Forward-looking Statements

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in "Part II-Item 1A-Risk Factors" and "Liquidity and Capital Resources" below. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report. Unless expressly stated or the context otherwise requires, the terms "we," "our," "us" and "NETGEAR" refer to NETGEAR, Inc. and our subsidiaries.

Overview

We design, develop and market innovative, branded technology products that address the specific networking, storage and security needs of small business and home users. We define a "small business" as a business with fewer than 250 employees. The company offers an end-to-end networking product portfolio to enable users to share internet access, peripherals, files, multimedia content, and applications among multiple computers and other Internet-enabled devices. We are focused on satisfying the ease-of-use, reliability, performance and affordability requirements of these users.

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

We sell our networking products through multiple sales channels worldwide, including traditional retailers, online retailers, wholesale distributors, DMRs, VARs, and broadband service providers. Our retail channel includes traditional retail locations domestically and internationally, such as Best Buy, Fry's Electronics, Radio Shack, Staples, Argos (U.K.), Dixons (U.K.), PC World (U.K.), MediaMarkt (Germany, Austria), and FNAC (France). Online retailers include Amazon.com, Dell, Newegg.com and Buy.com. Our DMRs include CDW Corporation, Insight Corporation and PC Connection in domestic markets and Misco throughout Europe. In addition, we also sell our products through broadband service providers, such as multiple system operators (MSOs), DSL, and other broadband technology operators domestically and internationally. Some of these retailers and broadband service providers purchase directly from us while others are fulfilled through wholesale distributors around the world. A substantial portion of our net revenue to date has been derived from a limited number of wholesale distributors, the largest of which are Ingram Micro Inc. and Tech Data Corporation. We expect that these wholesale distributors will continue to contribute a significant percentage of our net revenue for the foreseeable future.

Our net revenue decreased 4.6% from the three months ended September 28, 2008 to the three months ended September 27, 2009. The decrease in net revenue was principally attributable to the impact of a stronger U.S. dollar on our foreign currency denominated revenues. The decrease in revenue was also attributable to a decrease in sales of wireless-G products sold to retailers, a slight increase in expected sales returns, and weakening demand for our switch products. Our revenue decline continued to be negatively impacted by the economic downturn. These causes for decreased revenue were partially mitigated by increased sales of wireless-N products sold to retailers and existing service provider customers.

The small business and home networking markets are intensely competitive and subject to rapid technological change. We expect our competition to continue to intensify. We believe that the principal competitive factors in the small business and home markets for networking products include product breadth, size and scope of the sales channel, brand name, timeliness of new product

introductions, product performance, features, functionality and reliability, ease-of-installation, maintenance and use, and customer service and support. To remain competitive, we believe we must invest resources in developing new products and enhancing our current products while continuing to expand our channels and maintaining customer satisfaction worldwide.

Our gross margin decreased to 32.6% for the three months ended September 27, 2009, from 34.7% for the three months ended September 28, 2008. The decrease in gross margin was primarily attributable to the impact of a relatively stronger U.S. dollar on our foreign currency denominated revenues. Gross margins were also impacted by sales declines of our relatively more profitable switch products, as well as higher inbound freight costs. These margin decreases were partially offset by our increased focus on reducing sales incentives that impact net revenue. Operating expenses for the three months ended September 27, 2009 were $41.2 million, or 24.1% of net revenue, compared to $47.6 million, or 26.5% of net revenue, for the three months ended September 28, 2008.

Net income increased $5.4 million to $8.5 million for the three months ended September 27, 2009, from $3.1 million for the three months ended September 28, 2008. This increase was primarily attributable to a decrease in operating expenses of $6.4 million, a decrease in other income (expense), net of $4.4 million, and a decrease in the provision for income taxes of $2.1 million. These decreases were offset by a decrease in gross profit of $6.6 million and a decrease in interest income of $910,000.

Results of Operations

The following table sets forth the unaudited consolidated statements of
operations and the percentage change for the three and nine months ended
September 27, 2009, with the comparable reporting periods in the preceding year.



