Edgar Filing: EMC CORP

QuickLinks -- Click here to rapidly navigate through this document

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: June 30, 2002

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)

35 Parkwood Drive
Hopkinton, Massachusetts 01748-9103

(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 ý

NO o

The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of June 30, 2002 was 2,203,566,734.

EMC CORPORATION

		Page No
Part I — Financial Information
	Consolidated Balance Sheets at June 30, 2002 and December 31, 2001	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001	5
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2002 and 2001	6
	Notes to Interim Consolidated Financial Statements	7-20
	Management's Discussion and Analysis of Financial Condition and Results of Operations	21-39
Part II — Other Information		40-41
Signatures		42
Exhibit Index		43

EMC CORPORATION

PART I
FINANCIAL INFORMATION

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

				June 30, 2002			December 31, 2001
				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	1,632,354		$	2,129,019
	Short-term investments				591,877			445,428
	Accounts and notes receivable, less allowance for doubtful accounts of $48,922 and $36,169				1,022,836			1,348,569
	Inventories				456,935			583,985
	Deferred income taxes				261,584			287,597
	Other current assets				116,030			128,644

Total current assets					4,081,616			4,923,242
Long-term investments					3,238,524			2,509,112
Property, plant and equipment, net					1,773,741			1,827,331
Intangible and other assets, net					547,726			583,110
Deferred income taxes					45,508			46,840

		Total assets		$	9,687,115		$	9,889,635

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Notes payable and current portion of long-term obligations			$	47,851		$	56,677
	Accounts payable				415,944			424,132
	Accrued expenses				897,756			1,024,211
	Income taxes payable				350,686			315,368
	Deferred revenue				471,930			359,026

Total current liabilities					2,184,167			2,179,414
Other liabilities					87,076			109,401
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 2,228,041 and 2,221,442 shares				22,280			22,214
	Additional paid-in capital				3,532,009			3,470,325
	Deferred compensation				(17,375	)		(29,209	)
	Retained earnings				4,112,704			4,188,755
	Accumulated other comprehensive loss, net				(15,479	)		(33,007	)
	Treasury stock, at cost; 24,474 and 1,060 shares				(218,267	)		(18,258	)

		Total stockholders' equity			7,415,872			7,600,820

			Total liabilities and stockholders' equity	$	9,687,115		$	9,889,635

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 Six Months Ended
		June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
Revenues:
	Net sales	$	1,099,671		$	1,736,485		$	2,124,294		$	3,793,411
	Services		287,867			284,370			565,222			572,239

			1,387,538			2,020,855			2,689,516			4,365,650
Costs and expenses:
	Cost of sales		653,263			892,221			1,287,862			1,768,832
	Cost of services		177,874			179,322			344,208			354,995
	Research and development		202,027			245,627			402,978			469,667
	Selling, general and administrative		420,779			617,336			875,447			1,210,372

Operating income (loss)			(66,405	)		86,349			(220,979	)		561,784
Investment income			57,823			64,239			113,348			135,848
Interest expense			(2,720	)		(3,597	)		(5,581	)		(6,855	)
Other income (expense), net			(5,650	)		2,136			(13,540	)		4,642

Income (loss) before taxes			(16,952	)		149,127			(126,752	)		695,419
Income tax provision (benefit)			(17,760	)		40,265			(50,701	)		187,762

Net income (loss)		$	808		$	108,862		$	(76,051	)	$	507,657

Net income (loss) per weighted average share, basic		$	0.00		$	0.05		$	(0.03	)	$	0.23

Net income (loss) per weighted average share, diluted		$	0.00		$	0.05		$	(0.03	)	$	0.23

Weighted average shares, basic			2,208,383			2,207,655			2,214,997			2,205,770

Weighted average shares, diluted			2,215,903			2,239,799			2,214,997			2,247,021

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

EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

			For the Six Months Ended
			June 30, 2002			June 30, 2001
Cash flows from operating activities:
Net income (loss)			$	(76,051	)	$	507,657
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization			334,782			311,127
	Other than temporary declines in equity investments			6,315			—
	Reversal of non-cash inventory provision			(52,840	)		—
	Amortization of deferred compensation			7,552			10,837
	Provision for doubtful accounts			26,822			11,282
	Deferred income taxes			40,286			4,647
	Net loss on disposal of property, plant and equipment			6,821			1,049
	Tax benefit from stock options exercised			23,002			129,194
	Minority interest			—			29
Changes in assets and liabilities:
	Accounts and notes receivable			300,956			372,992
	Inventories			188,791			(82,628	)
	Other assets			36,910			(34,665	)
	Accounts payable			1,901			(90,101	)
	Accrued expenses			(132,376	)		(20,785	)
	Income taxes payable			4,639			(164,707	)
	Deferred revenue			107,678			59,789
	Other liabilities			(9,594	)		3,074

		Net cash provided by operating activities		815,594			1,018,791

Cash flows from investing activities:
	Additions to property, plant and equipment			(218,836	)		(507,476	)
	Proceeds from sales of property, plant and equipment			—			17,143
	Capitalized software development costs			(64,261	)		(59,557	)
	Purchases of short and long-term available for sale securities			(5,324,084	)		(3,072,293	)
	Sales of short and long-term available for sale securities			4,345,908			2,709,376
	Maturity of short and long-term available for sale securities			121,646			84,020
	Business acquisitions, net of cash acquired			—			(51,051	)

		Net cash used by investing activities		(1,139,627	)		(879,838	)

Cash flows from financing activities:
	Issuance of common stock			43,030			103,050
	Purchase of treasury stock			(200,009	)		(2,293	)
	Payment of short-term obligations, net			(796	)		—
	Payment of long-term obligations			(8,099	)		(9,163	)
	Issuance of long-term obligations			—			5
	Cash portion of McDATA Corporation spin-off dividend			—			(141,981	)

		Net cash used by financing activities		(165,874	)		(50,382	)

Effect of exchange rate changes on cash				(6,758	)		(2,970	)

Net increase (decrease) in cash and cash equivalents				(496,665	)		85,601
Cash and cash equivalents at beginning of period				2,129,019			1,983,221

Cash and cash equivalents at end of period			$	1,632,354		$	2,068,822

Non-cash activity:
—Issuance of capital lease obligations			$	—		$	24,490
—Distribution of net assets in McDATA Corporation dividend				—			234,152

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 Six Months Ended
		June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
Net income (loss)		$	808		$	108,862		$	(76,051	)	$	507,657
Other comprehensive income (loss), net of taxes (benefit):
	Foreign currency translation adjustments, net of taxes (benefit) of $3,797, $288, $(486) and $(1,802)		8,311			781			3,677			(4,866	)
	Equity adjustment for minimum pension liability, net of taxes (benefit) of $0, $0, $343 and $(7,616)		—			—			(343	)		(20,592	)
	Changes in market value of derivatives, net of taxes (benefit) of $(19), $(2,587), $(41) and $2,171		(168	)		(6,994	)		(364	)		5,869
	Changes in market value of investments, net of taxes (benefit) of $12,952, $(3,548), $4,771 and $2,854		41,010			(9,594	)		14,558			7,718

Other comprehensive income (loss)			49,153			(15,807	)		17,528			(11,871	)

Comprehensive income (loss)		$	49,961		$	93,055		$	(58,523	)	$	495,786

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 storage platforms and software offerings, as well as related services, that enable its customers to store, manage, protect and share electronic information.

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 June 30, 2002 and 2001.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for 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, 2001, which are contained in EMC's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2002.

Certain prior year amounts have been reclassified to conform with the 2002 presentation.

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.

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.

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 which 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.

2. Inventories

Inventories consist of (table in thousands):

	June 30, 2002		December 31, 2001
Purchased parts	$	19,215	$	28,508
Work-in-process		379,972		396,304
Finished goods		57,748		159,173

	$	456,935	$	583,985

3. Property, Plant and Equipment

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

	June 30, 2002			December 31, 2001
Furniture and fixtures	$	148,698		$	146,369
Equipment		1,930,937			1,888,361
Buildings and improvements		764,426			683,515
Land and improvements		92,027			93,159
Construction in progress		234,323			328,172

		3,170,411			3,139,576
Accumulated depreciation		(1,396,670	)		(1,312,245	)

	$	1,773,741		$	1,827,331

4. Goodwill and Other Intangible Assets

In July 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("FAS") No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets." FAS No. 141 supercedes Accounting Principles Board Opinion No. 16, "Business Combinations" and FAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." FAS No. 142 supercedes Accounting Principles Board Opinion No. 17, "Intangible Assets." These new statements require use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. Goodwill is no longer amortized but tested for impairment under a two-step process. Under the first step, an entity's net assets are broken down into reporting units and compared to their fair value. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. In addition, within six months of adopting the accounting standard, a transitional impairment test must be completed, and any impairments identified must be treated as a cumulative effect of a change in accounting principle. Additionally, new criteria have been established that determine whether an acquired intangible asset should be recognized separately from goodwill. The statements were effective for business combinations initiated after June 30, 2001, with the entire provisions of FAS No. 142 becoming effective for EMC

commencing with its 2002 fiscal year. EMC has completed its transitional impairment test and concluded that there is no impairment to goodwill. Additionally, EMC reassessed the useful lives of its intangible assets and determined that no changes were required. As a result of adopting FAS No. 142, approximately $45.0 million of goodwill amortization will not be recognized in 2002.

The following is a reconciliation of reported net income to adjusted net income and reported earnings per share to adjusted earnings per share had FAS No. 142 been in effect for the three and six months ended June 30, 2001 (table in thousands, except per share amounts):

	For the Three Months Ended June 30, 2001			For the Six Months Ended June 30, 2001
Net income	$	108,862		$	507,657
Add back: Impact of goodwill amortization, net of tax benefit of $1,511 and $1,966		12,715			23,742

Adjusted net income	$	121,577		$	531,399

Net income per share, basic	$	0.05		$	0.23
Add back: Impact of goodwill amortization, net of taxes		0.01			0.01

Adjusted net income per share, basic	$	0.06		$	0.24

Net income per share, diluted	$	0.05		$	0.23
Add back: Impact of goodwill amortization, net of taxes		0.01			0.01

Adjusted net income per share, diluted	$	0.05	*	$	0.24

*: Amount does not add to the total due to rounding.

Intangible assets as of June 30, 2002 and December 31, 2001 consist of (table in thousands):

	June 30, 2002			December 31, 2001
Goodwill	$	259,989		$	250,287
Accumulated amortization		(61,931	)		(61,931	)

	$	198,058		$	188,356

Purchased technology		99,005			95,305
Accumulated amortization		(58,455	)		(50,295	)

	$	40,550		$	45,010

Patents		57,157			57,157
Accumulated amortization		(43,559	)		(38,174	)

	$	13,598		$	18,983

Trademarks and customer lists		14,684			14,684
Accumulated amortization		(10,551	)		(9,750	)

	$	4,133		$	4,934

Total Intangible Assets		430,835			417,433
Accumulated amortization		(174,496	)		(160,150	)

	$	256,339		$	257,283

Amortization expense on intangible assets was $6.7 million and $14.3 million for the three and six months ended June 30, 2002, respectively, and $21.2 million and $40.0 million for the three and six months ended June 30, 2001, respectively. As of December 31, 2001, amortization expense on existing intangibles for the next five years was as follows (table in thousands):

2002		$	26,529
2003			22,650
2004			13,493
2005			3,810
2006			2,445

	Total	$	68,927

Changes in the carrying amount of goodwill, net, on a total consolidated basis and by segment for the three and six months ended June 30, 2002 and June 30, 2001 consist of the following (tables in thousands):

	For the Three Months Ended June 30, 2002
	Information Storage Products		Information Storage Services		Other		Total
Balance, March 31, 2002	$	196,443	$	1,615	$	—	$	198,058

Balance, June 30, 2002	$	196,443	$	1,615	$	—	$	198,058

	For the Three Months Ended June 30, 2001
	Information Storage Products			Information Storage Services			Other		Total
Balance, March 31, 2001	$	164,850		$	6,512		$	—	$	171,362
Goodwill acquired		48,837			—			—		48,837
Amortization expense		(13,285	)		(941	)		—		(14,226	)

Balance, June 30, 2001	$	200,402		$	5,571		$	—	$	205,973

	For the Six Months Ended June 30, 2002
	Information Storage Products		Information Storage Services		Other		Total
Balance, December 31, 2001	$	186,741	$	1,615	$	—	$	188,356
Finalization of purchase price allocation		9,702		—		—		9,702

Balance, June 30, 2002	$	196,443	$	1,615	$	—	$	198,058

	For the Six Months Ended June 30, 2001
	Information Storage Products			Information Storage Services			Other		Total
Balance, December 31, 2000	$	168,884		$	7,454		$	—	$	176,338
Goodwill acquired		55,343			—			—		55,343
Amortization expense		(23,825	)		(1,883	)		—		(25,708	)

Balance, June 30, 2001	$	200,402		$	5,571		$	—	$	205,973

5. Accrued Expenses

Accrued expenses consist of (table in thousands):

	June 30, 2002		December 31, 2001
Salary and benefits	$	290,909	$	310,214
Warranty		108,262		118,347
2001 restructuring (see Note 10)		116,356		199,281
Other		382,229		396,369

	$	897,756	$	1,024,211

6. Stockholders' Equity

Common Stock Repurchase Program

EMC's Board of Directors has authorized the repurchase of up to 50.0 million shares of its common stock, par value $.01 per share, of EMC ("Common Stock") from time to time. 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 stockholders' equity. As of June 30, 2002, EMC had reacquired approximately 24.5 million shares.

Supplemental Disclosures for Stock Based Compensation

FAS No. 123, "Accounting for Stock Based Compensation" defines 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 market 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 ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans. APB Opinion No. 25 does not require options to be expensed when granted with an exercise price equal to fair market value. The following presents EMC's net income (loss) and net income (loss) per share in

accordance with APB Opinion No. 25 and as adjusted to account for options in accordance with FAS No. 123 (table in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
Net income (loss)	$	808		$	108,862		$	(76,051	)	$	507,657
Incremental stock option expense per FAS No. 123		(92,051	)		(82,126	)		(191,541	)		(150,043	)

Adjusted net income (loss)	$	(91,243	)	$	26,736		$	(267,592	)	$	357,614

Net income (loss) per weighted average share, basic—as reported	$	0.00		$	0.05		$	(0.03	)	$	0.23

Net income (loss) per weighted average share, diluted—as reported	$	0.00		$	0.05		$	(0.03	)	$	0.23

Adjusted net income (loss) per weighted average share, basic	$	(0.04	)	$	0.01		$	(0.12	)	$	0.16

Adjusted net income (loss) per weighted average share, diluted	$	(0.04	)	$	0.01		$	(0.12	)	$	0.16

The fair value of each option granted during 2002 and 2001 is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	2002		2001
Dividend yield	None		None
Expected volatility	55.0	%	55.0	%
Risk-free interest rate	4.43	%	4.36	%
Expected life (years)	5.0		5.0

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 2002, shareholders of EMC approved an amendment to the 1989 Plan to increase the number of shares available for grant under the 1989 Plan to 58.0 million shares from 48.0 million shares.

Issuance of Subsidiary Stock

On February 7, 2001, EMC distributed to its stockholders of record as of the close of business on January 24, 2001, all of its shares of McDATA Corporation ("McDATA") Class A common stock. The distribution was effected by means of a pro rata dividend of approximately .0368069 of a share of McDATA Class A common stock for each share of Common Stock. In lieu of fractional shares of

McDATA Class A common stock, each stockholder received a cash payment. The distribution, which totaled $376.1 million, has been accounted for as a tax-free dividend to EMC stockholders and charged to retained earnings based on the book value as of the date of the distribution. As a result of the distribution, EMC no longer has any equity ownership interest in McDATA.

7. 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 Six Months Ended
	June 30, 2002		June 30, 2001		June 30, 2002			June 30, 2001
Net income (loss)	$	808	$	108,862	$	(76,051	)	$	507,657

Weighted average shares, basic		2,208,383		2,207,655		2,214,997			2,205,770
Weighted common stock equivalents		7,520		32,144		—			41,251

Weighted average shares, diluted		2,215,903		2,239,799		2,214,997			2,247,021

Net income (loss) per share, diluted	$	0.00	$	0.05	$	(0.03	)	$	0.23

Options to acquire 130.5 million and 143.1 million shares of Common Stock for the three and six months ended June 30, 2002 and options to acquire 56.8 million and 31.5 million shares of Common Stock for the three and six months ended June 30, 2001, respectively, were excluded from the calculation of diluted earnings per share because of their antidilutive effect.

8. 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. The Brazilian line requires EMC to borrow in Brazilian currency. As of June 30, 2002, EMC had $33.2 million outstanding on its line of credit in Brazil and none outstanding on its line of credit in the United States. 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 (21% at June 30, 2002) 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. As of June 30, 2002, EMC was in compliance with the covenants. The Brazilian line of credit is denominated in local currency and as such, bears an interest rate commensurate with local currency short-term interest rates. The Brazilian line of credit has been established to help manage currency volatility between the local currency and the U.S. dollar and facilitate cash repatriation.

Litigation

In April 2002, EMC filed a complaint against Hitachi, Ltd. and Hitachi Data Systems Corporation (together, "Hitachi") with the International Trade Commission ("ITC") and in the United States

Federal District Court in Worcester, Massachusetts. The ITC complaint alleges that Hitachi has engaged in unlawful activities by importing into the United States products that infringe six EMC patents. EMC asked the ITC to issue an injunction to block importation of Hitachi's infringing products and in May 2002, the ITC voted to commence an investigation into EMC's claims. The suit in District Court seeks preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In June 2002, the suit in District Court was stayed, pending the outcome of the ITC action. Subsequent to the date EMC filed a complaint against Hitachi, in April 2002, Hitachi and Hitachi Computer Products (America), Inc. ("HICAM") filed a complaint against EMC in the United States Federal District Court for the Western District of Oklahoma alleging that certain of EMC's products infringe eight Hitachi patents and seeking preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In July 2002, this suit was transferred to the United States Federal District Court in Worcester, Massachusetts. EMC believes that Hitachi and HICAM's claims are without merit.

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.

9. 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 Six Months Ended
	June 30, 2002		June 30, 2001		June 30, 2002		June 30, 2001
Information storage systems	$	779,109	$	1,225,600	$	1,520,687	$	2,789,912
Information storage software		320,568		497,538		602,891		965,057

	$	1,099,677	$	1,723,138	$	2,123,578	$	3,754,969

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 table (tables in thousands, except for footnote):

For the Three Months Ended	Information Storage Products			Information Storage Services			Other Businesses			Consolidated
June 30, 2002
Revenues	$	1,099,677		$	251,148		$	36,713		$	1,387,538
Gross profit		421,651	(1)		93,955			16,026			531,632	(1)
Gross profit percentage		38.3	%(1)		37.4	%		43.7	%		38.3	%(1)
June 30, 2001
Revenues	$	1,723,138		$	231,995		$	65,722		$	2,020,855
Gross profit		842,135			84,398			22,779			949,312
Gross profit percentage		48.9	%		36.4	%		34.7	%		47.0	%

For the Six Months Ended	Information Storage Products			Information Storage Services			Other Businesses			Consolidated
June 30, 2002
Revenues	$	2,123,578		$	489,678		$	76,260		$	2,689,516
Gross profit		782,976	(2)		189,399			32,231			1,004,606	(2)
Gross profit percentage		36.9	%(2)		38.7	%		42.3	%		37.4	%(2)
June 30, 2001
Revenues	$	3,754,969		$	463,981		$	146,700		$	4,365,650
Gross profit		2,016,039			175,915			49,869			2,241,823
Gross profit percentage		53.7	%		37.9	%		34.0	%		51.4	%

(1): Excludes the reduction of $24.8 million related to the third quarter of 2001 provision for excess and obsolete inventory. See Note 10.
(2): Excludes the reduction of $52.8 million related to the third quarter of 2001 provision for excess and obsolete inventory. See Note 10.

EMC's revenues are attributed to the 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 Six Months Ended
			June 30, 2002		June 30, 2001		June 30, 2002		June 30, 2001
Sales:
United States			$	782,198	$	1,110,450	$	1,531,878	$	2,480,483
Other North America				18,525		46,155		37,681		90,829

	Total North America			800,723		1,156,605		1,569,559		2,571,312
Europe, Middle East, Africa				346,970		528,984		632,579		1,125,678
Asia Pacific				212,861		263,313		436,706		542,539
Latin America				26,984		71,953		50,672		126,121

	Total International			586,815		864,250		1,119,957		1,794,338

		Total	$	1,387,538	$	2,020,855	$	2,689,516	$	4,365,650

No country other than the United States accounted for 10% or more of revenues during the three months or six months ended June 30, 2002 and June 30, 2001.

At June 30, 2002, long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,527.8 million in the United States and $173.0 million in Ireland. At December 31, 2001, the long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,551.5 million in the United States and $181.4 million in Ireland. No other country accounted for 10% or more of these assets at June 30, 2002 or December 31, 2001.

10. Restructuring Costs and Other Special Charges

In the third quarter of 2001, EMC implemented a restructuring program to reduce its cost structure and focus its resources on the highest potential growth areas of its business. As a result of the program, EMC incurred restructuring and other special charges of $825.2 million. The restructuring charges consisted of $111.5 million for employee termination benefits, $104.5 million related to the impairment of goodwill, purchased intangibles and other long-lived assets, $158.1 million to consolidate excess facilities and $34.5 million for other contractual obligations for which EMC will no longer derive an economic benefit. The other special charges included a provision for excess and obsolete inventory of $310.0 million and an other than temporary decline in certain equity investments of $106.6 million.

The following is a summary of the activity in the reserve for the restructuring liabilities from March 31, 2002 to June 30, 2002 (table in thousands):

Category		Balance as of March 31, 2002		Adjustment			Current Utilization			Balance as of June 30, 2002
Workforce reduction		$	27,106	$	19,277		$	(37,019	)	$	9,364
Other contractual obligations			11,838		(6,775	)		(1,017	)		4,046
Consolidation of excess facilities			120,345		(10,202	)		(7,197	)		102,946

	Total	$	159,289	$	2,300		$	(45,233	)	$	116,356

The following is a summary of the activity in the reserve for the restructuring liabilities from December 31, 2001 to June 30, 2002 (table in thousands):

Category		Balance as of December 31, 2001		Adjustment			Current Utilization			Balance as of June 30, 2002
Workforce reduction		$	48,149	$	19,277		$	(58,062	)	$	9,364
Other contractual obligations			23,645		(6,775	)		(12,824	)		4,046
Consolidation of excess facilities			127,487		(10,202	)		(14,339	)		102,946

	Total	$	199,281	$	2,300		$	(85,225	)	$	116,356

The restructuring program included a reduction in force of approximately 4,000 employees across all business functions and geographic regions. As of June 30, 2002, all identified personnel had been terminated.

The adjustment to the provision for workforce reduction was primarily attributable to greater severance payments associated with reductions in force in certain foreign jurisdictions. The adjustments to the provision for other contractual obligations and the provision for the consolidation of excess facilities resulted primarily from favorable settlements. For purposes of presentation in the accompanying statement of operations, the $2.3 million adjustment to the provision for restructuring has been classified within selling, general and administrative expenses.

The following is a summary of the activity in the reserve for excess and obsolete inventory established as part of the third quarter 2001 restructuring program. Activity is shown from March 31, 2002 to June 30, 2002 (table in thousands):

Category		Balance as of March 31, 2002			Reduction			Current Utilization			Balance as of June 30, 2002
Excess and obsolete inventory		$	181,282		$	(24,769	)	$	(46,478	)	$	110,035

The following is a summary of the activity in the reserve for excess and obsolete inventory established as part of the third quarter 2001 restructuring program. Activity is shown from December 31, 2001 to June 30, 2002 (table in thousands):

Category		Balance as of December 31, 2001			Reduction			Current Utilization			Balance as of June 30, 2002
Excess and obsolete inventory		$	255,467		$	(52,840	)	$	(92,592	)	$	110,035

The $24.8 million and $52.8 million reductions resulted from a combination of favorable settlements with vendors on amounts due for cancelled orders and the use of previously identified obsolete inventory. For purposes of presentation in the accompanying statement of operations, the reductions have been classified within cost of sales.

substantially paid by the end of 2002. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015.

11. Income Taxes

For the six months ended June 30, 2002, the estimated effective income tax rate was 40%. For the quarter ended March 31, 2002, the estimated effective income tax rate was 30%. 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. As a result of the change in estimate, the effective income tax rate benefit for the quarter ended June 30, 2002 was 104.8%. The rate for the quarter ended June 30, 2002 includes $11.0 million to provide for an annual estimated effective income tax rate of 40%. The estimated rate for 2002 is subject to further change as a result of changes in the composition of the income and losses in the countries in which EMC operates and the effects, if any, from tax audits.

12. New Accounting Pronouncements

In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS No. 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. The objectives of FAS No. 144 are to address issues relating to the implementation of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and to develop a model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. FAS No. 144 was effective for EMC commencing with its 2002 fiscal year. Upon adoption, this accounting pronouncement did not have a significant impact on EMC's financial position or results of operations.

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 on March 22, 2002. The following discussion contains forward-looking statements and should also be read in conjunction with "FACTORS THAT MAY AFFECT FUTURE RESULTS" beginning on page 33.

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

Results of Operations—Second Quarter of 2002 Compared to Second Quarter of 2001

Revenues

Total revenues for the second quarter of 2002 were $1,387.5, compared to $2,020.9 for the second quarter of 2001, representing a decrease of $633.4, or 31%.

Information storage systems revenues were $779.1 in the second quarter of 2002, compared to $1,225.6 in the second quarter of 2001, representing a decrease of $446.5, or 36%. Information storage software revenues were $320.6 in the second quarter of 2002, compared to $497.5 in the second quarter of 2001, representing a decrease of $176.9, or 36%. The decrease in both information storage systems and software revenues was primarily due to declining sales volume. Sales were negatively influenced by the global economic slowdown that began in 2001, which has led to a reduction in information technology spending. Competitive pricing pressures also had an adverse effect on revenues. Continued adverse changes in the economy, further reductions in information technology spending or continued pricing pressures may continue to negatively impact revenue during 2002.

Information storage services revenues were $251.1 in the second quarter of 2002, compared to $232.0 in the second quarter of 2001, representing an increase of $19.1, or 8%. The increase was primarily due to a greater volume of professional services.

Total information storage revenues were $1,350.8 in the second quarter of 2002, compared to $1,955.1 in the second quarter of 2001, representing a decrease of $604.3, or 31%.

Other businesses revenues were $36.7 in the second quarter of 2002, compared to $65.7 in the second quarter of 2001, representing a decrease of $29.0, or 44%. Other businesses revenues consist of revenues from AViiON server products and related services. Included in the second quarter of 2001 were revenues from AViiON server products of $13.3. In the third quarter of 2001, EMC stopped selling AViiON server products. Accordingly, other businesses revenues for 2002 and future quarters are and will be comprised only of AViiON services revenues. These revenues are expected to continue to decline in future quarters.

Revenues on sales into the North American markets were $800.7 in the second quarter of 2002, compared to $1,156.6 in the second quarter of 2001, representing a decrease of $355.9, or 31%. Revenues on sales into the European, Middle East and African markets were $347.0 in the second quarter of 2002, compared to $529.0 in the second quarter of 2001, representing a decrease of $182.0, or 34%. Revenues on sales into the Asia Pacific markets were $212.9 in the second quarter of 2002, compared to $263.3 in the second quarter of 2001, representing a decrease of $50.4, or 19%. Revenues on sales into the Latin American markets were $27.0 in the second quarter of 2002, compared to $72.0 in the second quarter of 2001, representing a decrease of $45.0, or 62%. The decline in revenues in all these markets was attributable to the global economic slowdown that began in 2001, which has led to a

reduction in information technology spending. Competitive pricing pressures also had an adverse effect on revenues.

Changes in exchange rates in the second quarter of 2002 compared to the second quarter of 2001 negatively impacted revenues by less than 1%. The impact was most significant in Japan, Brazil and Argentina.

Gross Margins

Gross margin decreased to $556.4 in the second quarter of 2002 from $949.3 in the second quarter of 2001, a decrease of $392.9, or 41%. Included in the second quarter of 2002 results is a reduction to cost of sales, resulting in a gross margin benefit of $24.8 related to the reduction of the third quarter 2001 provision for excess and obsolete inventory, which totaled $310.0. The reduction resulted from a combination of favorable settlements with vendors on amounts due for cancelled orders and the use of previously identified obsolete inventory. Included in the second quarter of 2001 was goodwill amortization of $11.1. As a result of implementing Statement of Financial Accounting Standards ("FAS") No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortized. Excluding the effects of these two items, gross margin decreased to $531.6 in the second quarter of 2002 from $960.4 in the second quarter of 2001, or 45%, and the gross margin percentage declined to 38.3% in the second quarter of 2002 from 47.5% in the second quarter of 2001. The decline in gross margin dollars and percentage was primarily attributable to the reduction in revenues resulting from lower sales volume, which caused fixed overhead costs to be absorbed over a lower sales base. In addition, lower average selling prices also contributed to the decline.

Gross margin for information storage products, excluding the effects of the $24.8 reduction to the provision for excess and obsolete inventory in the second quarter of 2002 and $10.2 related to goodwill amortization in the second quarter of 2001, decreased to 38.3% in the second quarter of 2002, compared to 49.5% in the second quarter of 2001. The decline was primarily attributable to the reduction in revenues resulting from lower sales volume, which caused fixed overhead costs to be absorbed over a lower sales base. In addition, lower average selling prices also contributed to the decline.

Gross margin for information storage services, excluding the effects of $0.9 related to goodwill amortization in 2001, increased to 37.4% in the second quarter of 2002, compared to 36.8% in the second quarter of 2001. The increase in the gross margin percentage was attributable to increased margins from systems maintenance.

Gross margin for other businesses increased to 43.7% in the second quarter of 2002, compared to 34.7% in the second quarter of 2001. The increase in the gross margin percentage resulted from this segment consisting of only services revenue in the second quarter of 2002 compared to both systems and services revenue in the second quarter of 2001.

Research and Development

Research and development ("R&D") expenses were $202.0 and $245.6 in the second quarters of 2002 and 2001, respectively, a decline of 18%. As a percentage of revenues, R&D expenses were 14.6% and 12.2% in the second quarters of 2002 and 2001, respectively. In addition, we spent $35.5 and $29.8 in the second quarters of 2002 and 2001, respectively, on software development, which costs were capitalized. Included in R&D expenses in the second quarter of 2001 was $3.1 related to goodwill amortization. As a result of implementing FAS No. 142, goodwill is no longer amortized.

R&D spending reflects our efforts to continue to improve our long-term competitive position. These efforts include enhancements to information storage software and information storage systems, including networked information storage systems. Significant efforts underway include R&D associated with our AutoIS software strategy, as well as enhancements to our Symmetrix, CLARiiON and Celerra systems.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses were $420.8 and $617.3 in the second quarters of 2002 and 2001, respectively, a decrease of 32%. As a percentage of revenues, SG&A expenses were 30.3% and 30.5% in the second quarters of 2002 and 2001, respectively. The decrease in SG&A expenses was primarily due to our continued cost cutting efforts that commenced in the third quarter of 2001 as part of our restructuring initiative as well as a decrease in commissions due to lower revenues.

Restructuring Costs and Other Special Charges

In the third quarter of 2001, we implemented a restructuring program to reduce our cost structure and focus our resources on the highest potential growth areas of our business. As a result of the program, we incurred restructuring and other special charges of $825.2. The restructuring charges consisted of $111.5 for employee termination benefits, $104.5 related to the impairment of goodwill, purchased intangibles and other long-lived assets, $158.1 to consolidate excess facilities and $34.5 for other contractual obligations for which we will no longer derive an economic benefit. The other special charges included a provision for excess and obsolete inventory of $310.0 and an other than temporary decline in certain equity investments of $106.6.

The following is a summary of the activity in the reserve for the restructuring liabilities from March 31, 2002 to June 30, 2002:

Category		Balance as of March 31, 2002		Adjustment			Current Utilization			Balance as of June 30, 2002
Workforce reduction		$	27.1	$	19.3		$	(37.0	)	$	9.4
Other contractual obligations			11.9		(6.8	)		(1.0	)		4.1
Consolidation of excess facilities			120.3		(10.2	)		(7.2	)		102.9

	Total	$	159.3	$	2.3		$	(45.2	)	$	116.4

The adjustment to the provision for workforce reduction was primarily attributable to greater severance payments associated with reductions in force in certain foreign jurisdictions. The adjustment to the provision for other contractual obligations and the provision for consolidation of excess facilities resulted primarily from favorable settlements. For purposes of presentation in the accompanying statement of operations, the $2.3 adjustment to the provision for restructuring has been classified within SG&A expenses.

Category		Balance as of March 31, 2002			Reduction			Current Utilization			Balance as of June 30, 2002
Excess and obsolete inventory		$	181.3		$	(24.8	)	$	(46.5	)	$	110.0

The $24.8 reduction resulted from a combination of favorable settlements with vendors on amounts due for cancelled orders and the use of previously identified obsolete inventory.

As of June 30, 2002, the restructuring program has been substantially completed, although the ability to sell and sublet facilities is subject to appropriate market conditions. The expected cash impact of the charge is $247.8, of which $55.4 was paid in 2001 and $76.0 was paid in 2002. Remaining cash expenditures relating to workforce reductions and other contractual obligations will be substantially paid by the end of 2002. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015. The restructuring program has reduced costs in all areas of our operations, favorably impacting cost of sales, SG&A expenses and R&D expenses. As of June 30, 2002, we have reduced operating expenses by approximately $250.0 per quarter compared to our operating cost structure for the quarter ended June 30, 2001.

Investment Income

Investment income decreased to $57.8 in the second quarter of 2002, from $64.2 in the second quarter of 2001. Investment income was earned from investments in cash equivalents, short and long-term investments and sales-type leases. Investment income decreased because of lower realized gains on sales of investments and lower yields on outstanding investment balances. The weighted average annualized return on investments, excluding realized gains, was 3.7% and 5.0% in the second quarters of 2002 and 2001, respectively.

Other Income (Expense), net

Other expense, net was $5.7 in the second quarter of 2002, compared to other income, net of $2.1 in the second quarter of 2001. The change was primarily due to lower foreign currency gains realized in the second quarter of 2002 compared to the second quarter of 2001.

Provision (Benefit) for Income Taxes

The benefit for income taxes was $17.8 in the second quarter of 2002 compared to a provision for income taxes of $40.3 in the second quarter of 2001. 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. As of the end of the first quarter of 2002, our projected estimated annual income tax rate was 30.0%. Due to a change in our estimated mix of income and losses in the countries in which we operate, our projected estimated annual income tax rate as of the end of the second quarter of 2002 was 40.0%. As a result of the change in estimate, the effective income tax rate benefit for the quarter ended June 30, 2002 was 104.8%. The rate for the quarter ended June 30, 2002 includes $11.0 million to provide for an annual estimated effective income tax rate of 40%. The estimated rate for 2002 is subject to further change as a result of changes in the composition of the income and losses in the countries in which we operate and the effects, if any, from tax audits. In the second quarter of 2001, we

had pre-tax earnings resulting in an effective tax rate of 27.0%. The rate of the tax benefit in the second quarter of 2002 is higher than the rate of the tax provision in the second quarter of 2001 due to the composition of income and losses in the countries in which we operate.

Results of Operations—First Six Months of 2002 Compared to First Six Months of 2001

Revenues

Total revenues for the first six months of 2002 were $2,689.5, compared to $4,365.7 for the first six months of 2001, representing a decrease of $1,676.2, or 38%.

Information storage systems revenues were $1,520.7 in the first six months of 2002, compared to $2,789.9 in the first six months of 2001, representing a decrease of $1,269.2, or 45%. Information storage software revenues were $602.9 in first six months of 2002, compared to $965.1 in the first six months of 2001, representing a decrease of $362.2, or 38%. The decrease in both information storage systems and software revenues was primarily due to declining sales volume. Sales were negatively influenced by the global economic slowdown that began in 2001, which has led to a reduction in information technology spending. Competitive pricing pressures also had an adverse effect on revenues. Continued adverse changes in the economy, further reductions in information technology spending or continued pricing pressures may continue to negatively impact revenue during 2002.

Information storage services revenues were $489.7 in the first six months of 2002, compared to $464.0 in the first six months of 2001, representing an increase of $25.7, or 6%. The increase was primarily due to a greater volume of professional services.

Total information storage revenues were $2,613.3 in the first six months of 2002, compared to $4,219.0 in the first six months of 2001, representing a decrease of $1,605.7, or 38%.

Other businesses revenues were $76.3 in the first six months of 2002, compared to $146.7 in the first six months of 2001, representing a decrease of $70.4, or 48%. Other businesses revenues consist of revenues from AViiON server products and related services. Included in the first six months of 2001 were revenues from AViiON server products of $38.4. In the third quarter of 2001, EMC stopped selling AViiON server products. Accordingly, other businesses revenues for 2002 and future quarters are and will be comprised only of AViiON services revenues. These revenues are expected to continue to decline in future quarters.

Revenues on sales into the North American markets were $1,569.6 in the first six months of 2002, compared to $2,571.3 in the first six months of 2001, representing a decrease of $1,001.7, or 39%. Revenues on sales into the European, Middle East and African markets were $632.6 in the first six months of 2002, compared to $1,125.7 in the first six months of 2001, representing a decrease of $493.1, or 44%. Revenues on sales into the Asia Pacific markets were $436.7 in the first six months of 2002, compared to $542.5 in the first six months of 2001, representing a decrease of $105.8, or 20%. Revenues on sales into the Latin American markets were $50.7 in the first six months of 2002, compared to $126.1 in the first six months of 2001, representing a decrease of $75.4, or 60%. The decline in revenues in all these markets was attributable to the global economic slowdown that began in 2001, which has led to a reduction in information technology spending. Competitive pricing pressures also had an adverse effect on revenues. The decline in revenues in Europe was also attributable to lower sales workforce productivity caused by the reduction in force related to our third quarter 2001 restructuring program, which, because of local labor laws, did not take place in Europe until well into the first quarter of 2002.

Changes in exchange rates in the first six months of 2002 compared to the first six months of 2001 negatively impacted revenues by approximately 1%. The impact was most significant in Japan, Argentina and Brazil.

Gross Margins

Gross margin decreased to $1,057.4 in the first six months of 2002 from $2,241.8 in the first six months of 2001, a decrease of $1,184.4, or 53%. Included in the first six months of 2002 results is a reduction to cost of sales, resulting in a gross margin benefit of $52.8 related to the reduction of the third quarter 2001 provision for excess and obsolete inventory, which totaled $310.0. The reduction resulted from a combination of favorable settlements with vendors on amounts due for cancelled orders and the use of previously identified obsolete inventory. Included in the first six months of 2001 was goodwill amortization of $22.2. As a result of implementing FAS No. 142, goodwill is no longer amortized. Excluding the effects of these two items, gross margin decreased to $1,004.6 in the first six months of 2002 from $2,264.1 in the first six months of 2001, or 56%, and the gross margin percentage declined to 37.4% in the first six months of 2002 from 51.9% in the first six months of 2001. The decline in gross margin dollars and percentage was primarily attributable to the reduction in revenues resulting from lower sales volume, which caused fixed overhead costs to be absorbed over a lower sales base. In addition, lower average selling prices also contributed to the decline.

Gross margin for information storage products, excluding the effects of the $52.8 reduction to the provision for excess and obsolete inventory in 2002 and $20.3 related to goodwill amortization in 2001, decreased to 36.9% in the first six months of 2002, compared to 54.2% in the first six months of 2001. The decline was primarily attributable to the reduction in revenues resulting from lower sales volume, which caused fixed overhead costs to be absorbed over a lower sales base. In addition, lower average selling prices also contributed to the decline.

Gross margin for information storage services, excluding the effect of the $1.9 related to goodwill amortization in 2001, remained consistent at 38.7% in the first six months of 2002, compared to 38.3% in the first six months of 2001.

Gross margin for other businesses increased to 42.3% in the first six months of 2002, compared to 34.0% in the first six months of 2001. The increase in the gross margin percentage resulted from this segment consisting of only services revenue in the first six months of 2002 compared to both systems and services revenue in the first six months of 2001.

Research and Development

R&D expenses were $403.0 and $469.7 in the first six months of 2002 and 2001, respectively, a decline of 14%. As a percentage of revenues, R&D expenses were 15.0% and 10.8% in the first six months of 2002 and 2001, respectively. In addition, we spent $64.3 and $59.6 in the first six months of 2002 and 2001, respectively, on software development, which costs were capitalized. Included in R&D expenses in the first six months of 2001 was $3.5 related to goodwill amortization. As a result of implementing FAS No. 142, goodwill is no longer amortized.

Selling, General and Administrative

SG&A expenses were $875.4 and $1,210.4 in the first six months of 2002 and 2001, respectively, a decrease of 28%. As a percentage of revenues, SG&A expenses were 32.6% and 27.7% in the first six months of 2002 and 2001, respectively. The decrease in SG&A expenses was primarily due to our continued cost cutting efforts that commenced in the third quarter of 2001 as part of our restructuring initiative as well as a decrease in commissions due to lower revenues.

Restructuring Costs and Other Special Charges

The following is a summary of the activity in the reserve for the restructuring liabilities from December 31, 2001 to June 30, 2002:

Category		Balance as of December 31, 2001		Adjustment			Current Utilization			Balance as of June 30, 2002
Workforce reduction		$	48.2	$	19.3		$	(58.1	)	$	9.4
Other contractual obligations			23.7		(6.8	)		(12.8	)		4.1
Consolidation of excess facilities			127.4		(10.2	)		(14.3	)		102.9

	Total	$	199.3	$	2.3		$	(85.2	)	$	116.4

The adjustment to the provision for workforce reduction was primarily attributable to greater severance payments associated with reductions in force in certain foreign jurisdictions. The adjustment to the provision for other contractual obligations and the provision for the consolidation of excess facilities resulted primarily from favorable settlements. For purposes of presentation in the accompanying statement of operations, the $2.3 adjustment to the provision for restructuring has been classified within SG&A expenses.

Category		Balance as of December 31, 2001			Reduction			Current Utilization			Balance as of June 30, 2002
Excess and obsolete inventory		$	255.5		$	(52.8	)	$	(92.7	)	$	110.0

The $52.8 reduction resulted from a combination of favorable settlements with vendors on amounts due for cancelled orders and the use of previously identified obsolete inventory.

The restructuring program has been substantially completed, although the ability to sell and sublet facilities is subject to appropriate market conditions. The expected cash impact of the charge is $247.8, of which $55.4 was paid in 2001 and $76.0 was paid in 2002. Remaining cash expenditures relating to workforce reductions and other contractual obligations will be substantially paid by the end of 2002. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015. The restructuring program has reduced costs in all areas of our operations, favorably impacting cost of sales, SG&A expenses and R&D expenses. As of June 30, 2002, we have reduced operating expenses by approximately $250.0 per quarter compared to our operating cost structure for the quarter ended June 30, 2001.

Investment Income

Investment income decreased to $113.3 in the first six months of 2002, from $135.8 in the first six months of 2001. Investment income was earned from investments in cash equivalents, short and long-term investments and sales-type leases. Investment income decreased because of lower realized gains on sales of investments and lower yields on outstanding investment balances. The weighted average annualized return on investments, excluding realized gains, was 3.6% and 5.2% in the first six months of 2002 and 2001, respectively.

Other Income (Expense), net

Other expense, net was $13.5 in the first six months of 2002, compared to other income, net of $4.6 in the first six months of 2001. The change was primarily due to foreign currency losses incurred in the first six months of 2002 compared to foreign currency gains realized in the first six months of 2001. Included in the six months ended June 30, 2002 was a $6.3 charge for other than temporary declines in equity investments. These investments are in privately-held companies, primarily in the storage industry. These investments are carried at cost, subject to adjustment for impairment.

Provision (Benefit) for Income Taxes

The benefit for income taxes was $50.7 in the first six months of 2002 compared to a provision for income taxes of $187.8 in the first six months of 2001. 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. As a result of our pre-tax loss in the first six months of 2002, we had an income tax benefit with an effective tax rate of 40.0%. The estimated rate for 2002 is subject to change as a result of changes in the composition of the income and losses in the countries in which we operate and effects, if any, from tax audits. In the first six months of 2001, we had pre-tax earnings resulting in an effective tax rate of 27.0%. The rate of benefit in the first six months of 2002 is higher than the rate of the tax provision in the first six months of 2001 due to the composition of income and losses in the countries in which we operate.

Financial Condition

Cash and cash equivalents and short and long-term investments were $5,462.8 and $5,083.6 at June 30, 2002 and December 31, 2001, respectively, an increase of $379.2. During the first six months of 2002, cash and cash equivalents decreased by $496.7 and short and long-term investments increased by $875.9. Our mix of cash and cash equivalents and short and long-term investments fluctuates from quarter to quarter and is subject to the timing of expected cash receipts and cash disbursements.

Cash provided by operating activities in the first six months of 2002 was $815.6, compared to $1,018.8 in the first six months of 2001. The decline in the first six months of 2002 compared to the first six months of 2001 was primarily attributable to the $76.1 net loss incurred in the first six months of 2002 compared to the $507.7 of net income generated in the first six months of 2001. Partially offsetting the reduction in net income was an improvement in working capital associated with reductions in accounts and notes receivable and inventories and an increase in deferred revenue associated primarily with software sales.

Cash used for investing activities was $1,139.6 in the first six months of 2002, compared to $879.8 in the first six months of 2001. Capital additions were $218.8 and $507.5 in the first six months of 2002 and 2001, respectively. The decrease in capital additions resulted from cost containment measures implemented during the third quarter of 2001. Net purchases and maturities of investments, consisting primarily of debt securities, were $856.5 and $278.9 in the first six months of 2002 and 2001, respectively.

Cash used for financing activities was $165.9 in the first six months of 2002, compared to $50.4 in the first six months of 2001. During the first six months of 2002, we repurchased 23.4 million shares of Common Stock at a cost of $200.0. As of June 30, 2002, we had repurchased 24.5 million of the 50.0 million shares of Common Stock authorized for repurchase by our Board of Directors in May 2001. During the first six months of 2001, we distributed our ownership interest in McDATA. As a result of the distribution, McDATA's net assets were no longer consolidated with our assets, which resulted in a $142.0 reduction in cash. Partially offsetting these uses of cash was the generation of $43.0 for the six months ended June 30, 2002 and $103.1 for the six months ended June 30, 2001, from the exercise of stock options.

We employ several strategies to enhance our liquidity and income. 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 exposure that may exist. Additionally, from time to time we may sell accounts receivable when it is economically beneficial. We also lend certain fixed income securities to generate investment income. During the first six months of 2002, 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 June 30, 2002, 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 June 30, 2002, we had $33.2 outstanding on our line of credit in Brazil and none outstanding on our line of credit in the United States. The Brazilian line of credit 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 June 30, 2002, we were in compliance with the covenants. The Brazilian line of credit has been established to help manage currency volatility between the local currency and the U.S. dollar and facilitate cash repatriation.

Based on our current operating and capital expenditure forecasts, we believe that the cominbation 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

Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and require our management's most difficult, subjective or complex judgments and estimates. Actual results could differ from those estimates. We believe the policies that fall within this category are the policies on revenue recognition, asset valuation and accounting for income taxes.

Revenue Recognition

EMC derives revenue from sales of information storage systems, software and services. We recognize 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 our contractual relationships with our customers and the manner in which we account for sales transactions.

Systems sales

Software sales

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 our 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.

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

Training revenues are recognized upon completion of the training.

Multiple element arrangements

We consider 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, we defer 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

Our sales contracts generally provide for the customer to accept title and risk of loss when the product leaves our facility. When shipping terms or local laws do not allow for passage of title and risk of loss at shipping point, we defer 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

We accrue for systems' warranty costs and reduce revenue for estimated sales returns at the time of shipment. Systems' warranty costs are estimated based upon our historical experience and specific identification of systems' requirements. Sales returns are estimated based upon our historical experience and specific identification of probable returns.

Revenue recognition is governed by various accounting principles, including the Securities and Exchange Commission's Staff Accounting Bulletin, No. 101, "Revenue Recognition in Financial Statements," Statement of Position 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, historical experience, credit-worthiness of customers and current market and economic conditions. Changes in judgments on these factors could impact the timing and amount of revenue and costs recognized.

As noted, 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 differ from our estimates.

Asset Valuation

Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, inventories, property, plant and equipment, investments, capitalized software and intangible and other assets. Asset valuation is governed by various accounting principles, including FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and Accounting Research Bulletin No. 43, "Restatement and Revision of Accounting Research Bulletins", among others. Management uses a variety of factors to assess valuation depending upon the asset. For example, accounts and notes receivable are evaluated based upon the credit-worthiness of customers, historical experience, an assessment of expected returns 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. Property, plant and equipment, capitalized software and intangible and other assets are evaluated utilizing various factors, including the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Investments are evaluated for impairment based upon market conditions, the industry sectors in which the entity operates and the viability of each entity. Changes in judgments on any of these factors could impact the value of the asset.

Accounting for Income Taxes

Our 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. We recognize changes in our estimates as additional information becomes available. In addition, 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 not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, we include such allowance as an expense within the tax provision in our statement of operations. In the event that actual results differ from our estimates, our provision for income taxes could be materially impacted.

New Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS No. 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. The objectives of FAS No. 144 are to address issues relating to the implementation of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and to develop a model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. FAS No. 144 was effective for us commencing with our 2002 fiscal year. Upon adoption, this accounting pronouncement did not have a significant impact on our financial position or results of operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our prospects are subject to certain 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 the forward-looking statements as a result of certain risk factors, including but not limited to those set forth below, other one-time events and other important factors disclosed previously and from time to time in our other filings with the SEC.

