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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED APRIL 25, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER 0-27130

NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 77-0307520
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

2770 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)

(408) 367-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
none none

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (no par value)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of May 31, 1997 was approximately $497,013,000 (based on the
closing price for shares of the Registrant's common stock as reported by the
Nasdaq National Market System for the last trading day prior to that date).
Shares of common stock held by each executive officer, director, and holder of
5% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

On May 31, 1997 approximately 16,665,993 shares of the Registrant's common
stock, no par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III is incorporated by reference
from designated sections of the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held September 25, 1997, which will be filed with
the Securities and Exchange Commission not later than 120 days after April 25,
1997.

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This Annual Report on Form 10-K contains forward looking statements that
are accompanied by cautionary statements that identify important factors that
could cause actual results to differ materially from those in the forward
looking statements.

PART I

ITEM 1. BUSINESS

OVERVIEW

Network Appliance, Inc. (the "Company" or "Network Appliance") designs,
manufactures, markets and supports high performance network data storage devices
which provide fast, simple, reliable and cost effective file service for
data-intensive network environments. The Company pioneered the concept of the
"network appliance," an extension of the industry trend towards dedicated,
specialized devices which perform a single function in the network, similar to
the adoption of the router for network communications management. The Company's
filer products combine specialized proprietary software and state-of-the-art
industry standard hardware to provide a unique solution for the NFS, Common
Internet File System ("CIFS"), and HTTP server markets.

ACQUISITION

In March 1997, the Company acquired all outstanding shares and options to
purchase shares of Internet Middleware Corporation ("IMC") common stock by
issuing 187,023 shares of the Company's common stock and options to purchase
shares of the Company's common stock. 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 these options, the Company 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 the Company's consolidated
financial statements. A substantial portion of the purchase price was charged to
expense as purchased in-process technology.

INDUSTRY BACKGROUND

In response to competitive pressures, businesses and other organizations
are increasingly 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 these organizations the
ability to increase productivity through the distribution of computing power
across their enterprises, providing large numbers of users with access to
applications, information and data. In this environment, it has become important
for organizations to manage the storage of and access to large volumes of data,
which increasingly represent critical information resources.

Data-Intensive Network Environment

Network computing environments that require large volumes of data, perform
intensive processing or computation of data, or involve frequent user access to
data can be characterized as "data-intensive." Increasingly, organizations are
deploying data-intensive applications and services as core business resources.
In addition, Internet and on-line service related businesses have grown
significantly. The data-intensity of the network environment is expected to
continue to increase substantially due to the development of new applications
and services and the more prevalent use of stored digital graphics, voice and
video, requiring dramatically more data capacity than equivalent alphanumeric
information. Examples of data-intensive applications and services include:

Data-Intensive Applications -- Data-intensive applications have become
increasingly prevalent in a variety of industries. Computer-aided design,
manufacturing and engineering ("CAD/CAM/CAE") are data-intensive applications in
which teams of engineers collaborate on a common design for a product such as

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a semiconductor device, computer system, aircraft or automobile. Software
development is also inherently data-intensive, involving the creation and
compilation by teams of developers of hundreds of thousands of lines of software
code which must be continuously tested, revised and recompiled. Energy, seismic
and satellite-related applications also involve the storage and manipulation of
large quantities of graphics and imaging data. Within the securities industry,
large volumes of trading and other market data need to be compiled and rapidly
processed in order to support trading decisions. Airline reservation systems
also involve the access to and processing of large quantities of data related to
flight schedules, equipment configurations, passenger information and seat
availability.

Data-Intensive Services -- Internet and public on-line services have become
increasingly data intensive. Organizations are also providing internal on-line
data repositories that can be accessed internally as well as by outside users.
As these services have proliferated, they have become "information utilities"
where increasing amounts of data are stored for broad availability to large
numbers of distributed users.

Issues in Data Management and Network Computing

Organizations utilizing data-intensive applications and services in network
computing environments generally share a common set of requirements in order to
derive the benefits that they are designed to provide. In this context, data
management has become increasingly complex and challenging. Specifically, three
significant problem areas have emerged: (i) data access performance; (ii) data
administration; and (iii) data availability and reliability.

Data Access Performance -- Traditionally, management information systems
("MIS") managers and network providers improved performance on a network by
increasing central processing unit ("CPU") performance or increasing the
underlying network bandwidth. In today's data-intensive network environment,
performance of applications and services is increasingly limited by the time to
read or write to hard disk drives. Improvements in performance for most
applications and services have been limited by disk input/output ("I/O")
performance, which because of the mechanical nature of disk drives, has not
improved as rapidly as CPU performance or network bandwidth.

Data Administration -- A key requirement in data administration is the
management of hardware and software systems that store the data. In the
data-intensive network environment, data management is difficult and complex due
to the large number of users accessing the data, the multiple servers storing
the data and the large volume of data. Furthermore, because data may be widely
distributed throughout the network, administrative functions such as back-up or
expansion of the file system become substantially more difficult. Finally, the
budgetary constraints of most organizations require that this increasingly
complex administration be accomplished cost-effectively, without increased
staffing.

Data Availability and Reliability -- As the data-intensive network
environment grows, data availability becomes critical to the organization's
productivity, time-to-market and responsiveness to customers. Achieving a high
level of data availability is particularly difficult because hard disk drives
are mechanical devices, which are prone to failure over extended periods of
intensive use. An organization may experience costly down-time or loss of data
from the failure of a single low-cost, network-attached disk drive. This is
particularly important to network service providers whose business is providing
network-stored data to their users. Therefore, it is imperative that systems
which are repositories of network-based data and services have low failure
rates, rapid recovery times and the ability to provide uninterrupted service in
the event of failure of a disk drive.

File Servers

The requirements of the data-intensive network environment have contributed
to the growing importance of the network file service function, the process of
reading and writing files to and from shared data storage over the network.
Until recently, the file service function had been performed exclusively by
larger, general purpose computer systems which also executed other tasks such as
print serving, application processing and communications functions. As networks
evolved, network managers increasingly dedicated general purpose

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systems specifically to the file service task in order to enhance performance,
simplify administration and reduce vulnerability to other application-related
failures. These dedicated systems became known as "file servers."

Systems vendors have offered a variety of specially configured and add-on
solutions for general purpose systems deployed as file servers. Selected vendors
have also introduced highly specialized, hardware-intensive systems architected
to exclusively perform the file service task. These approaches, such as the use
of hardware accelerators and the introduction of specialized hardware
architectures, were generally optimized for throughput (the number of I/O
requests processed by the CPU). Although these file server approaches addressed
throughput issues, they were not designed to address the specific problem of
response time (the speed at which an I/O request is satisfied) which is critical
in the data-intensive network environment. In addition, because these approaches
lack the flexibility to easily integrate additional network, file system and/or
disk interfaces or protocols associated with today's heterogeneous networks,
these approaches do not directly address the reliability issues associated with
data storage on a network. Consequently, users are searching for cost-effective,
flexible solutions to address data access performance, data administration and
data availability and reliability issues in the data-intensive network
environment.

THE NETWORK APPLIANCE SOLUTION

Network Appliance pioneered the concept of a "network appliance," a fast,
simple, reliable and cost-effective device designed to perform a specific
network data management function. The network appliance concept is part of the
trend towards the specialization of network devices, including the development
of routers, dedicated devices that manage network communications functions
previously performed by general purpose computer systems. The Company's network
appliance product line consists of network data storage appliances or "filers,"
developed to address the specific market requirements of data-intensive network
environments. These products utilize an efficient software kernel optimized to
exclusively perform the file service task. Unlike previous file server
approaches, these products are not burdened by a general purpose operating
system or file system overhead. By using a proprietary software architecture,
Network Appliance is able to use industry standard hardware components rather
than specialized hardware. The core elements of the Network Appliance solution
are:

Fast Response Time -- Network Appliance uses its proprietary Write Anywhere
File Layout ("WAFL") software architecture and a sophisticated caching scheme
coupled with industry standard processor architectures and I/O buses to achieve
response time over the network substantially faster than competing products.
Faster response times result in faster execution of applications and services in
data-intensive network environments. The filer's response time is significantly
faster than either general purpose computers or specialized hardware-centric
file servers. In addition, the Company's products are characterized by less
variation in response times under increasing aggregate loads than competing
products.

Network Appliance believes its approach enables its customers to meet the
performance needs of future data-intensive applications and services. The
Company's technology has allowed it to achieve substantial improvements in
response time by adopting faster industry standard microprocessors, while
competitive solutions have been generally limited by disk access time. For
example, successive releases of Network Appliance software on the Intel 486 or
Pentium(R)-based platforms, in addition to supporting incremental functionality,
have succeeded in reducing response times.

Ease of Administration -- Network Appliance products are easy to use and
install. Installation by a systems administrator typically requires less than an
hour. Administration requires knowledge of approximately 40 system commands,
versus the hundreds of commands typical of alternative products. Network
Appliance's Snapshot feature allows on-line back-up of an active file system
without interrupting users. This feature also allows users on-line access to
earlier versions of their data without involving the systems administrator.
During fiscal 1997, the Company introduced a Web-based graphical user interface
("GUI") administration tool called FilerView(TM) which allows for filer
administration using a standard web browser. Together, these features simplify
administration, permit more efficient use of personnel resources and increase
data availability.

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High Levels of Data Availability and Reliability -- Network Appliance
products are designed to provide high levels of data availability. Traditional
servers do not have an integrated facility to efficiently and reliably maintain
the availability of data upon disk drive failure. The approach to provide
increased data-availability for these systems has been to incrementally add RAID
(redundant array of independent disks) devices which are costly and are often
performance-limiting. Network Appliance's unique software integration of RAID
provides a solution at no incremental cost that yields more reliable data with
no performance penalties. In the event of a disk drive failure, the Network
Appliance filer will reconstruct the failed data on a spare drive which may be
hot-swapped with the failed drive without any interruption of data availability
to client users. Upon disruption of the system, Network Appliance servers
automatically reboot (with full data availability) at a speed of approximately
one to three minutes regardless of storage capacity (versus alternative systems
that may take up to one minute per gigabyte to reboot with full data
availability). The Network Appliance architecture allows system administrators
to add storage capacity or replace a failed disk drive without service
interruption or loss of data.

