Tara Dhillon – Senior Director, Investor Relations Daniel J. Warmenhoven –Executive Chairman Steven Gomo – Chief Financial Officer Thomas Georgens – President and Chief Executive Officer

Brent Bracelin – Pacific Crest Securities Benjamin Reitzes – Barclays Capital Mark Kelleher - Brigantine Advisors Brian Freed – Morgan, Keegan & Company David Bailey - Goldman Sachs Amit Daryanani - RBC Capital Markets Keith Bachman – BMO Capital Markets Brian Marshal – Broadpoint American Technology Research Eric Martinuzzi – Craig-Hallum Capital Group Bill Schultz – Credit Suisse Chris Whitmore – Deutsche Bank Securities Walter Pritchard – Cowen and Co. Alex Kurtz - Merriman Curhan Ford Mark Moskowitz – JP Morgan William Fearnley – FTN Midwest Securities Paul Mansky – Cannacord Adams Wamsi Mohan – Merrill Lynch Glenn Hanus - Needham & Company Katie Huberty – Morgan Stanley

Welcome to the NetApp, Inc. first quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the call over to Ms. Tara Dhillon, Senior Director of Investor Relations. Please proceed.

Good afternoon everyone. Thank you for joining us today. Our call is being web cast live and will be available for replay on our web site at www.netapp.com along with the earnings release, the financial tables and the GAAP to non-GAAP reconciliations. As a reminder we are also presenting slides concurrently with our audio remarks. They will be available for download on our Investor Relations site at the end of this call. In the course of today’s call we will make forward-looking statements and projections that involve risk and uncertainty, including statements regarding our financial performance for the second quarter of fiscal 2010, the timing of our new product introductions, our expectations regarding our professional services business and our expectation regarding future customer demand and our growth rate. Actual results may differ materially from our statements or projections. Factors that could cause actual results to differ from our projections include, but are not limited to, customer demand for products and services, our ability to increase revenue, increased competition, and the challenging global economic market conditions that currently exist. Other equally important factors are detailed in our accompanying press release as well as our 10-K and 10-Q reports on file with the SEC and also available on our web site, all of which are incorporated by reference into today’s discussion. Please note that all numbers are GAAP unless stated otherwise. To see the reconciliation items between non-GAAP and GAAP refer to the tables on our press release and on our web site. I would also like to point out that prior year GAAP financial statements are adjusted retrospectively for the adoption of FSP APB 14-1 related to our convertible debt. For example, last year’s Q1 FY09 GAAP P&L now reflects approximately $5 million more interest expense and $0.01 less EPS related to the change. Our balance sheet and cash flow statements have also been adjusted. With me on today’s call are Dan Warmenhoven, our Executive Chairman; our newly appointed CEO, Tom Georgens; and our CFO, Steve Gomo. Steve will review the first fiscal quarter financials and then Tom will discuss the trends we are seeing in our business and initiatives we have underway. First, I will turn the call over to Dan for some brief remarks. Dan?

Thank you Tara. I would like to invite everyone on the call to join me in congratulating Thomas Georgens for being appointed CEO of NetApp. Over the past four years Tom has demonstrated tremendous leadership, strategic thinking and operational ability especially during the challenging environment this past year. He has earned the respect of our employees, our customers, our shareholders and the board of directors and I am confident Tom is the right person to lead NetApp into the future. My 15 year tenure as NetApp’s CEO has been an incredibly rewarding journey but nothing lasts forever. I have had a long time personal goal to transition out of the CEO role by the time I turned 60 which is only about five quarters from now. This felt like an appropriate time to make the transition. The economy appears to have stabilized and it feels like we are sailing on somewhat calmer seas. It is always better to implement a transition during a time of relative tranquility. NetApp is also on the cusp of a new era, an era characterized by cloud computing and infrastructure service providers which will change the nature of our business. Plus the change in the character of our products as we start shipping the scale out technology and On Tap Release 8 in a few weeks. It seems wise to make the CEO change at the beginning of an era rather than in the middle to maximize continuity and minimize disruption and Tom is absolutely the right person to succeed me. He is ready to step into the CEO role to lead NetApp in this new era. Tom has demonstrated outstanding strategic leadership regarding the best way for NetApp to capitalize on the cloud opportunity. He will talk with you more about this opportunity at NetApp’s October 8th Analyst Day. As you probably saw in the press release while I am stepping down from the CEO position I will continue with NetApp in two distinct roles. First, I will continue as Chairman of the Board of Directors. In addition I will also take on an Executive role in the company to help build and expand relationships with certain key strategic partners. In this newly created position I will report to Tom as a member of the executive management team. I would like to thank everyone for their support and loyalty over the years. I am looking forward to the next stage of NetApp’s evolution under the direction of our new leader. At this point I will turn the call over to Steve for the quarterly update. Steve?

Thanks Dan. Good afternoon everyone. Given the economic backdrop NetApp performed reasonably well in the first quarter. The overall business environment also appeared to stabilize somewhat. As I walk through our results please keep in mind that Q1 was a 14-week quarter. Revenue for the first quarter was $838 million, down 5% sequentially and down 4% from Q1 last year. We estimate that about $20 million of revenue was added by the extra week in Q1. Foreign currency effect improved our sequential results by about 9/10 of a percentage point and reduced our year-over-year growth by almost four percentage points. Product revenue was down 6% sequentially and down 13% year-over-year to $478 million. Add on software which is a subset of product revenue was 16% of total revenue. Revenue from software entitlements and maintenance which is a deferred revenue element was $165 million or 20% of total revenue. Software E&M was up slightly sequentially and up 14% year-over-year. Total software, the combination of add on software and software E&M was 36% of total revenue compared to 36% in Q4 and 36% in Q1 of last year. Revenue from services was $194 million and 23% of total revenue, down 7% sequentially and up 10% over Q1 of last year. Service revenues are comprised mainly of hardware maintenance support and professional services. Revenue from maintenance support contracts is also a deferred element and was about 2/3 of our service revenue category this quarter. In Q1 it increased 2% sequentially and 19% year-over-year. During the first quarter we proactively began the process of moving some of our professional service business to partners, a trend you will continue to see going forward. Our partners appreciate the additional business and we are able to focus our investments on higher leverage areas of our business. As a result of this effort professional services declined 21% sequentially and decreased 3% from last year. On a non-GAAP basis consolidated gross margin was 63.6% of revenue this quarter. This was an increase of 1.8 percentage points over last quarter primarily due to an increase in software entitlements and maintenance in the revenue mix as well as better than expected margins on products this quarter. Compared to Q4, non-GAAP product gross margins were up 4.1 percentage points to 56.8%. This was due in part to improvements in the product cost and variance performance. Product discounts were also down slightly compared to Q4 of FY09. Non-GAAP service margins decreased to 51% returning to more typical levels. Non-GAAP software E&M gross margins declined slightly to 98.1%. Turning to our non-GAAP expenses, our operating expenses totaled $444 million or 53% of revenue. OpEx increased 4% sequentially and was virtually flat year-over-year. The $18 million increase in operating expense from Q4 was a little larger than we had planned. The effect of the 14th week was about $16 million or approximately $2 million higher than we had estimated. In addition, currency effect and a pull up of a planned outsourcing project added about $3 million more in expenses than anticipated. In addition to the non-GAAP operating expenses, Q1 GAAP operating expenses include FAS 123R stock compensation expense, amortization of intangible assets associated with prior acquisitions and the current period impact of prior restructuring actions. Also included in our GAAP operating expenses this quarter are the impact of the Data Domain merger termination fee and the professional advisor expenses incurred in conducting the transaction. Finally, the GAAP operating expenses included $13 million of non-cash interest expense associated with the adoption of APB 14-1 for our accounting treatment of convertible debt. All of these items may be found in their appropriate expense categories in our GAAP to non-GAAP reconciliation. Our headcount at the end of the quarter was 8,042, an increase of 66 people. Compared to Q4 of FY09 non-GAAP income from operations decreased to $89 million or 10.6% of revenue in Q1. However, non-GAAP operating income increased by 7% year-over-year and our non-GAAP operating margin finished one percentage point higher than in Q1 of last year. Non-GAAP other income which consists primarily of other income was $1.5 million, down from Q4 almost entirely because of lower interest rates earned on our investments. Non-GAAP net income before taxes was $90 million or 10.8% of revenue. Our non-GAAP effective tax rate remained at 16%. Non-GAAP net income totaled $75.9 million or $0.22 per share. Diluted share count increased 5.4 million shares in Q4 primarily due to the effect of our option exchange program. In April our shareholders approved an option exchange which resulted in 24.5 million options being surrendered in exchange for 3.2 million restricted shares on June 21. Going forward share count is expected to increase by about one million shares per quarter. Now moving to our cash flow performance our cash from operations was $38 million, down 79% sequentially and down 85% from Q1 of last year. As we have previously disclosed in Q4 we settled a dispute with the General Services Administration. The cash payment of $129 million including interest associated with the settlement was paid at the beginning of the first quarter of FY10. Also in Q1 we recorded the termination fee and external advisor expenses associated with the Data Domain transaction. The net effect of the Data Domain items added about $41 million to our cash flow. Capital expenditures were $25 million this quarter down from $135 million last quarter. Free cash flow which we define as cash from operations less capital expenditures totaled $13.5 million a decrease of 7% sequentially and down 92% from last year. Expressed as a percent of non-GAAP revenue Q1 free cash flow was 2%. Now excluding the GSA payment and the effect of the Data Domain transaction, free cash flow would have been roughly $100 million or 12% of revenue. Turning to our balance sheet, our Q1 cash and short-term investments totaled just under $2.7 billion for a net increase in cash and short-term investments of $59 million over Q4. At the end of Q1 our U.S. cash balance was 44% of our cash or roughly $1.2 billion. The total deferred revenue balance decreased sequentially by approximately $600,000 this quarter to $1.7 billion which reflects a 10% increase in the balance year-over-year. Turning to DSO, accounts receivable day sales outstanding were 39 days this quarter compared to 44 days last quarter and 45 days in Q1 last year. Inventory turns were solid at almost 20 turns compared to 22.1 turns achieved in Q4 and 21.7 turns achieved in Q1 of last year. Turning to our outlook for the second quarter of FY2010 our forecast is based on current business expectations and current market conditions and reflects our non-GAAP presentation. We are making forward-looking statements and projections that involve risks and uncertainties. Actual results may differ materially from our statements or projections for the reasons cited previously. While we believe the economy has begun to stabilize, predictability of close rates is improving but still remains somewhat limited. Therefore, we will not provide specific revenue guidance for the second quarter. In terms of color, we can tell you we do not expect normal sequential seasonality since we are coming off of a 14-week quarter and we certainly haven’t returned to a normal spending environment. Moving down the P&L we expect non-GAAP consolidated gross margins to remain strong likely holding between 62.5% and 63%. We expect our second quarter non-GAAP OpEx to decrease by about $20 million from Q1 levels reflecting a return to a 13-week quarter. Given this updated forecast for expenses we do not expect to reach the $405-410 million OpEx levels we had previously planned for Q2 and Q3. Compared to our plan, currency effect, a transfer of some employees from services COGS to sales and some minor administrative charges account for most of the difference. In Q2 our operating expenses are likely to be in a range of around $425 million subject to an adjustment based on what we see happening in the economy and our product lines. The transfer of employees between service COGS and sales is neutral to the operating margin. Finally, in Q2 other income is expected to remain at similar levels to Q1 and then expand into the second half of the year. At this point I will turn the call over to Tom for his operational update.

Thanks Steve. Thank you Dan for the support the confidence. I am looking forward to leading the team towards a new period of growth for NetApp. With the turn of the fiscal year and sensing some stabilization in the economy we took the opportunity to vigorously drive some new initiatives into the organization. We put a particular focus on a more disciplined pricing behavior and increasing market share by driving product revenue. The first indication of our progress is the highest gross margin quarter in many years, further evidence of the strength of our storage efficiency message to both end users and IT infrastructure providers. It is my expectation that the gross margin will not likely stay that high and we will use this as an opportunity to drive growth and market share. Turning now to specific operating results, this quarter the Americas showed signs of stabilization. Despite Q4 to Q1 seasonality, and difficult year-over-year compares, the Americas was up 1% both sequentially and from Q1 of last year, contributing 58% of total revenue. Within this, federal had a strong quarter up 8% sequentially and up 17% year-over-year producing 13% of total revenue. Europe had its typical seasonally softest performance down 16% sequentially and down 7% year-over-year to 32% of total revenue. Incidentally, Europe contributed the exact same 32% of total revenue in Q1 of last year. Although Asia Pac was down 14% year-over-year they were up 2% sequentially for a total of 11% of revenue. Overall, on a constant currency basis we were nearly flat year-over-year despite a traditional Q4 to Q1 seasonal decline, two of our three major geographies were actually up sequentially. Direct revenue was 31% of total revenue this quarter, down 23% year-over-year. Our indirect channel contributed 69% of total revenue, up 9% year-over-year. Arrow and AppNet each contributed about 11% of total revenue. Our IBM OEM bookings were down 7% year-over-year and IBM contributed almost 5% of revenue in Q1. The top 100 accounts increased as a percentage of total bookings compared to last quarter accounting for about 35%. The rest of the storage 5000 contributed about 1/3 and mid-sized enterprise accounts contributed a little over 30% of total bookings this quarter. We are pleased with this healthier balance of contribution from these three major segments compared to two years ago when just our top 50 were over 1/3 of our business. This is a major improvement in the diversification of our revenue base and the outcome of the awareness and new customer acquisition activity in the last 18 months. With respect to protocol trends this quarter 51% of our configured system revenue was sold with only NAS protocols. 15% was sold with only SAN protocols and 35% included both block and file protocols which we call unified storage. These numbers are based upon the new methodology we outlined for you a few weeks ago the details of which can be found on our Investor Relations website. For the sake of comparison as we transition, this quarter you will find data from the previous methodology in our accompanying slides. From a platform perspective almost 60% of our revenue continues to come from the mid range with the low end and the high end each contributing about the same percentage of configured systems revenue. Units shipped were down about 7% year-over-year with the largest percentage of decline coming from high end systems, typical of the other storage vendors as well. Renewals continue to be heavily skewed to one year terms for both service maintenance contracts and for software entitlements and maintenance indicating the continued aging of the install base and a potential refresh opportunity when economic conditions are more favorable. Once again, we had another strong quarter from our V series platform which is our controller and software functionality without any discs. Originally designed as a NAS gateway for SAN systems the incremental growth driver is to deliver NetApp data management and storage efficiency to the large footprint of legacy SAN products offered by our largest competitors. It is a great way for them to experience NetApp functionality without a big investment or immediate replacement of their existing traditional infrastructure. In fact, our V series often pays for itself almost immediately with the space reclaimed when our de-duplication technology is run on a competitors’ storage. Our V series units shipped were up 135% year-over-year and is one of the drivers of our new account growth. This quarter over 20% of our V series were installed in front of EMC storage which is one of our highest V series growth areas. I would like to take a moment to share our perspective on the implications of not completing the Data Domain transaction. As we said on last quarter’s earnings call, Data Domain would have brought a complementary product line with high synergies to our portfolio and selling motion. We also said that the market segment we were targeting was heterogeneous disc space backup. When NetApp has the primary storage footprint for the initial copy of the data, we have a high attach rate of our disc space backup solution behind it. The unified primary and secondary offerings are tightly integrated and space efficient so we do not see deep penetration of other disc space backup products into our installed base. However, other primary storage vendors represent 80% of the market and do not share our high attach rate for disc space backup. That has been the target market of Data Domain. We also participate in that market but our entry has been relatively recent and Data Domain would have accelerated our presence in this segment. While having Data Domain in our portfolio would have added another growth vector to the company, the absences of Data Domain will not diminish or otherwise make vulnerable the growth prospects of our core business. The two biggest drivers of new business continue to be server virtualization and windows consolidation. We have been very successful selling into virtual server environments with bookings sold into VMware environments up over 500% year-over-year. A recent Info Source survey ranked NetApp number two when IT professionals were asked who they considered to be the market leader in storage for virtualized servers. Number One when asked who they consider to be the innovation leader in storage for virtualized servers. Another highlight this quarter was being named Microsoft’s Storage Solution Partner of the Year, demonstrating the tremendous progress we have made with this key alliance partner both in optimizing the performance of their applications as well as in their server virtualization initiatives. We are involved in various joint marketing activities with Microsoft and Microsoft apps remain the most common installation environment for NetApp. Looking forward, the cloud computing opportunity Dan mentioned is one we believe will have dramatic impact on our business in the future and NetApp is uniquely poised to capitalize on it. Customers are looking everywhere for budget relief and ways to preserve capital. As a result, they are more urgently exploring the outsourcing of part or all of their IT function to a service provider or systems integrator rather than developing and running it in-house. These service providers and SI’s whom we call aggregators since they are aggregating customer demand, are in turn looking for best of breed solutions to help them offer enterprise class IT at extremely competitive prices. This new breed of vendor has a strong affinity for our compelling economics and simplified data management which in turn allows them to compete more effectively in these new business paradigms. With our unified architecture and virtualization technology combined with our seamless scale up solutions which will be available on On Tap 8, we make it difficult for other storage vendors with traditional architectures or silo disparate systems to vie for this new business. We have had many early successes with large scale aggregators who provide mission critical yet cost effective solutions for their customers. We expect this customer shift towards IT as a service, or cloud computing, to accelerate over the next few years and as these new aggregators of demand grow in influence and scope we believe NetApp will grow commensurately. We will go into greater detail about our positioning and enabling technologies related to cloud computing at our Analyst Day on October 8th in New York. I will close by commending the entire NetApp team for their continuing frugality and to the sales organization for such a prompt response to our call to action. We managed to increase operating income and operating margin year-over-year and produce the highest gross margin percentage in my four years at the company. While timing is uncertain, true year-over-year growth and a return to our operating model are more easily envisioned today than they were six months ago. We will talk more about our prospects at Analyst Day. At this point I will open the floor to questions. As always please limit yourself to one question. That rule does not change. Return to the queue for follow-up so we may address everyone at least once during our allotted time. Thank you. Operator? :

(Operator Instructions) The first question comes from the line of Brent Bracelin – Pacific Crest Securities. Brent Bracelin – Pacific Crest Securities: Dan I want to thank you for your insight over the last 10 years and since I have been working here with NetApp. I hope you take some time off. Tom congratulations on the promotion. My primary question on the services business 10% growth year-over-year and 7% decline sequentially. That is actually the slowest in more than five years. Clearly dragged down by professional services. How should we think about this transition of professional services shifting to your partners? Is this a one quarter drag on the services business? Should we model a drag for the next 2-3 quarters? How should we think about this transition and how long will it last?

I think that this is not going to have a big effect on the service revenue line. It will have some minor impact. We are not getting rid of all our professional services activities by any means. In fact, some of the ones we are retaining will continue to grow and will be providing clearly a significant amount of professional services to support our products. That said, if you look at the low end of the market some of the basics need to be required. Our partners are in a much better position to provide those services. The margins are much more in tune with their business model than they are with ours. That is the portion of the services we are moving out. I would think it would have a diminimous impact over the next 2-3 quarters. It may knock a point or two off service growth but that is probably the biggest impact you will see. Brent Bracelin – Pacific Crest Securities: From a sequential standpoint there could be a sequential impact over the next couple of quarters?

Yes for the next couple three quarters I think again maybe a point of growth knocked off. I don’t think it is more than that.

The next question comes from the line of Benjamin Reitzes – Barclays Capital. Benjamin Reitzes – Barclays Capital: I wanted to ask a little bit more about your expenses and margins. It looks like if I do the calculations the higher run rate expenses per quarter of about $15-20 million versus your goal are completely offset by the higher gross margin roughly each about $0.04 to $0.05 per quarter offsetting each other. I was just wondering if that math is about right and if that is the way it works out and whether there was an opportunity to actually hit your goal eventually later in the year on the OpEx side while keeping gross margins higher. If you can comment on that math and whether you can actually still hit that goal on the OpEx and still keep gross margins up.

The math is roughly right. I’m looking at some worksheets here that say the benefit from gross margin is slightly better than the impact from expenses. In fact, I think our revenue level required to hit our targeted margin is possibly even lower as a result of this. We are talking $10 million type of thing. As we go forward, just so you know the reason why expenses are up it is not like we are adding a lot of resources here. If you look at the $15 million delta between the $410 we were hoping to hit and the $425 over half of it is due to currency. We have also reclassified some people. We just talked about freeing up some professional services resources so we are taking those effective resources if you will and we moved them down to the sales line so there is about $3 million associated with that. Finally there are some miscellaneous commissions and one-time transformation projects, etc. that are a couple of million bucks. The biggest factor is currency. It is not like we are pouring a lot of new money here, or hiring a lot of new people. That is not the point behind the increase in OpEx.

Effectively the goal in the organization and the annual plan that people are spending to has not changed. All these differentials and the special line items that Steve indicated have not actually loosened the expenditures in terms of either hiring or in terms of other spending at the company. So, I think in terms of what the individual budget and individual managers are seeing they are actually performing close to our original plan. We just had a couple of these line items that added on to the top of the number.

The next question comes from the line of Mark Kelleher - Brigantine Advisors. Mark Kelleher - Brigantine Advisors: Could you just clarify your commentary regarding not expecting normal seasonality into the October quarter and perhaps what effect did that 14th week have on the revenue in the July quarter so we can maybe calibrate that effect on the seasonal sequential growth?

I think the seasonal sequential growth question has two elements. One of them is what is the overall economic climate going to allow. I think the other one is how much of it was absorbed into the 14th week in the current quarter. I think there has been a lot of discussion internally about what the 14th week actually meant in terms of the revenue impact. I think the expense impact is a lot easier to predict than the fixed cost. Our estimate is around $20 million. The contribution to deferred revenue and the deferred waterfall is pretty easy to understand and that is actually under $1 million and the rest of it is business that was taken in the quarter that was turned and turned into revenue. Given that not all the weeks are equal and we are back end loaded and the end of the fiscal months tend to be big weeks booking wise I think we all generally believe the impact is well less than a full week and $20 million is as good a number as any. So I think that is the number we are asking you to think about and you can factor into your own macroeconomic assessment as to what seasonality might look like.

I don’t think this is the normal seasonality in the sense that I went back and looked at 7 out of the past 8 years, I threw the year out where we missed the first quarter so we had a 14-15% increase in 2Q over 1Q a couple of years ago. If you look at 6 out of those 7 years we average about 5.5% in sequential increase when our growth rates were much higher obviously than they are today and the market was much healthier so you can take it from there.

The next question comes from the line of Brian Freed – Morgan, Keegan & Company. Brian Freed – Morgan, Keegan & Company: Thanks for taking my call. Real quick when you look at your free cash flow during the quarter relative to what it has been historically, your previous low was about 19.8% of revenue. This quarter even normalized it is more like 13% of revenue. Can you talk a little bit about your free cash flow goal going forward and what impaired cash flow generation in the quarter?

Please check your phone. I think we got about every other word. You were breaking up pretty badly there. If the question is given the fact you were roughly 12% of revenue this quarter with free cash flow and traditionally you have been north of 20% and do you see yourselves getting back there and how do we get back there. If we think about it, we just finished a quarter where the operating margin was 10.6 percentage points. So we got another 5.5-6 points right there when we get back to the operating model if we are going to take up our cash flow, roughly, because of our very efficient tax rate. The other thing to keep in mind is our other income is extremely low right now. It is down to the lowest level we have seen certainly since I have been here, 7 years now, and the reason for that is our cash is kept on short-term investments so the yield on those investments is very, very small. Over time we will be layering those out again as we feel comfortable with the kind of investment opportunities available to us and the securities that we have confidence in and we will be able to increase that. When you add back both the margin improvement we are going to get and you add back the other income improvement I think we are going to get a big one but just a reasonable one. Finally, if you return to a nominal level of growth; it doesn’t have to start with a 2 or a 3 kind of thing, I think I feel very comfortable about getting back up to the kind of levels in free cash flow that we have seen in the past.

The next question comes from the line of David Bailey - Goldman Sachs. David Bailey - Goldman Sachs: I had some questions on the tone of business. Have you seen the sales conversion rate increase and did you see current period purchases also start to reaccelerate this period and what were the drivers?

I think there are a couple of factors. I think if you compare to where we were 6-9 months ago particularly during the last part of last calendar year kind of the big trend out there and probably the biggest frustration was people had budgets in place that still could not get deals approved. So there was a substantial amount of transactions where you had technical recommendations and even departmental recommendation but we couldn’t get sign off. To that extent is what is a bit different today. I think the budgets are a bit more predictable although there is still some of that. I think the range of outcome as far as predictability of pipeline closing is better than it was 6-9 months ago but I would say it is not quite back to normal. So clearly we are still seeing a lot of no decision made being a criteria in our ability to close the pipeline. So win/loss ratio I think will remain substantially unchanged and I think the deferred decisions are going down but not quite where they once were. So I’m not going to declare we have normal buying behavior at this point but certainly improvement over where we were at the end of last year.

If I could add to that comment, I think one additional point to keep in mind is we are still seeing a lot of one-year renewals in service and support. That is an indication people are trying to stretch their capital as far as they can before they renew. I think that will drop and that will be an indicator that things are returning to normal and people are starting their normal buying patterns. David Bailey - Goldman Sachs: Did you see the one-year renewals come down this quarter or were they the same level as last quarter?

They came down slightly from last quarter but you are always expecting a very high fourth quarter because we are paying commissions on it and the sales guys are doing everything they can to get everything in the door. Compared with what I would have expected in the first quarter we are still a little bit on the high side.

The next question comes from the line of Amit Daryanani - RBC Capital Markets. Amit Daryanani - RBC Capital Markets: I just had a question on the margins. Given the puts and takes in OpEx and gross margins can you talk about if you are still comfortable with the ability to achieve 16% operating margins on I think 929 sales target? Maybe just address the concern that NetApp may end up spending the margin upside from revenue on more hiring or sales discounts moving forward.

From my perspective the gross margins are high. I think part of it is discipline and discussions we had with the sales organization going in and a bit more stabilization so we can put more pressure on them. I think we are quite pleased with the margin. I think they clearly indicate the strength of the product line particularly in storage efficiency. I don’t think the market has gotten any less competitive in the last quarter. I think we have been a bit firmer and a bit more diligent and I think we have done that without sacrificing revenue growth. All around I think that feels good. As far as getting back to 16, I will let Steve put a number on it if he wants. The way I would look at it, last year with the deteriorating market that we had for three consecutive quarters, Q2, Q3 and Q4 of increasing operating margin despite a deteriorating environment. We start this year a point better than where we started last year and hopefully with a better environment ahead of us. To my point about envisioning 16 points I am not quite sure I am quite in a position to talk about when we can get there but certainly the mathematics are favorable even with modest growth. It is certainly no matter how you look at it, those numbers are achievable again. As far as our spending plan I think we want to remain disciplined around our spending and I don’t think we have any real anticipation of releasing our spending constraints until we get back to our operating model. Right now we are very, very focused on achieving year-over-year growth and once we do that I think we will be pretty close to our operating model and when that happens I think only then will we think about spending more. Right now I don’t anticipate opening up the flood gates on spending in the near term until such time as we get closer to our historical model.

A couple minor thoughts. If you look at our product margins as you think about it as things bounce back the thing we are going to see first on the P&L is the revenue that we record in the period. That is the product margins. That is why it is important to get those back towards 60%. The big jump this quarter was very important. You will note, or I will note for you right now, the guidance we gave you with respect to our gross margins going forward the reason it is possibly a little higher than I think was anticipated was because we expect those product margins maybe not to hold at the current levels, but they are going to be up from where they have certainly been running and indeed I think the trend is in the right direction and I expect to see those to continue to climb over the next few quarters.

The next question comes from the line of Keith Bachman – BMO Capital Markets. Keith Bachman – BMO Capital Markets: On the gross margin you have mentioned a few times you thought gross margins could trend down in aggregate over time. It doesn’t sound like it is coming from the product side based on what you said. The twofold question is if you anticipate those gross margins move down from the current 62-63 level, what does that mean? Is that 61? Is it 62? Any color on what the end game is and then what are the drivers if it is not product?

First, this is the eternal struggle, right? The natural tendency is for gross margins to decline. The natural tendency of the management team is to fight that every step of the way. We are just trying to give you a prediction of where we feel it is going to fall. I think in the relatively short-term here I am looking for relative stability, a slight decline from maybe the 63.7% but relative stability in product gross margins. Look at the mix of SEM. SEM mix is at the highest level it has ever been. The revenue on SEM has 98% conversion rate to gross margin. So that is going to help our service profitability is good and products are coming up. So right now I think we are in a relatively stable situation. It could be a couple of percentage points. But a relatively stable situation with respect to gross margins.

Steve isn’t backing away from the number, I don’t think he was backing away from 61. He was backing away from where we just came in of nearly 64. Going forward I think the gross margin number was impressive and I think a sign of the field’s response to our request but I think in general that is probably a higher number than our historical pattern and not what it is going to take to get us back to 16 points. I think we would like to use a little bit of that to go a bit more competitively and use that to try and gain some share or motivate some partners or whatever. I think the dynamics that are leading to that number are largely intact and we might choose to use some of that strategically to generate some more demand.

The next question comes from the line of Brian Marshal – Broadpoint American Technology Research. Brian Marshal – Broadpoint American Technology Research: A question on the product gross margin side. I think you mentioned you expect it to continue to climb over the next couple of quarters off the 56.8% we saw in July. Is that largely dependent upon increasing volumes here in the back half of the year or what is that comment based off of?

I think it is just based on the performance we have seen. If we can just hold our discount levels where they are that will help us. I do expect it to come down a little bit next quarter. I don’t think we are going to see the kind of performance in manufacturing with respect to purchase price variances and manufacturing rebates but nonetheless they are going to be positive. As I look forward if we get any shift in mix back towards the mid range and any favorable volume effect again, we saw a decline in volume this past quarter but if we see any favorable volume effect that is only going to be good news for product margin. Brian Marshal – Broadpoint American Technology Research: The target at 60% to clarify? Your target on the product gross margin side over time is 60%?

I think that is a reasonable long-term objective for product gross margin. Yes.

The next question comes from the line of Eric Martinuzzi – Craig-Hallum Capital Group. Eric Martinuzzi – Craig-Hallum Capital Group: What are the macro criteria you need to see to get back to giving revenue guidance? In the current quarter we have seen sequential growth here in the Americas and sequential growth in APAC. What is the check list for you to get comfortable here again?

I think there are a couple. I think the first one is confidence in the conversion rate of the pipeline. Again, if you looked at our pipeline you might say gosh this is a really good looking pipeline, what is wrong with it? It is a question how confident we are that all those points on there convert when they say they are going to convert. While things are improving there they are not where they were a year ago type of thing where they gave us the confidence level to be able to predict. We are getting there. I would just say we are just not quite there yet. Eric Martinuzzi – Craig-Hallum Capital Group: Is this something you believe you could see in the current fiscal year?

I think we will know it when we see it is the best way to describe it. I think at this point we are pleased with the way the quarter came out. If you look at the storage industry we are seeing our competitors all talking about high teens and down 20% year-over-year. In fact most of the competition in this industry has given up on year-over-year compares. We just put up a quarter of flat year-over-year. I wouldn’t read into that not giving guidance that we have got concerns about the business. It is just that the business is unpredictable and there is a pretty high error guard around it. Overall I think that just in the recently reported quarter I think our numbers are pretty substantial compared to those of our competition.

The next question comes from the line of Bill Schultz – Credit Suisse. Bill Schultz – Credit Suisse: A clarification on the spending question asked previously. It sounds like you are saying headcount wouldn’t increase until margins hit the target range. Did I hear that right? An extension off of that given the current headcount numbers what do you think your current revenue capacity is so we can understand when we will see the hiring spigot turn on again?

A couple of questions. One is that headcount did go up this quarter. If you remember when we talked about the restructuring that we did a few quarters ago we indicated that virtually every group had passed their target in order to free up investment in their strategic initiatives. The expectation is they would back fill in accordance with that. That is more or less what happened. Some functions moved around and some displacement. The hiring we put in place and the incremental hiring that we had is absolutely consistent with those activities. They don’t represent a change in our stance relative to overall spending strategies. I think going forward sales force capacity is a fascinating question. I think we have tried to put numbers on it in the past. I would say overall sales force productivity today is substantially below where it was in a more steady times which leads me to believe that we have substantial sales capacity built into our existing infrastructure. I think we can grow the business on the opportunity return without having to hire a bunch of people first.

The next question comes from the line of Chris Whitmore – Deutsche Bank Securities. Chris Whitmore – Deutsche Bank Securities: I wanted to ask a question about deferred and the future waterfall as the deferred’s come onto the income statement. Deferred’s were actually down a little bit sequentially. That is the first time I have seen that in quite awhile. A bit below my expectation. What is going on with deferred and what should we expect in terms of software subscriptions going forward in terms of growth rate?

It is not surprising that deferred is slowing. After a year plus of seeing a deteriorating economic situation and the slowing of our business we have not been putting deferred’s on the balance sheet at the rate that we have been pulling them off. Obviously at some point you start to cross over. We saw it sequentially this quarter. I think that as you look forward I don’t think deferred rise in the mix. If you will notice both the SEM revenues and services have been rising in the mix over the past year or so as the slowing has been going on. I don’t think you are going to see that. I think what is going to happen if I were to predict going forward is as business starts to pick up first stabilizes and then starts to tilt up towards growth, the first thing that is going to hit the P&L is the non-deferred stuff. That is the stuff we recognize in the period. That is going to tend to drive the other two elements, the undeferred elements [down]. Plus, non-deferred elements are still going to suffer from the lag effect of the slow growth period we incurred over the past 15-18 months. Over time though as we start to grow deferred’s start to pile up in the balance sheet again. It is a complex equation. I think that the way to model this going forward is I hold my deferred element pretty flattish at the first quarter level as I move into the second quarter and maybe into the third. Chris Whitmore – Deutsche Bank Securities: Do you think they continue to grow on a year-over-year basis?

I think they do but on a diminishing rate. I think that our growth starts to kick in slowly they will start to turn the other way. Remember, everything attaches to products. Products drive everything and products are the leading indicator.

I must invoke the one question rule as we get closer to the end of the call.

The next question comes from the line of Walter Pritchard – Cowen and Co. Walter Pritchard – Cowen and Co.: I am wondering if you can just talk about M&A as opposed to the Data Domain attempt there and whether you see any, not expecting you to name specifics, but just talking in general about whether or not you see another large area that you might look to move into to drive or leverage your channel or do you think you will return to the more historical NetApp of smaller acquisitions?

I think we are always open to ideas. The first part of your question, we will always be open to technology tuck-ins. We will continue to do that. We did Arrow roughly a year ago and that clearly had a very, very successful year for us and was way over plan. I think we will continue to look for those particularly in the software space and the management space. As far as Data Domain is concerned, I went through the rationale for that. I think it gave us an opportunity to enter an adjacent market. It allowed us to enter an adjacent market in a way with a scale that was actually going to impact our overall growth rate as a company. I think we would be open to that. I don’t think that represents any diminishment of our confidence in our core business. Given the opportunity to pick up a property like Data Domain I think we would be glad to do it. Eventually those things have a price and this one I thought was beyond reasonable in terms of our analysis but I don’t think that opens up a void that we feel any compelling nature to fill with something else. I think it was an adjacent market. We have products in that market. We can up our investment or not and we can grow organically in that environment or not. I think for us the core business is still healthy and if there is an opportunistic way to add an adjacent market whether it be heterogeneous backup or something else I think we will pursue it. Certainly I don’t think we are gun shy.

The next question comes from the line of Alex Kurtz - Merriman Curhan Ford. Alex Kurtz - Merriman Curhan Ford: As you look out on the current quarter what are your thoughts about the different customer segments in mid size and enterprise and then larger enterprise as far as expectation of the pipeline and close rates? Do you see one improving over the other? Are they both sort of bottoming and last quarter improving both sequentially?

I think in the mid-sized enterprise you just have far more accounts. Statistically, relief is in your favor. In the large account what we see is we can see an average performance across them all but it is not that they are all within a few percentages of each other. Some are way up. Some are way down. Some are up last quarter and then they take a stall. I think when you have smaller accounts you have a lot more volatility quarter-to-quarter and therefore it makes that business harder to predict. When you try to track top enterprise accounts you are talking about 30-40 accounts, they are up, they are down. There is one way up. There is movement one way one quarter and one way down if they move the number. That business I think by nature simply because it is a smaller set with big numbers that are very volatile I think have a big impact on our business. The MSE is just a big long and deep pipeline that I think statistically then tend to be a little bit easier to predict. Maybe not individually but in the aggregate. I think of the two the MSE is a little bit easier to predict for us. I think if you look at our performance over the last year in terms of our new customer acquisitions, we have clearly diversified our revenue stream and I think that has been an important objective. We have got relatively high concentration and volatility in a small number of accounts with a big impact on our business. I think that the diversification as well as the overall economic climate I think has a bit more predictability.

The next question comes from the line of Mark Moskowitz – JP Morgan. Mark Moskowitz – JP Morgan: I want to talk a little bit about the unified bookings. The competition did decrease here sequentially. What was the impact on margins if any and could there be any sort of improvement in the unified platform as On Tap 8 rolls out there going forward?

No, I think we went with the new methodology. I think we need to get some quarters under our belt in terms of identifying the trend. Certainly we have been higher than we have been at this point and we have been lower than this point before. So it is not off the curve just yet. I think overall from a margin perspective I don’t think it really has any margin impact at all. If they are going to buy a product that is going to be SAN only or [inaudible] only as opposed to both of them they aren’t going to buy both protocols. I think that is going to have a small impact overall. I wouldn’t read anything into the margin story. Certainly I wouldn’t draw the fact that our margins were up because unified was down. I think that would be incorrect.

The next question comes from the line of William Fearnley – FTN Midwest Securities. William Fearnley – FTN Midwest Securities: I had a question on the customer side. You have been doing more new account acquisition and development. What is the latest there? How many added new customers? Is there any additional color you can give on the change in the sales and support staff development? Is that designed to get more pitches to hit here in terms of new clients and new customer development?

I missed a word there. I didn’t quite catch the question. If you could repeat it please? William Fearnley – FTN Midwest Securities: You are doing more new account acquisition and development. How many new customers did you add during the quarter? Any additional color on the change in the sales and support staff deployment? Is this designed to get more interest to hit here for new customer development and new customer acquisition? Is that what it is designed to do?

I think we have done a few things. I don’t have the new customer acquisition number off the top of my head but that is clearly the major priority for us. I think overall as a company the leverage of our partners as a way to reach both the mid size enterprise and even a fair amount of storage 5000 has been an important objective. So our indirect business this quarter was up year-over-year and our direct business was down. I think we are going to more of an aggressively leveraged model whether it be for resellers, systems integrators or our bigger partners like IBM. That is clearly an emphasis for us both in terms of gaining more market coverage and also getting more sales leverage from an SG&A perspective.

The next question comes from the line of Paul Mansky – Cannacord Adams. Paul Mansky – Cannacord Adams: Shifting gears just a touch over to V series, obviously unit volumes have been certainly impressive for a number of quarters now. How are you thinking about that internally as it relates to kind of transitioning that footprint into larger revenue opportunities, vis a vie systems sales? Is there specific product rev coming? Is it tied up in Data on Tap 8.0 or the subsequent spin of the kernel? How do you think about turning that into a bigger revenue opportunity?

One of the things that actually dragged on V series revenue is the fact that V series is often our entry point into a new account. It is one thing to go into a customer base and tell them we have this technology that will dramatically reduce the amount of storage you need. We can reduce it by 20-50%. In a lot of those cases we actually guarantee it. The customer says well that is great but I’ve already bought all this stuff. We go in with the V series today as an entry point. Over time as that back end equipment ages and comes to the end of its life and will be replaced, it is not uncommon and in fact for years our very largest V series account has recently converted over to actually selling full systems. So as our relationship grows with those a lot of the V series business goes away and converts into traditional SAS systems. The V series volume has actually had to overcome that offset of customers who buy the V series as an entry point and then it converts into full systems. So that dynamic clearly exists. The V series growth has overcome that. In the early days of the V series the sales force was somewhat reluctant to sell it simply because it didn’t have the dollar ASP of the full system. Sometime back we actually made it so we could actually had our own disc rate behind it so you could sell the V series today and then add disc drives. Then ultimately sell full systems when the customer was ready to do that. So, I am not quite sure where you are going with the question but overall I think we have been expanding our V series footprint and the V series represents a new account penetration and it also has a negative drag on in the fact that next generation customer might actually buy a V series in the past and might buy a full system from us, yet are still growing anyway. I think all in all the V series is an enormously powerful tool from the customer acquisitions.

The next question comes from the line of Wamsi Mohan – Merrill Lynch. Wamsi Mohan – Merrill Lynch: Your software license as a percent of sales of 16% is the lowest we have seen in years and moving towards the 35% of total software mix. At the same time you have seen in your new classification system of SAN and unified your unified system has sort of increased as a part of the mix. Is there some correlation in terms of the software attach for those deploying your systems and unified systems, is it lower or is just a mix of high end versus low end?

I think it is a range of mix. Another factor is when we talk about “systems” and hardware those things are not devoid of software. As a result it is also a function of what type of software we include in the base unit. Things like de-duplication, file systems and those types of things all come with the base system. The other thing we have been doing in order to simplify our software purchase is we have been doing more and more bundling. Certainly feedback we have gotten from customers is that our software menu leads for a very, very complex generation of [inaudible] and upgrades and things of that nature. We are restructuring how our software is put together both in terms of bundles and in terms of what we call a package and also what we include in the base system. I think the numbers may move around but they might not necessarily by apples-to-apples comparisons. I think probably a more compelling component of that is actually the combined product gross margin is probably more an indication of how successful we are in selling our value. I also think that as the economy comes back I think we are going to see a shift in mix just slightly. I think our mix has stabilized over the past several quarters now. We haven’t talked about a significant change. As the economy starts to grow and the customer is still more comfortable spending in IT and specifically storage I think we are going to see a mix shift back towards the mid range and towards more highly configured systems which includes more software up front. I think there is going to be less service renewal also to go along with that. The net/net of that would be to probably pick up the amount of configured software in the mix over time. It is not going to knock it off the chart. It is not going to move it four percentage points or something like that but it will move it up from where it is.

The next question comes from the line of Glenn Hanus - Needham & Company. Glenn Hanus - Needham & Company: Data On Tap 8.0, any thoughts there on how many beta sites you have? What types of accounts you are targeting and how that might be sort of you think about impacting the business model over the next few quarters?

Data on Tap is in the hands of some customers. I am not going to talk about how many data sites or how many they have had it. In the prepared talk we mentioned in the next few weeks is where we are at with that. Overall I don’t anticipate that it is going to be a sudden boost in revenue. Certainly it is going to open up some account activity for us but there shouldn’t be a sense that customers are waiting for that in order to buy from us. Data on Tap is a free upgrade for those people that have Data on Tap 7. It runs on the same hardware as Data on Tap 7. I think that the continuity of customer demand is probably not being disrupted or enhanced by Data On Tap 8. It is a foundational technology for us that brings a lot of base functionality but it also brings a lot of future innovation. That is really where we are going with it. I wouldn’t look for data on tap to be a stimulus of new demand nor would I conclude that Data on Tap is somehow deferring purchases until it comes out.

I would add that I think when the new operating system is out there and once it gets adopted into our installed base I think it is going to be a major leverage point for R&D efforts. It is going to be the platform of development and now we will be able to concentrate on one OS and hit it really hard with innovation.

The next question comes from the line of Katie Huberty – Morgan Stanley. Katie Huberty – Morgan Stanley: A number of source companies talked about more robust orders in the month of June. Did that strength carry into or even accelerate as you went into the month of July?

I’m not going to do month by month. I am not going to comment on what other people have said or talked about robust demand. Virtually every other storage company has actually seen year-over-year declines increase in Q2 and not Q1 and that is not true of NetApp. Although we don’t want to prognosticate about the future I think we feel pretty darn good about the quarter we just put out there. I think we feel pretty darned good about our prospects. I think we are doing a lot better than those other companies. With June/July and where is August, it is kind of hard. We have a back end loaded quarter and typically the only month that matters is the last one. Overall, I think we feel really good about the quarter out there and flat year-over-year, flat is the new up, our aspirations are better than that but we are still talking about year-over-year comparison and everybody else is giving up on it.

That concludes our question and answer portion. I would now like to turn the call over to Thomas Georgens for closing remarks. Please proceed sir.

We look forward to seeing you all on October 8th at our Analyst Day in New York and updating you on our future results on November 18th. Registration for Analyst day is open on September 1. Thank you for your time. Thanks for the kind words. Goodbye.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.