##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
 Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the year ended December 31, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission file number:
    001-33435
 Cavium Networks, Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

77-0558625(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. employer
    identification no.)   805 East
    Middlefield Road
    Mountain View, CA 94043(650) 623-7000 (Address
    of principal executive offices)
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par value

The NASDAQ Stock Market LLC(Title of Class)   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  þ o o o
  (Do not check if a smaller
    reporting company)
  Rule 12b-2 o þ
  and/or
  : 41,214,542
  Documents Incorporated by Reference: form 10-K Form 10-K.




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##### 





CAVIUM
    NETWORKS, INC.
  YEAR ENDED DECEMBER 31, 2008
  FORM 10-K
 ANNUAL REPORT
  TABLE OF CONTENTS
   
 PagePART I.Item 1.


Business


1Item 1A.


Risk Factors


10Item 1B.


Unresolved Staff Comments


26Item 2.


Properties


26Item 3.


Legal Proceedings


26Item 4.


Submission of Matters to a Vote of Security
    Holders


26PART II.Item 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


26Item 6.


Selected Financial Data


29Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


30Item 7A.


Quantitative and Qualitative Disclosures about
    Market Risk


45Item 8.


Financial Statements and Supplementary Data


46Item 9.


Changes In and Disagreements with Accountants on
    Accounting and Financial Disclosure


79Item 9A.


Controls and Procedures


79Item 9B.


Other Information


80PART III.Item 10.


Directors, Executive Officers and Corporate
    Governance


80Item 11.


Executive Compensation


80Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


81Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


81Item 14.


Principal Accountant Fees and Services


81PART IV.Item 15.


Exhibits, Financial Statement Schedules


81Signatures


82EX-3.1EX-10.3EX-10.7EX-10.9EX-10.12EX-10.15EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1




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##### Table of Contents



Forward
    Looking Statements
  Form 10-K Form 10-K Form 10-K
 PART I  Item 1.
    Business  Overview
     1




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Industry
    Background
    peer-to-peer
  end-to-end
   2




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Products
      Product Lines

Available



Target EndProduct Families

(# of MIPS Cores)

Configurations

Description

MarketsOCTEON Plus
    Multi-core
    MIPS64
    Processors

   CN58XX(16)
       CN57XX (12)
       CN56XX (12)
       CN55XX(6)
       CN54XX(6)
       CN52XX(4)
       CN50XX(2)

   Network Services Processor
   Storage Services Processor
   Secure Communication Processor

   Multi-core MIPS64 Processors with
    2-16 cores,
    integrated L4-L7 hardware acceleration and networking interfacesOCTEON
    Multi-core
    MIPS64
    Processors

   CN38XX(16)
       CN36XX(4)
       CN31XX(2)
       CN30XX(1)

   Network Services Processor
       Secure Communication Processor
       Communication Processor

   Multi-core MIPS64 Processors with
    2-16 cores,
    integrated L4-L7 hardware acceleration and networking interfaces

   Enterprise Network
   Access and Service Provider
   Data CenterNITROX
    Security
    Processors

   CN2XXX
       CN1XXX
       CN5XX

   i/s/w: IPsec, SSL or WLAN Security
    versions
       p: Multi-protocol version

   Standalone Security Processors, with
    wide range of interface connectivity

   Enterprise Network
       Data Center
       Access and Service Provider
       Broadband and ConsumerOCTEON
    Broadband Communication Processors

   CN50XX(2)
       CN31XX(2)
       CN30XX(1)

   Network Services Processor
       Secure Communication Processor
       Communication Processor

   Cost-effective Single & Dual core
    MIPS-based Communication Processors with integrated Networking,
    Security, QoS acceleration and built-in interfaces
       Performance: 100Mbps to 1Gbps

   Broadband and Consumer
       Enterprise and Consumer 3




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Product Lines

Available



Target EndProduct Families

(# of MIPS Cores)

Configurations

Description

MarketsECONA ARM
    processors

   CNS11XX
       CNS21XX

   Gateway processor
       Embedded processor
       Content processor

   Cost effective ARM based processors with
    integrated peripherals, networking and Layer 7 acceleration

   Broadband and consumer
       Connected home & officePureVu Video processors

   CNW31XX
       CNW35XX
       CNW36XX

   Video Conferencing
       Embedded
       Wireless HD

   HD Video conferencing
       Digital Video recorders
       Embedded applications
       Wireless HDMI cable replacement
    applications

   Enterprise and service provider
       Connected home & office
       Video capture, process and display
    segments           tm
 4




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tm
    Customers
      Sales and
    Marketing
     5




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Manufacturing
    Integrated Circuit Fabrication. sub-micron
  Assembly and Test.
  Quality Assurance.
  Research
    and Development
    Business
    Combinations
   6




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Intellectual
    Property
             7




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Competition
       8




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Backlog
    Employees
    Executive
    Officers of the Registrant
    Syed B. Ali


50


President, Chief Executive Officer, Director and Chairman of the
    Board of DirectorsArthur D. Chadwick


52


Vice President of Finance and Administration, Chief Financial
    Officer and SecretaryAnil K. Jain


52


Corporate Vice President, IC EngineeringRajiv Khemani


41


Vice President and General Manager of Networking and
    Communications DivisionSandeep Vij


43


Vice President and General Manager of Broadband and Consumer
    Division   Syed B. Ali
  Arthur D. Chadwick
  Anil K. Jain
  Rajiv Khemani
 9




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Sandeep Vij 2007-2008
  Corporate
    Information
  (650) 623-7000. Form 10-K. Form 10-K
  Available
    Information
  Form 10-K, Form 10-Q, Form 8-K, http://www.caviumnetworks.com,
  Item 1A.
    Risk
    Factors  The following risks and uncertainties may have a material
    adverse effect on our business, financial condition or results
    of operations. Investors should carefully consider the risks
    described below before making an investment decision. The risks
    described below are not the only ones we face. Additional risks
    not presently known to us or that we currently believe are
    immaterial may also significantly impair our business
    operations. Our business could be harmed by any of these risks.
    The trading price of our common stock could decline due to any
    of these risks, and investors may lose all or part of their
    investment.
  Risks
    Related to Our Business and Industry
  We had
    a limited history of profitability, and we may not achieve or
    sustain profitability in the future, on a quarterly or annual
    basis.
   10




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We
    face intense competition and expect competition to increase in
    the future, which could reduce our revenue and customer
    base.
        
  
    our products performance and cost effectiveness relative
    to that of our competitors products;
    our ability to deliver products in large volume on a timely
    basis at a competitive price;
    our success in utilizing new and proprietary technologies to
    offer products and features previously not available in the
    marketplace;
    our ability to recruit design and application engineers and
    sales and marketing personnel; and
    our ability to protect our intellectual property.   11




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Our
    customers may cancel their orders, change production quantities
    or delay production, and if we fail to forecast demand for our
    products accurately, we may incur product shortages, delays in
    product shipments or excess or insufficient product
    inventory.
    Adverse
    changes in general economic or political conditions in any of
    the major countries in which we do business could adversely
    affect our operating results.
    We
    receive a substantial portion of our revenues from a limited
    number of customers, and the loss of, or a significant reduction
    in, orders from one or a few of our major customers would
    adversely affect our operations and financial
    condition.
    
  
    some of our customers can stop incorporating our products into
    their own products with limited notice to us and suffer little
    or no penalty; and
    many of our customers have pre-existing or concurrent
    relationships with our current or potential competitors that may
    affect the customers decisions to purchase our products. 12




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We
    expect our operating results to fluctuate.
      
    our ability to retain, recruit and hire key executives,
    technical personnel and other employees in the positions and
    numbers, and with the experience and capabilities that we need;
    fluctuations in demand, sales cycles, product mix and prices for
    our products;
    the timing of our product introductions, and the variability in
    lead time between the time when a customer begins to design in
    one of our products and the time when the customers end
    system goes into production and they begin purchasing our
    products;
    the forecasting, scheduling, rescheduling or cancellation of
    orders by our customers;
    our ability to successfully define, design and release new
    products in a timely manner that meet our customers needs;
    changes in manufacturing costs, including wafer, test and
    assembly costs, mask costs, manufacturing yields and product
    quality and reliability;
    the timing and availability of adequate manufacturing capacity
    from our manufacturing suppliers;
    the timing of announcements by our competitors or us;
    future accounting pronouncements and changes in accounting
    policies;
    volatility in our stock price, which may lead to higher stock
    compensation expenses;
    general economic and political conditions in the countries where
    we operate or our products are sold or used; costs associated
    with litigation, especially related to intellectual
    property; and
    productivity and growth of our sales and marketing force.   13




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We may
    not sustain our growth rate, and we may not be able to manage
    any future growth effectively.
      
  
    add additional sales personnel and expand sales offices;
    expand our administrative, financial and operational systems,
    procedures and controls; and
    enhance our information technology support for enterprise
    resource planning and design engineering by adapting and
    expanding our systems and tool capabilities, and properly
    training new hires as to their use.    The
    average selling prices of products in our markets have
    historically decreased over time and will likely do so in the
    future, which could harm our revenues and gross
    profits.
    We may
    be unsuccessful in developing and selling new products or in
    penetrating new markets.
    
    timely and efficient completion of process design and transfer
    to manufacturing, assembly and test processes;
    the quality, performance and reliability of the product; and
    effective marketing, sales and service.   14




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Fluctuations
    in the mix of products sold may adversely affect our financial
    results.
    The
    semiconductor and communications industries have historically
    experienced significant fluctuations with prolonged downturns,
    which could impact our operating results, financial condition
    and cash flows
      Our
    products must meet exact specifications, and defects and
    failures may occur, which may cause customers to return or stop
    buying our products.
   15




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We may
    have difficulty selling our products if our customers do not
    design our products into their systems, and the nature of the
    design process requires us to incur expenses prior to
    recognizing revenues associated with those expenses which may
    adversely affect our financial results.
        
    our customers usually require a comprehensive technical
    evaluation of our products before they incorporate them into
    their designs;
    it can take from nine months to three years from the time our
    products are selected to commence commercial shipments; and our
    customers may experience changed market conditions or product
    development issues. The resources devoted to product development
    and sales and marketing may not generate material revenue for
    us, and from time to time, we may need to write off excess and
    obsolete inventory if we have produced product in anticipation
    of expected demand. We may spend resources on the development of
    products that our customers may not adopt. If we incur
    significant expenses and investments in inventory in the future
    that we are not able to recover, and we are not able to
    compensate for those expenses, our operating results could be
    adversely affected. In addition, if we sell our products at
    reduced prices in anticipation of cost reductions but still hold
    higher cost products in inventory, our operating results would
    be harmed.    If
    customers do not believe our products solve a critical need, our
    revenues will decline.
     16




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In the
    event we terminate one of our distributor arrangements, it could
    lead to a loss of revenues and possible product
    returns.
    We
    rely on our ecosystem partners to enhance our product offerings
    and our inability to continue to develop or maintain such
    relationships in the future would harm our ability to remain
    competitive.
    The
    loss of any of our key personnel could seriously harm our
    business, and our failure to attract or retain specialized
    technical, management or sales and marketing talent could impair
    our ability to grow our business.
         17




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We
    have a limited operating history, and we may have difficulty
    accurately predicting our future revenues for the purpose of
    appropriately budgeting and adjusting our
    expenses.
    Some
    of our operations and a significant portion of our customers and
    contract manufacturers are located outside of the United States,
    which subjects us to additional risks, including increased
    complexity and costs of managing international operations and
    geopolitical instability.
    
  
    longer and more difficult collection of receivables;
    difficulties in enforcing contracts generally;
    geopolitical and economic instability and military conflicts;
    limited protection of our intellectual property and other assets;
    compliance with local laws and regulations and unanticipated
    changes in local laws and regulations, including tax laws and
    regulations;
    trade and foreign exchange restrictions and higher tariffs;
    travel restrictions;
    timing and availability of import and export licenses and other
    governmental approvals, permits and licenses, including export
    classification requirements;
    foreign currency exchange fluctuations relating to our
    international operating activities;
    transportation delays and limited local infrastructure and
    disruptions, such as large scale outages or interruptions of
    service from utilities or telecommunications providers; 18




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
    difficulties in staffing international operations;
    heightened risk of terrorism;
    local business and cultural factors that differ from our normal
    standards and practices;
    differing employment practices and labor issues;
    regional health issues (e.g., SARS) and natural
    disasters; and
    work stoppages.  We
    outsource our wafer fabrication, assembly, testing, warehousing
    and shipping operations to third parties, and rely on these
    parties to produce and deliver our products according to
    requested demands in specification, quantity, cost and
    time.
        just-in-time
 19




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Any
    increase in the manufacturing cost of our products could reduce
    our gross margins and operating profit.
        If we
    fail to maintain an effective system of internal controls, we
    may not be able to accurately report our financial results or
    prevent fraud.
    We
    rely on third-party technologies for the development of our
    products and our inability to use such technologies in the
    future would harm our ability to remain
    competitive.
   20




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Our
    failure to protect our intellectual property rights adequately
    could impair our ability to compete effectively or to defend
    ourselves from litigation, which could harm our business,
    financial condition and results of operations.
  U.S.-based
      and/or and/or and/or
  Assertions
    by third parties of infringement by us of their intellectual
    property rights could result in significant costs and cause our
    operating results to suffer.
   21




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
    stop selling products or using technology that contain the
    allegedly infringing intellectual property;
    lose the opportunity to license our technology to others or to
    collect royalty payments based upon successful protection and
    assertion of our intellectual property against others; incur
    significant legal expenses;
    pay substantial damages to the party whose intellectual property
    rights we may be found to be infringing;
    redesign those products that contain the allegedly infringing
    intellectual property; or
    attempt to obtain a license to the relevant intellectual
    property from third parties, which may not be available on
    reasonable terms or at all.      Our
    third-party contractors are concentrated primarily in Taiwan and
    Japan, an area subject to earthquake and other risks. Any
    disruption to the operations of these contractors could cause
    significant delays in the production or shipment of our
    products.
    We may
    experience difficulties in transitioning to new wafer
    fabrication process technologies or in achieving higher levels
    of design integration, which may result in reduced manufacturing
    yields, delays in product deliveries and increased
    expenses.
  product-by-product
 22




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Our
    acquisition strategy may result in unanticipated accounting
    charges or otherwise adversely affect our results of operations,
    and result in difficulties in assimilating and integrating the
    operations, personnel, technologies and products of acquired
    companies or businesses, or be dilutive to existing
    shareholders.
      Our
    investment portfolio may become impaired by further
    deterioration of the capital markets.
    sub-prime
  We may
    need to raise additional capital, which might not be available
    or which, if available, may be on terms that are not favorable
    to use.
   23




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Our
    future effective tax rates could be affected by the allocation
    of our income among different geographic regions, which could
    affect our future operating results, financial condition and
    cash flows.
    Risks
    Related to our Common Stock
  The
    market price of our common stock may be volatile, which could
    cause the value of your investment to decline.
    
  
    general economic conditions and slow or negative growth of
    related markets;
    announcements by us or our competitors of design wins,
    acquisitions, new products, significant contracts, commercial
    relationships or capital commitments;
    our ability to develop and market new and enhanced products on a
    timely basis;
    commencement of, or our involvement in, litigation;
    disruption to our operations;
    the emergence of new sales channels in which we are unable to
    compete effectively;
    any major change in our board of directors or management;
    changes in financial estimates including our ability to meet our
    future revenue and operating profit or loss projections;
    changes in governmental regulations; and
    changes in earnings estimates or recommendations by securities
    analysts.   24




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A
    limited number of stockholders may have the ability to influence
    the outcome of director elections and other matters requiring
    stockholder approval.
    Delaware
    law and our amended and restated certificate of incorporation
    and bylaws contain provisions that could delay or discourage
    takeover attempts that stockholders may consider
    favorable.
    
  
    the right of the board of directors to elect a director to fill
    a vacancy created by the expansion of the board of directors or
    due to the resignation or departure of an existing board member;
    the prohibition of cumulative voting in the election of
    directors, which would otherwise allow less than a majority of
    stockholders to elect director candidates;
    the requirement for the advance notice of nominations for
    election to the board of directors or for proposing matters that
    can be acted upon at a stockholders meeting;
    the ability of our board of directors to alter our bylaws
    without obtaining stockholder approval;
    the ability of the board of directors to issue, without
    stockholder approval, up to 10,000,000 shares of preferred
    stock with terms set by the board of directors, which rights
    could be senior to those of our common stock;
    the elimination of the rights of stockholders to call a special
    meeting of stockholders and to take action by written consent in
    lieu of a meeting;
    the required approval of at least
    662/3%
    of the shares entitled to vote at an election of directors to
    adopt, amend or repeal our bylaws or repeal the provisions of
    our amended and restated certificate of incorporation regarding
    the election and removal of directors and the inability of
    stockholders to take action by written consent in lieu of a
    meeting; and
    the required approval of at least a majority of the shares
    entitled to vote at an election of directors to remove directors
    without cause.   25




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Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings  Form 10-K,
  Item 4.
    Submission
    of Matters to a Vote of Security Holders   Part II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information for Common Stock
      High


LowFirst Quarter 2008

$
23.20


$
14.22Second Quarter 2008

$
26.10


$
16.32Third Quarter 2008

$
20.71


$
12.33Fourth Quarter 2008

$
14.42


$
8.88Second Quarter 2007 (from May 7, 2007)

$
26.27


$
16.44Third Quarter 2007

$
35.60


$
21.53Fourth Quarter 2007

$
34.75


$
21.63  26




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Dividend
    Policy
    Stock
    Performance Graph(1)
   
 5/2/2007


12/31/2007


6/30/2008


12/31/2008Cavium Networks


100.0



139.9



127.7



63.9Nasdaq Composite Index


100.0



103.7



89.6



61.7Nasdaq Computer Index


100.0



115.8



97.0



61.8     (1)
    
    This Section is not soliciting material, is not
    deemed filed with the SEC and is not to be
    incorporated by reference in any filing of the Company under the
    Securities Act of 1933, as amended, or the Securities Exchange
    Act of 1934 Act, as amended, whether made before or after
    the date hereof and irrespective of any general incorporation
    language in any such filing. 27




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Recent
    Sales of Unregistered Securities
  (a)
    Sales of
    Unregistered Securities    (b)
    Use of
    Proceeds from Public Offering of Common Stock  Form S-1 No. 333-140660),
  (c)
    Purchases
    of Equity Securities by the Issuer and Affiliated
    Purchasers   28




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Item 6.
    Selected
    Financial Data  Form 10-K. Form 10-K. Form 10-K.
  Year Ended December 31,2008


2007


2006


2005


2004(In thousands, except per share data)Consolidated Statements of Operations Data:Net revenue

$
86,609


$
54,203


$
34,205


$
19,377


$
7,411Cost of revenue(1)(2)


35,639



19,898



13,092



7,865



3,080Gross profit


50,970



34,305



21,113



11,512



4,331Operating expenses:Research and development(2)


27,180



19,548



18,651



16,005



12,010Sales, general and administrative(2)


22,111



14,688



10,058



6,840



3,752In-process research and development


1,319















Total operating expenses


50,610



34,236



28,709



22,845



15,762Income (loss) from operations


360



69



(7,596
)


(11,333
)


(11,431
)Other income (expense), net:Interest expense


(499
)


(622
)


(707
)


(183
)


(388
)Warrant revaluation expense






(573
)


(467
)


(411
)


Interest income and other


2,576



3,458



345



355



86Total other income (expense), net


2,077



2,263



(829
)


(239
)


(302
)Income (loss) before income tax expense and cumulative effect of
    change in accounting principle


2,437



2,332



(8,425
)


(11,572
)


(11,733
)Income tax expense


930



142



560







Income (loss) before cumulative effect of change in accounting
    principle


1,507



2,190



(8,985
)


(11,572
)


(11,733
)Cumulative effect of change in accounting principle














(100
)


Net income (loss)

$
1,507


$
2,190


$
(8,985
)

$
(11,672
)

$
(11,733
)Net income (loss) per common share, basic

$
0.04


$
0.08


$
(1.11
)

$
(1.59
)

$
(1.82
)Shares used in computing basic net income (loss) per common share


40,385



29,006



8,066



7,319



6,459Net income (loss) per common share, diluted

$
0.04


$
0.07


$
(1.11
)

$
(1.59
)

$
(1.82
)Shares used in computing diluted net income (loss) per common
    share


42,566



32,432



8,066



7,319



6,459     (1)
    
    Includes acquired intangible asset amortization of $1,737, $860,
    $1,116, $1,007 and $254, in the years ended December 31,
    2008, 2007, 2006, 2005, and 2004, respectively. 29




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(2)
    
    Includes stock-based compensation expense as follows:  Year Ended December 31,2008(3)


2007(3)


2006(3)


2005


2004(In thousands)Cost of revenue

$
179


$
43


$
9


$



$
Research and development


2,684



805



396



10



Sales, general and administrative


3,194



1,021



340



75



85   (3)
    
    We applied the provisions of SFAS 123(R) in 2008, 2007 and
    2006.  Year Ended December 31,2008


2007


2006


2005


2004(In thousands)Consolidated Balance Sheet Data:Cash and cash equivalents

$
77,027


$
98,462


$
10,154


$
7,879


$
18,381Working capital


90,335



105,048



11,689



6,160



17,718Total assets


151,164



134,610



29,962



20,219



28,731Preferred stock warrant liability










701



1,184



Capital lease and technology license obligations


4,735



8,530



3,580



3,087



Notes payable










4,000







Other non-current liabilities


1,162







39



74



Convertible preferred stock










72,437



61,820



62,339Common stock and additional paid-in capital


185,784



175,580



3,740



1,261



641Total stockholders equity (deficit)

$
128,561


$
116,850


$
(57,180
)

$
(50,674
)

$
(39,776
)   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion should be read in conjunction with
    the Consolidated Financial Statements and the related notes that
    appear elsewhere in the document.
  The information in this Annual Report on
    Form 10-K
    contains forward-looking statements within the meaning of
    Section 27A of the Securities Act of 1933, as amended
    (Securities Act), and Section 21E of the
    Securities Exchange Act of 1934, as amended (Exchange
    Act), which are subject to the safe harbor
    created by those sections. Forward-looking statements are based
    on our managements beliefs and assumptions and on
    information currently available to our management. In some
    cases, you can identify forward-looking statements by terms such
    as may, will, should,
    could, would, estimate,
    project, predict, potential,
    continue, strategy, believe,
    anticipate, plan, expect,
    intend and similar expression intended to identify
    forward-looking statements. These statements involve known and
    unknown risks, uncertainties and other factors, which may cause
    our actual results, performance, time frames or achievements to
    be materially difference from any future results, performance,
    time frames or achievements expressed or implied by the
    forward-looking statements. We discuss many of these risks,
    uncertainties and other factors in this Annual Report on
    Form 10-K
    in greater detail under the heading Risk Factors.
    Given these risks, uncertainties and other factors, you should
    not place undue reliance on these forward-looking statements.
    Also, these forward-looking statements represent our estimates
    and assumptions only as of the date of this filing. You should
    read this Annual Report on
    Form 10-K
    completely and with the understanding that our actual future
    results may be materially different from what we expect. We
    hereby qualify our forward-looking statements by these
    cautionary statements. Except as required by law, we assume no
    obligation to update these forward-looking statements publicly,
    or to update the reasons actual results could differ materially
    from those anticipated in these forward-looking statements, even
    if new information becomes available in the future.
 30




---



##### Table of Contents



Overview
      tm tm
    off-the-shelf
 31




---



##### Table of Contents



Key
    Business Metrics
  Design Wins.
  Pricing and Margins.
  Sales Volume.
  Customer Product Life Cycle.
  Critical
    Accounting Policies and Estimates
      
    revenue recognition;
    product warranty accrual;
    stock-based compensation; 32




---



##### Table of Contents




    inventory valuation;
    accounting for income taxes;
    mask costs;
    business combinations; and
    goodwill and purchased intangible assets.  Revenue
    Recognition
            Warranty
    Accrual
    Stock-Based
    Compensation
   33




---



##### Table of Contents



Inventory
    Valuation
    Accounting
    for Income Taxes
      Accounting for Uncertainty
    in Income Taxes
    Mask
    Costs
   34




---



##### Table of Contents



Business
    Combinations
  Business
    Combinations
  Goodwill
    and Purchased Intangible Assets
    Results
    of Operations
  Net Revenue.
 35




---



##### Table of Contents



Year Ended December 31,2008


2007


2006Percentage of total revenueCisco


29
%


23
%


19
%F5 Networks


11



18



21Sumitomo


11



*



*     *
    
    Represents less than 10% of consolidated net revenue        Year Ended December 31,2008


2007


2006(In thousands)United States

$
44,787


$
32,748


$
19,483Japan


11,559



2,732



2,612Taiwan


11,533



10,500



7,403China


6,206



3,367



2,290Other countries


12,524



4,856



2,417Total

$
86,609


$
54,203


$
34,205   Cost of Revenue and Gross Margin.
 36




---



##### Table of Contents



12-month
    For the Year Ended December 31,2008


2007


2006(In thousands)Net revenue

$
86,609


$
54,203


$
34,205Cost of revenue


35,639



19,898



13,092Gross Profit

$
50,970


$
34,305


$
21,113Gross Margin


58.9
%


63.3
%


61.7
%  37




---



##### Table of Contents



Research and Development Expenses.
    For the Year Ended December 31,2008


2007


2006(In thousands)Research and development expenses

$
27,180


$
19,548


$
18,651Percent of total revenue


31.4
%


36.1
%


54.5
%   Sales, General and Administrative
    Expenses.
  For the Year Ended December 31,2008


2007


2006(In thousands)Sales, general and administrative

$
22,111


$
14,688


$
10,058Percent of total revenue


25.5
%


27.1
%


29.4
%   Other Income (Expense), Net. 150-5, Issuers Accounting under FASB Statement No. 150
    for Freestanding Warrants and Other Similar Instruments on
    Shares That Are Redeemable FSP 150-5.
  For the Year Ended December 31,2008


2007


2006(In thousands)Interest income and other

$
2,576


$
3,458


$
345Interest expense


(499
)


(622
)


(707
)Warrant revaluation expense






(573
)


(467
)Total other income (expense), net

$
2,077


$
2,263


$
(829
)  38




---



##### Table of Contents



Provision for Income Taxes.
  For the Year Ended December 31,2008


2007


2006(In thousands)Income (loss) before income taxes

$
2,437


$
2,332


$
(8,425
)Income tax expense


930



142



560Effective tax rate


38.2
%


6.1
%


−6.6
%     Fiscal
    2008 Compared to Fiscal 2007
  Net Revenue.
    Cost of Revenue and Gross Margin.
  Research and Development Expenses.
  Sales, General and Administrative
    Expenses.
  In-process research and development.
  Income Tax Expense.
 39




---



##### Table of Contents



Other Income (Expense), Net.
  Fiscal
    2007 Compared to Fiscal 2006
  Net Revenue.
  Cost of Revenue and Gross Margin.
  Research and Development Expenses.
  Sales, General and Administrative
    Expenses.
  Income Tax Expense.
  Other Income (Expense), Net.
  Quarterly
    Results of Operations
  period-to-period
 40




---



##### Table of Contents



Quarter Ended2008


2007Dec. 31


Sep. 30


Jun. 30


Mar. 31


Dec. 31


Sep. 30


Jun. 30


Mar. 31(In thousands, except per share data)Net revenue

$
22,180


$
24,525


$
21,562


$
18,342


$
16,231


$
14,165


$
12,666


$
11,141Cost of revenue


11,145



10,099



7,808



6,587



5,811



5,207



4,698



4,182Gross profit


11,035



14,426



13,754



11,755



10,420



8,958



7,968



6,959Operating expenses:Research and development


8,306



6,593



6,461



5,820



5,705



4,796



4,721



4,326Sales, general and administrative


6,158



5,944



5,454



4,555



4,021



3,976



3,482



3,209In-process research and development


1,319



























Total operating expenses


15,783



12,537



11,915



10,375



9,726



8,772



8,203



7,535(Loss) income from operations


(4,748
)


1,889



1,839



1,380



694



186



(235
)


(576
)Other income (expense), net:Interest expense


(96
)


(115
)


(135
)


(153
)


(50
)


(73
)


(291
)


(208
)Warrant revaluation expense


























(349
)


(224
)Interest income and other


476



499



609



992



1,265



1,307



817



69Total other income (expense), net


380



384



474



839



1,215



1,234



177



(363
)(Loss) income before income tax expense


(4,368
)


2,273



2,313



2,219



1,909



1,420



(58
)


(939
)Income tax (benefit) expense


(11
)


454



240



247



(59
)


110



34



57Net (loss) income

$
(4,357
)

$
1,819


$
2,073


$
1,972


$
1,968


$
1,310


$
(92
)

$
(996
)Net (loss) income per common share, basic and diluted

$
(0.11
)

$
0.04


$
0.05


$
0.05


$
0.05


$
0.03


$
0.00


$
(0.12
)        41




---



##### Table of Contents



Liquidity
    and Capital Resources
      Year Ended December 31,2008


2007


2006(In thousands)Working capital

$
90,335


$
105,048


$
11,689Cash and cash equivalents


77,027



98,462



10,154     Year Ended December 31,2008


2007


2006(In thousands)Net cash provided by (used in) operating activities

$
10,627


$
6,176


$
(7,819
)Net cash (used in) investing activities


(29,120
)


(5,772
)


(2,075
)Net cash (used in) provided by financing activities


(2,942
)


87,904



12,169   Cash
    Flows from Operating Activities
      Cash
    Flows from Investing Activities
     42




---



##### Table of Contents



Cash
    Flows from Financing Activities
        Indemnities
    Off-Balance
    Sheet Arrangements
    Contractual
    Obligations
    Payments Due By PeriodLess Than








More Than1 Year


1 to 2 Years


3 to 5 Years


5 Years


Total(In thousands)Operating lease obligations

$
1,835


$
3,532


$
1,323


$



$
6,690Capital lease obligations


2,862



2,183











5,045Purchase obligations


4,185















4,185Total

$
8,882


$
5,715


$
1,323


$



$
15,920  43




---



##### Table of Contents



Accounting for Uncertainty
    in Income Taxes
    th th
    Recent
    Accounting Pronouncements
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements,
  FSP 142-3, Determination of the Useful Life of Intangible
    Assets FSP 142-3. FSP 142-3 Goodwill and Other Intangible
    Asset. FSP 142-3 Business Combinations FSP 142-3 FSP 142-3
  FAS 157-3, FSP 157-3. FSP 157-3 FSP 157-3 FSP 157-3
 44




---



##### Table of Contents



No. 08-7, EITF 08-7. EITF 08-7 EITF 08-7 EITF 08-7 EITF 08-7
  Item 7A.
    Quantitative
    and Qualitative Disclosure About Market Risk  Foreign
    Currency Risk
    Interest
    Rate Risk
   45




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS    Report of Independent Registered Public
    Accounting Firm


47Consolidated Balance Sheets


48Consolidated Statements of Operations


49Consolidated Statements of Changes in Mandatorily
    Redeemable Convertible Preferred Stock and Stockholders
    Equity (Deficit)


50Consolidated Statements of Cash Flows


51Notes to Consolidated Financial Statements


52  46




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     Internal Control 
    Integrated Framework
      
    47




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.



CONSOLIDATED
    BALANCE SHEETS  As of December 31,2008


2007(In thousands, exceptshare and per share data)AssetsCurrent assets:Cash and cash equivalents

$
77,027


$
98,462Accounts receivable, net of allowances of $203 and $177,
    respectively


14,054



9,768Inventories


17,281



9,573Prepaid expenses and other current assets


1,298



946Total current assets


109,660



118,749Property and equipment, net


11,115



11,608Intangible assets, net


16,958



4,096Goodwill


12,925



Other assets


506



157Total assets

$
151,164


$
134,610Liabilities and Stockholders EquityCurrent liabilities:Accounts payable

$
7,309


$
5,311Accrued expenses and other current liabilities


7,697



2,253Deferred revenue


1,700



1,666Capital lease and technology license obligations, current portion


2,619



4,471Total current liabilities


19,325



13,701Capital lease and technology license obligations, net of current
    portion


2,116



4,059Other non-current liabilities


1,162



Total liabilities


22,603



17,760Commitments and contingencies (Note 12)Stockholders equityPreferred stock, par value $0.001:10,000,000 shares authorized, no shares issued and
    outstanding as of December 31, 2008 and 2007






Common stock, par value $0.001:200,000,000 shares authorized; 41,183,010 and
    40,307,361 shares issued and outstanding; as of
    December 31,2008 and 2007, respectively


41



40Additional paid-in capital


185,743



175,540Accumulated deficit


(57,223
)


(58,730
)Total stockholders equity


128,561



116,850Total liabilities and stockholders equity

$
151,164


$
134,610    48




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.



CONSOLIDATED
    STATEMENTS OF OPERATIONS  Year Ended December 31,2008


2007


2006(In thousands, except per share data)Net revenue

$
86,609


$
54,203


$
34,205Cost of revenue


35,639



19,898



13,092Gross profit


50,970



34,305



21,113Operating expenses:Research and development


27,180



19,548



18,651Sales, general and administrative


22,111



14,688



10,058In-process research and development


1,319







Total operating expenses


50,610



34,236



28,709Income (loss) from operations


360



69



(7,596
)Other income (expense), net:Interest expense


(499
)


(622
)


(707
)Warrant revaluation expense






(573
)


(467
)Interest income and other


2,576



3,458



345Total other income (expense), net


2,077



2,263



(829
)Income (loss) before income tax expense


2,437



2,332



(8,425
)Income tax expense


930



142



560Net income (loss)

$
1,507


$
2,190


$
(8,985
)Net income (loss) per common share, basic

$
0.04


$
0.08


$
(1.11
)Shares used in computing basic net income (loss) per common share


40,385



29,006



8,066Net income (loss) per common share, diluted

$
0.04


$
0.07


$
(1.11
)Shares used in computing diluted net income (loss) per common
    share


42,566



32,432



8,066    49




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.



CONSOLIDATED
    STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE

CONVERTIBLE
    PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFICIT)  TotalMandatorily Redeemable Convertible








Additional





StockholdersPreferred Stock


Common Stock


Paid-in


Accumulated


Equity/Shares


Amount


Shares


Amount


Capital


Deficit


(Deficit)(In thousands, except share data)Balance at December 31, 2005


21,091,375


$
61,820



8,739,315


$
9


$
1,252


$
(51,935
)

$
(50,674
)Common stock issued in connection with early-exercises of stock
    options subject to repurchase










33,868















Common stock issued in connection with other exercises of options










568,766







1,349







1,349Vesting of early-exercised stock options


















141







141Repurchase of shares of unvested common stock










(32,599
)






(20
)






(20
)Stock-based compensation


















745







745Issuance of common stock in connection with warrants exercise










56,250















Issuance of Series B preferred stock in connection with
    warrants exercises


179,976



1,094











134







134Issuance of Series D preferred stock, net of issuance costs
    of $15


1,032,037



8,965



















Issuance of Series D preferred stock in connection with
    warrants exercises


60,809



558











130







130Net loss






















(8,985
)


(8,985
)Balance as of December 31, 2006


22,364,197



72,437



9,365,600



9



3,731



(60,920
)


(57,180
)Common stock issued in connection with early-exercises of stock
    options subject to repurchase










25,000















Common stock issued in connection with other exercises of options










717,212



1



1,451







1,452Common stock issued in connection with vesting of restricted
    stock units










500















Vesting of early-exercised stock options


















110







110Repurchase of shares of unvested common stock










(14,585
)






(10
)






(10
)Stock-based compensation


















1,908







1,908Issuance of Series B preferred stock in connection with
    warrants exercises


181



3



















Conversion of preferred stock to common stock due to IPO


(22,364,378
)


(72,440
)


22,364,378



22



72,418







72,440Issuance of common stock for IPO, net of issuance cost of $2,790










7,762,500



8



94,660







94,668IPO


















1,272







1,272Common stock
    warrants-net
    exercise










86,756















Net income






















2,190



2,190Balance at December 31, 2007










40,307,361



40



175,540



(58,730
)


116,850Common stock issued in connection with exercises of stock options










516,759



1



857







858Common stock issued in connection with vesting of restricted
    stock units










25,125















Vesting of early-exercised stock options


















70







70Repurchase of shares of unvested common stock










(4,480
)






(4
)






(4
)Stock-based compensation


















6,182







6,182Issuance of common stock in connection with business acquisition










338,245







3,098







3,098Net income






















1,507



1,507Balance at December 31, 2008





$




41,183,010


$
41


$
185,743


$
(57,223
)

$
128,561    50




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.



CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended December 31,2008


2007


2006(In thousands)Cash flows from operating activities:Net income (loss)

$
1,507


$
2,190


$
(8,985
)Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities:Stock-based compensation expense


6,057



1,869



745Amortization of warrant costs to interest expense






149



143Revaluation of warrants to fair value






574



467Depreciation and amortization


11,978



6,221



5,009In-process research and development


1,319







Other






(20
)


10Changes in assets and liabilities, net of effects of
    acquisitions:Accounts receivable, net


(3,901
)


(2,520
)


(3,412
)Inventories


(6,063
)


(4,528
)


(2,919
)Prepaid expenses and other current assets


(66
)


(322
)


(41
)Other assets


(275
)


49



(101
)Accounts payable


1,360



1,836



125Deferred revenue


35



825



408Accrued expenses and other current and non-current liabilities


(1,324
)


(147
)


732Net cash provided by (used in) operating activities


10,627



6,176



(7,819
)Cash flows used in investing activities:Purchases of property and equipment


(8,965
)


(4,925
)


(2,075
)Acquisition of businesses, net of cash acquired


(19,824
)






Purchases of IP licenses and intangible assets


(331
)


(847
)


Net cash (used in) investing activities


(29,120
)


(5,772
)


(2,075
)Cash flows (used in) provided by financing activities:(Repayment) proceeds from term loan financing






(4,000
)


4,000Proceeds from issuance of convertible preferred stock, net of
    issuance cost










8,965Proceeds from initial public offering, net of bankers
    discount and commission






97,459



Payments of initial public offering costs






(2,791
)


Proceeds from issuance of common stock upon exercise of options


858



1,092



1,361Principal payment of capital lease and technology license
    obligations


(3,796
)


(3,846
)


(2,915
)Repurchases of shares of unvested common stock


(4
)


(10
)


(20
)Proceeds from issuance of convertible preferred stock in
    connection with warrant exercise










778Net cash (used in) provided by financing activities


(2,942
)


87,904



12,169Net (decrease) increase in cash and cash equivalents


(21,435
)


88,308



2,275Cash and cash equivalents, beginning of period


98,462



10,154



7,879Cash and cash equivalents, end of period

$
77,027


$
98,462


$
10,154Supplemental disclosure of cash flow information:Cash paid for interest

$
499


$
473


$
564Cash paid for taxes

$
909


$
469


$
Supplemental disclosure of non-cash investing and financing
    activities:Issuance of common stock in connection with the acquisition of
    W&W

$
3,098


$



$
Accrual for acquisition related costs

$
4,709


$



$
Capital lease and technology license obligations

$
723


$
9,812


$
3,408Vesting of early exercised options

$
70


$
110


$
141Additions to property and equipment included in accounts payable
    and accrued expenses

$



$
1,057


$
486Net exercise of common stock warrants

$



$
462


$
Conversion of mandatorily redeemable convertible preferred stock
    to common stock

$



$
72,440


$
    51




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS  1.
    Organization
    and Significant Accounting Policies  Organization
      Initial
    Public Offering
    Basis
    of Consolidation
    Use of
    Estimates
    Summary
    of Significant Accounting Policies
  Cash &
    Cash Equivalents
    Allowance
    for Doubtful Accounts
   52




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Inventories
  work-in-process first-in,
    Property
    and Equipment
    EstimatedUseful LivesSoftware, computer and other equipment


1 to 5 yearsMask costs and test equipment


1 to 3 yearsFurniture, office equipment and leasehold improvements


1 to 5 years     Impairment
    of Long-Lived Assets
   53




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Fair
    Value of Financial Instruments
    Concentration
    of Risk
        Year Ended December 31,2008


2007


2006Percentage of total net revenueCustomer A


29
%


23
%


19
%Customer B


11



18



21Customer C


11



*



*     *
    
    Represents less than 10% of the net revenue for the respective
    period end.  2008


2007Percentage of gross accounts receivable:Customer D


21
%


23
%Customer E


10



13   Intangible
    Assets
    Goodwill
  Goodwill and Other Intangible Assets
 54




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Revenue
    Recognition
  Revenue
    Recognition,
       55




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  SOP No. 97-2, Software Revenue Recognition SOP No. 98-9, Modification of
    SOP No. 97-2,
    Software Revenue Recognition with Respect to Certain
    Transactions.
      Warranty
    Accrual
    As of December 31,2008


2007(In thousands)Beginning balance

$
261


$
161Accruals


144



241Settlements and adjustments made


(251
)


(141
)Ending balance

$
154


$
261   Indemnities
    Research
    and Development
   56




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Advertising
    Operating
    Leases
    Income
    Taxes
    Accounting
    for Stock-Based Compensation
      No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services
 57




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Year Ended December 31,2008


2007


2006(In thousands)Cost of revenue

$
179


$
43


$
9Research and development


2,684



805



396Sales, general and administrative


3,194



1,021



340Total stock-based compensation expense

$
6,057


$
1,869


$
745     Other
    Comprehensive Income (Loss)
    Foreign
    Currency Remeasurement
  non-U.S. dollars end-of-period
  Preferred
    Stock Warrant Liability
  150-5, Issuers Accounting under FASB Statement No. 150
    for Freestanding Warrants and Other Similar Instruments on
    Shares That Are Redeemable FSP 150-5 FSP 150-5
    Recent
    Accounting Pronouncements
  Business Combinations
 58




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Noncontrolling Interests in Consolidated Financial
    Statements,
  FSP 142-3, Determination of the Useful Life of Intangible
    Assets FSP 142-3. FSP 142-3 Goodwill and Other Intangible
    Asset. FSP 142-3 FSP 142-3 FSP 142-3
  FAS 157-3, FSP 157-3. FSP 157-3 FSP 157-3 FSP 157-3
  No. 08-7, EITF 08-7. EITF 08-7 EITF 08-7 EITF 08-7 EITF 08-7
  2.
    Net
    Income (Loss) Per Common Share  Earnings Per
    Share
 59




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2008


2007


2006(In thousands)Net income (loss)

$
1,507


$
2,190


$
(8,985
)Weighted average common shares outstanding  basic


40,385



29,006



8,066Dilutive effect of employee stock plans


2,181



3,426



Weighted average common shares outstanding  diluted


42,566



32,432



8,066Basic net income (loss) per share


0.04



0.08



(1.11
)Diluted net income (loss) per share


0.04



0.07



(1.11
)     Year Ended December 31,2008


2007


2006(In thousands)Options to purchase common stock


643



701



5,094Convertible preferred stock (as converted basis)










22,364Convertible stock warrants (as converted basis)










103   3.
    Fair
    Value  Fair Value Measurements, No. FAS 157-2,
    
    Level 1  Quoted prices in active markets for
    identical assets or liabilities.
    Level 2  Inputs other than Level 1 that are
    observable, either directly or indirectly, such as quoted prices
    for similar assets or liabilities; quoted prices in markets that
    are not active; or other inputs that are observable or can be
    corroborated by observable market data for substantially the
    full term of the assets or liabilities.
    Level 3  Unobservable inputs that are supported
    by little or no market activity and that are significant to the
    fair value of the assets or liabilities.   60




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  The Fair Value Option for Financial Assets and
    Financial Liabilities, contract-by-contract
    4.
    Balance
    Sheet Components  Inventories
  first-in,
  As of December 31,2008


2007(In thousands)Work-in-process

$
14,411


$
8,092Finished goods


2,870



1,481$
17,281


$
9,573   Property and equipment, net, consist of the following:
  As of December 31,2008


2007(In thousands)Mask costs and test equipment

$
11,016


$
5,587Software, computer and other equipment


15,402



12,738Furniture, office equipment and leasehold improvements


121



5726,539



18,382Less: accumulated depreciation and amortization


(15,424
)


(6,774
)$
11,115


$
11,608      61




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accrued expenses and other current liabilities consist of the
    following:
  As of December 31,2008


2007(In thousands)Accrued compensation and related benefits

$
1,191


$
1,010Acquisition related payables


4,489



Accrued restructuring


389



Accrued warranty


154



261Refundable deposits related to unvested employee stock option
    exercises






70Professional fees


835



285Income tax payable


54



231Other


585



396$
7,697


$
2,253   Other non-current liabilities consist of the following:
  As of December 31,2008


2007(In thousands)Accrued rent

$
187


$
Acquisition related payables


220



Accrued restructuring


464



Income tax payable


291



$
1,162


$
   5.
    Business
    Combinations  Parallogic
    Corporation
  th th
   62




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Net tangible assets

$
Identifiable intangible assets:Customer relationships


76Developed technology


374Goodwill


816Total purchase price

$
1,266       time-to-market
  Star
    Semiconductor Corporation
     63




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Cash consideration

$
8,790Acquisition related expenses(1)


786Total purchase price

$
9,576     (1)
    
    Acquisition related expenses include legal and accounting fees
    and other external costs directly related to the acquisition.    Net tangible assets

$
973Identifiable intangible assets


5,295Goodwill


3,308Total purchase price

$
9,576     Estimated UsefulIntangible Assets

Life (In years)


AmountExisting technology  product


4.0


$
3,849Core technology  product


4.0



467Existing technology  license


0.2



507Customer contracts and relationships


7.0



307Trade name


2.0



82Order backlog


0.2



83Total





$
5,295         W&W
    Communications, Inc.
   64




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  No. 95-3, Recognition of Liabilities in Connection with Purchase
    Business Combinations EITF 95-3.
    Amount(In thousands)Total purchase price of the acquisition of W&W is as
    follows:Cash
    consideration(1)

$
3,894Value of common stock issued


3,098Acquisition related
    expenses(2)


969Total purchase price

$
7,961     (1)
    
    As of December 31, 2008, of
    the total cash consideration of $3.9 million, $100,000 was
    paid at the close of the acquisition and the remaining
    $3.8 million was not paid and was recorded as acquisition
    related payables in accrued expenses and other current
    liabilities. This amount is expected to be paid in 2009.(2)
    
    Acquisition related expenses
    include legal and accounting fees and other external costs
    directly related to the acquisition, of which $494,000 was paid
    at the close of the acquisition and the remaining $475,000 was
    not paid and was recorded as acquisition related payables in
    accrued expenses and other current liabilities. 65




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     As AdjustedCash and cash equivalents

$
283Inventories, net


836Other assets


230Goodwill


8,801In-process research and development


1,319Other intangibles, net


10,114Accounts payable


(1,445
)Accrued expenses


(2,464
)Accrued restructuring


(853
)Notes payable


(8,860
)Total purchase price

$
7,961     Estimated UsefulIntangible Assets

Life (In years)


Amount(In thousands)Existing technology


1-5


$
7,768Core technology


5.0



1,306Customer contracts and relationships


6.0



583Order backlog


0.6



457Total





$
10,114   Applicability of FASB Statement
    No. 2 to Business Combinations Accounted for by the
    Purchase Method
     66




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Pro
    forma financial information
      Year Ended December 31,2008

2007Net revenue

$
91,036


$
58,793Net loss

$
(10,775
)

$
(11,299
)Net loss per common share, basic

$
(0.26
)

$
(0.39
)Net loss per common share, diluted

$
(0.26
)

$
(0.39
)  67




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  6.
    Goodwill
    and Intangible Assets, Net  Goodwill
    Intangible
    assets, net consisted of the following:
  As of December 31,2008


2007(In thousands)Existing and core technology  product

$
17,614


$
3,343Technology license


9,536



9,205Customer contracts and relationships


966



Trade name


82



Order backlog


540



28,738



12,548Less: accumulated amortizationExisting and core technology  product


(4,398
)


(3,235
)Technology license


(6,787
)


(5,217
)Customer contracts and relationships


(65
)


Trade name


(17
)


Order backlog


(513
)


$
16,958


$
4,096     7.
    Restructuring
    Accrual  EITF 95-3
    Accrued restructuring  beginning balance

$
Additions


853Cash payments


Accrued restructuring  ending balance

$
853Less: current portion


389Long-term portion

$
464  68




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    Stockholders
    Equity  Common
    and Preferred Stock
    2007
    Stock Incentive Plan
    2001
    Stock Incentive Plan
      EITF 00-23, Working Group Work Plan Issues Related to the Accounting for
    Stock Compensation under APB Opinion No. 25, Accounting for
    Stock Issued to Employees, and FASB Interpretation No. 44
    Accounting for Certain Transactions involving Stock
    Compensation
 69




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Number of


Weighted-AverageUnvested Shares


Exercise/PurchaseOutstanding


PriceBalance as of December 31, 2005


1,062,970


$
0.56Issued


400,023



2.95Vested


(558,184
)


0.60Repurchased


(32,599
)


0.62Balance as of December 31, 2006


872,210


$
1.63Issued


80,397



5.64Vested


(501,360
)


1.59Repurchased


(14,585
)


0.71Balance as of December 31, 2007


436,662


$
2.45Issued






0.00Vested


(286,303
)


1.94Repurchased


(4,795
)


0.84Balance as of December 31, 2008


145,564


$
3.5     Number of


Weighted AverageShares Outstanding


Exercise PriceBalance at December 31, 2005


2,470,170


$
0.72Options granted


2,434,750



3.42Options exercised


(602,634
)


2.26Options cancelled and forfeited


(80,882
)


1.57Balance as of December 31, 2006


4,221,404


$
2.05Options granted


546,575



15.31Options exercised


(742,212
)


1.97Options cancelled and forfeited


(105,766
)


3.93Balance as of December 31, 2007


3,920,001


$
3.86Options granted


2,124,475



16.32Options exercised


(516,759
)


1.58Options cancelled and forfeited


(130,263
)


12.15Balance as of December 31, 2008


5,397,454


$
8.78    70




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Outstanding Options


Exercisable OptionsWeightedAverage


Weighted





WeightedRemaining


Average





Average


AggregateNumber of


Contractual


Exercise


Number of


Exercise


IntrinsicExercise Prices

Shares


Term


Price


Shares


Price


Value$0.20-0.80


280,522



5.44


$
0.31



280,522


$
0.311.02-1.50


959,138



6.61



1.05



814,711



1.043.04-3.04


1,436,561



7.17



3.04



799,723



3.043.74-8.52


485,198



8.01



6.95



197,833



6.6214.42-14.80


1,409,981



6.23



14.78



240,261



14.8016.32-20.33


358,000



6.02



17.88



43,453



18.8120.98-25.23


300,000



6.41



21.58



44,057



21.5728.46-31.54


168,054



8.58



28.91



61,781



28.61$0.20-31.54


5,397,454



6.74


$
8.78



2,482,341


$
4.74


$
24,399,616Exercisable


2,482,341



6.75


$
4.74










$
17,325,062Vested and expected to vest


5,205,792



6.74


$
8.59










$
24,113,835       For the Year EndedDecember 31,2008

2007Risk-free interest rate

1.31%-3.32%

3.29%-4.72%Expected life

4-5 years

4-6 yearsDividend yield

0%

0%Volatility

55%-63%

55%-56%      71




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Restricted
    Stock Unit Awards
    Weighted-AverageGrant Date FairNumber of Shares


Value Per ShareBalance as of December 31, 2006





$
Granted


12,500



31.54Issued and released


(500
)


31.54Cancelled and forfeited






Balance as of December 31, 2007


12,000


$
31.54Granted


300,820



16.82Issued and released


(25,125
)


20.07Cancelled and forfeited


(6,762
)


16.54Balance as of December 31, 2008


280,933


$
17.16Expected to vest as of December 31, 2008


257,980


$
17.16         9.
    Income
    Taxes      Year Ended December 31,2008


2007


2006(In thousands)Domestic

$
14,131


$
11,037


$
17,877Foreign


(11,694
)


(8,705
)


(26,302
)$
2,437


$
2,332


$
(8,425
)  72




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##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2008


2007


2006(In thousands)Current:Domestic

$
865


$
97


$
560Foreign


65



45



$
930


$
142


$
560Deferred:Domestic










Foreign


















Total

$
930


$
142


$
560     Year Ended December 31,2008


2007


2006Income tax at statutory rate


34.0
%


34.0
%


34.0
%State taxes, net of federal benefit


1.6



1.1



Non-deductible in-process research and development


18.4







Non-deductible stock compensation costs


10.4







Alternative minimum tax


33.0



2.5



6.6Change in valuation allowance


(228.6
)


(160.4
)


(140.0
)Foreign net operating losses not benefited


166.0



129.0



106.0Other


3.4



(0.1
)


Total


38.2
%


6.1
%


6.6
%     As of December 31,2008


2007(In thousands)Deferred tax assets:Tax credits


4,481


$
5,987Net operating loss carryforwards


6,340



3,092Capitalized research and development


85



115Depreciation and amortization


3,610



2,834Stock compensation


2,372



714Other


1,485



1,011Gross deferred tax assets


18,373



13,753Less: valuation allowance


(14,430
)


(13,753
)Net deferred tax assets


3,943



Deferred tax liabilities:Other


(3,943
)


Net deferred tax assets

$



$
  73




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
               74




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for
    Uncertainty in Income Taxes
  and/or and/or
    Year Ended December 31,2008


2007(In thousands)Balance at beginning of the year

$
3,574


$
3,264Gross increases related to prior years tax positions


147



40Gross increases related to current years tax positions


312



270Settlements






Expiration of the statute of limitations for the assessment of
    taxes






Balance at the end of the year

$
4,033


$
3,574         10.
    Retirement
    Plan   75




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  11.
    Segment
    Information  Disclosures About Segments of an
    Enterprise and Related Information
    Year Ended December 31,2008


2007


2006(In thousands)United States

$
44,787


$
32,748


$
19,483Japan


11,559



2,732



2,612Taiwan


11,533



10,500



7,403China


6,206



3,367



2,290Other countries


12,524



4,856



2,417Total

$
86,609


$
54,203


$
34,205   12.
    Commitments
    and Contingencies     76




---



##### Table of Contents



CAVIUM
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Capital Leaseand TechnologyLicense


OperatingObligations


Leases


Total(In thousands)2009

$
2,862



1,835


$
4,6972010


2,039



1,886



3,9252011


144



1,646



1,7902012






1,042



1,0422013






281



281thereafter










$
5,045


$
6,690


$
11,735Less: Interest component


(310
)Present value of minimum lease payment


4,735Less: current portion


(2,619
)Long-term portion of obligations

$
2,116       
    One of the license agreements, which was entered into in June
    2007, is with Cadence Design Systems for its electronic design
    automation software that is used in the design of the
    Companys products. The term of the license is two years
    and it expires in June 2009. As of December 31, 2008,
    $690,000 of the total $920,000 due under this license agreement
    was paid.
    A second license agreement is with MIPS Technologies, Inc.,
    which includes a non-exclusive, non-transferable right to
    develop multiple licensed MIPS cores that implement the MIPS
    architecture. This second license agreement required the Company
    to pay $1.9 million after the completion of its IPO for an
    automatic two-year extension of the license. The term of the
    license, including the two-year extension, is seven years and
    expires in December 2010. As of December 31, 2008, there
    are no remaining payments due under this license agreement.
    A third license agreement, which was entered into in October
    2007, with Synopsys was for certain design tools totaling
    $7.0 million, with 12 installment payments. The term of the
    license is three years which will expire in October 2010. The
    present value of the installment payments has been capitalized
    and is amortized over three years, and included within capital
    lease and technology license obligations on consolidated balance
    sheets. As of December 31, 2008, $2.9 million of the
    total $7.0 million due under the license agreement was paid.
    A fourth license agreement, which was entered into in October
    2008, with Synopsys was for certain design tools totaling
    $575,000. The term of the license is three years which will
    expire in October 2011. As of December 31, 2008, $48,000
    due under the license agreement was paid. 77




---



##### Table of Contents



Schedule II 
    Valuation and Qualifying Accounts and Reserves  Balance at








Balance atBeginning








End ofDescription

of Period


Additions


Deductions


Period(In thousands)Year ended December 31, 2008Allowance for doubtful accounts

$
38


$



$
(4
)

$
34Allowance for customer returns


139



70



(40
)


169Income tax valuation allowance


13,136



1,294







14,430Year ended December 31, 2007Allowance for doubtful accounts

$
68


$



$
(30
)

$
38Allowance for customer returns


34



434



(329
)


139Income tax valuation allowance


19,078







(5,942
)


13,136Year ended December 31, 2006Allowance for doubtful accounts

$
73


$
55


$
(60
)

$
68Allowance for customer returns


37



123



(126
)


34Income tax valuation allowance


23,474







(4,396
)


19,078    78




---



##### Table of Contents



Item 9.
    Changes
    In and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  Rules 13a-15(f) 15d-15(f)
      Changes
    in Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 79




---



##### Table of Contents



Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e) Form 10-K.
  Item 9B.
    Other
    Information   PART III  Form 10-K Form 10-K,
  Item 10.
    Directors,
    Executive Officers and Corporate Governance  Form 10-K,
      http://investor.caviumnetworks.com.
  Item 11.
    Executive
    Compensation.     80




---



##### Table of Contents



Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.      Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accounting Fees and Services.   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules      1.

Financial Statements:


46See Index to Financial Statements in Item 8 of this Annual
    Report on Form 10-K, which is incorporated herein by reference.2.

Financial Statement Schedule:


78Schedule II  Valuation and Qualifying Accounts
    and Reserve3.

Exhibits:


83The exhibits listed in the accompanying index to exhibits are
    filed or incorporated by reference as a part of this Annual
    Report on Form 10-K.  81




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##### Table of Contents



SIGNATURES      By
    /s/  Syed
    Ali     By
    /s/  Arthur
    Chadwick       Signature

Title

Date/s/  Syed
    AliSyed
    Ali

President, Chief Executive Officer and Director (Principal
    Executive Officer)

March 2, 2009/s/  Arthur
    ChadwickArthur
    Chadwick

Chief Financial Officer, Vice President of Finance and
    Administration and Secretary (Principal Financial and
    Accounting Officer)

March 2, 2009/s/  Kris
    ChellamKris
    Chellam

Director

March 2, 2009/s/  John
    JarveJohn
    Jarve

Director

March 2, 2009/s/  Anthony
    PantusoAnthony
    Pantuso

Director

March 2, 2009/s/  C.N.
    ReddyC.N.
    Reddy

Director

March 2, 2009/s/  Anthony
    ThornleyAnthony
    Thornley

Director

March 2, 2009  82




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##### Table of Contents



EXHIBIT INDEX  Incorporated by ReferenceExhibit



Schedule/

File



FilingNumber

Description

Form

Number

Exhibit

Date3
.1*

Amended and Restated Certificate of Incorporation of the
    Registrant3
.2

Amended and Restated Bylaws of the Registrant

S-1/A

333-140660

3.5


4/13/20074
.1

Reference is made to exhibits 3.1 and 3.24
.2

Form of the Registrants Common Stock Certificate

S-1/A

333-140660

4.2


4/24/20074
.3

Third Amended and Restated Investors Rights Agreement,
    dated December 8, 2004, as amended on October 25, 2005
    and August 9, 2006, by and among the Registrant and certain
    of its security holders

S-1

333-140660

4.3


2/13/200710
.1

Form of Indemnity Agreement to be entered into between the
    Registrant and its directors and officers

S-1

333-140660

10.1


2/13/200710
.2

2001 Stock Incentive Plan and forms of agreements thereunder

S-1

333-140660

10.2


2/13/200710
.3*

2007 Equity Incentive Plan10
.4

Form of Option Agreement under 2007 Equity Incentive Plan

10-Q

001-33435

10.24


5/2/200810
.5

Form of Option Grant Notice and Form of Exercise Notice under
    2007 Equity Incentive Plan

S-1

333-140660

10.4


2/13/200710
.6

Form of Restricted Stock Unit Award under 2007 Equity Incentive
    Plan

10-Q

333-33435

10.25


8/8/200810
.7*

Restricted Stock Unit Retention Plan10
.8

Executive Employment Agreement, dated January 2, 2001,
    between the Registrant and Syed Ali

S-1

333-140660

10.5


2/13/200710
.9*

Amendment to Executive Employment Agreement, dated
    December 24, 2008, between the Registrant and Syed Ali10
.10

Employment Offer Letter, dated December 27, 2004, between
    the Registrant and Arthur Chadwick

S-1

333-140660

10.6


2/13/200710
.11

Employment Offer Letter, dated January 22, 2001, between
    the Registrant and Anil K. Jain

S-1

333-140660

10.7


2/13/200710
.12*

Amendment to Offer Letter, dated December 24, 2008, between
    the Registrant and Anil Jain10
.13

Employment Offer Letter, dated May 6, 2003, between the
    Registrant and Rajiv Khemani

S-1

333-140660

10.8


2/13/200710
.14

Employment Offer Letter, dated May 1, 2008, between the
    Registrant and Sandeep Vij

10-Q

001-33435

10.23


5/2/200810
.15*

Amendment to Offer Letter, dated December 23, 2008, between
    the Registrant and Sandeep Vij 83




---



##### Table of Contents



Incorporated by ReferenceExhibit



Schedule/

File



FilingNumber

Description

Form

Number

Exhibit

Date10
.16

Letter Agreement, dated November 4, 2005, between the
    Registrant and Kris Chellam

S-1

333-140660

10.9


2/13/200710
.17

Letter Agreement, dated September 1, 2006, between the
    Registrant and Anthony Thornley

S-1

333-140660

10.10


2/13/200710
.18

Lease Agreement, dated April 15, 2005, between the
    Registrant and MB Technology Park, LLC

S-1

333-140660

10.11


2/13/200710
.19

First Amendment to Lease Agreement, dated March 6 2008, between
    the Registrant and MB Technology Park, LLC

10-K

001-33435

10.12


3/10/200810
.20

Letter Agreement, dated March 15, 2007, between the
    Registrant and AVM Capital, L.P.

S-1/A

333-140660

10.20


3/16/2007#10
.21

Master Technology License Agreement, dated December 30,
    2003, between the Registrant and MIPS Technologies, Inc.

S-1/A

333-140660

10.21


4/6/200710
.22

Asset Purchase Agreement by and between Cavium Networks, Inc.,
    Cavium International, Cavium (Taiwan) Ltd., and Star
    Semiconductor Corporation, dated July 15, 2008

8-K

001-33435

10.1


7/16/200810
.23

Agreement and Plan of Merger and Reorganization by and between
    Cavium Networks, Inc., WWC Acquisition Corporation, WWC I,
    LLC, and W&W Communications, Inc., dated November 19,
    2008

8-K

001-33435

10.26


11/20/200821
.1*

Subsidiaries of the Registrant23
.1*

Consent of PricewaterhouseCoopers LLP, independent registered
    public accounting firm31
.1*

Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002 of Syed B. Ali, President and Chief Executive Officer31
.2*

Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002 of Arthur D. Chadwick, Chief Financial Officer32
.1*

Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002 of Syed B. Ali, President and Chief Executive Officer
    and Arthur D. Chadwick, Chief Financial Officer     *
    
    Filed herewith#
    
    Confidential treatment has been requested with respect to
    certain portions of this exhibit. Omitted portions have been
    filed separately with the Securities and Exchange Commission.
    
    Management contract or compensatory plan or arrangement. 84