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, 2005 Commission File Number 1-9853

 

EMC CORPORATION

(Exact name of registrant as specified in its charter)

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

 

176 South Street
Hopkinton, Massachusetts 01748
(Address of principal executive offices, including zip code)

(508) 435-1000
(Registrant’s telephone number, including area code)

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

Yes [X] No [  ]

 

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

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

 

The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of September 30, 2005 was 2,390,691,816.

EMC CORPORATION

	Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2005 and December 31, 2004	3
Consolidated Income Statements for the Three and Nine Months Ended September 30, 2005 and 2004	4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004	5
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2005 and 2004	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	38
Item 4. Controls and Procedures	38
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6. Exhibits	39
SIGNATURES	40
EXHIBIT INDEX	41

 

PART I
FINANCIAL INFORMATION

Item 1.   Financial Statements

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

	September 30, 2005			December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	1,468,261		$	1,476,803
Short-term investments		2,996,492			1,236,726
Accounts and notes receivable, less allowance for doubtful accounts of $37,011 and $39,901		1,166,175			1,162,387
Inventories		756,245			514,065
Deferred income taxes		295,986			289,810
Other current assets		174,701			151,135
Total current assets		6,857,860			4,830,926
Long-term investments		3,155,644			4,727,237
Property, plant and equipment, net		1,679,572			1,571,810
Intangible assets, net		484,993			499,478
Other assets, net		560,327			509,041
Goodwill, net		3,607,111			3,284,414
Total assets	$	16,345,507		$	15,422,906
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current portion of long-term obligations	$	198		$	183
Accounts payable		517,523			522,587
Accrued expenses		1,113,316			1,090,666
Income taxes payable		438,394			404,772
Deferred revenue		1,020,966			930,492
Total current liabilities		3,090,397			2,948,700
Deferred revenue		683,162			570,995
Long-term convertible debt		127,335			128,456
Deferred income taxes		192,129			141,600
Other liabilities		104,429			109,868
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 and outstanding 2,390,692 and 2,404,969 shares		23,907			24,050
Additional paid-in capital		5,976,723			6,221,099
Deferred compensation		(209,242	)		(124,286	)
Retained earnings		6,422,216			5,437,346
Accumulated other comprehensive loss, net		(65,549	)		(34,922	)
Total stockholders’ equity		12,148,055			11,523,287
Total liabilities and stockholders’ equity	$	16,345,507		$	15,422,906

 

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

3

EMC CORPORATION
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2005			September 30, 2004			September 30, 2005			September 30, 2004
Revenues:
Product sales	$	1,687,277		$	1,486,918		$	4,996,110		$	4,321,293
Services		678,465			541,961			1,957,578			1,550,399
		2,365,742			2,028,879			6,953,688			5,871,692
Costs and expenses:
Cost of product sales		813,760			746,131			2,425,379			2,190,976
Cost of services		274,365			239,547			819,829			701,921
Research and development		254,720			215,708			742,359			625,411
Selling, general and administrative		641,219			557,450			1,899,619			1,640,934
Restructuring and other special charges		5,849			—			6,817			32,688
Operating income		375,829			270,043			1,059,685			679,762
Investment income		47,986			38,373			134,475			115,410
Interest expense		(1,907	)		(1,880	)		(5,923	)		(5,575	)
Other income (expense), net		2,439			452			(934	)		(7,520	)
Income before taxes		424,347			306,988			1,187,303			782,077
Income tax provision		2,675			88,953			202,433			231,433
Net income	$	421,672		$	218,035		$	984,870		$	550,644
Net income per weighted average share, basic	$	0.18		$	0.09		$	0.41		$	0.23
Net income per weighted average share, diluted	$	0.17		$	0.09		$	0.40		$	0.23
Weighted average shares, basic		2,383,770			2,396,399			2,390,314			2,405,216
Weighted average shares, diluted		2,433,079			2,433,671			2,439,576			2,451,916

 

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

4

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

	For the Nine Months Ended
	September 30, 2005			September 30, 2004
Cash flows from operating activities:
Cash received from customers	$	7,149,428		$	6,090,355
Cash paid to suppliers and employees		(5,646,136	)		(4,680,467	)
Dividends and interest received		184,133			113,692
Interest paid		(7,014	)		(4,730	)
Income taxes paid		(61,162	)		(65,641	)
Net cash provided by operating activities		1,619,249			1,453,209
Cash flows from investing activities:
Additions to property, plant and equipment		(418,962	)		(259,867	)
Capitalized software development costs		(121,208	)		(126,559	)
Purchases of short and long-term available for sale securities		(8,277,684	)		(6,431,165	)
Sales and maturities of short and long-term available for sale securities		8,037,653			5,909,212
Business acquisitions, net of cash acquired		(349,957	)		(544,016	)
Other		(8,155	)		(58,146	)
Net cash used in investing activities		(1,138,313	)		(1,510,541	)
Cash flows from financing activities:
Issuance of common stock		152,724			115,324
Purchase of treasury stock		(603,419	)		(417,554	)
Payment of short and long-term obligations		(3,011	)		(7,144	)
Proceeds from short and long-term obligations		201			8
Net cash used in financing activities		(453,505	)		(309,366	)
Effect of exchange rate changes on cash and cash equivalents		(35,973	)		317
Net decrease in cash and cash equivalents		(8,542	)		(366,381	)
Cash and cash equivalents at beginning of period		1,476,803			1,752,976
Cash and cash equivalents at end of period	$	1,468,261		$	1,386,595
Reconciliation of net income to net cash provided by operating activities:
Net income	$	984,870		$	550,644
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		474,889			450,923
Non-cash restructuring and other special charges		3,100			17,051
Amortization of deferred compensation		56,704			40,312
Provision for doubtful accounts		6,026			4,854
Deferred income taxes, net		55,430			154,017
Tax benefit from stock options exercised		36,263			27,330
Other		40,872			(1,746	)
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable		10,871			12,991
Inventories		(220,333	)		(15,372	)
Other assets		(46,414	)		(8,640	)
Accounts payable		(16,054	)		27,197
Accrued expenses		11,507			(5,567	)
Income taxes payable		50,194			(16,234	)
Deferred revenue		178,843			200,818
Other liabilities		(7,519	)		14,631
Net cash provided by operating activities	$	1,619,249		$	1,453,209
Non Cash Activity:
Issuance of stock options exchanged in business combinations	$	41,381		$	72,026

 

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

5

EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2005			September 30, 2004			September 30, 2005			September 30, 2004
Net income	$	421,672		$	218,035		$	984,870		$	550,644
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments, net of taxes (benefit) of $0, $(18), $(10,716) and $(91)		(4,943	)		(1,772	)		(19,052	)		(7,119	)
Changes in market value of derivatives, net of taxes (benefit) of $(44), $0, $234 and $0		(394	)		(21	)		2,141			(22	)
Changes in market value of investments, net of taxes (benefit) of $891, $4,454, $1,286 and $(8,548)		(9,027	)		21,902			(13,716	)		(21,103	)
Other comprehensive income (loss)		(14,364	)		20,109			(30,627	)		(28,244	)
Comprehensive income	$	407,308		$	238,144		$	954,243		$	522,400

 

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

6

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Company

EMC Corporation and its subsidiaries offer a wide range of systems, software, services and solutions that help organizations get more value from their information and get the most out of their information technology (IT) assets. EMC helps individuals and organizations store, share, manage, protect and apply information to collaborate, solve problems, save money, exploit new opportunities and enhance operational results.

EMC has led the market in developing solutions for customers to manage information intelligently based on its changing value to an organization over time. With a strategy known as information lifecycle management, we help organizations organize, protect, move and manage information on the lowest-cost storage system appropriate for the level of protection and the speed of access needed at each point in information’s life. Information lifecycle management simultaneously lowers the cost and reduces the risk of managing information, no matter what format it is in — documents, images or e-mail — as well as the data that resides in databases. Information lifecycle management provides for cost-effective business continuity and more efficient compliance with government and industry regulations. We also provide specialized virtual infrastructure software that can help organizations respond to changing IT requirements by dynamically altering their computing and storage environments without interruption to their businesses. Our unique capabilities deliver lower total operating costs, optimized service and performance and a more responsive IT infrastructure.