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. During 2001 and the first and second quarters of 2002, there was a decrease in demand for information storage products as customers delayed or reduced information technology expenditures. For 2002, customer forecasts indicate that information technology budgets have been further reduced. 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.

We may have difficulty managing operations.

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

•: retaining and hiring, as required, the appropriate number of qualified employees
•: enhancing and expanding, as appropriate, our infrastructure, including but not limited to, our information systems and management team
•: accurately forecasting revenues
•: managing inventory levels to minimize excess and obsolete inventory
•: controlling expenses
•: managing our manufacturing capacity, real estate facilities and other assets
•: executing on our plans

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

Competitive pricing and difficulty managing product costs could materially adversely affect our revenues and earnings.

Competitive pricing pressures exist in the information storage market and have had, and in the future may have, a material adverse effect on our revenues and earnings. 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. Further, the relative and varying rates of increases or decreases in product price and component cost could have a material adverse effect on our 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.

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 continue to 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.

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 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 longer 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.

If our suppliers do not meet our quality or delivery requirements, we could have decreased revenues and earnings.

We purchase 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 and power supplies. 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 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 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 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. Competition for highly skilled personnel is intense in the high technology industry. Because of the importance of stock-based incentive compensation in our total compensation program, the volatility or lack of positive performance in our stock price may from time to time adversely affect our ability to retain or attract key 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:

•: the significant size of our average product price in relation to our customers' budgets, resulting in long lead times for customers' budgetary approval, which tends to be given late in a quarter
•: 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
•: 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
•: seasonal influences

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:

•: 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
•: we generally ship products shortly after receipt of the order
•: customers may reschedule or cancel orders with little or no penalty

Moreover, delays in product shipping, caused by loss of power or telecommunications or similar services, 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.

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 are accompanied by the risks commonly encountered in an acquisition of a business including, among other things:

•: the effect of the acquisition on our financial and strategic position and reputation
•: the failure of an acquired business to further our strategies
•: the difficulty of integrating the acquired business
•: the lack of experience in new markets, products or technologies or the initial dependence on unfamiliar supply or distribution partners
•: the diversion of our management's attention from other business concerns
•: the impairment of relationships with customers of the acquired business
•: the potential loss of key employees of the acquired company
•: the potential impairment of acquired assets

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 potentially decreased earnings per share.

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.

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 more opportunity to address customers' various information technology requirements than us. We also compete with many smaller, less established companies in specific product segments. Some of these 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 by our competitors, including hardware and software products and services, and the implementation of effective marketing or sales strategies by our competitors.

Changes in foreign conditions could impair our international sales.

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 were to occur, we could experience a rate of failure in our products that would result in substantial repair or replacement costs and potential damage to our reputation. Continued improvement in manufacturing capabilities, control of 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 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 were 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:

•: the announcement of new products, services or technological innovations by us or our competitors
•: quarterly variations in our operating results
•: changes in revenue or earnings estimates by the investment community
•: speculation in the press or investment community

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

EMC CORPORATION

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

In April 2002, EMC filed a complaint against Hitachi, Ltd. and Hitachi Data Systems Corporation (together, "Hitachi") with the International Trade Commission ("ITC") and in the United States Federal District Court in Worcester, Massachusetts. The ITC complaint alleges that Hitachi has engaged in unlawful activities by importing into the United States products that infringe six EMC patents. We have asked the ITC to issue an injunction to block importation of Hitachi's infringing products and in May 2002, the ITC voted to commence an investigation into our claims. The suit in District Court seeks preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In June 2002, the suit in District Court was stayed, pending the outcome of the ITC action. Subsequent to the date we filed a complaint against Hitachi, in April 2002, Hitachi and Hitachi Computer Products (America), Inc. ("HICAM") filed a complaint against us in the United States Federal District Court for the Western District of Oklahoma alleging that certain of our products infringe eight Hitachi patents and seeking preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In July 2002, this suit was transferred to the United States Federal District Court in Worcester, Massachusetts. We believe that Hitachi and HICAM's claims are without merit.

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 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders was held on May 8, 2002. There was no solicitation in opposition to management's nominees as listed in EMC's proxy statement and all such nominees were elected as Class III directors for a three-year term. The stockholders approved an amendment to our 1989 Employee Stock Purchase Plan to increase the number of shares of available for grant under the Plan by 10,000,000 shares. The stockholders also voted on two stockholder proposals (Proposals 3 and 4). The stockholders approved Proposal 3, which requested that the Board take steps to nominate candidates that will result in a majority of independent directors. The stockholders voted against Proposal 4, which requested the Board nominating committee to make a greater commitment to locate qualified women and minorities as Board candidates, and provide a related report to stockholders. The results of the votes for each of these proposals were as follows:

1.: Election of Class III Directors:

	For	Withheld
Michael J. Cronin	1,745,808,239	64,538,176
W. Paul Fitzgerald	1,738,579,496	71,766,919
Joseph M. Tucci	1,583,719,365	226,627,050

In addition to these directors, EMC's other incumbent directors (John R. Egan, Windle B. Priem, Michael C. Ruettgers and Alfred M. Zeien) had terms that continued after the 2002 Annual Meeting.

2.: To amend EMC's 1989 Employee Stock Purchase Plan:

For:		1,755,738,187
Against:		47,762,900
Abstain:		6,845,328
Broker Non-Vote:		0

3.: To approve Proposal 3, a stockholder proposal, as described above:

For:		645,241,768
Against:		505,520,101
Abstain:		16,396,025
Broker Non-Vote:		643,188,520

4.: To approve Proposal 4, a stockholder proposal, as described above:

For:		358,860,778
Against:		756,491,341
Abstain:		51,805,775
Broker Non-Vote:		643,188,520

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

See index to Exhibits on page 43 of this report.

(b) Reports on Form 8-K

We did not file any current report on Form 8-K during the quarter ended June 30, 2002.

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.

		EMC CORPORATION
Date: July 30, 2002		By:		/s/ WILLIAM J. TEUBER, JR. William J. Teuber, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

3.1		Restated Articles of Organization of EMC Corporation, as amended. (1)
3.2		Amended and Restated By-laws of EMC Corporation. (2)
4.1		Form of Stock Certificate. (3)
10.1		EMC Corporation 1985 Stock Option Plan, as amended (filed herewith).
10.2		EMC Corporation 1992 Stock Option Plan for Directors, as amended (filed herewith).
10.3		EMC Corporation 1993 Stock Option Plan, as amended (filed herewith).
10.4		EMC Corporation 2001 Stock Option Plan, as amended (filed herewith).
10.5		EMC Corporation Executive Deferred Compensation Retirement Plan, as amended (filed herewith).

(1): Incorporated by reference to EMC Corporation's Quarterly Report on Form 10-Q filed August 9, 2001 (No. 1-9853).
(2): Incorporated by reference to EMC Corporation's Annual Report on Form 10-K filed March 17, 2000 (No. 1-9853).
(3): Incorporated by reference to EMC Corporation's Annual Report on Form 10-K filed March 31, 1988 (No. 0-14367).

QuickLinks

EMC CORPORATION
EMC CORPORATION
PART I FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
EMC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
EMC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
EMC CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited)
EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts in this MD&A are in millions.
EMC CORPORATION
PART II OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX