SecProbe.io

CORRESP
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corresp

December 21, 2006

Via FedEx: 7906.3474.4880

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 November 15, 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.

Page 1

     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

     Critical Accounting Estimates and Policies, page 36

    1.

    We note the planned revisions to your critical accounting estimates and policies in
response to prior comment number 2. Your response indicates there are material estimates
and/or judgments in determining whether VSOE can be established for the undelivered
elements in your arrangements. Consider revising future filings to discuss these
estimates and/or judgments and the assumptions you apply when determining that you have
established VSOE of fair value for the undelivered elements in your arrangements .

    The Company advises the Staff in future filings we will consider further discussion of
estimates and/or judgments and assumptions that we apply.

     Note 2. Significant Accounting Policies

     Revenue Recognition and Allowances, page 65

    2.

    We note your response to prior comment number 8, which indicates that you are not
aware of any authoritative accounting literature that provides guidance regarding the
concentration in pricing that is required before a vendor can reasonably conclude that
VSOE of fair value exists. However, your response to comment number 7 from your May 31,
2006 letter states that you analyze separate sales transactions to determine whether your
pricing is sufficiently concentrated to enable you to establish VSOE of fair value for
your undelivered elements. We further note that “in all cases where [you] believe VSOE is
required to establish fair value, more that 75 percent above and below the midpoint of the
range that contains the highest number of separate sales transactions.” Therefore, based
on your responses, it appears your accounting policy considered the concentration of
pricing of separate sales to determine whether VSOE of fair value of your undelivered
elements exits. If this is correct, clarify why you believe your range of separate sales
and concentration of separate sales is appropriately narrow and significantly concentrated
to establish VSOE of fair value of your undelivered elements. In this respect, we note
your policy does not comply with any of the non-authoritative interpretive guidance you
referenced in your response. Please advise.

    The Company advises the Staff that its observation is correct, that we considered the
concentration of pricing of separate sales in determining whether VSOE of fair value of our
undelivered elements exists. We considered the non-authoritative interpretive guidance
cited in our previous response in establishing our accounting policies for undelivered
elements, including what constitutes an

Page 2

    acceptable concentration to determine that VSOE exists and whether VSOE should be
established as a single-point estimate or an acceptable range.

    As described in the Appendix to our May 31, 2006 letter, the four categories of separate
renewal sales which required VSOE for the undelivered elements at time of product sale had
concentrations of 77%, 78%, 84%, and 89% within a range that is 15% above and below the
midpoint of that range. We believe our methodology both 1) meets the guidelines in the
KPMG guidance of “approaching 80% of the sales transactions for that stratum” [emphasis
added] and 2) significantly exceeds the commonly recognized mathematical significance of
67%, which is the concentration used in determining the distribution of observations within
a population that fall within one standard deviation from its mean. We believe the
guidance contained in the various firms’ publications indicate there is no “bright line”
for concluding whether VSOE exists when there is variability in the prices of separate
sales. For example, in a situation where 70% of separate sales transactions were priced at
the exact same discount rate, and the remaining 30% were priced at various other discounts
that were more than 15% lower than the 70% of the transactions priced at the identical
discount, it would appear to us that VSOE of fair value using the 70% of separate sales at
the same discount could still be established in that situation. We continue to believe that
concentration levels of 75% or more within a range of 15% above and below the midpoint are
sufficient to conclude that VSOE exists to determine the fair value of our undelivered
elements.

    3.

    We note your response to prior comment number 10, which indicates that you have
concluded the combined element of software PCS, premium hardware maintenance and storage
review services are not subject to SOP 97-2, but rather subject to the general revenue
recognition principles of SAB Topic 13. Clarify how you have evaluated the significance
of the storage review services compared to the other elements in the unit of accounting
when arriving at this conclusion. That is, we note your response to comment number 7 from
your May 31, 2005 letter, which states the storage review services “represent the smallest
category sold at the time of system sales. This service had a fair value time of sale for
2005 system sales of $17 million, which represents less than 1% of consolidated revenues
of the Company and, in aggregate, 5% of the value of the total undelivered elements at the
time of sale.” Therefore, please clarify why you believe it is appropriate to conclude
that your least significant element in your combined unit of accounting should dictate the
accounting literature you should apply to the unit of accounting.

    The Company advises the Staff that storage review services represent approximately 20% of
the fair value of the undelivered services when storage reviews are included in the bundled
element purchased by our customers, which represents a significant component of those
arrangements. The $17 million of revenues and the related percentages noted for our
storage review services arise

Page 3

    because, for fiscal 2005, the amount of combined software PCS, premium hardware maintenance
and storage review service bundles represented approximately 30% of the total dollar amount
of bundled arrangements purchased by our customers at the time of initial system sale.
However, for those bundled arrangements which included storage review services, the
estimated relative fair value of the storage review services represented approximately 20%
of the total fair value of the undelivered elements within the bundle (i.e., software PCS,
premium hardware maintenance, and storage review services) based on our list prices. (We
discuss in more detail our basis for using list price to determine relative fair value in
our response to comment 5 below.)

    We believe (as discussed in more detail in our response to comment 4 below) that storage
optimization reviews are not software or software-related, and therefore not subject to
97-2. Our August 31, 2006 response to comment 10 described the reasons we believe the
software PCS, premium hardware maintenance and storage review bundle could not be separated
under EITF 00-21 between its SOP 97-2 software and software-related elements and non-SOP
97-2 elements. We note that the storage review services represent an element of the
combined unit of accounting that is not insignificant based on the estimated relative fair
value of approximately 20% of the fair value of the undelivered bundled arrangement. We
further note that the Miller Revenue Recognition guidance cited in our August 31, 2006
letter1 indicates the inclusion of any non-SOP 97-2 elements would prohibit the
application of SOP 97-2 to the combined unit of accounting. Accordingly, we believe that
EITF 00-21 is the appropriate guidance to apply to determine the fair value of these
bundled arrangements.

