EMC CORP - 10-Q Quarterly Report

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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

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

The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of September 30, 2002 was 2,199,785,507.

EMC CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

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

EMC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

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

EMC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

EMC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

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

EMC Corporation and its subsidiaries ("EMC") design, manufacture, market and support a wide range of storage platforms and software offerings, as well as related services, that enable its customers to store, manage, protect and share electronic information.

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles. These statements include the accounts of EMC and its subsidiaries. Certain information and footnote disclosures normally included in EMC's annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to fairly present the results as of and for the periods ended September 30, 2002 and 2001.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2001, which are contained in EMC's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2002.

Certain prior year amounts have been reclassified to conform with the 2002 presentation.

EMC derives revenue from sales of information storage systems, software and services. EMC recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. This policy is applicable to all sales, including sales to resellers and end users. The following summarizes the major terms of EMC's contractual relationships with its customers and the manner in which EMC accounts for sales transactions.

Systems sales consist of the sale of hardware, including Symmetrix systems, CLARiiON systems, Celerra systems, Centera systems and Connectrix systems. Revenue for hardware is generally recognized upon shipment.

Software sales consist of the sale of software application programs that provide customers with information management, sharing or protection capabilities. Revenue for software is generally recognized upon shipment.

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

Installation is not considered essential to the functionality of EMC's products as these services do not alter the product capabilities, do not require specialized skills and may be performed by the customers or other vendors. Installation services revenues are recognized upon completion of installation.

Software warranty and maintenance and hardware maintenance revenues are recognized ratably over the contract period.

Professional services revenues, which include information infrastructure design, integration and implementation, business continuity, data migration, networking storage and project management, are recognized as milestones are met which reflect the percentage of costs incurred on the project to total estimated costs.

EMC considers sales contracts that include a combination of systems, software or services to be multiple element arrangements. An item is considered a separate element if it involves a separate earnings process. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, EMC defers the fair value of the undelivered elements with the residual revenue allocated to the delivered elements. Discounts are allocated only to the delivered elements. Fair value is determined based upon the price charged when the element is sold separately. Undelivered elements typically include installation, training, software warranty and maintenance, hardware maintenance and professional services.

EMC sales contracts generally provide for the customer to accept title and risk of loss when the product leaves EMC's facility. When shipping terms or local laws do not allow for passage of title and risk of loss at shipping point, EMC defers recognizing revenue until title and risk of loss transfer to the customer.

Revenue from sales-type leases is recognized at the net present value of future lease payments. Revenue from operating leases is recognized over the lease period.

EMC accrues for systems' warranty costs and reduces revenue for estimated sales returns at the time of shipment. Systems' warranty costs are estimated based upon EMC's historical experience and specific identification of systems' requirements. Sales returns are estimated based upon EMC's historical experience and specific identification of probable returns.

	September 30, 2002		December 31, 2001
Purchased parts	$	23,385	$	28,508
Work-in-process		424,368		396,304
Finished goods		67,446		159,173

	$	515,199	$	583,985

	September 30, 2002			December 31, 2001
Furniture and fixtures	$	148,285		$	146,369
Equipment		1,946,222			1,888,361
Buildings and improvements		774,870			683,515
Land and improvements		89,048			93,159
Construction in progress		210,028			328,172

		3,168,453			3,139,576
Accumulated depreciation		(1,464,498	)		(1,312,245	)

	$	1,703,955		$	1,827,331

In September 2002, EMC acquired all of the outstanding common and preferred stock of Prisa Networks, Inc. ("Prisa"), a software company, for $22.0 million. As of September 30, 2002, finalization of the purchase price allocation was subject to the completion of an appraisal of the acquired assets. Accordingly, as of September 30, 2002, the preliminary purchase price has been allocated to goodwill, all of which is classified within the information storage products segment. None of the goodwill is expected to be deductible for income tax purposes. The consolidated financial statements include the operating results of Prisa from the date of acquisition. Pro forma results of operations have not been presented because the effects of the acquisition were not material to EMC's consolidated results of operations.

In September 2002, EMC acquired 1.8 million shares of Series A Preferred Stock of Diligent Technologies Corporation ("Diligent"), a software company, in exchange for EMC's equity interest in one of its wholly owned subsidiaries, which had a net book value of $4.6 million. In October 2002, EMC acquired an additional 2.0 million shares of Series A Preferred Stock of Diligent for a purchase price of $5.0 million. As a result of these transactions, EMC owns approximately 24% of the outstanding equity of Diligent, which is majority owned by two former EMC employees. EMC's investment in Diligent is being accounted for under the equity method.

In July 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("FAS") No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets." FAS No. 141 supercedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations" and FAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." FAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets." These new statements require use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. Goodwill is no longer amortized but tested for impairment under a two-step process. Under the first step, an entity's net assets are broken down into reporting units and compared to their fair value. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. In addition, within six months of adopting the accounting standard, a transitional impairment test must be completed, and any impairments identified must be treated as a cumulative effect of a change in accounting principle. Additionally, new criteria have been established that determine whether an acquired intangible asset should be recognized separately from goodwill. The statements were effective for business combinations initiated after June 30, 2001, with the entire provisions of FAS No. 142 becoming effective for EMC commencing with its 2002 fiscal year. EMC has completed its transitional impairment test and concluded that there is no impairment to goodwill. As a result of adopting FAS No. 142, approximately $45.0 million of goodwill amortization will not be recognized in 2002.

The following is a reconciliation of reported net loss to adjusted net loss and reported loss per share to adjusted loss per share had FAS No. 142 been in effect for the three and nine months ended September 30, 2001 (table in thousands, except per share amounts):

	For the Three Months Ended September 30, 2001			For the Nine Months Ended September 30, 2001
Net loss	$	(945,207	)	$	(437,550	)
Add back: Impact of goodwill amortization, net of tax benefit of $1,462 and $3,428		12,725			36,467

Adjusted net loss	$	(932,482	)	$	(401,083	)

Net loss per share, basic	$	(0.43	)	$	(0.20	)
Add back: Impact of goodwill amortization, net of taxes		0.01			0.02

Adjusted net loss per share, basic	$	(0.42	)	$	(0.18	)

Net loss per share, diluted	$	(0.43	)	$	(0.20	)
Add back: Impact of goodwill amortization, net of taxes		0.01			0.02

Adjusted net loss per share, diluted	$	(0.42	)	$	(0.18	)

Intangible assets as of September 30, 2002 and December 31, 2001 consist of (table in thousands):

	September 30, 2002			December 31, 2001
Goodwill	$	282,572		$	250,287
Accumulated amortization		(61,931	)		(61,931	)

	$	220,641		$	188,356

Purchased technology		99,005			95,305
Accumulated amortization		(62,567	)		(50,295	)

	$	36,438		$	45,010

Patents		58,857			57,157
Accumulated amortization		(45,530	)		(38,174	)

	$	13,327		$	18,983

Trademarks and customer lists		14,684			14,684
Accumulated amortization		(10,950	)		(9,750	)

	$	3,734		$	4,934

Total intangible assets	$	455,118		$	417,433
Accumulated amortization		(180,978	)		(160,150	)

	$	274,140		$	257,283

Amortization expense on intangible assets was $6.5 million and $20.8 million for the three and nine months ended September 30, 2002, respectively, and $21.7 million and $61.7 million for the three and nine months ended September 30, 2001, respectively. The 2001 amounts included amortization of goodwill. As of December 31, 2001, amortization expense on existing intangibles for the next five years was as follows (table in thousands):

Changes in the carrying amount of goodwill, net, on a total consolidated basis and by segment for the three and nine months ended September 30, 2002 and September 30, 2001 consist of the following (tables in thousands):

	September 30, 2002		December 31, 2001
Salary and benefits	$	310,989	$	310,214
Warranty		106,911		118,347
2001 restructuring (See Note 11)		100,404		199,281
Other		357,114		396,369

	$	875,418	$	1,024,211

In May 2001, EMC's Board of Directors authorized the repurchase of up to 50.0 million shares of its common stock, par value $.01 per share ("Common Stock"). In October 2002, the Board of Directors authorized the repurchase of an additional 250.0 million shares of Common Stock. The purchased shares will be available for various corporate purposes, including for use in connection with stock option and employee stock purchase plans. EMC utilizes the cost method to account for the purchase of treasury stock, which presents the aggregate cost of reacquired shares as a component of stockholder's equity. As of September 30, 2002, EMC had reacquired 30.9 million shares.

FAS No. 123, "Accounting for Stock Based Compensation" defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. As provided for in FAS No. 123, EMC elected to apply APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans. APB Opinion No. 25 does not require options to be expensed when granted at fair market value. The following presents EMC's net income (loss) and net

income (loss) per share in accordance with APB Opinion No. 25 and as adjusted to account for options in accordance with FAS No. 123 (table in thousands, except per share amounts):

	Three Months Ended		Nine Months Ended
	September 30, 2002		September 30, 2001		September 30, 2002		September 30, 2001
Net income (loss)	$	21,261		$	(945,207	)	$	(54,790	)	$	(437,550	)
Incremental stock option expense per FAS No. 123		(74,706	)		(87,840	)		(266,247	)		(237,883	)

Adjusted net loss	$	(53,445	)	$	(1,033,047	)	$	(321,037	)	$	(675,433	)

Net income (loss) per weighted average share, basic-as reported	$	0.01		$	(0.43	)	$	(0.02	)	$	(0.20	)

Net income (loss) per weighted average share, diluted-as reported	$	0.01		$	(0.43	)	$	(0.02	)	$	(0.20	)

Adjusted net loss per weighted average share, basic	$	(0.02	)	$	(0.47	)	$	(0.15	)	$	(0.31	)

Adjusted net loss per weighted average share, diluted	$	(0.02	)	$	(0.47	)	$	(0.15	)	$	(0.31	)

The fair value of each option granted during 2002 and 2001 is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	2002		2001
Dividend yield	None		None
Expected volatility	55.0	%	55.0	%
Risk-free interest rate	4.16	%	4.36	%
Expected life (years)	5.0		5.0

Under EMC's 1989 Employee Stock Purchase Plan (the "1989 Plan"), eligible employees of EMC may purchase shares of Common Stock, through payroll deductions, at the lower of 85% of the fair market value of the Common Stock at the time of grant or 85% of the fair market value at the time of exercise. In accordance with the 1989 Plan, an option to purchase shares is granted to each eligible employee of EMC who elects to participate in the 1989 Plan twice yearly, on January 1 and July 1 and is exercisable on the succeeding June 30 or December 31, respectively. In May 2002, shareholders of EMC approved an amendment to the 1989 Plan to increase the number of shares available for grant under the Plan to 58.0 million shares from 48.0 million shares.

On February 7, 2001, EMC distributed to its stockholders of record as of the close of business on January 24, 2001, all of its shares of McDATA Corporation ("McDATA") Class A common stock. The distribution was effected by means of a pro rata dividend of approximately .0368069 of a share of

McDATA Class A common stock for each share of Common Stock. In lieu of fractional shares of McDATA Class A common stock, each stockholder received a cash payment. The distribution, which totaled $376.1 million, has been accounted for as a tax-free dividend to EMC stockholders and charged to retained earnings based on the book value as of the date of the distribution. As a result of the distribution, EMC no longer has any equity ownership interest in McDATA.

Calculation of diluted earnings (loss) per share is as follows (table in thousands, except per share amounts):

Options to acquire 126.5 and 137.6 million shares of Common Stock for the three and nine months ended September 30, 2002, respectively, and options to acquire 115.0 and 109.5 million shares of Common Stock for the three and nine months ended September 30, 2001, respectively, were excluded from the calculation of diluted earnings (loss) per share because of their antidilutive effect.

EMC has available for use credit lines of $50.0 million in the United States and $50.0 million in Brazil. The Brazilian line requires EMC to borrow in Brazilian currency. As of September 30, 2002, EMC had $25.3 million outstanding on its line of credit in Brazil and none outstanding on its line of credit in the United States. The U.S. credit line bears interest at the bank's base rate and requires EMC, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. The Brazilian credit line bears interest at the rate quoted by the lender (23% at September 30, 2002) and requires EMC to meet certain financial covenants with respect to limitations on losses and maintaining minimum levels of cash and investments. In the event the covenants are not met, the lender may require EMC to provide collateral to secure the outstanding balance. As of September 30, 2002, EMC was in compliance with the covenants. The Brazilian line of credit is denominated in local currency and as such, bears an interest rate commensurate with local currency short-term interest rates. The Brazilian line of credit has been established to help manage currency volatility between the local currency and the U.S. dollar and facilitate cash repatriation.

In April 2002, EMC filed a complaint against Hitachi, Ltd. and Hitachi Data Systems Corporation (together, "Hitachi") with the International Trade Commission ("ITC") and in the United States Federal District Court in Worcester, Massachusetts. The ITC complaint alleges that Hitachi has engaged in unlawful activities by importing into the United States products that infringe six EMC patents. EMC asked the ITC to issue an injunction to block importation of Hitachi's infringing products and in May 2002, the ITC voted to commence an investigation into EMC's claims. The suit in District Court seeks preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In June 2002, the suit in District Court was stayed, pending the outcome of the ITC action. Subsequent to the date EMC filed a complaint against Hitachi, in April 2002, Hitachi and Hitachi Computer Products (America), Inc. ("HICAM") filed a complaint against EMC in the United States Federal District Court for the Western District of Oklahoma alleging that certain of EMC's products infringe eight Hitachi patents and seeking preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In July 2002, this suit was transferred to the United States Federal District Court in Worcester, Massachusetts. EMC believes that Hitachi and HICAM's claims are without merit.

On September 30, 2002, EMC filed a complaint against Hewlett-Packard Company ("HP") in the United States Federal District Court in Worcester, Massachusetts alleging that certain HP products infringe six EMC patents. The suit seeks a permanent injunction as well as unspecified monetary damages for patent infringement. On September 30, 2002, HP filed a complaint against EMC in the United States Federal District Court for the Northern District of California alleging that certain EMC products infringe seven HP patents. The suit seeks a permanent injunction as well as unspecified monetary damages for patent infringement. EMC believes that HP's claims are without merit, and on October 1, 2002, EMC filed an amended complaint asking the court to declare that the seven HP patents referenced in HP's complaint are invalid and not infringed.

EMC is a party to other litigation that it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on EMC's business, results of operations or financial condition.

EMC operates in the following segments: information storage products, information storage services and other businesses. The following table presents the revenue components for information storage products (table in thousands):

EMC's management makes financial decisions and allocates resources based on revenues and gross profit achieved at the segment level. EMC does not allocate selling, general and administrative or

research and development expenses to each segment, as management does not use this information to measure the performance of the operating segments. The revenues and gross profit attributable to these segments are included in the following tables (tables in thousands, except for footnotes):

EMC's revenues are attributed to geographic areas according to the location of customers. Revenues by geographic area are included in the following table (table in thousands):

No country other than the United States accounted for 10% or more of revenues during the three months or nine months ended September 30, 2002 and 2001.

At September 30, 2002, long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,471.5 million in the United States and $163.4 million in Ireland. At December 31, 2001, the long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,551.5 million in the United States and $181.4 million in Ireland. No other country accounted for 10% or more of these assets at September 30, 2002 or December 31, 2001.

In the third quarter of 2001, EMC implemented a restructuring program to reduce its cost structure and focus its resources on the highest potential growth areas of its business. As a result of the program, EMC incurred restructuring and other special charges of $825.2 million. The restructuring charges consisted of $111.5 million for employee termination benefits, $104.5 million related to the impairment of goodwill, purchased intangibles and other long-lived assets, $158.1 million to consolidate excess facilities and $34.5 million for other contractual obligations for which EMC will no longer derive an economic benefit. The other special charges included a provision for excess and obsolete inventory of $310.0 million and an other than temporary decline in certain equity investments of $106.6 million.

The following is a summary of the activity in the reserve for the restructuring liabilities from June 30, 2002 to September 30, 2002 (table in thousands):

The following is a summary of the activity in the reserve for the restructuring liabilities from December 31, 2001 to September 30, 2002 (table in thousands):

The restructuring program included a reduction in force of approximately 4,000 employees across all business functions and geographic regions. As of June 30, 2002, all identified personnel had been terminated.

The adjustment to the provision for workforce reduction was primarily attributable to greater payouts associated with reductions in force in certain foreign jurisdictions. The adjustments to the provision for other contractual obligations and the provision for the consolidation of excess facilities resulted primarily from favorable settlements. For purposes of presentation in the accompanying statement of operations, the $2.3 million adjustment to the provision for restructuring has been classified within selling, general and administrative expenses.

The following is a summary of the activity in the reserve from June 30, 2002 to September 30, 2002 for excess and obsolete inventory established as part of the third quarter 2001 restructuring program (table in thousands):

The following is a summary of the activity in the reserve from December 31, 2001 to September 30, 2002 for excess and obsolete inventory established as part of the third quarter 2001 restructuring program (table in thousands):

The reversal of the reserve resulted from the sale of previously identified obsolete inventory and a combination of favorable settlements with vendors on amounts due for cancelled orders. For purposes of presentation in the accompanying statement of operations, the reductions have been classified within cost of sales.

In the fourth quarter of 2002, EMC announced an additional restructuring program to further reduce its cost structure. The restructuring program includes a reduction in force of approximately 1,350 employees across certain business functions and geographic regions and the closure of certain facilities. As a result, EMC will incur a restructuring charge in the fourth quarter of 2002.

For the nine months ended September 30, 2002, the estimated effective income tax rate was a benefit of 73.2%. The effective income tax rate is based upon the expected income (loss) for the year, the expected composition of that income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the nine months ended September 30, 2002, the effective rate varied from the statutory rate primarily as a result of the overall favorable resolution of international tax matters which aggregated approximately $67.7 million. Such amount included the favorable resolution of an international tax audit, partially offset by a provision for tax liabilities on other matters. As a result, the effective income tax rate benefit for the three months ended September 30, 2002 was 127.4%. The estimated effective income tax rate for 2002 is subject to further change as a result of changes in the composition of the income and losses in the countries in which EMC operates and the effects, if any, from tax audits.

In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS No. 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. The objectives of FAS No. 144 are to address issues relating to the implementation of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and to develop a model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. FAS No. 144 was effective for EMC commencing with its 2002 fiscal year. Upon adoption, this accounting pronouncement did not have a significant impact on EMC's financial position or results of operations.

In June 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." FAS No. 146 provides guidance on the accounting for recognizing, measuring and reporting of costs associated with exit and disposal activities, including restructuring activities. The pronouncement nullifies Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." Under EITF No. 94-3, a liability is recognized solely upon an entity's commitment to a plan. FAS No. 146 adjusts the timing of when a liability for termination benefits is to be recognized to be based upon whether the employee is required to render future service. A liability for costs to terminate an operating lease or other contract before the end of its term is to be recognized when the entity terminates the contract or ceases using the rights conveyed by the contract. All other costs associated with an exit or disposal activity are to be expensed as incurred. FAS No. 146 requires the liability to be measured at its fair value with subsequent changes in fair value to be recognized each reporting period utilizing an interest allocation approach. The pronouncement is effective for exit or disposal activities initiated after December 31, 2002. EMC is currently assessing the impact the pronouncement will have on its financial statements.

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 and the MD&A contained in EMC's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 22, 2002. The following discussion contains forward-looking statements and should also be read in conjunction with "FACTORS THAT MAY AFFECT FUTURE RESULTS" beginning on page 34.

Results of Operations—Third Quarter of 2002 Compared to Third Quarter of 2001

Total revenues for the third quarter of 2002 were $1,259.4, compared to $1,212.3 for the third quarter of 2001, representing an increase of $47.1, or 4%.

Information storage systems revenues were $662.4 in the third quarter of 2002, compared to $675.6 in the third quarter of 2001, representing a decrease of $13.2, or 2%. Information storage software revenues were $283.6 in the third quarter of 2002, compared to $242.5 in the third quarter of 2001, representing an increase of $41.1, or 17%. The changes in sales for both information storage systems and software were primarily volume related. While the combined storage systems and software revenues increased in the third quarter of 2002 compared to the third quarter of 2001, the third quarter of 2001 was negatively impacted by the global economic slowdown that began in 2001 and further exacerbated by the events of September 11, 2001. We continue to be negatively influenced by the global economic slowdown, which has led to a reduction in information technology spending, as well as competitive pricing pressures. Continued adverse changes in the economy, further reductions in information technology spending or continued pricing pressures may continue to negatively impact revenue during the fourth quarter of 2002 and future quarters.

Information storage services revenues were $279.2 in the third quarter of 2002, compared to $236.7 in the third quarter of 2001, representing an increase of $42.5, or 18%. The increase was primarily due to a greater volume of professional services, largely to support and implement automated networked storage solutions. Additionally, the increase was due to a greater volume of maintenance revenues associated with an increase in information storage software revenues.

Total information storage revenues were $1,225.2 in the third quarter of 2002, compared to $1,154.8 in the third quarter of 2001, representing an increase of $70.4, or 6%.

Other businesses revenues were $34.2 in the third quarter of 2002, compared to $57.4 in the third quarter of 2001, representing a decrease of $23.2, or 40%. Other businesses revenues consist of revenues from AViiON server products and related services. Included in the third quarter of 2001 were revenues from AViiON server products of $7.6. During the third quarter of 2001, EMC stopped selling AViiON server products. Accordingly, other businesses revenues for 2002 and future quarters are and will be comprised only of AViiON services revenues. These revenues are expected to continue to decline in future quarters.

Revenues on sales into the North American markets were $771.5 in the third quarter of 2002, compared to $714.2 in the third quarter of 2001, representing an increase of $57.3, or 8%. Revenues on sales into the European, Middle East and African markets were $305.6 in the third quarter of 2002,

compared to $283.5 in the third quarter of 2001, representing an increase of $22.1, or 8%. Revenues on sales into the Asia Pacific markets were $157.6 in the third quarter of 2002, compared to $158.1 in the third quarter of 2001, representing a decrease of $0.5, or 0%. Revenues on sales into the Latin American markets were $24.8 in the third quarter of 2002, compared to $56.6 in the third quarter of 2001, representing a decrease of $31.8, or 56%. The decline in revenues in the Asia Pacific and Latin American markets and nominal growth in North American and European, Middle East and African markets were attributable to the continued global economic slowdown that began in 2001, which has led to a reduction in information technology spending. Competitive pricing pressures also had an adverse effect on revenues. The decline in revenues in the Latin American markets has been further impacted by the region's political and currency instability.

Changes in exchange rates in the third quarter of 2002 compared to the third quarter of 2001 positively impacted revenues by approximately 1%. The impact was most significant in Germany, Italy and Brazil.

Gross margin increased to $473.6 in the third quarter of 2002 from $43.8 in the third quarter of 2001, an increase of $429.8. Included in the amount for the third quarter of 2001 is a charge of $320.1 for excess and obsolete inventory and impaired capitalized software. Included in the amount for the third quarter of 2002 is a reduction of $7.9 of the third quarter of 2001 provision for excess and obsolete inventory. The reduction resulted primarily from the sale of previously identified obsolete inventory. Additionally, included in the amount for the third quarter of 2001 is goodwill amortization of $11.2. As a result of implementing Statement of Financial Accounting Standards ("FAS") No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortized. Excluding the effects of these items, gross margin was $465.7 in the third quarter of 2002, or 37.0% of revenue compared to $375.1 in the third quarter of 2001, or 30.9% of revenue. The increase in gross margin dollars and percentage was primarily attributable to the information storage products and information storage services segments.

Gross margin for information storage products, excluding the effects of the adjustment for the provision for excess and obsolete inventory, impaired capitalized software and goodwill amortization, increased to 35.2% in the third quarter of 2002, compared to 29.3% in the third quarter of 2001. The increase was primarily attributable to the increased sales volume, a lower fixed cost component of cost of sales and a change in the product mix. The product mix in the third quarter of 2002 had a higher percentage of information storage software revenues, which has a higher gross margin percentage. Information storage software revenues accounted for 30% of information storage product revenues in the third quarter of 2002 compared to 26% in the third quarter of 2001.

Gross margin for information storage services, excluding the effects of the adjustment for goodwill amortization, increased to 41.5% in the third quarter of 2002, compared to 35.8% in the third quarter of 2001. The improvement in the gross margin percentage was attributable to greater productivity of our customer service and professional services personnel.

Gross margin for other businesses increased to 48.1% in the third quarter of 2002, compared to 37.2% in the third quarter of 2001. The increase in the gross margin percentage resulted from this segment consisting only of services revenue in the third quarter of 2002 compared to both systems and services revenue in the third quarter of 2001.

Research and development ("R&D") expenses were $191.7 and $242.1 in the third quarters of 2002 and 2001, respectively, a decline of 21%. As a percentage of revenues, R&D expenses were 15.2% and 20.0% in the third quarters of 2002 and 2001, respectively. The decrease in R&D expenses was due to our continued cost cutting efforts. In addition, we spent $31.5 and $28.3 in the third quarters of 2002 and 2001, respectively, on software development, which costs were capitalized. Included in R&D expenses in the third quarter of 2001 was $3.0 related to goodwill amortization. As a result of implementing FAS No. 142, goodwill is no longer amortized.

R&D spending reflects our efforts to continue to improve our long-term competitive position. These efforts include enhancements to information storage software and information storage systems, including networked information storage systems. Significant efforts underway include R&D associated with our AutoIS software strategy, as well as enhancements to our Symmetrix, CLARiiON and Celerra systems.

Selling, general and administrative ("SG&A") expenses were $412.3 and $510.9 in the third quarters of 2002 and 2001, respectively, a decrease of 19%. As a percentage of revenues, SG&A expenses were 32.7% and 42.1% in the third quarters of 2002 and 2001, respectively. The decrease in SG&A expenses was primarily due to our continued cost cutting efforts.

In the third quarter of 2001, we implemented a restructuring program to reduce our cost structure and focus our resources on the highest potential growth areas of our business. As a result of the program, we incurred restructuring and other special charges of $825.2. The restructuring charges consisted of $111.5 for employee termination benefits, $104.5 related to the impairment of goodwill, purchased intangibles and other long-lived assets, $158.1 to consolidate excess facilities and $34.5 for other contractual obligations for which we will no longer derive an economic benefit. The other special charges included a provision for excess and obsolete inventory of $310.0 and an other than temporary decline in certain equity investments of $106.6.

The following is a summary of the activity in the reserve for the restructuring liabilities from June 30, 2002 to September 30, 2002:

Category		Balance as of June 30, 2002		Adjustment		Current Utilization			Balance as of September 30, 2002
Workforce reduction		$	9.4	$	—	$	(9.3	)	$	0.1
Other contractual obligations			4.1		—		(0.1	)		4.0
Consolidation of excess facilities			102.9		—		(6.6	)		96.3

	Total	$	116.4	$	—	$	(16.0	)	$	100.4

The following is a summary of the activity in the reserve for excess and obsolete inventory from June 30, 2002 to September 30, 2002:

The reversal of the reserve resulted from a combination of the sale of previously identified obsolete inventory and favorable settlements with vendors on amounts due for cancelled orders.

As of June 30, 2002, the restructuring program had been substantially completed, although the ability to sell and sublet facilities is subject to appropriate market conditions. The expected cash impact of the charge is $247.8, of which $55.4 was paid in 2001 and $92.0 was paid in 2002. Remaining cash expenditures relating to workforce reductions and other contractual obligations will be substantially paid by the end of 2002. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015. The restructuring program has reduced costs in all areas of our operations, favorably impacting cost of sales, SG&A expenses and R&D expenses. As of September 30, 2002, we have reduced operating expenses by approximately $280.0 per quarter compared to our operating cost structure for the quarter ended June 30, 2001.

In the fourth quarter of 2002, we announced an additional restructuring program to further reduce our cost structure. The restructuring program includes a reduction in force of approximately 1,350 employees across certain business functions and geographic regions, and the closure of certain facilities. The restructuring program is expected to favorably impact cost of sales, SG&A and R&D. As a result, we will incur a restructuring charge in the fourth quarter of 2002. The amount of the charge will be dependent upon the amount of severance benefits and the number and site of facilities that are closed. We currently estimate the range of the charge will be between $125.0 and $250.0; however, the amount of the charge may change upon finalizing the plan.

Investment income increased to $73.1 in the third quarter of 2002, from $64.6 in the third quarter of 2001. Investment income was earned from investments in cash equivalents, short and long-term investments and sales-type leases. Investment income increased because of greater realized gains on sales of investments, offset partially by lower yields on outstanding investment balances. The weighted average return on investments, excluding realized gains, was 3.5% and 4.6% in the third quarters of 2002 and 2001, respectively.

Other expense, net was $17.4 in the third quarter of 2002, compared to $121.2 in the third quarter of 2001. Included in the 2001 amount was a $106.6 non-cash charge for other than temporary declines in equity investments. The 2002 amount was comprised primarily of losses on the disposal of assets.

The benefit for income taxes was $98.7 in the third quarter of 2002 compared to $222.7 in the third quarter of 2001. The effective income tax rate benefit was 127.4% in the third quarter of 2002 compared to 19.1% in the third quarter of 2001. The effective income tax rate is based upon the expected income (loss) for the year, the expected composition of that income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the quarter ended September 30, 2002, the effective income tax rate varied from the statutory rate primarily as a result of the overall favorable resolution of international tax matters which aggregated approximately $67.7 million. Such amount included the favorable resolution of an international tax audit, partially offset by a provision for tax liabilities on other matters. For the quarter ended September 30, 2001, the effective rate varied from the statutory rate due to the apportionment of income and losses in foreign countries and the establishment of provisions associated with the impact of foreign tax audits, partially offset by the tax benefits realized from a prior acquisition.

Results of Operations—First Nine Months of 2002 Compared to First Nine Months of 2001

Total revenues for the first nine months of 2002 were $3,949.0, compared to $5,577.9 for the first nine months of 2001, representing a decrease of $1,628.9, or 29%.

Information storage systems revenues were $2,183.1 in the first nine months of 2002, compared to $3,465.5 in the first nine months of 2001, representing a decrease of $1,282.4, or 37%. Information storage software revenues were $886.5 in first nine months of 2002, compared to $1,207.6 in the first nine months of 2001, representing a decrease of $321.1, or 27%. The decrease in both information storage systems and software revenues was primarily due to declining sales volume. Sales were negatively influenced by the global economic slowdown that began in 2001, which has led to a reduction in information technology spending. Competitive pricing pressures also had an adverse effect on revenues. Continued adverse changes in the economy, further reductions in information technology spending or continued pricing pressures may continue to negatively impact revenue during the fourth quarter of 2002 and future quarters.

Information storage services revenues were $768.9 in the first nine months of 2002, compared to $700.7 in the first nine months of 2001, representing an increase of $68.2, or 10%. The increase was primarily due to a greater volume of professional services and maintenance revenues.

Total information storage revenues were $3,838.5 in the first nine months of 2002, compared to $5,373.8 in the first nine months of 2001, representing a decrease of $1,535.3 or 29%.

Other businesses revenues were $110.5 in the first nine months of 2002, compared to $204.1 in the first nine months of 2001, representing a decrease of $93.6, or 46%. Other businesses revenues consist of revenues from AViiON server products and related services. Included in the first nine months of 2001 were revenues from AViiON server products of $46.1. In the third quarter of 2001, EMC stopped selling AViiON server products. Accordingly, other businesses revenues for 2002 and future quarters are and will be comprised only of AViiON services revenues. These revenues are expected to continue to decline in future quarters.

Revenues on sales into the North American markets were $2,341.1 in the first nine months of 2002, compared to $3,285.5 in the first nine months of 2001, representing a decrease of $944.4, or 29%. Revenues on sales into the European, Middle East and African markets were $938.1 in the first nine months of 2002, compared to $1,409.2 in the first nine months of 2001, representing a decrease of

$471.1, or 33%. Revenues on sales into the Asia Pacific markets were $594.3 in the first nine months of 2002, compared to $700.6 in the first nine months of 2001, representing a decrease of $106.3, or 15%. Revenues on sales into the Latin American markets were $75.4 in the first nine months of 2002, compared to $182.7 in the first nine months of 2001, representing a decrease of $107.3, or 59%. The decline in revenues in all these markets was attributable to the global economic slowdown that began in 2001, which has led to a reduction in information technology spending. Competitive pricing pressures also had an adverse effect on revenues. The decline in the Latin American markets has been further impacted by the region's political and currency instability.

Changes in exchange rates in the first nine months of 2002 compared to the first nine months of 2001 had a negligible effect on revenues.

Gross margin decreased to $1,531.1 in the first nine months of 2002 from $2,285.7 in the first nine months of 2001, a decrease of $754.6, or 33%. Included in the amount for the first nine months of 2001 is a charge of $320.1 for excess and obsolete inventory and impaired capitalized software. Included in the amount for the first nine months of 2002 is a reduction of $60.7 related to the third quarter of 2001 provision for excess and obsolete inventory. The reduction resulted from the sale of previously identified obsolete inventory and a combination of favorable settlements with vendors on amounts due for cancelled orders. Also included in the first nine months of 2001 is goodwill amortization of $33.5. As a result of implementing FAS No. 142, goodwill is no longer amortized. Excluding the effects of these items, gross margin decreased to $1,470.4 in the first nine months of 2002 from $2,639.2 in the first nine months of 2001 and the gross margin percentage declined to 37.2% in the first nine months of 2002 from 47.3% in the first nine months of 2001. The decline in gross margin dollars and percentage was primarily attributable to the information storage products segment.

Gross margin for information storage products, excluding the effects of the adjustments for the provision for excess and obsolete inventory, impaired capitalized software and goodwill amortization, decreased to 36.4% in the first nine months of 2002, compared to 49.3% in the first nine months of 2001. The decline was primarily attributable to the reduction in revenues resulting from lower sales volume, which caused fixed overhead costs to be absorbed over a lower sales base. In addition, lower average selling prices also contributed to the decline.

Gross margin for information storage services, excluding the effects of the adjustment for goodwill amortization, increased to 39.7% in the first nine months of 2002, compared to 37.5% in the first nine months of 2001. The increase in the gross margin percentage was attributable to increased margins earned on systems maintenance and professional services.

Gross margin for other businesses increased to 44.1% in the first nine months of 2002, compared to 34.9% in the first nine months of 2001. The increase in the gross margin percentage resulted from this segment consisting only of services revenue in the first nine months of 2002 compared to both systems and services revenue in the first nine months of 2001.

R&D expenses were $594.7 and $711.8 in the first nine months of 2002 and 2001, respectively, a decline of 16%. As a percentage of revenues, R&D expenses were 15.1% and 12.8% in the first nine months of 2002 and 2001, respectively. The decrease in R&D expenses was due to our continued cost cutting efforts. In addition, we spent $95.8 and $87.9 in the first nine months of 2002 and 2001, respectively, on software development, which costs were capitalized. Included in R&D expenses in the

first nine months of 2001 was $6.4 related to goodwill amortization. As a result of implementing FAS No. 142, goodwill is no longer amortized.

SG&A expenses were $1,287.8 and $1,721.3 in the first nine months of 2002 and 2001, respectively, a decrease of 25%. As a percentage of revenues, SG&A expenses were 32.6% and 30.9% in the first nine months of 2002 and 2001, respectively. The decrease in SG&A expenses was primarily due to our continued cost cutting efforts as well as a decrease in commissions due to lower revenues.

The following is a summary of the activity in the reserve for the restructuring liabilities from December 31, 2001 to September 30, 2002:

The adjustment to the provision for workforce reduction was primarily attributable to greater payouts associated with reductions in force in certain foreign jurisdictions. The adjustment to the provision for other contractual obligations and the provision for the consolidation of excess facilities resulted primarily from favorable settlements. For purposes of presentation in the accompanying statement of operations, the $2.3 adjustment to the provision for restructuring has been classified within SG&A expenses.

The following is a summary of the activity in the reserve for excess and obsolete inventory from December 31, 2001 to September 30, 2002:

The reversal of the reserve resulted from a combination of the usage of previously identified obsolete inventory and favorable settlements with vendors on amounts due for cancelled orders.

In the fourth quarter of 2002, we announced an additional restructuring program to further reduce our cost structure. The restructuring program includes a reduction in force of approximately 1,350 employees across certain business functions and geographic regions, and the closure of certain facilities. The restructuring program is expected to favorably impact cost of sales, SG&A and R&D. As a result, we will incur a restructuring charge in the fourth quarter of 2002. The amount of the charge will be dependent upon the amount of severance benefits and the number and size of facilities that are closed. We currently estimate the range of the charge will be between $125.0 and $250.0; however, the amount of the charge may change upon finalizing the plan.

Investment income decreased to $186.4 in the first nine months of 2002, from $200.5 in the first nine months of 2001. Investment income was earned from investments in cash equivalents, short and long-term investments and sales-type leases. Investment income decreased because of lower yields on outstanding investment balances. The weighted average return on investments, excluding realized gains, was 3.6% and 5.0% in the first nine months of 2002 and 2001, respectively.

Other expense, net was $31.0 in the first nine months of 2002, compared to $116.5 in the first nine months of 2001. Included in the 2001 amount was a $106.6 non-cash charge for other than temporary declines in equity investments. The 2002 amount was comprised primarily of losses on the disposal of assets.

The benefit for income taxes was $149.4 in the first nine months of 2002 compared to $35.0 in the first nine months of 2001. The effective income tax rate benefit was 73.2% in the first nine months of 2002 compared to 7.4% in the first nine months of 2001. The effective income tax rate is based upon the expected income (loss) for the year, the expected composition of that income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. For the nine months ended September 30, 2002, the effective income tax rate varied from the statutory rate primarily as a result of the overall favorable resolution of international tax matters which aggregated approximately $67.7 million. Such amount included the favorable resolution of an international tax audit, partially offset by a provision for tax liabilities on other matters. For the nine months ended September 30, 2001, the effective rate varied from the statutory rate due to the apportionment of income and losses in foreign countries and the establishment of provisions associated with the impact of foreign tax audits, partially offset by the tax benefits realized from a prior acquisition.

Cash and cash equivalents and short and long-term investments were $5,762.0 and $5,083.6 at September 30, 2002 and December 31, 2001, respectively, an increase of $678.4. During the first nine months of 2002, cash and cash equivalents decreased by $387.6 and short and long-term investments increased by $1,066.0. Our mix of cash and cash equivalents and short and long-term investments fluctuates from quarter to quarter and is subject to the timing of cash receipts and cash disbursements.

Cash provided by operating activities in the first nine months of 2002 was $1,250.7, compared to $1,315.3 in the first nine months of 2001. The decline in the first nine months of 2002 compared to the first nine months of 2001 was primarily attributable to a lower level of working capital generated in 2002 compared to 2001, partially offset by lower non-cash charges.

Cash used for investing activities was $1,433.5 in the first nine months of 2002, compared to $1,401.8 in the first nine months of 2001. Capital additions were $305.4 and $692.7 in the first nine months of 2002 and 2001, respectively. The decrease in capital additions resulted from cost containment measures. Net purchases and maturities of investments, consisting primarily of debt securities, were $1,007.7 and $535.6 in the first nine months of 2002 and 2001, respectively.

Cash used for financing activities was $200.6 in the first nine months of 2002, compared to $47.6 in the first nine months of 2001. During the first nine months of 2002, we repurchased 29.9 million shares of Common Stock at a cost of $243.1. As of September 30, 2002, we had repurchased 30.9 million of the 50.0 million shares of Common Stock authorized for repurchase by our Board of Directors in May 2001. In October 2002, the Board of Directors authorized an additional 250.0 million shares to be repurchased. During the first nine months of 2001, we distributed our ownership interest in McDATA. As a result of the distribution, McDATA's net assets were no longer consolidated with our assets, which resulted in a $142.0 reduction in cash. Partially offsetting these uses of cash was cash generated of $54.9 for the nine months ended September 30, 2002 and $126.0 for the nine months ended September 30, 2001, from the exercise of stock options.

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. If recourse is retained, we assess and provide for any exposure that may exist. Additionally, from time to time we may sell accounts receivable when it is economically beneficial. We also lend certain fixed income securities to generate

investment income. During the first nine months of 2002, we entered into various agreements to loan fixed income securities generally on an overnight basis. Under these securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities. The collateral is generally cash, U.S. government-backed securities or letters of credit. At September 30, 2002, there were no outstanding securities lending transactions.

We have available for use credit lines of $50.0 in the United States and $50.0 in Brazil. The Brazilian line requires us to borrow in Brazilian currency. As of September 30, 2002, we had $25.3 outstanding on our line of credit in Brazil and none outstanding on our line of credit in the United States. The Brazilian line of credit requires us to meet certain financial covenants with respect to limitations on losses and maintaining minimum levels of cash and investments. In the event the covenants are not met, the lender may require us to provide collateral to secure the outstanding balance. As of September 30, 2002, we were in compliance with the covenants. The Brazilian line of credit has been established to help manage currency volatility between the local currency and the U.S. dollar and facilitate cash repatriation.

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

Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and require our management's most difficult, subjective or complex judgments and estimates. Actual results could differ from those estimates. We believe the policies that fall within this category are the policies on revenue recognition, asset valuation and accounting for income taxes.

EMC derives revenue from sales of information storage systems, software and services. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. This policy is applicable to all sales, including sales to resellers and end users. The following summarizes the major terms of our contractual relationships with our customers and the manner in which we account for sales transactions.

Systems sales consist of the sale of hardware, including Symmetrix systems, CLARiiON systems, Celerra systems and Connectrix systems. Revenue for hardware is generally recognized upon shipment.

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

Installation is not considered essential to the functionality of our products as these services do not alter the product capabilities, do not require specialized skills and may be performed by the customers or other vendors. Installation services revenues are recognized upon completion of installation.

Software warranty and maintenance and hardware maintenance revenues are recognized ratably over the contract period.

We consider sales contracts that include a combination of systems, software or services to be multiple element arrangements. An item is considered a separate element if it involves a separate earnings process. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, we defer the fair value of the undelivered elements with the residual revenue allocated to the delivered elements. Discounts are allocated only to the delivered elements. Fair value is determined based upon the price charged when the element is sold separately. Undelivered elements typically include installation, training, software warranty and maintenance, hardware maintenance and professional services.

Our sales contracts generally provide for the customer to accept title and risk of loss when the product leaves our facility. When shipping terms or local laws do not allow for passage of title and risk of loss at shipping point, we defer recognizing revenue until title and risk of loss transfer to the customer.

Revenue from sales-type leases is recognized at the net present value of future lease payments. Revenue from operating leases is recognized over the lease period.

We accrue for systems' warranty costs and reduce revenue for estimated sales returns at the time of shipment. Systems' warranty costs are estimated based upon our historical experience and specific identification of systems' requirements. Sales returns are estimated based upon our historical experience and specific identification of probable returns.

Revenue recognition is governed by various accounting principles, including the SEC's Staff Accounting Bulletin, No. 101, "Revenue Recognition in Financial Statements," Statement of Position No. 97-2, "Software Revenue Recognition," FAS No. 48, "Revenue Recognition When Right of Return Exists," FAS No. 13, "Accounting for Leases," and SOP No. 81-1, "Accounting for Performance of

Construction-Type and Certain Production-Type Contracts," among others. The application of the appropriate accounting principle to our revenue is dependent upon the specific transaction and whether the sale or lease includes systems, software and services or a combination of these items. As our business evolves, the mix of products and services sold will impact the timing of when revenue and related costs are recognized. Additionally, revenue recognition involves judgments, including assessments of expected returns and the likelihood of nonpayment. We analyze various factors, including a review of specific transactions, historical experience, credit-worthiness of customers and current market and economic conditions. Changes in judgments on these factors could impact the timing and amount of revenue and costs recognized.

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

Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, inventories, property, plant and equipment, investments, capitalized software and intangible and other assets. Asset valuation is governed by various accounting principles, including FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and Accounting Research Bulletin No. 43, among others. Management uses a variety of factors to assess valuation depending upon the asset. For example, accounts and notes receivable are evaluated based upon the credit-worthiness of customers, historical experience, an assessment of expected returns and current market and economic conditions. The recoverability of inventories is based upon the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology. Property, plant and equipment, capitalized software and intangible and other assets are evaluated utilizing various factors, including the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Investments are evaluated for impairment based upon market conditions, the industry sectors in which the entity operates and the viability of each entity. Changes in judgments on any of these factors could have a material impact on the value of the asset.

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

In October 2001, the Financial Accounting Standards Board (the "FASB") issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS No. 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. The objectives of FAS No. 144 are

to address issues relating to the implementation of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and to develop a model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. FAS No. 144 was effective for EMC commencing with its 2002 fiscal year. Upon adoption, this accounting pronouncement did not have a significant impact on EMC's financial position or results of operations.

In June 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." FAS No. 146 provides guidance on the accounting for recognizing, measuring and reporting of costs associated with exit and disposal activities, including restructuring activities. The pronouncement nullifies Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." Under EITF No. 94-3, a liability is recognized solely upon an entity's commitment to a plan. FAS No. 146 adjusts the timing of when a liability for termination benefits is to be recognized to be based upon whether the employee is required to render future service. A liability for costs to terminate an operating lease or other contract before the end of its term is to be recognized when the entity terminates the contract or ceases using the rights conveyed by the contract. All other costs associated with an exit or disposal activity are to be expensed as incurred. FAS No.146 requires the liability to be measured at its fair value with subsequent changes in fair value to be recognized each reporting period utilizing an interest allocation approach. The pronouncement is effective for exit or disposal activities initiated after December 31, 2002. We are currently assessing the impact the pronouncement will have on our financial statements.

Our prospects are subject to certain uncertainties and risks. This Quarterly Report on Form 10-Q also contains certain forward-looking statements within the meaning of the Federal securities laws. Our future results may differ materially from our current results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to those set forth below, other one-time events and other important factors disclosed previously and from time to time in our other filings with the SEC.

Our business could continue to be materially adversely affected as a result of general economic and market conditions.

We are subject to the effects of general global economic and market conditions. Our operating results have been materially adversely affected as a result of unfavorable economic conditions and reduced information technology spending. If economic and market conditions do not improve, our business, results of operations or financial condition could continue to be materially adversely affected.

Our business could continue to 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 information storage systems, software and services, particularly in the product segments in which we compete. During 2001 and 2002, there has been a decrease in demand for information storage products as customers delayed or reduced information technology expenditures. Further delays or reductions in information technology spending, domestically or internationally, could continue to materially adversely affect demand for our products and services which could result in decreased revenues or earnings.

In October 2002, we announced a restructuring program to further reduce our cost structure. The restructuring program will include a reduction in force of approximately 1,350 employees and the closure of certain facilities. The reduction in force could result in a temporary reduction in productivity by our employees. Our future operating results will depend on the success of this restructuring program as well as on our overall ability to manage operations, which includes, among other things:

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

Competitive pricing and difficulty managing product costs could materially adversely affect our revenues and earnings.

Competitive pricing pressures exist in the information storage market and have had, and in the future may have, a material adverse effect on our revenues and earnings. There also has been and may continue to be a willingness on the part of certain competitors to reduce prices or provide information storage products or services, together with other products or services, at minimal or no additional cost in order to preserve or gain market share. We currently believe that pricing pressures are likely to continue.

To date, we have been able to manage our component and product design costs. However, there can be no assurance that we will be able to continue to achieve reductions in component and product design costs. Further, the relative and varying rates of increases or decreases in product price and component cost could have a material adverse effect on our earnings.

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

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

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 continue to be properly positioned in the market or that we will be able to introduce new or enhanced products into the market on a timely basis, or at all. We spend a considerable amount of money on research and development and introduce new products from time to time. There can be no assurance that enhancements to existing products or new products will receive customer acceptance.

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, and 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 longer 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.

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

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

Additionally, we periodically transition our product line to incorporate new technologies. The importance of transitioning our customers smoothly to new technologies, along with our historically uneven pattern of quarterly sales, intensifies the risk that a supplier who fails to meet our quality or delivery requirements will have a material adverse impact on our revenues and earnings.

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. Competition for highly skilled personnel is intense in the high technology industry. Because of the importance of stock-based incentive compensation in our total compensation program, the volatility or lack of positive performance in our stock price may from time to time adversely affect our ability to retain or attract key 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.

Historically uneven sales patterns could significantly impact our quarterly revenues and earnings.

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. Ongoing adverse global economic conditions have increased the likelihood that customers will unexpectedly delay, cancel or reduce orders, further increasing the difficulty in predicting revenues, earnings and working capital. We believe this uneven sales pattern is a result of many factors including:

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:

Moreover, delays in product shipping, caused by loss of power or telecommunications or similar services, 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.

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 or market products or services in competition with us in the future.

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 including, among other things:

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 common stock in connection with any future acquisition, existing stockholders may experience dilution and potentially decreased earnings per share.

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.

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

We compete with many established companies in the markets we serve and 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 more opportunity to address customers' various information technology requirements than us. We also compete with many smaller, less established companies in specific product segments. Some of these 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 by our competitors, including hardware and software products and services, and the implementation of effective marketing or sales strategies by our competitors.

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 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.

We generally rely upon patent, copyright, trademark and trade secret laws and contract rights in the United States and in other countries to establish and maintain our proprietary rights in our technology and products. However, there can be no assurance that any of our proprietary rights will not be challenged, invalidated or circumvented. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, there can be no assurance that we will be able to adequately protect our proprietary technology against unauthorized third-party copying or use, which could adversely affect our competitive position. Further, there can be no assurance that we will be able to obtain licenses to any technology that we may require to conduct our business or that, if obtainable, such technology can be licensed at a reasonable cost.

From time to time, we receive notices from third parties claiming infringement by our products of third-party patent or other intellectual property rights. Responding to any such claim, regardless of its merit, could be time-consuming, result in costly litigation, divert management's attention and resources

and cause us to incur significant expenses. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products or a successful claim of infringement against us requiring us to pay royalties to a third party, and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.

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

In the ordinary course of business, we may become involved in litigation, administrative proceedings and governmental proceedings. Such matters can be time-consuming, divert management's attention and resources and cause us to incur significant expenses. Furthermore, there can be no assurance that the results of any of these actions will not have a material adverse effect on our business, results of operations or financial condition.

As a multinational corporation, we are subject to income taxes in both the United States and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. From time to time, we are subject to income tax audits. While we believe we have complied with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed with additional taxes, there could be a material adverse affect on our results of operations or financial condition.

Our business, results of operations or financial condition could be materially adversely affected if laws, regulations or standards relating to us or our products were newly implemented or changed.

Our stock price, like that of other technology companies, is subject to significant volatility because of factors such as:

In addition, our stock price is affected by general economic and market conditions and has been negatively affected by unfavorable global economic conditions. If such conditions continue to deteriorate, our stock price could decline further.

Our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based on such evaluation, they have concluded that as of such date, our disclosure controls and procedures are effective.

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of evaluation by our principal executive officer and principal financial officer.

In April 2002, EMC filed a complaint against Hitachi, Ltd. and Hitachi Data Systems Corporation (together, "Hitachi") with the International Trade Commission ("ITC") and in the United States Federal District Court in Worcester, Massachusetts. The ITC complaint alleges that Hitachi has engaged in unlawful activities by importing into the United States products that infringe six EMC patents. We have asked the ITC to issue an injunction to block importation of Hitachi's infringing products and in May 2002, the ITC voted to commence an investigation into our claims. The suit in District Court seeks preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In June 2002, the suit in District Court was stayed, pending the outcome of the ITC action. Subsequent to the date we filed a complaint against Hitachi, in April 2002, Hitachi and Hitachi Computer Products (America), Inc. ("HICAM") filed a complaint against us in the United States Federal District Court for the Western District of Oklahoma alleging that certain of our products infringe eight Hitachi patents and seeking preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In July 2002, this suit was transferred to the United States Federal District Court in Worcester, Massachusetts. We believe that Hitachi and HICAM's claims are without merit.

On September 30, 2002, EMC filed a complaint against Hewlett-Packard Company ("HP") in the United States Federal District Court in Worcester, Massachusetts alleging that certain HP products infringe six EMC patents. The suit seeks a permanent injunction as well as unspecified monetary damages for patent infringement. On September 30, 2002, HP filed a complaint against us in the United States Federal District Court for the Northern District of California alleging that certain of our products infringe seven HP patents. The suit seeks a permanent injunction as well as unspecified monetary damages for patent infringement. We believe that HP's claims are without merit, and on October 1, 2002, we filed an amended complaint asking the court to declare that the seven HP patents are invalid and not infringed.

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

As required by Section 202 of the Sarbanes-Oxley Act of 2002, our Audit Committee has approved all of the non-audit services performed by PricewaterhouseCoopers LLP, our independent auditors, during the period covered by this Quarterly Report. These services relate to tax compliance assistance, tax consultations, statutory audits, employee benefit plan compliance, stock option plan compliance, and other technical, financial reporting and compliance services.

On August 13, 2002, we filed a Current Report on Form 8-K reporting under Item 7 the filing with the SEC of statements under oath of our principal executive officer and principal financial officer regarding facts and circumstances relating to Exchange Act filings pursuant to SEC Order No 4-460.

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.

I, Joseph M. Tucci, President and Chief Executive Officer of EMC Corporation (the "Registrant"), certify that:

I, William J. Teuber, Jr., Executive Vice President and Chief Financial Officer of EMC Corporation (the "Registrant"), certify that:

		Page No
PART I—FINANCIAL INFORMATION
	Item 1. Financial Statements (unaudited)
	Consolidated Balance Sheets at September 30, 2002 and December 31, 2001	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001	5
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2002 and 2001	6
	Notes to Interim Consolidated Financial Statements	7–21
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	22–40
	Item 4. Controls and Procedures	41
PART II—OTHER INFORMATION
	Item 1. Legal Proceedings	42
	Item 5. Other Information	42
	Item 6. Exhibits and Reports on Form 8-K	42
SIGNATURES		43
CERTIFICATIONS		44–45
EXHIBIT INDEX		46

				September 30, 2002			December 31, 2001
				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	1,741,396		$	2,129,019
	Short-term investments				795,352			445,428
	Accounts and notes receivable, less allowance for doubtful accounts of $49,906 and $36,169				753,474			1,348,569
	Inventories				515,199			583,985
	Deferred income taxes				236,583			287,597
	Other current assets				106,293			128,644

Total current assets					4,148,297			4,923,242
Long-term investments					3,225,238			2,509,112
Property, plant and equipment, net					1,703,955			1,827,331
Intangible and other assets, net					558,965			583,110
Deferred income taxes					36,951			46,840

		Total assets		$	9,673,406		$	9,889,635

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Notes payable and current portion of long-term obligations			$	37,866		$	56,677
	Accounts payable				511,166			424,132
	Accrued expenses				875,418			1,024,211
	Income taxes payable				238,992			315,368
	Deferred revenue				483,233			359,026

Total current liabilities					2,146,675			2,179,414
Other liabilities					92,571			109,401
Commitments and contingencies
Stockholders' equity:
	Series preferred stock, par value $.01; authorized 25,000 shares, none outstanding				—			—
	Common stock, par value $.01; authorized 6,000,000 shares; issued 2,230,716 and 2,221,442 shares				22,307			22,214
	Additional paid-in capital				3,546,130			3,470,325
	Deferred compensation				(14,264	)		(29,209	)
	Retained earnings				4,133,965			4,188,755
	Accumulated other comprehensive income (loss), net				7,343			(33,007	)
	Treasury stock, at cost; 30,931 and 1,060 shares				(261,321	)		(18,258	)

		Total stockholders' equity			7,434,160			7,600,820

			Total liabilities and stockholders' equity	$	9,673,406		$	9,889,635

		For the Three Months Ended						For the Nine Months Ended
		September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
Revenues:
	Net sales	$	946,055		$	925,736		$	3,070,349		$	4,719,147
	Services		313,383			286,537			878,605			858,776

			1,259,438			1,212,273			3,948,954			5,577,923
Costs and expenses:
	Cost of sales		605,021			984,476			1,892,883			2,753,308
	Cost of services		180,788			183,969			524,996			538,964
	Research and development		191,683			242,149			594,661			711,816
	Selling, general and administrative		412,313			510,888			1,287,760			1,721,260
	Restructuring and other charges		—			398,508			—			398,508

Operating loss			(130,367	)		(1,107,717	)		(351,346	)		(545,933	)
Investment income			73,071			64,627			186,419			200,475
Interest expense			(2,763	)		(3,673	)		(8,344	)		(10,528	)
Other expense, net			(17,418	)		(121,272	)		(30,958	)		(116,530	)

Loss before taxes			(77,477	)		(1,167,935	)		(204,229	)		(472,516	)
Income tax benefit			(98,738	)		(222,728	)		(149,439	)		(34,966	)

Net income (loss)		$	21,261		$	(945,207	)	$	(54,790	)	$	(437,550	)

Net income (loss) per weighted average share, basic		$	0.01		$	(0.43	)	$	(0.02	)	$	(0.20	)

Net income (loss) per weighted average share, diluted		$	0.01		$	(0.43	)	$	(0.02	)	$	(0.20	)

Weighted average shares, basic			2,203,063			2,213,328			2,210,956			2,208,302

Weighted average shares, diluted			2,207,989			2,213,328			2,210,956			2,208,302

			For the Nine Months Ended
			September 30, 2002			September 30, 2001
Cash flows from operating activities:
Net loss			$	(54,790	)	$	(437,550	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Depreciation and amortization			496,476			484,637
	Other than temporary declines in equity investments			6,315			106,560
	Non-cash restructuring, inventory and other special charges (reduction)			(60,735	)		407,535
	Amortization of deferred compensation			10,663			16,242
	Provision for doubtful accounts			30,441			11,811
	Deferred income taxes, net			51,428			(322,013	)
	Net loss on disposal of property, plant and equipment			18,920			974
	Tax benefit from stock options exercised			25,266			134,389
	Minority interest			—			29
Changes in assets and liabilities:
	Accounts and notes receivable			567,940			882,061
	Inventories			156,155			(128,983	)
	Other assets			55,061			(10,430	)
	Accounts payable			88,910			(65,896	)
	Accrued expenses			(147,466	)		292,305
	Income taxes payable			(107,006	)		(89,460	)
	Deferred revenue			118,707			29,220
	Other liabilities			(5,537	)		3,841

		Net cash provided by operating activities		1,250,748			1,315,272

Cash flows from investing activities:
	Additions to property, plant and equipment			(305,351	)		(692,739	)
	Proceeds from sales of property, plant and equipment			6			17,310
	Capitalized software development costs			(95,754	)		(87,866	)
	Purchases of short and long-term available for sale securities			(6,840,581	)		(4,153,019	)
	Sales of short and long-term available for sale securities			5,645,476			3,508,093
	Maturities of short and long-term available for sale securities			187,397			109,318
	Equity investment			(1,002	)		—
	Purchase of other assets			(1,700	)		—
	Business acquisition, net of cash acquired			(21,993	)		(102,889	)

		Net cash used by investing activities		(1,433,502	)		(1,401,792	)

Cash flows from financing activities:
	Issuance of common stock			54,914			125,959
	Purchase of treasury stock			(243,063	)		(18,258	)
	Payment of long term and short-term obligations			(13,952	)		(13,353	)
	Issuance of long-term and short term obligations			1,512			5
	Cash portion of McDATA Corporation spin-off dividend			—			(141,981	)

		Net cash used by financing activities		(200,589	)		(47,628	)
Effect of exchange rate changes on cash				(4,280	)		1,525

Net decrease in cash and cash equivalents				(387,623	)		(132,623	)
Cash and cash equivalents at beginning of period				2,129,019			1,983,221

Cash and cash equivalents at end of period			$	1,741,396			1,850,598

Non-cash activity:
—Options associated with business acquisitions			$	—		$	1,050
—Issuance of capital lease obligations				—			24,490
—Distribution of net assets in McDATA Corporation dividend				—			234,152
—Exchange of net assets for equity investment				3,560			—

		For the Three Months Ended					For the Nine Months Ended
		September 30, 2002		September 30, 2001			September 30, 2002			September 30, 2001
Net income (loss)		$	21,261	$	(945,207	)	$	(54,790	)	$	(437,550	)
Other comprehensive income (loss), net of taxes (benefit):
	Foreign currency translation adjustments, net of taxes of $1,759, $2,002, $1,273 and $200		4,150		5,413			7,827			547
	Equity adjustment for minimum pension liability, net of taxes (benefit) of $0, $0, $343 and $(7,616)		—		—			(343	)		(20,592	)
	Changes in market value of derivatives, net of taxes (benefit) of $32, $(2,706), $(9) and $(535)		284		(7,315	)		(80	)		(1,446	)
	Changes in market value of investments, net of taxes of $20,624, $12,646, $25,395 and $15,500		18,388		34,190			32,946			41,908

Other comprehensive income			22,822		32,288			40,350			20,417

Comprehensive income (loss)		$	44,083	$	(912,919	)	$	(14,440	)	$	(417,133	)

2002		$	26,529
2003			22,650
2004			13,493
2005			3,810
2006			2,445

	Total	$	68,927

	For the Three Months Ended September 30, 2002
	Information Storage Products		Information Storage Services		Other		Total
Balance, June 30, 2002	$	196,443	$	1,615	$	—	$	198,058
Goodwill acquired		22,583		—		—		22,583

Balance, September 30, 2002	$	219,026	$	1,615	$	—	$	220,641

For the Three Months Ended	Information Storage Products			Information Storage Services			Other Businesses			Consolidated
September 30, 2002
Revenues	$	946,008		$	279,217		$	34,213		$	1,259,438
Gross profit		333,300	(1)		115,963			16,471			465,734	(1)
Gross profit percentage		35.2	%		41.5	%		48.1	%		37.0	%
September 30, 2001
Revenues	$	918,112		$	236,734		$	57,427		$	1,212,273
Gross profit		258,887	(2)		83,659			21,348			363,894	(2)
Gross profit percentage		28.2	%		35.3	%		37.2	%		30.0	%

For the Nine Months Ended	Information Storage Products			Information Storage Services			Other Businesses			Consolidated
September 30, 2002
Revenues	$	3,069,586		$	768,895		$	110,473		$	3,948,954
Gross profit		1,116,276	(3)		305,362			48,702			1,470,340	(3)
Gross profit percentage		36.4	%		39.7	%		44.1	%		37.2	%
September 30, 2001
Revenues	$	4,673,081		$	700,715		$	204,127		$	5,577,923
Gross profit		2,274,926	(2)		259,574			71,217			2,605,717	(2)
Gross profit percentage		48.7	%		37.0	%		34.9	%		46.7	%

Category		Balance as of June 30, 2002		Adjustment		Current Utilization			Balance as of September 30, 2002
Workforce reduction		$	9,364	$	—	$	(9,256	)	$	108
Other contractual obligations			4,046		—		(125	)		3,921
Consolidation of excess facilities			102,946		—		(6,571	)		96,375

	Total	$	116,356	$	—	$	(15,952	)	$	100,404

Category		Balance as of December 31, 2001		Adjustment			Current Utilization			Balance as of September 30, 2002
Workforce reduction		$	48,149	$	19,277		$	(67,318	)	$	108
Other contractual obligations			23,645		(6,775	)		(12,949	)		3,921
Consolidation of excess facilities			127,487		(10,202	)		(20,910	)		96,375

	Total	$	199,281	$	2,300		$	(101,177	)	$	100,404

							Reversal of Reserve
				Inventory Scrapped and Charged Against the Reserve			Reversal of Reserve
Category		Balance as of June 30, 2002		Inventory Scrapped and Charged Against the Reserve			Inventory Sold			Favorable Vendor Settlements			Balance as of September 30, 2002
Excess and obsolete EMC owned inventory		$	107,269	$	(76,291	)	$	(7,798	)	$	—		$	23,180
Excess and obsolete vendor owned inventory			2,766		(2,670	)		—			(96	)		—

	Total	$	110,035	$	(78,961	)	$	(7,798	)	$	(96	)	$	23,180

							Reversal of the Reserve
				Inventory Scrapped and Charged Against the Reserve			Reversal of the Reserve
Category		Balance as of June 30, 2002		Inventory Scrapped and Charged Against the Reserve			Inventory Sold			Favorable Vendor Settlements			Balance as of September 30, 2002
Excess and obsolete EMC owned inventory		$	107.3	$	(76.3	)	$	(7.8	)	$	—		$	23.2
Excess and obsolete vendor owned inventory			2.7		(2.6	)		—			(0.1	)		—

	Total	$	110.0	$	(78.9	)	$	(7.8	)	$	(0.1	)	$	23.2

Category		Balance as of December 31, 2001		Adjustment			Current Utilization			Balance as of September 30, 2002
Workforce reduction		$	48.2	$	19.3		$	(67.4	)	$	0.1
Other contractual obligations			23.7		(6.8	)		(12.9	)		4.0
Consolidation of excess facilities			127.4		(10.2	)		(20.9	)		96.3

	Total	$	199.3	$	2.3		$	(101.2	)	$	100.4

		EMC CORPORATION
Date: November 8, 2002		By:	/s/ WILLIAM J. TEUBER, JR. William J. Teuber, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)


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)
99.1		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).
99.2		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).