RISK FACTORS

      An investment in our common stock involves many risks. You should carefully consider the following information about these risks, together with the financial and other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would likely suffer. In these circumstances, the market price of our common stock could decline, and you might lose all or part of the money you paid to buy our common stock.

Risks Related to Our Business and Industry

We expect our operating results to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate and decline.

      Our operating results are difficult to predict and may fluctuate substantially from quarter-to-quarter or year-to-year for a variety of reasons, many of which are beyond our control. As we implement our growth strategy, our expenditures may become significantly higher than our historical costs. We may not generate revenue sufficient to offset these expenditures or adjust spending in a timely manner to respond to any unanticipated decline in our revenue. If we are unable to manage our growth, we may experience significant losses on a quarterly and annual basis. As of December 31, 2002, we had an accumulated deficit of $38.4 million. Although we achieved net income of $2.7 million in 2000, we incurred a net loss of $19.5 million in 2001, before returning to profitability in 2002, with net income of $8.1 million for the year. If our actual revenue were to fall below our expectations, our quarterly and annual results would be negatively impacted. Other factors that could affect our quarterly and annual operating results include those listed in this “Risk Factors” section of this prospectus and others such as:

	•	changes in the pricing policies of or the introduction of new products or product enhancements by us or our competitors;
	•	general market conditions and effects of recession on the small business and home networking, consumer electronics, personal computer and related industries;
	•	slow or negative growth in the networking product, personal computer, Internet infrastructure, home electronics and related technology markets, as well as decreased demand for Internet access;
	•	changes in or consolidation of our sales channel and wholesale distributor relationships;
	•	delay or failure to fulfill orders for our products on a timely basis;
	•	our inability to accurately forecast our contract manufacturing needs;
	•	cancellation or postponement of product orders by wholesale distributors and our sales channel;
	•	delays in the introduction of new or enhanced products by us or market acceptance of these products;
	•	failure to manage our sales channel inventory and warehousing requirements;
	•	deferral of revenue under our revenue recognition policies, which may occur for a variety of reasons, including our determination that our wholesale distributors or members of our sales channel have excess inventory;
	•	increases in price protection claims, product returns and reserves for doubtful accounts;
	•	operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter;
	•	seasonal patterns, including a higher concentration of sales during the second half of our fiscal year; and
	•	unexpected changes in our costs, operating expenses or personnel.

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      As a result, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance. In addition, our future operating results may fall below the expectations of public market analysts or investors. In this event, our stock price could decline significantly.

If the small business and home markets into which we sell our products experience recession or other cyclical effects that diminish or delay the purchase by end users of networking products, our operating results could be severely harmed.

      In recent years, our results of operations have been negatively impacted by unfavorable economic conditions and reduced business and consumer spending, and our future results could be harmed to the extent that unfavorable economic conditions continue or worsen. Many sectors in the technology industry, including the network, semiconductor and personal computer sectors, have experienced a dramatic decrease in sales in recent years. In particular, our sales were negatively impacted during 2001 in part because of a general economic slowdown. We cannot predict if, or when, the economy will improve, but if the economic conditions in the United States worsen or if the global economic slowdown continues, we could experience a material adverse impact on our business, operating results and financial condition. The home market in particular may view our products as non-essential items and delay purchases during weak economic times. If the markets into which we sell our products experience recession or other cyclical effects that diminish or delay networking product expenditures, our operating results could be severely harmed.

If the acceptance of networking products in the small business and home markets does not continue to grow, we will be unable to increase or sustain our net revenue, and our business will be severely harmed.

      Our success will depend substantially upon the growing use of networking products in the small business and home markets. We believe that growth in the small business market will depend, in significant part, on the growth of the number of personal computers purchased by these end users and the demand for sharing data intensive applications, such as large graphic files. We believe that acceptance of networking products in the home will depend upon the availability of affordable broadband Internet access and increased demand for wireless products. We may not be able to accurately predict the future growth rate or the ultimate size of the networking needs for these markets. Moreover, if networking functions are integrated more directly into personal computers and other Internet-enabled devices, such as electronic games or personal video recorders, and these devices do not rely upon external network-enabling devices, sales of our products could suffer.

