Our fixed income and equity investments are classified as available for sale and recorded at their fair market values. We determine fair value using the following hierarchy:

Most of our fixed income securities are classified as Level 2 securities, with the exception of some of our U.S. government and agency obligations, which are classified as Level 1 securities, and all of our auction rate securities, which are classified as Level 3. At September 30, 2011, the vast majority of our Level 2 investments were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities. In the event observable inputs are not available, we assess other factors to determine the security's market value, including broker quotes or model valuations. Each month, we perform independent price verifications of all of our fixed income holdings. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair market value. Our publicly traded equity securities are classified as Level 1.

In general, investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. Our publicly traded equity securities are classified as long-term investments. As a result of the lack of liquidity for auction rate securities, we have classified these as long-term investments as of September 30, 2011 and December 31, 2010. At September 30, 2011 and December 31, 2010, all of our short- and long-term investments, excluding auction rate securities, were recognized at fair value, which was determined based upon observable inputs from our pricing vendors for identical or similar assets. At September 30, 2011 and December 31, 2010, auction rate securities were valued using a discounted cash flow model.

The following tables summarize the composition of our short- and long-term investments at September 30, 2011 and December 31, 2010 (tables in thousands):

	September 30, 2011
	Amortized Cost		Unrealized Gains		Unrealized (Losses)		Aggregate Fair Value
U.S. government and agency obligations	$	2,294,101	$	14,889	$	(2,268)	$	2,306,722
U.S. corporate debt securities		1,391,063		10,175		(3,595)		1,397,643
High yield corporate debt securities		448,200		4,549		(27,557)		425,192
Asset-backed securities		31,411		103		(11)		31,503
Municipal obligations		775,608		1,953		(479)		777,082
Auction rate securities		91,350		0		(10,259)		81,091
Foreign debt securities		1,048,249		7,391		(2,600)		1,053,040
Total fixed income securities		6,079,982		39,060		(46,769)		6,072,273
Publicly traded equity securities		58,205		4,428		0		62,633
Total	$	6,138,187	$	43,488	$	(46,769)	$	6,134,906

We held approximately $1.1 billion in foreign debt securities at September 30, 2011. These securities have an average credit rating of AA-, and approximately 6% of these securities are deemed sovereign debt with an average credit rating of AA. None of the securities deemed sovereign debt are from Greece, Italy, Ireland, Portugal or Spain. Additionally, we have an immaterial amount of exposure to French agencies and financial institutions.

	December 31, 2010
	Amortized Cost		Unrealized Gains		Unrealized (Losses)		Aggregate Fair Value
U.S. government and agency obligations	$	1,737,782	$	11,286	$	(2,674)	$	1,746,394
U.S. corporate debt securities		1,239,325		13,608		(1,307)		1,251,626
High yield corporate debt securities		421,469		18,306		(1,943)		437,832
Asset-backed securities		34,730		152		(1)		34,881
Municipal obligations		1,095,338		3,829		(3,266)		1,095,901
Auction rate securities		155,950		0		(9,906)		146,044
Foreign debt securities		653,251		6,878		(714)		659,415
Total fixed income securities		5,337,845		54,059		(19,811)		5,372,093
Publicly traded equity securities		22,376		32,448		0		54,824
Total	$	5,360,221	$	86,507	$	(19,811)	$	5,426,917

The following table represents our fair value hierarchy for our financial assets and liabilities measured at fair value as of September 30, 2011 (in thousands):

	Level 1		Level 2		Level 3		Total
Cash	$	1,186,959	$	-	$	-	$	1,186,959
Cash equivalents		1,838,607		100,044		-		1,938,651
U.S. government and agency obligations		1,277,304		1,029,418		-		2,306,722
U.S. corporate debt securities		-		1,397,643		-		1,397,643
High yield corporate debt securities		-		425,192		-		425,192
Asset-backed securities		-		31,503		-		31,503
Municipal obligations		-		777,082		-		777,082
Auction rate securities		-		-		81,091		81,091
Foreign debt securities		-		1,053,040		-		1,053,040
Publicly traded equity securities		62,633		0		-		62,633
Total cash and investments	$	4,365,503	$	4,813,922	$	81,091	$	9,260,516
Other items:
Foreign exchange derivative assets	$	-	$	60,341	$	-	$	60,341
Foreign exchange derivative liabilities		-		(58,617)		-		(58,617)
Commodity derivative liabilities		-		(708)		-		(708)
Interest rate swap contracts		-		(145,934)		-		(145,934)

In 2010, EMC entered into interest rate swap contracts with an aggregate notional amount of approximately $900 million. These swaps were designated as cash flow hedges for the forecasted issuance of debt in 2012 to replace the 2011 Notes. As such, the gain or loss on these hedges is recognized in other comprehensive loss until the underlying exposure is realized. As of September 30, 2011, the interest rate swaps have unrealized losses of $145.9 million primarily due to the change in interest rates since the contracts' inception.

Our auction rate securities are predominantly rated AAA and are primarily collateralized by student loans. The underlying loans of all but two of our auction rate securities, with a market value of $18.4 million, have partial guarantees by the U.S. government as part of the Federal Family Education Loan Program (“FFELP”) through the U.S. Department of Education. FFELP guarantees at least 95% of the loans which collateralize the auction rate securities. The two securities whose underlying loans are not guaranteed by the U.S. government have credit enhancements and are insured by third party agencies. We believe the quality of the collateral underlying all of our auction rate securities will enable us to recover our principal balance in full.

To determine the estimated fair value of our investment in auction rate securities, we used a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include an incremental discount rate for the lack of liquidity in the market (“liquidity discount margin”) for an estimated period of time. The discount rate we selected was based on AA-rated banks as the majority of our portfolio is invested in student loans where EMC acts as a financier to these lenders. The liquidity discount margin represents an estimate of the additional return an investor would require for the lack of liquidity of these securities over an estimated five-year holding period. The rate used for the discount margin was 2% at September 30, 2011 compared to 1% at December 31, 2010 due to the widening of credit spreads on AA-rated banks during 2011.

The following table provides a summary of changes in fair value of our Level 3 financial assets for the three and nine months ended September 30, 2011 (table in thousands):

	Three Months Ended		Nine Months Ended
	September 30, 2011		September 30, 2011
Balance, beginning of the period	$	99,154	$	146,044
Calls at par value		(13,100)		(64,600)
Decrease in previously recognized unrealized losses included in other
comprehensive income		(4,963)		(353)
Balance, end of the period	$	81,091	$	81,091

Unrealized losses on investments at September 30, 2011 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows (table in thousands):

	Less Than 12 Months		12 Months or Greater		Total
	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses		Gross Unrealized Losses
	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses
U.S. government and agency obligations	$ 747,809	$ (2,122)	$ 6,491	$ (146)	$ 754,300	$ (2,268)
U.S. corporate debt securities	549,667	(3,595)	-	-	549,667	(3,595)
High yield corporate debt securities	306,934	(27,557)	-	-	306,934	(27,557)
Asset-backed securities	7,047	(10)	5	(1)	7,052	(11)
Municipal obligations	304,076	(472)	8,147	(7)	312,223	(479)
Auction rate securities	-	-	81,091	(10,259)	81,091	(10,259)
Foreign debt securities	326,419	(2,600)	-	-	326,419	(2,600)
Total	$ 2,241,952	$ (36,356)	$ 95,734	$ (10,413)	$ 2,337,686	$ (46,769)

As of September 30, 2011, there were no publicly traded equity securities in a continuous unrealized loss position. For all of our securities for which the amortized cost basis was greater than the fair value at September 30, 2011, we have concluded that currently we neither plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers' credit rating, third party guarantees and the time to maturity.

During the three months ended June 30, 2011, a realized gain of $56.0 million was recorded in other expense, net on the Consolidated Income Statements for the sale of VMware's investment in Terremark Worldwide, Inc.

The contractual maturities of fixed income securities held at September 30, 2011 are as follows (table in thousands):

	September 30, 2011
	Amortized		Aggregate
	Cost Basis		Fair Value
Due within one year	$	1,602,305	$	1,604,979
Due after 1 year through 5 years		3,661,373		3,678,241
Due after 5 years through 10 years		356,779		346,741
Due after 10 years		459,525		442,312
Total	$	6,079,982	$	6,072,273

Short-term investments on the Consolidated Balance Sheet include $30.6 million of variable rate demand notes, which have contractual maturities ranging from 2013 through 2045, and are not classified within investments due within one year above.