that, he was a co-founder of Telemaster Corporation. Mr. Rossmann is a director of several private companies. Mr. Rossmann received a B.S. degree in Electrical Engineering from the University of Cincinnati and an M.B.A. from Santa Clara University.

     Stephen D. Royerhas served as one of our directors since September 2000. From 1991 to the present, Mr. Royer has been with Shamrock Capital Advisors, Inc., a merchant banking company, where he has served as a Managing Director for more than five years. Mr. Royer is a director of several private companies. Mr. Royer received a B.A. degree in Quantitative Economics from Stanford University and an M.B.A. degree from the University of California in Los Angeles.

Ralph E. Faisonhas agreed to serve as one of our directors to be effective upon completion of this offering. From February 2003 to the present, Mr. Faison has served as chief executive officer of Andrew Corporation, a public company and a manufacturer of communications equipment and systems, and from June 2002 to the present, Mr. Faison has also served as president and a director of Andrew Corporation. From June 2002 to February 2003, Mr. Faison served as chief operating officer of Andrew Corporation. From June 2001 to June 2002, Mr. Faison served as president and chief executive officer of Celiant Corporation, a manufacturer of power amplifiers and wireless radio frequency systems, which was acquired by Andrew Corporation in June 2002. From October 1997 to June 2001, Mr. Faison was vice president of the New Ventures Group at Lucent Technologies, a communications service provider, and from 1995 to 1997, he was vice president of advertising and brand management at Lucent Technologies. Prior to joining Lucent, Mr. Faison held various positions at AT&T, a voice and data communications company, including as vice president and general manager of AT&T’s wireless business unit and manufacturing vice president for its consumer products unit in Bangkok, Thailand. He is a member of the board of directors of WatchMark

56


Corporation, a telecommunications company and a member of the board of directors of The Chicago Executives Club. Mr. Faison received a B.A. degree in marketing from Georgia State University and a M.S. degree in management as a Sloan Fellow from Stanford University.

A. Timothy Godwinhas agreed to serve as one of our directors to be effective upon completion of this offering, and he will also serve as chairman of the audit committee of our board of directors at such time. From July 1989 to January 1997, Mr. Godwin worked at Tech Data Corporation, an information technology products distributor, in various capacities including serving as a member of its board of directors, vice chairman focusing on worldwide finance and administration, president and chief operating officer, chief financial officer and senior vice president of finance. From 1974 to June 1989, Mr. Godwin was employed by Price Waterhouse (now part of PriceWaterhouseCoopers LLP), most recently as an audit partner from July 1987 to June 1989. Mr. Godwin is a Certified Public Accountant and received a B.S. degree in Accounting from the University of West Florida.

Board Composition

     Our board of directors currently consists of sixseven members, who are Messrs. Lo, Brown,Faison, Godwin, Lacy, Poch, Rossmann and Royer. Mr. Lo is the only management member of our board of directors. Upon completion of this offering, Messrs. Faison and Godwin will join our board of directors, and Mr. Godwin will also serve as chairman of the audit committee of our board of directors. Mr. Brown has announced his intention to resign as a director effective upon the completion of this offering. Our preferred stockholders are parties to a voting agreement pursuant to which our current directors have been elected and ratified, which agreement will terminate upon the closing of this offering, provided that the aggregate gross proceeds to us are not less than $35.0 million and our valuation is at least $250.0 million. Upon the termination of the voting agreement, there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected or qualified or until the earlier of their death, resignation, disqualification or removal. There are no family relationships among any of our directors and executive officers.

Director Compensation

     Following this offering, ourOur non-employee directors will receive $1,000 per meeting and will beare entitled to reimbursement of business, travel and other related expenses incurred in connection with their attendance at meetings of the board of directors and committee meetings. The chairman of our audit committee will receivereceives an additional $1,000 per committee meeting attended and the chairman of the compensation committee will receivereceives an additional $500 per meeting attended. In addition, our directors, including non-employee directors, are eligible to receive stock options under our 20002003 Stock Option Plan. Non-employeeNew non-employee directors who join our board of directors after completion of this offering willare entitled to receive automatic, non-discretionary initial options to acquire 25,000 shares of our common stock, subject to three-year vesting. Directors who have served at least six months with us will also receive an annual option of 15,000 shares beginning at the firsteach annual meeting following the completion of this offering,starting at our 2004 meeting, which will be subject to one-year vesting, under our 2003 Stock Plan. See “Benefit Plans — Director Option Program.”

Board Committees

     Our board of directors has the authority to appoint committees to perform certain management and administrative functions. Our board of directors currently has an audit committee and a compensation committee.

Audit Committee

     Our audit committee is responsible for annually recommending independent accountants, preparing the reports, statements or charters as may be required by Nasdaq or the securities laws, and reviewing:

 • the adequacy of our system of internal accounting controls;

57


 • our audited financial statements and reports and discussing the statements and reports with management, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management; and

53


 • disclosures by independent accountants concerning relationships with our company and the performance of our independent accountants.

     Our audit committee currently consists of Messrs. Godwin, Lacy Poch and Royer, each of whom is a non-management member of our board of directors. Upon completion of this offering, Mr. Godwin will become a member of our board of directors and will also serveserves as chairman of the audit committee.

     Compensation Committee

     Our compensation committee is primarily responsible for reviewing and approving the compensation, benefits, corporate goals and objectives of our chief executive officer and our other executive officers; evaluating the performance and compensation of our executive officers in light of those goals and objectives; administering our employee benefit plans and making recommendations to our board of directors regarding these matters. Our compensation committee currently consists of Messrs. RossmannFaison, Poch and Royer,Rossmann, each of whom is a non-management member of our board of directors.

Compensation Committee Interlocks and Insider Participation

Mr. Royer, a memberPoch serves as chairman of our compensation committee, is managing director of Shamrock Capital Advisors, Inc., which is a related party to Shamrock Capital Growth Fund, L.P. Mr. Royer is also an Executive Vice President of Shamrock Capital Partners, L.L.C., the general partner of Shamrock Capital Growth Fund, L.P. In September 2000, Nortel Networks sold 2,068,809 shares of our Series A preferred stock to Shamrock Holdings of California, Inc. Shamrock Holdings transferred all shares of our capital stock held by it to Shamrock Capital Growth Fund, L.P. in March 2001. In addition on March 13, 2002, we issued a warrant to Shamrock Capital Advisors, Inc. to purchase 218,750 shares of our common stock at an exercise price of $1.29 per share, for services rendered to us by Shamrock in connection with our February 2002 Series C preferred stock financing.

committee. No other interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. The compensation committee reviews and approves the compensation and benefits for our executive officers, administers our employee benefit plans and makes recommendations to our board of directors regarding such matters.

58


company.

Executive Compensation

     The following table sets forth information regarding the compensation earned by our Chief Executive Officer and each of our four other most highly compensated executive officers, collectively referred to as the named executive officers in this prospectus, during the fiscal year ended December 31, 2002.2003.

Summary Compensation Table

                           
Long Term CompensationAnnual Compensation
Annual Compensation(1)
Board Agenda

Securities UnderlyingAll Other
All Other
Name and Principal PositionName and Principal PositionSalaryBonusOptionsCompensation(2)Name and Principal PositionSalaryBonus(1)Compensation(2)










Patrick C.S. LoPatrick C.S. Lo $275,000 $55,000  $5,280(3)Patrick C.S. Lo $350,000 $100,000 $1,500 
Chairman and Chief Executive Officer Chairman and Chief Executive Officer 
Raymond P. Robidoux(4)Raymond P. Robidoux(4) 115,000 23,077 396,042 750 Raymond P. Robidoux(4) 250,000 18,750 1,500 
President President 
Jonathan R. Mather(3)Jonathan R. Mather(3) 250,000 50,000 396,042 31,500(5)Jonathan R. Mather(3) 250,000 43,750 39,069 
Vice President and Chief Financial Officer Executive Vice President and Chief Financial Officer 
Leslie A. Adams(4)Leslie A. Adams(4) 206,731  109,063 
Vice President of Marketing 
Mark G. MerrillMark G. Merrill 203,000 37,555 39,501 1,500 Mark G. Merrill 203,000 15,225 1,500 
Chief Technology Officer Chief Technology Officer 
Richard A. Fabiano(6) 190,000 36,860 13,286 1,500 
Vice President of Finance 

(1) With respectEach of our executive’s bonus is earned in 2003, subject to eachthe review and approval of the named executive officers, the aggregate amount of perquisitesour Board, and other personal benefits, securities or property received was the lesser of either $50,000 or 10% of the total annual salary and bonus reported for such named executive officer, unless otherwise stated.paid in 2004.
 
(2) All other compensation consists of discretionary matching contributions to our 401(k) plan on behalf of each named executive officer, unless otherwise stated. Excludes prerequisites and personal benefits, securities or property to the extent such benefits do not exceed the lesser of either $50,000 or 10% of the total annual sales, and bonus for the named executive officer.
 
(3)Mr. Lo received other compensation consisting of a $1,500 matching contribution to our 401(k) plan on his behalf and the payment of insurance premiums in the amount of $3,780 for the year.
(4) Mr. Robidoux joined us as President in July 2002. His annual base salary is $250,000, and he is eligible to receive an annual bonus of up to $100,000.
(5) Mr. Mather received other compensation consisting of a $1,500 matching contribution to our 401(k) plan on his behalf and a tax protected housing allowance of $30,000$37,569 for the year.
 
(6)(4) AsMs. Adams received other compensation consisting of February 1, 2003, Mr. Fabiano is no longer serving as Vice President of Finance,a $41,177 housing allowance, $41,424 moving expenses, $18,193 in bonus payments related to calendar year 2002, and has assumed the title of Vice President of Business Development.$8,269 in payments resulting from her separation from us.

     In addition, two persons who served as executive officers during the year ended December 31, 2002, and who received compensation in excess of $100,000 during that year, have since terminated their employment with us.

     Leslie A. Adams, our Vice President of Marketing, began her employment with us in October 2002. Her annual base salary is $215,000 and she is eligible to earn an annual bonus of up to 40% of her annual base salary. As part of her employment agreement, Ms. Adams was granted an option to purchase 175,000 shares of our common stock. In addition, Ms. Adams will receive a temporary housing allowance of $3,000 per month for up to two years.

     Michael F. Falcon, our Vice President of Operations, began his employment with us in November 2002. His annual base salary is $190,000 and he is eligible to earn an annual bonus of up to 40% of his annual base salary. As part of his employment agreement, Mr. Falcon was granted an option to purchase 105,000 shares of our common stock.

     Charles T. Olson, our Vice President of Engineering, began his employment with us in January 2003. His annual base salary is $190,000 and he is eligible to earn an annual bonus of up to $76,000. As part of his employment agreement, Mr. Olson was granted an option to purchase 122,500 shares of our common

5954


stock. In addition, Mr. Olson will receive a temporary housing allowance of $2,000 per month for the first twelve months of his employment with the Company.

Stock Option Grants in Last Fiscal Year

     The following table sets forth information regarding grants ofNo stock options to each of the named executive officers during 2002. The percentage of total options set forth below is based on an aggregate of 2,408,791 options granted to employees during the fiscal year ended December 31, 2002. All options were granted at the fair market value ofduring 2003 to our common stock, as determined by our board of directors, on the date of grant.

                             
Individual Grants(1)

Potential Realizable
PercentageValue at Assumed
of TotalAnnual Rate of Stock
OptionsExercisePrice Appreciation for
Number ofGranted toor BaseOption Term(2)
Shares ofEmployees inPrice PerExpiration
Common StockFY 2002ShareDate0%5%10%







Patrick C.S. Lo                     
Raymond P. Robidoux  396,042   16.4% $5.10   07/31/12  $2,337,000  $4,933,000  $8,837,000 
Jonathan R. Mather  396,042   16.4   1.29   02/08/12   3,846,000   6,283,000   9,867,000 
Mark G. Merrill  39,501   1.6   6.00   10/30/12   198,000   465,000   872,000 
Richard A. Fabiano  13,286   0.6   6.00   10/30/12   66,000   156,000   293,000 


(1) These outstanding stock options were granted under our 2000 Stock Option Plan. The options vest over the course of four years, at a rate of 25% upon the first anniversary of their vesting start dates and then at a rate of  1/48 per month thereafter. See “Benefit Plans — 2000 Stock Option Plan” for a further description of certain terms relating to these options. In addition, the stock options granted to our officers are subject to the vesting acceleration provisions described under “Employment Agreements and Change of Control Arrangements” set forth below.
(2) Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts representing hypothetical gains are those that could be achieved if options are exercised at the end of the option term. The assumed 0%, 5% and 10% rates of stock price appreciation are provided in accordance with rules of the Securities and Exchange Commission based on the assumed initial public offering price of $11.00 per share, and do not represent our estimate or projection of the future stock price.
named executive officers.

Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

     None of the named executive officers exercised options during the fiscal year ended December 31, 2002.2003. The following table sets forth the number and value of securities underlying options held as of December 31, 2002.2003.

                
                        
Number of Shares
Number of Shares UnderlyingValue of Unexercised In-the-MoneyUnderlying UnexercisedValue of Unexercised In-the-
NumberUnexercised Options at Year-EndOptions at Year-End(1)Options at Year-EndMoney Options at Year-End
of SharesValue



NameAcquiredRealizedExercisableUnexercisableExercisableUnexercisableExercisableUnexercisableExercisableUnexercisable











Patrick C.S. Lo   747,570 249,191 $4,849,000 $1,616,000  996,761  11,442,816  
Raymond P. Robidoux    396,042  2,337,000  140,264 255,778 1,527,475 2,785,422 
Jonathan R. Mather   132,014 264,027 1,282,000 2,564,000  231,022 165,020 3,396,023 2,425,794 
Leslie A. Adams 51,041 123,959 509,900 1,238,350 
Mark G. Merrill   420,101 151,005 2,693,000 952,000  562,871 8,236 6,415,174 82,279 
Richard A. Fabiano   246,440 85,298 1,527,000 526,000 


(1) There was no public trading market for our common stock as of December 31, 2002. Accordingly, as permitted by the rules of the Securities and Exchange Commission, these values have been calculated based on a fair market value of our common stock of $11.00 per share as determined by our board of directors, less the applicable exercise price.

60


Employment Agreements and Change of Control Arrangements

     We have entered into employment agreements with the following of our named executive officers and current executive officers. Each agreement may be terminated by either us or the executive officer at any time with or without cause. In addition, the employment agreements provide for annual salary and bonus amounts and severance benefits, as may be adjusted from time to time by the board of directors.

     On December 3, 1999, we entered into an employment agreement with Patrick C.S. Lo, our Chairman and Chief Executive Officer. The agreement provides that if within one year following a change of control of the company, Mr. Lo is terminated without cause or resigns for good reason, he is entitled to full acceleration of any unvested portion of his stock options, and severance payments at his final base salary rate for a period of one year after his termination or resignation. If Mr. Lo is terminated without cause, he is entitled to receive severance payments at his final base salary rate for a period of one year and will continue to have his stock options vest for one year after such termination.

     On December 9, 1999, we entered into an employment agreement with Mark G. Merrill, our Chief Technology Officer, and an employmentOfficer. The agreement with Richard A. Fabiano, our Vice President of Business Development. The agreements provideprovides that if within one year following a change of control of the company, the officerMr. Merrill is terminated without cause or resigns for good reason, he is entitled to receive two years acceleration of any unvested portion of his stock options. If the officerMr. Merrill is terminated without cause, he is entitled to receive severance payments at his final base salary rate for 26 weeks and will continue to have his stock options vest for one year after such termination.

     On July 15, 2002, we entered into an employment agreement with Raymond P. Robidoux, our President and on August 10, 2001, we entered into an employment agreement with Jonathan R. Mather, our Executive Vice President and Chief Financial Officer. The agreements provide that if within one year following a change of control of the company (in the case of Mr. Mather, if such change of control occurs after August 31, 2003), the officer is terminated without cause or resigns for good reason, he is entitled to receive two years acceleration of any unvested portion of his stock options. If the officer is terminated without cause, he is entitled to receive severance payments at his final base salary rate for a period of 39 weeks and will continue to have his stock options vest for one year after such termination. With respect to Mr. Mather, if a change of control occurs prior to August 31, 2003, he is entitled to one year acceleration of any unvested portion of his stock options, and if he is terminated without cause or resigns for good reason within one year following the change of control, he is entitled to receive an additional one year acceleration of any unvested portion of his stock options. In addition, Mr. Mather is eligible to receive a no-interest housing loan not to exceed $250,000, which would be due and payable upon his termination of employment.

     In April 2003, we entered into an employment agreement with Leslie A. Adams, our Vice President of Marketing.     On November 4, 2002, we entered into an employment agreement with Michael F. Falcon, our Vice President of Operations. On January 6, 2003, we entered into an employment agreement with Charles T. Olson, our Vice President of Engineering. TheOn November 3, 2003, we entered into an employment agreement with Michael A. Werdann, our Vice President of America Sales. On November 14, 2003, we entered into an employment agreement with Christopher C. Marshall, our Vice President of Finance. Each of these agreements provide that if within one year following a change of control of the company,NETGEAR, the officer is terminated without cause or resigns for good reason, he or she is entitled to receive two years acceleration of any

55


unvested portion of his or herstock options, except that Mr. Falcon is entitled to receive one year acceleration of any unvested portion of his stock options. If the officer is terminated without cause, he or she is entitled to receive severance payments at his or her final base salary rate for a period of 26 weeks and will continue to have his or her stock options vest for one year after such termination, except that Mr. Marshall will continue to have his stock options vest for six months after such termination.

Benefit Plans

 
2000 Stock Option Plan

     Our 2000 Stock Option Plan, or the 2000 Stock Plan, was adopted by our board of directors in April 2000 and our stockholders initially approved our plan in April 2000. Our 2000 Stock Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to our employees, and for the grant of nonstatutory stock options to our employees, directors and consultants.

61


     Our board of directors has determined that no future options will be granted under our 2000 Stock Plan following the effective date of this offering. A total of 7,350,000 shares of our common stock were authorized for issuance under this plan. As of March 30, 2003,February 20, 2004, options to purchase an aggregate of 6,436,8174,986,747 shares of our common stock were outstanding and 956,933 shares were available for future grant. The options outstanding at the time of this offering will remain subject to the terms of the agreements evidencing those options and the terms of the 2000 Stock Plan. Our board of directors determined that upon the closing of our initial public offering, no future options were to be granted under our 2000 Stock Plan, and suchall remaining authorized options will continue to be administered byhave become issuable under our board of directors.2003 Stock Plan.

     The 2000 Stock Plan provides that in the event of (1) the direct or indirect sale by stockholders of more than 50% of our voting stock, (2) our merger with or into another corporation, (3) the sale of all or substantially all of our assets, or (4) our liquidation or dissolution, the successor corporation may assume or substitute for each option. If the successor corporation does not assume or substitute for the options, the options will become fully vested and exercisable as of ten days prior to the merger,proposed transaction, provided that such options will terminate if not exercised prior to the acquisition or other transaction.

2003 Stock Plan

2003 Stock Plan

     Concurrently with this offering, we intend to establish a 2003 Stock Plan.     Our board of directors adopted the 2003 Stock Plan in April 2003, and our stockholders approved the plan in July 2003. This plan provides for the grant of incentive stock options to our employees and nonstatutory stock options, stock purchase rights and stock appreciation rights to our employees, directors and consultants.

     Number of Shares of Common Stock Available Under the 2003 Stock Plan.As of April 8, 2003, a total of 750,000 Approximately 1.6 million shares of our common stock werehave been reserved for issuance pursuant to our 2003 Stock Plan. In addition, upon the closingAs of this offering, authorized but unissuedFebruary 20, 2004, options to purchase an aggregate of 314,875 shares of our common stock were outstanding under the 2000 Stock2003 Plan which equaled 956,933 shares at March 30, 2003, plus any shares returned to our 2000 Stock Plan as a result of termination of options or repurchase of shares issued thereunder, will be transferred to our 2003 Stock Planand 1,305,674 remain available for future issuance. No options have yet been issued pursuant to our 2003 Stock Plan.grant.

     If an option, stock purchase right or stock appreciation right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an option exchange program, the unpurchased shares which were subject to such award will become available for future grant or sale under our plan (unless our plan has terminated). However, shares that have actually been issued under our plan, upon exercise of an option, stock purchase right or stock appreciation right, will not be returned to our plan and will not be available for future distribution under our plan, except if shares of restricted stock are repurchased by us at their original price, in which case such shares will be available for future grant under our plan.

     Administration of the 2003 Stock Plan.Our board of directors, or one or more committees appointed by our board, will administeradministers our 2003 Stock Plan. In the case of awards intended to qualify as “performance based compensation” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, the committee will consist of two or more “outside directors” within the meaning of Section 162(m). The administrator has the power to determine the terms of the options, stock purchase rights or stock appreciation rights granted, including the exercise price (which may be changed by the administrator after the date of grant), the number of shares subject to each award, the exercisability of the awards and the form of consideration payable upon exercise.

     Options.The administrator will determine the exercise price of options granted under our 2003 Stock Plan. The terms of our 2003 Stock Plan allow the administrator to grant options at exercise prices that are equal to or above fair market value. After termination of one of our employees, directors or consultants, he or

56


she may exercise his or her option for the period of time stated in the option agreement. If termination is due to death or disability, the option will generally remain exercisable for 12 months following such termination. In all other cases, the option will generally remain exercisable for three months. However, an option may never be exercised later than the expiration of its term. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns 10% of the voting power of all classes of our outstanding capital stock, the term must not exceed five years and the exercise price must equal at least 110%

62


of the fair market value on the date of grant. The administrator determines the term of all other options. No optionee may be granted options to purchase more than 750,000 shares in any fiscal year. In connection with his or her initial service, an optionee may be granted additional options to purchase up to 750,000 shares.

     Stock Purchase Rights.Our 2003 Stock Plan allows the administrator to issue stock purchase rights at purchase prices that are equal to or above fair market value of the shares. Unless the administrator determines otherwise, the restricted stock purchase agreement, the agreement between us and an optionee which governs the terms of his or her stock purchase rights, will grant us a repurchase option that we may exercise upon the voluntary or involuntary termination of the optionee’s service with us for any reason including death or disability. The purchase price for shares we repurchase will generally be the original price paid by the optionee. The administrator determines the rate at which our repurchase option will lapse.

     Stock Appreciation Rights.A stock appreciation right is the right to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. We may pay the appreciation in either cash or in shares of our common stock. Stock appreciation rights are subject to the terms established by the administrator and become exerciseableexercisable as specified by the administrator in a notice of grant.

     Transferability of Awards.Unless the administrator determines otherwise, our 2003 Stock Plan does not allow for the transfer of awards other than by will or by the laws of descent and distribution, and only the participant may exercise an award during his or her lifetime.

     Adjustments upon Change in Control.Our 2003 Stock Plan provides that in the event of our change in control, including the sale of all or substantially all of our assets, the successor corporation will assume or substitute for each option or right. Any outstanding options or rights not assumed or substituted for will be fully exercisable, including as to shares that would not otherwise have been vested and exercisable, for a period of 15 days from the date of notice to the optionee. The option or right will terminate at the end of the 15-day period.

     Amendment and Termination of Our 2003 Stock Plan. Our 2003 Stock Plan will automatically terminate in 2013, unless we terminate it sooner. In addition, our board of directors has the authority to amend, suspend or terminate our 2003 Stock Plan provided it does not adversely affect any award previously granted under our plan.

 
Director Option Program

     The director option program is part of our 2003 Stock Plan and provides for the automatic, periodic grant of nonstatutory stock options to our non-employee directors. Each non-employee director who joins our board after completion of this offering will receivereceives an initial option to purchase 25,000 shares when such person first becomes a non-employee director, except for those directors who became non-employee directors through the termination of their employment with us. In addition, beginning in 2004, each non-employee director who has been a director for at least six months will receive a subsequent option to purchase 15,000 shares following each annual meeting of our stockholders.

     All options granted under our director option program have a term of ten years and an exercise price equal to the fair market value of our common stock on the date of grant. Each initial option becomes exercisable as to one-third of the shares subject to the option on each anniversary of the date of grant, provided the individual remains a non-employee director on such dates. Each subsequent option becomes exercisable as to 100% of the shares subject to the option on the first anniversary of the grant date, provided the individual remains a service provider on such date. If an outside director terminates service, he or she may generally exercise his or her options for 12 months following such termination or five years if

57


termination is due to a qualifying retirement. In the event of our change in control, each non-employee director option will vest in full.

63


 
2003 Employee Stock Purchase Plan

     Concurrently with this offering, we intend to establish a 2003 Employee Stock Purchase Plan.     Our board of directors adopted the 2003 Employee Stock Purchase Plan in April 2003, and our stockholders approved the plan in July 2003.

     Number of Shares of Common Stock Available Under Our Plan.A As of December 31, 2003, a total of 500,000 shares of our common stock will be madewere available for sale.sale under the 2003 Employee Stock Purchase Plan.

     Administration of Our Plan.Our board of directors, or aany committee appointed by our board, will administeradministers our plan and will havehas full and exclusive authority to interpret its terms and to determine eligibility under it.

     Eligibility to Participate.Our employees and employees of designated subsidiaries are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase stock under our plan if such employee:

 • immediately after the grant owns stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock; or
 
 • whose rights to purchase stock under all of our employee stock purchase plans accrue at a rate that exceeds $25,000 worth of stock for each calendar year.

     Offering Periods and Contributions.Our 2003 Employee Stock Purchase Plan is intended to qualify for preferential tax treatment under Section 423 of the Internal Revenue Code of 1986, as amended, and contains consecutive six-month offering periods. However,Although the first offering period under this plan will startstarted on the effective date of thisour initial public offering and will endended on January 31, 2004. Thereafter, the2004, offering periods will generally start on the first trading day on or after February 1 and August 1 of each year. All eligible employees will be automatically enrolled in the first offering period, but payroll deductions and continued participation in the first offering period will not be determined until after the effective date of the Form S-8 registration statement which is intended to register the shares reserved for issuance under our plan.

