UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number 0-27130

Network Appliance, Inc.

(Exact name of registrant as specified in its charter)

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.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands — unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts — unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands — unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in thousands, except per-share data)

(Unaudited)

      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.

      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. Certain prior period balances have been reclassified to conform with the current period presentation.

      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 nine months of fiscal 2005 and 2004 were 39-week and 40-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 and nine-month periods ended January 28, 2005 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”.

      The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 reserves and write-down; restructuring accruals; impairment losses on investments; accounting for stock-based compensation; and loss contingencies. Actual results could differ from those estimates.

      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 Statement of Financial Accounting Standards (“SFAS”) No. 123. Deferred compensation recognized under APB No. 25 is amortized ratably to expense over the vesting periods. We account for stock

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

options issued to non-employees in accordance with the provisions of SFAS No. 123 under the fair value based method.

      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 under the provisions of SFAS No. 123 are adjusted to reflect cancellations and forfeitures due to employee terminations as they occur.

      We recorded $1,968 and $5,963 of deferred compensation expense for the three and nine-month periods ended January 28, 2005, respectively, and $452 and $1,473 for the three and nine-month periods ended January 30, 2004, respectively, primarily related to the amortization of deferred stock compensation from unvested options assumed in the Spinnaker and WebManage 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 (discontinued as of December 31, 2004) and the award of restricted stock to certain employees. The net increase year-over-year in deferred compensation expense reflected primarily higher stock compensation relating to the Spinnaker acquisition and restricted stock awards offset by forfeitures of unvested options and forfeited restricted stock assumed in the Spinnaker acquisition.

      Based on deferred stock compensation recorded at January 28, 2005, estimated future deferred stock compensation amortization for the remainder of fiscal 2005, and fiscal years 2006, 2007 and 2008 are expected to be $1,773, $6,907, $5,407 and $3,810, respectively, and none thereafter.

      We recorded $221 and $469 in compensation expense in the three and nine-month periods ending January 28, 2005 and $13 and $539 in the three and nine-month periods ending January 30, 2004, 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.

      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 and pro forma net income per share would be as follows (in thousands, except per share data):

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      During the first quarter of fiscal 2005, as part of our expansion efforts, we purchased three buildings in Research Triangle Park, North Carolina, for $24,095 and which was included in Land and Construction-in-progress as of January 28, 2005.

      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 January 28, 2005, there was no indicators that would suggest the 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 Orca Systems, Inc. (“Orca”) in June 2000.

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Balances as of January 28, 2005 and April 30, 2004 are summarized as follows:

      Amortization expense for identified intangible assets is summarized below:

      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. 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.

      Based on the identified intangible assets (including patents) recorded at January 28, 2005, the future amortization expense of identified intangibles for the remainder of fiscal 2005 and the next four fiscal years and thereafter is as follows:

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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. We do not enter into derivative financial instruments for speculative or trading purposes. Our major foreign currency exchange exposures and related hedging programs are described below:

      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 and nine-month periods ended January 28, 2005 and January 30, 2004 as these options’ exercise prices were above

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the average market prices in such periods. For the three-month periods ended January 28, 2005 and January 30, 2004, 13,121 and 18,038 shares of common stock options with a weighted average exercise price of $57.67 and $50.14, respectively, were excluded from the diluted net income per share computation. For the nine-month periods ended January 28, 2005 and January 30, 2004, 14,873 and 24,559 shares of common stock options with a weighted average exercise price of $54.05 and $42.50, 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 (in thousands, except per share data):

      On May 13, 2003, we announced that the Board of Directors approved a $150,000 stock repurchase program to purchase shares of our outstanding common stock in the open market. On May 18, 2004, we announced that the Board authorized an expansion of the program to purchase an additional $200,000 of outstanding common stock, raising the total authorized stock purchase spending to $350,000. Under the program, we may purchase shares of common stock through open market transactions at prices deemed appropriate by management. The duration of the repurchase program is open-ended, and the program may be suspended or discontinued at any time. The timing and amount of repurchase transactions under this program will depend on market conditions and corporate and regulatory considerations, and will be funded from available working capital. Actual repurchases were recorded as treasury stock and resulted in a reduction of stockholders’ equity.