We face intense competition, which could result in price reductions, reduced margins and loss of market share.

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

      Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources, including Cisco Systems and Microsoft. Cisco Systems recently announced plans to acquire Linksys, a major competitor of ours. These competitors may, among other things, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers and exert more influence on the sales channel than we can. We anticipate that current and potential competitors will also intensify their efforts to penetrate our target markets. These competitors may have more advanced technology, more extensive distribution channels, stronger brand names, greater access to shelf space in retail locations, bigger

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      If any of these companies are successful in competing against us, our sales could decline, our margins could be negatively impacted, and we could lose market share, any of which could seriously harm our business and results of operations.

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

      Our products typically experience price erosion, a fairly rapid reduction in the average selling prices over their respective sales cycles. In order to sell products that have a falling average selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. To manage manufacturing costs, we must collaborate with our third-party manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully manage the price paid for components used in our products. We must also successfully manage our freight and inventory costs to reduce overall product costs. We also need to continually introduce new products with higher sales prices and gross margins in order to maintain our overall gross margins. If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our business will suffer.

If we fail to continue to introduce new products and product enhancements that achieve broad market acceptance on a timely basis, we will not be able to compete effectively and we will be unable to increase or maintain net revenue and gross margins.

      We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products and product enhancements that achieve broad market acceptance in the small business and home markets. Our future success will depend in large part upon our ability to:

	•	identify demand trends in the small business and home markets and quickly develop, manufacture and sell products that satisfy these demands;
	•	manage our cost structure to enable us to bring new products to market at competitive prices;
	•	respond effectively to new product announcements by our competitors by designing, either internally or through third parties, competitive products; and
	•	provide compatibility and interoperability of our products with products offered by other vendors and new technologies as they emerge.

      We have experienced delays in releasing new products and product enhancements in the past, which resulted in lower quarterly net revenue than expected. For example, in 2000, we introduced a proprietary wireless networking solution. Later, we decided to re-design our products to be compliant with the 802.11 standard promulgated by the Institute of Electrical and Electronic Engineers. As a result, we introduced our wireless local area networking, or LAN, 802.11b products in the first quarter of 2001, six months behind some of our competitors. In addition, we have experienced unanticipated delays in product introductions beyond announced release dates. Also, we announced in the second quarter of 2001 that our Gigabit manageable switches would be available in 2001. These products were actually made available in the fourth quarter of 2002 due to delays in porting software to a new central processing unit. Delays in product development and introduction could result in the following:

	•	loss of or delay in revenue and loss of market share;
	•	negative publicity and damage to our reputation and brand;
	•	cancellation of orders;
	•	decline in the average selling price of our products; and

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

We depend substantially on our sales channel, and our failure to maintain and expand our sales channel would harm our business.

      To maintain and grow our market share, net revenue and brand, we must maintain and expand our sales channel. We sell our products through our sales channel, which consists of traditional retailers, on-line retailers, direct market resellers, or DMRs, value added resellers, or VARs, and, recently, broadband service providers. These entities typically purchase our products through our wholesale distributors. We sell to small businesses primarily through DMRs, VARs and retail locations, and we sell to our home users primarily through retail locations, online retailers and broadband service providers. We have no minimum purchase commitments or long-term contracts with any of these third parties.

      Traditional retailers have limited shelf space and promotional budgets, and competition is intense for these resources. A competitor with more extensive product lines and stronger brand identity, such as Microsoft or Cisco Systems, may have greater bargaining power with these retailers. The competition for retail shelf space may increase, which would require us to increase our marketing expenditures simply to maintain current levels of retail shelf space. The recent trend in the consolidation of online retailers and DMR channels has resulted in intensified competition for preferred product placement, such as product placement on an online retailer’s home page. Expanding our presence in the VAR channel may be difficult and expensive. We compete with established companies that have longer operating histories and longstanding relationships with VARs that we would find highly desirable as sales channel partners. If we were unable to maintain and expand our sales channel, our growth would be limited and our business would be harmed.