     Our plan permits participants to purchase shares of our common stock through payroll deductions of up to 10% of their eligible compensation, which includes a participant’s base straight time gross earnings, commissions, overtime and shift premiums, but excludes all other compensation paid to our employees. A participant may purchase no more than 10,000 shares during any six-month offering period.

     Purchase of Shares.Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each six-month offering period. The price is 85% of the lower of the fair market value of our common stock at the beginning of an offering period or on the last day of the offering period. Participants may end their participation at any time during an offering period, and will be paid their accumulated payroll deductions upon withdrawal. Participation ends automatically three months following termination of employment with us unless terminated earlier at the participants’ request.

     Transferability of Rights.A participant may not transfer rights granted under our plan other than by will or the laws of descent and distribution.

     Adjustments Upon Change in Control.In the event of our change in control, including the sale of all or substantially all of our assets, a successor corporation may assume or substitute for each outstanding option. If the successor corporation does not assume or substitute for the outstanding options, the offering period then in progress will be shortened by setting a new exercise date, any offering period then in progress will end on the new exercise date and participant payroll deductions held by us will be used to purchase shares of our common stock on the new exercise date.

     Amendment and Termination.The administrator has the authority to amend or terminate our plan, except that, subject to certain exceptions described in our plan, no such action may adversely affect any outstanding rights to purchase stock under our plan.

6458


401(k) Retirement Savings Plan

     We sponsor a 401(k) retirement savings plan covering our employees who are at least 21 years of age. Our 401(k) retirement savings plan is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Contributions to the 401(k) retirement savings plan and income earned on such contributions are not taxable to employees until withdrawn from the 401(k) retirement savings plan. Subject to restrictions imposed by the Internal Revenue Code on highly compensated employees, employees may generally defer up to 15%100% of their pre-tax earnings up to the statutorily prescribed annual limit, which is $12,000$13,000 for the 20032004 calendar year, and to have the amount contributed to the 401(k) retirement savings plan. The 401(k) retirement savings plan permits, but does not require, additional matching contributions to the plan. To date, we have made limited matching contributions to the 401(k) savings plan up to a maximum of $1,500 per year per person. The 401(k) retirement savings plan may be amended or terminated by us at any time in our sole discretion.

Limitation on Liability and Indemnification Matters

     As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:

 • any breach of the director’s duty of loyalty to us or our stockholders;
 
 • any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
 
 • any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or
 
 • any transaction from which the director derived an improper personal benefit.

     The limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. If Delaware law is amended to authorize the further elimination or limiting of the liability of a director, then the liability of our directors will be eliminated or limited to the furthest extent permitted by Delaware law as so amended.

     Our certificate of incorporation allows us to indemnify our officers, directors and other agents to the full extent permitted by Delaware law. Our bylaws permit us to purchase insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether Delaware law would permit indemnification, and to provide indemnification in circumstances in which indemnification is otherwise discretionary under Delaware law. Our bylaws specify circumstances in which indemnification for our directors and executive officers is mandatory and when we may be required to advance expenses before final disposition of any litigation.

     We have entered into indemnification agreements with each of our directors and officers that are, in some cases, broader than the specific indemnification provisions permitted by Delaware law, and that may provide additional procedural protection. The indemnification agreements require us, among other things, to:

 • indemnify officers and directors against certain liabilities that may arise because of their status as officers or directors;
 
 • advance expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to limited exceptions; and
 
 • in certain cases obtain directors’ and officers’ insurance.

     At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation or proceeding that maycould result in claims for indemnification.

6559


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     We describe below transactions and series of similar transactions, during our last three fiscal years, to which we were a party or will be a party, in which:

 • the amounts involved exceeded or will exceed $60,000; and
 
 • a director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

     We also describe below certain other transactions with our directors, executive officers and stockholders.

Our Formation and Separation from Nortel Networks

     We were incorporated in 1996 as a wholly-owned subsidiary of Bay Networks. Nortel Networks acquired Bay Networks in August 1998. We remained a wholly owned subsidiary of Nortel Networks until March 2000 when we issued and sold 3,320,537 shares of our Series B preferred stock to Pequot Private Equity Fund II, L.P. At such time, we also entered into a number of agreements with Nortel Networks, including a contribution agreement, an intellectual property license agreement, a transition services agreement and a loaned employee agreement. The transition services agreement and the loaned employee agreement have been terminated. Nortel Networks sold part of its ownership interest in us in September 2000 and sold the remainder of its ownership interest in February 2002.

Equity Transactions and Related Matters

 
Series B Preferred Stock Financing

     In March 2000, we issued and sold an aggregate of 3,320,537 shares of our Series B preferred stock to Pequot Private Equity Fund II, L.P. for an aggregate purchase price of $15.0 million. The Series B preferred stock is convertibleconverted into an equal number of shares of common stock subject to future adjustments for dilution.in connection with our initial public offering. Gerald A. Poch is a Managing Director of Pequot Capital Management, Inc. and co-head of Pequot Ventures, and Gregory M. Rossmann is a General Partner of Pequot Private Equity Fund II, L.P. Both Mr. Poch and Mr. Rossmann serve as members of our board of directors.

 
Nortel Networks Sale of Series A Preferred Stock

     In September 2000, Nortel Networks sold the following shares of our Series A preferred stock then held by it, at a price of $7.25 per share, to the following entities:

         
No. of         
PurchaserPurchaserSharesPurchase PricePurchaserNo. of SharesPurchase Price







(in thousands)(in thousands)
Shamrock Holdings of California, Inc. (which is a related party to Shamrock Capital Growth Fund, L.P.)Shamrock Holdings of California, Inc. (which is a related party to Shamrock Capital Growth Fund, L.P.) 2,068,809 $14,990 Shamrock Holdings of California, Inc. (which is a related party to Shamrock Capital Growth Fund, L.P.) 2,068,809 $14,990 
Entities affiliated with Blue Ridge Limited PartnershipEntities affiliated with Blue Ridge Limited Partnership 1,131,703 8,200 Entities affiliated with Blue Ridge Limited Partnership 1,131,703 8,200 
BMO Nesbitt Burns Capital (U.S.) Inc. (which is a related party to Harris Nesbitt Corp.)BMO Nesbitt Burns Capital (U.S.) Inc. (which is a related party to Harris Nesbitt Corp.) 966,087 7,000 BMO Nesbitt Burns Capital (U.S.) Inc. (which is a related party to Harris Nesbitt Corp.) 966,087 7,000 
Entities affiliated with The Abernathy Group Institutional HSN Fund, L.P. Entities affiliated with The Abernathy Group Institutional HSN Fund, L.P.  1,395,459 10,111 Entities affiliated with The Abernathy Group Institutional HSN Fund, L.P. 1,395,459 10,111 
Delta International Holding Ltd. Delta International Holding Ltd.  414,037 3,000 Delta International Holding Ltd. 414,037 3,000 
 
 
   
 
 
Total 5,976,095 $43,301 Total 5,976,095 $43,301 
 
 
   
 
 

     Patrick C.S. Lo, our Chairman and Chief Executive Officer, was a limited partner in The Abernathy Group. In December 2000, The Abernathy Group funds transferred an aggregate of 648,527 shares of our Series A preferred stock held by them to 60 of their limited partners, which included an aggregate of 94,192 shares transferred to a trust on behalf of Mr. Lo. Each of the transferees thereby became direct stockholders of NETGEAR.

6660


     Stephen D. Royer, one of our directors, is managing director of Shamrock Capital Advisors, Inc., which is a related party to Shamrock Capital Growth Fund, L.P. Mr. Royer is also an Executive Vice President of Shamrock Capital Partners, L.L.C., the general partner of Shamrock Capital Growth Fund, L.P. In March 2001, Shamrock Holdings of California, Inc. transferred all shares of our capital stock held by it to Shamrock Capital Growth Fund, L.P.

     Timothy M. Brown, oneAll shares of preferred stock converted into common stock in connection with our directors, is a Vice President of Harris Nesbitt Corp., which is a related party to the Halyard Capital Fund, LP.

Delta International Holding Ltd. is an affiliate of Delta Networks, one of our primary contract manufacturers. Please see “Business — Manufacturing” for a further discussion of our relationship with Delta Networks.initial public offering.

 
Series C Preferred Stock Financing and Repurchase of Series A Preferred Stock Held by Nortel Networks

     In February 2002, we issued and sold an aggregate of 10,937,408 shares of our Series C preferred stock to our stockholders of record (other than Nortel Networks), on a pro rata basis, for an aggregate purchase price of $5.2 million. As payment for the Series C preferred stock, the stockholders (other than Nortel Networks and Pequot Private Equity Fund, II, L.P.) transferred to us 75% of a contractual liquidation preference right that such stockholders previously obtained from Nortel Networks in connection with their purchase of shares of our Series A preferred stock from Nortel Networks in September 2000. The liquidation preference right required Nortel Networks to, in the event of a liquidation of the company at a price of less than $7.43 per share, pay to all holders of Series A preferred stock (other than Nortel Networks) an amount up to $2.19 per share. Since Pequot Private Equity Fund, II, L.P. did not hold any shares of our Series A preferred stock, Pequot Private Equity Fund, II, L.P. paid us approximately $4.7 million in cash to purchase shares of our Series C preferred stock in the financing. The Series C preferred stock is convertibleconverted into an equal number of shares of common stock subject to future adjustments for dilution.in connection with our initial public offering.

     We used the cash proceeds from the sale of our Series C preferred stock as partial consideration to repurchase 20,273,918 shares of the our Series A preferred stock held by Nortel Networks. In consideration for the repurchase of the shares, we (1) paid Nortel Networks $4.7 million in cash, (2) issued a $20.0 million subordinated unsecured convertible promissory note and (3) assumed 75% of the contractual liquidation preference obligation previously payable by Nortel Networks as described above. We intend to pay the promissory note in full using a portion of the proceeds from this offering. Nortel Networks remains obligated to pay the remaining 25% of the contractual liquidation preference obligation.

     In connection with the stock repurchase, we also entered into a tax matters agreement with Nortel Networks which allocates rights and responsibilities for tax matters between us and Nortel Networks for prior tax years during which we were included in a joint tax return with Nortel Networks. The agreement provides that Nortel Networks will indemnify us for any tax liabilities arising on or before September 6, 2000 and we will indemnify Nortel Networks for any tax liabilities arising from our operations after September 6, 2000. We ceased to be included in Nortel Networks’ consolidated tax returns on September 6, 2000 for federal and state income tax purposes. We also entered into a letter agreement with Nortel Networks that sets forth the repayment terms of a $4.2 million trade payable obligation that we owed to Nortel Networks, which we have repaid in full after December 31, 2002.full.

 
Common Stock Warrant to Shamrock Capital Advisors, Inc.

     On March 13, 2002, we issued a warrant to Shamrock Capital Advisors, Inc. to purchase 218,750 shares of our common stock at an exercise price of $1.29 per share, for services rendered to us by Shamrock in connection with our February 2002 Series C preferred stock financing. The warrant is currently exercisable and will expire uponPursuant to the closing of this offering, provided that the aggregate gross proceeds to us are not less than $35.0 million and our valuation is at least $250.0 million, and will otherwise expire on March 13, 2007. The exercise price may be paid in cash or awarrant’s net exercise in which a portion ofprovision, the warrant is surrenderedwas exercised in lieufull immediately prior to our initial public offering with Shamrock Capital Advisors, Inc. receiving 198,593 shares of paying the exercise price.

67


our common stock.

Registration Rights

     HoldersCertain of our preferred stockstockholders are entitled to certain registration rights with respect to the common stock issued or issuable upon conversion of the preferred stock.rights. See “Description of Capital Stock — Registration Rights.”

61


Indemnification and Employment Agreements

     We have entered into indemnification agreements with each of our directors and officers. See “Management — Limitation on Liability and Indemnification Matters.” We have also entered into employment agreements with our officers. See “Management — Employment Agreements and Change of Control Arrangements.”

Certain Other Transactions with Executive Officers and Directors

     A. Timothy Godwin has agreed to serveserves as one of our directors to be effective upon completion of this offering, and he will also serveserves as chairman of the audit committee of our board of directors at such time.committee. From 1989 to March 1997, Mr. Godwin worked at Tech Data Corporation, an information technology products distributor, in various capacities, including as vice chairman, president, chief operating officer and a director of Tech Data from September 1995 to March 1997. A substantial portion of our revenue to date has been derived from a limited number of wholesale distributors, including Tech Data.

     Linwood A. Lacy, Jr., one of our directors, has been a director of Ingram Industries Inc. since 1991, and from 1985 to May 1996, he served as the co-chairman and chief executive officer of Ingram Micro, Inc., a microcomputer products distributor and a then wholly-owned subsidiary of Ingram Industries Inc. A substantial portion of our revenue to date has been derived from a limited number of wholesale distributors, the largest of which is Ingram Micro. From October 1996 to October 1997, Mr. Lacy also served as president and chief executive officer of Micro Warehouse Incorporated, a micro computer direct-marketing company andacquired by CDW, one of our top five direct market resellers.

     In April 2002, we issued a stand-alone nonstatutory stock option to Michael Ressner, one of our former directors associated with Nortel Networks, to purchase 43,750 shares of our common stock at an exercise price of $3.31 per share. The option is fully vested and expires on April 22, 2006, or earlier in connection with our change in control if not assumed or substituted by the successor company. Mr. Ressner resigned from our board of directors in February 2002 in connection with our repurchase of all of the shares of Series A preferred stock then held by Nortel Networks. We issued the stock option to Mr. Ressner pursuant to a settlement agreement and release in connection with such termination of services.

     In April 2003, we entered into separation and release agreements with each of Stephen Dix and Arthur J. Smith, two of our former executive officers. Pursuant to the terms of their separation agreements, each officer received twenty-six26 weeks of severance pay and benefits and option acceleration and exercise rights pursuant to the terms of their employment agreements with us.

On December 21, 2003, we entered into a severance agreement and release with Leslie A. Adams, our former Vice President of Marketing. Pursuant to the terms of her separation agreement, she is receiving 26 weeks of severance pay and benefits and will continue to have her options vest through one-year following her separation from us. In addition, the agreement provides for the monthly payment of a housing allowance to Ms. Adams, payable during the 26-week period following her termination of employment. Ms. Adams has agreed to a one-year non-solicitation period regarding our employees.

 
Stock Option Grants

     We have granted stock options to purchase shares of our common stock to our executive officers and directors. See “Principal Stockholders.”

 
Stock Option Exchange Program

     On October 30, 2002, we completed a stock option exchange program whereby eligible officers and employees of the company had the opportunity to exchange all or part of their then existing stock options for new options pursuant to a six months and a day option exchange program.

     Mark G. Merrill, our chief technology officer, participated in the option exchange program, pursuant to which he tendered, and we accepted for cancellation, options to purchase 57,750 shares of common stock, with an exercise price of $8.57 per share, which were cancelled on March 15, 2002. We granted Mr. Merrill

62


a new option to purchase 39,501 shares of common stock on October 30, 2002, with an exercise price of $6.00 per share.
45-Day Lock-up Agreement

68     Prior to this offering, we had entered into a 45-day Lock-up Agreement with each of the selling stockholders, which restricted their ability to sell our stock. Those agreements were terminated in connection with each of the selling stockholders entering a lock-up agreement with Lehman Brothers Inc. in connection with this offering.

63


PRINCIPAL AND SELLING STOCKHOLDERS

     The following table sets forth certain information with respect to the beneficial ownership of our common stock, as of June 29, 2003, and as adjusted to reflect the sale of common stock offered by us in this offering,February 20, 2004, for

 • each personstockholder who we know beneficially owns more than 5% of our common stock;
 
 • each of our directors;
 
 • each of our named executive officers;
• each selling stockholder; and
 
 • all of our directors and executive officers as a group.

     Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission and includes voting or investment power with respect toCommission. For the securities. Except as indicatedpurpose of calculating the percentage of shares beneficially owned by footnote, and subject to applicable community property laws, each person identified inany stockholder, the table possesses sole voting and investment power with respect to all capital stock shown to be held by them. The table below assumes the conversion of all outstanding preferred stock into common stock at the current one-to-one ratio. We currently have no shares of common stock outstanding. The number of shares of common stock deemed outstanding on an as-converted basis, used in calculating the percentage for each listed person or entity includes common stock underlying options or a warrant held by the person or entity that are exercisable within 60 days of June 29, 2003, but excludes common stock underlying options or warrants held by any other person or entity. Percentage of beneficial ownership is based on 20,230,946 shares of common stock outstanding as of June 29, 2003, after giving effect“Prior to the conversion of all outstanding preferred stock upon the closing of this offering. The numbers shown in the table assume no exercise by the underwriters of their over-allotment option. Unless otherwise indicated, the principal address of each of the stockholders below is c/o NETGEAR, Inc., 4500 Great America Parkway, Santa Clara, California 95054.

             
Percentage of Shares
Outstanding

Shares BeneficiallyPrior to
Owned Prior toThisAfter This
Name of Beneficial OwnerThis OfferingOfferingOffering




5% Stockholders:
            
Pequot Capital Management, Inc.(1)  6,953,486   34.4%  25.5%
Shamrock Capital Growth Fund, L.P.(2)  4,816,251   23.6   17.5 
Blue Ridge Limited Partnership(3)  2,514,976   12.4   9.2 
Halyard Capital Fund, LP(4)  2,146,929   10.6   7.9 
The Abernathy Group(5)  1,324,576   6.5   4.9 
Executive Officers and Directors:
            
Patrick C.S. Lo(6)  1,123,016   5.3   4.0 
Raymond P. Robidoux(7)  107,261   *   * 
Jonathan R. Mather(8)  198,021   1.0   * 
Mark G. Merrill(9)  515,284   2.5   1.9 
Leslie A. Adams     *   * 
Michael F. Falcon     *   * 
Charles T. Olson     *   * 
Richard A. Fabiano(10)  300,111   1.5   1.1 
Timothy M. Brown(4)  2,146,929   10.6   7.9 
Linwood A. Lacy, Jr.      *   * 
Gerald A. Poch(1)  6,953,486   34.4   25.5 
Gregory J. Rossmann(1)  6,953,486   34.4   25.5 
Stephen D. Royer(2)  4,816,251   23.6   17.5 
Ralph E. Faison (Director Nominee)     *   * 

69


             
Percentage of Shares
Outstanding

Shares BeneficiallyPrior to
Owned Prior toThisAfter This
Name of Beneficial OwnerThis OfferingOfferingOffering




A. Timothy Godwin (Director Nominee)     *   * 
All executive officers and directors as a group (15 persons)(11)  16,160,359   71.9   54.8 


Offering” includes:

 • 29,654,777 shares of common stock outstanding as of February 20, 2004; and
• the shares of common stock subject to options held by the beneficial owner that are currently exercisable within 60 days after February 20, 2004.

Except as indicated in the footnotes to this table and subject to applicable community property laws, the persons named in this table have the sole voting power with respect to all shares of common stock listed as beneficially owned by them.

                     
Shares BeneficiallyShares to be
Owned PriorNumber ofBeneficially
to this OfferingSharesOwned After Offering

Offered in
Number ofthisNumber of
Name of Beneficial OwnerSharesPercentOfferingSharesPercent






5% Stockholders and Selling Stockholders:
                    
Pequot Capital Management, Inc.(1)  6,953,486   23.4%  3,606,775   3,346,711   11.3%
Shamrock Capital Growth Fund, L.P.(2)  4,796,094   16.2   2,487,735   2,308,359   7.8 
Blue Ridge Limited Partnership(3)  2,539,976   8.6   1,317,486   1,222,490   4.1 
Halyard Capital Fund, LP(4)  2,146,929   7.2   1,113,613   1,033,316   3.5 
The Abernathy Group(5)  1,324,576   4.5   474,391   850,185   2.9 
           
         
Total          9,000,000         
           
         
 
Executive Officers and Directors:
                    
Patrick C.S. Lo(6)  1,206,080   3.9      1,206,080   3.9 
Raymond P. Robidoux(7)  159,867   *      159,867   * 
Jonathan R. Mather(8)  64,025   *      64,025   * 
Mark G. Merrill(9)  485,339   1.6      485,339   1.6 
Richard A. Fabiano(10)  218,315   *      218,315   * 
Michael F. Falcon(11)  18,187   *      18,187   * 
Christopher C. Marshall               
Charles T. Olson(12)  22,981   *      22,981   * 
David Soares(13)  99,859   *      99,859   * 
Michael A. Werdann(14)  292   *      292   * 
Ralph E. Faison               
A. Timothy Godwin  10,415   *      10,415   * 
Linwood A. Lacy, Jr.(15)  24,244          24,244     

64


                     
Shares BeneficiallyShares to be
Owned PriorNumber ofBeneficially
to this OfferingSharesOwned After Offering

Offered in
Number ofthisNumber of
Name of Beneficial OwnerSharesPercentOfferingSharesPercent






Gerald A. Poch(1)  6,953,486   23.4%  3,504,558   3,448,928   11.6%
Gregory J. Rossmann(1)  6,953,486   23.4   3,504,558   3,448,928   11.6 
Stephen D. Royer(2)  4,796,094   16.2   2,417,232   2,378,862   8.0 
All executive officers and directors as a group (16 persons)(16)  14,059,184   44.3%  5,921,790   8,137,393   25.1%

*  Represents beneficial ownership of less than 1%.

(1) Shares beneficially owned by Pequot Capital Management, Inc., the investment manager of Pequot Private Equity Fund II, L.P., represents 6,953,486 shares held of record by Pequot Private Equity Fund II, L.P. Pequot Capital Management, Inc. holds voting and dipositivedispositive power for all shares held by Pequot Private Equity Fund II, L.P. Gerald A. Poch is a Managing Director of Pequot Capital Management, Inc. and co-head of Pequot Ventures, and Gregory M. Rossmann is a General Partner of Pequot Private Equity Fund II, L.P. Both Mr. Poch and Mr. Rossmann serve as members of our board of directors and may be deemed to beneficially own the securities held of record by Pequot Private Equity Fund II, L.P. Mr. Poch and Mr. Rossmann disclaim beneficial ownership of these shares except to the extent of their pecuniary interest therein. The address of Pequot Capital Management, Inc. and Pequot Private Equity Fund II, L.P. is 500 Nyala Farm Road, Westport, CT 06880.
 
(2) Shares beneficially owned by Shamrock Capital Growth Fund, L.P. represent 4,597,501 shares held of record by Shamrock Capital Growth Fund, L.P. and 218,750198,593 shares issuable pursuant to a warrant issued tohold of record by Shamrock Capital Advisors, Inc. exercisable within 60 days of June 29, 2003. Stephen D. Royer, one of our directors, is a managing director of Shamrock Capital Advisors, Inc., which is a related party to Shamrock Capital Growth Fund, L.P. Shamrock Capital Partners, L.L.C. holds voting and dispositive power for the shares held of record by Shamrock Capital Growth Fund, L.P. Shamrock Capital Advisors, Inc. holds voting and dispositive power for the shares issuable pursuant to the warrant held by Shamrock Capital Advisors, Inc. Mr. Royer is also an executive vice president of Shamrock Capital Partners, L.L.C., the general partner of Shamrock Capital Growth Fund, L.P. Mr. Royer disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. The address of Shamrock Capital Advisors, Inc. and Shamrock Capital Growth Fund, L.P. is 4444 Lakeside Drive, Second Floor, Burbank, CA 91505.
 
(3) Shares beneficially owned by Blue Ridge Limited Partnership represent 2,453,6361,951,436 shares held of record by Blue Ridge Limited Partnership, and 61,340 shares held of record by Blue Ridge Private Equity Fund, LLC.LLC and 527,200 shares of record held by Blue Ridge Offshore Master Limited Partnership. The sole managing member of each of Blue Ridge Private Equity Fund, LLC, JAG Offshore Holdings, LLC and JAG Holdings, LLC is John A. Griffin. JAG Holdings, LLC holds voting and dispositive power for the shares held by Blue Ridge Limited Partnership, JAG Offshore Holdings, LLC holds voting and dispositive power for the shares held by Blue Ridge Offshore Master Limited Partnership and Mr. Griffin holds voting and dispositive power for the shares held by Blue Ridge Private Equity Fund, LLC. Mr. Griffin disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein, Blue Ridge Offshore Master Limited Partnership disclaims beneficial ownership of the shares held by Blue Ridge Limited Partnership and Blue Ridge Private Equity Fund, LLC and Blue Ridge Limited Partnership disclaims beneficial ownership of the shares held by Blue Ridge Offshore Master Limited Partnership and Blue Ridge Private Equity Fund, LLC. The address of each of Blue Ridge Limited Partnership, Blue Ridge Offshore Master Limited Partnership and Blue Ridge Private Equity Fund, LLC is 660 Madison Avenue, New York, NY 10021.
 
(4) Shares beneficially owned by Halyard Capital Fund, LP represent 2,146,929 shares held of record by Halyard Capital Fund, LP. Its general partner is Halyard Fund GP, LP, which has as its general partner Halyard Advisors, LLC. Halyard Advisors, LLC has as its investment member Halyard Principals, LLC. Each of such entities or persons may be deemed to be the beneficial owner and hold voting and dispositive power for the shares owned by Halyard Capital Fund, LP. Timothy M. Brown, one of our directors, is associated with certain entities affiliated with Halyard Capital Fund, LP. Mr. Brown disclaims beneficial ownership of these shares. The principal business address of

65


each such entity or person is Halyard Capital Fund, LP, 3 Times Square, 29th Floor, New York, NY 10036.
 