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. Accordingly, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2004 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2005.

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. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary to fairly state the results as of and for the periods ended September 30, 2005 and 2004. Certain reclassifications have been made to the prior year financial statements to conform to the current period presentation.

Presentation

We have changed the method of presenting the statement of cash flows from the indirect method to the direct method, which is the preferred method of presentation. The consolidated statement of cash flows for the nine months ended September 30, 2004 has been conformed to this method of presentation.

In 2004, we concluded that it was appropriate to classify our auction rate securities as short-term investments. Previously, such investments had been classified as cash and cash equivalents. We have made adjustments to our consolidated statement of cash flows for the nine months ended September 30, 2004 to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. This change in classification does not affect previously reported cash flows from operations or from financing activities in our consolidated statements of cash flows or our previously reported consolidated statements of operations for any period.

7

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“FAS”) No. 123R, “Share-Based Payment.” The statement replaces FAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”

FAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The adoption of the statement will result in the expensing of the fair value of stock options granted to employees in the basic financial statements. Previously, we elected to only disclose the impact of expensing the fair value of stock options in the notes to the financial statements. The statement is required to be adopted commencing with our first quarter of 2006.

FAS No. 123R applies to new equity awards and to equity awards modified, repurchased or canceled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the effective date shall be recognized as the requisite service is rendered on or after the effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated from the pro forma disclosures under FAS No. 123. Changes to the grant-date fair value of equity awards granted before the effective date of this statement are precluded. The compensation cost for those earlier awards shall be attributed to periods beginning on or after the effective date of this statement using the attribution method that was used under FAS No. 123, except that the method of recognizing forfeitures only as they occur shall not be continued. Any unearned or deferred compensation (contra-equity accounts) related to those earlier awards shall be eliminated against the appropriate equity accounts. Additionally, common stock purchased pursuant to stock options granted under our employee stock purchase plan will be expensed based upon the fair market value of the stock option.

The adoption of FAS No. 123R will have a material impact on our results of operations. Future results will be impacted by the number and value of additional equity awards as well as the value of existing unvested equity awards.

In March 2005, FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” which is an interpretation of FAS No. 143, “Accounting for Asset Retirement Obligations.” The interpretation requires a liability for the fair value of a conditional asset retirement obligation to be recognized if the fair value of the liability can be reasonably estimated. The interpretation is effective no later than the end of fiscal years ending after December 15, 2005, and is not expected to have a material impact on our financial position or results of operations.

In June 2005, FASB issued FAS No. 154, “Accounting Changes and Error Corrections.” This statement replaces APB Opinion No. 20, “Accounting Changes,” and FAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” The statement applies to all voluntary changes in accounting for and reporting of changes in accounting principles. FAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principles unless it is not practical to do so. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after May 31, 2005. The adoption of FAS No. 154 will not have a material impact on our financial position or results of operations.

In June 2005, FASB issued FASB Staff Position (“FSP”) No. FAS 143-1, “Accounting for Electronic Equipment Waste Obligations” to address the accounting for obligations associated with EU Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the “Directive”). The Directive requires EU member countries to adopt legislation to regulate the collection, treatment, recovery and environmentally sound disposal of electrical and electronic waste equipment. Under the Directive, the waste management obligation for historical

8

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the equipment is replaced. Depending upon the law adopted by the particular country, upon replacement, the waste management obligation for that equipment may be transferred to the producer of the related equipment. The user retains the obligation if they do not replace the equipment.

FSP No. FAS 143-1 requires a commercial user to apply the provisions of FAS No. 143, “Accounting for Asset Retirement Obligations” and related FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” to waste obligations associated with historical equipment. The rules require that a liability be established for the retirement obligation with an offsetting increase to the carrying amount of the related asset. FSP No. FAS 143-1 is effective the later of the first reporting period ending after June 8, 2005 or the date of adoption of the law by the applicable EU member country. The issuance of FSP No. FAS 143-1 is not expected to have a material impact on our financial position or results of operations.

Accounting for Stock-Based Compensation

FAS No. 123, “Accounting for Stock-Based Compensation” defined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. As provided for in FAS No. 123, we elected to apply APB Opinion No. 25 and related interpretations in accounting for our stock-based compensation plans. Compensation expense is recognized on a straight-line basis over the vesting period for restricted stock grants, stock options granted where the exercise price is below the market price on the date of the grant and stock options exchanged in business combinations.

The following is a reconciliation of net income per weighted average share had we adopted FAS No. 123 (table in thousands, except per share amounts):

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2005			September 30, 2004			September 30, 2005			September 30, 2004
Net income	$	421,672		$	218,035		$	984,870		$	550,644
Add back: Stock compensation costs, net of taxes, on stock-based awards		14,256			9,208			36,386			27,616
Less: Stock compensation costs, net of taxes, had stock compensation expense been measured at fair value		(91,157	)		(96,277	)		(282,901	)		(298,741	)
Incremental stock compensation expense per FAS No. 123, net of taxes		(76,901	)		(87,069	)		(246,515	)		(271,125	)
Adjusted net income	$	344,771		$	130,966		$	738,355		$	279,519
Net income per weighted average share, basic — as reported	$	0.18		$	0.09		$	0.41		$	0.23
Net income per weighted average share, diluted — as reported	$	0.17		$	0.09		$	0.40		$	0.23
Adjusted net income per weighted average share, basic	$	0.14		$	0.05		$	0.31		$	0.12
Adjusted net income per weighted average share, diluted	$	0.14		$	0.05		$	0.30		$	0.11

 

9

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The fair value of each option granted during the three and nine months ended September 30, 2005 and September 30, 2004 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	For the Three Months Ended		For the Nine Months Ended
	September 30, 2005	September 30, 2004	September 30, 2005	September 30, 2004
Dividend	None	None	None	None
Expected volatility	40.0%	45.0%	40.4%	53.2%
Risk-free interest rate	4.02%	3.47%	4.00%	3.57%
Expected life (in years)	4.0	5.0	4.0	5.0

 

Under the EMC Corporation 2003 Stock Plan (the “2003 Plan”), awards granted to an employee who meets the age and/or length of service requirements for “retirement” set forth in the plan generally will continue to vest after such employee’s retirement without additional service. In connection with the above reconciliation of net income assuming adoption of FAS No. 123, our policy with respect to these awards has been to recognize compensation cost over the stipulated vesting period, which is typically five years. If the employee retires before the end of the vesting period, any remaining unrecognized compensation cost would be recognized at the date of retirement. The Securities and Exchange Commission has determined that companies that follow this approach should continue to do so for all applicable equity-based awards issued prior to the effective date of FAS No. 123R. These awards should also continue to be accounted for in this manner subsequent to the effective date of FAS No. 123R. The cost of applicable equity-based awards issued subsequent to the effective date of FAS No. 123R, however, should be recognized through the retirement eligibility date. Had we recognized compensation expense over this shorter service period, the increase in stock compensation costs, net of taxes, presented under FAS No. 123 would have been $20.6 million and $2.0 million for the three months ended September 30, 2005 and 2004, respectively and $26.9 million and $6.6 million for the nine months ended September 30, 2005 and 2004, respectively.

2. Business Acquisitions and Goodwill

Acquisition of Rainfinity, Inc.

In August 2005, we acquired all of the outstanding capital stock of Rainfinity, Inc. (“Rainfinity”) for approximately $90.0 million in cash. Rainfinity is a provider of virtualization solutions for heterogeneous network attached storage (NAS) and file systems environments. The acquisition enables us to provide more comprehensive information lifecycle management solutions to our customers, helping them to improve their capacity utilization and performance and simplify data migration and consolidation projects regardless of the NAS operating systems they may be using. Pro forma results and other financial disclosures have not been provided because the effects of the acquisition were not material to us.

Acquisition of Smarts, Inc.

In February 2005, we acquired all of the outstanding capital stock of System Management Arts Incorporated (“Smarts”). Smarts’ software products automatically locate root cause problems, calculate their impacts across technology domains and present the logical action plan required to keep business services up and running. The acquisition enables us to offer event automation and real-time network systems management software. Additionally, the acquisition will enable us to apply the modeling, correlation and root cause analysis technology to expand our information and storage management offerings.

The aggregate purchase price, net of cash received, was $293.5 million, which consisted of $252.6 million of cash, $37.4 million in fair value of our stock options and $3.5 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. The fair value of the stock

10

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

options was estimated assuming no expected dividends and the following weighted-average assumptions:

Expected life (in years)	4.0
Expected volatility	45.0	%
Risk-free interest rate	2.7	%

 

The intrinsic value allocated to the unvested options issued in the acquisition that had yet to be earned as of the acquisition date was $3.5 million and has been recorded as deferred compensation in the purchase price allocation. The consolidated financial statements include the results of Smarts 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 will be made upon the finalization of our integration activities.

The following represents the preliminary allocation of the purchase price (table in thousands):

Current assets	$	21,076
Property, plant and equipment		7,596
Other long-term assets		533
Goodwill		264,408
Intangible assets:
Developed technology (estimated useful lives 4–7 years)		24,870
Customer relationships (estimated useful lives of 4–8 years)		16,170
Tradenames and trademarks (estimated useful lives of 2–7 years)		1,660
Non-solicitation agreements (estimated useful life of 3 years)		1,570
Acquired IPR&D		3,100
Total intangible assets		47,370
Deferred compensation		3,536
Current liabilities		(32,308	)
Deferred income taxes		(11,374	)
Long-term liabilities		(7,354	)
Total purchase price	$	293,483

 

In determining the purchase price allocation, we considered, among other factors, our intention to use the acquired assets and historical demand and estimates of future demand of Smarts’ 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 16%. 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 forecasted sales related to the technology and assets acquired from Smarts.

The total weighted average amortization period for the intangible assets is 6.0 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 EMC Software Group products and services segment.

Of the $47.4 million of acquired intangible assets, $3.1 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 real-time management of networks and services. 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

11

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and the risk associated with in-process technology, we deemed a discount rate of 40% as appropriate for valuing IPR&D.

In connection with the Smarts acquisition, we commenced integration activities which have resulted in recognizing $6.4 million in liabilities for lease obligations, employee termination benefits and other contractual obligations, of which $1.6 million was paid through September 30, 2005. The termination benefits will be paid through 2005 and the lease and contractual liabilities will be paid over the remaining periods through 2008.

Goodwill

Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment for the nine months ended September 30, 2005 consist of the following (table in thousands):

	Information Storage Products		Information Storage and Management Services		EMC Software Group Products and Services			VMware Products and Services			Other Businesses		Total
Balance, January 1, 2005	$	551,888	$	1,615	$	2,204,230		$	526,681		$	—	$	3,284,414
Goodwill acquired		—		—		342,598			4,427			—		347,025
Tax deduction from exercise of stock options		—		—		(7,626	)		—			—		(7,626	)
Finalization of purchase price allocations		—		—		(8,291	)		(8,411	)		—		(16,702	)
Balance, September 30, 2005	$	551,888	$	1,615	$	2,530,911		$	522,697		$	—	$	3,607,111

 

3. Inventories

Inventories consist of (table in thousands):

	September 30, 2005		December 31, 2004
Purchased parts	$	38,556	$	46,823
Work-in-process		464,035		349,788
Finished goods		253,654		117,454
	$	756,245	$	514,065

 

4. Property, Plant and Equipment

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

	September 30, 2005			December 31, 2004
Furniture and fixtures	$	131,518		$	136,441
Equipment		2,136,833			1,844,738
Buildings and improvements		882,843			865,184
Land		105,887			105,184
Building construction in progress		127,448			114,646
		3,384,529			3,066,193
Accumulated depreciation		(1,704,957	)		(1,494,383	)
	$	1,679,572		$	1,571,810

 

Building construction in progress and land owned at September 30, 2005 include $93.1 million and $6.0 million, respectively, of facilities under construction that we are holding for future use.

12

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. Accrued Expenses

Accrued expenses consist of (table in thousands):

	September 30, 2005		December 31, 2004
Salaries and benefits	$	394,594	$	426,408
Product warranties		213,198		180,758
Restructuring		84,370		115,262
Other		421,154		368,238
	$	1,113,316	$	1,090,666

 

Product Warranties

Systems sales include a standard product warranty. At the time of the sale, we accrue for systems’ warranty costs. The initial systems’ warranty accrual is based upon our historical experience and specific identification of systems’ requirements. 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 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, 2005			September 30, 2004			September 30, 2005			September 30, 2004
Balance, beginning of the period	$	217,792		$	132,801		$	180,758		$	118,816
Current year accrual		22,217			35,771			107,260			90,089
Amounts charged to the accrual		(26,811	)		(20,756	)		(74,820	)		(61,089	)
Balance, end of the period	$	213,198		$	147,816		$	213,198		$	147,816

 

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

6. Net Income Per Share

The reconciliation from basic to diluted earnings per share for both the numerators and denominators is as follows (table in thousands):

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2005		September 30, 2004		September 30, 2005		September 30, 2004
Numerator:
Net income, as reported, basic	$	421,672	$	218,035	$	984,870	$	550,644
Adjustment for interest expense on convertible debt, net of taxes		643		643		1,929		1,929
Net income-diluted	$	422,315	$	218,678	$	986,799	$	552,573
Denominator:
Basic weighted average common shares outstanding		2,383,770		2,396,399		2,390,314		2,405,216
Weighted common stock equivalents		40,253		28,216		40,206		37,644
Assumed conversion of convertible debt		9,056		9,056		9,056		9,056
Diluted weighted average shares outstanding		2,433,079		2,433,671		2,439,576		2,451,916

 

13

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Options to acquire 97.6 million and 87.1 million shares of our common stock for the three and nine months ended September 30, 2005, respectively, and options to acquire 158.6 and 113.2 million shares of our common stock for the three and nine months ended September 30, 2004, 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, 2005 and 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, 2005, 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, 2005, we were in compliance with the covenants.

Litigation

In May 2005, EMC and Hewlett-Packard Company (“HP”) jointly announced that the parties had agreed to amicably dismiss all claims and counterclaims with no findings or admissions of liability in a settlement of all pending patent infringement litigation between EMC and HP. As part of the settlement between the two companies, HP will pay a net $325 million balancing payment to EMC which can be satisfied through the purchase of complementary EMC products and services, such as the VMware product line, over the next five years as follows: HP will pre-pay $65 million to EMC prior to the beginning of each of five consecutive periods (“Purchase Periods”). The Purchase Periods begin on September 1, 2005, December 1, 2006, December 1, 2007, December 1, 2008 and December 1, 2009. The pre-payments will be made on August 29, 2005, November 29, 2006, November 29, 2007, November 29, 2008 and November 30, 2009. During each Purchase Period, HP may use its pre-payment as credit for product and services purchases from EMC for HP’s resale or internal use. Unused credits will expire at the end of each Purchase Period. For purposes of computing the amount of credit applied per dollar of EMC products that HP purchases, hardware products shall be deemed to have been purchased for 50% of the actual purchase price.

If EMC purchases HP products or services during the Purchase Periods, HP will be required to make an equivalent amount of additional product or services purchases from EMC of up to an aggregate amount of $108 million over five years, with caps for each Purchase Period as follows: $10.8 million for the first Purchase Period, $21.7 million for each of the second, third and fourth Purchase Periods and $32.5 million for the final Purchase Period. If HP does not make the required amount of additional purchases of EMC products and services attributable to such Purchase Period, HP will be required to pay the difference to EMC in cash. For purposes of computing the amount of credit applied per dollar of HP products that EMC purchases, hardware products shall be deemed to have been purchased for 50% of the actual purchase price.

We are a party to various other litigation matters 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.

14

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Segment Information

Management has organized the business around our product and service offerings. We operate in the following segments: information storage products, information storage and management 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 expenses, research and development expenses or assets to each segment, as management does not use this information to measure the performance of the operating segments.

Our information storage products segment includes systems revenues and platform-based storage software revenues. Our information storage and management services segment includes hardware and platform-based software maintenance revenues and professional services revenues. Our EMC Software Group products and services segment includes multi-platform-based storage and management software, software maintenance services and professional services. Our VMware products and services segment includes virtual infrastructure software, software maintenance services and professional services. Our other businesses segment includes hardware maintenance revenues associated with AViiON servers.

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

For the Three Months Ended	Information Storage Products			Information Storage and Management Services			EMC Software Group Products and Services			VMware Products and Services			Other Businesses			Consolidated
September 30, 2005
Systems revenues	$	1,091,881		$	—		$	—		$	—		$	—		$	1,091,881
Software license revenues		284,446			—			239,106			71,844			—			595,396
Services revenues		—			471,955			169,860			29,416			7,234			678,465
Total revenues	$	1,376,327		$	471,955		$	408,966		$	101,260		$	7,234		$	2,365,742
Gross profit	$	606,828		$	260,312		$	323,949		$	83,097		$	3,431		$	1,277,617
Gross profit percentage		44.1	%		55.2	%		79.2	%		82.1	%		47.4	%		54.0	%
September 30, 2004
Systems revenues	$	948,938		$	—		$	—		$	—		$	—		$	948,938
Software license 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	%

 

15

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For the Nine Months Ended	Information Storage Products			Information Storage and Management Services			EMC Software Group Products and Services			VMware Products and Services			Other Businesses			Consolidated
September 30, 2005
Systems revenues	$	3,186,577		$	—		$	—		$	—		$	—		$	3,186,577
Software license revenues		881,758			—			727,728			200,047			—			1,809,533
Services revenues		—			1,368,656			490,829			72,230			25,863			1,957,578
Total revenues	$	4,068,335		$	1,368,656		$	1,218,557		$	272,277		$	25,863		$	6,953,688
Gross profit	$	1,782,756		$	732,861		$	958,803		$	221,861		$	12,200		$	3,708,480
Gross profit percentage		43.8	%		53.5	%		78.7	%		81.5	%		47.2	%		53.3	%
September 30, 2004
Systems revenues	$	2,774,124		$	—		$	—		$	—		$	—		$	2,774,124
Software license 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	%

 

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, 2005		September 30, 2004		September 30, 2005		September 30, 2004
Revenues:
United States	$	1,369,690	$	1,171,291	$	3,979,586	$	3,329,386
Canada		31,182		27,171		102,492		84,878
Europe, Middle East, Africa		638,785		549,836		1,942,933		1,657,135
Asia Pacific		265,204		232,229		770,753		674,737
Latin America		60,881		48,352		157,924		125,556
Total	$	2,365,742	$	2,028,879	$	6,953,688	$	5,871,692

 

No single country other than the United States accounted for 10% or more of revenues during the three or nine months ended September 30, 2005 or September 30, 2004.

At September 30, 2005, long-lived assets, excluding financial instruments and deferred tax assets, were $6,060.1 million in the United States and $271.9 million internationally. At December 31, 2004, the long-lived assets, excluding financial instruments and deferred tax assets, were $5,602.4 million in the United States and $262.3 million internationally. No single country other than the United States accounted for 10% or more of these assets at September 30, 2005 or December 31, 2004.

For both the three and nine months ended September 30, 2005, Dell Inc. accounted for 11.1% of our total revenues.

16

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. Restructuring and Other Special Charges

Charges for the Three and Nine Months Ended September 30, 2005

During the three and nine months ended September 30, 2005, we recorded $5.8 million and $6.8 million, respectively, in restructuring charges. The $5.8 million recognized in the third quarter of 2005 represents adjustments to restructuring charges recognized in prior years for additional costs associated with excess facilities, net of a reduction of our severance accrual for charges taken in prior years. The remaining $1.0 million of restructuring and other special charges recognized during the nine months ended September 30, 2005 were recognized in the first quarter of 2005 and consisted of an IPR&D charge of $3.1 million associated with the Smarts acquisition, partially offset by a net restructuring reduction of $2.1 million. See Note 2. The net restructuring reduction included an aggregate of $5.2 million of reductions associated with our prior restructuring programs partially offset by a $3.1 million provision for employee termination benefits for individuals in our EMC Software Group products and services segment. The reductions were primarily attributable to lower than expected lease payout obligations associated with vacated facilities.

The workforce reduction recognized in the first quarter of 2005 impacted approximately 60 individuals across our major business functions. The expected cash impact of the workforce reduction is $3.1 million, of which $0.4 million and $1.4 million were paid in the three and nine month periods ended September 30, 2005, respectively. Approximately 84% of such employees were based in North America and the remainder were based in Europe. As of September 30, 2005, the reduction in force had been substantially completed. The remaining cash expenditures relating to workforce reduction are expected to be substantially paid by the end of 2006.

Additionally, from 1998 through 2004, we implemented several restructuring programs. The activity for these restructuring programs, including the adjustments made in 2005 for the three and nine months ended September 30, 2005, is presented below (tables in thousands):

Three Months Ended September 30, 2005

Category	Balance as of June 30, 2005		Additions (Reductions) to the Provision			Current Utilization			Balance as of September 30, 2005
Workforce reduction	$	13,987	$	(1,000	)	$	(3,245	)	$	9,742
Consolidation of excess facilities		69,318		6,849			(5,566	)		70,601
Other contractual obligations		2,327		—			—			2,327
Total	$	85,632	$	5,849		$	(8,811	)	$	82,670

 

Nine Months Ended September 30, 2005

Category	Balance as of December 31, 2004		Additions (Reductions) to the Provision			Current Utilization			Balance as of September 30, 2005
Workforce reduction	$	19,680	$	(786	)	$	(9,152	)	$	9,742
Consolidation of excess facilities		92,943		1,623			(23,966	)		70,601
Other contractual obligations		2,639		(244	)		(68	)		2,327
Total	$	115,262	$	593		$	(33,186	)	$	82,670

 

The increase in the provision for the consolidation of excess facilities for the three months ended September 30, 2005 was attributable to lower than expected sublease rentals.

17

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Charges for the Nine Months Ended September 30, 2004

During the first nine months of 2004, we recorded restructuring and other special charges of $32.7 million. These charges included restructuring activities, as well as IPR&D charges of $15.2 million associated with the VMware acquisition. The 2004 restructuring program consisted of employee termination benefits of $11.7 million and facilities-related charges of $0.8 million. The remaining $5.0 million of charges was associated with prior restructuring programs.

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 the Data General acquisition, 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 the plan. The measurement date for the plans is December 31.

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

	For the Three Months Ended
	September 30, 2005			September 30, 2004
Interest cost	$	4,741		$	4,617
Expected return on plan assets		(7,050	)		(6,625	)
Amortization of transition asset		(153	)		(213	)
Recognized actuarial loss		1,589			1,372
Net periodic benefit credit	$	(873	)	$	(849	)

 

	For the Nine Months Ended
	September 30, 2005			September 30, 2004
Interest cost	$	14,222		$	13,851
Expected return on plan assets		(21,151	)		(19,875	)
Amortization of transition asset		(458	)		(641	)
Recognized actuarial loss		4,768			4,116
Net periodic benefit credit	$	(2,619	)	$	(2,549	)

 

Post-Retirement Medical and Life Insurance Plan

Our post-retirement benefit plan, which was assumed in connection with the acquisition of Data General, 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.

18

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	For the Three Months Ended
	September 30, 2005			September 30, 2004
Interest cost	$	60		$	69
Expected return on plan assets		(7	)		(8	)
Amortization of transition asset		(25	)		(25	)
Recognized actuarial gain		(10	)		(11	)
Net periodic benefit cost	$	18		$	25

 

	For the Nine Months Ended
	September 30, 2005			September 30, 2004
Interest cost	$	180		$	207
Expected return on plan assets		(22	)		(24	)
Amortization of transition asset		(75	)		(75	)
Recognized actuarial gain		(30	)		(33	)
Net periodic benefit cost	$	53		$	75

 

11. Stockholders’ Equity

Stock Option Plans

In May 2005, our shareholders approved amendments to the 2003 Plan which (i) increased by 100.0 million the number of shares of common stock available for grant under the 2003 Plan and (ii) increased the number of shares which may be issued pursuant to awards of restricted stock and/or restricted stock units to 30% of the total authorized shares under the 2003 Plan.

During the nine months ended September 30, 2005, 10.2 million shares of restricted stock were granted under the 2003 Plan. A majority of these shares were granted to employees of VMware as restricted stock awards designed to retain and motivate highly qualified personnel. The shares of restricted stock granted to VMware employees cliff vest at the end of five years; however, in the event that certain performance-related criteria are met, the vesting accelerates. All restricted stock awards are recorded as deferred compensation and are being amortized over the vesting period of the awards.

Common Stock Repurchase Program

Our Board of Directors has authorized the repurchase of up to 300.0 million shares of our common stock. The purchased shares will be available for various corporate purposes, including our stock option and employee stock purchase plans. We repurchased 45.1 million shares at a cost of $603.4 million during the nine months ended September 30, 2005. As of September 30, 2005, we had reacquired a total of 153.7 million shares at a cost of $1,658.3 million.

12. Income Taxes

Our effective income tax rate was 0.6% for the three months ended September 30, 2005, and 17.0% for the nine months ended September 30, 2005. 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, 2005, the effective tax rate varied from the statutory tax rate 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. Additionally, during the three and nine month periods

19

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

ended September 30, 2005, we recognized a $105.7 million and $113.1 million benefit, respectively, resulting from the favorable resolution of certain income tax audits and expiration of statutes of limitations. Partially offsetting this benefit for the nine months ended September 30, 2005 was a non-deductible IPR&D charge of $3.1 million incurred in connection with the Smarts acquisition.

Our effective income tax rate was 29.0% for the three months ended September 30, 2004, and 29.6% for the 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. Partially offsetting this benefit were non-deductible IPR&D charges of $15.2 million incurred in connection with the VMware acquisition during the nine months ended September 30, 2004.

In October 2004, the American Jobs Creation Act of 2004 (the “AJCA”) was passed. The AJCA provides a deduction for income from qualified domestic production activities which will be phased in from 2005 through 2010. In return, the AJCA also provides for a two-year phase-out of the existing extra-territorial income exclusion for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. In December 2004, the FASB issued FASB Staff Position No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities by the American Jobs Creation Act of 2004.” FSP 109-1 treats the deduction as a “special deduction” as described in FAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the same period in which the deduction is claimed in our tax return.

The AJCA also created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. In October 2005, our Chief Executive Officer and Board of Directors approved a domestic reinvestment plan to repatriate up to $3.0 billion in foreign earnings. The repatriation will be completed by December 31, 2005.

The repatriation will result in a fourth quarter tax expense of up to approximately $200 million. Had the repatriation been recorded in the quarter ended September 30, 2005, net income would have been approximately $221.7 million and basic and diluted earnings per share would have been approximately $0.09.

13. Subsequent Event

In October 2005, we entered into a definitive agreement to acquire all of the outstanding capital stock of Captiva Software Corporation (“Captiva”). Under the agreement, we will pay $22.25 per share in cash or approximately $275 million, which is net of Captiva’s cash balance. Captiva is a leading provider of input management solutions which provide for the conversion of paper-based information to digital formats. The acquisition extends our enterprise content management offerings by addressing the early stages of information lifecycle management, including information capture, digitization and categorization. The acquisition is subject to regulatory and Captiva shareholder approval. We expect the transaction to be completed in either late 2005 or early 2006.

20

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 4, 2005. The following discussion contains forward-looking statements and should also be read in conjunction with “FACTORS THAT MAY AFFECT FUTURE RESULTS” beginning on page 31. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures or business combinations that may be announced after the date hereof.

All dollar amounts in this MD&A are in millions, except per share amounts.

INTRODUCTION

Our financial objective is to achieve profitable growth. Management believes that by providing a combination of systems, software, services and solutions to meet customers’ needs, we will be able to further increase revenues. Our operating income as a percentage of revenues increased from 11.6% for the nine months ended September 30, 2004 to 15.2% for the nine months ended September 30, 2005. Our efforts in 2004 and 2005 have been primarily focused on improving operating margins by increasing gross margins and reducing operating expenses as a percentage of revenues. Additionally, we have been expanding our portfolio of offerings to satisfy our customers’ requirements. We plan to continue to focus our efforts in 2005 on improving our operating and gross margins and expanding our product offerings. One of our objectives is to increase operating income as a percentage of revenues to the high teens in the fourth quarter of 2005.

Results of Operations

Revenues

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

	For the Three Months Ended
	September 30, 2005		September 30, 2004		$ Change			% Change
Information storage products	$	1,376.3	$	1,224.8	$	151.5			12	%
Information storage and management services		472.0		378.3		93.7			25
EMC Software Group products and services		409.0		350.9		58.1			17
VMware products and services		101.3		60.6		40.7			67
Other businesses		7.2		14.3		(7.1	)		(50	)
Total revenues	$	2,365.7	$	2,028.9	$	336.8			17	%

 

	For the Nine Months Ended
	September 30, 2005		September 30, 2004		$ Change			% Change
Information storage products	$	4,068.3	$	3,564.3	$	504.0			14	%
Information storage and management services		1,368.7		1,082.0		286.7			26
EMC Software Group products and services		1,218.6		1,027.2		191.4			19
VMware products and services		272.3		147.1		125.2			85
Other businesses		25.9		51.1		(25.2	)		(49	)
Total revenues	$	6,953.7	$	5,871.7	$	1,082.0			18	%

 

21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

Information storage products revenues include information storage systems and information storage software license revenues. Information storage systems revenues were $1,091.9 and $948.9 for the third quarters of 2005 and 2004, respectively, representing an increase of 15%, and were $3,186.6 and $2,774.1 for the first nine months of 2005 and 2004, respectively, also representing an increase of 15%. The increases were due to greater demand for these products attributable to wider customer acceptance of information lifecycle management-based solutions, increased demand for IT infrastructure products and enhanced distribution channels. Information storage software license revenues were $284.4 and $275.9 for the third quarters of 2005 and 2004, respectively, representing an increase of 3%, and were $881.8 and $790.2 for the first nine months of 2005 and 2004, respectively, representing an increase of 12%. Information storage software license revenues consist of revenues from platform-based software whose operation generally controls and enables functions that take place within an EMC storage system. The increases in information storage software license revenues were attributable to expanded product offerings, a greater demand for software to manage increasingly complex high-end and midrange networked storage environments and enhanced distribution channels. The increase for the third quarter of 2005 is lower compared to the increase for the nine months ended September 30, 2005 as a result of a change in the mix of information storage systems sold resulting in more units with a lower software content.

Information storage and management services revenues include platform-based software maintenance revenues, systems maintenance revenues and professional services revenues. Information storage and management services revenues increased due to greater demand for professional services, largely to support and implement information lifecycle management-based solutions. Additionally, increased demand for both software and system maintenance contracts associated with increased sales of information storage products contributed to the revenue increases.

EMC Software Group products and services revenues increased due to greater demand for backup and archive software, resource management software, content management software and related maintenance and other services revenues. Software license revenues increased 13% from $212.4 for the third quarter of 2004 to $239.1 for the third quarter of 2005, and increased 15% from $635.3 for the first nine months of 2004 to $727.7 for the first nine months of 2005. Related services revenues increased 23% from $138.5 for the third quarter of 2004 to $169.9 for the third quarter of 2005, and increased 25% from $391.9 for the first nine months of 2004 to $490.9 for the first nine months of 2005. The growth in services revenues was primarily due to increased software maintenance revenues.

The increases in VMware products and services revenues were attributable to increased demand for virtual infrastructure software and the introduction of new product offerings. License revenues increased 44% from $49.7 for the third quarter of 2004 to $71.8 for the third quarter of 2005, and increased 64% from $121.7 for the first nine months of 2004 to $200.0 for the first nine months of 2005. Maintenance and other services revenues increased 171% from $10.9 for the third quarter of 2004 to $29.4 for the third quarter of 2005, and increased 185% from $25.4 for the first nine months of 2004 to $72.2 for the first nine months of 2005. The growth in services revenues was primarily due to increased software maintenance revenues.

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

Revenues by geography were as follows:

	For the Three Months Ended
	September 30, 2005		September 30, 2004		Percentage Change
North America, excluding Mexico	$	1,400.9	$	1,198.5		17	%
Europe, Middle East and Africa		638.8		549.8		16
Asia Pacific		265.2		232.2		14
Latin America and Mexico		60.8		48.4		26

 

22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

	For the Nine Months Ended
	September 30, 2005		September 30, 2004		Percentage Change
North America, excluding Mexico	$	4,082.1	$	3,414.3		20	%
Europe, Middle East and Africa		1,942.9		1,657.1		17
Asia Pacific		770.8		674.7		14
Latin America and Mexico		157.9		125.6		26

 

Revenue increased in the three and nine months ended September 30, 2005 compared to the three and nine months ended September 30, 2004 in all geographies due to greater demand for our products and services and enhanced distribution channels. Changes in exchange rates favorably impacted consolidated revenue growth by 0.6% and 1.3% for the three and nine months ended September 30, 2005, respectively. The impact of the change in rates was most significant in the European market on a year-to-date basis and primarily in Brazil for the quarter ended September 30, 2005.

For 2005, we expect our consolidated revenues to grow at approximately 17% over 2004. However, our revenues could be negatively impacted by a number of factors, including the economy, demand for IT infrastructure, product availability, competitive factors and changes in exchange rates.

Costs and expenses

The following tables present our costs, gross margins, expenses and net income. Certain columns may not add due to rounding.

	For the Three Months Ended
	September 30, 2005		September 30, 2004		$ Change			% Change
Cost of revenue:
Information storage products	$	769.5	$	707.4	$	62.1			9	%
Information storage and management services		211.6		185.4		26.2			14
EMC Software Group products and services		85.0		73.9		11.1			15
VMware products and services		18.2		11.9		6.3			53
Other businesses		3.8		7.1		(3.3	)		(46	)
Total cost of revenue		1,088.1		985.7		102.4			10
Gross margins:
Information storage products		606.8		517.4		89.4			17
Information storage and management services		260.3		192.9		67.4			35
EMC Software Group products and services		324.0		277.0		47.0			17
VMware products and services		83.1		48.7		34.4			71
Other businesses		3.4		7.2		(3.8	)		(53	)
Total gross margins		1,277.6		1,043.2		234.4			22
Operating expenses:
Research and development		254.7		215.7		39.0			18
Selling, general and administrative		641.2		557.5		83.7			15
Restructuring and other special charges		5.8		—		(5.8	)		(100	)
Total operating expenses		901.7		773.2		128.5			17
Operating income		375.8		270.0		105.8			39
Investment income, interest expense, and other expense, net		48.5		36.9		11.6			31
Income before income taxes		424.3		307.0		117.3			38
Income tax provision		2.6		89.0		86.4			97
Net income	$	421.7	$	218.0	$	203.7			93	%

 

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

	For the Nine Months Ended
	September 30, 2005		September 30, 2004		$ Change			% Change
Cost of revenue:
Information storage products	$	2,285.6	$	2,078.6	$	207.0			10	%
Information storage and management services		635.8		532.2		103.6			19
EMC Software Group products and services		259.7		226.6		33.1			15
VMware products and services		50.4		31.5		18.9			60
Other businesses		13.7		24.0		(10.3	)		(43	)
Total cost of revenue		3,245.2		2,892.9		352.3			12
Gross margins:
Information storage products		1,782.8		1,485.7		297.1			20
Information storage and management services		732.8		549.8		183.0			33
EMC Software Group products and services		958.8		800.6		158.2			20
VMware products and services		221.9		115.7		106.2			92
Other businesses		12.2		27.1		(14.9	)		(55	)
Total gross margins		3,708.5		2,978.8		729.7			24
Operating expenses:
Research and development		742.4		625.4		117.0			19
Selling, general and administrative		1,899.6		1,640.9		258.7			16
Restructuring and other special charges		6.8		32.7		(25.9	)		(79	)
Total operating expenses		2,648.8		2,299.0		349.8			15
Operating income		1,059.7		679.8		379.9			56
Investment income, interest expense, and other expense, net		127.6		102.3		25.3			25
Income before income taxes		1,187.3		782.1		405.2			52
Income tax provision		202.4		231.4		(29.0	)		13
Net income	$	984.8	$	550.6	$	434.3			79	%

 

Gross Margins

Information storage products gross margin percentages were 44.1% and 42.2% for the third quarters of 2005 and 2004, respectively, and were 43.8% and 41.7% for the first nine months of 2005 and 2004, respectively. The increases in the gross margin percentages were attributable to achieving higher sales volumes while reducing component costs as a percentage of revenues, partially offset by a reduction in the mix of software license revenues to total revenues.

The gross margin percentages for information storage and management services were 55.2% and 51.0% for the third quarters of 2005 and 2004, respectively, and were 53.5% and 50.8% for the first nine months of 2005 and 2004, respectively. The gross margin improvements were driven by a shift in the mix of our maintenance services offerings with a greater proportion of revenues being derived from software maintenance contracts compared to systems maintenance contracts. Software maintenance contracts provide a higher gross margin than systems maintenance contracts. Improvements in the gross margins earned from professional services also contributed to the increase in gross margin percentage. The gross margin for professional services improved due to the mix of services provided with an increase in higher value services.

The gross margin percentages for the EMC Software Group products and services segment were 79.2% and 79.0% for the third quarters of 2005 and 2004, respectively, and 78.7% and 77.9% for the first nine months of 2005 and 2004, respectively. The increases in the gross margin percentages were primarily

24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

attributable to a more efficient cost structure for software maintenance and professional services offerings. For the nine months ended September 30, 2005, this increase was partially offset by a greater proportion of revenues being derived from services contracts compared to software licenses. Software licenses provide a higher gross margin than services.

The gross margin percentages for the VMware products and services segment were 82.1% and 80.4% for the third quarters of 2005 and 2004, respectively, and were 81.5% and 78.6% for the first nine months of 2005 and 2004, respectively. The gross margin improvements were attributable to achieving higher sales volumes while controlling our operating cost structure. Additionally, amortization expense associated with acquired intangible assets was spread over a larger revenue base, resulting in margin improvement. Partially offsetting these improvements in the gross margin percentages was a shift in the mix of software license revenue and services revenues, with a greater proportion of revenues being derived from services.

The gross margin percentages for other businesses were 47.4% and 50.2% for the third quarters of 2005 and 2004, respectively, and were 47.2% and 53.0% for the first nine months of 2005 and 2004, respectively. The decreases in the gross margin percentages resulted from declining revenues in this segment as the volume of AViiON maintenance contracts decreased.

Research and Development

As a percentage of revenues, research and development (“R&D”) expenses were 10.8% and 10.6% for the third quarters of 2005 and 2004, respectively, and were 10.7% for the first nine months of 2005 and 2004. In addition, we spent $38.7 and $40.2 in the third quarters of 2005 and 2004, respectively, and $121.2 and $126.6 in the first nine months of 2005 and 2004, respectively, on software development costs which were capitalized. R&D spending includes enhancements to our software and information storage systems. R&D expenses increased from $215.7 in the third quarter of 2004 to $254.7 in the third quarter of 2005 and increased from $625.4 in the first nine months of 2004 to $742.4 in the first nine months of 2005. The increases in R&D expenses were primarily attributable to increased headcount and related compensation costs to further enhance our development efforts on both software and systems.

Selling, General and Administrative

As a result of our focus on controlling costs, selling, general and administrative (“SG&A”) expenses grew at a slower rate than revenue during the three and nine months ended September 30, 2005. As a percentage of revenues, SG&A expenses were 27.1% and 27.5% for the third quarters of 2005 and 2004, respectively, and were 27.3% and 27.9% for the first nine months of 2005 and 2004, respectively. In absolute dollars, SG&A expenses increased from $557.5 in the third quarter of 2004 to $641.2 in the third quarter of 2005 and increased from $1,640.9 in the first nine months of 2004 to $1,899.6 in the first nine months of 2005. The increases in SG&A expenses were primarily attributed to higher selling costs associated with the growth in revenues, the acquisition of Smarts in February 2005 and higher levels of general and administrative expenses to support the overall growth in the business.

Restructuring and Other Special Charges

Charges for the Three and Nine Months Ended September 30, 2005

During the three and nine months ended September 30, 2005, we recorded $5.8 and $6.8, respectively, in restructuring charges. The $5.8 recognized in the third quarter of 2005 represents adjustments to restructuring charges recognized in prior years for additional costs associated with excess facilities, net of a reduction of our severance accrual of charges taken in prior years. The remaining $1.0 of restructuring and other special charges recognized during the nine months ended September 30, 2005 were recognized in the first quarter of 2005 and consisted of an IPR&D charge of $3.1 associated with the Smarts acquisition, partially offset by a net restructuring reduction of $2.1. The net restructuring reduction included an aggregate of $5.2 of reductions

25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

associated with our prior restructuring programs partially offset by a $3.1 provision for employee termination benefits for individuals in our EMC Software Group products and services segment. The reductions were primarily attributable to lower than expected lease payout obligations associated with vacated facilities.

The workforce reduction recognized in the first quarter of 2005 impacted approximately 60 individuals across our major business functions. The expected cash impact of the workforce reduction is $3.1, of which $0.4 and $1.4 were paid in the three and nine month periods ended September 30, 2005, respectively. Approximately 84% of such employees were based in North America and the remainder were based in Europe. As of September 30, 2005, the reduction in force had been substantially completed. The remaining cash expenditures relating to workforce reduction are expected to be substantially paid by the end of 2006.

From 1998 through 2004, we implemented several restructuring programs. The activity for these restructuring programs including the adjustments made in 2005 for the three and nine months ended September 30, 2005 is presented below:

Three Months Ended September 30, 2005

Category	Balance as of June 30, 2005		Additions (Reductions) to the Provision			Current Utilization			Balance as of September 30, 2005
Workforce reduction	$	14.0	$	(1.0	)	$	(3.2	)	$	9.8
Consolidation of excess facilities		69.3		6.8			(5.6	)		70.6
Other contractual obligations		2.3		—			—			2.3
Total	$	85.6	$	5.8		$	(8.8	)	$	82.6

 

Nine Months Ended September 30, 2005

Category	Balance as of December 31, 2004		Additions (Reductions) to the Provision			Current Utilization			Balance as of September 30, 2005
Workforce reduction	$	19.6	$	(0.8	)	$	(9.1	)	$	9.8
Consolidation of excess facilities		93.0		1.6			(24.0	)		70.6
Other contractual obligations		2.6		(0.3	)		—			2.3
Total	$	115.2	$	0.6		$	(33.1	)	$	82.6

 

The increase in the provision for the consolidation of excess facilities for the three months ended September 30, 2005 was attributable to lower than expected sublease rentals.

Charges for the Nine Months Ended September 30, 2004

During the first nine months of 2004, we recorded restructuring and other special charges of $32.7. These charges included 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 $11.7 and facilities-related charges of $0.8. The remaining $5.0 of charges was associated with prior restructuring programs.

Investment Income

     Investment income increased to $48.0 for the third quarter of 2005 from $38.4 for the third quarter of 2004 and increased to $134.5 for the first nine months of 2005 from $115.4 for the first nine months of 2004. The increases were due to higher yields and a larger outstanding investment balance, partially offset by realized losses from the sale of investments. The weighted average return on investments, excluding realized gains and losses, was 3.5% and 2.7% for the third quarters of 2005 and 2004, respectively, and was 3.3% and 2.5% for the first nine months of 2005 and 2004, respectively. Realized losses were $16.6 and $5.1 for the third quarters of 2005 and 2004, respectively, and were $43.2 and $5.3 for the first nine months of 2005 and 2004, respectively.

26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

Other Income (Expense), net

Other income, net was $2.5 for the third quarter of 2005 compared to $0.5 for the third quarter of 2004. Other expense, net was $(0.9) for the first nine months of 2005 compared to $(7.5) for the first nine months of 2004. The improvements in both periods were primarily due to lower foreign currency losses.

Provision for Income Taxes

Our effective income tax rate was 0.6% for the three months ended September 30, 2005, and 17.0% for the nine months ended September 30, 2005. 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, 2005, the effective tax rate varied from the statutory tax rate 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. Additionally, during the three and nine month periods ended September 30, 2005, we recognized a $105.7 and $113.1 benefit, respectively, resulting from the favorable resolution of certain income tax audits and expiration of statutes of limitations. Partially offsetting this benefit for the nine months ended September 30, 2005 was a non-deductible IPR&D charge of $3.1 incurred in connection with the Smarts acquisition.

Our effective income tax rate was 29.0% for the three months ended September 30, 2004, and 29.6% for the 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. Partially offsetting this benefit were non-deductible IPR&D charges of $15.2 incurred in connection with the VMware acquisition during the nine months ended September 30, 2004.

In October 2004, the American Jobs Creation Act of 2004 (the “AJCA”) was passed. The AJCA provides a deduction for income from qualified domestic production activities which will be phased in from 2005 through 2010. In return, the AJCA also provides for a two-year phase-out of the existing extra-territorial income exclusion for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. In December 2004, the FASB issued FASB Staff Position No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities by the American Jobs Creation Act of 2004.” FSP 109-1 treats the deduction as a “special deduction” as described in FAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the same period in which the deduction is claimed in our tax return.

The AJCA also created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. In October 2005, our Chief Executive Officer and Board of Directors approved a domestic reinvestment plan to repatriate up to $3,000.0 in foreign earnings. The repatriation will be completed by December 31, 2005.

The repatriation will result in a fourth quarter tax expense of up to approximately $200.0. Had the repatriation been recorded in the quarter ended September 30, 2005, net income would have been approximately $221.7 and basic and diluted earnings per share would have been approximately $0.09.

Financial Condition

Cash and cash equivalents and short and long-term investments were $7,620.4 and $7,440.8 at September 30, 2005 and December 31, 2004, respectively, an increase of $179.6.

27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

Cash provided by operating activities for the first nine months of 2005 was $1,619.2 compared to $1,453.2 for the first nine months of 2004. Cash received from customers was $7,149.4 and $6,090.4 for the first nine months of 2005 and 2004, respectively. The increase was attributable to higher sales volume and greater proceeds for future maintenance contracts. Additionally, we received $65.0 from Hewlett-Packard Company (“HP”) for future product purchases in connection with the settlement of all outstanding patent litigation between us and HP announced in May 2005. Cash paid to suppliers and employees was $5,646.1 and $4,680.5 for the first nine months of 2005 and 2004, respectively. The increase was partially attributable to higher headcount associated with the acquisitions of Dantz Development Corporation in 2004, Smarts and Rainfinity, Inc. (“Rainfinity”) in 2005 and the general growth of the business. Additionally, greater levels of component purchases to meet customer demand for information storage systems contributed to the increased amount of payments to suppliers. As part of our transition plan for our new high end storage system product line announced in July 2005, we also began increasing the inventory levels for such new products at the end of the second quarter of 2005 that continued through the third quarter of 2005. Cash received from dividends and interest was $184.1 and $113.7 for the first nine months of 2005 and 2004, respectively. The increase was due to higher rates of return earned on our investments and higher average investment balances. In the first nine months of 2005 and 2004, we paid $61.2 and $65.6, respectively, in income taxes.

Cash used for investing activities was $1,138.3 for the first nine months of 2005, compared to $1,510.5 for the first nine months of 2004. In the first nine months of 2005, we acquired all the outstanding shares of Smarts for $256.1, and Rainfinity for $87.8, net of cash received. In the first nine months of 2004, we acquired all the outstanding shares of VMware for $537.7, net of cash received. Capital additions were $418.9 and $259.9 for the first nine months of 2005 and 2004, respectively. The increase in capital additions was primarily due to greater infrastructure to support the overall growth of the business. Depreciation and amortization expense on property, plant and equipment and intangible assets increased from $450.9 for the first nine months of 2004 to $474.9 for the first nine months of 2005. The increase was primarily due to incremental amortization associated with capitalized software made available for resale, greater depreciation associated with our investment in property, plant and equipment and incremental intangible amortization expense associated with acquisitions. Net purchases and (maturities) of investments, consisting primarily of debt securities, were $(240.0) and $(522.0) for the first nine months of 2005 and 2004, respectively.

In addition, we entered into a definitive agreement in October 2005 to acquire all of the outstanding capital stock of Captiva Software Corporation (“Captiva”) for approximately $275.0, which is net of Captiva’s cash balance. The acquisition is subject to regulatory and Captiva shareholder approval. We expect the transaction to be completed in either late 2005 or early 2006.

Amortization of deferred compensation increased to $56.7 for the first nine months of 2005 from $40.3 for the first nine months of 2004. The increase was attributable to the issuance of restricted stock to certain employees, partially offset by reduced levels of amortization expense associated with unvested stock options exchanged in connection with acquisitions. We expect the amount of amortization to increase in future periods as we issue additional shares of restricted stock.

Cash used for financing activities was $453.5 for the first nine months of 2005 compared to $309.4 for the first nine months of 2004. During the first nine months of 2005 we repurchased 45.1 million shares of our common stock at a cost of $603.4. During the first nine months of 2004 we repurchased 37.0 million shares of our common stock at a cost of $417.6. We generated $152.8 and $115.3 in the first nine months of 2005 and 2004, respectively, from the exercise of stock options and the purchase of shares under the employee stock purchase plan. We intend to purchase approximately $400.0 of our common stock in the fourth quarter of 2005.

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.

28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

We have available for use a credit line of $50.0 in the United States. As of September 30, 2005, 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, 2005, 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 at least the next twelve months.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“FAS”) No. 123R, “Share-Based Payment.” The statement replaces FAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”

FAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The adoption of the statement will result in the expensing of the fair value of stock options granted to employees in the basic financial statements. Previously, we elected to only disclose the impact of expensing the fair value of stock options in the notes to the financial statements. The statement is required to be adopted commencing with our first quarter of 2006.

FAS No. 123R applies to new equity awards and to equity awards modified, repurchased or canceled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the effective date shall be recognized as the requisite service is rendered on or after the effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated from the pro forma disclosures under FAS No. 123. Changes to the grant-date fair value of equity awards granted before the effective date of this statement are precluded. The compensation cost for those earlier awards shall be attributed to periods beginning on or after the effective date of this statement using the attribution method that was used under FAS No. 123, except that the method of recognizing forfeitures only as they occur shall not be continued. Any unearned or deferred compensation (contra-equity accounts) related to those earlier awards shall be eliminated against the appropriate equity accounts. Additionally, common stock purchased pursuant to stock options granted under our employee stock purchase plan will be expensed based upon the fair market value of the stock option.

The adoption of FAS No. 123R will have a material impact on our results of operations. Future results will be impacted by the number and value of additional equity awards as well as the value of existing unvested equity awards.

In March 2005, FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” which is an interpretation of FAS No. 143, “Accounting for Asset Retirement Obligations.” The interpretation requires a liability for the fair value of a conditional asset retirement obligation to be recognized if the fair value of the liability can be reasonably estimated. The interpretation is effective no later than the end of fiscal years ending after December 15, 2005, and is not expected to have a material impact on our financial position or results of operations.

In June 2005, FASB issued FAS No. 154, “Accounting Changes and Error Corrections.” This statement replaces APB Opinion No. 20, “Accounting Changes,” and FAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” The statement applies to all voluntary changes in accounting for and reporting of changes in accounting principles. FAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principles unless it is not practical to do so. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS

29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after May 31, 2005. The adoption of FAS No. 154 will not have a material impact on our financial position or results of operations.

In June 2005, FASB issued FASB Staff Position (“FSP”) No. FAS 143-1, “Accounting for Electronic Equipment Waste Obligations” to address the accounting for obligations associated with EU Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the “Directive”). The Directive requires EU member countries to adopt legislation to regulate the collection, treatment, recovery and environmentally sound disposal of electrical and electronic waste equipment. Under the Directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the equipment is replaced. Depending upon the law adopted by the particular country, upon replacement, the waste management obligation for that equipment may be transferred to the producer of the related equipment. The user retains the obligation if they do not replace the equipment.

FSP No. FAS 143-1 requires a commercial user to apply the provisions of FAS No. 143, “Accounting for Asset Retirement Obligations” and related FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” to waste obligations associated with historical equipment. The rules require that a liability be established for the retirement obligation with an offsetting increase to the carrying amount of the related asset. FSP No. FAS 143-1 is effective for the later of the first reporting period ending after June 8, 2005 or the date of adoption of the law by the applicable EU member country. The issuance of FSP No. FAS 143-1 is not expected to have a material impact on our financial position or results of operations.

30

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 announced 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. If these 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. 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.

Component costs, competitive pricing, and sales volume and mix could materially adversely affect our revenues, gross margins and earnings.

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 component costs, increased pricing pressures, the relative and varying rates of increases or decreases in component costs and product price, changes in product and services revenue mixture or decreased volume could have a material adverse effect on our revenues, gross margins or earnings.

The costs of third party components comprise a significant portion of our product costs. While we generally have been able to manage our component and product design costs, we may have difficulty managing such costs if supplies of certain components become limited or component prices increase. Any such limitation could result in an increase in our component costs. An increase in component or design costs relative to our product prices could have a material adverse effect on our gross margins and earnings. Moreover, certain competitors may have advantages due to vertical integration of their supply chain, which may include disk drives, microprocessors, memory components and servers.

The markets in which we do business are highly competitive and we encounter aggressive price competition for all of our products and services from numerous companies globally. 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. Such price competition may result in pressure on our product prices and reductions in product prices may have a material adverse effect on our revenues, gross margins and earnings. We currently believe that pricing pressures are likely to continue.

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

31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

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.

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

As part of our business strategy, we seek to acquire businesses that offer complementary products, services or technologies. These acquisitions are accompanied by the risks commonly encountered in an acquisition of a business, 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

• 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 shareholders 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.

32

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 and solutions or new products and solutions 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, management or virtualization 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. In addition, as the IT industry consolidates, companies may improve their competitive position and ability to compete against 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.

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

33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

• managing, protecting and enhancing, as appropriate, our infrastructure, including but not limited to, our information systems and internal controls

• 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, 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.

In addition, we have historically used stock options and other equity awards as key elements of our compensation packages for many of our employees. Under recent accounting rules, we will be required to treat stock-based compensation as an expense commencing in our first quarter of 2006. In addition, changes to regulatory or stock exchange rules and regulations and in institutional shareholder voting guidelines on equity plans may result in additional requirements or limitations on our equity plans. As a result, we may change our compensation practices with respect to the number of shares and type of equity awards used. The value of our equity awards may also be adversely affected by the volatility of our stock price. These factors may impair our ability to attract, retain and motivate employees.

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:

34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

• the relative dollar amount of our product and services offerings in relation to many of our customers’ budgets, resulting in long lead times for customers’ budgetary approval, which tends to be given late in a quarter

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

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

35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

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 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.

36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

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

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

From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, 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 effect 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.

37

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 4, 2005. 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.

38

PART II
OTHER INFORMATION

Item 1.     Legal Proceedings

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

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

ISSUER PURCHASES OF EQUITY SECURITIES IN THE THIRD QUARTER OF 2005

Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs3		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2005 – July 31, 2005		7,584,056	1	$	14.07		7,500,000		163,035,900
August 1, 2005 – August 31, 2005		14,767,500		$	13.61		14,767,500		148,268,400
September 1, 2005 – September 30, 2005		2,003,969	2	$	13.01		2,000,000		146,268,400
Total		24,355,525		$	13.70		24,267,500		146,268,400

 

¹    Includes an aggregate of 84,056 shares acquired from employees for tax withholding purposes.

²    Includes an aggregate of 3,969 shares acquired from employees for tax withholding purposes.

³    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 41 of this report.

39

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: October 28, 2005	By:  /s/ William J. Teuber, Jr. William J. Teuber, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)

 

40

EXHIBIT INDEX

3.1 Restated Articles of Organization of EMC Corporation, as amended. (1)

3.2 Amended and Restated By-laws of EMC Corporation. (2)

4.1 Form of Stock Certificate. (3)

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 Quarterly Report on Form 10-Q filed November 3, 2004 (No. 1-9853).

(3) Incorporated by reference to EMC Corporation’s Annual Report on Form 10-K filed March 31, 1988 (No. 0-14367).

41