EMC Corp. Product Cycles Kick In. For analyst certification and other important disclosures, refer to the Disclosure Section.

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1 NORTH AMERICA Stock Rating Overweight-V Industry View In-Line Product Cycles Kick In Conclusion: With revenue traction and product cycles back on track and a strategy to further integrate the business for improved leverage, EMC appears set to outgrow our group overall in the next two years. If the company executes on our mid-teens revenue growth and 20%+ EPS forecast over the next two years, a low 20x P/E multiple remains reasonable Maintain Overweight-V. What's New 1: Systems revenue grew 19% YoY on the back of a tough June (15% YTD growth). Software generally remains EMC s higher growth segment up 25% YoY in 3Q (17% YTD). VMWare revenues increased 86% YoY; Smarts increased over 100% though content management growth did slow to 25% YoY (vs. 44% YTD). While the company didn t provide bookings/backlog insight, it appears management is more confident in the global economic environment and its ability to hit numbers going forward. What's New 2: EMC announced it will recognize a $150-$175 million charge next quarter to integrate its 21 acquisitions over the past 3-years. Ultimately, this adds $0.03-$0.04 to the bottom-line annually (assuming ~50% flow through) and provides one-face to EMC customers. Model Implication: Restructuring benefits roughly offset RSA dilution in 2007 and begin to add leverage in We maintain our $0.71 C2007 EPS and C2008 shifts to $0.90 from $0.87. Stock Implication: We remain positive on the longterm fundamentals of storage and think EMC s longterm strategy remains one of the best in Enterprise systems. Continued share repurchases and restructuring should drive EPS growth faster than revenues implying a sub-1.0x forward PEG ratio today (we forecast 20%+ EPS). This compares to an average Systems & PC Hardware PEG of x. Our $16 price target implies EMC will trade at 22 times our F07 EPS estimate of $0.71 (ex-cash) and more inline with average PEG ratios in the group. Morgan Stanley & Co. Incorporated Rebecca F. Runkle Rebecca.Runkle@morganstanley.com (212) Key Ratios and Statistics Kathryn Huberty, CFA Kathryn.Huberty@morganstanley.com (212) Reuters: EMC.N Bloomberg: EMC US Systems and PC Hardware / United States of America Price target $16.00 Shr price, close (Oct 17, 2006) $12.70 Mkt cap, curr (mm) $28,328 Fiscal Year (Dec) e 2007e ModelWare EPS ($)* Prior ModelWare EPS ($) Consensus EPS ($) P/E EV/rev EV/EBITDA P/BV ROE (%) RNOA (%) Div yld (%) * = Please see explanation of Morgan Stanley ModelWare later in this note. e = Morgan Stanley Research estimates Quarterly ModelWare EPS e 2006e Quarter 2004 Prior Current Prior Current Q a Q a Q a Q a = Actual company reported data Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the U.S. can receive independent, third-party research on the company covered in this report, at no cost to them, where such research is available. Customers can access this independent research at or can call to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section.