      We must also continuously monitor and evaluate emerging sales channels. If we fail to establish a presence in an important developing sales channel, our business could be harmed. For example, we believe that broadband service providers, such as cable operators and telecommunication carriers, will be an increasingly important channel for selling networking products. Broadband service providers typically bundle their service with some initial product sales and recommend hardware products to their customers. We may not be successful in establishing relationships with broadband service providers. Even if we do establish these types of relationships, we could experience reduced gross margins due to the relative strength of service providers’ purchasing power and the negotiating leverage this may provide them. If we are unable to establish relationships in emerging sales channels, our sales could decline and we would lose market share.

We rely on a limited number of wholesale distributors for most of our sales, and changes in price or purchasing patterns could adversely affect our operating results.

      We sell a substantial portion of our products through wholesale distributors, including Ingram Micro, Inc. and Tech Data Corporation. During 2002, sales to Ingram Micro and its affiliates accounted for 32% of our net revenue, and sales to Tech Data and its affiliates accounted for 20% of our net revenue. We expect that a significant portion of our net revenue will continue to come from sales to a small number of wholesale distributors for the foreseeable future. We have no minimum purchase commitments or long-term contracts with any of these distributors. The wholesale distributors could decide at any time to discontinue, decrease or delay their purchases of our products. In addition, the prices that wholesale distributors pay for our products are subject to negotiation and could change at any time. If any of our major wholesale distributors change their purchasing patterns or refuse to pay the prices that we set for our products, our net revenue and operating results could be harmed. If our wholesale distributors increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demands would be compromised. In addition, because our accounts receivable are concentrated with a small group of wholesale distributors, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow.

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

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

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

      All of our products are manufactured, assembled, tested and packaged by a limited number of original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs. In recent years, most of our products have been manufactured by Delta Electronics, Inc., Cameo Communications, Lite-On Group, Sercomm Corp. and Zcom Inc. We rely on our contract manufacturers to procure components and, in some cases, subcontract engineering work. Some of our products are manufactured by a single contract manufacturer. Our contract manufacturers are primarily located in a geographically concentrated region of mainland China, and may be subject to disruption by earthquakes, typhoons and other natural disasters, as well as political, social or economic instability. We do not have any long-term contracts with any of our third-party contract manufacturers. Some of these third-party contract manufacturers produce products for our competitors. The loss of the services of any of our primary third-party contract manufacturers could cause a significant disruption in operations and delays in product shipments. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming.

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

	•	unexpected increases in manufacturing and repair costs;
	•	interruptions in shipments if one of our manufacturers is unable to complete production;
	•	inability to control the quality of finished products;
	•	inability to control delivery schedules;
	•	unpredictability of manufacturing yields; and
	•	potential lack of adequate capacity to manufacture all or a part of the products we require.

      All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our ODM and OEM contract manufacturers are primarily responsible for obtaining most regulatory approvals for our products. If our ODMs and OEMs fail to obtain timely domestic or foreign regulatory approvals or certificates, we would be unable to sell our products and our sales and profitability could be reduced, our relationships with our sales channel could be harmed, and our reputation and brand would suffer.

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If we are unable to provide our third-party contract manufacturers an accurate forecast of our component and material requirements, we may experience delays in the manufacturing of our products and the costs of our products may increase.

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

If disruptions in our transportation network occur or our shipping costs substantially increase, our operating expenses could increase and our financial results could be negatively impacted.

