Edgar Filing: EMC CORP

e10vq

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For The Quarter Ended: September 30, 2004		Commission File Number 1-9853

EMC CORPORATION

(Exact name of registrant as specified in its charter)


Massachusetts (State or other jurisdiction of incorporation or organization)		04-2680009 (I.R.S. Employer Identification Number)

176 South Street

Hopkinton, Massachusetts 01748

(Address of principal executive offices, including zip code)

(508) 435-1000

(Registrant’s telephone number, including area code)

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

YES x NO o

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

YES x NO o

The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of September 30, 2004 was 2,396,278,626

EMC CORPORATION


		Page No.

PART I— FINANCIAL INFORMATION

	Item 1. Financial Statements (unaudited)

	Consolidated Balance Sheets at September 30, 2004 and December 31, 2003		3

	Consolidated Income Statements for the Three and Nine Months Ended September 30, 2004 and 2003		4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003		5

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2004 and 2003		6

	Notes to Interim Consolidated Financial Statements		7

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

	Item 3. Quantitative and Qualitative Disclosures About Market Risk		44

	Item 4. Controls and Procedures		44

PART II— OTHER INFORMATION

	Item 1. Legal Proceedings		45

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45

	Item 6. Exhibits		45

SIGNATURES			46

EXHIBIT INDEX			47

PART I

FINANCIAL INFORMATION


Item 1.	Financial Statements

EMC CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)


					September 30,			December 31,
					2004			2003

ASSETS
Current assets:
	Cash and cash equivalents				$	1,573,670		$	1,869,426
	Short-term investments					877,044			928,248
	Accounts and notes receivable, less allowance for doubtful accounts of $40,399 and $39,482					950,216			952,421
	Inventories					547,028			514,015
	Deferred income taxes					278,417			271,746
	Other current assets					133,498			151,448

Total current assets						4,359,873			4,687,304
Long-term investments						4,584,007			4,109,911
Property, plant and equipment, net						1,564,306			1,610,182
Intangible assets, net						517,598			475,295
Other assets, net						506,600			426,472
Goodwill, net						3,261,366			2,711,677
Deferred income taxes						—			72,019

				Total assets	$	14,793,750		$	14,092,860


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
	Notes payable and current portion of long-term obligations				$	62		$	7,104
	Accounts payable					448,427			414,251
	Accrued expenses					1,012,365			1,009,696
	Income taxes payable					433,869			436,434
	Deferred revenue					856,631			679,044

Total current liabilities						2,751,354			2,546,529
Deferred revenue						550,396			451,296
Deferred income taxes						71,517			—
Long-term convertible debt						128,832			129,966
Other liabilities						99,688			80,348
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 2,396,279 and 2,476,821 shares					23,963			24,768
	Additional paid-in capital					6,178,893			6,894,823
	Deferred compensation					(101,647	)		(94,068	)
	Retained earnings					5,116,801			4,566,157
	Accumulated other comprehensive income (loss), net					(26,047	)		2,197
	Treasury stock, at cost; 62,082 shares at December 31, 2003 (Note 11)					—			(509,156	)

		Total stockholders’ equity				11,191,963			10,884,721

			Total liabilities and stockholders’ equity		$	14,793,750		$	14,092,860

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

EMC CORPORATION

CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share amounts)

(unaudited)



		For the						For the
		Three Months Ended						Nine Months Ended

		September 30,			September 30,			September 30,			September 30,
		2004			2003			2004			2003

Revenues:
	Product sales	$	1,486,918		$	1,145,659		$	4,321,293		$	3,321,700
	Services		541,961			365,188			1,550,399			1,052,598

			2,028,879			1,510,847			5,871,692			4,374,298
Costs and expenses:
	Cost of product sales		746,131			658,581			2,190,976			1,932,660
	Cost of services		239,547			177,149			701,921			524,618
	Research and development		215,708			172,858			625,411			530,060
	Selling, general and administrative		557,450			390,164			1,640,934			1,167,977
	Restructuring and other special charges		—			1,696			32,688			25,785

Operating income			270,043			110,399			679,762			193,198
Investment income			38,373			45,473			115,410			149,796
Interest expense			(1,880	)		(672	)		(5,575	)		(2,711	)
Other income (expense), net			452			(3,842	)		(7,520	)		(9,826	)

Income before taxes			306,988			151,358			782,077			330,457
Income tax provision (benefit)			88,953			(7,731	)		231,433			54,446

Net income		$	218,035		$	159,089		$	550,644		$	276,011

Net income per weighted average share, basic		$	0.09		$	0.07		$	0.23		$	0.13

Net income per weighted average share, diluted		$	0.09		$	0.07		$	0.23		$	0.12

Weighted average shares, basic			2,396,399			2,186,213			2,405,216			2,186,679

Weighted average shares, diluted			2,433,671			2,213,875			2,451,916			2,208,230

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

EMC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



				For the
				Nine Months Ended

				September 30,			September 30,
				2004			2003

Cash flows from operating activities:
Net income				$	550,644		$	276,011
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				450,923			389,910
	Non-cash restructuring and other special charges				17,051			5,732
	Amortization of deferred compensation				40,312			7,193
	Provision for doubtful accounts				4,854			4,444
	Deferred income taxes, net				154,017			12,783
	Tax benefit from stock options exercised				27,330			3,093
	Other				(1,746	)		8,280
	Changes in assets and liabilities, net of acquisitions:
		Accounts and notes receivable			12,991			171,597
		Inventories			(15,372	)		(64,526	)
		Other assets			(8,640	)		(70,004	)
		Accounts payable			27,197			(38,253	)
		Accrued expenses			(5,567	)		(66,741	)
		Income taxes payable			(16,234	)		190,129
		Deferred revenue			200,818			275,700
		Other liabilities			14,631			(95,403	)

			Net cash provided by operating activities		1,453,209			1,009,945

Cash flows from investing activities:
	Additions to property, plant and equipment				(259,867	)		(266,490	)
	Capitalized software development costs				(126,559	)		(84,419	)
	Purchases of short and long-term available for sale securities				(5,295,866	)		(4,591,509	)
	Sales of short and long-term available for sale securities				4,770,994			3,779,868
	Maturities of short and long-term available for sale securities				73,544			186,389
	Business acquisitions, net of cash acquired				(544,016	)		(11,573	)
	Other				(58,146	)		(28,741	)

			Net cash used in investing activities		(1,439,916	)		(1,016,475	)

Cash flows from financing activities:
	Issuance of common stock				115,324			48,771
	Repurchase of common stock				(417,554	)		(99,447	)
	Payment of long-term and short-term obligations				(7,136	)		(27,831	)
	Proceeds from long-term and short-term obligations				—			4,609

			Net cash used in financing activities		(309,366	)		(73,898	)

Effect of exchange rate changes on cash					317			599

Net decrease in cash and cash equivalents					(295,756	)		(79,829	)
Cash and cash equivalents at beginning of period					1,869,426			1,686,598

Cash and cash equivalents at end of period				$	1,573,670		$	1,606,769

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

EMC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



		For the						For the
		Three Months Ended						Nine Months Ended

		September 30,			September 30,			September 30,			September 30,
		2004			2003			2004			2003

Net income		$	218,035		$	159,089		$	550,644		$	276,011
Other comprehensive income (loss), net of taxes (benefit):
	Foreign currency translation adjustments, net of taxes (benefit) of $(18), $72, $(91) and $1,781		(1,772	)		(9,961	)		(7,119	)		(8,306	)
	Changes in market value of derivatives, net of tax benefit of $0, $42, $0 and $0		(21	)		(500	)		(22	)		(376	)
	Changes in market value of investments, net of taxes (benefit) of $4,454, $(10,650), $(8,548) and $(14,921)		21,902			(17,935	)		(21,103	)		(25,443	)

Other comprehensive income (loss)			20,109			(28,396	)		(28,244	)		(34,125	)

Comprehensive income		$	238,144		$	130,693		$	522,400		$	241,886

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 design, manufacture, market and support a wide range of products and services for the storage, management and protection of information. Our products and services are designed to help customers deploy an information lifecycle management strategy to align the IT infrastructure with the business based upon the changing value of information while optimizing server, network and storage resources.


	General

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. These statements include the accounts of EMC and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to fairly present the results as of and for the periods ended September 30, 2004 and 2003. Certain prior year amounts have been reclassified to conform with the current presentation.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. Accordingly, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2004.


	Revenue Recognition

We derive revenue from sales of information 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

Systems sales consist of the sale of hardware, including CLARiiON systems, Symmetrix systems, NetWin and 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. Our software products provide customers with information management, content management, sharing, protection and server virtualization capabilities. Revenue for software is generally recognized upon shipment or electronic delivery. License revenue from royalty payments is recognized upon receipt of royalty reports from third party original equipment manufacturers (“OEMs”).


	• Services revenue

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

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


1.	Basis of Presentation (Continued)

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 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 earned based upon the hours incurred.


	• Multiple element arrangements

When hardware, software and services are contained in a single arrangement, we allocate revenue between the elements based on their relative fair value, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and reliable evidence of the fair value of the undelivered items. Fair value is generally determined based upon the price charged when the element is sold separately. Fair value of software support services may also be measured by the renewal rate offered to the customer. In the absence of fair value for a delivered element, we allocate revenue first to the fair value of the undelivered elements and allocate the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a deferral of revenue for the delivered elements until all undelivered elements are fulfilled.


	• Shipping terms

Our sales contracts generally provide for the customer to accept title and risk of loss when the product leaves our facilities. 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 the estimated costs of systems’ warranty at the time of sale. We reduce revenue for estimated sales returns at the time of sale. 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.


	Accounting for Stock-Based Compensation

Statement of Financial Accounting Standards (“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 value of the award and is recognized over the service period, which is usually the vesting period. As provided for in FAS No. 123, we elected to apply Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for our stock-based compensation plans. The following is a reconciliation of net

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


1.	Basis of Presentation (Continued)

income per weighted average share had we adopted FAS No. 123 (table in thousands, except per share amounts):



	For the						For the
	Three Months Ended						Nine Months Ended

	September 30,			September 30,			September 30,			September 30,
	2004			2003			2004			2003

Net income	$	218,035		$	159,089		$	550,644		$	276,011
Add back: Stock compensation costs, net of taxes, on stock-based awards		9,208			1,440			27,616			4,643
Less: Stock compensation costs, net of taxes, had stock compensation expense been measured at fair value		(96,277	)		(92,945	)		(298,741	)		(283,389	)

Incremental stock compensation expense per FAS No. 123, net of taxes		(87,069	)		(91,505	)		(271,125	)		(278,746	)

Adjusted net income (loss)	$	130,966		$	67,584		$	279,519		$	(2,735	)

Net income per weighted average share, basic – as reported	$	0.09		$	0.07		$	0.23		$	0.13

Net income per weighted average share, diluted – as reported	$	0.09		$	0.07		$	0.23		$	0.12

Adjusted net income per weighted average share, basic	$	0.05		$	0.03		$	0.12		$	—

Adjusted net income per weighted average share, diluted	$	0.05		$	0.03		$	0.11		$	—

The fair value of each option granted during 2004 and 2003 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:


	2004		2003

Dividend yield		None		None
Expected volatility		45.0%-55.0%		55.0%
Risk-free interest rate		2.77%-3.96%		2.39%-3.36%
Expected life (years)		5.0		5.0


	New Accounting Pronouncements

In March 2004, the Financial Accounting Standards Board (“FASB”) approved the consensus reached on the Emerging Issues Task Force Issue (“EITF”) No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-01 provides guidance on determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. EITF 03-01 also provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. The adoption of EITF 03-01 is not expected to have a material impact on our financial position or results of operations.

In May 2004, the FASB issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FAS 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


1.	Basis of Presentation (Continued)

Modernization Act of 2003 (“MPDIMA”), including the accounting for and disclosure of any federal subsidy provided by MPDIMA. The adoption of FAS 106-2 is not expected to have a material impact on our financial position or results of operations.

In October 2004, the FASB approved the consensus reached on EITF No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” EITF 04-08 provides guidance on when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings per share. The adoption of EITF 04-08 is not expected to have a material impact on our financial position or results of operations.


2.	Business Acquisitions and Goodwill


	Acquisition of VMware, Inc.

In January 2004, we acquired all of the shares of outstanding stock of VMware, Inc., a software company specializing in virtualization technology. VMware’s technology enables multiple operating systems to run simultaneously and independently on the same Intel-based server or workstation and move live applications across systems without business disruption. We determined that the acquisition advances our goal of simplifying the information technology operations of our customers and supports our overall information lifecycle management strategy. The aggregate purchase price, net of cash received, was approximately $611.9 million, which consisted of $538.2 million of cash, $72.0 million in fair value of our stock options and $1.7 million of transaction costs, which primarily consisted of fees paid for financial advisory, legal and accounting services. The fair value of our stock options issued to employees was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:


Dividend yield	None
Expected volatility	60.0	%
Risk-free interest rate	2.0	%
Expected life (years)	4.0

The intrinsic value allocated to the unvested options issued in the acquisition that had yet to be earned as of the acquisition date was $47.3 million and has been recorded as deferred compensation in the purchase price allocation.

The consolidated financial statements include the results of VMware from the date of acquisition. Pro forma results of operations have not been presented because the effects of the acquisition were not material to us. The purchase price has been allocated based on estimated fair values as of the acquisition date. The purchase price allocation is preliminary and a final determination of required purchase accounting adjustments

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


2.	Business Acquisitions and Goodwill (Continued)

will be made upon the completion of our integration activities. The following represents the preliminary allocation of the purchase price (table in thousands):


Current assets			$	19,840
Property, plant & equipment				2,472
Other long-term assets				1,520
Goodwill				522,606
Intangible assets:
	Developed technology (estimated useful life of 4-5 years)			93,610
	Support and subscription contracts (estimated useful life of 9 years)			3,950
	OEM contracts (estimated useful life of 5 years)			5,570
	Tradenames and trademarks (estimated useful life of 5 years)			7,580
	Non-solicitation agreements (estimated useful life of 3 years)			40
	Acquired in-process R&D (“IPR&D”)			15,200

		Total intangible assets		125,950
Deferred compensation				47,300
Current liabilities				(81,488	)
Deferred income taxes				(22,645	)
Long-term liabilities				(3,670	)

	Total purchase price		$	611,885

In determining the purchase price allocation, we considered, among other factors, our intention to use the acquired assets, historical demand and estimates of future demand of VMware’s products and services. The fair value of intangible assets was primarily based upon the income approach. The rate used to discount the net cash flows to their present values was based upon a weighted average cost of capital of 14%. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving forecast sales related to the technology and assets acquired from VMware.

The total weighted average amortization period for the intangible assets is 4.8 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized. None of the goodwill is deductible for income tax purposes. The goodwill is classified within our VMware products and services segment.

Of the $126.0 million of acquired intangible assets, $15.2 million was allocated to IPR&D and was written off at the date of acquisition because the IPR&D had no alternative uses and had not reached technological feasibility. The write-off is included in restructuring and other special charges in our income statement. Three IPR&D projects were identified relating to virtual machine software. The value assigned to IPR&D was determined utilizing the income approach by determining cash flow projections relating to the projects. The stage of completion of each in-process project was estimated to determine the discount rate to be applied to the valuation of the in-process technology. Based upon the level of completion and the risk associated with in-process technology, we deemed a discount rate of 50% as appropriate for valuing IPR&D.

In connection with the VMware acquisition, we commenced integration activities which have resulted in recognizing a $3.8 million liability for lease obligations, of which $0.8 million was paid in the first nine months of 2004. The liability will be paid over the remaining lease periods through 2007. We are working to finalize our integration activities which may result in additional purchase price allocations or adjustments.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


2.	Business Acquisitions and Goodwill (Continued)


	Goodwill

Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment for the nine months ended September 30, 2004 consist of the following (table in thousands):



	For the Nine Months Ended September 30, 2004

					EMC Software
	Information		Information		Group			VMware
	Storage		Storage		Products and			Products and			Other
	Products		Services		Services			Services			Businesses		Total

Balance, January 1, 2004	$	551,888	$	1,615	$	2,158,174		$	—		$	—	$	2,711,677
Goodwill acquired		—		—		3,684			522,306			—		525,990
Tax deduction from exercise of stock options		—		—		(14,126	)		(592	)		—		(14,718	)
Adjustment of purchase price allocations		—		—		38,117			300			—		38,417

Balance, September 30, 2004	$	551,888	$	1,615	$	2,185,849		$	522,014		$	—	$	3,261,366


3.	Inventories

Inventories consist of (table in thousands):


	September 30,		December 31,
	2004		2003

Purchased parts	$	40,781	$	34,010
Work-in-process		372,332		311,575
Finished goods		133,915		168,430

	$	547,028	$	514,015


4.	Property, Plant and Equipment

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


	September 30,			December 31,
	2004			2003

Furniture and fixtures	$	135,271		$	140,354
Equipment		1,752,583			1,719,108
Buildings and improvements		861,494			840,487
Land		105,382			105,033
Construction in progress		143,467			156,504

		2,998,197			2,961,486
Accumulated depreciation		(1,433,891	)		(1,351,304	)

	$	1,564,306		$	1,610,182

Construction in progress and land owned at September 30, 2004 include $93.1 million and $6.0 million, respectively, of facilities under construction that we are holding for future use.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


5.	Accrued Expenses

Accrued expenses consist of (table in thousands):


	September 30,		December 31,
	2004		2003

Salaries and benefits	$	393,521	$	367,067
Product warranties		147,816		118,816
Restructuring		109,959		139,135
Other		361,069		384,678

	$	1,012,365	$	1,009,696

Systems sales include a standard product warranty. At the time of the sale, we accrue for systems’ warranty costs. Upon expiration of the initial warranty, we may sell additional maintenance contracts to our customers. Revenue from these additional maintenance contracts is deferred and recognized ratably over the service period. The initial systems’ warranty accrual is based upon our historical experience and specific identification of systems’ requirements. The following represents the activity in our warranty accrual for our standard product warranty (table in thousands):



	For the Three Months Ended						For the Nine Months Ended

	September 30,			September 30,			September 30,			September 30,
	2004			2003			2004			2003

Balance, beginning of the period	$	132,801		$	118,419		$	118,816		$	104,258
Current year accrual		35,771			17,318			90,089			68,473
Amounts charged to the accrual		(20,756	)		(18,824	)		(61,089	)		(55,818	)

Balance, end of the period	$	147,816		$	116,913		$	147,816		$	116,913

The current period accrual includes amounts accrued for systems at the time of shipment, adjustments within the period for changes in estimated costs for warranties on systems shipped in the period and changes in estimated costs for warranties on systems shipped in prior periods. It is not practicable to determine the amounts applicable to each of the components.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


6.	Net Income Per Share

The reconciliation of the numerators and denominators of the diluted earnings per share calculations is as follows (table in thousands, except per share amounts):



			For the Three Months Ended				For the Nine Months Ended

			September 30,		September 30,		September 30,		September 30,
			2004		2003		2004		2003

Numerator:
	Net income, as reported		$	218,035	$	159,089	$	550,644	$	276,011
		Adjustment for interest expense on convertible debt, net of taxes		643		—		1,929		—

	Net income, adjusted		$	218,678	$	159,089	$	552,573	$	276,011

Denominator:
	Basic weighted average common shares outstanding			2,396,399		2,186,213		2,405,216		2,186,679
		Weighted common stock equivalents		28,216		27,662		37,644		21,551
		Assumed conversion of convertible debt		9,056		—		9,056		—

	Diluted weighted average shares outstanding			2,433,671		2,213,875		2,451,916		2,208,230

Net income per weighted average share, diluted			$	0.09	$	0.07	$	0.23	$	0.12

Options to acquire 158.6 million and 113.2 million shares of our common stock for the three and nine months ended September 30, 2004, respectively, and options to acquire 68.4 million and 100.7 million shares of common stock for the three and nine months ended September 30, 2003, respectively, were excluded from the calculation of diluted weighted average shares because of their antidilutive effect. The effect of our senior convertible debt, assumed in connection with our acquisition of Documentum, Inc., on the calculation of diluted net income per weighted average share for the three and nine months ended September 30, 2004 was calculated using the “if converted” method as required by FAS No. 128, “Earnings per Share.”