2 EMC Financial Summary Assumptions Income Statement Value Driver Key Assumptions FY Ending Dec a 2006e 2007e 2008e Top-Line Growth Gross Margin Completion of DMX-3 and mid-range transition should help EMC maintain good hardware growth in the next few Qs. Expanded Dell/CSCO/Intel partnership could prove incremental to EMC's top line over time. Demand for server & storage virtualization continues to provide strong growth opportunities for VMware/Invista. Most important margin drivers include 1) mix, 2) pricing/cost, and 3) volume Op Revenue ($ mn) 9,664 11,096 12,978 14,773 Op expenses ($ mn) 8,081 9,574 10,966 12,226 NOPAT ($ mn) 1,204 1,158 1,531 1,939 PTOP ($ mn) 1,583 1,521 2,012 2,548 ModelWare Net Income ($ mn) 1,292 1,282 1,591 1,998 ModelWare EPS ($) EPS nom 3-yr CAGR 19.1% Operating Margin Expect investment pace to moderate somewhat, overall mix to improve and improved services traction - driving margins higher over time. Company to focus more on organic revenue growth after making $7B of acquisitions in the past 3 years. Balance Sheet Source: Morgan Stanley Research FY Ending Dec a 2006e 2007e 2008e Op assets ($ mn) 9,435 12,448 12,777 12,920 Ratios Op liabilities ($ mn) 4,725 5,086 5,614 6,308 FY Ending Dec a 2006e 2007e 2008e Net fin assets (oblig) ($ mn) -7,355-3,246-3,520-4,825 PTOP margin 16.4% 13.7% 15.5% 17.2% Shareholders' Equity (mn) 12,065 10,608 10,683 11,437 NOPAT margin 12.5% 10.4% 11.8% 13.1% Cash & cash equiv. ($ mn) 2,322 1,425 1,699 3,004 EBITDA margin 23.0% 22.1% 24.0% 24.8% Net operating assets ($ mn) 4,710 7,362 7,164 6,612 ROE 11.2% 10.6% 15.0% 18.7% Dividend yield 0.0% 0.0% 0.0% 0.0% FCF yld ratio 6.9% 7.2% 5.3% 7.9% EV/EBITDA Cash Flow Statement Price to book value FY Ending Dec a 2006e 2007e 2008e FCF from op ($ mn) 2,184 1,996 1,439 2,183 FCF/Share Catalysts to Watch: Equity financing ($ mn) 354 2,822 1, New product cycles (DMX-3, Clariion CX-3, Celerra). Capital exp ($ mn) Expanded channel distributions with Dell/CSCO/Intel. Acquisitions & disposals ($ mn) , VMware ESX 3 should support strong growth. Gross CapEx growth (%) 12.9% 1.0% 13.8% a e p Actual company reported data Morgan Stanley Research Estimate Preliminary Morgan Stanley Research Estimate based on initial company financial disclosure Source: Company data, Morgan Stanley Research 2

3 Investment Case Summary & Conclusions Exhibits 1-2 starting on Page 4 provide a full overview of the quarter. Exhibits 3-4 provide details of our go forward estimates. We maintain our $16 price target. Valuation: Maintain Overweight-V; $16 Price Target EMC currently trades at the low-end of its historical multiple valuation metrics. Our price target assumes average (not peak) historical average ranges and a 45% premium to the broader S&P 500 market (S&P 500 EPS expected to grow 5% next year). Our $16 price target also assumes EMC trades at 22 times our C07 $0.71 (post option) EPS estimate, ex-cash ($2.5/share; $1.50/shr net cash). Our DCF/RI models also point to a $16 fair value and assume the following: Beta: 1.71 Risk-free rate: 5% (based on 10-year Treasury bonds) Market Premium: 4.0% Cost of capital: 11.8% EBITDA margins: remain in the 28% range in the forecast period ( ). Long-term growth: 3.5% Risks to our price target Risks to our $16 price target include: 1) software traction could be less than anticipated and hardware margin pressures could be worse; 2) EMC/CSCO/Dell/Intel partnerships could fail to materialize and provide meaningful revenue contributions; 3) market share could be lost as a result of the company s failure to introduce or refresh its product lines in a timely fashion; and 4) the company s silo-ed platform approach could prove a disadvantage over time. If overall IT spending slows, particularly on storage, EMC could be at risk. Conversely, if these concerns prove to be less than what we anticipate, the stock could surpass our price target. Company Description EMC supplies enterprise-oriented data storage and retrieval technology including intelligent disk arrays, software and services. EMC enjoys a leading market share with revenues exceeding $9 billion in C2005. Industry View: In-Line In-Line: In-line overall, but add a positive bias to our weighting for the first time in several years. Emerging technologies should drive improvements in average system configurations during 2007, potentially resulting in better ASP fundamentals. GICS Sector: Information Technology Strategist's Recommended Weight: 16.5% S&P 500 Weight: 15.5% 3

4 Exhibit 1 EMC 3Q06 Variance - Reported Results vs. Morgan Stanley Estimates F4Q06 and F2006 Expectations Current Consensus Est (pre call): F4Q06E revenue of $3.046B and EPS of $0.16, F06E revenue of $10.848B and EPS of $0.51 Morgan Stanley Est: F4Q06E revenue of $3.155B and EPS of $0.17 (pro forma), $0.07 (GAAP), F06E revenue of $11.1B and EPS of $0.55 (pro forma), $0.42 (GAAP) Management Commentary: Q4 revenue at least $3.16B, EPS of $0.16 (Non-GAAP), $0.09 (GAAP). EMC: F3Q06 Variance Analysis F3Q06 Per Cons. P/L Summary ($ Millions) F3Q05A F4Q05A F1Q06A F2Q06A Actual MS Est. % Diff Share Est. Q/Q Chg Y/Y Chg Comments Total Revenues 2, , , , , , % , % 19.0% RSA and Network Intelligence contributed $37.8M. Record revenue by RSA. Y/Y Growth 16.6% 14.9% 13.7% 9.8% 19.0% 12.1% Benefited from 2Q backlog, completion of product transition, and higher inventory levels Total Gross Profit 1, , , , , , % % 17.9% Gross margins down slightly due to higher storage hardware sales. Gross Margin % 54.0% 54.8% 53.1% 53.6% 53.5% 53.8% SG&A % (0.01) 3.4% 24.4% Announced consolidation efforts aims to provide unified information infrastructure. SG&A as % of Revenue 27.1% 26.1% 28.9% 30.0% 28.3% 28.0% To reduce workforce by ~1250 by the end of 2007, mostly in non-customer facing R&D % (0.00) 4.1% 21.1% functions and non-core R&D roles. Pre-tax charge of ~$150M - $175M in 4Q06. R&D as % of Revenue 10.8% 9.7% 11.0% 11.5% 11.0% 11.0% Operating Income % % 4.9% Operating Margin 16.1% 19.0% 13.2% 12.1% 14.2% 14.8% Net Interest Income % 0.00 (27.9%) (8.5%) Pre-Tax Income % % 3.4% Income Tax Expense Effective Tax Rate 25.6% 27.0% 26.0% 24.8% 26.1% 26.0% (0.00) Net Income % % 3.7% Y/Y Growth 46.8% 32.4% 9.4% (4.2%) 2.7% 0.6% Diluted EPS % % 12.7% Penny upside driven by better than expected share repurchases in the Q. Y/Y Growth 46.8% 31.3% 11.4% (0.1%) 12.7% 5.3% Share Count (Diluted) 2, , , , , ,325.4 (3.7%) 0.01 (4.3%) (7.9%) $1B share repurchase reduced share count more than we forecast. Segment Revenues F1Q05A F2Q05A F3Q05A F4Q05A F1Q06A F2Q06A F3Q06A MS Est. Q/Q Chg Y/Y Chg Hardware 1,026 1,069 1,092 1,300 1,227 1,152 1,299 1, % 19.0% New Clariion and Symmetrix traction as well as Symmetrix rollovers from 2Q. Y/Y Growth 14.6% 14.9% 15.1% 18.5% 19.6% 7.8% 19.0% 9.5% Software % 23.7% Software strength driven by Vmware, offset by lumpiness in content management. Y/Y Growth 22.9% 17.9% 10.7% 11.9% 4.6% 10.1% 23.7% 18.5% Services % 15.9% Services strength continued - a positive for long term trends/stability. Y/Y Growth 29.5% 30.0% 27.2% 12.9% 14.2% 14.0% 15.9% 11.3% Others (8.9%) (72.1%) Data general server lines continue to wind down - inline w/ our expectation. Y/Y Growth (49.1%) (49.8%) (49.4%) (44.5%) (71.6%) (74.0%) (72.1%) (71.6%) Source: Company data, Morgan Stanley Research 4

5 Exhibit 2 EMC F3Q06 Variance (Continued) - Reported Results vs. Morgan Stanley Estimates Product Revenues F1Q05A F2Q05A F3Q05A F4Q05A F1Q06A F2Q06A F3Q06A MS Est. +/- versus forecast Symmetrix (HW,SW,Upgrades) NM Strong bounce-back from 2Q weakness due to better DMX-3 (new pdt) availability and Y/Y Growth (2.9%) 4.3% (2.0%) (0.1%) 10.1% (0.1%) 20.6% solid enterprise demand. 90% of TB shipped were DMX-3. Clariion (HW,SW,Upgrades) NM Ramp up following completion of CX-3 product transition in 2Q. 85% of TB on CX-3. Y/Y Growth 46.9% 32.2% 19.8% 32.0% 12.7% 3.6% 17.9% Dell contributed to 1/3 of CLARiiON revenue. Connectivity (Connectrix,Celerra) Y/Y Growth 22.7% 14.5% 34.2% 26.6% 15.9% 12.5% 3.5% 30.2% EMC Platform SW License Y/Y Growth 13.3% 18.9% 3.1% 4.6% (4.1%) (7.0%) 10.3% 10.8% EMC Multi-Platform SW License Smarts license revenue was up 100% YoY, while content management was up only 11%. Y/Y Growth 24.3% 7.7% 12.6% 12.8% 3.7% 15.0% 13.0% 18.3% Vmware License Growth driven by broad adoption of VMware Infrastructure 3 which shiped in June. Y/Y Growth 87.9% 69.7% 44.4% 54.6% 47.4% 72.7% 74.7% 50.0% Security (RSA) 38 NA Balance Sheet/Return Metrics F1Q05A F2Q05A F3Q05A F4Q05A F1Q06A F2Q06A F3Q06A MS Est. +/- versus forecast Inventory Turns Increased inventory $130M QoQ after severe shortage in 2Q. Should trend down in 4Q. Days Inventory Days Sales Days Payable Cash Conversion CFO $600 $428 $590 $597 $637 $392 $458 $786 - Other Items ($ Million) F1Q05A F2Q05A F3Q05A F4Q05A F1Q06A F2Q06A F3Q06A MS Est. +/- versus forecast Share Buyback Expense ,000 1, Management stepped up share repurchase in the Q; expects to spend at least $3B for FY. Geographic Revenue Analysis F1Q05A F2Q05A F3Q05A F4Q05A F1Q06A F2Q06A F3Q06A North America YoY Growth (100.0%) 18.8% 16.9% 28.0% 14.0% 10.0% 21.0% Robust commercial/high-end demand; backlog from from 2Q. EMEA YoY Growth (99.9%) 20.1% 16.2% 45.7% 17.0% 12.0% 19.0% Strong growth in mid-tier products; backlog from 2Q. APJ YoY Growth (99.9%) 16.2% 14.1% 24.9% 1.0% 2.0% 7.0% Modest improvement. Hired new China region head. Latin America YoY Growth (99.7%) 24.5% 26.2% 75.8% 16.0% 21.0% 18.0% Strong performance in Argentina and Venezuela. Source: Company data, Morgan Stanley Research 5

