SecProbe.io

CORRESP
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corresp

May 31, 2006

Via EDGAR

Securities and Exchange Commission

One Solution Place

100 F Street, N.E.

Washington, D.C. 20549-4561

    Attn:

    Chris White

    Craig Wilson

    Re:

    Network Appliance

    Review of Form 10-K for the fiscal year ended April 30, 2005, filed on July 8, 2005,

    and Forms 8-K, filed August 17, 2005 and November 16, 2005

    File No. 000-27130

Ladies and Gentlemen:

     Network Appliance (the “Company”) submits this letter in response to comments from the Staff
of the Securities and Exchange Commission (the “Staff”) received by letter dated April 28, 2006
relating to the Company’s Form 10-K for the fiscal year ended
April 30, 2005, filed July 8, 2005,
and Forms 8-K filed on August 17, 2005 and November 16, 2005.

     In this letter, we have recited the comments from the Staff in italicized, bold type and have
followed each comment with the Company’s response.

    Form 10-K for the Fiscal Year Ended April 30, 2005

    Item 7. Management’s Discussion and Analysis of Finance Condition and Results of
Operations

    Overview, page 33

    1.

    Tell us what consideration you gave to disclosing key indicators of financial
condition and operating performance pursuant to Section III.B.1 of SEC Release. 33-8350,
Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition
and Results of Operations. As a part of your response, clarify the key variables and other
qualitative and quantitative factors you have identified that are necessary to understand
and evaluate your company.

    The Company considers the disclosure of key indicators of financial condition and operating
performance as a part of its disclosure controls associated with the
preparation and review of periodic reports filed with the Commission.

    In addition, the Company advises the Staff that the key indicators of financial condition
and operating performance disclosed in its Form 10-K include many of the same indicators
management reviews in assessing the financial performance of its business and discusses in
its analyst calls and investor presentations. The key indicators for which management
reviews levels and trends include:

    •

    Product, software subscription and service revenues

    •

    Product and service margins

    •

    Operating expenses

    •

    Other income/expense

    •

    Net profits

    •

    Tax rate

    •

    Cash flows

    •

    Balance sheet metrics (Cash balances, Days Sales Outstanding and inventory turns)

    The Company has also included qualitative disclosures about the industry and its business
including a discussion regarding consolidation in the storage industry. The Company’s
strategic investments are targeted to strong growth areas in the storage market such as
modular storage, data protection and grid computing. Further, the Company discussed
pricing declines in the industry which could have had an adverse impact on margins if not
offset by sales of software products and/or higher ASPs (Average Selling Prices). The
Company also discussed supplier constraint issues affecting the industry and the Company’s
response to such constraints.

    The Company will continue to review its disclosures to ensure that management’s key
financial indicators are disclosed and discussed in its financial filings.

    Critical Accounting Estimates and Policies, page 36

    2.

    Your critical accounting policies should describe more fully your estimates and
assumptions that are highly uncertain or susceptible to change and the related material
impact on financial condition of operating performance. Disclosure should be considered
as to why they bear risk of change, how you arrived at the estimate, accuracy of the
estimate/assumption in the past, how they have changed, and reasonably likely future
changes. For further disclosure guidance see Financial Reporting Release No. 60,
Cautionary Advice Regarding Disclosure About Critical Accounting Policies and Release No.
34-45907, Proposed Rule: Disclosure in Management’s Discussion and Analysis about the
Application of Critical Accounting Policies.

    The Company acknowledges the Staff’s comment. The Company will continue to assess the
appropriateness of its disclosures of Critical Accounting Estimates and Policies,
particularly with respect to those estimates and assumptions which are highly uncertain or
susceptible to change. The Company will also continue to review Financial Reporting Release No. 60 and make any appropriate changes in the filing of
its upcoming Form 10-K expected to be filed in early July 2006.

    New Accounting Standards, page 40

    3.

    Your disclosure states that the adoption of SFAS 123R will have a “significant impact
on our consolidated financial statements.” Tell us what consideration you gave to
disclosing the impact that is expected to have on your financial statements pursuant to
SAB Topic 11M with respect to the following:

    •

    A discussion of the quantitative impact that adoption of the standard is
expected to have on the financial statements, unless not known or reasonably
estimable and in that case include a statement to that effect.

    •

    Disclosure of the potential impact of other significant matters that you
believe might result from the adoption of the standard (such as technical
violation of debt covenant agreements, planned or intended changes in business
practices, etc.)

    The Company advises the Staff that, at the time of this disclosure, the Company had not
completed its analysis of the impact of adopting SFAS 123R. The Company based its
assessment of significance on the size of its pro-forma compensation expense, which
amounted to $81.7 million for the year ended April 30, 2005. As the Company is not
required to adopt this new standard until its first fiscal quarter of 2007, we have only
recently begun analyzing the provisions of SFAS 123R. We are still assessing the impact
and will complete the assessment at the end of our first fiscal quarter of 2007.
However, we anticipate that our disclosures in our Annual Report on Form 10-K for the year
ended April 30, 2006 will contain disclosures similar to other companies in their quarter
before adoption. The Company is not aware of any other changes in business practices and
does not expect any violations of debt covenants due to the adoption of SFAS 123R.

    Fiscal 2005 Compared to Fiscal 2004

    Product Revenues, page 42

    4.

    You disclose that “increase in product revenues was specifically attributable to
increased software licenses and software subscriptions and an increase in units shipped.”
You also disclose on page 42 that product revenues were negatively affected by
lower-cost-per-megabyte disk and declines both in average selling prices and older product
unit sales. Tell us your consideration of Regulation S-K,

    Item 303(a) (3) (ii) and (iii), which require you to disclose any known trends or uncertainties that have had or that you
reasonably expect will have a material favorable or unfavorable impact on net sales or
revenues or income from continuing operation. Address in your response the extent to
which increases in revenues are attributable to increases in prices, the volume of goods or
services being sold, or to the introduction of new products or services. In this respect
we believe you should quantify the impact of the favorable and negative factors that affect
product revenues. See Item 303 of Regulation S-K and the “Commission Guidance Regarding
Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
Release 33-8350 for further disclosure guidance.

    We consider the requirement to disclose known trends and uncertainties that could have a
material impact on our results of operations, as required by Item 303 of Regulation S-K and
the Staff’s interpretive guidance, as an integral part of our disclosure controls. These
factors are carefully considered by management and our disclosure committee in preparing
our periodic reports, and such factors are reviewed with our Audit Committee in connection
with our disclosure processes.

    In response to the Staff’s request, please be advised that increases in product revenues
during fiscal 2005 were primarily attributable to an increase in units shipped of our
current products plus increased sales of software licenses. The increase in units shipped
and licenses sold was due to increased demand for the Company’s products including sales
through indirect channels (resellers, distributors and OEM partners). Service revenues
grew due to our increasing installed base and demand for longer-term service packages and
renewals of support contracts by existing customers.

    As requested by the Staff, we will continue to evaluate and disclose as appropriate the
quantification of positive and negative factors affecting product revenues. We will also
identify and address those key variables and other qualitative and quantitative factors
necessary for an understanding of our results of operations, and provide readers a view of
the company through the eyes of management.

    5.

    You also disclose 2005 to 2004 material changes in Service Revenues, International
total revenues and Product Gross Margin. In addition, you state that product gross margin
was favorably affected by “favorable product and add-on software mix” and negatively
affected by “increased sales through certain indirect channels, which typically carry a
lower gross margin than our direct sales.” When discussing material changes and the
impact of positive and negative factors, your analysis should provide the underlying
reasons or implications of changes and factors and the financial implications of any
trends events or uncertainties. See Item 303 of Regulation S-K and the “Commission
Guidance Regarding Management’s Discussion and Analysis of Financial

    Condition and Results of Operations,” Release 33-8350 for further disclosure guidance.

    The Company acknowledges the Staff’s comment. The Company will continue to consider and
disclose as appropriate its disclosures regarding material changes and the impact of
positive and negative factors to ensure we provide the underlying reasons and implications of any changes as well as the financial ramifications
of any events or uncertainties.

    Note 2. Significant Accounting Policies

    Revenue Recognition and Allowance, page 65

    6.

    We note you derive a significant portion of your sales from the resale of disk drives as
components of your storage system from your disclosure on page 25. This and other
disclosure noted in your filings indicates that your product revenue includes a hardware and
software element. For example we note the “add-on software” related to sales of your
current product portfolio as disclosed on page 42. Tell us how you considered EITF Issue
No. 03-5 when determining whether the non-software deliverable included in your arrangement
(hardware, hardware installation and hardware maintenance) are software related and included
in the scope of SOP 97-2.

    The Company advises the Staff that, as noted in its comment, our product revenue includes
both hardware and software. At the time of sale, we also offer our customers the option to
purchase:

    •

    hardware installation services; and

    •

    premium hardware maintenance service above our standard hardware warranty, which
provides either quicker replacement part delivery times, on-site technicians to
perform the hardware replacements, or both;

    The following discussion addresses our evaluation of whether the hardware, hardware
installation, and premium hardware maintenance elements of our arrangements are subject to
SOP 97-2:

    Hardware

    Our enterprise storage products consist of our server and our network storage devices. Our
server is a proprietary design which combines commodity hardware components and
proprietary operating system/database protocol software. (We do not sell this software to
operate on systems manufactured by other companies, nor do other manufacturers sell
operating system software to operate on our servers.) Our storage devices combine OEM
storage devices, such as disk drives, with proprietary connection hardware and software in
order to operate with our server. (As sold, these storage devices will only function when
connected to our server.) Customers typically purchase a server and one or more storage
devices. In order to expand their storage capacity, depending on their initial hardware
configuration, customers may need to purchase both an additional
server and storage device, or only additional storage devices. While our hardware primarily consists of
commodity-based components, our software provides the functionality for its intended use, and our storage devices operate only when attached to our server.

    Paragraph 2 of EITF 03-5, Applicability of AICPA Statement of Position 97-2 to Non-Software
Deliverables in an Arrangement Containing More-Than-Incidental Software indicates ”...if
the software is essential to the functionality of the hardware, the hardware would be
considered software-related and therefore, included within the scope of 97-2.” Our
firmware and operating software are essential to the functionality of our storage devices.
Accordingly, we believe that SOP 97-2 applies to the hardware servers and storage
devices we sell.

    Hardware Installation Services

    We offer hardware installation services to our customers. Our software comes preloaded on
our hardware at the time of shipment, so no software installation service is required.
Only 35% of our customers elect to use our hardware installation service. All of our other
customers choose to perform the installation themselves or make use of other third parties.

    Paragraph 2 of EITF 03-5 states that “Software-related elements include software products
and services such as those listed in paragraph 9 of SOP 97-21 as well as any
non-software deliverables(s) for which a software deliverable is essential to its
functionality.” We believe that hardware installation is a non-software deliverable
because the software is not essential to the functionality of the installation service,
which consists principally of installing the various hardware units in rack mounts and
cabling the components together, and therefore is outside the scope of SOP 97-2.
Accordingly, we have applied the provisions of SAB Topic 13 to the hardware installation
services. We have concluded that our installation services are an inconsequential and
perfunctory obligation under SAB Topic 13 because:

    •

    Installation is not essential to the functionality of our hardware.

    1

    Paragraph 9 of SOP 97-2 states:

    Software arrangements may provide licenses for multiple software deliverables (for example, software products, upgrades/enhancements, PCS, or services), which are termed multiple elements. A number of the elements may be described in the arrangement as being deliverable only on a when-and-if-available basis. When-and-if-available deliverables should be considered in determining whether an arrangement includes multiple elements. Accordingly, the requirements of this SOP with respect to arrangements that consist of multiple elements should be applied to all additional products and services specified in the arrangement, including those described as being deliverable only on a when-and-if-available basis.

    •

    Installation does not involve significant changes to the features or
capabilities of the equipment nor does it require building complex interfaces or
connections.

    •

    Much of the work covered by our installation fee, such as
customer site
inspection, configuration and rack mounting and kitting of cables and other
accessories, is done prior to shipment; the time to finalize the installation service following shipment to t