UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended SeptemberMarch 30, 2007.2008.

For the transition period from             to

Commission file number: 000-50350

NETGEAR, Inc.

(Exact name of registrant as specified in its charter)

(408) 907-8000

(Registrant’s telephone number including area code)

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

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

Large Accelerated Filerfiler  x             Accelerated Filer  filer  ¨             Non-Accelerated Filer  filer  ¨            Smaller reporting company  ¨

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

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 35,172,16135,343,187 as of NovemberMay 2, 2007.2008.

TABLE OF CONTENTS

EXHIBIT 10.1

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32.1

EXHIBIT 32.2

PART I: FINANCIAL INFORMATION

NETGEAR, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

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

NETGEAR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

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

NETGEAR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

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

NETGEAR, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Summary of Significant Accounting Policies

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

The accompanying unaudited condensed consolidated financial statements include the accounts of NETGEAR, Inc., and its wholly owned subsidiaries. They have been prepared in accordance with established guidelines for interim financial reporting and with the instructions of Form 10-Q and Article 10 of regulationRegulation S-X. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at December 31, 20062007 has been derived from audited financial statements at such date. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments considered necessary (consisting only of normal recurring adjustments) to fairly state the Company’s financial position, results of operations and cash flows for the periods indicated. These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.2007.

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates and operating results for the three and nine months ended SeptemberMarch 30, 20072008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.2008.

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Other than the Company’s accounting policy relating to income taxes presented below, the2007. The Company’s significant accounting policies have not materially changed during the ninethree months ended SeptemberMarch 30, 2007.2008.

Income Taxes

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

As discussed in Note 9, effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). In the ordinary course of business there is inherent uncertainty in assessing the Company’s income tax positions. The Company assesses its tax positions and records benefits for all years subject to examination based on management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recorded in the financial statements. Where applicable, associated interest and penalties have also been recognized as a component of income tax expense.

2. Recent Accounting Pronouncements

In September 2006, the FASBFinancial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “FairFair Value Measurements”Measurements (“SFAS 157”), which defines fair value, establishes guidelinesa framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures regardingabout fair value measurements. SFAS 157 applies under other existing accounting pronouncements that require or permit fair value measurements, as the FASB previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements.measurements. Effective January 1, 2008, the Company adopted SFAS 157 isas it relates to financial assets and liabilities recognized at fair value on a recurring basis. The new disclosures required by SFAS 157 are included in Note 11.

In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which delays the effective date of SFAS 157 until January 1, 2009 for fiscal years beginning after November 15, 2007.all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The Company is currently evaluating the impact of adopting SFAS 157 for nonfinancial assets and liabilities on the consolidatedCompany’s financial statements.position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”Liabilities – Including an amendment of FASB Statement No. 115,” (“SFAS 159”). SFAS 159 which permits entities to chooseelect to measure many financial assetsinstruments and financial liabilitiescertain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for whichThis election is irrevocable. SFAS 159 was effective in the first quarter of fiscal 2008. The Company has not elected to apply the fair value option has been elected are reported in earnings. SFAS 159 also amends certain provisionsto any of its financial instruments.

In December 2007, the FASB issued SFAS No. 115, “Accounting141 (revised 2007), “Business Combinations” (“SFAS 141R”) and SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 141R will change how business acquisitions are accounted for Certain Investmentsand will impact financial statements both on the acquisition date and in Debtsubsequent periods. SFAS 160 will change the accounting and Equity Securities.”reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. SFAS 159 is141R and SFAS 160 are effective for fiscal years beginning after NovemberDecember 15, 2007.2008. The Company is currently evaluating the impact of adopting SFAS 159141R and SFAS 160 on the consolidated financial statements.

In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”(“SFAS 161”). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of adopting SFAS 161 on the consolidated financial statements.

3. Business Acquisition

On May 16, 2007, the Company completed the acquisition of 100% of the outstanding shares of Infrant Technologies, Inc. (“Infrant”), a developer of network attached storage products. The Company believes the acquisition will accelerate the Company’s participation in the expanding market for network attached storage. The aggregate purchase price was $60 million, paid in cash. Infrant shareholders may receive a total additional payout of up to $20 million in cash over the three years following closure of the acquisition if specific revenue targets are reached. Any additional payout will primarily be accounted for as additional purchase price and will be recorded as an increase in goodwill.

The results of Infrant’s operations have been included in the consolidated financial statements since the date of acquisition. The historical results of Infrant prior to the acquisition were not material to the Company’s results of operations.

The accompanying condensed consolidated financial statements reflect a purchase price of approximately $60.2 million, consisting of cash, and other costs directly related to the acquisition as follows (in thousands):

In accordance with the purchase method of accounting, the Company allocated the total purchase price to tangible assets, liabilities and identifiable intangible assets based on their estimated fair values. Goodwill was recorded based on the residual purchase price after allocating the purchase price to the fair market value of tangible and intangible assets acquired less liabilities assumed. Goodwill arises as a result of, among other factors, future unidentified new products and new technologies as well as the implicit value of future cost savings as a result of the combining of entities. Purchased intangibles are amortized on a straight-line basis over their respective estimated useful lives. The total allocation of the purchase price is as follows (in thousands):

The goodwill of $38.2 million recorded on the acquisition of Infrant is not deductible for income tax purposes.

A total of $4.1 million of the $22.7 million in acquired intangible assets was designated as in-process research and development (“in-process R&D”). In-process R&D is expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist. The Company acquired three in-process R&D projects. Two projects involve development of new products in the ReadyNAS desktop product category, and one project involves development of a higher end version of a product currently selling in the ReadyNAS rack mount product category. These three projects required further research and development to determine technical feasibility and commercial viability. The fair value assigned to in-process R&D was determined using the income approach, under which the Company considered the importance of products under development to the Company’s overall development plans, estimated the costs to develop the purchased in-process R&D into commercially viable products, estimated the resulting net cash flows from the products when completed and discounted the net cash flows to their present values. The Company used discount rates ranging from 36% to 38% in the present value calculations, which was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the products’ development and success as well as the products’ stage of completion. The estimates used in valuing in-process R&D were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may vary from the projected results.

