UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

NETAPP, INC.

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation)		0-27130 (Commission File Number)		77-0307520 (I.R.S. Employer Identification Number)

495 East Java Drive
Sunnyvale, CA 94089
(Address of principal executive offices) (Zip Code)

(408) 822-6000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report )

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

TABLE OF CONTENTS

Item 8.01 Other Events

Item 9.01 Financial Statements and Exhibits

SIGNATURES

EXHIBIT INDEX

Exhibit 23.1

Exhibit 99.1

Item 8.01 — Other Events.

          On April 25, 2009, NetApp, Inc. and subsidiaries (the “Company” , “we”, or “us”) adopted Financial Accounting Standards Board Staff Position Accounting Principles Board 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB No. 14-1”), which is required to be applied retrospectively. The adoption impacted the accounting for our convertible debt issued in June 2008 by requiring the initial proceeds to be allocated between a liability and an equity component based on the fair value of the debt component as of the issuance date in a manner that reflects a non-convertible debt borrowing rate. Accordingly, we have revised our consolidated financial statements to reflect this change. The information in this Form 8-K is not an amendment to or restatement of our Annual Report on Form 10-K for the year ended April 24, 2009 (the “Fiscal 2009 Form 10-K”).

          We are filing this Current Report on Form 8-K solely to show the effects of the adoption of this standard on previously issued financial statements. Information in this Current Report on Form 8-K updates the following sections of our Fiscal 2009 Form 10-K to reflect the adoption of FSP APB No. 14-1:

	•		Part II, Item 6. Selected Financial Data,
	•		Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and
	•		Part II, Item 8. Financial Statements and Supplementary Data

          No other information in our Fiscal 2009 Form 10-K has been otherwise updated for events or developments that occurred subsequent to the filing of our Fiscal 2009 Form 10-K. The disclosures in Exhibit 99.1 speak as of the original filing date of our Fiscal 2009 Form 10-K. Therefore, the information in this Form 8-K should be read in conjunction with the Fiscal 2009 Form 10-K and our filings made with the Securities and Exchange Commission subsequent to the filing of the Fiscal 2009 Form 10-K, including our Form 10-Q for our fiscal quarter ended July 31, 2009 (filed on September 4, 2009), and any amendments to those filings. The updated financial information attached to this Current Report on Form 8-K as Exhibit 99.1 is incorporated by reference in our currently effective registrations statements.

Item 9.01 — Financial Statements and Exhibits.

     (d) Exhibits.

23.1		Consent of Deloitte & Touche LLP, an Independent Registered Public Accounting Firm
99.1		Updated Selected Consolidated Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: September 30, 2009

Exhibit Index

Exhibit Number		Exhibit Title
23.1		Consent of Deloitte & Touche LLP, an Independent Registered Public Accounting Firm
99.1		Updated Selected Consolidated Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-25277, 333-40307, 333-32318, 333-41384, 333-53776, 333-57378, 333-73982, 333-100837, 333-109627, 333-113200, 333-119640, 333-125448, 333-128098, 333-133564, 333-138337, 333-139835, 333-147034, 333-149375, and 333-154867 on Form S-8 of our report dated June 16, 2009 (September 30, 2009 as to the effect of the retrospective adoption of Financial Accounting Standards Board Staff Position APB 14-1: Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement), relating to the consolidated financial statements of NetApp, Inc. and its subsidiaries (collectively, the “Company”) (which report expresses an unqualified opinion and includes explanatory paragraphs regarding the adoption of new accounting pronouncements), appearing in this Current Report on Form 8-K of the Company.

/s/ DELOITTE & TOUCHE LLP
San Jose, California
September 30, 2009

Exhibit 99.1

INTRODUCTORY NOTE

          On April 25, 2009, NetApp, Inc. and subsidiaries (the “Company” “we” or “us”) adopted Financial Accounting Standards Board Staff Position Accounting Principles Board 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” ( “FSP APB No. 14-1”), which is required to be applied retrospectively. The adoption impacted the accounting for our convertible debt issued in June 2008 by requiring the initial proceeds to be allocated between a liability and an equity component based on the fair value of the debt component as of the issuance date in a manner that reflects a non-convertible debt borrowing rate. Accordingly, we have revised our consolidated financial statements to reflect this change. The information in this Exhibit 99.1 is not an amendment to or restatement of our Annual Report on Form 10-K for the year ended April 24, 2009 (the “Fiscal 2009 Form 10-K”).

          Information in this Exhibit 99.1 updates the following sections of our Fiscal 2009 Form 10-K solely to reflect the adoption of FSP APB No. 14-1:

	•		Part II, Item 6. Selected Financial Data,
	•		Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and
	•		Part II, Item 8. Financial Statements and Supplementary Data

     No other information in our Fiscal 2009 Form 10-K has been otherwise updated for events or developments that occurred subsequent to the filing of our Fiscal 2009 Form 10-K or modified except as described above. The disclosures in Exhibit 99.1 speak as of the original filing date of our Fiscal 2009 Form 10-K. Therefore, the information in this Exhibit 99.1 should be read in conjunction with the Fiscal 2009 Form 10-K, our Form 10-Q for our fiscal quarter ended July 31, 2009 (filed on September 4, 2009), and the Company’s filings made with the SEC subsequent to the filing of the 10-K, including any amendments to those filings.

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

     This Exhibit 99.1 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor provisions set forth in the Exchange Act. Forward-looking statements usually contain the words “estimate,” “intend,” “plan,” “predict,” “seek,” “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “believe,” or similar expressions and variations or negatives of these words. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. All forward-looking statements, including but not limited to, statements about:

	•		our future financial and operating results;
	•		our business strategies;
	•		management’s plans, beliefs and objectives for future operations, research and development,
	•		acquisitions and joint ventures, growth opportunities, investments and legal proceedings;
	•		our restructuring plans and estimates;
	•		competitive positions;
	•		product introductions, development, enhancements and acceptance;
	•		economic and industry trends or trend analyses
	•		future cash flows and cash deployment strategies;

	•		short-term and long-term cash requirements;
	•		the impact of completed acquisitions;
	•		our anticipated tax rate;
	•		the continuation of our stock repurchase program;
	•		compliance with laws, regulations and loan covenants; and
	•		the conversion, maturation or repurchase of the Notes,

are inherently uncertain as they are based on management’s current expectations and assumptions concerning future events, and they are subject to numerous known and unknown risks and uncertainties. Therefore, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to:

	•		the amount of orders received in future periods;
	•		our ability to ship our products in a timely manner;
	•		our ability to achieve anticipated pricing, cost, and gross margins levels;
	•		our ability to maintain or increase backlog and increase revenue;
	•		our ability to successfully execute on our strategy
	•		our ability to increase our customer base, market share and revenue;
	•		our ability to successfully introduce new products;
	•		our ability to adapt to changes in market demand;
	•		the general economic environment and the growth of the storage markets;
	•		acceptance of, and demand for, our products;
	•		demand for our global service and support and professional services;
	•		our ability to identify and respond to significant market trends and emerging standards;
	•		our ability to realize our financial objectives through management of our investment in people, process, and systems;
	•		our ability to maintain our supplier and contract manufacturer relationships;
	•		the ability of our suppliers and contract manufacturers to meet our requirements;
	•		the ability of our competitors to introduce new products that compete successfully with our products;
	•		our ability to grow direct and indirect sales and to efficiently utilize global service and support;
	•		the general economic environment and the growth of the storage markets;
	•		variability in our gross margins;

	•		our ability to sustain and/or improve our cash and overall financial position;
	•		our cash requirements and terms and availability of financing;
	•		valuation and liquidity of our investment portfolio;
	•		our ability to finance business acquisitions, construction projects and capital expenditures through cash from operations and/or financing;
	•		the impact of industry consolidation
	•		the results of our ongoing litigation, tax audits, government audits and inquiries; and
	•		those factors discussed under “Risk Factors” elsewhere in the Fiscal 2009 Form 10-K.

     Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based upon information available to us at this time. These statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement. Actual results could vary from our forward looking statements due to foregoing factors as well as other important factors, including those described in the Risk Factors included on page 11 of our Fiscal 2009 Form 10-K.

Item 6. Selected Financial Data

     The following selected consolidated financial data for and as of the fiscal years ended 2009, 2008, 2007, 2006 and 2005 was derived from our audited consolidated financial statements. The summary consolidated selected financial data for and as of the year ended April 24, 2009 has been adjusted as a result of the retrospective adoption of FSP APB No. 14-1. Our consolidated financial statements as of April 24, 2009 and April 25, 2008 and financial statements for the fiscal years ended 2009, 2008 and 2007 are derived from the consolidated financial statements included elsewhere in the Current Report on Form 8-K. The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Financial Statements and Supplementary Data,” and other financial data included elsewhere in this report. Our historical results of operations are not necessarily indicative of results of operations to be expected for any future period.

Five Fiscal Years Ended April 24, 2009

		2009				2008				2007				2006				2005
		(In thousands, except per-share amounts)
Total revenues (1)		$	3,406,393			$	3,303,167			$	2,804,282			$	2,066,456			$	1,598,131
Total cost of revenue			1,416,478				1,289,791				1,099,782				809,995				623,083
Gross profit			1,989,915				2,013,376				1,704,500				1,256,461				975,048
Total operating expenses			1,942,740				1,699,776				1,403,258				948,170				721,861
Income from operations			47,175				313,600				301,242				308,291				253,187
Net income (1)		$	64,587			$	309,738			$	297,735			$	266,452			$	225,754
Net income per share, basic		$	0.20			$	0.88			$	0.80			$	0.72			$	0.63
Net income per share, diluted		$	0.19			$	0.86			$	0.77			$	0.69			$	0.59
Shares used in basic net income per share calculation			330,279				351,676				371,204				371,061				361,009
Shares used in diluted net income per share calculation			334,575				361,090				388,454				388,381				380,412
Cash, cash equivalents and short-term investments		$	2,604,206			$	1,164,390			$	1,308,781			$	1,322,892			$	1,169,965
Working capital			1,759,459				653,331				1,053,256				1,116,047				1,055,700
Total assets			5,384,379				4,070,988				3,658,478				3,260,965				2,372,647
Short-term debt			—				—				85,110				166,211				—
Long-term debt and other			1,219,216				318,658				9,487				138,200				4,474
Total stockholders’ equity			1,784,189				1,700,339				1,989,021				1,923,453				1,660,804

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion of our financial condition and results of operations should be read together with the financial statements and the related notes set forth under “Item 8. Financial Statements and Supplementary Data”. The following discussion also contains trend information and other forward looking statements that involve a number of risks and uncertainties. The Risk Factors set forth in “Item 1. Business” of our Fiscal 2009 Form 10-K are hereby incorporated into the discussion by reference.

Overview

     Fiscal 2009 was characterized initially by a slowdown in the macroeconomic environment with continued deterioration in global economic conditions as the year progressed. Customers were faced with data volumes that continued to grow and shrinking or frozen capital budgets. As a result, customers postponed many IT projects and looked for solutions that provided a rapid return on their investment — typically less than twelve months. Server virtualization remained one of the most often funded IT projects, due to the cost savings it produces. NetApp has been a direct beneficiary of the trend towards server virtualization because of the unique storage efficiency features we provide along with our ability to virtualize the storage infrastructure. With our software intensive solutions, we offer customers greater functionality, easier manageability and a smaller hardware footprint, helping them to meet their business objectives with less physical storage and a lower total cost of ownership. As a result, NetApp gained a significant number of new customer accounts in fiscal 2009.

     However, revenue from new accounts was not enough to offset the slowdown in spending from many of our largest accounts, and our overall revenue growth slowed relative to previous years. Our largest accounts contributed to a significant level of hardware service contract and software entitlement and maintenance contract renewals, demonstrating continued commitment to NetApp technology in their data centers while at the same time delaying capital expenditures amidst an uncertain economic environment.

     Net revenues increased by 3.1% to $3,406.4 million in fiscal 2009, from $3,303.2 million in fiscal 2008. The increase in our net revenues for fiscal 2009 was due to increases in software entitlements and maintenance revenues as well as service revenues, partially offset by decreases in product revenues and a negative impact from a GSA settlement. The $128.7 million GSA settlement was related to a dispute regarding our discount practices and compliance with the price reduction clause provisions of a GSA contract between August 1997 and February 2005.

     NetApp implemented comprehensive expense reduction programs in fiscal 2009 as the global macroeconomic conditions worsened. We decided to cease development and availability of our SnapMirror^® for Open Systems (“SMOS”) product. We also implemented a worldwide restructuring program which included a reduction in workforce, the closing or downsizing of certain facilities, and the establishment of a plan to outsource certain internal activities. As a result of these programs, we recognized total restructuring charges of $51.5 million, including the severance costs related to the elimination of approximately 450 regular positions, contract cancellation charges, write offs of intangible and fixed assets and costs association with the closure of some of our facilities; as well as $2.9 million of other charges to support our restructuring initiatives. Our actions were intended to better align our cost structure with expected revenues, as well as to reallocate resources into areas of our business with more growth potential.

     As a result of the financial crisis during fiscal 2009, we recorded an other-than-temporary impairment charge of $29.6 million on our investments which resulted from direct and indirect exposure to Lehman Brothers Holdings Inc. securities and other-than-temporary declines in the value of our auction rate securities and investments in privately held companies. The volatility in the financial markets and economic uncertainty has had and may continue to have an adverse impact on our business and financial condition in ways that we currently cannot predict.

