NETWORK APPLIANCE INC, 424B1, 1999-04-01

NETWORK APPLIANCE INC
424B1, 1999-04-01
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration No. 333-74979

PROSPECTUS

2,500,000 SHARES

LOGO

COMMON STOCK

- --------------------------------------------------------------------------------

Network Appliance, Inc. is offering 2,500,000 shares. Our shares are listed on
the Nasdaq National Market under the symbol "NTAP." The last reported sales
price of our shares on the Nasdaq National Market on March 31, 1999 was $50.625
per share.

INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 4.

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ 50.50 $126,250,000
Underwriting Discount....................................... 2.02 5,050,000
Proceeds to Network Appliance, Inc. ........................ 48.48 121,200,000
</TABLE>

We have also granted the underwriters the right to purchase up to an additional
375,000 shares within 30 days to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the disclosures in this prospectus. Any representation
to the contrary is a criminal offense.

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about April 6, 1999.

- --------------------------------------------------------------------------------

LEHMAN BROTHERS
BT ALEX. BROWN
MERRILL LYNCH & CO.
WIT CAPITAL CORPORATION
AS E-MANAGER(TM)

April 1, 1999
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 4
How We Intend to Use the Proceeds.... 12
Dividend Policy...................... 12
Price Range of Common Stock.......... 13
Capitalization....................... 14
Selected Consolidated Financial
Data............................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 17
</TABLE>

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business............................. 30
Management........................... 38
Description of Capital Stock......... 41
Underwriting......................... 43
Legal Matters........................ 45
Experts.............................. 45
Where You Can Find More
Information........................ 45
Index to Consolidated Financial
Statements......................... F-1
</TABLE>

Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock,
including stabilizing bids, syndicate covering transactions or the imposition of
penalty bids. For a discussion of these activities, see "Underwriting."

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<PAGE> 3

PROSPECTUS SUMMARY

This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read this entire prospectus carefully,
including the section entitled "Risk Factors" and the consolidated financial
statements and the related notes to those consolidated financial statements
included in and incorporated by reference into this prospectus. Except as
otherwise required by the context, references in this prospectus to "we," "us,"
"our" or the "company" refer to the combined business of Network Appliance, Inc.
and its subsidiaries. The term "you" refers to prospective investors in our
common stock. The term "fiscal" used in conjunction with a year refers to our
fiscal year ended or ending on the last Friday in April of that year. This
prospectus assumes that the underwriters have not exercised the over-allotment
option and gives effect to a two-for-one stock split of our common stock
effective December 21, 1998.

OUR COMPANY

Network Appliance pioneered the concept of the "network appliance," an
extension of the industry trend toward specialized devices that perform a
specific function in the network, similar to the development of the router for
network communications. Today we are the leading supplier of network attached
data storage and access devices, called filers. Our first filer product was
specifically designed to improve the storage and accessibility of data stored on
a network. In late 1997 we introduced an Internet caching appliance, our second
product category, designed to achieve Internet bandwidth savings and to improve
performance by moving data closer to end-users. This product is designed to
benefit customers struggling with Web data traffic that is, according to market
analysts, doubling every three months. Our filers are faster, more highly
available and easier to operate than similarly configured and competitively
priced products. This filer performance is accomplished by a specialized and
patented software system optimized to exclusively perform file service tasks,
thus providing performance advantages as compared to general purpose computers
used as file servers.

Initially we marketed our filers primarily in the UNIX(R) environment in
high technology companies seeking to achieve leading edge performance.
Thereafter, we significantly expanded our market by supporting heterogeneous
Windows NT(R), UNIX and Web platforms. More recently we began marketing our
products to users of leading database software applications, such as
applications offered by Oracle Corp. and Sybase, Inc. In fiscal 1999, we
intensified our focus on the Windows NT market and entered into original
equipment manufacturer (OEM) agreements with Dell Computer Corporation and
Fujitsu Limited.
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<PAGE> 4

THE OFFERING

<TABLE>
<S> <C>
Common stock offered................. 2,500,000 shares
Common stock outstanding after the
offering(1)........................ 71,896,295 shares
Use of proceeds...................... Working capital and general corporate purposes.
See "How We Intend to Use the Proceeds."
Nasdaq National Market Symbol........ NTAP
</TABLE>

- -------------------------
(1) The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of January 29,
1999, excluding:

- 16,999,469 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $12.62 per share;

- 6,262,903 shares that are reserved for future issuance under our 1995
Stock Incentive Plan and our Special Non-Officers Option Plan; and

- 796,574 shares that are reserved for future issuance under our Employee
Stock Purchase Plan.

Our executive offices are located at 2770 San Tomas Expressway, Santa
Clara, California 95051, and the telephone number at that address is (408)
367-3000.
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<PAGE> 5

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table sets forth summary consolidated financial data as of
and for the periods indicated. The consolidated statement of operations data for
the nine months ended January 23, 1998 and January 29, 1999 and consolidated
balance sheet data as of January 29, 1999 were derived from our unaudited
condensed consolidated financial statements included elsewhere in this
prospectus, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, which we consider necessary for
a fair presentation of our financial position and results of operations for
these periods. The results of operations for the nine months ended January 29,
1999 are not necessarily indicative of the results to be expected for the full
year or future periods. We operate on a 52/53 week fiscal year ending on the
last Friday in April of each year. For presentation purposes in the following
table we have indicated April 30 as our fiscal year end date. The consolidated
statement of operations data for each of the fiscal years in the three-year
period ended April 30, 1998 and the consolidated balance sheet data as of April
30, 1997 and 1998 were derived from our audited consolidated financial
statements included elsewhere in this prospectus. The consolidated statement of
operations data for the fiscal years ended April 30, 1994 and 1995 and the
consolidated balance sheet data as of April 30, 1994, 1995 and 1996 were derived
from our audited consolidated financial statements not included elsewhere in
this prospectus. The information in the table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and Condensed Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF JANUARY 29, 1999
------------------------------------------------ -------------------------
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED(4)
------- ------- ------- ------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, Cash Equivalents and Short-
Term Investments................ $ 2,426 $ 1,791 $27,619 $28,436 $ 48,115 $ 68,036 $188,636
Total Assets...................... 4,055 10,628 45,449 68,941 115,736 172,648 293,248
Long-Term Obligations............. 4,855 11,607 318 232 180 116 116
Total Shareholders' Equity
(Deficit)....................... (1,324) (5,923) 39,029 54,029 86,265 135,740 256,340
</TABLE>

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(1) Fiscal 1997 includes non-recurring charges of $10,519,000 ($9,215,000, net
of taxes) for purchased in-process technology and compensation expense
related to the acquisition of Internet Middleware Corporation and $4,300,000
(2,795,000, net of taxes) for the settlement of litigation. See Notes 4 and
9 of Notes to Consolidated Financial Statements.

(2) The basic net income (loss) per share computation excludes redeemable
convertible preferred stock, options and warrants to purchase common stock
and common stock subject to repurchase rights held by us. See Note 2 of
Notes to Consolidated Financial Statements and Note 6 of Notes to Condensed
Consolidated Financial Statements for a detailed explanation of the
determination of shares used in computing basic net income (loss) per share.

(3) The diluted net income (loss) per share computation excludes redeemable
convertible preferred stock, options and warrants to purchase common stock
and common stock subject to repurchase rights held by us in periods of net
loss as their effect would be antidilutive.

(4) Reflects, after deducting commissions and estimated offering expenses, the
net proceeds of the sale of the common stock offered hereby at a public
offering price of $50.50 per share.
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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
This prospectus also contains "forward-looking" statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.

FACTORS BEYOND OUR CONTROL COULD CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE.

Although we have experienced significant revenue growth in recent periods,
this growth may not be indicative of our future operating results. As a result,
we believe that period-to-period comparisons of our results of operations are
not necessarily meaningful and should not be relied upon as indicators of future
performance. Many of the factors that could cause our quarterly operating
results to fluctuate significantly in the future are beyond our control and
include the following:

- the level of competition in our target product markets;

- the size, timing and cancellation of significant orders;

- product configuration and mix;

- market acceptance of new products and product enhancements;

- new product announcements or introductions by us or our competitors;

- deferrals of customer orders in anticipation of new products or product
enhancements;

- changes in pricing by us or our competitors;

- our ability to timely develop, introduce and market new products and
enhancements;

- supply constraints;

- technological changes in our target product markets;

- the levels of expenditure on research and development and expansion of
our sales and marketing programs;

- seasonality; and

- general economic trends.

In addition, sales for any future quarter may vary and accordingly be
inconsistent with our plans. We generally operate with limited order backlog
because our products are typically shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are also difficult to forecast
because the network file server market is rapidly evolving and our sales cycle
varies substantially from customer to customer.

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Due to all of the foregoing factors, it is possible that in one or more
future quarters our results may fall below the expectations of public market
analysts and investors. In such event, the trading price of our common stock
would likely decrease.

OUR GROSS MARGINS MAY VARY BASED ON THE CONFIGURATION OF OUR PRODUCTS.

We derive a significant portion of our sales from the resale of disk drives
as components of our filers, and the resale market for hard disk drives is
highly competitive and subject to intense pricing pressures. Our sales of disk
drives generate lower gross margin percentages than those of our filer products.
As a result, as we sell more highly configured systems with greater disk drive
content, overall gross margin percentages will be negatively affected.
Consequently, we believe we will experience a modest decline in gross margins
and pre-tax income as a percentage of net sales in the fourth quarter of fiscal
1999 and in fiscal 2000.

Our gross margins have been and may continue to be affected by a variety of
other factors, including:

- competition;

- direct versus indirect sales;

- the mix and average selling prices of products, including software
licensing;

- new product introductions and enhancements; and

- the cost of components and manufacturing labor.

A SIGNIFICANT PERCENTAGE OF OUR EXPENSES ARE FIXED WHICH COULD AFFECT OUR NET
INCOME.

Our expense levels are based in part on our expectations as to future sales
and a significant percentage of our expenses are fixed. As a result, if sales
levels are below expectations, net income may be disproportionately affected.

OUR FUTURE FINANCIAL PERFORMANCE DEPENDS ON GROWTH IN THE NETWORK FILE SERVER
MARKET AND ANY LACK OF GROWTH WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING RESULTS.

All of our filer products address the network file server market.
Accordingly, our future financial performance will depend in large part on
continued growth in the network file server market and on emerging standards in
this market. We cannot assure you that the market for network file servers will
continue to grow or that emerging standards in the network file server market
will not adversely affect the growth of UNIX and Windows NT server markets. If
the network file server market grows more slowly than anticipated or if network
file servers based on emerging standards other than those adopted by us become
increasingly accepted by the market, our operating results could be materially
adversely affected.

THE SUCCESS OF OUR NETCACHE(TM) APPLIANCE PRODUCTS DEPENDS UPON MARKET
ACCEPTANCE OF CACHING TECHNOLOGY AND CONTINUED GROWTH IN THE CACHING APPLIANCE
MARKET.

In late 1997, we released our NetCache appliance products, a new category
of hardware-based Internet caching appliances designed to speed the delivery of
information stored on the Web. However, hardware-based caching technology is
still in its infancy.

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Our future financial performance will depend in part on the acceptance of
caching technology and the acceptance of our NetCache appliance products. We
cannot assure you that the caching appliance market will continue to grow at its
current rate, or at all.

IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS, OR IF OUR NEW PRODUCTS DO NOT
ACHIEVE MARKET ACCEPTANCE, OUR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED.

We derive a substantial portion of our revenue from the sale of our network
filer products. As a result, a reduction in the demand for our filer products
due to increased competition, a general decline in the market for network file
servers or other factors could materially adversely affect our operating
results. As part of our ongoing development process, we initiated production
shipments of four new filers in fiscal 1998 and in the second quarter of fiscal
1999 launched the F700 filer product family. We expect to derive a substantial
portion of our revenue from sales of our F700 filer product family. Additional
product introductions in future periods are expected to impact the sales of
existing products. If we are unable to introduce new products in a timely
manner, effectively manage the introduction of new products and any related
inventory transitions or if such products do not achieve market acceptance, our
operating results could be materially adversely affected.

IF WE FAIL TO MANAGE OUR EXPANDING BUSINESS EFFECTIVELY OUR OPERATING RESULTS
COULD BE MATERIALLY ADVERSELY AFFECTED.

We have experienced rapid growth. Our future operating results depend to a
large extent on management's ability to successfully manage expansion and
growth, including but not limited to expanding international operations,
forecasting revenues, addressing new markets, controlling expenses, implementing
infrastructure and systems and managing our assets. In addition, an unexpected
decline in the growth rate of revenues without a corresponding and timely
reduction in expense growth or a failure to manage other aspects of growth could
materially adversely affect our operating results.

WE DEPEND ON ATTRACTING AND RETAINING QUALIFIED TECHNICAL AND SALES PERSONNEL.

Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical and sales personnel. Because
our future success is dependent on our ability to continue to enhance and
introduce new products, we are particularly dependent on our ability to
identify, attract, motivate and retain qualified engineers with the requisite
education, backgrounds and industry experience. Competition for qualified
engineers, particularly in Silicon Valley, is intense. The loss of the services
of a significant number of our engineers or sales people could be disruptive to
our development efforts or business relationships and could materially adversely
affect our operating results.

RISKS INHERENT IN OUR INTERNATIONAL OPERATIONS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS.

We conduct business internationally. For the nine months ended January 29,
1999 approximately 31% of our net sales were to international customers
(including United States exports). Accordingly, our future operating results
could be materially adversely

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affected by a variety of factors, some of which are beyond our control,
including regulatory, political or economic conditions in a specific country or
region, trade protection measures and other regulatory requirements and
government spending patterns.

Our international sales are denominated in U.S. dollars and in foreign
currencies. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in foreign markets. For international sales and expenditures
denominated in foreign currencies, we are subject to risks associated with
currency fluctuations. We do not currently engage in hedging transactions, but
may do so in the future.

Additional risks inherent in our international business activities
generally include, among others, longer accounts receivable payment cycles,
difficulties in managing international operations and potentially adverse tax
consequences. Such factors could materially adversely affect our future
international sales and, consequently, our operating results.

Although operating results have not been materially adversely affected by
seasonality in the past, because of the significant seasonal effects experienced
within the industry, particularly in Europe, our future operating results could
be adversely affected by seasonality.

We believe that continued growth and profitability will require successful
expansion of our international operations and sales and therefore we have
committed significant resources to such expansion. In order to successfully
expand international sales in fiscal 1999 and subsequent periods, we must
strengthen foreign operations, hire additional personnel and recruit additional
international distributors and resellers. This will require significant
management attention and financial resources and could materially adversely
affect our operating results. To the extent that we are unable to effect these
additions in a timely manner, our growth, if any, in international sales will be
limited, and our operating results could be materially adversely affected. In
addition, we cannot assure you that we will be able to maintain or increase
international market demand for our products.

AN INCREASE IN COMPETITION COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.

The network file server market is intensely competitive and characterized
by rapidly changing technology. We compete with specialized network file server
companies such as Auspex Systems, Inc. We also compete against traditional
suppliers of UNIX-based general purpose computers that are used as network file
servers including Sun Microsystems, Inc., Hewlett-Packard Company, Silicon
Graphics, Inc. and IBM Corporation, among others. Many of our current and
potential competitors have significantly greater financial, technical, marketing
and other resources than we do. In addition, certain of these large traditional
suppliers of general purpose computers may in the future offer specialized file
server products which are more directly competitive with our products. We also
encounter competition from manufacturers of PC-based file servers utilizing
Windows NT and emerging standards, as well as competition from manufacturers of
open systems storage solutions such as EMC Corporation and Data General Corp.
Our NetCache appliances compete against a number of software and hardware
solutions, from companies ranging from small start-ups to larger systems
vendors, including Cisco Systems Inc., Inktomi Corp., Cacheflow Inc. and Novell,
Inc.

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<PAGE> 10

Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
our operating results. As a result, they may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, promotion, sale
and support of their products. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. We cannot assure you that we will be able to compete successfully against
current or future competitors. Competitive pressures we face could materially
adversely affect our operating results.

We believe that the principal competitive factors affecting our market
include product features such as response time, scalability, ease of use, price,
multiprotocol capabilities and customer service and support. Although we believe
that our products currently compete favorably with respect to these factors, we
cannot assure you that we can maintain our competitive position against current
and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.

WE RELY UPON A LIMITED NUMBER OF SUPPLIERS AND ANY DISRUPTION OR TERMINATION OF
THESE SUPPLY ARRANGEMENTS COULD DELAY SHIPMENT OF OUR PRODUCTS AND COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.

We rely upon a limited number of suppliers of several key components
utilized in the assembly of our products. We purchase most of our disk drives
through a single supplier. We purchase computer boards and microprocessors from
a limited number of suppliers. Our reliance on a limited number of suppliers
involves several risks, including:

- a potential inability to obtain an adequate supply of required components
because we do not have long-term supply commitments;

- price increases;

- timely delivery; and

- component quality.

In the future, we intend to increasingly rely on contract manufacturers to
assemble our products. If our contract manufacturers' operations were
interrupted for any reason, our ability to meet scheduled product deliveries to
customers would be adversely affected.

Component quality is particularly significant with respect to our supplier
of disk drives. In order to meet product performance requirements, we must
obtain disk drives of extremely high quality and capacity. In addition, there
are periodic supply and demand issues for disk drives, microprocessors and for
semiconductor memory components, which could result in component shortages,
selective supply allocations and increased prices of such components. We cannot
assure you that we will be able to obtain our full requirements of such
components in the future or that prices of such components will not increase. In
addition, problems with respect to yield and quality of such components and
timeliness of deliveries could occur. Disruption or termination of the supply of
these components could delay shipments of our products and could materially
adversely affect our operating results. Such delays could also damage
relationships with current and prospective customers.

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WE CANNOT ASSURE YOU THAT OUR OEM RELATIONSHIPS WITH DELL COMPUTER CORPORATION
AND FUJITSU LIMITED WILL GENERATE SIGNIFICANT REVENUE.

While our agreements with Dell Computer Corporation and Fujitsu Limited are
an element of our strategy to increase penetration in the Windows NT market,
neither Dell Computer Corporation nor Fujitsu Limited have made purchase
commitments for our products. In addition, since these agreements are new, we do
not have a history upon which to base an analysis of their future success.
Currently we do not, and cannot assure you that we will, generate significant
revenue from these agreements.

WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS AND ACCORDINGLY
THERE IS A RISK THAT THOSE DISTRIBUTORS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF
OTHER SUPPLIERS WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

Our distribution customers generally offer products of several different
companies, including products of our competitors. Accordingly, there is risk
that these distributors may give higher priority to products of other suppliers,
which could adversely affect our operating results.

WE DEPEND UPON OUR RESEARCH AND DEVELOPMENT EFFORTS TO DEVELOP AND INTRODUCE NEW
PRODUCTS AND ANY FAILURE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY
COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.

Our future growth depends upon the successful development and introduction
of new hardware and software products. We cannot assure you that these or other
new products will be introduced on a timely basis or attain market acceptance.
Due to the complexity of network file servers and Internet caching devices, and
the difficulty in gauging the engineering effort required to produce new
products, new products are subject to significant technical risks. We cannot
assure you that new products will be introduced on a timely basis or at all. In
the past, we have experienced delays in the shipments of our new products
principally due to an inability to qualify component parts from disk drive and
other suppliers, resulting in delay or loss of product sales. If new products
are delayed or do not achieve market acceptance, our operating results will be
materially adversely affected.

WE FACE RISKS OF TECHNOLOGICAL CHANGES THAT AFFECT OUR PRODUCTS.

The markets we serve are characterized by rapid technological change,
changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards could render our existing products
obsolete and unmarketable. Our future success will depend upon our ability to
develop and introduce new products (including new software releases and
enhancements) on a timely basis that keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs
of our customers. We cannot assure you that we will be successful in developing
and marketing new products that respond to technological changes or evolving
industry standards. If we are unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, our operating results will be
materially adversely affected.

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UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS
OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS.

Our products may contain undetected software errors or failures when first
introduced or as new versions are released. Despite testing by us and by current
and potential customers, errors may not be found in new products after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could materially adversely affect our operating results.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY BE SUBJECT TO
INCREASED COMPETITION WHICH COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.

Our success depends significantly upon our proprietary technology. We
currently rely on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures, contractual provisions and patents to protect our
proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret, copyright and patent laws, which afford
only limited protection. We have registered trademarks including our "Network
Appliance" name and logo and "NetApp" trademarks. We will continue to evaluate
the registration of additional trademarks as appropriate. We generally enter
into confidentiality agreements with our employees and with our resellers and
customers. We currently have multiple U.S. and international patent applications
pending and one U.S. patent issued. The pending applications may not be approved
and if patents are issued, such patents may be challenged. If such challenges
are brought, the patents may be invalidated. We cannot assure you that we will
develop proprietary products or technologies that are patentable, that any
issued patent will provide us with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not materially
adversely affect our ability to do business.

Litigation may be necessary to protect our proprietary technology. Any such
litigation may be time-consuming and costly. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect proprietary rights
to as great an extent as do the laws of the United States. We cannot assure you
that our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology, duplicate our
products or design around patents issued to us or other intellectual property
rights of ours.

We are subject to intellectual property infringement claims. We may, from
time to time receive claims that we are infringing third parties' intellectual
property rights. In the first quarter of fiscal 1997, we settled litigation
related to the alleged infringement of third party rights and other claims,
which resulted in a pre-tax expense of $4.3 million ($3.5 million in payments to
the plaintiffs and $0.8 million in legal fees). Third parties may in the future
claim infringement by us with respect to current or future products, trademarks
or other proprietary rights. We expect that companies in the appliance market
will increasingly be subject to infringement claims as the number of products
and competitors in our industry segment grows and the functionality of products
in different industry segments overlaps. Any such claims could be
time-consuming, result in costly litigation, cause product shipment delays,
require us to redesign our products or require us to enter into royalty or
licensing agreements, any of which could materially adversely affect

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our operating results. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all.

THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE AND ANY BROAD MARKET
FLUCTUATIONS MAY MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.

The market price for our common stock has been volatile in the past, and
several factors could cause the price to fluctuate substantially in the future.
These factors include:

- fluctuations in our operating results;

- fluctuations in the valuation of companies perceived by investors to be
comparable to us;

- a shortfall in revenues or earnings compared to securities analysts'
expectations;

- changes in analysts' recommendations or projections;

- announcements of new products, applications or product enhancements by us
or our competitors; and

- changes in our relationships with our suppliers or customers.

In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated to the operating results
of such companies. As a result, the market price of our common stock may
fluctuate significantly in the future and any broad market fluctuations may
adversely affect the market price of our common stock. Due to all of the
foregoing, the current market price of our common stock may not be indicative of
future market prices.

PROTECTIVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS COULD MATERIALLY
ADVERSELY AFFECT STOCKHOLDERS.

Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the shareholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock. Further, certain provisions
of our bylaws pertaining to the future elimination of cumulative voting and
shareholder action by written consent, and the requirement that shareholders may
call a special meeting of shareholders only upon a request of shareholders
owning at least 50% of our common stock, could delay or make more difficult a
proxy contest involving us, which could adversely affect the market price of our
common stock.

YEAR 2000 ISSUES COULD HARM OUR OPERATIONS.

The Year 2000 issue refers to computer programs which use two digits rather
than four to define a given year and which therefore might read a date using
"00" as the year

11
<PAGE> 14

1900 rather than the year 2000. As a result, many companies' systems and
software may need to be upgraded or replaced in order to function correctly
after December 31, 1999.

We are currently conducting a general software upgrade and replacement
program to enhance our computer systems and applications, in particular those
systems and applications related to our manufacturing, distribution and
financial operations. As part of this larger program we are addressing the
critical areas of our internal computer systems, products and relationships with
external organizations for Year 2000 compliance. We are addressing Year 2000
compliance for both our information technology ("IT") and non-IT systems, which
typically include embedded technology such as microcontrollers.

While we believe that the estimated cost of becoming Year 2000 compliant
will not be significant to our operating results, failure to complete all the
work in a timely manner could materially adversely affect our operating results.
While we expect all planned work to be completed, we can not guarantee that all
systems will be in compliance by the Year 2000, the systems of suppliers and
other companies and government agencies on which we rely will be converted in a
timely manner, or that our contingency planning will be able to fully address
all potential interruptions. Therefore, Year 2000 issues could cause delays in
our ability to produce or ship our products, process transactions or otherwise
conduct business in any of our markets. Year 2000 issues could lower demand for
our products while increasing our costs. The occurrence of one or more of these
factors could materially adversely affect our operating results. For more
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000."

HOW WE INTEND TO USE THE PROCEEDS

Our net proceeds from the sale of 2,500,000 shares of common stock we are
offering at an offering price of $50.50 per share are estimated to be
approximately $120.6 million, after deducting the underwriting discount and
commission and estimated offering expenses payable by us. We intend to use the
net proceeds from this offering for working capital and other general corporate
purposes. In addition, we may use a portion of the net proceeds to acquire
complementary assets, technologies and businesses. We currently have no
commitments or agreements and are not involved in any negotiations with respect
to any such transactions. See "Underwriting." Pending such uses, the net
proceeds of this offering will be invested in short-term, investment grade,
interest-bearing securities.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. We currently
anticipate retaining all available funds, if any, to finance internal growth and
product development. Payment of dividends in the future will depend upon our
earnings and financial condition and such other factors as the directors may
consider or deem appropriate at the time.

12
<PAGE> 15

PRICE RANGE OF COMMON STOCK

Our common stock commenced trading on the Nasdaq National Market on
November 21, 1995 and is traded under the symbol "NTAP." On March 31, 1999, the
last reported sale price for the common stock as reported by the Nasdaq National
Market was $50.625 per share. As of March 22, 1999, there were 313 shareholders
of record of our common stock. The following table sets forth for the periods
indicated the high and low closing sales prices for our common stock as reported
on the Nasdaq National Market. All information gives effect to two-for-one stock
splits effective December 1997 and 1998.

<TABLE>
<CAPTION>
SALES PRICE
----------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1997
Quarter ended July 26, 1996.......................... $ 9.69 $ 6.06
Quarter ended October 25, 1996....................... 8.80 5.44
Quarter ended January 24, 1997....................... 14.00 7.88
Quarter ended April 30, 1997......................... 13.75 6.56
FISCAL YEAR 1998
Quarter ended July 25, 1997.......................... $10.25 $ 7.00
Quarter ended October 24, 1997....................... 14.16 9.94
Quarter ended January 23, 1998....................... 17.75 12.06
Quarter ended April 30, 1998......................... 18.13 13.66
FISCAL YEAR 1999
Quarter ended July 31, 1998.......................... $25.13 $16.56
Quarter ended October 30, 1998....................... 30.22 17.38
Quarter ended January 29, 1999....................... 55.50 27.38
Quarter ended April 30, 1999 (through March 31,
1999).............................................. 54.13 39.63
</TABLE>

13
<PAGE> 16

CAPITALIZATION

The following table sets forth our capitalization as of January 29, 1999 on
an actual basis, and as adjusted to reflect the sale of 2,500,000 shares of
common stock offered by us at an offering price of $50.50 per share and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and our Consolidated Financial Statements and
Condensed Consolidated Financial Statements, including the notes thereto,
included elsewhere in this prospectus. All information gives effect to a
two-for-one stock split effective December 21, 1998.

<TABLE>
<CAPTION>
AS OF JANUARY 29, 1999
-------------------------
AS
ACTUAL ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Long-term obligations.................................. $ 116 $ 116
-------- --------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; no shares issued and outstanding,
actual and as adjusted............................ -- --
Common stock, no par value; 220,000,000 shares
authorized; 69,396,295 shares issued and
outstanding, actual; 71,896,295 shares issued and
outstanding, as adjusted(1)....................... 91,596 212,196
Deferred stock compensation............................ (941) (941)
Cumulative translation adjustment...................... (123) (123)
Retained earnings...................................... 45,208 45,208
-------- --------
Total shareholders' equity........................ 135,740 256,340
-------- --------
Total capitalization......................... $135,856 $256,456
======== ========
</TABLE>

- -------------------------
(1) As of January 29, 1999 excludes:

- 16,999,469 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $12.62 per share;

- 6,262,903 shares that are reserved for future issuance under our 1995
Stock Incentive Plan and our Special Non-Officers Stock Option Plan; and

- 796,574 shares that are reserved for issuance under our Employee Stock
Purchase Plan.

14
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data as of
and for the periods indicated. The consolidated statement of operations data for
the nine months ended January 23, 1998 and January 29, 1999 and consolidated
balance sheet data as of January 29, 1999 were derived from our unaudited
condensed consolidated financial statements included elsewhere in this
prospectus, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, which we consider necessary for
a fair presentation of our financial position and results of operations for
these periods. The results of operations for the nine months ended January 29,
1999 are not necessarily indicative of the results to be expected for the full
year or future periods. We operate on a 52/53 week fiscal year ending on the
last Friday in April of each year. For presentation purposes in the following
table we have indicated April 30 as our fiscal year end date. The consolidated
statement of operations data for each of the fiscal years in the three-year
period ended April 30, 1998 and the consolidated balance sheet data as of April
30, 1997 and 1998 were derived from our audited consolidated financial
statements included elsewhere in this prospectus. The consolidated statement of
operations data for the fiscal years ended April 30, 1994 and 1995 and the
consolidated balance sheet data as of April 30, 1994, 1995 and 1996 were derived
from our audited consolidated financial statements not included elsewhere in
this prospectus. The information in the table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and Condensed Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, -------------------------
------------------------------------------------ JANUARY 23, JANUARY 29,
1994 1995 1996 1997(1) 1998 1998 1999
------- ------- ------- ------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA
Net Sales.............................. $ 2,244 $14,796 $46,632 $93,333 $166,163 $115,805 $198,616
Cost of Sales.......................... 1,083 7,957 20,557 38,061 67,549 47,196 80,938
------- ------- ------- ------- -------- -------- --------
Gross Margin......................... 1,161 6,839 26,075 55,272 98,614 68,609 117,678
------- ------- ------- ------- -------- -------- --------
Operating Expenses:
Sales and Marketing.................. 1,513 6,284 12,735 24,268 42,779 29,352 51,830
Research and Development............. 780 2,608 4,762 8,968 16,649 11,738 20,618
General and Administrative........... 823 2,860 2,578 4,134 6,528 4,701 7,092
Purchased In-Process Technology and
Related Compensation Charge........ -- -- -- 10,519 -- -- --
Litigation Settlement................ -- -- -- 4,300 -- -- --
------- ------- ------- ------- -------- -------- --------
Total Operating Expenses...... 3,116 11,752 20,075 52,189 65,956 45,791 79,540
------- ------- ------- ------- -------- -------- --------
Income (Loss) From Operations.......... (1,955) (4,913) 6,000 3,083 32,658 22,818 38,138
Other Income, net...................... 81 149 600 960 889 640 1,658
------- ------- ------- ------- -------- -------- --------
Income (Loss) Before Income Taxes...... (1,874) (4,764) 6,600 4,043 33,547 23,458 39,796
Provision for Income Taxes............. -- -- -- 3,793 12,582 8,797 14,929
------- ------- ------- ------- -------- -------- --------
Net Income (Loss)...................... $(1,874) $(4,764) $ 6,600 $ 250 $ 20,965 $ 14,661 $ 24,867
======= ======= ======= ======= ======== ======== ========
Net Income (Loss) Per Share:
Basic(2)............................. $ (0.12) $ (0.28) $ 0.18 $ 0.00 $ 0.32 $ 0.23 $ 0.37
======= ======= ======= ======= ======== ======== ========
Diluted(3)........................... $ (0.12) $ (0.28) $ 0.10 $ 0.00 $ 0.29 $ 0.21 $ 0.32
======= ======= ======= ======= ======== ======== ========
Shares Used in Per Share Calculation:
Basic(2)............................. 16,258 17,140 35,994 60,978 64,914 64,562 67,803
======= ======= ======= ======= ======== ======== ========
Diluted(3)........................... 16,258 17,140 62,936 68,804 71,902 71,448 76,679
======= ======= ======= ======= ======== ======== ========
</TABLE>

15
<PAGE> 18

<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF
------------------------------------------------ JANUARY 29,
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, Cash Equivalents and Short-Term
Investments.................................... $ 2,426 $ 1,791 $27,619 $28,436 $ 48,115 $ 68,036
Total Assets..................................... 4,055 10,628 45,449 68,941 115,736 172,648
Long-Term Obligations............................ 4,855 11,607 318 232 180 116
Total Shareholders' Equity (Deficit)............. (1,324) (5,923) 39,029 54,029 86,265 135,740
</TABLE>

- -------------------------
(1) Fiscal 1997 includes non-recurring charges of $10,519,000 ($9,215,000, net
of taxes) for purchased in-process technology and compensation expense
related to the acquisition of Internet Middleware Corporation and $4,300,000
(2,795,000, net of taxes) for the settlement of litigation. See Notes 4 and
9 of Notes to Consolidated Financial Statements.
(2) The basic net income (loss) per share computation excludes redeemable
convertible preferred stock, options and warrants to purchase common stock
and common stock subject to repurchase rights held by us. See Note 2 of
Notes to Consolidated Financial Statements and Note 6 of Notes to Condensed
Consolidated Financial Statements for a detailed explanation of the
determination of shares used in computing basic net income (loss) per share.
(3) The diluted net income (loss) per share computation excludes redeemable
convertible preferred stock, options and warrants to purchase common stock
and common stock subject to repurchase rights held by us in periods of net
loss as their effect would be antidilutive.

16
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion of our financial condition and results of
operations should be read together with the financial statements and the related
notes included in another part of this prospectus and which are incorporated
into this prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
those anticipated in those forward-looking statements as a result of certain
factors, including those set forth in "Risk Factors," and elsewhere in this
prospectus.

We derive a substantial portion of our revenue from the sale of our network
filer products. As a result, a reduction in the demand for filer products due to
increased competition, a general decline in the market for network file servers
or other factors could materially adversely affect our operating results. In
fiscal 1998, we initiated product shipments of NetCache appliances and in the
second quarter of fiscal 1999 began shipments of the second generation of our
NetCache proxy server. We expect that NetCache product sales will become a
larger percentage of net sales.

Our gross margins may vary based on the configuration of systems that are
sold. Our sales of disk drives generate lower gross margin percentages than
those of our filer products. As a result, as we sell more highly configured
systems with greater disk drive content, overall gross margin percentages will
be negatively affected. Consequently, we believe we will experience a modest
decline in gross margins and pre-tax income as a percentage of net sales in the
fourth quarter of fiscal 1999 and fiscal 2000.

Our gross margins have been and may continue to be affected by a variety of
other factors, including:

- competition;

- direct versus indirect sales;

- the mix and average selling prices of products, including software
licensing;

- new product introductions and enhancements; and

- the cost of components and manufacturing labor.

Operating results have not been materially adversely affected by
seasonality in the past. However, because of the significant summer seasonal
effects experienced within the industry, particularly in Europe, our future
operating results could be adversely affected by seasonality.

For the nine months ended January 29, 1999, approximately 31% of our net
sales were derived from international customers (including United States
exports). Accordingly our future operating results could be materially adversely
affected by a variety of factors, some of which are beyond our control. For more
information on risks associated with our

17
<PAGE> 20

international operations, see "Risk Factors -- Risks inherent in our
international operations could have a material adverse effect on our operating
results."

RESULTS OF OPERATIONS

The following table sets forth certain consolidated statement of income
data as a percentage of net sales for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED APRIL 30, --------------------------
-------------------------- JANUARY 23, JANUARY 29,
1996 1997 1998 1998 1999
------ ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales................ 44.1 40.8 40.7 40.8 40.8
------ ------ ------ ------ ------
Gross Margin............... 55.9 59.2 59.3 59.2 59.2
------ ------ ------ ------ ------
Operating Expenses:
Sales and Marketing........ 27.3 26.0 25.7 25.3 26.1
Research and Development... 10.2 9.6 10.0 10.1 10.4
General and
Administrative.......... 5.5 4.4 3.9 4.1 3.5
Purchased In-Process
Technology and Related
Compensation Charge..... -- 11.3 -- -- --
Litigation Settlement...... -- 4.6 -- -- --
------ ------ ------ ------ ------
Total Operating
Expenses.............. 43.0 55.9 39.6 39.5 40.0
------ ------ ------ ------ ------
Income From Operations....... 12.9 3.3 19.7 19.7 19.2
Other Income, Net............ 1.3 1.0 0.5 0.6 0.8
------ ------ ------ ------ ------
Income Before Income Taxes... 14.2 4.3 20.2 20.3 20.0
Provision for Income Taxes... -- 4.0 7.6 7.6 7.5
------ ------ ------ ------ ------
Net Income................... 14.2% 0.3% 12.6% 12.7% 12.5%
====== ====== ====== ====== ======
</TABLE>

NINE MONTHS ENDED JANUARY 29, 1999 COMPARED TO JANUARY 23, 1998

Net sales increased by 71.5%, from $115.8 million for the nine months ended
January 23, 1998 to $198.6 million for the nine months ended January 29, 1999.
This increase was primarily attributable to a higher volume of units shipped, as
compared to the corresponding period of the prior fiscal year. Factors impacting
unit growth include:

- expansion of our direct sales force;

- increased unit shipments principally due to the successful launching of
our F700 filer product family during the second quarter of fiscal 1999;

- increased worldwide shipment of NetApp cluster failover and NetCache
solutions and growth in sales of the NetApp F630; and

- increased multi-protocol software licensing, software subscription and
service revenues due to a growing installed base, and increased sales of
multi-protocol systems.

Net sales growth was also positively impacted by a higher average selling
price of the newly introduced F700 filer product family due primarily to the
increase in storage content, and an increase in the average selling price of the
NetApp F630 primarily facilitated by the incorporation of fibre-channel disk
drives which increase system capacity. Factors

18
<PAGE> 21

which partially offset overall net sales growth include declining unit sales of
our older product family and decreases in base prices of our older product line
due to competitive forces.

International net sales (including United States exports) grew by 119.3%
for the nine months ended January 29, 1999 as compared to comparable period for
the prior fiscal year. International net sales were $60.9 million, or 30.7%, of
total net sales for the nine months ended January 29, 1999. The increase in
international sales for the nine months ended January 29, 1999 was primarily a
result of European sales growth due to increased headcount in the direct sales
force, indirect channel sales through resellers, shipments of filers and sales
of our new NetApp Cluster Failover solutions and NetCache appliances. Asia
Pacific net sales growth for the nine months ended January 29, 1999 was also
driven by increased headcount in the direct sales force, increased shipments of
filers and the sale of NetCache appliances, as compared to the corresponding
period of the prior fiscal year.

We cannot assure you that our net sales will continue to increase in
absolute dollars or at the rate at which they have grown in recent fiscal
periods.

Gross Margin -- Gross margin remained constant at 59.2% for the nine months
ended January 29, 1999 as compared to the corresponding period for the prior
fiscal year. The consistency in gross margin for the nine months ended January
29, 1999, as compared to the corresponding period for the prior fiscal year, was
primarily attributable to the increase in product volume, lower costs of key
components, increased manufacturing efficiencies, increased market acceptance of
our product line with the continuance of the cost-reduced designs introduced in
the second quarter of fiscal 1999, the introduction of the F700 filer product
family and NetApp Cluster Failover system during the second quarter of fiscal
1999 and the revenue growth from sales of NetCache appliances. Gross margin was
also favorably impacted by the licensing of multi-protocol software and support
contracts, and by growth in software subscription and service revenues due to a
larger installed base. Primary factors negatively impacting gross margin were
the increase in the sales volume of the F700 product family, which has higher
incremental costs associated with greater disk drive and memory content, and the
effect of base system price reductions across the full range of older generation
filers.

Our gross margin has been and will continue to be affected by a variety of
factors, including:

- competition;

- product configuration;

- direct versus indirect sales;

- the mix and average selling prices of products, including software
licensing;

- new product introductions and enhancements; and

- the cost of components and manufacturing labor.

Our gross margin may also vary based upon the configuration of systems that
are sold and whether they are sold directly or through indirect channels. Highly
configured systems have historically generated lower overall gross margin
percentages due to greater disk drive and memory content.

19
<PAGE> 22

Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and certain promotional expenses and customer
service and support costs. For the nine months ended January 29, 1999, sales and
marketing expenses of $51.8 million reflect an increase of 76.6% over the
comparable period of fiscal 1998. These expenses were 25.3% and 26.1% of net
sales for the nine months ended January 23, 1998 and January 29, 1999,
respectively. The increase in absolute dollars was primarily related to the
continued expansion of our sales and marketing organization, including growth in
the domestic and international direct sales forces and increased commission
expenses. We expect to continue to increase our sales and marketing expenses in
an effort to expand domestic and international markets, introduce new products,
establish and expand new distribution channels and increase product and company
awareness. We believe that our continued growth and profitability is dependent
in part on the successful expansion of our international operations, and
therefore, have committed significant resources intended to increase
international sales.

Research and Development -- Research and development expenses consist
primarily of salaries and benefits, prototype expenses and fees paid to outside
consultants. Research and development expenses increased 75.7% from $11.7
million for the nine months ended January 23, 1998 to $20.6 million for the nine
months ended January 29, 1999. These expenses represented 10.1% and 10.4% of net
sales, respectively, for those periods. Research and development expenses
increased in absolute dollars, primarily as a result of increased headcount,
ongoing support of current and future product development and enhancement
efforts and prototyping expenses associated with the development of new
products, including the NetApp F700 series filers and the C700 family, the
second generation of our NetCache appliances. We believe that our future
performance will depend in large part on our ability to maintain and enhance our
current product line, develop new products that achieve market acceptance,
maintain technological competitiveness and meet an expanding range of customer
requirements. We intend to continuously expand our existing product offerings
and to introduce new products. Consequently, we expect that such expenditures
will continue to increase in absolute dollars. For the nine months ended January
29, 1999 and January 23, 1998, no software development costs were capitalized.

General and Administrative -- General and administrative expenses increased
50.9% from $4.7 million for the nine months ended January 23, 1998 to $7.1
million for the nine months ended January 29, 1999. These expenses represented
4.1% and 3.5% of net sales, respectively, for those periods. Increases in
absolute dollars were primarily due to increased headcount, and increases to the
allowance for doubtful accounts and outside service fees. We believe that our
general and administrative expenses will increase in absolute dollars as we
continue to build our infrastructure.

Other Income, Net -- Other income, net, was $0.6 million and $1.7 million
for the nine months ended January 23, 1998 and January 29, 1999, respectively.
The increase was due primarily to foreign currency exchange gains recorded in
the second quarter of fiscal 1999.

Provision for Income Taxes -- Our effective tax rate was 37.5% for the nine
months ended January 23, 1998 and January 29, 1999.

20
<PAGE> 23

FISCAL 1998 COMPARED TO FISCAL 1997

Net Sales -- Net sales increased from $93.3 million in fiscal 1997 to
$166.2 million in fiscal 1998, an increase of 78.0%. The increase in net sales
was principally attributable to a higher volume of filers shipped. The increase
in unit shipments resulted primarily from expansion of our direct sales force
and the introduction of new products during June and July 1997, particularly the
enterprise-class NetApp F630, the NetApp F520 and the NetApp F230. Net sales for
fiscal 1998 were also positively impacted by a shift in product mix toward
higher-end systems, primarily due to the introduction of new products, leading
to higher average selling prices for filers than in the previous fiscal year.
Net sales also grew as a result of increased multi-protocol system shipments,
the licensing of multi-protocol software to pre-existing customers and increased
service and software subscription revenues due to a growing installed base.

International net sales (including United States exports) were $16.1
million and $37.8 million, for fiscal 1997 and 1998, respectively. The increase
in international net sales was primarily a result of European sales growth due
to increased headcount in the direct sales force over the prior fiscal year and
to the introduction of the new products in June and July 1997.

Gross Margin -- Gross margin remained relatively flat increasing slightly
from 59.2% of net sales for fiscal 1997 to 59.3% of net sales for fiscal 1997.
This increase in gross margin was primarily attributable to the increase in
product volume, lower costs of key components, increased manufacturing
efficiencies and the sale of our new product with cost-reduced designs first
introduced in June and July 1997. Gross margin was also favorably impacted by
the licensing of multi-protocol software and by growth in software subscription
and service revenues due to a growing installed base. Factors contributing to
gross margin growth were partially offset by the sale of 4 gigabyte drives at
reduced prices in fiscal 1998.

Our gross margin has been and will continue to be affected by a variety of
factors, including competition, product configuration, direct versus indirect
sales, the mix and average selling prices of products, new product introductions
and enhancements and the cost of components and manufacturing labor. In
particular, our gross margin varies based upon the configuration of systems that
are sold and whether they are sold directly or through indirect channels. Highly
configured systems typically generate lower overall gross margin percentages due
to greater disk drive and memory content.

Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and customer service
and support costs. Sales and marketing expenses increased 76.3% from $24.3
million in fiscal 1997 to $42.8 million in fiscal 1998. These expenses were
26.0% and 25.7% of net revenues for fiscal 1997 and 1998, respectively. The
increase in absolute dollars was primarily related to expansion of our sales and
marketing organization, including growth in the domestic and international
direct sales forces and increased commission expenses. During the quarter ended
January 23, 1998, we launched an advertising campaign which contributed to
absolute dollar growth in sales and marketing expenses for fiscal 1998. We
expect to continue to increase our sales and marketing expenses in an effort to
expand domestic and international markets, introduce new products, establish and
expand new distribution channels and increase product and company awareness. We
believe that our continued growth and profitability is dependent in part on the
successful expansion of our

21
<PAGE> 24

international operations, and therefore, we have committed significant resources
to international sales.

Research and Development -- Research and development expenses consist
primarily of salaries and benefits and prototype expenses. Research and
development expenses increased 85.6% from $9.0 million in fiscal 1997 to $16.6
million in 1998. These expenses represented 9.6% and 10.0% of net sales in
fiscal 1997 and 1998, respectively, and increased as a result of headcount
growth, prototyping expenses associated with the development of new products and
ongoing support of current and future product development and enhancement
efforts. We believe that significant investments in research and development
will be required to remain competitive and expect that such expenditures will
continue to increase in absolute dollars.

General and Administrative -- General and administrative expenses were $4.1
million in fiscal 1997, compared to $6.5 million in fiscal 1998, an increase of
57.9%. These expenses represented 4.4% and 3.9% of net sales for such periods
and increased in absolute dollars primarily as a result of headcount growth,
increased professional services fees and an increase to the allowance for
doubtful accounts. We believe that our general and administrative expenses will
increase in absolute dollars as we continue to build our infrastructure.

Litigation Settlement -- See "-- Fiscal 1997 Compared to Fiscal
1996 -- Litigation Settlement."

Purchased In-Process Technology and Related Compensation Charge -- See
discussion in Management's Discussion and Analysis of Financial Condition and
Results of Operations section titled "Fiscal 1997 Compared to Fiscal 1996."

Other Income, Net -- Other income, net, was $1.0 million and $0.9 million
in fiscal 1997 and 1998, respectively. Other income, net, decreased over the
corresponding period of the prior year due primarily to foreign currency
exchange losses recorded in fiscal 1998.

Provision for Income Taxes -- Our effective tax rate for fiscal 1997 was
93.8% compared to 37.5% for fiscal 1998. The fiscal 1997 tax rate was primarily
affected by the one-time charge to operations of $7.4 million for the write-off
of purchased in-process research and development related to the IMC acquisition
which was not deductible for income tax purposes. Excluding the net effect of
the IMC acquisition, the fiscal 1997 effective tax rate would have been 35%. The
higher effective tax rate in fiscal 1998, compared to the fiscal 1997 effective
tax rate, exclusive of the IMC acquisition, relates to increased earnings, which
reduce the impact of research and development and other tax credits on the
effective tax rate. Additionally, fiscal 1997 included a benefit for the
reversal of a valuation allowance previously provided against deferred tax
assets which did not occur in fiscal 1998. As of April 30, 1997 and 1998, a
valuation allowance was deemed unnecessary as management determined that it is
more likely than not that the net deferred tax asset is realizable.

FISCAL 1997 COMPARED TO FISCAL 1996

Net Sales -- Net sales increased by 100% from $46.6 million in fiscal 1996
to $93.3 million in fiscal 1997. This increase was attributable to an increased
shipping volume of filers and related peripheral devices and higher average
selling prices of filers. The increase in filer shipments resulted primarily
from expansion of our domestic and

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<PAGE> 25

international direct sales force, growth of our domestic and international
indirect sales channel, increased market acceptance of our products and the
introduction of the NetApp F540. The higher average selling prices resulted
primarily from the introduction of the enterprise-class NetApp F540 and the
shipment of a greater number of units directly to end users, who generally
purchase more highly configured systems at higher average selling prices than
resellers. Net sales also increased as a result of the introduction of multi-
protocol systems and the licensing of multi-protocol software to pre-existing
customers.

Gross Margin -- Gross margin increased from 55.9% in fiscal 1996 to 59.2%
in fiscal 1997. This increase in gross margin was primarily attributable to the
increase in product volume in fiscal 1997, lower costs of key components and
increased manufacturing efficiencies. Gross margin also increased over the prior
fiscal year as a result of licensing multi-protocol software and increases in
software subscription revenue due to a larger installed base. These factors
offset the effect of increased sales of highly configured systems during fiscal
1997, which generally generate lower gross margins per system due to higher disk
drive and memory content.

Sales and Marketing -- Sales and marketing expenses increased 90.6% from
$12.7 million in fiscal 1996 to $24.3 million in fiscal 1997. These expenses
were 27.3% and 26.0% of net sales in fiscal 1996 and 1997, respectively. The
increase in absolute dollars was primarily related to the expansion of our sales
and marketing organization, particularly the increase in the direct sales force,
and increased commission expenses related to higher sales volumes.

Research and Development -- Research and development expenses increased
88.3% from $4.8 million in fiscal 1996 to $9.0 million in fiscal 1997. These
expenses represented 10.2% and 9.6% of net sales in fiscal 1996 and 1997,
respectively, and increased in absolute dollars primarily as a result of
increased headcount, prototyping expenses associated with the development of new
products and the support of the current and future product development and
enhancement efforts.

General and Administrative -- General and administrative expenses were $2.6
million in fiscal 1996, compared to $4.1 million in fiscal 1997, an increase of
60.4%. These expenses represented 5.5% and 4.4%, respectively, of net sales for
such periods. In fiscal 1997, we continued our investments in additional
staffing, facilities expansion and related occupancy costs necessary to manage
and support our growth. Professional fees also increased from fiscal 1996 to
fiscal 1997. The growth in professional fees was primarily related to increases
in general legal fees, investor relations activities and accounting related
services.

Purchased In-Process Technology and Related Compensation Charge -- On March
17, 1997, we acquired all outstanding shares and options to purchase shares of
IMC common stock by issuing 748,092 shares of our common stock and options to
purchase shares of our common stock. In connection with the acquisition,
intangible assets of $8.4 million were acquired, of which $7.4 million was
reflected as a one-time charge to operations for the write-off of in-process
research and development that had not reached technological feasibility and, in
management's opinion, had no probable alternative future use. The remaining
intangible assets of $1.0 million, consisting of existing technology and
goodwill, are included in other assets in the accompanying consolidated balance
sheets and are being amortized over their estimated useful lives of five years.

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<PAGE> 26

Certain key employees of IMC who continued as our employees were also
granted vested options to purchase shares of our common stock at a discount to
the market price of our common stock immediately preceding the acquisition. In
connection with the granting of these options, we recorded a compensation charge
of $3.2 million in the fourth quarter of fiscal 1997.

The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in our consolidated financial statements. IMC results of operations
included in our consolidated financial statements for fiscal 1997 were not
significant. See Note 4 of Notes to Consolidated Financial Statements for pro
forma financial information.

Litigation Settlement -- In July 1994, we and certain of our former
employees were named as defendants in a lawsuit which alleged that one of our
founders, who left the company in March 1995, misappropriated confidential
information prior to the company's founding in April 1992. In August 1996, we
entered into a settlement with the plaintiff which resulted in a charge to
earnings of $4.3 million in the first quarter of fiscal 1997, which included a
$3.5 million payment to the plaintiffs and $0.8 million of legal fees. As the
payment released us from all liabilities associated with the case, we have no
future obligations to the plaintiffs. We deny any wrongdoing on our part or on
the part of the founder.

Other Income, Net -- Other income, net, was $0.6 million and $1.0 million
in fiscal 1996 and 1997, respectively. In both of these periods, other income,
net, represented less than 2% of net sales. Other income, net, increased in
fiscal 1997 due primarily to interest income earned over four quarters of fiscal
1997 on the net proceeds of $25.7 million from our November 1995 initial public
offering compared to interest earnings on initial public offering proceeds over
two quarters for fiscal 1996.

Provision for Income Taxes -- In fiscal 1996, our federal and state income
tax liabilities were offset by the realization of a portion of net deferred tax
assets. We recognized a benefit for net deferred tax assets to the extent that
they were recoverable through tax refunds in the event of future net operating
losses. We recorded a valuation allowance for the balance of our net deferred
tax assets as a result of uncertainty regarding realization of the assets,
including our limited operating history.

The fiscal 1997 income tax provision was $3.8 million (effective rate of
93.8%). The fiscal 1997 tax rate was primarily affected by the one-time charge
to operations of $7.4 million for the write-off of purchased in-process research
and development related to the IMC acquisition which was not deductible for
income tax purposes. Excluding the net effect of the IMC acquisition, the
effective tax rate would have been 35%. As of April 30, 1997, a valuation
allowance was deemed unnecessary as management determined that it was more
likely than not that the net deferred tax asset was realizable.

