Edgar Filing: EMC CORP

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended: September 30, 2003

Commission File Number 1-9853

EMC CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts

04-2680009

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer

Identification Number)

176 South Street

Hopkinton, Massachusetts 01748

(Address of principal executive offices, including zip code)

(508) 435-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x

NO ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES x

NO ¨

The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of September 30, 2003 was 2,185,540,191.

EMC CORPORATION

		Page No.
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Consolidated Balance Sheets at September 30, 2003 and December 31, 2002		3

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002		4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002		5

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2003 and 2002		6

Notes to Interim Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures About Market Risk		34

Item 4. Controls and Procedures		34

PART II—OTHER INFORMATION

Item 1. Legal Proceedings		35

Item 6. Exhibits and Reports on Form 8-K		35

SIGNATURES		36

EXHIBIT INDEX		37

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

EMC CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	September 30, 2003			December 31, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,606,769		$	1,686,598
Short-term investments		1,007,053			864,743
Accounts and notes receivable, less allowance for doubtful accounts of $39,993 and $50,551		722,334			881,325
Inventories		525,763			437,805
Deferred income taxes		238,572			250,197
Other current assets		105,544			96,580

Total current assets		4,206,035			4,217,248
Long-term investments		3,577,585			3,134,290
Property, plant and equipment, net		1,564,999			1,624,396
Intangible and other assets, net		437,086			365,557
Goodwill, net		217,130			205,030
Deferred income taxes		52,833			43,926

Total assets	$	10,055,668		$	9,590,447

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current portion of long-term obligations	$	9,389		$	27,507
Accounts payable		392,251			429,732
Accrued expenses		884,117			948,357
Income taxes payable		367,690			187,695
Deferred revenue		525,532			448,359

Total current liabilities		2,178,979			2,041,650
Deferred revenue		351,851			156,412
Other liabilities		66,848			166,383
Commitments and contingencies
Stockholders’ equity:
Series preferred stock, par value $.01; authorized 25,000 shares, none outstanding		—			—
Common stock, par value $.01; authorized 6,000,000 shares; issued 2,245,522 and 2,235,930		22,455			22,359
Additional paid-in capital		3,663,097			3,580,025
Deferred compensation		(4,381	)		(10,762	)
Retained earnings		4,346,060			4,070,049
Accumulated other comprehensive loss, net		(87,613	)		(53,488	)
Treasury stock, at cost; 59,982 and 50,555 shares		(481,628	)		(382,181	)

Total stockholders’ equity		7,457,990			7,226,002

Total liabilities and stockholders’ equity	$	10,055,668		$	9,590,447

The accompanying notes are an integral part of the consolidated financial statements.

EMC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
Revenues:
Net sales	$	1,145,659		$	946,055		$	3,321,700		$	3,070,349
Services		365,188			313,383			1,052,598			878,605

		1,510,847			1,259,438			4,374,298			3,948,954
Costs and expenses:
Cost of sales		658,581			605,021			1,932,660			1,892,883
Cost of services		177,149			180,788			524,618			524,996
Research and development		172,858			191,683			530,060			594,661
Selling, general and administrative		390,164			412,313			1,167,977			1,287,760
Restructuring and other special charges		1,696			—			25,785			—

Operating income (loss)		110,399			(130,367	)		193,198			(351,346	)
Investment income		45,473			73,071			149,796			186,419
Interest expense		(672	)		(2,763	)		(2,711	)		(8,344	)
Other expense, net		(3,842	)		(17,418	)		(9,826	)		(30,958	)

Income (loss) before taxes		151,358			(77,477	)		330,457			(204,229	)
Income tax provision (benefit)		(7,731	)		(98,738	)		54,446			(149,439	)

Net income (loss)	$	159,089		$	21,261		$	276,011		$	(54,790	)

Net income (loss) per weighted average share, basic	$	0.07		$	0.01		$	0.13		$	(0.02	)

Net income (loss) per weighted average share, diluted	$	0.07		$	0.01		$	0.12		$	(0.02	)

Weighted average shares, basic		2,186,213			2,203,063			2,186,679			2,210,956

Weighted average shares, diluted		2,213,875			2,207,989			2,208,230			2,210,956

The accompanying notes are an integral part of the consolidated financial statements.

EMC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	For the Nine Months Ended
	September 30, 2003			September 30, 2002
Cash flows from operating activities:
Net income (loss)	$	276,011		$	(54,790	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		389,910			496,476
Non-cash restructuring, inventory and other special charges (reversals)		5,732			(60,735	)
Amortization of deferred compensation		7,193			10,663
Provision for doubtful accounts		4,444			30,441
Deferred income taxes, net		12,783			51,428
Other		11,373			50,501
Changes in assets and liabilities:
Accounts and notes receivable		171,597			567,940
Inventories		(64,526	)		156,155
Other assets		(70,004	)		55,061
Accounts payable		(38,253	)		88,910
Accrued expenses		(66,741	)		(147,466	)
Income taxes payable		190,129			(107,006	)
Deferred revenue		275,700			118,707
Other liabilities		(95,403	)		(5,537	)

Net cash provided by operating activities		1,009,945			1,250,748

Cash flows from investing activities:
Additions to property, plant and equipment		(266,490	)		(305,351	)
Capitalized software development costs		(84,419	)		(95,754	)
Purchases of short and long-term available for sale securities		(4,591,509	)		(6,840,581	)
Sales of short and long-term available for sale securities		3,779,868			5,645,476
Maturities of short and long-term available for sale securities		186,389			187,397
Other		(40,314	)		(24,689	)

Net cash used in investing activities		(1,016,475	)		(1,433,502	)

Cash flows from financing activities:
Issuance of common stock		48,771			54,914
Purchase of treasury stock		(99,447	)		(243,063	)
Payment of long-term and short-term obligations		(27,831	)		(13,952	)
Proceeds from long-term and short-term obligations		4,609			1,512

Net cash used in financing activities		(73,898	)		(200,589	)

Effect of exchange rate changes on cash		599			(4,280	)

Net decrease in cash and cash equivalents		(79,829	)		(387,623	)
Cash and cash equivalents at beginning of period		1,686,598			2,129,019

Cash and cash equivalents at end of period	$	1,606,769		$	1,741,396

Non-cash activity:
Exchange of net assets for equity investment	$	—		$	3,560

The accompanying notes are an integral part of the consolidated financial statements.

EMC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	For the Three Months Ended					For the Nine Months Ended
	September 30, 2003			September 30, 2002		September 30, 2003			September 30, 2002
Net income (loss)	$	159,089		$	21,261	$	276,011		$	(54,790	)
Other comprehensive income (loss), net of taxes (benefit):
Foreign currency translation adjustments, net of taxes of $72, $1,759, $1,781 and $1,273		(9,961	)		4,150		(8,306	)		7,827
Equity adjustment for minimum pension liability, net of taxes of $0, $0, $0 and $343		—			—		—			(343	)
Changes in market value of derivatives, net of taxes (benefit) of $(42), $32, $0 and $(9)		(500	)		284		(376	)		(80	)
Changes in market value of investments, net of taxes (benefit) of $(10,650), $20,624, $(14,921) and $25,395		(17,935	)		18,388		(25,443	)		32,946

Other comprehensive income (loss)		(28,396	)		22,822		(34,125	)		40,350

Comprehensive income (loss)	$	130,693		$	44,083	$	241,886		$	(14,440	)

The accompanying notes are an integral part of the consolidated financial statements.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Company

EMC Corporation and its subsidiaries (“EMC”) design, manufacture, market and support a wide range of networked storage platforms, software and related services. EMC products and services are designed to enable organizations of all types and sizes to manage, protect and share their information in the most efficient and cost-effective manner possible.

Accounting

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles. These statements include the accounts of EMC and its subsidiaries. Certain information and footnote disclosures normally included in EMC’s annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to fairly present the results as of and for the periods ended September 30, 2003 and 2002. Certain prior year amounts have been reclassified to conform with the 2003 presentation.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002 which are contained in EMC’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2003.

Revenue Recognition

EMC derives revenue from sales of information storage systems, software and services. EMC recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. This policy is applicable to all sales, including sales to resellers and end users. The following summarizes the major terms of EMC’s contractual relationships with its customers and the manner in which EMC accounts for sales transactions.

•

Systems sales

Systems sales consist of the sale of hardware, including Symmetrix systems, CLARiiON systems, Celerra systems, Centera systems and Connectrix systems. Revenue for hardware is generally recognized upon shipment.

•

Software sales

Software sales consist of the sale of software application programs that provide customers with information management, sharing or protection capabilities. Revenue for software is generally recognized upon shipment. Software sales also include the licensing of technology, which is recognized ratably over the contract period.

•

Services revenue

Services revenue consists of the sale of installation services, software warranty and maintenance, hardware maintenance, training and professional services.

Installation is not considered essential to the functionality of EMC’s products as these services do not alter the product capabilities, do not require specialized skills and may be performed by the customers or other vendors. Installation services revenues are recognized upon completion of installation.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. Basis of Presentation (Continued)

Software warranty and maintenance and hardware maintenance revenues are recognized ratably over the contract period.

Training revenues are recognized upon completion of the training.

Professional services revenues, which include information infrastructure design, integration and implementation, business continuity, data migration, networking storage and project management, are recognized as milestones are met. The milestones reflect the percentage of costs incurred on the project to total estimated costs.

•

Multiple element arrangements

EMC considers sales contracts that include a combination of systems, software or services to be multiple element arrangements. An item is considered a separate element if it involves a separate earnings process. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, EMC defers the fair value of the undelivered elements with the residual revenue allocated to the delivered elements. Discounts are allocated only to the delivered elements. Fair value is determined based upon the price charged when the element is sold separately. Undelivered elements typically include installation, training, software warranty and maintenance, hardware maintenance and professional services.

•

Shipping terms

EMC sales contracts generally provide for the customer to accept title and risk of loss when the product leaves EMC’s facility. When shipping terms or local laws do not allow for passage of title and risk of loss at shipping point, EMC defers recognizing revenue until title and risk of loss transfer to the customer.

•

Leases

Revenue from sales-type leases is recognized at the net present value of future lease payments. Revenue from operating leases is recognized over the lease period.

•

Other

EMC accrues for systems’ warranty costs and reduces revenue for estimated sales returns at the time of shipment. Systems’ warranty costs are estimated based upon EMC’s historical experience and specific identification of systems’ requirements. Sales returns are estimated based upon EMC’s historical experience and specific identification of probable returns.

Accounting for Stock-Based Compensation

Statement of Financial Accounting Standards (“FAS”) No. 123, “Accounting for Stock-Based Compensation” defined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. As provided for in FAS No. 123, EMC elected to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. The following is a reconciliation of net income (loss) per weighted average

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. Basis of Presentation (Continued)

share had EMC adopted the fair value measurement provisions of FAS No. 123 for the three and nine months ended September 30, 2003 and September 30, 2002 (table in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
Net income (loss)	$	159,089		$	21,261		$	276,011		$	(54,790	)
Add back: Stock compensation costs, net of tax, on stock-based awards granted below fair market value		1,440			1,929			4,643			6,611
Less: Stock compensation costs, net of tax, had stock compensation expense been measured at fair value		(92,945	)		(76,635	)		(283,389	)		(272,858	)

Incremental stock option expense per FAS No. 123, net of tax		(91,505	)		(74,706	)		(278,746	)		(266,247	)

Adjusted net income (loss)	$	67,584		$	(53,445	)	$	(2,735	)	$	(321,037	)

Weighted average shares, basic – as reported		2,186,213			2,203,063			2,186,679			2,210,956
Weighted average shares, diluted – as reported		2,213,875			2,207,989			2,208,230			2,210,956
Net income (loss) per weighted average share, basic – as reported	$	0.07		$	0.01		$	0.13		$	(0.02	)

Net income (loss) per weighted average share, diluted – as reported	$	0.07		$	0.01		$	0.12		$	(0.02	)

Adjusted net income (loss) per weighted average share, basic	$	0.03		$	(0.02	)	$	—		$	(0.15	)

Adjusted net income (loss) per weighted average share, diluted	$	0.03		$	(0.02	)	$	—		$	(0.15	)

The fair value of each option granted during 2003 and 2002 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	2003		2002
Dividend yield	None		None
Expected volatility	55.0	%	55.0	%
Risk-free interest rate	3.01	%	4.16	%
Expected life (years)	5.0		5.0

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Inventories

Inventories consist of (table in thousands):

	September 30, 2003		December 31, 2002
Purchased parts	$	34,721	$	9,560
Work-in-process		351,399		347,395
Finished goods		139,643		80,850

	$	525,763	$	437,805

3. Property, Plant and Equipment

Property, plant and equipment consists of (table in thousands):

	September 30, 2003			December 31, 2002
Furniture and fixtures	$	142,053		$	142,669
Equipment		1,688,604			1,669,535
Buildings and improvements		835,374			828,569
Land		104,911			103,939
Construction in progress		155,985			162,570

		2,926,927			2,907,282
Accumulated depreciation		(1,361,928	)		(1,282,886	)

	$	1,564,999		$	1,624,396

Construction in progress and land owned at September 2003 include $95.3 million and $5.9 million, respectively, of facilities under construction that EMC is holding for future use.

4. Accrued Expenses

Accrued expenses consist of (table in thousands):

	September 30, 2003		December 31, 2002
Salaries and benefits	$	297,914	$	297,386
Product warranties		116,913		104,258
Restructuring (See Note 9)		158,348		224,253
Other		310,942		322,460

	$	884,117	$	948,357

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Accrued Expenses (Continued)

The amounts charged and accrued against the product warranty reserve is as follows (table in thousands):

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
Balance, beginning of the period	$	118,419		$	108,262		$	104,258		$	118,347
Current year provision		17,318			14,879			68,473			37,173
Amounts charged to the accrual		(18,824	)		(16,230	)		(55,818	)		(48,609	)

Balance, end of the period	$	116,913		$	106,911		$	116,913		$	106,911

5. Stockholders’ Equity

Common Stock Repurchase Program

EMC’s Board of Directors has authorized the repurchase of up to an aggregate of 300.0 million shares of its common stock, par value $.01 per share (“Common Stock”). The purchased shares will be available for various corporate purposes, including for use in connection with stock option and employee stock purchase plans. EMC utilizes the cost method to account for the purchase of treasury stock, which presents the aggregate cost of reacquired shares as a component of stockholder’s equity. As of September 30, 2003, EMC had reacquired 60.0 million shares.

Employee Stock Purchase Plan

Under EMC’s 1989 Employee Stock Purchase Plan (the “1989 Plan”), eligible employees of EMC may purchase shares of Common Stock, through payroll deductions, at the lower of 85% of the fair market value of the Common Stock at the time of grant or 85% of the fair market value at the time of exercise. In accordance with the 1989 Plan, an option to purchase shares is granted to each eligible employee of EMC who elects to participate in the 1989 Plan twice yearly, on January 1 and July 1, and is exercisable on the succeeding June 30 or December 31, respectively. In May 2003, stockholders of EMC approved an amendment to the 1989 Plan to increase the number of shares available for grant under the 1989 Plan to 73.0 million shares from 58.0 million shares.

Stock Plan

In May 2003, stockholders of EMC approved the EMC Corporation 2003 Stock Plan (the “2003 Plan”). The 2003 Plan provides for the grant of stock options, restricted stock and restricted stock units. The exercise price for a stock option shall not be less than 100% of the fair market value of the Common Stock on the date of grant. Incentive stock options expire no later than ten years after the date of grant. Restricted stock is Common Stock that is subject to a risk of forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Restricted stock units represent the right to receive shares of Common Stock in the future, with the right to future delivery of the shares subject to a risk of forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Awards of restricted stock or restricted stock units that vest by the passage of time only will not vest fully in less than three years after the date of grant. A total of 50.0 million shares of Common Stock have been reserved for issuance under the 2003 Plan, of which no more than 10.0 million shares of Common Stock may be issued pursuant to awards of restricted stock or restricted stock units.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Net Income (Loss) Per Share

Calculation of diluted earnings (loss) per share is as follows (table in thousands, except per share amounts):

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2003		September 30, 2002		September 30, 2003		September 30, 2002
Net income (loss)	$	159,089	$	21,261	$	276,011	$	(54,790	)

Weighted average shares, basic		2,186,213		2,203,063		2,186,679		2,210,956
Weighted average common stock equivalents		27,662		4,926		21,551		—

Weighted average shares, diluted		2,213,875		2,207,989		2,208,230		2,210,956

Net income (loss) per share, diluted	$	0.07	$	0.01	$	0.12	$	(0.02	)

Options to acquire 68.4 million and 100.7 million shares of Common Stock for the three and nine months ended September 30, 2003, respectively, and options to acquire 126.5 million and 137.6 million shares of Common Stock for the three and nine months ended September 30, 2002, respectively, were excluded from the calculation of diluted earnings per share because of their antidilutive effect.

7. Commitments and Contingencies

Lines of Credit

EMC has available for use credit lines of $50.0 million in the United States and $50.0 million in Brazil. As of September 30, 2003, EMC had no borrowings outstanding on either line of credit. The U.S. credit line bears interest at the bank’s base rate and requires EMC, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. The Brazilian credit line bears interest at the rate quoted by the lender and requires EMC to meet certain financial covenants with respect to limitations on losses and maintaining minimum levels of cash and investments. In the event the covenants are not met, the lender may require EMC to provide collateral to secure the outstanding balance. At September 30, 2003, EMC was in compliance with the covenants.

Litigation

On September 30, 2002, Hewlett-Packard Company (“HP”) filed a complaint against EMC in the United States Federal District Court for the Northern District of California alleging that certain EMC products infringe seven HP patents. HP seeks a permanent injunction as well as unspecified monetary damages for patent infringement. EMC believes that HP’s claims are without merit. On July 21, 2003, EMC answered the complaint and filed counterclaims alleging that certain HP products infringe nine EMC patents. EMC seeks a permanent injunction as well as unspecified monetary damages for patent infringement.