    4.

    Further clarify how you determined software is not essential to the functionality of
these storage review services and hence, that the storage review services are not
software-related pursuant to EITF 03-5. In this respect, we note from your response to
prior comment number 10 that these services include monitoring and data collection
activities. Please expand your description of these monitoring and data collection
activities. Clarify whether these services could be performed or rendered to your
customers without the customer’s acquisition of the software. In other words, tell us
whether your customers purchase the storage review services without purchasing the
software.

    1

    “As discussed earlier in this
chapter, separation of a multiple-element arrangement that includes SOP
97-2 software and software related elements and non-SOP 97-2 elements
should be based on the guidance in EITF 00-21. If the application of
EITF 00-21 results in a conclusion that the elements should not be
separated, then the general revenue recognition principles apply to the
bundled arrangement (for an SEC registrant, this would be SAB Topic 13).
In other words, SOP 97-2 should not be applied to determine when revenue
should be recognized since the bundled group of elements does not fall
within the scope of SOP 97-2.” (Miller Revenue Recognition Guide,
pages 10.52-53)

Page 4

    The Company acknowledges that in all cases where storage review services are performed, the
customer has purchased our proprietary operating system software. The issue, we believe,
is not whether the systems on which we perform storage reviews have our operating software,
but whether it is that operating software, or other software purchased by the customer,
which enables the monitoring and data collection activities. The Company advises the Staff
that we utilize a separate, NetApp-proprietary, software program to assist in performing
the monitoring and data collection activities which are part of our storage review
services. This software program is owned by the Company and is not available for sale to
our customers. This software program includes elements which are installed on the
customer’s hardware for the term of the service to gather performance data of the system
and transmit it electronically, as well as elements installed on NetApp-owned hardware to
receive, collect, and analyze that information. This software is the tool which enables us
to most efficiently provide the storage review services we offer. A third-party provider
of storage review services would need to develop their own data collection tools, either
manual or electronic, to perform these services.

    The software program we use to perform our data collection and monitoring efforts is not an
element that is sold with any of our product revenue transactions nor is it essential to
the functionality of the software that is an element to our product revenue transactions.
Based on these facts, we have concluded that the storage review service is not a
software-related element of our transactions and is appropriately accounted for outside the
scope of SOP 97-2.

    5.

    We note your response to prior comment number 12, which states that you present
revenue (and cost of revenue) from the bundled software subscription and premium hardware
maintenance in separate financial statement captions. Where there is a lack of fair value
among the arrangement elements, SOP 97-2 and EITF 00-21 prohibit separation of the total
arrangement fee for recognition purposes. Please explain your methodology and basis for
separation of elements in bundled arrangements within your income statement. Describe to
us other possible allocation methodologies for income statement presentation purposes that
you considered but rejected.

    The Company advises the Staff that, as noted in its previous responses, it does not have
information regarding separate sales of premium hardware maintenance or of storage review
services, and has determined the fair value of these services when sold as a bundle for
determining the fair value of these undelivered services for revenue recognition purposes.
Accordingly, the total fair value of these undelivered services is deferred and recognized
over the related service period.

    For income statement presentation purposes, we have concluded that all of these undelivered
items represent revenues from providing services, which require separate disclosure under
Regulation S-X 5-03(b)1, as discussed in more detail in

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    our response to comment 6 below. We have chosen to separate the amount of revenue that is
deferred and recognized over the service period relating to software PCS arrangements
separately from the other amounts of revenue that is recognized and included within other
service revenues. This presentation does not affect the timing of revenue recognition for
these undelivered elements (the total deferral is recognized over the same service period
for each of these elements), and therefore does not violate the guidance of either SOP 97-2
or EITF 00-21.

    In determining the amount to be separately presented for software PCS from the amounts
included in other service revenues, we considered two methods:

    •

    The residual method. As noted in our previous responses, we have VSOE for
software PCS when it is sold separately. Under the residual method, we would
calculate the amount of revenue to be deferred and amortized for all software PCS
included in initial product sales, whether sold as the only undelivered element or
when included within a combined unit of accounting, based on the VSOE fair value
rate for software PCS-only renewals; this amount would be deducted from the fair
value of the combined unit of accounting (calculated, as described in our previous
responses, based on the weighted average discount for each of the various bundled
arrangements when sold separately), and the remaining amount would be considered
the fair value of the premium hardware maintenance and storage review services and
classified as other service revenues.

    •

    The relative fair value method. As noted in our previous responses, all of our
services have stated list prices, which is the basis on which the pricing of these
services is negotiated with our customers. Under the relative fair value method,
we would use these stated list prices as the basis to determine the fair value of
the various elements sold at the time of initial product sale. For those sales
that included undelivered elements of software PCS, premium hardware maintenance
and storage review services, the overall weighted average discount used to
determine the total fair value of these combined units of accounting would be
applied against the list price of each of the elements in the combined unit to
determine their fair value.

    We also noted the guidance in paragraph 10-2 in E&Y’s booklet “Revenue Arrangements with
Multiple Deliverables — EITF Issue No. 00-21” which states in part:

    Regulation S-X, Rule 5-03(b), requires that public registrants separately present
revenues from the sale of products and revenues from providing services in the
income statement. When products and services included in an arrangement are not
separable and are a