Dan Warmenhoven - CEO Tom Mendoza - President Steve Gomo - CFO Tom Georgens - EVP of our Enterprise Storage Systems Group Tara Dhillon - Senior Director of IR

Richard Farmer - Merrill Lynch Harry Blount - Lehman Brothers Paul Mansky - Citigroup Laura Conigliaro - Goldman Sachs Bill Fearnley - FTN Midwest Dan Renouard - Robert Baird Rebecca Runkle - Morgan Stanley Aaron Rakers - A.G. Edwards Ben Reitzes - UBS Keith Bachman - Banc of America Chris Whitmore - Deutsche Bank Clay Sumner - FBR Tom Curlin - RBC Capital Brian Freed - Morgan Keegan Glenn Hanus - Needham & Company Andrew Neff - Bear Stearns

Good day, ladies and gentlemen, and welcome to the Network Appliance Second Quarter Earnings Call. My name is Jeremy and I will be your coordinator for today. At this time, all participants are in listen-only mode. (Operator Instructions). So, now I would like to turn the call over to Ms. Tara Dhillon, Senior Director of Investor Relations. Please proceed, ma'am.

Good afternoon, everyone. Thank you for joining us today. Our conference call is being webcast live and will be available for replay on our website at www.netapp.com, along with earnings release, the financial tables, and the reconciliation between GAAP and non-GAAP numbers. In the course of today’s call, we will make forward-looking statements and projections that involve risks and uncertainties, including statements regarding our expectations for operating results for our fiscal Q3 and FY '07, our stock repurchases and hiring goals, our intention to pay down our debt, the timing of and benefits to be derived from product introductions and technology advancement, including our FAS3070 and ONTAP GX products, our expectations regarding our market share and growth rate of our indirect channels, and the outcome of our IRS tax audit. Actual results may differ materially from our statements or projections. Important factors that could cause actual results to differ include, but are not limited to, customer demand for products and services, increased competition, a decline in general economic conditions and foreign currency exchange rate fluctuations. Other equally important factors that could cause actual results to differ from those in the forward-looking statements are detailed in the Risk Factor section of our 10-K and 10-Q reports on file with the SEC and accessible through our website, all of which are incorporated by reference into today’s discussion. We disclaim any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. With me on today’s call are Dan Warmenhoven, CEO; our President, Tom Mendoza; Steve Gomo, CFO; and Tom Georgens, EVP of our Enterprise Storage Systems Group. Steve will review this quarter’s financials and discuss our financial outlook for the third quarter, and then Dan will share his thoughts before we wind up with everyone here for a Q&A. Steve.

Thanks, Tara. Good afternoon, everyone. NetApp achieved another record quarter with strengths across all major areas of our business, in particular the U.S. Federal team had a stellar quarter, most of Europe exceeded our expectations and our FAS6000 kicked into gear this quarter. As I walk through the results with you, all numbers I mention comply with GAAP, unless stated otherwise. Total revenues for the second quarter were $652.5 million, up 35% compared to Q2 last year, and up 5% sequentially. Foreign currency effect added about six-tenth of percentage point to this quarter’s results on a sequential basis, and 1.6 percentage points on a year-over-year basis. The combination of product revenues and software subscriptions were $563.5 million, growing 33% year-over-year, and over 4% sequentially. Add-on software and software subscriptions accounted for about 36% of total revenue this quarter. This is a combination of add-on software products that were about 23% of total revenue and software subscriptions, which increased to 12.6% of total revenue. Revenue from IBM accounted for about 3% of total revenue and Decru was 2% of total revenue. For the full year, we continue to expect IBM to contribute between 3% and 4% of total revenue, and Decru to contribute between 2% and 3% of revenue. Revenue from services, which includes hardware support, installation, professional services and educational services, was almost 14% of total revenue, up 10% sequentially and up 53% over Q2 of last year. Our services organization continues to build out its practice and solution areas, which will drive faster than corporate average growth rate in service revenue. Service maintenance contracts increased 9% sequentially and 51% year-over-year. Professional services grew 18% sequentially and 63% year-over-year. Non-GAAP gross margins were 62.6% this quarter, the highest level in 4.5 years. Non-GAAP gross margins for the combination of products and software subscription finished Q2 at 67.4%, up 1.8 percentage points over last quarter. This increase was driven by a combination of factors. First, while still very competitive, the global pricing environment was less severe than we had anticipated. Product mix was also favorable. We saw a jump in the number of system heads sold without disks, with both the V-Series and the FAS6000 product contributing to this phenomenon. The FAS6000 series saw a strong jump in unit sales, one-third of which were heads only, as customers upgraded their existing 900 series system. Finally, favorable manufacturing variances contributed about four-tenths of a percentage point to gross margin versus last quarter. Now, we expect to pass most of this favorable margin variance back to our customers, so you should expect gross margins to modestly decline going forward. Non-GAAP service margins of 32.6% also increased significantly this quarter due to the continued growth in service contracts revenue and improvements in productivity. Given the demand for our services, we plan to increase our rate of hiring in our services organization in the third and fourth quarters. So, you should expect these service margins to pull back slightly and finish between 30% and 31% for the balance of FY '07. Turning to non-GAAP expenses, our operating expenses totaled $290 million or 44.5% of revenue. Expenses increased 5% sequentially and came in on our target spending plan for the quarter. Total employee headcount increased by 417 people, ending the quarter with 5,632 employees. Employee additions were extremely back-end loaded, with over 50% of the new hire starting in the third month of the quarter. A total of 656 people have been hired so far in '07, that's our fiscal year. Given the opportunities we see for growth and market share expansion, we now plan to hire a total of 1,400 to 1,500 people by the end of fiscal year, with the bulk of these hires concentrated in sales, engineering and professional services. GAAP operating expenses include the effect of intangible amortization and the effect of FAS 123R as well as the benefit of a one-time gain of $25.3 million on the sale of our net cash assets. At $118.6 million, non-GAAP income from operations finished at 18.2% of revenue, well above our targeted range and almost entirely due to higher gross margin. Non-GAAP other income, which consists primarily of interest income, was $14.2 million. Non-GAAP income before taxes for the quarter was $132.8 million or 20% of revenue. Our effective non-GAAP tax rate remains at 18%. On the subject of taxes, I would like to clarify the status of our tax audit. We are currently in initial phase of a routine IRS audit and they've asked us to provide data on a broad range profit. Contrary what you may have read, there have been no specific claims or actions by the IRS related to intellectual property buy-in payments by our overseas entity. As we stated in our 10-K, the possibility exists that this could be challenged based on what we have seen in few other tech company. However, I’d like to make it very clear that if this were to be challenged, NetApp would contest any proposed material assessment to the full extent allowed under the tax laws, and we strongly believe that we would prevail at any such contest. If there were an assessment, it would be a one time discrete charge and any associated tax payment would likely be offset by our large NOL carry-forward. It would not impact our [technical difficulty] $108.9 million or $0.28 per share. GAAP net income totaled $86.9 million or $0.22 per share. So, please refer to the table provided in our press release and on our website to see the reconciling items between GAAP and non-GAAP. Now, moving on to balance sheet, cash and investments totaled $1.38 billion, an increase of approximately $107 million over Q1. We repurchased approximately 4.3 million shares of outstanding common stock at an average price of $33.79 per share for a total cash outlay of roughly $144 million. There is approximately $41 million remaining in our previous stock repurchase authorization and as announced in today's press release, our Board has authorized an additional $800 million for stock buyback purposes. Next quarter, we expect to repurchase roughly $200 million worth of stock. Our cash generated from operations was a record $229.6 million this quarter, up 124% over the second quarter of last year. Capital purchases were $43.7 million and depreciation and amortization totaled $25.9 million. Cash and investments exclude $190 million of restricted cash associated with our fourth quarter foreign cash repatriation. The debt on our balance sheet related to this repatriation is currently $193 million. We paid down approximately $78 million of this debt during the second quarter and we plan to pay off the remaining balance within the next two years. Deferred revenue increased $75.4 million this quarter to $818.6 million, a 10% sequential increase and again a 53% year-over-year. This continue to increase [technical difficulty] 55 days reported last quarter. DSOs were relatively unchanged as we saw order momentum increased steadily throughout the quarter. Inventory turns remain solid at 17.3 times, the same as last quarter. Now, before I turn the call over to Dan for his comments, I'll discuss our target operating model for the third quarter and revised expectations for the full year. Our outlook is based on current business expectations and current market conditions, and reflect our non-GAAP presentation. We are making forward-looking statements and projections that involve risk and uncertainty. Actual results may differ materially from our statements or projections. We expect FY '07 third quarter sequentially revenue growth to be in the range of 7% to 8% over the second quarter, which translates into a 30% to 31% year-over-year growth rate. I would like to remind to you that this takes into account the reduction in total revenue from net cash now that those assets have been sold. In other words, our Q3 estimates reflect a reduction of about 2 percentage points in growth year-over-year and almost 2 percentage points sequentially due to the net cash sale. We expect total non-GAAP gross margins to moderate as we increase our hiring in professional services and as we pass along payable variances back to our customers. And with the additional operating -- operational hiring we are planning for the back half of the year, we expect to see our non-GAAP operating margin for the third quarter return to our target range of 15.8% to 16.4%. Third quarter non-GAAP earnings are expected to be about $0.28 per share. GAAP earnings are expected to be $0.17 to $0.18 per share. We expect our diluted share count to continue to decrease by 2 to 3 million shares per quarter over the remainder of FY07. Given the strength we see in our business, we are revising our target for FY07 revenue growth upwards to a range of 33% to 34% growth over FY06. Non-GAAP earnings per share are expected to be between $1.10 and a $1.11. With the inclusion of FAS 123R and GAAP earnings are very difficult to estimate, given the volatility of some of these variables including the impact of our stock price. That said, our GAAP -- our target GAAP range is estimated to be $0.73 to $0.76 per share based upon the information we have and the assumptions we make today. Now please note that since Topio transaction has not yet been closed, our guidance does not include the impact of Topio. That said, Topio is small in size and in the early phase of revenue development. As a result, we expect the impact of Topio's purchase to be negligible on revenues and depending on the timing of the close, dilutive by just under a penny for each of the next two quarters. At this point, I will turn the call over to Dan for his update. Dan.

Thank you, Steve. By all measures this was another terrific quarter. Our core business showed strong growth and our newer businesses and product lines are starting to gain traction. With strong execution around the world, we continue to gain momentum [technical difficulty] the NetApp value proposition is clearly exemplified again this quarter, IDC released its second quarter market share data for open systems network storage. NetApp was ranked number four in terms of revenue but for the first time achieved the number one position in petabytes shipped. Without a doubt, customers get more storage for less with Network Appliance for our bundled NetApp software including flexible volumes, they don't have to buy as much storage capacity upfront, but they do from our competitors to fulfill their project needs. And a recent Mercer study indicated storage administrators managed twice the amount of NetApp storage per person compared to HP and EMC systems. The customers also get significant savings in overhead admin costs. Our petabytes shipped this quarter increased modestly, growing just 2% sequentially to 74 terabytes. ATA accounted for 52% and fibre accounted for 48% of the total. The FAS 6000 series really took off this quarter increasing over 150% in terms of units shipped but as Steve mentioned over one-third of that increase was systems units without disks which carry a higher margin but no associated petabytes of storage. This means customers were buying FAS6000 heads to upgrade their older FAS900 systems. We also saw a 12% jump in the number of V-Series units shipped, which are also diskless systems. Another interesting dynamic was an increase in the number of add-on shelves sold. When we launched our 3000 series of FlexVol last year, customers no longer needed to over-provision their storage. So they only bought the amount of storage necessary for their more immediate needs. It appears that customers are beginning to reach the maximum utilization point of those units and are therefore starting to add more storage shelves to their systems. Add-on shelves purchased after the [time] give customers the flexibilities to spread the cost of storage acquisitions out overtime, realize lower cost as disk drive prices decline and more closely align their purchases with their actual storage usage. Our total storage systems shipped actually declined slightly this quarter. This was primarily due to 900 series products particularly 980 finally showing a significant slowdown. Units of the NearStore 200 also declined significantly as customers moved to ATA-based FAS3000 units to increase performance. The FAS3000 series units shipped increased to 50% as system units sold, and we also saw a growth in our average selling price. In Q3 we expect to just launch FAS3070 to make up the difference in units so that the 900 series continues to reign. The FAS270 increased modestly again this quarter, but the challenge that the industry is having was FAS technology. We have pushed back the launch for our next generation low-end, and we will continue to sell the FAS270 until we see additional maturity in FAS's physical infrastructure. We just don’t think the current risk levels are appropriate for our customers and we will keep you posted as we monitor evolution in this area. When competitive deals are decided on a technical or total cost ownership basis, NetApp is extremely successful. A competitor's incumbency is usually our greatest challenge and we are increasing this space in other vendors, but it can be a slow process with customers who are resistant to change. To help speed the process we announced our intent to acquire Topio, a company that provides software for heterogeneous data replication and recovery in any server or storage environment and across any distance. We believe our secondary storage value proposition helps us get our foot in the door with new customers and acquiring of Topio Technology will allow us to provide customers with the ability to mirror their incumbent primary storage and NetApp storage and get all the data management benefits and reduce storage requirements that come with NetApp functionality. This way they get to experience NetApp's ease of use, at the same time radically reduce the amount of storage they need for the development test environments by using our FlexClone software, which makes virtual clones of data sets rather than physical copies thus reducing most ebb and test storage needs by 80% or more compared to other vendors. Topio also brings heterogeneous SAN replication which further stimulates the growth of our SAN and iSCSI businesses. This quarter our block-based protocols were included in 38% of our storage business which excludes security and caching, and of this 28% of our business includes SAN, 16% include iSCSI and over 6 percentage points are overlap between the two. On the ultra high-end our scale-up technology, Data ONTAP GX is generating a lot of interest from the high performance computing environment its targeted for, and is currently being tested by many customers. These customers are eagerly awaiting a new release of GX, which provides very high levels of aggregate throughput and single file throughput by incorporating our flagship 6070 system which file [sharing], the ability to have a single file spread across multiple processors. The release is scheduled for this current quarter. Our new ultra-low-end SMB appliance also showed modest gains this quarter, as additional VARs were qualified, and we worked through some early supply chain challenges. After closing one of the largest deals in NetApp history last quarter, Decru was down slightly, but still a very solid quarter, contributing 2% of revenue. Our Virtual Tape Library took a while to get started, since it sells into a different part of the enterprise. But it has exceeded our plans this past quarter, and also closed its first $1 million deal. Net cash, since last quarter Network Appliance again contributed 3% of total revenue, as customers used the opportunity to make their final purchases and renewals of their service contract service. Now, that sale of net cash asset is closed, the contribution of revenue from this business will decline drastically in the next quarter, and all future revenue will be in the form of deferred revenue from our balance sheet, as we continue to support our existing net cash customers for the life of their service contracts. IBM continues to make steady progress. As Steve mentioned, they again contributed 3% of our business this quarter, and that it helped the increase in our software tax rate, getting closer to our corporate average as their field begins to learning how to effectively sell our data management value proposition. Geographically, this quarter's profile is exactly like last quarter's -- I am sorry, second quarter of last year. 60% of revenue came from the Americas, 29% from EMEA and 11% came from Asia-Pac. Business in most areas of the world was strong, and most normal was our US Federal team, which contributed over 14% of revenue this quarter. Our indirect channels up almost 11% sequentially, which was also aided by the Federal business, which is largely to resellers, to a total of 60% of revenue. Contribution from Arrow and Ad-net increased 16% sequentially, generating a record 12% of our revenue this quarter. For several quarters now, we focused our investments on developing our indirect channel, and with the leverage it provides, we continue to grow faster than the overall corporate growth rate. The leverage we get from our technology partners continues to expand every quarter. At Oracle OpenWorld a few weeks ago, you may have heard [Sopra Cutt] introduce Tom Mendoza's keynote telling the audience that, "Oracle voted with their dollars and the Oracle lost them data centers are commercial for NetApp." Huge traffic and lead generation event increased 10X over last year, while also increasing our visibility and success in Microsoft environments. In this quarter, we closed some of our largest exchange projects in our history, including a 200,000 seat installation at a major international oil company. We also completed the installation of NetApp systems in the Microsoft technology solutions centers around the globe. To wrap up, I would like to just reiterate, how pleased I am with the continued strong performance from the NetApp team. We remain focused on rapid growth, capturing market share and being the most innovative company in the storage space to help solve customer challenges. I would like to invite you to our fiscal year '07 Analyst Day to learn more about NetApp and our plans for fiscal year 2008. They will be held in New York City on March 13, 2007, and you'll receive additional information's from our Investor Relations team in the near future. At this point, I would like to open the floor to questions, and again I ask that you limit yourself to one question. And then if you have second to return to the queue, so we may address everyone in a timely fashion. Thank you. Operator?

(Operator Instructions). Your first question comes from the line of Richard Farmer of Merrill Lynch. Please proceed, sir. Richard Farmer - Merrill Lynch: Thanks. Dan and Steve, I wanted to ask you about the margin leverage that you had in the quarter. Both gross and operating margins came in higher than -- at least we were modeling what most people were looking for. You mentioned the benign pricing and the favorable mix with higher percentage of head and manufacturing variance as well, if I heard you correctly. But the question is, how much are those factors likely to persist going forward, and to what degree are you going to look to drive back down to the more 16% type range or are you now in a position where you're more comfortable realizing some sustained higher margins up at this 18% level?

Rich, this is Steve here. There were several forces, as I mentioned, that basically contributed to the outstanding gross margin performance. Most of those forces, we think, well not persist in the case of the less severe pricing environment or we will end up passing the favorable variances that we can control back to our customers. Our intent is not to milk the gross margin at this point, but to provide competitive solutions to our customers. So, if I were you, my advice would be that I would model a slight reduction in gross margin going forward, probably not down to the 60% level, consolidated company. I think that our margins are too strong for that right now. But certainly half a point to a point from where they are would be a reasonable reduction. Richard Farmer - Merrill Lynch: I mean, when I said that, I meant 16, and not 60, so I'm talking about the operating margin level there, but I appreciate the comment. Thank you.

Yes, this is Dan. I think we missed an opportunity to get more aggressive this past quarter, and I'd like to see that not happen again. I'd like to take part of that gross margin and use it for special circumstances, try to penetrate new accounts, help customers out of stranded assets, whatever it maybe, and use that as a way to further excel campaign. You'll notice that the expenses as a percent of revenue is unreasonably consistent at 44.5, and you go back several quarters is plus or minus a tenth of a point. And what I'd like to do is, see us hold that level, but use the additional gross margin and lower prices and be more aggressive at the point-of-sale. Richard Farmer - Merrill Lynch: Thank you.

And your next question comes from the line of Harry Blount of Lehman Brothers. Please proceed. Mr. Blount, your line is open. Harry Blount - Lehman Brothers: Hi. Can you hear me now?

Yes. Harry Blount - Lehman Brothers: Okay, great. You guys obviously, by taking up your guidance for both quarter, there is feeling that you have a fair amount of visibility. And I was just hoping that, Dan, you might be able to give us a little bit more perspective. You ran through a lot of your product sets momentum around some of the new products, the VTL, etcetera. But maybe if you could give us a little bit more perspective and depth, either by vertical or application, where you seem to see more visibility now than you have in the past.

I'm not going to be lot more specific, but when you look at the total pipeline we've got, I think we feel pretty confident that the total volume of opportunity we have there is adequate to cover an increase in the revenue forecast as we just indicated. I can't point to a particular product or vertical or anything else. All the geos are very strong. I think you'll see vertical performance flop around the mix. I mean, this was the big quarter for Federalm because it's the end of the fiscal year. I won't be at all surprised to see next quarter would be the big one for financial services. Europe will be up in the mix next quarter. It always is in Q3. We see more yearend budget flush there. But, there's no single thing you point to that says that's the driver. I think it’s a combination of many small factors and in aggregate, as I said we look at our pipeline, the business looks very good. Harry Blount - Lehman Brothers: Great, thanks.

And your next question is from the line of Paul Mansky of Citigroup. Paul Mansky - Citigroup: Great. Thank you. I was hoping you could spend a minute talking about one of your largest customers, specifically Yahoo!, where there is a sizable infrastructure upgrade underway. Does your participation there play into your revenue in margin guidance today?

No, if anything, I'd say Yahoo! this past quarter was slightly below their norm. Their big revenue or their big infrastructure revisions are not yet underway. Paul Mansky - Citigroup: I mean, does that play into your fiscal year revision?

Oh no, not at all. Paul Mansky - Citigroup: Okay, great. Thank you.

And your next question is from the line of Laura Conigliaro of Goldman Sachs. Laura Conigliaro - Goldman Sachs: Yes, given the fact that all the parts of your business seem to be working quite well right now, and you've made some comments just before about the pipeline also, shouldn’t you be able to carry a 30% type growth level into next year as well or why shouldn’t you? And also can you just give us a little more clarification on the pricing that was asked about earlier that is, you indicated it was less severe. Can you give us some observations as to why you think that’s the case?

Yes Laura, it's Dan. I will start with the outlook first. First of all, we never actually forecasted anything (inaudible). That really is beyond our visibility of horizon. Our typical sales cycle is measured in a few months, right. Long sales cycle these days is six, which only carries us to the end of the fiscal year. So, we have really very little base visibility on beyond that. And I think, even two quarters out, our ability to predict is somewhat cloudy. That's an area where it really is a crystal ball read as opposed to kind of quantitative analysis. On the pricing pieces, we've seen this industry has continued the lower prices as result of the drop in disk prices and increasing mix with ATA etcetera. And what that has led to is essentially a fairly orderly decline in prices; cusomers keep getting price decreases which are -- they find satisfactory and yet none of the vendors have had their resort to enormously deep discounting in order to satisfy the customers objectives. So, as seen in orderly market, I guess is the way to put it. Competition is strong. Don't get me wrong, and on a -- particularly our comp case, it can get really very, very aggressive but the bulk or core of the market seems to be a state where the natural price declines have allowed us to provide greater value to our customers and still hold our margins at the same time.

Yes, to Dan's point, Laura, the point he made was that the pricing environment was less severe than we had anticipated. It was still extremely competitive. This is a very competitive market, but we had anticipated even being more so.

Your next question is from the line of Bill Fearnley of FTN Midwest. Bill Fearnley - FTN Midwest: Yes, thanks. Could you give us some more granularity here in the 6000 strength. Do you have a lot of beta units still out there in the FAS6000, are you getting take up on test units and what type of ramp should we expect with the units here for the remainder of FY '07 and does that contribute to your upside in your guidance as well? Thanks.

I think all of those factors are in play. As Dan indicated, we saw a fair amount of upgrade activity of the 980, our older product, through the 6000. So that would be -- most of those 980s are not in test. They are actually in production, so that would be an indication that customers are accepting this product into their production environment, and we certainly see people doing some tests and people evaluating the new software, but I would say that the majority of these systems are going directly into significant operations and into production. I would say that there isn't a slow adoption rate or slow test cycle on this product. I think it's fairly aggressive. Bill Fearnley - FTN Midwest: And are most of them going into current NetApp customers or are you expanding the installed base with new customers here with this product yet?

A little bit of both. In fact, I'll ask Tom to comment on our customer who is in the Bay area we just displaced, a number of our competitor systems are running SAP, a very large SAN deployment.

I don't want to give this specifics to the customers, but Dan and I were talking about this last night. We've seen an interesting move -- our long-term sales efforts, I guess, but some real success we are getting, we accepted it, and usually in [cheers two] first and then we come right up. We take -- in the number of cases we have taken it all and our upper end product is the [Genesis]. So that I think what the customers are saying to me now is they feel confident. They may not give it all to its upfront, but they know that we can take it all. We can do all the cheers that they need. And as Dan said, we recently added one $4 million deal the other day, we swept the floor of our major competitor. And another one Southern California was the same thing and other one in Midwest. So we started to get confident that once people understand what the value proposition of NetApp is they are going to want it in the big way and I think these numbers are a result of that. Bill Fearnley - FTN Midwest: Thanks.

Your next question is from the line of Dan Renouard of Robert Baird. Dan Renouard - Robert Baird: Hi. Thanks. Can you just comment on the Federal business, which was up strong? There has been a lot of mixed signals in the market, a lot of people conjecturing that Federal was relatively weaker. Can you just talk about what you're doing specifically there at NetApp to drive Federal performance, and then kind of what you envision going forward in Federal for NetApp? Thanks.

So we have had a terrific team for years in NetApp Federal. That team has been together now about five years. They've done just a remarkable job of building the right partnerships with the major systems integrators, working all of the particular technical design and architectural angles with the various buyers in the Federal community, and it's just been a textbook classic case of just excellent salesmanship. We are now, I think, gaining enormous momentum in the Federal space. I think of it as three separate kind of units. In the intelligence community, we have a large cadre now of qualified, cleared individuals to work with our Intel customers as well as very tight relationships with the systems integrators with the primary contractors there. That continues to do extraordinarily well. And what I call the light military side, it is the kind that's open for public bid. You may have heard that we just were awarded a portion of the Navy and Marine Corps Internet infrastructure and that announcement came from EDS yesterday. This is now being dual sourced as opposed to sole sourced as it was prior, and, we continue to gain traction not only with the Navy and Marine Corps, but the Air Force, the Army, and so on. And then the third segment is the civilian agencies and we would get really broad coverage there. We started -- they'd act much like enterprise buyers. They start off with a small deployment, get some comfort and move up and we are gaining [such momentum] there as well. So, it's not -- again not a single component you can point to but it's been great business development, great customer development, great partner development and its gaining enormous momentum.

I think one of the easiest recruiting job, we have in the United -- in our sales force is into federal right now, the federal force is doubled over the last year and its with people who come with tremendous contacts and customers, tremendous reputation and they want to be part of NetApp, I am seeing much bigger opportunities, Dan just mentioned NMCI that was also of EMC for many, many years and the customer EDS decided to look for other alternatives for their exchange environment, and yet they would announce that NetApp and EMC will be splitting up business going forward, and we are on a contract. They also announced that they had Decru for their encryption, Decru was having tremendous success from the federal and I think the full solution set up what we provide is coming up there, so we feel very bullish going forward with federal. Dan Renouard - Robert Baird: Thanks.

Your next question is from the line of Rebecca Runkle of Morgan Stanley. Rebecca Runkle - Morgan Stanley: Great thanks. Just a quick continuation on the federal commentary, could you give us some sense of linearity on the quarter on whether or not you saw typical seasonality as it relates to federal, i.e., most of their business was done in the first couple of months of the quarter and did it continue into the October timeframe?

Well yes, this is Dan. This quarter in aggregate much like every other Q2, August was dead, the activity picks up in September, federal always has a big September but if you aggregate it together across the company, typically only half of our bookings are achieved in August, September year, the other half are in October, which is pretty typical for Q2. The nature of our federal businesses is that we see some of the last minute buying spill over into our fiscal October, for two reasons, one is that fiscal October actually starts in September, and number two is some of those orders get delayed as they come through the systems integrators. So, you don’t see the sharp spike in our fiscal September like you might on a calendar alignment. So, it really had a normal profile just like every other Q2, big surge but it was during September 15th and October 15th in federal.

Sir you next question is from the line of Aaron Rakers of A.G. Edwards. Aaron Rakers - A.G. Edwards: Yeah, thanks guys and congratulations on another good quarter. I guess my question is on the 6000 series solutions, may be you can help us understand how far along in the path we are in regards to upgrading your installed base of your 900 series customers and also if you could talk a little bit about where we are at in terms of IBM ramping with that new platform, I believe they started shipping that in early September, may be just any type of color there and where we are with IBM on that product?

This is Dan. In our last fiscal year and through the first half of this fiscal year, I think we shipped about 2000 or so 980, and that's just in the last six quarters right. If you go back the origin of the 980, I don't have that data handy it's probably double, it's probably 4,000. We are talking about number of 90 -- I am sorry 60-70 shipped being like a couple of 100. So, we just scratched the surface of this probably less than 5%. What was the other question? Aaron Rakers - A.G. Edwards: Yes the other question is just in regards to IBM actually pulling some of that 6000 box.

Yeah, I am not sure we have any orders from IBM. The 6000 just recently got in their product line of the NF 7000 and I haven't looked at the unit mix. I did not expect much because there the typical sales cycle is longer than the amount of time that is remaining in the quarter from time they got it out. I will say we're very, very pleased with IBM's performance in this field. I will also point out to you IBM typically does about 40% of their total bookings in the fiscal fourth quarter for them, which is the third or fourth calendar quarter, which is our current third fiscal, and I am really expecting IBM to be a really large contributor to our bookings performance this quarter. And, I think they've done a great job and we continue to partner well and I think it's on the right track. Aaron Rakers - A.G. Edwards: Thank you.

Your next question is from the line of Ben Reitzes with UBS. Ben Reitzes - UBS: Yeah, thanks. Lot of positives highlighted, so -- and on a pretty good quarter here, so I just wanted to know what worries you and in particular what you think the challenges are for NetApp going forward? You mentioned Decru was down a little sequentially. You mentioned that you have net cash going away and perhaps still you have a surge of business there and that's not going to repeat sequentially and then potentially any other challenges that you see out there that you might want to touch on that you are navigating through, perhaps your hiring needs look pretty high?

Yeah. I am particularly concerned, this is Dan. The Decru thing, let me just address that one for a second. Last quarter they had a $10 million single-customer order because their revenues surge in one quarter. There is no order anywhere in the company this quarter of over $5 million. Now, the Decru business is a much more distributed, I think it’s a much healthier business and that's represented by far more customers build out, so that’s a much better foundation. I am not particularly concerned about any single product component, I am not concerned about the net cash business going away. My all concerns are on execution. I think the future of our success is in our own hands, and I think the question of can we maintain the competitive intensity and the sense of urgency to go seize the opportunity we have right in front of us. We hired and about one out of every three people at NetApp this year -- we're here less than a year, so we have hired a tremendous amount. We got to make sure that they stay on the same page. We have a very strong culture and 75% to 80% of people come in and come in through references of employees or friends. So we have a feeling that we are on the right track. There is a tremendous enthusiasm here. And, we have to make sure that we all execute together so that the customers feel like we are providing the same value of 3 billion as we did at 1 billion or better. And that's what we are committed to doing. So it's not like we are sitting here worried about -- the issues are big enough or not to think that we are sitting here worried about because our business is very, very healthy on all areas, all geos and the product mix is going the way we want. Now we've just got to make sure that the customers continue to feel that we give better value than our competitors and this growth will continue. Ben Reitzes - UBS: Thanks a lot guys.

Your next question is from the line of Keith Bachman of Banc of America. Keith Bachman - Banc of America: Hi guys. I want to go back to the 6000 if I could. Did you say what the 6000 was as a percent of sales this quarter or a percent of total filers or any kind of metric that let's us know where you are?

No, I did not. Keith Bachman - Banc of America: Are you willing to?

If I were, I would have done already. Keith Bachman - Banc of America: Okay. And second part of that then if that doesn’t count as my first question? Is that -- can you refresh us on as the 6000 ramps what the margin impact there is going to be?

Actually the margin on the 6000 looks very consistent with the rest of the product line. And in aggregate they look almost identical to the aggregate of the 900 series. They have a different profile, right? They have got more disks attached, but they also carry generally more software attached, and so it blends up pretty well. Keith Bachman - Banc of America: Okay. So, no real impact there as that product ramps?

No. Keith Bachman - Banc of America: Okay. Thank you.

And your next question is from the line of Chris Whitmore of Deutsche Bank. Chris Whitmore - Deutsche Bank: Thanks, good afternoon. Hoping for some color on the 3070 product. I know you just announced it, but I was wondering if you have got any customer feedback for that product. And secondly, will IBM be taking up that product as well?

Okay. So, 3070, clearly we are pretty excited about that. It's a new high-end of our mid-range product. You may have seen the press releases and the announcements we did and the various studies that compared to the high-end products of our competition where we compared very favorably. So, I think we are pretty excited about this product on both the SAN market and the NAS markets. The overall 3000 family is quite healthy and I think this is just going to extend the appeal of that product offering. As far as IBM is concerned, IBM will be taking it. I will leave it to IBM to do that announcement, but it will be part of the IBM product portfolio.

This is an incredibly attractive product from both the performance and price performance viewpoint. I think we introduced the 3050 just about less than a year and half ago, and already you would have to consider the 3070 to kind of be a replacement. I mean, we are not withdrawing the 3050, but from a price performance viewpoint this becomes a compelling value proposition to the customer, clearly I think was formally interested in 3050. So, essentially it is a really strong workhorse in the product line and just made it bigger, faster and better. Chris Whitmore - Deutsche Bank: How does that impact either ASPs or margins going forward?

I don’t expect it to change dramatically. Chris Whitmore - Deutsche Bank: Thank you.

There's more performance, but it's almost the same price.

Yes. It's certainly a new benchmark for us in the -- certainly the mid-range modular area. The 3050 clearly gives you from our volumes and our growth as a very, very successful product, and here is a product with far superior price performance to that one. So, I think it just enhances our competitive position in a significant way in virtually all of our markets at once.

Your next question is from the line of Clay Sumner with FBR. Clay Sumner - FBR: Thanks very much. Your add-on software products, it looks like they were roughly flat sequentially while the maintenance was up strongly as you described. Can you just talk a little bit about the factors behind that?

Sure. As we said for sometime, Clay, this add-on software number is going to fluctuate around roughly the 35% of revenue range. We are going to be moving pieces of functionality from the add-on categories to the base configuration in our system. We do that based on a variety of issues that have to more to do with marketing than anything else. And I don't know that I [beat] a whole lot into the change or lack of change in add-on software here. One point I will make a note of, and that is the SSP portion has increased slightly and will continue to increase and reflect the phenomena of the SSPs coming off the balance sheet. So, I think that there could be some minor increase in that over time, but the base rate of add-on software -- truly add-on software is probably running at the high watermark right now. Clay Sumner - FBR: Okay. And maintenance, do you anything to do with them, net cash, maintenance renewals or any reason that was up so --

No. Nothing to do with that, that would be all deferred. Clay Sumner - FBR: Okay. Thanks.

Your next question comes from the line of Tom Curlin with RBC Capital. Tom Curlin - RBC Capital: Hi, good afternoon. On the entry level products, just give on SATA issues, I mean, how long will you wait before you decide to just rollout with an upgraded version using fibre channel and SATA Drives?

Well, clearly we're selling a product today that has both fibre channel and SATA capability. So, from our perspective it isn't like a hole in the product line that we need this technology to fill. SATA was a technology that we wanted to demonstrate leadership on. And just our observation, that is not going to meet the expectations of our customers at this point in time. So, when it's ready, it's ready. I don't feel any compelling reason to rush this to market. Our mainstream competitors don't offer products in this space, and the 270 is healthy for us. It generates good margins and it certainly has a lot of customer appeal. Tom Curlin - RBC Capital: Do you worry about conflict between the StoreVault series and the 270 though, not so -- what is it?

I really don't worry about that whatsoever. The StoreVault once the customer -- an enterprise customer takes a look at it, they rapidly conclude that it is not the right solution for them. And most of the differences have to do in two separate categories. One is around serviceability. That product is not supported through the NetApp services organization. There is no access to the NOW website, and typical parts replacement is 24 hours. I mean, it's just not intended to be in enterprise-type box. Second one is around upgradeability. There is absolutely no upgradeability of that product. What you buy is what you've got and you're done. And you've got to think of this as a kind of fixed box, low cost, low overhead in the structure, in terms of the support structure and the rest, and that's why you get the price down for the small and medium business customer. If enterprise customer buys that box, he's making a big serious mistake. Tom Curlin - RBC Capital: Okay. That’s very helpful, thank you.

One more comment on the 270. As Tom said, it’s a very strong product. But our tradition is that, we do not introduce new products in Q4, and our fiscal Q4 starts in February. So, my guess is the decision not to introduce the SATA replacement for 270 means it doesn’t come up before July. Tom Curlin - RBC Capital: Yes, summer of 2007.

Yeah. We don't want to upset our financial and fiscal year, and so maybe our drive is May, but the point is after this fiscal year is over. Tom Curlin - RBC Capital: Okay. Thank you very much.

And make no mistake, we have got Fibre channel and SATA offerings in that space today. The business is growing, is good margin. The new technology was ready, great, simplifies our product design. But it's not ready, and I don't feel exposed by my major competitors, either now or even in the timeframe that Dan talked about.

The highest availability of product in the product line based on field performances for 270, it is an absolutely rock solid product. And replaces one that we're uncertain about in terms of its overall availability is not a good move. So we decided to do the cost thing away. Tom Curlin - RBC Capital: Thanks very much.

Your next question is from the line of Brian Freed, Morgan Keegan. Brian Freed - Morgan Keegan: Hi, guys, good quarter. Thanks for taking my call. It sounds like the mix between SATA -- well, between ATA and Fibre channel drive is kind of flat out here, and relatively stable over the last few quarters. Do you view this as kind of a point of equilibrium between the two technologies within your customers? And as storage capacity needs continue to grow, does it bode well for ongoing revenue trends?

I think there's a number of dynamics in play. I don't think that the fibre channel ATA mix is a leading indicator of the overall success of Network Appliance as a company. I think there will be things that [lastly] our Federal business tends to be relatively SAN-centric, which would probably lean more towards fibre channel. On the other hand, our secondary storage business is very ATA-centeric. So, I would expect to see some oscillation around the current balance point as time goes on. I don't necessarily see a trend that's going to take us dramatically in one direction or the other, but I would expect it to not be so constant quarter-to-quarter.

I have a little different perspective on that, it really is -- if you think about, what's the real choice the customers, the main thing has to do with performance and confidence, and as their confidence level goes up in the availability of ATA drives, my guess is they're going to push it more onto areas where they don’t need the performance. We'll see how it all plays out. That’s really speculative, but I think, our customers like low cost and where it performs adequately for their application needs, I think they’re going to move it. Brian Freed - Morgan Keegan: Okay, thanks.

Your next question is from the line of Glenn Hanus of Needham & Company. Glenn Hanus - Needham & Company: Thanks for the question. Could you maybe comment on, with the very strong performance, how much you view that as your own competitive strength right now and taking that little bit of share versus the market environment being perhaps on the margin a little bit healthier that were not?

I don’t think there's any doubt. It's because of our strength in the market. I just [came from 9-week trip], Dan is on the road most of the same time, a number of our executives last week had a big deal. We've had a number of executives [forums right in the row], and what we hear back from the customers is that demonstrated value of NetApp is just now very obvious to them. And we’re starting to get tremendously higher shares of wallet in our existing accounts. They give us much more visibility to new application. Now, they are moving a number of things to direct-attached to our ATAs that they wouldn’t have done before to other vendors, but they've got confidence because of our ability to take the [double display] without going down because of RAID-DP. All these factors are playing, number one. Number two, as we've been investing in our sales force aggressively and telling you that now after about 18 months, and that is definitely paying off. Our coverage model is just getting better. So, when we sit around here and say, if we can get more coverage, if we can get more distribution and focus on that end, there is nothing stopping us from continuing to take share from our competitors. The customers believe that we have higher value than they do. And we are very, very -- it's just clear when you talk to them. It's not like we are debating any more. So, that's basically what I see, I don’t see it at all as the market all of a sudden getting healthy. I don’t see the other people doing that much different. I think our company is winning more.

