Dan Warmenhoven - Chief Executive Officer Tom Mendoza - President Steve Gomo - Chief Financial Officer Tom Georgens - Executive Vice President, Enterprise Storage Systems Tara Calhoun - Senior Director of Investor Relations Tom Curlin - RBC Capital Markets

Richard Farmer - Merrill Lynch Dan Renouard - R.W. Baird & Associates Bill Fearnley - FTN Midwest Securities Ben Reitzes - UBS Tom Curlin - RBC Capital Markets Keith Bachman - Banc of America Securities Chris Whitmore - Deutsche Bank Paul Mansky - Citigroup Harry Blount - Lehman Brothers Aaron Rakers - AG Edwards & Sons Brian Freed - Morgan Keegan Kevin Hunt - Thomas Weisel Partners Katie Huberty - Morgan Stanley Clay Sumner - FBR Research Brent Bracelin - Pacific Crest Securities

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Network Appliance first quarter fiscal year ’07 earnings conference call. My name is Carlo and I will be your coordinator for today’s presentation. At this time, all of our participants are on a listen-only mode. We will be facilitating a question-and-answer session toward the end of today’s prepared remarks. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Tara Calhoun, Senior Director of Investor Relations. Please proceed.

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 the 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 risk and uncertainty, including statements regarding our expectations for operating results for fiscal Q2 and FY07, 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 VTL, Decru, and FAS6000 products, FlexVol and ONTAP GX technologies, our expectations regarding our market share, the importance of our indirect channels, and benefits from our relationships with channel and technology partners. 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 quarter, and then Dan will share his thoughts before we wind up with everyone here for Q&A. Steve.

Thanks, Tara. Good afternoon, everyone. NetApp achieved another terrific quarter, demonstrating strength across every geography, with particularly strong showings from Germany, the U.K. and Ireland, and the U.S. federal team. Every major deal was above plan. Please note that I will walk through the following highlights and details with you. All numbers comply with GAAP unless otherwise stated. You will notice that we are providing a GAAP presentation of our financial statements and have eliminated the separate full non-GAAP income statement. We and other companies are moving towards this format in order to more easily comply with SEC regulation G. We will continue to provide key non-GAAP items in our press release, as well as all the necessary supplemental items in our press release and our website for investors to continue calculating our non-GAAP performance. Total revenue for the first quarter was $621.3 million, up over 39% compared to the first quarter of last year, and up 4% sequentially, demonstrating our continued strong market success. Foreign currency effect added about 1% to this quarter’s results on a sequential basis, and were neutral on a year-over-year basis. The combination of product revenues and software subscriptions were $540.4 million and grew 37% year over year, and over 3% sequentially. Add-on software and software subscriptions accounted for about 36% of total revenue this quarter. This figure is a combination of add-on software products that were approximately 24% of total revenue and software subscriptions, which were 12% of total revenue. As you can see in our press release, we are now breaking out software subscription revenues as a separate line item, which we will continue to do going forward. Revenue from IBM and Decru both increased nicely again this quarter, with IBM almost 3% of total revenue and Decru about 2.5% of total revenue. Given the strong performance from both these segments, we are revising our estimates for their contributions to our total revenues. For the full year, we now expect IBM to generate between 3% and 4% of total revenue, and Decru to contribute between 2% and 3% of revenue. Revenue from services, which includes hardware support, professional services, and educational services, was 13% of total revenue, up 8% sequentially and up 50% over Q1 of last year. Our investments in services organization have continued to drive faster than corporate average growth rates in services revenues. Service maintenance contracts increased 9% sequentially, and total professional services grew 4% sequentially, both of which were up over 50% year over year. NetApp gross margins were 61.2% this quarter, and non-GAAP gross margins for the combination of products and software subscriptions, finished Q1 at 65.6%, up half a percentage point from last quarter. This increase was driven primarily by favorable production costs and a slightly higher-than-average software mix. Non-GAAP service margins of 31.6% increased significantly over last quarter, as a result of both increased service contract revenue and improvements in productivity. With aggressive hiring in our services organization, we expect these service margins to pull back and remain around the 30% level for the rest of this fiscal year. Turning to non-GAAP expenses, our operating expenses totaled $276 million, just over 44% of revenue. Expenses increased 4% from Q4. Sales and marketing expenses included sales kick-off expenses and some unfavorable foreign exchange impact. R&D expenses increased only 2% sequentially, as new hires from Q4 were absorbed, and Q1 new hires were somewhat less than expected. Total employee headcount increased by 239 people this quarter, ending the quarter with 5,215 employees. GAAP operating expense includes the effect of intangible amortization, previous merger-related stock compensation charges, the effect of FAS-123R, and some minor adjustments of restructuring charges this quarter. At $104.2 million, non-GAAP income from operations finished at 16.8% of revenue, above our target range due to higher-than-expected gross margins and a slightly lower-than-planned hiring. Other income, which consists primarily of interest income, was $13.6 million. Non-GAAP income before taxes for the quarter was $117.8 million, or 19% of revenue. Our effective non-GAAP tax rate remains at 18%. Non-GAAP net income totaled $96.6 million, or $0.25 per share. GAAP net income totaled $54.7 million, or $0.14 per share. Please refer to the table provided in our press release and on our website to see the reconciling items from non-GAAP to GAAP. Moving on to the balance sheet, cash and investments totaled $1.27 billion, down approximately $50 million from Q4. We repurchased approximately $6.56 million shares of outstanding common stock at an average price of $33.53 per share, for a total cash outlay of roughly $220 million. Next quarter we expect to repurchase roughly $185 million worth of stock. Our cash generated from operations was $164.6 million this quarter, and included two large, non-routine items. The first was a $19 million tax payment related to our foreign cash repatriation, which was recognized in Q4 on the P&L but actually paid in Q1. The second was the annual employee incentive compensation payout of approximately $40 million. Capital purchases were $23.1 million this quarter, and depreciation and amortization totaled 23.9. Cash and investments exclude $232 million of restricted cash associated with our foreign cash repatriation. In Q4, we added $300 million of debt to our balance sheet to facilitate our foreign cash repatriation. We paid down approximately $28 million of this debt during the first quarter, and we plan to pay off the remaining balance within the next two to three years. Deferred revenue increased $61.7 million this quarter to $743.2 million. That is a 9% sequential increase, and up 53% year over year. This continued strong increase in deferred revenue is driven primarily by increases in software subscription purchases and hardware maintenance contracts. The average duration of these contracts remains steady at approximately 31 months. Accounts receivable day sales outstanding came down to 55 days compared to 63 days reported last quarter. DSO decreased this quarter, primarily due to a very linear shipment pattern during the quarter, and we expect to see similar DSO levels next quarter. Inventory turns improved again to 17.3 times compared to 14.7 times in Q4. As we discussed in Q4, we had built inventory in anticipation of the launch of our new FAS6000 product line. Our finished goods inventory dropped by over $6 million this quarter, partially as a result of the FAS6000 ramp. Now, before I turn the call over to Dan for his comments, I would like to discuss our operating model for the second quarter and revised expectations for the full year. Our outlook is based on current business expectations and market conditions and reflects our non-GAAP presentation. We are making forward-looking statements and projections that involve risk and uncertainty. Actual results may defer materially from our statements or projections. We expect FY07 second quarter sequential revenue growth to be in the range of 2.5% to 4% over the first quarter, which translates to a 32% to 34% year-over-year growth rate. We expect total non-GAAP gross margins to moderate slightly as software returns to more normal levels and we catch up on hiring. As a result, our non-GAAP operating margin for the second quarter is expected to be back at our targeted range of 15.8% to 16.4%. Second quarter non-GAAP earnings are expected to be $0.25 to $0.26 per share. GAAP earnings are expected to be $0.13 to $0.16 per share. We expect our diluted share count to decrease by about 1% over the remainder of FY07. Given the strength we see in our business, we are revising our targets for FY07 revenue upwards to a range of 32% to 33% growth over FY06. Non-GAAP earnings per share are expected to be in the range of $1.04 to $1.06. With the implementation of FAS-123R, GAAP earnings are very difficult to estimate, given the volatility of some variables, especially the impact of our stock price. Therefore, our target GAAP range is estimated to be $0.51 to $0.69 per share, based upon the information we have and the assumptions we make today. At this point, I will turn the call over to Dan for his update. Dan.