     Despite the current challenging economic environment, we believe there are fundamental aspects of our business that will allow us to succeed over the long term. We believe that our products and services provide customers with valuable storage solutions, even in a more constrained spending environment. We also believe that our investments in branding, awareness and new customer acquisition will lead to an increase in our market share once the economy begins to recover. However, continued revenue growth depends on the introduction and market acceptance of new products and solutions and continued market demand for our products. We will continue

our focus on expense management while improving our resource allocation to fund investment in strategic initiatives. Our actions are designed to preserve our revenue-generating potential, increase our focus on key growth opportunities, and at the same time improve operating leverage over the long term.

     Subsequent Event

     On May 20, 2009, we entered into an agreement to acquire Data Domain, a leading provider of storage solutions for backup and archive applications based on deduplication technology. Data Domain deduplication storage systems are designed to deliver reliable, efficient and cost-effective solutions that enable enterprises of all sizes to manage, retain and protect their data. The agreement was subsequently amended on June 3, 2009. Pursuant to the terms of the definitive merger agreement relating to the merger, each share of Data Domain common stock issued and outstanding immediately prior to the completion of merger will be cancelled and converted into the right to receive, subject to adjustment, a combination of $16.45 in cash and a certain number of shares of our common stock, calculated based on an exchange ratio.

     The merger, if completed, may result in material but indeterminable increases in our revenues, operating results, financial position and cash flows. While we anticipate cost synergies associated with combining facilities, IT infrastructure, and certain functions such as finance, human resources and administrative services with those of Data Domain, differences between our and Data Domain’s operations could cause unforeseen delays in the integration process, result in lower savings than originally anticipated, or both, which could adversely affect NetApp’s business and operating results.

Critical Accounting Estimates and Policies

     Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.

     We believe that the following accounting policies are “critical” as defined by the Securities and Exchange Commission, in that they are both highly important to the portrayal of our financial condition and results and require difficult management judgments and assumptions about matters that are inherently uncertain. We also have other important policies, including those related to derivative instruments and concentration of credit risk. However, these policies do not meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective. These policies are discussed in Note 2 to the consolidated financial statements accompanying our Fiscal 2009 Form 10-K.

     We believe the accounting policies described below are the ones that most frequently require us to make estimates and judgments and therefore are critical to the understanding of our results of operations:

	•		Revenue recognition and allowances
	•		Valuation of goodwill and intangibles
	•		Accounting for income taxes
	•		Inventory write-downs
	•		Restructuring accruals
	•		Impairment losses on investments
	•		Fair value measurements
	•		Accounting for stock-based compensation
	•		Loss contingencies

Revenue Recognition and Allowances

     We apply the provisions of Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition (SOP No. 97-2), and related interpretations to our product sales, both hardware and software, because our software is essential to the performance of our hardware. We recognize revenue when:

	•		Persuasive evidence of an arrangement exists: It is our customary practice to have a purchase order and/or contract prior to recognizing revenue on an arrangement from our end users, customers, value-added resellers, or distributors.
	•		Delivery has occurred: Our product is physically delivered to our customers, generally with standard transfer terms such as FOB origin. We typically do not allow for restocking rights with any of our value-added resellers or distributors. Products shipped with acceptance criteria or return rights are not recognized as revenue until all criteria are achieved. If undelivered products or services exist that are essential to the functionality of the delivered product in an arrangement, delivery is not considered to have occurred.
	•		The fee is fixed or determinable: Arrangements with payment terms extending beyond our standard terms, conditions and practices are not considered to be fixed or determinable. Revenue from such arrangements is recognized as the fees become due and payable. We typically do not allow for price-protection rights with any of our value-added resellers or distributors.
	•		Collection is probable: Probability of collection is assessed on a customer-by-customer basis. Customers are subjected to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay. If it is determined at the outset of an arrangement that collection is not probable based upon our review process, revenue is recognized upon cash receipt.

     Our multiple element arrangements include our systems and one or more of the following undelivered software-related elements: software entitlements and maintenance, premium hardware maintenance, and storage review services. Our software entitlements and maintenance entitle our customers to receive unspecified product upgrades and enhancements on a when-and-if-available basis, bug fixes, and patch releases. Premium hardware maintenance services include contracts for technical support and minimum response times. Revenues from software entitlements and maintenance, premium hardware maintenance services and storage review services are recognized ratably over the contractual term, generally from one to three years. We also offer extended service contracts (which extend our standard parts warranty and may include premium hardware maintenance) at the end of the warranty term; revenues from these contracts are recognized ratably over the contract term. We typically sell technical consulting services separately from any of our other revenue elements, either on a time and materials basis or for fixed price standard projects; we recognize revenue for these services as they are performed. Revenue from hardware installation services is recognized at the time of delivery and any remaining costs are accrued, as the remaining undelivered services are considered to be inconsequential and perfunctory. For arrangements with multiple elements, we recognize as revenue the difference between the total arrangement price and the greater of fair value or stated price for any undelivered elements (“the residual method”).

     For our undelivered software-related elements, we apply the provisions of SOP No. 97-2 and determine fair value of these undelivered elements based on vendor-specific objective evidence (“VSOE”), which for us consists of the prices charged when these services are sold separately either alone, in the case of software entitlements and maintenance, or as a bundled element which always includes software entitlements and maintenance and premium hardware maintenance, and may also include storage review services. To determine the fair value of these elements, we analyze both the selling prices when elements are sold separately as well as the concentrations of those prices. We believe those concentrations have been sufficient to enable us to establish VSOE of fair value for the undelivered elements. If VSOE cannot be obtained to establish fair value of the undelivered elements, paragraph 12 of SOP No. 97-2 would require that revenue from the entire arrangement be initially deferred and recognized ratably over the period these elements are delivered.

     For income statement presentation purposes, once fair value has been determined for our undelivered bundled elements, we allocate revenue first to software entitlements and maintenance, based on VSOE of its fair value with the remainder allocated to other service revenues.

     We record reductions to revenue for estimated sales returns at the time of shipment. Sales returns are estimated based on historical sales returns, current trends, and our expectations regarding future experience. We monitor and analyze the accuracy of sales returns estimates by reviewing actual returns and adjust them for future expectations to determine the adequacy of our current and future reserve needs. Our reserve levels have been sufficient to cover actual returns and have not required material changes in subsequent periods. While we currently have no expectations for significant changes to these reserves, if actual future returns and allowances differ from past experience, additional allowances may be required.

     We also maintain a separate allowance for doubtful accounts for estimated losses based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. We analyze accounts receivable and historical bad debts, customer concentrations, customer solvency, current economic and geographic trends, and changes in customer payment terms and practices when evaluating the adequacy of our current and future allowance. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, a specific allowance for bad debt is estimated and recorded, which reduces the recognized receivable to the estimated amount we believe will ultimately be collected. We monitor and analyze the accuracy of allowance for doubtful accounts estimate by reviewing past collectibility and adjust it for future expectations to determine the adequacy of our current and future allowance. Our reserve levels have generally been sufficient to cover credit losses. Our allowance for doubtful accounts as of April 24, 2009 was $3.1 million, compared to $2.4 million as of April 25, 2008. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

     Valuation of Goodwill and Intangibles

     Identifiable intangible assets are amortized over time, while in-process research and development is recorded as a charge on the date of acquisition and goodwill is capitalized, subject to periodic review for impairment. Accordingly, the allocation of the acquisition cost to identifiable intangible assets has a significant impact on our future operating results. The allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. Should conditions be different than management’s current assessment, material write-downs of the fair value of intangible assets may be required. We periodically review the estimated remaining useful lives of our intangible assets. A reduction in the estimate of remaining useful life could result in accelerated amortization expense or a write-down in future periods. As such, any future write-downs of these assets would adversely affect our operating results.

     Under our accounting policy we perform an annual review of the valuation of goodwill in the fourth quarter of each fiscal year, or more often if indicators of impairment exist. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Evaluations of possible impairment and, if applicable, adjustments to carrying values require us to estimate, among other factors, future cash flows, useful lives, and fair market values of our reporting units and assets. When we conduct our evaluation of goodwill, the fair value of goodwill is assessed using valuation techniques that require significant management judgment. Should conditions be different from management’s last assessment, significant write-downs of goodwill may be required, which would adversely affect our operating results. In fiscal 2009 we performed such evaluation and found no impairment of goodwill. As of April 24, 2009, our assets included $681.0 million in goodwill. See Note 12, “Goodwill and Purchased Intangible Assets,” to our Consolidated Financial Statements.

     In fiscal 2009, we increased goodwill by $0.9 million relating to the tax benefits associated with the subsequent exercise of previously vested assumed Spinnaker and Onaro options. During fiscal 2008, we recorded goodwill of $79.2 million in connection with our Onaro acquisition and a decrease of goodwill for $0.2 million in connection with the escrow received from our Topio acquisition in fiscal 2007.

     Accounting for Income Taxes

     The determination of our tax provision is subject to judgments and estimates due to the complexity of the tax law that we are subject to in several tax jurisdictions. Earnings derived from our international business are generally taxed at rates that are lower than U.S. rates, resulting in a lower effective tax rate than the U.S. statutory tax rate of 35.0%. The ability to maintain our current effective tax rate is contingent on existing tax laws in both the United States and the respective countries in which our international subsidiaries are located. Future changes in domestic or international tax laws could affect the continued realization of the tax benefits we are currently receiving. In addition, a decrease in the percentage of our total earnings from international business or a change in the mix of international business among particular tax jurisdictions could increase our overall effective tax rate.

     We account for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. We have provided a valuation allowance of $28.0 million as of April 24, 2009, compared to $28.6 million as of April 25, 2008 on certain of our deferred tax assets. The $0.5 million decrease in valuation allowance in fiscal 2009 was primarily related to changes in the blended state tax rates. Tax attributes related to the exercise of employee stock options

are not realized until they result in a reduction of taxes payable. Pursuant to SFAS No. 123R, we do not include unrealized stock option attributes as components of our gross deferred tax assets and corresponding valuation allowance disclosures. The tax effected amounts of gross unrealized net operating loss and business tax credit carryforwards, and their corresponding valuation allowance at April 24, 2009 and April 25, 2008 are $278.9 million and $245.1 million, respectively.

     On April 28, 2007, we adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the implementation of FIN No. 48, we recognize the tax liability for uncertain income tax positions on the income tax return based on the two-step process prescribed in the interpretation. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires us to determine the probability of various possible outcomes. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit, and new exposures. If we later determine that our exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and effect a related change in our tax provision during the period in which we make such determination.

     We are currently undergoing federal income tax audits in the United States and several foreign tax jurisdictions. The rights to some of our intellectual property (“IP”) are owned by certain of our foreign subsidiaries, and payments are made between foreign and U.S. tax jurisdictions relating to the use of this IP in a qualified cost sharing arrangement. Recently, several other U.S. companies have had their foreign IP arrangements challenged as part of IRS examinations, which have resulted in material proposed assessments and/or pending litigation. Effective September 27, 2007, the IRS’s Large and Mid-Sized Business Division (“LMSB”) released a Coordinated Issues Paper (“CIP”) with respect to qualified cost sharing arrangements (“CSAs”). Specifically, this CIP provides guidance to IRS personnel concerning methods that may be applied to evaluate the arm’s length charge (buy-in payment) for internally developed (pre-existing) as well as acquisition-related intangible property that is made available to a qualified CSA. During fiscal year 2009 we received Notices of Proposed Adjustments from the IRS in connection with a federal income tax audit of our fiscal 2003 and 2004 tax year tax returns. We recently filed a protest with the IRS in response to the Notices of Proposed Adjustments. The Notices of Proposed Adjustments focus primarily on issues of the timing and the amount of income recognized and deductions taken during the audit years and on the level of cost allocations made to foreign operations during the audit years. If upon the conclusion of these audits the ultimate determination of our taxes owed in any of these tax jurisdictions is for an amount in excess of the tax provision we have recorded in the applicable period or subsequently reserved for, our overall tax expense and effective tax rate may be adversely impacted in the period of adjustment.

     Effective March 20, 2008, the IRS’s LMSB also released a CIP with respect to the cost sharing of stock based compensation. Specifically, this CIP provides guidance to IRS personnel concerning stock based compensation related to a CSA by providing that the parties to a CSA will share all costs related to intangible development of the covered intangibles, including but not limited to, salaries, bonuses, and other payroll costs and benefits. Taxpayers should include all forms of compensation in the cost pool, including those costs related to stock-based compensation. On May 27, 2009, the United States Court of Appeals for the Ninth Circuit held in Xilinx Inc. v. Commissioner that stock-based compensation must be included in the research and development cost base of companies that have entered into a CSA and must, therefore, be allocated among the participants based on anticipated benefits. The Court’s reversal of the prior U.S. Tax Court decision will impact our estimate of tax benefits that were required to be recognized under FIN 48. We are evaluating the impact of the Xilinx case on our provision for income taxes for the first quarter of fiscal 2010, but expect any final adjustment will be limited to a reduction of our unrecognized tax attributes. Our international operations currently benefit from a tax ruling concluded in the Netherlands, which expires in 2010. If we are unable to negotiate a similar tax ruling upon expiration of the current ruling, our effective tax rate could increase and our operating results could be adversely affected. Our effective tax rate could also be adversely affected by different and evolving interpretations of existing law or regulations, which in turn would negatively impact our operating and financial results.