(5) Shares beneficially owned by The Abernathy Group represent (1) 1,115,8801,324,434 shares held of record by Abernathy Aggressive Appreciation Fund, LP, (2) 208,554 shares held of record by The Abernathy Group Moderate Growth,NETGEAR Holding, LP and (3)(2) 142 shares held of record by Abernathy Financial Services, LLC.

70


Steven Abernathy holds voting and dispositive power for these shares. The address of The Abernathy Group is Wall Street Tower, 38th Floor, Twenty Exchange Place, New York, NY 10005.
 
(6) Shares beneficially owned by Mr. Lo include (1) 199,171 shares held of record by The Patrick and Emily Lo Revocable Living Trust Dated 4-7-99, (2) 5,074 shares held of record by The Daphne T. W. Lo 2002 Irrevocable Education Trust, (3) 5,074 shares held of record by The Kai W. Lo 2002 Irrevocable Education Trust, and (4) 913,697996,761 shares issuable pursuant to options exercisable within 60 days of June 29, 2003.February 20, 2004.
 
(7) Includes 107,261159,867 shares issuable pursuant to options exercisable within 60 days of June 29, 2003.February 20, 2004.
 
(8) Includes 198,02164,025 shares issuable pursuant to options exercisable within 60 days of June 29, 2003.February 20, 2004.
 
(9) Includes 515,284485,339 shares issuable pursuant to options exercisable within 60 days of June 29, 2003.February 20, 2004.

(10) Includes 300,111218,315 shares issuable pursuant to options exercisable within 60 days of June 29, 2003.February 20, 2004.
 
(11)Includes 18,187 shares issuable pursuant to options exercisable within 60 days of February 20, 2004.
(12) Includes 22,981 shares issuable pursuant to options exercisable within 60 days of February 20, 2004.
(13) Includes 81,958 shares issuable pursuant to options exercisable within 60 days of February 20, 2004.
(14) Includes 292 shares issuable pursuant to options exercisable within 60 days of February 20, 2004.
(15) Includes 24,244 shares issuable pursuant to options exercisable within 60 days of February 20, 2004.
(16) Shares beneficially owned by all executive officers and directors as a group include 2,034,3741,971,969 shares issuable pursuant to options exercisable within 60 days of June 29, 2003 and 218,750 shares issuable pursuant to a warrant exercisable within 60 days of June 29, 2003.February 20, 2004.

7166


DESCRIPTION OF CAPITAL STOCK

General Matters

     Upon consummation of this offering, ourOur authorized capital stock will consistconsists of 200,000,000 shares of common stock, par value $0.001 per share and 5,000,000 shares of preferred stock, par value $0.001 per share. The following summary of certainspecified provisions of the common stock and the preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws, which are filed as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable law.

     As of March 30, 2003,February 20, 2004, there were no shares of common stock outstanding and there were 20,228,480 shares of preferred stock outstanding held by 77 stockholders of record, all of which will be converted into common stock upon the closing of this offering, and there was an outstanding warrant to purchase 218,750 shares of our common stock.outstanding:

• 29,654,777 shares of common stock held by 82 stockholders of record;
• options to purchase an aggregate of 5,301,622 shares of common stock; and
• no shares of preferred stock.

Common Stock

     Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available for distribution at such times and in such amounts as the board of directors from time to time may determine. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. Our certificate of incorporation and bylaws include provisions that require that certain amendments to the certificate of incorporation and the bylaws require the approval of the holders of at least 66 2/3% of the voting power of all outstanding stock. Cumulative voting for the election of directors is not authorized by our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The common stock is not entitled to preemptive rights or sinking fund provisions and is not subject to conversion or redemption. Upon liquidation, dissolution or winding-up of NETGEAR, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation of any preferred stock.

Preferred Stock

     The board of directors is authorized, without action by the stockholders, to designate and issue preferred stock in one or more series. The board of directors can fix the rights, preferences and privileges of the shares of each series and any qualifications, limitations or restrictions thereon. The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of NETGEAR. After conversion of the preferred stock outstanding at the effective date, weWe have no current plans to issue any shares of preferred stock.

WarrantsRegistration Rights

     On March 13, 2002, we issued a warrantUntil August 2006, and after giving effect to Shamrock Capital Advisors, Inc.this offering, the holders of up to purchase 218,75011,228,480 shares of our common stock with an exercise price of $1.29 per share. The warrant is currently exercisable and will expire upon the closing of this offering, provided that the aggregate gross proceeds to us are not less than $35.0 million and our valuation is at least $250.0 million, and will otherwise expire on March 13, 2007. This warrant contains net exercise provisions which allow the holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares that would bewas issued in this case would be based upon the market price of the common stock at the time of the net exercise.

Registration Rights

     Upon completion of this offering and for a term of up to three years thereafter, the holders of up to 20,228,480 shares of our common stock issuable upon conversion of our Series A, Series B and Series C

72


preferred stock have the right to cause us to register thesethose shares under the Securities Act of 1933, as amended, or the Securities Act, based on:
Act.

 • Demand Registration Rights; S-3 Registration Rights. Six months following completion of this offering, one or more stockholders holding at least 10%25% of the registrable shares of our securities has the right to request us to register shares held by them if the shares have an aggregate value of at least $5 million (based on the then current market price or fair value).
 
 • Piggyback Registration Rights. One or more stockholders holding registrable shares may request us to have their shares registered anytime after our initial public offering if we file a registration

67


statement to register any of our securities for our own account. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 30% of the total number of shares included in the registration statement.

     In addition, if we do not repay in full the $20.0 million subordinated unsecured convertible promissory note we issued to Nortel Networks, then Nortel Networks will hold certain registration rights in connection with any shares issuable upon conversion of the promissory note. We intend to repay the $20.0 million promissory note in full using a portion of the proceeds from this offering.

     Registration of shares of common stock because of the exercise of demand registration rights or piggyback registration rights under the Securities Act would result in the holders being able to trade these shares without restriction under the Securities Act when the applicable registration statement is declared effective. We will pay all registration expenses, other than underwriting discounts, related to any registration. The registration rights terminate upon the earlier of (1) three years after completion of this offering,August 5, 2006, (2) with respect to the demand registration rights of an individual holder, when the holder holds less than 175,000 registrable shares, or (3) for an individual holder, when the holder can sell all of the holder’s shares in any 90-day period under Rule 144 under the Securities Act.

Certain Provisions of our Certificate of Incorporation and Bylaws and Delaware Anti-Takeover Law

 
Certificate of Incorporation and Bylaws

     Certain provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult the acquisition of NETGEAR by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of NETGEAR to first negotiate with us. We believe that the benefits of increased protection of NETGEAR’s potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure NETGEAR outweighs the disadvantages of discouraging such proposals, including proposals that are priced above the then current market value of our common stock, because, among other things, negotiation of such proposals could result in an improvement of their terms.

     Our certificate of incorporation and bylaws include provisions that:

 • allow the board of directors to issue, without further action by the stockholders, up to 5,000,000 shares of undesignated preferred stock;
 
 • require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
 
 • prohibit cumulative voting in the election of directors;
 
 • require that special meetings of our stockholders be called only by the board of directors, the chairman of the board, the chief executive officer or the president;
 
 • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors; and

73


 • require that certain amendments to the certificate of incorporation and the bylaws require the approval of the holders of at least 66 2/3% of the voting power of all outstanding stock.

The Delaware General Corporation Law

     We are subject to Section 203 of the Delaware General Corporation Law. This provision generally prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date the stockholder became an interested stockholder, unless:

 • prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
 
 • upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation

68


outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
 
 • on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.

     Section 203 defines a business combination to include:

 • any merger or consolidation involving the corporation and the interested stockholder;
 
 • any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
 
 • subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
 
 • any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
 
 • the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

     In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person.

     These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board and in the policies formulated by the board and to discourage certain types of transactions that may involve an actual or threatened change of control of NETGEAR. These provisions are designed to reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of our company. These provisions, however, could discourage potential acquisition proposals and could complicate, delay or prevent a change in control of NETGEAR. They may also have the effect of preventing changes in our management. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweighs the disadvantages of discouraging these proposals, including proposals that are priced above the then current market value of our common stock, because, among other things, negotiation of these proposals could result in an improvement of their terms.

74


Transfer Agent and Registrar

     The transfer agent and registrar for our common stock is Mellon Investor Services LLC.

Nasdaq National Market Listing

     Our common stock has been approved for quotation on the Nasdaq National Market under the trading symbol “NTGR,” subject to official notice of issuance.

7569


UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

TO NON-UNITED STATES HOLDERS

     The following is a general discussion of the material United States federal income tax consequences of the ownership and disposition of our common stock to a non-United States holder. For the purpose of this discussion, a non-United States holder is any holder that for United States federal income tax purposes is not a United States person. For purposes of this discussion, the term United States person means:

 • an individual citizen or resident of the United States;
 
 • a corporation or other entity taxable as a corporation or a partnership or entity taxable as a partnership created or organized in the United States or under the laws of the United States or any political subdivision thereof;
 
 • an estate whose income is subject to United States federal income tax regardless of its source; or
 
 • a trust (x)(a) whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (y)(b) which has made an election to be treated as a United States person.

     If a partnership holds common stock, the tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships which hold our common stock and partners in such partnerships should consult their tax advisors.

     This discussion assumes that non-United States holders will hold our common stock issued pursuant to the offering as a capital asset (generally, property held for investment). This discussion does not address all aspects of United States federal income taxation that may be relevant in light of a non-United States holder’s special tax status or special tax situations. United States expatriates, life insurance companies, tax-exempt organizations, dealers in securities or currency, banks or other financial institutions, investors whose functional currency is other than the United States dollar, and investors that hold common stock as part of a hedge, straddle or conversion transaction are among those categories of potential investors that are subject to special rules not covered in this discussion. This discussion does not address any tax consequences arising under the laws of any state, local or non-United States taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, and Treasury Regulations and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. Accordingly, each non-United States Holder should consult a tax advisor regarding the United States federal, state, local and non-United States income and other tax consequences of acquiring, holding and disposing of shares of our common stock.

Dividends

     We have not paid any dividends on our common stock and we do not plan to pay any dividends for the foreseeable future. However if we do pay dividends on our common stock, those payments will constitute dividends for United States tax purposes to the extent paid from our current and accumulated earnings and profits, as determined under United States federal income tax principles. To the extent those dividends exceed our current and accumulated earnings and profits, the dividends will constitute a return of capital and will first reduce a holder’s basis, but not below zero, and then will be treated as gain from the sale of stock.

     Any dividend (out of earnings and profits) paid to a non-United States holder of common stock generally will be subject to United States withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. In order to receive a reduced treaty rate, a non-United States holder must provide us with an IRSInternal Revenue Service Form W-8BEN or other appropriate version of Form W-8 certifying qualification for the reduced rate.

     Dividends received by a non-United States holder that are effectively connected with a United States trade or business conducted by the non-United States holder are exempt from such withholding tax. In order to obtain this exemption, a non-United States holder must provide us with an Internal Revenue Service, or IRS, Form W-8ECI properly

76


certifying such exemption. Such effectively connected dividends, although not

70


subject to withholding tax, are taxed at the same graduated rates applicable to United States persons, net of certain deductions and credits.

     In addition to the graduated tax described above, dividends received by corporate non-United States holder that are effectively connected with a United States trade or business of the corporate non-United States holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty.

     A non-United States holder of common stock that is eligible for a reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld if an appropriate claim for refund is filed with the Internal Revenue Service, or IRS.Service.

Gain on Disposition of Common Stock

     A non-United States holder generally will not be subject to United States federal income tax on any gain realized upon the sale or other disposition of our common stock unless:

 • the gain is effectively connected with a United States trade or business of the non-United States holder (which gain, in the case of a corporate non-United States holder, must also be taken into account for branch profits tax purposes);
 
 • the non-United States holder is an individual who holds his or her common stock as a capital asset (generally, an asset held for investment purposes) and who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or
 
 • our common stock constitutes a United States real property interest by reason of our status as a “United States real property holding corporation” for United States federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the holder’s holding period for our common stock. We have determined that we are not and do not believe that we will become a “United States real property holding corporation” for United States federal income tax purposes.

Backup Withholding and Information Reporting

     Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.

     Payments of dividends or of proceeds on the disposition of stock made to a non-United States holder may be subject to backup withholding (currently at a rate of 30%) unless the non-United States holder establishes an exemption, for example by properly certifying its non-United States status on a Form W-8BEN or another appropriate version of Form W-8. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a United States person.

     Backup withholding is not an additional tax. Rather, the United States income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the IRS.

7771


SHARES ELIGIBLE FOR FUTURE SALE

     Immediately prior to this offering, there was no public market for our common stock. Future salesSales of substantial amounts of common stock in the public market could adversely affect the market price of the common stock. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractualRestricted Shares and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise capital in the future.Lock-Up Agreements

     Upon completionAll of this offering, we will have outstanding an aggregate of 27,228,480 shares of common stock, assuming the issuance of 7,000,000 shares of common stock. Of these outstanding shares, the shares sold by us in thethis offering will be freely tradable without restriction or further registration under the Securities Act, unless theseexcept for any shares are purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. The 20,228,480In addition, the shares sold by us and the selling stockholders in our initial public offering and any shares previously sold by our stockholders pursuant to Rule 144 are freely tradable under the Securities Act, unless they were purchased by our affiliates. Substantially all of the remaining shares of our common stock outstanding upon completion of the offering and held by existing stockholdersthat will be “restricted securities”outstanding after this offering are “restricted” shares as that term is defined in Rule 144 under the Securities Act. We issued and sold the restricted shares in private transactions in reliance upon exemptions from registration under the Securities Act. Restricted shares may be sold in the public market only if they are registered under the Securities Act or if they qualify for an exemption under Rulesfrom registration, such as Rule 144 144(k) or 701 promulgated under the Securities Act, which rules are summarized below, or another exemption.

Lock-up Agreementsbelow.

     We intendIn connection with this offering, our directors, executive officers and certain stockholders, including the selling stockholders, have agreed to obtaina 90-day lock-up agreements fromwith respect to approximately 10,756,740 shares, representing substantially all of our officers, directors, stockholders, warrant holders and optionholders under whichthe shares they will agree notbeneficially own following this offering. In addition, the lock-up will apply to transfer or dispose of, directly of indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period of 180 days after the date of this prospectus without the prior written consent of Lehman Brothers Inc. The lock-up agreements permit transfers ofall shares of our common stock which such persons may acquire during this 90-day period upon exercise of options and warrants to acquire our capital stock. This generally means that they cannot sell these shares during the 90 days following the date of this offering. After the 90-day lock-up period ends, these shares may be sold only in limited circumstances, provided that the transferee agrees to be bound in writing by the provisions of the lock-up agreement and that anyaccordance with an available exemption from registration, such transfer shall not involve a disposition for value.as Rule 144 or 701, which are described below.

     Lehman Brothers Inc., in its sole discretion, may release the shares subject to the lock-up agreements in whole or in part at anytime with or without notice.     We have been advised by Lehman Brothers Inc. that, when determining whether or not to release shares form the lock-up agreements, Lehman Brothers Inc. will consider, among other factors, the stockholder’s reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. Lehman Brothers Inc. has advised us that they have no present intention to release any of the shares subject to the lock-up agreements prior to the expiration of the lock-up period.

Asfiled a result of these lock-up agreements and rules ofregistration statement under the Securities Act covering shares of common stock issuable upon the restrictedexercise of options or reserved for issuance under our stock plans. The shares registered under this registration statement will, subject to Rule 144 provisions applicable to affiliates, be available for sale in the publicopen market, except to the extent that the shares are subject to certain volume and othervesting restrictions and subject to release as mentioned above, as follows:

Days After the DateNumber of Shares
of this ProspectusEligible for SaleComment



Date of prospectus0Shares not locked up and eligible for sale under Rule 144
90 days0Shares not locked up and eligible for sale under Rule 144
180 days20,228,480Lock-up released; shares eligible for sale under Rule 144

Rule 144or the lock-up agreements described above.

     In general, under Rule 144 as currently in effect, a person who owns shares that were acquired from us or an affiliate of us at least one year prior to the proposed sale is entitled to sell upon expiration of the lock-up described above, within any three-month period beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year would be entitled to sell, within any three-month period, up to that number of restricted shares as is equal to the greater of one percent of the number of shares of common stock then outstanding (which will equal approximately 296,548 shares immediately after this offering) or the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. Rule 144 also provides that doesour affiliates who are selling shares of common stock that are not exceedrestricted shares must nonetheless comply with the greater of:same restrictions applicable to restricted shares with the exception of the holding period requirement.

• 1% of the number of shares of common stock then outstanding, which will equal approximately 272,284 shares immediately after this offering; or
     Under Rule 144(k), beginning on the date of this prospectus, a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

78


• the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
     Rule 701 may be relied upon with respect to the resale of shares of common stock originally purchased from us by directors, employees or consultants prior to the date of this prospectus. Shares issued in reliance on Rule 701 are restricted shares and, subject to the lock-up agreements described above, may be sold beginning 90 days after the date of this prospectus by persons other than affiliates, subject only to the manner of sale provisions of Rule 144, and may be sold by affiliates under Rule 144 without compliance with its one-year holding period requirement.

     Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144 also provides that our affiliates who sell

72


shares of our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares with the exception of the holding period requirement.

Rule 144(k)

     Under Rule 144(k), a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate of us, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, “144(k) shares” may be sold immediately upon the completion of this offering.

Rule 701

     In general, under Rule 701 as currently in effect, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement will be eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.

Registration of Shares in Connection with Compensatory Benefit Plans

     As of March 30, 2003,February 20, 2004, options to purchase 6,393,0675,301,622 shares of common stock were issued and outstanding under our 2000 Stock Plan.

     Immediately after the completionPlans, all of this offering, we intend to file a registration statementwhich are freely tradeable under the Securities Act covering shares of common stock issued or reserved for issuance under our stock option and employee stock purchase plans. This registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under this registration statement will, subject to vesting provisions and Rule 144 volume limitation, manner of sale, notice and public information requirements applicable to our affiliates, be available for sale in the open market immediately after the 180 day lock-up agreements expire.Act.

Other Registration Rights

     Certain of our stockholders are parties to an agreement which obligates us to register their shares of our capital stock after this offering in specified circumstances. See “Description of Capital Stock — Registration Rights” for additional information.

7973


UNDERWRITING

     Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below for whom Lehman Brothers, Inc., Merrill Lynch, Pierce, FennerGoldman, Sachs & Smith Incorporated,Co., Needham & Company, Inc., Pacific Growth Equities, LLC and UBSJMP Securities LLC are acting as representatives, has severally agreed to purchase from us the selling stockholders the respective number of shares of common stock shown opposite its name below:

      
Number of
Underwritersof Shares


Lehman Brothers Inc.     
Merrill Lynch, Pierce, FennerGoldman, Sachs & Smith IncorporatedCo.     
UBSNeedham & Company, Inc. 
Pacific Growth Equities, LLC
JMP Securities LLC    
   
 
 Total  7,000,0009,000,000 
   
 

     The underwriting agreement provides that the underwriters’ obligations to purchase shares of common stock depends on the satisfaction of the conditions contained in the underwriting agreement, including:

 • the obligation to purchase all of the shares of common stock offered hereby if any of the shares are purchased;
 
 • the representations and warranties made by us to the underwriters are true;
 
 • there is no material change in the financial markets; and
 
 • we deliver customary closing documents to the underwriters.

Over-Allotment Option

     WeThe selling stockholders have granted to the underwriters an option to purchase up to an aggregate of 1,050,0001,350,000 additional shares of common stock, exercisable to cover over-allotments at the public offering price less the underwriting discount shown on the cover page of this prospectus. The underwriters may exercise this option at any time, and from time to time, until 30 days after the date of the underwriting agreement. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares of common stock proportionate to that underwriter’s initial commitment as indicated in the preceding table, and wethe selling stockholders will be obligated to sell the additional shares of common stock to the underwriters.

Commissions and Expenses

     The following table summarizes the underwriting discounts that wethe selling stockholders will pay. The amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional 1,050,0001,350,000 shares from us.the selling stockholders. The underwriting fee is the difference between the public offering price and the amount the underwriters pay to purchase the shares from us.the selling stockholders.

         
No ExerciseFull Exercise


Per share $   $  
Total $   $  

     The underwriters have advised us that they propose to offer the shares of common stock directly to the public at the public offering price presented on the cover page of this prospectus, and to selected dealers, who may include the underwriters, at the public offering price less a selling concession not in excess of $          per share. The underwriters may allow, and the selected dealers may reallow, a concession not in

80


excess of $          per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms.

     We estimate that the total expenses of this offering, payable by the selling stockholders, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding

74


underwriting discounts, will be approximately $2.2 million.$500,000. We anticipate the selling stockholders will paybear substantially all costs and expenses of this offering.

     In January 2003, we entered into an agreement with Lehman Brothers Inc. pursuant to which Lehman Brothers Inc. would provide financial advisory services to us. The agreement terminatesterminated upon the closing of the initial public offering. Under the terms of the agreement, Lehman’sLehman Brothers’ right of first refusal to provide financial advisory services to us would survivesurvived termination of the agreement for a limited period of time following termination. The National Association of Securities Dealers has deemed the right of first refusal to act as our underwriter or placement agent to be compensation to Lehman Brothers Inc. in this offering.

Lock-up Agreements

     We have agreed that, without the prior written consent of Lehman Brothers Inc., we will not, directly or indirectly, offer, sell or dispose of any common stock or any securities which may be converted into or exchanged for any common stock for a period of 18090 days from the date of this prospectus. All ofIn connection with this offering, our directors, executive officers and directors, certain other officers, and certain others who hold significant amounts of our common stock, holding instockholders, including the aggregate 20,105,400 shares of our common stock,selling stockholders, have agreed underto a 90-day lock-up with respect to approximately 10,756,740 shares, representing substantially all the shares they will beneficially own following this offering. Pursuant to these lock-up agreements they have agreed not to, without the prior written consent of Lehman Brothers Inc., directly or indirectly, offer, sell or otherwise dispose of any common stock or any securities which may be converted into or exchanged or exercised for any common stock that is subject to the lock-up, for a period of 18090 days from the date of this prospectus.

Offering Price DeterminationQuotation on the Nasdaq National Market

     Prior to this offering, there has been no public market of our common stock. The initial public offering price will be negotiated between the representatives and us. In determining the initial public offering price of ourOur common stock is quoted on the representatives will consider:

• prevailing market conditions;
• our historical performance and capital structure;
• estimates of our business potential and earnings prospects;
• an overall assessment of our management; and
• the consideration of these factors in relation to market valuation of companies in related businesses.
Nasdaq National Market under the symbol “NTGR.”

Indemnification

     We and the selling stockholders have agreed to indemnify the underwriters against liabilities relating to the offering, including liabilities under the Securities Act and liabilities arising from breaches of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriters may be required to make for these liabilities.

Stabilization, Short Positions and Penalty Bids

     The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock, in accordance with Regulation M under the Securities Exchange Act of 1934:

 • Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is

81


greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market.
 
 • Stabilizing transactions permit bids to purchase common stock so long as the stabilizing bids do not exceed a specified maximum.
 
 • Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, creating a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the

75


underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
 
 • Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

     These stabilizing transactions, syndicate covering transactions and penalty bids may raise or maintain the market price of our common stock or prevent or slow a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.

     Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

Passive Market Making

     In connection with this offering, underwriters and selling group members may engage in passive market making transactions in our common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act during the period before the commencement of offers or sales of common stock and extending through the completion of the distribution. A passive market maker must display its bids at a price not in excess of the highest independent bid of the security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must be lowered when specified purchase limits are exceeded.

Stamp Taxes

     If you purchase shares of common stock offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.

Notice to Canadian Residents

Resale Restrictions

The distribution of the common stock, or the securities, in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of securities are made. Any resale of the securities in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the securities.

Representation of Purchasers

     By purchasing securities in Canada and accepting a purchase confirmation a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:

• the purchaser is entitled under applicable provincial securities laws to purchase the securities without the benefit of a prospectus qualified under those securities laws;

82


• where required by law, that the purchaser is purchasing as principal and not as agent; and
• the purchaser has reviewed the text above under Resale Restrictions.

Rights of Action — Ontario Purchasers

Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the securities, for rescission against us in the event that this prospectus contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the securities. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the securities. If a purchase elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in any action exceed the price at which the securities were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the securities as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

Enforcement of Legal Rights

All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

Taxation and Eligibility for Investment

     Canadian purchasers of the securities should consult their own legal and tax advisors with respect to the tax consequences of an investment in the securities in their particular circumstances and about the eligibility of the securities for investment by the purchaser under relevant Canadian legislation.

Discretionary Sales

     The underwriters have informed us that they will not confirm sales to accounts over which they exercise discretionary authority in excess of 5% of the total number of shares offered by them.

Electronic Distribution

     A prospectus in electronic format may be made available on Internet sites or through other online services maintained by one or more of the underwriters or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations.

     Other than the prospectus in electronic format, information contained in any other web site maintained by an underwriter or selling group member is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us and should not be relied on by

83


investors in deciding whether to purchase any shares of common stock. The underwriters and selling group members are not responsible for information contained in web sites that they do not maintain.

Other Relationships

     Some of the underwriters have performed and may in the future perform investment banking and advisory services for us from time to time for which they have received or may in the future receive customary fees and expenses. The underwriters may, from time to time, engage in transactions with or perform services for us in the ordinary course of their business.

76


NOTICE TO CANADIAN RESIDENTS

Offers and Sales in Canada

     This prospectus is not, and under no circumstances is to be construed as, an advertisement or a public offering of shares in Canada or any province or territory thereof. Any offer or sale of shares in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable provincial securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made.

This prospectus is for the confidential use of only those persons to whom it is delivered by the underwriters in connection with the offering of the shares into Canada. The underwriters reserve the right to reject all or part of any offer to purchase shares for any reason or allocate to any purchaser less than all of the shares for which it has subscribed.