      We are highly dependent upon the transportation systems we use to ship our products, including surface and air freight. Our attempts to closely match our inventory levels to our product demand intensifies the need for our transportation systems to function effectively and without delay. The transportation network is subject to disruption from a variety of causes, including labor disputes or port strikes, acts of war or terrorism and natural disasters. For example, in September 2002, a major strike disrupted ports on the West Coast, which halted the transportation of our product shipments, resulting in our inability to meet some customer orders in a timely manner. Labor disputes among freight carriers are common, especially in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. Since September 11, 2001, the rate of inspection of international freight by governmental entities has substantially increased, and has become increasingly unpredictable. If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time would be materially adversely affected and result in delayed or lost revenue. In addition, if the recent increases in fuel prices were to continue, our transportation costs would likely further increase. Moreover, the cost of shipping our products by air freight is greater than other methods. From time to time in the past, we have shipped products using air freight to meet unexpected spikes in demand or to bring new product introductions to market quickly. If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost of freight could severely disrupt our business and harm our operating results.

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

      Any shortage or delay in the supply of key product components would harm our ability to meet scheduled product deliveries. Many of the semiconductors used in our products are specifically designed for use in our products and are obtained from sole source suppliers on a purchase order basis. In addition, some components that are used in all our products are obtained from limited sources. These components include connector jacks, plastic casings and physical layer transceivers. We also obtain switching fabric semiconductors, which are used in our Ethernet switches and Internet gateway products, from a limited number of suppliers. Our contract manufacturers purchase these components on our behalf on a purchase order basis, and we do not have any contractual commitments or guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain an adequate number of that component in a timely manner. In addition, if our suppliers experience financial or other difficulties or if worldwide demand for the components they provide increases significantly, the availability of these

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We rely upon third parties for technology that is critical to our products, and if we are unable to continue to use this technology and future technology, our business could suffer.

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

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

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

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

      The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent, trade secret and other intellectual property rights. In particular, leading companies in the data communications markets, some of which are competitors, have extensive patent portfolios with respect to networking technology. From time to time, third parties, including these leading companies, have asserted and may assert exclusive patent, copyright, trademark and other intellectual property rights against us and demand license or royalty payments or payment for damages, seek injunctive relief and pursue other remedies. We may be a party to litigation in the future as a result of an alleged infringement of another party’s intellectual property. In addition, third parties, some of which are potential competitors, may

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      In addition, from time to time we may be subject to other kinds of litigation, including claims from former or current employees. These types of claims can also be time consuming and costly to defend, even if they are without merit. If successful, these types of claims could be costly, which could harm our business, financial condition and results of operations.

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

      Our products are complex and may contain undetected defects, errors or failures, particularly when first introduced when new versions are released. For example, in the quarter ended September 29, 2002, we recalled some of our 48 port 10/100 Mbps Ethernet switches due to an intermittent connectivity issue with a connector. Some errors and defects may be discovered only after a product has been installed and used by the end user. If our products contain defects or errors, we could experience decreased sales and increased product returns, loss of customers and market share, and increased service, warranty and insurance costs. In addition, our reputation and brand could be damaged, and we could face potential legal claims regarding our products. A successful product liability or other claim could result in negative publicity and further harm our reputation, result in unexpected expenses and adversely impact our operating results.

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

      We intend to expand our operations and pursue market opportunities domestically and internationally to grow our sales. We expect that this expansion will strain our existing management information systems, and operational and financial controls. In addition, as we continue to grow, our expenditures will likely be significantly higher than our historical costs. For example, we anticipate that we will increase our sales and marketing expenditures in conjunction with our plans to continue developing our brand. In addition, we may increase our product development and engineering expenditures, including the addition of personnel and payments to suppliers for design services, tooling and product certification. Finally, there are significant costs associated with being a public company, including increased administrative expenses, insurance expenses and professional fees. We may not generate a sufficient level of net revenue to offset these expenditures or adjust spending in a timely manner to respond to any unanticipated decline in our net revenue. To continue to grow our business we will also be required to:

	•	manage our existing relationships and enter into new relationships with suppliers, contract manufacturers, wholesale distributors, sales channel partners and other service providers;
	•	improve existing operational, financial and managerial systems, order processing and reporting systems; and
	•	hire, train, integrate, motivate and manage additional qualified personnel, including sales, marketing and research and development personnel, both domestically and internationally.

      Even if we manage this growth effectively, we might make errors in other areas of our business, including sales forecasting, inventory and warehousing management, and financial planning, which could result in unanticipated fluctuations in our operating results. We may not be able to install adequate controls in

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

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

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

	•	political and economic instability, international terrorism and anti-American sentiment, particularly in emerging markets;
	•	preference for locally branded products, and laws and business practices favoring local competition;
	•	unusual or burdensome foreign laws or regulations, and unexpected changes to those laws or regulations;
	•	import and export license requirements, tariffs and taxes and other barriers;
	•	costs of customizing products for foreign countries;
	•	exchange rate fluctuations;
	•	increased difficulty in managing inventory;
	•	delayed revenue recognition;
	•	seasonal reductions in business activity;
	•	less effective protection of intellectual property; and
	•	difficulties and costs of staffing and managing foreign operations.

      The recent outbreak of severe acute respiratory syndrome, or SARS, that began in China, Hong Kong, Singapore and Vietnam may have a negative impact on our operations. Our operations may be impacted by a number of SARS-related factors, including, but not limited to, disruptions at our third-party manufacturers that are primarily located in China, reduced sales in our international retail channels and increased supply chain costs. If the number of cases continues to rise or spread to other areas, our international sales and operations could be harmed.

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

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If we lose our key personnel, we may not be able to execute our business strategy effectively.

      Our future success depends in large part upon the continued services of our key technical, sales, marketing and senior management personnel. The loss of any of our senior management or other key research, development, sales or marketing personnel, particularly if lost to competitors, could harm our ability to implement our business strategy and respond to the rapidly changing needs of the small business and home markets. Loss of key personnel could also delay the development and introduction of new products and product enhancements and negatively impact our ability to sell our products. In particular, the services of Patrick C.S. Lo, our Chairman and Chief Executive Officer, would be difficult to replace. All of our executive officers or key employees are at will employees, and we do not maintain any key person life insurance policies.

Our business is subject to disruption from natural disasters or actions of third parties.

      Our operations are vulnerable to damage or interruption from computer viruses, human error, natural disasters, telecommunications failures, intentional acts of vandalism and similar events. For example, much of our order fulfillment process is automated and the order information is stored on our server. If our computer systems and servers go down even for a short period at the end of a fiscal quarter, our ability to recognize revenue would be delayed until we were again able to process and ship our orders. This could result in our quarterly results failing to meet expectations. Other interruptions in our operations occurring at the end of a quarter could be equally disruptive.

      Our corporate headquarters are located in Northern California and one of our warehouses is located in Southern California, regions known for seismic activity. In addition, substantially all of our manufacturing occurs in a geographically concentrated area in mainland China, where disruptions from natural disasters and political, social and economic instability may affect the region. If our manufacturers or warehousing facilities are disrupted or destroyed, we would be unable to distribute our products on a timely basis, which could harm our business. We have not established a formal disaster recovery plan. Our back-up operations may be inadequate and our business interruption insurance may not be enough to compensate us for any losses that may occur. A significant business interruption could result in losses or damages and harm our business.

If we undertake strategic joint ventures, investments or acquisitions, these transactions may not be successful and they could also dilute your ownership in our common stock.

      We may expand our business by pursuing joint ventures with, investments in, and acquisitions of complementary businesses, products or technologies. We currently have no agreements, commitments or understandings with respect to any of these types of transactions, but we expect to consider them in the future. None of these transactions may be successful, and they could cause us to incur significant expense. To finance these transactions, it may be necessary for us to raise additional funds through public or private financings. Future transactions by us could result in potentially dilutive issuances of equity securities, the incurrence of debt and assumption of liabilities, and amortization expenses related to intangible assets, any of which could harm our business. These transactions entail numerous other risks, including:

	•	risks of entering markets in which we have no or limited prior experience;
	•	difficulties in the assimilation of acquired businesses, products or technologies;
	•	diversion of management’s attention from other business concerns; and
	•	potential loss of key employees of acquired organizations.

      We may not be able to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future.

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Risks Related to this Offering

We expect to experience volatility in our stock price, which could negatively affect your investment in our stock.

      The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

	•	quarterly variations in our results of operations or those of our competitors;
	•	announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships, or capital commitments;
	•	demand for networking products in general and our ability to develop, market and ship in a timely manner new and enhanced products that meet these demands;
	•	disruption to our operations or those of our contract manufacturers, suppliers, wholesale distributors or sales channels;
	•	consolidation of our sales channels or the emergence of new sales channels in which we are unable to compete effectively;
	•	our ability to develop and market new and enhanced products on a timely basis;
	•	our involvement in litigation;
	•	changes in governmental regulations or in the status of our regulatory approvals;
	•	changes in our earnings estimates or recommendations by securities analysts; and
	•	general economic conditions and slow or negative growth in personal computer, home electronic, Internet infrastructure and related markets.

      In addition, the stock market in general, and the market for technology companies such as ours in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance.

      Securities class action litigation has often been brought against a company following a decline in the market price of its securities. The risk is especially acute for us because technology companies such as ours have experienced significant share price volatility in recent years. As a result, we may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, and could seriously harm our business and negatively impact our stock price.

Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

      Upon completion of this offering, our executive officers, directors and principal stockholders will beneficially own, in total, approximately           % of our outstanding common stock. As a result, these stockholders, acting together, will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. They could dictate the management of our business and affairs. This concentration of control could be disadvantageous to other stockholders with interests different from those of our officers, directors and principal stockholders. For example, our officers, directors and principal stockholders could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders. In addition, this significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Please see “Principal Stockholders” for a more detailed description of our share ownership.

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

      Our current stockholders hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. A significant portion of these shares are held by a small number of stockholders. Sales by our current stockholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. In addition, the perception that our current stockholders might sell common stock could depress the trading price of the common stock. Sales of our shares, and the possibility of these sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we consider appropriate. Substantially all of our outstanding shares of capital stock are subject to lock-up agreements described in “Underwriting.”

      After this offering, the holders of approximately 20,228,481 shares of common stock, consisting of shares issued upon conversion of our preferred stock, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. In addition, after this offering, we intend to register all common stock that we may issue under our stock option plans and employee stock purchase plan. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in “Underwriting.” If any of these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. Please see “Shares Eligible for Future Sale” for a description of sales that may occur in the future.

Prior to this offering there was no established trading market for our stock and an active trading market might not develop, which would limit your ability to liquidate your investment.

      Before this offering, there has been no public market for shares of our common stock. An active public trading market may not develop following completion of this offering or, if a market does develop, may not be sustained. Moreover, if you purchase our common stock in this offering, you will pay a price that was not established in a competitive market. The price of the shares of common stock sold in this offering was determined by negotiation between the underwriters and us, and may not be indicative of prices that will prevail in the trading market. The price of our common stock that will prevail in the market may be lower than the price you pay. Please see “Underwriting” for a more detailed discussion regarding our arrangement with the underwriters and the factors considered in setting the initial public offering price.

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

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

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

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

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Some provisions of our charter documents and Delaware law may have anti-takeover effects that could prevent a change in our control, even if a change in control would be beneficial to our stockholders.

      Provisions of our amended and restated certificate of incorporation and bylaws and of Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions also may prevent changes in our management. These and other provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price of our common stock being lower than it would be without these provisions. For a further description of anti-takeover provisions in our charter documents and Delaware law, please see “Description of Capital Stock — Certain Provisions of our Certificate of Incorporation and Bylaws and Delaware Anti-Takeover Law.”

We do not intend to pay dividends on our common stock.

      We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any dividends in the foreseeable future. In addition, if we were to borrow against our existing credit facility, we would be prohibited from paying cash dividends.

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