     The Obama administration recently announced several proposals to reform United States tax rules, including proposals that may result in a reduction or elimination of the deferral of United States income tax on our future unrepatriated earnings. Absent a restructuring of some legal entities and their functionality, the changes as currently proposed would result in some of the future unrepatriated earnings being taxed at the United States federal income tax rate.

     Inventory Write-Downs

     Our inventory balance was $61.1 million as of April 24, 2009, compared to $70.2 million as of April 25, 2008. Inventories are stated at the lower of cost or market (which approximates actual cost on a first-in, first-out basis). We perform an in-depth excess and obsolete analysis of our inventory based upon assumptions about future demand and market conditions. We adjust the inventory value based on estimated excess and obsolete inventories determined primarily by future demand forecasts. Although we strive for accuracy in our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and commitments and on our reported results. If actual market conditions are less favorable than those projected, additional write-downs and other charges against earnings may be required. If actual market conditions are more favorable, we may realize higher gross margins in the period when the written-down inventory is sold. During the past few years, our inventory reserves have been sufficient to cover excess and obsolete exposure and have not required material changes in subsequent periods.

     We are subject to a variety of federal, state, local, and foreign environmental regulations relating to the use, storage, discharge, and disposal of hazardous chemicals used in the manufacture of our products, which may require design changes or recycling of products we manufacture. We will continue to monitor our compliance with these regulations, which may require us to incur higher costs, and adversely impact our operating results.

     Restructuring Accruals

     In fiscal 2009 we recorded restructuring and other charges of $54.4 million. We recognize a liability for restructuring costs when the liability is incurred. The restructuring accruals are based upon management estimates at the time they are recorded. These estimates can change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded. The main components of our restructuring charges are workforce reduction, intangibles and fixed assets write-offs and non-cancelable lease costs related to excess facilities. Severance-related charges are accrued when it is determined that a liability has been incurred, which is generally when individuals have been notified of their termination dates and expected severance payments. We record contract cancellation costs when contracts are terminated. The decision to eliminate excess facilities results in charges for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for elimination of excess facilities when we have vacated the premises. Intangible asset write-offs consist of impairment of acquired intangible assets related to our decision to cease the development and availability of SMOS. Fixed assets write-offs primarily consist of equipment and furniture associated with excess facilities being eliminated, and are based on an estimate of the amounts and timing of future cash flows related to the expected future remaining use and ultimate sale or disposal of the equipment and furniture.

     Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including future real estate market conditions and our ability to successfully enter into subleases or lease termination agreements with terms as favorable as those assumed when arriving at our estimates. We regularly evaluate a number of factors to determine the appropriateness and reasonableness of our restructuring accruals, including the various assumptions noted above. If actual results differ significantly from our estimates, we may be required to adjust our restructuring accruals in the future.

     Impairment Losses on Investments

     All of our available-for-sale investments and nonmarketable securities are subject to periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. This determination requires significant judgment. For publicly traded investments, impairment is determined based upon the specific facts and circumstances present at the time, including factors such as current economic and market conditions, the credit rating of the security’s issuer, the length of time an investment’s fair value has been below our carrying value, our ability and intent to hold investments to maturity or for a period of time sufficient to allow for any anticipated recovery in fair value. If an investment’s decline in fair value, caused by factors other than changes in interest rates, is deemed to be other-than-temporary, we reduce its carrying value to its estimated fair value, as determined based on quoted market prices, liquidation values or other metrics. For investments in publicly held companies, we recognize an impairment charge when the decline in the fair value of our investment is below its cost basis and is judged to be other-than-temporary. The ultimate value realized on these investments in publicly held companies is subject to market price volatility until they are sold.

     We actively review, along with our investment advisors, current investment ratings, company specific events, and general economic conditions in managing our investments and determining whether there is a significant decline in fair value that is other-than-temporary. As of April 24, 2009 and April 25, 2008, our short-term and long-term investments in marketable securities have been classified as “available-for-sale” and are carried at fair value. Available-for-sale investments with original maturities of greater than three months at the date of purchases are classified as short-term investments as these investments generally consist of marketable securities that are intended to be available to meet current cash requirements. Currently, all marketable securities held by us are classified as available-for-sale and our entire auction rate securities (ARS) portfolio and our investment in the Reserve Primary Fund (“Primary Fund”) are classified as long-term investments.

     Our ARS are securities with long-term nominal maturities which, in accordance with investment policy guidelines, had credit ratings of AAA and Aaa at the time of purchase. During the fourth quarter of fiscal 2008, we reclassified all of our investments in ARS from short-term investments to long-term investments as we believed our ability to liquidate these investments in the next twelve months was uncertain. Based on an analysis of the fair value and marketability of these investments, we recorded temporary impairment charges of approximately $7.0 million during fiscal 2009, partially offset by $0.3 million in unrealized gains within other comprehensive income (loss). During fiscal 2009, we recorded an other-than-temporary impairment loss of $2.1 million due to a significant decline in the estimated fair values of certain of our ARS related to credit quality risk and rating downgrades.

     During fiscal 2008 and 2007, recognized gains and losses on available-for-sale investments were not material. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates the classification at each reporting date. The fair value of our marketable securities, including those included in long-term investments, was $1.2 billion and $543.2 million as of April 24, 2009 and April 25, 2008, respectively.

     The valuation models used to estimate the fair value of our ARS included numerous assumptions such as assessments of the underlying structure of each security, expected cash flows, discount rates, credit ratings, workout periods, and overall capital market liquidity. These assumptions, assessments and the interpretations of relevant market data are subject to uncertainties, are difficult to predict and require significant judgment. The use of different assumptions, applying different judgments to inherently subjective matters and changes in future market conditions could result in significantly different estimates of fair value. There is no assurance as to when the market for auction rate securities will stabilize. The fair value of our ARS could change significantly based on market conditions and continued uncertainties in the credit markets. If these uncertainties continue or if these securities experience credit rating downgrades, we may incur additional temporary impairment related to our auction rate securities portfolio. We will continue to monitor the fair value of our ARS and relevant market conditions and will record additional temporary or other-than-temporary impairments if future circumstances warrant such charges.

     As a result of the bankruptcy filing of Lehman Brothers, which occurred during fiscal 2009, we recorded an other-than-temporary impairment charge of $11.8 million on our corporate bonds related to investments in Lehman Brothers securities and approximately $9.3 million on our investments in the Primary Fund that held Lehman Brothers investments. As of April 24, 2009, we have an investment in the Primary Fund, an AAA-rated money market fund at the time of purchase, with a par value of $60.9 million and an estimated fair value of $51.6 million, which suspended redemptions in September 2008 and is in the process of liquidating its portfolio of investments. The Primary Fund suspended redemptions in September 2008, and on December 3, 2008, it announced a plan for liquidation and distribution of assets that includes the establishment of a special reserve to be set aside out of its assets for pending or threatened claims, as well as anticipated costs and expenses, including related legal and accounting fees. On February 26, 2009, the Primary Fund announced a plan to set aside $3.5 billion of the fund’s remaining assets as the “special reserve” which may be increased or decreased as further information becomes available. Our pro rata share of the $3.5 billion special reserve is approximately $41.5 million. The Primary Fund announced plans to continue to make periodic distributions, up to the amount of the special reserve, on a pro-rata basis. The Primary Fund has received an SEC order providing that the SEC will supervise the distribution of assets from the Primary Fund. We could realize additional losses in our holdings of the Primary Fund and may not receive all or a portion of our remaining balance in the Primary Fund as a result of market conditions and ongoing litigation against the fund

     To determine the fair value of nonmarketable investments, we use the most recent information available to us, including new financings or estimates of current fair value, as well as through traditional valuation techniques. It is our policy to review the fair value of these investments on a regular basis to determine whether the investments in these companies are other-than-temporarily impaired. In the case of privately-held companies, this evaluation is based on information that we request from these companies. This evaluation includes, but is not limited to, reviewing company cash position, financing needs and prospects, earnings or revenue outlook, operational performance, management or ownership changes and competition. This information is not subject to the same disclosure regulations as United States publicly-traded companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. If we believe the carrying value of an investment is in excess of fair value, and this difference is other-than-temporary, it is our policy to write down the investment to fair value. The carrying value of our investments in privately-held companies were $4.0 million and $11.2 million as of April 24, 2009 and April 25, 2008, respectively. During fiscal 2009 and 2008, we recorded $6.3 million and $1.6 million of impairment charges, respectively, for our investments in privately-held companies, which were recorded in net gain (loss) on investments in our consolidated statements of operations, and adjusted the carrying amount of those investments to fair value, as we deemed the decline in the value of these assets to be other-than-temporary.

     Fair Value Measurements

     We adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” effective April 26, 2008 for financial assets and liabilities that are being measured and reported at fair value on a recurring basis. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when

available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

     The fair value hierarchy is broken down into the three input levels summarized below:

	•		Level 1 — Valuations are based on quoted prices in active markets for identical assets or liabilities, and readily accessible by us at the reporting date. Examples of assets and liabilities utilizing Level 1 inputs are certain money market funds, U.S. Treasury notes and trading securities with quoted prices on active markets.
	•		Level 2 — Valuations based on inputs other than the quoted prices in active markets that are observable either directly or indirectly in active markets. Examples of assets and liabilities utilizing Level 2 inputs are U.S. government agency bonds, corporate bonds, corporate securities, certificates of deposit, and over-the-counter derivatives.
	•		Level 3 — Valuations based on unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. Examples of assets and liabilities utilizing Level 3 inputs are cost method investments, ARS, and the Primary Fund.

     We measure our available-for-sale securities at fair value on a recurring basis. Available-for-sale securities include U.S. Treasury securities, U.S. government agency bonds, corporate bonds, corporate securities, auction rate securities money market funds and certificates of deposit. Where possible, we utilize quoted market prices to measure and such items are classified as Level 1 in the hierarchy. When quoted market prices for identical assets are unavailable, varying valuation techniques are used. Such assets are classified as Level 2 or Level 3 in the hierarchy. We classify items in Level 2 if the investments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. We classify items in Level 3 if the investments are valued using a pricing model, based on unobservable inputs in the market or require us to develop our own assumptions. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

     We evaluate our investments for other-than-temporary impairment in accordance with guidance provided by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and related guidance. We consider and review factors such as the length of time and extent to which fair value has been below cost basis, the significance of the loss incurred, the financial condition and credit rating of the issuer and insurance guarantor, the length of time the investments have been illiquid, and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value.

     We are also exposed to market risk relating to our available-for-sale investments due to uncertainties in the credit and capital markets. As a result of the bankruptcy filing of Lehman Brothers, we recorded an other-than-temporary impairment charge of $21.1 million in fiscal 2009 related to Lehman Brothers corporate bonds and the Primary Fund that held Lehman Brothers investments, as well as an other-than-temporary impairment charge of $2.1 million related to the value of our ARS. The fair value of our investments may change significantly due to events and conditions in the credit and capital markets. These securities/issuers could be subject to review for possible downgrade. Any downgrade in these credit ratings may result in an additional decline in the estimated fair value of our investments. We will continue to monitor and evaluate the accounting for our investment portfolio on a quarterly basis for additional other-than-temporary impairment charges. We could realize additional losses in our holdings of the Primary Fund and may not receive all or a portion of our remaining balance in the Primary Fund as a result of market conditions and ongoing litigation against the fund.

     Accounting for Stock-Based Compensation

     We account for stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment,” using the Black-Scholes option pricing model to value our employee stock options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. Option pricing models require the input of highly subjective assumptions, including the expected stock price volatility, expected life, and forfeiture rate. Any changes in these highly subjective assumptions may significantly impact the stock-based compensation expense for the future.

     Loss Contingencies

     We are subject to the possibility of various loss contingencies arising in the course of business. We consider the likelihood of the loss or impairment of an asset or the incurrence of a liability as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. In April 2009, we entered into a settlement agreement with the United States of America, acting through the United States Department of Justice (“DOJ”) and on behalf of the General Services Administration (the “GSA”), under which we agreed to pay the United States $128.0 million, plus interest of $0.7 million, related to a dispute regarding our discount practices and compliance with the price reduction clause provisions of GSA contracts between August 1997 and February 2005 in consideration for the release of NetApp by the DOJ and GSA with respect to the claims alleged in the investigation as set forth in the settlement agreement. The agreement reflects neither an admission nor denial by NetApp of any of the claims alleged by the DOJ and represents a compromise to avoid continued litigation and associated risks. NetApp made the settlement payment on April 27, 2009. In fiscal 2008 and 2007, we did not identify or accrue for any loss contingencies. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.

New Accounting Standards

     See Note 2 of the consolidated financial statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.

