Normal setup is straight forward. You plug the base station into a router, wait for all the lights to come on and then you visit arlo.netgear.com and follow the setup instructions - by this point the base station has connected to Netgear's cloud service and you're just associating it to your account. Security here is straightforward: you need to be coming from the same IP address as the Arlo. For most home users with NAT this works fine. I sat frustrated as it repeatedly failed to find any devices, before finally moving everything behind a backup router (my main network isn't NATted) for initial setup. Once you and the Arlo are on the same IP address, the site shows you the base station's serial number for confirmation and then you attach it to your account. Next step is adding cameras. Each base station is broadcasting an 802.11 network on the 2.4GHz spectrum. You connect a camera by pressing the sync button on the base station and then the sync button on the camera. The camera associates with the base station via WDS and now you're up and running.
This is the point where I get bored and stop following instructions, but if you're using a desktop browser (rather than using the mobile app) you appear to need Flash in order to actually see any of the camera footage. Bleah.
But back to the device itself. The first thing I traced was the initial device association. What I found was that once the device is associated with an account, it can't be attached to another account. This is good - I can't simply request that devices be rebound to my account from someone else's. Further, while the serial number is displayed to the user to disambiguate between devices, it doesn't seem to be what's used internally. Tracing the logon traffic from the base station shows it sending a long random device ID along with an authentication token. If you perform a factory reset, these values are regenerated. The device to account mapping seems to be based on this random device ID, which means that once the device is reset and bound to another account there's no way for the initial account owner to regain access (other than resetting it again and binding it back to their account). This is far better than many devices I've looked at.
Performing a factory reset also changes the WPA PSK for the camera network. Newsky Security discovered that doing so originally reset it to 12345678, which is, uh, suboptimal? That's been fixed in newer firmware, along with their discovery that the original random password choice was not terribly random.
All communication from the base station to the cloud seems to be over SSL, and everything validates certificates properly. This also seems to be true for client communication with the cloud service - camera footage is streamed back over port 443 as well.
Most of the functionality of the base station is provided by two daemons, xagent and vzdaemon. xagent appears to be responsible for registering the device with the cloud service, while vzdaemon handles the camera side of things (including motion detection). All of this is running as root, so in the event of any kind of vulnerability the entire platform is owned. For such a single purpose device this isn't really a big deal (the only sensitive data it has is the camera feed - if someone has access to that then root doesn't really buy them anything else). They're statically linked and stripped so I couldn't be bothered spending any significant amount of time digging into them. In any case, they don't expose any remotely accessible ports and only connect to services with verified SSL certificates. They're probably not a big risk.
Other than the dependence on Flash, there's nothing immediately concerning here. What is a little worrying is a family of daemons running on the device and listening to various high numbered UDP ports. These appear to be provided by Broadcom and a standard part of all their router platforms - they're intended for handling various bits of wireless authentication. It's not clear why they're listening on 0.0.0.0 rather than 127.0.0.1, and it's not obvious whether they're vulnerable (they mostly appear to receive packets from the driver itself, process them and then stick packets back into the kernel so who knows what's actually going on), but since you can't set one of these devices up in the first place without it being behind a NAT gateway it's unlikely to be of real concern to most users. On the other hand, the same daemons seem to be present on several Broadcom-based router platforms where they may end up being visible to the outside world. That's probably investigation for another day, though.
Overall: pretty solid, frustrating to set up if your network doesn't match their expectations, wouldn't have grave concerns over having it on an appropriately firewalled network.