A total of $10.8 million of the $22.7 million in acquired intangible assets was designated as existing technology. The value was calculated based on the present value of the future estimated cash flows derived from projections of future revenue attributable to existing technology. This $10.8 million will be amortized over its estimated useful life of four years.

A total of $5.2 million of the $22.7 million in acquired intangible assets was designated as core technology. The value was calculated based on the present value of the future estimated cash flows derived from estimated royalty savings attributable to the core technology. This $5.2 million will be amortized over its estimated useful life of four years.

A total of $2.6 million of the $22.7 million in acquired intangible assets was designated as trademarks. The value was calculated based on the present value of the future estimated cash flows derived from estimated royalty savings attributable to the trademarks. This $2.6 million will be amortized over its estimated useful life of six years.

4. Stock-based Compensation

The Company grants options and restricted stock units from the 2006 Long TermLong-Term Incentive Plan, under which awards may be granted to all employees. In addition, the Company’s stock option program includes the 2003 Stock Plan, from which the Company does not currently grant awards, but may choose to do so. Award vesting periods for these plans are generally four years. As of SeptemberMarch 30, 2007, 888,5302008, 178,337 shares were reserved for future grants under these plans.

Additionally, the Company sponsors an Employee Stock Purchase Plan (the “ESPP”), pursuant to which eligible employees may contribute up to 10% of base compensation, subject to certain income limits, to purchase shares of the Company’s common stock. Employees purchase stock semi-annually at a price equal to 85% of the fair market value on the purchase date.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option valuation model and the weighted average assumptions in the following table. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk free interest rate is based on the implied yield currently available on U.S. Treasury securities with an equivalent remaining term. Expected volatility is based on a combination of the historical volatility of the Company’s stock as well as the historical volatility of certain of the Company’s industry peers’ stock:

As of SeptemberMarch 30, 2007, $20.82008, $27.6 million of total unrecognized compensation cost related to stock options, adjusted for estimated forfeitures, is expected to be recognized over a weighted-average period of 1.591.42 years. Additionally, $3.2$5.6 million of total unrecognized compensation cost related to non-vested restricted stock awards, adjusted for estimated forfeitures, is expected to be recognized over a weighted-average period of 1.381.45 years.

5.4. Product Warranties

The Company provides for estimated future warranty obligations at the time revenue is recognized. The Company’s standard warranty obligation to its direct customers generally provides for a right of return of any product for a full refund in the event that such product is not merchantable or is found to be damaged or defective. At the time revenue is recognized, an estimate of future warranty returns is recorded to reduce revenue in the amount of the expected credit or refund to be provided to its direct customers. At the time the Company records the reduction to revenue related to warranty returns, the Company includes within cost of revenue a write-down to reduce the carrying value of such products to net realizable value. The Company’s standard warranty obligation to its end-users provides for repair or replacement of a defective product for one or more years. Factors that affect the warranty obligation include product failure rates, material usage, and service delivery costs incurred in correcting product failures. The estimated cost associated with fulfilling the Company’s warranty obligation to end-users is recorded in cost of revenue. Because the Company’s products are manufactured by contract manufacturers, in certain cases the Company has recourse to the contract manufacturer for replacement or credit for the defective products. The Company gives consideration to amounts recoverable from its contract manufacturers in determining its warranty liability. The Company assesses the adequacy of its warranty liability every quarter and, as necessary, makes adjustments to the liability. Changes in the Company’s warranty liability, which is included as a component of “Other accrued liabilities” in the condensed consolidated balance sheets, are as follows (in thousands):

6.5. Shipping and Handling Fees and Costs

The Company includes shipping and handling fees billed to customers in net revenue. Shipping and handling costs associated with inbound freight are included in cost of revenue. Shipping and handling costs associated with outbound freight are included in sales and marketing expenses and totaled $2.9$3.3 million for the three months ended SeptemberMarch 30, 2007, $2.12008 and $3.0 million for the three months ended OctoberApril 1, 2006, $8.7 million for the nine months ended September 30, 2007, and $6.4 million for the nine months ended October 1, 2006.2007.

7.6. Balance Sheet Components

Accounts receivable, net:

		March 30, 2008				December 31, 2007
		(In thousands)
Gross accounts receivable		$	168,567			$	169,986
Less: Allowance for doubtful accounts			(2,164	)			(2,307	)
Allowance for sales returns			(9,473	)			(9,417	)
Allowance for price protection			(1,087	)			(497	)
Total allowances			(12,724	)			(12,221	)
Accounts receivable, net		$	155,843			$	157,765

Inventories:

Other accrued liabilities:

8.7. Net Income Per Share

Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive common shares include outstanding stock options and unvested restricted stock awards, which are reflected in diluted net income per share by application of the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of stock-based compensation cost for future services that the Company has not yet recognized, and the amount of tax benefit that would be recorded in additional paid-in capital upon exercise are assumed to be used to repurchase shares.

Net income per share for the three and nine months ended SeptemberMarch 30, 20072008 and OctoberApril 1, 20062007 are as follows (in thousands, except per share data):

Weighted average stock options and unvested restricted stock awards to purchase 1,053,8812,577,783 and 909,9991,469,299 shares of the Company’s stock for the three and nine months ended SeptemberMarch 30, 2007, respectively,2008 and 996,002 and 639,641 shares for the three and nine months ended OctoberApril 1, 2006,2007, respectively, were excluded from the computation of diluted net income per share because their effect would have been anti-dilutive.