Scalability -- The architecture of Network Appliance products is designed
to be scalable so that performance, both in response time as well as in
aggregate throughput and storage capacity can cost-effectively grow on an
incremental basis. Adding an additional server to a network under this
architecture is as simple as adding an additional disk drive to many other
systems. The system can be easily expanded to terabytes of data, while
maintaining a relatively consistent response time.

Compatibility with Networking Environment -- Network Appliance products are
compatible with major network and peripheral interfaces and protocols. This is
accomplished through the use of industry standard I/O bus architectures,
providing compatibility with common network interfaces and protocols and disk
interconnects. Network Appliance's software is designed to be extendable to
additional network environments and interface standards, as appropriate.

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

Multiprotocol Capabilities -- The addition of multiprotocol capabilities
through recently developed software began the Company's entry into the HTTP, and
CIFS markets (CIFS is the standard file service protocol for Microsoft
Windows(R) products). The Company's product family now enables different types
of clients -- such as PCs, UNIX workstations and standard web browsers -- to
simultaneously access information on a single server.

STRATEGIES

Network Appliance's goal is to be a leader in the network data storage
appliance market, building on the initial success of its NFS filers. The Company
seeks to achieve this goal by employing the following core strategies:

Focus on Software Differentiation -- Network Appliance seeks to continue to
differentiate its products by focusing on the development and enhancements to
its specialized proprietary software. Network Appliance believes this approach
allows it to cost-effectively integrate desirable features such as intelligent
caching, the WAFL architecture, software integrated RAID and automated on-line
restoration of deleted or changed files through its Snapshot feature.

Embrace Industry Standards -- Network Appliance will continue to integrate
its specialized software solutions with state-of-the-art industry standard
hardware components and software interfaces. Industry standard hardware is
generally less expensive and more readily available than proprietary hardware.
For instance, since its first product introduction, successive generations of
Network Appliance products have migrated from industry standard architecture
("ISA") to peripheral connect interchange ("PCI")-bus. Network Appliance
believes this approach allows more rapid and cost-effective development and the
delivery of high performance products at attractive prices. Utilizing industry
standard interfaces enables Network Appliance products to be adaptable to a
variety of network environments.

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Broaden Penetration Into NFS Market -- Network Appliance's initial focus
was to provide NFS file servers for departmental and enterprise applications.
The Company's current focus is to expand its product offerings to include a
wider range of price, performance and storage capacities, as well as penetrating
additional vertical markets.

Develop New Markets -- During fiscal 1997, Network Appliance developed
multiprotocol software capable of providing simultaneous NFS and CIFS file
service. This product was designed to meet file server requirements for the
Windows NT market and to address the need to unify UNIX and Windows network file
services. The Windows NT market has been characterized by trends toward the
distributing and downsizing of centralized data-intensive applications, the
consolidation of smaller, independent PC-based LANs and the emergence of
multimedia as a significant corporate communications and training tool. Network
Appliance began shipping the first release of the Windows Networking file
protocol option in the third quarter of fiscal 1997.

In the predominantly Windows environment, Network Appliance's filers can
help proliferate Windows NT adoption at the enterprise level by providing much
higher capacities for network data access consolidation for Windows and UNIX
desktops, allowing the deployment of Windows NT(R) servers primarily for
application services. This not only helps scale application performance, by
off-loading network file service operations, but also contributes to easier data
administration through using the 40 standard commands which allows system
administrators to focus on user and application related issues.

Also during fiscal 1997, Network Appliance released its Web Filer(TM)
software. Web Filer is compatible with all standard Web servers, enables users
to update pages while the filer is simultaneously handling Web (HTTP) requests
and improves the performance of Internet networks, including corporate
intranets. Web Filer operates on any Network Appliance filer, either as a single
function HTTP data access server, or in a multiprotocol environment for file and
web data access. With the release of Web Filer, a single Network Appliance filer
can simultaneously support three different network file sharing protocols,
including NFS for UNIX clients, Microsoft's CIFS protocol for Windows 3.1,
Windows 95 and Windows NT clients and HTTP for any standard Web browser. By
supporting all three types of clients in a single, high-speed, data-access
server, Network Appliance enables corporations to avoid costly and complex data
replication and add-on client software, while simplifying system and network
administration.

In April 1997, Network Appliance released NetCache(TM), a Web proxy-caching
software product made available through the Company's recent acquisition of IMC.
NetCache improves Web access times and reduces network traffic by creating
read-only copies of Web pages that reside closer to users. NetCache is designed
for enterprise-wide corporate intranets and for Internet Service Providers who
have multiple points-of-presence and data centers. By caching copies of Web
content on multiple locations throughout the network, NetCache reduces access
times, particularly for users located in remote offices who access the corporate
intranet over a wide-area network connection. NetCache also reduces
telecommunications costs by eliminating the need for multiple end-user requests
for the same data. With support for traffic analysis, the new product also
improves network auditing and security. Network Appliance intends to release an
appliance version of the software in the future.

Expand Distribution -- Network Appliance seeks to market and distribute its
products and technology globally. In North America and in much of Europe, the
Company employs 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 the Pacific Rim and in portions of Europe,
Network Appliance products are sold through resellers, which are supported by
Network Appliance channel managers and technical support personnel. In addition,
the Company seeks to distribute its products through original equipment
manufacturers ("OEMs") and, where appropriate, through licensing arrangements
with computer systems companies.

SALES AND MARKETING

Network Appliance has established multiple distribution channels to
accelerate market penetration of its products. The Company initially marketed
its products primarily through indirect sales channels both domestically and
internationally. In fiscal 1995, the Company shifted its emphasis domestically
to direct sales

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and significantly expanded its direct sales force. The Company continues to rely
primarily on indirect sales in the Pacific Rim and in some portions of Europe.
Network Appliance has approximately 20 sales offices within North America.
Additionally, the Company has international offices in London, Paris, Munich,
Milan and Sydney.

No customers accounted for 10% or more of the Company's net sales in fiscal
1997 or 1996. In fiscal 1995, sales to ITOCHU and MTI each accounted for
approximately 10% of net sales. The Company entered into a Distributor Agreement
with ITOCHU under which the Company granted ITOCHU a nonexclusive,
nontransferable license to, among other things, market and distribute certain of
the Company's products in Japan, with payments to the Company in U.S. dollars
and a term that is automatically renewed each year. The Distributor Agreement
had an initial term through March 31, 1994, which is automatically renewed for
additional one year terms unless terminated 45 days prior to the end of a term.
The agreement may also be terminated with or without cause upon 90 days written
notice by either party and upon certain events of default by either party. The
Company generally has not entered into long-term volume purchase contracts with
its other end user customers or resellers. The Company terminated its
relationship with MTI in the second quarter of fiscal 1996.

BACKLOG

The Company manufactures its products based upon forecast of customers'
demand. Orders are generally placed by customers on an as-needed basis and
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, the Company does not believe "orders" constitute a firm
"backlog" and believes it is not a meaningful indicator of revenues nor material
to an understanding of its business.

PRODUCTS

In May 1997, the Company transformed its entire product line by adding the
NetApp(TM) F520 departmental filer, the NetApp F230 workgroup filer and the
NetApp F630, an enterprise-class filer that offers double the throughput and
capacity of its predecessor. The Company also introduced the F210 entry-level
filer for small workgroups. All filers are based on a PCI-bus architecture and
come packaged in rack mountable enclosures. The NetApp F210 and F230 filers are
based on Pentium processors. The NetApp F520 and NetApp F630 are based on
Digital's Alpha processor. Since the third quarter of fiscal 1997, customers
have had the option of purchasing filers that include from one to three software
protocols -- NFS, CIFS and HTTP. NetApp filer list prices range from
approximately $15,000 to $400,000, depending primarily on product configuration.

NetCache, the Web proxy caching software made available through the IMC
acquisition, was designed for heterogeneous Windows NT and UNIX server
infrastructures, can scale to growing demands, features a software architecture
optimized for a large volume of HTTP connections and provides proxy caching for
a number of data-sharing technologies, including HTTP, FTP, Gopher, and SSL
tunneling. The software is currently available for Windows NT, SPARC Solaris and
Digital UNIX. A single underlying software code base and user interface support
each product. NetCache supports environments with T1 speed (1.544 Mbps)
connections or greater. Network Appliance also offers NetCache Lite, a
scaled-back version of NetCache, which supports environments with up to a 256
Kbps connection to the Internet (roughly two ISDN lines). Network Appliance
intends to release an appliance version of the proxy caching software in the
future.

In the third quarter of fiscal 1997, Network Appliance began production
shipments of Data ONTAP(TM) Release 4.0, which is based on the Company's
specialized proprietary software architecture. Release 4.0 enables NetApp filers
to simultaneously access UNIX, Windows and Web network files. Release 4.0 added
new features, including ATM, full duplex Ethernet connectivity and FilerView,
which offers HTML/Java(R)-based server administration.

In June 1997, Network Appliance released Data ONTAP Release 4.1 which
features improved CIFS throughput. Data ONTAP Release 4.1 is standard on all new
filer products shipped as of June 1997. Installed base customers running
previous versions of the software can upgrade to Release 4.1 at no charge if
they are

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on the Company's Software Subscription Program, or by paying a per-incident
upgrade price. Some customers are eligible for a free upgrade depending on the
date of their filer purchase.