Results of Operations

     The following table sets forth certain Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:

		Year Ended
		April 24, 2009				April 25, 2008				April 27, 2007
Revenues:
Product			63.2	%			67.9	%			74.4	%
Software entitlements and maintenance			18.2				14.7				12.2
Service			22.4				17.4				13.4
GSA settlement			(3.8	)			—				—
			100.0				100.0				100.0
Cost of Revenues:
Cost of product			29.6				28.4				29.9
Cost of software entitlements and maintenance			0.3				0.3				0.4
Cost of service			11.7				10.4				8.9
Gross Margin			58.4				60.9				60.8
Operating Expenses:
Sales and marketing			34.8				32.6				32.0
Research and development			14.6				13.7				13.7
General and administrative			6.0				5.2				5.3
Restructuring and other charges			1.6				—				—
Gain on sale of assets			—				—				(0.9	)
Total Operating Expenses			57.0				51.5				50.1
Income from Operations			1.4				9.4				10.7
Other Income (Expenses), Net:
Interest income			1.7				2.0				2.5
Interest expense			(1.9	)			(0.2	)			(0.4	)
Gain (loss) on investments, net			(0.9	)			0.4				(0.1	)
Other income (expenses), net			(0.1	)			—				0.1
Total Other Income (Expenses), Net			(1.2	)			2.2				2.1
Income Before Income Taxes			0.2				11.6				12.8
Provision (Benefit) for Income Taxes			(1.7	)			2.2				2.2
Net Income			1.9	%			9.4	%			10.6	%

Discussion and Analysis of Results of Operations

     Net Revenues — Our net revenues for fiscal 2009, 2008 and 2007 were as follows:

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Net revenues		$	3,406.4			$	3,303.2				3.1	%		$	2,804.3				17.8	%

     Net revenues increased by 3.1% to $3,406.4 million in fiscal 2009, from $3,303.2 million in fiscal 2008. The increase in our net revenues for fiscal 2009 was due to increases in software entitlements and maintenance revenues as well as service revenues, partially offset by decreases in product revenues, and the negative impact from the GSA settlement.

     Net revenues increased by 17.8% to $3,303.2 million in fiscal 2008, from $2,804.3 million in fiscal 2007. Our fiscal 2008 revenue growth was attributable to increased product revenues, software entitlements and maintenance revenues, and service.

     Sales through our indirect channels represented 69.0%, 63.0% and 59.6% of net revenues for fiscal 2009, 2008 and 2007, respectively.

     During fiscal 2009, two U.S. distributors accounted for approximately 10.5% and 10.6% of our net revenues, respectively. No distributor or other customer accounted for ten percent or more of our net revenues during fiscal 2008 and 2007.

     Product Revenues

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Product revenues		$	2,152.7			$	2,242.5				(4.0	)%		$	2,085.9				7.5	%

     Product revenues decreased by $89.8 million, or 4.0% in fiscal 2009, compared to fiscal 2008. Unit volume increased, driven by smaller, low end systems, partially offset by decreases in mid-range and high end systems. This trend is consistent with a shift in customer buying patterns towards smaller systems, due to IT spending constraints and difficult economic conditions. In addition, average selling prices declined, driven by lower list prices, unfavorable configuration mix (consisting of hardware and software components, disk capacity and disk price) and higher discounting, as well as unfavorable foreign exchange rate changes during fiscal 2009. Partially offsetting these factors was an increase in revenues from add-on products, as customers focused more on extending the useful lives and capacity of their existing storage solutions.

     Product revenues increased by $156.6 million or 7.5% to $2,242.5 million in fiscal 2008, from $2,085.9 million in fiscal 2007. Unit volume increased, driven by low end and mid-range systems, partially offset by a slight decrease in high end systems. In addition, average selling prices increased, driven by higher list prices and favorable configuration mix, partially offset by higher discounting. Revenue from add-on products increased, as customers focused on extending the capacity of their storage solutions.

     Our systems are highly configurable to respond to customer requirements in the open systems storage markets that we serve. This wide variation in customer configurations can significantly impact revenue, cost of revenue, and gross margin performance. Price changes, unit volumes, and product configuration mix can also impact revenue, cost of revenue and gross margin performance. Disks are a significant component of our storage systems. Industry disk pricing continues to fall every year, and we pass along those price decreases to our customers while working to maintain relatively constant margins on our disk drives. While price per petabyte continues to decline, system performance, increased capacity and software to manage this increased capacity have an offsetting impact on product revenue.

     Software Entitlements and Maintenance Revenues

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Software entitlements and maintenance revenues		$	618.4			$	486.9				27.0	%		$	341.3				42.7	%

     Software entitlements and maintenance revenues increased by $131.5 million, or 27.0% in fiscal 2009 compared to fiscal 2008. This year over year increase in software entitlements and maintenance revenues was due primarily to the recognition of service contracts that were purchased or renewed in prior years, and to a lesser extent, service contracts entered into in fiscal 2009.

     Software entitlements and maintenance revenues increased by $145.6 million, or 42.7% in fiscal 2008, compared to fiscal 2007. The year over year increase was due to a larger installed base of customers who have purchased or renewed software entitlements and maintenance.

     Service Revenues

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Service revenues		$	764.1			$	573.8				33.2	%		$	377.1				52.1	%

     Service revenues increased by $190.3 million, or 33.2% in fiscal 2009, compared to fiscal 2008. Service revenues include service maintenance, professional services and educational and training services. The primary reason for the increase was increased service contract revenue related to an increase in the installed base. In addition, revenue from professional services increased due to increased integration consulting services provided in fiscal 2009 and improved productivity of our professional service personnel.

     Service revenues increased by $196.7 million, or 52.1% in fiscal 2008, compared to fiscal 2007. The primary reasons for the increase were increased service contract revenue, related to an increase in the installed base and the average revenue generated per installed base unit, and an increase in professional services.

     GSA settlement

     In April 2009, we entered into a settlement agreement with the United States of America, acting through the United States Department of Justice and on behalf of the General Services Administration (the “GSA”), under which we agreed to pay the United States $128.0 million, plus interest of $0.7 million, related to a dispute regarding our discount practices and compliance with the price reduction clause provisions of its GSA contracts between August 1997 and February 2005. We have recorded the settlement as a reduction of revenues in fiscal 2009.

     Total International Revenues

		Year Ended
						% of Net								% of Net												% of Net
		April 24, 2009				Revenues				April 25, 2008				Revenues				% Change				April 27, 2007				Revenues				% Change
		(In millions)
International		$	1,652.8				48.5	%		$	1,554.3				47.1	%			6.3	%		$	1,254.0				44.7	%			23.9	%
United States			1,753.6				51.5	%			1,748.9				52.9	%			0.3	%			1,550.3				55.3	%			12.8	%
Net revenues		$	3,406.4							$	3,303.2											$	2,804.3

     Total international revenues (including U.S. exports) increased by 6.3% in fiscal 2009 compared to fiscal 2008. Total international revenues (including U.S. exports) increased by 23.9% in fiscal 2008 compared to fiscal 2007.

     Cost of Revenues

     Our cost of revenue includes: (1) cost of product revenue, which includes the costs of manufacturing and shipping our storage systems, and amortization of purchased intangible assets, inventory write-downs, and warranty costs; (2) cost of software maintenance and entitlements, which includes the costs of providing software entitlements and maintenance and third party royalty costs, and (3) cost of service, which reflects costs associated with providing services for support center activities and global service partnership programs.

     Cost of Product Revenues

		Year Ended
						% of								% of								% of
						Product								Product								Product
		April 24, 2009				Revenue				April 25, 2008				Revenue				April 27, 2007				Revenue
		(In millions)
Cost of product revenue		$	1,007.6				46.8	%		$	938.4				41.8	%		$	838.0				40.2	%

     Cost of product revenue as a percentage of product revenue increased by 5.0% in fiscal 2009 as compared to fiscal 2008. The increase in total costs was primarily due to increased unit volume. The increase in costs as a percentage of revenues was due to a larger decrease in average selling prices than corresponding costs, primarily standard material costs, across all of our systems.

     Cost of product revenue as a percentage of product revenue increased by 1.6% in fiscal 2008 compared to fiscal 2007. The increase in total costs was primarily due to increased unit volume. The increase in costs as a percentage of revenues was due to a lower increase in average selling prices than corresponding costs, primarily related to standard material costs on new low end systems.

     Stock-based compensation expense included in cost of product revenues was $3.3 million, $3.4 million and $3.7 million in fiscal 2009, 2008, and 2007, respectively. Amortization of existing technology included in cost of product revenues was $24.5 million, $22.6 million and $17.6 million for fiscal 2009, 2008 and 2007, respectively.

     In the first quarter of fiscal 2009, we implemented a change in the reporting of warranty costs and reported these costs in cost of product revenues. These costs were included in cost of service revenues in previous periods. Our cost of product revenues and service revenues for fiscal years 2008 and 2007 reflect a reclassification of $27.0 million and $22.1 million, respectively, to conform to current period presentation. There was no change in warranty costs as a percentage of product revenue in fiscal 2009, 2008 and 2007.

     We expect future product gross margins to be impacted by a variety of factors including selective price reductions and discounts, increased indirect channel sales, higher software revenue mix and the margin profile of new products. If our shipment volumes, product mix, average selling prices and pricing actions that impact our product gross margin continue to be adversely affected by the economic downturn or market factors, our gross margin could decline.

     Cost of Software Entitlements and Maintenance Revenues

Year Ended

% of

% of

Software

% of Software

Software

Entitlements

Entitlements

Entitlements

and

and

and

Maintenance

Maintenance

Maintenance

April 24, 2009

Revenue

April 25, 2008

Revenue

April 27, 2007

Revenue

(In millions)

Cost of software entitlements and maintenance revenues

$

9.2

1.5%

$

8.6

1.8%

$

10.2

3.0%

     Cost of software entitlements and maintenance revenues as a percentage of software entitlements and maintenance revenue remained relatively flat at 1.5% in fiscal 2009 and 1.8% in fiscal 2008, respectively. Cost of software entitlements and maintenance revenues as a percentage of software entitlements and maintenance revenue decreased in fiscal 2008 compared to fiscal 2007 due to lower third-party royalty expenses.

     Cost of Service Revenues

		Year Ended
						% of Service								% of Service								% of Service
		April 24, 2009				Revenue				April 25, 2008				Revenue				April 27, 2007				Revenue
		(In millions)
Cost of service revenues		$	399.7				52.3	%		$	342.8				59.7	%		$	251.6				66.7	%

     Cost of service revenue as a percentage of service revenue decreased by 7.4% in fiscal 2009 from fiscal 2008 and by 7.0% in fiscal 2008 compared to fiscal 2007. The increase in service cost of revenues in fiscal 2009 compared to fiscal 2008 and in fiscal 2008 compared to fiscal 2007 was primarily due to increased service infrastructure spending to support our customers, which included additional professional support engineers, increased support center activities for a larger installed base of product, and global service partnership programs. The decrease in service cost of revenues as a percentage of service revenue in fiscal 2009 compared to fiscal 2008 and fiscal 2007 was primarily due to increased service revenue volume and improved productivity, partially offset by higher costs.

     Stock-based compensation expense of $12.3 million was included in the cost of service revenue for fiscal 2009 compared to $10.4 million and $10.1 million for fiscal 2008 and 2007, respectively.

     In the first quarter of fiscal 2009, we implemented a change in the reporting of warranty costs and reported these costs in cost of product revenues. These costs were included in cost of service revenues in previous periods. Our cost of product revenues and service revenues for fiscal years 2008 and 2007 reflect a reclassification of $27.0 million and $22.1 million, respectively, to conform to current period presentation.

     Service gross margin is also typically impacted by factors such as changes in the size of our installed base of product, as well as the timing of support service initiations and renewals, and incremental investments in our customer support infrastructure.

     Sales and Marketing — Sales and marketing expense consists primarily of salaries and related benefits, commissions, allocated facilities and IT costs, advertising and promotional expenses, stock-based compensation expense, and travel and entertainment expenses. Sales and marketing expense for fiscal 2009, 2008 and 2007 was as follows:

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Sales and marketing		$	1,186.1			$	1,075.6				10.3	%		$	895.8				20.1	%

     Sales and marketing expense increased by $110.5 million, or 10.3% in fiscal 2009 compared to fiscal 2008. The increase was primarily due to an increase in salaries and related benefits primarily due to increased average compensation and incentive plan costs per person, and an increase in IT expenses related to new software implementations partially offset by a decrease in marketing expenses and travel and entertainment expenses.

     The increase in sales and marketing expense in fiscal 2008 compared to fiscal 2007 was due to increased commission expenses resulting from increased revenues, higher payroll expenses due to higher profitability, higher partner program expenses, the continued worldwide investment in our sales and global service organizations associated with selling complete enterprise solutions, and higher stock-based compensation expenses.

     Sales and marketing expense for fiscal 2009 was favorably impacted by the strengthening of the U.S. dollar relative to other foreign currencies (primarily Euro, British pound and Australian Dollar). Had foreign exchange rates remained constant in these periods, our sales and marketing expense in fiscal 2009 would have been approximately $10.5 million higher, or 0.9%, higher. The foreign currency exchange rate impact on sales and marketing expense was insignificant for fiscal 2008 and 2007.

     Stock-based compensation expense included in sales and marketing expense in fiscal 2009 was $65.1 million compared to stock compensation expense of $65.4 million and $71.7 million in fiscal 2008 and 2007, respectively. Amortization of trademarks/trade names and customer contracts/relationships included in sales and marketing expense was $4.4 million in fiscal 2009 compared to $4.2 million and $2.9 million in fiscal 2008 and fiscal 2007, respectively.

     Research and Development — Research and development expense consists primarily of salaries and related benefits, allocated facilities and IT costs, depreciation and amortization, stock-based compensation, and prototype and engineering charges. Research and development expense for fiscal 2009, 2008 and 2007 was as follows:

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Research and development		$	498.5			$	452.2				10.2	%		$	385.4				17.3	%

     Research and development expense increased by $46.3 million, or 10.2% in fiscal 2009 as compared to fiscal 2008. The increase in research and development expense was primarily due to an increase in salaries and related benefits resulting from increased average compensation and incentive plan costs per person, as well as higher average headcount, and an increase in facilities expenses related to new engineering labs.