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<PAGE> 27

QUARTERLY RESULTS OF OPERATIONS

The following table presents selected consolidated quarterly financial
information for each of the seven quarters through January 29, 1999. This
information is unaudited but, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, which we consider
necessary for a fair presentation of our financial position and results of
operations for these periods. Such quarterly results are not necessarily
indicative of the results to be expected for the full year or future periods.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JULY 25, OCTOBER 24, JANUARY 23, APRIL 30, JULY 31, OCTOBER 30, JANUARY 29,
1997 1997 1998 1998 1998 1998 1999
-------- ----------- ----------- --------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA
Net Sales............. $33,420 $38,401 $43,984 $50,358 $57,375 $65,625 $75,616
Cost of Sales......... 13,570 15,746 17,880 20,353 23,239 26,881 30,818
------- ------- ------- ------- ------- ------- -------
Gross Margin........ 19,850 22,655 26,104 30,005 34,136 38,744 44,798
------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Sales and
Marketing......... 8,493 9,672 11,187 13,427 14,935 17,064 19,831
Research and
Development....... 3,415 3,903 4,420 4,911 6,081 6,722 7,815
General and
Administrative.... 1,356 1,493 1,852 1,827 1,885 2,552 2,655
------- ------- ------- ------- ------- ------- -------
Total Operating
Expenses........ 13,264 15,068 17,459 20,165 22,901 26,338 30,301
------- ------- ------- ------- ------- ------- -------
Income From
Operations.......... 6,586 7,587 8,645 9,840 11,235 12,406 14,497
Other Income, Net..... 168 229 243 249 121 995 542
------- ------- ------- ------- ------- ------- -------
Income Before Income
Taxes............... 6,754 7,816 8,888 10,089 11,356 13,401 15,039
Provision for Income
Taxes............... 2,533 2,931 3,333 3,785 4,259 5,025 5,645
------- ------- ------- ------- ------- ------- -------
Net Income............ $ 4,221 $ 4,885 $ 5,555 $ 6,304 $ 7,097 $ 8,376 $ 9,394
======= ======= ======= ======= ======= ======= =======
Net Income Per Share:
Basic............... $ 0.07 $ 0.08 $ 0.08 $ 0.10 $ 0.11 $ 0.12 $ 0.14
======= ======= ======= ======= ======= ======= =======
Diluted............. $ 0.06 $ 0.07 $ 0.08 $ 0.09 $ 0.10 $ 0.11 $ 0.12
======= ======= ======= ======= ======= ======= =======
Shares Used in Per
Share Calculation:
Basic............... 63,768 64,612 65,422 66,148 67,096 67,878 68,738
======= ======= ======= ======= ======= ======= =======
Diluted............. 70,278 72,152 72,500 73,438 74,542 76,112 78,932
======= ======= ======= ======= ======= ======= =======
</TABLE>

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<PAGE> 28

The following table sets forth, for the periods indicated, the percentage
of net sales represented by each item in the preceding consolidated statement of
income data.

While our quarterly operating results in the past seven quarters in the
table have been relatively consistent in percentage terms, quarterly results in
the future may vary significantly. See "Risk Factors -- Factors beyond our
control could cause our quarterly results to fluctuate" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."

LIQUIDITY AND CAPITAL RESOURCES

As of January 29, 1999, as compared to the April 30, 1998 balances, our
cash, cash equivalents and short-term investments increased by $19.9 million to
$68.0 million. Working capital increased by $37.3 million to $106.9 million,
impacted primarily by increases in cash and cash equivalents, accounts
receivable, inventories and deferred taxes and a decrease in accounts payable,
partially offset by increases in deferred revenue, accrued compensation and
related benefits, income taxes payable and other accrued liabilities, and a
decrease in short-term investments. We generated cash from operating activities
totaling $16.2 million and $26.5 million for the nine months ended January 23,
1998 and January 29, 1999, respectively. Net cash provided by operating
activities for the nine months ended January 29, 1999 principally related to net
income of $24.9 million, increases in income taxes payable, deferred revenue and
other accrued liabilities, coupled with depreciation and amortization which are
non-cash expenses, partially offset by increases in accounts receivable,
inventories, prepaid expenses and other assets and deferred income taxes and
decreases in accounts payable.

We used $4.9 million and $11.6 million of cash during the nine months ended
January 23, 1998 and January 29, 1999, respectively, to purchase property and
equipment. We were provided with $1.7 million and $2.7 million during the nine
months ended January 23, 1998 and January 29, 1999, respectively, from net
short-term investment redemptions. Financing activities provided $4.8 million
and $12.0 million during the nine

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<PAGE> 29

months ended January 23, 1998 and January 29, 1999, respectively. The increase
in cash provided by financing activities for the nine months ended January 29,
1999, compared to the corresponding period of the prior fiscal year, was due to
an increased quantity of stock options exercised at a higher average exercise
price and a greater number of employees participating in the employee stock
purchase plan.

In June 1998, we executed an agreement to acquire 5.9 acres of land in
Sunnyvale, California and the accompanying 127,000 square foot building. Under
terms of the agreement, we paid $5.5 million of the $33.8 million purchase price
as a nonrefundable deposit. In January 1999, we assigned our rights and
obligations under the agreement to a third-party entity and in exchange received
back our $5.5 million deposit. We subsequently entered into a $44.0 million
operating lease for this property. Our lease payments will vary based on the
London Interbank Offered Rate (LIBOR) plus a spread. The lease is for five years
and can be renewed for two five-year periods, subject to the approval of the
third-party entity. At the expiration or termination of the lease, we have the
option to either purchase the property for $44.0 million, or arrange for the
sale of the property to a third party for at least $44.0 million with a
contingent liability for any deficiency. If the property is not purchased or
sold as described above, we will be obligated for an additional lease payment of
approximately $37.0 million. The lease also requires us to maintain specified
financial covenants with which we were in compliance as of January 29, 1999.

In June 1998, we signed a 25-year operating lease requiring annual lease
payments of $3.1 million, commencing in October 1999, for a 6.2-acre plot in
Sunnyvale, California and an option agreement to purchase the 6.2 acres of land.
Under terms of the option agreement, we paid a $4.5 million nonrefundable
deposit. The option allows us to purchase the land, within a 90-day period,
commencing in December 1999 at a purchase price of $23.7 million. Our rights and
obligations under this agreement may be assigned to third parties, which we
intend to do if we can obtain satisfactory leasing terms.

In July 1998, we negotiated a $5.0 million unsecured revolving credit
facility with a domestic commercial bank. Under terms of the credit facility,
which expires in July 1999, we must maintain various financial covenants. Any
borrowings under this agreement bear interest at either LIBOR plus 1% or at the
lender's "prime" lending rate, such rate determined at our discretion. In
December 1998, we drew a $2.5 million letter of credit against our line of
credit to facilitate requirements associated with the acquisition of land in
Sunnyvale, California and the accompanying 79,000 square foot building,
described below.

In August 1998, we entered into an agreement to acquire 6.0 acres of land
in Sunnyvale, California and the accompanying 79,000 square foot building. Under
terms of the agreement, we paid $2.5 million of the $16.8 million purchase price
as a deposit, including $0.5 million in November 1998 upon satisfaction of
certain conditions under the agreement. The deposits are nonrefundable with
limited exceptions. Our rights and obligations under this agreement may be
assigned to third parties, which we intend to do if we can obtain satisfactory
leasing terms.

Excluding the commitments related to the aforementioned properties, which
we intend to assign to third parties and establish as operating leases, we
currently have no significant commitments other than commitments under operating
leases. We believe that our existing liquidity and capital resources, including
the available amounts under the $5.0 million line of credit, are sufficient to
fund our operations for at least the next twelve months.

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<PAGE> 30

YEAR 2000

The Year 2000 issue refers to computer programs which use two digits rather
than four to define a given year and which therefore might read a date using
"00" as the year 1900 rather than the year 2000. As a result, many companies'
systems and software may need to be upgraded or replaced in order to function
correctly after December 31, 1999.

We are currently conducting a general software upgrade and replacement
program to enhance our computer systems and applications, in particular those
systems and applications related to our manufacturing, distribution and
financial operations. As part of this larger program we are addressing the
critical areas of our internal computer systems, products and relationships with
external organizations for Year 2000 compliance. We are addressing Year 2000
compliance for both our IT and non-IT systems, which typically include embedded
technology such as microcontrollers.

As part of our general systems upgrade we have evaluated and selected
significant computer software applications which are represented by vendors as
Year 2000 compliant. We expect to complete installation of such software in our
domestic operations by the end of the first quarter of fiscal year 2000 followed
by installation in our international operations by mid-fiscal year 2000. Most of
our existing business applications are already supported by Year 2000 compliant
software. With the system changes implemented to date and other planned changes,
we anticipate that our internal computer software applications will be Year 2000
compliant prior to December 31, 1999. We believe that our current products are
Year 2000 compliant, and our new products are being designed to be Year 2000
compliant.

We rely on numerous third party vendors for certain products and services.
We are communicating with our principal service providers and suppliers to
assess their Year 2000 readiness. Responses indicate that our significant
service providers currently have compliant versions of their systems available
or are well into the renovation and testing phases with completion scheduled
prior to December 31, 1999. We are still assessing the effect Year 2000 issues
will have on our service providers and suppliers, however, our principal service
providers and suppliers have represented to us that they are Year 2000
compliant. We can give you no guarantee that the systems and products of these
service providers and suppliers on which we rely are, or will be, Year 2000
compliant.

Our contingency planning for Year 2000 issues relates primarily to the
efforts of our third-party vendors. In the event of any Year 2000 disruptions
related to third-party software, we expect to follow the individual vendor's
contingency directives. With respect to suppliers, we will consider alternative
sources as a contingency plan, if necessary. Contingency planning will continue
throughout 1999 and our plans will be modified based upon the progress of our
remediation efforts, system updates and installations and based upon our
communications with selected suppliers. We have determined that our "worst case"
scenario relates to Year 2000 compliance problems of our third party vendors and
suppliers and other external organizations which if not remedied could
materially adversely affect our operating results.

The costs we expect to incur in connection with our overall general systems
upgrade program, including both internal and third party costs, are primarily
external costs for software licenses, and implementation and consulting
services. These systems and applications were selected primarily for features
and functionality in addition to Year 2000 compliance. Accordingly, we do not
itemize costs of Year 2000 compliance separately.

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<PAGE> 31

Our expectations regarding the impact of Year 2000 issues are forward
looking statements and actual results could vary due to the factors discussed in
this section. While we believe that the estimated cost of becoming Year 2000
compliant will not be significant to our operating results, failure to complete
all the work in a timely manner could materially adversely affect our operating
results. While we expect all planned work to be completed, we can not guarantee
that all systems will be in compliance by the Year 2000, the systems of
suppliers and other companies and government agencies on which we rely will be
Year 2000 compliant, or that our contingency planning will be able to fully
address all potential interruptions. Therefore, Year 2000 issues could cause
delays in our ability to produce or ship our products, process transactions or
otherwise conduct business in any of our markets. Year 2000 issues could lower
demand for our products while increasing our costs. The occurrence of one or
more of these factors could materially adversely affect our operating results.

NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes interim
and annual reporting standards for an enterprise's business segments and related
disclosures about its products, services and geographic areas. We have not yet
identified our reporting segments. This statement is effective for us beginning
at fiscal year end 1999. Adoption of this statement is not expected to impact
our consolidated financial position, results of operations or cash flows.

In the first quarter of fiscal 1999, we adopted Statement of Position (SOP)
97-2, "Software Revenue Recognition," which provides guidance on applying
generally accepted accounting principles in recognizing revenue for software
transactions. SOP 97-2 requires, among other things, revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Adoption of this statement did not
have a material impact on our consolidated financial position, results of
operations or cash flows.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. On a forward-looking
basis, although we have not fully assessed the implications of this new
statement, we do not believe adoption of this statement will have a material
impact on our consolidated financial position, results of operations or cash
flows.

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<PAGE> 32

BUSINESS

Initially we marketed our filers primarily in the UNIX environment in high
technology companies seeking to achieve leading edge performance. Thereafter, we
significantly expanded our market by supporting heterogeneous Windows NT, UNIX
and Web platforms. More recently we began marketing our products to users of
leading database software applications, such as applications offered by Oracle
Corp. and Sybase, Inc. In fiscal 1999, we intensified our focus on the Windows
NT market and entered into OEM agreements with Dell Computer Corporation and
Fujitsu Limited.

INDUSTRY BACKGROUND

In response to competitive pressures, businesses and other organizations
are investing in information systems to shorten product development cycles,
enhance customer responsiveness, lower costs and improve the quality of their
products and services. Networked computing offers organizations the ability to
increase productivity through distribution of computing power and sharing of
information across enterprises. In addition, the Internet and online service
related businesses have significantly expanded the amount of data available.
Furthermore, the development of new applications and services, and the more
prevalent use of stored graphics, voice and video, all require dramatically more
storage capacity than alphanumeric information.

ISSUES IN DATA MANAGEMENT AND NETWORK COMPUTING

Enterprises utilizing networked computing environments generally share a
common set of key data management requirements driven by rapidly growing volumes
of distributed data. Certain of these requirements have become problematic,
including:

- Data Access Performance. Data access performance across networks has
historically been addressed by increasing server CPU performance or by
increasing network bandwidth. Today, however, network data access
performance is increasingly limited by disk input/output performance
which has not improved as fast as CPU or network technology.

- Data Administration. Network data administration, including the back up
and expansion of data storage capacity, requires the management of both
hardware and software systems and is made complex by the large volumes of
data, increasing

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<PAGE> 33

numbers of users accessing data and wide distribution of data stored
across the network.

- Reliability and Data Availability. As data availability becomes
increasingly critical to an enterprise's productivity, it is imperative
that network data storage devices have low failure rates, rapid recovery
times and the ability to provide uninterrupted data service.

- Heterogeneous Data Access. As Windows NT has gained acceptance in many
applications and environments traditionally dominated by UNIX,
organizations require solutions that provide shared access to common
data. Neither Windows NT nor UNIX-based file service solutions are
currently well-suited for accessing the other's data. In addition to
Windows NT and UNIX, the HTTP protocol is becoming more important with
the growth of the Internet.

THE NETWORK APPLIANCE SOLUTION

The core characteristics of the Network Appliance(TM) solution are:

Fast Response Time. Our filers achieve response time over networks
significantly faster than competitively priced products. This speed is achieved
through our patented Write Anywhere File Layout (WAFL(TM)) software architecture
and a sophisticated caching scheme coupled with industry standard processor
architectures and I/O buses. This architecture enables our appliances to service
user read and write requests significantly faster than competitively priced
solutions.

Ease of Use. Our products are easy to install and operate. Installation by
a systems administrator typically requires less than one hour and knowledge of
few system commands. For instance, an administrator can incrementally increase
storage capacity by adding disks and executing only one system command. Our
Snapshot(TM) feature allows online back up of an active file system without
interrupting users. This feature also allows users online access to earlier
versions of their data without involving the systems administrator. Together,
these features simplify administration, permit more efficient use of personnel,
increase data availability and permit remote deployment of filers.

High Levels of Data Availability and Reliability. In contrast to other
approaches, our products are designed to provide high levels of data
availability with minimal incremental cost. Traditional servers do not have an
integrated facility to efficiently and reliably maintain the availability of
data upon disk drive failure. The traditional approach for providing increased
data availability for these systems has been to add RAID (redundant array of
independent disks) devices which are costly and often performance-limiting. Our
unique software integration of RAID provides a solution at minimally incremental
cost that yields more reliable data availability with no performance penalties.
In the event of a disk drive failure, our filer will reconstruct the failed data
elsewhere in the drive array allowing a spare drive to be hot-swapped with the
failed drive without any interruption of data availability to client users or
requiring a system reboot. When system reboot is required our filers
automatically reboot with full data availability in a few minutes regardless of
storage capacity.

Multi-Protocol Solutions. Our filer products provide native support and
enable simultaneous shared file services for the NFS (UNIX), CIFS (Windows NT)
and HTTP (Internet) protocols. This means that support for these protocols is
woven into our WAFL

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software and file system. Our multi-protocol solutions eliminate the need to
duplicate data and do not require an organization to choose one operating system
for all network users.

Scalability. The architecture of our products is designed to be scalable so
that storage capacity can cost-effectively grow on an incremental basis while
maintaining high throughput levels. Adding an additional filer appliance to a
network under this architecture is much simpler than adding a general purpose
file server. In addition, a filer can be easily expanded to multi-terabytes of
data with relatively consistent response times.

Cost-Effectiveness. By combining our software-centric architecture with
state-of-the-art industry standard microprocessors and hard disk products, we
are able to achieve fast response times at a low cost per unit of storage.

STRATEGIES

We plan to extend our leadership in the network data access appliance
market by employing the following strategies:

Deepen Penetration into the Enterprise Market. Large enterprises are
increasingly deploying business critical systems and corporate intranets on
their networks. As a result, these organizations require enterprise-wide data
storage solutions that are reliable and fast while providing simple operation,
high scalability and efficient data management. These are the core
characteristics of our filers. In order to make our filers even better suited to
these enterprise requirements, we have incorporated features such as cluster
fail-over, fibre channel technology and Snapshot, our automated online backup
feature.

Focus on Software Differentiation. We seek to continue to differentiate our
products by focusing on developing additional specialized software. We believe
this approach allows us to cost-effectively integrate into our systems desirable
features such as intelligent Internet caching, software integrated RAID,
multi-protocol support, automated online backup and cluster fail-over.

Develop New Data Access Solutions. We seek to leverage our operating system
architecture to enter new network data access markets. Our latest product
technology, the NetCache appliance, has been specifically developed to take
advantage of our core software architecture. NetCache appliances reduce Internet
data traffic by locally storing copies of frequently requested Web pages. This
reduces the number of requests over the wide area network. As Internet traffic
continues to grow and high-speed access (such as Digital Subscriber Line (DSL))
becomes more widely available, the benefits of Internet caching are expected to
increase significantly.

Another market opportunity we are targeting is providing higher performing,
more simplified database storage solutions. Our filer products can offload file
service tasks from application servers thereby allowing performance tuning
specifically for the database application. Our Snapshot feature allows the
database to be backed-up to tape without interrupting database access. Our
database solution provides improved levels of database performance, increased
data availability and simplified data management. Our filer product line is
currently endorsed by major database vendors Oracle Corp. and Sybase, Inc.

Expand Distribution. We seek to market and distribute our products and
technology globally. In North America, we employ a multi-tiered distribution
strategy which focuses on product sales to end-users through a direct sales
force, as well as selected value-added resellers in certain geographies. In
Europe, we employ a mix of reseller and direct sales

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channels to sell to end-users. In Asia, our products are primarily sold through
resellers, which are supported by our channel managers and technical support
personnel. We recently entered into OEM agreements with Dell Computer
Corporation and Fujitsu Limited which are part of our strategy to increase the
worldwide distribution of our filer products.

Network Storage Strategy. We seek to leverage our network attached storage
products into expanding markets. Storage Area Network (SAN) architectures have
recently emerged from a variety of vendors. The goal of SAN architecture is to
directly connect multiple independent servers and storage subsystems through a
fibre channel switching fabric. This would provide enterprises with increased
disaster tolerance and the ability to attach larger numbers of disk drives per
server, among other benefits. We view the emergence of SAN architectures as
generally complementary to our Network Attached Storage (NAS) solution and are
working with leading industry partners to add the benefits of SAN to our leading
NAS technology architecture which already embraces fibre channel connectivity.