                                                         Three Months Ended                                           Nine Months Ended
                                        September 27,        Percentage         September 28,         September 27,     Percentage         September 28,
                                            2009               Change               2008                  2009            Change               2008
                                               (In thousands, except percentage data)                       (In thousands, except percentage data)
Net revenue                            $       171,071             (4.6 )%     $       179,367       $       467,763         (19.6 )%     $       581,985
Cost of revenue                                115,326             (1.5 )              117,074               327,827         (15.8 )              389,420

Gross profit                                    55,745            (10.5 )               62,293               139,936         (27.3 )              192,565

Operating expenses:
Research and development                         7,353            (11.1 )                8,267                22,202         (13.2 )               25,589
Sales and marketing                             25,710            (14.9 )               30,220                76,076         (19.4 )               94,440
General and administrative                       8,502              5.6                  8,048                24,594           5.8                 23,238
Restructuring                                      104            (89.2 )                  964                   798         (17.2 )                  964
Litigation reserves, net                          (480 )              * *                   85                 2,060             * *                  136

Total operating expenses                        41,189            (13.4 )               47,584               125,730         (12.9 )              144,367

Income from operations                          14,556             (1.0 )               14,709                14,206         (70.5 )               48,198
Interest income                                     66            (93.2 )                  976                   548         (84.5 )                3,528
Other income (expense), net                       (266 )          (94.3 )               (4,653 )                 338             * *               (1,824 )

Income before income taxes                      14,356             30.1                 11,032                15,092         (69.8 )               49,902
Provision for income taxes                       5,826            (26.5 )                7,929                13,612         (44.5 )               24,509

Net income                             $         8,530            174.9 %      $         3,103       $         1,480         (94.2 )%     $        25,393

** Percentage change not meaningful.

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

                                           Three Months Ended                           Nine Months Ended
                                   September 27,         September 28,         September 27,         September 28,
                                       2009                  2008                  2009                  2008
Net revenue                                  100 %                 100 %                 100 %                 100 %

Cost of revenue                             67.4                  65.3                  70.1                  66.9

Gross margin                                32.6                  34.7                  29.9                  33.1

Operating expenses:
Research and development                     4.3                   4.6                   4.7                   4.4
Sales and marketing                         15.0                  16.9                  16.3                  16.2
General and administrative                   5.0                   4.5                   5.3                   4.0
Restructuring                                0.1                   0.5                   0.2                   0.2
Litigation reserves, net                    (0.3 )                 0.0                   0.4                   0.0

Total operating expenses                    24.1                  26.5                  26.9                  24.8

Income from operations                       8.5                   8.2                   3.0                   8.3
Interest income                              0.0                   0.6                   0.1                   0.6
Other income (expense), net                 (0.1 )                (2.6 )                 0.1                  (0.3 )

Income before income taxes                   8.4                   6.2                   3.2                   8.6
Provision for income taxes                   3.4                   4.5                   2.9                   4.2

Net income                                   5.0 %                 1.7 %                 0.3 %                 4.4 %

Three Months Ended September 27, 2009 Compared to Three Months Ended
September 28, 2008

Net Revenue



                                          Three Months Ended
                           September 27,    Percentage        September 28,
                               2009           Change              2008
                                (In thousands, except percentage data)
            Net revenue   $       171,071         (4.6 )%    $       179,367

Our net revenue consists of gross product shipments, less allowances for estimated returns for stock rotation and warranty, price protection, end-user customer rebates and other sales incentives deemed to be a reduction of net revenue per the authoritative guidance for revenue recognition and net changes in deferred revenue.

Net revenue decreased $8.3 million, or 4.6%, to $171.1 million for the three months ended September 27, 2009, from $179.4 million for the three months ended September 28, 2008. The decrease in net revenue was principally attributable to the impact of a stronger U.S. dollar on our foreign currency denominated revenues. The decrease in revenue was also attributable to a decrease in sales of wireless-G products sold to retailers, a slight increase in expected sales returns, and weakening demand for our switch products. Our revenue decline continued to be negatively impacted by the economic downturn. These causes for decreased revenue were partially mitigated by increased sales of wireless-N products sold to retailers and existing service provider customers.

