<PAGE>   1
 
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   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
 
                                       OR
 
     [ ] 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)
 

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

 
                           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
 

<TABLE>
<S>                                           <C>
             TITLE OF EACH CLASS                   NAME OF EXCHANGE ON WHICH REGISTERED
                     none                                          none
</TABLE>

 
          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.
 
================================================================================

<PAGE>   2
 
     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
 
                                        2

<PAGE>   3
 
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
 
                                        3

<PAGE>   4
 
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.
 
                                        4

<PAGE>   5
 
     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.
 
                                        5

<PAGE>   6
 
     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
 
                                        6

<PAGE>   7
 
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
 
                                        7

<PAGE>   8
 
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
 
                                        8

<PAGE>   9
 
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

<PAGE>   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

<PAGE>   11
 
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

<PAGE>   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.
 
                                       12

<PAGE>   13
 
     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
 
                                       13

<PAGE>   14
 
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.
 

I
TEM 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:
 

<TABLE>
<CAPTION>
          NAME               AGE                            POSITION
- -------------------------    ---     -------------------------------------------------------
<S>                          <C>     <C>
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
</TABLE>

 
     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.
 
                                       14

<PAGE>   15
 
     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.
 

<TABLE>
<CAPTION>
                                                             FISCAL 1997           FISCAL 1996
                                                          -----------------     -----------------
                                                           HIGH       LOW        HIGH       LOW
                                                          ------     ------     ------     ------
<S>                                                       <C>        <C>        <C>        <C>
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
</TABLE>

 
     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)
 

<TABLE>
<CAPTION>
                                              1997        1996        1995        1994       1993
                                             -------     -------     -------     -------     -----
<S>                                          <C>         <C>         <C>         <C>         <C>
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
</TABLE>

 
- ---------------
 
(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).
 
                                       15

<PAGE>   16
 

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:
 

<TABLE>
<CAPTION>
                                                                YEARS ENDED APRIL 30,
                                                              -------------------------
                                                              1997      1996      1995
                                                              -----     -----     -----
        <S>                                                   <C>       <C>       <C>
        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)%
                                                              =====     =====     =====
</TABLE>

 
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
 
                                       16

<PAGE>   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

<PAGE>   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.
 
     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. 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

<PAGE>   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

<PAGE>   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.
 
                                       20

<PAGE>   21
 

I
TEM 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

 
                                       21

<PAGE>   22
 
                            NETWORK APPLIANCE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                                                                APRIL 30,
                                                                           -------------------
                                                                            1997        1996
                                                                           -------     -------
<S>                                                                        <C>         <C>
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
                                                                           =======     =======
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       22

<PAGE>   23
 
                            NETWORK APPLIANCE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                                                     YEARS ENDED APRIL 30,
                                                                -------------------------------
                                                                 1997        1996        1995
                                                                -------     -------     -------
<S>                                                             <C>         <C>         <C>
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
                                                                =======     =======     =======
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       23

<PAGE>   24
 
                            NETWORK APPLIANCE, INC.
 
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                      SERIES A
                                    CONVERTIBLE
                                  PREFERRED STOCK                               DEFERRED
                                --------------------                             STOCK       ACCUMULATED
                                  SHARES     AMOUNT      SHARES     AMOUNT    COMPENSATION     DEFICIT      TOTAL
                                ----------   -------   ----------   -------   ------------   -----------   -------
<S>                             <C>          <C>       <C>          <C>       <C>            <C>           <C>
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
                                ===========  =======   ==========   =======       =====        =======     =======
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       24

<PAGE>   25
 
                            NETWORK APPLIANCE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                     YEARS ENDED APRIL 30,
                                                                -------------------------------
                                                                 1997        1996        1995
                                                                -------     -------     -------
<S>                                                             <C>         <C>         <C>
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
                                                                =======     =======     =======
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       25

<PAGE>   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

<PAGE>   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

<PAGE>   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:
 

<TABLE>
<CAPTION>
                                                                       YEARS ENDED APRIL 30,
                                                                     --------------------------
                                                                      1997       1996       1995
                                                                     ------     -------     ---
<S>                                                                  <C>        <C>         <C>
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     $    --     $--
</TABLE>

 
     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

<PAGE>   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:
 

<TABLE>
<CAPTION>
                                                                     APRIL 30,
                                                                 -----------------
                                                                  1997       1996
                                                                 ------     ------
            <S>                                                  <C>        <C>
            Purchased components...............................  $6,775     $2,161
            Work in process....................................   1,524        970
            Finished goods.....................................   1,621      1,694
                                                                 ------     ------
                                                                 $9,920     $4,825
                                                                 ======     ======
</TABLE>

 
 4. PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following:
 

<TABLE>
<CAPTION>
                                                                    APRIL 30,
                                                               -------------------
                                                                1997        1996
                                                               -------     -------
            <S>                                                <C>         <C>
            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
                                                               =======     =======
</TABLE>

 
 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:
 

<TABLE>
<CAPTION>
                                                                   LEASES
                                                            ---------------------
                          YEARS ENDING APRIL 30,            OPERATING     CAPITAL
                ------------------------------------------  ---------     -------
                <S>                                         <C>           <C>
                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
                                                                            ====
</TABLE>

 
     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

<PAGE>   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:
 

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

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

<PAGE>   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:
 

<TABLE>
<CAPTION>
                                                            YEARS ENDED APRIL
                                                                   30,
                                                           -------------------
                                                            1997        1996
                                                           -------     -------
                <S>                                        <C>         <C>
                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
</TABLE>

 
 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

<PAGE>   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:
 

<TABLE>
<CAPTION>
                                                                    OUTSTANDING OPTIONS
                                                     SHARES       -----------------------
                                                   AVAILABLE        NUMBER       WEIGHTED
                                                   FOR GRANT      OF SHARES      AVERAGE
                                                   ----------     ----------     --------
        <S>                                        <C>            <C>            <C>
        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
                                                   ==========     ==========
</TABLE>

 
     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:
 

<TABLE>
<CAPTION>
                                     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
- ---------------     --------------     ----------------     --------------     -----------     --------------
<S>                 <C>                <C>                  <C>                <C>             <C>
  $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
                      ==========                                                ========
</TABLE>

 
                                       32

<PAGE>   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:
 

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

 
     The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the fiscal 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

<PAGE>   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:
 

<TABLE>
<CAPTION>
                                                                YEARS ENDED APRIL 30,
                                                                ---------------------
                                                                   1997       1996
                                                                ---------  ----------
            <S>                                                 <C>        <C>
            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     $    --
                                                                 ======     =======
</TABLE>

 
     Deferred income taxes result from differences in the timing of certain
expense items for tax and financial reporting purposes.
 
