SecProbe.io

CORRESP
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corresp

April 6, 2007

Via FedEx: 7902.1876.4634

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, Inc.

    Review of Form 10-K
for the fiscal year
ended April 30, 2005,
Form 10-K for the
fiscal year ended
April 30, 2006, and Form 10-Q for the
Quarterly Period Ended
July 28, 2006, Form
10-Q for the Quarterly
Period Ended October
27, 2006

    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 February 7, 2007
relating to the Company’s Form 10-K for the fiscal year ended April 30, 2005, Form 10-K for the
fiscal year ended April 30, 2006, and Form 10-Q for the quarterly period ended July 28, 2006 and
Form 10-Q for the quarterly period ended October 27, 2006.

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.

    Your response to prior comment number 1 indicates that you will consider further
discussion of estimates and/or judgments that you apply when determining whether you have
established VSOE of fair value for the undelivered elements in your arrangements. We note
that you have not included any additional disclosure about such estimates and/or judgments
in your Form 10-Q for the quarterly period ended October 27, 2006 (which was filed on
December 6, 2006). However, your response to comment number 2 from your letter dated
August 31, 2006 stated that you apply material estimates and/or judgments in determining
whether VSOE can be established for the undelivered elements in your arrangements. Based
on your response to comment number 2 from your letter dated December 21, 2006, it appears
that material estimates and judgments are involved in your analysis of the concentration
of pricing of separate sales in determining whether VSOE of fair value of your undelivered
elements exists. Please confirm that you will discuss in future filings what appear to be
these material estimates and 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 that we have revised our Significant Accounting Policies and Use of
Estimates in our Form 10-Q as follows:

    If the arrangement contains both software-related and non-software-related elements,
we allocate revenue to the non-software elements based on objective and reliable
evidence of fair value in accordance with Emerging Issues Task Force (“EITF”) 00-21,
Revenue Arrangements with Multiple Deliverables. Non-software elements are items for
which the functionality of the software is not essential to its performance; the
non-software-related elements in our arrangements may consist of storage optimization
reviews (which are sold only within a bundled service offering that also contains
software-related services), technical consulting, and/or installation services. For
undelivered software-related elements, we apply the provisions of SOP No. 97-2 and
determine fair value of these undelivered software-related elements based on
vendor-specific objective evidence which for us consists of the prices charged when
these services are sold separately. To determine the fair value of our
undelivered elements, we analyze both the selling prices when the elements are sold
separately as well as the concentrations of those prices. We believe these
concentrations have been sufficient to enable us to

Page 2

    establish VSOE or objective and reliable evidence of fair value for the
undelivered elements. If VSOE or objective and reliable evidence cannot be
obtained to establish fair value of the undelivered elements, revenue from the entire
arrangement would be deferred and recognized once these elements are delivered or
fair value is established.

     Note 2. Significant Accounting Policies

     Revenue Recognition and Allowances, page 65

    2.

    We note your response to prior comment number 2 with respect to your policy for
establishing fair value of the undelivered elements in your arrangements and are in the
process of reviewing your response. We further note the information being analyzed in
your response relates to your population of separate sales (i.e. renewals) in fiscal year
2005 as originally provided in your May 31, 2006 letter. Please update the analysis
provided in the Appendix to your May 31, 2006 letter for your separate sales in fiscal
year 2006. That is, please provide the fiscal year 2006 information demonstrating that
you have established VSOE of the fair value of the software PCS and bundled premium
hardware maintenance/PCS elements and objective and reliable evidence of the fair value of
the bundled storage reviews/premium hardware maintenance/PCS for both your top enterprise
accounts and your non-top enterprise accounts.

    See attached appendix 1.

    3.