9.8. Income taxes

The effective tax rate was 39.9% and 41.1%41.2% for the three and nine months ended SeptemberMarch 30, 2007, respectively.2008. The effective tax rate was 47.0% and 42.2%35.6% for the three and nine months ended OctoberApril 1, 2006, respectively.2007. The decreaseincrease in the effective tax rate for the three months ended SeptemberMarch 30, 20072008 compared to the three months ended OctoberApril 1, 2006 was2007 is primarily caused by certain non-recurring chargesincreases in the mix of forecasted profits in jurisdictions with relatively higher tax rates for fiscal 2008 as compared to fiscal 2007. Additionally, provisions in the U.S. federal tax law allowing taxpayers to claim tax credits related to the acquisition of SkipJam Corp. (“SkipJam”) incurred duringresearch and development activities expired on December 31, 2007. Accordingly, no benefit has been recorded in the three months ended October 1, 2006 that were non-deductibleMarch 30, 2008 for tax purposes.these credits.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of adoption, the Company recognized a decrease in income tax liabilities of approximately $255,000 and a corresponding increase in retained earnings as of January 1, 2007. As of the date of adoption, the Company had gross unrecognized tax benefits of $5.6 million and accrued interest expense of $294,000. The total amount of tax and accrued interest as of January 1, 2007 that, if recognized, would affect the effective tax rate was $2.6 million and $177,000, respectively. Consistent with the provisions of FIN 48, the Company reclassified $5.9 million of current income tax liabilities resulting in a $4.9 million increase to non-current income taxes payable and $1.0 million decrease to non-current deferred tax assets. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. As of SeptemberMarch 30, 2007,2008, the liability for unrecognized tax benefits, net of federal impacts on state tax issues, is $7.8$9.6 million. No unrecognized tax benefit is expected to be paid within one year, nor can the Company make a reliable estimate when cash settlement with a taxing authority may occur.

For the three and nine month period ended SeptemberMarch 30, 2007,2008, the increase in gross unrecognized tax benefits was $1.2 million and the increase in unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.6 million and $4.8 million, respectively.$1.1 million. The increase in accrued interest expense for the same period was $61,000 and $183,000, respectively.$167,000.

The Company conducts business globally and, as a result, the Company and its subsidiaries or branches file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States and Ireland. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2002.

During the three months ended SeptemberMarch 30, 2007, the federal statute2008, there were no settlements or lapses of limitations for the Company’s 2003 tax year closed. An immaterial amountstatutes of income tax liabilities related to issues considered effectively settled with respect to the 2003 tax year was released during the three months ended September 30, 2007.limitation.

10.9. Segment Information, Operations by Geographic Area and Significant Customers

Operating segments are components of an enterprise about which separate financial information is available and is regularly evaluated by management, namely the chief operating decision maker of an organization, in order to determine operating and resource allocation decisions. By this definition, the Company operates in one business segment, which comprises the development, marketing and sale of networking products for the small business and home markets. The Company’s headquarters and a significant portion of its operations are located in the United States.North America. The Company also conducts sales, marketing, customer service activities and certain distribution center activities through several small sales offices in Europe, Middle-East and Africa (“EMEA”) and Asia as well as outsourced distribution centers.

For reporting purposes revenue is attributed to each geographygeographic region based on the geographic location of the customer. Net revenue by geographygeographic region comprises gross revenue less such items as end-user customer rebates and other sales incentives deemed to be a reduction of net revenue per Emerging Issues Task Force (“EITF”) Issue No. 01-9, sales returns and price protection.

Net revenue by geographic location is as follows (in thousands):

Long-lived assets, comprising fixed assets, are reported based on the location of the asset. Long-lived assets by geographic location are as follows (in thousands):

Significant customers are as follows (as a percentage of net revenue):

11.10. Commitments and Contingencies

Litigation and Other Legal Matters

NETGEAR v. CSIRO

In May 2005, the Company filed a complaint for declaratory relief against the Commonwealth Scientific and Industrial Research Organization (“CSIRO”), in the San Jose division of the United States District Court, Northern District of California. The complaint alleges that the claims of CSIRO’s U.S. Patent No. 5,487,069 are invalid and not infringed by any of the Company’s products. CSIRO had asserted that the Company’s wireless networking products implementing the IEEE 802.11a and 802.11g wireless LAN standards infringe its patent. In July 2006, the United States Court of Appeals for the Federal Circuit affirmed the District Court’s decision to deny CSIRO’s motion to dismiss the action under the Foreign Sovereign Immunities Act. In September 2006, the Federal Circuit denied CSIRO’s request for a rehearing en banc. CSIRO filed a response to the complaint in September 2006. In December 2006, the District Court granted CSIRO’s motion to transfer the case to the Eastern District of Texas, where CSIRO had brought and won a similar lawsuit against Buffalo Technology (USA), Inc., which Buffalo is currently appealing. This action is in the discovery phase. AThe Company attended a court-mandated mediation has been scheduled forin November 2007 but failed to resolve the latter part of November 2007.

SercoNet v. NETGEAR

In May 2006, a lawsuit was filed against the Company by SercoNet, Ltd. (“SercoNet”), a manufacturer of computer networking products organized under the laws of Israel, in the United Stateslitigation. The District Court for the Southern District of New York. SercoNet

alleges that the Company infringes U.S. Patent Nos. 5,841,360; 6,480,510; 6,970,538; 7,016,368; and 7,035,280. SercoNet has accused the Company of infringement with respect to certain of the Company’s switches, routers, modems, adapters, power line products and wireless access points. In July 2006, the court granted the Company’s motion to transfer the action to the Northern District of California. This action is in the discovery phase. In the second quarter of 2007, the court heldscheduled a June 26, 2008 claim construction hearing whereby each side presented its interpretation of the claims in the patents being litigated. The court issued its claim construction rulings in the third quarter of 2007. In October 2007, without admitting any patent infringement, wrongdoing or violation of law and to avoid the distraction and expense of continued litigation, the Company agreed to settle the litigation. In exchange for a payment of $850,000, the Company will receive a fully paid perpetual license to the SercoNet patents asserted in the lawsuit. Based on the historical and estimated projected future unit sales of the Company’s products that are alleged to infringe the asserted patents, the Company allocated $202,000 of the settlement cost towards product shipments prior to the settlement, which the Company recorded as a litigation settlement expense in the three months ended September 30, 2007. Additionally, the Company will allocate $648,000 of the settlement cost to prepaid royalties which will be recognized as a component of cost of revenue as the related products are sold.an April 13, 2009 jury trial.

Linex Technologies v. NETGEAR

In June 2007, a lawsuit was filed against the Company by Linex Technologies, Inc. (“Linex”), a patent holding company organized under the laws of Delaware, in the U.S. District Court, Eastern District of Texas. Linex alleges that the Company infringes U.S. Patent No. 6,757,322. Linex has accused certain of the Company’s wireless networking products incorporating multiple input/multiple output (MIMO) technology.technology of infringement. Linex has also sued 14 other technology companies alleging similar claims of patent infringement. The Company filed its answer in the third quarter of 2007. This action is in the discovery phase. The District Court has scheduled a January 15, 2009 claim construction hearing.