6 Exhibit 3 EMC - Income Statement F2003-F2007E F2005A F2006E Annual ($ in Millions) Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 F2003A F2004A F2005A F2006E F2007E Total Revenues $2,243.1 $2,344.8 $2,365.7 $2,710.3 $2,550.7 $2,574.5 $2,815.3 $3,155.0 $6,236.8 $8,229.5 $9,663.9 $11,095.5 $12,978.4 Information Storage Products 1, ,688.3 $1,687.3 $2, , , , , , , , , ,311.2 Information Storage Systems 1, , , , , , , , , , , , ,639.2 Symmetrix , , , , ,406.8 Clariion , , ,772.1 Celerra/Connectrix ,062.2 Other (Centera,EDM,RSA) Information Storage Software , , , , ,671.9 Services , , , , ,664.7 Other Businesses Cost of Goods Sold 1, , , , , , , , , , , , ,951.8 Information Storage Products (Systems & Software) , , , , , ,391.4 Services , , ,559.2 Other Businesses Gross Profit 1, , , , , , , , , , , , ,026.5 Information Storage Products (systems & software) , , , , , , , ,919.8 Services , , , ,105.5 Other Businesses Total Expenses , , , , , , , , ,057.9 SG&A , , , , ,656.5 Research and Development , , ,401.4 Proforma Operating income , , , ,968.6 Interest and Other Income Interest Expenses (2.0) (2.0) (1.9) (2.1) (2.0) (0.6) (5.8) 0.0 (3.0) (7.5) (8.0) (8.4) 0.0 Other Non-Operating Expenses (2.3) (1.1) 2.4 (9.7) (0.9) (5.3) (14.9) (8.2) (10.6) (3.1) (6.7) Net Interest Income Pre-Tax Income , , , ,135.8 Tax Expense Effective Tax Rate 25.5% 27.0% 25.6% 27.0% 26.0% 24.8% 26.1% 26.1% 22.2% 28.1% 26.3% 25.8% 27.0% Net Income , , ,559.1 Total One Time Charges (Benefits) (99.8) (21.2) (0.5) Net Income - GAAP (reported) , ,269.1 Reported GAAP Tax Expense Statutory Tax Rate 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% Basic EPS EPS - Operating EPS - Pro forma (Pre option expense) EPS - Pro forma EPS - GAAP (reported) Diluted EPS EPS - Operating EPS - Pro forma (w/o option expense) EPS - Pro forma EPS - GAAP (reported) Share Count Period End (in millions) 2, , , , , , , , , , , , ,276.4 Basic (Average) 2, , , , , , , , , , , , ,142.9 Diluted (Average) 2, , , , , , , , , , , , ,188.2 Source: Company data, Morgan Stanley Research 6

7 Exhibit 4 EMC - Income Statement Margin Comparisons F2003-F2007E ($ in Millions) Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 F2003A F2004A F2005A F2006E F2007E Margin Analysis (%) Gross Margin 52.3% 53.6% 54.0% 54.8% 53.1% 53.6% 53.5% 52.6% 45.6% 51.2% 53.7% 53.2% 54.1% Information Storage Products 50.7% 51.8% 51.8% 53.4% 51.5% 52.9% 52.1% 51.7% 43.7% 50.0% 52.0% 52.0% 52.8% Services 56.7% 58.3% 59.6% 58.8% 57.4% 55.2% 57.2% 55.5% 51.1% 54.7% 58.4% 56.3% 57.5% Other Business 44.5% 50.1% 47.4% 52.8% 52.0% 51.8% 51.5% 50.0% 53.8% 52.4% 48.3% 51.4% 50.0% EBITDA Margin OpEx Margin 37.9% 38.2% 37.9% 35.7% 39.9% 41.5% 39.3% 37.9% 38.1% 37.8% 37.4% 39.5% 39.0% Operating Margin (Pro forma) 14.4% 15.4% 16.1% 19.0% 13.2% 12.1% 14.2% 14.7% 7.5% 13.4% 16.4% 13.6% 15.2% Pretax Margin (Pro forma) 16.2% 17.1% 18.2% 20.7% 15.7% 14.5% 15.8% 15.9% 10.2% 15.1% 18.2% 15.5% 16.5% Net Margin (Pro forma) 12.0% 12.5% 13.5% 15.1% 11.6% 10.9% 11.7% 11.8% 7.9% 10.8% 13.4% 11.5% 12.0% As a % of Revenue Information Storage Systems Revenue 45.7% 45.6% 46.2% 48.0% 48.1% 44.7% 46.2% 46.8% 53.1% 47.0% 46.4% 46.5% 43.5% Information Storage Software Revenue 26.5% 26.4% 25.2% 26.3% 24.4% 26.5% 26.2% 27.9% 22.6% 26.5% 26.1% 26.3% 28.3% Services Revenue 27.3% 27.6% 28.4% 25.5% 27.4% 28.7% 27.6% 25.2% 22.7% 25.6% 27.1% 27.1% 28.2% Other Business Revenue 0.5% 0.4% 0.3% 0.3% 0.1% 0.1% 0.1% 0.1% 1.6% 0.8% 0.3% 0.1% 0.0% SG&A 27.5% 27.4% 27.1% 26.1% 28.9% 30.0% 28.3% 27.5% 26.6% 27.5% 27.0% 28.6% 28.2% R&D 10.4% 10.8% 10.8% 9.7% 11.0% 11.5% 11.0% 10.4% 11.5% 10.3% 10.4% 10.9% 10.8% Operating Expenses 37.9% 38.2% 37.9% 35.7% 39.9% 41.5% 39.3% 37.9% 38.1% 37.8% 37.4% 39.5% 39.0% Net Interest Income 1.7% 1.7% 2.1% 1.6% 2.5% 2.4% 1.6% 1.2% 2.7% 1.7% 1.8% 1.9% 1.3% Year-Over-Year Growth (%) Total Revenue 19.8% 19.0% 16.6% 14.9% 13.7% 9.8% 19.0% 16.4% 14.7% 32.0% 17.4% 14.8% 17.0% Information Storage Products 17.5% 16.0% 13.5% 16.1% 14.1% 8.6% 20.6% 17.2% 12.0% 28.2% 15.8% 15.2% 15.3% Information Storage Systems 14.6% 14.9% 15.1% 18.5% 19.6% 7.8% 19.0% 13.6% 11.0% 16.8% 15.9% 14.9% 9.4% Symmetrix -10.2% -2.5% -1.9% 8.2% 17.9% -2.0% 20.7% 6.4% 13.2% 3.5% -1.5% 10.4% 2.7% Clariion 77.9% 53.8% 36.9% 31.8% 20.0% 13.2% 17.6% 16.8% -2.9% 41.3% 47.1% 16.9% 9.1% Celerra/Connectrix/Centera/Other 22.7% 14.5% 33.5% 26.6% 15.9% 15.0% 9.5% 10.4% 23.1% 18.4% 24.5% 12.4% 13.5% Information Storage Software 22.9% 17.9% 10.7% 11.9% 4.6% 10.1% 23.7% 23.6% 14.3% 55.0% 15.5% 15.8% 25.7% Services 29.5% 30.0% 27.2% 12.9% 14.2% 14.0% 15.9% 15.1% 31.1% 49.3% 24.2% 14.8% 21.7% Other Businesses -49.1% -49.8% -49.4% -44.5% -71.6% -74.0% -72.1% -72.1% -29.7% -36.1% -48.5% -72.5% -72.1% Cost of Goods Sold 14.5% 11.8% 10.4% 9.2% 11.8% 9.8% 20.3% 22.0% 0.4% 18.3% 11.3% 16.2% 14.6% Information Storage Systems (Products & Software) 14.2% 10.8% 8.9% 10.4% 12.3% 6.1% 19.9% 21.6% -0.7% 13.9% 11.0% 15.2% 13.4% Services 17.3% 16.8% 16.8% 6.9% 12.3% 22.3% 22.6% 24.4% 10.0% 38.4% 14.1% 20.5% 18.5% Other Businesses -36.7% -47.3% -46.6% -47.6% -75.5% -74.9% -74.3% -70.5% -40.5% -34.2% -44.1% -74.1% -71.3% Gross Profit 25.2% 26.0% 22.5% 20.2% 15.4% 9.8% 17.9% 11.8% 38.1% 48.3% 23.2% 13.6% 19.1% Information Storage Systems (Products & Software) 20.9% 21.2% 18.1% 21.6% 15.8% 10.9% 21.3% 13.3% 33.9% 46.5% 20.5% 15.2% 17.1% Services 40.6% 41.5% 35.4% 17.6% 15.6% 8.0% 11.3% 8.7% 60.5% 59.7% 32.6% 10.8% 24.2% Other Businesses -59.1% -52.2% -52.2% -41.4% -66.8% -73.1% -69.7% -73.6% -16.8% -37.7% -52.4% -70.7% -72.9% SG&A 15.2% 17.1% 15.0% 12.9% 19.8% 20.0% 24.4% 22.8% -1.5% 36.9% 15.0% 21.8% 15.2% R&D 14.5% 23.5% 18.1% 18.0% 19.5% 16.9% 21.1% 25.0% -8.1% 18.0% 18.5% 20.7% 15.6% Operating expenses 15.0% 18.8% 15.9% 14.2% 19.8% 19.1% 23.5% 23.4% -3.6% 31.2% 15.9% 21.5% 15.3% Operating Income 63.1% 48.0% 41.4% 33.2% 4.1% -13.5% 4.9% -10.0% % 135.3% 43.9% -4.3% 30.0% Net Interest Income 16.2% 26.0% 31.3% 14.2% 61.7% 52.2% -8.5% -14.1% -17.6% -17.0% 21.8% 20.2% -19.0% Pretax Income 56.3% 45.4% 40.2% 31.4% 10.3% -6.9% 3.4% -10.3% % 94.7% 41.4% -1.9% 24.1% Net Income 60.7% 48.6% 46.8% 32.4% 9.4% -4.2% 2.7% -9.3% % 80.1% 44.8% -1.2% 22.1% EPS (Pro forma diluted) 62.3% 48.8% 46.8% 31.3% 11.4% -0.1% 11.6% -1.4% % 64.4% 45.9% 4.4% 28.4% Seq. Quarterly Growth (%) Total Revenue -4.9% 4.5% 0.9% 14.6% -5.9% 0.9% 9.4% 12.1% Information Storage Products -6.5% 4.2% -0.1% 19.3% -8.2% -0.8% 11.0% 15.8% Information Storage Systems -6.5% 4.2% 2.2% 19.1% -5.6% -6.1% 12.8% 13.7% Information Storage Software -6.7% 4.2% -3.9% 19.7% -12.8% 9.7% 8.0% 19.7% Services 0.2% 5.8% 3.6% 2.9% 1.3% 5.6% 5.3% 2.2% Other Businesses -18.9% -16.0% -14.9% -4.1% -58.6% -23.1% -8.9% -4.1% Cost of Goods Sold -4.7% 1.7% 0.0% 12.6% -2.4% -0.1% 9.5% 14.2% Information Storage Systems (Products & Software) -6.0% 1.8% -0.1% 15.4% -4.4% -3.7% 13.0% 17.0% Services -0.3% 1.9% 0.4% 4.8% 4.8% 11.0% 0.6% 6.3% Other Businesses -10.0% -24.5% -10.3% -14.0% -57.8% -22.7% -8.3% -1.2% Gross Profit -5.0% 7.1% 1.6% 16.2% -8.8% 1.8% 9.2% 10.2% Information Storage Systems (Products & Software) -7.0% 6.5% -0.1% 22.9% -11.5% 2.0% 9.3% 14.8% Services 0.5% 8.8% 5.9% 1.5% -1.1% 1.7% 9.0% -0.8% Other Businesses -27.9% -5.4% -19.5% 6.8% -59.2% -23.4% -9.4% -6.9% SG&A -1.6% 4.4% -0.2% 10.2% 4.5% 4.5% 3.4% 8.7% R&D 5.3% 8.1% 0.5% 3.0% 6.7% 5.7% 4.1% 6.4% Operating expenses 0.2% 5.4% 0.0% 8.1% 5.1% 4.9% 3.6% 8.1% Operating Income -16.5% 11.6% 5.8% 35.1% -34.7% -7.3% 28.3% 15.9% Net Interest Income -0.2% 4.6% 20.0% -8.9% 41.4% -1.5% -27.9% -14.5% Pretax Income -15.0% 10.8% 7.2% 30.2% -28.7% -6.4% 19.0% 12.9% Net Income -12.6% 8.6% 9.1% 27.8% -27.8% -4.9% 17.0% 12.9% EPS (Pro forma diluted) -14.4% 8.6% 9.6% 29.0% -27.4% -2.5% 22.3% 13.9% Source: Company data, Morgan Stanley Research F2005A F2006E Annual 7

8 ModelWare is Morgan Stanley s new system for helping investors and analysts to uncover value, free from the distortions and ambiguities created by accounting data. Morgan Stanley has dissected and fundamentally redefined the components of corporate valuation, giving clients more consistent definitions, more comparable data, and more flexible analytic tools. ModelWare makes investment insights easier by making value more visible. Past inconsistencies in financial reporting made it difficult to compare performance among companies and across sectors and regions. Even within US GAAP, flexibility complicates comparisons. And accounting standards were developed to analyze historical data, not to facilitate projections. In response, Morgan Stanley analysts spent two years reviewing our entire coverage universe of company metrics. They defined more than 2,000 general and industry-specific metrics that eliminated inconsistencies stemming from regional differences, historical precedents and accounting conventions. The team applied these metrics across also all companies we cover, and created flexible tools and services that let analysts redefine and use the data with maximum creativity. Because ModelWare provides complete transparency, users see every component of every calculation, to choose elements or recombine them as they wish. ModelWare EPS illustrates the approach. It represents ModelWare EPS as ModelWare net income divided by average fully diluted shares outstanding. ModelWare net income sums net operating profit after tax (NOPAT), net financial income or expense (NFE) and other income or expense. ModelWare adjusts reported net income to improve comparability across companies, sectors and regions. Among these adjustments: We exclude goodwill amortization and items deemed by analysts to be one-time events; we capitalize operating leases where their use is significant (e.g., in transportation and retail); and we convert inventory to FIFO accounting when LIFO costing is used. For more information on these adjustments and others, as well as additional background, please see Morgan Stanley ModelWare (ver. 1.0): A Road Map for Investors, by Trevor Harris and team, August 2,

9 Disclosure Section The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively, "Morgan Stanley"). Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Rebecca Runkle. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy This research has been published in accordance with our conflict management policy, which is available at Important US Regulatory Disclosures on Subject Companies The following analyst, strategist, or research associate (or a household member) owns securities in a company that he or she covers or recommends in this report: Rebecca Runkle - DELL (common stock), Hewlett-Packard (common stock), IBM (common stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of September 29, 2006, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: Apple Computer Inc., DELL, Gateway, Lexmark International. As of September 29, 2006, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in this report (including where guarantor of the securities): DELL, Hewlett-Packard, IBM, Seagate Technology, Sun Microsystems. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Seagate Technology. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from DELL, Hewlett- Packard, IBM, Network Appliance, Inc., Seagate Technology, Sun Microsystems. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Apple Computer Inc., DELL,, Gateway, Hewlett-Packard, IBM, Lexmark International, Network Appliance, Inc., Seagate Technology, Sun Microsystems. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from Apple Computer Inc., DELL, Gateway, Hewlett-Packard, IBM, Network Appliance, Inc., Seagate Technology. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following companies covered in this report: Apple Computer Inc., DELL,, Gateway, Hewlett-Packard, IBM, Lexmark International, Network Appliance, Inc., Seagate Technology, Sun Microsystems. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following companies covered in this report: Apple Computer Inc., DELL,, Gateway, Hewlett-Packard, IBM, NCR Corp., Network Appliance, Inc., Seagate Technology, Sun Microsystems. The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. 9

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13 The Americas Europe Japan Asia/Pacific 1585 Broadway 25 Cabot Square, Canary Wharf Ebisu, Shibuya-ku Three Exchange Square New York, NY United States London E14 4QA United Kingdom Tokyo Japan Central Hong Kong Tel: +1 (1) Tel: +44 (0) Tel: +81 (0) Tel: Industry Coverage:Systems and PC Hardware Company (Ticker) Rating (as of) Price (10/17/2006) Rebecca F. Runkle Apple Computer Inc. (AAPL.O) O (03/18/2005) $74.29 DELL (DELL.O) O (03/12/2004) $24.54 (EMC.N) O-V (03/29/2005) $12.70 Gateway (GTW.N) E-V (02/03/2004) $1.85 Hewlett-Packard (HPQ.N) E-V (05/22/2006) $39.06 IBM (IBM.N) O (07/13/2004) $86.95 Lexmark International (LXK.N) U (10/07/2005) $61.88 NCR Corp. (NCR.N) E (03/12/2004) $39.70 Network Appliance, Inc. (NTAP.O) U-V (07/17/2006) $38.33 Seagate Technology (STX.N) E-V (07/17/2006) $21.89 Sun Microsystems (SUNW.O) O-V (03/29/2006) $5.15 Stock Ratings are subject to change. Please see latest research for each company Morgan Stanley