PRODUCTS

Filers. Our first network appliance product was a filer developed for the
UNIX environment. Subsequently, we added the capability for the filer to handle
the heterogeneous network environment of UNIX, Windows NT and HTTP protocols.
Current products include: the NetApp F720, an entry-level filer targeted for
workgroups and smaller application environments, the NetApp F740, designed to
address the needs of large departments, and the NetApp F760, an enterprise class
filer. All filers are based on a PCI-bus architecture and come packaged in rack
mountable enclosures. The NetApp F700-series filers are all based on the
Digital(R) Alpha(R) processor and support either SCSI or fibre channel
arbitrated loop conventions as storage options.

All of our filers include the Data ONTAP(TM) operating system and one base
or standard protocol (either NFS, CIFS or HTTP). Data ONTAP delivers
simultaneous file service to UNIX, Windows NT and Web clients. Data ONTAP,
versions 5.0 and higher, supports multiple volume server partitioning, a popular
strategy for modularizing, consolidating and administering data according to
applications, data types and organizational needs. Native multi-protocol
functionality can be easily added through licensing non-base protocols at an
additional cost. Cluster failover software technology, which automatically
senses a system failure and switches all file service functions to its cluster
partner, is available on the NetApp F740 and NetApp F760 products.

Our filer list prices range from $20,000 to $750,000, depending primarily
on the model purchased and product configuration.

NetCache Appliances. NetCache appliances were developed to address the
explosive growth of Internet traffic that is slowing Web data access. Web access
delays can be substantially reduced if frequently accessed data is stored or
"cached" nearer to the end user. To do this effectively, a solution must have
three capabilities: (i) remote deployability requiring little maintenance, (ii)
high object caching "hit rates" so that trips over the Internet are minimized
and (iii) high scalability that can handle many users. Using the proprietary
software developed for our filers, we developed and are selling our NetCache
family of appliances.

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Current products include the entry-level NetApp C720s, a dedicated caching
appliance designed for smaller ISP and enterprise environments, the NetApp C720,
designed for remote, low administrative overhead environments such as Internet
Points-of-Presence (POPs) and larger enterprises, and the NetApp C760, which
supports the most demanding, data-intensive caching environments. Under an
existing agreement we will provide Hewlett-Packard Company a NetCache software
solution for HP's UNIX platform, beginning late in the fourth quarter of fiscal
1999.

CUSTOMERS AND INDUSTRY SEGMENTS

Below is a partial list of our customers during calendar 1998 in selected
industry segments.

NETWORKING

3Com
Ascend
Bay Networks
Cisco Systems
Lucent
Nortel
QUALCOMM

SEMICONDUCTOR

Adaptec
AMD
Broadcom
Cirrus Logic
Intel
Motorola
National Semiconductor
Texas Instruments
VLSI Technology

TELECOMMUNICATIONS

AT&T
Bell South
Ericsson
France Telecom
GTE
MCI
Nokia
Pacific Bell
Sprint
US West
ONLINE AND INTERNET SERVICES

@Home
Amazon.com
America Online
Demon Internet
Earthlink Networks
GTE Internet
Infoseek
Mindspring
Netcom
Netscape
UUNET
WebTV
Yahoo

COMPUTERS

Dell
Fujitsu Limited
Hewlett-Packard
Hitachi
IBM
NEC
Siemens
Tandem
Toshiba

FINANCIAL SERVICES

Bear Stearns
Citicorp Securities
Fidelity Investments
NationsBank
The Money Store
GOVERNMENT

Dept. of the Army
Dept. of the Navy
Los Alamos Nat'l Lab
NASA
USGS

SOFTWARE

Baan
Cadence
Informix
Microsoft
PeopleSoft
Rational/Pure Atria
Sybase

ENERGY

Amoco
Chevron
Western Geophysical

SALES AND MARKETING

We seek to market and distribute our products and technology globally. In
North America, we employ a multi-tiered distribution strategy which focuses on
product sales to end-users through a direct sales force, as well as selected
value-added resellers in certain geographies. In Europe, we employ a mix of
reseller and direct sales channels to sell to end-users. In Asia, our products
are primarily sold through resellers, which are supported by our channel
managers and technical support personnel. We recently entered into OEM

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<PAGE> 37

agreements with Dell Computer Corporation and Fujitsu Limited which are part of
our strategy to increase the worldwide distribution of our filer products. No
single customer accounted for 10% or more of our net sales in fiscal 1996, 1997
or 1998.

BACKLOG

We manufacture our products based upon forecasts of our customers' demand.
Orders are generally placed by customers on an as-needed basis. Products are
typically shipped within one to four weeks following receipt of an order. In
general, customers may cancel or reschedule orders without penalty. For these
reasons, we do not believe "orders" constitute a firm "backlog" and believe
orders are not a meaningful indicator of revenues nor material to an
understanding of our business.

CUSTOMER SERVICE AND SUPPORT

Our customer service and support organization provides technical support,
education and training. We believe that providing a high level of customer
service and technical support is critical to customer satisfaction and our
success. Warranty coverage, which is generally one year for hardware and 90 days
for software, includes 24-hour telephone support and advanced replacement of
defective hardware shipped on a next business day basis. We also offer upgraded
service during the warranty period, providing for faster on-site hardware
repair. Software support, including the repair of errors or defects, and new
release updates are provided at no extra charge for 90 days after product
shipment. Additional software support is available after the initial warranty
period through the software subscription program. Post-warranty service programs
include:

- cooperative maintenance where the customer purchases replacements or
extra parts and performs self-maintenance tasks;

- a full-service program involving a combination of telephone-based support
and on-site advanced replacement; and

- a software subscription program that includes telephone support and
software upgrades.

We charge for service programs on an annual subscription basis, with
discounts to sites with multiple filers. On-site support is primarily provided
by independent parties both in North America and internationally.

MANUFACTURING

Our manufacturing operations, located in Santa Clara, California, include
materials procurement, commodity management, component engineering,
manufacturing engineering, product assembly, product assurance, quality control
and final test. We rely on many suppliers for materials, as well as several key
subcontractors for the production of certain sub-assemblies. Our strategy has
been to develop close relationships with our suppliers, exchanging critical
information and implementing joint quality training programs. We are currently
expanding the use of subcontractors for the production of major sub-assemblies.
See "Risk Factors -- We rely upon a limited number of suppliers." This
manufacturing strategy minimizes capital investment and overhead expenditures
and creates flexibility by allowing us to rapidly expand. During May 1997, we
were awarded the ISO 9001 certification.

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<PAGE> 38

RESEARCH AND DEVELOPMENT

Since our inception we have made substantial investments in research and
development. We believe that our future performance will depend in large part on
our ability to maintain and enhance our current product line, develop new
products that achieve market acceptance, maintain technological competitiveness
and meet an expanding range of customer requirements. We intend to continuously
expand our existing product offerings and to introduce new products. As part of
our ongoing development process, in fiscal 1998 we initiated production
shipments of four new filers, in the second quarter of fiscal 1999 we launched
the F700 filer product family and in the third quarter of fiscal 1999 we
introduced the C700 family, the second generation of our NetCache appliances.

Our future growth depends upon the successful development and introduction
of new hardware and software, however we cannot assure you that these or other
new products will attain market acceptance. See "Risk Factors -- We depend upon
our research and development efforts to develop and introduce new products" and
"-- We face risks of technological changes that affect our products."

Our total expenses for research and development for fiscal years 1996, 1997
and 1998 and the nine months ended January 29, 1999 were $4.8 million, $9.0
million, $16.6 million and $20.6 million, respectively. We anticipate that
research and development expenses will increase in absolute dollars in future
periods.

COMPETITION

The network file server market is intensely competitive and characterized
by rapidly changing technology. We experience competition from specialized
network file server companies such as Auspex Systems, Inc. We also compete
against traditional suppliers of UNIX-based general purpose computers that are
used as network file servers including Sun Microsystems, Inc., Hewlett-Packard
Company, Silicon Graphics, Inc. and IBM Corporation, among others. In addition,
certain of these large traditional suppliers of general purpose computers may in
the future offer specialized file server products which are more directly
competitive with our products. We also encounter competition from manufacturers
of PC-based file servers utilizing Windows NT and emerging standards, as well as
competition from manufacturers of open systems storage solutions such EMC
Corporation and Data General Corp. Our NetCache Appliances and NetCache Software
compete against a number of software and hardware solutions, from companies
ranging from small start-ups to larger systems vendors including Cisco Systems
Inc., Inktomi Corp., Cacheflow Inc. and Novell, Inc. See "Risk Factors -- An
increase in competition could materially adversely affect our operating results"
and "-- We face risks of technological changes that affect our products."

We believe that the principal competitive factors affecting our market
include product features such as response time, scalability, ease of use, price,
multiprotocol capabilities and customer service and support. Although we believe
that our products currently compete favorably with respect to these factors, we
can not assure you that we can maintain our competitive position against current
and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.

PROPRIETARY RIGHTS

We currently rely on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures, contractual provisions and patents to
protect our proprietary

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<PAGE> 39

rights. We seek to protect our software, documentation and other written
materials under trade secret, copyright and patent laws, which afford only
limited protection. We have registered our "Network Appliance" name and logo,
and "NetApp" trademarks. We will continue to evaluate the registration of
additional trademarks as appropriate. We generally enter into confidentiality
agreements with our employees, resellers and customers. We currently have
multiple U.S. and international patent applications pending and one U.S. patent
issued. See "Risk Factors -- If we are unable to protect our intellectual
property, we may be subject to increased competition which could materially
adversely affect our operating results."

EMPLOYEES

As of January 29, 1999, we had approximately 660 employees. Of the total,
365 were in sales and marketing, 173 in research and development, 64 in finance
and administration and 58 in operations. Our future performance depends in
significant part upon our key technical and senior management personnel, none of
whom is bound by an employment agreement. We have never had a work stoppage and
consider relations with our employees to be good.

FACILITIES

Our principal administrative, sales, marketing, manufacturing and research
and development facilities are located in approximately 168,000 square feet of
space in Santa Clara, California. The facilities are leased under various
operating leases which expire through fiscal 2003. In June, July and August
1998, we executed agreements to acquire approximately 18 acres of land in
Sunnyvale, California and accompanying 206,000 square feet of buildings. We
expect to occupy the Sunnyvale facilities in phases beginning in July 1999. All
of our principal activities will relocate to Sunnyvale. In January 1999, we
assigned our rights and obligations under one of the agreements for the
Sunnyvale facilities to a third-party entity and entered into an operating
lease. The lease is for five years and can be renewed for two five-year periods,
subject to the approval of the third-party entity. At the expiration or
termination of the lease, we have the option to either purchase the property at
a pre-determined amount, or arrange for the purchase by another party at a price
equal to the fair market value, and be contingently liable for any deficiency in
price. We lease other sales offices throughout the United States and
internationally. We believe that our existing facilities and those being
developed in Sunnyvale are adequate for our requirements over at least the next
two years and that additional space will be available as needed.

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<PAGE> 40

MANAGEMENT

Our executive officers and directors and their ages as of March 31, 1999,
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
Daniel J. Warmenhoven................. 48 President, Chief Executive Officer
and Director
M. Helen Bradley...................... 45 Vice President, Engineering
Jeffry R. Allen....................... 47 Vice President, Finance and
Operations, Chief Financial Officer
and Secretary
Thomas F. Mendoza..................... 48 Senior Vice President,
Worldwide Sales and Marketing
Charles E. Simmons.................... 50 Vice President, Corporate Development
Donald T. Valentine................... 66 Chairman of the Board, Director
Sanjiv Ahuja.......................... 43 Director
Carol A. Bartz(1)..................... 50 Director
Larry R. Carter(2).................... 55 Director
Michael R. Hallman(2)................. 53 Director
Robert T. Wall(1)..................... 53 Director
</TABLE>

- -------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.

Daniel J. Warmenhoven has served as our President and Chief Executive
Officer and has been a member of the Board of Directors since October 1994.
Prior to joining us, Mr. Warmenhoven served in various capacities, including
President, Chief Executive Officer and Chairman of the Board of Directors of
Network Equipment Technologies, Inc., a telecommunications company, from
November 1989 to January 1994. Mr. Warmenhoven holds a B.S. degree in electrical
engineering from Princeton University.

M. Helen Bradley has served as our Vice President, Engineering since
September 1995. Prior to that, Ms. Bradley owned a management consulting
business from January 1995 to September 1995. She also served as Senior Vice
President, Technology Development at Openvision, Inc., a client-server
applications company, from May 1994 to January 1995. From August 1990 to April
1994, Ms. Bradley was the Vice President, Systems Software at Sun Microsystems,
Inc. Ms. Bradley holds a B.S. degree in mathematics from the Massachusetts
Institute of Technology and an M.S. degree in computer science from the Georgia
Institute of Technology.

Jeffry R. Allen has served as our Vice President, Finance and Operations,
Chief Financial Officer and Secretary since December 1996. From October 1994 to
December 1996, Mr. Allen served in various capacities, including Senior Vice
President of Operations and Vice President and Controller of Bay Networks, Inc.,
a networking company. From December 1990 to October 1994, Mr. Allen held various
positions at SynOptics, Inc., the latest of which was Vice President and
Controller. Before joining SynOptics, Inc., he held various positions, from
December 1973 to November 1990, at Hewlett-Packard Company, the latest of which
was Controller of the Information Networks Group. Mr. Allen holds a B.S. degree
from San Diego State University.

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<PAGE> 41

Thomas F. Mendoza has served as our Senior Vice President, Worldwide Sales
since 1998 and Senior Vice President, Marketing since February 1999. Prior to
that he served as Vice President, North American Sales. From November 1993 to
April 1994, Mr. Mendoza served in various capacities including Vice President,
Sales at Work Group Technology, a product data management company. Prior to
that, Mr. Mendoza served in various capacities including Vice President of North
American Sales at Auspex Systems, Inc., a UNIX-based network file server
company, from November 1990 to October 1993. Mr. Mendoza was previously Vice
President of Western Operations at Stratus Computer Corp., a vendor of fault
tolerant computers, from May 1982 to October 1990. Mr. Mendoza holds a B.A.
degree from the University of Notre Dame.

Charles E. Simmons has served as our Vice President, Corporate Development
since February 1999. From May 1996 to February 1999 he served as Vice President,
Marketing. Prior to that, Mr. Simmons was a senior partner at Rohner &
Associates, a consulting firm, from October 1994 to May 1996. From February 1994
to October 1994, Mr. Simmons served as Vice President of Marketing at Voyant
Corporation, a developer of videoconferencing equipment. Prior to that, Mr.
Simmons was with Sun Microsystems Computer Company, a subsidiary of Sun
Microsystems, Inc., from November 1984 to February 1994, most recently as
Director of Business Strategy and Technology Marketing. Mr. Simmons received a
B.S. degree in electrical engineering from Washington University, an M.S. degree
in electrical engineering from the Massachusetts Institute of Technology and an
M.B.A. from Santa Clara University.

Donald T. Valentine has been a director and Chairman of the Board of
Directors since September 1994. Mr. Valentine has been a general partner of
Sequoia Capital, a venture capital firm, since 1972. He is also Chairman of the
Board of C-Cube Microsystems Inc., a semiconductor video compression company and
Vice Chairman of Cisco Systems Inc.

Sanjiv Ahuja has been a director since August 1998. Since January 1997, Mr.
Ahuja has been the President and Chief Operating Officer of Bellcore, a leading
provider of communications software and consulting and a wholly owned subsidiary
of Science Applications International Corporation (SAIC). He joined Bellcore in
1994 as Corporate Vice President and President of the Software Systems Group
after holding several key executive positions at IBM where he began his career
in 1979. Mr. Ahuja currently serves on the Board of Directors of Bellcore and
Tellium, Inc., a wave division multiplexing systems provider. He received a B.S.
degree in electrical engineering with top honors from Delhi University, India
and an M.S. degree in computer science with a concentration in communications
from Columbia University.

Carol A. Bartz has been a director since September 1995. From April 1992
through September 1996, Ms. Bartz served as Chairman of the Board, President and
Chief Executive Officer of Autodesk, Inc., and presently serves as Chairman of
the Board and Chief Executive Officer of Autodesk, Inc., a PC software company
and supplier of design software. Prior to that, Ms. Bartz was with Sun
Microsystems Inc. from September 1983 to April 1992, most recently as Vice
President of Worldwide Field Operations. In addition, Ms. Bartz currently serves
on the Board of Directors of Airtouch Communications Inc., Cadence Design
Systems, Inc., Cisco Systems Inc. and BEA Systems, Inc. Ms. Bartz received a
B.A. degree in computer science from the University of Wisconsin.

Larry R. Carter has been a director since April 1997. Since January 1995,
Mr. Carter has been Vice President, Finance and Administration, Chief Financial
Officer and

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<PAGE> 42

Secretary of Cisco Systems Inc. From July 1992 to January 1995, he was Vice
President and Corporate Controller for Advanced Micro Devices Inc. Prior to
that, he was with VLSI Technology, Inc. for four years where he held the
position of Vice President, Finance and Chief Financial Officer. Mr. Carter
received a B.S. degree in Business Administration and Accounting from Arizona
State University.

Michael R. Hallman has been a director since August 1994. Mr. Hallman is
the President of The Hallman Group, a management consulting firm, which he
founded in June 1992. Prior to that, he served as President and Chief Operating
Officer of Microsoft Corporation, a microcomputer software company, from March
1990 to March 1992. He presently serves on the Board of Directors of InFocus
Systems Inc., a computer peripherals company, Intuit Inc., a microcomputer
software company, and Keytronics Corporation, an input device company. Mr.
Hallman holds B.B.A. and M.B.A. degrees from the University of Michigan.

Robert T. Wall has been a director since January 1993. From June 1997 to
November 1998, he was Chief Executive Officer and a member of the Board of
Directors of Clarity Wireless, Inc., a broadband wireless datacommunications
company which was acquired by Cisco Systems Inc. in November 1998. Mr. Wall was
Chairman of the Board, President and Chief Executive Officer of Theatrix
Interactive, Inc., a consumer educational software publisher, from April 1994 to
August 1997. In August 1984, he founded On Point Developments, LLC, a venture
management company, where he has served as President since its formation. He
presently serves on the Board of Directors of Egghead.com, Inc., an online
reseller of personal computer products. He received an A.B. degree in economics
from De Pauw University and an M.B.A. degree from Harvard Business School.

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<PAGE> 43

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 220,000,000 shares of common stock
after giving effect to two-for-one stock splits effective December 1997 and
1998, and 5,000,000 shares of preferred stock.