Thank you, Steve. When we looked at all the quarter end statistics we use to track our business performance, spanning products, new initiatives, operations, investments and goals, there are many, many noteworthy gains that provided both reinforcement for the effectiveness of our strategies to penetrate the enterprise and demonstration of our increasing competitive success around the world. I am very pleased with how the company is executing, and excited about our momentum in the market. This quarter, we had the highest percentage of our business ever from enterprise accounts. Almost 70% of our bookings were from enterprise customers, well ahead of our goal to accomplish this by the end of FY07. According to IDC in their Q1 2006 storage tracker, Network Appliance is virtually tied for the number two position in terms of total petabytes shipped. On the current trajectory, we would expect to move into the number one position of petabytes shipped within a year. How are we accomplishing this at such a fast rate? It is a combination of innovations and systems software, a compelling value proposition, effective marketing, and the right field operation strategy to accomplish our goals. No competitor comes close to our rate of new product introductions. Our rate of innovation is extremely high because we are investing more in a single architecture than anyone else in the industry. Our data ONTAP 7G operating system breaks the historical rules about price per megabyte storage. FlexVol, thin provision capability that allows customers to buy as little as one half the amount of storage relative to the competition to satisfy a specific project need, and then dynamically add additional storage later as the application grows. FlexVol is available standard with our 7G operating systems. Our RAID DP technology is the only raid six for protection against double-disk failure in the industry that does not have a significant performance penalty. This allows customers to confidently and reliably deploy inexpensive ATA drives in primary storage environments. With unified storage, SAN NAS, and SCSI, are all available concurrently in every one of our storage products. Running one operating system across all of our storage product lines requires far less customer management overhead. Customers get better value, redeployment flexibility throughout the product life, the highest utilization rates in the industry, and greater reliability from NetApp storage solutions. Through innovation, effective education, and successful enterprise deployments, we are also now considered a serious SAN vendor for they are increasingly turning to us to solve their enterprise storage and data management challenges. In our first fiscal quarter, our total storage shipped increased to almost 73 petabytes, a 20% sequential increase from the record 60 petabytes shipped in Q4. ATA drives accounted for over 85% of this increase, jumping to 54% of total petabytes shipped from 47% last quarter. The new 500 gigabyte ATA drives just introduced in Q4 contribute about 30% of the total capacity shipped this quarter. We believe that close to one-third of all ATA shipped in our FAS storage systems are now used in primary storage environments. We are also seeing larger and larger average capacities ordered, and our transaction sizes continue to increase. We had our single largest deal ever in the first quarter this year, rather unusual for a first quarter dynamic. Interestingly enough, the actual unit number of enterprise storage systems shipped during the quarter only increased 3% sequentially. The situation there was a continued decline in the older 900 series system, which are more than offset by the new product lines. Units shipped for the FAS3000 increased 6% sequentially and the average volume on the FAS3000 series increased almost 60% sequentially. We shipped over 100 units of the new FAS6000, double the number shipped in Q4, and the average capacity shipped in the FAS6000 increased 27% sequentially. These larger transaction sizes are a strong indicator of increasing customer confidence and our ability to support even the largest enterprise environments. This is also evidenced by further expansion of our SAN presence. This quarter, 35% of total bookings had a SAN component included, with 25% fiber channel SAN, 14% iSCSI, and a 4% overlap that included both. Remember that many of these orders also had a MAS component, indicating more customers are understanding the value proposition of unified storage from network appliance. They do not have to buy three separate systems, increasing the value and redeployment flexibility derived from our network appliance technology. Historically, we have calculated the SAN component as a percentage of our total business, but as we expand into emerging areas adjacent to storage, like encryption and virtual tape libraries, this number becomes diluted by products that do not have a protocol component. Therefore, starting this quarter and going forward, we will be calculating and measuring our SAN performance as a percentage of just our total storage business. Using this new more representative formula, a SAN protocol was included in 36% of total storage bookings, with 26% including Fiber Channel SAN, 14% iSCSI, and still 4% overlap, so a very modest change, but we expect to see that move going forward. Another area as we look at enterprise traction and secondary storage, data protection, disaster recovery, archival and compliance requirements all contribute to the dramatic increase in our petabytes shipped, particularly in ATA drives. Both Gardiner and IDC currently rank NetApp the number two software vendor for array based data replication. The value proposition of our secondary storage gives us a tremendous advantage, especially where primary storage deals are extremely competitive. The significant cost savings and flexibility of our data replication software make the primary and secondary package as a whole the most compelling solution. Our emerging products are also providing and proving to be very effective ways to penetrate new accounts, giving us other entry points into new enterprise customers. The compelling nature of the Decru encryption products are beginning to provide entry into new accounts where we have not been able to get traction in the past. As Steve mentioned, Decru jumped almost 3% of revenue this quarter, and in addition to financial services and government accounts, Decru is beginning deals in telecom, education, and technology institutions. Another new area for us is the virtual tape library, which sells into a very different part of the enterprise. While we found the sale cycle to be longer, we are learning quickly the different skill sets required to speed success, and we saw good increases in units shipped this quarter, selling over a petabyte of storage in just the second quarter after its launch. We will continue to monitor and incubate this emerging opportunity. NetCash contributed about 3% of total revenue again this quarter. A good portion of this revenue is coming from the deferred revenue line of our balance sheet. We will continue to recognize this revenue in future quarters in the deferred revenue account even after the sale of NetCash and assets is complete. Please note that we will also continue to support our existing NetCash customers’ service contracts for the life of their contract. As we indicated in our press release, we expect the impact on earnings for this transaction to be negligible. In fact, in this conference call, we just increased our revenue earnings targets for the year, even as some of the NetCash revenue will go away. IBM is part of what makes up the difference. IBM is making steady progress in understanding how to sell NetApp systems and having competitive success in their own right. As Steve mentioned, they have grown to almost 3% of our business. Partners like IBM also bring NetApp increased credibility and effectiveness at penetrating enterprise accounts. Our relatively new partners like SAP continue to grow in influence. We are winning in more SAP accounts and getting bigger deals in those accounts than ever before. Our relationship with Microsoft continues to deepen. This quarter, our equipment was installed in Microsoft Training Centers worldwide for demonstrations, training, customer evaluations, and modeling of customer environments. Our indirect channel accounted for 56% of total revenue this quarter, growing about 6% sequentially and up 46% compared to Q1 of last year. Investments in programs to develop more resellers are paying off, with these new partners becoming very effective at selling and installing Network Appliance. Contributions from Arrow and Ad-net increased 9% sequentially from a strong fourth quarter, providing 11% of total revenue this quarter. We expect the indirect channel to continue to grow faster than the company as a whole. Geographically, Europe hit the ball out of the park, up 54% year over year, and over 6% sequentially. The U.K. and Ireland were significantly above target, and Germany, despite being highly distracted for about a month during the World Cup, beat their goal as well. Asia-Pac contributed 11% of total revenue, showing healthy improvement in several countries, and the Americas was 57% of total revenues. The federal team was well above plan. Even during the seasonally light summer months, and the East showed particularly strength. All in all, it was just a stellar quarter, and I am very proud of the team. The company is executing very well and we are managing our growth very effectively. Not only are we successful today -- we are looking out at a long time horizon and believe we are building even more competitive differentiation into our products and go-to-market strategies for the future. Our next generation operating system, ONTAP GX, is a perfect example. Its architecture is based upon our forecast of what the storage industry will look like five or 10 years from now. We are the only vendor with the capability to seamlessly scale hundreds of systems that will appear like a single one. GX is the evolution of 7G, the clustering extension of ONTAP 7G. We are getting great feedback on the first release of GX. Symantec was one of our first customers, and they are very happy with the opportunity for massive scalability and manageability that GX will provide them. The release is stable and solid and will begin a broader push into high-performance computing and NFS environments this quarter. To wrap up, I would like to congratulate the Network Appliance team -- one team, on a job well done. I am excited about the increased awareness of NetApp in the marketplace and the momentum we have generated. At this point, I will open the floor to questions. As usual, I would ask that you limit yourself to one question at a time and then get back in the queue so we may address everyone on a timely basis. Operator.

(Operator Instructions) Our first question is from the line of Richard Farmer with Merrill Lynch. Richard Farmer - Merrill Lynch: Thank you. I would like to ask a question on services margins, please. They were a little bit better than at least I was modeling. I heard you mentioned the increased productivity and that might not persist into the future, but would you just help us understand a little bit better what is driving the services margins and how they will change going forward?

I would be happy to. I think there are two forces at work here. First is the just general productivity that we are seeing across the services organization, both in the break-fix-repair area, as well as professional services. The productivity will continue. The productivity improvements we are seeing I think are going to continue for some time. I think what we were alluding to with respect to being a little conservative on the margins has to do with the fact that we are going to probably continue at a very aggressive pace of hiring there, particularly in professional services. As we bring these new people on board, it takes them six to nine months to be able to get up to speed to where they can generate revenue, so we pay their expenses during that period while they do not generate any revenue. But, to the productivity point earlier, eventually they start producing revenue and once they get on board and get up to speed, that gross margin starts to come from a negative position and up to a standard industry average.

Our next question is from the line of Dan Renouard with R.W. Baird. Dan Renouard - R.W. Baird & Associates: My question is on your new FAS6000 series. Dan, you talked about a hundred units, or maybe a little over 100 units this quarter. How should we be thinking in terms of success, relative success of that product in the October quarter and beyond? Would a doubling of that, or are you thinking even bigger numbers in terms of units? Or is there some sort of a revenue contribution that we should be thinking about? That would be helpful. Thank you.

Yes, I would think doubling is certainly the right kind of goal. Let me point out to you that the software release that went out with the FAS6000 was not what we consider to be generally deployable level, general availability level. That was the first release of our operating system on a 64-bit architecture. So not only were customers looking at new hardware, they were essentially looking at a new version of the OS, which I think slowed down accepts. Most of our customers like to have a particular level of support from NetApp, and that support, the recommendation from NetApp as to when its deployable. We achieved that, as I recall, August 3rd, so yes, I would expect to see the 6,000 increase dramatically. I am particularly interested in the 6070. I personally think the 6030 is going to subsume the 980 over time, but the 6070 is a unique price range and class. The ASP’s on the 6070 are roughly double what we have seen historically on our high-end. By the time it is clustered, it turns out to be the two systems in tandem are about a $0.5 million ASP, so if we can get a doubling of those, we are going to see some pretty good upward leverage.

Our next question is from the line of Bill Fearnley with FTN Midwest Securities. Bill Fearnley - FTN Midwest Securities: Thank you. I had a question for you with IBM. When you talk about the traction with IBM, could you compare and contrast your traction with the IBM direct sales force? How is the traction with the IBM reseller channel versus your expectations in the relationship? Thank you.

First of all, on a retailer channel side, we are finding many of IBM’s largest retailers are aggressively picking up our product. IBM is excited about that. We are hoping to train those folks. Some of them are buying some stuff directly from NetApp. In fact, some were doing so before, but IBM is very, very excited about the acceptance rate, and so are we. Secondarily, with a sales force as big as IBM, it is going to take us a while to get the whole thing globally, but some of the interesting points, we trained hundreds of system architects, that is always useful. We have gotten to a number of account execs on some of the biggest accounts in the world for IBM, and they are actively pushing the NetApp technology, and we won a couple of those already. I always believe you can judge these things in the first six months by the attitude of the executives and the teams that you are meeting with. The attitudes are terrific, and every country -- I have been on the road a lot, and every country I go to I visit with IBM and I find that they are extremely interested in having a go-to-market plan together, and our teams are working great together. This is going better than any of us thought it would go at this point.

I want to add just a little bit to that. There have been lots of rumor and innuendo about the channel conflict, particularly through the indirect channel. What the conflict there was, first of all it was very small, but what there was was largely a result of the fact that IBM did not have our entire product line. Remember, they have been in a process of rolling out the individual components over time. That process comes to a completion in the next month or so, when they introduce their version of the FAS6000. At that point, we will have product line parity, and so the indirect channels really are no longer going to have a reason to try to come to NetApp directly. I think that is going to be a lot more harmony to those field relationships.

The other thing I would say is our largest resellers -- Dan gave you that our reseller business is really doing well. In fact, we were just voted the number one vendor to…[multiple speakers]. But anyway, other than that, with a couple of key excepts, having the best years ever -- explosive growth in some cases with NetApp, and they have said to a person running those companies that the IBM relationship has helped raise the visibility of NetApp in the market. They just find that the market understands what we are and that we are going to be here and be big for a long time, and it has helped them crack major enterprises. Market visibility was an issue with us for many years. I do not think it is anymore, and I think the channel partners would be the first to say that the IBM relationship has helped that.

Our next question is from the line of Ben Reitzes with UBS. Ben Reitzes - UBS: Good afternoon. Thanks a lot, guys. You guys raised guidance for the year, about $80 million, according to my math. Maybe about 3 or 4 points above where you were before. The quarter was about $5 million above the street, so you have raised guidance a little bit there in terms of growth. That is pretty good. Can you just talk about exactly why again? Is it Decru and IBM? What did you see? It seemed like a pretty in-line revenue quarter versus our expectations, but obviously beat a little on the street, but you raised guidance. I am just wondering what you exactly saw. Sorry if you said it earlier, but if you could put it to three or four factors, that would be great.

I think the net is, Ben, it is across the board. Depending on which dimension of the business you want to look at, all the tiers are very strong. Several are already ahead of plan. They are forecasting continued success going forward. You look at the product lines. We are really pleased with the way some of the new ones have ramped up, like Decru. We have a lot of optimism around the 6,000 going forward. IBM is ahead of plan. We had forecast maybe 3% a year earlier. I think it is probably going to be closer to 4% at this point. The base business is just very strong. Look at all the upsides around it and you go hey, these things are all starting to click, so I cannot point to a single item. If IBM is up 1% over the forecast, Decru is up 1% of the revenue over the forecast, the base business is up 1% over the forecast, that means you are there, you know?

I would just keep it simple -- we are winning. We are winning big deals, big opportunities we were not even in before. We are getting invited into big deals that we were not invited to before. Dan and I just finished a whirlwind tour this quarter. He went one way, I went the other. We covered the world pretty well, and when we sat down to talk about it, we both thought it was astounding the level of interest at a CIO level and understanding how we can be an alternative to their current vendors and what exactly we can do. I have had big companies say to me yes, I think you are big enough. If we did not have our current vendor, how would we deploy NetApp? We used to have those conversations. I think when you see that 70% of business is enterprise, that surprised some people. You look at the ASP’s rising. You look at the professional services and the deferred revenue -- we are selling into very, very big accounts and when you win those, they are going to be around a long time, so that gives you some confidence.

Our next question is from the line of Tom Curlin with RBC Capital Markets. Tom Curlin - RBC Capital Markets: Good afternoon. Can you just walk us through the tax situation and the IRS review, please?

You want the -- let me make sure I understand your question. Do you want our guidance going forward and what our tax rate is going to be, or do you want to understand the status of our tax audit? Tom Curlin - RBC Capital Markets: The tax audit and just how it relates to the Netherlands structure and what specifically is the point of contention.

We have not started the tax audit yet, but what the audit will be involved in this particular audit is a review of always of our international tax entities as well as the domestic tax structure we have. With the international tax entities, the question there is the same question we have seen throughout the industry, some other large companies in the tech world, the issue has to do with the buy-in of the foreign entity into the intellectual property and the ability to sell the intellectual property in their particular jurisdiction. This is going to get real complex really fast. The question here is what value should they pay for the right to resell the intellectual property and right to resell those products. We think we are on very solid ground with a lot of precedent, and court precedent, on our side and we are not expecting any significant problems here. Tom Curlin - RBC Capital Markets: So it just relates to how you estimate the appropriate transfer payments between those entities and NetApp proper, I guess?

Yes, at the end of the day, that is the issue. Tom Curlin - RBC Capital Markets: Thank you.

Our next question is from the line of Keith Bachman with Banc of America. Keith Bachman - Banc of America Securities: Thanks. Could you help a little bit on the NetCash transaction, help explain how it works and more specifically, when should we be modeling that business to go to zero? My understanding is there will be residual revenues in that business over the next few quarters. If you could just add some color there, that would be great.

Basically what we did was sell the rights to our product line to Blue Coat. We are going to try to transition our customer base over to them as well. They are going to continue to sell the current product. We have on our balance sheet obviously, as you pointed out, the deferred revenues associated with software support and also maintenance. We retain the obligation to support those customers who currently have contracts with us. So essentially, it is the sale of the product line but we retain the support obligations is really the way to think about it. Clearly they will try to converge product lines over time. I think the duration -- Steve, help me here -- is probably about 30 months is roughly what we have. You will see some bleed-off of components. It will decline over time. It is kind of a waterfall kind of effect, right, so you will see is slowly decline in terms of percentage or dollar value of business per quarter. You will see some component from it for roughly about the next 10 quarters.

That is correct. Keith Bachman - Banc of America Securities: Steve, just to clarify, will you continue to see product levels, sales of NetCash flow over the next few quarters?

I am sorry. I could not understand your question. You were breaking up.

Product level sales over the next few quarters -- no, we are essentially exiting that business over the next few quarters. I think you should expect that we will have revenues in this current quarter, but obviously by the time the transaction closes the objective would be those revenues wind up in the future being revenues to Blue Coat.

Right. I think what you will see, the first thing that will step down is the product revenues themselves, the SSP’s in the service contracts will continue as Dan said, over a period of about 30 months roughly. It also turns out that NetCash had a disproportionately high amount of deferred revenues in their revenue line, so they had more, if you will, more deferred revenue dollars per total dollars of revenue, so that means that the fall-off is not going to be as precipitous as many of you I think have modeled.

Our next question is from the line of Chris Whitmore with Deutsche Bank. Chris Whitmore - Deutsche Bank: Thank you. Good afternoon, guys. Just a question on channel inventory level. There has been some debate about excess inventory out there in the channel. Can you quantify your channel inventory levels and what you do to measure them? Thank you.

It is approximately zero. Virtually everything, all business we do is configured to order, even through the channel. With the exception of the SMB business and a little bit of OEM inventory for the Fujitsu relationship in Japan, there is essentially no inventory in that channel whatsoever. It is all build-to-order, and customizable for each single system.

That has always been true, by the way, so I am not sure why there would be…

Yes, we do not have any build of stock products except for the new SMB product.

Our next question is from the line of Paul Mansky with Citigroup. Paul Mansky - Citigroup: Dan, I believe last quarter you gave us a breakdown of the contributors by vertical. If you could please do that again, as well as maybe paint some additional color around your strength on the federal side. Have not had a chance to listen to HP’s comments tonight, but I think pretty much everybody else has talked about the [sweetness] on the federal side, maybe what you are seeing specifically there.

The federal business was great. I mean, our total global government business was 10%, but I have to say, the federal guys had higher than 40% year over year growth in bookings, and took down the single-largest order in the history of NetApp at $12 million plus. Our federal business has just been on fire. They just did a wonderful job. Maybe the other guys have seen a slowdown as a result. The vertical performance goes roughly as this: high-tech was down a little bit in the mix, it is about 15%; financial services up in the mix, they are now at 13%; global governments, which includes -- is really primarily our U.S. federal but also includes international governments, defense organizations, et cetera, is about 10% of our total; telco’s about 8% of the mix; then the others are each running 3% to 4%, like energy, manufacturing, health services, et cetera.

Our next question is from the line of Harry Blount with Lehman Brothers. Harry Blount - Lehman Brothers: Dan, you were alluding to strength across the board in a number of different vectors. I want to try to attack it a different way. Can you maybe talk about your competitive win rates and the partnerships if you saw strength in any particular area, highlighted SAP, I am just wondering if there are any others, as well as a competitive dynamics.

Let me take the competitive side and I will flip it back to Dan. On the competitive side, our Oracle relationship continues to be an amazing strength. The success we have had with the on-demand business being hosted on us has resulted in a tremendous push with them into a number of markets, so that has done really well. The SAP relationship has really taken hold. In Europe, it has done spectacularly well, but even the United States we are starting to get some significant success. We are investing in partnerships. IBM is also investing in a nice deliverable around SAP, which is going to help us. The IBM relationship touches all of these, I would think. Our relationship with Symantec is also very, very strong. Dan mentioned us selling into Symantec, but we sell with Symantec, especially with KVS. We have had some tremendous wins with them. I think those partnerships -- [inaudible] had been a strong partner, I assume they will continue to be a strong partner, given what happened. I would say [VMware] is a very good partner. I think EMC has done a good job of leaving them alone. Most of their solutions revolve around iSCSI and NAS [inaudible] strength, and they are a very good company, picking up market share and we do a lot with them all over the world. The leverage is just being compounded on a quarterly basis as people are getting used to our solutions there, we have a lot of references there. We do a lot of big speaking engagements for them. I am one of the keynotes at Oracle World again, my seventh one in two-and-a-half years, and Dan has been doing a lot of these, so we are getting a lot of visibility with those particular partners.

I would add one more to that list, is Microsoft. We have had really a significant change in the nature of that relationship over the last roughly six months. After a culmination of some executive meetings, they actually sent the message out to their field that NetApp is a fine partner, not a competitor. That is what allowed us to move our technology into their I think they call them MTCs -- Microsoft Technology Centers -- around the globe, and that has unlocked a lot of joint selling activity with the Microsoft reps. They are still very neutral, but it used to be they had a negative bias towards us. Now we are welcome into the deals, especially as it relates to exchange. Exchange has been a hot application area for us, and SQL Server right behind it. Relative to competitive engagements, in terms of frequency, the vendor line-up looks as you would expect -- pretty much commensurate of market share, with the exception we do not -- IBM has dropped in the mix. I think that is a good thing. That is a reflection of the OEM agreement. We are doing more partnering than competing, but they were never very high. The top five stay pretty constant -- EMC, Hewlett Packard and Hitachi through the various channels, et cetera. Win rates have actually gone up a little bit against EMC and Hitachi. I think that is more a reflection of the high-end and also some secondary storage deployments in the kind of mid-range. Let me rephrase that -- ATA deployments in mid-range primary application environments -- did you decipher all those adjectives? That has been a big benefit for us, so win rates are up, but not all that much. Overall, pipeline is up. We are into more deals.

Our next question is from the line of Aaron Rakers with AG Edwards. Aaron Rakers - AG Edwards & Sons: Just wanted to circle back on the gross margin on the services side going forward. I know you talked about 30% in this upcoming quarter, but maybe you can help us understand with your hiring plans and as you get utilization rates up, where we see the longer-term gross margin play out for that services business. Also, you had mentioned that hiring was a little bit slower than anticipated in the quarter. Do you guys continue to expect to hire 300 persons per quarter throughout the remainder of this year? Thank you.

Let me start with that one on the services side. First of all, let’s define long-term. If long-term is within two years, then you are not going to see that margin move much over the next two years. This is a supply-and-demand question and a function of how much demand there is for our services from enterprise customers and how many people we need to support it. Right now, the bookings growth rate exceeds the revenue growth rate, which means we are actually falling behind in terms of delivering those services. Our plan is to continue to hire service personnel to respond to that demand and help our customers consume our technology and deploy it more rapidly. I do not see any end in site for that, so we are going to balance in the low 30’s, right? I would expect over the next couple of years, you would not see it exceed 35%. We are just going to keep scaling it up as rapidly as we can. Relative to total hiring for the company, you should expect to see us hire in the vicinity of about 300 people per quarter.

Our next question is from the line of Brian Freed with Morgan Keegan. Brian Freed - Morgan Keegan: I expect an upgrade to the FAS3000 here over the course of the rest of this year. Are you comfortable with your plans in place that we do not see a repeat of last year, particularly given that it may impact the sales of the FAS900 product family?

I am slow, but I am a good learner. I only have to screw it up once to make sure I don’t do it again.

If you look at the product line, with the 6000, even the SMB product this quarter, that is basically a range on a single architecture that goes from $5,000 to $10,000 ASPs all the way up, as Dan indicated, to clustered machines at $0.5 million ASP, and then you throw the GX on top of that.

Which has a $1 million ASP.

Which so far has a $1 million ASP and can grow from there. As far as the mid-range is concerned, certainly the introduction of mid-range technology, since it is more technologically current, has a chance of cannibalizing the previous high end. I think we have a lot more scalability in our product offering this time than we did last time. Last time, the top of the product line was the 980. Now the top of the product line is the 6070 with clustered GX on top of that, so the opportunity of us introducing a mid-range product that takes the high-end away I do not think is quite nearly so likely this time around, but clearly we need to be concerned about that. We need to be balancing that, not only from a market demand but also an inventory control issue as well. I think we are going to be pretty diligent on the point, but that is not going to slow us down in terms of introducing new products. In fact, I think our rate of product introduction is actually increasing over time.

Our next question is from the line of Kevin Hunt with Thomas Weisel Partners. Kevin Hunt - Thomas Weisel Partners: I actually have a couple of things. In terms of NetCash, a follow-up on that question, when is it actually going to close and when should we expect that step function down? Can you give us any color on that large deal you talked about -- how big it was, what vertical it might have been in?

The large deal was in the federal sector and was over $10 million. On the NetCash side, the deal closing is not necessarily under our control. I believe it will happen somewhere before the end of this particular fiscal quarter. I am not sure I can get a lot more precise than that. At that time, the product revenues will -- I think the right assumption is there will not be much in the way of product revenues next quarter. Kevin Hunt - Thomas Weisel Partners: Going back to that federal deal, the big deal there, is that something where you could see continued deals of that size? How should we be thinking about that?

We did the largest deal in our history in Q4 with a $10 million order around Decru, and this quarter, we had two orders that both beat it.

We had multiple orders in the $5 million to $10 million range, so it is not -- they are not in the same verticals. It is just people getting more confident in our technology, wanting to deploy it faster and in many cases, they want to get off of an architecture that is too expensive for them because of complexity, so they give us the whole range of application, including tier 1 and tier 2, and that is an explosive number for us. In almost every case, they have taken all the NetApp software and when we go to really find out why we won, they love the fact that they can get higher utilization, they love the fact they can recover in a simple way and they do not have to add a lot of people to the equation to solve major problems.

Our next question is from the line of Katie Huberty with Morgan Stanley. Katie Huberty - Morgan Stanley: Just to circle back around on the competitive question, now that you have sold a good number of the 6000 boxes and that is somewhat of a new market for you, do you have a sense of whose systems you are replacing in those deals?

Clearly in that price point the big traditional monolithic vendors are there, and for us to be winning in that space, clearly we need to be taking share away from them, so I think we know who they are. In addition, I think a big part of our business is the growth of secondary storage. Business continuous applications, disk-to-disk back-up, so the need to consolidate that in a big way is another attractive opportunity for the 6000. But in the primary space, clearly we are competing against the big monolithic vendors, just like the product was originally intended, but we are also seeing other market opportunities in the secondary space as well.

Our next question is from the line of Clay Sumner with FBR. Clay Sumner - FBR Research: Tom, in those large deals you were just talking about where folks are tending to take a lot of NetApp software, is the add-on software revenue as a percentage of the mix of those deals larger than your corporate average of 24% or so?

It is about the same. It is just that they look at us for a primary application and then they buy all the SAP products in the sale-over. They tend to also want to really move aggressively with all the things you get out of 7G really is fundamental to why they are going with NetApp. The discussion is more about how they can take advantage of NetApp software and the fact that it is a single architecture. Another thing Dan brought up was the success for ADP. I do not think people really understand how compelling that is at a customer level to be able to move apps -- they are probably doing direct attach today and move them to our network storage and have the confidence that they can have a double display or not go down, is bringing all kinds of new apps on in these same accounts. Once they understand the whole NetApp story, we are taking away in many cases what they were doing with their other vendors but also taking a lot of stuff off of direct attached onto the network and they are becoming religious about the fact they can do this without adding people.

If you look at our base deal mix, if you will, by the size of system, it turns out it is relatively consistent from low-end system to high-end system. At the low-end, the hardware costs less if you add less software, but the ratio is still about 3-to-1. As you scale up, it turns out you are buying a whole lot of hardware, a $10 million deal is $7.5 million of hardware, and guess what? You add on $2.5 million of software -- that is a lot of software, but guess what? The ratio is still 3-to-1. It stays relatively consistent throughout the product line. I want to underscore what Tom said. The ray DP thing is really starting to -- customers are really starting to figure it out. That is what is allowing them to deploy more ATA based storage into primary application environments. They are now gaining enough confidence in ray DP with ATA, they say they do not need the performance in a lot of those applications, it is production storage. This is not secondary storage. They see no performance penalty. They see no cost penalty by having dual parity protection, and they get a really cheap solution based on ATA. It is a very compelling value proposition.

Two other things -- disc-to-disc is becoming very popular for NetApp. As you know, we are doing great. The more you can rely -- the issue in doing data consolidation is recovery. You have to keep a consistent recovery time. If you are coming from disc rather than tape, you can do more consolidation -- huge payback. Secondarily, people oftentimes use our disc-to-disc for recovery of information. They say wait a minute, with ray DP, I can also use that as my DR. You see many, many of our up-front systems DR to our other stuff, and they were not even thinking that way before. They were thinking DR would be too expensive. Everybody has a plan, nobody implements. That is classic DR. In our case, many of our systems are DR to us. Clay Sumner - FBR Research: Actually, just a follow-up on that ray DP point. Do you notice that the ATA mix stays the same in high-end 6000 versus the 3000 and on down?

I think we are seeing a phenomena we have not experienced in the past. As Tom indicated, a lot of the 6000 appear to be going out ATA heavy. It would appear, at least in some of the early adopters, they are using that as a primary consolidation for their secondary storage in the disc-to-disc model Tom was just talking about, building one great big clustered 6030 is probably a cheaper solution than several near-stores. But you have to get big to do that, right? It is a form of consolidation, and the 6000 becomes the focal point for it. I do not know if we are going to see that continue in the mix going forward. It is still pretty early, but certainly we have seen a disproportionate amount of ATA in the 6000, especially 6030.

(Operator Instructions) Our next question is from the line of Brent Bracelin with Pacific Crest Securities. Brent Bracelin - Pacific Crest Securities: Thank you. Two quick questions. First question, you talked about 70% of bookings tied to enterprise. What was that mix a year ago for comparisons? Then I had a follow-up on Store Vault. What has been the initial feedback on the low-end Store Vault and what are your expectations to accelerate the ramp in the adoption of that product?

Year-ago enterprise penetration was roughly about 60%. Actually, I think in Q1 of last year, and I am doing this from memory, it was 58%, and it was trending up through the year, and the year finished at a little over 60%, but it was 58%. Anyway, the point is we made significant progress and it has gone up sequentially every quarter, so we are pretty happy with the progress. The Store Vault, we actually have a little revenue in Store Vault. It was not material It does not make the round-off hardly, but it is off to a great start. The feedback from the channel is great. The feedback from the customer community is great. My guess is we will start seeing some revenue contribution from that next quarter. I want to caution not to get too bullish on that. We are still trying to figure out what that market is, how to reach it, and have we got the right product, et cetera. We do not really have much in Store Vault revenue built into our guidance going forward.

Our next question is from the line of Clay Sumner. Clay Sumner - FBR Research: Thank you. A follow-up on IBM. I would assume that they are tending to sell mostly MAS at this point, but I do not know -- do you expect them to sell a lot of SAN, and where are they relative to your expectations there?

Actually, our IBM mix looks very much like the rest of our mix. If you look at -- take IBM out of the equation, we sell more SAN product through the channel than we do through our own direct organization. That is one of the things we are trying to bring back into balance this year. That is because I think our channel partners understand the SAN environment better than our own direct guys in many cases, so they are just more proficient at it. IBM has that same type of proficiency, so you look at their mix, it is actually a little higher in terms of SAN and iSCSI than it is in MAS, relative to what we see from our normal direct organization. Overall, those could be considered round-off errors as well. They are 3% of revenue, so it may not be a statistically valid sample, but so far, SAN is higher in their mix than it is from direct.

Ladies and gentlemen, this concludes the question-and-answer portion of today’s conference. I would like to turn it back over to Dan Warmenhoven, Chief Executive Officer, for any further comments.

Again, thank you very much for joining us today. You know, we look at this as one of the best well-rounded performances and probably maybe the best financial performance of any quarter that I can certainly remember in the last few years. Every single metric headed in the right direction this quarter, so we feel pretty good about where we are at, and looking forward to having the opportunity to share with you the results of Q2 about three months from now. Thank you, and have a great day.

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect. Good day.