     The increase in research and development expense in fiscal 2008 compared to fiscal 2007 was primarily due increased headcount, ongoing operating impact of acquisitions, ongoing current and future product development and enhancement efforts, higher performance-based payroll expenses due to higher profitability, and higher stock-based compensation expense.

     Stock-based compensation expense included in research and development expense for fiscal 2009 was $37.9 million, compared to $46.6 million and $51.3 million in fiscal 2008 and 2007, respectively. No software development costs were capitalized during any of the periods.

     We believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve market acceptance, maintain technological competitiveness, and meet an expanding range of customer requirements. We expect to continuously support current and future product development, broaden our existing product offerings and introduce new products that expand our solutions portfolio.

     General and Administrative — General and administrative expense consists primarily of salaries and related benefits, professional and corporate legal fees, stock-based compensation, recruiting expenses, and allocated facilities and IT costs. General and administrative expense for fiscal 2009, 2008 and 2007 was as follows:

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
General and administrative		$	203.7			$	171.5				18.7	%		$	147.5				16.3	%

     General and administrative expense increased by $32.2 million, or 18.7% in fiscal 2009 as compared to fiscal 2008. The increase was primarily due to increased professional and legal fees, an increase in salaries and related benefits primarily resulting from increased average compensation and incentive plan costs per person, and an increase in IT expenses.

     The increase in general and administrative expense in fiscal 2008 compared to fiscal 2007 was primarily due to higher payroll expenses due to higher profitability and increased headcount, higher stock-based compensation expense recognized, and higher legal and professional fees for general corporate matters.

     Stock-based compensation expense included in general and administrative expense in fiscal 2009 was $22.2 million compared to $22.1 million and $26.2 million for fiscal 2008 and 2007, respectively.

     Restructuring and Other Charges

     Fiscal 2009 Restructuring Plans — In February 2009, we announced our decision to execute a worldwide restructuring program, which included a reduction in workforce, the closing or downsizing of certain facilities, and the establishment of a plan to outsource certain internal activities. In December 2008, we announced our decision to cease the development and availability of SMOS, which was originally acquired through our acquisition of Topio in fiscal 2007. As part of this decision, we also announced the closure of our engineering facility in Haifa, Israel. These restructuring activities resulted in restructuring charges totaling $51.5 million of severance-related amounts and other charges attributable to the termination of approximately 450 regular positions, abandoned excess facilities charges relating to non-cancelable lease costs, which are net of expected sublease income; contract cancellation charges; outplacement expenses; fixed assets and intangibles write-offs; as well as $2.9 million of other charges to support our restructuring initiatives. In recording the facility lease restructuring reserve, we made certain estimates and assumptions related to the (i) time period over which the relevant buildings would remain vacant, (ii) sublease terms, and (iii) sublease rates.

     As of April 24, 2009, approximately $15.9 million of the costs associated with these activities were unpaid. We expect that severance-related charges and other costs will be substantially paid by the third quarter of fiscal 2010 and the facilities-related lease payments to be substantially paid by the third quarter of fiscal 2013.

     Fiscal 2002 Restructuring Plan — As of April 24, 2009, we also have $1.3 million remaining in facility restructuring reserves established as part of a restructuring in fiscal 2002 related to future lease commitments on exited facilities, net of expected sublease income. We reevaluate our estimates and assumptions periodically and make adjustments as necessary based on the time period over which the facilities will be vacant, expected sublease terms, and expected sublease rates. During fiscal 2009, we recorded restructuring recoveries of $0.1 million resulting from a change in the estimated operating expenses relating to this facility restructuring reserve. We expect to substantially fulfill the remaining contractual obligations related to this facility restructuring reserve by fiscal 2011.

     Of the restructuring reserve balance at April 24, 2009, $14.7 million was included in other accrued liabilities, and the remaining $2.5 million was classified as other long-term obligations.

     See Note 13, “Restructuring and Other Charges,” of the Notes to our consolidated financial statements for further discussion of our restructuring activities.

     Other Income and Expense

     Interest Income — Interest income for fiscal 2009, 2008 and 2007 was as follows:

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Interest income		$	57.6			$	64.6				(10.8	)%		$	68.8				(6.1	)%

     The decrease in interest income in fiscal 2009 compared to fiscal 2008 was primarily due to lower market yields on our cash and investment portfolio, in part due to a shift of our portfolio to shorter term investments with lower risk. This yield decline was partially offset by an increase in our cash and investment balances due to the issuance of the Convertible Notes (the “Notes”), see Note 4, “Convertible Notes and Credit Facilities” of the consolidated financial statements. The decrease in interest income in fiscal 2008 compared to fiscal 2007 was primarily driven by lower average interest rates on our investment portfolio and lower cash and investment balances.

     We expect that period-to-period changes in interest income will continue to be impacted by the volatility of market interest rates, cash and investment balances, cash generated by operations, timing of our stock repurchases, cash used in acquisitions, capital expenditures, and payments of our contractual obligations.

     Interest Expense — Interest expense for fiscal 2009, 2008 and 2007 was as follows:

		Year Ended (in millions)
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
Interest expense		$	(63.4	)		$	(8.0	)			693.9	%		$	(11.6	)			(31.4)	%

     The increase in interest expense in fiscal 2009 compared to fiscal 2008 was primarily due to interest expense on our Notes, including $41.0 million of non-cash interest expense from the amortization of debt discount and issuance costs, partially offset by lower interest expense related to the reduced outstanding balance on our secured credit agreement we entered into with JPMorgan in October 2007. The decrease in interest expense in fiscal 2008 compared to fiscal 2007 was due to full repayment of the loan agreement entered with JPMorgan, partially offset by increased interest expense on the $250.0 million outstanding under the revolving secured credit agreement with JPMorgan Securities during fiscal 2008.

     We expect period-to-period changes in interest expense to fluctuate based on market interest rate volatility and amounts that may be due from time to time under various outstanding debt agreements.

Gain (Loss) on Investments, Net —

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Gain (loss) on investments, net		$	(29.6	)		$	12.6				(334.4	)%		$	(1.5	)			(920.2	)%

     During fiscal 2009, net loss on investments of $29.6 million included a net impairment loss related to our investments in privately held companies of $6.3 million, an other-than-temporary impairment charge on our available-for-sale investments related to direct and indirect investments in Lehman Brothers securities of $21.1 million, and a decline in the value of our auction rate securities of $2.1 million.

     Net gain on sale of investments was $12.6 million for fiscal 2008. Net gain for fiscal 2008 consisted primarily of a gain of $13.6 million related to the sale of shares of Blue Coat common stock offset by a net write-down of $1.0 million for our investments in privately-held companies. For fiscal 2007, net loss on sale of investments was $1.5 million, including a net write-down of $2.1 million related to the impairment of our investment in privately-held companies.

Other Income (Expense), Net —

		Year Ended
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
		(In millions)
Other income (expense), net		$	(3.5	)		$	(0.1	)			2507.4	%		$	2.8				(104.8	)%

     Other income (expense), net, consists of primarily net exchange losses and gains from foreign currency transactions and related hedging activities. We believe that period-to-period changes in foreign exchange gains or losses will continue to be impacted by hedging costs associated with our forward and option activities and forecast variance.

     Provision (Benefit) for Income Taxes

						Year Ended (in millions)
		April 24, 2009				April 25, 2008				% Change				April 27, 2007				% Change
Provision (Benefit) for Income Taxes		$	(56.3	)		$	73.0				(177.2)	%		$	62.0				17.7	%

     For fiscal 2009, we applied to pretax income an effective tax rate benefit of 597.5% before discrete reporting items. After taking into account the tax effect of federal research tax credit and other immaterial items, the effective tax rate benefit for fiscal 2009 was 681.5%, and the effective tax rate expense for fiscal 2008 and 2007 was 19.1% and 17.2%, respectively. Our effective tax rate for fiscal 2009, which was negative and thus a benefit, decreased relative to the effective tax rate for fiscal, 2008 primarily due to the decrease in the U.S. portion of our income and to the benefits generated from the retroactive extension of the research and development tax credit which was part of the Emergency Economic Stabilization Act of 2008. The geographic composition of our consolidated income was impacted by losses generated in the U.S. for restructuring charges, coupon and non-cash interest expense related to our convertible debt and the GSA settlement. These charges resulted in a taxable loss in the U.S. which primarily drove the tax benefit.

     For fiscal 2008 and 2007, we applied to pretax income an annual effective tax rate before discrete reporting items of 13.3% and 19.0%, respectively. The decrease in the annual effective tax rate in fiscal 2008 compared to fiscal 2007 was primarily attributable to a relative increase in the benefits attributable to our foreign operations, as well as to a relative decrease in the tax impact of nondeductible stock-based compensation, brought about in part by our decision to cease granting incentive stock options. Since we have replaced the granting of incentive stock options with the granting of nonqualified stock options, this gives rise to the recognition of more income tax benefits as stock-based compensation is recognized.

Liquidity and Capital Resources

     The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash flow on our liquidity and capital resources. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and by monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of April 24, 2009.

     Liquidity Sources, Cash Requirements

     Our principal sources of liquidity as of April 24, 2009, consisted of: (1) approximately $2.6 billion in cash and cash equivalents and short-term investments, (2) cash we expect to generate from operations, and (3) an unsecured revolving credit facility totaling $250.0 million, of which $0.6 million has been allocated as of April 24, 2009 to support certain of our outstanding letters of credit. Our principal liquidity requirements are primarily to meet our working capital needs, including a one-time payment of $128.7 million related to our GSA settlement, support ongoing business activities, implement restructuring plans, research and development, capital expenditure needs, the proposed Data Domain acquisition and other business acquisitions, investment in critical or complementary technologies, and to service our debt and synthetic leases.

     Key factors that could affect our cash flows include changes in our revenue mix and profitability as well as our ability to effectively manage our working capital, in particular, accounts receivable and inventories and whether or not we ultimately complete the merger with Data Domain discussed below. Based on our current business outlook, we believe that our sources of cash will be sufficient to fund our operations and meet our cash requirements for at least the next 12 months. However, in the event our liquidity is insufficient, we may be required to further curtail spending and implement additional cost saving measures and restructuring actions. In light of the current economic and market conditions, we cannot be certain that we will continue to generate cash flows at or above current levels or that we will be able to obtain additional financing, if necessary, on satisfactory terms, if at all.

     Our investment portfolio, including the Primary Fund and auction rate securities has been and will continue to be exposed to market risk due to uncertainties in the credit and capital markets. In fiscal 2009, we recorded an other-than-temporary impairment charge to earnings of $21.1 million related to Lehman Brothers corporate bonds and the Primary Fund that held Lehman Brothers investments. In addition, we also recorded an other-than-temporary impairment of $2.1 million relating to certain auction rate securities. We could realize additional losses in our holdings of the Primary Fund and may not receive all or a portion of our remaining balance in the Primary Fund as a result of market conditions and ongoing litigation against the fund. However, we are not dependent on liquidating these investments in the next twelve months in order to meet our liquidity needs. We continue to closely monitor current economic and market events to minimize our market risk on our investment portfolio. Based on our ability to access our cash and short-term investments, our expected operating cash flows, and our other potential sources of cash, we do not anticipate that the lack of liquidity of these investments will impact our ability to fund working capital needs, capital expenditures, acquisitions or other cash requirements. We intend to and believe that we have the ability to hold these investments until the market recovers. If current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional charges to earnings in future quarters.

     Capital Expenditure Requirements

     We expect to fund our capital expenditures, including our commitments related to facilities and equipment operating leases over the next few years through cash generated from operations, existing cash, cash equivalents and investments. The timing and amount of our capital requirements cannot be precisely determined at this time and will depend on a number of factors including future demand for products, product mix, changes in the network storage industry, economic conditions and market competition. We expect that our existing facilities in Sunnyvale, California; Research Triangle Park, North Carolina; and worldwide are adequate for our requirements over at least the next two years, and that additional space will be available as needed. However, if current economic conditions deteriorate further, we may be required to implement additional restructuring plans to eliminate or consolidate excess facilities, incur cancellation penalties and impair fixed assets.

     Acquisition Related Requirements

     On May 20, 2009, we announced our entry into a definitive agreement with Data Domain, Inc. to acquire such company in a merger for an aggregate merger consideration of approximately $1.5 billion in cash and common stock (net of Data Domain’s cash balances). On June 3, 2009, we revised the terms of the definitive agreement to increase the aggregate merger consideration to $1.9 billion (net of Data Domain’s cash balance). If the acquisition is completed under the current terms, we expect that we will have to use at least $1 billion of our cash, cash equivalent and investments for cash consideration to Data Domain shareholders and transaction costs. The merger is subject to customary closing conditions, including regulatory approvals. The transaction is valued at approximately $2 billion and is expected to be completed in 60 to 120 days.

     Cash Flows

     As of April 24, 2009, compared to April 25, 2008, our cash and cash equivalents and short-term investments increased by $1,439.8 million to $2,604.2 million. The increase in cash and cash equivalents and short-term investments was primarily a result of net proceeds from issuance of the Notes and warrants, cash provided by operating activities, issuance of common stock related to employee stock option exercises and employee stock purchases, partially offset by stock repurchases, execution of the Note Hedge, capital expenditures, and repayment of the secured revolving credit facility. We derive our liquidity and capital resources primarily from our cash flow from operations and from working capital. Working capital increased by $1,106.1 million to $1,759.5 million as of April 24, 2009, compared to $653.3 million as of April 25, 2008.

     Cash Flows from Operating Activities

     During fiscal 2009, we generated cash flows from operating activities of $889.2 million, compared with $1,008.9 million and $864.5 million for fiscal 2008 and fiscal 2007, respectively. We recorded net income of $64.6 million for fiscal 2009, compared to $309.7 million and $297.7 million for fiscal 2008 and fiscal 2007, respectively. A summary of the significant changes in noncash adjustments affecting net income and changes in assets and liabilities impacting operating cash flows is as follows:

	•		Stock-based compensation expense was $140.8 million in fiscal 2009, compared to $148.0 million and $163.0 million in fiscal 2008 and 2007, respectively. The decrease in stock-based compensation was primarily a result of a lower fair value of equity awards driven by our declining stock price.
	•		Depreciation and amortization expense was $170.5 million, $144.2 million, and $110.8 million in fiscal 2009, 2008 and 2007, respectively. The increase for depreciation was due to continued capital expansion during fiscal 2009 and 2008. The increase for amortization expense was due to an increase in intangibles related to the Onaro acquisition in fiscal 2008, partially offset by the impairment of certain acquired intangible assets related to the Topio acquisition in fiscal 2009.
	•		Non-cash interest expense from the accretion of debt discount and issuance costs on Notes of $41.0 million in fiscal 2009.
	•		Asset impairment charges and write-offs of $31.6 million during fiscal 2009 related to impairment of intangibles and leasehold improvements in connection with our restructuring plans in fiscal 2009, as well as a write-off related to a sales force automation tool recorded in fiscal 2009.
	•		Impairment losses (gains) on investment consist of other-than-temporary impairment of $20.3 million related to investments in Lehman Brothers securities, a decline in the value of our auction rate securities and impairment losses on investment in privately held companies during fiscal 2009. A gain on sale of investments of $12.6 million during fiscal 2008 included sale of Blue Coat common shares of $13.6 million.
	•		Deferred income tax provisions of $124.6 million, $53.0 million and $146.0 million were due to temporary tax differences associated with such items as accruals, deferred revenue, stock compensation tax benefits, and net operating losses and credit carryforwards.
	•		The decrease in accounts receivable of $128.7 million during fiscal 2009 was due to improved collections. The increase in accounts receivable of $27.7 million and $175.2 million in fiscal 2008 and 2007, respectively, was due to increased shipment levels weighted towards the end of the fourth quarter, offset by timing of collections.
	•		The decrease in inventories of $9.1 million during fiscal 2009 was due to increased inventory reserves as a result of lower customer demand due to depressed economic conditions. Inventories increased $15.4 million in fiscal 2008 due to higher inventory required to support revenue growth during the fourth quarter of fiscal 2008. Inventories decreased $9.9 million for fiscal 2007, primarily due to higher inventory at fiscal 2006 year end associated with the new FAS 6000 launch.
	•		The increases in deferred revenues of $219.3 million and $401.0 million during fiscal 2009 and 2008, respectively, were primarily due to increased service contract and software entitlement and maintenance contract sales, partially offset by the recognition of previously deferred revenues. An increase in deferred revenue of $421.3 million in fiscal 2007 was due to larger installed base renewals for service contracts and software entitlement and maintenance contracts, upgrades and an increased number of new enterprise customers purchasing software entitlement and maintenance contracts.

•

The decrease in accounts payable of $27.0 million during fiscal 2009 was due to timing of payment activities. The increase in accounts payable of $20.0 million and $36.6 million in fiscal 2008 and 2007, respectively, was primarily attributable to elevated purchasing activity required to support our business growth and facilities expansion projects.

•

The accrual for the GSA settlement of $128.7 million in fiscal 2009 consisted of the unpaid liability related to that matter.

•

The increase in accrued compensation and related benefits of $12.9 million, $18.8 million and $43.6 million in fiscal 2009, 2008 and 2007, respectively, reflected increased headcount and the timing of payroll accruals versus payments.

     Other changes in prepaid expenses, other accrued liabilities, income taxes payable, and other liabilities balances were due to timing of payments versus recognition of assets or liabilities. We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the rate at which products are shipped during the quarter (which we refer to as shipment linearity), accounts receivable collections, inventory and supply chain management, excess tax benefits from stock-based compensation, and the timing and amount of tax and other payments.

     Cash Flows from Investing Activities

     Capital expenditures for fiscal 2009 were $289.7 million as compared to $188.3 million and $165.8 million in fiscal 2008 and 2007, respectively. We used $116.8 million in fiscal 2009 and received $376.4 million and $187.9 million in fiscal 2008 and 2007, respectively, for net purchases and redemptions of short-term investments, and restricted investments. During fiscal 2009, we reclassified $598.0 million of cash equivalents relating to the Primary Fund to short-term investments. In fiscal 2009, 2008 and 2007, we received $1.1 million, $19.2 million and $2.8 million, respectively, from the sale of nonmarketable and marketable securities. In fiscal 2009, 2008 and 2007, we also used $0.3 million, $4.2 million and $1.6 million for purchases of nonmarketable and marketable securities. In fiscal 2008, we acquired Onaro, Inc. and remitted total cash payments including related transaction costs totaling $99.6 million and received $0.2 million escrow related to our Topio acquisition. In fiscal 2007, we acquired Topio, Inc. and remitted total cash payments including related transaction costs totaling $131.2 million. In fiscal 2007, we received $23.9 million in cash in connection with the sale of certain assets to Blue Coat.

     Cash Flows from Financing Activities

     We received $696.6 million in fiscal 2009 and used $662.4 million and $747.3 million in fiscal 2008 and 2007, respectively from financing activities. During fiscal 2009, 2008 and 2007, we made repayments of $172.6 million, $231.5 million and $214.9 million, respectively, in connection with our Secured Credit Agreement and the Term Loan. We repurchased 17.0 million, 32.8 million and 22.6 million shares of common stock for a total of $400.0 million, $903.7 million and $805.7 million in fiscal 2009, 2008 and 2007, respectively. Proceeds from employee stock option exercises and employee stock purchases were $91.0 million, $114.7 million and $215.5 million in fiscal 2009, 2008 and 2007, respectively. Tax benefits, related to tax deductions in excess of stock-based compensation expense recognized, of $36.7 million, $45.4 million and $63.2 million for 2009, 2008 and 2007, respectively. During fiscal 2009, 2008 and 2007, we withheld shares with an aggregate value of $5.1 million, $6.0 million and $5.3 million, respectively, in connection with the vesting of certain employees’ restricted stock units for purposes of satisfying those employees’ federal, state, and local withholding tax obligations. In addition, during fiscal 2009, we issued $1.265 billion of convertible notes and paid financing costs of $26.6 million. We also received proceeds of $163.1 million for sale of common stock warrants, and paid $254.9 million for purchase of Note Hedges. During fiscal 2008, we borrowed $318.8 million through a Secured Credit Agreement.

     Net proceeds from the issuance of common stock related to employee participation in employee stock programs have historically been a significant component of our liquidity. The extent to which our employees participate in these programs generally increases or decreases based upon changes in the market price of our common stock. As a result, our cash flow resulting from the issuance of common stock in connection with employee participation in employee stock programs and related tax benefits will vary.

     Stock Repurchase Program

     At April 24, 2009, $1,096.3 million remained available for future repurchases under plans approved as of that date. The stock repurchase program may be suspended or discontinued at any time.

     Convertible Notes

     In June 2008, we issued $1.265 billion of 1.75% Convertible Senior Notes due 2013 and concurrently entered into Note Hedges and separate warrant transactions. See Note 4, “Convertible Notes and Credit Facilities” of the consolidated financial statements. The Notes will mature on June 1, 2013, unless earlier repurchased or converted. As of April 24, 2009, the Notes have not been repurchased or converted. We also have not received any shares under the Note Hedges or delivered cash or shares under the Warrants.

     Credit Facilities

     As of April 24, 2009, we have an unsecured revolving credit facility totaling $250.0 million, of which $0.6 million has been allocated as of April 24, 2009 to support certain of our outstanding letters of credit (See Note 4 of the consolidated financial statements.)

     This credit facility requires us to maintain specified financial covenants, with which we were in compliance as of April 24, 2009. Such specified financial covenants include a maximum ratio of Total Debt to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and a minimum amount of Unencumbered Cash and Short-Term Investments. Our failure to comply with these financial covenants could result in a default under the credit facilities, which would give the counterparties thereto the ability to exercise certain rights, including the right to accelerate the amounts outstanding thereunder and to terminate the facility. We were in compliance with all of our financial covenants at April 24, 2009.

     Contractual Obligations

     The following summarizes our contractual obligations at April 24, 2009 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

		2010				2011				2012				2013				2014				Thereafter				Total
		(In millions)
Contractual Obligations:
Office operating lease payments(1)		$	28.5			$	24.2			$	18.3			$	15.1			$	12.7			$	30.2			$	129.0
Real estate lease payments(2)			3.9				3.9				3.9				129.4				—				—				141.1
Equipment operating lease payments(3)			19.1				11.1				3.4				1.2				—				—				34.8
Venture capital funding commitments(4)			0.2				0.1				—				—				—				—				0.3
Purchase commitments with contract manufacturers(5)			83.7				—				—				—				—				—				83.7
Capital expenditures(6)			6.5				—				—				—				—				—				6.5
Communications and maintenance(7)			25.0				14.5				3.6				0.4				—				—				43.5
1.75% Convertible notes(8)			22.1				22.1				22.1				22.1				1,276.1				—				1,364.5
Uncertain tax positions(9)			—				—				—				—				—				105.8				105.8
Total Contractual Cash Obligations		$	189.0			$	75.9			$	51.3			$	168.2			$	1,288.8			$	136.0			$	1,909.2

		2010				2011				2012				2013				2014				Thereafter				Total
		(In millions)
Letters of credit(10)		$	4.8			$	0.2			$	0.3			$	0.1			$	—			$	0.5			$	5.9

     For purposes of the above table, contractual obligations for the purchase of goods and services are defined as agreements that are enforceable, are legally binding on us, and subject us to penalties if we cancel the agreement. Some of the figures we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal or termination, anticipated actions by management and third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual future obligations may vary from those reflected in the table.

     We have commitments related to four lease arrangements with BNPPLC for approximately 564,274 square feet of office space for our headquarters in Sunnyvale, California. As of April 24, 2009, we have a leasing arrangements (“Leasing Arrangements 1”) which requires us to lease a portion of our land in Sunnyvale to BNPPLC for a period of 99 years and to lease approximately 190,000 square feet of space costing up to $48.5 million. As of April 24, 2009, we also have commitments relating to financing and operating leasing arrangements with BNPPLC (“Leasing Arrangements 2, 3, 4”) for land and approximately 374,274 square feet of buildings located in Sunnyvale, California, costing up to $101.1 million. Under these leasing arrangements, we began paying BNPPLC minimum lease payments, which vary based on LIBOR plus a spread or a fixed rate on the costs of the facilities on the respective lease commencement dates. We will make payments for each of the leases for a term of five years. We have the option to renew each of the leases for two consecutive five-year periods upon approval by BNPPLC. Upon expiration (or upon any earlier termination) of the lease terms, we must elect one of the following options: (i) purchase the buildings from BNPPLC at cost; (ii) if certain conditions are met, arrange for the sale of the buildings by BNPPLC to a third party for an amount equal to at least 85% of the costs (residual guarantee), and be liable for any deficiency between the net proceeds received from the third party and such amounts; or (iii) pay BNPPLC supplemental payments for an amount equal to at least 85% of the costs (residual guarantee), in which event we may recoup some or all of such payments by arranging for a sale of each or all buildings by BNPPLC during the ensuing two-year period. The following table summarizes the costs, the residual guarantee, the applicable LIBOR plus spread or fixed rate at April 24, 2009, and the date we began to make payments for each of our leasing arrangements:

										LIBOR
										Plus				Lease
Leasing						Residual				Spread or				Commencement
Arrangements		Cost				Guarantee				Fixed Rate				Date		Term
1		$	48.5			$	41.2				3.99	%		January 2008		5 years
2		$	80.0			$	68.0				1.36	%		December 2007		5 years
3		$	10.5			$	8.9				3.97	%		December 2007		5 years
4		$	10.6			$	9.0				3.99	%		December 2007		5 years

     All leases require us to maintain specified financial covenants with which we were in compliance as of April 24, 2009. Such specified financial covenants include a maximum ratio of Total Debt to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and a minimum amount of Unencumbered Cash and Short-Term Investments. Our failure to comply with these financial covenants could result in a default under the leases which, subject to our right and ability to exercise our purchase option, would give BNPPLC the right to, among other things, (i) terminate our possession of the leased property and require us to pay lease termination damages and other amounts as set forth in the lease agreements, or (ii) exercise certain foreclosure remedies. If we were to exercise our purchase option, or be required to pay lease termination damages, these payments would significantly reduce our available liquidity, which could constrain our operating flexibility.

     We may from time to time terminate one or more of our leasing arrangements and repay amounts outstanding in order to meet our operating or other objectives. For example, on April 1, 2009, we terminated two leasing arrangement in connection with two buildings located in Sunnyvale, California and Research Triangle Park, North Carolina and repaid $119.3 million of the outstanding balance under the leasing arrangements. On December 1, 2008, we terminated a leasing arrangement in connection with a separate building located in Sunnyvale, California and repaid $8.1 million of the outstanding balance drawn under the construction allowance. As a result of these terminations, we are no longer contractually obligated to pay the lease payments for the lease periods and the residual guarantees.

     Legal Contingencies

     On September 5, 2007, we filed a patent infringement lawsuit in the Eastern District of Texas seeking compensatory damages and a permanent injunction against Sun Microsystems. On October 25, 2007, Sun Microsystems filed a counter claim against us in the Eastern District of Texas seeking compensatory damages and a permanent injunction. On October 29, 2007, Sun filed a second lawsuit against us in the Northern District of California asserting additional patents against us. The Texas court granted a joint motion to transfer the Texas lawsuit to the Northern District of California on November 26, 2007. On March 26, 2008, Sun filed a third lawsuit in federal court that extends the patent infringement charges to storage management technology we acquired in January 2008. The three lawsuits are currently in the discovery phase and no trial date has been set, so we are unable at this time to determine the likely outcome of these various patent litigations. In addition, as we are unable to reasonably estimate the amount or range of the potential settlement, no accrual has been recorded as of April 24, 2009.

     In April 2009, we entered into a settlement agreement with the United States of America, acting through the United States Department of Justice (“DOJ”) and on behalf of the General Services Administration (the “GSA”), under which we agreed to pay the United States $128.0 million, plus interest of $0.7 million, related to a dispute regarding our discount practices and compliance with the price reduction clause provisions of GSA contracts between August 1997 and February 2005.

     In addition, we are subject to various legal proceedings and claims which have arisen or may arise in the normal course of business. While the outcome of these legal matters is currently not determinable, we do not believe that any current litigation or claims will have a material adverse effect on our business, cash flow, operating results, or financial condition.

     Off-Balance Sheet Arrangements

     During the ordinary course of business, we provide standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated either by us or our subsidiaries. As of April 24, 2009, our financial guarantees of $5.9 million that were not recorded on our balance sheet consisted of standby letters of credit related to workers’ compensation, a customs guarantee, a corporate credit card program, foreign rent guarantees and surety bonds, which were primarily related to self-insurance.

     We use derivative instruments to manage exposures to foreign currency risk. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. The program is not designated for trading or speculative purposes Currently, we do not enter into any foreign exchange forward contracts to hedge exposures related to firm commitments or nonmarketable investments. Our major foreign currency exchange exposures and related hedging programs are described below:

	•		We utilize monthly foreign currency forward and options contracts to hedge exchange rate fluctuations related to certain foreign monetary assets and liabilities.
	•		We use currency forward contracts to hedge exposures related to forecasted sales denominated in certain foreign currencies. These contracts are designated as cash flow hedges and in general closely match the underlying forecasted transactions in duration.

     As of April 24, 2009, our notional fair value of foreign exchange forward and foreign currency option contracts totaled $314.0 million. We do not believe that these derivatives present significant credit risks, because the counterparties to the derivatives consist of major financial institutions, and we manage the notional amount of contracts entered into with any one counterparty. We do not enter into derivative financial instruments for speculative or trading purposes. Other than the risk associated with the financial condition of the counterparties, our maximum exposure related to foreign currency forward and option contracts is limited to the premiums paid.

     We have entered into indemnification agreements with third parties in the ordinary course of business. Generally, these indemnification agreements require us to reimburse losses suffered by the third party due to various events, such as lawsuits arising from patent or copyright infringement. These indemnification obligations are considered off-balance sheet arrangements in accordance with FASB Interpretation 45, of FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

     We have commitments related to four lease arrangements with BNPPLC for approximately 564,274 square feet of office space for our headquarters in Sunnyvale, California (as further described above under “Contractual Obligations”).

     We have evaluated our accounting for these leases under the provisions of FIN No. 46R and have determined the following:

	•		BNPPLC is a leasing company for BNP Paribas in the United States. BNPPLC is not a “special purpose entity” organized for the sole purpose of facilitating the leases to us. The obligation to absorb expected losses and receive expected residual returns rests with the parent, BNP Paribas. Therefore, we are not the primary beneficiary of BNPPLC as we do not absorb the majority of BNPPLC’s expected losses or expected residual returns; and
	•		BNPPLC has represented in the related closing agreements that the fair value of the property leased to us by BNPPLC is less than half of the total of the fair values of all assets of BNPPLC, excluding any assets of BNPPLC held within a silo. Further, the property leased to NetApp is not held within a silo. The definition of “held within a silo” means that BNPPLC has obtained funds equal to or in excess of 95% of the fair value of the leased asset to acquire or maintain its investment in such asset through nonrecourse financing or other contractual arrangements, the effect of which is to leave such asset (or proceeds thereof) as the only significant asset of BNPPLC at risk for the repayment of such funds.

     Accordingly, under the provisions of FIN No. 46R, we are not required to consolidate either the leasing entity or the specific assets that we lease under the BNPPLC lease. Our future minimum lease payments and residual guarantees under these real estate leases will amount to a total of $141.1 million as reported under our Note 15, “Commitments and Contingencies.”

     We also have operating leases for various facilities. Total rental expense for operating leases was $28.8 million for fiscal 2009, $29.6 million for fiscal 2008, and $24.0 million for fiscal 2007.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to market risk related to fluctuations in interest rates, market prices, and foreign currency exchange rates. We use certain derivative financial instruments to manage these risks. We do not use derivative financial instruments for speculative or trading purposes. All financial instruments are used in accordance with management-approved policies.

Market Risk and Market Interest Risk

     Investment and Interest Income — As of April 24, 2009, we had available-for-sale investments of $1,228.2 million. Our investment portfolio primarily consists of investments with original maturities at the date of purchase of greater than three months, which are classified as available-for-sale. These investments, consisting primarily of corporate bonds, corporate securities, U.S. government agency bonds, U.S. Treasuries, certificates of deposit, and money market funds, are subject to interest rate and interest income risk and will decrease in value if market interest rates increase. A hypothetical 10 percent increase in market interest rates from levels at April 24, 2009 would cause the fair value of these available-for-sale investments to decline by approximately $1.6 million. Because we have the ability to hold these investments until maturity, we would not expect any significant decline in value of our investments caused by market interest rate changes. Declines in interest rates over time will, however, reduce our interest income. We do not use derivative financial instruments in our investment portfolio.

     Our investment policy is to limit credit exposure through diversification and investment in highly rated securities. We further mitigate concentrations of credit risk in our investments by limiting our investments in the debt securities of a single issuer and by diversifying risk across geographies and type of issuer. We actively review, along with our investment advisors, current investment ratings, company specific events, and general economic conditions in managing our investments and in determining whether there is a significant decline in fair value that is other-than-temporary. As a result of the bankruptcy filing of Lehman Brothers, we recorded in fiscal 2009 an other-than-temporary impairment charge of $11.8 million on our corporate bonds related to investments in Lehman Brothers securities and approximately $9.3 million on our investments in the Reserve Primary Fund, which also held Lehman Brothers investments. We will continue to monitor and evaluate the accounting for our investment portfolio on a quarterly basis for additional other-than-temporary impairment charges. We could realize additional losses in our holdings of the Primary Fund and may not receive all or a portion of our remaining balance in the Primary Fund as a result of market conditions and ongoing litigation against the fund.

     We are also exposed to market risk relating to our auction rate securities due to uncertainties in the credit and capital markets. As of April 24, 2009, we determined there was a total decline in the fair value of our auction rate securities investments of approximately $8.8 million, of which we recorded temporary impairment charges of $7.0 million, offset by unrealized gains of $0.3 million, and $2.1 million was recognized as an other-than-temporary impairment charge. The fair value of our auction rate securities may change significantly due to events and conditions in the credit and capital markets. These securities/issuers could be subject to review for possible downgrade. Any downgrade in these credit ratings may result in an additional decline in the estimated fair value of our auction rate securities. Changes in the various assumptions used to value these securities and any increase in the markets’ perceived risk associated with such investments may also result in a decline in estimated fair value.

     If current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in other comprehensive income (loss) or other-than-temporary impairment charges to earnings in future quarters. We intend and have the ability to hold these investments until the market recovers. We do not believe that the lack of liquidity relating to our portfolio investments will impact our ability to fund working capital needs, capital expenditures or other operating requirements. See Note 8, “Fair Value Measurement,” to the consolidated financial statements in Part II, Item 8; Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources,” in Part II, Item 7; and Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K for a description of recent market events that may affect the value and liquidity of the investments in our portfolio that we held at April 24, 2009.

     Lease Commitments — As of April 24, 2009, one of our four lease arrangements with BNPPLC is based on a floating interest rate. The minimum lease payments will vary based on LIBOR plus a spread. All of our leases have a term of five years, and we have the option to renew these leases for two consecutive five-year periods upon approval by BNPPLC. A hypothetical 10 percent increase in market interest rate from the level at April 24, 2009 would increase our lease payments on this one floating lease arrangement under the initial five-year term by an immaterial amount. We do not currently hedge against market interest rate increases. As additional cash flow generated from operations is invested at current market rates, it will offer a natural hedge against interest rate risk from our lease commitments in the event of a significant change in market interest rate.

     Convertible Notes — In June 2008, we issued $1.265 billion principal amount of 1.75% Notes due 2013, of which $1.017 billion was allocated to debt and $0.248 billion was allocated to equity, (see Note 2 to the consolidated financial statements). Holders may convert their Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, we would pay the holder the cash value of the applicable number of shares of our common stock, up to the principal amount of the Note. Amounts in excess of the principal amount, if any, may be paid in cash or in stock at our option. Concurrent with the issuance of the Notes, we entered into

convertible note hedge transactions and separately, warrant transactions, to reduce the potential dilution from the conversion of the Notes and to mitigate any negative effect such conversion may have on the price of our common stock.

     The fair value of our Notes is subject to interest rate risk, market risk and other factors due to the convertible feature. Generally, the fair value of Notes will increase as interest rates fall and/or our common stock price increases, and decrease as interest rates rise and/or our common stock price decreases. The interest and market value changes affect the fair value of our Notes, but do not impact our financial position, cash flows, or results of operations due to the fixed nature of the debt obligations. We do not carry the Notes at fair value, but present the fair value of the principal amount of our Notes for disclosure purposes. As of April 24, 2009, the principal amount of our Notes, which consists of the combined debt and equity components, was $1.265 billion, and the total estimated fair value of such was $1.143 billion based on the closing trading price of $90.38 per $100 of our Notes as of that date.

     Nonmarketable Securities — We have from time to time made cash investments in companies with distinctive technologies that are potentially strategically important to us. Our investments in nonmarketable securities would be negatively affected by an adverse change in equity market prices, although the impact cannot be directly quantified. Such a change, or any negative change in the financial performance or prospects of the companies whose nonmarketable securities we own, would harm the ability of these companies to raise additional capital and the likelihood of our being able to realize any gains or return of our investments through liquidity events such as initial public offerings, acquisitions, and private sales. These types of investments involve a high degree of risk, and there can be no assurance that any company we invest in will grow or be successful. We do not currently engage in any hedging activities to reduce or eliminate equity price risk with respect to such nonmarketable investments. Accordingly, we could lose all or part of these investments if there is an adverse change in the market price of a company we invest in. Our investments in nonmarketable securities had a carrying amount of $4.0 million as of April 24, 2009 and $11.2 million as of April 25, 2008. If we determine that an other-than-temporary decline in fair value exists for a nonmarketable equity security, we write down the investment to its fair value and record the related write-down as an investment loss in our Consolidated Statements of Operations. During fiscal 2009, we recorded net losses of $6.3 million for our investments in privately held companies.

Foreign Currency Exchange Rate Risk and Foreign Exchange Forward Contracts

     We hedge risks associated with foreign currency transactions to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward and option contracts to hedge against the short-term impact of foreign currency fluctuations on certain assets and liabilities denominated in foreign currencies. All balance sheet hedges are marked to market through earnings every period. We also use foreign exchange forward contracts to hedge foreign currency forecasted transactions related to forecasted sales transactions. These derivatives are designated as cash flow hedges under SFAS No. 133. For cash flow hedges outstanding at April 24, 2009, the time-value component is recorded in earnings while all other gains or losses were included in other comprehensive income.

     We do not enter into foreign exchange contracts for speculative or trading purposes. In entering into forward and option foreign exchange contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We attempt to limit our exposure to credit risk by executing foreign exchange contracts with creditworthy multinational commercial banks. All contracts have a maturity of less than one year.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
NetApp, Inc.
Sunnyvale, California

     We have audited the accompanying consolidated balance sheets of NetApp, Inc. and subsidiaries (collectively, the “Company”) as of April 24, 2009 and April 25, 2008, and the related consolidated statements of operations, cash flows, and stockholders’ equity and comprehensive income for each of the three years in the period ended April 24, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all material respects, the financial position of NetApp, Inc. and subsidiaries as of April 24, 2009 and April 25, 2008, and the results of their operations and their cash flows for each of the three years in the period ended April 24, 2009, in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 2 to the consolidated financial statements, in the year ended April 25, 2008, the Company changed its method of measuring and recognizing tax benefits associated with uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. In addition, as discussed in Notes 2 and 4 to the consolidated financial statements, on April 25, 2009, the Company changed its method of accounting for convertible debt instruments in accordance with FASB Staff Position APB 14-1: Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”) and accordingly retrospectively adjusted the accompanying consolidated financial statements as of April 24, 2009 and for the year then ended for the changes required by this statement.

/s/ DELOITTE & TOUCHE LLP                    

San Jose, California
June 16, 2009 (September 30, 2009 as to the effects of the retrospective adoption of FSP APB 14-1
as disclosed in Notes 2 and 4)

NETAPP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)

		April 24, 2009				April 25, 2008
ASSETS
Current Assets:
Cash and cash equivalents		$	1,494,153			$	936,479
Short-term investments			1,110,053				227,911
Accounts receivable, net of allowances of $3,068 at April 24, 2009, and $2,439 at April 25, 2008			446,537				582,110
Inventories			61,104				70,222
Prepaid expenses and other assets			119,887				123,514
Short-term deferred income taxes			207,050				127,197
Total current assets			3,438,784				2,067,433
Property and Equipment, Net			807,923				693,792
Goodwill			680,986				680,054
Intangible Assets, Net			45,744				90,075
Long-Term Investments and Restricted Cash			127,317				331,105
Long-Term Deferred Income Taxes and Other Assets			283,625				208,529
		$	5,384,379			$	4,070,988
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	137,826			$	178,233
Accrued compensation and related benefits			204,168				202,929
Other accrued liabilities			190,315				154,331
Accrual for GSA settlement			128,715				—
Income taxes payable			4,732				6,245
Deferred revenue			1,013,569				872,364
Total current liabilities			1,679,325				1,414,102
Revolving Credit Facilities			—				172,600
1.75% Convertible Senior Notes Due 2013			1,054,717				—
Other Long-Term Obligations			164,499				146,058
Long-Term Deferred Revenue			701,649				637,889
			3,600,190				2,370,649
Commitments and Contingencies (Note 14)
Stockholders’ Equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; shares outstanding: none in 2009 and 2008			—				—
Common stock, $0.001 par value; 885,000 shares authorized; 436,565 shares issued at April 24, 2009, and 429,080 shares issued at April 25, 2008			437				429
Additional paid-in capital			3,115,796				2,690,629
Treasury stock at cost (104,325 shares at April 24, 2009, and 87,365 shares at April 25, 2008)			(2,927,376	)			(2,527,395	)
Retained earnings			1,600,490				1,535,903
Accumulated other comprehensive income (loss)			(5,158	)			773
Total stockholders’ equity			1,784,189				1,700,339
		$	5,384,379			$	4,070,988

See notes to consolidated financial statements.

NETAPP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

		Year Ended
		April 24, 2009				April 25, 2008				April 27, 2007
Revenues:
Product		$	2,152,657			$	2,242,474			$	2,085,898
Software entitlements and maintenance			618,352				486,896				341,258
Service			764,099				573,797				377,126
GSA settlement			(128,715	)			—				—
Net revenues			3,406,393				3,303,167				2,804,282
Cost of Revenues:
Cost of product			1,007,642				938,431				838,010
Cost of software entitlements and maintenance			9,179				8,572				10,210
Cost of service			399,657				342,788				251,562
Total cost of revenues			1,416,478				1,289,791				1,099,782
Gross margin			1,989,915				2,013,376				1,704,500
Operating Expenses:
Sales and marketing			1,186,141				1,075,588				895,813
Research and development			498,495				452,205				385,357
General and administrative			203,698				171,536				147,501
Restructuring and other charges (recoveries)			54,406				447				(74	)
Gain on sale of assets			—				—				(25,339	)
Total operating expenses			1,942,740				1,699,776				1,403,258
Income from Operations			47,175				313,600				301,242
Other Income (Expenses), Net:
Interest income			57,610				64,610				68,837
Interest expense			(63,430	)			(7,990	)			(11,642	)
Gain (loss) on investments, net			(29,571	)			12,614				(1,538	)
Other income (expense), net			(3,520	)			(135	)			2,829
Total other income (expense), net			(38,911	)			69,099				58,486
Income Before Income Taxes			8,264				382,699				359,728
Provision (Benefit) for Income Taxes			(56,323	)			72,961				61,993
Net Income		$	64,587			$	309,738			$	297,735
Net Income per Share:
Basic		$	0.20			$	0.88			$	0.80
Diluted		$	0.19			$	0.86			$	0.77
Shares Used in Net Income per Share Calculations:
Basic			330,279				351,676				371,204
Diluted			334,575				361,090				388,454

See notes to consolidated financial statements.

NETAPP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Year Ended
		April 24, 2009				April 25, 2008				April 27, 2007
Cash Flows from Operating Activities:
Net income		$	64,587			$	309,738			$	297,735
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			170,538				144,184				110,833
Accretion of discount and issue costs on notes			40,989				—				—
Stock-based compensation			140,754				147,964				163,033
Impairment loss (gain) of investments			20,273				(12,614	)			1,538
Gain on sale of assets			—				—				(25,339	)
Asset impairment and write-offs			31,573				1,841				773
Allowance for doubtful accounts			1,146				818				928
Deferred income taxes			(124,568	)			(53,031	)			(145,989	)
Deferred rent			4,789				3,912				1,033
Tax benefit from stock-based compensation			45,445				48,195				175,036
Excess tax benefit from stock-based compensation			(36,702	)			(45,391	)			(63,159	)
Changes in assets and liabilities:
Accounts receivable			128,692				(27,741	)			(175,231	)
Inventories			9,126				(15,382	)			9,908
Prepaid expenses and other assets			(828	)			(7,549	)			(6,366	)
Accounts payable			(26,969	)			20,031				36,589
Accrued compensation and related benefits			12,874				18,754				43,612
Other accrued liabilities			50,295				3,974				16,903
Accrual for GSA settlement			128,715				—				—
Income taxes payable			(1,443	)			(47,300	)			1,556
Long term other liabilities			10,643				117,469				(265	)
Deferred revenue			219,301				401,014				421,328
Net cash provided by operating activities			889,230				1,008,886				864,456
Cash Flows from Investing Activities:
Purchases of investments			(1,152,505	)			(1,053,450	)			(2,630,350	)
Redemptions of investments			1,035,722				1,429,899				2,818,207
Reclassification from cash and cash equivalents to short-term investments			(597,974	)			—				—
Change in restricted cash			336				(793	)			290
Proceeds from sale of assets			—				—				23,914
Proceeds from sale of nonmarketable and marketable securities			1,057				19,154				2,813
Purchases of nonmarketable securities			(300	)			(4,235	)			(1,583	)
Purchases of property and equipment			(289,657	)			(188,280	)			(165,828	)
Purchase of businesses, net of cash acquired			—				(99,390	)			(131,241	)
Net cash provided by (used in) investing activities			(1,003,321	)			102,905				(83,778	)
Cash Flows from Financing Activities:
Proceeds from sale of common stock related to employee stock transactions			91,014				114,697				215,453
Tax withholding payments reimbursed by restricted stock			(5,115	)			(6,020	)			(5,272	)
Excess tax benefit from stock-based compensation			36,702				45,391				63,159
Proceeds from revolving credit facility			—				318,754				—
Proceeds from issuance of convertible notes			1,265,000				—				—
Payment of financing costs			(26,581	)			—				—
Sale of common stock warrants			163,059				—				—
Purchase of note hedges			(254,898	)			—				—
Repayment of revolving credit facility and debt			(172,600	)			(231,510	)			(214,890	)
Repurchases of common stock			(399,981	)			(903,704	)			(805,708	)
Net cash provided by (used in) financing activities			696,600				(662,392	)			(747,258	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(24,835	)			(1,999	)			(5,597	)
Net Increase in Cash and Cash Equivalents			557,674				447,400				27,823
Cash and Cash Equivalents:
Beginning of period			936,479				489,079				461,256
End of period		$	1,494,153			$	936,479			$	489,079

See notes to consolidated financial statements.

NETAPP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

		Common Stock												Treasury Stock																Accumulated
										Additional												Deferred								Other
										Paid-in								Treasury				Stock				Retained				Comprehensive
		Shares				Amount				Capital				Shares				Amount				Compensation				Earnings				Income (Loss)				Total
Balances, April 30, 2006			407,994			$	408			$	1,872,962				(31,996	)		$	(817,983	)		$	(49,266	)		$	928,430			$	(11,098	)		$	1,923,453
Components of comprehensive income:
Net income			—				—				—				—				—				—				297,735				—				297,735
Currency translation adjustment			—				—				—				—				—				—				—				2,954				2,954
Unrealized gain on investments, net			—				—				—				—				—				—				—				15,183				15,183
Unrealized gain on derivatives			—				—				—				—				—				—				—				(1,537	)			(1,537	)
Total comprehensive income																																			314,335
Issuance of common stock related to employee transactions			13,308				14				215,439				—				—				—				—				—				215,453
Restricted stock awards issued			125				—				—				—				—				—				—				—				—
Restricted stock awards cancelled			(5	)			—				—				—				—				—				—				—				—
Restricted stock units vested			43				—				—				—				—				—				—				—				—
Decru NQ auto exercises			233				—				—				—				—				—				—				—				—
Restricted stock units exercises			75				—				—				—				—				—				—				—				—
Restricted stock withheld for taxes			(150	)			—				(5,272	)			—				—				—				—				—				(5,272	)
Repurchase of common stock			—				—				—				(22,597	)			(805,708	)			—				—				—				(805,708	)
Repurchase of restricted stock - Decru			—				—				(1	)			—				—				—				—				—				(1	)
Assumption of options in connection with acquisition of Topio			—				—				8,369				—				—				—				—				—				8,369
Deferred stock compensation			—				—				(49,266	)			—				—				49,266				—				—				—
Stock compensation expense - employee			—				—				163,356				—				—				—				—				—				163,356
Income tax benefit from employee stock transactions			—				—				175,036				—				—				—				—				—				175,036
Balances, April 27, 2007			421,623			$	422			$	2,380,623				(54,593	)		$	(1,623,691	)		$	—			$	1,226,165			$	5,502			$	1,989,021
Components of comprehensive income:
Net income			—				—				—				—				—				—				309,738								309,738
Currency translation adjustment			—				—				—				—				—				—				—				1,111				1,111
Unrealized gain on investments, net			—				—				—				—				—				—				—				(7,786	)			(7,786	)
Unrealized gain on derivatives			—				—				—				—				—				—				—				1,946				1,946
Total comprehensive income			—				—				—				—				—				—				—				—				305,009
Issuance of common stock related to employee transactions			7,711				7				114,695				—				—				—				—				—				114,702
Restricted stock awards issued			—				—				—				—				—				—				—				—				—
Restricted stock awards cancelled			—				—				—				—				—				—				—				—				—
Restricted stock units vested			—				—				—				—				—				—				—				—				—
Decru NQ auto exercises			—				—				—				—				—				—				—				—				—
Spinnaker restricted stock units exercises			—				—				—				—				—				—				—				—				—
Restricted stock units exercises			—				—				—				—				—				—				—				—				—
Restricted stock withheld for taxes			(196	)			—				(6,020	)			—				—				—				—				—				(6,020	)
Repurchase of common stock			—				—				—				(32,772	)			(903,704	)			—				—				—				(903,704	)
Repurchase of restricted stock & RSA			(58	)			—				(5	)			—				—				—				—				—				(5	)
Stock compensation expense - employee			—				—				147,924				—				—				—				—				—				147,924
Assumption of options in connection with acquisition of Onaro			—				—				5,217				—				—				—				—				—				5,217
Income tax benefit from employee stock transactions			—				—				48,195				—				—				—				—				—				48,195
Balances, April 25, 2008			429,080			$	429			$	2,690,629				(87,365	)		$	(2,527,395	)		$	—			$	1,535,903			$	773			$	1,700,339
Components of comprehensive income:
Net income			—				—				—				—				—				—				64,587				—				64,587
Currency translation adjustment			—				—				—				—				—				—				—				(4,764	)			(4,764	)
Unrealized gain on investments, net			—				—				—				—				—				—				—				(1,986	)			(1,986	)
Unrealized gain on derivatives			—				—				—				—				—				—				—				819				819
Total comprehensive income			—				—				—				—				—				—				—				—				58,656
Issuance of common stock related to employee transactions			7,770				8				91,006				—				—				—				—				—				91,014
Restricted stock withheld for taxes			(279	)			—				(5,115	)			—				—				—				—				—				(5,115	)
Repurchase of common stock			—				—				—				(16,960	)			(399,981	)			—				—				—				(399,981	)
Repurchase of restricted stock & RSA			(6	)			—				—				—				—				—				—				—				—
Purchase of Note Hedges			—				—				(254,898	)			—				—				—				—				—				(254,898	)
Sale of common stock warrants			—				—				163,059				—				—				—				—				—				163,059
Equity component of convertible notes			—				—				248,038				—				—				—				—				—				248,038
Issuance costs related to equity component of convertible notes			—				—				(5,212	)			—				—				—				—				—				(5,212	)
Net tax effect of issuance costs related to convertible notes			—				—				2,083				—				—				—				—				—				2,083
Stock compensation expense - employee			—				—				140,761				—				—				—				—				—				140,761
Income tax benefit from employee stock transactions			—				—				45,445				—				—				—				—				—				45,445
Balances, April 24, 2009			436,565			$	437			$	3,115,796				(104,325	)		$	(2,927,376	)		$	—			$	1,600,490			$	(5,158	)		$	1,784,189