CUSTOMER SERVICE AND SUPPORT

Network Appliance's customer service and support organization provides
customers with technical support, education and training. Network Appliance
believes that providing a high level of customer service and technical support
is critical to customer satisfaction and the Company's success. In providing
service and support to customers, the Company uses its own products extensively.
Warranty coverage includes 24 hour telephone support plus next business day
hardware repair. For an additional charge, the Company also offers upgraded
service during the warranty period, providing for faster on-site hardware
repair. The standard hardware warranty for most parts includes one year of part
replacement for failed components. Software support, including bug fixes and new
release updates are provided at no extra charge for 90 days after product
shipment. Support for software is available beyond the initial period through
the software subscription program.

Post-warranty service programs include: cooperative maintenance where the
customer purchases spares and performs self-maintenance tasks, a full-service
program involving a combination of telephone-based support and on-site repair,
and a software subscription program that includes telephone support and software
upgrades. The Company charges 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

Network Appliance's manufacturing operations, located in Santa Clara,
California, consist of procurement of materials, product assembly, product
assurance, quality control and final test. Network Appliance relies on many
suppliers for the procurement of materials, as well as several key
subcontractors for the production of certain board level assemblies. The
Company's manufacturing strategy has been to develop close relationships with
its suppliers, exchanging critical information and implementing joint quality
training programs. This manufacturing strategy minimizes capital investment and
overhead expenditures and creates flexibility by providing the capacity for
rapid expansion. During May 1997, Network Appliance was awarded the ISO 9001
certification.

The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. The Company
purchases disk drives and enclosures from Digital Equipment Corporation and from
other vendors. The Company's reliance on its suppliers involves several risks,
including a potential inability to obtain an adequate supply of required
components, price increases, timely delivery and component quality. This risk is
particularly significant with respect to suppliers of disk drives because in
order to meet product performance requirements, the Company must obtain disk
drives with extremely high quality and capacity. In addition, there are periodic
supply and demand issues for disk drives and for semiconductor memory
components, which could result in component shortages, selective supply
allocations and increased prices of such components. Although to date the
Company has been able to purchase its requirements of such components, there is
no assurance that the Company will be able to obtain its full requirements of
such components in the future or that prices of such components will not
increase. In addition, there can be no assurance that problems with respect to
yield and quality of such components and timeliness of deliveries will not
occur. Disruption or termination of the supply of these components could delay
shipments of the Company's products and could have a material adverse effect on
the Company's business, operating results and financial condition. Such delays
could also damage relationships with current and prospective customers.

The Company's resellers sometimes purchase minimally configured systems
from the Company and source additional disk drives and memory components from
other vendors. In addition, certain end-users also purchase disk drives and
memories from other suppliers. Since these components do not undergo the
Company's rigorous sourcing and testing procedures, they may experience more
failures when deployed in the

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Company's products. Any such higher failure rate could negatively impact the
Company's reputation and, as a result, could materially adversely affect its
business, operating results and financial condition.

RESEARCH AND DEVELOPMENT

Since its inception, Network Appliance has made substantial investments in
research and development. Network Appliance believes that its future performance
will depend in large part on its ability to maintain and enhance its current
product line, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new products for the network file server market.

As part of the Company's ongoing development process, the Company
introduced a significant software release during fiscal 1997 -- Data ONTAP
release 4.0. In July 1997, The Company released Data ONTAP Release 4.1. The
Company also worked extensively in bringing four new products to market in May
1997 -- the NetApp F210, NetApp F230, NetApp F520 and NetApp F630. The Company
also released NetCache software in April 1997. In addition, the Company has
under development new network file servers. The Company's future growth depends
upon the success of these and other new products, however there can be no
assurance that these or other new products will attain market acceptance. Due to
the complexity of network file servers and the difficulty in gauging the
engineering effort required to produce new products, new products are subject to
significant technical risks. There can be no assurance that new products will be
introduced on a timely basis or at all. In the past, the Company has experienced
delays in the shipments of its 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, the Company's business, operating results and financial condition
will be materially adversely affected.

The network file server market is 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 the Company's existing
products obsolete and unmarketable. The Company's future success will depend
upon its 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 its customers. There can be no assurance that the Company
will be successful in developing and marketing new products that respond to
technological changes or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is 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, the Company's business, operating
results and financial condition will be materially adversely affected.

Network file server products like those offered by the Company may contain
undetected software errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found in new products
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.

The Company's total expenses for research and development for fiscal years
1997, 1996 and 1995 were $9.0 million, $4.8 million and $2.6 million,
respectively. The Company anticipates 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. The Company experiences substantial competition
from specialized network file server companies, such as Auspex Systems, Inc.
("Auspex"). The Company also competes against traditional suppliers of UNIX
systems and PC products that are used as network file servers including Sun
Microsystems, Digital Equipment

9
10

Corporation, 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 those of the Company.
The Company also expects new and emerging competition in the network file server
market, including competition from manufacturers of PC-based file servers based
upon Windows NT and other emerging standards. While the Company believes that
the price-performance characteristics of its products are currently competitive,
increased competition is likely to result in price reductions, reduced gross
margin and loss of market share, any of which could materially adversely affect
the Company's business, operating results and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or devote greater resources to the
development, promotion, sale and support of their products than the Company. 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. In addition, the Company derives a
significant portion of its sales from the resale of disk drives as components of
its filers and therefore experiences competition from disk drive resellers. The
market for the resale of disk drives is highly competitive and subject to
intense price pressures. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results and financial condition.

The Company believes that the principal competitive factors affecting its
market include product features such as response time, scalability and ease of
use, price, multiprotocol capabilities and customer service and support.
Although the Company believes that its products currently compete favorably with
respect to these factors, there can be no assurance that the Company can
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources.

PROPRIETARY RIGHTS

Network Appliance's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company has registered
its FAServer trademark and will continue to evaluate the registration of
additional trademarks as appropriate. The Company generally enters into
confidentiality agreements with its employees and with its resellers and
customers. The Company currently has four U.S. patent applications pending and
three corresponding international patent applications pending. There can be no
assurance that the pending applications will be approved, or that if issued,
such patents will not be challenged, and if such challenges are brought, that
such patents will not be invalidated. There can be no assurance that the Company
will develop proprietary products or technologies that are patentable, that any
issued patent will provide the Company with any competitive advantages or will
not be challenged by third parties, or that the patents of others will not have
a material adverse effect on the Company's ability to do business. Litigation
may be necessary to protect the Company's proprietary technology. Any such
litigation may be time-consuming and costly. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards 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. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology, duplicate the Company's products or
design around patents issued to the Company or other intellectual property
rights of the Company.

There have also been substantial amounts of litigation in the computer
industry regarding intellectual property rights. In the first quarter of fiscal
1997, the Company settled litigation related to the alleged infringement of
third party rights and other claims, which resulted in the Company recording a
pre-tax

10
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expense of $4.3 million ($3.5 million in payments to the plaintiffs and $0.8
million in legal fees). In addition, the Company has from time to time received
claims that it is infringing third parties' intellectual property rights, and
there can be no assurance that third parties will not in the future claim
infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that companies in
the file server market will increasingly be subject to infringement claims as
the number of products and competitors in the Company's 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 the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have a
material adverse effect upon the Company's business, operating results and
financial condition. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all.

EMPLOYEES

As of May 31, 1997, Network Appliance had a total of approximately 265
employees. Of the total, 122 were in sales and marketing, 18 in customer
support, 61 in research and development, 28 in finance and administration and 36
in operations. The Company's future performance also depends in significant part
upon the continued service of its key technical and senior management personnel,
none of whom is bound by an employment agreement. The loss of the services of
one or more of the Company's officers or other key employees could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's future success also depends on its continuing
ability to attract and retain highly qualified technical and management
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key technical and management employees
or that it can attract, assimilate or retain other highly qualified technical
and management personnel in the future. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.

OTHER FACTORS AFFECTING THE COMPANY

History of Operating Losses; Potential Fluctuations in Quarterly
Results -- The Company was organized in April 1992 and first shipped products in
June 1993. The Company had an accumulated deficit of $624,000 as of April 25,
1997. While the Company generated net income in fiscal 1997 and in fiscal 1996,
it incurred significant losses in fiscal 1995 and in each of its prior fiscal
years. There can be no assurance that the Company will remain profitable on a
quarterly or annual basis.

The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including the
level of competition; the size and timing of significant orders; product
configuration and mix; market acceptance of new products and product
enhancements; new product announcements or introductions by the Company or its
competitors; deferrals of customer orders in anticipation of new products or
product enhancements; changes in pricing by the Company or its competitors; the
ability of the Company to develop, introduce and market new products and product
enhancements on a timely basis; hardware component costs; supply constraints;
the Company's success in expanding its sales and marketing programs;
technological changes in the network file server market; the mix of sales among
the Company's sales channels; levels of expenditure on research and development;
changes in Company strategy; personnel changes; general economic trends and
other factors. Although the Company has not experienced seasonality in the past,
because of the significant seasonal effects experienced within the industry and
the Company's goal to expand international sales, there can be no assurance that
the Company's future operating results will not be adversely affected by
seasonality.

Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are 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 the Company's
sales cycle varies substantially from customer to customer. A significant
portion of the Company's revenues in any quarter may be derived from sales to a
limited number of customers. Any significant deferral of these sales could have
a material adverse effect on the Company's results of operations

11
12

in any particular quarter; and to the extent that significant sales occur
earlier than expected, operating results for subsequent quarters may be
adversely affected. The Company's expense levels are based, in part, on its
expectations as to future sales. As a result, if sales levels are below
expectations, net income may be disproportionately affected. Although the
Company has experienced significant revenue growth in recent periods, the
Company does not believe such growth is indicative of future operating results.
The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indicator of future performance. Due to all of the foregoing factors, it is
possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's common stock would likely be materially adversely
affected.