COMMON STOCK

As of January 29, 1999, there were 69,396,295 shares of our common stock
outstanding that were held by approximately 304 shareholders of record. Upon
completion of this offering, we will have outstanding an aggregate of 71,896,295
shares of common stock, assuming (i) the issuance of 2,500,000 shares of common
stock offered hereby, (ii) no exercise of the Underwriters' over-allotment
option and (iii) no exercise after January 29, 1999 of options to purchase
common stock.

Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of legally available funds. See "Dividend
Policy." In the event of the liquidation, dissolution or winding up of our
business, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.

PREFERRED STOCK

Our Articles of Incorporation authorize 5,000,000 shares of preferred
stock. Our Board of Directors has the authority to issue the preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the shareholders. Issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire, or could discourage a third party from acquiring, a majority
of our outstanding stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. At present, we have no
plans to issue any of the preferred stock.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE BYLAWS

Our Bylaws, as amended and restated, provide that all shareholder actions
must be effected at a duly called meeting and not by a consent in writing. The
Bylaws also provide that our shareholders may call a special meeting of
shareholders only upon a request of shareholders owning at least 50% of our
capital stock. These provisions of the Bylaws and the existence of authorized,
but undesignated, preferred stock could discourage potential acquisition
proposals and could delay or prevent a change in control. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the

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<PAGE> 44

Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control. The provisions also are intended to discourage
certain tactics that may be used in proxy fights. However, such provisions could
have the effect of discouraging others from making tender offers for our shares
and, as a consequence, they also may inhibit fluctuations in the market price of
our shares that could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in management. "See
Risk Factors -- Protective anti-takeover provisions in our charter and bylaws
could materially adversely affect stockholders."

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the common stock is Harris Trust
Company of California.

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<PAGE> 45

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the form
of which is filed as an exhibit to the Registration Statement of which this
prospectus forms a part, we have agreed to sell to each of the Underwriters
named below, and each of such Underwriters, for whom Lehman Brothers Inc., BT
Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Wit Capital Corporation, as e-Manager,(TM) are acting as representatives (the
"Representatives"), has severally agreed to purchase from us the respective
number of shares of common stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ----------------
<S> <C>
Lehman Brothers Inc..................................... 815,000
BT Alex. Brown Incorporated............................. 815,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated...... 815,000
Wit Capital Corporation................................. 55,000
---------
Total......................................... 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of common stock are subject to certain
conditions, and that if any of the foregoing shares of common stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, then all
of the shares of common stock agreed to be purchased by the Underwriters
pursuant to the Underwriting Agreement must be so purchased.

We have been advised that the Underwriters propose to offer the shares of
common stock in part directly to the public at the offering price set forth on
the cover page of this prospectus, and in part to certain selected dealers (who
may include the Underwriters) at such public offering price less a selling
concession not in excess of $1.22 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share to
certain brokers and dealers. After this offering, the public offering price, the
concession to selected dealers and the reallowance may be changed by the
Underwriters.

We have granted to the Underwriters options to purchase up to an aggregate
of 375,000 additional shares of common stock, at the public offering price, less
the aggregate underwriting discounts and commissions shown on the cover page of
this prospectus, exercisable solely to cover over-allotments, if any. Such
options may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the options are exercised, the
Underwriters will be committed, subject to certain conditions, to purchase a
number of additional shares of common stock proportionate to such Underwriters'
initial commitment as indicated in the preceding table and we will be obligated,
pursuant to such over-allotment options, to sell such shares of common stock to
the Underwriters.

We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, subject to certain limited exceptions, directly or
indirectly, offer, sell or otherwise dispose of any shares of common stock, or
any securities convertible into or exchangeable or exercisable for any such
shares, for the period ending 90 days after the date of this prospectus. Our
executive officers and directors have agreed pursuant to lock-up agreements
that, without the prior written consent of Lehman Brothers Inc., they will not,
subject to certain limited exceptions, directly or indirectly, offer, sell or
otherwise dispose

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<PAGE> 46

of any shares of common stock or any securities convertible into or exchangeable
or exercisable for any such shares for the period ending May 20, 1999. After
this date, our executive officers and directors, and the companies affiliated
with them, will be free to sell their shares into the market.

We have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act and to contribute, under certain
circumstances, to payments that the Underwriters may be required to make in
respect thereof.

Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of common stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the common stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the common stock.

If the Underwriters create a short position in the common stock in
connection with this offering (i.e., if they sell more shares of common stock
than the number of shares set forth on the cover page of the prospectus), the
Representatives may reduce that short position by purchasing common stock in the
open market. The Representatives also may elect to reduce any short position by
exercising all or part of the over-allotment option described herein.

The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of common stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the common stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of this offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.

Neither we nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the Underwriters makes any representation that the Representatives
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.

Any offers in Canada will be made only pursuant to an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.

Purchasers of common stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the country
of purchase in addition to the offering price set forth on the cover page
hereof.

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<PAGE> 47

Lehman Brothers Inc. has provided investment banking, financial advisory
and other services to us, for which services Lehman Brothers Inc. has received
customary fees.

LEGAL MATTERS

The validity of the shares of common stock offered by the company hereby
will be passed upon for the company by Brobeck, Phleger & Harrison LLP, San
Francisco, California, and for the Underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The consolidated financial statements as of April 30, 1997 and 1998 and for
each of the three years in the period ended April 30, 1998 included in this
prospectus and the related consolidated financial statement schedule included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any document we file at the public reference facilities of the SEC
located at 450 Fifth Street N.W., Washington D.C. 20549. You may obtain
information on the operation of the SEC's public reference facilities by calling
the SEC at 1-800-SEC-0330. You can also access copies of such material
electronically on the SEC's home page on the World Wide Web at
http://www.sec.gov. Information concerning Network Appliance, Inc. is also
available for inspection at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.

This prospectus is part of a registration statement (Registration No.
333-74979) we filed with the SEC. The SEC permits us to "incorporate by
reference" the information we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and information we file with the SEC after the date of this
prospectus will automatically update and supersede this information. We
incorporate by reference the following documents filed by us with the SEC (File
No. 00027130). We also incorporate by reference any future filings made with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, after the date of this prospectus until the termination of
this offering.

1. Our Annual Report on Form 10-K for the fiscal year ended April 24,
1998.

2. Our Annual Report on Form 10-K/A for the fiscal year ended April
24, 1998.

3. Our Quarterly Report on Form 10-Q for the fiscal quarter ended July
31, 1998.

4. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
October 30, 1998.

5. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
January 29, 1999.

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<PAGE> 48

If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies you requested at no charge.
However, we will not send exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. You should direct
request for such copies to Chief Financial Officer, 2770 San Tomas Expressway,
Santa Clara, California, 95051, (408) 367-3000.

You should rely only on the information contained in this prospectus and
incorporated by reference into this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
We are offering to sell, and seeking offers to buy, shares of our common stock
only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
shares.

46
<PAGE> 49

NETWORK APPLIANCE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets -- April 30, 1997 and 1998.... F-3
Consolidated Statements of Income -- Three Years Ended
April 30, 1998......................................... F-4
Consolidated Statements of Shareholders' Equity
(Deficit) -- Three Years Ended April 30, 1998.......... F-5
Consolidated Statements of Cash Flow -- Three Years Ended
April 30, 1998......................................... F-6
Notes to Consolidated Financial Statements................ F-7
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -- April 30, 1998
and January 29, 1999................................... F-22
Condensed Consolidated Statements of Income -- Nine Months
Ended
January 23, 1998 and January 29, 1999.................. F-23
Condensed Consolidated Statements of Cash Flows -- Nine
Months Ended
January 23, 1998 and January 29, 1999.................. F-24
Notes to Condensed Consolidated Financial Statements...... F-25
</TABLE>

F-1
<PAGE> 50

INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Network Appliance, Inc.:

We have audited the accompanying consolidated balance sheets of Network
Appliance, Inc. and its subsidiaries as of April 30, 1997 and 1998, and the
related consolidated statements of income, shareholders' equity (deficit) and
cash flows for each of the three years in the period ended April 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Network
Appliance, Inc. and its subsidiaries as of April 30, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1998 in conformity with generally accepted accounting
principles.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
May 8, 1998 (July 17, 1998 as to
the first three paragraphs of Note 11
and December 21, 1998 as to the last
three paragraphs of Note 11)

F-2
<PAGE> 51

NETWORK APPLIANCE, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
APRIL 30,
-------------------
1997 1998
------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $21,520 $ 37,315
Short-term investments.................................. 6,916 10,800
Accounts receivable, net of allowances of $330 in 1997
and $811 in 1998..................................... 13,911 34,313
Inventories............................................. 9,920 8,707
Prepaid expenses and other.............................. 1,253 2,524
Deferred taxes.......................................... 3,100 5,280
------- --------
Total current assets............................ 56,620 98,939
------- --------
PROPERTY AND EQUIPMENT, NET............................... 9,238 12,217
OTHER ASSETS.............................................. 3,083 4,580
------- --------
$68,941 $115,736
======= ========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term obligations................ $ 21 $ 17
Accounts payable........................................ 4,394 10,024
Income taxes payable.................................... 1,023 1,782
Accrued compensation and related benefits............... 4,666 8,485
Other accrued liabilities............................... 2,280 4,201
Deferred revenue........................................ 2,317 4,799
------- --------
Total current liabilities....................... 14,701 29,308
------- --------
LONG-TERM OBLIGATIONS..................................... 211 163
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000 shares authorized;
shares outstanding: none in 1997 and 1998............ -- --
Common stock, no par value; 220,000 shares authorized;
shares outstanding: 65,664 in 1997 and 67,296 in
1998................................................. 54,707 66,422
Deferred stock compensation............................. (54) (498)
Retained earnings (accumulated deficit)................. (624) 20,341
------- --------
Total shareholders' equity...................... 54,029 86,265
------- --------
$68,941 $115,736
======= ========
</TABLE>

See notes to consolidated financial statements.
F-3
<PAGE> 52

NETWORK APPLIANCE, INC.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
NET SALES....................................... $46,632 $93,333 $166,163
COST OF SALES................................... 20,557 38,061 67,549
------- ------- --------
Gross margin.......................... 26,075 55,272 98,614
------- ------- --------
OPERATING EXPENSES:
Sales and marketing........................... 12,735 24,268 42,779
Research and development...................... 4,762 8,968 16,649
General and administrative.................... 2,578 4,134 6,528
Purchased in-process technology and related
compensation charge........................ -- 10,519 --
Litigation settlement......................... -- 4,300 --
------- ------- --------
Total operating expenses.............. 20,075 52,189 65,956
------- ------- --------
INCOME FROM OPERATIONS.......................... 6,000 3,083 32,658
OTHER INCOME (EXPENSE):
Interest income............................... 668 1,048 1,097
Interest and other expense.................... (68) (88) (208)
------- ------- --------
Total other income.................... 600 960 889
------- ------- --------
INCOME BEFORE INCOME TAXES...................... 6,600 4,043 33,547
PROVISION FOR INCOME TAXES...................... -- 3,793 12,582
------- ------- --------
NET INCOME...................................... $ 6,600 $ 250 $ 20,965
======= ======= ========
NET INCOME PER SHARE:
Basic......................................... $ 0.18 $ 0.00 $ 0.32
======= ======= ========
Diluted....................................... $ 0.10 $ 0.00 $ 0.29
======= ======= ========
SHARES USED IN PER SHARE CALCULATION:
Basic......................................... 35,994 60,978 64,914
======= ======= ========
Diluted....................................... 62,936 68,804 71,902
======= ======= ========
</TABLE>

See notes to consolidated financial statements.
F-4
<PAGE> 53

NETWORK APPLIANCE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE RETAINED
PREFERRED STOCK COMMON STOCK DEFERRED EARNINGS
---------------- ---------------- STOCK (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT) TOTAL
------ ------- ------ ------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, APRIL 30, 1995... 4,748 $ 1,340 20,264 $ 211 $ -- $(7,474) $(5,923)
Exercise of stock
options.................. -- -- 5,750 274 -- -- 274
Exercise of warrants....... -- -- 1,438 708 -- -- 708
Issuance of common stock in
connection with the
Company's initial public
offering................. -- -- 8,620 25,714 -- -- 25,714
Repurchase of common
stock.................... -- -- (858) (68) -- -- (68)
Conversion of Series A
preferred stock into
common stock............. (4,748) (1,340) 4,748 1,340 -- -- --
Conversion of Series B and
C preferred stock into
common stock............. -- -- 24,598 11,354 -- -- 11,354
Deferred stock
compensation............. -- -- -- 515 (515) -- --
Amortization of deferred
stock compensation....... -- -- -- -- 132 -- 132
Income tax benefit from
employee stock
transactions............. -- -- -- 238 -- -- 238
Net income................. -- -- -- -- -- 6,600 6,600
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1996... -- -- 64,560 40,286 (383) (874) 39,029
Issuance of common stock... -- -- 1,166 1,730 -- -- 1,730
Repurchase of common
stock.................... -- -- (752) (52) -- -- (52)
Amortization of deferred
stock compensation....... -- -- -- -- 85 -- 85
Reversal of deferred stock
compensation due to
employee termination..... -- -- -- (244) 244 -- --
Income tax benefit from
employee stock
transactions............. -- -- -- 2,487 -- -- 2,487
Common stock issued for IMC
acquisition.............. -- -- 690 7,350 -- -- 7,350
Compensation charge for IMC
acquisition.............. -- -- -- 3,150 -- -- 3,150
Net income................. -- -- -- -- -- 250 250
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1997... -- -- 65,664 54,707 (54) (624) 54,029
Issuance of common stock... -- -- 1,654 6,937 -- -- 6,937
Repurchase of common
stock.................... -- -- (22) (1) -- -- (1)
Deferred stock
compensation............. -- -- -- 714 (714) -- --
Amortization of deferred
stock compensation....... -- -- -- -- 270 -- 270
Income tax benefit from
employee stock
transactions............. -- -- -- 4,065 -- -- 4,065
Net income................. -- -- -- -- -- 20,965 20,965
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1998... -- $ -- 67,296 $66,422 $(498) $20,341 $86,265
====== ======= ====== ======= ===== ======= =======
</TABLE>

See notes to consolidated financial statements.
F-5
<PAGE> 54

NETWORK APPLIANCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 6,600 $ 250 $ 20,965
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 1,386 2,866 5,548
Purchased in-process technology and
related compensation charge............. -- 10,519 --
Provision for doubtful accounts........... 110 -- 481
Deferred income taxes..................... (2,100) (2,794) (1,749)
Deferred rent............................. 87 (69) (36)
Changes in assets and liabilities:
Accounts receivable..................... (2,270) (8,573) (20,883)
Inventories............................. (1,181) (5,095) 1,213
Prepaid expenses and other.............. (525) (1,031) (1,484)
Accounts payable........................ (1,415) 2,295 5,626
Accrued compensation and related
benefits............................. 1,065 2,636 3,819
Income taxes payable.................... 500 3,010 4,823
Other accrued liabilities............... 876 338 1,921
Deferred revenue........................ 370 1,917 2,482
------- -------- --------
Net cash provided by operating
activities........................ 3,503 6,269 22,726
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......... (4,281) (7,124) (7,971)
Redemptions of short-term investments........ -- 13,836 11,166
Purchases of short-term investments.......... (2,982) (17,770) (15,050)
Other assets................................. -- -- (2,000)
Cash acquired from IMC purchase.............. -- 11 --
------- -------- --------
Net cash used in investing
activities........................ (7,263) (11,047) (13,855)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..... 1,250 -- --
Repayments of long-term obligations.......... (1,272) (17) (12)
Payments for repurchase of common stock...... (68) (52) (1)
Proceeds from sale of common stock, net...... 26,696 1,730 6,937
------- -------- --------
Net cash provided by financing
activities........................ 26,606 1,661 6,924
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 22,846 (3,117) 15,795
CASH AND CASH EQUIVALENTS:
Beginning of year............................ 1,791 24,637 21,520
------- -------- --------
End of year.................................. $24,637 $ 21,520 $ 37,315
======= ======== ========
</TABLE>

See notes to consolidated financial statements.
F-6
<PAGE> 55

NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

1. THE COMPANY

Network Appliance, Inc., incorporated in the state of California in April
1992, and its subsidiaries (the "Company") operate in a single industry segment
and are involved in the design, manufacturing, marketing and support of high
performance network data storage devices which provide fast, simple, reliable
and cost-effective file service for data-intensive network environments.

2. SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year -- Although the Company operates on a 52-week or 53-week year
ending on the last Friday in April, for presentation purposes the Company has
indicated in the accompanying consolidated financial statements that its fiscal
year end is April 30. Fiscal 1996, 1997 and 1998 were 52-week years. Fiscal 1999
will be a 53-week fiscal year.

Basis of Presentation -- The consolidated financial statements include the
Company and its wholly-owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation. Certain amounts from prior years
have been reclassified to conform to current-year presentation. These
reclassifications did not change previously reported total assets, liabilities,
shareholders' equity or net income.

Cash and Cash Equivalents -- The Company considers all highly liquid debt
investments with original maturities of three months or less to be cash
equivalents.

Short-term Investments -- The Company's short-term investments consist of
securities with original maturities ranging between three and six months. All of
the Company's investments are classified as available-for-sale, and are stated
at amortized cost, which approximates fair market value. Short-term investments
consist of $6,916 and $10,800 of municipal securities as of April 30, 1997, and
April 30, 1998, respectively. No short-term investments were sold during any of
the periods presented.

Inventories -- Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Inventories consist of the following:

<TABLE>
<CAPTION>
APRIL 30,
----------------
1997 1998
------ ------
<S> <C> <C>
Purchased components......................... $6,775 $4,494
Work in process.............................. 1,524 1,889
Finished goods............................... 1,621 2,324
------ ------
$9,920 $8,707
====== ======
</TABLE>

Property and Equipment -- Property and equipment is stated at cost and is
depreciated on a straight-line basis over estimated useful lives which range
from two to

F-7
<PAGE> 56
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

five years. Leasehold improvements are amortized over their estimated useful
lives or the life of the lease, whichever is shorter. Property and equipment
consists of the following:

<TABLE>
<CAPTION>
APRIL 30,
------------------
1997 1998
------- -------
<S> <C> <C>
Computers, related equipment and purchased
software................................. $11,011 $16,979
Furniture and fixtures..................... 1,221 1,962
Leasehold improvements..................... 1,520 2,782
------- -------
13,752 21,723
Accumulated depreciation and
amortization............................. (4,514) (9,506)
------- -------
$ 9,238 $12,217
======= =======
</TABLE>

Revenue Recognition -- The Company recognizes revenue and records estimated
product return and warranty reserves upon shipment if no material obligations
remain outstanding and the collectibility of receivables is deemed to be
probable. Service and software subscription revenues are recognized over the
terms of the related contractual periods. Combined service and software
subscription revenues were less than 10% of net sales for all of the periods
presented.

