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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 	 	 	
(Mark One)	 	 	
þ	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934	
 	
 	 	For the quarterly period ended July 30, 2004	
 	
or	
 	
o	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934	
 	
 	 	For the transition period from           to	
Commission file number 0-27130

Network Appliance, Inc.
(Exact name of registrant as specified in its charter)
 	 	 	
Delaware	 	77-0307520	
(State or other jurisdiction of
incorporation or organization)	 	(IRS Employer
Identification No.)	
495 East Java Drive,
Sunnyvale, California 94089	
(Address of principal executive offices, including zip code)	
Registrant’s telephone number, including area code:
(408) 822-6000

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

      Number of shares outstanding of the registrant’s common stock, $0.001 par value, as of the latest practicable date.
 	 	 	 	 	
 	 	Outstanding at	
Class	 	July 30, 2004	

	 	

	
Common Stock	 	 	357,676,696	 	

TABLE OF CONTENTS
 	 	 	 	 	 	 	 	 	
 	 	 	 	Page No.	 	 	

	 	 	
 PART I — FINANCIAL INFORMATION	 	 	
 Item 1.	 	 Condensed Consolidated Financial Statements (Unaudited)	 	 	2	 	 	 	
 	 	 Condensed Consolidated Balance Sheets as of July 30, 2004 (Unaudited) and April 30, 2004	 	 	2	 	 	 	
 	 	 Condensed Consolidated Statements of Income for the three-month periods ended July 30, 2004 and August 1, 2003 (Unaudited)	 	 	3	 	 	 	
 	 	 Condensed Consolidated Statements of Cash Flows for the three-month periods ended July 30, 2004 and August 1, 2003 (Unaudited)	 	 	4	 	 	 	
 	 	 Notes to Condensed Consolidated Financial Statements (Unaudited)	 	 	5	 	 	 	
 Item 2.	 	 Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	17	 	 	 	
 Item 3.	 	 Quantitative and Qualitative Disclosures About Market Risk	 	 	38	 	 	 	
 Item 4.	 	 Controls and Procedures	 	 	40	 	 	 	
 PART II — OTHER INFORMATION	 	 	
 Item 1.	 	 Legal Proceedings	 	 	41	 	 	 	
 Item 2.	 	 Changes in Securities	 	 	41	 	 	 	
 Item 3.	 	 Defaults Upon Senior Securities	 	 	41	 	 	 	
 Item 4.	 	 Submission of Matters to Vote of Securityholders	 	 	41	 	 	 	
 Item 5.	 	 Other Information	 	 	41	 	 	 	
 Item 6.	 	 Exhibits and Reports on Form 8-K	 	 	42	 	 	 	
 SIGNATURE	 	 	43	 	 	 	
 EXHIBIT 10.2	
 EXHIBIT 31.1	
 EXHIBIT 31.2	
 EXHIBIT 32.1	
 EXHIBIT 32.2	

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PART I. FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements (Unaudited)

NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands — unaudited)
 	 	 	 	 	 	 	 	 	 	 	
 	 	July 30,	 	April 30,	
 	 	2004	 	2004	

	 	

	
ASSETS	
Current Assets:	 	 	 	 	 	 	 	 	
 	Cash and cash equivalents	 	$	228,045	 	 	$	241,149	 	
 	Short-term investments	 	 	598,596	 	 	 	566,816	 	
 	Accounts receivable, net of allowances of $4,917 at July 30, 2004 and $5,071 at April 30, 2004	 	 	199,746	 	 	 	193,942	 	
 	Inventories	 	 	34,710	 	 	 	34,109	 	
 	Prepaid expenses and other	 	 	39,290	 	 	 	29,057	 	
 	Deferred income taxes	 	 	24,719	 	 	 	24,163	 	

	 	 	 	

	 	
 	 	Total current assets	 	 	1,125,106	 	 	 	1,089,236	 	
Property and Equipment, net	 	 	392,588	 	 	 	370,717	 	
Goodwill	 	 	291,816	 	 	 	291,816	 	
Intangible Assets, net	 	 	28,935	 	 	 	31,718	 	
Other Assets	 	 	82,642	 	 	 	93,779	 	

	 	 	 	

	 	
 	 	$	1,921,087	 	 	$	1,877,266	 	

	 	 	 	

	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	
Current Liabilities:	 	 	 	 	 	 	 	 	
 	Accounts payable	 	$	51,691	 	 	$	52,719	 	
 	Income taxes payable	 	 	15,172	 	 	 	16,033	 	
 	Accrued compensation and related benefits	 	 	50,866	 	 	 	65,186	 	
 	Other accrued liabilities	 	 	46,775	 	 	 	43,683	 	
 	Deferred revenue	 	 	182,801	 	 	 	166,602	 	

	 	 	 	

	 	
 	 	Total current liabilities	 	 	347,305	 	 	 	344,223	 	
Long-Term Deferred Revenue	 	 	126,355	 	 	 	112,337	 	
Long-Term Obligations	 	 	4,787	 	 	 	4,858	 	

	 	 	 	

	 	
 	 	Total liabilities	 	 	478,447	 	 	 	461,418	 	

	 	 	 	

	 	
Stockholders’ Equity:	 	 	 	 	 	 	 	 	
 	Common stock	 	 	367	 	 	 	364	 	
 	Additional paid-in capital	 	 	1,166,580	 	 	 	1,138,158	 	
 	Deferred stock compensation	 	 	(20,775	)	 	 	(23,348	)	
 	Treasury stock	 	 	(183,914	)	 	 	(136,172	)	
 	Retained earnings	 	 	483,086	 	 	 	436,224	 	
 	Accumulated other comprehensive loss	 	 	(2,704	)	 	 	622	 	

	 	 	 	

	 	
 	 	Total stockholders’ equity	 	 	1,442,640	 	 	 	1,415,848	 	

	 	 	 	

	 	
 	 	$	1,921,087	 	 	$	1,877,266	 	

	 	 	 	

	 	
See accompanying notes to unaudited condensed consolidated financial statements.

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NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts — unaudited)

 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Revenues:	 	 	 	 	 	 	 	 	
 	Product revenue	 	$	324,627	 	 	$	235,786	 	
 	Service revenue	 	 	33,794	 	 	 	24,723	 	

	 	 	 	

	 	
 	 	Total revenues	 	 	358,421	 	 	 	260,509	 	

	 	 	 	

	 	
Cost of Revenues:	 	 	 	 	 	 	 	 	
 	Cost of product revenue	 	 	114,215	 	 	 	85,039	 	
 	Cost of service revenue	 	 	29,248	 	 	 	19,347	 	

	 	 	 	

	 	
 	 	Total cost of revenues	 	 	143,463	 	 	 	104,386	 	

	 	 	 	

	 	
 	Gross margin	 	 	214,958	 	 	 	156,123	 	

	 	 	 	

	 	
Operating Expenses:	 	 	 	 	 	 	 	 	
 	Sales and marketing	 	 	103,311	 	 	 	79,356	 	
 	Research and development	 	 	38,703	 	 	 	31,541	 	
 	General and administrative	 	 	16,882	 	 	 	12,265	 	
 	Stock compensation(1)	 	 	2,104	 	 	 	654	 	

	 	 	 	

	 	
 	 	Total operating expenses	 	 	161,000	 	 	 	123,816	 	

	 	 	 	

	 	
Income from Operations	 	 	53,958	 	 	 	32,307	 	
Other Income (Expense), net:	 	 	 	 	 	 	 	 	
 	Interest income	 	 	4,082	 	 	 	3,045	 	
 	Other expenses, net	 	 	(912	)	 	 	(47	)	
 	Net gain on investments	 	 	—	 	 	 	145	 	

	 	 	 	

	 	
 	 	Total other income, net	 	 	3,170	 	 	 	3,143	 	

	 	 	 	

	 	
Income before Income Taxes	 	 	57,128	 	 	 	35,450	 	
Provision for Income Taxes	 	 	10,266	 	 	 	8,377	 	

	 	 	 	

	 	
Net Income	 	$	46,862	 	 	$	27,073	 	

	 	 	 	

	 	
Net Income per Share:	 	 	 	 	 	 	 	 	
 	Basic	 	$	0.13	 	 	$	0.08	 	

	 	 	 	

	 	
 	Diluted	 	$	0.13	 	 	$	0.08	 	

	 	 	 	

	 	
Shares Used in per Share Calculations:	 	 	 	 	 	 	 	 	
 	Basic	 	 	356,743	 	 	 	341,687	 	

	 	 	 	

	 	
 	Diluted	 	 	372,974	 	 	 	358,497	 	

	 	 	 	

	 	
(1) Stock compensation includes:
 	 	 	 	 	 	 	 	 	
Sales and marketing	 	$	510	 	 	$	358	 	
Research and development	 	 	1,384	 	 	 	192	 	
General and administrative	 	 	210	 	 	 	104	 	

	 	 	 	

	 	
 	 	$	2,104	 	 	$	654	 	

	 	 	 	

	 	
See accompanying notes to unaudited condensed consolidated financial statements.

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NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands — unaudited)

 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Cash Flows from Operating Activities:	 	 	 	 	 	 	 	 	
 	Net income	 	$	46,862	 	 	$	27,073	 	
 	Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
 	 	Depreciation	 	 	13,239	 	 	 	13,426	 	
 	 	Amortization of patents	 	 	450	 	 	 	150	 	
 	 	Amortization of intangible assets	 	 	2,333	 	 	 	1,364	 	
 	 	Stock compensation	 	 	2,104	 	 	 	654	 	
 	 	Net gain on investments	 	 	(29	)	 	 	(145	)	
 	 	Allowance for doubtful accounts	 	 	(154	)	 	 	(290	)	
 	 	Deferred rent	 	 	90	 	 	 	271	 	
 	 	Changes in assets and liabilities:	 	 	 	 	 	 	 	 	
 	 	 	Accounts receivable	 	 	(5,650	)	 	 	9,638	 	
 	 	 	Inventories	 	 	(3,330	)	 	 	(5,796	)	
 	 	 	Prepaid expenses and other assets	 	 	(1,261	)	 	 	(2,306	)	
 	 	 	Accounts payable	 	 	(1,028	)	 	 	2,202	 	
 	 	 	Income taxes payable	 	 	4,831	 	 	 	2,602	 	
 	 	 	Accrued compensation and related benefits	 	 	(14,320	)	 	 	(5,271	)	
 	 	 	Other accrued liabilities	 	 	3,669	 	 	 	(1,708	)	
 	 	 	Deferred revenue	 	 	30,217	 	 	 	14,912	 	

	 	 	 	

	 	
 	 	 	 	Net cash provided by operating activities	 	 	78,023	 	 	 	56,776	 	

	 	 	 	

	 	
Cash Flows from Investing Activities:	 	 	 	 	 	 	 	 	
 	Purchases of short and long-term investments	 	 	(69,245	)	 	 	(89,136	)	
 	Redemptions of short and long-term investments	 	 	35,645	 	 	 	92,581	 	
 	Purchases of property and equipment	 	 	(33,285	)	 	 	(12,318	)	
 	Proceeds from disposal of property and equipment	 	 	—	 	 	 	105	 	
 	Proceeds from sales of investments	 	 	298	 	 	 	419	 	
 	Purchase of patents	 	 	—	 	 	 	(9,015	)	
 	Purchases of equity securities	 	 	—	 	 	 	(325	)	

	 	 	 	

	 	
 	 	 	 	Net cash used in investing activities	 	 	(66,587	)	 	 	(17,689	)	

	 	 	 	

	 	
Cash Flows from Financing Activities:	 	 	 	 	 	 	 	 	
 	Proceeds from sale of common stock related to employee stock transactions	 	 	23,202	 	 	 	24,256	 	
 	Repurchases of common stock	 	 	(47,742	)	 	 	(26,825	)	

	 	 	 	

	 	
 	 	 	 	Net cash used in financing activities	 	 	(24,540	)	 	 	(2,569	)	

	 	 	 	

	 	
Net Increase (Decrease) in Cash and Cash Equivalents	 	 	(13,104	)	 	 	36,518	 	
Cash and Cash Equivalents:	 	 	 	 	 	 	 	 	
 	Beginning of period	 	 	241,149	 	 	 	284,161	 	

	 	 	 	

	 	
 	End of period	 	$	228,045	 	 	$	320,679	 	

	 	 	 	

	 	
Noncash Investing and Financing Activities:	 	 	 	 	 	 	 	 	
 	Deferred stock compensation, net of reversals	 	$	(546	)	 	$	1,668	 	
 	Conversion of evaluation inventory to fixed assets	 	$	2,729	 	 	$	661	 	
 	Income tax benefit from employee stock transactions	 	$	5,692	 	 	$	9,874	 	
Supplemental cash flow information:	 	 	 	 	 	 	 	 	
 	Income taxes paid	 	$	6,826	 	 	$	1,456	 	
See accompanying notes to unaudited condensed consolidated financial statements.

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NETWORK APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands, except per-share data)
(Unaudited)

1.	The Company	
      Based in Sunnyvale, California, Network Appliance was incorporated in California in April 1992, and reincorporated in Delaware in November 2001. Network Appliance offers unified storage solutions for the data-intensive enterprise. NetApp® network storage solutions and service offerings provide data-intensive enterprises with consolidated storage, improved data center operations, economical business continuance, and efficient remote data access across the distributed enterprise.

2.	Condensed Consolidated Financial Statements	
      The accompanying interim unaudited condensed consolidated financial statements have been prepared by Network Appliance, Inc. without audit and reflect all adjustments, (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for annual consolidated financial statements.

      We operate on a 52-week or 53-week year ending on the last Friday in April. For presentation purposes we have indicated in the accompanying interim unaudited condensed consolidated financial statements that our fiscal year end is April 30. The first quarters of fiscal 2005 and 2004 were 13-week and 14-week fiscal periods, respectively.

      These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended April 30, 2004. The results of operations for the three-month period ended July 30, 2004 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods. In the following notes to our interim condensed consolidated financial statements, Network Appliance Inc. is also referred to as “we”, “our” and “us”.

3.	Use of Estimates	
      The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, revenue recognition and allowances; valuation of goodwill and intangibles; accounting for income taxes; inventory write-down; restructuring accruals; impairment losses on investments; accounting for stock-based compensation; and loss contingencies. Actual results could differ from those estimates.

4.	Derivative Instruments	
      We adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”  as amended by SFAS No. 149,  “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” Derivatives that are not designated as hedges are adjusted to fair value through earnings. If the derivative is designated as a hedge, depending on the nature of the exposure being hedged, changes in fair value will either be offset against the change in fair value of the hedged

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NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

asset or liability through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the hedge is recognized in earnings immediately.

      As a result of our significant international operations, we are subject to risks associated with fluctuating exchange rates. We use derivative financial instruments, principally currency forward contracts and currency options, to attempt to minimize the impact of exchange rate movements on our balance sheet relating to certain foreign currency assets and liabilities and operating results. We have established transaction and balance sheet risk management programs to protect against reductions in fair value and volatility of future cash flows caused by changes in exchange rates. Factors that could have an impact on the effectiveness of our hedging program include the accuracy of forecasts and the volatility of foreign currency markets. These programs reduce, but do not always entirely eliminate, the impact of currency exchange movements. The maturities of these instruments are generally less than one year.

      Currently, we do not enter into any foreign exchange forward contracts to hedge exposures related to firm commitments or equity investments. Our major foreign currency exchange exposures and related hedging programs are described below:
 	 	
 	     Balance Sheet. We utilize currency forward contracts and currency options to hedge currency exchange rate fluctuations related to certain foreign currency assets and liabilities. Gains and losses on these derivatives offset gains and losses on the assets and liabilities being hedged and the net amount is included in earnings. For the three-month periods ended July 30, 2004 and August 1, 2003, net gains generated by hedged assets and liabilities totaled $1,288 and $2,447, respectively, and were offset by losses on the related derivative instruments of $2,216 and $2,618, respectively.	
 	 	
 	      The premiums paid on the foreign currency option contracts are recognized as a reduction to other income when the contract is entered into. Other than the risk associated with the financial condition of the counterparties, our maximum exposure related to foreign currency options is limited to the premiums paid.	
 	 	
 	     Forecasted Transactions. We use currency forward contracts to hedge exposures related to forecasted sales and operating expenses denominated in Euros and British Pounds. These contracts are designated as cash flow hedges when the transactions are forecasted and in general closely match the underlying forecasted transactions in duration. The contracts are carried on the balance sheet at fair value and the effective portion of the contracts’ gains and losses is recorded as other comprehensive income until the forecasted transaction occurs.	
 	 	
 	      If the underlying forecasted transactions do not occur, or it becomes probable that they will not occur, the gain or loss on the related cash flow hedge is recognized immediately in earnings. For the three-month periods ended July 30, 2004 and August 1, 2003, we did not record any gains or losses related to forecasted transactions that did not occur or became improbable.	
 	 	
 	      We measure the effectiveness of hedges of forecasted transactions on at least a quarterly basis by comparing the fair values of the designated currency forward contracts with the fair values of the forecasted transactions. No ineffectiveness was recognized in earnings during the three-month periods ended July 30, 2004 and August 1, 2003.	
 	 	
 	      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.	
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NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.	Balance Sheet Components	

 	Inventories	
      Inventories are stated at the lower of cost (first-in, first-out basis) or market. Inventories consist of the following:
 	 	 	 	 	 	 	 	 	
 	 	July 30,	 	April 30,	
 	 	2004	 	2004	

	 	

	
Purchased components	 	$	13,156	 	 	$	13,296	 	
Work in process	 	 	1,111	 	 	 	624	 	
Finished goods	 	 	20,443	 	 	 	20,189	 	

	 	 	 	

	 	
 	 	$	34,710	 	 	$	34,109	 	

	 	 	 	

	 	

 	Property and Equipment	
 	 	 	 	 	 	 	 	 	
 	 	July 30,	 	April 30,	
 	 	2004	 	2004	

	 	

	
Land	 	$	163,110	 	 	$	158,316	 	
Buildings and building improvements	 	 	119,729	 	 	 	119,262	 	
Leasehold improvements	 	 	17,886	 	 	 	16,788	 	
Computers, related equipment and purchased software	 	 	219,502	 	 	 	211,956	 	
Furniture	 	 	21,212	 	 	 	20,781	 	
Construction-in-progress	 	 	37,535	 	 	 	16,750	 	

	 	 	 	

	 	
 	 	 	578,974	 	 	 	543,853	 	
Accumulated depreciation and amortization	 	 	(186,386	)	 	 	(173,136	)	

	 	 	 	

	 	
 	 	$	392,588	 	 	$	370,717	 	

	 	 	 	

	 	
      During the first quarter of fiscal 2005, as part of our expansion efforts, we purchased three buildings in Research Triangle Park (“RTP”), North Carolina, for $24,095 and was included in Land and Construction-in-progress at July 30, 2004.

6.	Goodwill and Intangible Assets	
      Goodwill is reviewed annually for impairment (or more frequently if indicators of impairment arise). We completed our annual impairment assessment on February 27, 2004 and concluded that goodwill was not impaired. From the period subsequent to February 27, 2004 through July 30, 2004, there was no impairment of goodwill and intangible assets.

      Goodwill and identified intangible assets relate to our acquisitions of Spinnaker Networks, Inc. (“Spinnaker”) in February 2004, WebManage Technologies, Inc. (“WebManage”) in November 2000, and

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NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Orca Systems, Inc. (“Orca”) in June 2000. Balances as of July 30, 2004 and April 30, 2004 are summarized as follows:

 	 	July 30, 2004	

	
 	 	Amortization	 	 	
 	 	Period	 	Gross	 	Accumulated	 	Net	
 	 	(Years)	 	Assets	 	Amortization	 	Assets	

	 	

	 	

	 	

	
 	 	 	 	 	
 	 	 	 	(In thousands)	
Intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Patents	 	 	5	 	 	$	9,145	 	 	$	(2,084	)	 	$	7,061	 	
 	Existing technology	 	 	5	 	 	 	33,525	 	 	 	(17,938	)	 	 	15,587	 	
 	Trademarks/ Tradenames	 	 	3	 	 	 	280	 	 	 	(42	)	 	 	238	 	
 	Customer Contracts/ Relationships	 	 	1.5	 	 	 	1,100	 	 	 	(336	)	 	 	764	 	
 	Covenants Not to Compete	 	 	1.5	 	 	 	7,610	 	 	 	(2,325	)	 	 	5,285	 	

	 	 	 	

	 	 	 	

	 	
Total Intangible assets, net	 	 	 	 	 	$	51,660	 	 	$	(22,725	)	 	$	28,935	 	

	 	 	 	

	 	 	 	

	 	

 	 	April 30, 2004	

	
 	 	Amortization	 	 	
 	 	Period	 	Gross	 	Accumulated	 	Net	
 	 	(Years)	 	Assets	 	Amortization	 	Assets	

	 	

	 	

	 	

	
 	 	 	 	 	
 	 	 	 	(In thousands)	
Intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Patents	 	 	5	 	 	$	9,145	 	 	$	(1,633	)	 	$	7,512	 	
 	Existing technology	 	 	5	 	 	 	33,525	 	 	 	(17,080	)	 	 	16,445	 	
 	Trademarks/ Tradenames	 	 	3	 	 	 	280	 	 	 	(19	)	 	 	261	 	
 	Customer Contracts/ Relationships	 	 	1.5	 	 	 	1,100	 	 	 	(153	)	 	 	947	 	
 	Covenants Not to Compete	 	 	1.5	 	 	 	7,610	 	 	 	(1,057	)	 	 	6,553	 	

	 	 	 	

	 	 	 	

	 	
Total Intangible assets, net	 	 	 	 	 	$	51,660	 	 	$	(19,942	)	 	$	31,718	 	

	 	 	 	

	 	 	 	

	 	
      Amortization expense for identified intangibles is summarized below:

 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Patents	 	$	450	 	 	$	150	 	
Existing technology	 	 	858	 	 	 	1,364	 	
Other identified intangibles	 	 	1,475	 	 	 	—	 	

	 	 	 	

	 	
 	 	$	2,783	 	 	$	1,514	 	

	 	 	 	

	 	
      Capitalized patents are amortized over an estimated useful life of five years as research and development expenses. Existing technology is amortized as cost of product revenue. Existing technology from the WebManage acquisition is fully amortized at April 30, 2004. Trademarks and tradenames as well as customer contracts and relationships are amortized as sales and marketing expenses. Covenants not to compete are amortized as general and administrative expenses.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Based on the identified intangible assets (including patents) recorded at July 30, 2004, the future amortization expense of identified intangibles for the next five fiscal years is as follows:
 	 	 	 	 	
Year ending April,	 	Amount	

	 	

	
2005	 	$	8,351	 	
2006	 	 	7,022	 	
2007	 	 	5,309	 	
2008	 	 	5,235	 	
2009	 	 	3,018	 	
Thereafter	 	 	—	 	

	 	
Total	 	$	28,935	 	

	 	

7.	Stock Compensation	
      We account for stock-based compensation in accordance with the provisions of Accounting Principle Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,”  and comply with the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosures.”  Deferred compensation recognized under APB No. 25 is amortized ratably to expense over the vesting periods. We account for stock options issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18  “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”  under the fair value based method.

      Had compensation expense been determined based on the fair value at the grant date for awards, consistent with the provisions of SFAS No. 123, our pro forma net income (loss) and pro forma net income (loss) per share would be as follows (in thousands, except per share data):

 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Net income as reported	 	$	46,862	 	 	$	27,073	 	
Add: stock based employee compensation expense included in reported net income under APB No. 25, net of related tax effects	 	 	1,216	 	 	 	311	 	
Deduct: total stock based compensation determined under fair value based method for all awards, net of related tax effects	 	 	18,551	 	 	 	32,147	 	

	 	 	 	

	 	
 	Pro forma net income (loss)	 	$	29,527	 	 	$	(4,763	)	

	 	 	 	

	 	
Basic net income per share, as reported	 	$	0.13	 	 	$	0.08	 	

	 	 	 	

	 	
Diluted net income per share, as reported	 	$	0.13	 	 	$	0.08	 	

	 	 	 	

	 	
Basic net income (loss) per share, pro forma	 	$	0.08	 	 	$	(0.01	)	

	 	 	 	

	 	
Diluted net income (loss) per share, pro forma	 	$	0.08	 	 	$	(0.01	)	

	 	 	 	

	 	
      We amortize deferred stock-based compensation ratably over the vesting periods of the applicable stock purchase rights, restricted stocks and stock options, generally four years. Deferred stock compensation under APB No. 25 and pro forma net income (loss) under the provisions of SFAS No. 123 are adjusted to reflect cancellations and forfeitures due to employee terminations as they occur.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      We recorded $2,027 and $519 of compensation expense for the three-month periods ended July 30, 2004 and August 1, 2003, respectively, primarily related to the amortization of deferred stock compensation from unvested options assumed in the WebManage and Spinnaker acquisitions, the retention escrow shares relative to Spinnaker, the grant of stock options to certain highly compensated employees below fair value at the date of grant and the award of restricted stock to certain employees. We reversed $687 and $60 of deferred compensation to deferred stock compensation and common stock in the three-month periods ended July 30, 2004 and August 1, 2003, all due to employee terminations.

      Estimated future deferred stock compensation amortization for fiscal 2005, 2006, 2007 and 2008 are expected to be $5,483, $6,578, $5,032 and $3,682, respectively, and none thereafter.

      We recorded $77 and $135 in compensation expense in the three-month periods ending July 30, 2004 and August 1, 2003, respectively, for the fair value of options granted to a member of the Board of Directors in recognition for services performed outside of the normal capacity of a board member.

8.	Earnings Per Share	
      Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for that period. Diluted net income per share is computed giving effect to all dilutive potential shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares subject to repurchase, common shares issuable upon exercise of stock options and restricted stock awards.

      During all periods presented, we had certain options outstanding, which could potentially dilute basic earnings per share in the future, but were excluded in the computation of diluted earnings per share in such periods, as their effect would have been antidilutive. These certain options were antidilutive in the three-month periods ended July 30, 2004 and August 1, 2003 as these options’ exercise prices were above the average market prices in such periods. For the three-month periods ended July 30, 2004 and August 1, 2003, 27,992 and 30,278 shares of common stock options with a weighted average exercise price of $38.88 and $38.21, respectively, were excluded from the diluted net income per share computation.

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

 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Net Income (Numerator):	 	 	 	 	 	 	 	 	
 	Net income, basic and diluted	 	$	46,862	 	 	$	27,073	 	

	 	 	 	

	 	
Shares (Denominator):	 	 	 	 	 	 	 	 	
 	Weighted average common shares outstanding	 	 	357,290	 	 	 	341,732	 	
 	Weighted average common shares outstanding subject to repurchase	 	 	(547	)	 	 	(45	)	

	 	 	 	

	 	
 	Shares used in basic computation	 	 	356,743	 	 	 	341,687	 	
 	Weighted average common shares outstanding subject to repurchase	 	 	547	 	 	 	45	 	
 	Common shares issuable upon exercise of stock options	 	 	15,684	 	 	 	16,765	 	

	 	 	 	

	 	
 	Shares used in diluted computation	 	 	372,974	 	 	 	358,497	 	

	 	 	 	

	 	
Net Income Per Share:	 	 	 	 	 	 	 	 	
 	Basic	 	$	0.13	 	 	$	0.08	 	

	 	 	 	

	 	
 	Diluted	 	$	0.13	 	 	$	0.08	 	

	 	 	 	

	 	
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.	Comprehensive Income	
      The components of comprehensive income, net of tax, were as follows:

 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Net income	 	$	46,862	 	 	$	27,073	 	
Currency translation adjustment	 	 	(1,363	)	 	 	1,402	 	
Unrealized loss on derivatives	 	 	(1,307	)	 	 	(286	)	
Unrealized gain (loss) on investments	 	 	(656	)	 	 	(1,070	)	

	 	 	 	

	 	
Comprehensive income	 	$	43,536	 	 	$	27,119	 	

	 	 	 	

	 	
      The components of accumulated other comprehensive income (loss) net of related tax effects were as follows:
 	 	 	 	 	 	 	 	 	
 	 	July 30,	 	April 30,	
 	 	2004	 	2004	

	 	

	
Accumulated translation adjustments, net	 	$	(161	)	 	$	1,202	 	
Accumulated realized loss on derivatives	 	 	(344	)	 	$	312	 	
Accumulated unrealized gain on available-for-sale investments, net	 	 	(2,199	)	 	 	(892	)	

	 	 	 	

	 	
Total accumulated other comprehensive loss	 	$	(2,704	)	 	$	622	 	

	 	 	 	

	 	

10.	Restructuring Charges	

 	Fiscal 2002 Second Quarter Restructuring Plan	
      In fiscal 2002, as a result of continuing unfavorable economic conditions and a reduction in IT spending rates, we implemented two restructuring plans, which included reductions in workforce and consolidations of facilities. As a result of the restructuring in August 2001, we recorded a charge of $7,980. The restructuring charge included $4,796 of severance-related amounts, $2,656 of committed excess facilities and facility closure expenses, and $528 in fixed assets write-offs. The reserve balance related to this restructuring charge was $854 at July 30, 2004 was included in other accrued liabilities.

      In the event that the foreign facilities are not subleased, we will be obligated for additional total lease payments of approximately $366 as of July 30, 2004 to be payable through January 2006.

      As of July 30, 2004, we have $722 outstanding in our accrued and unpaid severance-related restructuring costs due to changes in estimated costs of certain severance-related matters. We expect to pay or adjust the remaining severance-related restructuring costs pending the outcome of the ultimate resolution of these matters in the next twelve months.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following analysis sets forth the significant components of the second quarter fiscal 2002 restructuring at July 30, 2004:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Severance-	 	Fixed Assets	 	 	 	 	
 	 	related amounts	 	write-off	 	Facility	 	Total	

	 	

	 	

	 	

	
Restructuring charge	 	$	4,796	 	 	$	528	 	 	$	2,656	 	 	$	7,980	 	
Cash payments and others	 	 	(4,508	)	 	 	—	 	 	 	(803	)	 	 	(5,311	)	
Non-cash portion	 	 	—	 	 	 	(528	)	 	 	(37	)	 	 	(565	)	
Adjustments	 	 	(95	)	 	 	—	 	 	 	(1,509	)	 	 	(1,604	)	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2002	 	 	193	 	 	 	—	 	 	 	307	 	 	 	500	 	
Cash payments and others	 	 	64	 	 	 	—	 	 	 	(82	)	 	 	(18	)	
Non-cash portion	 	 	—	 	 	 	—	 	 	 	(9	)	 	 	(9	)	
Adjustments	 	 	410	 	 	 	—	 	 	 	(76	)	 	 	334	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2003	 	 	667	 	 	 	—	 	 	 	140	 	 	 	807	 	
Cash payments and others	 	 	50	 	 	 	—	 	 	 	(9	)	 	 	41	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2004	 	 	717	 	 	 	—	 	 	 	131	 	 	 	848	 	
Cash payments and others	 	 	5	 	 	 	—	 	 	 	1	 	 	 	6	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at July 30, 2004	 	$	722	 	 	$	—	 	 	$	132	 	 	$	854	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	

 	Fiscal 2002 Fourth Quarter Restructuring Plan	
      In April 2002, we completed a restructuring related to the closure of an engineering facility and consolidation of resources to the Sunnyvale headquarters. As a result of this restructuring, we incurred a charge of $5,850. The restructuring charge included $813 of severance-related amounts, $4,564 of committed excess facilities and facility closure expenses, and $473 in fixed assets write-offs. Of the reserve balance at July 30, 2004, $653 was included in other accrued liabilities and the remaining $4,375 was classified as long-term obligations.

      In fiscal 2003 and 2004, we updated our assumptions and estimates based on certain triggering events, which resulted in additional net charges of $923 and $1,327 respectively, primarily relating to sublease assumptions for our engineering facility lease. Our restructuring estimates are reviewed and revised periodically and may result in a substantial charge to restructuring expense should different conditions prevail than were anticipated in previous management estimates. Such estimates included various assumptions such as the time period over which the facilities will be vacant, expected sublease terms, and expected sublease rates. In the event that the engineering facility is not subleased as anticipated, we will be obligated for additional total lease payments of $1,761 as of July 30, 2004 to be payable through November 2010.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following analysis sets forth the significant components of the restructuring reserve at July 30, 2004:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Severance-	 	Fixed Assets	 	 	 	 	
 	 	related amounts	 	write-off	 	Facility	 	Total	

	 	

	 	

	 	

	
Restructuring charge	 	$	813	 	 	$	473	 	 	$	4,564	 	 	$	5,850	 	
Cash payments and others	 	 	(629	)	 	 	—	 	 	 	(32	)	 	 	(661	)	
Non-cash portion	 	 	—	 	 	 	(473	)	 	 	—	 	 	 	(473	)	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2002	 	 	184	 	 	 	—	 	 	 	4,532	 	 	 	4,716	 	
Cash payments and others	 	 	(77	)	 	 	—	 	 	 	(991	)	 	 	(1,068	)	
Adjustments	 	 	(107	)	 	 	—	 	 	 	1,030	 	 	 	923	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2003	 	 	—	 	 	 	—	 	 	 	4,571	 	 	 	4,571	 	
Cash payments and others	 	 	—	 	 	 	—	 	 	 	(690	)	 	 	(690	)	
Adjustments	 	 	—	 	 	 	—	 	 	 	1,327	 	 	 	1,327	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2004	 	 	—	 	 	 	—	 	 	 	5,208	 	 	 	5,208	 	
Cash payments and others	 	 	—	 	 	 	—	 	 	 	(180	)	 	 	(180	)	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at July 30, 2004	 	$	—	 	 	$	—	 	 	$	5,028	 	 	$	5,028	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	

11.	Short-Term Investments	
      All our investments are classified as available for sale at July 30, 2004 and April 30, 2004. Available-for-sale investments with original maturities of greater than three months are classified as short-term investments, as these investments generally consist of highly marketable securities that are intended to be available to meet current cash requirements. Investment securities classified as available-for-sale are reported at fair market value, and net unrealized gains or losses are recorded in accumulated other comprehensive loss, a separate component of stockholders’ equity, net of taxes. Any gains or losses on sales of investments are computed based upon specific identification. For all periods presented, realized gains and losses on available-for-sale investments were not material. Management evaluates investments on a regular basis to determine if an other-than-temporary impairment has occurred. Our investments in publicly held companies are generally considered impaired when a decline in the fair value of an investment as measured by quoted market prices is less than its carrying value and such a decline is not considered temporary. We adopted the provisions of EITF No. 03-01 on other-than-temporary impairments on debt and equity investments, the adoption did not have a significant impact on our carrying value of our investment at July 30, 2004.

12.	New Accounting Pronouncements	
      The Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, ” in January 2003, and a revised interpretation of FIN No. 46 (“FIN 46-R”) in December 2003. FIN No. 46 requires certain variable interest entities (“VIEs”) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN No. 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, the Company has not invested in any entities it believes are variable interest entities for which the Company is the primary beneficiary. For all arrangements entered into after January 31, 2003, the Company is required to continue to apply FIN No. 46 through April 30, 2004. The Company is required to adopt the provisions of FIN No. 46-R for those arrangements on May 1, 2004. For arrangements entered into prior to February 1, 2003, the Company is required to adopt the provisions of FIN No. 46-R on May 1, 2004.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company does not expect the adoption of FIN No. 46-R to have an impact on the financial position, results of operations or cash flows of the Company.

      In November 2003, the EITF reached an interim consensus on EITF No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, ” to require additional disclosure requirements for securities classified as available-for-sale or held-to-maturity for fiscal years ending after December 15, 2003. In March 2004, the EITF reached a final consensus on this Issue, to provide additional guidance which companies must follow in determining whether investment securities have an impairment which should be considered other-than-temporary. The guidance is applicable for reporting periods after June 15, 2004. Adoption of the consensus did not have a significant impact on the carrying value of its investments at July 30, 2004. The Company will continue to monitor the carrying value of its investments under this new guidance in fiscal 2005.

13.	Commitments and Contingencies	
      The following summarizes our commitments and contingencies at July 30, 2004, and the effect such obligations may have on our future periods, (in thousands):

 	 	Payments Due by Period	

	
 	 	2005	 	2006	 	2007	 	2008	 	2009	 	Thereafter	 	Total	

	 	

	 	

	 	

	 	

	 	

	 	

	
Commitments & Contingencies:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Rent operating lease payments(1)	 	$	9,404	 	 	$	11,176	 	 	$	7,494	 	 	$	6,667	 	 	$	6,584	 	 	$	9,533	 	 	$	50,858	 	
Equipment operating lease payments	 	 	1,970	 	 	 	2,465	 	 	 	1,505	 	 	 	203	 	 	 	73	 	 	 	—	 	 	 	6,216	 	
Venture capital funding commitments(2)	 	 	423	 	 	 	564	 	 	 	564	 	 	 	552	 	 	 	539	 	 	 	1,077	 	 	 	3,719	 	
Purchase commitments and other(3)	 	 	10,186	 	 	 	720	 	 	 	600	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	11,506	 	
Communications & Maintenance(4)	 	 	4,352	 	 	 	3,735	 	 	 	170	 	 	 	29	 	 	 	12	 	 	 	—	 	 	 	8,298	 	
Estimated contingent lease payments(5)	 	 	78	 	 	 	125	 	 	 	374	 	 	 	385	 	 	 	427	 	 	 	738	 	 	 	2,127	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Total Commitments & Contingencies:	 	$	26,413	 	 	$	18,785	 	 	$	10,707	 	 	$	7,836	 	 	$	7,635	 	 	$	11,348	 	 	$	82,724	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	

 	 	Amount of Commitment Expiration Per Period	

	
 	 	2005	 	2006	 	2007	 	2008	 	2009	 	Thereafter	 	Total	

	 	

	 	

	 	

	 	

	 	

	 	

	
Other Commercial Commitments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Letters of Credit(6)	 	$	1,423	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	337	 	 	$	1,760	 	
Restricted Cash(7)	 	 	875	 	 	 	675	 	 	 	508	 	 	 	439	 	 	 	277	 	 	 	99	 	 	 	2,873	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Total Commercial Commitments	 	$	2,298	 	 	$	675	 	 	$	508	 	 	$	439	 	 	$	277	 	 	$	436	 	 	$	4,633	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	

 	 	
(1) 	We lease sales offices and research and development facilities throughout the U.S. and internationally. These sales offices are also leased under operating leases which expire through fiscal 2019. We are responsible for certain maintenance costs, taxes, and insurance under these leases. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease. Our future operating lease obligations would change if we were to exercise these renewal options and if we were to enter into additional operating lease agreements. Certain real estate operating sub-lease income of $271 has been included as a reduction of the payment amounts shown in the table. Rent operating lease payments in the table exclude the leases impacted by the restructurings and include only rent lease commitments that are over one year.	
 	 	
(2) 	Venture capital funding commitments includes a quarterly committed management fee based on a percentage of our committed funding to be payable through June 2011.	
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(3) 	Purchase commitments represent agreements to purchase component inventory from our suppliers and contract manufacturers that are enforceable and legally binding against us. Other commitments include facilities-related and utilities usage minimum commitment. Purchase commitments and other excludes purchases of good and services we expect to consume in the ordinary course of business in the next twelve months. It also excludes costs that are not reasonably estimable at this time.	
 	 	
(4) 	Under certain communications contracts with major telephone companies as well as maintenance contracts with multiple vendors, we are required to pay based on a minimum volume. Such obligations expire in January 2009.	
 	 	
(5) 	As a result of headcount reductions and a restructuring in fiscal 2002, we are not currently utilizing certain existing space at our California headquarters site. Additionally, we have also exited office space under non-cancellable leases in certain locations both in the U.S. and Europe. If we are unable to successfully sublease our vacated and unoccupied office space under operating leases, we would be obligated to pay $2,127 million in excess of the liability recorded in our restructuring reserves. See “Note 10 — Restructuring Charges.”	
 	 	
(6) 	The amounts outstanding under these letters of credit relate to workers’ compensation, customs guarantee and a foreign lease.	
 	 	
(7) 	Restricted cash arrangements relate to facility lease requirements, service performance guarantees, customs and duties guarantees, and VAT requirements and are included under Prepaid Expenses and Other and Other Assets on our Consolidated Balance Sheets.	
      In May 2000, we entered into a split dollar insurance arrangement with Daniel J. Warmenhoven. Under the arrangement, we will pay the annual premiums on several insurance policies on the life of the survivor of Mr. Warmenhoven and his wife Charmaine Warmenhoven, and Mr. Warmenhoven will pay us each year for a portion of those premiums equal to the economic value of the term insurance coverage provided him under the policies. For each of the 2001, 2002, 2003, 2004 and 2005 fiscal years, we paid an aggregate net annual premium on these split dollar polices in the amount of approximately $2,050. Under the arrangement, we will be reimbursed for all premium payments made on those policies, and it is intended that we will be reimbursed not later than May 2005. Accordingly, such balances have been reclassified from Other Assets to Prepaid Expenses and Other at July 30, 2004. The policies are owned by a family trust established by Mr. Warmenhoven, and upon the death of the survivor of Mr. Warmenhoven and his wife or any earlier cash-out of the policies, we will be entitled to a portion of the insurance proceeds or cash surrender value of the policies equal to the net amount of cumulative premiums paid on those policies by us, and the balance will be paid to the trust. We have obtained a collateral assignment of the policies as a security interest for our portion of the proceeds or cash surrender value payable to us under the policies, and neither Mr. Warmenhoven nor the trust may borrow against the policies while that security interest remains in effect. The arrangement is terminable by us upon thirty (30)-days prior notice, and such termination will trigger a refund of the net cumulative premiums paid by us on the policies.

      From time to time, we have committed to purchase various key components used in the manufacture of our products. We establish accruals for estimated losses on purchased components for which we believe it is probable that they will not be utilized in future operations. To the extent that such forecasts are not achieved, our commitments and associated accruals may change.

      We are subject to various legal proceedings and claims which 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.

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NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14.	Guarantees	
      As of July 30, 2004, our financial guarantees consisted of standby letters of credit outstanding, bank guarantee, and restricted cash, which were related to facility lease requirements, service performance guarantees, customs and duties guarantees, VAT requirements, and workers’ compensation plans. The maximum amount of potential future payments under these arrangements was $4,633 and $4,338 as of July 30, 2004 and April 30, 2004, respectively. Of this maximum exposure, $2,873 and $2,736 of restricted cash was classified under Prepaid Expense and Other Assets on our balance sheet at July 30, 2004 and April 30, 2004, respectively. We have not recorded any liability at July 30, 2004 and April 30, 2004, respectively, related to these guarantees.

      As of July 30, 2004, our notional fair values of foreign exchange forward and foreign currency option contracts totaled $145,985. 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 offer both recourse and non-recourse lease financing arrangements to our customers. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing company in the event that any customers were to default. We defer 100% of the recourse lease obligation and recognize revenue over the term of the lease as the lease payments become due. As of July 30, 2004 and April 30, 2004, the maximum recourse exposure under such leases totaled approximately $6,711 and $6,755, respectively. Under the terms of the non-recourse leases we do not have any continuing obligations or liabilities. To date, we have not experienced significant losses under this lease financing program.

      We do not maintain a general warranty reserve for estimated costs of product warranties at the time revenue is recognized due to our extensive product quality program and processes and because our global customer service inventories utilized to correct product failures are carried at zero cost.

      We enter into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, we agree to defend and indemnify the other party, primarily our customers or business partners or subcontractors for damages and reasonable costs incurred in any suit or claim brought against them alleging that our products sold to them infringe any U.S. patent, copyright, trade secret or similar right. If a product becomes the subject of an infringement claim, we may, at our option: (i) replace the product with another non-infringing product that provides substantially similar performance; (ii) modify the infringing product so that it no longer infringes but remains functionally equivalent; (iii) obtain the right for the customer to continue using the product at our expense and for the reseller to continue selling the product; (iv) take back the infringing product and refund to customer the purchase price paid less depreciation amortized on a straight line basis. We have not been required to make material payments pursuant to these provisions historically. We have not identified any losses that are probable under these provisions and, accordingly, we have not recorded a liability related to these indemnification provisions.

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
      This Quarterly Report on Form 10-Q 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 are 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,” “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, (1) our plans to continue to leverage our product capabilities to enhance our storage grid architectures; (2) the possibility that we may engage in future acquisitions; (3) our expectation that we will increasingly rely on our indirect sales channel for a significant portion of our revenue; (4) our expectation that the ultimate costs to resolve any outstanding legal claims or proceedings will not be material to our business; (5) our expectation that we will see strong demand for storage in many areas; (6) our belief that our unified storage architecture provides for a complete and flexible solution across all tiers of storage; (7) our intent to regularly introduce new products and product enhancements and our intent to support current and new products and product enhancements; (8) our expectation that our expenditures on expanding our current product offerings and introducing new products in order to capitalize on growth opportunities will increase in absolute dollars; (9) the possibility that we may need to increase our materials purchases, contract manufacturing capacity and internal test and quality functions to meet anticipated demand; (10) our belief that our products currently compete favorably with our competitors; (11) our intention to continue to establish and maintain business relationships with technology companies; (12) our belief that our existing facilities and those currently being developed, will be sufficient for our needs for at least the next two years; (13) our expectation that we will continue to add sales capacity; (14) our expectation that we will increase sales and marketing expenses commensurate with future revenue growth; (15) our belief that our general and administrative expenses will increase in absolute terms in fiscal 2005; (16) our belief that our existing liquidity and capital resources are sufficient to fund our operations for at least the next twelve months; (17) our expectation that interest income will increase in fiscal 2005; (18) our expectation that the value of our investments will not decline significantly because of changes in market interest rates; (19) the expected impact of recent accounting pronouncements on our financial condition and results of operations; (20) our belief that our forward currency contracts will not subject us to undue risk; (21) our expectation regarding estimated future deferred stock compensation amortization expenses; (22) the possibility that we may be obligated for additional lease payments to be payable through November 2010 in the event that our vacated facilities are not subleased; (23) our expectation that there will be a further decline in the price per petabyte; (24) our estimates of future intangibles and stock compensation amortization expense relating to the Spinnaker acquisition; (25) our expectation that service margins will improve; (26) our estimates regarding future capitalized patents amortization expenses; (27) our expectation that we will continuously support current and future product development and enhancement efforts and incur corresponding charges; (28) our intention to continuously broaden our existing product offerings and introduce new products; (29) our belief that our research and development expenses will increase in absolute dollars for fiscal 2005; (30) our expectation that capital expenditures will increase consistent with our business growth; and (31) our expectations regarding our contractual cash obligations and other commercial commitments at July 30, 2004 for fiscal years 2005 through 2009 and thereafter, which we anticipate will equal no more than $91.1 million in the aggregate; (32) our belief that our strategic investments are targeted at some of the strongest growth areas of the storage market 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: (1) the amount of orders received in future periods; (2) our ability to ship our products in a timely manner; (3) our ability to achieve anticipated pricing, cost and gross margin levels; (4) our ability to successfully introduce new products; (5) our ability to achieve and capitalize on changes in market demand; (6) acceptance of, and demand for, our products; (7) our ability to identify and respond to significant market trends and emerging standards; (8) our ability to

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realize our financial objectives through increased investment in people, process and systems; (9) acceptance of, and demand for, our products; (10) our ability to maintain our supplier and contract manufacturer relationships; (11) the ability of our competitors to introduce new products that compete successfully with our products; (12) the general economic environment and the continued growth of the storage and content delivery markets; (13) our ability to sustain and/or improve our cash and overall financial position; (14) our ability to generate future income to utilize our deferred tax assets; and (15) those factors discussed under “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q. 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.

Overview

      Based in Sunnyvale, California, Network Appliance was incorporated in California in April 1992, and reincorporated in Delaware in November 2001. Network Appliance offers unified storage solutions for the data-intensive enterprise. Network Appliance TM  network storage solutions and service offerings provide data-intensive enterprises with consolidated storage, improved data center operations, economical business continuance, and efficient remote data access across the distributed enterprise. Network Appliance solutions are the data management and storage foundation for enterprises, government agencies, and universities worldwide.

 	First Quarter Fiscal 2005 Highlights	
      Throughout the first quarter of fiscal year 2005, we deployed our tier-one storage solutions for the most demanding customers, expanded partnerships, and enhanced our storage grid architecture. Enterprise customers have chosen to deploy Network Appliance solutions to reduce complexity, achieve a low total cost of ownership (TCO), and utilize our advanced storage and software management capabilities.. We expect to continue to see strong demand for storage in many areas, including mission-critical tier-one environments, distributed enterprise, disk-to-disk backup, compliance, disaster recovery, and unified SAN and NAS solutions.

      Customers across all geographies deploy our solutions for a variety of database, collaborative, and other data center and mission-critical applications. Customers are increasingly moving towards storage solutions that support multiple applications. Our customers are adopting our technology to build storage infrastructures that support all tiers of data — creating a multi-purpose storage utility, similar in concept to their network utility which is independent of the applications it supports, and therefore much more flexible. For example, in our SAN business, customers are using both IP SAN and fibre channel SAN together in the systems they purchase. Many of our systems are purchased along with multiple protocols and interfaces to support a variety of access types and data structures. We believe it is our unified architecture, based on one operating system with interoperability across all of our product lines, that provides for a complete and flexible solution for our customers across all of their tiers of storage.

      Our year-over-year quarterly revenue growth was driven by strong demand for our new products across all major product lines, as well as increased sales of our software and services products, however, we cannot assure you that revenue will continue to grow at previous rates. In addition, we also broadened our channel strategy with the addition of distributors such as, Arrow and Avnet to expand our storage businesses and gain greater market penetration opportunities. This revenue growth has occurred while the market for our storage products and solutions has grown more competitive with downward pricing pressures that could negatively impact our revenue growth rate. At the same time, we anticipate and continue to experience further price decline per petabyte for our products which may have an adverse impact on our gross margin if not offset by favorable software mix and higher average selling prices associated with new products. We continue to expect our gross margin to be impacted by factors such as new product introductions and enhancements, add-on software and product mix, discount level, competition and global service investment. Revenue growth in fiscal 2005 is dependent on the introduction of our new products, including but not limited to the incorporation of new advanced distributed storage technologies from our Spinnaker acquisition into our existing products. As with

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any product introduction, we face risks in the design, testing, qualification and market acceptance of our new products. If we fail to timely introduce new products, or if there is no or reduced demand for these or our current products, we may experience a decline in revenue. We believe that our strategic investments are targeted at some of the strongest growth areas of the storage market. However, if any storage market trends and emerging standards on which we are basing our assumptions do not materialize as anticipated, our business could be materially adversely affected. Additionally, we plan to invest in the people, processes, and systems necessary to best optimize these growth opportunities. However, we cannot assure you that such investments will achieve our financial objectives. See “Risk Factors” under Item 2.

 	First Quarter Fiscal 2005 Financial Performance	

 	• 	Our revenues for the first quarter of fiscal 2005 were $358.4 million, a 37.6% increase over the same period a year ago. While all product areas contributed to revenue growth, NearStore, FAS 980 and the FAS 270 were significant contributors.	
 	 	 	
 	• 	Our overall gross margins improved to 60.0% in the first quarter of fiscal 2005 from 59.9% in the same period in fiscal 2004. The slight improvement in our gross margin was attributable to a favorable change in product and add-on software mix, partially offset by the continued investment in our service infrastructure.	
 	 	 	
 	• 	Net income for the first quarter increased 73.1% to $46.9 million compared to net income of $27.1 million for the same period a year ago.	
 	 	 	
 	• 	Our balance sheet as of July 31, 2004 remains debt-free, with cash, cash equivalents and investments of $826.6 million (net of $47.7 million of cash repurchases of our common stock in the first quarter of fiscal 2005), due primarily to our net income and the related cash generated from operations. Days Sales Outstanding decreased to 51 days as of July 30, 2004 from 54 days as of August 1, 2003, reflecting more linear quarterly sales and solid credit management. Inventory turns were 16.4 times, improved 54.4% from a year ago. Deferred revenue increased 63.3% to $309.2 million from $189.3 million reported a year ago. Capital purchases of plant, property and equipment were $33.3 million, which included the $24.1 million site purchase in Research Triangle Park, North Carolina.	
Results of Operations

      The following table sets forth certain consolidated statements of operations data as a percentage of total revenues for the periods indicated:

 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Revenues:	 	 	100.0	%	 	 	100.0	%	
 	Product revenue	 	 	90.6	 	 	 	90.5	 	
 	Service revenue	 	 	9.4	 	 	 	9.5	 	
Cost of Revenues:	 	 	 	 	 	 	 	 	
 	Cost of product revenue	 	 	31.8	 	 	 	32.6	 	
 	Cost of service revenue	 	 	8.2	 	 	 	7.5	 	

	 	 	 	

	 	
 	 	Gross margin	 	 	60.0	 	 	 	59.9	 	

	 	 	 	

	 	
Operating Expenses:	 	 	 	 	 	 	 	 	
 	Sales and marketing	 	 	28.8	 	 	 	30.4	 	
 	Research and development	 	 	10.8	 	 	 	12.1	 	
 	General and administrative	 	 	4.7	 	 	 	4.7	 	
 	Stock compensation	 	 	0.6	 	 	 	0.3	 	

	 	 	 	

	 	
 	 	Total operating expenses	 	 	44.9	 	 	 	47.5	 	

	 	 	 	

	 	
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 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Income from Operations	 	 	15.1	 	 	 	12.4	 	
Other Income (Expense), net:	 	 	 	 	 	 	 	 	
 	Interest income	 	 	1.1	 	 	 	1.2	 	
 	Other expenses, net	 	 	(0.2	)	 	 	(0.1	)	
 	Net gain on investments	 	 	—	 	 	 	0.1	 	

	 	 	 	

	 	
 	 	Total other income, net	 	 	0.9	 	 	 	1.2	 	

	 	 	 	

	 	
Income before Income Taxes	 	 	16.0	 	 	 	13.6	 	
Provision for Income Taxes	 	 	2.9	 	 	 	3.2	 	

	 	 	 	

	 	
Net Income	 	 	13.1	%	 	 	10.4	%	

	 	 	 	

	 	
      The following table presents the components of revenues, stated as a percentage of total revenues:

 	 	Three Months Ended	

	
 	 	July 30,	 	August 1,	
 	 	2004	 	2003	

	 	

	
Product revenue:	 	 	 	 	 	 	 	 	
 	Products	 	 	80.4	%	 	 	81.3	%	
 	Software subscriptions	 	 	10.2	%	 	 	9.2	%	

	 	 	 	

	 	
 	 	 	90.6	%	 	 	90.5	%	
Service revenue	 	 	9.4	%	 	 	9.5	%	

	 	 	 	

	 	
Total revenues	 	 	100.0	%	 	 	100.0	%	

	 	 	 	

	 	

 	Discussion of Results of Operations	
     Product Revenues — Product revenues increased by 37.7% to $324.6 million for the first quarter of fiscal 2005, from $235.8 million for the first quarter of fiscal 2004. Product revenues growth was across all geographies. This increase in product revenues was specifically attributable to increased software licenses and software subscriptions and an increase in units shipped, as compared to the same period in the prior year.

      Product revenues were favorably impacted by the following factors:
 	 	 	
 	• 	increased revenues from our current product portfolio, such as: FAS980, FAS270, and FAS250 filer products; NearStore® R200 nearline storage systems; and NetCache® C2100 and C6200 appliances;	
 	 	 	
 	• 	increased revenues from our solutions portfolio, which consists of multiple access types and multiple applications under one common architecture;	
 	 	 	
 	• 	increased sales of software subscription upgrades representing 10.2% of total revenues for the first quarter of fiscal 2005 compared to 9.2% of total revenue for the same period in fiscal 2004;	
 	 	 	
 	• 	increased demand for NetApp’s mission-critical tier-one storage environments, distributed enterprise, disk-to-disk backup, compliance, disaster recovery, and unified SAN and NAS solutions;	
 	 	 	
 	• 	increased sales through indirect channels in absolute dollars, including sales through our resellers, distributors and OEM partners, representing 45.9% and 51.7% of total revenues for the first quarters of fiscal 2005 and fiscal 2004, respectively.	
      Product revenues were negatively impacted by the following factors:
 	 	 	
 	• 	lower-cost-per-megabyte disks;	
 	 	 	
 	• 	declining average selling price and unit sales of our older filer and caching products, and	
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 	• 	incremental revenue due to an extra week of business in the first quarter of fiscal 2004 compared to the same quarter in fiscal 2005.	
      The Spinnaker acquisition did not have a significant impact on our first quarter fiscal 2005 revenue. We cannot assure you that we will be able to maintain or increase market demand for our products.

     Service Revenues — Service revenues, which include hardware support, professional services, and educational services, increased by 36.7% to $33.8 million in the first quarter of fiscal 2005, from $24.7 million in the first quarter of fiscal 2004. Service revenues are generally deferred and, in most cases, recognized ratably over the service obligation periods, which are typically one to three years. Service revenues represented 9.4% and 9.5% of total revenues for the first quarters of fiscal 2005 and fiscal 2004, respectively. The increase in absolute dollars was due to an increasing number of enterprise customers, which typically purchase more complete and generally longer-term service packages than our non-enterprise customers. Higher service revenues were also related to a growing installed base resulting in new customer support contracts in addition to support contract renewals by existing customers. While it is an element of our strategy to expand and offer a more comprehensive, global enterprise support and service solution, we cannot assure you that service revenue will grow at the current rate in the remainder of fiscal 2005.

     International total revenues — International total revenues (including United States exports) increased by 37.6% for the first quarter of fiscal 2005 as compared to the same period of fiscal 2004. International total revenues were $149.3 million, or 41.6% of total revenues and $108.5 million, or 41.6% of total revenues for the first quarters of fiscal 2005 and fiscal 2004, respectively. The increase in international sales was primarily a result of European and Asia Pacific net revenues growth, driven by larger storage implementations, increased demand for our current product portfolio and higher storage spending in certain geographic regions, as compared to the same period in the prior fiscal year. We cannot assure you that we will be able to maintain or increase international revenues in the remainder of fiscal 2005.

     Product Gross Margin — Product gross margin increased to 64.8% for the first quarter of fiscal 2005, from 63.9% for the first quarter of fiscal 2004. Amortization of existing technology included in cost of product revenues was $0.9 million and $1.4 million for the first quarters of fiscal 2005 and 2004, respectively. Estimated future amortization of existing technology to cost of product revenues relating to the Spinnaker acquisition will be $2.6 million for 2005 and $3.4 million for each of fiscal years 2006, 2007, 2008; $2.8 million for fiscal year 2009; and none thereafter.

      Product gross margin was favorably impacted by:
 	 	 	
 	• 	favorable product and add-on software mix;	
 	 	 	
 	• 	competitive pricing solutions with our bundled software and solutions set;	
 	 	 	
 	• 	higher average selling prices for our newer products;	
 	 	 	
 	• 	growth in software subscription upgrades and software licenses due primarily to a larger installed base and an increasing number of new enterprise customers;	
 	 	 	
 	• 	lower cost of components; and	
 	 	 	
 	• 	transitional expenses incurred in the first quarter of fiscal 2004 associated with the initial implementation of a new Enterprise Resource Planning (“ERP”) system, which we did not incur in the first quarter of fiscal 2005.	
      Product gross margin was negatively impacted by:
 	 	 	
 	• 	increased sales through certain indirect channels, which carry a lower gross margin than our direct sales;	
 	 	 	
 	• 	higher disk content with an expanded storage capacity for the higher-end filers and Nearstore systems, as resale of disk drives generates lower gross margin;	
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 	• 	sales price reductions due to competitive pricing pressure and selective pricing discounts;	
 	 	 	
 	• 	lower average selling price of certain add-on software options.	
     Service Gross Margin — Service gross margin decreased to 13.5% in the first quarter of fiscal 2005 as compared to 21.7% in the first quarter of fiscal 2004. Investments in customer service increased by 51.2% to $29.2 million in the first quarter of fiscal 2005, from $19.3 million in the first quarter of fiscal 2004. The decrease in service gross margin was primarily due to the continued investment in our service infrastructure to support our increasing enterprise customer base partially offset by improved headcount utilization. These investments included additional professional support engineers, increased support center activities and global service partnership programs. Service gross margin will typically experience some variability over time due to the timing of technical support service initiations and renewals and additional investments in our customer support infrastructure. We expect service margin to improve as we begin to see service revenue growth and improved headcount utilization, partially offset by major investments in headcount and logistics as we continue to build out our service capability and capacity.

     Sales and Marketing — Sales and marketing expenses consist primarily of salaries, commissions, advertising and promotional expenses, and certain customer service and support costs. Sales and marketing expenses increased 30.2% to $103.3 million for the first quarter of fiscal 2005, from $79.4 million for the first quarter of fiscal 2004. These expenses were 28.8% and 30.4% of total revenues for the first quarters of fiscal 2005 and fiscal 2004, respectively. The increase in absolute dollars was attributed to increased sales kick off expenses, increased commission expenses resulting from increased revenues, higher performance-based payroll expenses due to higher profitability, and the continued worldwide investment in our sales and global service organizations associated with selling complete enterprise solutions and scaling our sales infrastructure, offset by a 14-week quarter in the first quarter of fiscal 2004 as compared to a 13-week quarter in the same period in fiscal 2005. Amortization of Spinnaker trademarks/tradenames and customer contracts/relationships included in sales and marketing expenses was $0.2 million for the first quarter of fiscal 2005 and none in the first quarter of fiscal 2004, respectively. Estimated future amortization of trademarks, tradenames, customer contracts and relationships relating to the Spinnaker acquisition will be $0.6 million for the remainder of fiscal year 2005 and $0.4 million for fiscal 2006, respectively, and none thereafter.

      Sales and marketing headcount increased to 1,515 at July 30, 2004 from 1,188 at August 1, 2003. We expect to continue to selectively add sales capacity in an effort to expand domestic and international markets, introduce new products, establish and expand new distribution channels, and increase product and company awareness. We expect to increase our sales and marketing expenses commensurate with future revenue growth.

     Research and Development — Research and development expenses consist primarily of salaries and benefits, prototype expenses, non-recurring engineering charges, fees paid to outside consultants and amortization of capitalized patents. Included in research and development expenses is capitalized patents amortization of $0.5 million for the three-month period ending July 30, 2004, as compared to $0.2 million for the same period in the prior year. Estimated future capitalized patents amortization expenses for fiscal 2005 will be $1.4 million, $1.8 million for each of the fiscal years 2006, 2007 and 2008 and $0.3 million thereafter.

      Research and development expenses increased 22.7% to $38.7 million for the first quarter of fiscal 2005 from $31.5 million for the first quarter of fiscal 2004. These expenses represented 10.8% and 12.1% of total revenues for the first quarters of fiscal 2005 and 2004, respectively. The increase in research and development expenses was primarily a result of increased headcount, increased ongoing impact of the Spinnaker acquisition, ongoing support of current and future product development and enhancement efforts, higher performance-based payroll expenses due to higher profitability, offset by an extra week of expenses in the first quarter of fiscal 2004 compared to the same period in fiscal 2005, cost control and reduction in discretionary spending efforts. Research and development headcount increased to 687 as of July 30, 2004 compared to 540 as of August 1, 2003. For both the first quarters of fiscal 2005 and 2004, no software development costs were capitalized.

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      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 and enhancement efforts, and incur prototyping expenses and non-recurring engineering charges associated with the development of new products and technologies. We intend to continuously broaden our existing product offerings and introduce new products that expand our solutions portfolio.

      We believe that our research and development expenses will increase in absolute dollars for the remainder of fiscal 2005, primarily due to ongoing costs associated with the development of new products and technologies, projected headcount growth and the operating impact of the Spinnaker acquisition as compared to the comparable period in the prior year.

     General and Administrative — General and administrative expenses increased 37.6% to $16.9 million for the first quarter of fiscal 2005, from $12.3 million for the first quarter of fiscal 2004. These expenses represented 4.7% and 4.7% of total revenues for the first quarters of fiscal 2005 and 2004, respectively. This increase in absolute dollars was primarily due to expenses associated with expanded regulatory requirements, higher legal expenses and professional fees for general corporate matters, higher performance-based payroll expenses due to higher profitability, partially offset by reduced expenses as a result of one less week of expenses in the first quarter of fiscal 2005 compared to the same period in fiscal 2004 and higher expenses associated with investments in our enterprise-wide ERP system and back-office infrastructure in the first quarter of fiscal 2004.

      General and administrative headcount increased to 348 at July 30, 2004 from 282 at August 1, 2003. We believe that our general and administrative expenses will increase in absolute dollars for the remainder of fiscal 2005 due to additional expenses related to expanded regulatory requirements as compared to the same period in the prior year. Amortization of Spinnaker covenants not to compete included in general and administrative expenses was $1.3 million for the first quarter of fiscal 2005 and none in the first quarter of fiscal 2004. Estimated future amortization of covenants not to compete relating to the Spinnaker acquisition will be $3.8 million in the remainder of fiscal 2005 and $1.5 million for fiscal year 2006, respectively, and none thereafter.

     Stock Compensation — Stock compensation expenses were $2.1 million and $0.7 million for the first quarters of fiscal 2005 and 2004, respectively. This net increase in stock compensation expenses reflected primarily higher stock compensation relating to the Spinnaker acquisition and restricted stock awards offset by forfeitures of unvested options assumed in the Spinnaker and WebManage acquisitions. Estimated future deferred stock compensation amortization expenses are $5.5 million in the remainder of fiscal 2005, $6.6 million in fiscal 2006, $5.0 million in fiscal 2007 and $3.7 million in fiscal 2008 and none thereafter.

     Restructuring Charges — In fiscal 2002, as a result of continuing unfavorable economic conditions and a reduction in IT spending rates, we implemented two restructuring plans, which included reductions in our workforce and consolidations of our facilities.

 	Fiscal 2002 Second Quarter Restructuring Plan	
      In August 2001, we implemented the first restructuring plan, which included a reduction in workforce by approximately 200 employees and a consolidation of facilities. The action was required to properly align and manage the business commensurate with our revenue at that time. All functional areas of the Company were affected by the reduction. We completed our actions during the second quarter of fiscal 2002. As a result of this restructuring, we recorded a charge of $8.0 million. The restructuring charge included $4.8 million of severance-related amounts, $2.7 million of committed excess facilities and facility closure expenses, including certain facilities in foreign countries, and $0.5 million in fixed assets write-offs. The reserve balance related to this restructuring charge was $0.9 million at July 30, 2004 was included in other accrued liabilities.

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      In the event that the foreign facilities that we vacated are not subleased, we will be obligated for additional total lease payments of approximately $0.4 million as of July 30, 2004 to be payable through January 2006.

      As of July 30, 2004, we have $0.7 million outstanding in our accrued and unpaid severance-related restructuring costs due to changes in estimated costs of certain severance-related matters. We expect to pay or adjust the remaining severance-related restructuring costs pending the outcome of the ultimate resolution of these matters in the next twelve months.

      The following analysis sets forth the significant components of the second quarter fiscal 2002 restructuring at July 30, 2004 (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Severance-	 	Fixed Assets	 	 	 	 	
 	 	related amounts	 	write-off	 	Facility	 	Total	

	 	

	 	

	 	

	
Restructuring charge	 	$	4,796	 	 	$	528	 	 	$	2,656	 	 	$	7,980	 	
Cash payments and others	 	 	(4,508	)	 	 	—	 	 	 	(803	)	 	 	(5,311	)	
Non-cash portion	 	 	—	 	 	 	(528	)	 	 	(37	)	 	 	(565	)	
Adjustments	 	 	(95	)	 	 	—	 	 	 	(1,509	)	 	 	(1,604	)	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2002	 	 	193	 	 	 	—	 	 	 	307	 	 	 	500	 	
Cash payments and others	 	 	64	 	 	 	—	 	 	 	(82	)	 	 	(18	)	
Non-cash portion	 	 	—	 	 	 	—	 	 	 	(9	)	 	 	(9	)	
Adjustments	 	 	410	 	 	 	—	 	 	 	(76	)	 	 	334	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2003	 	 	667	 	 	 	—	 	 	 	140	 	 	 	807	 	
Cash payments and others	 	 	50	 	 	 	—	 	 	 	(9	)	 	 	41	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2004	 	 	717	 	 	 	—	 	 	 	131	 	 	 	848	 	
Cash payments and others	 	 	5	 	 	 	—	 	 	 	1	 	 	 	6	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at July 30, 2004	 	$	722	 	 	$	—	 	 	$	132	 	 	$	854	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	

 	Fiscal 2002 Fourth Quarter Restructuring Plan	
      In April 2002, we completed a restructuring related to the closure of an engineering facility and consolidation of resources to the Sunnyvale headquarters. As a result of this restructuring, we recorded a charge of $5.9 million. The restructuring charge included $0.8 million of severance-related amounts, $4.6 million of committed excess facilities and facility closure expenses, and $0.5 million in fixed assets write- offs. Of the reserve balance at July 30, 2004, $0.7 million was included in other accrued liabilities and the remaining $4.3 million was classified as long-term obligations.

      In fiscal 2003 and 2004, we updated our assumptions and estimates based on certain triggering events, which resulted in additional net charges of $0.9 million and $1.3 million, respectively, primarily relating to sublease assumptions for our engineering facility. Our estimates are reviewed and revised periodically and may result in a substantial charge to restructuring expense should different conditions prevail than were anticipated in previous management estimates. Such estimates included various assumptions such as the time period over which the facilities will be vacant, expected sublease terms, and expected sublease rates. In the event that the engineering facility is not subleased as anticipated, we will be obligated for an additional total lease payments of $1.8 million as of July 30, 2004 to be payable through November 2010.

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      The following analysis sets forth the significant components of the fourth quarter fiscal 2002 restructuring at July 30, 2004 (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Severance-	 	Fixed Assets	 	 	 	 	
 	 	related amounts	 	write-off	 	Facility	 	Total	

	 	

	 	

	 	

	
Restructuring charge	 	$	813	 	 	$	473	 	 	$	4,564	 	 	$	5,850	 	
Cash payments and others	 	 	(629	)	 	 	—	 	 	 	(32	)	 	 	(661	)	
Non-cash portion	 	 	—	 	 	 	(473	)	 	 	—	 	 	 	(473	)	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2002	 	 	184	 	 	 	—	 	 	 	4,532	 	 	 	4,716	 	
Cash payments and others	 	 	(77	)	 	 	—	 	 	 	(991	)	 	 	(1,068	)	
Adjustments	 	 	(107	)	 	 	—	 	 	 	1,030	 	 	 	923	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2003	 	 	—	 	 	 	—	 	 	 	4,571	 	 	 	4,571	 	
Cash payments and others	 	 	—	 	 	 	—	 	 	 	(690	)	 	 	(690	)	
Adjustments	 	 	—	 	 	 	—	 	 	 	1,327	 	 	 	1,327	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at April 30, 2004	 	 	—	 	 	 	—	 	 	 	5,208	 	 	 	5,208	 	
Cash payments and others	 	 	—	 	 	 	—	 	 	 	(180	)	 	 	(180	)	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Reserve balance at July 30, 2004	 	$	—	 	 	$	—	 	 	$	5,028	 	 	$	5,028	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
     Interest Income —Interest income was $4.1 million and $3.0 million for the first quarters of fiscal 2005 and 2004, respectively. The increase in interest income was primarily driven by higher cash and investment balances provided by operating activities and higher average interest rates on our investment portfolio. We expect interest income to increase for fiscal 2005 as a result of higher cash and invested balances in a higher interest-rate portfolio environment as we reinvest our securities in longer-term investments and rising average interest rates.

     Other Expenses, Net —The first quarters of fiscal 2005 and 2004 included net exchange losses from foreign currency transactions of $0.9 million and $0.2 million, respectively. The increase in net exchange loss in the first quarter of fiscal 2005 was a result of volatility of the currency exchange market and increased hedging costs associated with our forward and option activities compared to the same period a year ago.

     Net Gain on Investments —Our investments in publicly held companies are generally considered impaired when a decline in the fair value of an investment as measured by quoted market prices is less than its carrying value, and such a decline is not considered temporary. In the first quarter of fiscal 2004, we realized a net gain of $0.1 million on the sale of previously impaired investments.

     Provision for Income Taxes —For the first quarter of fiscal 2005, we applied an annual tax rate of 18.0% to pretax income. Our estimate is based on existing tax laws and our current projections of income (loss) and distributions of income (loss) among different entities and tax jurisdictions, and is subject to change, based primarily on varying levels of profitability.

      Provision for income taxes for fiscal 2004 included a nonrecurring income tax benefit of $16.8 million or approximately $0.05 per share associated with a favorable foreign tax ruling, which occurred during the second quarter of fiscal 2004. This favorable ruling from the Netherlands provides for retroactive benefits dating back to fiscal year 2001 as well as current and future tax rate benefits. This Dutch tax ruling, however, will expire at the end of calendar 2005. There are uncertainties associated with securing a new Dutch tax ruling. As such, we cannot assure you that we will be able to extend this ruling or secure any new favorable rulings, the absence of which may have an adverse impact on the results of our international operations.

Liquidity and Capital Resources

      As of July 30, 2004, as compared to April 30, 2004, our cash, cash equivalents, and short-term investments increased by $18.7 million to $826.6 million. We derive our liquidity and capital resources

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primarily from our cash flow from operations and from working capital. Working capital increased by $32.8 million to $777.8 million as of July 30, 2004, compared to $745.0 million as of April 30, 2004.

      In addition to higher net income in the first quarter of fiscal 2005, the primary factors that impacted the period-to-period change in cash flows relating to operating activities included the following:
 	 	 	
 	• 	Increase in deferred revenues from higher software subscription and service billings attributable to our continuing shift toward larger enterprise customers;	
 	 	 	
 	• 	Increased income taxes payable, primarily reflecting higher profitability in the first quarter of fiscal 2005 as compared to the same period in fiscal 2004; partially offset by higher worldwide tax payments.	
      The above factors were partially offset by the effects of:
 	 	 	
 	• 	Increased accounts receivable balances due to higher revenues offset by more linear quarterly sales resulting in more collections in the first quarter of fiscal 2005 compared to the same period in the prior year;	
 	 	 	
 	• 	Decreased accrued compensation and related benefits due to the payout of higher commission and other profit dependent payroll-related expenses accrued in fiscal 2004 and paid in the first quarter of fiscal 2005 as compared to the same period a year ago.	
      Capital expenditures for the first quarter of fiscal 2005 were $33.3 million, which included the $24.1 million site purchase in Research Triangle Park (RTP), North Carolina, as compared to $12.3 million in the same period a year ago. We used net proceeds of $33.6 million in the first quarter of fiscal 2005 and received net proceeds of $3.4 million in first quarter of fiscal 2004 respectively, for net purchases/redemptions of short-term investments. In the first quarter of fiscal 2004, we acquired additional patents for a purchase price of approximately $9.0 million. Investing activities in the first quarter of fiscal 2004 also included new investments in privately held companies of $0.3 million. We received $0.3 million and $0.4 million in sales proceeds from sales of short and long-term investments in the first quarters of fiscal 2005 and fiscal 2004, respectively.

      We used $24.5 million and $2.6 million in the first quarters of fiscal 2005 and fiscal 2004 from net financing activities, which included sales of common stock related to employee stock transactions net of common stock repurchases. We repurchased 2.5 million shares of common stock at a total of $47.7 million during the first quarter of fiscal 2005. During the first quarter of fiscal 2004, we repurchased 2.2 million shares at a total of $34.8 million, of which we paid cash of $26.8 million and the remaining $8.0 million was included in other accrued liabilities. Other financing activities provided $23.2 million and $24.3 million in the first quarters of fiscal 2005 and fiscal 2004, respectively, which related to sales of common stock related to employee stock transactions. The change in cash flow from financing was primarily due to the effects of higher common stock repurchases partially offset by proceeds from issuance of common stock under employee programs compared to the same period in the prior year. 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 related to employee participation in employee stock programs will vary.

      On May 18, 2004, we announced that the Board authorized an expansion of our stock repurchase program to purchase up to $200.0 million of outstanding common stock in the open market. Any repurchases under our stock repurchase program may be made from time to time in the open market subject to market conditions. The stock repurchase program may be suspended or discontinued at any time. The stock repurchases will be funded from available working capital. The shares repurchased have been taken in as treasury shares and will be held as treasury shares until our Board of Directors designates that these shares be retired or used for some other purpose.

      For the first quarters of fiscal 2005 and 2004, we recorded tax benefits, in the form of reduced payments, of $5.7 million and $9.9 million, respectively, associated with disqualifying dispositions of employee stock options. If stock option exercise patterns change, we may receive less cash from stock option exercises and

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may not receive the same level of tax benefits in the future, which could cause our cash payments for income taxes to increase.

      In August 2004, we received a tax refund of $9.0 million and $1.3 million of interest income, in connection with a carryback of net operating losses generated in fiscal 2000. These losses are being carried back into tax years fiscal 1996, 1997, 1998, and 1999.

      We expect capital expenditures to increase in the future consistent with the growth in our business, as we continue to invest in people, land, buildings, capital equipment and enhancements to our infrastructure. We expect that our existing facilities and those being developed in Sunnyvale, California and RTP, North Carolina are adequate for our requirements over at least the next two years and that additional space will be available as needed. During the first quarter of fiscal 2005, we purchased three buildings in RTP, North Carolina, for $24.1 million. We expect to finance these construction projects through cash from operations and existing cash and investments. In July 2004, we announced that we are the recipient of an award under the new state Job Development Investment Grant (JDIG) program from the state of North Carolina to assist in our expansion of newly acquired offices in RTP, North Carolina.

      Under the split dollar insurance arrangement with Daniel J. Warmenhoven (see Note 13) , we will be reimbursed for all premium payments made on these policies. We expect to be reimbursed $10.2 million no later than May 2005.

      Our capital and liquidity requirements depend on numerous factors, including risks relating to fluctuating operating results, continued growth in the network storage and content delivery markets, customer and market acceptance of our products, dependence on new products, rapid technological change, dependence on qualified technical and sales personnel, risk inherent in our international operations, competition, reliance on a limited number of suppliers and contract manufacturers, relationships with strategic partners and resellers, dependence on proprietary technology, intellectual property rights, the value of our investments in equity securities and real estate, and other factors. We believe that our existing liquidity and capital resources are sufficient to fund our operations for at least the next twelve months.

 	Contractual Cash Obligations and Other Commercial Commitments	
      The following summarizes our contractual cash obligations and commercial commitments at July 30, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in future periods, (in thousands):

 	 	Payments Due by Period	

	
 	 	2005	 	2006	 	2007	 	2008	 	2009	 	Thereafter	 	Total	

	 	

	 	

	 	

	 	

	 	

	 	

	
Contractual Obligations:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Facilities operating lease payments(1)	 	$	9,404	 	 	$	11,176	 	 	$	7,494	 	 	$	6,667	 	 	$	6,584	 	 	$	9,533	 	 	$	50,858	 	
Equipment operating lease payments	 	 	1,970	 	 	 	2,465	 	 	 	1,505	 	 	 	203	 	 	 	73	 	 	 	—	 	 	 	6,216	 	
Venture capital funding commitments(2)	 	 	423	 	 	 	564	 	 	 	564	 	 	 	552	 	 	 	539	 	 	 	1,077	 	 	 	3,719	 	
Purchase commitments and other(3)	 	 	10,186	 	 	 	720	 	 	 	600	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	11,506	 	
Communications & Maintenance(4)	 	 	4,352	 	 	 	3,735	 	 	 	170	 	 	 	29	 	 	 	12	 	 	 	—	 	 	 	8,298	 	
Restructuring Charges(5)	 	 	1,342	 	 	 	794	 	 	 	832	 	 	 	836	 	 	 	818	 	 	 	1,260	 	 	 	5,882	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Total Contractual Cash Obligations	 	$	27,677	 	 	$	19,454	 	 	$	11,165	 	 	$	8,287	 	 	$	8,026	 	 	$	11,870	 	 	$	86,479	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
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      For purposes of the above table, contractual obligations for the purchase of goods and services are defined as agreements that are enforceable, legally binding on us, and subject us to penalties if we cancel the agreement.

 	 	Amount of Commitment Expiration Per Period	

	
 	 	2005	 	2006	 	2007	 	2008	 	2009	 	Thereafter	 	Total	

	 	

	 	

	 	

	 	

	 	

	 	

	
Other Commercial Commitments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Letters of Credit(6)	 	$	1,423	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	337	 	 	$	1,760	 	
Restricted Cash(7)	 	 	875	 	 	 	675	 	 	 	508	 	 	 	439	 	 	 	277	 	 	 	99	 	 	 	2,873	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	
Total Commercial Commitments	 	$	2,298	 	 	$	675	 	 	$	508	 	 	$	439	 	 	$	277	 	 	$	436	 	 	$	4,633	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	

 	 	
(1) 	We enter into facilities operating leases in the normal course of business. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease. Our future operating lease obligations would change if we were to exercise these renewal options and if we were to enter into additional operating lease agreements. Certain facilities operating sublease income of $271 has been included as a reduction of the payment amounts shown in the table. Facilities operating lease payments exclude the leases impacted by the restructurings. The amounts for the leases impacted by the restructurings are included in sub-paragraph (5) below.	
 	 	
(2) 	Venture capital funding commitments includes a quarterly committed management fee based on a percentage of our committed funding to be payable through June 2011.	
 	 	
(3) 	Purchase commitments represent agreements to purchase component inventory from our suppliers and contract manufacturers that are enforceable and legally binding against us. Other commitments include facilities-related and utilities usage minimum commitment. Purchase commitments and other excludes purchases of good and services we expect to consume in the ordinary course of business in the next twelve months. It also excludes costs that are not reasonably estimable at this time.	
 	 	
(4) 	Under certain communication contracts with major telco companies as well as maintenance contracts with multiple vendors, we are required to pay based on a minimum volume. Such obligations expire through January 2009.	
 	 	
(5) 	These amounts are included on our Consolidated Balance Sheets under Long-term Obligations and Other Accrued Liabilities which is comprised of committed lease payments, operating expenses net of committed and estimated sublease income. The restructuring estimated sublease income included various assumptions such as the time period over which the facilities will be vacant, expected sublease terms, and expected sublease rates. The actual amount paid, if the facility is not subleased, would be increased by $2,127 to be payable through November 2010.	
 	 	
(6) 	The amounts outstanding under these letters of credit relate to workers’ compensation, customs guarantee and a foreign lease.	
 	 	
(7) 	Restricted cash arrangements relate to facility lease requirements, service performance guarantees, customs and duties guarantees, and VAT requirements and are included under Prepaid Expenses and Other and Other Assets on our Consolidated Balance Sheets.	

 	Guarantees	
      As of July 30, 2004, our notional fair values of foreign exchange forward and foreign currency option contracts totaled $145,985. 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 offer both recourse and non-recourse lease financing arrangements to our customers. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining

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lease payments to the third-party leasing company in the event that any customers were to default. We defer 100% of the recourse lease obligation and recognize revenue over the term of the lease as the lease payments become due. As of July 30, 2004 and April 30, 2004, the maximum recourse exposure under such leases totaled approximately $6,711 and $6,755, respectively. Under the terms of the non-recourse leases we do not have any continuing obligations or liabilities. To date, we have not experienced significant losses under this lease financing program.

Critical Accounting Estimates and Policies

      Our consolidated financial statements 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 the Notes to the Consolidated Financial Statements, which are included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2004.

      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-down;	
 	 	 	
 	• 	restructuring accruals;	
 	 	 	
 	• 	impairment losses on investments;	
 	 	 	
 	• 	accounting for stock-based compensation; and	
 	 	 	
 	• 	loss contingencies.	
      These accounting estimates and policies should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended April 30, 2004.

New Accounting Standards

      The FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” in January 2003, and a revised interpretation of FIN 46 (“FIN 46-R”) in December 2003. FIN 46 requires certain variable interest entities (“VIEs”) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, the Company has not invested in any entities it believes are variable interest entities for which the Company is the primary beneficiary. For all arrangements entered into after January 31, 2003, the Company is required to continue to apply FIN 46 through April 30, 2004. The Company is required to adopt

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the provisions of FIN 46-R for those arrangements on May 1, 2004. For arrangements entered into prior to February 1, 2003, the Company is required to adopt the provisions of FIN 46-R on May 1, 2004. The Company does not expect the adoption of FIN 46-R to have an impact on the financial position, results of operations or cash flows of the Company.

      In November 2003, the EITF reached an interim consensus on EITF No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, ” to require additional disclosure requirements for securities classified as available-for-sale or held-to-maturity for fiscal years ending after December 15, 2003. In March 2004, the EITF reached a final consensus on this Issue, to provide additional guidance which companies must follow in determining whether investment securities have an impairment which should be considered other-than-temporary. The guidance is applicable for reporting periods after June 15, 2004. Adoption of the consensus did not have a significant impact on the carrying value of its investments at July 30, 2004. The Company will continue to monitor the carrying value of its investments under this new guidance in fiscal 2005.

Risk Factors

      The following risk factors and other information included in this Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, operating results, and financial condition could be materially adversely affected.

 	Factors beyond our control could cause our quarterly results to fluctuate.	
      We believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. Many of the factors that could cause our quarterly operating results to fluctuate significantly in the future are beyond our control and include, but are not limited to, the following:
 	 	 	
 	• 	changes in general economic conditions and specific economic conditions in the computer, storage, and networking industries;	
 	 	 	
 	• 	general decrease in global corporate spending on information technology leading to a decline in demand for our products;	
 	 	 	
 	• 	the effects of terrorist activity and international conflicts, which could lead to business interruptions and difficulty in forecasting;	
 	 	 	
 	• 	the level of competition in our target product markets;	
 	 	 	
 	• 	the size, timing, and cancellation of significant orders;	
 	 	 	
 	• 	product configuration and mix;	
 	 	 	
 	• 	the extent to which our customers renew their service and maintenance contracts with us;	
 	 	 	
 	• 	market acceptance of new products and product enhancements;	
 	 	 	
 	• 	announcements, introductions, and transitions of new products by us or our competitors;	
 	 	 	
 	• 	deferrals of customer orders in anticipation of new products or product enhancements introduced by us or our competitors;	
 	 	 	
 	• 	changes in pricing by us in response to competitive pricing actions;	
 	 	 	
 	• 	our ability to develop, introduce, and market new products and enhancements in a timely manner;	
 	 	 	
 	• 	supply constraints;	
 	 	 	
 	• 	technological changes in our target product markets;	
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 	• 	the levels of expenditure on research and development and sales and marketing programs;	
 	 	 	
 	• 	our ability to achieve targeted cost reductions;	
 	 	 	
 	• 	excess facilities;	
 	 	 	
 	• 	future accounting pronouncements and changes in accounting policies; and	
 	 	 	
 	• 	seasonality.	
      In addition, sales for any future quarter may vary and accordingly be inconsistent with our plans. We manufacture products based on a combination of specific order requirements and forecasts of our customer demands. Products are typically shipped within one to four weeks following receipt of an order. In certain circumstances, customers may cancel or reschedule orders without penalty. Product sales are also difficult to forecast because the network storage market is rapidly evolving and our sales cycle varies substantially from customer to customer.

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

 	Our gross margins may vary based on the configuration of our product and service solutions, and such variation may make it more difficult to forecast our earnings.	
      We derive a significant portion of our sales from the resale of disk drives as components of our filers, and the resale market for hard disk drives is highly competitive and subject to intense pricing pressures. Our sales of disk drives generate lower gross margin percentages than those of our filer products. As a result, as we sell more highly configured systems with greater disk drive content, overall gross margin percentages may be negatively affected.

      Our gross margins have been and may continue to be affected by a variety of other factors, including:
 	 	 	
 	• 	demand for storage and content delivery products;	
 	 	 	
 	• 	discount levels and price competition;	
 	 	 	
 	• 	direct versus indirect sales;	
 	 	 	
 	• 	product and add-on software mix;	
 	 	 	
 	• 	the mix of services as a percentage of revenue;	
 	 	 	
 	• 	the mix and average selling prices of products;	
 	 	 	
 	• 	the mix of disk content;	
 	 	 	
 	• 	new product introductions and enhancements;	
 	 	 	
 	• 	excess inventory purchase commitments as a result of changes in demand forecasts and possible product and software defects as we transition our products; and	
 	 	 	
 	• 	the cost of components, manufacturing labor, and quality.	
      Changes in service gross margin may result from various factors such as continued investments in our customer support infrastructure, changes in the mix between technical support services and professional services, as well as the timing of technical support service contract initiations and renewals.

 	A significant percentage of our expenses are fixed, which could materially and adversely affect our net income.	
      Our expense levels are based in part on our expectations as to future sales and a significant percentage of our expenses are fixed. As a result, if sales levels are below expectations or previously higher levels, net income will be disproportionately affected in a material and adverse manner.

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 	If we fail to manage our expanding business effectively our operating results could be materially adversely affected.	
      We have experienced growth in fiscal 2004 and the first quarter of fiscal 2005. Our future operating results depend to a large extent on management’s ability to successfully manage expansion and growth, including but not limited to expanding international operations, forecasting revenues, addressing new markets, controlling expenses, implementing infrastructure and systems and managing our assets. In addition, an unexpected decline in the growth rate of revenues without a corresponding and timely reduction in expense growth or a failure to manage other aspects of growth could materially adversely affect our operating results.

 	Our future financial performance depends on growth in the network storage and content delivery markets. If these markets do not continue to grow at the rates at which we forecast growth, our operating results will be materially and adversely impacted.	
      All of our products address the storage and content delivery markets. Accordingly, our future financial performance will depend in large part on continued growth in the storage and content delivery markets and on our ability to adapt to emerging standards in these markets. We cannot assure you that the markets for storage and content delivery will continue to grow or that emerging standards in these markets will not adversely affect the growth of UNIX®, Windows®, and the World Wide Web server markets upon which we depend.

      For example, we provide our open access data retention solutions to customers within the financial services, healthcare, pharmaceuticals and government market segments, industries that are subject to various evolving governmental regulations with respect to data access, reliability and permanence (such as Rule 17(a)(4) of the Securities Exchange Act of 1934, as amended) in the United States and in the other countries in which we operate. If our products do not meet, and continue to comply with, these evolving governmental regulations in this regard, customers in these market and geographical segments will not purchase our products and, therefore, we will not be able to expand our product offerings in these market and geographical segments at the rates for which we have forecast.

      In addition, our business also depends on general economic and business conditions. A reduction in demand for network storage and content delivery caused by weakening economic conditions and decreases in corporate spending have resulted in decreased revenues and lower revenue growth rates. In prior years, the network storage and content delivery market growth declined significantly causing both our revenues and operating results to decline. If the network storage and content delivery markets grow more slowly than anticipated or if emerging standards other than those adopted by us become increasingly accepted by these markets, our operating results could be materially adversely affected.

 	The market price for our common stock has fluctuated significantly in the past and will likely continue to do so in the future.	
      The market price for our common stock has experienced substantial volatility in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
 	 	 	
 	• 	fluctuations in our operating results;	
 	 	 	
 	• 	fluctuations in the valuation of companies perceived by investors to be comparable to us;	
 	 	 	
 	• 	economic developments in the network storage market as a whole;	
 	 	 	
 	• 	international conflicts and acts of terrorism;	
 	 	 	
 	• 	a shortfall in revenues or earnings compared to securities analysts’ expectations;	
 	 	 	
 	• 	changes in analysts’ recommendations or projections;	
 	 	 	
 	• 	announcements of new products, applications or product enhancements by us or our competitors;	
 	 	 	
 	• 	changes in our relationships with our suppliers, customers, channel and strategic partners; and	
 	 	 	
 	• 	general market conditions.	
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      In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many technology companies. Additionally, certain macroeconomic factors such as changes in interest rates, the market climate for the technology sector, and levels of corporate spending on information technology could also have an impact on the trading price of our stock. As a result, the market price of our common stock may fluctuate significantly in the future and any broad market decline, as well as our own operating results, may materially and adversely affect the market price of our common stock.

 	If we are unable to develop and introduce new products and respond to technological change, if our new products do not achieve market acceptance, or if we fail to manage the transition between our new and old products, our operating results could be materially and adversely affected.	
      Our future growth depends upon the successful development and introduction of new hardware and software products. Due to the complexity of storage subsystems and Internet caching devices, and the difficulty in gauging the engineering effort required to produce new products, such products are subject to significant technical risks. However, we cannot assure you that any of our new products will achieve market acceptance. Additional product introductions in future periods may also impact our sales of existing products. In addition, our new products must respond to technological changes and evolving industry standards. If we are unable, for technological or other reasons, to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, or if such products do not achieve market acceptance, our operating results could be materially adversely affected.

      In particular, in conjunction with the introduction of our product offerings in the fabric-attached storage market, we introduced products with new features and functionality that address the storage area network market. During fiscal 2003, we introduced iSCSI-enabled unified storage solutions. We also introduced Direct Access File System (“DAFS”) protocol-capable products and NearStore backup and recovery products during fiscal 2002. We face risks relating to these product introductions, including risks relating to forecasting of demand for such products, as well as possible product and software defects and a potentially different sales and support environment associated with selling these new systems. If any of the foregoing occur, our operating results could be adversely affected.

      As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories, and ensure that enough supplies of new products can be delivered to meet customers’ demands.

 	Our business could be materially adversely affected as a result of a natural disaster, terrorist acts, or other catastrophic events.	
      Our operations, including our suppliers’ and contract manufacturers’ operations, are susceptible to outages due to fire, floods, power loss, power shortages, telecommunications failures, break-ins, and similar events. In addition, our headquarters are located in Northern California, an area susceptible to earthquakes. If any significant disaster were to occur, our ability to operate our business could be impaired.

      Weak economic conditions or terrorist actions could lead to significant business interruptions. If such disruptions result in cancellations of customer orders, a general decrease in corporate spending on information technology, or direct impacts on our marketing, manufacturing, financial functions, or our suppliers’ logistics function, our results of operations and financial condition could be adversely affected.

 	We depend on attracting and retaining qualified technical and sales personnel. If we are unable to attract and retain such personnel, our operating results could be materially and adversely impacted.	
      Our continued success depends, in part, on our ability to identify, attract, motivate, and retain qualified technical and sales personnel. Because our future success is dependent on our ability to continue to enhance and introduce new products, we are particularly dependent on our ability to identify, attract, motivate, and retain qualified engineers with the requisite education, backgrounds, and industry experience. Competition for qualified engineers, particularly in Silicon Valley, can be intense. The loss of the services of a significant

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number of our engineers or sales people could be disruptive to our development efforts or business relationships and could materially adversely affect our operating results.

 	Risks inherent in our international operations could have a material adverse effect on our operating results.	
      We conduct business internationally. For first quarter of fiscal year 2005, approximately 41.6% of our total revenues was from international customers (including U.S. exports). Accordingly, our future operating results could be materially adversely affected by a variety of factors, some of which are beyond our control, including regulatory, political, or economic conditions in a specific country or region, trade protection measures and other regulatory requirements, government spending patterns, and acts of terrorism and international conflicts.

      Our international sales are denominated in U.S. dollars and in foreign currencies. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in foreign markets. For international sales and expenditures denominated in foreign currencies, we are subject to risks associated with currency fluctuations. We hedge risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward and option contracts to hedge our currency exposure associated with certain assets and liabilities as well as anticipated foreign currency cash flow. All balance sheet hedges are marked to market through earnings every period, while gains and losses on cash flow hedges are recorded in other comprehensive income. These hedges attempt to reduce, but do not always entirely eliminate, the impact of currency exchange movements. Factors that could have an impact on the effectiveness of our hedging program include the accuracy of forecasts and the volatility of foreign currency markets. There can be no assurance that such hedging strategies will be successful and that currency exchange rate fluctuations will not have a material adverse effect on our operating results.

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

      Potentially adverse tax consequences could also negatively impact the operating and financial results from international operations. International operations currently benefit from a tax ruling concluded in the Netherlands. The Dutch tax ruling, however, will expire at the end of calendar 2005. There are uncertainties associated with securing a new Dutch tax ruling.

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

      We cannot assure you that we will be able to maintain or increase international market demand for our products.

 	An increase in competition could materially adversely affect our operating results.	
      The storage and content delivery markets are intensely competitive, and are characterized by rapidly changing technology.

      In the storage market, our FAS appliances and associated storage software portfolio compete primarily with storage system products and data management software from EMC Corporation, Hitachi Data Systems, Hewlett-Packard Company (including the integrated Compaq Computer Corporation), IBM Corporation, and Sun Microsystems, Inc. We have also historically encountered less-frequent competition from companies including Dell, Engenio Information Technologies, Inc. (formerly the Storage Systems Group of LSI Logic Corp.), StorageTek Technology Corporation, Silicon Graphics, Inc., and Xiotech Corporation. In the nearline storage market, which includes the disk-to-disk backup and regulated data storage segments, our NearStore appliances compete primarily against products from EMC and StorageTek. Our NearStore appliances also compete indirectly with traditional tape backup solutions in the broader data backup/recovery space.

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      In the content delivery market, our NetCache appliances and content delivery software compete against caching appliance and content delivery software vendors including BlueCoat Systems (formerly CacheFlow, Inc.), and Cisco Systems, Inc. Our NetCache business is also subject to indirect competition from content delivery service products such as those offered by Akamai Technologies.

      Additionally, a number of new, privately held companies are currently attempting to enter the storage systems and data management software markets, the nearline storage market, and the caching and content delivery markets, some of which may become significant competitors in the future.

      We believe that the principal competitive factors affecting the storage and content delivery markets include product benefits such as response time, reliability, data availability, scalability, ease of use, price, multiprotocol capabilities, and global service and support. To date, we have been able to compete successfully with our principal competitors in large part based on the product benefits that we believe result from the superior technology of our products. We must continue to maintain and enhance this technological advantage over our competitors. Otherwise, if those competitors with greater financial, marketing, service, support, technical and other resources were able to offer products that matched or surpassed the technological capabilities of our products, these competitors would, by virtue of these greater resources, gain a competitive advantage over us that could lead to greater sales for these competitors at the expense of our own market share, which would have a material adverse effect on our business, financial condition and results of operations.

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

 	We rely on a limited number of suppliers, and any disruption or termination of these supply arrangements could delay shipment of our products and could materially and adversely affect our operating results.	
      We rely on a limited number of suppliers of several key components utilized in the assembly of our products. We purchase most of our disk drives through a single supplier. We purchase computer boards and microprocessors from a limited number of suppliers. Our reliance on a limited number of suppliers involves several risks, including:
 	 	 	
 	• 	a potential inability to obtain an adequate supply of required components because we do not have long-term supply commitments;	
 	 	 	
 	• 	supplier capacity constraints;	
 	 	 	
 	• 	price increases;	
 	 	 	
 	• 	timely delivery; and	
 	 	 	
 	• 	component quality.	
      Component quality is particularly significant with respect to our suppliers of disk drives. In order to meet product performance requirements, we must obtain disk drives of extremely high quality and capacity. In addition, there are periodic supply-and-demand issues for disk drives, microprocessors, and for semiconductor memory components, which could result in component shortages, selective supply allocations, and increased prices of such components. We cannot assure you that we will be able to obtain our full requirements of such components in the future or that prices of such components will not increase. In addition, problems with respect to yield and quality of such components and timeliness of deliveries could occur. Disruption or

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termination of the supply of these components could delay shipments of our products and could materially adversely affect our operating results. Such delays could also damage relationships with current and prospective customers.

      In addition, we license certain technology and software from third parties that is incorporated into our products. If we are unable to obtain or license the technology and software on a timely basis, we will not be able to deliver products to our customers in a timely manner.

 	The loss of any contract manufacturers or the failure to accurately forecast demand for our products or successfully manage our relationships with our contract manufacturers could negatively impact our ability to manufacture and sell our products.	
      We currently rely on several contract manufacturers to manufacture most of our products. Our reliance on our third-party contract manufacturers reduces our control over the manufacturing process, exposing us to risks, including reduced control over quality assurance, production costs, and product supply. If we should fail to effectively manage our relationships with our contract manufacturers, or if our contract manufacturers experience delays, disruptions, capacity constraints, or quality control problems in their manufacturing operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. Qualifying a new contract manufacturer and commencing volume production are expensive and time-consuming. If we are required to change contract manufacturers or assume internal manufacturing operations, we may lose revenue and damage our customer relationships. If we inaccurately forecast demand for our products, we may have excess or inadequate inventory, or incur cancellation charges or penalties, which could adversely impact our operating results. As of July 30, 2004, we have no such purchase commitment.

      We intend to regularly introduce new products and product enhancements, which will require us to rapidly achieve volume production by coordinating with our contract manufacturers and suppliers. We may need to increase our material purchases, contract manufacturing capacity, and internal test and quality functions to meet anticipated demand. The inability of our contract manufacturers to provide us with adequate supplies of high-quality products, or the inability to obtain raw materials, could cause a delay in our ability to fulfill orders.

 	If we are unable to maintain our existing relationships and develop new relationships with major strategic partners, our revenue may be impacted negatively.	
      An element of our strategy to increase revenue is to strategically partner with major third-party software and hardware vendors that integrate our products into their products and also comarket our products with these vendors. A number of these strategic partners are industry leaders that offer us expanded access to segments of the storage market. There is intense competition for attractive strategic partners, and even if we can establish strategic relationships with these partners, we cannot assure you that these partnerships will generate significant revenue or that the partnerships will continue to be in effect for any specific period of time.

      We intend to continue to establish and maintain business relationships with technology companies to accelerate the development and marketing of our storage solutions. To the extent we are unsuccessful in developing new relationships and maintaining our existing relationships, our future revenue and operating results could be impacted negatively. In addition, the loss of a strategic partner could have a material adverse effect on the progress of our new products under development with that partner.

 	We may incur problems with current or future equity investments and acquisitions, and these investments may not achieve our objectives.	
      From time to time, we make equity investments for the promotion of business and strategic objectives. We have already made strategic investments in a number of network storage-related technology companies. Equity investments may result in the loss of investment capital. The market price and valuation of our equity investments in these companies may fluctuate due to market conditions and other circumstances over which

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we have little or no control. To the extent that the fair value of these securities is less than our cost over an extended period of time, our results of operations and financial position could be negatively impacted.

      As part of our strategy, we are continuously evaluating opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets, or enhance our technical capabilities. We have acquired three companies since the beginning of fiscal 2001, including the acquisition of Spinnaker Networks, Inc., for approximately $306.0 million. We completed the Spinnaker acquisition during the fourth quarter of fiscal 2004 and have completed integrating the acquired operations and products from this acquisition into our operations. We may engage in future acquisitions that dilute our stockholders’ investments and cause us to use cash, to incur debt, or to assume contingent liabilities.

      Acquisitions of companies entail numerous risks, and we may not be able to successfully integrate acquired operations and products or realize anticipated synergies, economies of scale, or other value. In addition, we may experience a diversion of management’s attention, the loss of key employees of acquired operations, or the inability to recover strategic investments in development stage entities. Any such problems could have a material adverse effect on our business, financial condition, and results of operations.

      In addition, we adopted SFAS No. 142 “Goodwill and Other Intangible Assets,” which changes the accounting for goodwill from an amortization method to an impairment-only approach. As of July 30, 2004, the fair value for each of our reporting units exceeded the reporting unit’s carrying amount and no impairment was recognized. On an ongoing basis, goodwill is reviewed annually for impairment (or more frequently if indicators of impairment arise). There had been no impairment of goodwill and intangible assets as of the end of the first quarter of fiscal 2005. There can be no assurance that future impairment tests will not result in a charge to earnings.

 	We rely and will increasingly rely on our indirect sales channel for a significant portion of our revenue. If we are unable to effectively manage this sales channel, we will not be able to maintain or increase our revenue as we have forecasted, which would have a material adverse impact on our business, financial condition and results of operations.	
      We market and sell our storage solutions directly through our worldwide sales force and indirectly through channels such as value-added resellers (“VARs”), systems integrators, distributors and strategic business partners and derive a significant portion of our revenue from these indirect channel partners. However, in order for us to maintain our current revenue sources and grow our revenue as we have forecasted, we must effectively manage our relationships with these indirect channel partners. To do so, we must attract and retain a sufficient number of qualified channel partners to successfully market our products. However, because we also sell our products directly to customers through our sales force, on occasion we compete with our indirect channels for sales of our products to our end customers, competition that could result in conflicts with these indirect channel partners and make it harder for us to attract and retain these indirect channel partners. At the same time, our indirect channel partners may develop and offer products of their own that are competitive to ours. Or, because our reseller partners generally offer products from several different companies, including products of our competitors, these resellers may give higher priority to the marketing, sales and support of our competitors’ products than ours. If we fail to manage effectively our relationships with these indirect channel partners to minimize channel conflict and continue to evaluate and meet our indirect sales partners’ needs with respect to our products, we will not be able to maintain or increase our revenue as we have forecasted, which would have a materially adverse affect on our business, financial condition, and results of operations.

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

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 	If actual results or events differ materially from our estimates and assumptions, our reported financial condition and results of operations for future periods could be materially affected.	
      The preparation of the consolidated financial statements and related disclosure in conformity with accounting principles generally accepted in the United States of America requires management to establish policies that contain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 of the Notes to Consolidated Financial Statements of the Annual Report on Form 10-K for the year ended April 30, 2004 describes the significant accounting policies essential to preparing our consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances. Actual future results may differ materially from these estimates. We evaluate, on an ongoing basis, our estimates and assumptions. In addition, see our Critical Accounting Estimates and Policies under Item 7 of the Annual Report on Form 10-K for the year ended April 30, 2004.

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

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

      We are subject to intellectual property infringement claims. We may, from time to time, receive claims that we are infringing third parties’ intellectual property rights. Third parties may in the future claim infringement by us with respect to current or future products, patents, trademarks, or other proprietary rights. We expect that companies in the appliance market will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims could be time-consuming, result in costly litigation, cause product shipment delays, require us to redesign our products or require us to enter into royalty or licensing agreements, any of which could materially adversely affect our operating results. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all.

Item 3.	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

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derivative financial instruments for speculative or trading purposes. All financial instruments are used in accordance with management-approved policies.

Market Interest and Interest Income Risk

     Interest and Investment Income — As of July 30, 2004, we had short-term investments of $598.6 million. Our investment portfolio primarily consists of highly liquid investments with original maturities at the date of purchase of greater than three months, which are classified as available-for-sale, and investment in marketable equity securities in primarily technology companies. These highly liquid investments, consisting primarily of government and corporate debt securities, 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 July 30, 2004 would cause the fair value of these short-term investments to decline by approximately $1.3 million. By policy, we limit our exposure to longer term investments, and a substantial majority of our investment portfolio has maturities of less than three years. 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.

Market Price Risk

     Equity Securities — We are also exposed to market price risk on our equity securities included in our short-term investments, which are primarily in publicly traded companies in the volatile high-technology industry sector.

      We do not attempt to reduce or eliminate our market exposure on these securities and, as a result, the amount of income and cash flow that we ultimately realize from our investment in future periods may vary materially from the current fair value. A 50% adverse change in the equity price would result in an immaterial decrease in the fair value of our equity security as of July 30, 2004.

      The hypothetical changes and assumptions discussed above will be different from what actually occurs in the future. Furthermore, such computations do not anticipate actions that may be taken by management, should the hypothetical market changes actually occur over time. As a result, the effect on actual earnings in the future will differ from those described above.

Foreign Currency Exchange Rate Risk

      We hedge risks associated with foreign currency transactions in order 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 certain sales and operating expenses. These derivatives are designated as cash flow hedges under SFAS No. 133. For cash flow hedges, the gains or losses were included in other comprehensive income at July 30, 2004.

      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 credit worthy multinational commercial banks. All contracts have a maturity of less than one year.

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      The following table provides information about our foreign exchange forward and option contracts outstanding on July 30, 2004 (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Foreign	 	Contract Value	 	Fair Value	
Currency	 	Buy/Sell	 	Currency Amount	 	USD	 	in USD	

	 	

	 	

	 	

	 	

	
Forward contracts:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	CAD	 	 	Sell	 	 	 	4,829	 	 	$	3,623	 	 	$	3,650	 	
 	CHF	 	 	Sell	 	 	 	2,882	 	 	$	2,246	 	 	$	2,246	 	
 	EUR	 	 	Sell	 	 	 	64,707	 	 	$	77,777	 	 	$	77,838	 	
 	GBP	 	 	Sell	 	 	 	18,830	 	 	$	34,042	 	 	$	34,113	 	
 	ZAR	 	 	Sell	 	 	 	23,304	 	 	$	3,687	 	 	$	3,687	 	
 	AUD	 	 	Buy	 	 	 	1,915	 	 	$	1,332	 	 	$	1,332	 	
 	DKK	 	 	Buy	 	 	 	7,252	 	 	$	1,173	 	 	$	1,173	 	
 	EUR	 	 	Buy	 	 	 	7,534	 	 	$	9,049	 	 	$	9,062	 	
 	GBP	 	 	Buy	 	 	 	1,809	 	 	$	3,265	 	 	$	3,277	 	
 	SEK	 	 	Buy	 	 	 	6,359	 	 	$	827	 	 	$	827	 	
 	
Option contracts:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	EUR	 	 	Sell	 	 	 	5,000	 	 	$	6,017	 	 	$	6,085	 	
 	GBP	 	 	Buy	 	 	 	1,500	 	 	$	2,722	 	 	$	2,695	 	

Item 4.	Controls and Procedures	
      Disclosure Controls are procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

      Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Network Appliance, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Network Appliance’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

      There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

40

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PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	
      None

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	
Repurchases of common stock

      On May 13, 2003, we announced that the Board of Directors approved a $150.0 million stock repurchase program to purchase shares of our outstanding common stock in the open market. During fiscal 2004, we repurchased 6.9 million shares of our common stock at an aggregate cost of $136.2 million. The repurchases were recorded as treasury stock and resulted in a reduction of stockholders’ equity. On May 18, 2004, we announced that the Board authorized an expansion of the program to purchase an additional $200.0 million of outstanding common stock. Total authorized stock purchase spending may be up to $350.0 million. The stock repurchase program may be suspended or discontinued at any time. The duration of the repurchase program is open-ended. Under the program, we may purchase shares of common stock through open market transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under this program will depend on market conditions and corporate and regulatory considerations. The purchases will be funded from available working capital.

      The following table sets forth common stock repurchases by Network Appliance for the periods indicated:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Approximate	
 	 	 	 	 	 	Total number	 	Dollar Value of	
 	 	 	 	 	 	of shares	 	Shares that may	
 	 	 	 	 	 	purchased as	 	yet be purchased	
 	 	 	 	 	 	part of the	 	under the	
 	 	Shares	 	Average price paid	 	Repurchase	 	Repurchase	
Period	 	purchased	 	per share	 	Program	 	Program	

	 	

	 	

	 	

	 	

	
May 1, 2004 – May 31, 2004	 	 	1,910,000	 	 	$	19.37	 	 	 	1,910,000	 	 	$	176,825,438	 	
June 1, 2004 – June 30, 2004	 	 	550,000	 	 	$	19.52	 	 	 	550,000	 	 	$	166,087,623	 	
July 1, 2004 – July 30, 2004	 	 	—	 	 	$	—	 	 	 	—	 	 	$	166,087,623	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	
Total	 	 	2,460,000	 	 	$	19.41	 	 	 	2,460,000	 	 	$	166,087,623	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

Item 3.	Defaults Upon Senior Securities	
      None

Item 4.	Submission of Matters to a Vote of Security Holders	
      None

Item 5.	Other Information	
      The information required by this item is incorporated by reference from our Proxy Statement for the 2004 Annual Meeting of Stockholders.

41

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Item 6.	Exhibits and Reports on Form 8-K	
      (a) Exhibits
 	 	 	 	 	
 	2.1(3)	 	 	Agreement and Plan of Merger, dated as of November 3, 2003, by and among Network Appliance, Inc., Nagano Sub, Inc., and Spinnaker Networks, Inc.	
 	2.2(3)	 	 	Amendment to Merger Agreement, dated as of February 9, 2004, by and among Network Appliance, Inc., Nagano Sub, Inc., and Spinnaker Networks, Inc.	
 	3.1(1)	 	 	Certificate of Incorporation of the Company	
 	3.2(1)	 	 	Bylaws of the Company	
 	4.1(1)	 	 	Reference is made to Exhibits 3.1 and 3.2	
 	4.2(4)	 	 	Spinnaker Networks, Inc. 2000 Stock Plan	
 	10.1(2)	 	 	Asset Purchase Agreement dated June 20, 2003, by and between Auspex Systems, Inc. and the Company.	
 	10.2	 	 	Purchase and Sale Agreement dated July 27, 2004 by and between Cisco Systems, Inc. and the Company.	
 	21(5)	 	 	Subsidiaries of the Company	
 	31.1	 	 	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 31, 2004.	
 	31.2	 	 	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e)and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 31, 2004.	
 	32.1	 	 	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 31, 2004.	
 	32.2	 	 	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 31, 2004.	

 	 	
(1) 	Previously filed as an exhibit with the Company’s Current Report on Form 8-K dated December 4, 2001.	
 	 	
(2) 	Previously filed as an exhibit with the Company’s Quarterly Report on Form 10-Q dated September 3, 2003.	
 	 	
(3) 	Previously filed as an exhibit with the Company’s Current Report on Form 8-K dated February 27, 2004.	
 	 	
(4) 	Previously filed as an exhibit with the Company’s Form S-8 registration statement dated March 1, 2004.	
 	 	
(5) 	Previously filed as an exhibit with the Company’s Annual Report on Form 10-K dated June 29, 2004.	
      (b) Reports on Form 8-K

      On May 18, 2004, we furnished (but did not file) a report on Form 8-K relating to financial information for Network Appliance for the quarter and year ended April 30, 2004 and forward-looking statements relating to fiscal year 2005, as presented in a press release of May 18, 2004.

42

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SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 	 	
 	NETWORK APPLIANCE INC.	
 	(Registrant)	
 	 	
 	/s/ STEVEN J. GOMO	

	
 	Steven J. Gomo	
 	Senior Vice President of Finance	
 	and Chief Financial Officer	
Date: August 31, 2004

43

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EXHIBIT INDEX
 	 	 	 	 	
Exhibit No.	 	Description	

	 	

	
 	2.1(3)	 	 	Agreement and Plan of Merger, dated as of November 3, 2003, by and among Network Appliance, Inc., Nagano Sub, Inc., and Spinnaker Networks, Inc.	
 	2.2(3)	 	 	Amendment to Merger Agreement, dated as of February 9, 2004, by and among Network Appliance, Inc., Nagano Sub, Inc., and Spinnaker Networks, Inc.	
 	3.1(1)	 	 	Certificate of Incorporation of the Company.	
 	3.2(1)	 	 	Bylaws of the Company.	
 	4.1(1)	 	 	Reference is made to Exhibits 3.1 and 3.2.	
 	4.2(4)	 	 	Spinnaker Networks, Inc. 2000 Stock Plan	
 	10.1(2)	 	 	Asset Purchase Agreement dated June 20, 2003, by and between Auspex Systems, Inc. and the Company.	
 	10.2	 	 	Purchase and Sale Agreement dated July 27, 2004 by and between Cisco Systems, Inc. and the Company.	
 	 21(5)	 	 	Subsidiaries of the Company	
 	31.1	 	 	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 31, 2004.	
 	31.2	 	 	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 31, 2004.	
 	32.1	 	 	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 31, 2004.	
 	32.2	 	 	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 31, 2004.	

 	 	
(1) 	Previously filed as an exhibit with the Company’s Current Report on Form 8-K dated December 4, 2001.	
 	 	
(2) 	Previously filed as an exhibit with the Company’s Quarterly Report on Form 10-Q dated September 3, 2003.	
 	 	
(3) 	Previously filed as an exhibit with the Company’s Current Report on Form 8-K dated February 27, 2004.	
 	 	
(4) 	Previously filed as an exhibit with the Company’s Form S-8 registration statement dated March 1, 2004.	
 	 	
(5) 	Previously filed as an exhibit with the Company’s Annual Report on Form 10-K dated June 29, 2004.	
44

EXHIBIT 10.2

PURCHASE AND SALE AGREEMENT

Seller:       CISCO SYSTEMS, INC.,
A CALIFORNIA CORPORATION

Buyer:        NETWORK APPLIANCE, INC.,
A DELAWARE CORPORATION

Dated as of:  July_______, 2004

Property:     Research Triangle Park Site 12
Buildings 13, 14 and 15
7301-13 Kit Creek Road
7301-14 Kit Creek Road
7301-15 Kit Creek Road
Research Triangle Park, North Carolina 27709

SUBMISSION NOT AN OPTION

THE SUBMISSION OF THIS AGREEMENT FOR EXAMINATION AND NEGOTIATION DOES NOT
CONSTITUTE AN OFFER TO SELL, A RESERVATION OF, OR OPTION FOR THE PROPERTY AND
SHALL VEST NO RIGHT IN ANY PARTY. BUYER OR ANYONE CLAIMING UNDER OR THROUGH
BUYER SHALL HAVE THE RIGHTS TO THE PROPERTY AS SET FORTH HEREIN AND THIS
AGREEMENT SHALL BECOME EFFECTIVE AS A AGREEMENT ONLY UPON EXECUTION,
ACKNOWLEDGMENT AND DELIVERY THEREOF BY SELLER AND BUYER, REGARDLESS OF ANY
WRITTEN OR VERBAL REPRESENTATION OF ANY AGENT, MANAGER OR EMPLOYEE OF SELLER TO
THE CONTRARY.

PURCHASE AND SALE AGREEMENT

Buyer and Seller hereby enter into this Purchase and Sale Agreement
(this "Agreement"), intending to be legally bound hereby, as of July ____, 2004
(the "Effective Date") (i.e., the date both parties have executed this
Agreement).

1.       DEFINED TERMS:

a.       The terms listed below shall have the following
meanings throughout this Agreement:

Buyer:                     Network Appliance, Inc., a Delaware corporation

Buyer's Address:           495 East Java Drive
Sunnyvale, California 94089
Attn: Vice President, Work Place Resources

Closing Date:              The Effective Date, or such later date (but no later
than July 30, 2004) as may be agreed to in writing
between Buyer and Seller.

Improvements:              A four story office building (Building 13), a three
story office building (Building 14), and a three
story office building (Building 15), all with
accessory surface parking areas and other
improvements located on or affixed to the Land,
including any and all, heating, air conditioning and
ventilation lines, utilities and boilers, fixtures,
parking areas, and landscaping.

Leases:                    None.

Land:                      That certain parcel of land located in Research
Triangle Park, Wake County, North Carolina, more
particularly described on Exhibit A attached hereto,
together with all rights and interests appurtenant
thereto.

Operating

Agreements:                (i) all assignable contracts and agreements
(collectively, the "Service Contracts") (it being
understood that there are no Service Contracts), and
(ii) all assignable licenses, permits, plans,
drawings, soils reports, engineering reports,
warranties, guaranties, and indemnities in favor of
the Seller relating to or affecting the ownership,
maintenance or use of the Property, together with any
and all amendments, modifications or supplements
thereto (collectively, the "Intangibles").

Personal Property:         All items of tangible personal property
owned by Seller located at or attached and
appurtenant to or forming a part of the Property.

Property:                  The Real Property, the Personal Property, and the
Operating Agreements.

2

Property Address:          Research Triangle Park Site 12
Buildings 13, 14 and 15
7301-13 Kit Creek Road
7301-14 Kit Creek Road
7301-15 Kit Creek Road
Research Triangle Park, North Carolina 27709

Purchase Price:            $23,968,760.00, all cash.

Real Property:             The Land and the Improvements.

Review Period:             The period commencing as of June 30, 2004 (which the
parties acknowledge is the commencement date of the
Review Period even though such date is before the
date this Agreement is fully executed), and ending
immediately prior to the Closing.

Seller:                    Cisco Systems, Inc., a California corporation

Seller's Address:          170 West Tasman Drive
San Jose, California 95134-1706
Attn: Director, Americas Real Estate

Tenants:                   None.

Title Company/             Chicago Title Insurance Company
Escrow Agent:              150 Fayetteville Street Mall, Suite 1130 (27601)
P.O. Box 1880
Raleigh, North Carolina 27602-1883
Attn: Ms. Dixie R. Ladrie

3

b.       The following terms are defined in the referenced portion of this
Agreement:

Defined Term                            Defined In

Agreement                                   Preliminary Statement
Buyer's Agents                              Section 4
Closing                                     Section 7.a
Contingencies                               Section 5.a
Deed                                        Section 2.a
Forced Removal Title Exceptions             Section 6.c
General Instrument                          Section 2.b
Hazardous Substances                        Section 11.k
Mortgage Exceptions                         Section 6.c
Notice                                      Section 21
Review Materials                            Section 4
Seller's Documents                          Section 8.a
Specimen Title Policy                       Section 6.a
Survey                                      Section 6.a
Title Commitment                            Section 6.a
Title Requirements                          Section 6.a

2.       PURCHASE OF PROPERTY: PAYMENT OF PURCHASE PRICE.

Seller shall sell the Property to Buyer, and Buyer shall purchase the
Property from Seller, subject to all of the terms, covenants and conditions
hereinafter set forth in this Agreement.

a.       Real Property. Seller shall sell the Real Property to
Buyer, and Buyer shall purchase the Real Property from Seller, on all of the
mutual terms, covenants and conditions hereinafter set forth in this Agreement.
The Real Property shall be conveyed to Buyer by a Special Warranty Deed ("DEED")
in the form attached hereto as Exhibit B and incorporated herein by this
reference.

b.       Other Interests. All other interests of Seller in the
Property (including the Personal Property) shall be transferred and assigned by
Seller to Buyer pursuant to the General Instrument of Transfer ("GENERAL
INSTRUMENT") in the form annexed hereto as Exhibit C and incorporated herein by
this reference.

3.       [Intentionally Deleted]

4.       DELIVERY OF MATERIALS FOR REVIEW; CONFIDENTIALITY.

In connection with Buyer's acquisition of the Property, Seller has
delivered to Buyer or made available to Buyer for its review at the Property, at
Seller's Address or at the offices of O'Brien/Atkins Associates, PA, located in
Research Triangle Park, North Carolina, any operating files maintained by Seller
or its property manager in connection with the leasing, current maintenance
and/or management of the Property, including, without limitation, operating
agreements, insurance policies, bills, invoices, receipts and other general
records relating to the

4

income and expenses of the Property, correspondence, surveys, plans and
specifications, warranties for services and materials provided to the Property,
environmental audits and similar materials, but excluding materials not directly
related to the leasing, current maintenance and/or management of the Property
such as, without limitation, Seller's internal memoranda, financial projections,
budgets, appraisals, accounting and tax records and similar proprietary,
elective or confidential information ("REVIEW MATERIALS"). In addition to the
Review Materials, Seller has made available to Buyer at such place or places at
the Property, in the offices of the property manager or elsewhere as the same
may be located, copies of all other materials and other information in
connection with the leasing, current maintenance and/or management of the
Property, to the extent the same were requested by Buyer.

The Review Materials and all materials, books and records made
available to or examined by or on behalf of Buyer pursuant to this Agreement
shall: (i) be held in strict confidence by Buyer; (ii) not be used for any
purpose other than the investigation and evaluation of the Property by Buyer and
its lenders, attorneys, engineers, consultants and representatives
(collectively, "BUYER'S AGENTS"); and (iii) not be disclosed, divulged or
otherwise furnished to any other person or entity except to Buyer's Agents or as
required by law. If this Agreement is terminated for any reason whatsoever,
Buyer shall return to Seller all of the Review Materials, in the possession of
Buyer and Buyer's Agents. The provisions of this Section shall survive the
termination of this Agreement.

5.       CONTINGENCIES.

a.       Contingencies to Purchase. Buyer's obligation to
purchase the Property is subject to the satisfaction of the contingencies
described below ("CONTINGENCIES TO PURCHASE").

(1)      Seller shall have delivered to Escrow Agent
or Buyer all of the items required to be delivered to Escrow Agent or
Buyer pursuant to the terms of this Agreement, including but not
limited to, those required to be delivered by Seller pursuant to
Section 8.

(2)      All of the representations and warranties of
Seller contained in this Agreement shall be true and correct in all
material respects as of the Closing Date (with appropriate
modifications permitted under this Agreement or not materially adverse
to Buyer).

(3)      Seller shall have performed and observed, in
all material respects, all covenants and agreements of this Agreement
to be performed and observed by Seller as of the Closing Date.

b.       Contingencies to Sell. Seller's obligation to sell
the Property is subject to the satisfaction of the contingencies described below
("CONTINGENCIES TO SELL").

(1)      Seller shall have received the Purchase
Price as adjusted pursuant to and payable in the manner provided for in
this Agreement.

5

(2)      Buyer shall have delivered to Escrow Agent
or Seller all of the items required to be delivered to Escrow Agent or
Seller pursuant to the terms of this Agreement, including but not
limited to, those provided for in Section 8.

(3)      All of the representations and warranties of
Buyer contained in this Agreement shall be true and correct in all
material respects as of the date of Closing.

(4)      Buyer shall have performed and observed, in
all material respects, all covenants and agreements of this Agreement
to be performed and observed by Buyer as of the date of Closing.

(5)      Seller shall have received written approval
of this transaction from Research Triangle Foundation of North
Carolina.

6.       TITLE. At Closing, Seller shall convey and transfer
to Buyer such title to the Property as will enable the Title Company to issue to
Buyer, at Buyer's expense, an ALTA Owner's Policy of Title Insurance (the "TITLE
POLICY") covering the Property, in the full amount of the Purchase Price.
Notwithstanding anything contained herein to the contrary, the Property shall be
conveyed subject to the following matters, which shall be deemed to be Permitted
Exceptions: (i) the lien of all ad valorem real estate taxes and assessments not
yet due and payable as of the date of Closing, subject to adjustment as herein
provided; (ii) local, state and federal laws, ordinances or governmental
regulations, including but not limited to, building and zoning laws, ordinances
and regulations, now or hereafter in effect relating to the Property; and (iii)
items appearing of record (other than the Forced Removal Title Exceptions (as
defined below)) or shown on the Survey.

(a)      Title Commitment; Survey. Buyer, at Buyer's expense,
shall have the right to cause the issuance of (i) a commitment of the Title
Company ("TITLE COMMITMENT") for an owner's title insurance policy in the form
of a specimen ALTA Form B (1987) with respect to the Real Property ("SPECIMEN
TITLE POLICY"), containing such endorsements, affirmative coverages, deletions
of printed exceptions and title exceptions, and reinsurance agreements as Buyer
shall approve, and Title Company agrees to issue, and specifying Title Company's
requirements relating to the issuance of such Specimen Title Policy ("TITLE
REQUIREMENTS") and (ii) an ALTA survey of the Real Property by a duly licensed
surveyor showing all physical conditions affecting the Real Property sufficient
for the deletion of the survey exception in accordance with the Title
Requirements ("SURVEY").

(b)      [Intentionally Deleted]

(c)      Forced Removal Title Exceptions. Seller hereby agrees
that it shall remove (x) a mechanic's or materialman's lien for work performed
on the Property at the request of Seller; or (y) a mortgage or related security
documents or similar encumbrance given to secure indebtedness for money borrowed
by Seller ("MORTGAGE EXCEPTIONS") (all of the foregoing in (x) and (y))
hereinafter collectively referred to as "FORCED REMOVAL TITLE EXCEPTIONS").

6

7.       CLOSING REQUIREMENTS.

a.       The Closing. On the Closing Date, all matters to be
performed under this Agreement incident to the sale of the Property, and the
payment of the Purchase Price (collectively, "CLOSING") shall be performed at
the offices of Escrow Agent in Raleigh, North Carolina, or other mutually
acceptable location agreed to in writing by Buyer and Seller. The Closing shall
commence at 10:00 a.m. Notwithstanding anything in this Section 7.a to the
contrary, the parties agree to use commercially reasonable efforts to pre-close
the transaction contemplated hereby (i.e., sign documents into escrow) on the
business day immediately preceding the then-scheduled date of Closing.

b.       Possession and Condition of the Property. Without
limiting the generality of the foregoing, at Closing full possession of the Real
Property is to be delivered to Buyer, subject to the Permitted Exceptions.

8.       CLOSING DELIVERIES.

a.       Seller's Deliveries. Seller shall deliver or cause to
be delivered the following documents ("SELLER'S DOCUMENTS") at or prior to the
Closing:

(1)      The duly executed and acknowledged Deed.

(2)      A certification duly executed by Seller
under penalty of perjury stating that Seller is not a "foreign person"
within the meaning of Section 1445 of the Internal Revenue Code of
1986, as amended, in the form annexed hereto as Exhibit E.

(3)      Originals (or copies thereof if originals
are not available) of all documents and materials in the possession of
Seller or Seller's agents assigned pursuant to the General Instrument.

(4)      Originals (or copies thereof if originals
are not available) of all Review Materials if not already provided, and
all other books and records of Seller in the possession or control of
Seller pertaining in a material way to the operation and management of
the Property (excluding materials not directly related to the
maintenance, operation or management of the Property such as, without
limitation, Seller's internal memoranda, financial projections,
budgets, appraisals, accounting and income tax records and similar
proprietary, elective or confidential information).

(5)      [Intentionally Deleted]

(6)      [Intentionally Deleted]

(7)      Such affidavits as the Title Company may
reasonably require in order to omit from any title insurance policy
issued to Buyer or Buyer's mortgagee except for (i) parties in
possession and (ii) mechanic's liens created by or through Seller.

(8)      Any corporate, partnership or other
authorization documents necessary to record the Deed.

7

(9)      Evidence as the Title Company may reasonably
require as to the authority of any individuals or constituent members
in Seller to execute any instruments executed and delivered by Seller
at Closing.

(10)     Any of the following which are requested by
Buyer and in the possession of or reasonably available to Seller: any
and all keys, and lock and safe combinations.

(11)     Additional documents reasonably required by
the Title Company to consummate the transaction expressly contemplated
by this Agreement.

b.       Mutual Deliveries. Buyer and Seller shall deliver or
cause to be delivered the following at or prior to the Closing:

(1)      Executed counterparts of the General
Instrument; and

(2)      A closing statement reflecting the
adjustments made at the Closing and described in Section 9 hereof.

c.       Buyer's Deliveries. Buyer shall, at or prior to the
Closing:

(1)      Pay to Seller the full amount of the
Purchase Price (plus any additional funds necessary to pay Buyer's
share of closing costs and prorations, as hereinafter set forth) by
wire transfer of immediately available funds; and

(2)      [Intentionally Deleted]

(3)      Deliver evidence as the Title Company may
reasonably require as to the authority of any individuals or
constituent members in Buyer to execute any instruments executed and
delivered by Buyer at Closing.

9.       CLOSING COSTS AND PRORATIONS. At Closing, closing costs shall
be paid and prorations made as follows:

a.       Closing Costs. Seller shall pay: (a) the fees of any
counsel representing it in connection with this transaction; (b) one-half (1/2)
of any escrow fee which may be charged by the Title Company; and (c) all state,
county, or local transfer (excise) taxes. Buyer shall pay: (u) the fees of any
counsel representing it in connection with this transaction; (v) recording
charges and costs; (x) the fee for any title exam and the title insurance
premium for the Owner's title insurance policy issued at Closing to Buyer by the
Title Company; (y) the costs for the Survey; and (z) one-half (1/2) of any
escrow fee charged by the Title Company.

b.       Prorations. The Purchase Price shall be subject to
the following prorations. All such prorations shall be made so that Buyer has
the benefit of rent and bears the burden of expenses as of 12:01 a.m. on the
date of Closing.

(1)      Taxes. Non-delinquent real property taxes
and non-delinquent general and special assessments shall be prorated
through the Closing Date on the basis of

8

the calendar year for such taxes and assessments. Delinquent real
property taxes or delinquent general or special assessments shall be
paid at Closing, and Seller shall be charged an amount equal to that
portion of such taxes or assessments which relates to the period prior
to Closing. If the Closing Date shall occur before the real property
tax rate for such calendar year is fixed, the apportionment of taxes
shall be made on the basis of the taxes assessed for the preceding
calendar year. After the real property taxes are finally fixed for the
calendar year in which the Closing Date occurs, Seller and Buyer shall
make a recalculation of the apportionment of such taxes, and Seller or
Buyer, as the case may be, shall make an appropriate payment to the
other based on such recalculation. To the extent Seller has undertaken
to obtain any real estate tax abatement, the amount of the net proceeds
of such tax abatement shall be prorated through the Closing Date, if,
as and when such proceeds are paid by the applicable governmental
taxing authority.

(2)      Utilities. Final readings on all gas, water
and electric meters shall be made as of the Closing Date, if possible.
If final readings are not possible, gas, water and electricity charges
will be prorated based on the most recent period for which costs are
available. Any deposits made by Seller with utility companies shall be
returned to Seller by such utility companies. Buyer shall be
responsible for making all arrangements for the continuation of utility
services.

Notwithstanding any of the foregoing provisions: the Personal Property
is included in this sale, without further charge, except that Buyer shall pay to
Seller the amount of any and all sales or similar taxes payable in connection
with the Personal Property, if any, and Buyer shall execute and deliver any tax
returns required of it in connection therewith, said obligations of Buyer to
survive Closing.

10.      DEFAULT.

a.       Buyer's Default. If Seller is not in default of
Seller's representations, warranties and covenants under this Agreement and is
ready, willing and able to convey the Property in accordance with this
Agreement, and Buyer fails to consummate this Agreement and take title, then the
parties hereto recognize and agree that the damages that Seller will sustain as
a result thereof will be substantial, but difficult if not impossible to
ascertain and Seller shall, as its sole remedy, be entitled to retain the
Deposit as liquidated damages, and not as a penalty and neither party shall have
any further rights or obligations with respect to the other under this
Agreement, except for the those which are expressly stated to survive
termination of this Agreement. Buyer agrees not to interpose any defense or
otherwise seek to interfere with Seller's retention and ownership of the
Deposit.

b.       Seller's Default. In the event that Buyer is not in
default of Buyer's representations, warranties and covenants under this
Agreement and is ready, willing and able to take title to the Property in
accordance with this Agreement, and Seller fails to consummate this Agreement
and convey title as set forth herein, Buyer shall have an action for specific
performance of Seller's obligations to execute the documents required to convey
the Property to Buyer, it being understood that the remedy of specific
performance shall not be available to enforce any other obligation of Seller
hereunder; alternatively, Buyer may elect to terminate this Agreement and
recover the Deposit. In either such case, Buyer shall have no right to an action

9

for damages against Seller other than for the return of the Deposit. Buyer shall
be deemed to have elected to terminate this Agreement and receive back the
Deposit if Buyer fails to file suit for specific performance against Seller in a
court having jurisdiction in the county and state in which the Property is
located, on or before sixty (60) following the date upon which Closing was to
have occurred.

11.      SELLER'S REPRESENTATIONS AND WARRANTIES. Seller hereby makes
the following representations and warranties to Buyer as of the Effective Date:

a.       Due Authorization. Seller is duly organized, validly
existing, and in good standing under the laws of the State of California, has
all necessary power and authority to own and use its properties and to transact
the business in which it is engaged, and has full power and authority to enter
into this Agreement, to execute and deliver the documents and instruments
required of Seller herein, and to perform its obligations hereunder. Seller is
duly authorized to execute and deliver, and perform this Agreement and all
documents and instruments and transactions contemplated hereby or incidental
hereto.

b.       Leases. There are no leases or occupancy agreements
to which Seller is a party affecting the Property.

c.       No Conflict. The execution and delivery of, and
consummation of the transactions contemplated by this Agreement is not
prohibited by, and will not conflict with, constitute grounds for termination
of, or result in the breach of any agreement or instrument to which Seller is
now a party or otherwise subject.

d.       Notices. To Seller's knowledge, prior to the
Effective Date Seller has received no written notice or citation (a "NOTICE")
from any federal, state, county or municipal authority or any other party
alleging any fire, health, safety, building pollution, environmental, zoning or
other violation of any law, regulation, permit, order or directive in respect of
the Property or any part thereof which violation remains outstanding.

e.       Legal Proceedings. Seller has received no written
notice of any actions, suits or proceedings, pending before any court,
commission, agency or other administrative authority against, or affecting the
Property which, if adversely determined, could individually or in the aggregate
have a materially adverse effect on title to the Property or any portion thereof
or which could in any material way interfere with the consummation by Seller of
the transaction contemplated by this Agreement.

f.       [Intentionally Deleted]

g.       Eminent Domain. Seller has received no written notice
from any governmental authority that any eminent domain proceedings relating to
the Property are pending, and to Seller's knowledge no such proceedings are
threatened.

h.       No Other Contracts. There are no other written
agreements affecting the Property by which Purchaser would be bound other than
the Operating Agreements, the Permitted Exceptions and this Agreement (and the
closing documents executed by Buyer in connection herewith).

10

i.       Updating of Schedules Exhibits Representations and
Warranties. Seller shall modify, update and supplement all representations,
warranties, exhibits and schedules attached to or delivered in connection with
this Agreement through the Closing Date to the extent required to make such
representations, warranties, exhibits and schedules true, accurate and complete.

j.       As-Is Purchase. As a material inducement to Seller to
execute this Agreement, Buyer acknowledges, represents and warrants that,
subject to and in reliance on the representations and warranties of Seller set
forth in this Section 11, upon the satisfaction or waiver of the Contingencies
(i) Buyer will have fully examined and inspected the Property, together with the
Review Materials and such other documents and materials with respect to the
Property which Buyer deems necessary or appropriate in connection with its
investigation and examination of the Property, (ii) Buyer will have accepted the
foregoing and the physical condition, value, presence/absence of Hazardous
Substances, financing status, use, leasing, operation, tax status, income and
expenses of the Property, (iii) except with respect to Seller's representations
and warranties as set forth in this Section 11 (subject to the limitations set
forth in this Section 11, including, without limitation, in subsections l and
m), the Property will be purchased by Buyer "AS IS" and "WHERE IS" and with all
faults and, upon Closing, Buyer shall assume responsibility for the physical
condition of the Property and (iv) Buyer will have decided to purchase the
Property solely on the basis of its own independent investigation. Except as
expressly set forth herein or in Seller's Documents, Seller has not made, does
not make, and has not authorized anyone else to make any representation as to
the present or future physical condition, value, presence/absence of Hazardous
Substances, financing status, leasing, operation, use, tax status, income and
expenses or any other matter or thing pertaining to the Property, and Buyer
acknowledges that no such representation or warranty has been made and that in
entering into this Agreement it does not rely on any representation or warranty
other than those expressly set forth in this Agreement or in Seller's Documents.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR IN SELLER'S DOCUMENTS, SELLER
MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED OR ARISING BY OPERATION
OF LAW, INCLUDING, WITHOUT LIMITATION, ANY WAY OF CONDITION, HABITABILITY,
MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY. Seller
shall not be liable for or bound by any verbal or written statements,
representations, real estate broker's "setups" or information pertaining to the
Property furnished by any real estate broker, agent, employee, servant or any
other person unless the same are specifically set forth in this Agreement or in
Seller's Documents. The provisions of this Section l1.j. shall survive the
Closing. If Buyer shall proceed to Closing with actual knowledge of any matter,
or as to any matter set forth in the Review Materials which is in conflict with
any of Seller's representations, warranties or indemnities made in this
Agreement, Buyer shall be deemed to have waived such Seller's representations,
warranties or indemnities to the extent inconsistent with such actual knowledge
or the contents of such Review Materials.

k.       Environmental Status. Except as disclosed in Exhibit
F and the additional reports and/or governmental files referred to therein, to
Seller's knowledge, Seller has received no written notification that any
governmental or quasi-governmental authority has determined that there are any
violations of any environmental statutes, ordinances or regulations affecting
the Property. As used herein, the term "HAZARDOUS SUBSTANCES" shall include,

11

asbestos-containing materials, polychlorinated biphenyls, flammable materials,
explosives, radioactive materials, petroleum products and those materials or
substances now or heretofore defined as "hazardous substances," "hazardous
materials," "hazardous waste," "toxic substances," or other similar designations
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901 et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801 et seq., the Federal Water Pollution
Control Act, 33 U.S.C. Section 1251 et seq., the Clean Air Act, 42 U.S.C.
Section 7401 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601
et seq., the Refuse Act, 33 U.S.C. Section 407 et seq., together with all
implementing regulations or any other applicable similar state federal, county,
regional, municipal or local law, statute, ordinance, rule or regulation
governing the control of substances dangerous to public health or safety as same
may be amended from time to time.

l.       Limitation of Seller's Representations. All
representations and warranties made by Seller in this Agreement, unless
expressly provided otherwise, shall not survive the Closing. Where
representations and warranties are made in this Agreement to "Seller's
knowledge," such phrase shall mean and be limited to the actual knowledge of
Suzanne Cooper, Chris Kite and Thomas Colwell (the "DESIGNATED EMPLOYEES") and
shall not be construed, by imputation or otherwise, to refer to the knowledge of
Seller or any affiliate of Seller, to any property manager or to any officer,
agent, manager, representative or employee of Seller or any affiliate of Seller,
or to impose upon such Designated Employees any duty to investigate the matter
to which such actual knowledge, or the absence thereof, pertains.

m.       Survival of Seller's Representations and Warranties.
The representations and warranties of Seller set forth in this Section 11, as
updated by the certificate of Seller to be delivered to Buyer at Closing in
accordance with Section 8.a(6) hereof, shall survive Closing for a period of
twelve (12) months. No claim for a breach of any representation or warranty of
Seller shall be actionable or payable (a) if the breach in question results from
or is based on a condition, state of facts or other matter which was actually
known to Buyer or disclosed in writing to Buyer prior to Closing, (b) unless the
valid claims for all such breaches collectively aggregate more than
Fifty-Thousand Dollars ($50,000.00), in which event the full amount of such
claims shall be actionable, and (c) unless written notice containing a
description of the specific nature of such breach shall have been given by Buyer
to Seller prior to the expiration of said twelve (12) month period and an action
shall have been commenced by Buyer against Seller within ninety (90) days after
the termination of the survival period provided for above in this Section. Buyer
agrees to first seek recovery under any insurance policies and service contracts
prior to seeking recovery from Seller, and Seller shall not be liable to Buyer
if Buyer's claim is satisfied from such insurance policies and service
contracts. As used herein, the term "Cap" shall mean the total aggregate amount
of One Million Dollars ($1,000,000.00). In no event shall Seller's aggregate
liability to Buyer under this Agreement, for breach of any representation or
warranty of Seller in this Agreement or the certificate to be delivered by
Seller at Closing pursuant to Section 8.a(6) hereof or otherwise for any other
breach by Seller under this Agreement, exceed the amount of the Cap.

12.      BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby makes the
following representations and warranties to Seller as of the Effective Date:

12

a.       Due Authorization. Buyer is duly organized, validly
existing, and in good standing under the laws of the State of Delaware, is duly
qualified and in good standing under the laws of the State of North Carolina,
has full power to execute, deliver and carry out the terms and provisions of
this Agreement and has taken all necessary action to authorize the execution,
delivery and performance of this Agreement, and the individual(s) executing this
Agreement on behalf of Buyer has the authority to bind Buyer to the terms and
conditions of this Agreement.

b.       Enforceability. This Agreement and all documents
required hereby to be executed by Buyer, when so executed, shall be legal,
valid, and binding obligations of Buyer, enforceable against Buyer in accordance
with their respective terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, and other similar laws affecting the rights of
creditors generally and, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law).

13.      GENERAL COVENANTS. The parties covenant to do the following.

a.       [Intentionally Deleted]

b.       Entry; Buyer's Inspection; Termination. During the
Review Period, Buyer and Buyer's Agents may enter the Property from time to time
(and without unreasonably interfering with the operation of the Property) for
purposes of (i) performing non-invasive physical tests (except that Buyer may
perform minor testing to determine the presence of asbestos-containing
materials, termites and other wood destroying insects, provided that all damage
resulting therefrom is promptly repaired by Buyer at its sole expense and to
Seller's reasonable satisfaction) and (ii) conduct any and all engineering,
environmental and other inspections at the Property and examine and evaluate
relevant agreements and documents within the possession of Seller or subject to
its control as Buyer may reasonably request. No soil and/or ground water
sampling shall be performed unless and until the location, scope and methodology
of such sampling and the environmental consultant selected by Buyer to perform
such sampling have all been approved by Seller. Prior to conducting any such
sampling, Buyer shall have a utility mark-out performed for the Property. Copies
of all environmental and engineering reports prepared by or on behalf of Buyer
with respect to the Property shall be provided promptly to Seller. With respect
to Buyer's right to inspect the Property, Buyer agrees that each inspection
shall be performed during normal business hours or at such other times as Seller
and Buyer shall mutually agree. Seller shall have the right, at its option, to
cause Seller's representative to be present at all inspections, reviews and
examinations conducted on the Property by Buyer. All communications in
connection with this Agreement and/or access to the Property shall be through
Suzanne Cooper and no one else. Such inspections, assessments and tests shall
not damage the Property in any respect, shall not be invasive in any respect
(unless Buyer obtains Seller's prior written consent), and shall be conducted in
accordance with standards customarily employed in the industry and in compliance
with all governmental laws, rules and regulations. Following each entry by Buyer
with respect to inspections and/or tests on the Property, Buyer shall restore
the Property to a condition which is as near to its original condition as
existed prior to any such inspections and/or tests. Buyer shall not contact any
third parties in connection with the Property without obtaining Seller's prior
consent and shall not disrupt Seller's activities on the Property. Buyer shall
obtain, pay for, and maintain at all times during the term of this Agreement,
insurance policies and minimum limits of coverage as designated below, and any

13

other insurance required by law, regulation or order, with insurance companies
licensed to do business in the state in which Buyer's activities hereunder are
to be performed, with an A.M. Best's Insurance Rating of A:VIII or better. In no
way do these minimum requirements limit the liability assumed elsewhere in this
Agreement, including but not limited to Buyer's defense and indemnity
obligations.

(i)      Workers' Compensation insurance as required by any
applicable law or regulation, and Employer's Liability insurance in amounts not
less than $1,000,000;

(ii)     Commercial General Liability insurance on an
occurrence, not claims-made, basis, including coverage for bodily injury,
property damage, personal and advertising injury, products/completed operations,
contractual liability and cross liability, covering all operations by or on
behalf of Buyer arising out of or connected with this Agreement, with the
minimum limits of $1,000,000.00 per occurrence and $2,000,000.00 in the annual
aggregate, and including Seller as an additional insured, but only to the extent
of Buyer's indemnity obligations pursuant to this Agreement;

(iii)    Automobile Liability insurance covering all Buyer's
owned, hired and non-owned vehicles used in connection with this Agreement,
providing coverage of $1,000,000.00 combined single limit; and

(iv)     Umbrella and/or Excess Liability insurance on an
occurrence, not claims-made, basis, with minimum limits of $5,000,000.00 per
occurrence excess of Buyer's Employer's Liability, Commercial General Liability
and Automobile Liability policies, and with coverage terms at least as broad as
the underlying insurance

Buyer's insurance shall be primary to and noncontributory with any and all other
insurance maintained by or otherwise afforded to Seller. Except where prohibited
by law, Buyer's insurers shall waive all rights of recovery or subrogation
against Seller, but only to the extent of liabilities falling within Buyer's
indemnity obligations under this Agreement. Buyer shall deliver to Seller
certificates of insurance evidencing the coverages outlined above at the time
this Agreement is executed or within a reasonable time thereafter and within a
reasonable time after such coverage is renewed or replaced. All such
certificates shall provide that the insurer will endeavor to provide Seller with
30 days prior written notice in the event of cancellation or non-renewal of
coverage. The provisions of this Section 13.b shall survive the Closing or the
earlier termination of this Agreement.

c.       [Intentionally Deleted]

d.       Tenant Estoppels. No estoppels are required to be
obtained or delivered by Seller in connection with the transaction contemplated
by this Agreement.

14.      USE OF PROCEEDS TO CLEAR TITLE. Any unpaid taxes, assessments,
water charges and sewer rents, together with the interest and penalties thereon,
which are due and payable on or before the Closing Date, and any other liens and
encumbrances which Seller is obligated to pay and discharge, together with the
cost of recording and filing any instruments necessary to discharge such liens
and encumbrances of record, may be paid out of the proceeds of the monies

14

payable on the Closing Date provided satisfactory arrangements are made with the
Title Company to ensure obtaining and recording of discharges with respect to
the same.

15.      SURVIVAL. The terms, covenants and indemnities contained in
this Agreement required to be operative after delivery of the Deed shall survive
delivery of the Deed without limitation as to time, unless a time limitation is
expressly provided, and shall not be deemed to have been merged in the Deed.

16.      DAMAGE TO PROPERTY. If the Property or any part thereof (i) is
damaged by casualty or (ii) is taken by exercise of the power of eminent domain
prior to the Closing Date, and in the case of either such casualty or taking the
damage to the Property exceeds One Million Dollars ($1,000,000), as reasonably
determined by Seller, Buyer may terminate this Agreement by notice given to
Seller within ten (10) business days of the date Seller gives notice to Buyer of
such casualty or taking. If Buyer does so terminate this Agreement, Seller shall
promptly return the Deposit to Buyer. If Buyer does not so terminate this
Agreement or such damage does not exceed One Million Dollars ($1,000,000) the
parties shall proceed to Closing without any reduction in the Purchase Price
except as specifically provided below. At the Closing, Seller shall assign to
Buyer all insurance proceeds arising from the casualty, together with a credit
against the Purchase Price equal to the deductible amount under the applicable
insurance policy, or pay over or assign to Buyer all awards recovered or
recoverable on account of such taking. As an inducement to Buyer to agree to the
provisions of this Section 16, Seller represents to Buyer that Seller maintains
property insurance for the Property through a program of self insurance in an
amount equal to the full replacement cost of the Improvements, and Seller agrees
to continue coverage in such amount in effect through the Closing Date.

17.      BROKERAGE COMMISSION. Seller and Buyer each warrant to the
other party that its sole contact with the other party or the Property regarding
this transaction has been directly with the other party. Nevertheless, Seller
has communicated with The Staubach Company ("STAUBACH") and Buyer has
communicated with Tri Properties ("TP") and Commercial Carolina Corporation
("CCC") in connection with the transaction contemplated by this Agreement.
Seller has agreed to pay a commission to Staubach in connection with the
transaction contemplated by this Agreement in the amount of one hundred thousand
dollars ($100,000.00). As an accommodation, Seller has agreed to pay a
commission directly to each of TP and CCC in connection with the transaction
contemplated by this Agreement in the amount of one quarter of one percent 
(.25%) of the Purchase Price (collectively, the "Cisco Share"). Neither
Staubach, CCC nor TP shall be entitled to any other commission, brokerage fee,
or other compensation from Seller in connection with this transaction. Any
additional compensation which may be due to TP and CCC shall be payable from
Buyer only. The foregoing commissions shall be earned, due and payable only upon
consummation of Closing (including recordation of the Deed and receipt of
Seller's funds) and not otherwise. In the event Closing (including recordation
of the Deed and receipt of Seller's funds) does not occur, for whatever reason,
whether by default of Buyer or Seller, or otherwise, Staubach, TP and CCC hereby
waive any right to any fee or commission and any claim or right of claim to any
fee or commission, including, without limitation, a claim of frustration of
commission. Seller and Buyer further warrant to each other that no other broker
or finder can properly claim a right to a commission or finder's fee based upon
contacts between the claimant and the warranting party with respect to the other
party or the Property. Seller and Buyer shall indemnify, defend, protect and
hold the

15

other party harmless from and against any loss, cost or expense, including, but
not limited to, reasonable attorneys' fees and court costs, resulting from any
claim for a fee or commission by any broker or finder in connection with the
Property and this Agreement resulting from the indemnifying party's actions or a
breach of any of the foregoing provisions. Without limiting the foregoing, Buyer
specifically agrees to indemnify Cisco for any amounts that may be payable to TP
or CCC over and above the Cisco Share and for any loss, cost or expense,
including, but not limited to, reasonable attorneys' fees and court costs,
resulting from CCC's or TP's failure to sign the signature block of this
Agreement. The foregoing indemnities shall survive the Closing.

18.      SUCCESSORS AND ASSIGNS. The terms, covenants and conditions
herein contained shall be binding upon and inure to the benefit of the
successors and assigns of the parties hereto. Buyer may not assign its rights
under this Agreement without first obtaining Seller's written approval, which
approval may be given or withheld in Seller's sole and absolute discretion. No
assignment shall release or otherwise relieve Buyer from any obligations
hereunder.

19.      ENTIRE AGREEMENT. This Agreement contains all of the
covenants, conditions and agreements between the parties and shall supersede all
prior correspondence, agreements and understandings, both verbal and written.
The parties intend that this Agreement constitute the complete and exclusive
statement of its terms and that no extrinsic evidence may be introduced in any
proceeding involving this Agreement.

20.      ATTORNEYS' FEES. In the event of any litigation regarding the
rights and obligations under this Agreement or in the Escrow Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees and court
costs. Each party shall bear its own attorneys' fees in connection with the
preparation of this Agreement and the consummation of the transactions
contemplated hereunder.

21.      NOTICES. Any notice, demand, request, consent, approval,
disapproval or certificate ("NOTICE") required or desired to be given under this
Agreement shall be in writing and given by certified mail, return receipt
requested, by personal delivery or by Federal Express or a similar nationwide
over-night delivery service providing a receipt for delivery. Notices may not be
given by facsimile. The date of giving any Notice shall be deemed to be the date
upon which delivery is actually made by one of the methods described in this
Section 12.7 (or attempted if said delivery is refused or rejected). If a Notice
is received on a Saturday, Sunday or legal holiday, it shall be deemed received
on the next business day. All notices, demands, requests, consents, approvals,
disapprovals, or certificates shall be addressed as follows:

If to Buyer:       Network Appliance, Inc.
495 East Java Drive
Sunnyvale, California 94089
Attn: Mr. Thomas Bryant

with a copy to:    Cox, Castle & Nicholson LLP
555 Montgomery Street
Suite 1500
San Francisco, California 94111
Attn: Doug Van Gessel, Esq.

16

If to Seller:      Cisco Systems, Inc.
170 West Tasman Drive
San Jose, California 95134-1706
Attn: Director of Americas Real Estate

with a copy to:    Piper Rudnick LLP
1200 Nineteenth Street, N.W.
Washington, D.C. 20036
Attn: Jeffrey R. Keitelman, Esq.

Either party may change its address by giving reasonable advance written Notice
of its new address in accordance with the methods described in this Section 21.

22.      EXHIBITS AND DEFINED TERMS. All exhibits attached hereto are
incorporated herein by reference thereto. All of the terms and definitions set
forth in the Defined Terms section are incorporated in this Agreement by
reference thereto.

23.      TIME. Time is of the essence of every provision herein
contained. When the last day for the performance of any act permitted or
required hereunder falls on any day which is not a business day in the City of
Raleigh, North Carolina, such act may be performed on the next business day in
said city. When an act must be performed or a notice given by the end of a
specified day, such act must be performed or such notice given by 5:00 p.m. in
the City of Raleigh, North Carolina.

24.      CONFIDENTIALITY. Buyer and its representatives shall hold in
strictest confidence all data and information obtained with respect to Seller or
its business, whether obtained before or after the execution and delivery of
this Agreement, and shall not disclose the same to others; provided, however,
that it is understood and agreed that Buyer may disclose such data and
information to the employees, consultants, accountants and attorneys of Buyer
provided that such persons agree in writing to treat such data and information
confidentially. In the event this Agreement is terminated or Buyer fails to
perform hereunder, Buyer shall promptly return to Seller any statements,
documents, schedules, exhibits or other written information obtained from Seller
in connection with this Agreement or the transaction contemplated herein. It is
understood and agreed that, with respect to any provision of this Agreement
which refers to the termination of this Agreement and the return of the Deposit
to Buyer, such Deposit shall not be returned to Buyer unless and until Buyer has
fulfilled its obligation to return to Seller the materials described in the
preceding sentence. In the event of a breach or threatened breach by Buyer or
its agents or representatives of this Section 24, Seller shall be entitled to an
injunction restraining Buyer or its agents or representatives from disclosing,
in whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting Seller from pursuing any other available remedy at law
or in equity for such breach or threatened breach. The provisions of this
Section 24 shall survive Closing or any early termination of this Agreement.

25.      APPLICABLE LAW. This Agreement shall be governed by the laws
of the State of North Carolina.

17

26.      NO ORAL MODIFICATION OR WAIVER. This Agreement may not be
changed or amended orally, but only by an agreement in writing. No waiver shall
be effective hereunder unless given in writing, and waiver shall not be inferred
from any conduct of either party.

27.      NO RECORDING. Buyer agrees that it shall not record or file
this Agreement or any summary of the provisions thereof. Any such recording or
filing shall automatically render this Agreement null and void.

28.      COUNTERPARTS; ELECTRONIC COPY. This Agreement may be executed
in any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument. This
Agreement is legally effective, valid, and enforceable despite the fact that it
or signatures on it may be in electronic form or that it may have been created,
transmitted, stored, or otherwise handled or formed, in whole or in part, by
electronic means.

29.      CAPTIONS. The captions of this Agreement are for convenience
and reference only and in no way define, describe, extend or limit the scope,
meaning or intent of this Agreement.

30.      SEVERABILITY. The invalidation or unenforceability in any
particular circumstance of any of the provisions of this Agreement shall in no
way affect any of the other provisions hereof which shall remain in full force
and effect.

31.      NO JOINT VENTURE. This Agreement shall not be construed as in
any way establishing a partnership, joint venture, express or implied agency, or
employer-employee relationship between Buyer and Seller.

32.      NO THIRD PARTY BENEFICIARIES. This Agreement is for the sole
benefit of the parties hereto, their respective successors and permitted
assigns, and no other person or entity shall be entitled to rely upon or receive
any benefit from this Agreement or any term hereof.

33.      NO PERSONAL LIABILITY. No general or limited partner of
Seller, no officer, director, or stockholder or member of any corporation or
limited liability company which is a partner at any tier in Seller, no disclosed
or undisclosed principal of Seller, and no person or entity in any way
affiliated with Seller shall have any personal liability with respect to this
Agreement, any instrument delivered by Seller at Closing, or the transaction
contemplated hereby, nor shall the property of any such person or entity be
subject to attachment, levy, execution or other judicial process. No general or
limited partner of Buyer, no officer, director, or stockholder or member of any
corporation or limited liability company which is a partner at any tier in
Buyer, no disclosed or undisclosed principal of Buyer, and no person or entity
in any way affiliated with Buyer shall have any personal liability with respect
to this Agreement, any instrument delivered by Buyer at Closing, or the
transaction contemplated hereby, nor shall the property of any such person or
entity be subject to attachment, levy, execution or other judicial process.

34.      EXECUTION. The submission of this Agreement for examination
does not constitute an offer by or to either party. This Agreement shall be
effective and binding only after

18

due execution and delivery by the parties hereto; provided, however, that this
Agreement shall not be binding in any way upon Seller unless and until:

(a) Seller shall execute and deliver the same to Buyer; and

(b) Research Triangle Foundation of North Carolina has given its
written approval thereof.

If Seller notifies Buyer in writing at or prior to Closing that this Agreement
has not been approved by Research Triangle Foundation, then this Agreement shall
be deemed terminated.

[SIGNATURES ON FOLLOWING PAGE]

19

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

BUYER                                     SELLER

NETWORK APPLIANCE, INC.,                  CISCO SYSTEMS, INC.,
A DELAWARE CORPORATION                    A CALIFORNIA CORPORATION

By: /s/ STEVEN J. GOMO                    By:__________________________________
----------------------------------
Its: Senior Vice President of Finance     Its:_________________________________
and Chief Financial Officer
---------------------------------     Date:________________________________
Date: July 27, 2004     
--------------------------------     ESCROW AGENT

CHICAGO TITLE
INSURANCE COMPANY

By:__________________________________

Its:_________________________________

Date:________________________________

20

Staubach, CCC and TP join herein to agree to the provisions of Section 17 above.

THE STAUBACH COMPANY                      COMMERCIAL CAROLINA CORPORATION

By:__________________________________     By:__________________________________

Its:_________________________________     Its:_________________________________

Date:________________________________     Date:________________________________

TRI PROPERTIES

By:__________________________________

Its:_________________________________

Date:________________________________

21

EXHIBIT A

LAND DESCRIPTION

That certain parcel of land situate in Research Triangle Park, Cedar Fork
Township, Wake County, North Carolina, described more particularly as follows:

BEING all of Site 12 containing 37.8259 acres (including Surface Cover
Maintenance Easement containing 0.7774 acres) as shown on that map entitled
'Exempt Subdivision Map of Site 12' prepared by Barbara H. Mulkey Engineering,
Inc., on May 30, 2000 as recorded in Book of Maps 2000, Page 1300, Wake County,
North Carolina Registry.

TOGETHER WITH a permanent, non-exclusive open space easement over all of that
property identified as 'Natural Area Preserve' containing 26.0741 acres as shown
on the aforesaid map, said easement being more particularly described in
instrument recorded in Book 8706, Page 1763, aforesaid records.

22

EXHIBIT B

FORM OF DEED

Excise Tax - $47,938.00               Recording Time, Book and Page
--------------------------------------------------------------------------------

Tax Lot No._________________________    Parcel Identifier No.______________
Verified by_________________________ County on _____________________, 20________
by______________________________________________________________________________

Mail after recording to: Edward P. Tewkesbury

1604 Battleground Ave., Suite B, Greensboro, NC  27408

This instrument was prepared by: Edward P. Tewkesbury

Brief description for the index:________________________________________________

NORTH CAROLINA SPECIAL WARRANTY DEED

THIS DEED is made on________________, 2004, by and between

GRANTOR                                        GRANTEE

Cisco Systems, Inc.                              Network Appliance, Inc.
170 West Tasman Drive                            495 East Java Drive
San Jose, California 95134-1706                  Sunnyvale, California 94089

The designations Grantor and Grantee include the parties, their heirs,
successors, and assigns, and include the singular, plural, masculine, feminine
or neuter as required by context.

WITNESSETH, that Grantor, for valuable consideration paid by Grantee,
the receipt of which is hereby acknowledged, has and by these presents does
grant, bargain, sell and convey to Grantee in fee simple, the parcel of land
situated in Cedar Fork Township, Wake County, North Carolina, and more
particularly described on Exhibit A attached and incorporated into this Deed
(the "Property").

TO HAVE AND TO HOLD the Property, and all privileges and appurtenances
thereto belonging, to Grantee in fee simple.

23

And Grantor covenants with Grantee that Grantor has done nothing to
impair such title as Grantor received and that Grantor will warrant and defend
the title against the lawful claims of all persons claiming by, under or through
Grantor, except for matters of record, to which title to the Property is
subject.

IN WITNESS WHEREOF, Grantor has caused this instrument to be signed in
its corporate name by its duly authorized officer by authority of its board of
directors, the date first written above.

CISCO SYSTEMS, INC., a California corporation

By:_________________________________
Name:_______________________________
Title:______________________________

County of ________________
State of _________________

I, a Notary Public of ______________ County, _______________, certify
that ____________________ personally came before me this day and acknowledged
that (s)he is the ____________________ of Cisco Systems, Inc., a California
corporation, and that (s)he, as _________, being authorized to do so, executed
the foregoing on behalf of the corporation. Witness my hand and official seal or
stamp on_________________, 2004.

My Commission Expires:_______________  ____________________________Notary Public

[Official seal or stamp]

24

EXHIBIT C

FORM OF GENERAL INSTRUMENT

GENERAL INSTRUMENT OF TRANSFER
7301-13, 7301-14 and 7301-15 Kit Creek Road
Research Triangle Park, North Carolina 27709

This General Instrument of Transfer ("INSTRUMENT") is made as of the
____ day of __________, 2004, by and between CISCO SYSTEMS, INC., a California
corporation with a principal place of business at 170 West Tasman Drive, San
Jose, California 95134-1706 ("Assignor"), and NETWORK APPLIANCE, INC., a
Delaware corporation having a place of business at 495 East Java Drive,
Sunnyvale, California 94089 ("Assignee").

In connection with the conveyance of certain property owned by Assignor known
and numbered as Research Triangle Park Site 12 (Buildings 13, 14 and 15),
7301-13,7301-14, and 7301-15 Kit Creek Road, Research Triangle Park, North
Carolina 27709, more particularly described on Schedule I attached hereto and
made a part hereof (the "Premises"), and in consideration of Ten Dollars
($10.00) and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Assignor hereby sells, assigns, transfers,
grants and conveys unto Assignee, all of Assignor's right, title and interest in
and to the following to the extent the same apply to the Premises and are
transferable or assignable (collectively, the "Interests"):

1.       All appurtenances and privileges belonging to the Premises and the
rights, benefits and privileges of owning and operating the same;

2.       All rights, entitlements and/or approvals to develop the Premises which
have been or may hereafter be granted by governmental bodies having
jurisdiction or authority over the Premises, and any certificates
evidencing compliance therewith;

3.       All variances, conditional use permits, special permits, exceptions,
rezonings, general plan amendments, parcel maps, development
agreements, permits, Licenses, applications, any other governmental
approvals and consents (if any) relating to the Premises;

4.       All guarantees, warranties, and indemnities giving rise to any rights
or benefits of Assignor in respect of the Premises and all claims
and/or causes of action against contractors with respect to the
Premises or any part thereof or any buildings, structures or
improvements thereon, provided, however, that Assignor reserves, in
common with Assignee, such rights in respect of the matters assigned in
this paragraph 4 as may be necessary or convenient for Assignor's
discharge of liabilities, or defense of claims, relating to the
Premises which are not assigned to or assumed by Buyer in connection
with the acquisition of the Premises;

5.       All bonds, construction contracts, architect's contracts, licenses,
applications, permits, plans, drawings, specifications, "as-built"
plans and/or surveys, site plans, maps, and any other plans relating to
the construction of the improvements on the Premises;

25

6.       All engineering, soils, ground water and environmental reports and
other technical descriptions and environmental reports concerning the
Premises; and

7.       All tangible personal property owned by Assignor and located on or
attached and appurtenant to, or forming part of the Premises ("PERSONAL
PROPERTY").

Assignee hereby accepts the foregoing transfer from Assignor of the
above-assigned Interests.

This Instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, successors and assigns and shall be
governed by the laws of the State of North Carolina.

This Instrument may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

IN WITNESS WHEREOF, the parties have executed this Assignment under
seal as of the date first written above.

ASSIGNEE                                  ASSIGNOR

NETWORK APPLIANCE, INC.,                  CISCO SYSTEMS, INC.,
A DELAWARE CORPORATION                    A CALIFORNIA CORPORATION

By:__________________________________     By:__________________________________

Its:_________________________________     Its:_________________________________

Date:______________________               Date:______________________

26

Schedule I

The Premises

That certain parcel of land situate in Research Triangle Park, Cedar Fork
Township, Wake County, North Carolina, described more particularly as follows:

BEING all of Site 12 containing 37.8259 acres (including Surface Cover
Maintenance Easement containing 0.7774 acres) as shown on that map entitled
'Exempt Subdivision Map of Site 12' prepared by Barbara H. Mulkey Engineering,
Inc., on May 30, 2000 as recorded in Book of Maps 2000, Page 1300, Wake County,
North Carolina Registry.

TOGETHER WITH a permanent, non-exclusive open space easement over all of that
property identified as 'Natural Area Preserve' containing 26.0741 acres as shown
on the aforesaid map, said easement being more particularly described in
instrument recorded in Book 8706, Page 1763, aforesaid records.

27

EXHIBIT D

[RESERVED]

28

EXHIBIT E

FORM OF NON-FOREIGN CERTIFICATE

NON-FOREIGN CERTIFICATE

7301-13, 7301-14 and 7301-15 Kit Creek Road
Research Triangle Park, North Carolina 27709

Section 1445 of the Internal Revenue Code provides that a purchaser of
a United States Property interest must withhold tax if the seller is a foreign
person. To inform Network Appliance, Inc., a Delaware corporation ("Buyer") that
withholding of tax is not required upon the disposition of a United States
Property interest by Cisco Systems, Inc. ("Seller"), the undersigned hereby
certifies the following on behalf of Seller:

1.       Seller is not a foreign person (as that term is defined in the Internal
Revenue Code and Income Tax Regulations);

2.       Seller's United States employer identification number is 77-0059951;
and

3.       Seller's office address is        170 West Tasman Drive 
San Jose, California 95134-1706

Seller understands that this certification may be disclosed to the Internal
Revenue Service by Buyer and that any false statement contained herein could be
punished by fine, imprisonment, or both.

Under penalties of perjury I declare that I have examined this certification and
to the best of my knowledge and belief it is true, correct, and complete, and I
further declare that I have authority to sign this document on behalf of Seller.

CISCO SYSTEMS, INC., A CALIFORNIA CORPORATION

By:__________________________________

Its:_________________________________

Date:______________________

29

EXHIBIT F

ENVIRONMENTAL REPORTS SCHEDULE

TITLE                                  AUTHOR                      DATE
-------------------------------------------------------------------------------------------------

Phase 1 Environmental Site Assessment            Engineering Consulting        March 24, 2000
Services, LTD.

-------------------------------------------------------------------------------------------------
Abandonded Underground Natural Gas Pipeline      Arcadis Geraghty & Miller     July 12, 2000
Investigation, Research Triangle Park,           of North Carolina, Inc.
North Carolina

-------------------------------------------------------------------------------------------------
Phase 1 Environmental Site Assessment            Engineering Consulting        July 20, 2000
Services, LTD.

-------------------------------------------------------------------------------------------------
Report of Subsurface Exploration and             Engineering Consulting        July 25, 2000
Geotechnical Engineering Analysis                Services, LTD.

-------------------------------------------------------------------------------------------------
RTP Site 12 Site Plan Approval Letter            Elizabeth H.                  August 17, 2000
Rooks-Research Triangle
Foundation of North
Carolina

-------------------------------------------------------------------------------------------------
Architectural Elevation Approval for             Elizabeth H.                  September 27, 2000
Buildings 13-15                                  Rooks-Research Triangle
Foundation of North
Carolina

-------------------------------------------------------------------------------------------------
Report of Additional Subsurface                  Engineering Consulting        October 4, 2000
Explorations for the Parking Lots on Cisco       Services, LTD.
Systems Site 12 Located in Research
Triangle Park, North Carolina ECS, Ltd.
Project Number 8590

-------------------------------------------------------------------------------------------------
Right of Way Encroachment Agreement Primary      State of North Carolina       November 1, 2000
and Secondary Highways                           Wake County

-------------------------------------------------------------------------------------------------
Three Party Right of Way Encroachment            State of North Carolina       November 1, 2000
Agreement on Primary and Seconday System         Wake County

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

30

TITLE                                  AUTHOR                      DATE
-------------------------------------------------------------------------------------------------

Application for Driveway Entrance onto           Brandon H. Jones-State of     December 8, 2000
Louis Stevens Road Permit Number                 North Carolina Department
D51-40-00-259                                    of Transportation

-------------------------------------------------------------------------------------------------
Application for Driveway Entrance onto SR        Brandon H. Jones-State of     December 8, 2000
1639 Permit Number D51-40-00-252                 North Carolina Department
of Transportation

-------------------------------------------------------------------------------------------------
Encroachment Contract 12" x 8" tapping           State of North Carolina       December 29, 2000
sleeve, 8" gate valve and 20" steel carrier      Department of
pipe Louis Stevens Drive E51-40-00-0886          Transportation

-------------------------------------------------------------------------------------------------
Encroachment Contract 12" x 8" tapping           State of North Carolina       December 29, 2000
sleeve and  8" gate SR 1639 E51-40-00-0887       Department of
Transportation

-------------------------------------------------------------------------------------------------
Certificate of Substantial Completion Site       O'Brien/Atkins Associates     February 21, 2001
12

-------------------------------------------------------------------------------------------------
Encroachment Contract Tree Clearing and          State of North Carolina       August 6, 2001
Grading SR 1639 E51-4--01-0739                   Department of
Transportation

-------------------------------------------------------------------------------------------------
Cisco Systems, Inc. Building 13 Warranties,      Bovis Lend Lease, Inc.        November 6, 2001
General Information, Operations &
Maintenance Manuals, Test Reports

-------------------------------------------------------------------------------------------------
Certificate of Substantial Completion            O'Brien/Atkins Associates     November 16, 2001
Building 14

-------------------------------------------------------------------------------------------------
Cisco Systems, Inc. Building 14 Warranties,      Bovis Lend Lease, Inc.        December 14, 2001
General Information, Operations &
Maintenance Manuals, Test Reports

-------------------------------------------------------------------------------------------------
Cisco Systems, Inc. Building 15 Warranties,      Bovis Lend Lease, Inc.        February 13, 2002
General Information, Operations &
Maintenance Manuals, Test Reports

-------------------------------------------------------------------------------------------------
Cisco Systems, Inc. Site 12 Operations &         Bovis Lend Lease, Inc.        February 15, 2002
Maintenance Manuals, General Information &
Warranties

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

31

TITLE                                  AUTHOR                      DATE
-------------------------------------------------------------------------------------------------

Total Acceptance of Maintenance-Public           Jimmy Little-Development      May 9, 2002
Water and Sanitary Sewer lines                   Inspector, Town of Cary

-------------------------------------------------------------------------------------------------
Air Permit No. 9439M00                           Laura S. Butler-North         June, 04 2004
Carolina Department of
Environmental and Natural
Resources Division of Air
Quality

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

32

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel J. Warmenhoven, certify that:

1)      I have reviewed this quarterly report on Form 10-Q of Network Appliance,
Inc.;

2)      Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3)      Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4)      The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:

a)      designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;

b)      evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures as of the end of the period covered by this
quarterly report based on such evaluation; and

c)      disclosed in this quarterly report any change in the
registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting;

5)      The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):

a)      all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and

b)      any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.

/s/ DANIEL J. WARMENHOVEN
----------------------------------
Daniel J. Warmenhoven
Chief Executive Officer

Date: August 31,  2004

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002

I, Steven J. Gomo, certify that:

1)      I have reviewed this quarterly report on Form 10-Q of Network Appliance,
Inc.;

2)      Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3)      Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4)      The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:

a)      designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;

b)      evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures as of the end of the period covered by this
quarterly report based on such evaluation;; and

c)      disclosed in this quarterly report any change in the
registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting;

5)      The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):

a)      all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and

b)      any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.

/s/ STEVEN J. GOMO
--------------------------------------------
Steven J. Gomo
Senior Vice President of Finance
and Chief Financial Officer

Date: August 31, 2004

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel J. Warmenhoven, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of Network Appliance, Inc., on Form 10-Q for the quarterly
period ended July 30, 2004 fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, and that
information contained in such Quarterly Report on Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of
Network Appliance, Inc.

/s/ DANIEL J. WARMENHOVEN

-----------------------------------
Daniel J. Warmenhoven
Chief Executive Officer

Date: August 31, 2004

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven J. Gomo, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of Network Appliance, Inc., on Form 10-Q for the quarterly
period ended July 30, 2004 fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, and that
information contained in such Quarterly Report on Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of
Network Appliance, Inc.

/s/ STEVEN J. GOMO
------------------------------------
Steven J. Gomo
Senior Vice President of Finance
and Chief Financial Officer

Date:  August 31, 2004