On September 30, 2002, EMC filed a complaint against HP in the United States Federal District Court in Worcester, Massachusetts. The complaint alleged that certain HP products infringe nine EMC patents. The suit sought a permanent injunction as well as unspecified monetary damages for patent infringement. On June 20, 2003, the parties filed a joint motion to dismiss the suit without prejudice, and thereafter, the suit was dismissed by the court.

EMC is a party to other litigation that it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on EMC’s business, results of operations or financial condition.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Segment Information

EMC operates in the following segments: information storage products, information storage services and other businesses. The following table presents the revenue components for information storage products (table in thousands):

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2003		September 30, 2002		September 30, 2003		September 30, 2002
Information storage systems	$	801,075	$	662,417	$	2,357,276	$	2,183,104
Information storage software		344,584		283,591		964,424		886,482

	$	1,145,659	$	946,008	$	3,321,700	$	3,069,586

EMC’s management makes financial decisions and allocates resources based on revenues and gross profit achieved at the segment level. EMC does not allocate selling, general and administrative or research and development expenses to each segment, as management does not use this information to measure the performance of the operating segments. The revenues and gross profit attributable to these segments are included in the following tables (tables in thousands, except for footnote):

For the Three Months Ended	Information Storage Products			Information Storage Services		Other Businesses		Consolidated
September 30, 2003
Revenues	$	1,145,659		$	341,113	$	24,075	$	1,510,847
Gross profit		487,078			175,383		12,656		675,117
Gross profit percentage		42.5%			51.4%		52.6%		44.7%

September 30, 2002
Revenues	$	946,008		$	279,217	$	34,213	$	1,259,438
Gross profit		333,300	(1)		115,963		16,471		465,734	(1)
Gross profit percentage		35.2%	(1)		41.5%		48.1%		37.0%	(1)

For the Nine Months Ended	Information Storage Products			Information Storage Services		Other Businesses		Consolidated
September 30, 2003
Revenues	$	3,321,700		$	975,508	$	77,090	$	4,374,298
Gross profit		1,389,040			487,422		40,558		1,917,020
Gross profit percentage		41.8%			50.0%		52.6%		43.8%

September 30, 2002
Revenues	$	3,069,586		$	768,895	$	110,473	$	3,948,954
Gross profit		1,116,276	(2)		305,362		48,702		1,470,340	(2)
Gross profit percentage		36.4%	(2)		39.7%		44.1%		37.2%	(2)

(1)

Excludes the benefit of $7.9 million related to the sale of previously identified obsolete inventory.

(2)

Excludes the benefit of $60.7 million related to the sale of previously identified obsolete inventory.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Segment Information (Continued)

EMC’s revenues are attributed to geographic areas according to the location of customers. Revenues by geographic area are included in the following table (table in thousands):

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2003		September 30, 2002		September 30, 2003		September 30, 2002
Sales:
United States	$	901,959	$	751,403	$	2,599,523	$	2,283,281
Other North America		19,492		20,110		82,346		57,791

Total North America		921,451		771,513		2,681,869		2,341,072

Europe, Middle East, Africa		382,226		305,568		1,118,371		938,147
Asia Pacific		172,763		157,598		486,667		594,304
Latin America		34,407		24,759		87,391		75,431

Total International		589,396		487,925		1,692,429		1,607,882

Total	$	1,510,847	$	1,259,438	$	4,374,298	$	3,948,954

No country other than the United States accounted for 10% or more of revenues during the three months or nine months ended September 30, 2003 or September 30, 2002.

At September 30, 2003, long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,363.5 million in the United States and $146.5 million in Ireland. At December 31, 2002, the long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,419.6 million in the United States and $145.3 million in Ireland. No other country accounted for 10% or more of these assets at September 30, 2003 or December 31, 2002.

For the quarter ended September 30, 2003, Dell Inc. accounted for $155.8 million of total revenues. These revenues are included in both the information storage products and information storage services segments.

9. Restructuring Costs and Other Special Charges

2002 Restructuring Program

In the fourth quarter of 2002, EMC implemented a restructuring program to reduce its cost structure. As a result of the program, EMC incurred restructuring and other special charges of $140.9 million. The restructuring charge included employee termination benefits, consolidation of excess facilities, impairment of long-lived assets and contractual and other obligations for which EMC no longer derives an economic benefit. The activity for the three and nine months ended September 30, 2003 is presented below (tables in thousands):

Category	Balance as of June 30, 2003		Additions to the Provision		Current Utilization			Balance as of September 30, 2003
Workforce reduction	$	17,926	$	396	$	(9,091	)	$	9,231
Consolidation of excess facilities		49,911		—		(4,933	)		44,978
Contractual and other obligations		6,639		1,300		(2,374	)		5,565

Total	$	74,476	$	1,696	$	(16,398	)	$	59,774

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. Restructuring Costs and Other Special Charges (Continued)

Category	Balance as of December 31, 2002		Additions to the Provision		Current Utilization			Balance as of September 30, 2003
Workforce reduction	$	22,121	$	22,481	$	(35,371	)	$	9,231
Consolidation of excess facilities		52,647		9,638		(17,307	)		44,978
Contractual and other obligations		15,260		1,300		(10,995	)		5,565

Total	$	90,028	$	33,419	$	(63,673	)	$	59,774

The $0.4 million addition to the provision for workforce reduction for the three months ended September 30, 2003 and the $22.5 million addition to the provision for workforce reduction for the nine months ended September 30, 2003 were primarily attributable to finalizing severance packages for employees in foreign jurisdictions. The $9.6 million addition to the provision for the consolidation of excess facilities for the nine months ended September 30, 2003 represents additional charges for facilities being vacated. The $1.3 million addition to the provision for contractual and other obligations for the three and nine months ended September 30, 2003 represents an adjustment to the previously established obligations associated with the restructuring program.

The 2002 restructuring program includes a reduction in force of approximately 1,500 employees across all business functions and geographic regions. Approximately 64% of such employees were based in North America and the remainder were based in Europe, Latin America and the Asia Pacific region.

As of June 30, 2003, the 2002 restructuring program had been substantially completed, although the ability to sublet facilities is subject to appropriate market conditions. The expected cash impact of the 2002 restructuring program is $142.0 million, of which $24.2 million was paid in 2002 and $58.0 million was paid in 2003. Remaining cash expenditures, relating to workforce reductions and contractual obligations, are expected to be substantially paid by the end of 2003. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015.

Other Restructuring Programs

In the third quarter of 2001, EMC implemented a restructuring program to reduce its cost structure. As a result of the program, EMC incurred restructuring and other special charges of $825.2 million. Additionally, during 1999, EMC recorded a charge of $223.6 million relating to restructuring, merger and other special charges primarily associated with its acquisition of Data General Corporation. For the nine months ended September 30, 2003, the Data General restructuring accrual was reduced by $7.6 million, resulting from a favorable resolution of liabilities incurred in connection with the acquisition of Data General. As of September 30, 2003, the remaining accrued obligations associated with the 2001 and 1999 charges are an aggregate of $98.6 million. The amounts primarily relate to remaining lease obligations for vacated facilities that will be paid through 2015. In addition, the amounts relate to executive severance obligations attributable to the acquisition of Data General.

10. Income Taxes

For the nine months ended September 30, 2003, the estimated effective income tax rate was 16.5%. The effective income tax rate is based upon the expected income for the year, the expected composition of that income in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the three and nine months ended September 30, 2003, the effective tax rate varied from the statutory tax rate primarily as a result of the favorable resolution of a series of tax audits which aggregated

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Income Taxes (Continued)

$53.6 million. As a result, an income tax benefit of $7.7 million was recognized in the three months ended September 30, 2003. The estimated effective tax rate for 2003 is subject to further change as a result of changes in the composition of the income in the countries in which EMC operates and the effects, if any, from tax audits.

11. Acquisition of LEGATO Systems, Inc.

In July 2003, EMC entered into a definitive agreement to acquire all of the outstanding common stock of LEGATO Systems, Inc. (“LEGATO”), in a stock transaction valued at approximately $1.3 billion. LEGATO develops, markets, and supports storage software products and services worldwide. Under the terms of the agreement, LEGATO stockholders will receive 0.9 of a share of Common Stock for each share of LEGATO common stock. The acquisition was completed in October 2003.

The acquisition will result in identifiable intangible assets, including customer relations, developed technology, trade names and trademarks and non-competition agreements. While the final determination of their values is subject to the completion of an appraisal, EMC estimates the total value of these intangible assets will be $161.0 million.

12. Subsequent Event

In October 2003, EMC entered into a definitive agreement to acquire all of the outstanding common stock of Documentum, Inc. (“Documentum”) in a stock transaction valued at approximately $1.7 billion. Documentum provides enterprise content management software, enabling organizations to organize and manage unstructured data. Under the terms of the agreement, Documentum stockholders will receive 2.175 shares of Common Stock for each share of Documentum common stock. The acquisition is subject to customary closing conditions, including Documentum’s stockholder and regulatory approvals, and is expected to be completed in the fourth quarter of 2003 or the first quarter of 2004.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report and MD&A contained in EMC’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2003. The following discussion contains forward-looking statements and should also be read in conjunction with “FACTORS THAT MAY AFFECT FUTURE RESULTS” beginning on page 27. EMC disclaims any obligation to update any such forward-looking statements after the date of this Quarterly Report.

All dollar amounts in this MD&A are in millions.

Results of Operations—Third Quarter of 2003 Compared to Third Quarter of 2002

Revenues

Total revenues for the third quarter of 2003 were $1,510.8, compared to $1,259.4 for the third quarter of 2002, representing an increase of $251.4, or 20%.

Information storage products revenues were $1,145.6 in the third quarter of 2003, compared to $946.0 in the third quarter of 2002, representing an increase of $199.6, or 21%. Information storage products revenues include information storage systems and information storage software revenues. Information storage systems revenues were $801.1 in the third quarter of 2003, compared to $662.4 in the third quarter of 2002, representing an increase of $138.7, or 21%. Information storage software revenues were $344.5 in the third quarter of 2003, compared to $283.6 in the third quarter of 2002, representing an increase of $60.9, or 22%. The increase in revenues for information storage products was primarily volume related, attributable to a broadened product portfolio of both information storage systems and information storage software as well as a greater demand for these products. Partially offsetting the increase in the volume of information storage systems revenue were price declines.

Information storage services revenues were $341.1 in the third quarter of 2003, compared to $279.2 in the third quarter of 2002, representing an increase of $61.9, or 22%. The increase was primarily due to a growth in maintenance revenues associated with a greater volume of software and hardware maintenance contracts. Additionally, a greater volume of professional services, largely to support and implement automated networked storage solutions, contributed to the increase.

Total information storage revenues were $1,486.7 in the third quarter of 2003, compared to $1,225.2 in the third quarter of 2002, representing an increase of $261.5, or 21%.

Other businesses revenues were $24.1 in the third quarter of 2003, compared to $34.2 in the third quarter of 2002, representing a decrease of $10.1, or 30%. For both periods, other businesses revenues consist primarily of maintenance services relating to AViiON server products that we stopped selling in the third quarter of 2001. These revenues are expected to continue to decline in future quarters.

Revenues on sales into the North American markets were $921.5 in the third quarter of 2003, compared to $771.5 in the third quarter of 2002, representing an increase of $150.0, or 19%. Revenues on sales into the European, Middle East and African markets were $382.2 in the third quarter of 2003, compared to $305.6 in the third quarter of 2002, representing an increase of $76.6, or 25%. Revenues on sales into the Asia Pacific markets were $172.8 in the third quarter of 2003, compared to $157.6 in the third quarter of 2002, representing an

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

increase of $15.2, or 10%. Revenues on sales into the Latin American markets were $34.4 in the third quarter of 2003, compared to $24.8 in the third quarter of 2002, representing an increase of $9.6, or 39%. The increase in revenues worldwide was attributable to greater demand for our products and services.

Changes in exchange rates in the third quarter of 2003 compared to the third quarter of 2002 positively impacted revenues by approximately 2.9%. The impact was most significant in the European market, primarily Germany, the United Kingdom, Italy and France.

Gross Margins

Gross margin dollars increased to $675.1 in the third quarter of 2003 from $473.6 in the third quarter of 2002, an increase of $201.5, or 43%. The increase in gross margin dollars was attributable to our information storage products and information storage services segments.

The gross margin percentage for information storage products increased to 42.5% in the third quarter of 2003, compared to 36.1% in the third quarter of 2002. The gross margin percentage for the third quarter of 2002 was favorably impacted by $7.9, or 0.9%, resulting primarily from the sale of previously identified obsolete inventory for which a reserve was established in 2001. The increase in the gross margin percentage in the third quarter of 2003 compared to the third quarter of 2002 was primarily attributable to increased sales volume and a lower fixed cost component of cost of sales.

The gross margin percentage for information storage services increased to 51.4% in the third quarter of 2003, compared to 41.5% in the third quarter of 2002. The increase in the gross margin percentage in the third quarter of 2003 compared to the third quarter of 2002 was attributable to a higher proportion of revenues being comprised of maintenance revenues than professional services revenues in the third quarter of 2003 compared to the third quarter of 2002. Maintenance revenues provide a higher margin than professional services revenues.

The gross margin percentage for other businesses increased to 52.6% in the third quarter of 2003 compared to 48.1% in the third quarter of 2002. The increase in the gross margin percentage resulted from reducing costs in this segment as the volume of maintenance contracts diminished.

Research and Development

Research and development (“R&D”) expenses were $172.9 and $191.7 in the third quarters of 2003 and 2002, respectively, a decline of 10%. As a percentage of revenues, R&D expenses were 11.4% and 15.2% in the third quarters of 2003 and 2002, respectively. In addition, we spent $27.2 and $31.5 in the third quarters of 2003 and 2002, respectively, on software development, which costs were capitalized. The decline in R&D expenses was primarily due to our cost cutting initiatives. R&D spending levels reflect our efforts to continue to improve our long-term competitive position. R&D spending includes enhancements to information storage software and information storage systems, including networked information storage systems.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses were $390.2 and $412.3 in the third quarters of 2003 and 2002, respectively, a decrease of 5%. As a percentage of revenues, SG&A expenses were 25.8% and 32.7% in the third quarters of 2003 and 2002, respectively. The decrease in SG&A expenses was primarily due to a reduction in salary, benefits and related costs associated with our cost cutting initiatives. Additionally, due to improvements in the underlying quality and age of our accounts receivable, the allowance for bad debts was reduced by $6.0 in the third quarter of 2003.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Acquisition of LEGATO Systems, Inc.

In October 2003, we completed the acquisition of LEGATO Systems, Inc. (“LEGATO”). As a result of the transaction, we expect to incur certain charges in the fourth quarter of 2003, including in-process R&D, integration and other expenses. The integration expenses may include the elimination of duplicative facilities, operational realignment expenses and related workforce reductions. While management is currently finalizing its integration plan, we estimate the fourth quarter charge will be between $30.0 and $60.0; however, we expect the charge to be closer to the higher end of this range.

The acquisition of LEGATO will favorably impact our software and service revenues. Additionally, the acquisition will result in increased SG&A and R&D expenses. The acquisition will result in identifiable intangible assets, including customer relations, developed technology, trade names and trademarks and non-competition agreements. While the final determination of their values is subject to the completion of an appraisal, we estimate the total value of these intangible assets will be $161.0. These intangible assets will be amortized over their respective useful lives resulting in increased quarterly operating expenses.

2002 Restructuring Program

In the fourth quarter of 2002, we implemented a restructuring program to reduce our cost structure. As a result of the program, we incurred restructuring and other special charges of $140.9. The restructuring charge included employee termination benefits, consolidation of excess facilities, impairment of long-lived assets and contractual and other obligations for which we no longer derive an economic benefit. The activity for the period June 30, 2003 to September 30, 2003 is presented below:

Category	Balance as of June 30, 2003		Additions to the Provision		Current Utilization			Balance as of September 30, 2003
Workforce reduction	$	17.9	$	0.4	$	(9.1	)	$	9.2
Consolidation of excess facilities		49.9		—		(4.9	)		45.0
Contractual and other obligations		6.7		1.3		(2.4	)		5.6

Total	$	74.5	$	1.7	$	(16.4	)	$	59.8

The $0.4 addition to the provision for workforce reduction was primarily attributable to finalizing severance packages for employees in foreign jurisdictions. The $1.3 addition to the provision for contractual and other obligations represents an adjustment to the previously established obligations associated with the restructuring program.

As of June 30, 2003, the 2002 restructuring program had been substantially completed, although the ability to sublet facilities is subject to appropriate market conditions. The expected cash impact of the 2002 restructuring program is $142.0, of which $24.2 was paid in 2002 and $58.0 was paid in 2003. Remaining cash expenditures, relating to workforce reductions and contractual obligations, are expected to be substantially paid by the end of 2003. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Other Restructuring Programs

In the third quarter of 2001, we implemented a restructuring program to reduce our cost structure. As a result of the program, we incurred restructuring and other special charges of $825.2. Additionally, during 1999, we recorded a charge of $223.6 relating to restructuring, merger and other special charges primarily associated with our acquisition of Data General Corporation. As of September 30, 2003, the remaining accrued obligations associated with the 2001 and 1999 charges are an aggregate of $98.6. The amounts primarily relate to remaining lease obligations for vacated facilities that will be paid through 2015. In addition, the amounts relate to executive severance obligations attributable to the acquisition of Data General.

Investment Income

Investment income decreased to $45.5 in the third quarter of 2003, from $73.1 in the third quarter of 2002. Investment income was earned from investments in cash equivalents, short and long-term investments and sales-type leases. Investment income decreased because of lower yields on outstanding investment balances and reduced realized gains from the sale of investments. The weighted average annualized return on investments, excluding realized gains, was 2.5% and 3.5% in the third quarters of 2003 and 2002, respectively.

Other Expense, net

Other expense, net was $3.8 in the third quarter of 2003, compared to $17.4 in the third quarter of 2002. The decrease was due to lower foreign currency exchange losses.

Benefit for Income Taxes

We recognized a benefit for income taxes of $7.7 in the third quarter of 2003 on pre-tax income of $151.4. We recognized a benefit for income taxes of $98.7 in the third quarter of 2002 on a pre-tax loss of $77.5. The effective rate of benefit was 5.1% in the third quarter of 2003 compared to 127.4% in the third quarter of 2002. The effective income tax rate is based upon the expected income for the year, the expected composition of that income in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the quarter ended September 30, 2003, the effective tax rate varied from the statutory tax rate primarily as a result of the favorable resolution of a series of tax audits which aggregated $53.6. For the quarter ended September 30, 2002, the effective income tax rate varied from the statutory rate primarily as a result of the overall favorable resolution of international tax matters which aggregated approximately $67.7. Such amount included the favorable resolution of an international tax audit, partially offset by a provision for tax liabilities on other matters.

Results of Operations—First Nine Months of 2003 Compared to First Nine Months of 2002

Revenues

Total revenues for the first nine months of 2003 were $4,374.3, compared to $3,949.0 for the first nine months of 2002, representing an increase of $425.3, or 11%.

Information storage products revenues were $3,321.7 in the first nine months of 2003, compared to $3,069.6 in the first nine months of 2002, representing an increase of $252.1, or 8%. Information storage products revenues include information storage systems and information storage software revenues. Information storage systems revenues were $2,357.3 in the first nine months of 2003, compared to $2,183.1 in the first nine months of 2002, representing an increase of $174.2, or 8%. Information storage software revenues were $964.4 in the first nine months of 2003, compared to $886.5 in the first nine months of 2002, representing an increase of $77.9,

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

or 9%. The increase in revenues for information storage products was primarily volume related, attributable to a broadened product portfolio of both information storage systems and information storage software as well as a greater demand for these products. Partially offsetting the increase in the volume of information storage systems revenue were price declines.

Information storage services revenues were $975.5 in the first nine months of 2003, compared to $768.9 in the first nine months of 2002, representing an increase of $206.6, or 27%. The increase was primarily due to growth in maintenance revenues associated with a greater volume of software and hardware maintenance contracts. Additionally, a greater volume of professional services, largely to support and implement automated networked storage solutions, contributed to the increase.

Total information storage revenues were $4,297.2 in the first nine months of 2003, compared to $3,838.5 in the first nine months of 2002, representing an increase of $458.7, or 12%.

Other businesses revenues were $77.1 in the first nine months of 2003, compared to $110.5 in the first nine months of 2002, representing a decrease of $33.4, or 30%. For both periods, other businesses revenues consist primarily of maintenance services relating to AViiON server products that we stopped selling in the third quarter of 2001. These revenues are expected to continue to decline in future quarters.

Revenues on sales into the North American markets were $2,681.9 in the first nine months of 2003, compared to $2,341.1 in the first nine months of 2002, representing an increase of $340.8, or 15%. Revenues on sales into the European, Middle East and African markets were $1,118.4 in the first nine months of 2003, compared to $938.1 in the first nine months of 2002, representing an increase of $180.3, or 19%. Revenues on sales into the Asia Pacific markets were $486.7 in the first nine months of 2003, compared to $594.3 in the first nine months of 2002, representing a decrease of $107.6, or 18%. Revenues on sales into the Latin American markets were $87.4 in the first nine months of 2003, compared to $75.4 in the first nine months of 2002, representing an increase of $12.0, or 16%. The increase in revenues in the North American, European, Middle East and African and Latin American markets was attributable to greater demand for our products and services. The decrease in revenue in the Asia Pacific markets was due to several large non-recurring customer orders received in the first nine months of 2002.

Changes in exchange rates in the first nine months of 2003 compared to the first nine months of 2002 positively impacted revenues by approximately 2.9%. The impact was most significant in the European market, primarily Germany, the United Kingdom, Italy and France.

Gross Margins

Gross margin dollars increased to $1,917.0 in the first nine months of 2003 from $1,531.1 in the first nine months of 2002, an increase of $385.9, or 25%. The increase in gross margin dollars was attributable to our information storage products and information storage services segments.

The gross margin percentage for information storage products increased to 41.8% in the first nine months of 2003, compared to 38.3% in the first nine months of 2002. The gross margin percentage for the first nine months of 2002 was favorably impacted by $60.7, or 1.9%, resulting primarily from the sale of previously identified obsolete inventory for which a reserve was established in 2001. The increase in the gross margin percentage in the first nine months of 2003 compared to the first nine months of 2002 was primarily attributable to increased sales volume and a lower fixed cost component of cost of sales.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

The gross margin percentage for information storage services increased to 50.0% in the first nine months of 2003, compared to 39.7% in the first nine months of 2002. The increase in the gross margin percentage in the first nine months of 2003 compared to the first nine months of 2002 was attributable to a higher proportion of revenues being comprised of maintenance revenues than professional services revenues in the first nine months of 2003 compared to the first nine months of 2002. Maintenance revenues provide a higher margin than professional services revenues.

The gross margin percentage for other businesses increased to 52.6% in the first nine months of 2003, compared to 44.1% in the first nine months of 2002. The increase in the gross margin percentage resulted from reducing costs in this segment as the volume of maintenance contracts diminished.

Research and Development

R&D expenses were $530.1 and $594.7 in the first nine months of 2003 and 2002, respectively, a decline of 11%. As a percentage of revenues, R&D expenses were 12.1% and 15.1% in the first nine months of 2003 and 2002, respectively. In addition, we spent $84.4 and $95.8 in the first nine months of 2003 and 2002, respectively, on software development, which costs were capitalized. The decline in R&D expenses was primarily due to our cost cutting initiatives. R&D spending levels reflect our efforts to improve our long-term competitive position. R&D spending includes enhancements to information storage software and information storage systems, including networked information storage systems.

Selling, General and Administrative

SG&A expenses were $1,168.0 and $1,287.8 in the first nine months of 2003 and 2002, respectively, a decrease of 9%. As a percentage of revenues, SG&A expenses were 26.7% and 32.6% in the first nine months of 2003 and 2002, respectively. The decrease in SG&A expenses was primarily due to a reduction in salary, benefits and related costs associated with our cost cutting initiatives.

Acquisition of LEGATO Systems, Inc.

In October 2003, we completed the acquisition of LEGATO. As a result of the transaction, we expect to incur certain charges in the fourth quarter of 2003, including in-process R&D, integration and other expenses. The integration expenses may include the elimination of duplicative facilities, operational realignment expenses and related workforce reductions. While management is currently finalizing its integration plan, we estimate the fourth quarter charge will be between $30.0 and $60.0; however, we expect the charge to be closer to the higher end of this range.

2002 Restructuring Program

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

contractual and other obligations for which we no longer derive an economic benefit. The activity for the period December 31, 2002 to September 30, 2003 is presented below:

Category	Balance as of December 31, 2002		Additions to the Provision		Current Utilization			Balance as of September 30, 2003
Workforce reduction	$	22.1	$	22.5	$	(35.4	)	$	9.2
Consolidation of excess facilities		52.6		9.6		(17.2	)		45.0
Contractual and other obligations		15.3		1.3		(11.0	)		5.6

Total	$	90.0	$	33.4	$	(63.6	)	$	59.8

The $22.5 addition to the provision for workforce was primarily attributable to finalizing severance packages for employees in foreign jurisdictions. The $9.6 addition to the provision for the consolidation of excess facilities represent additional charges for facilities being vacated. The $1.3 addition to the provision for contractual and other obligations represents an adjustment to the previously established obligations associated with the restructuring program.

As of June 30, 2003, the 2002 restructuring program had been substantially completed, although the ability to sublet facilities is subject to appropriate market conditions. The expected cash impact of the 2002 restructuring program is $142.0, of which $24.2 was paid in 2002 and $58.0 was paid in 2003. Remaining cash expenditures, relating to workforce reductions and contractual obligations, are expected to be substantially paid by the end of 2003. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015.

Other Restructuring Programs

In the third quarter of 2001, we implemented a restructuring program to reduce our cost structure. As a result of the program, we incurred restructuring and other special charges of $825.2. Additionally, during 1999, we recorded a charge of $223.6 relating to restructuring, merger and other special charges primarily associated with our acquisition of Data General. For the nine months ended September 30, 2003, the Data General restructuring accrual was reduced by $7.6, resulting from a favorable resolution of liabilities incurred in connection with the acquisition of Data General. As of September 30, 2003, the remaining accrued obligations associated with the 2001 and 1999 charges are an aggregate of $98.6. The amounts primarily relate to remaining lease obligations for vacated facilities that will be paid through 2015. In addition, the amounts relate to executive severance obligations attributable to the acquisition of Data General.

Investment Income

Investment income decreased to $149.8 in the first nine months of 2003, from $186.4 in the first nine months of 2002. Investment income was earned from investments in cash equivalents, short and long-term investments and sales-type leases. Investment income decreased because of lower yields on outstanding investment balances and reduced realized gains from the sale of investments. The weighted average annualized return on investments, excluding realized gains, was 2.8% and 3.6% in the first nine months of 2003 and 2002, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Other Expense, net

Other expense, net was $9.8 in the first nine months of 2003, compared to $31.0 in the first nine months of 2002. The decrease was due to lower foreign currency exchange losses.

Provision (Benefit) for Income Taxes

The provision for income taxes was $54.4 in the first nine months of 2003 compared to a benefit for income taxes of $149.4 in the first nine months of 2002. The effective income tax rate was 16.5% in the first nine months of 2003 compared to an effective rate of benefit of 73.2% in the first nine months of 2002. The effective income tax rate is based upon the expected income (loss) for the year, the expected composition of that income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the nine months ended September 30, 2003, the effective tax rate varied from the statutory tax rate primarily as a result of the favorable resolution of a series of tax audits which aggregated $53.6. The estimated effective tax rate for 2003 is subject to further change as a result of changes in the composition of the income in the countries in which we operate and the effects, if any, from tax audits. For the nine months ended September 30, 2002, the effective income tax rate varied from the statutory rate primarily as a result of the overall favorable resolution of international tax matters which aggregated approximately $67.7. Such amount included the favorable resolution of an international tax audit, partially offset by a provision for tax liabilities on other matters.

Financial Condition

Cash and cash equivalents and short and long-term investments were $6,191.4 and $5,685.6 at September 30, 2003 and December 31, 2002, respectively, an increase of $505.8.

Cash provided by operating activities in the first nine months of 2003 was $1,009.9, compared to $1,250.7 in the first nine months of 2002. The decrease for the first nine months of 2003 compared to the first nine months of 2002 was primarily attributable to decreased collections of accounts and notes receivable due to lower accounts and notes receivable balances, an increase in inventories due to our Symmetrix product transition, and a $107.4 contribution to fund a portion of the Data General pension plan liability. These uses of cash were partially offset by a $209.5 federal income tax refund and an increase in deferred revenues associated with a greater volume of software and hardware maintenance contracts and professional services engagements.

Cash used for investing activities was $1,016.5 in the first nine months of 2003, compared to $1,433.5 in the first nine months of 2002. Capital additions were $266.5 and $305.4 in the first nine months of 2003 and 2002, respectively. The decrease in capital additions resulted from our cost containment measures. The reduction in capital additions contributed to a decline in depreciation and amortization expense. Depreciation and amortization expense declined from $496.5 for the nine months ended September 30, 2002 to $389.9 for the nine months ended September 30, 2003. Net purchases and maturities of investments, consisting primarily of debt securities, were $625.3 and $1,007.7 in the first nine months of 2003 and 2002, respectively.

Cash used for financing activities was $73.9 in the first nine months of 2003, compared to $200.6 in the first nine months of 2002. During the first nine months of 2003, we repurchased 9.4 million shares of our common stock, par value $.01 per share (“Common Stock”), at a cost of $99.4. During the first nine months of 2002, we repurchased 29.9 million shares of Common Stock, at a cost of $243.1. As of September 30, 2003, we had repurchased 60.0 million of the 300.0 million shares of Common Stock authorized for repurchase by our Board of Directors. From time to time, we enter into Rule 10b5-1 plans to facilitate our share repurchases. Partially offsetting these uses of cash was the generation of $48.8 for the nine months ended September 30, 2003 and $54.9 for the nine months ended September 30, 2002, from the exercise of stock options. For the nine months

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

ended September 30, 2003, we had net reductions in short and long-term obligations of $23.2 compared to $12.4 for the nine months ended September 30, 2002.

We derive revenues from both selling and leasing activity. We customarily sell the notes receivable resulting from our leasing activity. Generally, we do not retain any recourse on the sale of these notes. If recourse is retained, we assess and provide for any estimated exposure. We also lend certain fixed income securities to generate investment income. During the first nine months of 2003, we entered into various agreements to loan fixed income securities generally on an overnight basis. Under these securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities. The collateral is generally cash, U.S. government-backed securities or letters of credit. At September 30, 2003, there were no outstanding securities lending transactions.

We have available for use credit lines of $50.0 in the United States and $50.0 in Brazil. The Brazilian line requires us to borrow in Brazilian currency. As of September 30, 2003, we had no borrowings outstanding on either line of credit. The Brazilian credit line bears interest at the rate quoted by the lender and requires us to meet certain financial covenants with respect to limitations on losses and maintaining minimum levels of cash and investments. In the event the covenants are not met, the lender may require us to provide collateral to secure the outstanding balance. As of September 30, 2003, we were in compliance with the covenants.

In July 2003, we entered into a definitive agreement to acquire all of the outstanding common stock of LEGATO, in a stock transaction valued at approximately $1,300.0. LEGATO develops, markets, and supports storage software products and services worldwide. Under the terms of the agreement, LEGATO stockholders will receive 0.9 of a share of Common Stock for each share of LEGATO common stock. The acquisition was completed in October 2003.

In October 2003, we entered into a definitive agreement to acquire all of the outstanding common stock of Documentum, Inc. (“Documentum”) in a stock transaction valued at approximately $1,700.0. Documentum provides enterprise content management software, enabling organizations to organize and manage unstructured data. Under the terms of the agreement, Documentum stockholders will receive 2.175 shares of Common Stock for each share of Documentum common stock. The acquisition is subject to customary closing conditions, including Documentum’s stockholder and regulatory approvals, and is expected to be completed in the fourth quarter of 2003 or the first quarter of 2004.

Based on our current operating and capital expenditure forecasts, we believe that the combination of funds currently available, funds generated from operations and our available lines of credit will be adequate to finance our ongoing operations for the next twelve months.

To date, inflation has not had a material impact on our financial results.

Critical Accounting Policies

Our consolidated financial statements are based on the selection and application of generally accepted accounting principles which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. EMC’s significant accounting policies are presented within Note A to our Consolidated Financial Statements contained in our Annual Report on Form 10-K filed with the SEC on March 18, 2003.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Revenue Recognition

Revenue recognition is governed by various accounting principles, including the SEC’s Staff Accounting Bulletin, No. 101, “Revenue Recognition in Financial Statements”; Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition”; FAS No. 48, “Revenue Recognition When Right of Return Exists”; FAS No. 13, “Accounting for Leases”; and SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” among others. The application of the appropriate accounting principle to our revenue is dependent upon the specific transaction and whether the sale or lease includes systems, software and services or a combination of these items. As our business evolves, the mix of products and services sold will impact the timing of when revenue and related costs are recognized. Additionally, revenue recognition involves judgments, including assessments of expected returns and the likelihood of nonpayment. We analyze various factors, including a review of specific transactions, the credit-worthiness of our customers, our historical experience and market and economic conditions. Changes in judgments on these factors could materially impact the timing and amount of revenue and costs recognized.

Warranty Costs

We accrue for systems warranty costs at the time of shipment. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. Should actual product failure rates, material usage or service delivery costs differ from our estimates, the amount of actual warranty costs could materially differ from our estimates.

Asset Valuation

Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, inventories and intangible assets. We use a variety of factors to assess valuation, depending upon the asset. Accounts and notes receivable are evaluated based upon the credit-worthiness of our customers, our historical experience, the age of the receivable and current market and economic conditions. The recoverability of inventories is based upon the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology. Intangible assets are evaluated based upon the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any of these factors could materially impact the value of the asset.

Restructuring Charges

We recognized restructuring charges in 2003, 2002 and 2001. The restructuring charges include, among other items, estimated losses on the sale of real estate, subletting of facilities and termination of various contracts. The amount of the actual obligations may be different than our estimates due to various factors, including market conditions and negotiations with third parties. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.

Accounting for Income Taxes

As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheet. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is more likely than not, do not establish a valuation allowance. In the event that actual results differ from these estimates, our provision for income taxes could be materially impacted.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our prospects are subject to uncertainties and risks. This Quarterly Report on Form 10-Q also contains certain forward-looking statements within the meaning of the Federal securities laws. Our future results may differ materially from our current results and actual results could differ materially from those projected in any forward-looking statements as a result of certain risk factors, including but not limited to those set forth below, one-time events and other important factors disclosed previously and from time to time in our other filings with the SEC. We disclaim any obligation to update any forward-looking statements contained herein after the date of this Quarterly Report.

Our business could continue to be materially adversely affected as a result of general economic and market conditions.

We are subject to the effects of general global economic and market conditions. Our operating results have been materially adversely affected as a result of unfavorable economic conditions and reduced information technology spending. If economic and market conditions do not improve, our business, results of operations or financial condition could continue to be materially adversely affected.

Our business could continue to be materially adversely affected as a result of a lessening demand in the information technology market.

Our revenue and profitability depend on the overall demand for information storage systems, software and services, particularly in the product segments in which we compete. We have experienced a decrease in demand for our information storage products as customers have delayed or reduced their information technology expenditures. Further delays or reductions in information technology spending, domestically or internationally, could continue to materially adversely affect demand for our products and services which could result in decreased revenues or earnings.

Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments.

As part of our business strategy, we seek to acquire businesses that offer complementary products, services or technologies. These acquisitions, including our recent acquisition of LEGATO in October 2003 as well as our recently announced plan to acquire Documentum, are accompanied by the risks commonly encountered in an acquisition of a business, which may include, among other things:

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the effect of the acquisition on our financial and strategic position and reputation

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the failure of an acquired business to further our strategies

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the failure of the acquisition to result in expected benefits, which may include benefits relating to enhanced revenues, technology, human resources, costs savings, operating efficiencies and other synergies

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the difficulty and cost of integrating the acquired business, including costs and delays in implementing common systems and procedures and costs and delays caused by communication difficulties or geographic distances between the two companies’ sites

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the potential impairment of acquired assets

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the lack of experience in new markets, products or technologies or the initial dependence on unfamiliar supply or distribution partners

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

•

the diversion of our management’s attention from other business concerns

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the impairment of relationships with customers or suppliers of the acquired business or our customers or suppliers

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the potential loss of key employees of the acquired company

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the potential incompatibility of business cultures

These factors could have a material adverse effect on our business, results of operations or financial condition. To the extent that we issue shares of our Common Stock or other rights to purchase Common Stock in connection with any future acquisition, existing stockholders may experience dilution and our earnings per share may decrease.

In addition to the risks commonly encountered in the acquisition of a business as described above, we may also experience risks relating to the challenges and costs of closing a transaction (such as Documentum). Further, the risks described above may be exacerbated as a result of managing the acquisitions of multiple acquisitions at the same time.

We also seek to invest in businesses that offer complementary products, services or technologies. These investments are accompanied by risks similar to those encountered in an acquisition of a business.

We may be unable to keep pace with rapid industry, technological and market changes.

The markets in which we compete are characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing needs of customers. There can be no assurance that our existing products will be properly positioned in the market or that we will be able to introduce new or enhanced products into the market on a timely basis, or at all. We spend a considerable amount of money on research and development and introduce new products from time to time. There can be no assurance that enhancements to existing products or new products will receive customer acceptance. As competition in the storage industry increases, it may become increasingly difficult for us to maintain a technological advantage and to leverage that advantage toward increased revenues and profits.

Risks associated with the development and introduction of new products include delays in development and changes in data storage, networking and operating system technologies which could require us to modify existing products. Risks inherent in the transition to new products include the difficulty in forecasting customer preferences or demand accurately, the inability to expand production capacity to meet demand for new products, the impact of customers’ demand for new products on the products being replaced, thereby causing a decline in sales of existing products and an excessive obsolete supply of inventory, and delays in initial shipments of new products. Further risks inherent in new product introductions include the uncertainty of price-performance relative to products of competitors, competitors’ responses to the introductions and the desire by customers to evaluate new products for extended periods of time. Our failure to introduce new or enhanced products on a timely basis, keep pace with rapid industry, technological or market changes or effectively manage the transitions to new products or new technologies could have a material adverse effect on our business, results of operations or financial condition.

The markets we serve are highly competitive, and we may be unable to compete effectively.

We compete with many established companies in the markets we serve and some of these companies (whether independently or by establishing alliances) may have substantially greater financial, marketing and technological resources, larger distribution capabilities, earlier access to customers and greater opportunity to

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

address customers’ various information technology requirements than us. We also compete with many smaller, less established companies who may be able to focus more effectively on specific product segments or markets. Historically, we have competed primarily on the basis of our products’ features and performance. As product pricing becomes a more important criteria for our customers, we may experience increased competition from certain low-price competitors.

Companies may develop new technologies or products in advance of us or establish business models or technologies disruptive to us. Our business may be materially adversely affected by the announcement or introduction of new products, including hardware and software products, and services by our competitors, and the implementation of effective marketing or sales strategies by our competitors. In addition, as we continue to increase our software and services businesses, we may face new competitive challenges.

We may have difficulty managing operations.

Our future operating results will depend on our overall ability to manage operations, which includes, among other things:

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retaining and hiring, as required, the appropriate number of qualified employees

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enhancing, as appropriate, our infrastructure, including but not limited to, our information systems

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accurately forecasting revenues

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transitioning our sales force to sell more software and services

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successfully integrating new acquisitions

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managing inventory levels, including minimizing excess and obsolete inventory, while maintaining sufficient inventory to meet customer demands

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controlling expenses

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managing our manufacturing capacity, real estate facilities and other assets

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executing on our plans

An unexpected decline in revenues without a corresponding and timely reduction in expenses or a failure to manage other aspects of our operations could have a material adverse effect on our business, results of operations or financial condition.

Competitive pricing, component costs and sales volume could materially adversely affect our revenues, gross margins and earnings.

Competitive pricing pressures exist in the information storage market. There also has been and may continue to be a willingness on the part of certain competitors to reduce prices or provide information storage products or services, together with other products or services, at minimal or no additional cost in order to preserve or gain market share. We currently believe that pricing pressures are likely to continue.

To date, we have been able to manage our component and product design costs. However, there can be no assurance that we will be able to continue to achieve reductions in component and product design costs.

Our gross margins are impacted by a variety of factors, including competitive pricing, component and product design costs as well as the volume and relative mixture of information storage product and services revenues. Increased pricing pressures, increased component costs, the relative and varying rates of increases or decreases in product price and component costs, changes in product and services revenue mixture or decreased volume could have a material adverse effect on our revenues, gross margins or earnings.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

If our suppliers are not able to meet our requirements, we could have decreased revenues and earnings.

We purchase or license many sophisticated components and products from one or a limited number of qualified suppliers, including some of our competitors. These components and products include disk drives, high density memory components, power supplies and software developed and maintained by third parties. We have experienced delivery delays from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. If any of our suppliers were to cancel or materially change contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell certain products cost-effectively or on a timely basis, if at all, and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition. Additionally, we periodically transition our product line to incorporate new technologies. The importance of transitioning our customers smoothly to new technologies, along with our historically uneven pattern of quarterly sales, intensifies the risk that a supplier who fails to meet our quality or delivery requirements will have a material adverse impact on our revenues and earnings.

Our business could be materially adversely affected as a result of war or acts of terrorism.

Terrorist acts or acts of war may cause damage or disruption to our employees, facilities, customers, partners, suppliers and distributors and resellers, which could have a material adverse effect on our business, results of operations or financial condition. Such conflicts may also cause damage or disruption to transportation and communication systems and to our ability to manage logistics in such an environment, including receipt of components and distribution of products.

Our business may suffer if we are unable to retain or attract key personnel.

Our business depends to a significant extent on the continued service of senior management and other key employees, the development of additional management personnel and the hiring of new qualified employees. There can be no assurance that we will be successful in retaining existing personnel or recruiting new personnel. The loss of one or more key or other employees, our inability to attract additional qualified employees or the delay in hiring key personnel could have a material adverse effect on our business, results of operations or financial condition.

Historically uneven sales patterns could significantly impact our quarterly revenues and earnings.

Our quarterly sales have historically reflected an uneven pattern in which a disproportionate percentage of a quarter’s total sales occur in the last month and weeks and days of each quarter. This pattern makes prediction of revenues, earnings and working capital for each financial period especially difficult and uncertain and increases the risk of unanticipated variations in quarterly results and financial condition. We believe this uneven sales pattern is a result of many factors including:

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the size of our average product and services prices in relation to our customers’ budgets, resulting in long lead times for customers’ budgetary approval, which tends to be given late in a quarter

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the tendency of customers to wait until late in a quarter to commit to purchase in the hope of obtaining more favorable pricing from one or more competitors seeking their business

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the fourth quarter influence of customers’ spending their remaining capital budget authorization prior to new budget constraints in the first quarter of the following year

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seasonal influences

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Our uneven sales pattern also makes it extremely difficult to predict near-term demand and adjust manufacturing capacity accordingly. If predicted demand is substantially greater than orders, there will be excess inventory. Alternatively, if orders substantially exceed predicted demand, the ability to assemble, test and ship orders received in the last weeks and days of each quarter may be limited, which could materially adversely affect quarterly revenues and earnings.

In addition, our revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and our backlog at any particular time is not necessarily indicative of future sales levels. This is because:

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we assemble our products on the basis of our forecast of near-term demand and maintain inventory in advance of receipt of firm orders from customers

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we generally ship products shortly after receipt of the order

•

customers may reschedule or cancel orders with little or no penalty

Loss of infrastructure, due to factors such as an information systems failure, loss of public utilities or extreme weather conditions, could impact our ability to ship products in a timely manner. Delays in product shipping or an unexpected decline in revenues without a corresponding and timely slowdown in expenses, could intensify the impact of these factors on our business, results of operations and financial condition.

Risks associated with our distribution channels may materially adversely affect our financial results.

In addition to our direct sales force, we have agreements in place with many distributors, systems integrators, resellers and original equipment manufacturers to market and sell our products and services. We may, from time to time, derive a significant percentage of our revenues from such distribution channels. Our financial results could be materially adversely affected if our contracts with channel partners were terminated, if our relationship with channel partners were to deteriorate or if the financial condition of our channel partners were to weaken. In addition, as our market opportunities change, we may have an increased reliance on channel partners, which may negatively impact our gross margins. There can be no assurance that we will be successful in maintaining or expanding these channels. If we are not successful, we may lose sales opportunities, customers and market share. Furthermore, the partial reliance on channel partners may materially reduce the visibility to our management of potential customers and demand for products and services, thereby making it more difficult to accurately forecast such demand. In addition, there can be no assurance that our channel partners will not develop or market products or services in competition with us in the future.

Changes in foreign conditions could impair our international operations.

A substantial portion of our revenues is derived from sales outside the United States. In addition, a substantial portion of our products is manufactured outside of the United States. Accordingly, our future results could be materially adversely affected by a variety of factors, including changes in foreign currency exchange rates, changes in a specific country’s or region’s political or economic conditions, trade restrictions, import or export licensing requirements, the overlap of different tax structures or changes in international tax laws, changes in regulatory requirements, compliance with a variety of foreign laws and regulations and longer payment cycles in certain countries.

Undetected problems in our products could directly impair our financial results.

If flaws in design, production, assembly or testing of our products (by us or our suppliers) were to occur, we could experience a rate of failure in our products that would result in substantial repair, replacement or service costs and potential damage to our reputation. Continued improvement in manufacturing capabilities, control of

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

material and manufacturing quality and costs and product testing are critical factors in our future growth. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations or financial condition.

Our business could be materially adversely affected as a result of the risks associated with alliances.

We have alliances with leading information technology companies and we plan to continue our strategy of developing key alliances in order to expand our reach into markets. There can be no assurance that we will be successful in our ongoing strategic alliances or that we will be able to find further suitable business relationships as we develop new products and strategies. Any failure to continue or expand such relationships could have a material adverse effect on our business, results of operations or financial condition.

There can be no assurance that companies with which we have strategic alliances, certain of which have substantially greater financial, marketing or technological resources than us, will not develop or market products in competition with us in the future, discontinue their alliances with us or form alliances with our competitors.

Our business may suffer if we cannot protect our intellectual property.

We generally rely upon patent, copyright, trademark and trade secret laws and contract rights in the United States and in other countries to establish and maintain our proprietary rights in our technology and products. However, there can be no assurance that any of our proprietary rights will not be challenged, invalidated or circumvented. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, there can be no assurance that we will be able to adequately protect our proprietary technology against unauthorized third-party copying or use, which could adversely affect our competitive position. Further, there can be no assurance that we will be able to obtain licenses to any technology that we may require to conduct our business or that, if obtainable, such technology can be licensed at a reasonable cost.

From time to time, we receive notices from third parties claiming infringement by our products of third-party patent or other intellectual property rights. Responding to any such claim, regardless of its merit, could be time-consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products or a successful claim of infringement against us requiring us to pay royalties to a third party, and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.

We may become involved in litigation that may materially adversely affect us.

In the ordinary course of business, we may become involved in litigation, administrative proceedings and governmental proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, there can be no assurance that the results of any of these actions will not have a material adverse effect on our business, results of operations or financial condition.

We may have exposure to additional income tax liabilities.

As a multinational corporation, we are subject to income taxes in both the United States and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. From time to time, we are subject to income tax audits. While we believe we have complied with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed with additional taxes, there could be a material adverse affect on our results of operations or financial condition.

Changes in regulations could materially adversely affect us.

Our business, results of operations or financial condition could be materially adversely affected if laws, regulations or standards relating to us or our products are newly implemented or changed.

Our stock price is volatile.

Our stock price, like that of other technology companies, is subject to significant volatility because of factors such as:

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the announcement of new products, services or technological innovations by us or our competitors

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quarterly variations in our operating results

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changes in revenue or earnings estimates by the investment community

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speculation in the press or investment community

In addition, our stock price is affected by general economic and market conditions and has been negatively affected by unfavorable global economic and market conditions. If such conditions continue to deteriorate, our stock price could decline further.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk, primarily from changes in foreign exchange rates, interest rates and credit risk. To manage the volatility relating to these exposures, we enter into various derivative transactions pursuant to our policies to hedge against known or forecasted market exposures.

Credit Risk

We place our temporary cash investments and short and long-term investments primarily in investment grade instruments and limit the amount of investment in any one issuer. During the third quarter of 2003, we purchased bank loans. The bank loans have a senior position to other debt. We believe this investment strategy more effectively manages our exposure to interest rate risks and diversifies our investment portfolio. Bank loan yields are floating rate, which significantly reduce our interest rate risk. As of September 30, 2003, bank loans represent 5% of our temporary cash and cash equivalents and short and long-term investments.

We employ a variance/covariance model to calculate value-at-risk for our bank loan portfolios. This model assumes that the relationships among market rates and prices that have been observed over the last year are valid for estimating risk over the next trading day. This model measures the potential loss in fair value that could arise from changes in market conditions, using a 95% confidence level and assuming a one-day holding period. The value-at-risk on the bank-loan portfolios was $0.3 million as of September 30, 2003. The average, high and low value-at-risk amount for the third quarter of 2003 was $0.3 million.

For additional quantitative and qualitative disclosures about market risk affecting us, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K filed with the SEC on March 18, 2003. Other than as discussed above, our exposure to market risks has not changed materially from that set forth in our Annual Report.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms and were effective.

Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

On September 30, 2002, Hewlett-Packard Company (“HP”) filed a complaint against us in the United States Federal District Court for the Northern District of California alleging that certain of our products infringe seven HP patents. HP seeks a permanent injunction as well as unspecified monetary damages for patent infringement. We believe that HP’s claims are without merit. On July 21, 2003, we answered the complaint and filed counterclaims alleging that certain HP products infringe six EMC patents. EMC seeks a permanent injunction as well as unspecified monetary damages for patent infringement.

On September 30, 2002, EMC filed a complaint against HP in the United States Federal District Court in Worcester, Massachusetts. The complaint alleged that certain HP products infringe six EMC patents. The suit sought a permanent injunction as well as unspecified monetary damages for patent infringement. On June 20, 2003, the parties filed a joint motion to dismiss the suit without prejudice, and thereafter, the suit was dismissed by the court.

We are a party to other litigation which we consider routine and incidental to our business. Management does not expect the results of any of these actions to have a material adverse effect on our business, results of operations or financial condition.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

See index to Exhibits on page 37 of this report.

(b) Reports on Form 8-K

On July 8, 2003, we filed a Current Report on Form 8-K, reporting under Item 5 the announcement of the execution of an Agreement and Plan of Merger dated as of July 7, 2003 by and among EMC, Eclipse Merger Corporation and LEGATO Systems, Inc.

On July 8, 2003, we furnished a Current Report on Form 8-K pursuant to Item 12 containing the press release relating to our preliminary financial results for the quarter ended June 30, 2003.

On July 16, 2003, we furnished a Current Report on Form 8-K pursuant to Item 12 containing the press release relating to our financial results for the quarter ended June 30, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

2.1		Agreement and Plan of Merger dated as of July 7, 2003 by and among EMC Corporation, Eclipse Merger Corporation and LEGATO Systems, Inc. (1)

2.2		Agreement and Plan of Merger dated as of October 13, 2003 by and among EMC Corporation, Elite Merger Corporation and Documentum, Inc. (2)

3.1		Restated Articles of Organization of EMC Corporation, as amended. (3)

3.2		Amended and Restated By-laws of EMC Corporation. (4)

4.1		Form of Stock Certificate. (5)

31.1		Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

(1)

Incorporated by reference to EMC Corporation’s Current Report on Form 8-K filed on July 8, 2003 (No. 033-03656)

(2)

Incorporated by reference to EMC Corporation’s Current Report on Form 8-K filed on October 13, 2003 (No. 033-03656)

(3)

Incorporated by reference to EMC Corporation’s Quarterly Report on Form 10-Q filed August 9, 2001 (No. 1-9853).

(4)

Incorporated by reference to EMC Corporation’s Annual Report on Form 10-K filed March 17, 2000 (No. 1-9853).

(5)

Incorporated by reference to EMC Corporation’s Annual Report on Form 10-K filed March 31, 1988

(No. 0-14367).

EMC CORPORATION

Date: October 31, 2003

/s/ WILLIAM J. TEUBER, JR.

William J. Teuber, Jr.

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)