Dependence on Growth in the Network File Server Market -- All of the
Company's filer products address the network file server market. The Company's
future financial performance will depend in large part on continued growth in
the network file server market and on emerging standards in this market. There
can be no assurance that the market for network file servers will continue to
grow or that emerging standards in the network file server market, such as
Windows NT, will not adversely affect the growth of the NFS server market on
which the Company has focused to date. If the network file server market fails
to grow, grows more slowly than anticipated, or if network file servers based on
emerging standards other than those adopted by the Company become increasingly
accepted by the market, the Company's business, operating results and financial
condition would be materially adversely affected. During recent years, segments
of the computer industry have experienced significant economic downturns
characterized by decreased product demand, production overcapacity, price
erosion, work slowdowns and layoffs. The Company's operations may in the future
experience substantial fluctuations from period-to-period as a consequence of
such industry patterns, general economic conditions affecting the timing of
orders from major customers and other factors affecting capital spending. There
can be no assurance that such factors will not have a material adverse effect on
the Company's business, operating results and financial condition.

Expansion of International Operations -- The Company believes that its
continued growth and profitability will require successful expansion of its
international operations and sales and therefore the Company has committed
significant resources to such expansion. Sales by the Company's foreign
subsidiaries represented approximately 11% of the Company's net sales in fiscal
1997 and less than 10% of net sales in fiscal 1996 and 1995. In order to
successfully expand international sales in fiscal 1998 and subsequent periods,
the Company must establish 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 the Company's business, operating results and financial
condition. To the extent that the Company is unable to effect these additions in
a timely manner, the Company's growth, if any, in international sales will be
limited, and the Company's business, operating results and financial condition
could be materially adversely affected. In addition, there can be no assurance
that the Company will be able to maintain or increase international market
demand for the Company's products. The Company currently sells a significant
portion of its products internationally through resellers, most significantly,
ITOCHU. There can be no assurance that ITOCHU or any of the Company's
international resellers or customers will continue to distribute or purchase the
Company's products.

The Company's 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 the Company's products more expensive and,
therefore, potentially less competitive in those markets. For international
sales denominated in foreign currencies, the Company is subject to risks
associated with currency fluctuations. Additional risks inherent in the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, if any, in foreign
countries, longer accounts receivable payment cycles, difficulties in managing
international operations, potentially adverse tax consequences including
restrictions on the repatriation of earnings, and the burdens of complying with
a wide variety of foreign laws. There can be no assurance that such factors will
not have a material adverse effect on the Company's future international sales
and, consequently, the Company's business, operating results and financial
condition.

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Product Concentration; Changing Product Mix -- The Company derives
substantially all of its revenues from the sale of its network filer product
line. 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 would have a material adverse effect on the Company's business,
operating results and financial condition. Prior to fiscal 1996, the Company
derived substantially all of its revenue from the sale of its FAServer 450 and
1400 products. The mix of products sold by the Company has changed substantially
with the introduction of the NetApp F220, NetApp F330 and NetApp F540. In May
1997, the Company transformed its product line by introducing four new products:
the NetApp F210, NetApp F230, NetApp F520 and NetApp F630. Additional product
introductions in future years are expected to impact the sales of existing
products. If the Company is 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, the Company's
business, operating results and financial condition could be materially
adversely affected.

Concentration of Sales -- Historically, a significant portion of the
Company's sales have been made to a limited number of end user customers and
resellers. In fiscal 1997 and 1996, no customers accounted for 10% or more of
net sales. In fiscal 1995, sales to resellers ITOCHU Corporation ("ITOCHU") and
MTI Technology Corporation ("MTI") each accounted for approximately 10% of net
sales. The Company's relationship with MTI terminated in the second quarter of
fiscal 1996. The Company generally has not entered into long term volume
purchase contracts with its end user customers or resellers, and such end user
customers or resellers may have certain rights to extend or delay the shipment
of their orders. The loss of a major end user customer or reseller, the
reduction, delay or cancellation of orders or a delay in shipment of the
Company's products to such end user customer or reseller could materially
adversely affect the Company's business, operating results and financial
condition. In addition, should one or more of these resellers choose to promote
products competitive with the Company's products, the Company's business,
operating results and financial condition could be materially adversely
affected.

Recent Management Additions and Management of Expanding
Operations -- Certain of the Company's senior management joined the Company
during the last year. The Company's Chief Financial Officer/Vice President of
Operations joined in December 1996 and its Vice President of Marketing joined in
May 1996. The Company is in the process of implementing a number of new
financial and management controls, reporting systems and procedures. In addition
to its senior management, the Company has recently hired a significant number of
employees, including sales staff, and plans to further increase its total
employee base. The Company also plans to expand the geographic scope of its
customer base and operations. This expansion has resulted and will continue to
result in substantial demands on the Company's management systems and resources.
The Company's ability to compete effectively and to manage future expansion of
its operations, if any, will require the Company to continue to improve its
financial and management controls, reporting systems and procedures on a timely
basis and effectively expand, train and manage its work force. If the Company's
efforts are not successful, the Company's business, operating results and
financial condition could be materially adversely affected.

Possible Volatility of Stock Price -- The trading price of the Company's
common stock could be subject to wide fluctuations in response to a number of
factors, including quarterly variations in operating results, announcements of
technological innovations or new products, applications or product enhancements
by the Company or its competitors, changes in financial estimates by securities
analysts and other events. 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 or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock.

Effect of Certain Charter Provisions; Anti-takeover Effects of Provisions
of the Bylaws -- The Company's 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

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majority of the outstanding voting stock of the Company. Further, certain
provisions of the Company's 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 the Company's common stock, could delay
or make more difficult a proxy contest involving the Company, which could
adversely affect the market price of the Company's common stock.

ITEM 2. PROPERTIES

Network Appliance's principal administrative, sales, marketing,
manufacturing and research and development facility is located in approximately
95,000 square feet of space in Santa Clara, California. This facility is leased
through May 2000. The Company leases other sales offices throughout the U.S. and
in Europe. The Company believes that the existing facilities are adequate for
its current needs and that additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY-HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.

EXECUTIVE OFFICERS

The executive officers of the Company, and their ages as of May 31, 1997,
are as follows:

NAME AGE POSITION
- ------------------------- --- -------------------------------------------------------

Daniel J. Warmenhoven.... 46 President, Chief Executive Officer and Director
M. Helen Bradley......... 42 Vice President, Engineering
Jeffry R. Allen.......... 45 Vice President, Finance and Operations, Chief Financial
Officer and Secretary
Thomas F. Mendoza........ 45 Vice President, World Wide Sales
Charles E. Simmons....... 48 Vice President, Marketing

DANIEL J. WARMENHOVEN joined the Company in October 1994 as President and
Chief Executive Officer, and has been a member of the Board of Directors since
October 1994. Prior to joining the Company, 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 joined the Company as Vice President, Engineering in
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, 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. 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 joined the Company in December 1996 as Vice President,
Finance and Operations, Chief Financial Officer and Secretary. 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, the latest of which was Vice President and Controller.
Before joining SynOptics, 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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THOMAS F. MENDOZA joined the Company in May 1994 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, 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, 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 joined the Company in May 1996 as Vice President,
Marketing. Prior to that, Mr. Simmons was a senior partner at Rohner &
Associates, a consulting firm, from January 1995 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
MBA from Santa Clara University.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common stock commenced trading on the Nasdaq National Market
on November 21, 1995 and is traded under the symbol "NTAP." As of May 31, 1997
there were approximately 380 holders of record of the common stock. The
following table sets forth for the periods indicated the high and low closing
sale prices for the common stock as reported on the Nasdaq National Market.

FISCAL 1997 FISCAL 1996
----------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------

First Quarter........................................... $38.75 $24.25 $ -- $ --
Second Quarter.......................................... $35.19 $21.75 $ -- $ --
Third Quarter........................................... $56.00 $31.50 $41.12 $13.50
Fourth Quarter.......................................... $55.00 $26.25 $38.75 $27.00

The Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in its
business and does not anticipate paying any cash dividends.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

FIVE FISCAL YEARS ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1997 1996 1995 1994 1993
------- ------- ------- ------- -----

Net Sales.................................. $93,333 $46,632 $14,796 $ 2,244 $ --
Income (Loss) from Operations(1)........... $ 3,083 $ 6,000 $(4,913) $(1,955) $(825)
Net Income (Loss)(2)....................... $ 250 $ 6,600 $(4,764) $(1,874) $(836)
Net Income (Loss) per Share(2)............. $ .01 $ .42 $ (.38) $ -- $ --
Total Assets............................... $68,941 $45,449 $10,628 $ 4,055 $ 612
Long-Term Obligations...................... $ 232 $ 318 $11,607 $ 4,855 $ --
Total Shareholders' Equity (Deficit)....... $54,029 $39,029 $(5,923) $(1,324) $ 545

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

(1) Fiscal 1997 includes the purchased in-process technology and compensation
charge related to the IMC acquisition of $10,519 and the Whipsaw litigation
of $4,300. See Notes 6 and 11 of Notes to Consolidated Financial Statements.

(2) Fiscal 1997 includes the purchased in-process technology and compensation
charge related to the IMC acquisition of $9,215 (net of taxes) and the
Whipsaw litigation of $2,795 (net of taxes).

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Network Appliance, Inc. was incorporated in April 1992 to design,
manufacture, market and support network data storage appliances ("filers"). The
Company's filer products combine specialized proprietary software and
state-of-the-art industry standard hardware to provide a unique solution for the
NFS, CIFS and HTTP server markets.

In September 1995, the Company introduced the NetApp F330, a rack-mounted,
Pentium and PCI bus-based filer. In January 1996, the Company introduced the
NetApp F220, a rack-mounted, Pentium and PCI bus-based filer designed for
workgroup and LAN environments. In May 1996, the Company introduced the NetApp
F540, an enterprise-class file server appliance. In October 1996, the Company
first shipped systems and software with multiprotocol capabilities.

In March 1997, the Company acquired IMC, a developer of Internet/intranet
proxy-caching software. 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. A
substantial portion of the purchase price was charged to expense as purchased
in-process technology. IMC net sales and expenses subsequent to the acquisition
were not significant. The Company intends to continue product development and to
incorporate IMC software into the Company's future product line. See Note 6 of
Notes to Consolidated Financial Statements.

In May 1997, the Company announced a new product expansion. Included within
the new products is the NetApp F630, a high-capacity enterprise class server,
and the NetApp F210, an entry-level filer for small workgroups.

RESULTS OF OPERATIONS

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

YEARS ENDED APRIL 30,
-------------------------
1997 1996 1995
----- ----- -----

Net Sales........................................... 100.0% 100.0% 100.0%
Cost of Sales....................................... 40.8 44.1 53.8
----- ----- -----
Gross margin.............................. 59.2 55.9 46.2
----- ----- -----
Operating Expenses:
Sales and marketing............................... 26.0 27.3 42.5
Research and development.......................... 9.6 10.2 17.6
General and administrative........................ 4.4 5.5 19.3
Purchased in-process technology and related
compensation charge............................ 11.3 -- --
Litigation settlement............................. 4.6 -- --
----- ----- -----
Total operating expenses.................. 55.9 43.0 79.4
----- ----- -----
Income (Loss) from Operations....................... 3.3 12.9 (33.2)
----- ----- -----
Other Income, net................................... 1.0 1.3 1.0
----- ----- -----
Income (Loss) Before Income Taxes................... 4.3 14.2 (32.2)
Provision for Income Taxes.......................... 4.0 -- --
----- ----- -----
Net Income (Loss)......................... 0.3% 14.2% (32.2)%
===== ===== =====

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

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17

higher average selling prices of filers. The increase in filer shipments
resulted primarily from the Company's expansion of its domestic and
international direct sales force, growth of the Company's domestic and
international indirect sales channel, increased market acceptance of the
Company's 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 multiprotocol systems and the licensing of multiprotocol software to
pre-existing customers. See revenue recognition policy within Note 2 of Notes to
Consolidated Financial Statements.

There can be no assurance that the Company's net sales will continue to
increase in absolute dollars or at the rate at which they have grown in recent
fiscal years.

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 multiprotocol 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 content.

The Company's 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, the Company's 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 90.6% from $12.7
million in fiscal 1996 to $24.3 million in fiscal 1997. These expenses were
26.0% and 27.3% of net sales in fiscal 1997 and 1996, respectively. The increase
in absolute dollars was primarily related to the expansion of the Company's
sales and marketing organization, particularly the increase in the direct sales
force, and increased commission expenses related to higher sales volumes. The
Company expects to continue to increase its sales and marketing expenses in an
effort to expand domestic and international markets. The Company believes that
its continued growth and profitability is dependent in part on the successful
expansion of its international operations, and therefore, has committed
significant resources to 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 88.3% from $4.8 million
in fiscal 1996 to $9.0 million in fiscal 1997. These expenses represented 9.6%
and 10.2% of net sales in fiscal 1997 and 1996, 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. Software
development costs capitalized in fiscal 1997 were not significant. In fiscal
1996, no software development costs were capitalized as amounts that qualified
for capitalization were immaterial. The Company believes that significant
investments in research and development will be required to remain competitive
and expects 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 $2.6 million in fiscal 1996, an increase of
60.4%. These expenses represented 4.4% and 5.5%, respectively, of net sales for
such periods. In fiscal 1997, the Company continued its investments in
additional staffing, facilities expansion and related occupancy costs necessary
to manage and support the Company's 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 relation activities and
accounting related services.

17
18

The Company believes that its general and administrative expenses will
increase in absolute dollars as the Company continues to build its
infrastructure to support future growth.

The level of the Company's operating expenses are partially based on its
expectations of future revenue. Since expense levels are usually committed in
advance of revenues and because only a small portion of expenses vary with
revenue, the Company's operating results may be materially adversely affected if
revenue does not materialize in a period as expected.

Purchased In-Process Technology and Related Compensation Charge -- On March
17, 1997, the Company acquired all outstanding shares and options to purchase
shares of IMC common stock by issuing 187,023 shares of the Company's common
stock and options to purchase shares of the Company's 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.

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. IMC results of
operations included in the Company's consolidated financial statements for
fiscal 1997 were not significant. See Note 6 of Notes to Consolidated Financial
Statements for pro forma financial information.

Litigation Settlement -- In July 1994, the Company and certain of its
former employees were named as defendants in a lawsuit which alleged that one of
the Company's founders, who left the Company in March 1995, misappropriated
confidential information prior to the Company's founding in April 1992. In
August 1996, the Company 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 the Company from all liabilities
associated with the case, the Company has no future obligations to the
plaintiffs. The Company denies any wrongdoing on its part or on the part of the
founder.

Other Income, net -- Other income, net, was $1.0 million and $0.6 million
in fiscal 1997 and 1996, 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 the Company's November 1995
initial public offering ("IPO") compared to interest earnings on IPO proceeds
over two quarters for fiscal 1996.

Provision for Income Taxes -- 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 is 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 Company management
determined that it is more likely than not that the net deferred tax asset is
realizable.

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

18
19

The Company expects that its effective tax rate will be slightly higher in
fiscal 1998 than the 35% rate in fiscal 1997, excluding the net effect of the
IMC acquisition, as fiscal 1997 included a benefit for the reversal of a
valuation allowance previously provided against deferred tax assets which will
not occur in fiscal 1998.

FISCAL 1996 COMPARED TO FISCAL 1995

Net Sales -- Net sales increased by 215% from $14.8 million in fiscal 1995
to $46.6 million in fiscal 1996. In fiscal 1995, the Company sold its products
primarily through indirect channels. The increase in net sales in fiscal 1996
resulted primarily from the Company's expansion of its domestic direct sales
force, increased market acceptance of the Company's products, and the
introduction of two new system products, the NetApp F330 and F220. The Company
also shipped a greater number of units directly to end users in fiscal 1996,
which generally purchase more highly configured systems at higher average
selling prices than resellers.

Gross Margin -- Gross margin increased from 46.2% in fiscal 1995 to 55.9%
in fiscal 1996. This increase in gross margin was primarily attributable to more
efficient absorption of manufacturing overhead, lower costs of key components
and manufacturing efficiencies achieved during fiscal 1996, all of which were
related to the significant increase in production volume. These factors offset
the effect of increased sales of highly configured systems during fiscal 1996
which generally generate lower gross margins per system.

Sales and Marketing -- Sales and marketing expenses increased 102.3% from
$6.3 million in fiscal 1995 to $12.7 million in fiscal 1996. These expenses were
27.3% and 42.5% of net sales in fiscal 1996 and 1995, respectively. The increase
in absolute dollars was primarily related to the expansion of the Company's
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
82.6% from $2.6 million in fiscal 1995 to $4.8 million in fiscal 1996. These
expenses represented 10.2% and 17.6% of net sales in fiscal 1996 and 1995,
respectively. These expenses 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 $2.9 million in fiscal 1995. These expenses
represented 5.5% and 19.3%, respectively, of net sales for such periods. The
higher level of general and administrative expenses during fiscal 1995 related
primarily to certain litigation expenses, severance costs and increases in the
provision for bad debts. In fiscal 1996, the Company continued its investments
in additional staffing, facilities expansion and related occupancy costs and
information system investments necessary to manage and support the Company's
growth.

Other Income, net -- Other income, net, was $0.6 million and $0.1 million
in fiscal 1996 and 1995, respectively. In both of these periods, other income,
net, represented less than 2% of net sales. Other income, net, increased in
fiscal 1996 due primarily to interest income earned on the net proceeds of $25.7
million from the Company's initial public offering that was completed in
November 1995.

Provision for Income Taxes -- The Company did not incur state or federal
income taxes in fiscal 1995 due to operating losses incurred during those
periods. In fiscal 1996, the Company's federal and state income tax liabilities
were offset by the realization of a portion of its net deferred tax assets. The
Company recognized a benefit for its net deferred tax assets to the extent that
they are recoverable through tax refunds in the event of future net operating
losses. The Company recorded a valuation allowance for the balance of its net
deferred tax assets as a result of significant uncertainties regarding the
realization of the assets, including the limited operating history of the
Company, a recent history of losses and the variability of operating results.

LIQUIDITY AND CAPITAL RESOURCES

As of April 25, 1997, the Company's liquidity primarily consisted of cash
and cash equivalents of $21.5 million and short-term investments of $6.9
million. The Company generated cash from operating activities totaling $6.3
million and $3.5 million in fiscal 1997 and fiscal 1996, respectively. Net cash
provided by operating activities in fiscal 1997 principally related to purchased
in-process technology and related

19
20

compensation expense (a non-cash expense of $10.5 million), and to increases in
accounts payable, accrued compensation and related benefits and income taxes
payable, offset by increases in accounts receivable and inventories.

The Company used $7.1 million and $4.3 million of cash during fiscal 1997
and 1996, respectively, to purchase property and equipment. The increase in
purchases of property and equipment over the prior year was primarily due to
computer and equipment purchases to support increased headcount and to the
Company's move to a new leased facility which required furniture purchases and
leasehold improvements. In addition, the Company used $3.9 million and $3.0
million in fiscal 1997 and 1996, respectively, for net short-term investment
purchases. Financing activities provided $1.7 million and $26.6 million during
fiscal 1997 and 1996, respectively, due primarily to the exercise of stock
options in fiscal 1997 and 1996 and to proceeds from the Company's IPO in fiscal
1996.

The Company currently has no significant capital commitments other than
commitments under operating and capital leases. The Company believes that its
existing liquidity and capital resources are sufficient to fund its operations
for at least the next twelve months.

