This Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements and should also be read in conjunction with the risk factors set forth in Item 1A. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof.

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

INTRODUCTION

We manage our business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure.

EMC Information Infrastructure

Our EMC Information Infrastructure business consists of three of our segments: Information Storage, Content Management and Archiving and RSA Information Security. Our objective for our EMC Information Infrastructure business is to grow faster than the markets we serve by investing in the business for sustainable advantage.

To further improve the competitiveness and efficiency of our global business in response to a challenging global economy, in the fourth quarter of 2008, we implemented a restructuring program to further streamline the costs related to our Information Infrastructure business. We expect the program to reduce costs from our 2008 rate by approximately $350 in 2009, increasing to approximately $500 in 2010. The program's focus is to consolidate back office functions, field and campus offices, rebalance investments towards higher-growth products and markets, reduce management layers, and further reduce indirect spend on contractors, third-party services and travel. The restructuring program will reduce our global Information Infrastructure workforce by approximately 2,400 positions. The program is expected to favorably impact our cost of sales, selling, general & administrative ("SG&A") and research & development ("R&D") expenses. For 2009, we estimate that approximately a third of these reductions will be to our cost of sales and the remaining two thirds will be to our other operating expenses.

The program's expected savings will come from both cost reductions and the transformation of several areas of our operational cost structure. As part of the program, we are undertaking several initiatives to transform the structural efficiency of our operations worldwide. These initiatives will include the consolidation and movement of various facilities and processes beginning in 2009 and to be completed by the end of 2010. As part of these transformation efforts, we expect to incur additional non-recurring costs of approximately $75 to $100 over this period. These investments are necessary to implement the new, more efficient capabilities ahead of transitioning from the existing cost structure.

As a result of the program, we recognized a restructuring charge of $247.9 in the fourth quarter of 2008. We expect to record additional restructuring charges of approximately $100 to $125 across 2009 and 2010.

We expect the global economic situation to have a negative impact on IT spending in 2009. Our best estimate is that 2009 global IT spending will decline as a percentage in the mid to high single digits compared with 2008. We expect the markets that we address will perform slightly better than the overall IT market. We also expect that a higher than usual percentage of the full-year IT spending will take place in the second half of the year.

VMware Virtual Infrastructure

Our VMware Virtual Infrastructure business has achieved significant revenue growth to date by focusing on delivering new virtual infrastructure software solutions technology and products, expanding its network of technology and distribution partners, increasing product awareness, promoting the adoption of virtualization and building long-term relationships with its customers through the adoption of enterprise license agreements.

The current financial focus of VMware is on revenue growth to generate cash flows to fund its expansion of industry segment share and development of virtualization-based products for data centers, desktops and cloud computing. VMware expects to continue its revenue growth by broadening its virtual infrastructure software solutions technology and product portfolio.

Although VMware is currently the leading provider of virtual infrastructure solutions, management believes the use of virtual infrastructure solutions is at early stages by customers. The business faces competitive threats to its leadership from a number of companies, some of which have significantly greater resources, which could result in increased pressure to reduce prices on its offerings. As a result, management believes it is important to continue to invest in strategic initiatives related to product research and development, market expansion and associated support functions to expand industry leadership. These investments could result in contracting operating margins as VMware invests in its future.

RESULTS OF OPERATIONS

Revenues

    The following table presents revenue by our segments:

                                                                                          Percentage Change
                                               2008         2007         2006      2008 vs 2007      2007 vs 2006
Information Storage                         $ 11,632.3   $ 10,610.9   $  9,608.6             9.6 %            10.4 %
Content Management and Archiving                 785.6        773.2        685.8             1.6              12.7
RSA Information Security                         581.3        525.3        151.7            10.7             246.3
VMware Virtual Infrastructure                  1,876.9      1,320.8        709.0            42.1              86.3

          Total revenues                    $ 14,876.2   $ 13,230.2   $ 11,155.1            12.4 %            18.6 %

The Information Storage segment revenues include systems, software and other services revenues. Systems revenues were $6,281.6, $5,737.6 and $5,124.8 in 2008, 2007 and 2006, respectively, representing an increase of 9.5% in 2008 and 12.0% in 2007. The increases in systems revenues were due to greater demand for these products attributable to increased demand for our IT infrastructure offerings and a broadened product portfolio. Software revenues were $3,170.5, $3,078.0 and $2,941.2 in 2008, 2007 and 2006, respectively, representing an increase of 3.0% and 4.7% in 2008 and 2007, respectively. The 2008 increase of 3.0% was due to an $186.4 or 18.6% increase in software maintenance revenues, partially offset by a decrease in software license revenues of $93.9 or 4.5%. Software maintenance revenues increased due to continued demand for support from our installed base. The decline in software license revenues was due to a combination of factors, including existing systems' customers migrating to higher-end systems while continuing to utilize their existing software licenses and increased lower-end systems sales which utilize less software. The 2007 increase of 4.7% was due to a $76.3 or 8.2% increase in software maintenance revenues and a $60.5 or 3.0% increase in software license revenues. Software maintenance revenues increased due to continued demand for support from our installed base. Software license revenue increased when compared to the prior comparable period due to demand for our backup recovery software and platform based software. Total other services revenues were $2,180.2, $1,795.3 and $1,542.6 in 2008, 2007 and 2006, respectively, representing an increase of 21.4% in 2008 and 16.4% in 2007. Other services primarily consist of professional services and system maintenance. Professional services increased $278.6 or 22.7% and $208.3 or 20.5% in 2008 and 2007, respectively, and system maintenance revenues increased $89.1 or 17.7% and $36.6 or 7.8% in 2008 and 2007, respectively. The increase in professional services was partially attributable to greater demand for our professional services, largely to support and implement information lifecycle management-based solutions and to acquisitions consummated in 2007 and 2008. Acquisitions in 2008 contributed 300 basis points to the 2008 increase in revenues and acquisitions in 2007 contributed 68 basis points to the 2007 increase in revenues. System maintenance increased due to greater demand for our information storage systems. Total Information Storage revenue growth was also driven by higher sales volume from our channel partners. Our channel partners accounted for 27.2% and 57.8% of the revenue growth in 2008 and 2007, respectively.

The Content Management and Archiving segment revenues primarily include software revenues and other services revenues. Total software revenues were $580.6, $585.0 and $542.6 in 2008, 2007 and 2006, respectively, representing a decrease of 0.8% in 2008 and an increase of 7.8% in 2007. The 0.8% decrease in 2008 software revenues was primarily due to a decrease in software license revenues of $57.0 or 17.2%, partially offset by an increase in software maintenance revenues of $52.6 or 20.8%. The decrease in software license revenues was attributable to lower demand for application software resulting from the current uncertain economic climate and resulting negative impact in our customers' IT

purchases. Software maintenance revenues increased due to continued demand for support from our installed base. The 7.8% increase in software revenues in 2007 was due to an increase in software maintenance revenue of $33.9 or 15.5% and an increase in software license revenues of $8.5 or 2.6%. Software maintenance revenues increased due to continued demand for support from our installed base. The increase in software license revenues in 2007 was attributable to greater demand for our content management offerings. Other services revenues increased $19.1 or 10.5% and $48.2 or 35.8% in 2008 and 2007, respectively, as a result of increased demand for professional services to support and implement solutions for managing increasing volumes of customers' unstructured data.

The RSA Information Security segment was created during the third quarter of 2006 as a result of our acquisitions of RSA and Network Intelligence Corporation in September 2006. The RSA Information Security segment revenues primarily include software revenues and other services revenues. Total software revenues were $461.6, $438.7 and $127.3 in 2008, 2007 and 2006, respectively, representing an increase of 5.2% in 2008 and 244.6% in 2007. The 5.2% increase in 2008 was primarily due to an increase in software maintenance revenues of $26.4 or 27.0%, partially offset by a decrease in software license revenues of $3.5 or 1.0%. Software maintenance revenues increased due to continued demand for support from our installed base. The decrease in software license revenues in 2008 was attributable to lower demand resulting from the current uncertain economic climate and resulting negative impact in our customers' IT purchases. Other services revenues increased $32.4 or 46.7% and $52.3 or 305.1% in 2008 and 2007, respectively, as a result of increased demand for professional services. Because this segment was formed during the third quarter of 2006, the 2007 growth rate is not representative of the actual ongoing growth rate.

The VMware Virtual Infrastructure segment includes software license revenues and services revenues. Total revenues were $1,876.9, $1,320.8 and $709.0 in 2008, 2007 and 2006, respectively, representing an increase of 42.1% in 2008 and 86.3% in 2007. Software license revenues were $1,175.1, $903.2 and $494.6 in 2008, 2007 and 2006, respectively, representing an increase of 30.1% in 2008 and 82.6% in 2007. A significant majority of the revenue growth in 2008 and 2007 when compared to the prior comparable period is the result of greater demand for VMware's virtualization product offerings attributable to wider industry acceptance of virtualization as part of organizations' IT infrastructure, a broadened product portfolio and expansion of VMware's network of indirect channel partners. ELAs continue to be a significant component of VMware's revenue growth. Under a typical ELA, a portion of the revenue is attributed to the license and recognized immediately, but the majority is deferred and recognized as services revenue in future periods. At the end of the fourth quarter of 2008, VMware observed seasonal strength in ELAs from its enterprise accounts and comparative weakness in the transactional business especially with price-sensitive customers, such as the academic market and smaller businesses. During the second half of the year, customers began purchasing VMware solutions in smaller quantities through the channel to meet their immediate needs, forgoing larger discounts offered under ELAs. VMware expects that customers may continue smaller purchases through the channel at least through the first quarter of 2009 and perhaps longer. VMware expects the rate of revenue growth to continue to decelerate due primarily to the size and scale of its business and lengthened sales cycles attributable to challenges its customers may face in the current uncertain economic environment, such as decreases in IT budgets and difficulties in obtaining financing.

VMware software maintenance and services revenues were $701.9, $417.6 and $214.4 in 2008, 2007 and 2006, respectively, representing an increase of 68.1% in 2008 and 94.8% in 2007. Software maintenance and services revenues primarily consist of software maintenance and professional services revenues. This growth reflects the increase in VMware's license revenues, as software maintenance services are generally purchased with licenses, the benefit from multi-year software maintenance contracts sold in previous periods and renewals of existing customer software maintenance contracts. Professional services revenue growth reflects increased demand for design and implementation services and training programs, as end-user organizations deployed virtualization across their organizations. Given the reasons cited previously, VMware expects that services revenue will compose a larger proportion of its revenue mix and revenue growth in 2009.

Revenues by geography were as follows:

                                                                                 Percentage Change
                                        2008        2007        2006       2008 vs 2007     2007 vs 2006
United States                         $ 7,990.8   $ 7,343.0   $ 6,319.7              8.8 %           16.2 %
Europe, Middle East and Africa          4,555.0     3,921.1     3,232.6             16.2             21.3
Asia Pacific                            1,640.1     1,400.0     1,126.2             17.2             24.3
Latin America, Mexico and Canada          690.3       566.1       476.6             21.9             18.8

Revenue increased in 2008 and 2007 in all of our markets due to greater demand for our products and services. Changes in exchange rates had a favorable impact on revenue growth of 0.8% and 2.3% in 2008 and 2007, respectively. The impact of the change in rates in both periods was most significant in the European market, primarily: Germany, France, Italy and the United Kingdom; and Japan.

Costs and expenses

The following table presents our costs and expenses, other income and net income. For segment reporting purposes, stock-based compensation and acquisition-related intangible asset amortization are considered corporate reconciling items and are not allocated among our various operating segments in preparing the segment operating performance measures utilized by our chief operating decision maker.

                                                                                     Percentage Change
                                            2008        2007        2006       2008 vs 2007     2007 vs 2006
Cost of revenue:
Information Storage                       $ 5,670.1   $ 5,237.2   $ 4,714.7              8.3 %           11.1 %
Content Management and Archiving              305.6       271.5       225.8             12.6             20.2
RSA Information Security                      170.6       144.4        37.7             18.1            283.0
VMware Virtual Infrastructure                 268.7       188.6       103.1             42.5             82.9
Corporate reconciling items                   238.7       177.2       160.6             34.7             10.3

       Total cost of revenue                6,653.8     6,018.9     5,241.9             10.5             14.8
Gross margins:
Information Storage                         5,962.2     5,373.6     4,893.9             11.0              9.8
Content Management and Archiving              480.0       501.8       460.0             (4.3 )            9.1
RSA Information Security                      410.7       380.9       114.0              7.8            234.1
VMware Virtual Infrastructure               1,608.2     1,132.2       605.9             42.0             86.9
Corporate reconciling items                  (238.7 )    (177.2 )    (160.6 )           34.7             10.3

       Total gross margin                   8,222.4     7,211.3     5,913.2             14.0             22.0
Operating expenses:
Research and development(1)                 1,721.3     1,526.9     1,254.2             12.7             21.7
Selling, general and administrative(2)      4,601.6     3,912.7     3,253.3             17.6             20.3
In-process research and development            85.8         1.2        35.4          7,050.0            (96.6 )
Restructuring charges                         244.7        31.3       162.6            681.8            (80.8 )

       Total operating expenses             6,653.4     5,472.1     4,705.4             21.6             16.3

Operating income                            1,568.9     1,739.3     1,207.8             (9.8 )           44.0
Investment income, interest expense and
other expenses(3)                             133.9       320.3       182.3            (58.2 )           75.7

Income before taxes, cumulative effect
of a change in accounting principle and
minority interest                           1,702.8     2,059.6     1,390.0            (17.3 )           48.2
Provision for income taxes                    312.5       378.4       162.7            (17.4 )          132.6
Minority interest                             (44.7 )     (15.5 )         -            188.4               NM
Cumulative effect of a change in
accounting principle                              -           -        (0.2 )              -               NM

Net income                                $ 1,345.6   $ 1,665.7   $ 1,227.6            (19.2 )%          35.7 %

NM - not measurable

Gross Margins

Overall, our gross margin percentages were 55.3%, 54.5% and 53.0% in 2008, 2007 and 2006, respectively. The improvement in the gross margin percentage in 2008 compared to 2007 was attributable to the VMware Virtual Infrastructure segment, which contributed 123 basis points and the Information Storage segment, which contributed 21 basis points. These improvements were partially offset by the margin impact of the Content Management and Archiving segment, which decreased overall gross margins by 19 basis points and the RSA Information Security segment, which decreased overall gross margins by 1 basis point. The increase in corporate reconciling items, consisting of stock-based compensation and acquisition-related intangible asset amortization decreased the consolidated gross margin percentage by 44 basis points. The improvement in the gross margin percentage in 2007 compared to 2006 was attributable to the VMware Virtual Infrastructure segment, which contributed 163 basis points, and the RSA Information Security segment, which contributed 54 basis points. These improvements were partially offset by the margin impact of the Information Storage segment, which decreased overall gross margins by 50 basis points and the Content Management and Archiving segment, which decreased overall gross margins by 4 basis points. The increase in corporate reconciling items, consisting of stock-based compensation and acquisition-related intangible asset amortization decreased the consolidated gross margin percentage by 13 basis points.

For segment reporting purposes, stock-based compensation and acquisition-related intangible asset amortization are recognized as corporate expenses and are not allocated among our various operating segments. The increase of $61.5 in the corporate reconciling items in 2008 was attributable to a $38.6 increase in intangible asset amortization expense associated with acquisitions and a $22.9 increase in stock-based compensation expense, primarily attributable to VMware equity grants. The increase of $16.6 in the corporate reconciling items in 2007 was attributable to a $25.6 increase in intangible asset amortization expense associated with acquisitions, partially offset by a $9.0 decrease in stock-based compensation expense. The $9.0 decrease in stock-based compensation expense was due to higher valued options becoming fully vested in 2006.

The gross margin percentages for the Information Storage segment were 51.3%, 50.6% and 50.9% in 2008, 2007 and 2006, respectively. The increase in the gross margin percentage in 2008 compared to 2007 was primarily attributable to our ability to achieve higher gross margins from our focus on selling overall solutions to our customers, partially offset by the margin impact from the acquisition of Iomega in June of 2008. The acquisition of Iomega reduced gross margins by 70 basis points for 2008. Iomega operates within the consumer and small business marketplace which historically has had lower gross margins than our traditional Information Storage segment. The decrease in gross margin percentage in 2007 was primarily attributable to the reduction in the mix of software license revenues as a percentage of total segment revenues to 19.6% in 2007 from 21.0% in 2006. Software license revenues generally provide a higher margin percentage than systems and services revenues.

The gross margin percentages for the Content Management and Archiving segment were 61.1%, 64.9% and 67.1% in 2008, 2007 and 2006, respectively. The decreases in the gross margin percentage for both 2008 and 2007 were primarily attributable to a decline in software license revenues as a percentage of total segment revenues. Software license revenues as a percentage of total revenues decreased from 47.2% in 2006 to 42.9% in 2007 and to 35.0% in 2008. Software license revenues generally provide a higher gross margin percentage than software maintenance and other services revenues.

The gross margin percentages for the RSA Information Security segment were 70.6%, 72.5% and 75.2% in 2008, 2007 and 2006, respectively. The decreases in the gross margin percentage in 2008 and 2007 were primarily due to a decrease in software license revenues as a percentage of total segment revenues. Software license revenues as a percentage of total revenues decreased from 68.5% in 2006 to 64.9% in 2007 and to 58.0% in 2008. Software license revenues generally provide a higher gross margin percentage than software maintenance and other services revenues.

The gross margin percentages for the VMware Virtual Infrastructure segment were 85.7% in 2008, 85.7% in 2007 and 85.5% in 2006. The consistency in the gross margin percentage in 2008, 2007 and 2006 was primarily due to consistent software license and maintenance revenue mix as a percentage of total revenues. Software license and maintenance revenues as a percentage of total revenues decreased slightly from 93.2% in 2007 to 92.2% in 2008 and from 93.3% in 2006 to 93.2% in 2007.

Research and Development

As a percentage of revenues, R&D expenses were 11.6%, 11.5% and 11.2% in 2008, 2007 and 2006, respectively. R&D expenses increased $194.4 and $272.7 in 2008 and 2007, respectively, primarily due to higher personnel-related costs, including salaries, benefits, recruiting, contract labor and consulting and higher cost of facilities. Personnel-related costs increased by $218.5 and $261.6 and the cost of facilities increased by $26.4 and $21.9 in 2008 and 2007, respectively. Partially offsetting these increases was an increase in capitalized software development costs of $59.9 and $42.7 in 2008 and 2007, respectively, which reduced R&D costs. Additionally, we experienced a reduction in the cost of materials to support new product development of $13.2 and $18.4 in 2008 and 2007, respectively.

Corporate reconciling items within R&D consist of stock-based compensation and intangible asset amortization. These costs increased $56.0 to $175.4 in 2008 and decreased $0.7 to $119.4 in 2007. In 2008, stock-based compensation expense increased $54.4 and intangible asset amortization increased $1.6. The increase in stock-based compensation expense consisted of a $35.6 increase within the VMware Virtual Infrastructure business and an $18.8 increase within EMC's Information Infrastructure business. The increase in stock-based compensation expense was primarily attributable to incremental VMware equity grants made in 2007 and 2008. In 2007, intangible asset amortization decreased $1.3 and stock-based compensation expense increased $0.6. The increase in stock-based compensation expense in 2007 consisted of a $16.5 increase within the VMware Virtual Infrastructure business offset by a $15.9 decrease within EMC's Information Infrastructure business. The increase in stock-based compensation expense within the VMware Virtual Infrastructure business was attributable to incremental equity grants made in 2007. The decrease in stock-based compensation expense within EMC's Information Infrastructure business was primarily attributable to higher valued options becoming fully vested in 2006. For segment reporting purposes, corporate reconciling items are not allocated to our various operating segments.

R&D expenses within EMC's Information Infrastructure business, as a percentage of EMC's Information Infrastructure business revenues, were 9.3% in 2008 and 9.7% in 2007 and 2006. R&D expenses increased $51.5 and $135.3 in 2008 and 2007, respectively. In 2008, the increase was primarily due to higher personnel-related costs and increased facilities costs which increased by $74.7 and $6.2, respectively. Partially offsetting the increase was an increase in capitalized software development costs of $16.6 which reduced R&D costs and a reduction in the cost of materials to support new product development of $14.4. In 2007, the increase was primarily due to higher personnel-related costs and increased facilities cost which increased by $151.7 and $15.9, respectively. Partially offsetting the increase was an increase in capitalized software . . .