Responsibility

Except as otherwise expressly required by applicable law or as agreed to in contract, no representation, warranty, or undertaking (express or implied) is made and no responsibilities or liabilities of any kind or nature whatsoever are accepted by any underwriter or dealer as to the accuracy or completeness of the information contained in this prospectus or any other information provided by us or the selling stockholders in connection with the offering of the shares into Canada.

Resale Restrictions

The distribution of the shares in Canada is being made on a private placement basis only and is exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the relevant Canadian regulatory authorities. Accordingly, any resale of the shares must be made in accordance with applicable securities laws, which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with exemptions from registration and prospectus requirements. Canadian purchasers are advised to seek legal advice prior to any resale of the shares.

Representations of Purchasers

Each Canadian investor who purchases shares will be deemed to have represented to us, the selling stockholders, the underwriters and any dealer who sells shares to such purchaser that: (i) the offering of the shares was not made through an advertisement of the shares in any printed media of general and regular paid circulation, radio, television or telecommunications, including electronic display, or any other form of advertising in Canada; (ii) such purchaser has reviewed the terms referred to above under “Resale Restrictions” above; (iii) where required by law, such purchaser is purchasing as principal for its own account and not as agent; and (iv) such purchaser or any ultimate purchaser for which such purchaser is acting as agent is entitled under applicable Canadian securities laws to purchase such shares without the benefit of a prospectus qualified under such securities laws, and without limiting the generality of the foregoing: (a) in the case of a purchaser located in a province other than Ontario and Newfoundland and Labrador, without the dealer having to be registered, (b) in the case of a purchaser located in a province other than Ontario or Quebec, such purchaser is an “accredited investor” as defined in section 1.1 of Multilateral Instrument 45-103 —Capital Raising Exemptions, (c) in the case of a purchaser located in Ontario, such purchaser, or any ultimate purchaser for which such purchaser is acting as agent, is an “accredited investor”, other than an individual, as that term is defined in Ontario Securities Commission Rule 45-501 —Exempt Distributionsand is a person to which a dealer registered as an international dealer in Ontario may sell shares, and (d) in the case of a purchaser located in Québec, such purchaser is a “sophisticated purchaser” within the meaning of section 44 or 45 of theSecurities Act(Québec).

77


Taxation and Eligibility for Investment

Any discussion of taxation and related matters contained in this prospectus does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase the shares. Canadian purchasers of shares should consult their own legal and tax advisers with respect to the tax consequences of an investment in the shares in their particular circumstances and with respect to the eligibility of the shares for investment by the purchaser under relevant Canadian federal and provincial legislation and regulations.

Rights of Action for Damages or Rescission (Ontario)

Securities legislation in Ontario provides that every purchaser of shares pursuant to this prospectus shall have a statutory right of action for damages or rescission against us and any selling stockholder in the event this prospectus contains a misrepresentation as defined in theSecurities Act (Ontario). Ontario purchasers who purchase shares offered by this prospectus during the period of distribution are deemed to have relied on the misrepresentation if it was a misrepresentation at the time of purchase. Ontario purchasers who elect to exercise a right of rescission against us and any selling stockholder on whose behalf the distribution is made shall have no right of action for damages against us or the selling stockholders. The right of action for rescission or damages conferred by the statute is in addition to, and without derogation from, any other right the purchaser may have at law. Prospective Ontario purchasers should refer to the applicable provisions of Ontario securities legislation and are advised to consult their own legal advisers as to which, or whether any, of such rights or other rights may be available to them.

The foregoing summary is subject to the express provisions of theSecurities Act(Ontario) and the rules, regulations and other instruments thereunder, and reference is made to the complete text of such provisions contained therein. Such provisions may contain limitations and statutory defences on which we and the selling stockholders may rely. The enforceability of these rights may be limited as described herein under “Enforcement of Legal Rights.”

The rights of action discussed above will be granted to the purchasers to whom such rights are conferred upon acceptance by the relevant dealer of the purchase price for the shares. The rights discussed above are in addition to and without derogation from any other right or remedy which purchasers may have at law. Similar rights may be available to investors in other Canadian provinces.

Enforcement of Legal Rights

We are organized under the laws of the State of Delaware in the United States of America. All, or substantially all, of our directors and officers, as well as the selling stockholders and the experts named herein, may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the company or such persons. All or a substantial portion of our assets and such other persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or such persons in Canada or to enforce a judgment obtained in Canadian courts against us or such persons outside of Canada.

Language of Documents

Upon receipt of this document, you hereby confirm that you have expressly requested that all documents evidencing or relating in any way to the sale of the securities described herein (including for greater certainty any purchase confirmation or any notice) be drawn up in the English language only.Par la réception de ce document, vous confirmez par les présentes que vous avez expressément exigé que tous les documents faisant foi ou se rapportant de quelque manière que ce soit à la vente des valeurs mobilières décrites aux présentes (incluant, pour plus de certitude, toute confirmation d’achat ou tout avis) soient rédigés en anglais seulement.

78


LEGAL MATTERS

     The validity of the shares of common stock offered hereby will be passed upon for us by Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP.LLP, Menlo Park, California.

EXPERTS

     The consolidated financial statements for the year ended December 31, 2000 included in this prospectus and the related consolidated financial statement schedule for the year ended December 31, 2000 included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

     The consolidated financial statements as of December 31, 2001 and 2002 and 2003 and for each of the three years thenin the period ended December 31, 2003 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent auditors,accountants, given on the authority of said firm as experts in accountingauditing and auditing.accounting.

8479


WHERE YOU CAN FIND ADDITIONAL INFORMATION

     We have filed with the Securities and Exchange Commission, or SEC, a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect to NETGEAR and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 450 Fifth Street, N.W., Room 1200, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains an Internet web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site ishttp://www.sec.gov.www.sec.gov.

     Upon completion of this offering, we will becomeWe are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will beare available for inspection and copying at the public reference room and web site of the SEC referred to above. We maintain a web site at www.NETGEAR.com. You may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission, or SEC, free of charge at our web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our web address does not constitute incorporation by reference of the information contained at this site.

8580


NETGEAR, INC.

 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
     
Page

Independent Auditors’ Report for the year ended December 31, 2000.F-2
Report of Independent Auditors for the years ended December 31, 2001, 2002 and 20022003F-2
Consolidated Balance Sheets  F-3 
Consolidated Balance SheetsStatements of Operations  F-4 
Consolidated Statements of OperationsStockholders’ Equity  F-5
Consolidated Statements of Stockholders’ Equity (Deficit)F-6 
Consolidated Statements of Cash Flows  F-7F-6 
Notes to Consolidated Financial Statements  F-8F-7 

F-1


INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of

NETGEAR, Inc.

     We have audited the accompanying consolidated statements of operations, stockholders’ equity (deficit), and cash flows of NETGEAR, Inc. (“the Company”) for the year ended December 31, 2000 (prior to the stock split and the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” as described in Notes 13 and 2, respectively). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.

     We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and cash flows for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
March 9, 2001

F-2


REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and ShareholdersStockholders
of NETGEAR, Inc.

     In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations, of stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of NETGEAR, Inc. and its subsidiaries at December 31, 20012002 and 2002,2003, and the results of their operations and their cash flows for each of the three years thenin the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     As discussed in Note 2 to the accompanying consolidated financial statements, in 2002 NETGEAR, Inc. changed its method of accounting for goodwill.

The financial statements of NETGEAR, Inc. for the year ended December 31, 2000, were audited by other independent accountants. As described in Note 13, these financial statements have been adjusted to give effect to the stock split. We audited the adjustments described in Note 13 that were applied to restate the 2000 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. In addition, as described in Note 2, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company as of January 1, 2002. We audited the transitional disclosures described in Note 2. In our opinion, the transitional disclosures for 2000 in Note 2 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2000 financial statements of the Company other than with respect to such adjustments and disclosures and, accordingly, we do not express an opinion or any other form of assurance on the December 31, 2000 financial statements taken as a whole.

/s/ PricewaterhouseCoopers
/S/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

March 20, 2003, except for Note 13, as to which the date is July 29, 2003
February 23, 2004

F-3F-2


NETGEAR, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)
                
Pro forma
Stockholders’
December 31,Equity at          

March 30,March 30,
2001200220032003December 31,





(unaudited)20022003
(unaudited)(Note 1)

ASSETS
ASSETS
 ASSETS
Current Assets:Current Assets: Current Assets: 
Cash and cash equivalents $9,152 $19,880 $21,755 Cash and cash equivalents $19,880 $61,215 
Accounts receivable, net 18,752 42,492 46,173 Short-term investments  12,390 
Inventories 31,256 24,774 27,128 Accounts receivable, net 42,492 74,866 
Prepaid expenses and other current assets 1,910 3,003 2,464 Inventories 24,774 39,266 
 
 
 
 Deferred income taxes  9,056 
 Total current assets 61,070 90,149 97,520 Prepaid expenses and other current assets 3,003 4,169 
 
 
 
 Total current assets 90,149 200,962 
Property and equipment, netProperty and equipment, net 1,274 3,144 3,338 Property and equipment, net 3,144 3,626 
Goodwill, net 558 558 558 
GoodwillGoodwill 558 558 
 
 
 
   
 
 
 Total assets $62,902 $93,851 $101,416  Total assets $93,851 $205,146 
 
 
 
   
 
 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:Current Liabilities: Current Liabilities: 
Accounts payable $11,929 $10,628 $16,206 Accounts payable $10,628 $24,480 
Payable to related parties 12,578 13,687 16,003 Payable to related parties 13,687 6,412 
Accrued employee compensation 971 3,375 4,006 Accrued employee compensation 3,375 3,871 
Other accrued liabilities 14,745 29,419 27,365 Other accrued liabilities 29,419 31,299 
Deferred revenue 366 5,059 2,907 Deferred revenue 5,059 2,380 
Income taxes payable 4,302 934 1,875 Income taxes payable 934 1,765 
Note payable to Nortel Networks  13,294 13,655 Note payable to Nortel Networks 13,294  
 
 
 
   
 
 
 Total current liabilities 44,891 76,396 82,017  Total current liabilities 76,396 70,207 
 
 
 
   
 
 
Commitments (Note 7)Commitments (Note 7) Commitments (Note 7) 
Redeemable convertible preferred stock: $0.001 par value; shares authorized, 29,570,541 in 2001, and 40,508,038 in 2002 and 2003 (unaudited) 
Redeemable convertible preferred stock: $0.001 par value; shares authorized, 40,508,038 in 2002 and none in 2003Redeemable convertible preferred stock: $0.001 par value; shares authorized, 40,508,038 in 2002 and none in 2003 
Series A, shares designated: 26,250,000;
Shares issued and outstanding: 26,250,000 in 2001, 5,976,082 in 2002, 5,973,557 in 2003 (unaudited), and none pro forma (unaudited)
 29,123 6,630 6,624 $ Series A, shares designated: 26,250,000 in 2002, none in 2003; shares issued and outstanding: 5,976,082 in 2002 and none in 2003 6,630  
Series B, shares designated: 3,320,538;
Shares issued and outstanding: 3,320,537 in 2001, 2002 and 2003 (unaudited) and none pro forma (unaudited)
 14,955 14,955 14,955  Series B, shares designated: 3,320,538 in 2002, none in 2003; shares issued and outstanding: 3,320,537 in 2002 and none in 2003 14,955  
Series C, shares designated: 10,937,500;
Shares issued and outstanding: none in 2001 and 10,937,406 in 2002, 10,934,386 in 2003 (unaudited) and none proforma (unaudited)
  26,467 26,460  Series C, shares designated: 10,937,500 in 2002, none in 2003; shares issued and outstanding: 10,937,406 in 2002 and none in 2003 26,467  
 
 
 
 
   
 
 
 44,078 48,052 48,039    48,052  
 
 
 
 
   
 
 
Stockholders’ equity (deficit):Stockholders’ equity (deficit): Stockholders’ equity (deficit): 
Common stock: $0.001 par value; shares authorized, 63,656,250;
Shares issued and outstanding: none in 2001, 2002 and 2003 (unaudited) and 20,228,480 pro forma (unaudited)
    20 Preferred stock: $0.001 par value; shares authorized, none in 2002 and 5,000,000 in 2003; none outstanding in 2002 or 2003   
Additional paid-in capital 2,601 12,810 13,111 61,130 Common stock: $0.001 par value; shares authorized, 63,656,250 in 2002, and 200,000,000 in 2003; 
Deferred stock-based compensation  (4,997) (4,953) (4,953) Shares issued and outstanding: none in 2002 and 28,618,969 in 2003  28 
Accumulated deficit (28,668) (38,410) (36,798) (36,798) Additional paid-in capital 12,810 164,459 
 
 
 
 
  Deferred stock-based compensation (4,997) (4,248)
 Total stockholders’ equity (deficit) (26,067) (30,597) $(28,640) $19,399  Cumulative other comprehensive income  13 
 
 
 
 
  Accumulated deficit (38,410) (25,313)
 Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $62,902 $93,851 $101,416   
 
 
 
 
 
  Total stockholders’ equity (deficit) (30,597) 134,939 
 
 
 
 Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $93,851 $205,146 
 
 
 

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

F-3


NETGEAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)
                
Year Ended December 31,

200120022003



Net revenue $192,440  $237,331  $299,302 
   
   
   
 
Cost of revenue:            
 Cost of revenue  172,795   176,972   215,332 
 Amortization of deferred stock-based compensation     144   128 
   
   
   
 
 Total cost of revenue  172,795   177,116   215,460 
   
   
   
 
Gross profit  19,645   60,215   83,842 
   
   
   
 
Operating expenses:            
 Research and development  4,432   7,359   8,220 
 Sales and marketing  24,267   32,622   48,963 
 General and administrative  5,914   8,103   8,977 
 Goodwill amortization  335       
 Amortization of deferred stock-based compensation:            
  Research and development     306   454 
  Sales and marketing     346   715 
  General and administrative     867   476 
   
   
   
 
   Total operating expenses  34,948   49,603   67,805 
   
   
   
 
Income (loss) from operations  (15,303)  10,612   16,037 
Interest income  308   119   364 
Interest expense  (939)  (1,240)  (901)
Extinguishment of debt        (5,868)
Other expenses, net  (478)  (19)  (59)
   
   
   
 
Income (loss) before taxes  (16,412)  9,472   9,573 
Provision for (benefit from) income taxes  3,072   1,333   (3,524)
   
   
   
 
Net income (loss)  (19,484)  8,139   13,097 
Deemed dividend on Preferred Stock     (17,881)   
   
   
   
 
Net income (loss) attributable to common stockholders $(19,484) $(9,742) $13,097 
   
   
   
 
Net income (loss) per share attributable to common stockholders (Note 4):            
 Basic $(0.66) $(0.46) $0.55 
   
   
   
 
 Diluted $(0.66) $(0.46) $0.49 
   
   
   
 
 
Weighted average shares outstanding            
Used to compute net income (loss) per share:            
Basic  29,571   21,181   23,653 
   
   
   
 
Diluted  29,571   21,181   26,800 
   
   
   
 

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

F-4


NETGEAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONSSTOCKHOLDERS’ EQUITY (DEFICIT)

Years Ended December 31, 2001, 2002 and 2003
(In Thousands, Except Per Share Data)thousands, except share data)
                        
Three Months Ended
Year Ended December 31,

March 31,March 30,
20002001200220022003





(unaudited)
Net revenue $176,663  $192,440  $237,331  $45,528  $67,706 
   
   
   
   
   
 
Cost of revenue:                    
 Cost of revenue  145,531   172,795   176,972   34,685   49,246 
 Amortization (recovery) of deferred stock-based compensation        144   66   (11)
   
   
   
   
   
 
 Total cost of revenue  145,531   172,795   177,116   34,751   49,235 
   
   
   
   
   
 
Gross profit  31,132   19,645   60,215   10,777   18,471 
   
   
   
   
   
 
Operating expenses:                    
 Research and development  3,319   4,432   7,359   894   2,016 
 Sales and marketing  18,309   24,267   32,622   7,180   10,961 
 General and administrative  4,417   5,914   8,103   1,528   1,902 
 Goodwill amortization  335   335          
 Amortization of deferred stock-based compensation:                    
  Research and development        306   143   96 
  Sales and marketing        346   143   109 
  General and administrative        867   200   151 
   
   
   
   
   
 
   Total operating expenses  26,380   34,948   49,603   10,088   15,235 
   
   
   
   
   
 
Income (loss) from operations  4,752   (15,303)  10,612   689   3,236 
Interest income  1,092   308   119   21   28 
Interest expense     (939)  (1,240)  (18)  (361)
Other expenses, net  (1,322)  (478)  (19)  (68)  (78)
   
   
   
   
   
 
Income (loss) before taxes  4,522   (16,412)  9,472   624   2,825 
Provision for income taxes  1,868   3,072   1,333   87   1,213 
   
   
   
   
   
 
Net income (loss)  2,654   (19,484)  8,139   537   1,612 
Deemed dividend on Preferred Stock  (2,601)     (17,881)  (17,881)   
   
   
   
   
   
 
Net income (loss) attributable to common stockholders $53  $(19,484) $(9,742) $(17,344) $1,612 
   
   
   
   
   
 
Net income (loss) per share attributable to common stockholders (Note 4):                    
 Basic $0.00  $(0.66) $(0.46) $(0.72) $0.08 
   
   
   
   
   
 
 Diluted $0.00  $(0.66) $(0.46) $(0.72) $0.07 
   
   
   
   
   
 
Pro forma net income per share (unaudited — Note 4):                    
 Basic         $0.38      $0.08 
           
       
 
 Diluted         $0.36      $0.07 
           
       
 
                                 
CumulativeTotal
Common StockAdditionalDeferredOtherStockholders’

Paid-InStock-basedComprehensiveAccumulatedEquityComprehensive
SharesAmountCapitalCompensationIncomeDeficit(Deficit)Income (loss)








Balance at January 1, 2001    $  $2,601  $  $  $(9,184) $(6,583) $(9,184)
Net loss                 (19,484)  (19,484)  (19,484)
   
   
   
   
   
   
   
   
 
Balance at December 31, 2001        2,601         (28,668)  (26,067)  (28,668)
Forgiveness of payable by Nortel Networks        2,927            2,927    
Deferred stock-based compensation        6,660   (6,660)            
Amortization of deferred stock-based compensation            1,663         1,663    
Deemed dividend related to repurchase of Series A Preferred Stock and issuance of Series C Preferred Stock                 (17,881)  (17,881)  (17,881)
Issuance of common stock warrant in connection with issuance of Series C Preferred Stock        622            622    
Net income                 8,139   8,139   8,139 
   
   
   
   
   
   
   
 �� 
 
Balance at December 31, 2002        12,810   (4,997)     (38,410)  (30,597)  (38,410)
Deferred stock-based compensation        1,024   (1,024)            
Amortization of deferred stock-based compensation           1,773         1,773    
Conversion of Preferred Stock into common stock  20,228,480   20   48,019            48,039    
Issuance of common stock (net of issuance costs of $2,999)  8,050,000   8   101,801            101,809    
Exercise of common stock warrants  218,750      283            283    
Repurchase of common stock  (20,157)     (283)           (283)   
Exercise of common stock options  141,896      805            805    
Unrealized gain on short-term investments              13      13   13 
Net income                 13,097   13,097   13,097 
   
   
   
   
   
   
   
   
 
Balance at December 31, 2003  28,618,969  $28  $164,459  $(4,248) $13  $(25,313) $134,939  $(25,300)
   
   
   
   
   
   
   
   
 

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

F-5


NETGEAR, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)CASH FLOWS

YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
AND THE THREE MONTHS ENDED MARCH 30, 2003 (Unaudited)
(In Thousands, Except Share Data)thousands)
                         
Total
Common StockAdditionalDeferredStockholders’

Paid-InStock-basedAccumulatedEquity
SharesAmountCapitalCompensationDeficit(Deficit)






Balance at January 1, 2000  26,250,000  $33,366  $  $  $(9,237) $24,129 
Issuance of Series A Preferred Stock in exchange for common stock  (26,250,000)  (29,123)           (29,123)
Issuance of common stock warrants in connection with the issuance of Series B Preferred Stock        2,601         2,601 
Dividend — beneficial conversion on Series B Preferred Stock              (2,601)  (2,601)
Capital distribution to Nortel Networks      (4,243)           (4,243)
Net income              2,654   2,654 
   
   
   
   
   
   
 
Balance at December 31, 2000        2,601      (9,184)  (6,583)
Net loss              (19,484)  (19,484)
   
   
   
   
   
   
 
Balance at December 31, 2001        2,601      (28,668)  (26,067)
Forgiveness of payable by Nortel Networks        2,927         2,927 
Deferred stock-based compensation        6,660   (6,660)      
Amortization of deferred stock-based compensation            1,663      1,663 
Deemed dividend related to repurchase of Series A Preferred Stock and issuance of Series C Preferred Stock              (17,881)  (17,881)
Issuance of common stock warrant in connection with issuance of Series C Preferred Stock        622         622 
Net income              8,139   8,139 
   
   
   
   
   
   
 
Balance at December 31, 2002        12,810   (4,997)  (38,410)  (30,597)
Deferred stock-based compensation (unaudited)        301   (301)      
Amortization of deferred stock-based compensation (unaudited)           345      345 
Net income (unaudited)              1,612   1,612 
   
   
   
   
   
   
 
Balance at March 30, 2003 (unaudited) $   $   $13,111  $(4,953) $(36,798) $(28,640)
   
   
   
   
   
   
 
                 
Year Ended December 31,

200120022003



Cash flows from operating activities:
            
 Net income (loss) $(19,484) $8,139  $13,097 
 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:            
  Depreciation and amortization  898   1,354   2,007 
  Goodwill amortization  335       
  Amortization of deferred stock-based compensation     1,663   1,773 
  Deferred income taxes  3,472      (9,056)
  Accretion of note payable to Nortel Networks     1,220   838 
  Extinguishment of debt charge        5,868 
  Changes in assets and liabilities:            
   Accounts receivable  14,400   (23,740)  (32,374)
   Inventories  31,259   6,482   (14,492)
   Prepaid expenses and other current assets  (459)  (1,093)  (1,166)
   Accounts payable  (7,402)  (1,301)  13,852 
   Payable to related parties  2,362   1,109   (7,275)
   Accrued employee compensation  (463)  2,404   496 
   Other accrued liabilities  7,302   14,674   1,880 
   Deferred revenue  (27,286)  4,693   (2,679)
   Income tax payable  (1,107)  (441)  831 
   
   
   
 
    Net cash provided by (used in) operating activities  3,827   15,163   (26,400)
   
   
   
 
Cash flows from investing activities:
            
 Purchase of short-term investments        (12,377)
 Purchase of property and equipment  (1,122)  (3,224)  (2,489)
   
   
   
 
    Net cash used in investing activities  (1,122)  (3,224)  (14,866)
   
   
   
 
Cash flows from financing activities:
            
 Borrowing under line of credit  12,042   47,473   17,000 
 Repayments under line of credit  (12,042)  (47,473)  (17,000)
 Repayment of note payable to Nortel Networks        (20,000)
 Issuance of common stock in IPO        101,809 
 Proceeds from issuance of Series C Preferred Stock     4,700    
 Series C Preferred Stock issuance costs     (1,211)   
 Repurchase of Series A Preferred Stock     (4,700)  (13)
 Proceeds from exercise of stock options        805 
   
   
   
 
    Net cash provided by (used in) financing activities     (1,211)  82,601 
   
   
   
 
Net increase in cash and cash equivalents  2,705   10,728   41,335 
Cash and cash equivalents at beginning of year  6,447   9,152   19,880 
   
   
   
 
Cash and cash equivalents at end of year $9,152  $19,880  $61,215 
   
   
   
 
Supplemental cash flow information:
            
 Cash paid for income taxes $425  $1,903  $4,840 
   
   
   
 
 Cash paid for interest $939  $18  $67 
   
   
   
 
Supplemental schedule of noncash investing and financing:
            
 Conversion of Preferred Stock to common stock $  $  $48,039 
   
   
   
 
 Cashless exercise of warrants and net common stock issued $  $  $283 
   
   
   
 

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

F-6


NETGEAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
                         
Three Months Ended
Year Ended December 31,

March 31,March 30,
20002001200220022003





(unaudited)
Cash flows from operating activities:
                    
 Net income (loss) $2,654  $(19,484) $8,139  $537  $1,612 
 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                    
  Depreciation and amortization  373   898   1,354   267   369 
  Goodwill amortization  335   335          
  Amortization of deferred stock-based compensation        1,663   552   345 
  Deferred income taxes  (3,472)  3,472          
  Accretion of note payable to Nortel Networks        1,220      361 
  Changes in assets and liabilities:                    
   Accounts receivable  (4,016)  14,400   (23,740)  (6,965)  (3,681)
   Inventories  (44,628)  31,259   6,482   11,164   (2,354)
   Prepaid expenses and other current assets  (1,439)  (459)  (1,093)  (191)  539 
   Accounts payable  7,183   (7,402)  (1,301)  (4,947)  5,578 
   Payable to related parties  10,216   2,362   1,109   (227)  2,316 
   Accrued employee compensation  554   (463)  2,404   410   631 
   Other accrued liabilities  5,352   7,302   14,674   1,830   (2,054)
   Deferred revenue  7,842   (27,286)  4,693   3,216   (2,152)
   Income tax payable  5,409   (1,107)  (441)  156   941 
   
   
   
   
   
 
    Net cash provided by (used in) operating activities  (13,637)  3,827   15,163   5,802   2,451 
   
   
   
   
   
 
Cash flows from investing activities:
                    
 Purchase of property and equipment  (1,055)  (1,122)  (3,224)  (540)  (563)
   
   
   
   
   
 
    Net cash used in investing activities  (1,055)  (1,122)  (3,224)  (540)  (563)
   
   
   
   
   
 
Cash flows from financing activities:
                    
 Borrowing under line of credit     12,042   47,473   47,473    
 Repayments under line of credit     (12,042)  (47,473)  (47,458)   
 Proceeds from issuance of Series C Preferred Stock        4,700   4,700    
 Series C Preferred Stock issuance costs        (1,211)  (1,211)   
 Repurchase of Preferred Stock        (4,700)  (4,700)  (13)
 Net capital distributions to Nortel Networks  (4,243)            
 Proceeds from sale of Preferred Stock and warrant, net  14,955             
   
   
   
   
   
 
    Net cash provided by (used in) financing activities  10,712      (1,211)  (1,196)  (13)
   
   
   
   
   
 
Net increase (decrease) in cash and cash equivalents  (3,980)  2,705   10,728   4,066   1,875 
Cash and cash equivalents at beginning of year  10,427   6,447   9,152   9,152   19,880 
   
   
   
   
   
 
Cash and cash equivalents at end of year $6,447  $9,152  $19,880  $13,218  $21,755 
   
   
   
   
   
 
Supplemental cash flow information:
                    
 Cash paid for income taxes $  $425  $1,903  $64  $256 
   
   
   
   
   
 
 Cash paid for interest $  $939  $18  $15  $ 
   
   
   
   
   
 

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

F-7


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTENote– THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:— The Company and Summary of Significant Accounting Policies:

The Company

     NETGEAR, Inc. (“NETGEAR” or the “Company”) was incorporated in Delaware in January 1996. 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 traditional retailers, on-line retailers, direct marketing resellers, or DMRs, value added resellers, or VARs, and recently, broadband service providers.

     The Company was a wholly-ownedwholly owned subsidiary of Nortel Networks NA Inc. (“Nortel Networks”) until March 2000. In March 2000, the Company sold Series B redeemable convertible preferred stock (“Preferred Stock”) to a third-party investor, thereby diluting Nortel Networks’ ownership in the Company. In September 2000, Nortel Networks sold a portion of its ownership in the Company to additional third-party investors, further diluting its ownership interest in the Company. In February 2002, the Company sold Series C Preferred Stock to third-party investors, and Nortel Networks sold to the Company its remaining ownership interest in the Company. See Note 8 for description of the change in capital structure of the Company.

     On July 31, 2003, the Company completed its initial public offering, selling 8,050,000 shares of common stock (which included an underwriters’ overallotment of 1,050,000 shares) resulting in net proceeds to the Company of $101.8 million (after underwriters’ discount of $7.9 million and related offering expenses of $3.0 million). During the third quarter of 2003 the Company 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 the 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. The Company also signed several arrangements with Nortel Networksused an additional $17.0 million of the proceeds to facilitaterepay debt on amounts drawn on its transitionbank line of credit.

     Immediately prior to become an independentits initial public offering, the Company (see Note 3).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 consolidated financial statements of NETGEAR have been adjusted to reflect this split.

Basis of presentation

     The accompanying consolidated financial statements include the accounts of the Company and its wholly-ownedwholly owned subsidiaries. Any intercompanyAll inter-company accounts and transactions have been eliminated.

Unaudited interim results

     The accompanying consolidated balance sheet as of March 30, 2003, the consolidated statements of income and of cash flows for the three months ended March 31, 2002 and March 30, 2003, and the consolidated statement of stockholders deficit for the three months ended March 30, 2003 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and,eliminated in the opinionconsolidation of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 30, 2003 and results of operations and cash flows for the three months ended March 31, 2002 and March 30, 2003. The financial data and other information disclosed in these notes to financial statements related to the three-month periods are unaudited. The results for the three months ended March 30, 2003 are not necessarily indicative of the results to be expected for the year ending December 31, 2003 or for any other interim period or for any other future year.subsidiaries.

Fiscal periods

     The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. Effective January 1, 2002, the Company began reporting its results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters is 13 weeks long, endingends on Sundaysthe Sunday closest to the calendar quarter end, with the fourth fiscal quarter covering the remaining part of the fiscal year.ending on December 31.

Pro forma stockholders’ equity information (unaudited)

     Immediately prior to the effective date of an initial public offering, the Company’s outstanding Preferred Stock will automatically convert into 20,228,480 shares of common stock. The pro forma effects of this

F-8


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

transaction are unaudited and have been reflected in the accompanying Pro Forma Stockholders’ Equity as of March 30, 2003.

Use of estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

F-7


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents

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

     AsShort-term Investments

     Short-term investments comprise of marketable securities that consist of government securities with an original maturity or a remaining maturity at December 31, 2002, the Companytime of purchase, of greater than three months and less than twelve months. All marketable securities are held $360,000 in restricted cash for lettersthe Company’s name and are held primarily with one high quality banking institution. The Company’s policy is to protect the value of credit (see Note 6).its investment portfolio and minimize principal risk by earning returns based on current interest rates. All of the Company’s marketable securities are classified as available-for-sale securities in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting For Certain Investments in Debt and Equity Securities” and are carried at fair value with unrealized gains and losses, net of taxes, reported as a separate component of stockholders’ equity.

Certain risks and uncertainties

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

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

Concentration of credit risk

     Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. The Company believes that there is minimal credit risk associated with the investment of its cash and cash equivalents and accounts receivable.short-term investment, due to the high quality banking institutions in which its investments are deposited and the restrictions placed on the type of investment that can be entered into under the Company’s investment policy.

     The Company’s accounts receivable are derived from revenue earned from customers located in the U.S., mainly distributorsUnited States, and retailers, andat numerous international locations around the world. TheseThe Company’s customers are primarily distributors, retailers and retailersbroadband service providers who sell the product to a large group of end users. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable.estimated rates for failure to pay by customers.

F-9F-8


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 — (Continued)

     The following table summarizes the balances from customers in excess of 10% of the total accounts receivable as of December 31, 2001 and 2002 and March 30, 2003.

            
    
December 31,March 30,


December 31,
200120022003



20022003
(unaudited)

Company A 34% 30% 31% 30% 40% 
Company B 16% 16% 15% 16% 10% 
Company C  15% 

Fair value of financial instruments

     The carrying amounts of the Company’s financial instruments, including cash and cash equivalent,equivalents, accounts receivable, prepaid expenses, accounts payable, including payable to Nortel Networks, accrued employee compensation and other accrued liabilities approximate their fair values due to their short maturities. Based on borrowing rates currently available to the CompanySee Note 2 for loans with similar terms, the carryingfair value of the note payable to Nortel Networks approximates its fair value.short-term investments.

Inventories

     Inventories consist primarily of finished goods and purchased components andwhich are valued at the lower of cost or market, cost being determined using the first-in, first-out method.

Property and equipment

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

   
Computer equipment 2-3 years
Furniture and fixtures  5 years
Software 2-5 years
Machinery and equipment 1-3 years
Leasehold improvements Shorter of the lease term
or 5 years

     The Company accounts for impairment of property and equipment in accordance with Statement of Financial Accounting Standards (“SFAS”)SFAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets,Assets. which the Company adopted in 2002. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. The carrying value of the asset is reviewed on a regular basis for the existence of facts, both internally and externally, that may suggest impairment. The Company did not recognize impairment charges in any of the periods presented.

Goodwill

     In 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization and the performance of an annual impairment test. As a result, a total of approximately $558,000 of goodwill will no longer be amortized. The standard also requires that goodwill be allocated to a company’s reporting units for purposes of impairment testing. The Company has only one reporting unit. In lieu of amortization, the Company performed anregularly reviews the goodwill balance for potential impairment. The identification and measurement of goodwill impairment involves the estimation of the fair value of the Company. The estimates of fair value of the Company are based on the best information available as of the date of the assessment, which primarily includes the Company’s market capitalization and incorporates management assumptions about expected future cash flows.

F-10F-9


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 — (Continued)

Although no goodwill impairment review of itshas been recorded to date, there can be no assurances that future goodwill balance upon the initial adoption of SFAS No. 142. The impairment review performed by the Company involves two-step process as follows:

     Step 1 — The Company compares the market value of its reporting unit to the carrying value, including goodwill, of the unit — if the carrying value of the reporting unit, including goodwill, exceeds the unit’s market value, the Company moves on to step 2. If the market value of the reporting unit exceeds the carrying value, no further work is performed and no impairment charge is necessary.

     Step 2 — The Company performs an allocation of the market value of the reporting unit to its identifiable tangible and intangible assets and liabilities. This derives an implied fair value of the reporting unit’s goodwill. The Company then compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of reporting unit’s goodwill is greater than the implied fair value of goodwill, an impairment charge is recognized for the excess. No impairment charge was recognized in 2002.will not occur.

Product Warranties

     The Company provides for future warranty obligations upon product delivery. The warranties are generally for 1one year from the date of purchase by the end user. The Company’s liability under these warranties is to provide a replacement product or issue a credit to the customer. Because the Company’s products are manufactured by a contract manufacturer, in most cases the Company has recourse to the contract manufacturer for replacement or credit for the defective products. The Company accounts for warranty returns similar to stock rotation returns. That is, revenue on shipments is reduced for estimated returns for product under warranty. Factors that affect the Company’s warranty liability include the number of installed units, historical experience and the Company’smanagement’s judgment regarding anticipated rates of warranty claims. The Company assesses the adequacy of its recorded warranty liabilitiesliability every quarter and makes adjustments to the liability if necessary. Changes in the Company’s warranty liability, which is included as a component of “Other accrued liabilities” on the Consolidated Balance Sheet, during the periods are as follows (in thousands):

                
Year Ended3 Months Ended
December 31,March 30,Year Ended December 31,
20022003


20022003
(unaudited)

Balance as of beginning of the period $4,720 $8,941 
Balance as of the beginning of the period $4,720 $8,941 
Provision for warranty liability for sales made during the period 12,587 2,450  12,587 16,237 
Settlements made during the period (8,366) (3,186) (8,366) (13,219)
 
 
  
 
 
Balance as of end of period $8,941 $8,205 
Balance as of the end of period $8,941 $11,959 
 
 
  
 
 

Internal use software

     In accordance with Statement of Position (“SOP”) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, the Company capitalized certain software development costs, that primarily relate to costs to purchase third party software. These capitalized software costs are amortized over the useful life of the software, not to exceed 60 months. The capitalized software costs are included in property and equipment on the balance sheet.

F-11


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The following table summarizes the movements in capitalized software expenses for the year ended December 31, 2002 (in thousands):

     
Balance at December 31, 2001 $ 
Additions  1,866 
Amortization  (200)
   
 
Balance at December 31, 2002 $1,666 
   
 

Revenue recognition

     Revenue from product sales is generally recognized at the time the product is shipped, provided that persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the salesselling price is fixed or determinable and the collection of the related receivable is reasonably assured. At the end of each fiscal quarter, the Company estimates and defers revenue related to the product that is in-transit to international customers and selected retail customers in the United States that purchase direct from the Company. The revenue iscontinues to be deferred until passage ofsuch time that title passes to the customer. Currently, for the international customers, title passes to the customer upon delivery to the port of destination. Fordestination and for our selected retailers in the retailersUnited States to whom the Company sells directly,directly; title passes to the customer upon their receipt of product. In addition, the Company defers revenue related to distributor and reseller channel inventory that the Company deems to be excess based on end user sales levels.

     In addition to warranty relatedwarranty-related returns, certain distributors and retailers generally have the right to return product for stock rotation purposes. Every quarter, stock rotation rights are limited to 10% of invoiced purchases bysales to the distributor or retailer in the prior three months.quarter. Upon shipment of the product, the Company reduces revenue for an estimate of potential future product warranty and stock rotation returns related to current period product revenue. Management analyzes historical returns, channel inventory levels, current economic trends and changes in customer demand and acceptance of the Company’s products when evaluating the adequacy of the allowance for sales returns, namely warranty and stock rotation returns allowances.rotations returns. Revenue on shipments is also reduced for estimated price protection programs customer rebates and cooperative marketing expenses deemed to be a sales incentives under Emerging Issues Task Force (“EITF”) Issue 01-9.

     Prior to January 1, 2001, revenue on shipments to domestic distributors was deferred until resale by the distributors because the Company could not reasonably estimate the amount of future returns. Revenue on all shipments to international distributors was recognized upon cash collection, as the Company had not established a history of collection with foreign distributors. In 2001, the Company determined that it had accumulated sufficient historical evidence with respect to returns and cash collections with its distributors to enable the Company to make reasonable estimates and for all shipments on and after January 1, 2001.

Sales incentives

     The Company follows EITF Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” As a consequence, the Company records channel marketing costs as a reduction of net revenue.

F-10


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shipping and handling fees and costs

     In September 2000, the EITF issued EITF Issue 00-10, “Accounting for Shipping and Handling Fees and Costs”.Costs.” EITF Issue 00-10 requires shipping and handling fees billed to customers to be classified as revenue and shipping and handling costs to be either classified as cost of revenue or disclosed in the notes to the consolidated financial statements. The Company includes shipping and handling fees billed to customers in net revenue. Shipping and handling costs associated with inbound freight are included in cost of revenue.

F-12


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Shipping and handling costs associated with outbound freight are included in sales and marketing expenses and totaled $1.0 million, $2.6 million, $2.7 million $650,000 (unaudited) and $740,000 (unaudited)$4.2 million in 2000,the years ended December 31, 2001, 2002 and the three months ended March 31, 2002 and March 30, 2003, respectively.

Research and development

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

Advertising costs

     Advertising costs are expensed as incurred. Total advertising and promotional expenses were $2.0 million $4.9 million and $7.1 million and $12.8 million in 2000,the years ended December 31, 2001, 2002 and 2002,2003, respectively.

Income taxes

     The Company accounts for income taxes under the liability method. Under this method, which recognizes deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets when, management estimates, based on available objective evidence, that it is more likely than not that the benefit of such assets will not be realized for the deferred tax assets.realized.

Stock-based compensation

     Pursuant to 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.

F-11


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, the Company’s net

F-13


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

income (loss) would have been reduced (increased)adjusted to the amounts indicated below (in thousands, except per share data):

                 
Three Months Ended
Year Ended December 31,
            

March 31,March 30,
20002001200220022003Year Ended December 31,






200120022003
(unaudited)


Net income (loss) attributable to common stockholders, as reportedNet income (loss) attributable to common stockholders, as reported $53 $(19,484) $(9,742) $(17,344) $1,612 Net income (loss) attributable to common stockholders, as reported $(19,484) $(9,742) $13,097 
Add: Employee stock-based compensation included in reported net income (loss)Add: Employee stock-based compensation included in reported net income (loss)   1,581 552 345 Add: Employee stock-based compensation included in reported net income (loss)  1,581 1,773 
Less: Total employee stock-based compensation determined under fair value methodLess: Total employee stock-based compensation determined under fair value method (6,710) (5,723) (5,558) (1,886) (1,378)Less: Total employee stock-based compensation determined under fair value method (5,723) (5,558) (5,846)
 
 
 
 
 
   
 
 
 
Adjusted net loss attributable to common stockholdersAdjusted net loss attributable to common stockholders $(6,657) $(25,207) $(13,719) $(18,678) $579 Adjusted net loss attributable to common stockholders $(25,207) $(13,719) $9,024 
 
 
 
 
 
   
 
 
 
Basic net income (loss) per share attributable to common stockholders:Basic net income (loss) per share attributable to common stockholders: Basic net income (loss) per share attributable to common stockholders: 
As reported $0.00 $(0.66) $(0.46) $(0.72) $0.08 As reported $(0.66) $(0.46) $0.55 
 
 
 
 
 
   
 
 
 
Adjusted $(0.23) $(0.85) $(0.65) $(0.78) $0.03 Adjusted $(0.85) $(0.65) $0.38 
 
 
 
 
 
   
 
 
 
Diluted net income (loss) per share attributable to common stockholders:Diluted net income (loss) per share attributable to common stockholders: Diluted net income (loss) per share attributable to common stockholders: 
As reported $0.00 $(0.66) $(0.46) $(0.72) $0.07 As reported $(0.66) $(0.46) $0.49 
 
 
 
 
 
   
 
 
 
Adjusted $(0.23) $(0.85) $(0.65) $(0.78) $0.02 Adjusted $(0.85) $(0.65) $0.34 
 
 
 
 
 
   
 
 
 

Comprehensive income

     Under SFAS 130, “Reporting Comprehensive Income,” the Company is required to display comprehensive income includes all changesand its components as part of the financial statements. The Company has displayed its comprehensive income as part of the consolidated statements of stockholders equity (deficit). Other comprehensive income for the year ended December 31, 2003 was a $13,000 unrealized gain on available-for-sale securities. There were no items of other comprehensive income in equity (net assets) during a period from non-owner sources. For the years ended December 31, 2000, 2001 and 2002, there were no differences between the Company’s net income (loss) and its comprehensive income (loss).or 2002.

Foreign currency translation

     The Company uses the U.S. dollar as its functional currency.currency for all of its international subsidiaries. Foreign currency assets and liabilities are translated into U.S. dollars at the end-of-period exchange rates except for fixed assets, which are translated at historical exchange rates. Expenses are translated at average exchange rates in effect during each period, except for those expenses related to balance sheet amounts, which are translated at historical exchange rates. Gains or losses arising from foreign currency transactions are included in net earningsincome (loss) and were immaterial for all periods.periods being reported.

Recent accounting pronouncements

     In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit and Disposal Activities.” SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 was effective for exit or disposal activities initiated after December 31,

F-14


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2002 and the adoption of SFAS No. 146 did not have a material impact on the Company’s financial position, results of operations or cash flows.

     FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), was issued in November 2002. FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement requirement of FIN 45 is effective for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002, and are applicable to certain guarantees issued by the Company before December 31, 2002. The Company adopted FIN 45 disclosure requirements as of December 31, 2002 contained in Note 7. The adoption of the provisions for recognition and initial measurement did not have a material impact on the Company’s position, results of operations or cash flows.

     In November 2002, the EITF reached a consensus on Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue 00-21 will applyapplies to revenue arrangements entered into in fiscalreporting periods beginning after June 15, 2003. The Company does not expect the adoption of EITF Issue 00-21 todid not have a material impact on itsthe financial position, results of operations or cash flows.flows of the Company.

F-12


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In December 2002,2003, the Financial Accounting Standards Board (“FASB”) issued a revision to Interpretation number 46, “Consolidation of variable interest entities, and interpretation of ARB Opinion No. 51 (FIN 46R).” FIN 46R clarifies the application of ARB 51 “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders. FIN 46R requires the consolidation of these entities, known as variable interest entities (“VIE’s”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.

     Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the interpretation for public companies to the end of the first reporting period ending after March 15, 2004, except that all public companies must at a minimum apply the unmodified provisions of the interpretation to entities that were previously considered “special-purpose entities” in practice and under the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary changeliterature prior to the fair value based methodissuance of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosuresFIN 46R by the end of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal yearsfirst reporting period ending after December 15, 20022003.

     Among the scope exceptions, companies are not required to apply FIN 46R to an entity that meets the criteria to be considered a “business” as defined in the interpretation unless one or more of four named conditions exist. FIN 46R applies immediately to a VIE created or acquired after January 31, 2003. The company does not have any interests in VIE’s, and have been adopted by the Company, which has elected to continue to account for employee stock options under Accounting Principles Board Opinion (“APB”) No. 25. The disclosure only provisions of SFAS No. 123 are contained within “Stock-based compensation” in Note 1. The interim disclosure requirements are effective for interim periods commencing after December 15, 2002. The adoption of this standard didFIN 46R is not expected to have a material effectimpact on the Company’s financial position, results of operations or cash flows.

NOTENote– BALANCE SHEET COMPONENTS— Balance Sheet Components (In Thousands)thousands):

Available-for-sale short-term investments consist of the following:

               
December 31,

20012002


Accounts receivable, net:
            
 Gross accounts receivable $25,501  $49,780     
   
   
     
 Less: Allowance for doubtful accounts  (1,500)  (873)    
   Reserve for sales returns  (2,947)  (3,363)    
   Reserve for price protection  (2,302)  (3,052)    
   
   
     
   (6,749)  (7,288)    
   
   
     
  $18,752  $42,492     
   
   
     
                         
December 31,

20022003


UnrealizedEstimatedUnrealizedEstimated
CostGains/(Losses)Fair ValueCostGains/(Losses)Fair Value






Government Securities          $12,377  $13  $12,390 
   
   
   
   
   
   
 
Totals          $12,377  $13  $12,390 
   
   
   
   
   
   
 

F-15Accounts receivable and related allowances consist of the following:

           
December 31,

20022003


Gross accounts receivable $49,780  $83,639 
   
   
 
Less: Allowance for doubtful accounts  (873)  (1,322)
  Allowance for sales returns  (3,363)  (4,845)
  Allowance for price protection  (3,052)  (2,606)
   
   
 
   Total allowances  (7,288)  (8,773)
   
   
 
Accounts receivable, net $42,492  $74,866 
   
   
 

F-13


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 — (Continued)

Inventories consist of the following:

              
December 31,

March 30,
200120022003



(unaudited)
Inventories:
            
 Purchased components $2,504  $  $ 
 Finished goods  28,505   21,719   25,390 
 Inventories in channel or in-transit to customer  247   3,055   1,738 
   
   
   
 
  $31,256  $24,774  $27,128 
   
   
   
 
         
December 31,

20022003


Finished goods $24,774  $39,266 
   
   
 

Property and Equipment, net consists of the following:

              
Property and equipment, net:
            
 Computer equipment $1,405  $2,129     
 Furniture, fixtures and leasehold improvements  171   399     
 Software  1,086   2,878     
 Machinery  570   1,032     
 Construction in progress  23   41     
   
   
     
   3,255   6,479     
 Less: Accumulated depreciation and amortization  (1,981)  (3,335)    
   
   
     
  $1,274  $3,144     
   
   
     
         
December 31,

20022003


Computer equipment $2,129  $2,722 
Furniture, fixtures and leasehold improvements  399   794 
Software  2,878   3,236 
Machinery  1,032   2,216 
Construction in progress  41    
   
   
 
   6,479   8,968 
Less: Accumulated depreciation and amortization  (3,335)  (5,342)
   
   
 
  $3,144  $3,626 
   
   
 

     Depreciation expense in 2000, 2001, 2002 and 20022003 was $373,000, $950,000, $1.4 million and $1.4$2.0 million, respectively.

     In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill amortization was discontinued as of January 1, 2002. The carrying value of goodwill at December 31, 20012002 and 20022003 was $558,000, net of $1.1 million of accumulated amortization, andamortization. Management has determined that the net book value of the goodwill has not been determined by the Company to not be impaired.

F-16


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     The following table reflects consolidated results of operations adjusted as though the adoption of SFAS No. 142 occurred as of January 1, 20002001 (in thousands):

             
Year Ended December 31,

200020012002



Reported net income (loss) attributable to common stockholders $53  $(19,484) $(9,742)
Goodwill amortization  335   335    
   
   
   
 
Adjusted net income (loss) attributable to common stockholders $388  $(19,149) $(9,742)
   
   
   
 
Basic net income (loss) per share attributable to common stockholders $0.00  $(0.66) $(0.46)
Goodwill amortization  0.01   0.01    
   
   
   
 
Adjusted basic net income (loss) per share attributable to common stockholders $0.01  $(0.65) $(0.46)
   
   
   
 
Diluted net income (loss) per share attributable to common stockholders $0.00  $(0.66) $(0.46)
Goodwill amortization  0.01   0.01    
   
   
   
 
Adjusted diluted net income (loss) per share attributable to common stockholders $0.01  $(0.65) $(0.46)
   
   
   
 
          
December 31,

20012002


Other accrued liabilities (in thousands):
        
 Sales and marketing $6,237   13,855 
 Warranty obligation  4,720   8,941 
 Other  3,788   6,623 
   
   
 
  $14,745  $29,419 
   
   
 
     
Year Ended
December 31,

2001

Reported net income (loss) attributable to common stockholders $(19,484)
Goodwill amortization  335 
   
 
Adjusted net income (loss) attributable to common stockholders $(19,149)
   
 
Basic net income (loss) per share attributable to common stockholders $(0.66)
Goodwill amortization  0.01 
   
 
Adjusted basic net income (loss) per share attributable to common stockholders $(0.65)
   
 
Diluted net income (loss) per share attributable to common stockholders $(0.66)
Goodwill amortization  0.01 
   
 
Adjusted diluted net income (loss) per share attributable to common stockholders $(0.65)
   
 

F-17F-14


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 — (Continued)

NOTE 3 – RELATED PARTY TRANSACTIONS:

TRANSACTIONS WITH NORTEL NETWORKSOther accrued liabilities consist of the following;

         
December 31,

20022003


Sales and marketing programs $13,855  $14,207 
Warranty obligation  8,941   11,959 
Outsourced engineering costs  1,588   1,604 
Freight  2,593   937 
Other  2,442   2,592 
   
   
 
  $29,419  $31,299 
   
   
 

Note 3 — Related Party Transactions:

     In 2000, the Company’s costs and expenses include allocations from Nortel Networks for centralized legal accounting, treasury, real estate, information technology, distribution, customer service, sales and marketing, engineering, and other corporate services and infrastructure costs provided by Nortel Networks. These allocations have been determined on bases that Nortel Networks and NETGEAR considered to be reasonable reflections of the utilization of services provided or the benefit received by NETGEAR. The allocation methods include net assets, headcount, square footage and direct effort expended. In addition, the Company has derived certain revenue and purchased certain products from Nortel Networks during the period. The allocated amounts may not represent the actual costs and expenses incurred by the Company if operated on a stand alone basis.

Revenues and products purchased from Nortel Networks, allocated costs and other intercompany transactions included in the accompanying statements of operations are as follows (in thousands):

             
Year Ended December 31,

200020012002



Net revenue $(538) $(23) $ 
Cost of revenue  1,500       
Research and development  224       
Sales and marketing  3,390       
General and administrative  1,430       

     As discussed in Note 8, the Company changed its capital structure on March 10, 2000. For purposes of governing the ongoing relationship between NETGEAR and Nortel Networks on and after March 10, 2000, and to provide for an orderly transition, NETGEAR and Nortel Networks entered into various agreements. The results of those agreements are disclosed in the table above. A brief description of each of the agreements follows:

Contribution agreement

     Nortel Networks transferred to the Company its rights in and to the NETGEAR and GearGuy trademarks and certain technical trade secrets, its interest in executory contracts with distributors and suppliers of the Company’s products, equipment, personal property and fixtures used by employees and contractors dedicated to the Company’s business and the records relating to the Company’s business.

Transition services agreement

     Nortel Networks agreed to provide administrative, financial, management and other services for a period of six months ended September 10, 2000. Additionally, Nortel Networks agreed to provide property and casualty insurance for as long as it maintained a 50% or greater ownership interest in NETGEAR. In the opinion of management, fees associated with this agreement were made on a reasonable and consistent basis; however, they are not necessarily indicative of, and it is not practical for management to determine the level of, expenses which might have been incurred had NETGEAR been operating as a separate stand-alone company. This agreement was terminated as a result of the change in the Company’s capital structure (see Note 8).

F-18


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Intellectual property license agreement

     The Company received a perpetual, non-exclusive, royalty-free license to continue to use Nortel Networks’ world-wide intellectual property rights underlying the Company’s products, other than those rights transferred pursuant to the contribution agreement, for use in the production, distribution and sale of the Company’s products.

Loaned employee agreement

     Nortel Networks agreed in March 2000 to provide the Company with the services of 16 persons employed by Nortel Networks in exchange for fees, based upon allocation of its current costs associated with such personnel, including all of the international sales and marketing personnel that provided services to the Company. This agreement was terminated with the employment of most of these individuals by the Company at December 31, 2000.

Tax sharing agreement

     In February 2002, as part of the change in capital structure of the Company (Note 8), the Company signed a Tax SharingManufacturing Agreement with Nortel Networks. As part of the agreement, Nortel Networks agreed that the Company would not be liable for any outstanding taxes relating to periods before September 2000. As a result, in February 2002, the Company reversed $2.9 million of accrued taxes payable and the credit was taken to additional paid in capital.

Intercompany balanceDelta Electronics

     Prior to March 10, 2000, the net intercompany borrowings from Nortel Networks were considered a contribution to the capital of NETGEAR. The following table presents intercompany transactions and balances between NETGEAR and Nortel Networks for the period from January 1, 2000 through March 10, 2000 (in thousands):

     
Period from
January 1,
2000 to
March 10,
2000

Balance at beginning of the period $33,366 
Distribution to Nortel Networks — working capital  (1,083)
Intercompany purchases  711 
Intercompany revenue  (204)
Allocation of corporate services  815 
Net cash transfer to Nortel Networks  (4,482)
   
 
Net capital distributions to Nortel Networks  (4,243)
Effect of stock purchase  (29,123)
   
 
Balance at end of the period $ 
   
 
Average balance during the period $14,562 
   
 

F-19


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Subsequent to March 10, 2000, NETGEAR reimbursed Nortel Networks for services described above. The following table presents intercompany transactions and balances between NETGEAR and Nortel Networks subsequent to March 10, 2000 (in thousands):

                 
Three Months Ended
Year Ended December 31,

March 31,March 30,
2001200220022003




(unaudited)
Beginning balance $4,245  $4,162  $4,162  $662 
Intercompany revenue  (23)           
Other  (60)           
Net cash transfer to Nortel Networks     (3,500)  (2,500)  (500)
   
   
   
   
 
Balance (included in payable to related parties) $4,162  $662  $1,662  $162 
   
   
   
   
 

     On January 23, 2002, the Board of Directors of the Company approved the Trade Payable Letter Agreement. Per the terms of the agreement, the Company paid back immediately $2.0 million of the $4.2 million balance payable to Nortel Networks at December 31, 2001 and the remaining balance of $2.2 million to be paid back in quarterly installments of $0.5 million. The outstanding amounts do not accrue interest.

MANUFACTURING AGREEMENT

     A substantial majoritySome of the Company’s products are manufactured by Delta Electronics, which is associated with Delta International Holding Ltd., a shareholder in NETGEAR. Product purchases from Delta Electronics amounted to $6.0 million, $81.0 million, $121.3 million and $121.3$68.6 million during the years ended December 31, 2000, 2001, and 2002, respectively, and $26.5 million (unaudited) and $30.2 million (unaudited) during the three months ended March 31, 2002 and March 30, 2003, respectively. Payables related to these purchases amounted to $8.4 million, $13.0 million and $15.8$6.4 million (unaudited) at December 31, 2001 and 2002 and March 30, 2003, respectively, and are included in payables to related parties in the accompanying balance sheets.

OTHER RELATED PARTY TRANSACTIONSOther Related Party Transactions

     As consideration for services received in relation to the issuance of Series C Preferred Stock (see Note 8), the Company in March 2002 the Company issued a warrant to one of its shareholders to purchase 218,750 shares of common stock. The warrant iswas fully exercisable on the day of grant. The warrant willwas due to expire in the event of an initial public offering provided that the aggregate gross proceeds from the offering are not less than $35.0 million and the valuation of the Company is at least $250.0 million, and willbut would otherwise expire on March 13, 2007. Immediately prior to the Company’s 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. The Company determined the fair value of the warrant using Black-Scholes option pricing model usingwith 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%., expected life — 4 years. The fair value of the warrant of $622,000 was recorded against the proceeds of Series C Preferred Stock.

NOTENote– NET INCOME (LOSS) PER SHARE:— Net Income (Loss) Per Share:

     TheImmediately 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 arewere 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

F-20


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

F-15


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. Although there were no common shares outstanding during 2001 and 2002, basic net loss per share attributable to common stockholders is presented, as there were potential common shares outstanding (representing Preferred Stock) during the period. This per share data is based on the net loss, which would be attributable to one share of common stock during each period, after apportioning the loss to reflect the participation rights of the preferred stockholders.

     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):

          
Year Ended December 31, 2000

Common StockPreferred Stock


Basic net income per share:        
 Apportioned net income after deemed dividend to Preferred Stock $9  $44 
 Deemed dividend to Preferred Stock     2,601 
   
   
 
 Total numerator for basic net income per share $9  $2,645 
   
   
 
 Weighted average basic shares outstanding  5,020   23,915 
   
   
 
Basic net income per share $0.00  $0.11 
   
   
 
          
Year Ended December 31, 2001

Common StockPreferred Stock


Basic net loss per share:        
 Apportioned net loss     $(19,484)
       
 
 Total numerator for basic net loss per share     $(19,484)
       
 
 Weighted average basic shares outstanding      29,571 
       
 
Basic net loss per share $(0.66)(A) $(0.66)
   
   
 
                  
Year Ended December 31, 2002Year Ended December 31, 2002


Common StockPreferred StockCommon StockPreferred Stock




Basic net income (loss) per share:Basic net income (loss) per share: Basic net income (loss) per share: 
Apportioned net loss after deemed dividend to Preferred Stock $(9,742)Apportioned net loss after deemed dividend to Preferred Stock $(9,742)
Deemed dividend to Preferred Stock 17,881 Deemed dividend to Preferred Stock 17,881 
 
   
 
Total numerator for basic net income (loss) per share $8,139 Total numerator for basic net income (loss) per share $8,139 
 
   
 
Weighted average basic shares outstanding 21,181 Weighted average basic shares outstanding 21,181 
 
   
 
Net income (loss) per shareNet income (loss) per share $(0.46)(A) $0.38 Net income (loss) per share $(0.46)(A) $0.38 
 
 
   
 
 
          
Year Ended December 31, 2003

Common StockPreferred Stock


Basic net income per share:        
 Apportioned net income $6,621  $6,476 
   
   
 
 Total numerator for basic net income per share $6,621  $6,476 
   
   
 
 Weighted average basic shares outstanding  11,958   11,695 
   
   
 
Basic net income per share $0.55  $0.55 
   
   
 

F-16


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      
December 31,
2003

Common Stock

Diluted net income per share:    
 Apportioned net income $13,097 
   
 
 Total numerator for diluted net income per share $13,097 
   
 
Weighted average shares outstanding:    
 Basic  11,958 
 Conversion of preferred stock  11,695 
 Options and warrants  3,147 
   
 
 Total diluted  26,800 
   
 
Diluted net income per share $0.49 
   
 

(A): As described above, these amounts represent the amount of net loss after deemed dividend to Preferred Stock which would be apportioned to one share of common stock.

F-21


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
          
Three Months Ended
March 31, 2002 (unaudited)

Common StockPreferred Stock


Basic net income (loss) per share:        
 Apportioned net loss after deemed dividend to Preferred Stock     $(17,344)
 Deemed dividend to Preferred Stock      17,881 
       
 
 Total numerator for basic net income (loss) per share     $537 
       
 
 Weighted average basic shares outstanding      24,072 
       
 
Basic net income (loss) per share $(0.72)(A) $0.02 
   
   
 
          
Three Months Ended
March 30, 2003 (unaudited)

Common StockPreferred Stock


Basic net income per share:        
 Apportioned net income     $1,612 
       
 
 Total numerator for basic net income per share     $1,612 
       
 
 Weighted average basic shares outstanding      20,231 
       
 
Basic net income per share $0.08(A) $0.08 
   
   
 
          
Three Months Ended
March 30, 2003 (unaudited)

Common StockPreferred Stock


Diluted net income per share:        
 Apportioned net income     $1,612 
       
 
 Total numerator for diluted net income per share     $1,612 
       
 
Weighted average shares outstanding:        
 Basic      20,231 
 Options and warrants      3,719 
       
 
 Total diluted      23,950 
       
 
Diluted net income per share $0.07(A) $0.07 
   
   
 

     Diluted net income (loss) per share attributable to common stockholders for 2000, 2001 2002 and for three months ended March 31, 2002 is the same as basic net income (loss) per share attributable to common stockholders because the impact of including common stock equivalents would not be dilutive.

     Anti-dilutive common stock options and warrants amounting to none, 6,695,592, 3,021,893 5,426,454 (unaudited) and none (unaudited)175,000 were excluded from the weighted average shares outstanding from the diluted per share calculation for 2000, 2001, 2002 and three months ended March 31, 2002 and March 30, 2003, respectively.


(A): As described above, these amounts represent the amount of net loss after deemed dividend to Preferred Stock which would be apportioned to one share of common stock.

F-22


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     Pro forma basic and diluted net income per share is presented for 2002 and three months ended March 30, 2003 to reflect per share data assuming the automatic conversion of all outstanding shares of Preferred Stock into common stock, which will occur upon the closing of a qualified initial public offering, as if the conversion had taken place at the beginning of the year, or at the date of issuance, if later. Basic pro forma per share data for 2002 was calculated by dividing net loss attributable to common stockholders, adding back the deemed dividend on preferred stock, by 21.1 million which is the weighted average number of shares of common stock into which the Preferred Stock outstanding during the periods was convertible. Diluted pro forma net income per share data for 2002 was calculated the same as basic pro forma net income per share except that the denominator was adjusted to 22.5 million shares to include weighted average potential common shares (representing warrants and stock options) outstanding during the period. Anti-dilutive common stock options amounting to 652,428, were excluded from the weighted average shares outstanding for the diluted per share calculation in 2002. For the three months ended March 30, 2003, pro forma basic and diluted income per share did not differ from actual basic and diluted income per share.

NOTENote– INCOME TAXES:— Income Taxes:

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

                 
Year Ended December 31,Year Ended December 31,


200020012002200120022003






Current:
Current:
 
Current:
 
U.S. federal $4,162 $(546) $378 U.S. federal $(546) $378 $4,282 
State and local 1,178 (154) 662 State (154) 662 513 
Foreign  300 293 Foreign 300 293 737 
 
 
 
   
 
 
 
 5,340 (400) 1,333   (400) 1,333 5,532 
 
 
 
   
 
 
 
Deferred:
Deferred:
 
Deferred:
 
U.S. federal (2,702) 2,702  U.S. federal 2,702  (7,908)
State and local (770) 770  State 770  (1,148)
 
 
 
   
 
 
 
 $1,868 $3,072 $1,333   3,472  (9,056)
 
 
 
   
 
 
 
TotalTotal $3,072 $1,333 $(3,524)
 
 
 
 

F-17


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Deferred tax assets and liabilities consist of the following (in thousands):

                 
December 31,December 31,


2001200220022003




Deferred tax assets:
Deferred tax assets:
 
Deferred tax assets:
 
Net operating loss carryforwards $2,868 $182 
Accruals and reserves 10,134 9,275 Net operating loss carry-forwards $182 $180 
Deferred revenue 146  Accruals and allowances 9,275 9,050 
Tax credits 210 33 Other 33  
 
 
   
 
 
 13,358 9,490   9,490 9,230 
 
 
   
 
 
Deferred tax liabilities:
Deferred tax liabilities:
 
Deferred tax liabilities:
 
Depreciation and goodwill amortization (359) (317)Depreciation and goodwill amortization (317) (174)
 
 
   
 
 
 (359) (317)  (317) (174)
 
 
   
 
 
Gross deferred tax assetsGross deferred tax assets 12,999 9,173 Gross deferred tax assets 9,173 9,056 
Valuation allowanceValuation allowance (12,999) (9,173)Valuation allowance (9,173)  
 
 
   
 
 
Net deferred tax assetsNet deferred tax assets $ $ Net deferred tax assets $�� $9,056 
 
 
   
 
 

F-23


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     As of December 31, 2002,2003, the Company had approximately $3.1 million of California state net operating loss carryforwardscarry-forwards available to offset future taxable income. These net operatingnet-operating losses will begin to expire in 2013.

     Management believesDuring the fiscal year ended December 31, 2003, the Company reassessed its ability to realize its deferred tax assets and determined that given the Company’s historical cumulative losses and the uncertainty regarding future profitability, it is more likely than not that future 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.

     Accordingly, the Company fully reversed the valuation allowance of $9,772,000 in the second quarter of the year ended December 31, 2003 to reflect the anticipated net deferred tax assets will not be utilized, such that a full valuation allowance has been recorded for 2002 deferred tax assets.asset utilization.

     The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:

             
Year Ended December 31,

200020012002



U.S. statutory federal tax rate  35.0%  (34.0)%  34.0%
State taxes, net of federal benefit  5.8%  (4.6)%  9.6%
Permanent and other items  0.5%  0.6%  10.9%
Change in valuation allowance     57.9%  (40.4)%
   
   
   
 
Effective tax rate  41.3%  18.7%  14.1%
   
   
   
 
             
Year Ended December 31,

200120022003



Tax at federal statutory rate  (34.0)%  34.0%  35.0%
State, net of federal benefit  (4.6)  9.6   4.3 
Stock-based compensation  0.0   2.7   7.3 
Non-deductible interest charges  0.0   2.2   27.1 
Tax credits  (0.4)  0.0   (6.4)
Other  1.0   6.0   (2.0)
Change in valuation allowance  56.7   (40.4)  (102.1)
   
   
   
 
Provision (Benefit) for taxes  18.7%  14.1%  (36.8)%
   
   
   
 

F-18


NETGEAR, INC.

NOTE 6 – BORROWINGS:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6 — Borrowings:

Lines of credit

     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. No amounts were outstanding under the credit line as of December 31, 2001. In 2002, the Company signed an amendment to the credit line agreement to terminate the credit agreement effective July 28, 2002.

     On July 25, 2002, the Company entered into a revolving line of credit agreement with anothera 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 the bank’s 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 of up to an aggregate face amount of $2$2.0 million. DuringPrior to the termclosing of the Company’s initial public offering the line of credit agreementcontained 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 has to follow various financialmaintain a ratio of quick assets to current liabilities of at least 1.25 : 1.00, 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 non-financial covenants.1.50% per annum for letters of credit. During the year ended December 31, 2002 and 2003, the Company was in compliance with all the covenants. The Company did not draw down on the lines of credit during 2002 and the three months ended March 30, 2003, however, the Company utilized $396,000 of the available credit line in the form of letters of credit. The revolving line of credit expires in July 2004.covenants.

Letters of credit

     As collateral for ourthe Company’s payment obligations to certain third parties who provide inventory warehousing and distribution services, the Company is contingently liable under letters of credit for an aggregate of $746,000, $756,000 and $756,000 (unaudited),$360,000 at December 31, 2001 and 2002 and March 30, 2003, respectively. No amount has been drawn under these letters of credit as of December 31, 2001 and 2002 and March 30, 2003.

F-24


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTENote– COMMITMENTS:— Commitments:

Employments Agreements

     The Company has signed various employment agreements with key executives pursuant to which if their employment is terminated without cause, the employees are entitled to receive their base salary (and commission or bonus, as applicable) for 52 weeks (for the Chief Executive Officer), 39 weeks (for the Chief Financial Officer and for the President) orand 26 weeks (for other key executives), and will continue to have stock options vest for a one year period following the termination. If the termination, without cause, occurs within one year of a change in control, the officer is entitled to two years acceleration of any unvested portion of his or her stock options.

Leases

     The Company leases office space and equipment under noncancelablenon-cancelable operating leases with various expiration dates through December 2004.March 2006. Rent expense in 2000,the years ended, December 31, 2001, 2002 and 20022003 was $1.8 million, $1.2 million, $959,000 and $959,000,$1.1 million, respectively. The terms of the facility lease provideprovides for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.

F-19


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Future minimum lease payments under noncancelablenon-cancelable operating and capital leases are as follows (in thousands):

     
Year EndingOperating
December 31,Leases


2003 $1,047 
2004  634 
   
 
Total minimum lease payments $1,681 
   
 
     
Operating
Year Ending December 31,Leases


2004 $1,033 
2005  153 
2006  26 
   
 
Total minimum lease payments $1,212 
   
 

Guarantees, Indemnifications

     The Company entersentered into various inventory related purchase agreements with suppliers. Under these agreements, 50% of orders are cancelable by giving notice 3046 to 60 days prior to the expected shipment date, and payment25% of a 5% cancellation fee.orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are noncancelable within 30 days prior to the expected shipment date. At March 30,December 31, 2003, the Company had $16.8$27.5 million in noncancelable purchase commitments with suppliers and $22.8 million subject to the 5% cancellation fees.suppliers. The Company expects to sell all products for which it has committed to purchase from suppliers.

     During 2001, the Company entered into an agreement with a service provider with respect to legal consultative and other services in international jurisdictions. Under the agreement, the Company agreed to indemnify the service provider 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 March 30,at December 31, 2003.

     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 a Director and Officer Insurance Policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the

F-25


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of March 30,at December 31, 2003.

     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 not 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 March 30,December 31, 2003.

F-20


NOTENETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note– REDEEMABLE CONVERTIBLE PREFERRED STOCK— Redeemable Convertible Preferred Stock (“PREFERRED STOCK”Preferred Stock”):

     The following table summarizes the activity of Preferred Stock (in thousands, except share data):

                                 
Series ASeries BSeries CTotal




SharesAmountSharesAmountSharesAmountSharesAmount








Balance at December 31, 1999    $     $     $     $ 
Issuance of Preferred Stock in exchange for common stock  26,250,000   29,123               26,250,000   29,123 
Issuance of Preferred Stock for cash (net of issuance cost $35)        3,320,537   12,354         3,320,537   12,354 
Deemed Preferred Stock dividend           2,601            2,601 
   
   
   
   
   
   
   
   
 
Balances at December 31, 2000 and 2001  26,250,000   29,123   3,320,537   14,955         29,570,537   44,078 
Issuance of Preferred Stock (net of issuance cost $1,833)              10,937,406   3,368   10,937,406   3,368 
Repurchase of Preferred Stock  (20,273,918)  (17,275)              (20,273,918)  (17,275)
Deemed Preferred Stock dividend     (5,218)           23,099      17,881 
   
   
   
   
   
   
   
   
 
Balances at December 31, 2002  5,976,082   6,630   3,320,537   14,955   10,937,406   26,467   20,234,025   48,052 
Repurchase of Preferred Stock (unaudited)  (2,525)  (6)        (3,020)  (7)  (5,545)  (13)
   
   
   
   
   
   
   
   
 
Balances at March 30, 2003 (unaudited)  5,973,557  $6,624   3,320,537  $14,955   10,934,386  $26,460   20,228,480  $48,039 
   
   
   
   
   
   
   
   
 
                                 
Series ASeries BSeries CTotal




SharesAmountSharesAmountSharesAmountSharesAmount








Balances at January 1, 2002  26,250,000  $29,123   3,320,537  $14,955     $   29,570,537  $44,078 
Issuance of Preferred Stock (net of issuance cost $1,833)              10,937,406   3,368   10,937,406   3,368 
Repurchase of Preferred Stock  (20,273,918)  (17,275)              (20,273,918)  (17,275)
Deemed Preferred Stock dividend     (5,218)           23,099      17,881 
   
   
   
   
   
   
   
   
 
Balances at December 31, 2002  5,976,082   6,630   3,320,537   14,955   10,937,406   26,467   20,234,025   48,052 
Repurchase of Preferred Stock  (2,525)  (6)        (3,020)  (7)  (5,545)  (13)
Conversion of Preferred Stock into common stock  (5,973,557)  (6,624)  (3,320,537)  (14,955)  (10,934,386)  (26,460)  (20,228,480)  (48,039)
   
   
   
   
   
   
   
   
 
Balances at December 31, 2003    $     $     $     $ 
   
   
   
   
   
   
   
   
 

     Preferred Stock atAs of December 31, 2002 consists of the following (in thousands, except share data):

             
Shares

Liquidation
SeriesAuthorizedOutstandingAmount




A  26,250,000   5,976,082  $26,978 
B  3,320,538   3,320,537   14,990 
C  10,937,500   10,937,406   19,587 
   
   
   
 
   40,508,038   20,234,025  $61,555 
   
   
   
 

Change in capital structure of the Company

     The Company was a wholly-owned subsidiary of Nortel Networks NA, Inc. (“Nortel Networks”) until March 10, 2000. On March 10, 2000, the Company sold Series B Preferred Stock representing approximately 11% of the Company’s outstanding shares of preferred stock to a third-party investor. The Company also

F-26


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

signed several arrangements with Nortel Networks to facilitate its transition to become an independent Company (see Note 3).

     During September 2000, Nortel Networks transferred part of its holdings in Series A Preferred Stock to certain third party investors. This transfer did not have an impact to the financial statements of the Company. As part of the transfer, Nortel Networks granted additional liquidation preference rights to the transferees (“Nortel Liquidation Preference Obligation.”) Under the Nortel Liquidation Preference Obligation, Nortel Networks is obligated to pay to each transferee of Series A Preferred Stock an amount based on the distribution amount to the Series A Preferred Stockholders upon liquidation of the Company.

     On February 7, 2002, the Company issued 10,937,406 shares of Series C Preferred Stock to holders of the Company’s outstanding shares of Series A and Series B Preferred Stock, other than Nortel Networks. Consideration for the issuance of the shares was received partly in cash for $4.7 million and partly, in the form of transfer of the right to receive 75% of the amounts payable by Nortel Networks under the Nortel Liquidation Preference Obligation.

     Upon closing of the sale of Series C Preferred Stock, the Company entered into a Series A Preferred Stock Purchase Agreement with Nortel Networks. Under the terms of the agreement, the Company repurchased from Nortel Networks 20,273,918 shares of Series A Preferred Stock (which represented the entirety of stock held by Nortel Networks). In consideration for the repurchase of the shares, the Company paid Nortel Networks $4.7 million in cash, surrendered the right to receive 75% of the amount payable by Nortel Networks under the Nortel Liquidation Preference Obligation and entered into a Subordinated Unsecured Convertible Promissory Note Payable to Nortel Networks (the “Note”).

     The Note has a principal amount of $20.0 million. Principal and accrued but unpaid interest are due on February 7, 2009. The Note bears interest at 7% per year, starting to accrue on February 7, 2005. Upon a change in control of the Company, the holder of the Note has the right to demand immediate repayment of principal and accrued interest under the Note. Upon closing of a public equity financing (other than corporate re-organization and transaction on Form S-4), the Company shall pay Nortel the lesser of (i) the principal then outstanding and accrued but unpaid interests or (ii) 66.66% of the net proceeds from such equity financing in excess of $10.0 million. In the event the proceeds of the public equity financing are not sufficient to repay the Note, then Nortel Networks has the right to convert the outstanding balance and accrued but unpaid interest into shares of common stock of the Company for a period starting upon the closing of a Company’s initial public offering (“IPO”) and for two years after the IPO date. The conversion price will be the price per share equal to the gross offering price in the IPO. The $20.0 million Note is carried at its net present value of $13.3 million, at December 31, 2002, calculated using borrowing rates currently available to the Company for loans with similar terms.

     In connection with the issuance of Series C Preferred Stock and repurchase of Series A Preferred Stock, the Company determined that the holders of Preferred Stock received a beneficial conversion feature in the amount of $17.9 million. This amount was determined by comparing the Preferred Stock issuance price to the fair value of the common stock that would be received by the preferred stockholders if they exercised their right to convert their Preferred Stock into the common stock. The beneficial conversion feature has been recorded as dividend to the preferred stockholders.

     The holders of Preferred Stock have various rights and preferences as follows:

Voting

     Each share of Series A, B and C Preferred Stock has voting rights equal to an equivalent number of shares of common stock into which it is convertible and votes together as one class with the common stock.

F-27


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     The Company must obtain approval from at least 60% of the outstanding2003, 5,000,000 shares of Preferred Stock in order to alter the Company’s Certificatehad been authorized, of Incorporation, authorize any shares of capital stock with preference over the Preferred Stock, or authorize any shares of capital stock on a parity with Preferred Stock. The Company must obtain approval from not less than 60% of the then outstanding shares of Preferred Stock in order to pay, declare any dividend or distribute any shares of common stock, sell the Company with gross proceeds of less than $300.0 million, liquidate, dissolve or wind-up the Company acquire all or a portion of the properties, assets or capital stock of any other company for consideration greater than $5.0 million and incur indebtedness in excess of $30.0 million.

Dividendswhich no amount was outstanding.

Note 9 —Common Stock:

     The holders of Series A, B and C Preferred Stock will also be entitled to participate in non-cumulative dividends on common stock, when and if declared by the Board of Directors, based on the number of shares of common stock held on an as-if converted basis. No dividends on Preferred Stock or common stock have been declared by the Board from inception through December 31, 2002.

Liquidation

     In the event of any liquidation, dissolution or winding up of the Company, including a merger, acquisition or sale of assets where the beneficial owners of the Company’s common stock and Preferred Stock own less than 50% of the resulting voting power of the surviving entity, the holders of Series A, B and C Preferred Stock are each entitled to receive an amount of $4.51, $4.51 and $1.79 per share, respectively, plus any declared but unpaid dividends prior to and in preference to any distribution to the holders of common stock. The remaining assets, if any, shall be distributed to holders of Preferred Stock and common stock with equal priority and pro rata based on the number of shares held by each such holder. Should the Company’s legally available assets be insufficient to satisfy the liquidation preferences the funds will be distributed pro rata to the holders of Series A, B and C Preferred Stock.

Conversion

     Each share of Series A, B and C Preferred Stock is convertible, at the option of the holder, according to a conversion ratio, subject to adjustment for dilution. Each share of Series A, B and C Preferred Stock automatically converts into the number of shares of common stock into which such shares are convertible at the then effective conversion ratio upon the closing of a public offering of common stock resulting in at least $35.0 million gross proceeds at a valuation of the Company of $250.0 million.

     At December 31, 2002, the Company reserved 5,976,082, 3,320,538 and 10,937,500 shares of common stock for the conversion of Series A, B and C Preferred Stock, respectively.

NOTE 9 – COMMON STOCK:

The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 63,656,250200,000,000 shares of $0.001 par value common stock. There were no28,618,969 shares of common stock outstanding at December 31, 2001 or 2002.2003.

Note 10 —Stock Option Plans:

Warrants for common stock

     In connection with the issuance of Series B Preferred Stock, the Company issued warrants to purchase 2,625,000 shares of common stock for $5.71 per share. Such warrants were outstanding at December 31, 2000 and expired unexercised on May 15, 2001. The Company determined the fair value of warrants of $2.6 million at the date of grant, using the Black-Scholes pricing model with the following assumptions: no dividends, risk-free rate of 6.4%, volatility at 71% and contractual life of one year.

F-28


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     The Company received $15.0 million in proceeds from the issuance of Series B Preferred Stock, of which $2.6 million was allocated to the common stock warrants resulting in a beneficial conversion feature in the Series B Preferred Stock of $2.6 million, which has been recorded as a dividend to the holders of Series B Preferred Stock.

     As discussed in Note 3, the Company issued warrants to a related party to purchase 218,750 shares of the Company’s common stock.

NOTE 10 – STOCK OPTION PLANS:

Nortel Networks Stock Option Plans

     Until March 2000, certain employees of the Company received grants of nonqualifying stock options under Nortel Networks stock option plans. The stock options were granted at the market price on the date of grant and expire on the tenth anniversary date. The stock options granted generally vested over three years.

     As discussed in the Note 8, on February 7, 2002 the Company repurchased all shares held by Nortel Networks. As a result, the Nortel Networks stock option holders had to exercise the options within 90 days after the close of the transaction or the options were to be cancelled. As a result, 393,718 options of Nortel Networks stock were cancelled in 2002.

Additional information with respect to stock options under the Nortel Networks plans is as follows:

                         
200020012002



AverageAverageAverage
ExerciseExerciseExercise
SharesPriceSharesPriceSharesPrice






Options outstanding at January 1  575,806  $9.91   408,048  $12.56   393,718  $12.47 
Options granted  5,600   65.49             
Employee transfers  38,370   14.53             
Exercised  (207,269)  6.89   (8,349)  11.23       
Canceled  (4,459)  8.13   (5,981)  20.05   (393,718)  12.47 
   
       
       
     
Outstanding at December 31  408,048   12.56   393,718   12.47       
   
       
       
     
Options exercisable at December 31  266,869  $11.06   353,732  $11.64     $ 
   
       
       
     

2000 Stock Option Plan

     In April 2000, the Company adopted the 2000 Stock Option Plan (the “Plan”). The Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) may be granted only to Company employees (including officers and directors who are also employees). Nonqualified stock options (“NSO”) may be granted to Company employees and consultants. The Company has reserved 7,350,000 shares of Common Stock for issuance under the Plan.

     Options under the Plan may be granted for periods of up to ten years and at prices no less than the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively. To date, options granted generally vest over four years.

F-292003 Stock Plan

     In April 2003, the Company adopted the 2003 Stock Plan (the “Plan”). The Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) may be

F-21


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 — (Continued)

Voluntarygranted only to Company employees (including officers and directors who are also employees). Nonqualified stock options (“NSO”) may be granted to Company employees and consultants. The Company has reserved 750,000 shares of Common Stock plus any shares which were reserved but not issued under the Company’s 2000 Stock Option Exchange Program

     On January 23, 2002, the Board of DirectorsPlan as of the Company authorizeddate of the Voluntaryapproval of the 2003 Stock Plan, The number of shares which were reserved but not issued under the Company’s 2000 Stock Option Exchange Program. UnderPlan that were transferred to the termsCompany’s 2003 Stock Plan were 615,290, which when combined which the stock option allocation for the Company’s 2003 Stock Plan give a total of 1,365,290 under the Company’s 2003 Stock Plan as of the program, each eligible employee was offered the opportunity to exchange all or somedate of their outstanding stock optionstransfer. As of December 31, 2003, 1,396,412 shares were reserved for issuance under the Company’s at an exchange ratio of 0.684 for new stock options to2003 Stock Plan.

     Options under the Plan may be granted byfor periods of up to ten years and at prices no less than the Company. The exercise price of the new stock options was theestimated fair value of the common stock on the date of grant. Grantgrant as determined by the closing sales price for such stock as quoted on any established stock exchange or a national market system, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than the estimated fair value of the shares on the date wasof grant, respectively, and (ii) the expirationexercise price of 6an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively. To date, options granted generally vest over four years, the first tranche at the end of twelve months and one day following the stockremaining options offering period. As a result ofvesting monthly over the program 321,825 shares were cancelled on March 15, 2002 and 220,129 shares were subsequently issued related to the program.remaining three years.

Stock based compensation

     For financial reporting purposes, the Company has determined that the estimated value of the common stock determined in anticipation of the Company’s initial public offering was in excess of the exercise price, which was deemed to be the fair market value as of the dates of grant. In connection with the grants of such options, the Company recorded deferred stock based compensation of $6.7 million in 2002.the year ended December 31, 2002 and $1.0 million in the year ended December 31, 2003. For the year ended December 31, 2002 and December 31, 2003, respectively, the amortization of non-cash deferred stock-based compensation was $1.6 million.

     On April 22, 2002, the Company issued a stand-alone nonstatutory stock option to a former director associated with Nortel Networks, to purchase 43,750 shares of the Company’s common stock at an exercise price of $3.31 per share. The option is fully vestedmillion and expires on April 22, 2006, or earlier in connection with a change of control of the Company. The Company issued the stock option to the former director pursuant to a settlement agreement and release in connection with this individual’s termination of service in February 2002 on the Company’s board of directors. The fair value of the options was determined at the date of the grant using the Black-Scholes option pricing model. The determined fair value of $82,000 was expensed in the year ended December 31, 2002.$1.8 million, respectively.

     Activity under the combined Company’s 2000 and 2003 Stock Option PlanPlans is set forth as follows:

                            
Three Months
Year Ended December 31,Ended March 30,                       


Year Ended December 31,
2000200120022003




AverageAverageAverageAverage200120022003
ExerciseExerciseExerciseExercise


SharesPriceSharesPriceSharesPriceSharesPriceAverageAverageAverage








ExerciseExerciseExercise
SharesPriceSharesPriceSharesPrice
(unaudited)





Options outstanding at January 1Options outstanding at January 1  $ 5,134,900 $5.39 4,706,349 $5.40 6,433,092 $4.68 Options outstanding at January 1 5,134,900 $5.39 4,706,349 $5.40 6,433,092 $4.68 
Options granted 5,211,900 5.38 514,937 8.57 2,470,041 3.99 129,500 8.57 Options granted 514,937 8.57 2,470,041 3.99 654,735 12.14 
Options exercised         Options exercised     (141,896) 5.67 
Options cancelled (77,000) 4.62 (943,488) 7.09 (743,298) 6.88 (169,525) 4.39 Options cancelled (943,488) 7.09 (743,298) 6.88 (384,238) 4.93 
 
 
 
 
   
 
 
 
Outstanding at end of periodOutstanding at end of period 5,134,900 5.39 4,706,349 5.40 6,433,092 4.68 6,393,067 4.77 Outstanding at end of period 4,706,349 5.40 6,433,092 4.68 6,561,693 5.39 
 
 
 
 
   
 
 
 
Options exercisable at end of periodOptions exercisable at end of period 573,133 4.51 2,188,058 5.17 3,256,417 4.69 3,494,169 4.66 Options exercisable at end of period 2,188,058 5.17 3,256,417 4.69 4,654,024 4.88 
 
 
 
 
   
 
 
 

F-30F-22


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 — (Continued)

     Additional information regarding stock options outstanding under the Company’s 2000 Stock Option Plan and 2003 Stock Plan as of December 31, 20022003 is as follows:

                     
Options Outstanding

WeightedOptions Exercisable
Average
RemainingWeightedWeighted
Range ofContractualAverageAverage
ExerciseNumberLife (inExerciseNumberExercise
PriceOutstandingYears)PriceOutstandingPrice






$1.29-$1.29  818,665   9.2  $1.29   254,377  $1.29 
$3.31-$4.21  244,720   9.5  $3.73     $ 
$4.51-$5.10  3,962,006   7.7  $4.61   2,564,893  $4.54 
$5.54-$6.00  755,273   9.9  $5.96   120,310  $6.00 
$7.25-$8.57  652,428   8.2  $8.29   316,837  $8.16 
   
           
     
$1.29-$8.57  6,433,092   8.3  $4.68   3,256,417  $4.69 
   
           
     
                     
Options Outstanding

WeightedOptions Exercisable
Average
RemainingWeightedWeighted
ContractualAverageAverage
NumberLife (inExerciseNumberExercise
Range of Exercise PriceOutstandingYears)PriceOutstandingPrice






$1.29-$2.99  740,983   8.0  $1.29   429,378  $1.29 
$3.00-$5.99  4,037,668   6.7  $4.58   3,484,681  $4.55 
$6.00-$8.99  1,274,431   7.7  $7.23   637,814  $7.40 
$9.00-$11.99  273,186   9.2  $11.00   656  $11.00 
$12.00-$14.99  60,000   9.6  $14.00     $ 
$15.00-$17.99  175,425   9.9  $16.25   101,495  $15.34 
   
           
     
$1.29-$17.99  6,561,693   7.2  $5.39   4,654,024  $4.88 
   
           
     

     The fair value of each option grant under the Company’s stock option plan is estimated on the date of grant using the fair value method, using the following weighted average assumptions:

                   
Three Months Ended
Year Ended December 31,
         

March 31,March 30,
20002001200220022003Year Ended December 31,






200120022003
(unaudited)


Risk free interest rate 6.2% 4.81% 3.14% 3.14% 2.68% 4.81% 3.14% 2.68%
Expected life (years) 4 4 4 4 4  4 4 4 
Expected dividends $ $ $ $ $  $ $ $ 
Volatility 71% 71% 71% 71% 71% 71% 71% 71%

     The weighted average fair value of options granted during 2000, 2001, 2002 and the three months ended March 31, 2002 and March 30, 2003 was $3.12, $4.86, $4.45 $2.71 and $7.72 (unaudited),$8.37, respectively.

Under the Nortel NetworksNote 11 — Employee Stock Option Plans,Purchase Plans:

     In April 2003, the Company calculatedadopted the Employee Stock Purchase Plan (the “Purchase Plan”) under which 500,000 shares have been reserved for issuance. The Purchase Plan permits purchases of common stock via payroll deductions. The maximum payroll deduction is 10% of the employee’s cash compensation. Purchases of the common stock will occur on February 1 and August 1 of each year. The price of each share purchased will be 85% of the lower of:

     The fair market value per share of common stock on the first trading day of each offering period (which lasts 6 months); or

     The fair market value per share of common stock on the first trading day on or subsequent to the last day of the offering period, if it falls on a weekend or Government holiday.

     The value of each option grant on the dateshares purchased in any calendar year may not exceed $25,000.

As of grant using the Black-Scholes pricing model with the following assumptions in 2000: dividend yield at 0.16%; weighted average expected option term of four years; risk-free interest rate of 6.0%. The weighted average fair value of options grantedDecember 31, 2003 there had not been any payroll deductions and employee transfers during 2000 was $17.02 and $3.19, respectively. No options were grantedno shares had been issued under the Nortel Networks Stock Option Plans in 2001 and 2002.Purchase Plan.

 
NOTE 11 –Note 12 —SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS:Segment Information, Operations by Geographic Area and Customers Concentration:

     Operating segments are components of an enterprise about which separate financial information is available and is regularly evaluated by management, namely the chief operating decision maker of an

F-23


NETGEAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

organization, in order to make operating and resource allocation decisions. By this definition, the Company primarily operates in one business segment, which iscomprises the development, marketing and sale of networking products for the small business and home markets. NETGEAR’s headquartersprimary headquarter functions and mosta significant portion of its operations are located in the United States. The Company also conducts sales, marketing, and customer service activities and certain distribution center activities through several small sales offices in Europe, Middle-East and Asia.Africa (EMEA) and Asia as well outsourced distribution centers. Geographic revenue information is based on the location of the reseller or distributor.

     Long-lived assets, primarily fixed assets, are reported below based on the location of the asset.

F-31


NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Geographic information

     Net revenue consist of (in thousands):

                     
Three Months Ended
Year Ended December 31,

March 31,March 30,
20002001200220022003





(unaudited)
United States $118,422  $121,688  $150,096  $25,279  $36,661 
Europe  38,935   52,977   68,006   15,951   24,455 
Asia Pacific  17,899   16,294   18,053   4,065   6,436 
Rest of the world  1,407   1,481   1,176   233   154 
   
   
   
   
   
 
  $176,663  $192,440  $237,331  $45,528  $67,706 
   
   
   
   
   
 
             
Year Ended December 31,

200120022003



North America $121,688  $150,096  $172,885 
United Kingdom  20,701   23,919   35,415 
Germany  16,156   23,963   34,422 
EMEA (excluding United Kingdom and Germany)  16,120   20,124   29,585 
Asia Pacific and rest of world  17,775   19,229   26,995 
   
   
   
 
  $192,440  $237,331  $299,302 
   
   
   
 

     Long-lived assets consist of (in thousands):

             
December 31,March 30,


200120022003



(unaudited)
United States $1,214  $3,074  $3,210 
Europe  31   12   41 
Asia Pacific  29   58   87 
   
   
   
 
  $1,274  $3,144  $3,338 
   
   
   
 
         
December 31,

20022003


North America $3,074  $3,260 
EMEA  12   45 
Asia Pacific  58   321 
   
   
 
  $3,144  $3,626 
   
   
 

     Significant customersCustomer Concentration: (as a percentage of net revenue):

                             
Year EndedThree Months EndedYear Ended
December 31,
December 31,

March 31,March 30,
Customer20002001200220022003200120022003









(unaudited)
A 33% 36% 32% 30% 32% 36% 32% 31% 
B 20% 23% 20% 28% 20% 23% 20% 15% 
NOTE 13 —Employee Benefit Plan:

NOTE 12 – EMPLOYEE BENEFIT PLAN:

Until March 2000, Nortel Networks offered participation in a 401(k) retirement savings plan to employees of the Company. Under the plan, employees could defer up to 15% of their compensation to a tax-deferred savings account, up to the maximum allowable IRS deduction, and Nortel Networks matched one half of each dollar contributed up to the first 5% of compensation, limited to a maximum of $1,500. Nortel Networks charged the Company expenses of $16,000 for the three months ended March 31, 2000.     In April 2000, the Company adopted the NETGEAR 401(k) Plan to which employees could contribute up to 15% of salary subject to the legal maximum. The Company contributes an amount equal to 50% of the first 5% of the employees’ contribution. The maximum Company contribution is $1,500 per year.year per employee. The Company expensed $54,000, $80,000, $130,000 and $130,000$233,000 related to the NETGEAR 401(k) Plan in 2000,the years ended December 31, 2001, 2002 and 2002,2003, respectively.

NOTE 13 – SUBSEQUENT EVENTS:

In April 2003, the Company’s board of directors approved a 1.75-for-1 stock split, which became effective on July 29, 2003, for both preferred and common stock. All share and per share amounts in these consolidated financial statements have been retroactively adjusted to give effect to the stock split.

F-32


(NEATGEAR LOGO)F-24




7,000,0009,000,000 Shares

(NETGEAR LOGO)

Common Stock


PROSPECTUS
                        , 20032004

LEHMAN BROTHERS

MERRILL LYNCHGOLDMAN, SACHS &Co.CO.

UBS INVESTMENT BANK         NEEDHAM &

COMPANY, INC.

PACIFIC GROWTH EQUITIES, LLC

JMP SECURITIES


PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.Other Expenses of Issuance and Distribution.Other Expenses of Issuance and Distribution.

     The following table sets forth all costs and expenses, to be paid by the registrant, other than the underwriting discount,discounts and commissions payable by the selling stockholders, in connection with this offering. All amounts shown are estimates except for the registration fee and the NASD filing fee and the Nasdaq National Market listing fee.

          
Amount to beAmount to be
PaidPaid


SEC registration feeSEC registration fee $9,304 SEC registration fee $19,638 
NASD filing feeNASD filing fee 12,000 NASD filing fee 16,000 
Nasdaq National Market listing fee 100,000 
Printing and engravingPrinting and engraving 280,000 Printing and engraving 150,000 
Legal fees and expensesLegal fees and expenses 750,000 Legal fees and expenses 200,000 
Accounting fees and expensesAccounting fees and expenses 875,000 Accounting fees and expenses 100,000 
Blue sky fees and expenses (including legal fees)Blue sky fees and expenses (including legal fees) 7,500 Blue sky fees and expenses (including legal fees) 10,000 
Transfer agent and registrar feesTransfer agent and registrar fees 15,000 Transfer agent and registrar fees 20,000 
MiscellaneousMiscellaneous 151,196 Miscellaneous 9,362 
 
   
 
Total $2,200,000 Total $525,000 
 
   
 

Item 14.Indemnification of Officers and Directors.Indemnification of Officers and Directors.

     Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to officers, directors and other corporate agents in terms sufficiently broad to permit such indemnification under certain circumstances and subject to certain limitations.

     The registrant’s certificate of incorporation and bylaws provide that the registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law.

     In addition, the registrant has entered into separate indemnification agreements with its directors, officers and certain employees which requires the registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status as directors, officers or certain other employees. The registrant also intends to maintain director and officer liability insurance, if available on reasonable terms.

     These indemnification provisions and the indemnification agreements entered into between the registrant and its officers and directors may be sufficiently broad to permit indemnification of the registrant’s officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act.

     The underwriting agreement filed as Exhibit 1.1 to this registration statement provides for indemnification by the underwriters of the registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise.

II-1


Item 15.Recent Sales of Unregistered Securities.Recent Sales of Unregistered Securities.

     The registrant has sold and issued the following securities since AprilMarch 1, 2000:2001:

      (a) On July 30, 2003, we issued options to purchase an aggregate of 60,000 shares of our common stock at an exercise price of $14.00 per share to A. Timothy Godwin and Ralph E. Faison, members of our board of directors.

II-1


     (b) On July 30, 2003, we issued and sold 6,632 shares of our common stock to an optionholder upon exercise of options at an exercise price of $1.29
     (c) On July 25, 2003, issued and sold 11,082 shares of our common stock to an optionholder upon exercise of options at an exercise price of $4.51.
     (d) On July 11, 2003, we issued options to purchase an aggregate of 176,274 shares of our common stock at a weighted exercise price of $10.28 per share to certain employees.
     (e) On May 19, 2003, we issued and sold 2,466 shares of our common stock to an optionholder upon exercise of options at a weighted exercise price of $8.64.$4.94.
 
      (b)  On March 14, 2003, we promised to grant options to purchase an aggregate of 104,787 shares of our common stock to certain employees at an exercise price to be determined on the date of grant.
     (c)(f) On February 3, 2003, we issued options to purchase an aggregate of 7,000 shares of our common stock at an exercise price of $8.57 per share to an employee.
 
      (d)(g) On January 6, 2003, we issued options to purchase an aggregate of 122,500 shares of our common stock at an exercise price of $8.57 per share to an employee.
 
      (e)(h) On December 16, 2002, we issued options to purchase an aggregate of 10,500 shares of our common stock at an exercise price of $8.57 per share to certain employees.
 
      (f)(i) On December 6, 2002, we issued options to purchase an aggregate of 53,375 shares of our common stock at an exercise price of $8.57 per share to certain employees.
 
      (g)(j) On November 4, 2002, we issued options to purchase an aggregate of 105,000 shares of our common stock at an exercise price of $6.00 per share to an employee.
 
      (h)(k) On October 31, 2002, we issued options to purchase an aggregate of 293,650 shares of our common stock at an exercise price of $6.00 per share to certain employees.
 
      (i)(l) On October 30, 2002, we issued options to purchase an aggregate of 220,123 shares of our common stock at an exercise price of $6.00 per share to certain employees pursuant to our 2002 stock option exchange program.
 
      (j)(m) On September 30, 2002, we issued options to purchase an aggregate of 5,250 shares of our common stock at an exercise price of $6.00 per share to an employee.
 
      (k)(n) On September 11, 2002, we issued options to purchase an aggregate of 61,250 shares of our common stock at an exercise price of $6.00 per share to Linwood A. Lacy, Jr., a member of our board of directors.
 
      (l)(o) On August 31, 2002, we issued options to purchase an aggregate of 70,000 shares of our common stock at an exercise price of $5.54 per share to certain employees.
 
      (m)(p) On July 31, 2002, we issued options to purchase an aggregate of 464,292 shares of our common stock at an exercise price of $5.10 per share to certain employees.
 
      (n)(q) On June 30, 2002, we issued options to purchase an aggregate of 90,125 shares of our common stock at an exercise price of $4.65 per share to certain employees.
 
      (o)(r) On May 31, 2002, we issued options to purchase an aggregate of 109,375 shares of our common stock at an exercise price of $4.21 per share to certain employees.
 
      (p)(s) On April 30, 2002, we issued options to purchase an aggregate of 54,250 shares of our common stock at an exercise price of $3.76 per share to certain employees.
 
      (q)(t) On April 22, 2002, we issued options to purchase an aggregate of 43,750 shares of our common stock at an exercise price of $3.31 per share to Michael Ressner, a former member of our board of directors.

II-2


      (r)(u)  On March 31, 2002, we issued options to purchase an aggregate of 81,095 shares of our common stock at an exercise price of $3.31 per share to certain employees.
 
      (s)(v)  On March 13, 2002, we granted a fully vested warrant to purchase an aggregate of 218,750 shares of our common stock to Shamrock Capital Advisors, Inc. at an exercise price of $1.29 per share.
 
      (t)(w)  On February 8, 2002, we issued options to purchase an aggregate of 851,756 shares of our common stock at an exercise price of $1.29 per share to certain employees.
 
      (u)(x) On February 7, 2002, we issued and sold an aggregate of 10,937,386 shares of Series C Preferred Stock to our investors at the time at a purchase price of $1.29 per share. The Series C Preferred Stock is convertible into an equal number of shares of common stock, subject to future adjustments for dilution.
 
      (v)(y) On April 26, 2001, we issued options to purchase an aggregate of 90,125 shares of our common stock at an exercise price of $8.57 per share to certain employees.
 
      (w)(z) On March 20, 2001, we issued options to purchase an aggregate of 52,500 shares of our common stock at an exercise price of $8.57 per share to certain employees.
     (x) On January 30, 2001, we issued options to purchase an aggregate of 372,313 shares of our common stock at an exercise price of $8.57 per share to certain employees.
     (y) On October 24, 2000, we issued options to purchase an aggregate of 635,600 shares of our common stock at an exercise price of $8.57 per share to certain employees.
     (z) On August 29, 2000, we issued options to purchase an aggregate of 614,250 shares of our common stock at an exercise price of $7.25 per share to certain employees.
     (aa)  On July 18, 2000, we issued options to purchase an aggregate of 430,500 shares of our common stock at an exercise price of $4.88 per share to certain employees.
     (bb) On April 5, 2000, we issued options to purchase an aggregate of 3,531,551 shares of our common stock at an exercise price of $4.51 per share to certain employees.

     The issuance of securities describe in item 15(a) through 15(bb) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) or Rule 701 of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. The sale of these securities were made without general solicitation or advertising.

Item 16.     Exhibits and Financial Statement Schedules.Schedule.

     (a) The following exhibits are filed herewith:

        
ExhibitExhibitExhibit
NumberNumberExhibit TitleNumberExhibit Title





1.1 Form of Underwriting Agreement.**1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of registrant.**3.1 Amended and Restated Certificate of Incorporation of registrant. Incorporated by reference to Exhibit 3.3 of the registration statement on Form S-1 of the Registrant, file no. 333-104419.
3.2 Form of Amended and Restated Certificate of Incorporation of registrant to be effective prior to the closing of the initial public offering.**3.2 Bylaws of the registrant. Incorporated by reference to Exhibit number 3.5 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
3.3 Form of Amended and Restated Certificate of Incorporation of registrant to be filed after the closing of the initial public offering.**4.1 Form of registrant’s common stock certificate. Incorporated by reference to Exhibit number 4.1 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
4.2 Amended and Restated Investor Rights Agreement, dated February 7, 2002, by and between the registrant and the individuals and entities listed therein. Incorporated by reference to Exhibit number 4.2 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
5.1 Form of Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.
10.1 Form of Indemnification Agreement for directors and officers. Incorporated by reference to Exhibit number 10.1 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.2 2000 Stock Option Plan and forms of agreements thereunder. Incorporated by reference to Exhibit number 10.2 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.3 2003 Stock Plan and forms of agreements thereunder. Incorporated by reference to Exhibit number 10.3 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.

II-3


        
ExhibitExhibitExhibit
NumberNumberExhibit TitleNumberExhibit Title





3.4 Bylaws of the registrant, and Certificate of Amendment No. 1 of the Bylaws, dated January 11, 2002.**10.4 2003 Employee Stock Purchase Plan. Incorporated by reference to Exhibit number 10.4 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
3.5 Bylaws of the registrant to be effective upon the closing of the initial public offering.**10.5 Employment Agreement, dated December 3, 1999, between the registrant and Patrick C.S. Lo. Incorporated by reference to Exhibit number 10.5 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
4.1 Form of registrant’s common stock certificate.**10.6 Employment Agreement, dated July 15, 2002, between the registrant and Ray Robidoux. Incorporated by reference to Exhibit number 10.6 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
4.2 Amended and Restated Investor Rights Agreement, dated February 7, 2002, by and between the registrant and the individuals and entities listed therein.**10.7 Employment Agreement, dated August 10, 2001, between the registrant and Jonathan R. Mather. Incorporated by reference to Exhibit number 10.7 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
4.3 Common Stock Warrant Agreement, dated March 13, 2002, issued by the registrant to Shamrock Capital Advisors, Inc.**10.8 Employment Agreement, dated December 9, 1999, between the registrant and Mark G. Merrill. Incorporated by reference to Exhibit number 10.8 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
5.1 Form of Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.**10.9 Employment Agreement, dated November 4, 2002, between the registrant and Michael F. Falcon. Incorporated by reference to Exhibit number 10.10 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.1 Form of Indemnification Agreement for directors and officers.**10.10 Employment Agreement, dated January 6, 2003, between the registrant and Charles T. Olson. Incorporated by reference to Exhibit number 10.11 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.2 2000 Stock Option Plan and forms of agreements thereunder.**10.11 Loan and Security Agreement, dated July 25, 2002, between the registrant and Comerica Bank-California. Incorporated by reference to Exhibit number 10.13 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.3 2003 Stock Plan and forms of agreements thereunder to be effective upon the closing of the initial public offering.**10.12 Standard Office Lease, dated December 3, 2001, between the registrant and Dell Associates II-A, and First Amendment to Standard Office Lease, dated March 21, 2002. Incorporated by reference to Exhibit number 10.14 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.4 2003 Employee Stock Purchase Plan to be effective upon the closing of the initial public offering.**10.13* Distributor Agreement, dated March 1, 1997, between the registrant and Tech Data Product Management, Inc. Incorporated by reference to Exhibit number 10.15 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.5 Employment Agreement, dated December 3, 1999, between the registrant and Patrick C.S. Lo.**10.14* Distributor Agreement, dated March 1, 1996, between the registrant and Ingram Micro Inc., as amended by Amendment dated October 1, 1996 and Amendment No. 2 dated July 15, 1998. Incorporated by reference to Exhibit number 10.16 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.6 Employment Agreement, dated July 15, 2002, between the registrant and Ray Robidoux.**10.15* Non-exclusive Distributor Agreement, dated September 25, 1995, between registrant and Computer 2000 AG, as amended by Amendment dated September 30, 1996. Incorporated by reference to Exhibit number 10.17 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.7 Employment Agreement, dated August 10, 2001, between the registrant and Jonathan R. Mather.**10.16* Master Purchase Agreement, dated February 11, 2003, between the registrant and Lite-On Technology Corporation. Incorporated by reference to Exhibit number 10.18 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.8 Employment Agreement, dated December 9, 1999 between the registrant and Mark G. Merrill.**10.17* Master Purchase Agreement, dated March 31, 2003, between the registrant and Delta Networks, Inc., as signed by the registrant on April 24, 2003. Incorporated by reference to Exhibit number 10.19 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.9 Employment Agreement, dated October 14, 2002, between the registrant and Leslie A. Adams.**
10.10 Employment Agreement, November 4, 2002, between the registrant and Michael F. Falcon.**
10.11 Employment Agreement, dated January 6, 2003 between the registrant and Charles T. Olson.**
10.12 Subordinated Unsecured Convertible Promissory Note, dated February 7, 2002, issued by the registrant to Nortel Networks Limited.**
10.13 Loan and Security Agreement, dated July 25, 2002, between the registrant and Comerica Bank-California.**
10.14 Standard Office Lease, dated December 3, 2001, between the registrant and Dell Associates II-A, and First Amendment to Standard Office Lease, dated March 21, 2002.**
10.15† Distributor Agreement, dated March 1, 1997, between the registrant and Tech Data Product Management, Inc.**
10.16† Distributor Agreement, dated March 1, 1996, between the registrant and Ingram Micro Inc., as amended by Amendment dated October 1, 1996 and Amendment No. 2 dated July 15, 1998.**
10.17† Non-exclusive Distributor Agreement, dated September 25, 1995, between registrant and Computer 2000 AG, as amended by Amendment dated September 30, 1996.**
10.18† Master Purchase Agreement, dated February 11, 2003, between the registrant and Lite-On Technology Corporation.**
10.19† Master Purchase Agreement, dated March 31, 2003, between the registrant and Delta Networks, Inc., as signed by the registrant on April 24, 2003.**
10.20† Vendor Agreement, dated September 24, 2001, between the registrant and Best Buy Co., Inc.**
10.21† Product Service Addendum to the Vendor Agreement, dated September 21, 2001, between the registrant and Best Buy Co., Inc., and Addendum Consignment Agreement to the Vendor Agreement, dated January 1, 2002.**
10.22† Master Purchase Agreement, dated April 25, 2003, between the registrant and SerComm Corporation, as signed by the registrant on May 8, 2003.**
10.23† Vendor Agreement, dated March 26, 1998, between the registrant and Fry’s Electronics, Inc.**

II-4


        
ExhibitExhibitExhibit
NumberNumberExhibit TitleNumberExhibit Title





10.24† Retail Outlet Retailer Agreement, dated April 1, 1998, between the registrant and Circuit City Stores, Inc.**10.18* Vendor Agreement, dated September 24, 2001, between the registrant and Best Buy Co., Inc. Incorporated by reference to Exhibit number 10.20 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.25† Warehousing Agreement, dated July 5, 2001, between the registrant and APL Logistics Americas, Ltd.**10.19* Product Service Addendum to the Vendor Agreement, dated September 21, 2001, between the registrant and Best Buy Co., Inc., and Addendum Consignment Agreement to the Vendor Agreement, dated January 1, 2002. Incorporated by reference to Exhibit number 10.21 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.26† Distribution Operation Agreement, dated April 27, 2001, between the registrant and Furness Logistics BV.**10.20* Master Purchase Agreement, dated April 25, 2003, between the registrant and SerComm Corporation, as signed by the registrant on May 8, 2003. Incorporated by reference to Exhibit number 10.22 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.27† Distribution Operation Agreement, dated December 1, 2001, between the registrant and Kerry Logistics (Hong Kong) Limited.**10.21* Vendor Agreement, dated March 26, 1998, between the registrant and Fry’s Electronics, Inc. Incorporated by reference to Exhibit number 10.23 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.28 Services Agreement, dated March 11, 2000, between the registrant and TRINET Employer Group, Inc.**10.22* Retail Outlet Retailer Agreement, dated April 1, 1998, between the registrant and Circuit City Stores, Inc. Incorporated by reference to Exhibit number 10.24 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.29† Wholesale Vendor Agreement, dated August 28, 2002, between the registrant and Costco Wholesale Corporation and The Price Company.**10.23* Warehousing Agreement, dated July 5, 2001, between the registrant and APL Logistics Americas, Ltd. Incorporated by reference to Exhibit number 10.25 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.30† Master Purchase Agreement, dated March 27, 2003, between the registrant and Cameo Communications Corporation.**10.24* Distribution Operation Agreement, dated April 27, 2001, between the registrant and Furness Logistics BV. Incorporated by reference to Exhibit number 10.26 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.31† Master Purchase Agreement, dated April 18, 2003, between the registrant and Z-Com, Inc., as signed by the registrant on April 23, 2003.**10.25* Distribution Operation Agreement, dated December 1, 2001, between the registrant and Kerry Logistics (Hong Kong) Limited. Incorporated by reference to Exhibit number 10.27 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
16.1 Letter from Deloitte & Touche LLP, Independent Auditors, regarding change in accountants.**10.26 Services Agreement, dated March 11, 2000, between the registrant and TRINET Employer Group, Inc. Incorporated by reference to Exhibit number 10.28 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
21.1 List of subsidiaries.**10.27* Wholesale Vendor Agreement, dated August 28, 2002, between the registrant and Costco Wholesale Corporation and The Price Company. Incorporated by reference to Exhibit number 10.29 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.10.28* Master Purchase Agreement, dated March 27, 2003, between the registrant and Cameo Communications Corporation. Incorporated by reference to Exhibit number 10.30 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
23.2 Report of Deloitte & Touche LLP, Independent Auditors, on Financial Statement Schedule.**10.29* Master Purchase Agreement, dated April 18, 2003, between the registrant and Z-Com, Inc., as signed by the registrant on April 23, 2003. Incorporated by reference to Exhibit number 10.31 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants.10.30 Employment Agreement, dated November 3, 2003, between the registrant and Michael Werdann. Incorporated by reference to Exhibit number 10.12 to the Annual Report on Form 10-K of the registrant for the year ended December 31, 2003, filed on March 5, 2004.
23.4 Report of PricewaterhouseCoopers LLP, Independent Auditors, on Financial Statement Schedule.**10.31 Employment Agreement, dated November 14, 2003, between the registrant and Christopher Marshall. Incorporated by reference to Exhibit number 10.32 to the Annual Report on Form 10-K of the registrant for the year ended December 31, 2003, filed on March 5, 2004.
23.5 Consent of Counsel (included in Exhibit 5.1).**10.32 Severance Agreement and Release, dated December 14, 2003, between the registrant and Leslie Adams. Incorporated by reference to Exhibit number 10.32 to the Annual Report on Form 10-K of the registrant for the year ended December 31, 2003, filed on March 5, 2004.
24.1 Power of Attorney (see page II-6 of the Registration Statement).**
99.1 Schedule II — Valuation and Qualifying Accounts.**
99.2 Consent of person named as about to become a director of NETGEAR, Inc.**
99.3 Consent of person named as about to become a director of NETGEAR, Inc.**

II-5


     
Exhibit
NumberExhibit Title


 16.1 Letter from Deloitte & Touche LLP, Independent Auditors, regarding change in accountants. Incorporated by reference to Exhibit number 16.1 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
 21.1 List of subsidiaries. Incorporated by reference to Exhibit number 21.1 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
 23.2 Report of PricewaterhouseCoopers LLP, Independent Auditors, on Financial Statement Schedule.
 23.3 Consent of Counsel (included in Exhibit 5.1).
 24.1 Power of Attorney (see page II-6 of the Registration Statement).
 99.1 Schedule II — Valuation and Qualifying Accounts.

*Previously filed.

 Confidential treatment has been requested with respectgranted as to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.Exhibit.

Item 17.     Undertakings.

     The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

     Insofar as indemnification by the registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 above or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate

II-5


jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

     The undersigned registrant hereby undertakes that:

     For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

     For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.

II-6


SIGNATURES

     Pursuant to the requirements of the Securities Act, of 1933, the registrantRegistrant has duly caused this amendment to the registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, County of Santa Clara, State of California, on the 30th5th day of July, 2003.

March 2004.

 NETGEAR, INC.

Registrant
 
By: /s/ PATRICK C.S. LO
 
 Patrick C.S. Lo
 (Principal Executive Officer)

POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Patrick C.S. Lo and Jonathan Mather, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, of 1933, this amendment to the registration statement has been signed by the following persons in the capacities and on the dates indicated:

       
SignatureTitleDate



 
/s/ PATRICK C.S. LO

Patrick C.S. Lo
 Chairman and Chief Executive Officer
(Principal Executive Officer)
 July 30th, 2003March 5, 2004
 
/s/ JONATHAN MATHER

Jonathan Mather
 Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
 July 30th, 2003March 5, 2004
 
*/s/ RALPH FAISON

Timothy M. BrownRalph Faison
 Director July 30th, 2003March 5, 2004
 
*/s/ A. TIMOTHY GODWIN

A. Timothy Godwin
DirectorMarch 5, 2004
/s/ LINWOOD A. LACY, JR.

Linwood A. Lacy, Jr.
 Director July 30th, 2003March 5, 2004

II-7


SignatureTitleDate



 
*/s/ GERALD A. POCH

Gerald A. Poch
 Director July 30th, 2003March 5, 2004
 
*/s/ GREGORY J. ROSSMANN

Gregory J. Rossmann
 Director July 30th, 2003March 5, 2004
 
*/s/ STEPHEN D. ROYER

Stephen D. Royer
 Director July 30th, 2003
*By:/s/ JONATHAN MATHER

Jonathan Mather
Attorney-in-Fact
July 30th, 2003March 5, 2004

II-7II-8


EXHIBIT INDEX

        
ExhibitExhibitExhibit
NumberNumberExhibit TitleNumberExhibit Title





1.1 Form of Underwriting Agreement.**1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of registrant.**3.1 Amended and Restated Certificate of Incorporation of registrant. Incorporated by reference to Exhibit 3.3 of the registration statement on Form S-1 of the Registrant, file no. 333-104419.
3.2 Form of Amended and Restated Certificate of Incorporation of registrant to be effective prior to the closing of the initial public offering.**3.2 Bylaws of the registrant. Incorporated by reference to Exhibit number 3.5 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
3.3 Form of Amended and Restated Certificate of Incorporation of registrant to be filed after the closing of the initial public offering.**4.1 Form of registrant’s common stock certificate. Incorporated by reference to Exhibit number 4.1 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
3.4 Bylaws of the registrant, and Certificate of Amendment No. 1 of the Bylaws, dated January 11, 2002.**4.2 Amended and Restated Investor Rights Agreement, dated February 7, 2002, by and between the registrant and the individuals and entities listed therein. Incorporated by reference to Exhibit number 4.2 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
3.5 Bylaws of the registrant to be effective upon the closing of the initial public offering.**5.1 Form of Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.
4.1 Form of registrant’s common stock certificate.**10.1 Form of Indemnification Agreement for directors and officers. Incorporated by reference to Exhibit number 10.1 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
4.2 Amended and Restated Investor Rights Agreement, dated February 7, 2002, by and between the registrant and the individuals and entities listed therein.**10.2 2000 Stock Option Plan and forms of agreements thereunder. Incorporated by reference to Exhibit number 10.2 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
4.3 Common Stock Warrant Agreement, dated March 13, 2002, issued by the registrant to Shamrock Capital Advisors, Inc.**10.3 2003 Stock Plan and forms of agreements thereunder. Incorporated by reference to Exhibit number 10.3 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
5.1 Form of Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.**10.4 2003 Employee Stock Purchase Plan. Incorporated by reference to Exhibit number 10.4 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.1 Form of Indemnification Agreement for directors and officers.**10.5 Employment Agreement, dated December 3, 1999, between the registrant and Patrick C.S. Lo. Incorporated by reference to Exhibit number 10.5 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.2 2000 Stock Option Plan and forms of agreements thereunder.**10.6 Employment Agreement, dated July 15, 2002, between the registrant and Ray Robidoux. Incorporated by reference to Exhibit number 10.6 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.3 2003 Stock Plan and forms of agreements thereunder to be effective upon the closing of the initial public offering.**10.7 Employment Agreement, dated August 10, 2001, between the registrant and Jonathan R. Mather. Incorporated by reference to Exhibit number 10.7 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.4 2003 Employee Stock Purchase Plan to be effective upon the closing of the initial public offering.**10.8 Employment Agreement, dated December 9, 1999, between the registrant and Mark G. Merrill. Incorporated by reference to Exhibit number 10.8 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.5 Employment Agreement, dated December 3, 1999, between the registrant and Patrick C.S. Lo.**10.9 Employment Agreement, dated November 4, 2002, between the registrant and Michael F. Falcon. Incorporated by reference to Exhibit number 10.10 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.6 Employment Agreement, dated July 15, 2002, between the registrant and Ray Robidoux.**10.10 Employment Agreement, dated January 6, 2003, between the registrant and Charles T. Olson. Incorporated by reference to Exhibit number 10.11 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.7 Employment Agreement, dated August 10, 2001, between the registrant and Jonathan R. Mather.**10.11 Loan and Security Agreement, dated July 25, 2002, between the registrant and Comerica Bank-California. Incorporated by reference to Exhibit number 10.13 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.8 Employment Agreement, dated December 9, 1999 between the registrant and Mark G. Merrill.**10.12 Standard Office Lease, dated December 3, 2001, between the registrant and Dell Associates II-A, and First Amendment to Standard Office Lease, dated March 21, 2002. Incorporated by reference to Exhibit number 10.14 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.9 Employment Agreement, dated October 14, 2002, between the registrant and Leslie A. Adams.**
10.10 Employment Agreement, November 4, 2002, between the registrant and Michael F. Falcon.**
10.11 Employment Agreement, dated January 6, 2003 between the registrant and Charles T. Olson.**
10.12 Subordinated Unsecured Convertible Promissory Note, dated February 7, 2002, issued by the registrant to Nortel Networks Limited.**
10.13 Loan and Security Agreement, dated July 25, 2002, between the registrant and Comerica Bank-California.**
10.14 Standard Office Lease, dated December 3, 2001, between the registrant and Dell Associates II-A, and First Amendment to Standard Office Lease, dated March 21, 2002.**
10.15† Distributor Agreement, dated March 1, 1997, between the registrant and Tech Data Product Management, Inc.**
10.16† Distributor Agreement, dated March 1, 1996, between the registrant and Ingram Micro Inc., as amended by Amendment dated October 1, 1996 and Amendment No. 2 dated July 15, 1998.**
10.17† Non-exclusive Distributor Agreement, dated September 25, 1995, between registrant and Computer 2000 AG, as amended by Amendment dated September 30, 1996.**
10.18† Master Purchase Agreement, dated February 11, 2003, between the registrant and Lite-On Technology Corporation.**
10.19† Master Purchase Agreement, dated March 31, 2003, between the registrant and Delta Networks, Inc., as signed by the registrant on April 24, 2003.**
10.20† Vendor Agreement, dated September 24, 2001, between the registrant and Best Buy Co., Inc.**


        
ExhibitExhibitExhibit
NumberNumberExhibit TitleNumberExhibit Title





10.21† Product Service Addendum to the Vendor Agreement, dated September 21, 2001, between the registrant and Best Buy Co., Inc., and Addendum Consignment Agreement to the Vendor Agreement, dated January 1, 2002.**10.13* Distributor Agreement, dated March 1, 1997, between the registrant and Tech Data Product Management, Inc. Incorporated by reference to Exhibit number 10.15 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.22† Master Purchase Agreement, dated April 25, 2003, between the registrant and SerComm Corporation, as signed by the registrant on May 8, 2003.**10.14* Distributor Agreement, dated March 1, 1996, between the registrant and Ingram Micro Inc., as amended by Amendment dated October 1, 1996 and Amendment No. 2 dated July 15, 1998. Incorporated by reference to Exhibit number 10.16 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.23† Vendor Agreement, dated March 26, 1998, between the registrant and Fry’s Electronics, Inc.**10.15* Non-exclusive Distributor Agreement, dated September 25, 1995, between registrant and Computer 2000 AG, as amended by Amendment dated September 30, 1996. Incorporated by reference to Exhibit number 10.17 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.24† Retail Outlet Retailer Agreement, dated April 1, 1998, between the registrant and Circuit City Stores, Inc.**10.16* Master Purchase Agreement, dated February 11, 2003, between the registrant and Lite-On Technology Corporation. Incorporated by reference to Exhibit number 10.18 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.25† Warehousing Agreement, dated July 5, 2001, between the registrant and APL Logistics Americas, Ltd.**10.17* Master Purchase Agreement, dated March 31, 2003, between the registrant and Delta Networks, Inc., as signed by the registrant on April 24, 2003. Incorporated by reference to Exhibit number 10.19 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.26† Distribution Operation Agreement, dated April 27, 2001, between the registrant and Furness Logistics BV.**10.18* Vendor Agreement, dated September 24, 2001, between the registrant and Best Buy Co., Inc. Incorporated by reference to Exhibit number 10.20 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.27† Distribution Operation Agreement, dated December 1, 2001, between the registrant and Kerry Logistics (Hong Kong) Limited.**10.19* Product Service Addendum to the Vendor Agreement, dated September 21, 2001, between the registrant and Best Buy Co., Inc., and Addendum Consignment Agreement to the Vendor Agreement, dated January 1, 2002. Incorporated by reference to Exhibit number 10.21 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.28 Services Agreement, dated March 11, 2000, between the registrant and TRINET Employer Group, Inc.**10.20* Master Purchase Agreement, dated April 25, 2003, between the registrant and SerComm Corporation, as signed by the registrant on May 8, 2003. Incorporated by reference to Exhibit number 10.22 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.29† Wholesale Vendor Agreement (Basic), dated August 28, 2002, between the registrant and Costco Wholesale Corporation and The Price Company.**10.21* Vendor Agreement, dated March 26, 1998, between the registrant and Fry’s Electronics, Inc. Incorporated by reference to Exhibit number 10.23 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.30† Master Purchase Agreement, dated March 27, 2003, between the registrant and Cameo Communications Corporation.**10.22* Retail Outlet Retailer Agreement, dated April 1, 1998, between the registrant and Circuit City Stores, Inc. Incorporated by reference to Exhibit number 10.24 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
10.31† Master Purchase Agreement, dated April 18, 2003, between the registrant and Z-Com, Inc., as signed by the registrant on April 23, 2003.**10.23* Warehousing Agreement, dated July 5, 2001, between the registrant and APL Logistics Americas, Ltd. Incorporated by reference to Exhibit number 10.25 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
16.1 Letter from Deloitte & Touche LLP, Independent Auditors, regarding change in accountants.**10.24* Distribution Operation Agreement, dated April 27, 2001, between the registrant and Furness Logistics BV. Incorporated by reference to Exhibit number 10.26 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
21.1 List of subsidiaries.**10.25* Distribution Operation Agreement, dated December 1, 2001, between the registrant and Kerry Logistics (Hong Kong) Limited. Incorporated by reference to Exhibit number 10.27 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.10.26 Services Agreement, dated March 11, 2000, between the registrant and TRINET Employer Group, Inc. Incorporated by reference to Exhibit number 10.28 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
23.2 Report of Deloitte & Touche LLP, Independent Auditors, on Financial Statement Schedule.**
23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.4 Report of PricewaterhouseCoopers LLP, Independent Auditors, on Financial Statement Schedule.**
23.5 Consent of Counsel (included in Exhibit 5.1).**
24.1 Power of Attorney (see page II-6 of the Registration Statement).**
99.1 Schedule II — Valuation and Qualifying Accounts.**
99.2 Consent of person named as about to become a director of NETGEAR, Inc.**
99.3 Consent of person named as about to become a director of NETGEAR, Inc.**


     
Exhibit
NumberExhibit Title


 10.27* Wholesale Vendor Agreement, dated August 28, 2002, between the registrant and Costco Wholesale Corporation and The Price Company. Incorporated by reference to Exhibit number 10.29 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
 10.28* Master Purchase Agreement, dated March 27, 2003, between the registrant and Cameo Communications Corporation. Incorporated by reference to Exhibit number 10.30 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
 10.29* Master Purchase Agreement, dated April 18, 2003, between the registrant and Z-Com, Inc., as signed by the registrant on April 23, 2003. Incorporated by reference to Exhibit number 10.31 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
 10.30 Employment Agreement, dated November 3, 2003, between the registrant and Michael Werdann. Incorporated by reference to Exhibit number 10.12 to the Annual Report on Form 10-K of the registrant for the year ended December 31, 2003, filed on March 5, 2004.
 10.31 Employment Agreement, dated November 14, 2003, between the registrant and Christopher Marshall. Incorporated by reference to Exhibit number 10.32 to the Annual Report on Form 10-K of the registrant for the year ended December 31, 2003, filed on March 5, 2004.
 10.32 Severance Agreement and Release, dated December 14, 2003, between the registrant and Leslie Adams. Incorporated by reference to Exhibit number 10.32 to the Annual Report on Form 10-K of the registrant for the year ended December 31, 2003, filed on March 5, 2004.
 16.1 Letter from Deloitte & Touche LLP, Independent Auditors, regarding change in accountants. Incorporated by reference to Exhibit number 16.1 to the registration statement on Form S-1 of the Registrant, file no. 333-104419.
 21.1 List of subsidiaries. Incorporated by reference to Exhibit number 21.1 to the registration statement on Form S-1 of the Registrant, filed no. 333-104419.
 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
 23.2 Report of PricewaterhouseCoopers LLP, Independent Auditors, on Financial Statement Schedule.
 23.3 Consent of Counsel (included in Exhibit 5.1).
 24.1 Power of Attorney (see page II-6 of the Registration Statement).
 99.1 Schedule II — Valuation and Qualifying Accounts.


*Previously filed.

 Confidential treatment has been requested with respectgranted as to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.Exhibit.