RECENTLY ISSUED ACCOUNTING STANDARD

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
The Company is required to adopt SFAS 128 in the third quarter of fiscal 1998
and will restate at that time earnings per share ("EPS") data for prior periods
to conform with SFAS 128. Earlier application is not permitted.

SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. If SFAS 128 had been in effect for
fiscal 1997, basic and diluted EPS would not have been significantly different
than EPS currently reported in fiscal 1997.

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21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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 1996, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended April 30, 1997.
Our audit also included the consolidated financial statement schedule listed in
Item 14(a)(2). These financial statements and financial statement schedule 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 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
May 5, 1997

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22

NETWORK APPLIANCE, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

APRIL 30,
-------------------
1997 1996
------- -------

ASSETS
Current Assets:
Cash and cash equivalents.............................................. $21,520 $24,637
Short-term investments................................................. 6,916 2,982
Accounts receivable, net of allowances of $330 in 1997 and 1996........ 13,911 5,330
Inventories............................................................ 9,920 4,825
Prepaid expenses and other............................................. 1,253 528
Deferred taxes......................................................... 3,100 2,100
------- -------
Total current assets........................................... 56,620 40,402
------- -------
Property and Equipment, net.............................................. 9,238 4,849
Other Assets............................................................. 3,083 198
------- -------
$68,941 $45,449
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations............................... $ 21 $ 19
Accounts payable....................................................... 4,394 2,099
Income taxes payable................................................... 1,023 500
Accrued compensation and related benefits.............................. 4,666 2,015
Other accrued liabilities.............................................. 2,280 1,110
Deferred revenue....................................................... 2,317 378
------- -------
Total current liabilities...................................... 14,701 6,121
------- -------
Long-Term Obligations, net of current portion............................ 12 31
Deferred Rent............................................................ 199 268
Commitments and Contingencies (Notes 5 and 11)
Shareholders' Equity:
Preferred stock, no par value; 5,000,000 shares authorized; shares
outstanding: none in 1997 and 1996.................................. -- --
Common stock, no par value; 55,000,000 shares authorized; shares
outstanding: 16,415,835 in 1997 and 16,140,083 in 1996.............. 54,707 40,286
Deferred stock compensation............................................ (54) (383)
Accumulated deficit.................................................... (624) (874)
------- -------
Total shareholders' equity..................................... 54,029 39,029
------- -------
$68,941 $45,449
======= =======

See notes to consolidated financial statements.

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23

NETWORK APPLIANCE, INC.

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

YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
------- ------- -------

NET SALES..................................................... $93,333 $46,632 $14,796
COST OF SALES................................................. 38,061 20,557 7,957
------- ------- -------
Gross margin........................................ 55,272 26,075 6,839
------- ------- -------
OPERATING EXPENSES
Sales and marketing......................................... 24,268 12,735 6,284
Research and development.................................... 8,968 4,762 2,608
General and administrative.................................. 4,134 2,578 2,860
Purchased in-process technology and related compensation
charge................................................... 10,519 -- --
Litigation settlement....................................... 4,300 -- --
------- ------- -------
Total operating expenses............................ 52,189 20,075 11,752
------- ------- -------
INCOME (LOSS) FROM OPERATIONS................................. 3,083 6,000 (4,913)
------- ------- -------
OTHER INCOME (EXPENSE)
Interest income............................................. 1,048 668 157
Interest and other expense.................................. (88) (68) (8)
------- ------- -------
Total other income.................................. 960 600 149
------- ------- -------
Income (Loss) Before Income Taxes............................. 4,043 6,600 (4,764)
Provision for Income Taxes.................................... 3,793 -- --
------- ------- -------
NET INCOME (LOSS)............................................. $ 250 $ 6,600 $(4,764)
======= ======= =======
NET INCOME (LOSS) PER SHARE................................... $ .01 $ .42 $ (.38)
======= ======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES.......... 17,392 15,820 12,590
======= ======= =======

See notes to consolidated financial statements.

23
24

NETWORK APPLIANCE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

SERIES A
CONVERTIBLE
PREFERRED STOCK DEFERRED
-------------------- STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT TOTAL
---------- ------- ---------- ------- ------------ ----------- -------

BALANCES, APRIL 30, 1994...... 1,186,922 $ 1,340 4,089,500 $ 46 $ -- $(2,710) $(1,324)
Sale of common stock.......... -- -- 375,635 59 -- -- 59
Exercise of stock options..... -- -- 843,589 108 -- -- 108
Repurchase of common stock.... -- -- (242,578) (2) -- -- (2)
Net loss...................... -- -- -- -- -- (4,764) (4,764)
----------- ------- ---------- ------- ----- ------- -------
BALANCES, APRIL 30, 1995...... 1,186,922 1,340 5,066,146 211 -- (7,474) (5,923)
Exercise of stock options..... -- -- 1,437,328 274 -- -- 274
Exercise of warrants.......... -- -- 359,690 708 -- -- 708
Issuance of common stock in
connection with the
Company's initial public
offering.................... -- -- 2,155,000 25,714 -- -- 25,714
Repurchase of common stock.... -- -- (214,464) (68) -- -- (68)
Conversion of Series A
preferred stock into common
stock....................... (1,186,922) (1,340) 1,186,922 1,340 -- -- --
Conversion of Series B and C
preferred stock into common
stock....................... -- -- 6,149,461 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...... -- -- 16,140,083 40,286 (383) (874) 39,029
Issuance of common stock...... -- -- 291,349 1,730 -- -- 1,730
Repurchase of common stock.... -- -- (187,969) (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................. -- -- 172,372 7,350 -- -- 7,350
Compensation charge for IMC
acquisition................. -- -- -- 3,150 -- -- 3,150
Net income.................... -- -- -- -- -- 250 250
----------- ------- ---------- ------- ----- ------- -------
BALANCES, APRIL 30, 1997...... -- $ -- 16,415,835 $54,707 $ (54) $ (624) $54,029
=========== ======= ========== ======= ===== ======= =======

See notes to consolidated financial statements.

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25

NETWORK APPLIANCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
------- ------- -------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 250 $ 6,600 $(4,764)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 2,781 1,254 389
Amortization of deferred stock compensation............ 85 132 --
Purchased in-process technology and related
compensation charge.................................. 10,519 -- --
Provision for doubtful accounts........................ -- 110 210
Deferred income taxes.................................. (2,794) (2,100) --
Deferred rent.......................................... (69) 87 125
Changes in assets and liabilities:
Accounts receivable.................................. (8,573) (2,270) (2,860)
Inventories.......................................... (5,095) (1,181) (3,214)
Prepaid expenses and other........................... (1,031) (525) (154)
Accounts payable..................................... 2,295 (1,415) 3,119
Accrued compensation and related benefits............ 2,636 1,065 869
Income taxes payable................................. 3,010 500 --
Other accrued liabilities............................ 338 876 424
Deferred revenue..................................... 1,917 370 8
------- ------- -------
Net cash provided by (used in) operating
activities...................................... 6,269 3,503 (5,848)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (7,124) (4,281) (1,504)
Redemptions of short-term investments..................... 13,836 -- --
Purchases of short-term investments....................... (17,770) (2,982) --
Cash acquired from IMC purchase........................... 11 -- --
------- ------- -------
Net cash used in investing activities............. (11,047) (7,263) (1,504)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................. -- 1,250 --
Repayments of long-term obligations....................... (17) (1,272) (3)
Payments for repurchase of common stock................... (52) (68) (2)
Proceeds from sale of common stock, net................... 1,730 26,696 167
Proceeds from sale of preferred stock, net................ -- -- 6,555
------- ------- -------
Net cash provided by financing activities......... 1,661 26,606 6,717
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (3,117) 22,846 (635)
CASH AND CASH EQUIVALENTS
Beginning of period....................................... 24,637 1,791 2,426
------- ------- -------
End of period............................................. $21,520 $24,637 $ 1,791
======= ======= =======

See notes to consolidated financial statements.

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26

NETWORK APPLIANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR VALUES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. THE COMPANY

Network Appliance, Inc., incorporated in the state of California in April
1992, and its subsidiaries (the "Company") operates in a single industry segment
and is involved in the design, manufacturing, marketing and support of network
data storage appliances.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation -- The consolidated financial statements include the
Company and its wholly-owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation. Beginning in fiscal 1996, the
Company's fiscal year ended on the Friday nearest to April 30. For fiscal 1997
and for fiscal 1996, the Company's fiscal years ended on April 25 and April 26,
respectively. For presentation purposes, the Company reflects April 30 as the
fiscal year end for all periods presented in the accompanying consolidated
financial statements.

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
consisted of $6,916 of municipal securities at April 30, 1997, and $1,982 of
corporate debt securities and $1,000 of certificates of deposit at April 30,
1996. No short-term investments were sold during fiscal 1997.

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

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 three to five years. Equipment under capital lease is stated at the present
value of the minimum lease payments at the inception of the lease. Such
equipment and leasehold improvements are amortized over their estimated useful
lives or the life of the lease, whichever is shorter.

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 revenues are recognized over the term of the related
contractual period. Software subscription revenues are recognized over the term
of the related contractual period. Combined service and software subscription
revenues were less than 10% of net sales for all of the periods presented.

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. For fiscal 1997 software development costs capitalized were not
significant. In fiscal 1996 and 1995, costs which were eligible for
capitalization were insignificant, and thus, the Company charged all software
development costs to research and development expense in the accompanying
consolidated statements of operations.

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 operations, have not
been significant.

26
27

NETWORK APPLIANCE, INC.

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

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, valuation allowances for deferred tax assets and warranty reserves.
Actual results could differ from those estimates.

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments and accounts receivable. Cash equivalents and short-term investments
consist primarily of money market funds that are held with two financial
institutions and municipal securities. 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. While the Company maintains an allowance for potential
credit losses, such losses have not been significant.

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

Net Income (Loss) Per Share -- Net income (loss) per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares include preferred stock
(using the "if converted" method) and stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded from the
computation if their effect is anti-dilutive except that, pursuant to the
Securities and Exchange Commission's Staff Accounting Bulletins and staff
policy, such computations include all common and common equivalent shares issued
within the 12 months preceding the initial filing date of the Company's Form S-1
Registration Statement (October 6, 1995) as if they were outstanding for all
periods presented. In addition, all outstanding preferred stock that converted
in connection with the initial public offering is included in the computation as
common equivalent shares even when the effect is anti-dilutive.

27
28

NETWORK APPLIANCE, INC.

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

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

YEARS ENDED APRIL 30,
--------------------------
1997 1996 1995
------ ------- ---

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.................................................... $ -- $ 60 $ 8
Income taxes paid................................................ $3,809 $ 1,362 $--
NONCASH INVESTING AND FINANCING ACTIVITIES
Deferred stock compensation...................................... $ (244) $ 515 $--
Conversion of preferred stock into common stock.................. $ -- $12,694 $--
Income tax benefit from employee stock transactions.............. $2,487 $ 238 $--
Equipment acquired under capital lease........................... $ -- $ -- $75
Common stock issued for IMC acquisition.......................... $7,350 $ -- $--
Compensation charge for IMC acquisition.......................... $3,150 $ -- $--

Reclassification -- Certain amounts in prior years have been reclassified
to conform with the fiscal 1997 presentation. These reclassifications did not
change previously reported total assets, liabilities, shareholders' equity or
net income (loss).

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 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 Standard -- In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). The Company is required to adopt
SFAS 128 in the third quarter of fiscal 1998 and will restate at that time
earnings per share ("EPS") data for prior periods to conform with SFAS 128.
Earlier application is not permitted. SFAS 128 replaces current EPS reporting
requirements and requires a dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. If SFAS 128 had been
in effect for fiscal 1997, basic and diluted EPS would not have been
significantly different than EPS currently reported in fiscal 1997.

28
29

NETWORK APPLIANCE, INC.

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

3. INVENTORIES

Inventories consist of the following:

APRIL 30,
-----------------
1997 1996
------ ------

Purchased components............................... $6,775 $2,161
Work in process.................................... 1,524 970
Finished goods..................................... 1,621 1,694
------ ------
$9,920 $4,825
====== ======

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

APRIL 30,
-------------------
1997 1996
------- -------

Computers, related equipment and purchased
software....................................... $11,011 $ 5,691
Furniture and fixtures........................... 1,221 397
Leasehold improvements........................... 1,520 494
------- -------
13,752 6,582
Accumulated depreciation and amortization........ (4,514) (1,733)
------- -------
$ 9,238 $ 4,849
======= =======

5. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS

Certain equipment is leased under capital lease agreements. As of April 30,
1997 the net book value of equipment under capital lease was $23 (net of
accumulated amortization of $37).

The Company leases its main facility and various sales offices under
operating leases that expire through fiscal 2001. The Company is responsible for
certain maintenance costs, taxes and insurance under the leases. Future minimum
annual lease payments as of April 30, 1997 are as follows:

LEASES
---------------------
YEARS ENDING APRIL 30, OPERATING CAPITAL
------------------------------------------ --------- -------

1998...................................... $ 2,742 $ 22
1999...................................... 2,282 13
2000...................................... 2,142 --
2001...................................... 183 --
------ ----
Total lease payments...................... $ 7,349 35
======
Amounts representing interest............. (2)
----
33
Current portion........................... (21)
----
Long-term portion......................... $ 12
====

Rent expense was approximately $1,195, $755, and $566 for the years ended
April 30, 1997, 1996 and 1995, respectively. Rent expense under a Company
facility lease is recognized on a straight-line basis over the term of the
lease. The difference between the amounts paid and the amounts expensed is
classified as deferred rent in the accompanying consolidated balance sheets.

29
30

NETWORK APPLIANCE, INC.

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

The total of minimum rental payments to be received through 1999 under
non-cancelable subleases is $2,016 as of April 30, 1997.

6. ACQUISITION

On March 17, 1997, the Company acquired all outstanding shares and options
to purchase shares of IMC common stock by issuing 187,023 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 approximately $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 operations 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 are as follows:

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
=======

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 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

30
31

NETWORK APPLIANCE, INC.

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

reflect the Company's actual results of operations for that year less the
amortization of intangible assets related to the acquisition:

YEARS ENDED APRIL
30,
-------------------
1997 1996
------- -------

Net Sales................................ $93,552 $46,632
Net Income (Loss)........................ $ (390) $ 6,401
Net Income (Loss) per Share.............. $ (.02) $ .40
Weighted Average Common and Common
Equivalent Shares (in thousands)....... 16,337 16,075

7. COMMON STOCK AND STOCK OPTION PLANS

Initial Public Offering -- In November 1995, the Company completed its
initial public offering of 2,155,000 shares of its common stock. Net proceeds
from the offering were approximately $25,714. In conjunction with the offering,
all outstanding shares of preferred stock automatically converted into common
stock. In addition, the Company issued 181,119 shares of common stock upon the
exercise of Series A preferred warrants, and 178,571 shares of common stock upon
the exercise of Series C preferred warrants. The Company received total proceeds
of approximately $708 from the exercise of these warrants.

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.

31
32

NETWORK APPLIANCE, INC.

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

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 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. A summary of the
combined activity under the Company's stock option plans and agreements is as
follows:

OUTSTANDING OPTIONS
SHARES -----------------------
AVAILABLE NUMBER WEIGHTED
FOR GRANT OF SHARES AVERAGE
---------- ---------- --------

Balances, April 30, 1994................. 451,000 549,000 $ 0.12
Shares reserved for plan............... 1,400,000 -- --
Options granted........................ (1,832,500) 1,832,500 $ 0.14
Options exercised...................... (843,589) $ 0.13
Options canceled....................... 149,428 (149,428) $ 0.13
---------- ----------
Balances, April 30, 1995................. 167,928 1,388,483 $ 0.14
Shares reserved for plan............... 3,250,000 -- --
Options granted (weighted average fair
value of $3.20)..................... (1,793,190) 1,793,190 $ 8.46
Options exercised...................... -- (1,437,328) $ 0.21
Options canceled....................... 147,721 (147,721) $ 2.01
---------- ----------
Balances, April 30, 1996................. 1,772,459 1,596,624 $ 9.25
Shares reserved for IMC acquisition.... 129,148 -- --
Options granted (weighted average fair
value of $13.19).................... (1,668,908) 1,668,908 $29.67
Options exercised...................... -- (208,977) $ 3.29
Options canceled....................... 236,977 (236,977) $10.69
---------- ----------
Balances, April 30, 1997................. 469,676 2,819,578 $21.66
========== ==========

Options for the purchase of approximately 497,709 shares of common stock
were vested as of April 30, 1997. Unvested common shares issued under the 1993
Plan of approximately 577,013 as of April 30, 1997 are subject to repurchase by
the Company.

Additional information regarding options outstanding as of April 30, 1997
is as follows:

OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ------------------------------
AVERAGE WEIGHTED
NUMBER REMAINING WEIGHTED AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE AVERAGE NUMBER EXERCISE
EXERCISE PRICES APRIL 30, 1997 (IN YEARS) EXERCISE PRICE EXERCISABLE PRICE
- --------------- -------------- ---------------- -------------- ----------- --------------

$0.10 - $0.20 145,304 7.27 $ 0.15 145,304 $ 0.15
$0.28 - $0.28 54,917 8.08 $ 0.28 54,917 $ 0.28
$2.00 - $4.50 163,812 8.22 $ 3.01 149,165 $ 3.02
$6.00 - $11.79 676,945 8.71 $ 8.84 562,444 $ 8.24
$21.75 - $48.25 1,778,600 9.53 $30.67 86,682 $27.28
-------------- -----------
2,819,578 998,512
========== ========

32
33

NETWORK APPLIANCE, INC.

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

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 350,000 shares
authorized to be issued under this plan, 267,628 shares were available for
issuance at April 30, 1997 and 82,372 shares were issued in fiscal 1997 at a
weighted average price of $12.65.

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 $85 and $132 in fiscal 1997 and 1996,
respectively, which relates to amortization of deferred stock compensation
initially recorded in May 1995.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and earnings 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 calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions:

YEARS ENDED
APRIL 30,
---------------
1997 1996
----- -----

Expected life (in years)..................... 2.90 3.01
Risk-free interest rate...................... 6.06% 5.89%
Volatility................................... 50% 50%
Expected dividend............................ $ -- $ --

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 1997 and 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net income (loss) would have been
$(4,661) or $(.29) per share in fiscal 1997 and $5,824 or $.37 per share in
fiscal 1996. 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 1997 and 1996 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 531,500 shares of common stock at $.28 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
$1.25 (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.

8. EMPLOYEE BENEFIT PLAN

The Company has established a 401(k) tax-deferred savings plan. Employees
meeting the eligibility requirements, as defined, may contribute specified
percentages of their salaries. For the fiscal year ended April 30, 1997, the
Company contributed $119 (none in fiscal 1996 and 1995).

33
34

NETWORK APPLIANCE, INC.

