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UNITED STATES

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

EMC CORPORATION

176 South Street

(508) 435-1000

      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.

YES x                    NO o

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

YES x                    NO o

     The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of September 30, 2004 was 2,396,278,626

EMC CORPORATION

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PART I

Item 1.	Financial Statements

EMC CORPORATION

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

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EMC CORPORATION

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

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EMC CORPORATION

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

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EMC CORPORATION

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

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EMC CORPORATION

      EMC Corporation and its subsidiaries design, manufacture, market and support a wide range of products and services for the storage, management and protection of information. Our products and services are designed to help customers deploy an information lifecycle management strategy to align the IT infrastructure with the business based upon the changing value of information while optimizing server, network and storage resources.

      The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. These statements include the accounts of EMC and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. 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, 2004 and 2003. Certain prior year amounts have been reclassified to conform with the current presentation.

      The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. Accordingly, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2004.

      We derive revenue from sales of information 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 CLARiiON systems, Symmetrix systems, NetWin and 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. Our software products provide customers with information management, content management, sharing, protection and server virtualization capabilities. Revenue for software is generally recognized upon shipment or electronic delivery. License revenue from royalty payments is recognized upon receipt of royalty reports from third party original equipment manufacturers (“OEMs”).

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

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1.	Basis of Presentation (Continued)

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

      Training revenues are recognized upon completion of the training.

      Professional services revenues, which include information infrastructure design, integration and implementation, business continuity, data migration, networking storage and project management, are recognized as earned based upon the hours incurred.

      When hardware, software and services are contained in a single arrangement, we allocate revenue between the elements based on their relative fair value, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and reliable evidence of the fair value of the undelivered items. Fair value is generally determined based upon the price charged when the element is sold separately. Fair value of software support services may also be measured by the renewal rate offered to the customer. In the absence of fair value for a delivered element, we allocate revenue first to the fair value of the undelivered elements and allocate the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a deferral of revenue for the delivered elements until all undelivered elements are fulfilled.

      Our sales contracts generally provide for the customer to accept title and risk of loss when the product leaves our facilities. 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 the estimated costs of systems’ warranty at the time of sale. We reduce revenue for estimated sales returns at the time of sale. 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.

      Statement of Financial Accounting Standards (“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, we elected to apply Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for our stock-based compensation plans. The following is a reconciliation of net

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income per weighted average share had we adopted FAS No. 123 (table in thousands, except per share amounts):

      The fair value of each option granted during 2004 and 2003 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

      In March 2004, the Financial Accounting Standards Board (“FASB”) approved the consensus reached on the Emerging Issues Task Force Issue (“EITF”) No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-01 provides guidance on determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. EITF 03-01 also provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. The adoption of EITF 03-01 is not expected to have a material impact on our financial position or results of operations.

      In May 2004, the FASB issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FAS 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and

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Modernization Act of 2003 (“MPDIMA”), including the accounting for and disclosure of any federal subsidy provided by MPDIMA. The adoption of FAS 106-2 is not expected to have a material impact on our financial position or results of operations.

      In October 2004, the FASB approved the consensus reached on EITF No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” EITF 04-08 provides guidance on when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings per share. The adoption of EITF 04-08 is not expected to have a material impact on our financial position or results of operations.

      In January 2004, we acquired all of the shares of outstanding stock of VMware, Inc., a software company specializing in virtualization technology. VMware’s technology enables multiple operating systems to run simultaneously and independently on the same Intel-based server or workstation and move live applications across systems without business disruption. We determined that the acquisition advances our goal of simplifying the information technology operations of our customers and supports our overall information lifecycle management strategy. The aggregate purchase price, net of cash received, was approximately $611.9 million, which consisted of $538.2 million of cash, $72.0 million in fair value of our stock options and $1.7 million of transaction costs, which primarily consisted of fees paid for financial advisory, legal and accounting services. The fair value of our stock options issued to employees was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:

The intrinsic value allocated to the unvested options issued in the acquisition that had yet to be earned as of the acquisition date was $47.3 million and has been recorded as deferred compensation in the purchase price allocation.

      The consolidated financial statements include the results of VMware from the date of acquisition. Pro forma results of operations have not been presented because the effects of the acquisition were not material to us. The purchase price has been allocated based on estimated fair values as of the acquisition date. The purchase price allocation is preliminary and a final determination of required purchase accounting adjustments

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will be made upon the completion of our integration activities. The following represents the preliminary allocation of the purchase price (table in thousands):

      In determining the purchase price allocation, we considered, among other factors, our intention to use the acquired assets, historical demand and estimates of future demand of VMware’s products and services. The fair value of intangible assets was primarily based upon the income approach. The rate used to discount the net cash flows to their present values was based upon a weighted average cost of capital of 14%. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving forecast sales related to the technology and assets acquired from VMware.

      The total weighted average amortization period for the intangible assets is 4.8 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized. None of the goodwill is deductible for income tax purposes. The goodwill is classified within our VMware products and services segment.

      Of the $126.0 million of acquired intangible assets, $15.2 million was allocated to IPR&D and was written off at the date of acquisition because the IPR&D had no alternative uses and had not reached technological feasibility. The write-off is included in restructuring and other special charges in our income statement. Three IPR&D projects were identified relating to virtual machine software. The value assigned to IPR&D was determined utilizing the income approach by determining cash flow projections relating to the projects. The stage of completion of each in-process project was estimated to determine the discount rate to be applied to the valuation of the in-process technology. Based upon the level of completion and the risk associated with in-process technology, we deemed a discount rate of 50% as appropriate for valuing IPR&D.

      In connection with the VMware acquisition, we commenced integration activities which have resulted in recognizing a $3.8 million liability for lease obligations, of which $0.8 million was paid in the first nine months of 2004. The liability will be paid over the remaining lease periods through 2007. We are working to finalize our integration activities which may result in additional purchase price allocations or adjustments.

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      Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment for the nine months ended September 30, 2004 consist of the following (table in thousands):

      Inventories consist of (table in thousands):

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

      Construction in progress and land owned at September 30, 2004 include $93.1 million and $6.0 million, respectively, of facilities under construction that we are holding for future use.

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      Accrued expenses consist of (table in thousands):

      Systems sales include a standard product warranty. At the time of the sale, we accrue for systems’ warranty costs. Upon expiration of the initial warranty, we may sell additional maintenance contracts to our customers. Revenue from these additional maintenance contracts is deferred and recognized ratably over the service period. The initial systems’ warranty accrual is based upon our historical experience and specific identification of systems’ requirements. The following represents the activity in our warranty accrual for our standard product warranty (table in thousands):

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

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      The reconciliation of the numerators and denominators of the diluted earnings per share calculations is as follows (table in thousands, except per share amounts):