Wi-Lan Inc. v. NETGEAR

In October 2007, a lawsuit was filed against the Company by Wi-Lan Inc. (“Wi-Lan”), a patent holding company existing under the laws of Canada, in the U.S. District Court, Eastern District of Texas. Wi-Lan alleges that the Company infringes U.S. Patent Nos. 5,282,222, RE37,802 and 5,956,323. Wi-Lan has accused the Company’s wireless networking products compliant with the IEEE 802.11 standards and ADSL products compliant with the ITU G.992 standards.standards of infringement. Wi-Lan has also sued 21 other technology companies alleging similar claims of patent infringement. The Company filed its answer in the first quarter of 2008.

Fujitsu et. al v. NETGEAR

In December 2007, a lawsuit was filed against the Company by Fujitsu Limited, LG Electronics, Inc. and U.S. Philips Corporation in the U.S. District Court, Central District of Wisconsin. The plaintiffs allege that the Company infringes U.S. Patent Nos. 6,018,642, 6,469,993 and 4,975,952. The plaintiffs accuse the Company’s wireless networking products compliant with the IEEE 802.11 standards of infringement. The Company filed its answer in the first quarter of 2008. This action is in the discovery phase. The District Court has scheduled an August 15, 2008 claim construction hearing and an April 27, 2009 jury trial.

OptimumPath, L.L.C. v. NETGEAR

In January 2008, a lawsuit was filed against the Company by OptimumPath, L.L.C (“OptimumPath”), a patent holding company existing under the laws of the State of South Carolina, in the U.S. District Court for the District of South Carolina. OptimumPath alleges that the Company infringes U.S. Patent No. 7,035,281. OptimumPath has accused the Company’s wireless networking products of infringement. OptimumPath has also sued six other technology companies alleging similar claims of patent infringement. The Company filed its answer in the second quarter of 2008.

Network-1 Security Solutions, Inc. v. NETGEAR

In February 2008, a lawsuit was filed against the Company by Network-1 Security Solutions, Inc. (“Network-1”), a patent holding company existing under the laws of the State of Delaware, in the U.S. District Court for the Eastern District of Texas. Network-1 alleges that the Company infringes U.S. Patent No. 6,218,930. Network-1 has accused the Company’s power over Ethernet products of infringement. Network-1 has also sued six other companies alleging similar claims of patent infringement. The Company filed its answer in the second quarter of 2008.

Fenner Investments Ltd. v. NETGEAR

In February 2008, a lawsuit was filed against the Company by Fenner Investments, Ltd. (“Fenner”), a patent holding company existing under the laws of the State of Texas, in the U.S. District Court for the Eastern District of Texas. Fenner alleges that the Company infringes U.S. Patent No. 7,145,906 entitled “Packet Switching Node”. Fenner has also sued six other companies alleging similar claims of patent infringement. The Company is in the process of assessing the claims asserted by Wi-Lan.Fenner.

Ruckus Wireless v. NETGEAR

In May 2008, a lawsuit was filed against the Company by Ruckus Wireless (“Ruckus”), a developer of Wi-Fi technology, in the U.S. District Court for the Northern District of California. Ruckus alleges that the Company infringes U.S. Patent Nos. 7,358,912 and 7,193,562 in the course of deploying Wi-Fi antenna array technology in its products. The Company is in the process of assessing the claims asserted by Ruckus.

XE103 Powerline Ethernet Adapter – Voluntary Recall

On January 4, 2008, the Company announced a voluntary recall of its XE103 Powerline Ethernet Adapter made for Europe and other countries using 220-240 volt power sources and sold individually or in a bundled kit. Results of tests carried out on the affected product have shown a potential for a semiconductor integrated circuit within the product to malfunction in 220-240 volt environments, causing the product to stop working and potentially overheat. The Company has not received any reports of any personal injury or damage to property caused by this potential malfunction. Products sold in North America or other countries using 100-120 volt power sources are not affected by this recall.

The total cost of the recall has been estimated at approximately $757,000. The Company is contractually entitled to recover these costs by its supplier and believes it will recover all amounts owed from its supplier. Therefore, the full amount of the costs associated with the recall is recorded as a receivable in the asset section of the Company’s balance sheet as of March 30, 2008.

IP Indemnification Claims

In addition, in its sales agreements, the Company typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties.

In December 2005, the Company received a request for indemnification from Charter Communications, Inc. (“Charter”), a direct customer, related to a lawsuit filed in the U.S. District Court, Eastern District of Texas, by Hybrid Patents, Inc. (“Hybrid”), a patent holding company. Hybrid alleges that Charter infringes U.S. Patent Nos. 5,586,121, 5,818,845, 6,104,727 and Re. 35,774. Hybrid alleges that products implementing the Data Over Cable Service Interface Specification (DOCSIS)(“DOCSIS”) standard, which are supplied to Charter by, among others, the Company, infringes these patents. In the third quarter of 2006, the Company together with a number of other equipment suppliers to Charter assumed the defense of the litigation. In the second quarter of 2007, a jury found that the Hybrid patents were not infringed by Charter. Hybrid has filed similar lawsuits in the same jurisdiction against Comcast Corporation, Comcast of Dallas, LP, Time Warner Cable, Inc. and Cox Communications, Inc., all of whom are also customers of the Company. In May 2008, the Company, together with several co-defendants, agreed to settle the litigation as part of a group settlement with Hybrid. Without admitting any patent infringement, wrongdoing or violation of law and to avoid the distraction and expense of continued litigation, the Company agreed to make a one-time payment of $450,000 for its portion of the settlement, in exchange for a fully paid perpetual license to all Hybrid patents, including those asserted in the lawsuit. Based on the historical and estimated projected future unit sales of the Company’s products that are alleged to infringe the asserted patents, the Company allocated $109,000 of the settlement cost towards product shipments prior to the settlement, which the Company recorded as a litigation settlement expense in the three months ended March 30, 2008. Additionally, the Company will allocate $341,000 of the settlement cost to prepaid royalties which will be recognized as a component of cost of revenue as the related products are sold.

In June 2006, the Company received a request for indemnification from Charter and Charter Communications Operating, LLC, related to a lawsuit filed in the U.S. District Court, Eastern District of Texas, by Rembrandt Technologies, L.P. (“Rembrandt”), a patent holding company. Rembrandt alleges that Charter infringes U.S. Patent Nos. 5,243,627, 5,852,631, 5,719,858 and 4,937,819. Rembrandt alleges that products implementing the DOCSIS standard, which are supplied to Charter by, among others, the Company, infringesinfringe these patents. Rembrandt has also filed a similar lawsuit in the same jurisdiction against Comcast Corporation, Comcast Cable Communications, LLC and Comcast of Plano, LP. In November 2007, the Company along with Motorola, Inc., Cisco Systems, Inc., Scientific-Atlanta, Inc., ARRIS Group, Inc., Thomson, Inc. and Ambit Microsystems, Inc. filed a complaint for declaratory judgment in the U.S. District Court for the District of Delaware against Rembrandt, seeking a declaration that Rembrandt’s alleged patents are either invalid or not infringed. The action is currently in the discovery phase.

With respect to allAll of the above described claims against the Company, or filed by the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of

significant operational resources. Were an unfavorable outcome to occur, there exists the possibility it would have a material adverse impact on the Company’s financial position and results of operations for the period in which the unfavorable outcome occurs or becomes probable. In addition, the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including litigation related to intellectual property and employment matters.

While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Environmental Regulation

The European Union (“EU”) has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods, including home and small business networking products, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for the individual member states of the EU to enact the directive in their respective countries was August 13, 2004 (such legislation, together with the directive, the “WEEE Legislation”). Producers participating in the market are financially responsible for implementing these responsibilities under the WEEE Legislation beginning in August 2005. Similar WEEE Legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan. The Company adopted FASB Staff Position (“FSP”) SFAS No. 143-1, “Accounting for Electronic Equipment Waste Obligations”, in the third quarter of fiscal 2005 and has determined that its effect did not have a material

impact on its consolidated results of operations and financial position for the three and nine months ended SeptemberMarch 30, 20072008 and the three and nine months ended OctoberApril 1, 2006.2007. The Company is continuing to evaluate the impact of the WEEE Legislation and similar legislation in other jurisdictions as individual countries issue their implementation guidance.

Additionally, the EU has enacted the Restriction of Hazardous Substances Directive (“RoHS Legislation”). The RoHS Legislation, along with similar legislation in China, prohibits the use of certain substances, including mercury and lead, in certain products put on the market after July 1, 2006. The Company believes it has met the requirements of the RoHS Legislation.

Employment 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) and up to 26 weeks (for other key executives). Such employees will continue to have stock options vest for up to a one year period following the termination. If the termination, without cause, occurs within one year of a change in control, the officer is entitled to two years acceleration of any unvested portion of his or her stock options.

Leases

The Company leases office space, cars and equipment under non-cancelable operating leases with various expiration dates through December 2026. The terms of some of the Company’s office leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.

Guarantees and Indemnifications

The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. At SeptemberMarch 30, 2007,2008, the Company had $65.5$95.9 million in non-cancelable purchase commitments with suppliers. The Company expects to sell all products for which it has committed purchases from suppliers.

The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a Director and Officer Insurance Policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of SeptemberMarch 30, 2007.2008.

In its sales agreements, the Company typically agrees to indemnify its direct customers, distributors and resellers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. The Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of SeptemberMarch 30, 2007.2008.

11. Fair Value of Financial Instruments

The Company adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities measured on a recurring basis. SFAS 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Although there was no impact for adoption of SFAS 157 to the consolidated financial statements, the Company is now required to provide additional disclosures as part of its financial statements. In accordance with FSP 157-2, the Company deferred adoption of SFAS 157 as it relates to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis. SFAS 157 establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table summarizes the valuation of the Company’s short-term investments by the above SFAS 157 categories as of March 30, 2008:

The Company’s investments in available-for-sale securities are recorded at fair value based on quoted market prices in active markets.

The carrying value of other financial instruments, including cash, cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short maturities.

The Company monitors its investments for impairment by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, and records reductions in carrying values when necessary. Any impairment loss deemed to be other than temporary is reported under “Other income (expense)” in the consolidated statement of operations.

Forward-looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—II - Item 1A—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 itsour subsidiaries.

Overview

We design, develop and market innovative networking products that address the specific needs of small business and home users. We define small business as a business with fewer than 250 employees. We are focused on satisfying the ease-of-use, reliability, performance and affordability requirements of these users. Our product offerings enable users to share Internet access, peripherals, files, digital multimedia content and applications among multiple networked devices and other Internet-enabled devices.

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, direct market resellers (“DMRs”), value added resellers (“VARs”), and broadband service providers. Our retail channel includes traditional retail locations domestically and internationally, such as Best Buy, Circuit City, CompUSA, 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, Newegg.com and Buy.com. Our DMRs include Dell, 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 in domestic markets and cable and DSL operators internationally. Some of these retailers and resellers purchase directly from us while most 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 grew 26.5%14.2% from the three months ended OctoberApril 1, 20062007 to the three months ended SeptemberMarch 30, 2007.2008. The increase in net revenue was primarily attributable to increased shipments in our small business switchescable gateway products sold to new and hubs product categoryexisting service provider customers, as well as sales of our ReadyNAS products, which were acquired in connection with our acquisition of Infrant Technologies, Inc. (“Infrant”). in May 2007. We have also experienced growth in our home wireless product category.wireless-N router sales.

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 significant resources in developing new products, enhancing our current products, expanding our channels and maintaining customer satisfaction worldwide.

Our gross margin decreased to 33.3%32.2% for the three months ended SeptemberMarch 30, 2007,2008, from 33.4%34.6% for the three months ended OctoberApril 1, 2006. This2007. The decrease in gross margin percentage was primarily attributable to increased sales of products carrying lower gross margins to service providers and retailers. The decrease was primarilyalso attributable to higher warranty costs associated with end-user warranty returns as well asand amortization expense related to certain intangible assets acquired in connection with the Infrant aquisition.acquisition. Operating expenses for the three months ended SeptemberMarch 30, 20072008 were $45.3$49.1 million, or 23.7%24.8% of net revenue, compared to $36.9$40.9 million, or 24.4%23.6% of net revenue, for the three months ended OctoberApril 1, 2006.2007. This increase was primarily attributable to a $5.3$4.1 million increase in salary and other employee related expenses. We increased our employee count slightly faster than our revenue growth.

Net income increased $5.3decreased $2.8 million, or 66.2%19.9%, to $13.3$11.2 million for the three months ended SeptemberMarch 30, 2007,2008, from $8.0$14.0 million for the three months ended OctoberApril 1, 2006.2007. This increasedecrease was primarily attributable to an increase in gross profitoperating expenses of $13.2$8.2 million, an increasea decrease in interest income of $184,000 and an increase in other income of $2.0 million. These increases were partially offset by an increase in operating expenses of $8.4 million$859,000 and an increase in the provision for income taxes of $1.7$106,000. These decreases were offset by an increase in gross profit of $3.9 million and an increase in other income of $2.5 million.

Results of Operations

The following table sets forth the consolidated statements of operations and the percentage change for the three and nine months ended SeptemberMarch 30, 2007,2008, with the comparable reporting period in the preceding year.

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

Three Months Ended SeptemberMarch 30, 20072008 Compared to Three Months Ended OctoberApril 1, 20062007

Net Revenue

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

Net revenue increased $40.1$24.6 million, or 26.5%14.2%, to $191.7$198.2 million for the three months ended SeptemberMarch 30, 2007,2008, from $151.6$173.6 million for the three months ended OctoberApril 1, 2006.2007. The increase in net revenue was primarily attributable to increased shipmentshigher sales in our small business switches and hubs product category as well as salesseveral of our product categories. These include cable gateway products sold to new and existing service provider customers, ReadyNAS products, which were acquired in connection with our acquisition of Infrant. We have also experienced growthInfrant in ourMay 2007, and home wireless product category.products.

In the three months ended SeptemberMarch 30, 2007,2008, net revenue generated within North America, Europe, Middle-East and Africa (“EMEA”) and Asia Pacific was 39.8%40.0%, 49.9%49.5% and 10.3%10.5%, respectively, of our total net revenue. The comparable net revenue for the three months ended OctoberApril 1, 20062007 was 37.0%38.1%, 53.9%53.3% and 9.1%8.6%, respectively, of our total net revenue. The increase in net revenue over the prior year comparable quarter for each region was 36.1%19.9%, 17.0%6.0% and 43.2%, respectively. The North America increase in net revenue was primarily attributable to increased sales of cable gateways to service providers as well as increased sales of switch and ReadyNAS products. The EMEA increase in net revenue was driven by strong sales of switch products.39.1%.

Cost of Revenue and Gross Margin

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 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 and transitions from older to newer products.

Cost of revenue increased $26.9$20.8 million, or 26.6%18.3%, to $127.9$134.3 million for the three months ended SeptemberMarch 30, 2007,2008, from $101.0$113.5 million for the three months ended OctoberApril 1, 2006.2007. In addition, our gross margin decreased to 33.3%32.2% for the three months ended SeptemberMarch 30, 2007,2008, from 33.4%34.6% for the three months ended OctoberApril 1, 2006. In the three months ended September 30, 2007, primarily attributable to increased sales of products carrying lower gross margins to service providers and retailers. Additionally, we amortized $1.1 million in intangibles in the three months ended March 30, 2008 related to our recent acquisition of Infrant in May 2007, which resulted in lower gross margins. Additionally,margins, and we incurred higher warranty costs associated with end-user warranty returns. These negative margin impacts were partially mitigated by certain gross margin improvements. We experienced relatively lower inbound freight costs, as we were able to shift the mix of inbound shipments from our suppliers from more costly air freight to lower cost sea freight, and experienced lower excess inventory expense. Additionally, we experienced lower sales returns and price protection expense in the three months ended September 30, 2007.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, tooling design costs, 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. We expect to continue to add additional employees in our research and development department. In the future, we believe that research and development expenses will increase in absolute dollars as we expand into new networking product technologies and broaden our core competencies.

Research and development expenses increased $3.1$2.5 million, or 67.2%41.9%, to $7.8$8.7 million for the three months ended SeptemberMarch 30, 2007,2008, from $4.7$6.2 million for the three months ended OctoberApril 1, 2006.2007. The increase was primarily attributable to increased salary, related payroll and other employee expenses of $1.8$1.2 million resulting from research and development related headcount growth. Included in the $1.8$1.2 million was $725,000$917,000 of incremental headcount expenses related to the acquisition of Infrant. Employee headcount increased by 96%75% to 112121 employees as of SeptemberMarch 30, 20072008 as compared to 5769 employees as of OctoberApril 1, 2006,2007, partially due to 2628 employees obtained from the acquisition of Infrant. Rent and facilities expenses also increased $106,000 related to

the Infrant acquisition and additional lab and infrastructure investments in our China Engineering Center. Non-recurring engineering costs increased $409,000$675,000 primarily attributable to incremental product development projects. Furthermore, IT infrastructure costs allocated to research and development increased $303,000 as a result of additional investments in software and systems in 2007. Additionally, stock-based compensation expense increased $363,000$332,000 to $694,000$801,000 for the three months ended SeptemberMarch 30, 2007,2008, from $331,000$469,000 for the three months ended OctoberApril 1, 2006.2007.

Sales and Marketing

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. 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 plannedexpected growth of our business.

Sales and marketing expenses increased $7.0$5.2 million, or 29.7%18.7%, to $30.5$33.0 million for the three months ended SeptemberMarch 30, 2007,2008, from $23.5$27.8 million for the three months ended OctoberApril 1, 2006.2007. Of this increase, $2.9$2.5 million was attributable to increased salary, related payroll and other employee expenses as a result of sales and marketing related headcount growth. Employee headcount increased by 36%32% to 258292 employees as of SeptemberMarch 30, 20072008 as compared to 190221 employees as of OctoberApril 1, 2006.2007. More specifically, 6062 of the 6871 incremental employees related to expansion in EMEA and Asia Pacific. Outside service fees related to customer service and technical support also increased by $939,000, in support of higher call volumes related to increased units sold and geographic expansion. Information technology (“IT”) infrastructure costs allocated to sales and marketing increased $485,000$207,000 as a result of additional investments in software and systems in 2007.2008. We have continued to expand our geographic market presence with investments in sales resources, and incurred a $948,000$1.1 million increase in advertising, travel, and promotion expenses related to expanded marketing activities. Furthermore, outbound freight increased $755,000,$299,000, reflecting our higher sales volume. Additionally, stock-based compensation expense increased $422,000$225,000 to $781,000$847,000 for the three months ended SeptemberMarch 30, 2007,2008, from $359,000$622,000 for the three months ended OctoberApril 1, 2006.2007.

General and Administrative

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. We expect a modest increase in general and administrative costs in absolute dollars related to the growth of the business.

General and administrative expenses increased $1.0 million,$399,000, or 17.7%5.8%, to $6.8$7.3 million for the three months ended SeptemberMarch 30, 2007,2008, from $5.8$6.9 million for the three months ended OctoberApril 1, 2006.2007. The increase was primarily attributable to increased salary, related payroll and other employee expenses of $621,000$443,000 due to an increase in general and administrative related headcount and increases in compensation for existing employees. Employee headcount increased by 12%29% to 7384 employees as of SeptemberMarch 30, 20072008 as compared to 65 employees as of OctoberApril 1, 2006. We also incurred an $870,000 increase in fees for outside professional services.2007. Additionally, stock-based compensation expense increased $288,000$305,000 to $731,000$928,000 for the three months ended SeptemberMarch 30, 2007,2008, from $443,000$623,000 for the three months ended OctoberApril 1, 2006.2007. Partially offsetting these increases were higher IT and facilities allocations to the other lines of businesses, due to the relatively higher headcount growth in sales and marketing as well as research and development.

Litigation Reserves

During the three months ended September 30, 2007, we recorded anfunctional expense of $202,000 for costs related to the settlement of theSercoNet v. NETGEAR lawsuit. For a detailed discussion of our litigation matters, please see Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Interest Income and Other Income (Expense), net

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

Interest income increased $184,000, or 11.0%, to $1.9 million for the three months ended September 30, 2007, from $1.7 million for the three months ended October 1, 2006. The increase in interest income was primarily attributable to an increase in the average interest rate earned in the three months ended September 30, 2007 as compared to the three months ended October 1, 2006.

Other income (expense), net, increased $2.0 million to an income of $1.7 million for the three months ended September 30, 2007, from an expense of $315,000 for the three months ended October 1, 2006. The income of $1.7 million was primarily attributable to a foreign exchange gain experienced in the three months ended September 30, 2007 due to the weakening of the U.S. dollar against the euro, British pound and Australian dollar in that period. The expense of $315,000 in the three months ended October 1, 2006 was primarily attributable to a foreign exchange loss due to the strengthening of the U.S. dollar against the euro and British pound in that period.

Provision for Income Taxes

The provision for income taxes increased $1.7 million, or 24.2%, to $8.8 million for the three months ended September 30, 2007, from $7.1 million for the three months ended October 1, 2006. The effective tax rate was approximately 39.9% for the three months ended September 30, 2007 and approximately 47.0% for the three months ended October 1, 2006. The decrease in the effective tax rate for the three months ended September 30, 2007 as compared to the three months ended October 1, 2006 was primarily caused by a non-recurring non-deductible in-process research and development (“in-process R&D”) expense related to the 2006 acquisition of SkipJam.

As described in Note 1 and Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements, we have adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007.

Net Income

Net income increased $5.3 million, or 66.2%, to $13.3 million for the three months ended September 30, 2007, from $8.0 million for the three months ended October 1, 2006. This increase was primarily attributable to an increase in gross profit of $13.2 million, an increase in interest income of $184,000 and an increase in other income of $2.0 million. These increases were partially offset by an increase in operating expenses of $8.4 million and an increase in the provision for income taxes of $1.7 million.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended October 1, 2006

Net Revenue

Net revenue increased $119.9 million, or 29.3%, to $529.5 million for the nine months ended September 30, 2007, from $409.6 million for the nine months ended October 1, 2006. The increase in net revenue was primarily attributable to increased shipments in our gateway, small business switch and hub, and network storage product categories. This growth was most notably driven by increased sales of gateways to service providers. We have also experienced broad-based growth in sales of all small business switches as well as sales of our ReadyNAS products, which were acquired in connection with our acquisition of Infrant.

In the nine months ended September 30, 2007, net revenue generated within North America, EMEA and Asia Pacific was 38.6%, 51.6% and 9.8%, respectively, of our total net revenue. The comparable net revenue for the nine months ended October 1, 2006 was 41.3%, 48.4% and 10.3%, respectively, of our total net revenue. The increase in net revenue over the prior year comparable period for each region was 20.8%, 37.8% and 23.2%, respectively. The North America increase in net revenue was primarily attributable to increased sales of cable gateways to service providers as well as increased sales of switch and ReadyNAS products. The EMEA increase in net revenue was primarily attributable to growth in the United Kingdom, as a result of increased sales of gateways to service providers, as well as strong sales of switch products.

Cost of Revenue and Gross Margin

Cost of revenue increased $80.7 million, or 30.0%, to $349.8 million for the nine months ended September 30, 2007, from $269.1 million for the nine months ended October 1, 2006. In addition, our gross margin decreased to 33.9% for the nine months ended September 30, 2007, from 34.3% for the nine months ended October 1, 2006. We amortized $2.1 million in intangibles related to our recent acquisitions in the nine months ended September 30, 2007, which resulted in lower gross margins. We also sold through the entire $3.5 million in inventory acquired from Infrant, which was recorded at fair value under purchase accounting guidelines. Of this $3.5 million, $1.3 million represented a charge for the step-up to fair value in connection with the acquisition purchase accounting. Additionally, we incurred higher warranty costs associated with end-user warranty returns. These negative margin impacts were partially mitigated by certain gross margin improvements. We experienced relatively lower inbound freight costs, as we were able to shift the mix of inbound shipments from our suppliers from more costly air freight to lower cost sea freight, and we experienced lower excess inventory expense. Additionally, we experienced lower sales returns and price protection expense in the nine months ended September 30, 2007.

Operating Expenses

Research and Development

Research and development expenses increased $7.7 million, or 58.2%, to $20.9 million for the nine months ended September 30, 2007, from $13.2 million for the nine months ended October 1, 2006. The increase was primarily attributable to increased salary, related payroll and other employee expenses of $4.6 million resulting from research and development related headcount growth. Included in the $4.6 million was $564,000 related to incremental retention bonuses for certain employees associated with the acquisition of SkipJam and $1.1 million of incremental headcount expenses related to the acquisition of Infrant. Employee headcount increased by 96% to 112 employees as of September 30, 2007 as compared to 57 employees as of October 1, 2006, partially due to 26 employees obtained from the acquisition of Infrant. Rent and facilities expenses increased $516,000 related to the Infrant acquisition and additional lab and infrastructure investments in our China Engineering Center. Non-recurring engineering costs increased $507,000 primarily attributable to incremental product development projects. Furthermore, IT infrastructure costs allocated to research and development increased $746,000 as a result of additional investments in software and systems in 2007. Additionally, stock-based compensation expense increased $967,000 to $1.7 million for the nine months ended September 30, 2007, from $725,000 for the nine months ended October 1, 2006.

Sales and Marketing

Sales and marketing expenses increased $19.9 million, or 29.6%, to $86.8 million for the nine months ended September 30, 2007, from $66.9 million for the nine months ended October 1, 2006. Of this increase, $8.3 million was attributable to increased salary, related payroll and other employee expenses as a result of sales and marketing related headcount growth. Employee headcount increased by 36% to 258 employees as of September 30, 2007 as compared to 190 employees as of October 1, 2006. More specifically, 60 of the 68 incremental employees related to expansion in EMEA and Asia Pacific. Outside service fees related to customer service and technical support also increased by $2.6 million, in support of higher call volumes related to increased units sold and geographic expansion. Outbound freight increased $2.2 million, reflecting our higher sales volume. We have continued to expand our geographic market presence with investments in sales resources, and incurred a $2.7 million increase in advertising, travel and promotion expenses related to expanded marketing activities. Furthermore, IT infrastructure costs allocated to sales and marketing increased $1.6 million as a result of additional investments in software and systems in 2007. Additionally, stock-based compensation expense increased $1.4 million to $2.3 million for the nine months ended September 30, 2007, from $955,000 for the nine months ended October 1, 2006.

General and Administrative

General and administrative expenses increased $5.4 million, or 36.0%, to $20.6 million for the nine months ended September 30, 2007, from $15.2 million for the nine months ended October 1, 2006. The increase was primarily attributable to increased salary, related payroll and other employee expenses of $2.6 million primarily attributable to an increase in general and administrative related headcount and increases in compensation for existing employees. Employee headcount increased by 12% to 73 employees as of September 30, 2007 compared to 65 employees as of October 1, 2006. We also incurred a $2.9 million increase in fees for outside professional services. Additionally, stock-based compensation expense increased $1.0 million to $2.1 million for the nine months ended September 30, 2007, from $1.1 million for the nine months ended October 1, 2006. Partially offsetting these increases were higher IT and facilities allocations to the other lines of businesses,categories, due to the relatively higher headcount growth in sales and marketing as well as research and development.

In-process Research and Development

During the nine months ended September 30, 2007, we expensed $4.1 million for in-process R&D related to intangible assets purchased in our acquisition of Infrant. See Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding this acquisition. In-process R&D was expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist. We acquired three in-process R&D projects. Two projects involve development of new products in the ReadyNAS desktop product category, and one project involves development of a higher end version of a product currently selling in the ReadyNAS rack mount product category.

To date, there have been no significant differences between the actual and estimated results of the in-process R&D projects. We estimate that we will incur costs of approximately $1.0 million to complete the projects, of which approximately $419,000 was incurred through September 30, 2007. We expect to complete and begin benefitting from the three projects in early 2008.

The development of the acquired technology remains a significant risk due to factors including the remaining efforts to achieve technical viability, rapidly changing customer markets, uncertain standards for new products and competitive threats. The nature of the efforts to develop these technologies into commercially viable products consists primarily of planning, designing, experimenting, and testing activities necessary to determine that the technology can meet market expectations, including functionality and technical requirements. Failure to bring these products to market in a timely manner could result in loss of market share or a lost opportunity to capitalize on emerging markets and could have a material adverse impact on our business and operating results.

Litigation Reserves

During the ninethree months ended SeptemberMarch 30, 2007,2008, we recorded net litigation reserves expense of $51,000, comprised of an expense of $202,000$109,000 for costs related to the settlement of the lawsuit filed bySercoNet v. NETGEARHybrid lawsuit., as well as a reduction in previously accrued legal costs of $58,000. For a detailed discussion of our litigation matters, please see Note 1110 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Interest Income and Other Income

Interest income increased $1.4 million,represents amounts earned on our cash, cash equivalents and short-term investments. Other income primarily represents net gains and losses on transactions denominated in foreign currencies and other miscellaneous expenses.

Interest income decreased $859,000, or 28.0%36.2%, to $6.4$1.5 million for the ninethree months ended SeptemberMarch 30, 2007,2008, from $5.0$2.4 million for the ninethree months ended OctoberApril 1, 2006.2007. The increasedecrease in interest income was primarily attributable to an increasea decrease in the average interest rate earned in the first ninethree months of 2007ended March 30, 2008 as compared to the first ninethree months of 2006.ended April 1, 2007.

Other income increased $2.6$2.5 million, or 420.1%945.2%, to $3.2$2.8 million for the ninethree months ended SeptemberMarch 30, 2007,2008, from $606,000$272,000 for the ninethree months ended OctoberApril 1, 2006.2007. The increase in other income was primarily attributable to foreign exchange gains experienced due to the continued weakening of the U.S. dollar against the euro in the three months ended March 30, 2008. The increase in other income is also attributable to the continued weakening of the U.S. dollar against the Japanese yen, British pound, and Australian dollar in the ninethree months ended SeptemberMarch 30, 2007.2008.