Yeah, I will say also that there is a, I think architectural trend that customers are adopting that plays to our strength. As they move towards utility computing, they also move towards a utility storage infrastructure that can be used for a variety of different environments, and the unified storage message and the ability to mix and match high-end systems and low-end systems and the same kind of infrastructure really does play right to our strengths. And I am sure you'll see it in the customer review today, we would like to get to a consolidated tiered storage model with a kind of simple architecture that's easy to manage and that's kind of [over the top].

The other thing I would say is data replication, data recovery is such an important topic for customers today, and in fact that we have one set of software regardless what platform we are, you can do the same data replication of every piece of NetApp and go to another NetApp, still have the same consistent [platform] system resonates more now than it did six months ago, much more than a year ago and that is just, that brings a level of confidence of putting new apps on NetApp that probably wasn't there a year ago in a higher degree of certainty than they will with our competitors because with the competitor they have to introduce much more complexity. Glenn Hanus - Needham & Company: Okay. So, market strength basically unchanged and sort of outlook for market growth perhaps next year, kind of, like this year from what you are seeing?

I think that's fair. Glenn Hanus - Needham & Company: Thank you.

And your next question is from the line from of Andrew Neff, Bear Stearns. Andrew Neff - Bear Stearns: Sure, just a -- this is something that has been addressed, but just as you know talk about the competitive environment, your growth rates are well above some of your competitors and you talked about the different reasons for that, are you expecting them to take steps to come after you? What do you think they are going to do and how are you preparing for that?

Yeah. I think it's varies, Andy, by who the competitor is. First, I think the most of the server vendors, who own the share, are still very server centric and I don’t expect them to play in the utility infrastructure kind of model, and so I think that is just going to keep moving in our direction. And, I think the other horizontally focused (inaudible) they do everything in their power to become more aggressive and I mean it's not a cakewalk right now. You shouldn't walk away thinking this is easy. There is a lot of street fighting going on out there and it’s a very, very competitive market. And I think they will do everything in their power to try to gain share just like we are doing.

We’ve been in a 4-5 year war with EMC. I think they have NetApp to number seven, if I am numbered them right. But -- so they have been doing everything they could, but I think they have changed tactics a year about. Over two or three months ago, they start started going public with their number one and they are putting out these papers, which are fairly easy to dispute in the side, but the fact of the matter is that they are trying to get their customers thinking differently because it's not going so well for them. That to me is very, very positive. I can't tell you how many customer say it's just amazing to me how much attention they are focusing on a company your size versus their size. And that typically happens when the other guy have a better weapon. So if they had better weapons, they wouldn’t need to focus this much on it. So the fact of the matter is they are going to come out with campaign. They have done this forever. I don’t -- they can keep doing what they are doing. We have to focus on our company, our customers, and our business, and I think this is going to be the real one. Andrew Neff - Bear Stearns: Thank you.

And your final question is a follow-up from the line of Harry Blount of Lehman Brothers. Harry Blount - Lehman Brothers: Thanks guys, slipped in just under the wire. Basically -- I actually am going to try two quick ones in. One is the competitive win rate, just you guys have historically talked about that, I wanted to see if you've seen any kind of change in trend on those competitive win rates? And then the second one, I know I am opening a can of worms here a little bit, Steve, but on the option dilution, if my calc is right, you've had about $0.17 of option dilution first half of the year, the guidance kind of implies $0.18 to $0.20 option dilution back half of the year. I'm trying to understand if that is mostly related to anticipation of higher stock price and/or when we might be seeing the peak of the dilution?

Yes. This is Dan. On the competitive front, the win rates hasn't changed significantly. I think what we have seen is more deal activity. So our percentage of outcome, it's about the same, but in terms of total size of the pipeline, it's is growing. It's growing largely because of regular channel partners as well. And the performance of Arrow and Avnet this quarter was really strong, as I said up 16% sequential. That's partially tied with the Federal business, but almost all our Federal business is indirect. You look at the channel partner performance, I've got to tell is that's really what's increased the pipeline quite dramatically.

Arrow and Avnet are just two of the bigger distributors. Our overall channel partners both domestically and internationally have had a great quarter.

Fujitsu Siemens had another terrific quarter in Europe, so you just look all around the globe, it's just breadth in the pipeline coming in?

Hi, this is Steve. So let's be clear on these options expensing as you know it tends to be a little bit of hot button for me. But maybe you can understand that, but I think it's been very clear, the company has consistently over the past several years in terms of units of equity outstanding only increased the dilutions by 3% or less every year. Okay. So the dilution you are referring to -- the dilution is associated with the option expensing, the FAS 123R implementation. Harry Blount - Lehman Brothers: Correct.

Right. Now the higher the stock price, there are so many variables there Harry with respect to the volatility of the stock price and the term under which people are going to hold their stock, the stock price itself, it is a really, really difficult item to project and again we can talk all about the economics you want, but frankly I don't think the economics are properly reflected in stock option expense -- the higher stock price goes the more expense we are going to incur.

But the other aspect of it, you said is it just stock pricing, the question, the answer is no. Our hiring profiles are a little non-linear, were a little back half loaded in terms of number of heads we are going to bring in and most of the grants go to new hires. Harry Blount - Lehman Brothers: Great. Very helpful thanks.

And at this time there are no further questions. I would like to hand it back to Dan Warmenhoven for any closing remarks.

Ladies and gentlemen thank you very much for joining us today for the Q2 conference call. Again I would like to remind you all that we are planning an analyst day in New York and I think its March 13, 2007 and we hope you all would join us there and also please try to join us in February for the Q3 earnings conference call. Thank you, have a great holiday period.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.