     The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
 

<TABLE>
<CAPTION>
                                                                YEARS ENDED APRIL 30,
                                                                ---------------------
                                                                   1997       1996
                                                                ---------   ---------
            <S>                                                  <C>        <C>
            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     $    --
                                                                 ======     =======
</TABLE>

 
     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:
 

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

 
                                       34

<PAGE>   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:
 

<TABLE>
<CAPTION>
                                                                     APRIL 30,
                                                                 -----------------
                                                                  1997       1996
                                                                 ------     ------
            <S>                                                  <C>        <C>
            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
                                                                 ======     ======
</TABLE>

 
     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:
 

<TABLE>
<CAPTION>
                                                     UNITED
                                                     STATES      EUROPE      TOTAL
                                                     -------     ------     -------
            <S>                                      <C>         <C>        <C>
            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
</TABLE>

 
     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

<PAGE>   36
 

I
TEM 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

<PAGE>   37
 
     3. Exhibits.
 

<TABLE>
<CAPTION>
      EXHIBIT
        NO.                                         DESCRIPTION
    ------------     -------------------------------------------------------------------------
    <C>              <S>
     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
</TABLE>

 
- ---------------
 
(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

<PAGE>   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

<PAGE>   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:
 

<TABLE>
<CAPTION>
                 SIGNATURES                                  TITLE                      DATE
- ---------------------------------------------   --------------------------------   --------------
<S>                                             <C>                                <C>
 
          /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)
</TABLE>

 
                                       39

<PAGE>   40
 
                                  SCHEDULE II
 
                            NETWORK APPLIANCE, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
                   YEARS ENDED APRIL 30, 1997, 1996 AND 1995
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                 BALANCE AT      CHARGED TO                    BALANCE AT
                                                BEGINNING OF     COSTS AND                       END OF
                 DESCRIPTION                       PERIOD         EXPENSES      DEDUCTIONS       PERIOD
- ----------------------------------------------  ------------     ----------     ----------     ----------
<S>                                             <C>              <C>            <C>            <C>
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
</TABLE>


<PAGE>   41
 

                              INDEX TO EXHIBITS
 

<TABLE>
<CAPTION>
      EXHIBIT
        NO.                                         DESCRIPTION
    ------------     -------------------------------------------------------------------------
    <C>              <S>
    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
</TABLE>

 





<PAGE>   1
                             NETWORK APPLIANCE, INC.
                            1995 STOCK INCENTIVE PLAN

                   (AMENDED AND RESTATED AS OF JULY 17, 1997)

                                   ARTICLE ONE

                               GENERAL PROVISIONS


      I.    PURPOSE OF THE PLAN

            This 1995 Stock Incentive Plan is intended to promote the interests
of Network Appliance, Inc., a California corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.

            Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

      II.   STRUCTURE OF THE PLAN

            A.    The Plan shall be divided into four separate equity programs:

                  (i) the Discretionary Option Grant Program under which
      eligible persons may, at the discretion of the Plan Administrator, be
      granted options to purchase shares of Common Stock,

                  (ii) the Salary Investment Option Grant Program under which
      the Corporation's officers and other highly-compensated employees may
      elect to have a portion of their base salary reduced each year in return
      for options to purchase shares of Common Stock,

                  (iii) the Stock Issuance Program under which eligible persons
      may, at the discretion of the Plan Administrator,
 be issued shares of
      Common Stock directly, either through the immediate purchase of such
      shares or as a bonus for services rendered the Corporation (or any Parent
      or Subsidiary), and

                  (iv) the Automatic Option Grant Program under which Eligible
      Directors shall automatically receive option grants at periodic intervals
      to purchase shares of Common Stock.



<PAGE>   2

            B. The provisions of Articles One and Six shall apply to all equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.

      III.  ADMINISTRATION OF THE PLAN

            A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. The Primary
Committee shall also have the sole and exclusive authority to administer the
Salary Investment Option Grant Program and to select the eligible individuals
who are to participate in that program for one or more calendar years.

            B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.

            C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance Programs and
to make such determinations under, and issue such interpretations of, the
provisions of such programs and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant or Stock Issuance Program under its jurisdiction or
any stock option or stock issuance thereunder.

            D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

            E. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to option
grants made thereunder.


                                       2

<PAGE>   3
      IV. ELIGIBILITY

            A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

                  (i) Employees,

                  (ii) non-employee members of the Board or the board of
      directors of any Parent or Subsidiary, and

                  (iii) consultants and other independent advisors who provide
      services to the Corporation (or any Parent or Subsidiary).

            B. Only the Corporation's officers and other highly-compensated
Employees shall be eligible to participate in the Salary Investment Option Grant
Program.

            C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine, (i) with respect to the option grants
under the Discretionary Option Grant Program, which eligible persons are to
receive option grants, the time or times when such option grants are to be made,
the number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times when each option is to become exercisable, the vesting schedule (if any)
applicable to the option shares and the maximum term for which the option is to
remain outstanding and (ii) with respect to stock issuances under the Stock
Issuance Program, which eligible persons are to receive stock issuances, the
time or times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration to be paid for such shares. The Primary
Committee shall have sole and exclusive authority to select the individuals
eligible to participate in the Salary Investment Option Grant Program, but all
options granted under such program shall be made solely in accordance with the
express terms and conditions of Article Three of the Plan.

            D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

            E. The individuals eligible to participate in the Automatic Option
Grant Program shall be limited to (i) those individuals who first become
non-employee Board members on or after the Plan Effective Date, whether through
appointment by the Board or election by the Corporation's stockholders, and (ii)
those individuals who are re-elected as non-employee Board members at one or
more Annual Stockholders Meetings held after the Plan Effective Date, including
those individuals serving as non-employee Board members on the Plan Effective
Date. A non-employee Board member who has previously


                                       3

<PAGE>   4
been in the employ of the Corporation (or any Parent or Subsidiary) shall not be
eligible to receive an initial option grant under the Automatic Option Grant
Program on the Plan Effective Date or (if later) at the time he or she first
becomes a non-employee Board member, but such individual shall be eligible to
receive periodic option grants under the Automatic Option Grant Program upon his
or her re-election as a non-employee Board member at one or more Annual
Stockholders Meetings.

      V.    STOCK SUBJECT TO THE PLAN

            A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 5,006,262 shares.
Such authorized share reserve includes the additional increase of 1,600,000
shares authorized by the Board on July 17, 1997, subject to stockholder approval
at the 1997 Annual Meeting.

            B. No one person participating in the Plan may receive options and
direct stock issuances for more than 500,000 shares of Common Stock in the
aggregate per calendar year, beginning with the 1995 calendar year.

            C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
(including any options incorporated from the Predecessor Plan) expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant provisions of Article Two.
In addition, any unvested shares issued under the Plan and subsequently
repurchased by the Corporation, at the option exercise or direct issue price
paid per share, pursuant to the Corporation's repurchase rights under the Plan
shall be added back to the number of shares of Common Stock reserved for
issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances under the
Plan. Should the exercise price of an option under the Plan (including any
option incorporated from the Predecessor Plan) be paid with shares of Common
Stock or should shares of Common Stock otherwise issuable under the Plan be
withheld by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance.

            D. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the maximum number and/or class


                                       4


<PAGE>   5
of securities for which any one person may be granted options and direct stock
issuances per calendar year, (iii) the number and/or class of securities for
which automatic option grants are to be made subsequently per Eligible Director
under the Automatic Option Grant Program and (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option (including any option incorporated from the Predecessor Plan) in order to
prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive.


                                       5

<PAGE>   6
                                   ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM


      I.    OPTION TERMS

            Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

            A.    Exercise Price.

                  1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

                  2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the forms
specified below:

                  (i) cash or check made payable to the Corporation,

                  (ii) shares of Common Stock held for the requisite period
      necessary to avoid a charge to the Corporation's earnings for financial
      reporting purposes and valued at Fair Market Value on the Exercise Date,
      or

                  (iii) to the extent the option is exercised for vested shares,
      through a special sale and remittance procedure pursuant to which the
      Optionee shall concurrently provide irrevocable instructions to (a) a
      Corporation-designated brokerage firm to effect the immediate sale of the
      purchased shares and remit to the Corporation, out of the sale proceeds
      available on the settlement date, sufficient funds to cover the aggregate
      exercise price payable for the purchased shares plus all applicable
      Federal, state and local income and employment taxes required to be
      withheld by the Corporation by reason of such exercise and (b) the
      Corporation to deliver the certificates for the purchased shares directly
      to such brokerage firm in order to complete the sale transaction.

            Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.


                                       6

<PAGE>   7
            B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

            C. Effect of Termination of Service.

                  1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

                  (i) Any option outstanding at the time of the Optionee's
      cessation of Service for any reason shall remain exercisable for such
      period of time thereafter as shall be determined by the Plan Administrator
      and set forth in the documents evidencing the option, but no such option
      shall be exercisable after the expiration of the option term.

                  (ii) Any option exercisable in whole or in part by the
      Optionee at the time of death may be exercised subsequently by the
      personal representative of the Optionee's estate or by the person or
      persons to whom the option is transferred pursuant to the Optionee's will
      or in accordance with the laws of descent and distribution.

                  (iii) During the applicable post-Service exercise period, the
      option may not be exercised in the aggregate for more than the number of
      vested shares for which the option is exercisable on the date of the
      Optionee's cessation of Service. Upon the expiration of the applicable
      exercise period or (if earlier) upon the expiration of the option term,
      the option shall terminate and cease to be outstanding for any vested
      shares for which the option has not been exercised. However, the option
      shall, immediately upon the Optionee's cessation of Service, terminate and
      cease to be outstanding to the extent the option is not otherwise at that
      time exercisable for vested shares.

                  (iv) Should the Optionee's Service be terminated for
      Misconduct, then all outstanding options held by the Optionee shall
      terminate immediately and cease to be outstanding.

                  2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

                  (i) extend the period of time for which the option is to
      remain exercisable following the Optionee's cessation of Service from the
      period otherwise in effect for that option to such greater period of time
      as the


                                       7

<PAGE>   8
      Plan Administrator shall deem appropriate, but in no event beyond the
      expiration of the option term, and/or

                  (ii) permit the option to be exercised, during the applicable
      post-Service exercise period, not only with respect to the number of
      vested shares of Common Stock for which such option is exercisable at the
      time of the Optionee's cessation of Service but also with respect to one
      or more additional installments in which the Optionee would have vested
      under the option had the Optionee continued in Service.

            D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

            E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

            F. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, Non-Statutory Options
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.

      II.   INCENTIVE OPTIONS

            The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.


                                       8

<PAGE>   9
            A. Eligibility. Incentive Options may only be granted to Employees.

            B. Exercise Price. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.

            C. Dollar Limitation. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

            D. 10% Stockholder. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

      III.  CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding option
shall not so accelerate if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof), (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator, and its determination shall be final, binding and
conclusive.


                                       9

<PAGE>   10
            B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.

            C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

            D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options and
direct stock issuances under the Plan per calendar year.

            E. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in whole or in part in the event the Optionee's Service
subsequently terminates by reason of an Involuntary Termination within a
designated period (not to exceed twelve (12) months) following the effective
date of any Corporate Transaction in which those options are assumed or replaced
and do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that one or more of the Corporation's outstanding
repurchase rights with respect to shares held by the Optionee at the time of
such Involuntary Termination shall immediately terminate in whole or in part,
and the shares subject to those terminated rights shall accordingly vest.

            F. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in whole or in part in the event the Optionee's Service
subsequently terminates by reason of an Involuntary Termination within a
designated period (not to exceed twelve (12) months) following the effective
date of any Change in Control. Each option so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that


                                       10

<PAGE>   11
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate in whole or in part, and the shares subject to those
terminated rights shall accordingly vest.

            G. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Qualified
Option under the Federal tax laws.

            H. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

      IV.   CANCELLATION AND REGRANT OF OPTIONS

            The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.


                                       11

<PAGE>   12
                                  ARTICLE THREE

                     SALARY INVESTMENT OPTION GRANT PROGRAM

      I.    OPTION GRANTS

            The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Corporation's officers
and other highly compensated Employees who are to participate in the Salary
Investment Option Grant Program for those calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Primary Committee (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her salary for that calendar year.
The minimum amount of authorized salary reduction shall not be less than Fifteen
Thousand Dollars ($15,000), and the maximum salary reduction amount authorized
by any individual shall not exceed Seventy Five Thousand Dollars ($75,000). Each
selected individual who files a proper salary reduction authorization shall
automatically be granted an option under this Salary Investment Option Grant
Program on the first trading day in January of the calendar year for which that
salary reduction is to be in effect.

      II.   OPTION TERMS

            Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Primary Committee; provided, however, that
each such document shall comply with the terms specified below.

            A. Exercise Price.

                  1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.

                  2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.


                                       12

<PAGE>   13
            B. Number of Option Shares. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

                  X = A / (B x 66-2/3%), where

                  X is the number of option shares,

                  A is the dollar amount by which the Optionee's base salary is
                  to be reduced for the calendar year, and

                  B is the Fair Market Value per share of Common Stock on the
                  option grant date.

            C. Exercise and Term of Options. The option shall become exercisable
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.

            D. Effect of Termination of Service. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the expiration of the ten (10)-year option term. Should the
Optionee die while holding one or more options under this Article Three, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Service (less
any shares subsequently purchased by Optionee prior to death), by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution. Such right of exercise shall lapse, and the
option shall terminate, upon the expiration of the ten (10)-year option term.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

      III.  CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. Should any Corporate Transaction be effected while the Optionee
remains in Service, then each outstanding option held by such Optionee under the
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor


                                       13

<PAGE>   14
corporation (or parent thereof) in the Corporate Transaction and shall remain
exercisable for the fully-vested shares until the expiration of the ten
(10)-year option term.

            B. Should any Change in Control occur while the Optionee remains in
Service, then each outstanding option held by such Optionee under the Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. The option shall remain so
exercisable until the expiration of the ten (10)-year option term.

            C. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.

      III.  REMAINING TERMS

            The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.


                                       14

<PAGE>   15
                                  ARTICLE FOUR

                             STOCK ISSUANCE PROGRAM


      I.    STOCK ISSUANCE TERMS

            Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below. Shares of Common Stock
may also be issued under the Stock Issuance Program pursuant to share right
awards which entitle the recipients to receive those shares upon the attainment
of designated performance goals.

            A. Purchase Price.

                  1. The purchase price per share of Common Stock subject to
direct issuance shall be fixed by the Plan Administrator, but shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the issuance date.

                  2. Shares of Common Stock may be issued under the Stock
Issuance Program for any of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:

                  (i) cash or check made payable to the Corporation, or

                  (ii) past services rendered to the Corporation (or any Parent
      or Subsidiary).

            B. Vesting/Issuance Provisions.

                  1. The Plan Administrator may issue shares of Common Stock
under the Stock Issuance Program which are fully and immediately vested upon
issuance or which are to vest in one or more installments over the Participant's
period of Service or upon attainment of specified performance objectives. The
elements of the vesting schedule applicable to any unvested shares of Common
Stock issued under the Stock Issuance Program, namely:

                  (i) the Service period to be completed by the Participant or
      the performance objectives to be attained,

                  (ii) the number of installments in which the shares are to
      vest,


                                       15

<PAGE>   16
                  (iii) the interval or intervals (if any) which are to lapse
      between installments, and

                  (iv) the effect which death, Permanent Disability or other
      event designated by the Plan Administrator is to have upon the vesting
      schedule,

shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement. Alternatively, the Plan Administrator may issue share right
awards under the Stock Issuance Program which shall entitle the recipient to
receive a specified number of shares of Common Stock upon the attainment of one
or more performance goals established by the Plan Administrator. Upon the
attainment of such performance goals, fully-vested shares of Common Stock shall
be issued in satisfaction of those share right awards.

                  2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

                  3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

                  4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for cash consideration, the Corporation shall repay that
consideration to the Participant at the time the shares are surrendered.

                  5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
cessation of the Participant's Service or the non-attainment of the performance
objectives applicable to those shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares


                                       16

<PAGE>   17
of Common Stock as to which the waiver applies. Such waiver may be effected at
any time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.

                  6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock in
satisfaction of one or more outstanding share right awards as to which the
designated performance goals are not attained.

      II.   CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

            B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within twelve (12) months
following the effective date of any Corporate Transaction in which those
repurchase rights are assigned to the successor corporation (or parent thereof).

            C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within twelve (12) months
following the effective date of any Change in Control.

      III.  SHARE ESCROW/LEGENDS

            Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.


                                       17

<PAGE>   18
                                  ARTICLE FIVE

                         AUTOMATIC OPTION GRANT PROGRAM


      I.    OPTION TERMS

            A. GRANT DATES. Option grants shall be made on the dates specified
below:

                  1. Each individual who is first elected or appointed as a non-
employee Board member on or after the Plan Effective Date shall automatically be
granted, on the date of such initial election or appointment, a Non-Statutory
Option to purchase 24,000 shares of Common Stock, provided such individual has
not previously been in the employ of the Corporation (or any Parent or
Subsidiary).

                  2. On the date of each Annual Stockholders Meeting held after
the Plan Effective Date, each individual who is to continue to serve as an
Eligible Director shall automatically be granted a Non-Statutory Option to
purchase 6,000 shares of Common Stock, provided such individual has served as a
non-employee Board member for at least six (6) months. There shall be no limit
on the number of such 6,000-share option grants any one Eligible Director may
receive over his or her period of Board service.

            B. EXERCISE PRICE.

                  1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

                  2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

            C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.

            D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial 24,000-share grant shall vest,
and the Corporation's repurchase right shall lapse, in a series of four (4)
successive equal annual installments over the Optionee's period of


                                       18

<PAGE>   19
continued service as a Board member, with the first such installment to vest
upon the Optionee's completion of one (1) year of Board service measured from
the option grant date. Each annual 6,000-share grant made on or after July 17,
1997 shall vest, and the Corporation's repurchase right shall lapse, upon the
Optionee's continuation in Board service through the day immediately preceding
the next Annual Stockholders Meeting following the option grant date.

            E. EFFECT OF TERMINATION OF BOARD SERVICE. The following provisions
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:

                  (i) The Optionee (or, in the event of Optionee's death, the
      personal representative of the Optionee's estate or the person or persons
      to whom the option is transferred pursuant to the Optionee's will or in
      accordance with the laws of descent and distribution) shall have a twelve
      (12)-month period following the date of such cessation of Board service
      in which to exercise each such option.

                  (ii) During the twelve (12)-month exercise period, the option
      may not be exercised in the aggregate for more than the number of vested
      shares of Common Stock for which the option is exercisable at the time of
      the Optionee's cessation of Board service.

                  (iii) Should the Optionee cease to serve as a Board member by
      reason of death or Permanent Disability, then all shares at the time
      subject to the option shall immediately vest so that such option may,
      during the twelve (12)-month exercise period following such cessation of
      Board service, be exercised for all or any portion of those shares as
      fully-vested shares of Common Stock.

                  (iv) In no event shall the option remain exercisable after the
      expiration of the option term. Upon the expiration of the twelve
      (12)-month exercise period or (if earlier) upon the expiration of the
      option term, the option shall terminate and cease to be outstanding for
      any vested shares for which the option has not been exercised. However,
      the option shall, immediately upon the Optionee's cessation of Board
      service for any reason other than death or Permanent Disability, terminate
      and cease to be outstanding to the extent the option is not otherwise at
      that time exercisable for vested shares.


                                       19

<PAGE>   20
      II.   CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. The shares of Common Stock subject to each outstanding option at
the time of a Corporate Transaction but not otherwise vested shall automatically
vest in full so that each such option shall, immediately prior to the effective
date of that Corporate Transaction, become fully exercisable for all of the
shares of Common Stock at the time subject to such option and may be exercised
for all or any portion of those shares as fully-vested shares of Common Stock.
Immediately following the consummation of the Corporate Transaction, each
automatic option grant shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).

            B. The shares of Common Stock subject to each outstanding option at
the time of a Change in Control but not otherwise vested shall automatically
vest in full so that each such option shall, immediately prior to the effective
date of that Change in Control, become fully exercisable for all of the shares
of Common Stock at the time subject to such option and may be exercised for all
or any portion of those shares as fully-vested shares of Common Stock. Each such
option shall remain exercisable for such fully-vested option shares until the
expiration or sooner termination of the option term.

            C. All repurchase rights of the Corporation outstanding under the
Automatic Option Grant Program at the time of a Corporate Transaction or Change
in Control shall automatically terminate at that time, and the shares of Common
Stock subject to those terminated rights shall immediately vest.

            D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

            E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

      III.  REMAINING TERMS

            The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.