    Your response to prior comment number 3 states 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 your reference to the interpretive
guidance of the Miller Revenue Recognition guidance cited in your August 31, 2006 letter.
Please clarify how you have considered other interpretive guidance when determining that
the guidance in the Miller Revenue Recognition guide is the appropriate interpretive
guidance to apply to your arrangements based on your facts and circumstances. In addition
tell us how the application of other interpretive guidance would impact the allocation and
recognition of the elements in this bundled unit of accounting. Tell us how you
considered an interpretation that suggests revenue recognition of the combined unit of
accounting based on the revenue recognition guidance otherwise applicable to the
predominant deliverable in the unit of accounting. Please clarify how the application of
this interpretation would impact the allocation and recognition of the elements in your
bundled unit of accounting.

Page 3

    The Company advises the Staff that it considered other interpretive guidance as well as the
Miller Revenue Recognition Guide (the Miller Guide) in determining the appropriate
accounting for multiple element arrangements when Software PCS, premium hardware
maintenance and storage review services are sold as a combined bundle. As discussed in our
previous response, we have concluded that the Software PCS, premium hardware maintenance
and storage review services represent a combined unit of accounting. Based on our review,
we considered the following two questions:

    First, should the storage reviews be considered insignificant and excluded from the
consideration of the accounting for the undelivered elements? Ernst & Young’s publication
entitled, “Revenue Arrangements with Multiple Deliverables – EITF Issue No. 00-21” (EY’s
guidance) indicated that, if the deliverable were assessed as “so insignificant”, it would
not be considered as a deliverable for applying the provisions of EITF 00-21 and that no
revenue should be allocated to that deliverable.1 However, KPMG’s publication
entitled “Accounting for Revenue Arrangements with Multiple Deliverables – An Analysis of
EITF Issue 00-21” indicated that minor deliverables could not be excluded from the
provisions of EITF 00-21.2 The Miller Revenue Recognition Guide does not
explicitly address this issue.

    Because the storage review services represent 20% of the fair value of the combined bundle,
we concluded these services could not be considered “so insignificant” and believe they
must be considered as a deliverable in applying the provisions of EITF 00-21. As can be
seen in the data provided in Appendix I, there are little differences between the weighted
average discounts from our list prices when storage reviews are included or excluded from a
bundled element at time of renewal; these differences were only 4.0% and 2.6% for non-TEA
[Top Enterprise Account] and TEA customers, respectively, in FY 05 and 2.6% and 4.1% in FY
06, respectively. The similarity in discounting when storage reviews are included or
excluded in the renewal bundle indicates that the customer thoroughly considers the
decision to purchase a bundle that contains storage review services; they do not consider
such services as a “free” or insignificant service. Accordingly, we do not believe it is
appropriate to consider the storage

    1

    8-1 Question: Are there instances in which a
deliverable is identified, but should not be evaluated under Issue 00-21?
Response: Generally, all deliverables within an arrangement should be evaluated
to determine if they should be accounted for as separate units of accounting.
However, there may be situations in which an item included in an arrangement
is, at the inception of the arrangement, assessed as so insignificant to the
overall arrangement that consideration of it as a separate deliverable is not
warranted from a cost/benefit perspective. In such situations, no revenue is
allocated to the insignificant deliverable and its status as a delivered or
undelivered item does not effect the determination of whether other
deliverables included in the arrangement should be considered separate units
of accounting. In essence, such an item is not considered a deliverable when
applying the provisions of Issue 00-21.

    2

    Question 9.2 — Can minor deliverables be
excluded from the guidance in EITF 00-21? Answer 9.2 – No. The consensus
should be applied to all deliverables in the arrangement......

Page 4

    review services as so insignificant that it may be ignored as a deliverable under our
analysis of EITF 00-21.

    Secondly, we considered whether the revenue recognition for the combined unit of accounting
should be based on the accounting for the “predominant deliverable.” Question 10-1 of EY’s
guidance contained the only reference to the concept of a predominant deliverable:

    Question: How should revenue be recognized when deliverables included in an
arrangement are accounted for as one unit of accounting?

    Response: Determining the appropriate revenue recognition model to follow when
multiple deliverables do not meet the separation criteria pursuant to Issue 00-21,
and therefore should be treated as a combined unit of accounting, requires the use
of professional judgment and is dependent on the relevant facts and
circumstances....The presumption that the final deliverable revenue recognition model
should be applied may be overcome based on the facts and circumstances of the
arrangement. For example, it may be inappropriate to apply a revenue recognition
model based on the final deliverable included in the arrangement when one
deliverable included in the arrangement clearly comprises the majority of the value
of the overall combined unit of accounting (that is, it is the predominant
deliverable included in the arrangement). In such cases, it may be appropriate to
recognize revenue for the combined unit of accounting based on the revenue
recognition guidance otherwise applicable to the predominant deliverable. [emphasis
added]

    We concluded that the EY guidance was not applicable in our situation because the context
in which the EY guidance proposes the use of the predominant deliverable method is as an
alternative to the final deliverable recognition model; that is, in situations where all
revenue would otherwise be deferred in total until the final deliverable occurred. The
Miller Guide also suggests the final deliverable model is the appropriate recognition model
for a combined unit of accounting when elements did not qualify for separation because of a
lack of objective and reliable evidence of fair value. Furthermore, the Miller Guide does
not specify the predominant deliverable model as an alternative (see page 4.52). In the
Company’s case, all of the deliverables in its combined unit of accounting – software PCS,
premium hardware maintenance and storage review services, are delivered over
contemporaneous periods and all three elements should be recognized using a straight-line
method over the same period. Unlike the EY guidance, the Miller Guide specifically
addresses the appropriate accounting model when SOP 97-2 elements are combined with non-SOP
97-2 elements in one unit of accounting. Since our arrangements include non-SOP 97-2
elements as well as SOP 97-2 elements we concluded that the guidance in the Miller Guide
that specifically addresses these types of arrangements is the most relevant guidance to
our arrangements.

Page 5

    Based on our conclusions, we did not consider an interpretation that would have excluded
storage review services from the determination of the appropriate revenue recognition model
for this combined unit of accounting. Such an interpretation may require the application
of SOP 97-2 to this bundled unit of accounting. Had we reached the conclusion that 97-2
should be applied to this bundled unit of accounting, the following additional procedures
would be required:

    •

    Because 97-2 requires VSOE for all undelivered elements, we would have
evaluated whether our current data was sufficiently concentrated to conclude
whether or not we had VSOE for the combined undelivered element which included
storage reviews for any of our reporting periods.

    •

    If we did not have VSOE for this combined undelivered element for certain
reporting periods, we would have performed further analysis of our separate sales
information to determine whether there were subgroups of customers within each of
the two categories previously identified (TEA and other) that had sufficient
concentrations to conclude that we had VSOE for some or all of these subgroups.

    •

    In the event that there were categories for which we concluded that VSOE was
required and had not been established, then, in accordance with SOP 97-2, hardware
and software revenue for each of the arrangements within those subgroups would be
initially deferred and recognized ratably over the service period; in addition,
certain direct incremental costs related to these arrangements may qualify to be
capitalized and amortized over the service period.

    •

    In order to identify how much revenue should be deferred and costs capitalized,
an invoice-by-invoice analysis would be required to identify those systems sales
which included storage review services as part of the arrangement.

    This represents a significant and time consuming exercise which we have not performed and
therefore are unable to quantify the impact of this interpretation; however we make the
following observations:

    •

    As noted in our May 31, 2006 letter to the Staff, approximately 25% of our FY
2005 system sales included storage system reviews; as a result, if it were
determined that VSOE were required and not been established for all of our
arrangements which contained storage system reviews, the impact would be a
substantial reduction in reported product revenues for FY 05, which would be
amortized into product revenues in future years.

    •

    As can be seen from the data at Appendix I, the pricing obtained for bundled
elements which included storage system reviews became more concentrated in FY 06.
In addition, the pricing also fell within the VSOE ranges previously discussed
with the Staff (i.e., 76% of non-TEA and 79% of TEA pricing was within 15% above
or below the midpoint of the

Page 6

    range). Therefore, a s