Advertising Costs -- Advertising costs are charged to operations when
incurred. Advertising expenses for fiscal 1996, 1997 and 1998 were aproximately
$25, $100 and $1,000, respectively.

Software Development Costs -- The Company capitalizes eligible computer
software development costs, which include software enhancement costs, upon the
establishment of technological feasibility, which occurs upon the completion of
a working model. Software development costs capitalized have not been
significant.

Foreign Currency Translation -- The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the year,
nonmonetary assets and liabilities are translated at historical rates and net
sales and expenses are translated at average exchange rates in effect during the
period. Transaction gains and losses, which are included in other income
(expense) in the accompanying consolidated statements of income, have not been
significant.

Certain Significant Risks and Uncertainties -- The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such management estimates include the
allowance for doubtful accounts receivable, inventory reserves, various accruals
and warranty reserves. Actual results could differ from those estimates.

The Company is subject to certain risks, including without limitation risks
relating to history of operating losses, fluctuating operating results, customer
and market acceptance

F-8
<PAGE> 57
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

of new products, dependence on new products, rapid technological change,
litigation, dependence on growth in the network file server market, expansion of
international operations, product concentration, changing product mix,
competition, recent management additions, management of expanding operations,
dependence on high-quality components, dependence on proprietary technology,
intellectual property rights, dependence on key personnel, volatility of stock
price, shares eligible for future sale, effect of certain anti-takeover
provisions and dilution and the Year 2000 Issue.

Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments and accounts receivable. Cash, cash
equivalents and short-term investments consist primarily of municipal
securities, cash accounts held at various banks and a money market fund held at
a single financial institution. The Company sells its products primarily to
large organizations in different industries and geographies. Credit risk is
further mitigated by the Company's credit evaluation process and limited payment
terms. The Company does not require collateral or other security to support
accounts receivable. The Company maintains an allowance for potential credit
losses.

Net Income Per Share -- The Company has adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
effective in the third quarter of fiscal 1998. SFAS 128 requires the
presentation of basic and diluted net income per share. Basic net income per
share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for that period. Diluted
net income per share is computed giving effect to all dilutive potential shares
that were outstanding during the period. Dilutive potential common shares
consist of incremental common shares subject to repurchase, common shares
issuable upon exercise of stock options and warrants and convertible preferred
stock. All prior-period net income (loss) per-share amounts have been restated
to comply with SFAS 128 as well as to reflect the two-for-one stock splits
effective on December 18, 1997 and on December 21, 1998 (See Note 11).

F-9
<PAGE> 58
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for the periods presented:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
NET INCOME (NUMERATOR):
Net Income, basic and diluted.......... $ 6,600 $ 250 $20,965
======= ======= =======
SHARES (DENOMINATOR):
Weighted average common shares
outstanding......................... 41,896 64,658 66,400
Weighted average common shares
outstanding subject to repurchase... (5,902) (3,680) (1,486)
------- ------- -------
Shares used in basic computation....... 35,994 60,978 64,914
Weighted average common shares
outstanding subject to repurchase... 5,902 3,680 1,486
Common shares issuable upon exercise of
stock options and warrants.......... 4,538 4,146 5,502
Convertible preferred stock............ 16,502 -- --
------- ------- -------
Shares used in diluted computation..... 62,936 68,804 71,902
======= ======= =======
NET INCOME PER SHARE:
Basic.................................. $ 0.18 $ 0.00 $ 0.32
======= ======= =======
Diluted................................ $ 0.10 $ 0.00 $ 0.29
======= ======= =======
</TABLE>

Statements of Cash Flows -- Supplemental cash flow and noncash investing
and financing activities are as follows:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------
1996 1997 1998
------- ------ -------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................... $ 60 $ -- $ --
Income taxes paid....................... 1,362 3,809 9,402
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Deferred stock compensation............. 515 (244) 714
Conversion of preferred stock into
common stock......................... 12,694 -- --
Income tax benefit from employee stock
transactions......................... 238 2,487 4,065
Common stock issued for IMC
acquisition.......................... -- 7,350 --
Deferred stock compensation charge for
IMC acquisition...................... -- 3,150 --
</TABLE>

Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."

Accounting for Long-Lived Assets -- Effective May 1, 1996, the Company
adopted Financial Accounting Standards Board Statement No. 121 ("SFAS 121")
"Accounting for

F-10
<PAGE> 59
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which requires the Company to review the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of SFAS 121 had no impact on the Company's
financial condition or results of operations.

Recently Issued Accounting Standards -- In June 1997, the Financial
Accounting Standards Board issued two new statements of financial accounting
standards ("SFAS"). SFAS No. 130, "Reporting Comprehensive Income", requires
that an enterprise report, by major components and as a single total, the change
in its net assets from nonowner sources during the period. SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, and geographic
areas. The Company has not yet identified its SFAS No. 131 reporting segments.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows. Both statements are
effective for the Company's fiscal year 1999.

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition".
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SOP No. 97-2 is
effective for transactions entered into during the Company's fiscal year 1999
and thereafter. The Company does not expect that the adoption of this statement
will materially impact the Company's financial position, results of operations
or cash flows.

3. COMMITMENTS

The Company leases its main facility under operating leases that expire
through fiscal 2003. Sales offices of the Company are also leased under
operating leases which expire through fiscal 2013. The Company is responsible
for certain maintenance costs, taxes and insurance under the leases. Future
minimum annual lease payments as of April 30, 1998, are as follows:

<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
----------------------
<S> <C>
1999..................................... $ 4,249
2000..................................... 3,323
2001..................................... 1,049
2002..................................... 886
2003..................................... 707
Thereafter............................... 2,185
-------
Total lease payments.......................... $12,399
=======
</TABLE>

Rent expense was $755, $1,195 and $4,278 for the years ended April 30,
1996, 1997 and 1998, respectively. Rent expense under certain Company facility
leases is recognized on a straight-line basis over the term of the lease. The
difference between the amounts

F-11
<PAGE> 60
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

paid and the amounts expensed is classified as long-term obligations in the
accompanying consolidated balance sheets.

The total of minimum rental payments to be received through 1999 under
non-cancelable subleases is $1,268 as of April 30, 1998.

4. ACQUISITION

On March 17, 1997, the Company acquired all outstanding shares and options
to purchase shares of IMC common stock by issuing 748 shares of the Company's
common stock and options to purchase shares of the Company's common stock. The
purchase price related to the common stock and options to purchase shares of the
Company's common stock was $7,350. IMC was founded in 1996 to develop and
commercialize Internet/ intranet proxy caching software.

Certain key employees of IMC who continued as employees of the Company were
also granted vested options to purchase shares of the Company's common stock at
a discount to the market price of the Company's common stock immediately
preceding the acquisition. In connection with the granting of discounted options
to purchase shares of the Company's common stock, the Company recorded a
compensation expense of $3,150 in the fourth quarter of fiscal 1997. The Company
also recorded a deferred income tax benefit of $1,304, primarily related to the
compensation charge.

The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in the Company's consolidated financial statements. In connection with
the acquisition, intangible assets of $8,362 were acquired, of which $7,369 was
reflected as a one-time charge to operations for the write-off of purchased
in-process research and development that had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. The $10,519 combined one-time charge for purchased in-process technology
and compensation expense has been reflected in the Company's fiscal 1997
consolidated statement of income within operating expenses. The remaining
intangible assets of $993, consisting of existing technology and goodwill, are
included in other assets in the accompanying consolidated balance sheets and are
being amortized over their estimated useful lives of five years.

In connection with the acquisition, net assets acquired were as follows:

<TABLE>
<S> <C>
Current assets........................................ $ 21
Property and equipment, net........................... 46
Intangible assets, including purchased in-process
technology.......................................... 8,362
Current liabilities assumed........................... (1,079)
-------
Net assets acquired................................... $ 7,350
=======
</TABLE>

The following unaudited pro forma information shows the results of
operations for the two fiscal years ended April 30, 1997 as if the IMC
acquisition had occurred at the beginning of each period presented and at the
purchase price established in March 1997. The results are not necessarily
indicative of what would have occurred had the acquisition

F-12
<PAGE> 61
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

actually been made at the beginning of each of the respective periods presented
or of future operations of the combined companies. The pro forma results for
fiscal 1997 combine the Company's results of operations for the fiscal year
ended April 30, 1997 with the results of IMC for the period from inception (May
6, 1996) through the date of acquisition and include the $10,519 charge for
purchased in-process technology and the related compensation charge, as well as
the related tax benefits, and the straight-line amortization of intangible
assets over a period of five years. The pro forma results for fiscal 1996
reflect the Company's actual results of operations for that year less the
amortization of intangible assets related to the acquisition:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Net Sales................................ $46,632 $93,552
Net Income (Loss)........................ 6,401 (390)
Net Income (Loss) per Share, Basic....... 0.17 (0.01)
Net Income (Loss) per Share, Diluted..... 0.10 (0.01)
</TABLE>

5. SHAREHOLDERS' EQUITY

Initial Public Offering -- In November 1995, the Company completed its
initial public offering of 8,620 shares of its common stock. Net proceeds from
the offering were $25,714. In conjunction with the offering, all outstanding
shares of preferred stock automatically converted into common stock. In
addition, the Company issued 724 shares of common stock upon the exercise of
Series A preferred warrants, and 714 shares of common stock upon the exercise of
Series C preferred warrants. The Company received total proceeds of $708 from
the exercise of these warrants.

Preferred Stock -- The Company's Board of Directors has the authority to
issue up to 5,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders.

Stock Option Plans -- The Company adopted the 1993 Stock Option/Stock
Issuance Plan (the "1993 Plan") in April 1993. In September 1995, the Company
adopted the 1995 Stock Incentive Plan (the "1995 Plan"). The 1995 Plan replaced
the 1993 Plan, and provides for the grant of options and the issuance of common
stock under terms substantially the same as those provided under the 1993 Plan,
except that the 1995 Plan does not allow for the exercise of options prior to
vesting. Accordingly, all options and shares issued under the 1993 Plan were
incorporated into the 1995 Plan upon the effectiveness of the Company's initial
public offering.

Under the 1995 Plan, the Board of Directors may grant to employees,
directors and consultants options to purchase shares of the Company's common
stock. The exercise price for an incentive stock option and a nonqualified stock
option cannot be less than 100% and 85%, respectively, of the fair market value
of the Company's common stock as determined by the Board of Directors on the
date of grant. Options granted under the 1995 Plan generally vest at a rate of
25% on the first anniversary of the vesting commencement date

F-13
<PAGE> 62
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

and then ratably over the following 36 months. Options expire as determined by
the Board of Directors, but not more than ten years after the date of grant.

In April 1997, the Board of Directors adopted the Special Non-Officer Stock
Option Plan (the "Non-Officer Plan")which provides for the grant of options and
the issuance of common stock under terms substantially the same as those
provided under the 1995 Plan, except that the Non-Officer Plan allows only for
the issuance of nonqualified options to non-officer employees. A summary of the
combined activity under the Company's stock option plans and agreements is as
follows:

<TABLE>
<CAPTION>
SHARES OUTSTANDING OPTIONS
AVAILABLE ---------------------
FOR NUMBER WEIGHTED
GRANT OF SHARES AVERAGE
--------- --------- --------
<S> <C> <C> <C>
Balances, April 30, 1995................ 672 5,554 $ 0.04
Shares reserved for plan.............. 13,000 -- --
Options granted (weighted average fair
value of $.80)..................... (7,172) 7,172 2.12
Options exercised..................... -- (5,750) 0.06
Options canceled...................... 590 (590) .51
------ -------
Balances, April 30, 1996 (392 options
exercisable).......................... 7,090 6,386 2.32
Shares reserved for IMC acquisition... 516 -- --
Options granted (weighted average fair
value of $3.30).................... (6,676) 6,676 7.42
Options exercised..................... -- (836) .83
Options canceled...................... 948 (948) 2.68
------ -------
Balances, April 30, 1997 (3,994 options
exercisable).......................... 1,878 11,278 5.42
Shares reserved for plan.............. 8,000 -- --
Options granted (weighted average fair
value of $4.56).................... (5,448) 5,448 11.76
Options exercised..................... -- (1,240) 4.23
Options canceled...................... 1,148 (1,148) 6.91
------ -------
Balances, April 30, 1998 (5,012 options
exercisable).......................... 5,578 14,338 $ 7.79
====== =======
</TABLE>

Options for the purchase of 3,746 shares of common stock were vested as of
April 30, 1998. Unvested common shares issued under the 1993 Plan of 620 as of
April 30, 1998 are subject to repurchase by the Company.

F-14
<PAGE> 63
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

Additional information regarding options outstanding as of April 30, 1998
is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
NUMBER REMAINING WEIGHTED
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES APRIL 30, 1998 (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.03 - $ 0.04 362 6.15 $ 0.03 362 $ 0.03
0.05 - 0.07 254 6.95 0.07 222 0.07
0.50 - 0.75 362 7.38 0.67 324 0.66
1.13 - 1.50 230 7.32 1.32 230 1.32
1.80 - 2.03 1,348 7.46 1.92 1,348 1.92
2.75 - 2.95 820 8.17 2.84 516 2.78
5.44 - 7.88 4,606 8.58 6.95 1,430 6.79
8.50 - 12.69 4,366 9.02 10.21 580 9.48
12.82 - 16.79 1,990 9.69 14.89 -- 0.00
------ -----
$ 0.03 - $16.79 14,338 8.60 $ 7.79 5,012 $ 3.94
====== =====
</TABLE>

Employee Stock Purchase Plan -- Under the Employee Stock Purchase Plan,
employees are entitled to purchase shares of the Company's common stock at 85%
of the fair market value at certain specified dates. Of the 1,400 shares
authorized to be issued under this plan, 670 shares were available for issuance
at April 30, 1998 and 328 and 402 shares were issued in fiscal 1997 and 1998,
respectively, at a weighted average price of $3.17 and $4.21, respectively.

Pro Forma Information -- As discussed in Note 2, the Company continues to
account for its stock-based awards using the intrinsic value method in
accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees" and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements with the exception of $132, $85 and $270 in fiscal 1996, 1997 and
1998, respectively, which consists of the amortization of deferred stock
compensation related to the granting of nonqualified stock options at exercise
prices below market.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and net income per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradeable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's

F-15
<PAGE> 64
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Expected life (in years)....................... 3.01 2.90 2.94
Risk-free interest rate........................ 5.89% 6.06% 6.00%
Volatility..................................... 50% 50% 50%
Expected dividend.............................. -- -- --
</TABLE>

The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the fiscal 1996, 1997 and 1998 awards had been amortized to expense
over the vesting period of the awards, pro forma net income (loss) and net
income (loss) per share would have been as follows:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1996 1997 1998
------ ------- ------
<S> <C> <C> <C>
Net income (loss).......................... $5,824 $(4,661) $8,677
Net income (loss) per share, basic......... 0.16 (0.08) 0.13
Net income (loss) per share, diluted....... 0.09 (0.07) 0.12
</TABLE>

However, the impact of outstanding non-vested stock options granted prior
to fiscal 1996 has been excluded from the pro forma calculations; accordingly,
the fiscal 1996, 1997 and 1998 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.

Deferred Stock Compensation -- In May 1995, the Company issued stock
options for the purchase of 2,126 shares of common stock at $0.07 per share. The
Company recognized $515 of deferred compensation in May 1995 equal to the
difference between the option price as determined by the Board of Directors and
$0.32 (the deemed fair value for financial reporting purposes) for each option.
The Company is amortizing the deferred compensation expense ratably over the
four-year period in which the options vest.

In fiscal 1998, the Company recorded $714 of deferred compensation,
primarily related to the grant of stock options to certain highly compensated
employees. Under terms of the 1995 Stock Option Plan, highly compensated
employees as defined by Company's management are eligible to contribute between
$15 to $75 in annual salary for the rights to be granted nonqualified stock
options. The discount from fair market value which is equal to the amount of
salary contributed has been recorded as deferred compensation expense. The
Company is amortizing the deferred compensation expense ratably over a one-year
period.

F-16
<PAGE> 65
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

6. EMPLOYEE BENEFIT PLAN

The Company has established a 401(k) tax-deferred savings plan ("Savings
Plan"). Employees meeting the eligibility requirements, as defined, may
contribute specified percentages of their salaries. The Company contributed $119
and $202 for fiscal 1997 and 1998, respectively. The Company did not make any
contributions to the Savings Plan in fiscal 1996.

7. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CURRENT:
Federal................................ $ 1,880 $ 5,062 $12,132
State.................................. 220 1,525 2,199
------- ------- -------
Total current.......................... 2,100 6,587 14,331
------- ------- -------
DEFERRED:
Federal................................ (1,880) (2,394) (1,597)
State.................................. (220) (400) (152)
------- ------- -------
Total deferred......................... (2,100) (2,794) (1,749)
------- ------- -------
Provision for income taxes..... $ -- $ 3,793 $12,582
======= ======= =======
</TABLE>

Deferred income taxes result from differences in the timing of certain
expense items for tax and financial reporting purposes.

The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------
1996 1997 1998
------- ------ -------
<S> <C> <C> <C>
Tax computed at federal statutory rate.... $ 2,310 $1,415 $11,741
State income taxes, net of federal
benefit................................. 405 764 1,482
Non-deductible acquisition charges related
to the IMC acquisition.................. -- 2,904 --
Research and experimentation credit....... (50) (410) (555)
Investment tax credit..................... (150) -- --
Benefit of foreign sales corporation...... -- (105) (489)
Tax exempt interest....................... -- (184) (281)
Change in valuation allowance............. (2,510) (673) --
Business meal exclusion................... -- 45 100
Other..................................... (5) 37 584
------- ------ -------
Provision for income taxes................ $ -- $3,793 $12,582
======= ====== =======
</TABLE>

F-17
<PAGE> 66
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

The income tax benefits associated with dispositions from employee stock
transactions reduced taxes currently payable by $238, $2,487 and $4,291,
respectively, for fiscal 1996, 1997 and 1998.

Income before income taxes is as follows:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Domestic................................... $6,580 $3,983 $33,175
Foreign.................................... 20 60 372
------ ------ -------
Total............................ $6,600 $4,043 $33,547
====== ====== =======
</TABLE>

Current net deferred tax assets are $3,100 and $5,280, as of April 30, 1997
and April 30, 1998, respectively. Non-current net deferred tax assets at April
30, 1997 and 1998 of $1,794 and $1,363, respectively, are included in other
assets within the accompanying consolidated balance sheets. The components of
the Company's net deferred tax assets are as follows:

<TABLE>
<CAPTION>
APRIL 30,
----------------
1997 1998
------ ------
<S> <C> <C>
Reserves and accruals not currently deductible
for tax purposes.............................. $2,662 $4,599
Tax benefit of options issued in IMC
acquisition................................... 1,304 1,074
Net operating loss carryforwards................. 116 236
Depreciation..................................... 369 197
Deferred rent.................................... 80 66
Capitalized research and development costs....... 142 --
Other............................................ 221 471
------ ------
Deferred tax assets...................... $4,894 $6,643
====== ======
</TABLE>

As of April 30, 1998, the Company had federal net operating loss
carryforwards of approximately $674 available to offset future taxable income.
These carryforwards expire in fiscal 2010.

8. OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS

The Company operates primarily in one industry segment: the design,
manufacturing and marketing of high-performance network data storage devices.

F-18
<PAGE> 67
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

The Company's European operations primarily consist of sales by its
subsidiaries in the United Kingdom, France, Germany and Italy to either
unaffiliated European customers or to independent distributors.

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------
1997 1998
-------- ---------
<S> <C> <C>
NET SALES:
North America..................................... $83,342 $138,379
Europe............................................ 9,991 27,784
------- --------
Total net sales......................... $93,333 $166,163
======= ========
OPERATING INCOME:
North America..................................... $ 3,023 $ 32,285
Europe............................................ 60 373
------- --------
Total operating income.................. $ 3,083 $ 32,658
======= ========
IDENTIFIABLE ASSETS:
North America..................................... $66,019 $105,601
Europe............................................ 2,922 10,135
------- --------
Total assets............................ $68,941 $115,736
======= ========
</TABLE>

North America revenues include export sales to Asia which amounted to less
than 10% of total net sales for all periods presented. Sales, operating income
and identifiable assets of the Company's foreign operations were less than 10%
of the comparable amounts on a consolidated basis in fiscal 1996.

No single customer accounted for 10% or more of net sales in fiscal 1996,
1997 or 1998.

9. LITIGATION

The computer industry is characterized by frequent litigation regarding
intellectual property rights. During fiscal 1995 a lawsuit of this nature was
filed against the Company and two of its shareholders (the "Whipsaw
Litigation"). During the first quarter of fiscal 1997, the Company settled the
Whipsaw litigation and recorded a pre-tax expense of $4,300 ($3,500 in payments
to the plaintiffs and $800 in legal fees). In connection with the settlement,
the Whipsaw group released the Company from all liabilities.

F-19
<PAGE> 68
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1997
----------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales..................... $18,460 $21,048 $24,845 $28,980
Gross margin.................. 10,867 12,466 14,729 17,210
Net income (loss)(1).......... (491) 2,780 3,380 (5,419)
Net income (loss) per share,
basic(1).................... (0.01) 0.04 0.05 (0.09)
Net income (loss) per share,
diluted(1).................. (0.01) 0.04 0.05 (0.09)
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1998
----------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales..................... $33,420 $38,401 $43,984 $50,358
Gross margin.................. 19,850 22,655 26,104 30,005
Net income.................... 4,221 4,885 5,555 6,304
Net income per share, basic... 0.07 0.08 0.08 0.10
Net income per share,
diluted..................... 0.06 0.07 0.08 0.09
</TABLE>

- ---------------

(1) The first quarter of fiscal 1997 includes the Whipsaw Litigation of $2,795
(net of taxes). See Note 9. The fourth quarter of fiscal 1997 includes the
purchased in-process technology and compensation charge related to the IMC
acquisition of $9,215 (net of taxes). See Note 4.

11. SUBSEQUENT EVENTS

In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid $5,000 of the $33,750 purchase
price as a nonrefundable deposit. The agreement allows the Company to assign its
rights and obligations to a third-party entity should the Company decide to
enter into an operating lease. It is the Company's intent to assign its rights
and obligations to a third-party entity and enter into an operating lease,
provided the Company can obtain satisfactory leasing terms.

In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3,084, commencing in October 1999, for a 6.2 acre plot in
Sunnyvale, California and an option agreement to purchase the 6.2 acres of land.
Under terms of the option agreement, the Company paid a $4,500 nonrefundable
deposit. The option allows the Company to purchase the land, within a 90-day
period, commencing in December 1999 at a purchase price of $23,745. The
Company's rights and obligations under this agreement may be assigned to third
parties, which it intends to do if it can obtain satisfactory leasing terms.

In July 1998, the Company negotiated a $5,000 unsecured revolving credit
facility with a domestic commercial bank. Under terms of the credit facility,
which expires in July

F-20
<PAGE> 69
NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)

1999, the Company must maintain various financial covenants. Any borrowings
under this agreement bear interest at either LIBOR plus 1% or at the Lender's
"prime" lending rate, such rate determined at the discretion of the Company. As
of July 17, 1998, there were no borrowings under the credit facility.

In August 1998, the Company entered into an agreement to acquire 6.0 acres
of land in Sunnyvale, California and the accompanying 79,000 square foot
building. Under terms of the agreement, the Company paid $2,500 of the $16,750
purchase price as a deposit, including $500 in November 1998 upon satisfaction
of certain conditions under the agreement. The deposit is nonrefundable with
limited exceptions. The Company's rights and obligations under this agreement
may be assigned to third parties, which the Company intends to do if it can
obtain satisfactory leasing terms.

On December 9, 1998, the Company drew a $2,500 letter of credit against its
line of credit to facilitate payments associated with the August 1998
acquisition of land in Sunnyvale, California and the accompanying 79,000 square
foot building.

On December 21, 1998, the Company effected a two-for-one stock split of the
outstanding shares of common stock. All share and per share amounts in these
consolidated financial statements have been adjusted to give effect to the stock
split.

F-21
<PAGE> 70

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
APRIL 30, JANUARY 29,
1998 1999
--------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 37,315 $ 59,886
Short-term investments................................ 10,800 8,150
Accounts receivable, net.............................. 34,313 50,735
Inventories........................................... 8,707 11,751
Prepaid expenses and other............................ 2,524 3,235
Deferred taxes........................................ 5,280 9,963
-------- --------
Total current assets.......................... 98,939 143,720
-------- --------
PROPERTY AND EQUIPMENT, NET............................. 12,217 17,204
DEPOSITS................................................ -- 7,000
OTHER ASSETS............................................ 4,580 4,724
-------- --------
$115,736 $172,648
======== ========

CURRENT LIABILITIES:
Accounts payable...................................... $ 10,041 $ 8,296
Income taxes payable.................................. 1,782 1,384
Accrued compensation and related benefits............. 8,485 11,672
Other accrued liabilities............................. 4,201 7,362
Deferred revenue...................................... 4,799 8,078
-------- --------
Total current liabilities..................... 29,308 36,792
-------- --------
LONG-TERM OBLIGATIONS................................... 163 116
-------- --------
SHAREHOLDERS' EQUITY:
Common stock.......................................... 65,924 90,655
Retained earnings..................................... 20,341 45,208
Cumulative translation adjustment..................... -- (123)
-------- --------
Total shareholders' equity.................... 86,265 135,740
-------- --------
$115,736 $172,648
======== ========
</TABLE>

See notes to condensed consolidated financial statements.
F-22
<PAGE> 71

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
JANUARY 23, JANUARY 29,
1998 1999
----------- -----------
<S> <C> <C>
NET SALES.............................................. $115,805 $198,616
COST OF SALES.......................................... 47,196 80,938
-------- --------
Gross margin...................................... 68,609 117,678
-------- --------
OPERATING EXPENSES:
Sales and marketing.................................. 29,352 51,830
Research and development............................. 11,738 20,618
General and administrative........................... 4,701 7,092
-------- --------
Total operating expenses.......................... 45,791 79,540
-------- --------
INCOME FROM OPERATIONS................................. 22,818 38,138
OTHER INCOME, NET...................................... 640 1,658
-------- --------
INCOME BEFORE INCOME TAXES............................. 23,458 39,796
PROVISION FOR INCOME TAXES............................. 8,797 14,929
-------- --------
NET INCOME............................................. $ 14,661 $ 24,867
======== ========
NET INCOME PER SHARE(1):
Basic................................................ $ 0.23 $ 0.37
======== ========
Diluted.............................................. $ 0.21 $ 0.32
======== ========
SHARES USED IN PER SHARE CALCULATION(1):
Basic................................................ 64,562 67,803
======== ========
Diluted.............................................. 71,448 76,679
======== ========
</TABLE>

- -------------------------
(1) Share and per share amounts have been adjusted to reflect the two-for-one
stock split which was effective December 21, 1998.

See notes to condensed consolidated financial statements.
F-23
<PAGE> 72

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------
JANUARY 23, 1998 JANUARY 29, 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 14,661 $ 24,867
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 3,885 7,091
Provision for doubtful accounts........... 216 5,675
Deferred income taxes..................... (77) (4,683)
Deferred rent............................. (29) (47)
Changes in assets and liabilities:
Accounts receivable..................... (12,989) (22,199)
Inventories............................. 875 (3,065)
Prepaid expenses and other assets....... (764) (1,069)
Accounts payable........................ 2,489 (1,745)
Income taxes payable.................... 1,657 11,812
Accrued compensation and related
benefits............................. 2,433 3,187
Other accrued liabilities............... 1,737 3,385
Deferred revenue........................ 2,105 3,279
-------- --------
Net cash provided by operating
activities........................ 16,199 26,488
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.......... (7,600) (15,230)
Redemptions of short-term investments........ 9,266 17,880
Purchases of property and equipment.......... (4,886) (11,615)
Payment of deposits, net..................... -- (7,000)
-------- --------
Net cash used in investing
activities........................ (3,220) (15,965)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations.......... (12) --
Proceeds from sale of common stock, net...... 4,815 12,048
-------- --------
Net cash provided by financing
activities........................ 4,803 12,048
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS...... 17,782 22,571
CASH AND CASH EQUIVALENTS:
Beginning of period.......................... 21,520 37,315
-------- --------
End of period................................ $ 39,302 $ 59,886
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock compensation.................. $ 714 $ 473
Income tax benefit from employee stock
transactions.............................. $ -- $ 12,210
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid............................ $ 7,138 $ 7,031
</TABLE>

See notes to condensed consolidated financial statements.
F-24
<PAGE> 73

NETWORK APPLIANCE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements have been
prepared by Network Appliance, Inc. without audit and reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation of
our financial position and results of operations for the interim periods. The
statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission (SEC). Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles.
The results of operations for the nine-month period ended January 29, 1999 are
not necessarily indicative of the operating results to be expected for the full
fiscal year or future operating periods. The information included in this report
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the fiscal year ended April 30, 1998 and the risk factors
as set forth in our Annual Report on Form 10-K, including, without limitation,
risks relating to history of operating losses, fluctuating operating results,
dependence on new products, rapid technological change, dependence on growth in
the network file server market, expansion of international operations, product
concentration, changing product mix, competition, management of expanding
operations, dependence on high-quality components, dependence on proprietary
technology, intellectual property rights, dependence on key personnel,
volatility of stock price, shares eligible for future sale, the effect of
certain anti-takeover provisions and the Year 2000 Issue. Any party interested
in reviewing these publicly available documents should contact the SEC or our
Chief Financial Officer.

2. SIGNIFICANT ACCOUNTING POLICIES

Fiscal Periods -- We operate on a 52-week or 53-week year ending on the
last Friday in April. Fiscal 1999 is a 53-week year. Fiscal 1998 was a 52-week
year. The quarter ended January 29, 1999 includes 13 weeks of operating
activity, compared to 13 weeks of activity for the corresponding period of the
prior fiscal year. The nine months ended January 29, 1999 includes 40 weeks of
activity, compared to 39 weeks of activity for the corresponding period of the
prior fiscal year.

Foreign Currency Translation -- In the first quarter of fiscal 1999, we
determined that the functional currencies of certain of our foreign subsidiaries
had changed from the U.S. dollar to the local currencies. Accordingly, assets
and liabilities of our foreign subsidiaries are translated in U.S. dollars at
the exchange rates in effect as of the balance sheet date, and results of
operations for each subsidiary are translated using average rates in effect for
the period presented. Translation adjustments have been included within
shareholders' equity as a cumulative translation adjustment. The effect of the
change in functional currencies did not have a material impact on our
consolidated financial position, results of operations or cash flow.

F-25
<PAGE> 74
NETWORK APPLIANCE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
APRIL 30, JANUARY 29,
1998 1999
--------- -----------
<S> <C> <C>
Purchased components..................... $4,494 $ 4,410
Work in process.......................... 1,889 2,825
Finished goods........................... 2,324 4,516
------ -------
$8,707 $11,751
====== =======
</TABLE>

4. COMMITMENTS

In June 1998, we executed an agreement to acquire 5.9 acres of land in
Sunnyvale, California and the accompanying 127,000 square foot building. Under
terms of the agreement, we paid $5,500 of the $33,750 purchase price as a
nonrefundable deposit. In January 1999, we assigned our rights and obligations
under the agreement to a third-party entity and in exchange received back our
$5,500 deposit. We subsequently entered into a $44,000 operating lease for this
property. Our lease payments will vary based on the London Interbank Offered
Rate (LIBOR) plus a spread. The lease is for five years and can be renewed for
two five-year periods, subject to the approval of the third-party entity. At the
expiration or termination of the lease, we have the option to either purchase
the property for $44,000, or arrange for the sale of the property to a third
party for at least $44,000 with a contingent liability for any deficiency. If
the property is not purchased or sold as described above, we will be obligated
for an additional lease payment of approximately $36,960. The lease also
requires us to maintain specified financial covenants with which we were in
compliance as of January 29, 1999.

In June 1998, we signed a 25-year operating lease requiring annual lease
payments of $3,084, commencing in October 1999, for a 6.2-acre plot in
Sunnyvale, California and an option agreement to purchase the 6.2 acres of land.
Under terms of the option agreement, we paid a $4,500 nonrefundable deposit. The
option allows us to purchase the land, within a 90-day period, commencing in
December 1999 at a purchase price of $23,745. Our rights and obligations under
this agreement may be assigned to third parties, which we intend to do if we can
obtain satisfactory leasing terms.

In August 1998, we entered into an agreement to acquire 6.0 acres of land
in Sunnyvale, California and the accompanying 79,000 square foot building. Under
terms of the agreement, we paid $2,500 of the $16,750 purchase price as a
deposit, including $500 in November 1998 upon satisfaction of certain conditions
under the agreement. The deposits are nonrefundable with limited exceptions. Our
rights and obligations under this agreement may be assigned to third parties,
which we intend to do if we can obtain satisfactory leasing terms.

F-26
<PAGE> 75
NETWORK APPLIANCE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)

5. LINE OF CREDIT

In July 1998, we negotiated a $5,000 unsecured revolving credit facility
with a domestic commercial bank. Under terms of the credit facility, which
expires in July 1999, we must maintain various financial covenants. Any
borrowings under this agreement bear interest at either LIBOR plus 1% or at the
Lender's "prime" lending rate, such rate determined at our discretion. In
December 1998, we drew a $2,500 letter of credit against this line of credit to
facilitate payments associated with the August 1998 acquisition of land in
Sunnyvale, California and the accompanying 79,000 square foot building.

6. COMMON STOCK AND NET INCOME PER SHARE

We have adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128), effective in the third
quarter of fiscal 1998. SFAS 128 requires the presentation of basic and diluted
net income per share. Basic net income per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for that period. Diluted net income per share is computed giving
effect to all dilutive potential shares that were outstanding during the period.
Dilutive potential common shares consist of incremental common shares subject to
repurchase and common shares issuable upon exercise of stock options.

On December 21, 1998, we effected a two-for-one stock split of the
outstanding shares of common stock. All share and per share amounts in these
condensed consolidated financial statements have been adjusted to give effect to
the stock split.

F-27
<PAGE> 76
NETWORK APPLIANCE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)

The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for the periods presented:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
JANUARY 23, JANUARY 29,
1998 1999
----------- -----------
<S> <C> <C>
NET INCOME (NUMERATOR):
Net income, basic and diluted................ $14,661 $24,867
======= =======
SHARES (DENOMINATOR):
Weighted average common shares outstanding... 66,234 68,144
Weighted average common shares outstanding
subject to repurchase..................... (1,672) (341)
------- -------
Shares used in basic computation............. 64,562 67,803
Weighted average common shares outstanding
subject to repurchase..................... 1,672 341
Common shares issuable upon exercise of stock
options................................... 5,214 8,535
------- -------
Shares used in diluted computation........... 71,448 76,679
======= =======
NET INCOME PER SHARE:
Basic........................................ $ 0.23 $ 0.37
======= =======
Diluted...................................... $ 0.21 $ 0.32
======= =======
</TABLE>

7. COMPREHENSIVE INCOME

We have adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," as of the first quarter of fiscal 1999. SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, it has no impact on our net income or
shareholders' equity.

The components of comprehensive income, net of tax, are as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
JANUARY 23, JANUARY 29,
1998 1999
----------- -----------
<S> <C> <C>
Net income..................................... $14,661 $24,867
Change in cumulative translation adjustment.... -- (123)
------- -------
Comprehensive income........................... $14,661 $24,744
======= =======
</TABLE>

8. NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise

F-28
<PAGE> 77
NETWORK APPLIANCE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)

and Related Information," which establishes interim and annual reporting
standards for an enterprise's business segments and related disclosures about
its products, services and geographic areas. We have not yet identified our
reporting segments. This statement is effective for us beginning at fiscal year
end 1999. Adoption of this statement is not expected to impact our consolidated
financial position, results of operations or cash flows.

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which defines derivatives,
requires that all derivatives be carried at fair value, and provides for hedging
accounting when certain conditions are met. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. On a
forward-looking basis, although we have not fully assessed the implications of
this new statement, we do not believe adoption of this statement will have a
material impact on our consolidated financial position, results of operations or
cash flows.

F-29
<PAGE> 78

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