In the three months ended September 27, 2009, net revenue generated within North America, Europe, the Middle-East and Africa ("EMEA") and Asia Pacific was 44.1%, 42.4% and 13.5%, respectively, of our total net revenue. The comparable net revenue for the three months ended September 28, 2008 was 41.1%, 45.5% and 13.4%, respectively, of our total net revenue. The percentage change in net revenue compared to the prior year comparable period for North America, EMEA, and Asia Pacific was a 2.3% increase, an 11.1% decrease, and a 4.0% decrease, respectively.

Cost of Revenue and Gross Margin



                                               Three Months Ended
                               September 27,       Percentage        September 28,
                                   2009              Change              2008
                                     (In thousands, except percentage data)
    Cost of revenue           $       115,326            (1.5 )%    $       117,074
    Gross margin percentage              32.6 %                                34.7 %

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

Cost of revenue decreased $1.8 million, or 1.5%, to $115.3 million for the three months ended September 27, 2009, from $117.1 million for the three months ended September 28, 2008. In addition, our gross margin decreased to 32.6% for the three months ended September 27, 2009, from 34.7% for the three months ended September 28, 2008. The decrease in gross margin was primarily attributable to the impact of a relatively stronger U.S. dollar on our foreign currency denominated revenues. Gross margins were also impacted by sales declines of our relatively more profitable switch products, as well as higher inbound freight costs. These margin decreases were partially offset by our increased focus on reducing sales incentives that impact net revenue.

Operating Expenses

Research and Development



                                                               Three Months Ended
                                            September 27,          Percentage           September 28,
                                                2009                 Change                 2008
                                                     (In thousands, except percentage data)
Research and development expense           $         7,353              (11.1 )%       $         8,267
Percentage of net revenue                              4.3 %                                       4.6 %

Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, prototypes and other consulting fees. Research and development expenses are recognized as they are incurred. We have invested in building our research and development organization to enhance our ability to introduce innovative and easy-to-use products.

Research and development expenses decreased $914,000, or 11.1%, to $7.4 million for the three months ended September 27, 2009, from $8.3 million for the three months ended September 28, 2008. The decrease was primarily attributable to decreased costs of $690,000 related to a reduction in payroll and other employee expenses, including reductions in travel and recruiting-related expenses. Additionally, stock-based compensation expense decreased $362,000.

Sales and Marketing



                                                 Three Months Ended
                                 September 27,       Percentage        September 28,
                                     2009              Change              2008
                                       (In thousands, except percentage data)
  Sales and marketing expense   $        25,710           (14.9 )%    $        30,220
  Percentage of net revenue                15.0 %                                16.9 %

Sales and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, product marketing expenses, outbound freight costs, personnel expenses for sales and marketing staff and technical support expenses. In 2009 we expect sales and marketing costs to decrease as compared to the year ended December 31, 2008 as we continue our cost savings efforts.

Sales and marketing expenses decreased $4.5 million, or 14.9%, to $25.7 million for the three months ended September 27, 2009, from $30.2 million for the three months ended September 28, 2008. Of this decrease, $1.6 million was related to a reduction in payroll and other employee expenses primarily attributable to decreased overall sales and marketing headcount, decreased variable compensation and a reduction in travel expenses. Sales and marketing headcount decreased 9%, to 259 employees at September 27, 2009 compared to 285 employees at September 28, 2008. Additionally, marketing expenses and other outside service costs decreased $2.0 million, attributable to reduced marketing campaigns due to decreased sales, as well as cost savings efforts. Furthermore, outbound freight costs decreased $324,000, attributable to our reduction in sales.

General and Administrative



                                                      Three Months Ended
                                      September 27,       Percentage       September 28,
                                          2009              Change             2008
                                            (In thousands, except percentage data)
General and administrative expense   $         8,502             5.6 %    $         8,048
Percentage of net revenue                        5.0 %                                4.5 %

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

General and administrative expenses increased $454,000, or 5.6%, to $8.5 million for the three months ended September 27, 2009, from $8.0 million for the three months ended September 28, 2008. We experienced increased fees of about $900,000 for outside legal services primarily due to increased patent litigation defense costs, offset by a decrease of $407,000 for outside professional services, primarily due to decreased use of information technology consulting. Such consulting expenses were relatively higher in the year ago period due to our implementation of new enterprise resource planning software in 2008.

Restructuring

In July 2008, we ceased using buildings leased in Santa Clara and Fremont, California, and consolidated all personnel and operations from those locations to our new corporate headquarters in San Jose, California. We expensed $964,000 related to this relocation in the three months ended September 28, 2008. In the three months ended September 27, 2009, we agreed to reduce the monthly facility maintenance fees owed us by one sub-lessee. We increased our accrual for restructuring charges by $104,000 in the three months ended September 27, 2009, primarily related to this agreement. For a further discussion of our restructuring expenses, please see Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Litigation Reserves

During the three months ended September 27, 2009, we recorded a net benefit to litigation reserves of $480,000 primarily related to a summary judgment received on a particular case ruling in our favor. For a detailed discussion of our litigation matters, please see Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Interest Income and Other Income (Expense), Net



                                                                            Three Months Ended
                                                                September 27,                 September 28,
                                                                     2009                         2008
                                                                              (In thousands)
Interest income                                                $             66              $           976
Other income (expense), net                                                (266 )                     (4,653 )

Total interest income and other income (expense), net          $           (200 )            $        (3,677 )

Interest income represents amounts earned on our cash, cash equivalents and short-term investments. Other income (expense), net, primarily represents gains and losses on transactions denominated in foreign currencies and other miscellaneous expenses.

Interest income decreased $910,000, or 93.2%, to $66,000 for the three months ended September 27, 2009, from $976,000 for the three months ended September 28, 2008. The decrease in interest income was primarily attributable to a decrease in the average interest rate earned in the three months ended September 27, 2009 as compared to the three months ended September 28, 2008.

Other expense, net, decreased $4.4 million to $266,000 for the three months ended September 27, 2009, from $4.7 million for the three months ended September 28, 2008. The U.S. dollar weakened against the Australian dollar, British pound, and euro during the three months ended September 27, 2009, but our foreign currency hedging program more than offset these movements. The foreign exchange loss in the three months ended September 28, 2008 was due to the strengthening of the U.S. dollar against the Australian dollar, British pound, and euro during that period. Additionally, we did not have a hedging program during that period. For details of our hedging program and related foreign currency contracts, please see Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Provision for Income Taxes

The tax provision for the three months ended September 27, 2009 was $5.8 million compared to the tax provision for the three months ended September 28, 2008 of $7.9 million. The decrease in the tax provision for the three months ended September 27, 2009 is primarily caused by a lower annual projected effective tax rate, combined with a decrease from certain discrete tax adjustments booked in the third quarter of fiscal 2008 due to changed forecasts for the prior fiscal year.

Net Income

Net income increased $5.4 million to $8.5 million for the three months ended September 27, 2009, from $3.1 million for the three months ended September 28, 2008. This increase was primarily attributable to a decrease in operating expenses of $6.4 million, a decrease in other income (expense), net of $4.4 million, and a decrease in the provision for income taxes of $2.1 million. These decreases were offset by a decrease in gross profit of $6.6 million and a decrease in interest income of $910,000.

Nine months Ended September 27, 2009 Compared to Nine months Ended September 28, 2008

Net Revenue



                                          Nine Months Ended
                           September 27,    Percentage        September 28,
                               2009           Change              2008
                                (In thousands, except percentage data)
            Net revenue   $       467,763        (19.6 )%    $       581,985

Net revenue decreased $114.2 million, or 19.6%, to $467.8 million for the nine months ended September 27, 2009, from $582.0 million for the nine months ended September 28, 2008. The decrease in net revenue was principally attributable to lower shipments of our broadband gateway products to traditional resellers and existing service provider customers. The decrease in revenue was also due to a slight increase in sales returns. Additionally, we experienced weakening demand for our switch products. Our revenue decline continued to be negatively impacted by the economic downturn and relatively stronger U.S. dollar. A decrease in sales of wireless-G products was partially mitigated by increased sales of wireless-N products sold to retailers and existing service provider customers.

In the nine months ended September 27, 2009, net revenue generated within North America, EMEA and Asia Pacific was 44.9%, 43.0% and 12.1%, respectively, of our total net revenue. The comparable net revenue for the nine months ended September 28, 2008 was 39.3%, 47.7% and 13.0%, respectively, of our total net . . .