Stock-Based Compensation

EMC Information Infrastructure Equity Plans

The EMC Corporation Amended and Restated 2003 Stock Plan (the “2003 Plan”) provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units. The exercise price for a stock option shall not be less than 100% of the fair market value of our common stock on the date of grant. Options generally become exercisable in annual installments over a period of five years after the date of grant and expire ten years after the date of grant. Incentive stock options will expire no later than ten years after the date of grant. Restricted stock is common stock that is subject to a risk of forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Restricted stock units represent the right to receive shares of common stock in the future, with the right to future delivery of the shares subject to a risk of forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Grants of restricted stock awards or restricted stock units that vest only by the passage of time will not vest fully in less than two years after the date of grant, except for grants to non-employee Directors that are not subject to this minimum two-year vesting requirement. The 2003 Plan allows us to grant up to 360.0 million shares of common stock. We recognize restricted stock awards and restricted stock units against the 2003 Plan share reserve as two shares for every one share issued in connection with such awards.

In addition to the 2003 Plan, we have four other stock option plans (the “1985 Plan,” the “1993 Plan,” the “2001 Plan” and the “1992 Directors Plan”). In May 2007, these four plans were consolidated into the 2003 Plan such that all future grants will be granted under the 2003 Plan and shares that are not issued as a result of cancellations, expirations or forfeitures, will become available for grant under the 2003 Plan.

A total of 922.4 million shares of common stock have been reserved for issuance under the above five plans. At December 31, 2012, there were an aggregate of 49.4 million shares of common stock available for issuance pursuant to future grants under the 2003 Plan.

We have, in connection with the acquisition of various companies, assumed the stock option plans of these companies. We do not intend to make future grants under any of such plans.

EMC Information Infrastructure Employee Stock Purchase Plan

Under our Amended and Restated 1989 Employee Stock Purchase Plan (the “1989 Plan”), eligible employees may purchase shares of common stock through payroll deductions at 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly, on January 1 and July 1, and are exercisable on the succeeding June 30 or December 31. A total of 153.0 million shares of common stock have been reserved for issuance under the 1989 Plan. The following table summarizes the 1989 Plan activity in the years ended December 31, 2012, 2011 and 2010 (table in thousands, except per share amounts):



	For the Year Ended
	December 31, 2012		December 31, 2011		December 31, 2010
Cash Proceeds	$	153,698	$	141,023	$	120,694
Common shares purchased	7,101		6,899		6,949
Weighted-average price per share	$	21.65	$	20.44	$	17.37

EMC Information Infrastructure Stock Options

The following table summarizes our option activity under all equity plans since January 1, 2010 (shares in thousands):



	Number of Shares		Weighted Average Exercise Price (per share)
Outstanding, January 1, 2010	234,918		$	18.31
Options granted relating to business acquisitions	12,595		5.57
Granted	3,286		20.07
Forfeited	(6,632	)	14.36
Expired	(14,970	)	70.59
Exercised	(56,781	)	11.63
Outstanding, December 31, 2010	172,416		15.23
Options granted relating to business acquisitions	141		3.24
Granted	1,665		25.31
Forfeited	(4,159	)	13.00
Expired	(13,866	)	40.05
Exercised	(44,659	)	11.91
Outstanding, December 31, 2011	111,538		13.69
Options granted relating to business acquisitions	2,330		1.54
Granted	861		26.80
Forfeited	(2,227	)	13.75
Expired	(183	)	14.19
Exercised	(34,870	)	11.65
Outstanding, December 31, 2012	77,449		14.39
Exercisable, December 31, 2012	60,575		14.34
Vested and expected to vest, December 31, 2012	76,538		$	14.41

At December 31, 2012, the weighted-average remaining contractual term was 4.0 years and the aggregate intrinsic value was $664.0 million for the 60.6 million exercisable shares. For the 76.5 million shares vested and expected to vest at December 31, 2012, the weighted-average remaining contractual term was 4.6 years and the aggregate intrinsic value was $835.1 million. The intrinsic value is based on our closing stock price of $25.30 as of December 31, 2012, which would have been received by the option holders had all in-the-money options been exercised as of that date. The total pre-tax intrinsic values of options exercised in 2012, 2011 and 2010 were $517.9 million, $619.2 million and $470.2 million, respectively. Cash proceeds from the exercise of stock options were $406.6 million, $532.4 million and $660.0 million in 2012, 2011 and 2010, respectively. Income tax benefits realized from the exercise of stock options in 2012, 2011 and 2010 were $96.9 million, $126.7 million and $75.3 million, respectively.

EMC Information Infrastructure Restricted Stock and Restricted Stock Units

Our restricted stock awards and units are valued based on our stock price on the grant date. Our restricted stock awards and units have various vesting terms from the date of grant, including pro rated vesting over three or four years, cliff vesting at the end of three or five years with acceleration for achieving specified performance criteria and vesting on various dates contingent on achieving specified performance criteria. For awards with performance conditions, management evaluates the criteria in each grant to determine the probability that the performance condition will be achieved.

The following table summarizes our restricted stock and restricted stock unit activity since January 1, 2010 (shares in thousands):



	Number of Shares		Weighted Average Grant Date Fair Value
Restricted stock and restricted stock units at January 1, 2010	37,363		$	15.01
Granted	19,261		20.31
Vested	(11,062	)	15.09
Forfeited	(2,185	)	15.82
Outstanding, December 31, 2010	43,377		17.20
Granted	20,945		25.12
Vested	(14,832	)	16.44
Forfeited	(3,959	)	20.56
Outstanding, December 31, 2011	45,531		21.10
Granted	21,451		26.57
Vested	(16,035	)	18.92
Forfeited	(3,740	)	23.09
Restricted stock and restricted stock units at December 31, 2012	47,207		$	24.39

The total intrinsic values of restricted stock and restricted stock units that vested in 2012, 2011 and 2010 were $421.1 million, $371.1 million and $203.7 million, respectively. As of December 31, 2012, restricted stock and restricted stock units representing 47.2 million shares were outstanding and unvested, with an aggregate intrinsic value of $1,194.3 million. These shares and units are scheduled to vest through 2017. Of the total shares of restricted stock and restricted stock units outstanding, 41.2 million shares and units will vest upon fulfilling service conditions, of which vesting for 9.2 million shares and units will accelerate upon achieving performance conditions. The remaining 6.0 million shares and units will vest only if certain performance conditions are achieved.

VMware Equity Plans

In June 2007, VMware adopted its 2007 Equity and Incentive Plan (the “2007 Plan”). In May 2009, VMware amended its 2007 Plan to increase the number of shares available for issuance by 20.0 million shares for total shares available for issuance of 100.0 million. The number of shares underlying outstanding equity awards that VMware assumes in the course of business acquisitions are also added to the 2007 Plan reserve on an as-converted basis. VMware has assumed 2.1 million shares, which accordingly have been added to the 2007 Plan reserve. Awards under the 2007 Plan may be in the form of stock options or other stock-based awards, including awards of restricted stock units. The exercise price for a stock option awarded under the 2007 Plan shall not be less than 100% of the fair market value of VMware Class A common stock on the date of grant. Most options granted under the 2007 Plan vest 25% after the first year and then monthly thereafter over the following three years and expire between six and seven years from the date of grant. Since 2009, VMware has not issued new stock options outside of those assumed in acquisitions. Most restricted stock grants made under the 2007 Plan have a three-year to four-year period over which they vest. VMware’s Compensation and Corporate Governance Committee determines the vesting schedule for all equity awards. VMware utilizes both authorized and unissued shares to satisfy all shares issued under the 2007 Plan. At December 31, 2012, there were an aggregate of 16.5 million shares of common stock available for issuance pursuant to future grants under the 2007 Plan.

VMware Stock Repurchase Programs

The following table summarizes stock repurchase authorizations in the years ended December 31, 2012, 2011 and 2010 (amounts in table in thousands):



Month Authorized	Amount Authorized	Expiration Date
November 2012	$250,000	End of 2014
February 2012	600,000	End of 2013
February 2011	550,000	End of 2012
March 2010	400,000	End of 2011

Purchases under the February 2011 authorization were completed in the second quarter of 2012. Purchases under the March 2010 authorization were completed in the first quarter of 2011. From time to time, stock repurchases may be made pursuant to the November 2012 and February 2012 authorizations in open market transactions or privately negotiated transactions as permitted by securities laws and other legal requirements.

VMware is not obligated to purchase any shares under its stock repurchase programs. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including VMware’s stock price, cash requirements for operations and business combinations, corporate and regulatory requirements and other market and economic conditions. Purchases can be discontinued at any time that VMware feels additional purchases are not warranted. All shares repurchased under VMware's stock repurchase programs are retired.

The following table summarizes stock repurchase activity in the years ended December 31, 2012, 2011 and 2010 (table in thousands, except per share amounts):



	For the Year Ended December 31,
	2012		2011		2010
Aggregate purchase price	$	467,534	$	526,203	$	338,527
Class A common shares repurchased	5,132		5,953		4,909
Weighted-average price per share	$	91.10	$	88.37	$	68.96

The amount of repurchased shares includes commissions and was classified as a reduction to additional paid-in capital. As of December 31, 2012, the authorized amount remaining for repurchase was $467.9 million.

VMware Employee Stock Purchase Plan

In June 2007, VMware adopted its 2007 Employee Stock Purchase Plan (the “ESPP”), which is intended to be qualified under Section 423 of the Internal Revenue Code. A total of 6.4 million shares of VMware Class A common stock were reserved for future issuance. Under the ESPP, eligible VMware employees are granted options to purchase shares at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are generally granted twice yearly on February 1 and August 1 and exercisable on the succeeding July 31 and January 31, respectively, of each year. As of December 31, 2012, 0.6 million shares of VMware Class A common stock were available for issuance pursuant to future grants under the ESPP.

The following table summarizes ESPP activity in the years ended December 31, 2012, 2011 and 2010 (table in thousands, except per share amounts):



	For the Year Ended
	December 31, 2012		December 31, 2011		December 31, 2010
Cash proceeds	$	69,372	$	56,964	$	45,162
Class A common shares purchased	897		816		1,510
Weighted-average price per share	$	77.34	$	69.81	$	29.90

As of December 31, 2012, $37.2 million of ESPP withholdings were recorded as a liability on the consolidated balance sheet for the next purchase in January 2013.

VMware Stock Options

The following table summarizes activity since January 1, 2010 for VMware employees in VMware stock options (shares in thousands):



	Number of Shares		Weighted Average Exercise Price (per share)
Outstanding, January 1, 2010	41,507		$	28.34
Granted	3,362		57.60
Forfeited	(2,220	)	30.78
Expired	(151	)	83.86
Exercised	(15,574	)	24.79
Outstanding, December 31, 2010	26,924		33.54
Granted	171		5.68
Forfeited	(1,011	)	40.98
Expired	(112	)	101.66
Exercised	(9,798	)	28.64
Outstanding, December 31, 2011	16,174		35.27
Granted	1,201		4.67
Expired	(644	)	42.07
Exercised	(6,598	)	30.44
Outstanding, December 31, 2012	10,133		34.36
Exercisable, December 31, 2012	7,382		35.49
Vested and expected to vest	10,067		$	34.23

The above table includes stock options granted in conjunction with unvested stock options assumed in business combinations. As a result, the weighted-average exercise price per share may vary from the VMware stock price at time of grant.

As of December 31, 2012, for the VMware stock options, the weighted-average remaining contractual term was 1.9 years and the aggregate intrinsic value was $439.5 million for the 7.4 million exercisable shares. For the 10.1 million options vested and expected to vest at December 31, 2012, the weighted-average remaining contractual term was 2.7 years and the aggregate intrinsic value was $609.6 million. These aggregate intrinsic values represent the total pre-tax intrinsic values based on VMware’s closing stock price of $94.14 as of December 31, 2012, which would have been received by the option holders had all in-the-money options been exercised as of that date.

Cash proceeds from the exercise of VMware stock options for the years ended December 31, 2012, 2011 and 2010 were $183.8 million, $280.6 million and $386.1 million, respectively. The options exercised in 2012, 2011 and 2010 had a pre-tax intrinsic value of $443.3 million, $647.8 million and $678.8 million, respectively.

VMware Restricted Stock

The following table summarizes restricted stock activity since January 1, 2010 (units in thousands):



	Number of Units		Weighted Average Grant Date Fair Value (per unit)
Restricted stock at January 1, 2010	9,211		$	33.21
Granted	4,933		74.87
Vested	(3,688	)	32.38
Forfeited	(704	)	39.05
Outstanding, December 31, 2010	9,752		54.17
Granted	4,548		91.51
Vested	(3,853	)	48.47
Forfeited	(907	)	64.70
Outstanding, December 31, 2011	9,540		72.74
Granted	7,832		101.73
Vested	(3,751	)	69.01
Forfeited	(1,451	)	81.53
Outstanding, December 31, 2012	12,170		$	91.93

The total fair value of VMware restricted stock including restricted stock and restricted stock units that vested in the years ended December 31, 2012, 2011 and 2010 was $346.9 million, $356.1 million and $258.0 million, respectively. As of December 31, 2012, restricted stock representing 12.2 million shares of VMware's Class A common stock were outstanding, with an aggregate intrinsic value of $1,145.7 million based on VMware’s closing price as of December 31, 2012. These awards are scheduled to vest through 2016.

Stock-Based Compensation Expense

The following tables summarize the components of total stock-based compensation expense included in our consolidated income statements in 2012, 2011 and 2010 (in thousands):



	Year Ended December 31, 2012
	Stock Options		Restricted Stock		Total Stock-Based Compensation
Cost of product sales	$	22,399	$	29,150	$	51,549
Cost of services	20,968		52,950		73,918
Research and development	88,495		236,232		324,727
Selling, general and administrative	130,646		339,467		470,113
Stock-based compensation expense before income taxes	262,508		657,799		920,307
Income tax benefit	66,780		161,859		228,639
Total stock-based compensation, net of tax	$	195,728	$	495,940	$	691,668
	Year Ended December 31, 2011
	Stock Options		Restricted Stock		Total Stock-Based Compensation
Cost of product sales	$	29,504	$	31,194	$	60,698
Cost of services	25,221		37,758		62,979
Research and development	106,556		192,699		299,255
Selling, general and administrative	164,760		248,479		413,239
Stock-based compensation expense before income taxes	326,041		510,130		836,171
Income tax benefit	73,293		119,850		193,143
Total stock-based compensation, net of tax	$	252,748	$	390,280	$	643,028
	Year Ended December 31, 2010
	Stock Options		Restricted Stock		Total Stock-Based Compensation
Cost of product sales	$	29,586	$	20,646	$	50,232
Cost of services	29,493		28,928		58,421
Research and development	112,484		146,262		258,746
Selling, general and administrative	156,059		161,595		317,654
Stock-based compensation expense before income taxes	327,622		357,431		685,053
Income tax benefit	75,771		89,902		165,673
Total stock-based compensation, net of tax	$	251,851	$	267,529	$	519,380

Stock-based compensation expense includes $51.5 million, $43.6 million and $34.9 million of expense associated with our employee stock purchase plans for 2012, 2011 and 2010, respectively.

The table below presents the net change in amounts capitalized or accrued in 2012 and 2011 for the following items (in thousands):



	Increased (decreased) during the year ended December 31, 2012			Increased (decreased) during the year ended December 31, 2011
Inventory	$	203		$	111
Accrued expenses (accrued warranty expenses)	(1,534		)	(1,702		)
Other assets	7,577			4,552

As of December 31, 2012, the total unrecognized after-tax compensation cost for stock options, restricted stock and restricted stock units was $1,403.2 million. This non-cash expense will be recognized through 2017 with a weighted-average remaining period of 1.5 years.

Fair Value of EMC Information Infrastructure Options

The fair value of each option granted during the years ended December 31, 2012, 2011 and 2010 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	For the Year Ended December 31,
EMC Stock Options	2012			2011			2010
Dividend yield	None			None			None
Expected volatility	34.3		%	33.3		%	32.9		%
Risk-free interest rate	0.8		%	1.6		%	1.8		%
Expected term (in years)	5.2			4.9			4.8
Weighted-average fair value at grant date	$	8.56		$	8.00		$	6.25

For all equity awards granted in 2012, 2011 and 2010, volatility was based on an analysis of historical stock prices and implied volatilities from traded options in our stock. We use EMC historical data to estimate the expected term of options granted within the valuation model. For all periods presented, EMC’s expected dividend yield input was zero as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options.

Fair Value of VMware Options

The fair value of each option to acquire VMware Class A common stock granted during the years ended December 31, 2012, 2011 and 2010 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	For the Year Ended December 31,
VMware Stock Options	2012			2011			2010
Dividend yield	None			None			None
Expected volatility	35.8		%	37.7		%	38.0		%
Risk-free interest rate	0.3		%	1.0		%	1.5		%
Expected term (in years)	2.7			3.0			3.5
Weighted-average fair value at grant date	$	80.45		$	88.40		$	18.05
	For the Year Ended December 31,
VMware Employee Stock Purchase Plan	2012			2011			2010
Dividend yield	None			None			None
Expected volatility	37.8		%	34.9		%	33.1		%
Risk-free interest rate	0.1		%	0.2		%	0.2		%
Expected term (in years)	0.5			0.5			0.5
Weighted-average fair value at grant date	$	23.36		$	23.69		$	15.18

The weighted-average grant date fair value of VMware stock options can fluctuate from period to period primarily due to higher valued options assumed through business combinations with exercise prices lower than the fair market value of VMware’s stock on the date of grant.

For all equity awards granted in 2012, 2011 and 2010, volatility was based on an analysis of historical stock prices and implied volatilities of publicly-traded companies with similar characteristics, including industry, stage of life cycle, size, financial leverage, as well as the implied volatilities of VMware’s Class A common stock. The expected term was calculated based upon an analysis of the expected term of similar grants of comparable publicly-traded companies, the term of the purchase period for grants made under the ESPP, or the weighted-average remaining term for options assumed in acquisitions. For all periods presented, VMware’s expected dividend yield input was zero as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options.