                                       20

<PAGE>   21
                                   ARTICLE SIX

                                  MISCELLANEOUS


      I.    TAX WITHHOLDING

            A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of stock options or the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.

            B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:

                  (i) Stock Withholding: The election to have the Corporation
      withhold, from the shares of Common Stock otherwise issuable upon the
      exercise of such Non-Statutory Option or the vesting of such shares, a
      portion of those shares with an aggregate Fair Market Value equal to the
      percentage of the Taxes (not to exceed one hundred percent (100%))
      designated by the holder.

                  (ii) Stock Delivery: The election to deliver to the
      Corporation, at the time the Non-Statutory Option is exercised or the
      shares vest, one or more shares of Common Stock previously acquired by
      such holder (other than in connection with the option exercise or share
      vesting triggering the Taxes) with an aggregate Fair Market Value equal to
      the percentage of the Taxes (not to exceed one hundred percent (100%))
      designated by the holder.

      II.   EFFECTIVE DATE AND TERM OF THE PLAN

            A. The Plan became effective on the Plan Effective Date and serves
as the successor to the Predecessor Plan, and no further option grants or direct
stock issuances are to be made under the Predecessor Plan after the Plan
Effective Date. All options outstanding under the Predecessor Plan as of such
date have been incorporated into the Plan and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise


                                       21

<PAGE>   22
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.

            B. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.

            C. The Plan shall terminate upon the earliest of (i) August 31,
2005, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares pursuant to option exercises or
direct stock issuances under the Plan or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such Plan
termination, all outstanding stock options and unvested stock issuances shall
continue to have force and effect in accordance with the provisions of the
documents evidencing such options or issuances.

      III.  AMENDMENT OF THE PLAN

            A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect any rights and obligations with respect
to options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

            B. The Plan was amended and restated by the Board on July 17, 1997
(the "1997 Restatement") to effect the following changes: (i) increase the
maximum number of shares of Common Stock authorized for issuance over the term
of the Plan from 3,406,262 shares to 5,006,262 shares, (ii) modify the vesting
provisions to be in effect for future option grants made to non-employee Board
members under the Automatic Option Grant Program, (iii) render the non-employee
Board members who are serving as Plan Administrator eligible to receive option
grants and direct stock issuances under the Discretionary Option Grant and Stock
Issuance Programs, (iv) allow unvested shares issued under the Plan and
subsequently repurchased by the Corporation at the option exercise price or
direct issue price paid per share to be reissued under the Plan, (v) remove
certain restrictions on the eligibility of non-employee Board members to serve
as Plan Administrator, (vi) eliminate the stock appreciation right provisions
and loan features of the Plan and (vii) effect a series of additional changes to
the provisions of the Plan (including the stockholder approval requirements and
the transferability of Non-Statutory Options) in order to take advantage of the
recent amendments to Rule 16b-3 of the Securities and Exchange Commission which
exempts certain officer and director transactions under the Plan from the
short-swing liability provisions of the federal securities laws. The 1997
Restatement is subject to stockholder approval at the 1997 Annual Meeting, and
no option grants made on the basis


                                       22

<PAGE>   23
of the 1,600,000-share increase shall become exercisable in whole or in part
unless and until the 1997 Restatement is approved by the stockholders. Should
such stockholder approval not be obtained, then any options granted on the basis
of the 1,600,000-share increase shall terminate without ever becoming
exercisable for those shares, and no further option grants or direct stock
issuances shall be made on the basis of such share increase. In addition, none
of the other changes effected by 1997 Restatement shall be implemented, except
to the extent the Plan Administrator otherwise deems it advisable to do so.
However, in the absence of such stockholder approval, option grants and direct
stock issuances may continue to be made pursuant to the provisions of the Plan
as in effect immediately prior to the 1997 Restatement. All option grants and
direct stock issuances made prior to the 1997 Restatement shall remain
outstanding in accordance with the terms and conditions of the respective
instruments evidencing those options or issuances, and nothing in the 1997
Restatement shall be deemed to modify or in any way affect those outstanding
options or issuances. Subject to the foregoing limitations, the Plan
Administrator may make option grants and direct stock issuances under the Plan
at any time before the date fixed herein for the termination of the Plan.

            C. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
are held in escrow until there is obtained stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess grants or issuances are
made, then (i) any unexercised options granted on the basis of such excess
shares shall terminate and cease to be outstanding and (ii) the Corporation
shall promptly refund to the Optionees and the Participants the exercise or
purchase price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.

      IV.   REGULATORY APPROVALS

            A. The implementation of the Plan, the granting of any option under
the Plan and the issuance of any shares of Common Stock either upon the exercise
of any option or under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.

            B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of


                                       23

<PAGE>   24
the Form S-8 registration statement for the shares of Common Stock issuable
under the Plan, and all applicable listing requirements of any stock exchange
(or the Nasdaq National Market, if applicable) on which Common Stock is then
listed for trading.

      V.    USE OF PROCEEDS

            Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.

      VI.   NO EMPLOYMENT/SERVICE RIGHTS

            Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.


                                       24

<PAGE>   25
                                    APPENDIX


            The   following definitions shall be in effect under the Plan:

      A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.

      B. BOARD shall mean the Corporation's Board of Directors.

      C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

                  (i) the acquisition, directly or indirectly, by any person or
      related group of persons (other than the Corporation or a person that
      directly or indirectly controls, is controlled by, or is under common
      control with, the Corporation), of beneficial ownership (within the
      meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
      fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities pursuant to a tender or exchange
      offer made directly to the Corporation's stockholders, or

                  (ii) a change in the composition of the Board over a period of
      thirty-six (36) consecutive months or less such that a majority of the
      Board members ceases, by reason of one or more contested elections for
      Board membership, to be comprised of individuals who either (A) have been
      Board members continuously since the beginning of such period or (B) have
      been elected or nominated for election as Board members during such period
      by at least a majority of the Board members described in clause (A) who
      were still in office at the time the Board approved such election or
      nomination.

      D. CODE shall mean the Internal Revenue Code of 1986, as amended.

      E. COMMON STOCK shall mean the Corporation's common stock.

      F. CORPORATE TRANSACTION shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:

                  (i) a merger or consolidation in which securities possessing
      more than fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities are transferred to a person or
      persons different from the persons holding those securities immediately
      prior to such transaction; or


                                      A-1.

<PAGE>   26
                  (ii) the sale, transfer or other disposition of all or
      substantially all of the Corporation's assets in complete liquidation or
      dissolution of the Corporation.

      G. CORPORATION shall mean Network Appliance, Inc., a California
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Network Appliance, Inc. which shall by appropriate
action adopt the Plan.

      H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
grant program in effect under the Plan.

      I. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

      J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

      K. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.

      L. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

                  (i) If the Common Stock is at the time traded on the Nasdaq
      National Market, then the Fair Market Value shall be the closing selling
      price per share of Common Stock on the date in question, as such price is
      reported by the National Association of Securities Dealers on the Nasdaq
      National Market or any successor system. If there is no closing selling
      price for the Common Stock on the date in question, then the Fair Market
      Value shall be the closing selling price on the last preceding date for
      which such quotation exists.

                  (ii) If the Common Stock is at the time listed on any Stock
      Exchange, then the Fair Market Value shall be the closing selling price
      per share of Common Stock on the date in question on the Stock Exchange
      determined by the Plan Administrator to be the primary market for the
      Common Stock, as such price is officially quoted in the composite tape of
      transactions on such exchange. If there is no closing selling price for
      the Common Stock on the date in question, then the Fair Market Value shall
      be the closing selling price on the last preceding date for which such
      quotation exists.


                                      A-2.

<PAGE>   27
      M. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.

      N. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:

                  (i) such individual's involuntary dismissal or discharge by
      the Corporation for reasons other than Misconduct, or

                  (ii) such individual's voluntary resignation following (A) a
      change in his or her position with the Corporation which materially
      reduces his or her level of responsibility, (B) a reduction in his or her
      level of compensation (including base salary, fringe benefits and
      participation in corporate-performance based bonus or incentive programs)
      by more than fifteen percent (15%) or (C) a relocation of such
      individual's place of employment by more than fifty (50) miles, provided
      and only if such change, reduction or relocation is effected by the
      Corporation without the individual's consent.

      O. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).

      P. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

      Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.

      R. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant, Salary Investment Option Grant or Automatic Option
Grant Programs.

      S. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.


                                      A-3.

<PAGE>   28
      T. PARTICIPANT shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.

      U. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for the purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.

      V. PLAN shall mean the Corporation's 1995 Stock Incentive Plan, as set
forth in this document.

      W. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

      X. PLAN EFFECTIVE DATE shall mean November 20, 1995, the date on which the
Underwriting Agreement was executed and the initial public offering price of the
Common Stock was established.

      Y. PREDECESSOR PLAN shall mean the Corporation's 1993 Stock Option/Stock
Issuance Plan.

      Z. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.

      AA. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the special equity
incentive program in effect under the Plan pursuant to which selected
individuals may apply a portion of their base salary to the acquisition of
below-market option grants.

      AB. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.

      AC. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.


                                      A-4.

<PAGE>   29
      AD. SERVICE shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

      AE. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.

      AF. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

      AG. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
under the Plan.

      AH. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

      AI. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.

      AJ. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

      AK. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters who managed the initial public
offering of the Common Stock.


                                      A-5.



<PAGE>   1
                                                                   EXHIBIT 10.13

                             NETWORK APPLIANCE, INC.
                      SPECIAL NON-OFFICER STOCK OPTION PLAN

                                   ARTICLE ONE

                                     GENERAL

               A. This Special Non-Officer Stock Option Plan is intended to
promote the interests of Network Appliance, Inc., a California corporation, by
authorizing an additional reserve of shares of the Corporation's common stock
for issuance through long-term option grants to individuals in the employ of the
Corporation (or any Parent or Subsidiary) who are neither officers of the
Corporation nor members of the Board and who are not otherwise Section 16
Insiders.

               B. The Plan shall become effective immediately upon adoption by
the Board on April 30, 1997.

               C. This Plan shall supplement the authorized share reserve under
the Corporation's 1995 Stock Incentive Plan, and share issuances under this Plan
shall not reduce or otherwise affect the number of shares of the Corporation's
common stock available for issuance under the 1995 Stock Incentive Plan. In
addition, share issuances under the 1995 Stock Incentive Plan shall not reduce
or otherwise affect the number of shares of the Corporation's common stock
available for issuance under this Plan.

               Capitalized terms shall have the meanings assigned to such terms
in
 the attached Appendix.

       I.      ADMINISTRATION OF THE PLAN

               A. The Plan Administrator shall have full power and discretion
(subject to the express provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for the proper administration of the Plan
and to make such determinations under, and issue such interpretations of, the
provisions of the Plan and any outstanding option grants thereunder as it may
deem necessary or advisable. Decisions of the Plan Administrator shall be final
and binding on all parties who have an interest in the Plan or any outstanding
option thereunder.

               B. The individuals serving as Plan Administrator shall serve for
such period as the Board may determine and shall be subject to removal by the
Board at any time.



<PAGE>   2
               C. Service as Plan Administrator shall constitute service as a
Board member, and each Board member serving as Plan Administrator shall
accordingly be entitled to full indemnification and reimbursement as a Board
member for such service. No individual serving as Plan Administrator shall be
liable for any act or omission made in good faith with respect to the Plan or
any option granted under the Plan.

     II.       ELIGIBILITY

               A. The persons eligible to participate in the Plan shall be
limited to those Employees who are neither officers of the Corporation nor
members of the Board and who are not otherwise Section 16 Insiders.

               B. The Plan Administrator shall have full authority to determine
which eligible Employees are to receive option grants under the Plan, the number
of shares to be covered by each such grant, the time or times at which each
granted option is to become exercisable and the maximum term for which the
option may remain outstanding. All options granted under the Plan shall be
Non-Statutory Options.

     III.      STOCK SUBJECT TO THE PLAN

               A. Shares of Common Stock shall be available for issuance under
the Plan and shall be drawn from either the Corporation's authorized but
unissued shares of Common Stock or from reacquired shares of Common Stock,
including shares repurchased by the Corporation on the open market. The maximum
number of shares of Common Stock reserved for issuance over the term of the Plan
shall be limited to 400,000 shares, subject to adjustment from time to time in
accordance with the provisions of this Section III.

               B. Should one or more outstanding options under this Plan expire
or terminate for any reason prior to exercise in full (including any option
cancelled in accordance with the cancellation-regrant provisions of Section III
of Article Two), then the shares subject to the portion of each option not so
exercised shall be available for subsequent issuance under the Plan. Should the
exercise price of an outstanding option under the Plan be paid with shares of
Common Stock, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised, and not by the net number of shares of Common Stock
actually issued to the holder of such option.

               C. Should any change be made to the Common Stock issuable under
the Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, then appropriate adjustments shall be made to (i) the maximum
number and/or class of securities issuable under the Plan, and (ii) the number
and/or class of securities and price per share in effect under each option
outstanding under the Plan. Such adjustments to the outstanding options are to
be effected


                                       2.


<PAGE>   3
in a manner which shall preclude the enlargement or dilution of rights and
benefits under such options. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.



                                       3.


<PAGE>   4
                                   ARTICLE TWO

                              OPTION GRANT PROGRAM


       I.      OPTION TERMS

               Options granted under the Plan shall be authorized by action of
the Plan Administrator and shall be evidenced by one or more instruments in the
form approved by the Plan Administrator; provided, however, that each such
instrument shall comply with the terms and conditions specified below. All such
granted options shall be Non-Statutory Options.

               A.     Exercise Price.

                      1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the grant date.

                      2. Full payment of the exercise price shall become
immediately due upon exercise of the option and shall be payable in one or more
of the forms specified below:

                         (i) cash or check made payable to the Corporation's
       order,

                         (ii) shares of Common Stock held for the requisite
       period necessary to avoid a charge to the Corporation's earnings for
       financial reporting purposes and valued at Fair Market Value on the
       Exercise Date, or

                         (iii) through a special sale and remittance procedure
       pursuant to which the Optionee shall concurrently provide irrevocable
       instructions to (a) a Corporation-designated brokerage firm to effect the
       immediate sale of the purchased shares and remit to the Corporation, out
       of the sale proceeds available on the settlement date, sufficient funds
       to cover the aggregate exercise price payable for the purchased shares
       plus all applicable Federal, state and local income and employment taxes
       required to be withheld by the Corporation in connection with such
       purchase and to (b) the Corporation to deliver the certificates for the
       purchased shares directly to such brokerage firm in order to complete the
       sale transaction.

               Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.


                                       4.


<PAGE>   5
               B. Term and Exercise of Options. Each option shall be exercisable
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing such option. No option shall have a maximum term in excess of ten
(10) years. During the lifetime of the Optionee, the option shall be exercisable
only by the Optionee and shall not be assignable or transferable except for a
transfer of the option effected by will or by the laws of inheritance following
the Optionee's death.

               C. Effect of Termination of Service.

                      1. The following provisions shall govern the exercise of
any options held by the Optionee at the time of cessation of Service or death:

                           (i) Should Optionee cease to remain in Service for
        any reason (other than death, Permanent Disability or Misconduct) while
        this option is outstanding, then Optionee shall retain the right to
        exercise this option until the expiration of the earlier of (A) the
        three (3)-month period commencing with the date of such cessation of
        Service or (B) the ten (10)-year option term.

                          (ii) If the Optionee dies while holding an outstanding
        option, then the personal representative of Optionee's estate or the
        person or persons to whom the option is transferred pursuant to
        Optionee's will or in accordance with the laws of inheritance shall have
        the right to exercise this option. Such right shall lapse, and this
        option shall cease to be outstanding, upon the expiration of the earlier
        of (A) the twelve (12)-month period measured from the date of Optionee's
        death or (B) the ten (10)-year option term.

                         (iii) Should Optionee cease Service by reason of
        Permanent Disability while this option is outstanding, then Optionee
        shall retain the right to exercise this option until the expiration of
        the earlier of (A) the twelve (12)-month period commencing with the date
        of such cessation of Service or (B) the ten (10)-year option term.

                          (iv) Should Optionee's Service be terminated for
        Misconduct, then this option shall terminate immediately and cease to
        remain outstanding.

                           (v) During the applicable post-Service exercise
        period, the option may not be exercised in the aggregate for more than
        the number of shares for which the option is exercisable on the date of
        Optionee's cessation of Service. Upon the expiration of the applicable
        exercise period or (if earlier) upon the expiration of the option term,
        the option shall

                                       5.


<PAGE>   6
        terminate and cease to be outstanding for any otherwise exercisable
        shares for which the option has not been exercised. However, the option
        shall, immediately upon Optionee's cessation of Service for any reason,
        terminate and cease to be outstanding with respect to any and all option
        shares for which the option is not otherwise at the time exercisable.

                      2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

                         (i) extend the period of time for which the option is
       to remain exercisable following Optionee's cessation of Service or death
       from the limited period otherwise in effect for that option to such
       greater period of time as the Plan Administrator shall deem appropriate,
       but in no event beyond the expiration of the option term, and/or

                         (ii) permit the option to be exercised, during the
       applicable post-Service exercise period, not only with respect to the
       number of shares of Common Stock for which such option is exercisable at
       the time of the Optionee's cessation of Service but also with respect to
       one or more additional installments for which the option would have
       become exercisable had the Optionee continued in Service.

               D. Shareholder Rights. A Optionee shall have none of the rights
of a shareholder with respect to any option shares until such person shall have
exercised the option and paid the exercise price for the purchased shares.

      II.      CORPORATE TRANSACTION

               A. In the event of any Corporate Transaction, each option which
is at the time outstanding under the Plan shall automatically accelerate so that
each such option shall, immediately prior to the specified effective date for
such Corporate Transaction, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to that option and may be
exercised for all or any portion of those shares as fully-vested shares.
However, an outstanding option under the Plan shall NOT so accelerate if and to
the extent: (i) such option is, in connection with the Corporate Transaction, to
be assumed by the successor corporation or parent thereof, (ii) such option is
to be replaced with a cash incentive program of the successor corporation which
preserves the option spread existing at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same exercise schedule
applicable to such option or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant.


                                       6.

<PAGE>   7
               B. The Plan Administrator shall have the discretionary authority
to structure one or more options under the Plan so that those options shall
immediately accelerate upon an Involuntary Termination of the Optionee's Service
within a designated period (not to exceed twelve (12) months) following the
effective date of a Corporate Transaction in which those options are assumed by
the successor corporation and accordingly do not accelerate at the time of such
Corporate Transaction.

               C. Immediately following the consummation of the Corporate
Transaction, all outstanding options under the Plan shall terminate and cease to
remain outstanding, except to the extent assumed by the successor corporation or
its parent company.

               D. Each outstanding option which is assumed in connection with
the Corporate Transaction shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply and pertain to the number and class of
securities which would have been issued to the Optionee, in consummation of the
Corporate Transaction, had such person exercised the option immediately prior to
such Corporate Transaction. Appropriate adjustments shall also be made to the
exercise price payable per share, provided the aggregate exercise price payable
for such securities shall remain the same. In addition, the class and number of
securities available for issuance under the Plan following the consummation of
the Corporate Transaction shall be appropriately adjusted.

               E. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.

     III.      CANCELLATION AND REGRANT OF OPTIONS

               The Plan Administrator shall have the sole and exclusive
authority to effect, at any time and from time to time, with the consent of the
affected Optionees, the cancellation of any or all outstanding options under the
Plan and to grant in substitution new options under the Plan covering the same
or different numbers of shares of Common Stock but with an exercise price per
share not less than the Fair Market Value of the Common Stock on the new grant
date.


                                       7.


<PAGE>   8
                                  ARTICLE THREE

                                  MISCELLANEOUS

       I.      AMENDMENT OF THE PLAN

               The Board has complete and exclusive power and authority to amend
or modify the Plan in any or all respects whatsoever. However, no such amendment
or modification shall adversely affect rights and obligations with respect to
stock options at the time outstanding under the Plan, unless the affected
Optionees consent to such amendment.

      II.      TAX WITHHOLDING

               The Corporation's obligation to deliver shares of Common Stock
upon the exercise of stock options under the Plan shall be subject to the
satisfaction of all applicable Federal, state and local income tax and
employment tax withholding requirements.

     III.      EFFECTIVE DATE AND TERM OF PLAN

               A.     This Plan became effective upon approval by the Board at 
the April 30, 1997 Board meeting and shall not be subject to shareholder 
approval.

               B. The Plan shall terminate upon the earlier of (i) December 31,
2007 or (ii) the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of options under the Plan. If
the date of termination is determined under clause (i) above, then all option
grants outstanding on such date shall thereafter continue to have force and
effect in accordance with the provisions of the instruments evidencing those
grants.

      IV.      USE OF PROCEEDS

               Any cash proceeds received by the Corporation from the sale of
shares pursuant to option grants under the Plan shall be used for general
corporate purposes.

       V.      REGULATORY APPROVALS

               A. The implementation of the Plan, the granting of any option
under the Plan, and the issuance of Common Stock upon the exercise of the stock
options granted hereunder shall be subject to the Corporation's procurement of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the stock options granted under it and the Common Stock issued
pursuant to it.


                                       8.


<PAGE>   9
               B. No shares of Common Stock or other assets shall be issued or
delivered under this Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any securities exchange on which the Common Stock is then listed for trading.

      VI.      NO EMPLOYMENT/SERVICE RIGHTS

               Neither the action of the Corporation in establishing the Plan,
nor any action taken by the Plan Administrator hereunder, nor any provision of
the Plan shall be construed so as to grant any individual the right to remain in
Service for any period of specific duration, and the Corporation (or any Parent
or Subsidiary employing such individual) may terminate such individual's Service
at any time and for any reason, with or without cause.


                                       9.


<PAGE>   10
                                    APPENDIX


               The following definitions shall be in effect under the Plan:

        A.     BOARD shall mean the Corporation's Board of Directors.

        B.     CODE shall mean the Internal Revenue Code of 1986, as amended.

        C.     COMMON STOCK shall mean the Corporation's common stock.

        D.     CORPORATE TRANSACTION shall mean either of the following 
shareholder-approved transactions to which the Corporation is a party:

               - a merger or consolidation in which securities possessing more
        than fifty percent (50%) of the total combined voting power of the
        Corporation's outstanding securities are transferred to a person or
        persons different from the persons holding those securities immediately
        prior to such transaction; or

               - the sale, transfer or other disposition of all or substantially
        all of the Corporation's assets in complete liquidation or dissolution
        of the Corporation.

        E. CORPORATION shall mean Network Appliance, Inc., a California
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Network Appliance, Inc. which shall by appropriate
action adopt the Plan.

        F. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

        G. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.

        H.     FAIR MARKET VALUE per share of Common Stock on any relevant date 
shall be determined in accordance with the following provisions:

               - If the Common Stock is at the time traded on the Nasdaq
        National Market, then the Fair Market Value shall be the closing selling
        price per share of Common Stock on the date in question, as such price
        is reported by the National Association of Securities Dealers on the
        Nasdaq National Market or any successor system. If there is no closing
        selling price for the Common Stock on the date in question, then the
        Fair Market Value shall be


                                      A-1.

<PAGE>   11
        the closing selling price on the last preceding date for which such
        quotation exists.

               - If the Common Stock is at the time listed on any national
        securities exchange, then the Fair Market Value shall be the closing
        selling price per share of Common Stock on the date in question on that
        exchange, as such price is officially quoted in the composite tape of
        transactions on such exchange. If there is no closing selling price for
        the Common Stock on the date in question, then the Fair Market Value
        shall be the closing selling price on the last preceding date for which
        such quotation exists.

        I.     INVOLUNTARY TERMINATION shall mean the termination of the Service
of any individual which occurs by reason of:

               -      such individual's involuntary dismissal or discharge by 
        the Corporation for reasons other than Misconduct, or

               - such individual's voluntary resignation following (A) a change
        in his or her position with the Corporation which materially reduces his
        or her level of responsibility, (B) a reduction in his or her level of
        compensation (including base salary, fringe benefits and target bonuses
        under corporate-performance based bonus or incentive programs) by more
        than fifteen percent (15%) or (C) a relocation of such individual's
        place of employment by more than fifty (50) miles, provided and only if
        such change, reduction or relocation is effected by the Corporation
        without the individual's consent.

        J. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure
by the Optionee of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by the
Optionee adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee or other person in the Service of the Corporation (or any Parent
or Subsidiary).

        K. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.

        L. OPTIONEE shall mean any person to whom an option is granted under the
Plan.


                                      A-2.


<PAGE>   12
        M. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

        N. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment expected to result in death
or to be of continuous duration of twelve (12) months or more.

        O. PLAN shall mean the Corporation's Special Non-Officer Stock Option 
Plan, as set forth in this document.

        P. PLAN ADMINISTRATOR shall mean the committee comprised of one or more
Board members appointed by the Board to administer the Plan.

        Q. SECTION 16 INSIDER shall mean an officer or director of the 
Corporation subject to the short-swing profit restrictions of Section 16 of the
1934 Act.

        R. SERVICE shall mean the provision of services on a periodic basis to
the Corporation (or any Parent or Subsidiary) in the capacity of an Employee or
an independent consultant or advisor, except to the extent otherwise
specifically provided in the applicable stock option agreement.

        S. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.



                                      A-3.



<PAGE>   1
 
                                                                    EXHIBIT 21.1
 
                          SUBSIDIARIES OF THE COMPANY
 
SUBSIDIARIES
Network Appliance Ltd. (U.K.)
Network Appliance Corporation France
Network Appliance Srl. (Italy)
Network Appliance GmbH (Germany)
Network Appliance FSC Incorporated





<PAGE>   1
 
                                                                    EXHIBIT 23.1
 
                         INDEPENDENT AUDITORS' CONSENT
 
To the Board of Directors and Shareholders of Network Appliance, Inc.
 
     We consent to the incorporation by reference in Registration Statement Nos.
33-99638 and 333-25277 on Form S-8 and Registration No. 333-26163 on Form S-3 of
our report dated May 5, 1997, appearing in this Annual Report on Form 10-K of
Network Appliance, Inc. for the year ended April 30, 1997.
 
/s/ DELOITTE & TOUCHE LLP
 
San Jose, California
July 21, 1997





<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          APR-25-1997
<PERIOD-START>                             APR-27-1996
<PERIOD-END>                               APR-25-1997
<CASH>                                          21,520
<SECURITIES>                                     6,916
<RECEIVABLES>                                   13,911
<ALLOWANCES>                                       330
<INVENTORY>                                      9,920
<CURRENT-ASSETS>                                56,620
<PP&E>                                          13,752
<DEPRECIATION>                                   4,514
<TOTAL-ASSETS>                                  68,941
<CURRENT-LIABILITIES>                           14,701
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                        54,653
<OTHER-SE>                                       (624)
<TOTAL-LIABILITY-AND-EQUITY>                    68,941
<SALES>                                         93,333
<TOTAL-REVENUES>                                93,333
<CGS>                                           38,061
<TOTAL-COSTS>                                   38,061
<OTHER-EXPENSES>                                52,189
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                  4,043
<INCOME-TAX>                                     3,793
<INCOME-CONTINUING>                                250
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       250
<EPS-PRIMARY>                                      .01
<EPS-DILUTED>                                      .01
        

</TABLE>