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

9. INCOME TAXES

The Company incurred losses for financial reporting and tax purposes in
fiscal 1995, and accordingly did not record a provision for income taxes. In
fiscal 1997 and 1996, the provision for income taxes consists of the following:

YEARS ENDED APRIL 30,
---------------------
1997 1996
--------- ----------

CURRENT
Federal......................................... $5,062 $ 1,880
State........................................... 1,525 220
------ -------
Total current................................... 6,587 2,100
------ -------
DEFERRED
Federal......................................... (2,394) (1,880)
State........................................... (400) (220)
------ -------
Total deferred.................................. (2,794) (2,100)
------ -------
Provision for income taxes.............. $3,793 $ --
====== =======

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:

YEARS ENDED APRIL 30,
---------------------
1997 1996
--------- ---------

Tax computed at federal statutory rate............ $1,415 $ 2,310
State income taxes, net of federal benefit........ 764 405
Non-deductible acquisition charges related to the
IMC acquisition................................. 2,904 --
Research and experimentation credit............... (410) (50)
Investment tax credit............................. -- (150)
Benefit of foreign sales corporation.............. (105) --
Tax exempt interest............................... (184) --
Change in valuation allowance..................... (673) (2,510)
Other............................................. 82 (5)
------ -------
Provision for income taxes.............. $3,793 $ --
====== =======

The income tax benefits associated with dispositions from employee stock
transactions reduced taxes currently payable for fiscal 1997 by $2,487 ($238 and
$0 for fiscal 1996 and 1995, respectively).

Income before income taxes is as follows:

YEARS ENDED APRIL 30,
---------------------
1997 1996
-------- --------

Domestic.......................................... $3,983 $6,580
Foreign........................................... 60 20
------ ------
Total................................... $4,043 $6,600
====== ======

34
35

NETWORK APPLIANCE, INC.

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

Current net deferred tax assets at April 30, 1997 and 1996 were $3,100 and
$2,100, respectively. Non-current net deferred tax assets at April 30, 1997 and
1996 of $1,794 and $0, 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:

APRIL 30,
-----------------
1997 1996
------ ------

Deferred tax assets:
Capitalized research and development costs....... $ 142 $ 696
Reserves and accruals not currently deductible
for tax purposes.............................. 2,662 1,828
Net operating loss carryforwards................. 116 141
Depreciation..................................... 369 --
Deferred rent.................................... 80 108
Tax benefit of options issued in IMC
acquisition................................... 1,304 --
Other............................................ 221 --
------ ------
4,894 2,773
Valuation allowance................................ -- (673)
------ ------
Net deferred tax asset................... $4,894 $2,100
====== ======

As of April 30, 1997, the Company had federal net operating loss
carryforwards of approximately $332 available to offset future taxable income.
These carryforwards expire in 2010.

10. 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.

The Company's foreign operations consist of sales by its subsidiaries in
the United Kingdom, France, Germany and Italy to either unaffiliated European
customers or to independent distributors. The following table summarizes the
Company's fiscal 1997 operations by geographic area:

UNITED
STATES EUROPE TOTAL
------- ------ -------

Net sales.............................. $83,342 $9,991 $93,333
Income (loss) from operations.......... $ 3,023 $ 60 $ 3,083
Identifiable assets.................... $66,019 $2,922 $68,941

Sales by the Company's foreign subsidiaries for fiscal 1996 and fiscal 1995
were less than 10% of net sales. No customer accounted for 10% or more of net
sales in either fiscal 1997 or in fiscal 1996. In fiscal 1995, two customers
each accounted for 10% of net sales.

11. 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.

35
36

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

The information required by this Item with respect to the Company's
executive officers is incorporated herein by reference from the information
under Item 4 of Part I of this Report under the section entitled "Executive
Officers". The information required by this Item with respect to the Company's
directors is incorporated herein by reference from the information provided
under the heading "Election of Directors" of the Proxy Statement which will be
filed with the Commission. The information required by Item 405 of Regulation
S-K is incorporated herein by reference from the information provided under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy
Statement.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding the compensation of executive officers and directors
of the Company is incorporated by reference from the information under the
heading "Executive Compensation and Related Information" in the Company's Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the information under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
incorporated by reference from the information under the caption "Employment
Contracts, Termination of Employment and Change-In-Control Agreements" in the
Company's Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) List of Documents filed as part of this Annual Report on Form 10-K.

1. The following consolidated financial statements of Network
Appliance, Inc. are filed as part of this Form 10-K:

Independent Auditors' Report
Consolidated Balance Sheets -- April 30, 1997 and 1996
Consolidated Statements of Operations for the years ended April 30,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended April 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended April 30,
1997, 1996 and 1995
Notes to Consolidated Financial Statements

2. Financial Statement Schedule.

The following financial statement schedule of the Company is filed
as part of this Annual Report on Form 10-K:

Schedule II -- Valuation and Qualifying Accounts

All other schedules have been omitted since the required information
is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the
consolidated financial statements or notes thereto.

36
37

3. Exhibits.

EXHIBIT
NO. DESCRIPTION
------------ -------------------------------------------------------------------------

2.1(1) Agreement and Plan of Reorganization, dated as of March 17, 1997, between
the Registrant and IMC, a California corporation
2.2(1) Agreement of Merger between the Registrant and IMC as filed with the
California Secretary of State on March 17, 1997
3.1(2) Restated Articles of Incorporation of the Company
3.2(3) Bylaws of the Company
4.1(3) Reference is made to Exhibits 3.1 and 3.2
4.2(3) Specimen Common Stock certificate
4.3(3) Amended and Restated Investors' Rights Agreement, dated September 23,
1994, among the Company and the investors and the founders named therein,
as amended
4.4(3) Amended and Restated Shareholders Agreement, dated September 23, 1994,
among the Company and the employee holders and the Preferred Stock
investors named therein
4.5(3) Forms of Warrants to Purchase Shares of Series A and Series C Preferred
Stock
10.1(3),(4) Distributor Agreement, dated June 1, 1993, by and among the Company,
ITOCHU Corporation and CTC Supply Sales
10.2(3) Forms of Indemnification Agreements entered into between the Company and
its directors and officers
10.3(3) The Company's 1993 Stock Option/Stock Issuance Plan
10.4(3) The Company's 1993 Stock Incentive Plan
10.5(3) The Company's Employee Stock Purchase Plan
10.6(3) Series C Preferred Stock and Common Stock and Warrant to Purchase Series
C Preferred Stock Purchase Agreement, dated September 23, 1994, among the
Company and the purchasers named therein
10.7(3) Office lease dated October 21, 1993, between the Company and Vanni
Business Park General Partnership ("Vanni") and Office Lease Agreement,
dated October 20, 1994, between the Company and Vanni
10.8(3) Agreement dated June 19, 1995, between the Company and Imperial Bank, as
amended, Promissory Note issued thereunder and ancillary documents
10.9(3) Settlement Agreement and General Release, dated June 28, 1995, between
the Company and Michael Malcolm
10.10(3) Security and Loan Agreement, Credit Terms and Conditions and General
Security Agreement between the Company and Imperial Bank, dated August
31, 1994, as amended
10.11(5) Facility sublease, dated August 9, 1996, by and between S3, Inc. and the
Registrant
10.12 The Company's Amended 1995 Stock Incentive Plan
10.13 The Company's Special Non-Officer Stock Option Plan
16.1(3) Letter Regarding Change in Independent Auditors
21.1 Subsidiaries of the Company
23.1 Independent Auditors' Consent
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule

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

(1) Previously filed as an exhibit with the Company's Form 8-K dated March 17,
1997.

(2) Previously filed as an exhibit with the Company's Annual Report on Form 10-K
dated July 25, 1996.

(3) Previously filed as an exhibit to the Company' Registration Statement on
Form S-1 (No. 33-97864).

(4) Confidential treatment requested as to certain portions of these exhibits.

(5) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 7, 1997.

37
38

(b) Reports on Form 8-K.

On March 28, 1997, the Company filed a current report on Form 8-K,
announcing the execution of an Agreement and Plan of Reorganization with
Internet Middleware Corporation on March 17, 1997.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on July 22, 1997.

NETWORK APPLIANCE, INC.

By: /s/ DANIEL J. WARMENHOVEN
------------------------------------
Daniel J. Warmenhoven
President and Chief Executive
Officer

38
39

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel J. Warmenhoven and Jeffry R. Allen, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes, may lawfully do or cause to be done by virtue
thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:

SIGNATURES TITLE DATE
- --------------------------------------------- -------------------------------- --------------

/s/ DANIEL J. WARMENHOVEN President and Chief Executive July 22, 1997
- --------------------------------------------- Officer, Director (Principal
(Daniel J. Warmenhoven) Executive Officer)

/s/ DONALD T. VALENTINE Chairman of the Board, Director July 22, 1997
- ---------------------------------------------
(Donald T. Valentine)

/s/ JEFFRY R. ALLEN Vice President Finance and July 22, 1997
- --------------------------------------------- Operations, Chief Financial
(Jeffry R. Allen) Officer and Secretary (Principal
Financial and Accounting
Officer)

/s/ CAROL A. BARTZ Director July 22, 1997
- ---------------------------------------------
(Carol A. Bartz)

/s/ LARRY R. CARTER Director July 22, 1997
- ---------------------------------------------
(Larry R. Carter)

/s/ MICHAEL R. HALLMAN Director July 22, 1997
- ---------------------------------------------
(Michael R. Hallman)

/s/ KURT R. JAGGERS Director July 22, 1997
- ---------------------------------------------
(Kurt R. Jaggers)

/s/ ROBERT T. WALL Director July 22, 1997
- ---------------------------------------------
(Robert T. Wall)

39
40

SCHEDULE II

NETWORK APPLIANCE, INC.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
(IN THOUSANDS)

BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ---------------------------------------------- ------------ ---------- ---------- ----------

Allowance for doubtful account:
1997........................................ $ 330 $ -- $ -- $ 330
1996........................................ 220 110 -- 330
1995........................................ 10 210 -- 220

Excess and obsolescence inventory reserve:
1997........................................ $1,043 $2,551 $578 $3,016
1996........................................ 345 698 -- 1,043
1995........................................ 45 300 -- 345

INDEX TO EXHIBITS

EXHIBIT
NO. DESCRIPTION
------------ -------------------------------------------------------------------------

10.12 The Company's Amended 1995 Stock Incentive Plan
10.13 The Company's Special Non-Officer Stock Option Plan
21.1 Subsidiaries of the Company
23.1 Independent Auditors' Consent
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule