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 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, network storage 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, Fry's Electronics, Radio Shack, Staples, Wal-Mart, 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 decreased 6.4% from the three months ended September 30, 2007 to the three months ended September 28, 2008. The decrease in revenue was attributable principally to lower shipments of our broadband gateway products to existing service provider customers, as well as weakening demand for home wireless products. This decrease was offset partially by higher sales of switch products. Due to recent uncertainties in the global economy and financial markets worldwide, we believe that demand for consumer products may remain weakened from historical patterns until financial confidence returns to the market.

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 increased to 34.7% for the three months ended September 28, 2008, from 33.3% for the three months ended September 30, 2007. The increase in gross margin percentage was primarily attributable to decreased sales of relatively lower gross margin broadband gateway products to service providers, as well as relatively lower sales incentives expenditures, a reduction in end- user rebates, and a reduction in air freight expenses as a result of increased on-hand inventory levels. Operating expenses for the three months ended September 28, 2008 were $47.6 million, or 26.5% of net revenue, compared to $45.3 million, or 23.7% of net revenue, for the three months ended September 30, 2007.

Net income decreased $10.2 million, or 76.6%, to $3.1 million for the three months ended September 28, 2008, from $13.3 million for the three months ended September 30, 2007. This decrease was primarily attributable to a change in other income (expense), net, from an income of $1.7 million for the three months ended September 30, 2007, to an expense of $4.7 million for the three months ended September 28, 2008, due to transaction losses on foreign currency denominated accounts receivable in connection with a strengthening of the U.S. dollar. Additionally, operating expenses increased $2.3 million and gross profit decreased $1.5 million.

We intend to acquire certain assets of privately-held CP Secure, Inc. ("CP Secure") in the fourth quarter of 2008. Founded in 2002 and with an established engineering center in Nanjing, China, CP Secure is a leading provider of integrated security solutions that protect organizations from Internet-originated web and email based malware threats. Under the terms of the agreement, we will pay $14.0 million in cash for certain CP Secure assets. CP Secure may receive a total additional payout of up to $3.5 million in cash following closure of the acquisition if it achieves certain specified objectives in the next five years. We will account for the acquisition as a business combination using the purchase method.

On October 21, 2008, our Board of Directors authorized a program to repurchase up to 6,000,000 shares of our common stock. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as levels of cash generation from operations, cash requirements for acquisitions, current stock price, and other factors. Under the program, we may repurchase shares from time to time on the open market. We will finance the repurchase program with available cash on hand. The stock repurchase program may be modified or discontinued at any time.

Results of Operations

The following table sets forth the consolidated statements of operations and the
percentage change for the three and nine months ended September 28, 2008, with
the comparable reporting periods in the preceding year.



                                                        Three Months Ended                                        Nine Months Ended
                                        September 28,       Percentage        September 30,      September 28,       Percentage        September 30,
                                            2008              Change              2007               2008              Change              2007
                                              (In thousands, except percentage data)                   (In thousands, except percentage data)
Net revenue                            $       179,367            (6.4 %)    $       191,681    $       581,985             9.9 %     $       529,528
Cost of revenue                                117,074            (8.5 )             127,903            389,420            11.3               349,766

Gross profit                                    62,293            (2.3 )              63,778            192,565             7.1               179,762

Operating expenses:
Research and development                         8,267             5.8                 7,816             25,589            22.5                20,881
Sales and marketing                             30,220            (0.9 )              30,509             94,440             8.9                86,756
General and administrative                       8,048            18.7                 6,781             23,238            12.6                20,643
Restructuring                                      964               * *                  -                 964               * *                  -
In-process research and development                 -                * *                  -                  -           (100.0 )               4,100
Litigation reserves, net                            85           (57.9 )                 202                136           (32.7 )                 202

Total operating expenses                        47,584             5.0                45,308            144,367             8.9               132,582

Income from operations                          14,709           (20.4 )              18,470             48,198             2.2                47,180
Interest income                                    976           (47.5 )               1,860              3,528           (45.1 )               6,424
Other income (expense), net                     (4,653 )             * *               1,732             (1,824 )             * *               3,152

Income before income taxes                      11,032           (50.0 )              22,062             49,902           (12.1 )              56,756
Provision for income taxes                       7,929            (9.9 )               8,796             24,509             5.0                23,336

Net income                             $         3,103           (76.6 %)    $        13,266    $        25,393           (24.0 %)    $        33,420

** Percentage change not meaningful.

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

                                                 Three Months Ended                        Nine Months Ended
                                         September 28,        September 30,        September 28,        September 30,
                                             2008                 2007                 2008                 2007
Net revenue                                        100 %                100 %                100 %                100 %

Cost of revenue                                   65.3                 66.7                 66.9                 66.1

Gross margin                                      34.7                 33.3                 33.1                 33.9

Operating expenses:
Research and development                           4.6                  4.1                  4.4                  3.9
Sales and marketing                               16.9                 15.9                 16.2                 16.4
General and administrative                         4.5                  3.6                  4.0                  3.9
Restructuring                                      0.5                  0.0                  0.2                  0.0
In-process research and development                0.0                  0.0                  0.0                  0.8
Litigation reserves, net                           0.0                  0.1                  0.0                  0.0

Total operating expenses                          26.5                 23.7                 24.8                 25.0

Income from operations                             8.2                  9.6                  8.3                  8.9
Interest income                                    0.6                  1.0                  0.6                  1.2
Other income (expense), net                       (2.6 )                0.9                 (0.3 )                0.6

Income before income taxes                         6.2                 11.5                  8.6                 10.7
Provision for income taxes                         4.5                  4.6                  4.2                  4.4

Net income                                         1.7 %                6.9 %                4.4 %                6.3 %

Three Months Ended September 28, 2008 Compared to Three Months Ended
September 30, 2007

Net Revenue



                                          Three Months Ended
                            September 28,    Percentage       September 30,
                                2008           Change             2007
                                (In thousands, except percentage data)
             Net revenue   $       179,367         (6.4 %)   $       191,681

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 decreased $12.3 million, or 6.4%, to $179.4 million for the three months ended September 28, 2008, from $191.7 million for the three months ended September 30, 2007. The decrease in revenue was attributable principally to lower shipments of our broadband gateway products to existing service provider customers, as well as weakening demand for home wireless products. This decrease was offset partially by higher sales of switch products. Due to recent uncertainties in the global economy and financial markets worldwide, we believe that demand for consumer products may remain weakened from historical patterns until financial confidence returns to the market.

In the three months ended September 28, 2008, net revenue generated within North America, Europe, the Middle-East and Africa ("EMEA") and Asia Pacific was 41.1%, 45.5% and 13.4%, respectively, of our total net revenue. The comparable net revenue for the three months ended September 30, 2007 was 39.8%, 49.9% and 10.3%, respectively, of our total net revenue. The percentage change

in net revenue compared to the prior year comparable quarter for North America, EMEA, and Asia Pacific was a 3.5% decrease, a 14.6% decrease, and a 21.5% increase, respectively. The decrease in EMEA was primarily due to decreased sales to service providers in that region. The increase in Asia Pacific was primarily due to increased sales to service providers in that region.

Cost of Revenue and Gross Margin



                                                Three Months Ended
                                 September 28,      Percentage       September 30,
                                     2008             Change             2007
                                      (In thousands, except percentage data)
      Cost of revenue           $       117,074           (8.5 %)   $       127,903
      Gross margin percentage              34.7 %                              33.3 %

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, and charges for excess or obsolete inventory and transitions from older to newer products.

Cost of revenue decreased $10.8 million, or 8.5%, to $117.1 million for the three months ended September 28, 2008, from $127.9 million for the three months ended September 30, 2007. In addition, our gross margin increased to 34.7% for the three months ended September 28, 2008, from 33.3% for the three months ended September 30, 2007. The increase in gross margin percentage was primarily attributable to decreased sales of relatively lower gross margin broadband gateway products to service providers, as well as relatively lower sales incentives expenditures, a reduction in end-user rebates, and a reduction in air freight expenses as a result of increased on-hand inventory levels.

Operating Expenses

Research and Development



                                                     Three Months Ended
                                      September 28,      Percentage      September 30,
                                          2008             Change            2007
                                           (In thousands, except percentage data)
  Research and development expense   $         8,267            5.8 %   $         7,816
  Percentage of net revenue                      4.6 %                              4.1 %

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 $451,000, or 5.8%, to $8.3 million for the three months ended September 28, 2008, from $7.8 million for the three months ended September 30, 2007. The increase was primarily attributable to increased costs of $372,000 related to product certifications and new project spending, as well as a $236,000 increase in facilities costs related to our new corporate headquarters in San Jose, California. Furthermore, outside services costs increased $144,000 as a result of increased product localization and documentation activities. Partially offsetting these increases were lower incentive compensation expenses of $363,000.

Sales and Marketing



                                                  Three Months Ended
                                   September 28,      Percentage       September 30,
                                       2008             Change             2007
                                        (In thousands, except percentage data)
    Sales and marketing expense   $        30,220           (0.9 %)   $        30,509
    Percentage of net revenue                16.9 %                              15.9 %

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. 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 decrease in absolute dollars during this time of global economic slowdown.

Sales and marketing expenses decreased $289,000, or 0.9%, to $30.2 million for the three months ended September 28, 2008, from $30.5 million for the three months ended September 30, 2007. Of this decrease, $997,000 was attributable to a reduction in payroll and other employee expenses primarily due to decreased employee sales commissions. Partially offsetting this decreases was increased facilities costs allocated to sales and marketing of $606,000 primarily related to our new corporate headquarters.

General and Administrative



                                                      Three Months Ended
                                       September 28,      Percentage      September 30,
                                           2008             Change            2007
                                            (In thousands, except percentage data)
 General and administrative expense   $         8,048           18.7 %   $         6,781
 Percentage of net revenue                        4.5 %                              3.6 %

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 increased infrastructure expenses.

General and administrative expenses increased $1.2 million, or 18.7%, to $8.0 million for the three months ended September 28, 2008, from $6.8 million for the three months ended September 30, 2007. The increase was primarily attributable to increased fees of $589,000 for outside legal and other professional services. Infrastructure costs increased $477,000 primarily due to higher software maintenance associated with our new enterprise resource planning software and increased office-related expenses. Additionally, stock-based compensation expense increased $313,000 to $1.0 million for the three months ended September 28, 2008, from $731,000 for the three months ended September 30, 2007. Partially offsetting these increases were higher information technology and facilities allocations to the other functional expense categories.

Restructuring

During the three months ended September 28, 2008, we expensed $964,000 related to excess facilities we ceased to use in Santa Clara and Fremont, California due to our relocation to a new corporate headquarters in San Jose. We did not incur any restructuring expense during the three months ended September 30, 2007. For a 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 28, 2008, we recorded a litigation reserve expense of $85,000 for estimated settlement costs. During the three months ended September 30, 2007, we recorded an expense of $202,000 for costs related to the settlement of the SercoNet v. NETGEAR lawsuit. SercoNet, Ltd. ("SercoNet"), a manufacturer of computer networking products, accused us of infringement with respect to certain of our switches, routers, modems, adapters, power line products and wireless access points. In October 2007, without admitting any patent infringement, wrongdoing or violation of law and to avoid the distraction and expense of continued litigation, we agreed to settle the litigation. 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



                                                                     Three Months Ended
                                                            September 28,           September 30,
                                                                 2008                   2007
                                                                       (In thousands)
Interest income                                            $            976        $         1,860
Other income (expense), net                                          (4,653 )                1,732

Total interest income and other income (expense), net      $         (3,677 )      $         3,592

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 decreased $884,000, or 47.5%, to $976,000 for the three months ended September 28, 2008, from $1.9 million for the three months ended September 30, 2007. The decrease in interest income was primarily attributable to a decrease in the average interest rate earned in the three months ended September 28, 2008 as compared to the three months ended September 30, 2007.

Other income (expense), net decreased $6.4 million to an expense of $4.7 million for the three months ended September 28, 2008, from income of $1.7 million for the three months ended September 30, 2007. The foreign exchange loss in the three months ended September 28, 2008 is due to the strengthening of the U.S. dollar against the Australian dollar, British pound, and euro in that period. We expect that we will experience further foreign exchange losses in the fourth quarter of 2008.

Provision for Income Taxes

The provision for income taxes decreased $867,000, or 9.9%, to $7.9 million for the three months ended September 28, 2008, from $8.8 million for the three months ended September 30, 2007. The effective tax rate was approximately 71.9% for the three months ended September 28, 2008 and approximately 39.9% for the three months ended September 30, 2007. The increase in the effective tax rate for the three months ended September 28, 2008 compared to the three months ended September 30, 2007 is primarily caused by increases in the mix of forecasted profits in jurisdictions with relatively higher tax rates for fiscal 2008 as compared to fiscal 2007. Additionally during the period we recorded an increase to tax expense resulting primarily from changes in estimates of prior year's tax liabilities. For the same period, the rate is further adversely impacted by the . . .