Netgear 2011 Annual Report Download - page 27

Table of Contents
We are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from
such evaluation could impact investor confidence in the reliability of our internal controls over financial reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control
over financial reporting. Such report must contain among other matters, an assessment of the effectiveness of our internal control over financial
reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.
During the second quarter of fiscal 2009, in connection with the restatement of our previously issued financial statements for the period
ended March 29, 2009, and our assessment of our disclosure controls and procedures, management concluded that as of March 29, 2009, our
disclosure controls and procedures were not effective and that we had a material weakness in internal control over financial reporting. The
material weakness related to the accounting for income taxes. Specifically, we did not maintain a sufficient complement of tax personnel with
the required proficiency to identify, evaluate, review, and report complex tax accounting matters. In order to remediate the material weakness,
we hired additional personnel in the tax department with sufficient knowledge and experience in tax to strengthen the controls around the tax
provision. We also engaged tax specialists to assist us in the preparation and review of the income tax provision. As a result of these actions,
management has concluded that we have remediated the material weakness related to income taxes as of December 31, 2009.
Continued performance of the system and process documentation and evaluation needed to comply with Section 404 is both costly and
challenging. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting,
we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is
effective as of the end of a fiscal year or if our independent registered public accounting firm is unable to express an opinion on the effectiveness
of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports,
which may have an adverse effect on our stock price.
If our products contain defects or errors, we could incur significant unexpected expenses, experience product returns and lost sales,
experience product recalls, suffer damage to our brand and reputation, and be subject to product liability or other claims.
Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new versions are released.
The industry standards upon which many of our products are based are also complex, experience change over time and may be interpreted in
different manners. Some errors and defects may be discovered only after a product has been installed and used by the end-user. For example, in
January 2008, we announced a voluntary recall of the XE103 Powerline Ethernet Adapter made for Europe and other countries using 220-240
volt power sources and sold individually or in a bundled kit.
In addition, epidemic failure clauses are found in certain of our customer contracts, especially contracts with service providers. If invoked,
these clauses may entitle the customer to return for replacement or obtain credits for products and inventory, as well as assess liquidated damage
penalties and terminate an existing contract and cancel future or then current purchase orders. In such instances, we may also be obligated to
cover significant costs incurred by the customer associated with the consequences of such epidemic failure, including freight and transportation
required for product replacement and out-of-pocket costs for truck rolls to end user sites to collect the defective products. Costs or payments we
make in connection with an epidemic failure may materially adversely affect our results of operations and financial condition. If our products
contain defects or errors, or are found to be noncompliant with industry standards, we could experience decreased sales and increased product
returns, loss of customers and market share, and increased service, warranty and insurance costs. In addition, our reputation and brand could be
damaged, and we could face legal claims regarding our products. A product liability or other claim could result in negative publicity and harm to
our reputation, resulting in unexpected
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