10-Q

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 Quarterly Period Ended August 2, 2002

Commission file number: 0-17017

Dell Computer Corporation

(Exact name of registrant as specified in its charter)

Delaware	74-2487834
(State of incorporation)	(I.R.S. Employer ID No.)

One Dell Way

Round Rock, Texas 78682

(Address of principal executive offices)

807 Las Cimas Parkway, Building 2

Austin, Texas 78746

(Former address of principal executive offices)

(512) 338-4400

(Telephone number)

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 twelve months and (2) has been subject to such filing requirements for the past 90 days.     Yes þ     No o

As of the close of business on August 30, 2002, 2,589,841,698 shares of common stock, par value $.01 per share, were outstanding.

TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION
	ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART II -- OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 4. Submission of Matters to a Vote of Security Holders
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
EX-10.1 2002 Long Term Incentive Plan

PART I — FINANCIAL INFORMATION

ITEM 1.     Financial Statements

DELL COMPUTER CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(in millions; unaudited)

			August 2,			February 1,
			2002			2002
ASSETS
Current assets:
	Cash and cash equivalents		$	3,725		$	3,641
	Short-term investments			319			273
	Accounts receivable, net			2,590			2,269
	Inventories			291			278
	Other			1,358			1,416
		Total current assets		8,283			7,877
Property, plant and equipment, net				872			826
Investments				4,589			4,373
Other non-current assets				318			459
		Total assets	$	14,062		$	13,535
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	5,621		$	5,075
	Accrued and other			2,424			2,444
		Total current liabilities		8,045			7,519
Long-term debt				516			520
Other				935			802
		Total liabilities		9,496			8,841
Stockholders’ equity:
	Preferred stock and capital in excess of $.01 par value; shares issued and outstanding: none			—			—
	Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 2,666 and 2,654, respectively			5,805			5,605
	Treasury stock, at cost; 80 and 52 shares, respectively			(3,479	)		(2,249	)
	Retained earnings			2,322			1,364
	Other comprehensive income (loss)			(13	)		38
	Other			(69	)		(64	)
		Total stockholders’ equity		4,566			4,694
		Total liabilities and stockholders’ equity	$	14,062		$	13,535

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

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DELL COMPUTER CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts; unaudited)

			Three Months Ended					Six Months Ended
			August 2,		August 3,			August 2,		August 3,
			2002		2001			2002		2001
Net revenue			$	8,459	$	7,611		$	16,525	$	15,639
Cost of revenue				6,944		6,281			13,619		12,861
	Gross margin			1,515		1,330			2,906		2,778
Operating expenses:
	Selling, general and administrative			727		672			1,418		1,409
	Research, development and engineering			111		113			221		236
	Special charge			—		482			—		482
		Total operating expenses		838		1,267			1,639		2,127
		Operating income		677		63			1,267		651
Investment and other income (loss), net				49		(207	)		97		(149	)
	Income (loss) before income taxes			726		(144	)		1,364		502
Income tax provision (benefit)				225		(43	)		406		141
	Net income (loss)		$	501	$	(101	)	$	958	$	361
Earnings (loss) per common share:
	Basic		$	0.19	$	(0.04	)	$	0.37	$	0.14
	Diluted		$	0.19	$	(0.04	)	$	0.36	$	0.13
Weighted average shares outstanding:
	Basic			2,586		2,601			2,591		2,600
	Diluted			2,649		2,601			2,661		2,743

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

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DELL COMPUTER CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions; unaudited)

				Six Months Ended
				August 2,			August 3,
				2002			2001
Cash flows from operating activities:
	Net income			$	958		$	361
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			103			125
		Tax benefits of employee stock plans			220			163
		Special charges			—			742
		Other, primarily effects of exchange rates on monetary assets and liabilities denominated in foreign currencies			(214	)		129
	Changes in:
		Operating working capital			317			213
		Non-current assets and liabilities			63			40
			Net cash provided by operating activities		1,447			1,773
Cash flows from investing activities:
	Investments:
		Purchases			(3,044	)		(2,662	)
		Maturities and sales			2,755			1,703
	Capital expenditures				(140	)		(145	)
			Net cash used in investing activities		(429	)		(1,104	)
Cash flows from financing activities:
	Purchase of common stock				(1,230	)		(1,490	)
	Issuance of common stock under employee plans				99			166
	Other				1			13
			Net cash used in financing activities		(1,130	)		(1,311	)
Effect of exchange rate changes on cash					196			(108	)
Net increase (decrease) in cash					84			(750	)
Cash and cash equivalents at beginning of period					3,641			4,910
Cash and cash equivalents at end of period				$	3,725		$	4,160

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

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DELL COMPUTER CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 — BASIS OF PRESENTATION

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements of Dell Computer Corporation (the “Company”) should be read in conjunction with the consolidated financial statements and notes thereto filed with the U.S. Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2002. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the financial position of the Company and its consolidated subsidiaries at August 2, 2002 and February 1, 2002, and the results of their operations and their cash flows for the three and six months ended August 2, 2002 and August 3, 2001.

Revenue Recognition — Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). The Company offers separately-priced extended service contracts to customers that extend the support, parts and labor coverage offered as a part of the base warranty included with the product. The Company allocates fees from multiple element arrangements to the various elements based on the relative fair values of each element. Fair values are generally determined based on separate list prices. Product revenue is recognized when both title and risk of loss transfer to the customer, provided that no significant obligations remain. The Company provides for an estimate of product returns and doubtful accounts, based on historical experience. Revenue from service and extended warranty contracts for which the Company is obligated to perform is deferred and subsequently recognized on a gross basis over the term of the contract. Revenue from sales of third party service and extended warranty contracts for which the Company is not obligated to perform is recognized on a net basis at the time of sale. Professional services revenue is recorded when services are performed.

The Company does not recognize revenue for product shipments until received by the customer, although title transfers to the customer on substantially all products when shipped. Consequently, the product costs related to these in-transit customer shipments are included in other current assets in the accompanying condensed consolidated statement of financial position.

Website Development Costs — The Company expenses the cost of maintenance and minor enhancements to the features and functionality of its websites.

NOTE 2 — INVENTORIES

		August 2,		February 1,
		2002		2002
		(in millions)
Inventories:
	Production materials	$	167	$	153
	Work-in-process and finished goods		124		125
		$	291	$	278

NOTE 3 — EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income (loss) by the weighted average shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares used in the basic earnings (loss) per share calculation plus the number of common shares

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that would be issued assuming conversion of all potentially dilutive common shares outstanding. The following table sets forth the computation of basic and diluted earnings (loss) per share:

			Three Months Ended					Six Months Ended
			August 2,		August 3,			August 2,		August 3,
			2002		2001			2002		2001
			(in millions, except per share amounts)
Net income (loss)			$	501	$	(101	)	$	958	$	361
	Weighted average shares outstanding:
		Basic		2,586		2,601			2,591		2,600
		Employee stock options and other		63		—			70		143
		Diluted		2,649		2,601			2,661		2,743
Earnings (loss) per common share:
		Basic	$	0.19	$	(0.04	)	$	0.37	$	0.14
		Diluted	$	0.19	$	(0.04	)	$	0.36	$	0.13

Employee stock options and put obligations exercisable for 197 million and 319 million shares during the second quarter of fiscal 2003 and 2002, respectively, and for 197 million and 260 million shares during the six-month periods ended August 2, 2002 and August 3, 2001, respectively, were not included in the computation of diluted weighted average shares outstanding because the effect of such instruments was antidilutive.

NOTE 4 — COMPREHENSIVE INCOME (LOSS)

The Company’s comprehensive income (loss) is comprised of net income (loss), foreign currency translation adjustments, unrealized gains (losses) on derivative financial instruments related to foreign currency hedging, and unrealized gains (losses) on marketable securities classified as available-for-sale. Comprehensive income (loss) for the three- and six-month periods ended August 2, 2002 and August 3, 2001, was as follows:

		Three Months Ended						Six Months Ended
		August 2,			August 3,			August 2,			August 3,
		2002			2001			2002			2001
		(in millions)
Comprehensive income (loss):
	Net income (loss)	$	501		$	(101	)	$	958		$	361
	Foreign currency translations		2			—			3			1
	Unrealized gains (losses) on foreign currency hedging instruments		(4	)		(39	)		(93	)		9
	Unrealized gains (losses) on marketable securities		36			3			39			(74	)
Total comprehensive income (loss), net of taxes		$	535		$	(137	)	$	907		$	297

NOTE 5 — SEGMENT INFORMATION

The Company conducts operations worldwide and is primarily managed on a geographic basis, with those geographic segments being the Americas, Europe, and Asia Pacific-Japan regions. The Americas region, which is based in Round Rock, Texas, covers the United States, Canada, South America, and Latin America. The Company has two reportable segments within the Americas: Business and U.S. Consumer. The Americas Business segment includes sales to commercial, government and education customers. The European region, which is based in Bracknell, England, covers the European countries and also some countries in the Middle East and Africa. The Asia Pacific-Japan region covers the Pacific Rim, including Japan, Australia and New Zealand, and is based in Singapore. The accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2002. The Company allocates resources to and evaluates the performance of its segments based on operating income. Corporate expenses are included in the Company’s measure of segment operating income for management reporting purposes.

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The table below presents information about the Company’s reportable segments for the three- and six-month periods ended August 2, 2002 and August 3, 2001:

				Three Months Ended					Six Months Ended
				August 2,		August 3,			August 2,		August 3,
				2002		2001			2002		2001
				(in millions)
Net revenue:
	Americas:
		Business		$	5,046	$	4,549		$	9,433	$	9,023
		U.S. Consumer			1,095		853			2,314		1,824
			Total Americas		6,141		5,402			11,747		10,847
	Europe				1,526		1,483			3,184		3,235
	Asia Pacific-Japan				792		726			1,594		1,557
Total net revenue				$	8,459	$	7,611		$	16,525	$	15,639
Operating income:
	Americas:
		Business		$	486	$	406		$	893	$	789
		U.S. Consumer			59		26			131		45
			Total Americas		545		432			1,024		834
	Europe				78		82			150		209
	Asia Pacific-Japan				54		31			93		90
	Less: Special charge				—		(482	)		—		(482	)
Total operating income				$	677	$	63		$	1,267	$	651

NOTE 6 — SPECIAL CHARGES

During fiscal 2001 and 2002, the Company undertook two separate actions to reduce its workforce and exit certain activities to align its cost structure with ongoing economic and industry conditions. Special charges of $105 million and $482 million related to these actions were recorded in operating expenses in the fourth quarter of fiscal 2001 and the second quarter of fiscal 2002, respectively. As part of these actions, the Company eliminated approximately 5,700 employee positions worldwide from various business functions and job classes. Non-cash charges consisted primarily of buildings being exited, as well as equipment, technology/software developed or purchased for internal use, and other assets being abandoned or disposed of as part of these actions. This included $75 million to write off goodwill and substantially all intellectual property associated with the fiscal 2000 acquisition of ConvergeNet Technologies, Inc. (ConvergeNet) due to the Company’s decision to discontinue the development of ConvergeNet’s proprietary storage technology.

A summary of special charges is as follows (in millions):

									Liability at
		Total				Non-Cash			August 2,
		Charge		Paid		Charges			2002
Employee separations		$	184	$	178	$	—		$	6
Facility consolidations			224		112		(79	)		33
Other asset impairments and exit costs			179		24		(152	)		3
	Total	$	587	$	314	$	(231	)	$	42

As of August 2, 2002, approximately $42 million of liabilities related to these charges remained accrued, which primarily represents net lease expenses that will be paid over the respective lease terms through fiscal 2006.

In addition to the special charges described above, the Company also recorded an impairment charge of $260 million during the second quarter of fiscal 2002 reflecting other-than-temporary declines in fair value of certain venture investments. This charge was recorded in investment and other income (loss), net.

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NOTE 7 — TRANSACTIONS WITH LEASING AFFILIATE

The Company is currently a partner in Dell Financial Services L.P. (“DFS”). Through a series of transactions more fully described below, CIT Group, Inc. (“CIT”) became the other venture partner in DFS. The joint venture brought together two parties with complementary interests: the Company wanted to enable sales of its products to customers who desired a financing option, and CIT wanted a steady source of originations for its financial services business. The existence of the joint venture allows the Company to provide customers with various financing alternatives and asset management services as a part of the total service package offered to the customer. CIT, as a financial services company, is the entity that finances the transaction between DFS and the customer.

The Company may sell equipment directly to customers who, in turn, enter into loans with DFS to finance their purchases. The Company recognized revenue on equipment sold to end-user customers which was financed with DFS installment loans in the amount of $422 million and $246 million during the second quarter of fiscal 2003 and fiscal 2002, respectively, and $868 million and $523 million during the six-month periods ended August 2, 2002 and August 3, 2001, respectively. In addition, when the Company’s customers desire lease financing, the Company usually sells equipment to DFS, and DFS will enter into direct financing lease arrangements with the customers. The Company recognizes revenue from the sale of equipment to DFS in accordance with the Company’s revenue recognition policy (see Note 1) because leases between DFS and the customer qualify as direct financing leases. The Company recognized revenue on sales to DFS in the amount of $295 million and $341 million during the second quarter of fiscal 2003 and 2002, respectively, and $565 million and $690 million during the six-month periods ended August 2, 2002 and August 3, 2001, respectively. Neither CIT nor DFS have any recourse or rights of return to the Company. The Company receives a referral fee from DFS for introducing customers to DFS for financing alternatives. Such fees were $10 million and $14 million for the second quarter of fiscal 2003 and fiscal 2002, respectively, and $22 million and $38 million for the six-month periods ended August 2, 2002 and August 3, 2001, respectively, and are included in net revenue.

In accordance with the partnership agreement between the Company and CIT, losses generated by DFS are allocated to CIT. Net income generated by DFS is allocated 70% to the Company and 30% to CIT, after CIT has recovered any cumulative losses. The Company’s share of DFS net income is reflected in investment and other income, net. The Company had recognized approximately $1 million of cumulative pretax earnings as of the end of fiscal 2002. Additionally, the Company has recognized $0.7 million and $1 million of pretax earnings for three and six months ended August 2, 2002. In the event DFS is terminated with a cumulative deficit, the Company is not obligated to fund any losses. Although the Company has a 70% equity interest in DFS, because the Company cannot and does not exercise control over DFS, the investment is accounted for under the equity method. The Company’s investment in DFS at August 2, 2002 was $24 million.

DFS was formed in fiscal 1998 by the Company and Newcourt Credit Group, Inc. (“Newcourt”). In fiscal 2000, Newcourt was acquired by CIT and in fiscal 2002, CIT was acquired by Tyco International Inc. (“Tyco”). In July 2002, Tyco spun off CIT as an independent company and, as a result, CIT became the Company’s partner in DFS.

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

Statements in this Report that relate to future results and events are based on the Company’s current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. For a discussion of factors affecting the Company’s business and prospects, see “Item 1 — Business — Factors Affecting the Company’s Business and Prospects” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2002.

All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full fiscal year.

Second Quarter Overview

During the second quarter and first six months of fiscal 2003, the Company continued to profitably grow and increase its market share, strengthening its reputation as a leading supplier of personal and business computing systems. The Company’s second quarter performance significantly exceeded the overall industry. Its net revenue, earnings and unit shipments increased year over year and sequentially, while its top competitors collectively experienced declining year-over-year revenues and continued operating losses in their personal computer systems and related businesses.

During the quarter, the Company further demonstrated the strength of its low-cost structure and efficient direct-to-customer model generating increased operating profitability. Gross margins for the quarter increased sequentially and year over year primarily as a result of a favorable shift in product mix toward enterprise and notebook computer systems and component cost declines resuming normal patterns. Additionally, the Company’s continued focus on cost control resulted in Company record-low operating expenses as a percentage of revenue and improved operating margins. By maintaining its strategy of profitable market share growth with a focus on improving overall profitability, management currently expects to continue to capitalize on market opportunities as the industry consolidates.

In addition, cash flow from operations was $1.4 billion for the first six months of fiscal 2003, and at August 2, 2002, the Company had cash and investments totalling $8.6 billion. The Company believes that going forward it will continue to generate strong cash flow relative to earnings, that it will grow market share even if the overall market does not grow, and that it is well positioned to capitalize on the economic upturn when it occurs.

Results of Operations

The following table summarizes the results of the Company’s operations for the three and six months ended August 2, 2002 and August 3, 2001.

	Three Months Ended										Six Months Ended
	August 2, 2002					August 3, 2001					August 2, 2002					August 3, 2001
			% of net						% of net				% of net					% of net
	Dollars		revenue			Dollars			revenue		Dollars		revenue			Dollars		revenue
	(dollars in millions)
Net revenue	$	8,459		100.0	%	$	7,611			100.0%	$	16,525		100.0	%	$	15,639		100.0%
Gross margin		1,515		17.9	%		1,330			17.5%		2,906		17.6	%		2,778		17.8%
Operating expenses		838		9.9	%		785			10.3%		1,639		9.9	%		1,645		10.5%
Special charge		—		—			482			6.4%		—		—			482		3.1%
Total operating expenses		838		9.9	%		1,267			16.7%		1,639		9.9	%		2,127		13.6%
Operating income		677		8.0	%		63			0.8%		1,267		7.7	%		651		4.2%
Net income (loss)	$	501		5.9	%	$	(101	)		-1.3%	$	958		5.8	%	$	361		2.3%

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Net Revenue

The following table summarizes the Company’s net revenue by geographic region:

				Three Months Ended				Six Months Ended
				August 2,		August 3,		August 2,		August 3,
				2002		2001		2002		2001
				(in millions)
Net revenue:
	Americas:
		Business		$	5,046	$	4,549	$	9,433	$	9,023
		U.S. Consumer			1,095		853		2,314		1,824
			Total Americas		6,141		5,402		11,747		10,847
	Europe				1,526		1,483		3,184		3,235
	Asia Pacific-Japan				792		726		1,594		1,557
Consolidated net revenue				$	8,459	$	7,611	$	16,525	$	15,639

The global economy remained soft and the resulting pressure on capital spending continued to impact overall industry demand. However, the Company’s net unit shipments increased 18% from the second quarter of fiscal 2002 as compared to a year-over-year industry decline of 5% (excluding the Company) for the second calendar quarter of 2002. The Company continued to profitably grow market share.

Average revenue per-unit sold decreased 6% compared to the same period a year ago, but was flat on a sequential basis. The year-over-year decline resulted primarily from competitive industry pricing and the Company’s practice of quickly passing component cost declines to its customers. The Company anticipates that average revenue per-unit will decline at a more moderate rate than in recent periods. However, the Company will adjust its pricing as necessary in response to further economic and competitive conditions.

In the second quarter and first six months of fiscal 2003, net revenue increased 11% and 6%, respectively, as compared to the same periods a year ago as growth in net unit shipments continued to drive an increase in net revenue. This increase was partially offset by declines in average revenue per unit. Net revenue in the second quarter of fiscal 2003 increased 5% sequentially, primarily as a result of the growth in unit shipments and a more favorable mix of notebook and enterprise products.

Overall, the Company’s second quarter geographic results were primarily driven by its performance in the Americas — and in the U.S. in particular. Americas net revenue increased 14% in the second quarter of fiscal 2003 compared to the same quarter a year ago and 10% sequentially. For the six-month period ended August 2, 2002, Americas net revenue increased 8% as compared to the same period in fiscal 2002. Net revenue in the U.S. Consumer segment grew 28% from the second quarter of fiscal 2002 as the Company continued to build on fiscal 2002 market share gains, and declined 10% sequentially consistent with normal seasonal patterns. Net revenue in the Business segment increased 11% in the second quarter of fiscal 2003 as compared to the same quarter in the previous year and 15% sequentially, driven primarily by the Company’s U.S. education and government businesses. These businesses experienced strong seasonal increases in unit shipments together with gains in market share.

Weak industry conditions continue to impact Europe. Second quarter net revenue increased 3% from the same period a year ago as unit growth offset declining average per-unit revenue. Net revenue decreased 8% sequentially, consistent with normal seasonal patterns. Net revenue in Asia Pacific-Japan increased 10% from the second quarter of fiscal 2002, as the Company experienced an improved enterprise product mix and improved market share in a weak market, while experiencing a seasonal decline of 12% from the first quarter.

The Company’s enterprise systems, which include servers, storage, networking products, and workstations, continued to outpace the industry with unit shipments growing 20% compared to the second quarter of fiscal 2002 and 5% sequentially; and compared to a year-over-year industry decline of 1% (excluding the Company) for the second calendar quarter of 2002. The Company continues to focus on extending its capabilities in enterprise systems. The Company has introduced new products, such as through its long-term strategic alliance with EMC Corporation (which enables the Company to address a broad range of customer needs with storage products that provide additional enterprise-class features), and has expanded its enterprise-level professional services and support offerings (such as Dell Professional Services® and Premier Enterprise

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Services®). In addition, the Company continues the trend of increasing the portion of its research, development and engineering expenses spent on enterprise systems, allowing the Company to remain competitive.

Notebook computer unit shipments increased 17% from the same period in fiscal 2002 and 11% sequentially, compared to year-over-year industry growth of 4% (excluding the Company) for the second calendar quarter of 2002. Desktop shipments continued to gain share while units increased 18% from second quarter fiscal 2002 levels and increased 4% sequentially, compared to year-over-year industry decline of 7% (excluding the Company) for the second calendar quarter of 2002.

Gross Margin

As a percentage of net revenue, gross margin increased from 17.5% in the second quarter of fiscal 2002 to 17.9% in the second quarter of fiscal 2003, while also increasing sequentially from 17.2%. On a year-to-date basis, gross margin decreased from 17.8% during the first six months of fiscal 2002 to 17.6% during the first six months of fiscal 2003. The year-over-year growth of second quarter gross margin occurred primarily as a result of a favorable shift in product mix toward enterprise systems, competitive cost reductions driven by moderating personal computer market demand, and the Company’s continued focus on control of component costs. Based on industry, economic and other factors discussed above, the Company currently expects that this gross margin environment will continue to be challenging, but the Company’s intent is to focus on continuing to improve gross margins and operating margins as the economy improves. Management believes that the strength of the Company’s direct-to-customer business model, as well as its strong liquidity position, makes the Company better positioned than its competitors to profitably grow market share in the current business climate.

Operating Expenses

The following table presents certain information regarding the Company’s operating expenses during the periods indicated:

	Three Months Ended										Six Months Ended
	August 2, 2002					August 3, 2001					August 2, 2002					August 3, 2001
			% of net					% of net					% of net					% of net
	Dollars		revenue			Dollars		revenue			Dollars		revenue			Dollars		revenue
	(dollars in millions)
Selling, general and administrative	$	727		8.6	%	$	672		8.8	%	$	1,418		8.6	%	$	1,409		9.0	%
Research, development and engineering		111		1.3	%		113		1.5	%		221		1.3	%		236		1.5	%
Special charge		—		—			482		6.4	%		—		—			482		3.1	%
Total operating expenses	$	838		9.9	%	$	1,267		16.7	%	$	1,639		9.9	%	$	2,127		13.6	%

Selling, general and administrative expenses increased in absolute dollar amounts and decreased as a percentage of revenue in the second quarter of fiscal 2003 as compared to the second quarter of fiscal 2002. Management continues to focus on aggressively managing expenses relative to actual revenue growth rates, and as a result, selling, general and administrative expenses as a percentage of net revenue declined to 8.6% in the most recent period, down from 8.8% in the same period a year ago.

During the second quarter of fiscal 2002, the Company undertook actions to reduce its workforce and exit certain activities to align its cost structure with ongoing economic and industry conditions resulting in a special charge of $482 million. As a result, the Company eliminated approximately 4,000 employee positions worldwide from various business functions and job classes. Non-cash charges consisted primarily of buildings being exited as well as equipment, technology/software developed or purchased for internal use, and other assets being abandoned or disposed as part of these actions. In addition, the Company also recorded an impairment charge of $260 million during the second quarter of fiscal 2002 reflecting other-than-temporary declines in fair value of certain venture investments. This impairment charge was recorded in investment and other income (loss), net.

The Company continues to invest in research, development and engineering activities to develop and introduce new products and to support its continued goal of improving and developing efficient procurement, manufacturing and distribution processes. For the three and six months ended August 2, 2002, research,

10

development and engineering expenses decreased slightly from the respective periods a year ago and remained flat sequentially in absolute dollars during the second quarter of fiscal 2003 as the Company managed its spending in light of current industry conditions. The Company expects to continue to invest in research, development and engineering activity, with an increasing emphasis on enterprise products, including servers and storage. The Company has received 796 U.S. patents and has applied for an additional 582 patents.

As part of its focus on improving margins, the Company remains focused on reducing costs to maintain price leadership and improve profitability. Currently, the focus is on four areas: manufacturing costs, warranty costs, structural or design costs, and overhead or operating expenses. Within these categories, some of the specific cost reduction initiatives include reductions in transformation costs, continued migration to low-cost sites, product design savings, and facilities rationalization.

Investment and Other Income (Loss), net

Investment and other income (loss), net, primarily includes interest income and expense, gains and losses from the sale of investments, and foreign exchange transaction gains and losses. For the second quarter of fiscal 2003 and 2002, investment and other income (loss), net, was $49 million and ($207) million, respectively. For the six months ended August 2, 2002 and August 3, 2001, investment and other income (loss), net, was $97 million and ($149) million, respectively. The prior year periods include the previously mentioned impairment charges of $260 million for other-than-temporary declines in fair value of the Company’s venture investments due to ongoing market conditions. Excluding the effect of such impairment charge, the year-on-year decrease of investment and other income (loss), net, is due primarily to declining interest rates and fewer investment gains in the Company’s private and public equity securities portfolio.

Income Taxes

The Company’s effective tax rate was 31% and 30% for the second quarter of fiscal 2003 and 2002, respectively. For the six-month periods ended August 2, 2002 and August 3, 2001, the Company’s effective tax rate was 30% and 28%, respectively. The higher effective rates for the second quarter of fiscal 2003 and 2002 result from revising the expected full year rate due to a higher mix of profits from the U.S. The Company’s effective tax rate is lower than the U.S. federal statutory rate of 35%, principally because of the Company’s geographical distribution of taxable income.

Liquidity and Capital Resources

Liquidity

The following table presents selected financial statistics and information:

	August 2,			February 1,
	2002			2002
	(dollars in millions)
Cash and investments	$	8,633		$	8,287
Working capital	$	238		$	358
Days of sales in accounts receivable		32			29
Days of supply in inventory		4			4
Days in accounts payable		73			69
Cash conversion cycle		(37	)		(36	)

The Company ended the second quarter with $8.6 billion in cash and investments. The Company invests a large portion of its available cash in highly liquid/ highly rated corporate, bank, and government debt securities of varying maturities at the date of acquisition. The Company’s investment policy is to manage its investment portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds. As of August 2, 2002, only $248 million of the Company’s cash and investments were represented by its venture portfolio of private and public equity investments as compared to $454 million a year ago.

During the first six months of fiscal 2003, the Company generated $1.4 billion in cash flows from operating activities, which represents the Company’s principal source of cash. Cash flows from operating activities resulted primarily from net income and income tax benefits that resulted from the exercise of employee stock options. These benefits represent corporate tax deductions (that are considered taxable income to the

11

employee) that represent the amount by which the fair value of the Company’s stock exceeds the option strike price on the day the employee exercises an option, that reduce the Company’s taxes payable, and that under generally accepted accounting principles are recorded directly to stockholders’ equity accounts rather than to earnings. Management believes that the Company’s cash provided from operations will continue to be strong and more than sufficient to support its operations and capital requirements, even if the economic climate should remain weak. The Company currently anticipates that it will continue to utilize its strong liquidity and cash flows to repurchase its common stock, make a limited number of strategic equity investments, consider and possibly make acquisitions and invest in systems and processes, as well as invest in the development and growth of its enterprise products.

The Company ended the second quarter of fiscal 2003 with a Company record cash conversion cycle of negative 37 days. Days of sales outstanding include the effect of customer shipments recorded in other current assets in the accompanying consolidated statement of financial position included in “Item 1 — Financial Statements”. For more information, see “Item 8 — Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended February 1, 2002.

Capital Commitments

Share Repurchases — The Company has a share repurchase program that it uses primarily to manage the dilution resulting from shares issued under the Company’s employee stock plans. As of the end of the second quarter of fiscal 2003, the Company had cumulatively repurchased 968 million shares under the program for an aggregate cost of $11 billion, or approximately $11 per share. Upon settlement of the remaining outstanding put obligations (discussed below), the Company will have repurchased its shares over the life of the program for approximately $12 per share. In June 2002, the Company’s Board of Directors increased the program by 250 million shares, bringing the total number of shares authorized under the share repurchase program to 1.25 billion. During the most recent quarter, the Company repurchased 14 million shares of common stock for an aggregate cost of $618 million. The Company has utilized equity instrument contracts to facilitate its repurchase of common stock, but has not entered into any new contracts since October 2000. At August 2, 2002, the Company had outstanding put obligations covering 22 million shares with an average exercise price of $47.82 per share for a total of $1 billion, including $18.5 million scheduled to expire in the first quarter of fiscal 2004. These puts had an estimated fair value liability of approximately $525 million (based on the closing market price of $24.13 as of August 2, 2002, for the Company’s stock). A 10% decrease in the Company’s stock price would increase the fair value of the put obligation by approximately $52 million, and a 10% increase would reduce the fair value by a like amount. Subsequent to August 2, 2002, the Company settled the $18.5 million scheduled to expire in the first quarter of fiscal 2004. The remaining equity instruments expire prior to the end of fiscal 2003 and are exercisable by the holder only at the date of expiration. However, these instruments contain termination triggers that allow the holder to force settlement beginning at an $8 share price. The outstanding put obligations at August 2, 2002 permitted net share settlement at the Company’s option and, therefore, did not result in a liability on the accompanying Condensed Consolidated Statement of Financial Position. The Company’s practice has been to physically settle in-the-money put contracts as they mature by repurchasing the shares subject to the contracts and plans to continue to utilize this settlement option. In connection with this program, the Company also has options allowing it to purchase 12.3 million shares of common stock. Currently, these options are significantly out of the money and will likely expire unexercised.

Capital Expenditures — The Company spent approximately $140 million on capital projects during the six-month period ended August 2, 2002. Product demand and mix, as well as ongoing efficiencies in operating and information technology infrastructure, influence the level and prioritization of the Company’s capital expenditures. Capital expenditures for the fiscal year 2003 are currently expected to be approximately $300 million.

Long Term Debt — As of August 2, 2002, the Company had outstanding $200 million in Senior Notes due April 15, 2008 and $300 million in Senior Debentures due April 15, 2028.

Master Lease Facilities — The Company maintains master lease facilities providing the capacity to fund up to $1.1 billion. At August 2, 2002, $635 million of the combined facilities had been utilized, and the Company currently does not expect any additional future utilization of these facilities.

Transactions with Leasing Affiliate — The Company is a partner with CIT in DFS. See Note 7 of “Notes to Condensed Consolidated Financial Statements” included in “Item 1 — Financial Statements.” DFS provides

12

the Company’s customers with various financing alternatives and asset management services as a part of a total service package offering, and CIT, as a financial services company, finances the transaction between DFS and the customer. In accordance with the partnership agreement between the Company and CIT, losses generated by DFS are allocated to CIT. Net income in DFS is allocated 70% to the Company and 30% to CIT, after CIT has recovered any cumulative losses. Although the Company has a 70% equity interest in DFS, because the Company cannot and does not exercise control over DFS, the investment is accounted for under the equity method.

Although the Company has no economic exposure to the existing assets and liabilities of DFS, should the joint venture experience an interruption in operations, the Company would likely have to find alternative sources for future financing arrangements with its customers. Alternatives could include negotiating a financing arrangement with another entity or the Company’s financing customer purchases itself. Other companies have expressed interest in becoming potential future funding sources. Absent such an alternative financing arrangement, the Company could experience reductions in revenues due to losses in originations of financing arrangements. Currently, the Company does not anticipate any such interruption in DFS operations.

Factors Affecting the Company’s Business and Prospects

There are numerous factors that affect the Company’s business and the results of its operations. These factors include general economic and business conditions; the level of demand for the Company’s products and services; the level and intensity of competition in the technology industry and the pricing pressures that have resulted; the ability of the Company to timely and effectively manage periodic product transitions, as well as component availability and cost; the ability of the Company to develop new products based on new or evolving technology and the markets acceptance of those products; the ability of the Company to manage its inventory levels to minimize excess inventory, declining inventory values and obsolescence; the product, customer and geographic sales mix of any particular period; the Company’s ability to recover its investment in venture capital activities; and the Company’s ability to effectively manage its operating costs. For a discussion of these and other factors affecting the Company’s business and prospects, see “Item 1 — Business — Factors Affecting the Company’s Business and Prospects” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2002.

ITEM 3.     Quantitative and Qualitative Disclosures About Market Risk

For a description of the Company’s market risks, see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2002.

ITEM 4.     Controls and Procedures

Not applicable.

13

PART II — OTHER INFORMATION

ITEM 1.     Legal Proceedings

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in any of these legal proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

ITEM 4.     Submission of Matters to a Vote of Security Holders

The annual meeting of the Company’s stockholders was held on July 18, 2002. At that meeting, two proposals were submitted to a vote of the Company’s stockholders: (1) the election of four Class II directors (with, Michael S. Dell, Michael H. Jordan, Klaus S. Luft and Samuel A. Nunn, Jr. being the nominees); and (2) the approval of the 2002 Long-Term Incentive Plan. At the close of business on the record date for the meeting (which was May 24, 2002), there were 2,594,351,263 shares of common stock outstanding and entitled to be voted at the meeting. Holders of 2,288,499,982 shares of common stock (representing a like number of votes) were present at the meeting, either in person or by proxy. The following table sets forth the results of the voting:

Proposal		For		Withhold
1.	Election of four Class II directors:
	Michael S. Dell		2,261,890,836		26,609,146
	Michael H. Jordan		2,260,999,843		27,500,139
	Klaus S. Luft		2,261,523,426		26,976,556
	Samuel A. Nunn, Jr.		2,225,096,569		63,403,413

							Broker
	For		Against		Abstain		Non-Votes
2. Approval of the 2002 Long-Term Incentive Plan		1,070,600,548		669,221,146		16,517,645		532,160,643

With respect to Proposal 1, each nominee received the favorable vote of at least 97% of the shares represented and entitled to be voted on that proposal; consequently, each such nominee was duly and validly elected by the stockholders. With respect to Proposal 2, the 2002 Long-Term Incentive Plan received the favorable vote of 61% of the shares represented and entitled to vote on that proposal (which excludes the broker non-votes); consequently, the plan was duly and validly approved by the stockholders.

ITEM 6.     Exhibits and Reports on Form 8-K

(a) Exhibits.

      10.1 Dell Computer Corporation 2002 Long Term Incentive Plan

(b) Reports on Form 8-K.

      None.

14

SIGNATURE

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.

DELL COMPUTER CORPORATION

September 16, 2002

/s/ JAMES M. SCHNEIDER

James M. Schneider

Senior Vice President and Chief

Financial Officer

(On behalf of the registrant and as principal

financial and accounting officer)

15

CERTIFICATIONS

I, Michael S. Dell, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Dell Computer Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

September 16, 2002

/s/ MICHAEL S. DELL

Michael S. Dell

Chairman of the Board and Chief

Executive Officer

I, James M. Schneider, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Dell Computer Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

September 16, 2002

/s/ JAMES M. SCHNEIDER

James M. Schneider

Senior Vice President and Chief

Financial Officer

16

INDEX TO EXHIBITS

Exhibit
No.		Description
	10.1	Dell Computer Corporation 2002 Long Term Incentive Plan

EX-10.1

                                                                    EXHIBIT 10.1


                              AMENDED AND RESTATED
                            DELL COMPUTER CORPORATION

                          2002 LONG-TERM INCENTIVE PLAN


         Capitalized terms used herein shall have the respective meanings
ascribed to them in Section 5.1(a) below.


                                    ARTICLE I

                                     GENERAL

         1.1 PURPOSE. The 2002 Long-Term Incentive Plan (the "PLAN") has been
established by Dell Computer Corporation, a Delaware corporation (the
"COMPANY"), to attract and retain qualified employees, consultants and directors
and to motivate them to achieve long-term goals, to provide incentive
compensation opportunities that are competitive with those of similar companies
and to further align Participants' interests with those of the Company's other
stockholders through compensation alternatives based on the Company's common
stock, thereby promoting the long-term financial interests of the Company and
enhancing long-term stockholder return.


         1.2 TERM. The Plan shall be effective as of the date on which it is
approved by the Company's stockholders (the "EFFECTIVE DATE"), and unless the
Plan is sooner terminated by the Board, no Award shall be granted under the plan
after the tenth anniversary of the Effective Date.

                                   ARTICLE II

                          ADMINISTRATION AND OPERATION

         2.1 THE COMMITTEE.

                  (a) CONSTITUTION. The Plan will be administered by a committee
of the Board (the "COMMITTEE") consisting of two or more directors designated
from time to time by the Board. Each member of the Committee shall qualify as a
"Non-Employee Director," as defined for purposes of Rule 16b-3 under the
Exchange Act, and as an "outside director," as defined for purposes of Section
162(m) of the Code.

                  (b) AUTHORITY.

                           (1) The Committee shall have complete and absolute
         authority to construe and interpret the Plan and Awards granted
         hereunder, to establish and amend rules for Plan administration and to
         make all other determinations that it deems necessary or advisable for
         the effective administration of the Plan.

                           (2) Subject to the provisions of the Plan, the
         Committee shall have complete and absolute authority to select Award
         recipients, to determine the types of Awards, to establish the terms,
         conditions, performance criteria, restrictions and other provisions of
         Awards and to amend, modify or suspend Awards. In making Award
         determinations, the Committee may take into account the nature of
         services rendered by the







         recipient, his or her present and potential contribution to the
         Company's success and such other factors as the Committee deems
         relevant.

                           (3) In all matters relating to the Plan, the
         Committee shall act in a manner that is consistent with the Company's
         certificate of incorporation and by-laws and all applicable laws. The
         decisions and determinations of the Committee shall be made in
         accordance with its judgment as to the best interests of the Company
         and its stockholders and in accordance with the purposes of the Plan.
         All decisions relating to the Plan and any Award shall be final and
         binding on all persons. No member of the Committee shall be personally
         liable for any action or determination relating to the Plan or any
         Award that was taken or made in good faith.

                  (c) DELEGATION. The Committee may delegate any or all of its
authority and responsibilities with respect to the Plan and Awards, on such
terms and conditions as it considers appropriate, to the Chief Executive Officer
or the President of the Company or to such other members of the Company's
management as it may determine; provided, however, that determinations and
decisions regarding Awards or other benefits under the Plan to the Executive
Officers may not be delegated and shall be made by the Committee. All references
to "Committee" herein shall include those persons to whom the Committee has
properly delegated authority and responsibility pursuant to this subsection.

         2.2 ELIGIBILITY.

                  (a) The Eligible Recipients shall consist of (1) all employees
of the Company and its Subsidiaries, (2) all Non-Employee Directors and (3) any
consultants, independent contractors or advisors to the Company or its
Subsidiaries whom the Committee identifies as having a direct and significant
effect on the performance of the Company or any of its Subsidiaries. No Eligible
Recipient shall be entitled to receive any Award under the Plan unless and until
such Eligible Recipient has been designated by the Committee to be a Participant
and such Eligible Recipient has actually received such Award. The designation of
an Eligible Recipient to receive any Award under the Plan shall not require the
Committee to designate that person to receive any other Award under the Plan. In
selecting Eligible Recipients to be Participants and in determining the type and
amount of their respective Awards, the Committee shall consider any and all
factors that it deems relevant or appropriate.

                  (b) The Plan does not constitute a contract of employment with
any Eligible Recipient or Participant, and selection as a Participant will not
give any Eligible Recipient the right to be retained in the employ of the
Company or any Subsidiary or to continue to provide services to the Company or
any Subsidiary.

         2.3 WITHHOLDING OF TAXES. All distributions under the Plan (including
the grant of Awards and the issuance of Stock, cash or other consideration
pursuant to an Award) are subject to withholding of all applicable taxes, and
the Committee may condition the delivery of any Award, or the issuance of any
Stock, cash or other consideration pursuant to an Award, on the satisfaction of
applicable withholding obligations. The Committee, subject to such requirements
as it may impose, may permit such withholding obligations to be satisfied
through cash payment by the Participant, through the surrender of shares of
Stock that the Participant already owns or through the surrender of shares of
Stock to which the Participant is otherwise entitled under the Plan.







                                   ARTICLE III

                           SHARES AVAILABLE FOR AWARDS

         3.1 AUTHORIZED SHARES. The number of Authorized Shares shall be equal
to the number of shares of Stock that, at the Effective Date, remain available
for issuance under the Company's 1994 Incentive Plan (the "1994 PLAN"). In
addition, any shares of Stock underlying outstanding awards under the 1994 Plan
that expire without being exercised or would otherwise again be available for
issuance under the 1994 Plan shall constitute Authorized Shares hereunder.

         3.2 AVAILABLE SHARES. At any time, the number of shares that may then
be issued pursuant to Awards under the Plan (the "AVAILABLE SHARES") shall be
equal to the difference between (a) the number of Authorized Shares at such time
and (b) the sum of (1) the number of shares of Stock subject to issuance upon
exercise or settlement of then outstanding Awards and (2) the number of shares
of Stock that have been previously issued upon exercise or settlement of
outstanding Awards.

         3.3 RESTORATION OF SHARES. If Stock subject to any Award is not issued
or ceases to be issuable for any reason, including because the Award is
forfeited, terminated, expires unexercised, is settled in cash in lieu of Stock
or is exchanged for other Awards, the shares of Stock that were subject to that
Award shall no longer be charged against the number of Authorized Shares in
calculating the number of Available Shares under Section 3.2 and shall again be
included in Available Shares. In addition, any shares of Stock that are issued
by the Company in connection with, through the assumption of or in substitution
for outstanding awards previously granted by an entity acquired by the Company
shall not be charged against the number of Authorized Shares in calculating the
number of Available Shares under Section 3.2.

         3.4 ADJUSTMENTS TO NUMBER OF AUTHORIZED SHARES AND AVAILABLE SHARES. In
the event of any change in the number of outstanding shares of Stock by reason
of a stock dividend, split, spin-off, recapitalization, merger, consolidation,
combination, extraordinary dividend, exchange of shares or other similar change,
the number of Authorized Shares and the number of Available Shares, as well as
the exercise price, the number of shares and other appropriate terms of any
outstanding Award, may be equitably adjusted by the Committee in its sole
discretion.

         3.5 SOURCE OF STOCK. Shares of Stock issued under the Plan may consist
in whole or in part of authorized and unissued shares or treasury shares.

         3.6 NO FRACTIONAL SHARES. No fractional shares shall be issued under
the Plan or upon exercise or settlement of any Award. The Committee may
determine to pay cash in lieu of any fractional share that would otherwise be
issuable or may determine to cancel such fractional share with no payment of
consideration.

         3.7 LIMITATION ON CERTAIN AWARDS.

                  (a) The maximum number of Authorized Shares that may be issued
pursuant to Restricted Awards (as defined below) shall be equal to the number of
shares of Stock that, at the Effective Date, remain available for issuance as
"Stock





Awards" under the 1994 Plan; provided, however, that this limitation shall not
apply with respect to shares of Stock issued in connection with the exercise or
settlement of an Award other than a Restricted Award, whether or not such shares
of Stock are subject to a substantial risk of forfeiture when issued. The term
"RESTRICTED AWARD" means a Stock Award or a Stock Option with an exercise price
that is less than 100% of the Fair Market Value per share of the Stock on the
date of grant (provided, however, that a Stock Option shall not be considered to
be a Restricted Award if the Participant pays or otherwise foregoes value to the
Company in an amount at least equal to the difference between the Fair Market
Value per share of Stock on the date of grant and the exercise price).

                  (b) Except for Restricted Awards relating to shares in the
Unrestricted Pool (as defined below), all Restricted Awards shall either be
subject to a vesting period of three years or more or be subject to vesting
(over a period of at least one year) that is contingent upon specified
performance standards. A Restricted Award that relates to shares in the
Unrestricted Pool may be subject to whatever vesting restriction the Committee
specifies, if any. The term "UNRESTRICTED POOL" shall mean, for each fiscal year
of the Company, a number of shares of Stock that is equal to 5% of the total
number of shares of Stock underlying Awards made under the Plan during such
fiscal year.

                  (c) No Participant shall receive in any fiscal year (1) Stock
Options to which more than 10,000,000 shares of Stock are subject or (2) Awards
(other than Stock Options) to which more than 3,000,000 shares of Stock are
subject.

                  (d) No Participant shall receive in any fiscal year cash in
payment for or settlement of a Performance Unit in excess of 0.5% of the
Company's aggregate consolidated operating income (as reported on the Company's
audited consolidated financial statements) during the Vesting Years. "VESTING
YEARS" shall mean the number of fiscal years of the Company immediately
preceding the fiscal year in which the Performance Unit vests equal to the
number of years required for vesting of the Performance Unit as set forth in the
applicable Award Agreement.


                                   ARTICLE IV

                                     AWARDS

         4.1 GENERAL. Subject to the provisions of the Plan, the Committee shall
determine the type of Award to grant to a Participant. Awards may be granted
singly or in combination with other Awards. Awards also may be made in
combination with, in replacement of, as alternatives to or as the payment form
for grants or rights under any other compensation plan, contract or agreement of
the Company.

         4.2 AWARD TERMS.

                  (a) Subject to the provisions of the Plan, the Committee shall
have complete and absolute authority to determine and establish the terms and
provisions of each Award, including (as applicable) (1) the number of shares of
Stock subject to the Award, (2) the exercise price or base price per share, (3)
the vesting and exercisability schedule (including provisions regarding
acceleration of vesting and exercisability), (4) the conditions under which the
Award is cancelled or forfeited, (5) whether the Award is transferable and, if
so, the circumstances under which such







Award may be transferred and (6) the termination and expiration of the Awards.
It shall be expressly within the discretion of the Committee to include in any
Award terms that provide for the acceleration of vesting and lapse of
restrictions, as applicable, upon or following a Participant's death, Permanent
Disability or Normal Retirement or upon the occurrence of a Change in Control.

                  (b) Notwithstanding the provisions of subsection (a) of this
Section, the following limitations shall apply to the Committee's exercise of
its discretion (in addition to any other limitations that may be contained in
other provisions of the Plan):

                           (1) The exercise price per share for an Incentive
         Stock Option shall be not less than 100% of Fair Market Value of the
         Stock on the date of grant.

                           (2) The exercise price per share for a Non-Qualified
         Option shall not be less than 100% of the Fair Market Value of the
         Stock on the date of grant unless:

                                    (A) The Stock Option is granted
                  retroactively in tandem with or as a substitution for a Stock
                  Appreciation Right, in which case the exercise price per share
                  shall not be less than 100% of the Fair Market Value of the
                  Stock on the date the Stock Appreciation Right was granted (as
                  set forth in the applicable Award Agreement);

                                    (B) The exercise price per share is not less
                  than 85% of the Fair Market Value of the Stock on the date of
                  grant and the Participant pays or otherwise foregoes value to
                  the Company in an amount at least equal to the difference
                  between the Fair Market Value per share of Stock on the date
                  of grant and the exercise price; or

                                    (C) The Stock Option relates to shares in
                  the Unrestricted Pool.

                           (3) The base price for a Stock Appreciation Right
         shall not be less than 100% of the Fair Market Value of the Stock on
         the date of grant unless the Stock Appreciation Right is granted
         retroactively in tandem with or in substitution for a Stock Option, in
         which case the base price shall not be less than the exercise price of
         such tandem or replaced Stock Option.

                           (4) No Award (or any portion thereof) may expire more
         than ten years after the date of grant, except that the Committee may
         extend the expiration of an Award to no more than fifteen years after
         the date of grant if necessary, appropriate or desirable under laws,
         rules or regulations applicable in any foreign jurisdiction.

         4.3 AWARD AGREEMENTS. Each Award will be evidenced by a written
Agreement issued by the Company and setting forth the terms, provisions and
conditions of such Award (an "AWARD AGREEMENT"). Each Award Agreement shall be
in such form as may be specified by the Committee and may be evidenced by an
electronic transmission (including an e-mail or reference to a website or other
URL)







sent to the recipient through the Company's normal process for communicating
electronically with its employees. As a condition to receiving an Award, the
Committee may require the proposed Eligible Recipient to affirmatively accept
the Award and agree to the terms, provisions and conditions set forth in the
Award Agreement by physically or electronically executing the Award Agreement or
by otherwise physically or electronically acknowledging such acceptance and
agreement. With or without such affirmative acceptance and agreement, however,
the Committee may prescribe conditions (including the exercise or attempted
exercise of any benefit conferred by the Award) under which the proposed
Eligible Recipient may be deemed to have accepted the Award and agreed to the
terms, provisions and conditions set forth in the Award Agreement.

         4.4 PERFORMANCE BASED COMPENSATION. The Committee may designate any
Award as "performance-based compensation" for purposes of Section 162(m) of the
Code. Any Awards designated as "performance-based compensation" shall be
conditioned on the achievement of one or more Performance Measures, and the
measurement may be stated in absolute terms or relative to comparable companies.
Notwithstanding any other provision of the Plan, the Committee may grant an
Award that is not contingent on performance goals or is contingent on
performance goals other than the Performance Measures, so long as the Committee
has determined that such Award is not required to satisfy the requirements for
"qualified performance-based compensation" within the meaning of Section 162(m)
of the Code.

         4.5 TRANSFERABILITY OF AWARDS. The Committee may limit or provide for
the transferability of Awards by Participants and may grant an Award that
otherwise would be granted to an Eligible Recipient to a permitted transferee of
such Eligible Recipient.

         4.6 PROHIBITION ON REPRICING. Notwithstanding any other provision of
the Plan, the Committee shall not "reprice" any Stock Option granted under the
Plan if the effect of such repricing would be to decrease the exercise price per
share applicable to such Stock Option. For this purpose, a "repricing" would
include a tandem cancellation and regrant or any other amendment or action that
would have substantially the same effect as decreasing the exercise price of
outstanding Stock Options.

         4.7 PROHIBITION ON LOANS TO PARTICIPANTS. The Company shall not loan
funds to any Participant for the purpose of paying the exercise or base price
associated with any Award or for the purpose of paying any taxes associated with
the exercise or vesting of an Award.

         4.8 RELOAD PROVISIONS. Stock Options may contain a provision pursuant
to which a Participant who pays all or a portion of the exercise price of the
Stock Option or the tax required to be withheld pursuant to the exercise of the
Stock Option by surrendering shares of Stock shall automatically be granted a
Stock Option for the purchase of the number of shares of Stock equal to the
number of shares surrendered (a "RELOAD OPTION"). A Reload Option shall have an
exercise price per share equal to the Fair Market Value of the Stock on the date
of grant of the Reload Option and shall have a term that is no longer than the
original term of the exercised Stock Option.







         4.9 DIVIDENDS AND DIVIDEND EQUIVALENTS. An Award may provide the
Participant with the right to receive dividend payments or dividend equivalent
payments with respect to Stock subject to the Award (both before and after such
Stock is earned or vested), which payments may be either made currently or
credited to an account for the Participant and may be settled in cash or Stock,
as determined by the Committee. Any such settlements, and any such crediting of
dividends or dividend equivalents or reinvestment in shares of Stock, may be
subject to such conditions, restrictions and contingencies as the Committee
shall establish, including the reinvestment of such credited amounts in Stock
equivalents.

         4.10 SETTLEMENT OF AWARDS. The obligation to make payments and
distributions with respect to Awards may be satisfied through cash payments, the
delivery of shares of Stock, the granting of replacement Awards or any
combination thereof, as the Committee shall determine. Satisfaction of any such
obligations under an Award may be subject to such conditions, restrictions and
contingencies as the Committee shall determine. The Committee may permit or
require the deferral of any Award payment, subject to such rules and procedures
as it may establish, which may include provisions for the payment or crediting
of interest or dividend equivalents and may include converting such credits into
deferred Stock equivalents.

         4.11 AWARDS TO NON-EMPLOYEE DIRECTORS. Non-Employee Directors shall not
be eligible to receive any Awards under the Plan other than the Awards specified
in this Section.

                  (a) DISCRETIONARY AWARDS. The Committee may, in its
discretion, grant a Non-Qualified Option or Restricted Stock to any Non-Employee
Director; provided, however, that (1) no Non-Employee Director may receive
Awards (not including Awards granted in lieu of Annual Cash Retainer pursuant to
subsection (b) of this Section) covering more than 50,000 shares of Stock in any
Service Year (or, in the case of a newly-elected Non-Employee Director, covering
more than two times the annual limit in the Service Year in which such
Non-Employee Director is first elected or appointed to the Board) and (2) the
aggregate number of shares of Stock awarded as Restricted Stock to a
Non-Employee Director during any Service Year (not including Awards granted in
lieu of Annual Cash Retainer pursuant to subsection (b) of this Section) may not
exceed 20% of the total number of shares of Stock subject to all Awards granted
to such Non-Employee Director during such Service Year. Awards under this
Section are discretionary, and until the Committee grants an Award to a
Non-Employee Director, such Non-employee Director shall not have any right or
claim to any Award. The receipt of an Award under the Plan shall not give any
Non-Employee Director any right or claim to receive any other Award under the
Plan, and the Committee or the Board may determine that any or all Non-Employee
Directors are not eligible to receive Awards under the Plan for an indefinite
period or for specified Service Years.

                  (b) AWARDS IN LIEU OF ANNUAL CASH RETAINER. In addition to any
Awards granted pursuant to subsection (a) of this Section, the Committee, in its
discretion, may permit a Non-Employee Director to elect to receive a
Non-Qualified Option or Restricted Stock in lieu of all or a portion of his or
her Annual Cash Retainer for any Service Year. If the Committee permits any such
election, it, in its discretion, shall determine the appropriate terms of such
Award (including the appropriate number of shares of Stock subject to the Award
and, in the case of a Non-Qualified Option, the appropriate exercise price per
share). Any such election, if







permitted by the Committee, shall be made in accordance with such procedures as
are adopted from time to time by the Committee.

                  (c) TERMS OF NON-EMPLOYEE DIRECTOR AWARDS. In connection with
the grant of an Award under this Section, the Committee, in its discretion
pursuant to Section 4.2, shall establish the terms and provisions of such Award,
subject to the following limitations (in addition to any other applicable
limitations that may be contained in other provisions of the Plan):

                           (1) The exercise price per share of any Stock Option
         granted pursuant to this Section shall not be less than 100% of the
         Fair Market Value of the Stock on the date of grant;

                           (2) No Stock Option (or any portion thereof) granted
         pursuant to this Section may be exercisable earlier than six months
         from the date of grant; and

                           (3) No Restricted Stock (or any portion thereof)
         granted pursuant to this Section may be transferable earlier than six
         months from the date of grant.


                                    ARTICLE V

                               GENERAL PROVISIONS

         5.1      USE OF TERMS.

                  (a) DEFINED TERMS. As used herein, the following terms shall
have the respective meanings indicated below:

         "Annual Cash Retainer" means the annual cash retainer fee, in such
amount as is established from time to time by resolution of the Board, payable
to a Non-Employee Director for his or her services as a director of the Company.

         "Authorized Shares" means the aggregate number of shares of Stock that
may be issued pursuant to Awards under the Plan, as specified in Section 3.1.

         "Available Shares" has the meaning specified in Section 3.2.

         "Award" means an award granted under the Plan. An Award may be in the
form of Stock Options, Stock Appreciation Rights, Stock Bonuses, Restricted
Stock, Restricted Stock Units, Performance Units or Performance Shares.

         "Award Agreement" has the meaning specified in Section 4.3.

         "Board" means the Board of Directors of the Company.

         "Change in Control" has the meaning specified from time to time by the
Committee.

         "Code" means the Internal Revenue Code of 1986.





         "Committee" has the meaning specified in Section 2.1(a).

         "Company" has the meaning specified in Section 1.1.

         "Effective Date" has the meaning specified in Section 1.2.

         "Eligible Recipient" means any person who is eligible to receive an
Award under the Plan, as specified in Section 2.2(a).

         "Exchange Act" means the Securities Exchange Act of 1934.

         "Executive Officer" means an Executive Officer of the Company, as
designated from time to time by the Board.

         "Fair Market Value" of a share of Stock on a particular date shall be
equal to the average of the high and low sales prices of the Stock (1) reported
by the Nasdaq National Market on that date or (2) if the Stock is listed on a
national stock exchange, reported on the stock exchange composite tape on that
date, or in either case, if no prices are reported on that date, on the last
preceding date on which such prices of the Stock are so reported. If the Stock
is traded over the counter at the time a determination of Fair Market Value is
required to be made hereunder, the Fair Market Value shall be deemed to be equal
to the average between the reported high and low or closing bid and asked prices
of Stock on the most recent date on which Stock was publicly traded. In the
event Stock is not publicly traded at the time a determination of Fair Market
Value is required to be made hereunder, the determination of Fair Market Value
shall be made by the Committee in such manner as it deems appropriate.
Notwithstanding the foregoing, the Committee may use any other definition of
Fair Market Value consistent with applicable tax, accounting and other rules.

         "Incentive Stock Option" means a Stock Option that is intended to
satisfy the requirement applicable to an "incentive stock option" as that term
is described in Section 422(b) of the Code.

         "1994 Plan" has the meaning specified in Section 3.1.

         "Non-Employee Director" means a member of the Board who is not an
employee of the Company or any of its Subsidiaries.

         "Non-Qualified Option" means a Stock Option that is not intended to
satisfy the requirement applicable to an "incentive stock option" as that term
is described in Section 422(b) of the Code.

         "Normal Retirement" has the meaning specified from time to time by the
Committee.

         "Participant" means any person who receives an Award under the Plan.

         "Performance Measures" mean (1) total stockholder return (Stock price
appreciation plus dividends), (2) net income, (3) earnings per share, (4) return
on sales, (5) return on equity, (6) return on assets, (7) return on invested
capital, (8) increase in the market price of Stock or other securities, (9)
revenues (10) operating income, (11) operating margin (operating income divided
by revenues), (12) the







performance of the Company in any of the items mentioned in clause (1) through
(11) in comparison to the average performance of the companies included in the
Dow Jones Computer Index or successor index or (13) the performance of the
Company in any of the items mentioned in clause (1) through (11) in comparison
to the average performance of the companies used in a self-constructed peer
group established before the beginning of the period for measuring performance
under an Award; and any other performance objective approved by the stockholders
of the Company in accordance with Section 162(m) of the Code.

         "Performance Share" is a grant of Stock subject to the satisfaction of
specified conditions or the achievement of specified performance goals.

         "Performance Unit" is a right to receive a cash payment subject to the
satisfaction of specified conditions or the achievement of specified performance
goals.

         "Permanent Disability" has the meaning specified from time to time by
the Committee.

         "Plan" has the meaning specified in Section 1.1.

         "Reload Option" has the meaning specified in Section 4.8.

         "Restricted Award" has the meaning specified in Section 3.7(a).

         "Restricted Stock" is Stock that is subject to a risk of forfeiture or
other restrictions that will lapse upon the satisfaction of specified conditions
or the achievement of specified performance goals.

         "Restricted Stock Unit" is a right to receive Stock in the future, with
the right to future delivery of such Stock being subject to a risk of forfeiture
or other restrictions that will lapse upon the satisfaction of specified
conditions or the achievement of specified performance goals.

         "Securities Act" means the Securities Act of 1933.

         "Service Year" means the approximately annual period commencing at an
annual meeting of the Company's stockholders and ending at the next annual
meeting of the Company's stockholders.

         "Stock" means the common stock, $0.01 par value per share, of the
Company.

         "Stock Appreciation Right" is a right to receive an amount, payable in
cash or shares of Stock, equal to the excess of the Fair Market Value of a
specified number of shares of Stock on the date of exercise over a base price
for such number of shares of Stock set forth in the applicable Award Agreement.

         "Stock Award" is an Award consisting of Restricted Stock, Restricted
Stock Units, Performance Shares or a Stock Bonus.

         "Stock Bonus" is a grant of Stock that is not subject to a substantial
risk of forfeiture or other conditions.





         "Stock Option" is a right to purchase a specified number of shares of
Stock at a specified price. A Stock Option may be an Incentive Stock Option or a
Non-Qualified Option.

         "Subsidiary" means any entity of which 50% or more of the total
combined voting power of all classes of securities entitled to vote is owned,
directly or indirectly, by the Company. Notwithstanding the foregoing, the
Committee may use any other definition of "Subsidiary" it deems necessary or
desirable in accordance with its judgment as to the best interests of the
Company and its stockholders and in accordance with the purposes of the Plan.

         "Unrestricted Pool" has the meaning specified in Section 3.7(b).

         "Vesting Years" has the meaning specified in Section 3.7(d).

                  (b) OTHER DEFINITIONAL PROVISIONS.

                           (1) Words of any gender (whether masculine, feminine
         or neuter) shall be deemed to include all other genders. Words of the
         singular number shall be deemed to include the plural number, and vice
         versa, where applicable.

                           (2) When used herein, the word "including" means
         "including, without limitation."

                           (3) Unless otherwise specified, references herein to
         Articles or Sections shall be deemed to be references to Articles or
         Sections, as applicable, of the Plan. When used herein, the words
         "hereof," "herein" and "hereunder" and words of similar import shall
         refer to the Plan as a whole and not to any particular provision of the
         Plan.

         5.2 AMENDMENT AND TERMINATION. The Board or the Committee may at any
time and in any way amend, suspend or terminate the Plan or any Award granted
under the Plan; provided, however, that no such amendment, suspension or
termination may materially impair any Award then outstanding without the consent
of the holder of such Award; and provided further, however, that without the
requisite vote of the Company's stockholders, no amendment to the Plan may
increase the number of shares available for issuance under the Plan or modify
any of the limitations described in Section 3.7, 4.2(b), 4.6 or 4.7 in such a
manner as to materially reduce such limitation.

         5.3 LIABILITY OF THE COMPANY. By accepting any benefits under the Plan,
each Participant and each person claiming under or through such Participant
shall be conclusively deemed to have indicated acceptance and ratification of,
and consented to, any action taken or made under the Plan by the Company, the
Board, the Committee or any other committee appointed by the Board. No
Participant or any person claiming under or through a Participant shall have any
right or interest, whether vested or otherwise, in the Plan or in any Award
hereunder, contingent or otherwise, unless and until such Participant shall have
complied with all of the terms, conditions and provisions of the Plan and the
Award Agreement relating thereto. Neither the Company, its directors, officers
or employees, nor any Subsidiary, shall be liable to any Participant or other
person if it is determined for any reason by the





Internal Revenue Service or any court having jurisdiction that any Incentive
Stock Option granted hereunder does not qualify for tax treatment as an
incentive stock option under Section 422 of the Code. Neither the Company, the
Board nor the Committee shall be required to give any security or bond for the
performance of any obligation which may be created by the Plan.

         5.4 UNFUNDED PLAN. Insofar as it provides for Awards, the Plan shall be
unfunded. Although bookkeeping accounts may be established with respect to
Participants who are granted Awards, any such accounts will be used merely as an
administrative convenience. Except for the holding of Restricted Stock in
escrow, the Company shall not be required to segregate any assets that may at
any time be represented by Awards, nor shall the Plan be construed as providing
for such segregation, nor shall the Company, the Board or the Committee be
deemed to be a trustee of Stock or cash to be awarded under the Plan. Any
liability of the Company to any Participant with respect to an Award shall be
based solely upon any contractual obligations that may be created by the Plan;
no such obligation of the Company shall be deemed to be secured by any pledge or
other encumbrance on any property of the Company.

         5.5 RIGHTS AS STOCKHOLDER. No Award under the Plan shall confer upon a
Participant any right as a stockholder of the Company prior to the date on which
he or she fulfills all service requirements and other conditions for receipt of
shares of Stock. If the transfer of Stock is restricted, certificates
representing such Stock may bear a legend referring to such restrictions.

         5.6 COMPLIANCE WITH APPLICABLE LAWS. Notwithstanding any other
provision of the Plan or any Award Agreement, the Company shall have no
obligation to issue any shares of Stock under the Plan or pursuant to any Award
unless such issuance would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity. Prior to the issuance
of any shares of Stock under the Plan or pursuant to an Award, the Company may
require a written statement that the recipient is acquiring the shares for
investment and not for the purpose or with the intention of distributing the
shares. The certificates representing the shares of Stock issued pursuant to an
Award under the Plan may bear such legend or legends as the Committee deems
appropriate in order to assure compliance with applicable securities laws and
regulations.

         5.7 GOVERNING LAW AND VENUE. The Plan and Awards granted hereunder
(including Award Agreements evidencing such Awards) will be governed by and
construed in accordance with the laws of the State of Delaware, United States of
America, other than with respect to choice of laws, rules and principles. Venue
for any and all disputes arising out of or in connection with the Plan, any
Award hereunder or any Award Agreement shall exclusively be in Williamson
County, Texas, United States of America, and the courts sitting in Williamson
County, Texas, United States of America shall have exclusive jurisdiction to
adjudicate such disputes.

         5.8 FOREIGN JURISDICTIONS. To the extent that the Committee determines
that the material terms set by the Committee or imposed by the Plan preclude the
achievement of the material purposes of the Plan in jurisdictions outside the
United States, the Committee will have the authority and discretion to modify
those terms and provide for such additional terms and conditions as the
Committee determines to be necessary, appropriate or desirable to accommodate
differences in local law, policy or custom or to facilitate administration of
the Plan. The Committee may







adopt or approve sub-plans, appendices or supplements to, or amendments,
restatements or alternative versions of, the Plan as it may consider necessary,
appropriate or desirable, without thereby affecting the terms of the Plan as in
effect for any other purpose. The special terms and any appendices, supplements,
amendments, restatements or alternative versions, however, shall not include any
provisions that are inconsistent with the terms of the Plan as then in effect,
unless the Plan could have been amended to eliminate such inconsistency without
further approval by the stockholders.