7.	Commitments and Contingencies


	Line of Credit

We have available for use a credit line of $50.0 million in the United States. As of September 30, 2004, we had no borrowings outstanding on the line of credit. The credit line bears interest at the bank’s base rate and requires us, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. In the event the covenants are not met, the lender may require us to provide collateral to secure the outstanding balance. At September 30, 2004, we were in compliance with the covenants.


	Litigation

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

We are a party (either as plaintiff or defendant) to various other patent litigation matters, including certain matters which we assumed in connection with our acquisitions of LEGATO Systems, Inc. and VMware.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


7.	Commitments and Contingencies (Continued)

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.


8.	Segment Information

We operate in the following segments: information storage products, information storage services, EMC Software Group products and services, VMware products and services and other businesses. Our management makes financial decisions and allocates resources based on revenues and gross profit achieved at the segment level. We do 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.

In July 2004, we revised our segments and established the EMC Software Group products and services segment. The EMC Software Group products and services segment includes the LEGATO products and services revenues and the Documentum products and services revenues that were historically presented in separate segments. The EMC Software Group products and services segment also includes EMC multi-platform license revenues and related software maintenance revenues that were historically included in our information storage products and information storage services segments. Prior period segment information has been restated to conform to the current presentation.

The revenue components and gross profit attributable to these segments are set forth in the following tables (tables in thousands, except percentages):


								EMC Software
		Information			Information			Group			VMware
		Storage			Storage			Products and			Products and			Other
For the Three Months Ended		Products			Services			Services			Services			Businesses			Consolidated

September 30, 2004
Systems revenues		$	948,938		$	—		$	—		$	—		$	—		$	948,938
Software revenues			275,851			—			212,383			49,746			—			537,980
Services revenues			—			378,284			138,500			10,874			14,303			541,961

	Total revenues	$	1,224,789		$	378,284		$	350,883		$	60,620		$	14,303		$	2,028,879

Gross profit		$	517,400		$	192,872		$	277,033		$	48,722		$	7,174		$	1,043,201
Gross profit percentage			42.2	%		51.0	%		79.0	%		80.4	%		50.2	%		51.4	%
September 30, 2003
Systems revenues		$	801,075		$	—		$	—		$	—		$	—		$	801,075
Software revenues			228,994			—			115,590			—			—			344,584
Services revenues			—			313,548			27,565			—			24,075			365,188

	Total revenues	$	1,030,069		$	313,548		$	143,155		$	—		$	24,075		$	1,510,847

Gross profit		$	386,789		$	156,009		$	119,663		$	—		$	12,656		$	675,117
Gross profit percentage			37.5	%		49.8	%		83.6	%		—			52.6	%		44.7	%

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


8.	Segment Information (Continued)


								EMC Software
		Information			Information			Group			VMware
		Storage			Storage			Products and			Products and			Other
For the Nine Months Ended		Products			Services			Services			Services			Businesses			Consolidated

September 30, 2004
Systems revenues		$	2,774,124		$	—		$	—		$	—		$	—		$	2,774,124
Software revenues			790,153			—			635,287			121,729			—			1,547,169
Services revenues			—			1,081,959			391,920			25,383			51,137			1,550,399

	Total revenues	$	3,564,277		$	1,081,959		$	1,027,207		$	147,112		$	51,137		$	5,871,692

Gross profit		$	1,485,671		$	549,781		$	800,595		$	115,658		$	27,090		$	2,978,795
Gross profit percentage			41.7	%		50.8	%		77.9	%		78.6	%		53.0	%		50.7	%
September 30, 2003
Systems revenues		$	2,357,276		$	—		$	—		$	—		$	—		$	2,357,276
Software revenues			640,246			—			324,178			—			—			964,424
Services revenues			—			901,124			74,384			—			77,090			1,052,598

	Total revenues	$	2,997,522		$	901,124		$	398,562		$	—		$	77,090		$	4,374,298

Gross profit		$	1,112,650		$	435,730		$	328,082		$	—		$	40,558		$	1,917,020
Gross profit percentage			37.1	%		48.4	%		82.3	%		—			52.6	%		43.8	%

Our revenue is attributed to geographic areas according to the location of customers. Revenues by geographic area are set forth in the following table (table in thousands):



		For the Three Months Ended				For the Nine Months Ended

		September 30,		September 30,		September 30,		September 30,
		2004		2003		2004		2003

Revenues:
United States		$	1,171,291	$	901,959	$	3,329,386	$	2,599,523
Canada			27,171		19,492		84,878		82,346
Europe, Middle East, Africa			549,836		382,226		1,657,135		1,118,371
Asia Pacific			232,229		172,763		674,737		486,667
Latin America and Mexico			48,352		34,407		125,556		87,391

	Total	$	2,028,879	$	1,510,847	$	5,871,692	$	4,374,298

No single country other than the United States accounted for 10% or more of revenues during the three or nine months ended September 30, 2004 or September 30, 2003.

At September 30, 2004, long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,359.9 million in the United States and $204.4 million internationally. At December 31, 2003, the long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,405.4 million in the United States and $204.8 million internationally. No single country other than the United States accounted for 10% or more of these assets at September 30, 2004 or December 31, 2003.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


9.	Restructuring and Other Special Charges


	2004 Charges

During the first nine months of 2004, we recorded restructuring and other special charges of $32.7 million. These charges include restructuring activities, as well as IPR&D charges of $15.2 million associated with the VMware acquisition. See Note 2. The 2004 restructuring program consisted of employee termination benefits of $10.0 million and costs associated with vacating excess facilities of $0.7 million. The 2004 restructuring program impacted our information storage products, information storage services and EMC Software Group products and services segments. The 2004 restructuring program and other restructuring programs have been developed and executed on a corporate-wide basis, without regard to individual segments. These programs impact our cost of sales, selling, general and administrative expenses and research and development expenses. Segment information (Note 8) is reported only at the gross profit level. The remaining $6.8 million of charges was associated with prior restructuring programs. The expected cash impact of the 2004 restructuring charge is $10.7 million, of which $4.1 million was paid in the first nine months of 2004. The activity for the 2004 restructuring program for the three and nine months ended September 30, 2004 is presented below (tables in thousands):

Three Months Ended September 30, 2004


		Balance as of		Reductions						Balance as of
		June 30,		to the			Current			September 30,
Category		2004		Provision			Utilization			2004

Workforce reduction		$	10,072	$	(1,678	)	$	(2,295	)	$	6,099
Elimination of excess facilities			777		(66	)		(179	)		532

	Total	$	10,849	$	(1,744	)	$	(2,474	)	$	6,631

Nine Months Ended September 30, 2004


				Additions
				(Reductions)						Balance as of
		Initial		to the			Current			September 30,
Category		Provision		Provision			Utilization			2004

Workforce reduction		$	11,654	$	(1,678	)	$	(3,877	)	$	6,099
Elimination of excess facilities			—		711			(179	)		532

	Total	$	11,654	$	( 967	)	$	(4,056	)	$	6,631

The $1.7 million reversal of the provision for workforce reduction for the three months and nine months ended September 30, 2004 was attributable to a decrease in the number of individuals included in the reduction in force. The $0.7 million addition to the elimination of excess facilities provision for the nine months ended September 30, 2004 relates to charges for facilities being vacated.

The 2004 restructuring program includes a reduction in force of approximately 150 employees across our major business functions and all major geographic regions. Approximately 71% of such employees are or were based in North America, excluding Mexico, and 29% are or were based in Europe, Latin America, Mexico and the Asia Pacific region. As of September 30, 2004, approximately 120 employees have been terminated. The remaining cash expenditures relating to workforce reduction are expected to be substantially paid by the end of 2004. Amounts relating to elimination of excess facilities will be paid over the respective lease terms through 2005.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


9.	Restructuring and Other Special Charges (Continued)


	2003 Restructuring Program

In 2003, we recognized restructuring and other special charges for employee termination benefits, write-off of a duplicative software project and consolidation of excess facilities. The activity for the 2003 restructuring program for the three and nine months ended September 30, 2004 is presented below (tables in thousands):

Three Months Ended September 30, 2004


		Balance as of		Reductions						Balance as of
		June 30,		to the			Current			September 30,
Category		2004		Provision			Utilization			2004

Workforce reduction		$	6,549	$	(447	)	$	(1,080	)	$	5,022
Elimination of excess facilities			9,346		(1,870	)		(656	)		6,820

	Total	$	15,895	$	(2,317	)	$	(1,736	)	$	11,842

Nine Months Ended September 30, 2004


				Additions
		Balance as of		(Reductions)						Balance as of
		December 31,		to the			Current			September 30,
Category		2003		Provision			Utilization			2004

Workforce reduction		$	14,696	$	(1,845	)	$	(7,829	)	$	5,022
Asset impairment			—		25			(25	)		—
Elimination of excess facilities			2,262		7,897			(3,339	)		6,820

	Total	$	16,958	$	6,077		$	(11,193	)	$	11,842

The $0.4 million reversal of the provision for workforce reduction for the three months ended September 30, 2004 and $1.8 million reversal of the provision for workforce reduction for the nine months ended September 30, 2004 was attributable to finalizing severance packages for employees in foreign jurisdictions. The $1.9 million reduction to the provision for elimination of excess facilities for the three months ended September 30, 2004 relates to reduced costs incurred in closing a facility. The $7.9 million addition to the provision for elimination of excess facilities for the nine months ended September 30, 2004 relates to additional net charges for facilities being vacated.

The 2003 restructuring program included a reduction in force of approximately 200 employees across our major business functions and all major geographic regions. Approximately 55% of such employees were based in North America, excluding Mexico, and approximately 45% were based in Europe, Latin America, Mexico and the Asia Pacific region.

As of March 31, 2004, the 2003 restructuring program had been substantially completed. The expected cash impact of the charge is $25.0 million, of which $3.9 million was paid in 2003 and $9.3 million was paid in the nine months ended September 30, 2004. The remaining cash expenditures relating to workforce reductions are expected to be substantially paid by the end of 2004. Amounts related to elimination of excess facilities will be paid over the respective lease term through 2005.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


9.	Restructuring and Other Special Charges (Continued)


	Other Restructuring Programs

During the period from 1998 through 2002, we implemented several restructuring programs. The activity for these restructuring programs for the three and nine months ended September 30, 2004 is presented below (tables in thousands):

Three Months Ended September 30, 2004


				Additions
		Balance as of		(Reductions)						Balance as of
		June 30,		to the			Current			September 30,
Category		2004		Provision			Utilization			2004

Workforce reduction		$	3,094	$	(8	)	$	(212	)	$	2,874
Elimination of excess facilities			88,167		4,048			(7,863	)		84,352
Contractual and other obligations			4,417		21			(178	)		4,260

	Total	$	95,678	$	4,061		$	(8,253	)	$	91,486

Nine Months Ended September 30, 2004


				Additions
		Balance as of		(Reductions)						Balance as of
		December 31,		to the			Current			September 30,
Category		2003		Provision			Utilization			2004

Workforce reduction		$	12,442	$	(6,814	)	$	(2,754	)	$	2,874
Elimination of excess facilities			104,034		7,517			(27,199	)		84,352
Contractual and other obligations			5,701		21			(1,462	)		4,260

	Total	$	122,177	$	724		$	(31,415	)	$	91,486

For the three and nine months ended September 30, 2004, the elimination of excess facilities provision was increased due to additional charges on vacated facilities. For the nine months ended September 30, 2004, the workforce reduction provision was reduced due to the favorable resolution of certain executive severance obligations attributable to the acquisition of Data General Corporation. Amounts relating to elimination of excess facilities will be paid over the respective lease terms through 2015.


	2003 Charges

During the third quarter of 2003, we recorded restructuring and other special charges of $1.7 million associated with our 2002 restructuring program. Included in the charge was $0.4 million of additional workforce reduction costs primarily attributable to finalizing severance packages for employees in foreign jurisdictions. There was also $1.3 million of additional costs associated with contractual and other obligations.

During the first nine months of 2003, we recorded restructuring and other special charges of $25.8 million. The charges consisted of $33.4 million of additional restructuring costs associated with our 2002 restructuring program, offset by a favorable resolution of liabilities incurred in connection with the acquisition of Data General totaling $7.6 million. Included in the charge was $22.5 million of additional workforce reduction costs, primarily attributable to finalizing severance packages for employees in foreign jurisdictions. There was also $9.6 million of additional costs associated with excess facilities being vacated and $1.3 million associated with contractual and other obligations.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


10.	Retirement Plans and Retiree Medical Benefits


	Defined Benefit Pension Plans

We have a noncontributory defined benefit pension plan which was assumed as part of our acquisition of Data General in 1999, which covers substantially all former Data General employees located in the U.S. In addition, certain of the former Data General foreign subsidiaries also have retirement plans covering substantially all of their employees. All of these plans have been frozen; therefore, such employees no longer accrue pension benefits for future services.

Benefits under these plans are generally based on either career average or final average salaries and creditable years of service as defined in the plans. The annual cost for these plans is determined using the projected unit credit actuarial cost method that includes actuarial assumptions and estimates which are subject to change. Prior service cost is amortized over the average remaining service period of employees expected to receive benefits under these plans. Funds contributed to the plans are invested primarily in common stock, bonds and cash equivalent securities.

The components of net periodic benefit cost of the Data General U.S. pension plan are as follows (tables in thousands):



	For the Three Months Ended

	September 30,			September 30,
	2004			2003

Interest cost	$	4,617		$	4,460
Expected return on plan assets		(6,625	)		(5,479	)
Amortization of transition asset		(213	)		(213	)
Recognized actuarial loss		1,372			1,941
Curtailment, net of settlements		—			11

Net periodic benefit cost (credit)	$	(849	)	$	720



	For the Nine Months Ended

	September 30,			September 30,
	2004			2003

Interest cost	$	13,851		$	13,380
Expected return on plan assets		(19,875	)		(16,437	)
Amortization of transition asset		(641	)		(639	)
Recognized actuarial loss		4,116			5,823
Curtailment, net of settlements		—			33

Net periodic benefit cost (credit)	$	(2,549	)	$	2,160


	Post-Retirement Medical and Life Insurance Plan

Our post-retirement benefit plan, which was assumed in connection with the Data General acquisition, provides certain medical and life insurance benefits for retired former Data General employees. With the exception of certain participants who retired prior to 1986, the medical benefit plan requires monthly contributions by retired participants in an amount equal to insured equivalent costs less a fixed EMC contribution which is dependent on the participant’s length of service and Medicare eligibility. Benefits are continued to dependents of eligible retiree participants for 39 weeks after the death of the retiree. The life insurance benefit plan is noncontributory. Funds contributed to the plan are invested primarily in common stocks, mutual funds and cash equivalent securities.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


10.	Retirement Plans and Retiree Medical Benefits (Continued)

The components of net periodic benefit cost of the plan are as follows (tables in thousands):



	For the Three Months Ended

	September 30,			September 30,
	2004			2003

Interest cost	$	69		$	76
Expected return on plan assets		(8	)		(6	)
Amortization of transition asset		(25	)		(25	)
Recognized actuarial gain		(11	)		(14	)

Net periodic benefit cost	$	25		$	31



	For the Nine Months Ended

	September 30,			September 30,
	2004			2003

Interest cost	$	207		$	228
Expected return on plan assets		(24	)		(18	)
Amortization of transition asset		(75	)		(75	)
Recognized actuarial gain		(33	)		(42	)

Net periodic benefit cost	$	75		$	93


11.	Stockholders’ Equity


	Common Stock Repurchase Program

In May 2001, our Board of Directors authorized the repurchase of up to 50.0 million shares of common stock. In October 2002, the Board of Directors authorized the repurchase of an additional 250.0 million shares of common stock. We repurchased 10.4 million shares at a cost of $107.9 million during the three months ended September 30, 2004 and 37.0 million shares at a cost of $417.6 million during the nine months ended September 30, 2004. As of September 30, 2004, we had reacquired a total of 99.1 million shares at a cost of $926.7 million.

On July 1, 2004, the Massachusetts Business Corporation Act (“MBCA”) became effective and eliminated treasury shares. Under the MBCA, shares repurchased by Massachusetts corporations constitute authorized but unissued shares. As a result, all of our former treasury shares were automatically converted to unissued shares on July 1, 2004 and have been accounted for as a reduction of common stock (at par value) and additional paid-in capital. As of September 30, 2004, common stock and additional paid-in capital have been reduced by $1.0 and $925.7 million, respectively.


	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 our 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 2004, our stockholders approved an amendment to the 1989 Plan to increase the number of shares available for grant under the 1989 Plan to 98.0 million shares from 73.0 million shares.

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


11.	Stockholders’ Equity (Continued)


	Stock Plan

The EMC Corporation 2003 Stock Plan (the “2003 Plan”) provides for the grant of stock options, restricted stock and restricted stock units. In May 2004, our stockholders approved an amendment to the 2003 Plan to increase the number of shares available for grant under the 2003 Plan to 100.0 million shares from 50.0 million shares and to allow awards of restricted stock and restricted stock units to be granted to non-employee Directors. No more than 20.0 million shares of common stock may be issued pursuant to awards of restricted stock or restricted stock units.


12.	Income Taxes

For the three months ended September 30, 2004, our effective income tax rate was 29.0% and for the nine months ended September 30, 2004, our effective income tax rate was 29.6%. The effective income tax rate is based upon the estimated income (loss) for the year, the composition of the income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the three and nine months ended September 30, 2004, the effective tax rate varied from the statutory tax rate primarily as a result of the mix of income attributable to foreign versus domestic jurisdictions. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States. Partially offsetting this benefit for the nine months ended September 30, 2004 were non-deductible IPR&D charges of $15.2 million incurred in connection with the VMware acquisition. We did not derive a tax benefit from these charges.

For the three months ended September 30, 2003, the effective rate of benefit was 5.1%. For the nine months ended September 30, 2003, the effective income tax rate was 16.5%. For the three and nine months ended September 30, 2003, the effective tax rate varied from the statutory tax rate primarily as a result of the favorable resolution of a series of tax audits which aggregated $53.6 million. As a result, an income tax benefit of $7.7 million was recognized in the three months ended September 30, 2003. In addition, the mix of income attributable to foreign jurisdictions favorably impacted the rate.


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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 2, 2004. The following discussion contains forward-looking statements, within the meaning of the Federal securities laws, about our business and prospects, including without limitation statements regarding the following: our revenues, our operating income as a percentage of revenues, our overall gross margin percentage, our research and development (“R&D”) expenses, our selling, general and administrative (“SG&A”) expenses, our purchase of additional shares of our common stock, our ability to finance our on-going operations, our introduction of new and enhanced products and service offerings, our expansion of distribution channels, our investment income and our income tax rate. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “plans,” “intends,” “expects,” “goals” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Our future results may differ materially from our past results and from those projected in the forward-looking statements due to various uncertainties and risks, including those described in “FACTORS THAT MAY AFFECT FUTURE RESULTS” beginning on page 37. We disclaim any obligation to update any forward-looking statements contained herein after the date of this Quarterly Report.

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

INTRODUCTION

We generate revenue through the sale, license and lease of products and services that help our customers manage their information, from the time of its creation to the archival and eventual disposal, through a strategy for aligning their IT infrastructures with the needs of their business based on information’s changing value. We refer to this strategy as information lifecycle management. Our financial objective is to achieve profitable growth. Management believes that by providing a combination of systems, software and services to meet customers’ demand for information lifecycle management, we will be able to further increase revenues. Our operating income as a percentage of revenues increased from 4.4% for the first nine months of 2003 to 11.6% for the first nine months of 2004. We believe that by increasing revenues and further controlling costs, we will be able to continue to improve operating income as a percentage of revenues. Our efforts in 2004 have been and will continue to be primarily focused on expanding our portfolio of offerings to satisfy our customers’ information lifecycle management requirements. This includes additional investments in R&D and the introduction of new and enhanced product and service offerings, with a goal of increasing our market share. To further increase revenues, we are also expanding our distribution channels.

In July 2004, we revised our segments and established the EMC Software Group products and services segment. The EMC Software Group products and services segment includes LEGATO products and services revenues, Documentum products and services revenues and EMC multi-platform software license and related software maintenance revenues.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

Results of Operations— Third Quarter of 2004 Compared to Third Quarter of 2003


	*Revenues*

The following table presents revenues by our segments. Certain columns may not add due to rounding.



		For the Three Months Ended

		September 30,		September 30,
		2004		2003		$ Change			% Change

Information storage products		$	1,224.8	$	1,030.1	$	194.7			19	%
Information storage services			378.3		313.5		64.8			21
EMC Software Group products and services			350.9		143.2		207.7			145
VMware products and services			60.6		—		60.6			—
Other businesses			14.3		24.1		(9.8	)		41

	Total revenues	$	2,028.9	$	1,510.8	$	518.1			34	%

Information storage products revenues include information storage systems and information storage software revenues. Information storage systems revenues were $948.9 in the third quarter of 2004, compared to $801.1 in the third quarter of 2003, representing an increase of $147.8, or 18%. The increase was due to greater demand for these products attributable to a broadened product portfolio, increased demand for IT infrastructure and new and enhanced distribution channels, partially offset by price declines. Information storage software revenues were $275.9 in the third quarter of 2004, compared to $229.0 in the third quarter of 2003, representing an increase of $46.9, or 20%. Information storage software revenues consist of platform-based software revenues. The increase in information storage software revenues was attributable to an expanded product offering and a greater demand for software to manage increasingly complex high-end and midrange networked storage environments.

Information storage services revenues increased due to increased demand for software and hardware maintenance contracts associated with the increase in sales of information storage products. Additionally, increased demand for professional services, largely to support and implement information lifecycle management based solutions, contributed to the increase. Software and hardware maintenance accounted for 53.3% of total information storage services revenues in the third quarter of 2004 compared to 50.3% in the third quarter of 2003. Professional services accounted for 46.7% of total information storage services revenues in the third quarter of 2004 compared to 49.7% in the third quarter of 2003.

The EMC Software Group products and services segment was established in July 2004. The EMC Software Group products and services revenues include LEGATO products and services revenues and Documentum products and services revenues that were historically presented in separate segments. The EMC Software Group products and services revenues also include EMC multi-platform software licenses and related software maintenance revenues that were historically included in our information storage products and information storage services segments. The increase in the EMC Software Group products and services revenues was attributable to the incremental revenue related to the acquisitions of Documentum, Inc. and LEGATO Systems, Inc. and greater demand for multi-platform software products.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

The VMware products and services segment was established as a result of our acquisition of VMware in January 2004. VMware’s technology enables multiple operating systems to run simultaneously and independently on the same Intel-based server or workstation and move live applications across systems without any business disruption. VMware product and services revenues were $60.6 in the third quarter of 2004.

Other businesses revenues consist of revenues from AViiON maintenance services. These revenues are expected to continue to decline in future years as we have discontinued selling AViiON servers.

Revenues on sales into the North American markets, excluding Mexico, were $1,198.5 in the third quarter of 2004, compared to $921.5 in the third quarter of 2003, representing an increase of $277.0, or 30%. Revenues on sales into markets other than North America, excluding Mexico, increased to $830.4 in the third quarter of 2004 from $589.4 in the third quarter of 2003, representing an increase of $241.0, or 41%. Revenues on sales into markets other than North America, excluding Mexico, accounted for 41% of total revenues in the third quarter of 2004 compared to 39% in the third quarter of 2003. Revenues on sales into the European, Middle East and African markets were $549.8 in the third quarter of 2004, compared to $382.2 in the third quarter of 2003, representing an increase of $167.6, or 44%. Revenues on sales into the Asia Pacific markets were $232.2 in the third quarter of 2004, compared to $172.8 in the third quarter of 2003, representing an increase of $59.4, or 34%. Revenues on sales into the Latin American markets and Mexico were $48.4 in the third quarter of 2004, compared to $34.4 in the third quarter of 2003, representing an increase of $14.0, or 41%. The increase in revenues in these geographies in the third quarter of 2004 compared to the third quarter of 2003 was attributable to greater demand for our products and services. Also contributing to the increase were revenues generated from the acquisitions of Documentum, LEGATO and VMware, new and enhanced distribution channels, broadened product offerings and favorable foreign currency exchange rates.

Changes in exchange rates in the third quarter of 2004 compared to the third quarter of 2003 positively impacted consolidated revenues by approximately 3.1%. The impact was most significant in the European market, primarily the United Kingdom, Germany, Italy and France.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)


	*Costs and Expenses*

The following table presents our costs and expenses and net income. Certain columns may not add due to rounding.



		For the Three Months Ended

		September 30,		September 30,
		2004		2003			$ Change			% Change

Cost of revenue:
Information storage products		$	707.4	$	643.3		$	64.1			10	%
Information storage services			185.4		157.5			27.9			18
EMC Software Group products and services			73.9		23.5			50.4			214
VMware products and services			11.9		—			11.9			—
Other businesses			7.1		11.4			(4.3	)		38

	Total cost of revenue		985.7		835.7			150.0			18

Gross margins:
Information storage products			517.4		386.8			130.6			34
Information storage services			192.9		156.0			36.9			24
EMC Software Group products and services			277.0		119.7			157.3			131
VMware products and services			48.7		—			48.7			—
Other businesses			7.2		12.7			(5.5	)		43

	Total gross margins		1,043.2		675.1			368.1			55

Operating expenses:
Research and development			215.7		172.9			42.8			25
Selling, general and administrative			557.5		390.2			167.3			43
Restructuring and other special charges			—		1.7			(1.7	)		100

	Total operating expenses		773.2		564.7			208.5			37

Operating income			270.0		110.4			159.6			145
Investment income, interest expense, and other income (expense), net			36.9		41.0			(4.1	)		10

Income before income taxes			307.0		151.4			155.6			103
Income tax provision (benefit)			89.0		(7.7	)		96.7			N/A

Net income		$	218.0	$	159.1		$	58.9			37	%


	*• Gross Margins*

Information storage products gross margin percentage increased to 42.2% in the third quarter of 2004 from 37.5% in the third quarter of 2003. The increase in the gross margin percentage was attributable to increased sales volume over a lower fixed cost component of cost of sales.

The gross margin percentage for information storage services increased to 51.0% in the third quarter of 2004 compared to 49.8% in the third quarter of 2003. The increase in the gross margin percentage was primarily attributable to a greater proportion of revenues derived from the sale of software and hardware maintenance contracts compared to professional services revenues. Maintenance revenues provide a higher gross margin than professional services revenues.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

The gross margin percentage for the EMC Software Group products and services segment decreased to 79.0% in the third quarter of 2004 compared to 83.6% in the third quarter of 2003. The decrease in the gross margin percentage was attributable to intangible amortization associated with the acquisitions of LEGATO and Documentum. Additionally, the decrease in the gross margin percentage was attributable to a higher proportion of software maintenance and professional services revenues and a lower proportion of software license revenues in the third quarter of 2004 compared to the third quarter of 2003. This shift in mix was attributable to the acquisitions of LEGATO and Documentum. Software license revenues have a higher gross margin than software maintenance and professional services revenues.

The gross margin percentage for the VMware products and services segment was 80.4% in the third quarter of 2004.

The gross margin percentage for other businesses decreased to 50.2% in the third quarter of 2004 compared to 52.6% in the third quarter of 2003. The decrease in the gross margin percentage resulted from declining revenues in this segment as the volume of maintenance contracts decreased.

Our overall gross margin percentage was 51.4% in the third quarter of 2004 compared to 44.7% in the third quarter of 2003. We anticipate our overall gross margin percentage will exceed 50.0% for 2004. However, if sales volumes decline or competitive pricing pressures increase, gross margins may be negatively impacted.


	*• Research and Development*

As a percentage of revenues, R&D expenses were 10.6% and 11.4% in the third quarters of 2004 and 2003, respectively. In addition, we spent $40.2 and $27.2 in the third quarters of 2004 and 2003, respectively, on software development, which costs were capitalized. R&D spending includes enhancements to our software and information storage systems. The increase in R&D expenses was primarily attributable to the increased salaries and related costs from the LEGATO, Documentum and VMware acquisitions. We expect the amount of R&D expenses to continue to be higher in 2004 compared to 2003, primarily due to the R&D spending of LEGATO, Documentum and VMware. As a percentage of revenues, we expect R&D expenses to be around 11% for 2004. This percentage may vary, however, depending primarily on our 2004 revenues.


	*• Selling, General and Administrative*

As a percentage of revenues, SG&A expenses were 27.5% and 25.8% in the third quarters of 2004 and 2003, respectively. The increase in SG&A expenses was primarily attributable to the increased salaries and related costs from the LEGATO, Documentum and VMware acquisitions. We expect the amount of SG&A expenses to continue to be higher in 2004 compared to 2003, primarily due to the SG&A spending of LEGATO, Documentum and VMware. As a percentage of revenues, we expect SG&A expenses to be between 26% and 29% for 2004. This percentage may vary, however, depending primarily on our 2004 revenues.


	*• Restructuring and Other Special Charges*

In the third quarter of 2004, we adjusted the provisions associated with prior period restructuring charges. We decreased by $1.7 the provision for workforce reductions associated with the 2004 restructuring program. The decrease was attributed to a reduced number of individuals impacted by the reduction in force. There were also adjustments associated with the 2003 restructuring program, consisting of a reduction of $1.9 of costs associated with vacated facilities attributable to reduced costs incurred in closing of a facility and a $0.4 reversal to the provision for workforce reduction attributable to finalizing severance packages for employees in foreign jurisdictions. Additionally, during the quarter, we recorded a $4.0 charge associated with prior restructuring programs, consisting of additional costs for vacated facilities. The net effect of these adjustments had no impact on our results of operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

The 2004 restructuring program includes a reduction in force of approximately 150 employees across our major business functions and all major geographic regions. Approximately 71% of such employees are or were based in North America, excluding Mexico, and 29% are or were based in Europe, Latin America, Mexico and the Asia Pacific region. As of September 30, 2004, approximately 120 employees have been terminated. The expected cash impact of the 2004 restructuring charge is $10.7, of which $2.5 was paid in the third quarter of 2004. The remaining cash expenditures relating to workforce reduction are expected to be substantially paid by the end of 2004. Amounts relating to elimination of excess facilities will be paid over the respective lease terms through 2005.

During the third quarter of 2003, we recorded restructuring and other special charges of $1.7 associated with our 2002 restructuring program. Included in the charge was $1.3 of additional costs associated with contractual and other obligations. There was also $0.4 of additional workforce reduction costs primarily attributable to finalizing severance packages for employees in foreign jurisdictions.


	• *Investment Income*

Investment income decreased to $38.4 in the third quarter of 2004 from $45.5 in the third quarter of 2003. Investment income was earned primarily from investments in cash and cash equivalents, short and long-term investments and sales-type leases. Investment income decreased in the third quarter of 2004 compared to the third quarter of 2003 due to losses from the sale of investments, partially offset by higher yields on higher outstanding investment balances. The weighted average return on investments, excluding realized gains and losses, was 2.7% and 2.5% in the third quarters of 2004 and 2003, respectively. Realized gains (losses) were $(5.1) and $8.7 in the third quarters of 2004 and 2003, respectively. We expect our investment income to be lower in 2004 compared to 2003.


	• *Other Income, net*

Other income, net was $0.5 in the third quarter of 2004, compared to other expense, net of $3.8 in the third quarter of 2003. The change was primarily due to gains on the sale of strategic investments in the third quarter of 2004.


	• *Provision (Benefit) for Income Taxes*

In the third quarter of 2004, we reported pre-tax income of $307.0 resulting in a provision for income taxes of $89.0. In the third quarter of 2003, we reported pre-tax income of $151.4 and a corresponding benefit of income taxes of $7.7. The effective income tax rate was 29.0% in the third quarter of 2004 compared to an effective rate of benefit of 5.1% in the third quarter of 2003. The effective income tax rate is based upon the estimated income (loss) for the year, the composition of the income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the quarter ended September 30, 2004, the effective tax rate varied from the statutory rate primarily as a result of the mix of income attributable to foreign versus domestic jurisdictions. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States. For the quarter ended September 30, 2003, the effective tax rate varied from the statutory rate primarily as a result of the overall favorable resolution of international tax matters which aggregated approximately $53.6. In addition, the mix of income attributable to foreign jurisdictions favorably impacted the rate. We expect our tax rate to be approximately 29% for 2004; however, the rate may vary depending upon the income for the year, the composition of the income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits.

In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA contains a series of provisions, several of which are pertinent to us. The AJCA creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income abroad by providing an 85% dividends

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

received deduction for certain dividends from controlled foreign corporations. It has been our practice to permanently reinvest all foreign earnings into our foreign operations and we currently still plan to continue to reinvest our foreign earnings permanently into our foreign operations. Should we determine that we plan to repatriate any of our foreign earnings, we will be required to establish an income tax expense and related tax liability on such earnings.

The AJCA also provides U.S. corporations with an income tax deduction equal to a stipulated percentage of qualified income from domestic production activities (“qualified activities”). The deduction, which cannot exceed 50% of annual wages paid, is phased in as follows: 3% of qualified activities in 2005 and 2006; 6% in 2007 through 2009; and 9% in 2010 and thereafter. The impact of the AJCA on our tax rate for 2005 is not yet known.

Results of Operations— First Nine Months of 2004 Compared to First Nine Months of 2003


	*Revenues*

The following table presents revenues by our segments. Certain columns may not add due to rounding.



		For the Nine Months Ended

		September 30,		September 30,
		2004		2003		$ Change			% Change

Information storage products		$	3,564.3	$	2,997.5	$	566.8			19	%
Information storage services			1,082.0		901.1		180.9			20
EMC Software Group products and services			1,027.2		398.6		628.6			158
VMware products and services			147.1		—		147.1			—
Other businesses			51.1		77.1		(26.0	)		34

	Total revenues	$	5,871.7	$	4,374.3	$	1,497.4			34	%

Information storage products revenues include information storage systems and information storage software revenues. Information storage systems revenues were $2,774.1 in the first nine months of 2004, compared to $2,357.3 in the first nine months of 2003, representing an increase of $416.8, or 18%. The increase was due to greater demand for these products attributable to a broadened product portfolio, increased demand for IT infrastructure and new and enhanced distribution channels, partially offset by price declines. Information storage software revenues were $790.2 in the first nine months of 2004, compared to $640.2 in the first nine months of 2003, representing an increase of $150.0, or 23%. Information storage software revenues consist of platform-based software revenue. The increase in information storage software revenue was attributable to an expanded product offering and greater demand for software to manage increasingly complex high-end and midrange networked storage environments.

Information storage services revenues increased due to increased demand for software and hardware maintenance contracts associated with the increase in sales of information storage products. Additionally, increased demand for professional services, largely to support and implement information lifecycle management based solutions, contributed to the increase. Software and hardware maintenance accounted for 51.2% of total information storage services revenues in the first nine months of 2004 compared to 50.2% in the first nine months of 2003. Professional services accounted for 48.8% of total information storage services revenues in the first nine months of 2004 compared to 49.8% in the first nine months of 2003.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

The EMC Software Group products and services segment was established in July 2004. The EMC Software Group products and services revenues include LEGATO products and services revenues and Documentum products and services revenues that were historically presented in separate segments. EMC Software Group products and services revenues also include EMC multi-platform software licenses and related software maintenance revenues that were historically included in our information storage products and information storage services segments. The increase in the EMC Software Group products and services revenues was attributable to the incremental revenue related to the acquisitions of Documentum and LEGATO and greater demand for EMC multi-platform software products.

The VMware products and services segment was established as a result of the acquisition of VMware in January 2004. VMware’s technology enables multiple operating systems to run simultaneously and independently on the same Intel-based server or workstation and move live applications across systems without any business disruption. From the date of acquisition (January 9, 2004) to September 30, 2004, VMware product and services revenues were $147.1.

Other businesses revenues consist of revenues from AViiON maintenance services. These revenues are expected to continue to decline in future years as we have discontinued selling AViiON servers.

Revenues on sales into the North American markets, excluding Mexico, were $3,414.3 in the first nine months of 2004, compared to $2,681.9 in the first nine months of 2003, representing an increase of $732.4, or 27%. Revenues on sales into markets other than North America, excluding Mexico, increased to $2,457.4 in the first nine months of 2004 from $1,692.4 in the first nine months of 2003, representing an increase of $765.0, or 45%. Revenues on sales into markets other than North America, excluding Mexico, accounted for 42% of total revenues in the first nine months of 2004 compared to 39% in the first nine months of 2003. Revenues on sales into the European, Middle East and African markets were $1,657.1 in the first nine months of 2004, compared to $1,118.4 in the first nine months of 2003, representing an increase of $538.7, or 48%. Revenues on sales into the Asia Pacific markets were $674.7 in the first nine months of 2004, compared to $486.7 in the first nine months of 2003, representing an increase of $188.0, or 39%. Revenues on sales into the Latin American markets and Mexico were $125.6 in the first nine months of 2004, compared to $87.4 in the first nine months of 2003, representing an increase of $38.2, or 44%. The increase in revenues in these geographies in the first nine months of 2004 compared to the first nine months of 2003 was attributable to greater demand for our products and services. Also contributing to the increase were revenues generated from the acquisitions of Documentum, LEGATO and VMware, new and enhanced distribution channels, broadened product offerings and favorable foreign currency exchange rates.

Changes in exchange rates in the first nine months of 2004 compared to the first nine months of 2003 positively impacted consolidated revenues by approximately 4.2%. The impact was most significant in the European market, primarily the United Kingdom, Germany, Italy and France.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

Costs and Expenses

The following table presents our costs and expenses and net income. Certain columns may not add due to rounding.



		For the Nine Months Ended

		September 30,		September 30,
		2004		2003		$ Change			% Change

Cost of revenue:
Information storage products		$	2,078.6	$	1,884.9	$	193.7			10	%
Information storage services			532.2		465.4		66.8			14
EMC Software Group products and services			226.6		70.5		156.1			221
VMware products and services			31.5		—		31.5			—
Other businesses			24.0		36.5		(12.5	)		34

	Total cost of revenue		2,892.9		2,457.3		435.6			18

Gross margins:
Information storage products			1,485.7		1,112.7		373.0			34
Information storage services			549.8		435.7		114.1			26
EMC Software Group products and services			800.6		328.1		472.5			144
VMware products and services			115.7		—		115.7			—
Other businesses			27.1		40.6		(13.5	)		33

	Total gross margins		2,978.8		1,917.0		1,061.8			55

Operating expenses:
Research and development			625.4		530.1		95.3			18
Selling, general and administrative			1,640.9		1,168.0		472.9			40
Restructuring and other special charges			32.7		25.8		6.9			27

	Total operating expenses		2,299.0		1,723.8		575.2			33

Operating income			679.8		193.2		486.6			252
Investment income, interest expense, and other expense, net			102.3		137.3		(35.0	)		25

Income before income taxes			782.1		330.5		451.6			137
Income tax provision			231.4		54.4		177.0			325

Net income		$	550.6	$	276.0	$	274.6			99	%


	*• Gross Margins*

Information storage products gross margin percentage increased to 41.7% in the first nine months of 2004 from 37.1% in the first nine months of 2003. The increase in the gross margin percentage was attributable to increased sales volume over a lower fixed cost component of cost of sales.

The gross margin percentage for information storage services increased to 50.8% in the first nine months of 2004 compared to 48.4% in the first nine months of 2003. The increase in the gross margin percentage was primarily attributable to a greater proportion of revenues derived from the sale of software and hardware maintenance contracts compared to professional services revenues. Maintenance revenues provide a higher gross margin than professional services revenues.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

The gross margin percentage for the EMC Software Group products and services segment decreased to 77.9% in the first nine months of 2004 compared to 82.3% in the first nine months of 2003. The decrease in the gross margin percentage was attributable to intangible amortization associated with the acquisitions of LEGATO and Documentum. Additionally, the decrease in the gross margin percentage was attributable to a higher proportion of software maintenance and professional services revenues as compared to software license revenues in the first nine months of 2004 compared to the first nine months of 2003. This shift in mix was attributable to the acquisitions of LEGATO and Documentum. Software license revenues have a higher gross margin than software maintenance and professional services revenues.

The gross margin percentage for the VMware products and services segment was 78.6% in the first nine months of 2004.

The gross margin percentage for other businesses increased to 53.0% in the first nine months of 2004 compared to 52.6% in the first nine months of 2003. The increase in the gross margin percentage resulted from reducing costs in this segment as the volume of maintenance contracts decreased.

Our overall gross margin percentage was 50.7% in the first nine months of 2004 compared to 43.8% in the first nine months of 2003. We anticipate our overall gross margin percentage will exceed 50.0% for 2004. However, if sales volumes decline or competitive pricing pressures increase, gross margins may be negatively impacted.


	*• Research and Development*

As a percentage of revenues, R&D expenses were 10.7% and 12.1% in the first nine months of 2004 and 2003, respectively. In addition, we spent $126.6 and $84.4 in the first nine months of 2004 and 2003, respectively, on software development, which costs were capitalized. R&D spending includes enhancements to our software and information storage systems. The increase in R&D expenses was primarily attributable to the increased salaries and related costs from the LEGATO, Documentum and VMware acquisitions. We expect the amount of R&D expenses to continue to be higher in 2004 compared to 2003, primarily due to the R&D spending of LEGATO, Documentum and VMware. As a percentage of revenues, we expect R&D expenses to be around 11% for 2004. This percentage may vary, however, depending primarily on our 2004 revenues.


	*• Selling, General and Administrative*

As a percentage of revenues, SG&A expenses were 27.9% and 26.7% in the first nine months of 2004 and 2003, respectively. The increase in SG&A expenses was primarily attributable to the increased salaries and related costs from the LEGATO, Documentum and VMware acquisitions. We expect the amount of SG&A expenses to continue to be higher in 2004 compared to 2003, primarily due to the SG&A spending of LEGATO, Documentum and VMware. As a percentage of revenues, we expect SG&A expenses to be between 26% and 29% for 2004. This percentage may vary, however, depending primarily on our 2004 revenues.


	*• Restructuring and Other Special Charges*

During the first nine months of 2004, we recorded restructuring and other special charges of $32.7. These charges include restructuring activities, as well as IPR&D charges of $15.2 associated with the VMware acquisition. The 2004 restructuring program consisted of employee termination benefits of $10.0 and costs associated with excess facilities being vacated of $0.7. The 2004 restructuring program impacted our information storage products, information storage services and EMC Software Group products and services segments. The 2004 restructuring program and other restructuring programs have been developed and executed on a corporate-wide basis, without regard to individual segments. These programs impact our cost of sales, selling, general and administrative expenses and research and development expenses. Segment information is reported only at the gross profit level. The remaining $6.8 of charges was associated with prior restructuring programs.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

The 2004 restructuring program includes a reduction in force of approximately 150 employees across our major business functions and all major geographic regions. Approximately 71% of such employees are or were based in North America, excluding Mexico, and 29% are or were based in Europe, Latin America, Mexico and the Asia Pacific region. As of September 30, 2004, approximately 120 employees have been terminated. The expected cash impact of the 2004 restructuring charge is $10.7, of which $4.1 was paid in the first nine months of 2004. The remaining cash expenditures relating to workforce reduction are expected to be substantially paid by the end of 2004. Amounts relating to elimination of excess facilities will be paid over the respective lease terms through 2005.

During the first nine months of 2003, we recorded restructuring and other special charges of $25.8. The charges consisted of $33.4 of additional restructuring costs associated with our 2002 restructuring program, offset by a favorable resolution of liabilities incurred in connection with the acquisition of Data General totaling $7.6. Included in the charge was $22.5 of additional workforce reduction costs primarily attributable to finalizing severance packages for employees in foreign jurisdictions. There was also $9.6 of additional costs associated with excess facilities being vacated and $1.3 associated with contractual and other obligations.


	*• Investment Income*

Investment income decreased to $115.4 in the first nine months of 2004, from $149.8 in the first nine months of 2003. Investment income was earned primarily from investments in cash and cash equivalents, short and long-term investments and sales-type leases. Investment income decreased in the first nine months of 2004 compared to the first nine months of 2003 because of lower yields on outstanding investment balances and losses from the sale of investments. The weighted average return on investments, excluding realized gains and losses, was 2.5% and 2.8% in the first nine months of 2004 and 2003, respectively. Realized gains (losses) were $(5.3) and $30.3 in the first nine months of 2004 and 2003, respectively. As a result of the foregoing factors, we expect our investment income to be lower in 2004 compared to 2003.


	*• Other Expense, net*

Other expense, net was $7.5 in the first nine months of 2004, compared to $9.8 in the first nine months of 2003. The change is primarily due to a gain on sale of strategic investments in 2004 partially offset by increased realized foreign currency exchange losses.


	*• Provision for Income Taxes*

In the first nine months of 2004, we reported pre-tax income of $782.1 resulting in a provision for income taxes of $231.4. In the first nine months of 2003, we reported pre-tax income of $330.5 resulting in a provision of income taxes of $54.4. The effective income tax rate was 29.6% and 16.5% in the first nine months of 2004 and 2003, respectively. The effective income tax rate is based upon the estimated income (loss) for the year, the composition of the income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the nine months ended September 30, 2004, the effective tax rate varied from the statutory rate primarily as a result of the mix of income attributable to foreign versus domestic jurisdictions. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States. Partially offsetting this benefit were non-deductible IPR&D charges of $15.2 incurred in connection with the VMware acquisition. We did not derive a tax benefit from these charges. For the nine months ended September 30, 2003, the effective tax rate varied from the statutory rate primarily as a result of the favorable resolution of a series of tax audits which aggregated $53.6. Additionally, the mix of income attributable to foreign jurisdictions favorably impacted our tax rate. We expect our tax rate to be approximately 29% for 2004; however, the rate may vary depending upon the income for the year, the composition of the income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

In October 2004, the AJCA was signed into law. The AJCA contains a series of provisions, several of which are pertinent to us. The AJCA creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. It has been our practice to permanently reinvest all foreign earnings into our foreign operations and we currently still plan to continue to reinvest our foreign earnings permanently into our foreign operations. Should we determine that we plan to repatriate any of our foreign earnings, we will be required to establish an income tax expense and related tax liability on such earnings.


	*Financial Condition*

Cash and cash equivalents and short and long-term investments were $7,034.7 and $6,907.6 at September 30, 2004 and December 31, 2003, respectively, an increase of $127.1.

Cash provided by operating activities in the first nine months of 2004 was $1,453.2 compared to $1,009.9 in the first nine months of 2003. The increase in the first nine months of 2004 compared to the first nine months of 2003 was primarily attributable to improved profitability. Additionally, non-cash charges, primarily depreciation and amortization, amortization of deferred compensation and deferred income taxes, net increased in the nine month period ended September 30, 2004 compared to the nine month period ended September 30, 2003. The increases were attributable to the acquisitions of LEGATO, Documentum and VMware and the utilization of tax net operating loss carryforwards. Partially offsetting these items was a reduction in cash generated from working capital in 2004 compared to 2003.

Cash used in investing activities was $1,439.9 in the first nine months of 2004, compared to $1,016.5 in the first nine months of 2003. In 2004, we acquired all the outstanding shares of VMware for $539.9. Capital additions were $259.9 and $266.5 in the first nine months of 2004 and 2003, respectively. Net purchases and maturities of investments, consisting primarily of debt securities, were $451.3 and $625.3 in the first nine months ended 2004 and 2003, respectively.

Cash used in financing activities was $309.4 in the first nine months of 2004, compared to $73.9 in the first nine months of 2003. During the first nine months of 2004, we repurchased 37.0 million shares of our common stock at a cost of $417.6. As of September 30, 2004, we had repurchased 99.1 million of the 300.0 million shares of our common stock authorized for repurchase by our Board of Directors. We anticipate purchasing additional shares of our common stock during the remainder of 2004. Partially offsetting this use in cash was $115.3 of cash generated in the first nine months of 2004 from the exercise of stock options. In 2003, we generated $48.8 from the exercise of stock options and used $27.8 for payments of obligations.

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. We also lend certain fixed income securities to generate investment income. During the first nine months of 2004, we entered into various agreements to loan fixed income securities generally on an overnight basis. Under these securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities. The collateral is generally cash, U.S. government-backed securities or letters of credit. At September 30, 2004, there were no outstanding securities lending transactions.

We have available for use a credit line of $50.0 in the United States. As of September 30, 2004, we had no borrowings outstanding on the line of credit. The credit line bears interest at the bank’s base rate and

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

requires us, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. In the event the covenants are not met, the lender may require us to provide collateral to secure the outstanding balance. At September 30, 2004, we were in compliance with the covenants.

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

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

Critical Accounting Policies

Our consolidated financial statements are based on the selection and application of accounting principles generally accepted in the United States of America which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. Our significant accounting policies are presented within Note A to our Consolidated Financial Statements contained in our Annual Report on Form 10-K filed with the SEC on March 2, 2004.


	*• Revenue Recognition*

Revenue recognition is governed by various accounting principles, including Staff Accounting Bulletin (“SAB”), No. 104, “Revenue Recognition”; Emerging Issues Task Force, No. 00-21, “Revenue Arrangements with Multiple Deliverables”; Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition”; FAS No. 48, “Revenue Recognition When Right of Return Exists”; FAS No. 13, “Accounting for Leases”; and SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” among others. The application of the appropriate accounting principle to our revenue is dependent upon the specific transaction and whether the sale or lease includes systems, software and services or a combination of these items. As our business evolves, the mix of products and services sold will impact the timing of when revenue and related costs are recognized. Additionally, revenue recognition involves judgments, including assessments of expected returns and the likelihood of nonpayment. We analyze various factors, including a review of specific transactions, the credit-worthiness of our customers, our historical experience and market and economic conditions. Changes in judgments on these factors could materially impact the timing and amount of revenue and costs recognized. Should market or economic conditions deteriorate, our actual return experience could exceed our estimate.


	*• Warranty Costs*

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


	*• Asset Valuation*

Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, inventories, goodwill and other intangible assets. We use a variety of factors to assess valuation, depending upon the asset. Accounts and notes receivable are evaluated based upon the credit-worthiness of

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

our customers, our historical experience, the age of the receivable and current market and economic conditions. Should current market and economic conditions deteriorate, our actual bad debt experience could exceed our estimate. The recoverability of inventories is based upon the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology. Should current market and economic conditions deteriorate, our actual recovery could be less than our estimate. Other intangible assets are evaluated based upon the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any of these factors could materially impact the value of the asset. Our goodwill valuation is based upon a discounted cash flow analysis performed at the reporting unit level. The analysis factors in estimated revenue and expense growth rates. The estimates are based upon our historical experience and projections of future activity, factoring in customer demand, changes in technology and a cost structure necessary to achieve the related revenues. Changes in judgments on any of these factors could materially impact the value of the asset.


	*• Restructuring Charges*

We recognized restructuring charges in 2004, 2003 and 2002. The restructuring charges include, among other items, estimated losses on the sale of real estate, employee termination benefit costs, subletting of facilities and termination of various contracts. The amount of the actual obligations may be different than our estimates due to various factors, including market conditions and negotiations with third parties. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.


	*• Accounting for Income Taxes*

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

FACTORS THAT MAY AFFECT FUTURE RESULTS

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Federal securities laws, about our business and prospects. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures or business combinations that may be completed after the date hereof. Our future results may differ materially from our past results and from those projected in the forward-looking statements due to various uncertainties and risks, including but not limited to those set forth below, one-time events and other important factors disclosed previously and from time to time in our other filings with the SEC. We disclaim any obligation to update any forward-looking statements contained herein after the date of this Quarterly Report.

Our business could 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 were materially adversely affected in 2001 and 2002 as a result of unfavorable economic conditions. If economic and market conditions deteriorate, our business, results of operations or financial condition could be materially adversely affected.

Our business could 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 our products and services. Our operating results were materially adversely affected in 2001 and 2002 as a result of reduced IT spending. Recently, we have experienced an increase in demand for our products and services; however, delays or reductions in IT spending, domestically or internationally, could materially adversely affect demand for our products and services which could result in decreased revenues or earnings.

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

As part of our business strategy, we seek to acquire businesses that offer complementary products, services or technologies. These acquisitions, including our acquisitions of LEGATO in October 2003, Documentum in December 2003 and VMware in January 2004, are accompanied by the risks commonly encountered in an acquisition of a business, which may include, 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 failure of the acquisition to result in expected benefits, which may include benefits relating to enhanced revenues, technology, human resources, costs savings, operating efficiencies and other synergies

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

	•	the assumption of liabilities of the acquired business, including litigation-related liabilities

	•	the potential impairment of acquired assets

	•	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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)


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

	•	the potential loss of key employees of the acquired company

	•	the potential incompatibility of business cultures

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

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

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

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

Competitive pricing pressures exist in the information storage market. There also has been and may continue to be a willingness on the part of certain competitors to reduce prices or provide storage-related products or services, together with other IT 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. Moreover, certain competitors may have advantages due to vertical integration of their supply chain, which may include disk drives, microprocessors, memory components and servers.

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

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

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

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

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

Risks associated with the development and introduction of new products include delays in development and changes in data storage, networking and operating system technologies which could require us to modify existing products. Risks inherent in the transition to new products include:


	•	the difficulty in forecasting customer preferences or demand accurately

	•	the inability to expand production capacity to meet demand for new products

	•	the impact of customers’ demand for new products on the products being replaced, thereby causing a decline in sales of existing products and an excessive, obsolete supply of inventory

	•	delays in initial shipments of new products.

Further risks inherent in new product introductions include the uncertainty of price-performance relative to products of competitors, competitors’ responses to the introductions and the desire by customers to evaluate new products for extended periods of time. Our failure to introduce new or enhanced products on a timely basis, keep pace with rapid industry, technological or market changes or effectively manage the transitions to new products or new technologies could have a material adverse effect on our business, results of operations or financial condition.

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

We compete with many companies in the markets we serve, certain of which offer a broad spectrum of IT products and services and others which offer specific information storage or management products or services. Some of these companies (whether independently or by establishing alliances) may have substantially greater financial, marketing and technological resources, larger distribution capabilities, earlier access to customers and greater opportunity to address customers’ various IT requirements than us. We compete on the basis of our products’ features, performance and price as well as our services. Our failure to compete on any of these bases could affect demand for our products or services, which could have a material adverse effect on our business, results of operations or financial condition.

Companies may develop new technologies or products in advance of us or establish business models or technologies disruptive to us. Our business may be materially adversely affected by the announcement or introduction of new products, including hardware and software products, and services by our competitors, and the implementation of effective marketing or sales strategies by our competitors. The material adverse effect to our business could include a decrease in demand for our products and services and an increase in the length of our sales cycle due to customers taking longer to compare products and services and to complete their purchases.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

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

	•	accurately forecasting revenues

	•	training our sales force to sell more software and services

	•	successfully integrating new acquisitions

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

	•	controlling expenses

	•	managing our manufacturing capacity, real estate facilities and other assets

	•	executing on our plans

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

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

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

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

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

Our quarterly revenues and earnings could be materially adversely affected by uneven sales patterns and changing purchasing behaviors.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)


	•	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 six months 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

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

In addition, unanticipated changes in our customers’ purchasing behaviors such as customers taking longer to negotiate and complete their purchases or making smaller, incremental purchases based on their current needs, also make the prediction of revenues, earnings and working capital for each financial period difficult and uncertain and increase the risk of unanticipated variations in our quarterly results 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, market or sell products or services in competition with us in the future.

In addition, as we focus on new market opportunities and additional customers through our various distribution channels, including small-to-medium sized businesses, we may be required to provide different levels of service and support than we typically provided in the past. We may have difficulty managing directly

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

or indirectly through our channels these different service and support requirements and may be required to incur substantial costs to provide such services which may adversely affect our business, results of operations or financial condition.

Changes in foreign conditions could impair our international operations.

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

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

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS— (Continued)

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 conditions could be materially adversely affected if laws, regulations or standards relating to us or our products are newly implemented or changed. In addition, our compliance with existing regulations, such as the Sarbanes-Oxley Act of 2002, may have a material adverse impact on us. Under Sarbanes-Oxley, we are required to evaluate and determine the effectiveness of our internal control structure and procedures for financial reporting. Compliance with this legislation may divert management’s attention and resources and cause us to incur significant expense. Should we or our independent auditors determine that we have material weaknesses in our internal controls, our results of operations or financial condition may be materially adversely affected or our stock price may decline.

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 acquisitions, 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 been negatively affected by unfavorable global economic and market conditions. If such conditions deteriorate, our stock price could decline.


Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting us, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K filed with the SEC on March 2, 2004. Our exposure to market risks has not changed materially from that set forth in our Annual Report.


Item 4.	CONTROLS AND PROCEDURES

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

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

PART II

OTHER INFORMATION


Item 1.	Legal Proceedings


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES IN THE THIRD QUARTER OF 2004


							Maximum Number
							(or Approximate
					Total Number of		Dollar Value) of
					Shares Purchased		Shares that May Yet
	Total Number		Average		as Part of Publicly		Be Purchased
	of Shares		Price Paid		Announced Plans		Under the Plans
Period	Purchased		per Share		or Programs(1)		or Programs

July 1, 2004 – July 31, 2004		3,000,000	$	10.91		3,000,000		208,300,700
August 1, 2004 – August 31, 2004		5,300,000	$	9.92		5,300,000		203,000,700
September 1, 2004 – September 30, 2004		2,106,000	$	10.72		2,106,000		200,894,700

Total		10,406,000	$	10.37		10,406,000		200,894,700

(1)

All shares were purchased in open-market transactions pursuant to a previously announced authorization by our Board of Directors in October 2002 to repurchase 250.0 million shares of our common stock. The repurchase program does not have a termination date. In addition, in May 2001, our Board authorized the repurchase of up to 50.0 million shares of our common stock, which shares were repurchased in 2001 and 2002.


Item 6.	Exhibits

(a) Exhibits

See index to Exhibits on page 47 of this report.

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: November 3, 2004


	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 (filed herewith).
4	.1	Form of Stock Certificate. (2)
10	.1	EMC Corporation 2003 Stock Plan, as amended. (3)
10	.2	Form of Indemnification Agreement for directors and executive officers (filed herewith).
10	.3	Form of Stock Option Agreement under the EMC Corporation 2003 Stock Plan (filed herewith).
10	.4	Form of Restricted Stock Agreement under the EMC Corporation 2003 Stock Plan (filed herewith).
31	.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31	.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


(1)	Incorporated by reference to EMC Corporation’s 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 31, 1988 (No. 0-14367).

(3)	Incorporated by reference to EMC Corporation’s Definitive Proxy Statement on Schedule 14A filed March 12, 2004 (No. 033-03656).