      During fiscal 2004, we repurchased 6,853 shares of our common stock at an average price of $19.87 per share for an aggregate cost of $136,172. During the three-month period ended January 28, 2005, we purchased 1,532 shares of our common stock at an average price of $32.62 per share for an aggregate purchase price of

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$49,980. During the nine-month period ended January 28, 2005, we purchased 5,580 shares of our common stock at an average price of $23.83 per share for an aggregate purchase price of $132,993. Since the inception of the stock repurchase program through January 28, 2005, we have purchased 12,433 shares of our common stock at an average price of $21.65 per share for an aggregate purchase price of $269,165.

      The components of comprehensive income, were as follows (in thousands):

      The components of accumulated other comprehensive income (loss) net of related tax effects were as follows:

      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.

      During the first nine months of fiscal 2005, we paid $544 pursuant to final resolution of certain severance-related restructuring accruals. As of January 28, 2005, we have no outstanding balance in our restructuring liability for the second quarter fiscal 2002 restructuring.

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following analysis sets forth the significant components of the second quarter fiscal 2002 restructuring at January 28, 2005 (in thousands):

      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 January 28, 2005, $667 was included in other accrued liabilities and the remaining $3,976 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 January 28, 2005 to be payable through November 2010.

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following analysis sets forth the significant components of the restructuring reserve at January 28, 2005 (in thousands):

      All our investments are classified as available for sale at January 28, 2005 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. In the third quarter of fiscal 2005, the Company began to classify its investment in auction-rate securities as short term investments. These investments were included in cash and equivalents in previous periods ($148.8 million and $192.3 million at April 30, 2004 and 2003, respectively), and such amounts have been reclassified in the accompanying interim financial statements to conform to the current period classification. This change in classification had no effect on the amounts of total current assets, total assets, net income or cash flow from operations of the Company.

      In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151 “Inventory Costs” (SFAS No. 151). This statement amends the guidance in Accounting Research

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory cost incurred in fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of fiscal 2007. The Company does not expect the adoption of SFAS No. 151 to have a material impact on its consolidated financial statements.

      In December 2004, the FASB issued SFAS No. 123R, Share-Based Payments. Generally, the requirements of SFAS No. 123R are similar to those of SFAS No. 123. However, SFAS No. 123R requires companies to now recognize all share-based payments to employees, including grants of employee stock options, in their statements of operations based on the fair value of the payments. Pro forma disclosure will no longer be an alternative. We are required to adopt SFAS No. 123R beginning with the second quarter of our fiscal year 2006.

      SFAS No. 123R permits public companies to adopt its requirements using one of two methods: (1) a “modified prospective” method under which compensation cost is recognized beginning with the effective date based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that are unvested on the effective date; or (2) a “modified retrospective” method which includes the requirements of the modified prospective method and also permits companies to restate either all prior periods presented or prior interim periods of the year of adoption using the amounts previously calculated for pro forma disclosure under SFAS No. 123. We have not yet determined which method we will select for our adoption of SFAS No. 123R.

      As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options through our statement of operations but rather disclose the effect in our financial statement footnotes. Accordingly, the adoption of SFAS No. 123R’s fair value method will have a significant impact on our reported results of operations. However, the impact of the adoption of SFAS No. 123R cannot be quantified at this time because it will depend on levels of share-based payments granted in the future, but had we applied the principles of SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123, as described in the disclosure of pro forma net income and earnings per share in Note 4 to these condensed consolidated financial statements. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.

      In January 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 109-1, “Application of SFAS No. 109 to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”. This FSP provides guidance for the accounting of a deduction provided to U.S. manufacturing companies and is effective immediately. The Company believes the adoption of this position currently will not have a material effect of its financial position or results of operations. However, there is no assurance that there will not be a material impact in the future.

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following summarizes our commitments and contingencies at January 28, 2005, and the effect such obligations may have on our future periods, (in thousands):

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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 for approximately $10,200 not later than May 2005. Accordingly, this balance was reclassified from Other assets to Prepaid expenses and other in the first quarter of fiscal 2005. 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.

      As of January 28, 2005, our financial guarantees consisted of standby letters of credit outstanding, bank guarantees, 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 $5,588 and $4,338 as of

NETWORK APPLIANCE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

January 28, 2005 and April 30, 2004, respectively. Of this maximum exposure, $3,767 and $2,736 consists of restricted cash and was classified under Prepaid expenses and other and Other Assets on our balance sheet at January 28, 2005 and April 30, 2004, respectively. Except for the restricted cash recorded on our balance sheet, we have not recorded any liability at January 28, 2005 for the remaining $1,821 in guarantees.

      As of January 28, 2005, our notional fair values of foreign exchange forward and foreign currency option contracts totaled $231,899. 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 January 28, 2005 and April 30, 2004, the maximum recourse exposure under such leases totaled approximately $6,093 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 of a third party. 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; or (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.

      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 belief that the trend towards unification of storage continues to accelerate; (2) our expectation that we will see strong demand for storage in many areas; (3) our plans to continue to leverage our product capabilities to enhance our storage grid architectures; (4) our belief that the data storage market experienced growth and increased IT spending; (5) our belief that our competitors may be re-positioned to acquire significant market share from us; (6) our expectation that there will be a further decline in the price per petabyte; (7) our belief that our strategic investments are targeted at some of the strongest growth areas of the storage market; (8) our estimates of future intangibles and stock compensation amortization expense relating to the Spinnaker acquisition; (9) our expectation that service margins will vary over time; (10) our expectation that we will continue to add sales capacity; (11) our expectation that we will increase sales and marketing expenses commensurate with future revenue growth; (12) our intention to continuously broaden our existing product offerings and introduce new products; (13) our estimates regarding future capitalized patents amortization expenses and future amortization of existing technology; (14) our expectation that we will continuously support current and future product development and enhancement efforts and incur corresponding charges; (15) our belief that our research and development expenses will increase in absolute dollars for the remainder of fiscal 2005; (16) our belief that our general and administrative expenses will increase in absolute terms in the remainder of fiscal 2005; (17) our expectation regarding estimated future deferred stock compensation amortization expenses and future covenants not to compete; (18) 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; (19) our expectation that interest income will increase for the remainder of fiscal 2005; (20) our expectations regarding our contractual cash obligations and other commercial commitments at January 28, 2005 for the remainder of fiscal 2005 and fiscal years 2006 through 2009 and thereafter, which we anticipate will equal no more than $103.0 million in the aggregate; (21) our expectation that capital expenditures will increase consistent with our business growth; (22) our expectation that our existing facilities and those currently being developed, will be sufficient for our needs for at least the next two years and that these construction projects will be financed through cash from operations and existing cash and investments; (23) our belief that our existing liquidity and capital resources are sufficient to fund our operations for at least the next twelve months; (24) our belief that the accounting policies described under the Critical Accounting Estimates and Policies are the ones that most frequently require us to make estimates and judgments; (25) our belief that foreign currency hedging contracts will not subject us to significant credit risk; (26) our belief that we have been able to compete successfully with our principal competitors based on the superior technology of our products; (27) our intent to regularly introduce new products and product enhancements; (28) the possibility that we may need to increase our materials purchases, contract manufacturing capacity and internal test and quality functions to meet anticipated demand; (29) our intention to continue to establish and maintain business relationships with technology companies; (30) the possibility that we may engage in future acquisitions; (31) our expectation that we will increasingly rely on our indirect sales channel for a significant portion of our revenue; (32) our expectation that the ultimate costs to resolve any outstanding legal claims or proceedings will not be material to our business; (33) our expectation that companies in the appliance market will increasingly be subject to infringement claims as the industry grows; (34) our expectation that the value of our investments will not decline significantly because of changes in market interest rates, (35) our expectation regarding ATA’s future impact on the storage market; (36) our expectation that our investments in emerging technologies will contribute to our long term growth; (37) our expectation that we will release Spinnaker integrated capabilities in our products by the end of calendar year 2005; (38) our belief that the current enterprise disk drive supply constraints and price rigidity will not negatively impact our gross margin; and (39) cash from operating

activities may fluctuate in future periods, 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 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; and (14) 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.

      Throughout the third quarter of fiscal year 2005, we introduced new security and compliance solutions, expanded partnerships, and continued to grow iSCSI deployments. A wide range of enterprise customers have chosen to deploy NetApp for a variety of reasons — reduced complexity, a low total cost of ownership (TCO), advanced management capabilities through Data ONTAP^tm software and a range of advanced storage and software management capabilities.

      One of the key drivers of growth was demand for data protection solutions including compliance, disk-to-disk backup, and business continuity solutions. Our NearStore product with RAID-DP (“Redundant Array of Independent Disks — Double Parity”) capability protects customers against double disk drive failures, making inexpensive ATA (“Advanced Technology Attachment”) drives more reliable as server class drives. We see ATA going well beyond nearline applications, bridging the gap between secondary and primary storage in tiers in the enterprise. We expect this to have a significant impact on overall storage economics, driving costs for our customers, even as we increase storage capacity and functionality.

      We also experienced growth in our Windows® business and more storage-grid-style Linux deployments. Our storage-attached networks (“SAN”) penetration continued to grow with the majority of fibre channel SAN systems deployed in combination with either network-attached storage (“NAS”) or iSCSI protocols. We believe that the trend towards unification of storage continues to accelerate, as exemplified by the strong performance of our SAN and iSCSI business. We expect our investment in emerging technologies such as iSCSI, virtualization and the storage grid to increasingly contribute to our growth over the long term.

      During the third quarter of fiscal 2005, we shipped our latest version of our enterprise storage software, Data ONTAP 7G, providing flexible data management for enterprise grid storage environments. Customers using Data ONTAP 7G can increase their storage utilization rates, increase I/ O performance for enterprise-

class applications and reduce storage management costs for multi-application environments. Additionally, the NetApp enterprise gFiler^tm storage systems will now provide fibre channel data access and fully leverage the new enterprise storage virtualization capabilities in Data ONTAP 7G for multi-vendor/protocol storage environments. We also introduced new data management software portfolio with SnapValidator^tm, which can be applied across the full line of NetApp storage systems, across any protocol, supporting highly database-intensive environments. We plan to continue to leverage our product capabilities to enhance our storage grid architectures.

      Customers across all geographies deploy our solutions for a variety of database, security, and other data center and mission-critical applications. 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. Overall, our year-over-year revenue growth was primarily driven by strong demand for our new and existing products across all major product lines, increased sales of our software and services products, additional channel/partner opportunities, and improving IT spending. We believe the data storage market experienced growth and increased IT spending but remain cautiously optimistic about the economic recovery. While we are focused on increasing revenue and gaining market share, some of our competition may be challenged to sustain their market share. However, we believe that those competitors who survived the economic downturn are now re-focused and re-positioned to take advantage of these positive market conditions, some of which may in turn acquire significant market share from us. We cannot assure you that we will be able to maintain our competitive position against current and potential competition, particularly competitors that have greater financial, technical, marketing, sales, service and other resources than we do and therefore may be able to respond more quickly than us to the new or changing opportunities, technologies and customer requirements.

      We also cannot assure you that revenue will continue to grow at previous rates. 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, high disk content, discount level, competition and global service investment.

      Continued revenue growth 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 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.

Results of Operations

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

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

      Product Revenues — Product revenues increased by 36.8% to $367.9 million for the third quarter of fiscal 2005, from $269.0 million for the third quarter of fiscal 2004. Product revenues increased by 36.5% to $1,029.3 million for the nine-month period ended January 28, 2005, from $754.3 million for the nine-month period ended January 30, 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:

      Product revenues were negatively impacted by the following factors: