0001193125-07-151857 SC TO-I 9 20070709 20070709 EMC CORP 0000790070 3572 042680009 MA 1231 SC TO-I 34 005-38034 07970319 176 SOUTH STREET HOPKINTON MA 01748-9103 5084351000 176 SOUTH STREET HOPKINTON MA 01748-9103 VMWARE, INC. 0001124610 7372 943292913 DE 1231 SC TO-I 3401 HILLVIEW AVENUE PALO ALTO CA 94304 (650) 427-5000 3401 HILLVIEW AVENUE PALO ALTO CA 94304 VMWARE INC 20000923 SC TO-I 1 dsctoi.htm SCHEDULE TO-I Schedule TO-I

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE TO

TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR 13(e)(1)

OF THE SECURITIES EXCHANGE ACT OF 1934

EMC Corporation

(Name of Subject Company (Issuer/Offeror))

EMC Corporation

(Issuer/Offeror)

VMware, Inc.

(Offeror)

(Name of Filing Persons)

Options to Purchase Common Stock, Par Value $0.01 Per Share and

Restricted Common Stock, Par Value $0.01 Per Share

(Title of Class of Securities)

268648102

(CUSIP Number of Class of Securities)

(Underlying Common Stock)

 

Paul T. Dacier, Esq.

EMC Corporation

176 South Street

Hopkinton, Massachusetts 01748

(508) 435-1000

  Rashmi Garde, Esq.
VMware, Inc.
3401 Hillview Avenue
Palo Alto, CA 94304
(650) 427-5000

(Name, Address and Telephone Number of Person Authorized to

Receive Notices and Communications on Behalf of Filing Person)

Copy to:

 

Margaret A. Brown, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

One Beacon Street

Boston, MA 02108

(617) 573-4800


CALCULATION OF FILING FEE

 

 
Transaction Valuation*   Amount of Filing Fee*
$325,800,000   $10,002.06
 

 

* Calculated solely for purposes of determining the filing fee. This number assumes: 1) all eligible options and shares of restricted stock are properly tendered and not withdrawn in the offer; 2) an initial public offering price of VMware Class A common stock equal to $24.00, the midpoint of the estimated initial public offering price of VMware Class A common stock reflected in the IPO Registration Statement and 3) a volume-weighted average price per share of EMC common stock on the New York Stock Exchange over the final two full trading days prior to the expiration date of the exchange offer during the period beginning at 6:30 a.m., Pacific Time (or such other time as is the official open of trading on the New York Stock Exchange), and ending at 1:00 p.m., Pacific Time (or such other time as is the official close of trading on the New York Stock Exchange), as reported by Bloomberg Financial LP, equal to $18.00 (which is representative of recent trading prices of EMC stock). The amount of the filing fee, calculated in accordance with Rule 0-11 of the Securities Exchange Act of 1934, as amended, equals $30.70 for each $1,000,000 of the aggregate value of this transaction.

 

x Check the box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

Amount Previously Paid:   $10,002.06   Filing Party: VMware, Inc.
Form or Registration No.:   Form S-4,   Date Filed: July 9, 2007
  Registration No.333-144424  

 

¨ Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer.

Check the appropriate boxes below to designate any transactions to which the statement relates:

  ¨ third-party tender offer subject to Rule 14d-1.
  x issuer tender offer subject to Rule 13e-4.
  ¨ going-private transaction subject to Rule 13e-3.
  ¨ amendment to Schedule 13D under Rule 13d-2.

Check the following box if the filing is a final amendment reporting the results of the tender offer:  ¨


This Tender Offer Statement on Schedule TO (this “Schedule TO”) is filed by EMC Corporation (“EMC”), a Massachusetts corporation, and VMware, Inc. (“VMware”), a wholly owned subsidiary of EMC. This Schedule TO relates to the offer by EMC and VMware to eligible employees of VMware and its subsidiaries in the United States of a one-time opportunity to exchange all of such employees’ outstanding stock options (“EMC Options”) to purchase shares of EMC’s common stock, par value $0.01 per share (the “EMC Stock”), for options (“VMware Options”) to purchase VMware Class A common stock, par value $0.01 per share (the “VMware Stock”), as determined on an award-by-award basis, and to exchange all of such employees’ restricted EMC Stock (“EMC Restricted Stock”) for restricted VMware Stock (“VMware Restricted Stock”), as determined on an award-by-award basis, upon the terms and subject to the conditions set forth in the Prospectus – Offer to Exchange, dated July 9, 2007 (the “Prospectus – Offer to Exchange”) and the related Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1)(A) and (a)(1)(B) (which together, as they may be amended or supplemented from time to time, constitute the “Offer”). In connection with the Offer, VMware has filed under the Securities Act of 1933, as amended, a registration statement on Form S-4 (Registration No. 333-144424) to register the VMware Options and VMware Restricted Stock. The information set forth in the Prospectus – Offer to Exchange and the Letter of Transmittal is incorporated herein by reference in response to all the items of this Schedule TO. The Offer is intended to expire substantially concurrently with the initial public offering of VMware Stock (the “IPO”). In connection with the IPO, VMware has filed with the Securities and Exchange Commission (the “SEC”) a Registration Statement on Form S-1 (the “IPO Registration Statement”) and in connection with this Offer, VMware has filed a Registration Statement on Form S-4 which includes the Prospectus – Offer to Exchange.

 

Item 1. Summary Term Sheet.

Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “Summary Term Sheet – Questions and Answers,” which is incorporated herein by reference.

 

Item 2. Subject Company Information.

(a) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “Summary of this Prospectus – Offer to Exchange – The Companies,” which is incorporated herein by reference.

(b) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “The Exchange Offer – Terms of the Exchange Offer – Eligible Options and Restricted Stock,” which is incorporated herein by reference. As of June 15, 2007, there were 2,089,747,775 outstanding shares of EMC Stock.

(c) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “Market Prices and Dividend Information – Shares of EMC’s Common Stock and Dividends,” which is incorporated herein by reference.

 

Item 3. Identity and Background of Filing Person.

(a) EMC is a filing person and is the subject company. Reference is made to the information set forth in the Prospectus – Offer to Exchange under the headings “Summary of this Prospectus – Offer to Exchange – The Companies” and “Security Ownership of Management of EMC,” which is incorporated herein by reference.

VMware is also a filing person and is a wholly owned subsidiary of EMC. Reference is made to the information set forth in the Prospectus – Offer to Exchange under the headings “Summary of this Prospectus – Offer to Exchange – The Companies” and “Management of VMware – Stock Ownership of Directors and Executive Officers,” which is incorporated herein by reference.

 

Item 4. Terms of the Transaction.

(a) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the headings “The Transaction – Accounting Treatment,” “The Exchange Offer,” “U.S. Federal Income Tax Consequences” and “Comparison of Rights of Holders of EMC Stock and Holders of VMware Stock,” which is incorporated herein by reference.

(b) Not Applicable.


Item 5. Past Contacts, Transactions, Negotiations and Agreements.

(e) Reference is made to the information set forth in EMC’s Definitive Proxy Statement on Schedule 14A filed by EMC on March 27, 2007 with the SEC under the headings “Director Compensation,” “Compensation Discussion and Analysis,” “Compensation of Executive Officers” and “Certain Transactions” and the information set forth in the Prospectus – Offer to Exchange under the headings “VMware’s Compensation Discussion and Analysis,” “Compensation of VMware Executive Officers,” “VMware’s Certain Relationships and Related Person Transactions,” “Management of VMware – Stock Ownership of Directors and Executive Officers” and “Security Ownership of Management of EMC,” which is incorporated herein by reference.

 

Item 6. Purposes of the Transaction and Plans or Proposals.

(a) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “The Transaction – Reasons for the Offer,” which is incorporated herein by reference.

(b) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “The Exchange Offer – Delivery of VMware Restricted Shares, Options to Purchase VMware Common Stock,” which is incorporated herein by reference.

(c) Except as otherwise disclosed in the Prospectus – Offer to Exchange, neither EMC nor VMware presently have any plans or proposals that relate to or would result in:

 

  1. any extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving either one of them;

 

  2. any purchase, sale or transfer of a material amount of either of their assets;

 

  3. any material change in either of their present dividend policies, or indebtedness or capitalization;

 

  4. any change in either of their present boards of directors or senior management, including a change in the number or term of directors to fill any existing vacancies on the board of directors, or any change in an executive officer’s material terms of employment;

 

  5. any other material change in either of their corporate structures or business;

 

  6. EMC Stock not being authorized (or VMware Stock after it has been so authorized) for quotation in an automated quotation system operated by a national securities association;

 

  7. EMC Stock or VMware Stock becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”);

 

  8. the suspension of EMC’s obligation (or VMware’s obligation once it is so obliged) to file reports pursuant to Section 15(d) of the Exchange Act;

 

  9. the acquisition by any person of any material amount of EMC’s or VMware’s securities or the disposition of any material amount of EMC’s or VMware’s securities; or

 

  10. any change in EMC’s or VMware’s Certificate of Incorporation or By-laws, or any actions which may impede the acquisition or control of us by any person.

 

Item 7. Source and Amount of Funds or Other Consideration.

(a) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “The Exchange Offer – Terms of the Exchange Offer – Number of VMware Options and Restricted Stock to be Issued in Exchange,” which is incorporated herein by reference.

(b) Not applicable.

(d) Not applicable.


Item 8. Interest in Securities of the Subject Company.

(a) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the headings “The Exchange Offer – Terms of the Exchange Offer – Eligible Options and Restricted Stock,” “Management of VMware – Stock Ownership of Directors & Executive Officers” and “Security Ownership of Management of EMC – Security Ownership of EMC Management,” which is incorporated herein by reference.

(b) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the headings “Management of VMware – Recent Transactions in EMC Common Stock” and “Security Ownership of Management of EMC – Recent Transactions in EMC Common Stock,” which is incorporated herein by reference.

 

Item 9. Persons/Assets, Retained, Employed, Compensated or Used.

(a) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “The Exchange Offer – Fees and Expenses,” which is incorporated herein by reference.

 

Item 10. Financial Statements.

(a) Reference is made to the information set forth in the Prospectus – Offer to Exchange under the heading “Summary of this Prospectus – Offer to Exchange – Comparative Per Share Data,” which is incorporated herein by reference. The information set forth under “Item 8. Financial Statements and Supplementary Data” in EMC’s Annual Report on Form Form 10-K, as filed with the SEC on February 27, 2007, is incorporated herein by reference. The information set forth under “Item 1. Financial Statements” in EMC’s Quarterly Report on Form 10-Q, as filed with the SEC on May 4, 2007, is incorporated herein by reference.

EMC files annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You may read and copy this information at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of this information by mail from the SEC at the above address, at prescribed rates. The SEC also maintains a website that contains reports, proxy statements and other information that EMC files electronically with the SEC. The address of that website is http://www.sec.gov.

(b) Not applicable.

 

Item 11. Additional Information.

(a) Reference is made to the information set forth in EMC’s Definitive Proxy Statement on Schedule 14A filed by EMC on March 27, 2007 with the “SEC under the heading “Certain Transactions” and the information set forth in the Prospectus – Offer to Exchange under the heading “VMware’s Certain Relationships and Related Person Transactions,” which is incorporated herein by reference.

To EMC’s and VMware’s knowledge, there are currently no material pending legal proceedings relating to this Offer. EMC and VMware are not aware of any license or regulatory permit that appears to be material to EMC’s or VMware’s businesses that might be adversely affected by the exchange as contemplated by the Offer, or of any approval or other action by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, that would be required for the acquisition or ownership of VMware Options and VMware Restricted Stock as contemplated herein. Should any such approval or other action be required, EMC and VMware presently contemplate that they will seek such approval or take such other action. EMC and VMware are unable to predict whether they may determine that they are required to delay the acceptance of EMC Options or EMC Restricted Stock for exchange pending the outcome of any such matter. EMC and VMware cannot assure you that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that the failure to obtain any such approval or other action might not result in adverse consequences to EMC’s or VMware’s businesses.

(b) Not applicable.


Item 12. Exhibits.

 

(a)(1)(A)

   Prospectus – Offer to Exchange dated July 9, 2007

(a)(1)(B)

   Letter of Transmittal

(a)(1)(C)

   Notice of Withdrawal

(a)(4)

   Prospectus – Offer to Exchange dated July 9, 2007

(a)(5)(A)

   Amended and Restated Certificate of Incorporation(3)

(a)(5)(B)

   Amended and Restated Bylaws(3)

(a)(5)(C)

   Form of specimen common stock certificate*

(a)(5)(D)

   Form of Master Transaction Agreement between VMware and EMC(3)

(a)(5)(E)

   Form of Administrative Services Agreement between VMware and EMC(3)

(a)(5)(F)

   Form of Tax Sharing Agreement between VMware and EMC(3)

(a)(5)(G)

   Form of Intellectual Property Agreement between VMware and EMC(2)

(a)(5)(H)

   Form of Employee Benefits Agreement between VMware and EMC(3)

(a)(5)(I)

   Form of Real Estate License Agreement between VMware and EMC(3)

(a)(5)(J)

   Letter Agreement between VMware and Mark Peek+(2)

(a)(5)(K)

   Form of Indemnification Agreement for directors and executive officers+(2)

(a)(5)(L)

   2007 Equity and Incentive Plan+(2)

(a)(5)(M)

   Promissory Note between VMware and EMC Corporation(1)

(a)(5)(N)

   Form of Insurance Matters Agreement between VMware and EMC(3)

(a)(5)(O)

   Form of Option Agreement+(2)

(a)(5)(P)

   Form of Restricted Stock Unit Agreement+(2)

(a)(5)(Q)

   2007 Employee Stock Purchase Plan+(2)

(a)(5)(R)

   Letter Agreement between VMware and Thomas J. Jurewicz+(2)

(a)(5)(S)

   Distribution Agreement between VMware and Ingram Micro**(3)

(a)(5)(T)

   Form of Real Estate Purchase and Sale Agreement between VMware and EMC(3)

(a)(5)(U)

   Class A Common Stock Purchase Agreement between VMware and Intel Capital(3)

(a)(5)(V)

   Investor Rights Agreement between VMware and Intel Capital(3)

(a)(5)(W)

   Form of Early Exercise Option Agreement+(3)

(a)(5)(X)

   List of subsidiaries(1)

(a)(5)(Y)

   Form of Letter of Transmittal(4)

(a)(5)(Z)

   Form of Notice of Withdrawal(4)

(b)

   None

(d)

   See exhibits (a)(5)(A) through (a)(5)(W)

(g)

   None

(h)

   None

+ Management contract or compensatory plan or arrangement.

* To be filed by amendment.

** Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission.

(1) Incorporated by reference to the Registration Statement on Form S-1 of VMware, Inc. (Registration Statement No. 333-142368) filed with the Commission on April 26, 2007.

(2) Incorporated by reference to the Registration Statement on Form S-1 of VMware, Inc. (Registration Statement No. 333-142368) filed with the Commission on June 11, 2007.

(3) Incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 of VMware, Inc. (Registration Statement No. 333-142368) filed with the Commission on July 9, 2007.

(4) Incorporated by reference to the Prospectus – Offer to Exchange (Registration Statement No. 333-144424) filed with the Commission on July 9, 2007.

 

Item 13. Information Required by Schedule 13E-3.

Not applicable.


SIGNATURE

After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Schedule TO is true, complete and correct.

 

EMC CORPORATION

By:    /s/ Paul T. Dacier

Name:  

Paul T. Dacier

Title:

  Executive Vice President and General Counsel
VMWARE, INC.

By:    /s/ Rashmi Garde

Name:

    Rashmi Garde

Title:

    Vice President and General Counsel

Date: July 9, 2007


INDEX TO EXHIBITS

 

EXHIBIT
NUMBER
  DESCRIPTION OF EXHIBIT
(a)(1)(A)   Prospectus – Offer to Exchange dated July 9, 2007
(a)(1)(B)   Letter of Transmittal
(a)(1)(C)   Notice of Withdrawal
(a)(4)   Prospectus – Offer to Exchange dated July 9, 2007
(a)(5)(A)   Amended and Restated Certificate of Incorporation(3)
(a)(5)(B)   Amended and Restated Bylaws(3)
(a)(5)(C)   Form of specimen common stock certificate*
(a)(5)(D)   Form of Master Transaction Agreement between VMware and EMC(3)
(a)(5)(E)   Form of Administrative Services Agreement between VMware and EMC(3)
(a)(5)(F)   Form of Tax Sharing Agreement between VMware and EMC(3)
(a)(5)(G)   Form of Intellectual Property Agreement between VMware and EMC(2)
(a)(5)(H)   Form of Employee Benefits Agreement between VMware and EMC(3)
(a)(5)(I)   Form of Real Estate License Agreement between VMware and EMC(3)
(a)(5)(J)   Letter Agreement between VMware and Mark Peek+(2)
(a)(5)(K)   Form of Indemnification Agreement for directors and executive officers+(2)
(a)(5)(L)   2007 Equity and Incentive Plan+(2)
(a)(5)(M)   Promissory Note between VMware and EMC Corporation(1)
(a)(5)(N)   Form of Insurance Matters Agreement between VMware and EMC(3)
(a)(5)(O)   Form of Option Agreement+(2)
(a)(5)(P)   Form of Restricted Stock Unit Agreement+(2)
(a)(5)(Q)   2007 Employee Stock Purchase Plan+(2)
(a)(5)(R)   Letter Agreement between VMware and Thomas J. Jurewicz+(2)
(a)(5)(S)   Distribution Agreement between VMware and Ingram Micro**(3)
(a)(5)(T)   Form of Real Estate Purchase and Sale Agreement between VMware and EMC(3)
(a)(5)(U)   Class A Common Stock Purchase Agreement between VMware and Intel Capital(3)
(a)(5)(V)   Investor Rights Agreement between VMware and Intel Capital(3)
(a)(5)(W)   Form of Early Exercise Option Agreement+(3)
(a)(5)(X)   List of subsidiaries(1)
(a)(5)(Y)   Form of Letter of Transmittal(4)
(a)(5)(Z)   Form of Notice of Withdrawal(4)
(b)   None
(d)   See exhibits (a)(5)(A) through (a)(5)(W)
(g)   None
(h)   None

+ Management contract or compensatory plan or arrangement.

* To be filed by amendment.

** Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission.

(1) Incorporated by reference to the Registration Statement on Form S-1 of VMware, Inc. (Registration Statement No. 333-142368) filed with the Commission on April 26, 2007.

(2) Incorporated by reference to the Registration Statement on Form S-1 of VMware, Inc. (Registration Statement No. 333-142368) filed with the Commission on June 11, 2007.

(3) Incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 of VMware, Inc. (Registration

Statement No. 333-142368) filed with the Commission on July 9, 2007.

(4) Incorporated by reference to the Prospectus – Offer to Exchange (Registration Statement No. 333-144424) filed with the Commission on July 9, 2007.

EX-99.(A)(1)(A) 2 dex99a1a.htm PROSPECTUS - OFFER TO EXCHANGE DATED JULY 9, 2007 Prospectus - Offer to Exchange dated July 9, 2007
Table of Contents

Exhibit (a)(1)(A)

The information in this Prospectus—Offer to Exchange may change. VMware may not complete the exchange offer until the registration statement filed with the U.S. Securities and Exchange Commission with respect to the exchange offer is effective. This Prospectus—Offer to Exchange is not an offer to sell or exchange these securities and VMware is not soliciting offers to buy or exchange these securities in any jurisdiction where the exchange offer or the sale of these securities is not permitted.

 

PROSPECTUS-OFFER TO EXCHANGE

EMC CORPORATION

VMWARE, INC.

OFFER TO EXCHANGE

CERTAIN OUTSTANDING OPTIONS TO PURCHASE SHARES

OF COMMON STOCK OF EMC CORPORATION

FOR OPTIONS TO PURCHASE SHARES OF

CLASS A COMMON STOCK OF VMWARE, INC.

AND

CERTAIN OUTSTANDING RESTRICTED STOCK OF EMC CORPORATION FOR RESTRICTED

CLASS A COMMON STOCK OF VMWARE, INC.

 


THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE

AT 11:00 A.M., PACIFIC TIME, ON AUGUST 6, 2007,

UNLESS THE OFFER IS EXTENDED.

 


EMC Corporation (“EMC”) and VMware, Inc. (“VMware” or the “Company”), a wholly owned subsidiary of EMC, are offering eligible employees of VMware and its subsidiaries in the United States a one-time opportunity to exchange (sometimes referred to as “tender”) all of such employees’ outstanding stock options (“EMC Options”) to purchase shares of EMC’s common stock, par value $0.01 per share (the “EMC Stock”), granted under the EMC Plans (as listed under “The Exchange Offer—Eligible Options and Restricted Stock”) for options (“VMware Options”) to purchase VMware Class A common stock, par value $0.01 per share (the “VMware Stock”), as determined on an award-by-award basis, and to exchange all of such employees’ restricted EMC Stock granted under the EMC Plans (“EMC Restricted Stock”) for restricted VMware Stock (“VMware Restricted Stock”), as determined on an award-by-award basis. VMware and EMC are making the offer upon the terms and subject to the conditions set forth in this Prospectus—Offer to Exchange and in the related accompanying Letter of Transmittal (which together, as they may be amended or supplemented from time to time, constitute the “Offer”). References in this Offer to Exchange to “we,” “us” and “our,” unless the context otherwise requires, are references to VMware.

This Offer is being made to employees of VMware and its subsidiaries in the United States on the date hereof who hold EMC Options or EMC Restricted Stock. To remain eligible to tender EMC Options or EMC Restricted Stock for exchange and cancellation and receive VMware Options or VMware Restricted Stock pursuant to this Offer, you must continue to be an employee of VMware or its subsidiaries, employed in the United States, on and from the date hereof through the expiration of this Offer at 11:00 a.m., Pacific Time, on August 6, 2007, or such later date to which this Offer may be extended (such date, as it may be extended, the “Expiration Date”) and also through the time and date on which the VMware Options and shares of VMware Restricted Stock are granted (such time and date, the “Grant Date”). The Grant Date will be on or promptly following the date we accept EMC Options or EMC Restricted Stock tendered for exchange in this Offer, which we expect will be on or promptly following the Expiration Date. See “The Exchange Offer.”

This Offer is intended to expire substantially concurrently with the initial public offering of VMware Stock (the “IPO”). Prior to the IPO, VMware Stock has not been traded in a public market. VMware Stock has been approved for listing on the New York Stock Exchange under the symbol “VMW.” We are currently a wholly owned subsidiary of EMC and following the IPO and this Offer, EMC will continue to be our controlling stockholder. Following the IPO, we will have two classes of authorized common stock: Class A common stock and Class B common stock. EMC will own 32,500,000 shares of Class A common stock and all 300,000,000 shares of Class B common stock, representing approximately 89% of our total outstanding shares of common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting, the election of directors, conversion, certain actions that require the consent of holders of Class B common stock and other protective provisions as set forth in this Prospectus—Offer to Exchange. The holders of Class B common stock shall be entitled to 10 votes per share and the holders of Class A common stock shall be entitled to one vote per share. Therefore, EMC will hold approximately 99% of the combined voting power of our outstanding common stock upon completion of the IPO and this Offer.

Investing in our Class A common stock or options to purchase our Class A common stock involves risks. See “ Risk Factors” beginning on page 19.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus—Offer to Exchange is truthful or complete. Any representation to the contrary is a criminal offense.

 


The Information and Exchange Agent for this Offer is:

Mellon Investor Services

July 9, 2007


Table of Contents

TABLE OF CONTENTS

 

     Page

SUMMARY TERM SHEET—QUESTIONS AND ANSWERS

   ii

SUMMARY OF THIS PROSPECTUS—OFFER TO EXCHANGE

   1

RISK FACTORS

   19

FORWARD-LOOKING STATEMENTS

   40

THE TRANSACTION

   41

THE EXCHANGE OFFER

   44

MARKET PRICES AND DIVIDEND INFORMATION

   57

USE OF THE IPO PROCEEDS

   58

CAPITALIZATION OF VMWARE

   59

VMWARE MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   60

BUSINESS OF VMWARE

   80

MANAGEMENT OF VMWARE

   95

VMWARE’S COMPENSATION DISCUSSION AND ANALYSIS

   100

COMPENSATION OF VMWARE EXECUTIVE OFFICERS

   110

VMWARE’S CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

   118

SECURITY OWNERSHIP OF MANAGEMENT OF EMC

   128

U.S. FEDERAL INCOME TAX CONSEQUENCES

   132

DESCRIPTION OF CAPITAL STOCK OF VMWARE

   133

COMPARISON OF RIGHTS OF HOLDERS OF EMC STOCK AND HOLDERS OF VMWARE STOCK

   143

PRINCIPAL STOCKHOLDERS

   157

SHARES ELIGIBLE FOR FUTURE SALE

   159

LEGAL MATTERS

   162

EXPERTS

   162

WHERE YOU CAN FIND MORE INFORMATION ABOUT EMC AND VMWARE

   162

This Prospectus—Offer to Exchange incorporates important business and financial information about EMC Corporation from other documents that are not included in, or delivered with, this Prospectus—Offer to Exchange. This information is available to you without charge upon request. You can obtain the incorporated documents by requesting them in writing from EMC Investor Relations at the following address:

176 South Street

Hopkinton, MA 01748

If you would like to request additional copies of this Prospectus—Offer to Exchange or the related Letter of Transmittal or Notice of Withdrawal, the information and exchange agent, Mellon Investor Services, must receive your request by July 30, 2007, which is five business days prior to the scheduled expiration of this Offer, in order to ensure that you receive the documents prior to the expiration of the Offer. You may contact Mellon Investor Services at the following addresses and telephone numbers:

By Mail:

  By Hand:   By Overnight:

Mellon Investor Services

Reorganization Department

PO Box 3301

South Hackensack, NJ 07606

 

Mellon Investor Services

Reorganization Department

27th Floor

480 Washington Blvd.

Jersey City, NJ 07310

 

Mellon Investor Services

Reorganization Department

480 Washington Blvd.

Mail Stop - Reorg

Jersey City, NJ 07310

1-888-313-1479 (from within the U.S.)

201-680-6672 (from outside the U.S.)

Also see “Where You Can Find More Information about EMC and VMware” on page 162.


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Tendering EMC Options or EMC Restricted Stock for exchange, and receiving VMware Options or VMware Restricted Stock pursuant to the Offer, does not confer upon you any right to remain an employee of VMware. The terms of your employment with VMware remain unchanged. We cannot guarantee or provide you with any assurance that you will not be subject to involuntary termination or that you will otherwise remain in the employ of VMware until the Grant Date or thereafter. If you voluntarily terminate your employment with us or if we terminate your employment for any reason before the Grant Date, even if you tendered EMC Options or EMC Restricted Stock for exchange in the Offer prior to such termination, such tender will not be accepted and such EMC Options will not be exchanged for VMware Options or VMware Restricted Stock.

We are not making the Offer to, nor will we accept any tender of options or restricted stock from or on behalf of, optionholders or holders of restricted stock in any jurisdiction in which the Offer or the acceptance of any tender of EMC Options or EMC Restricted Stock would not be in compliance with the laws of such jurisdiction. However, we may, in our discretion, take any actions necessary for us to make the Offer to VMware’s optionholders or holders of restricted stock in any such jurisdiction.

There is currently no trading market for VMware Stock, and the value of VMware Stock you may receive in the Offer will not be known until the pricing of the IPO. In the IPO Registration Statement, we have estimated the initial public offering price of VMware Stock to be between $23.00 per share and $25.00 per share. Throughout this Offer, indicative exchange ratios (as defined below) (calculated in the manner and at the intervals described in this Prospectus—Offer to Exchange), will also be available to eligible employees through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware and from the information and exchange agent, Mellon Investor Services, at 1-888-313-1479 (from within the U.S.) or at 201-680-6672 (from outside the U.S.). The exchange ratio is a fraction (the “Exchange Ratio”), the numerator of which will be the average (arithmetic mean) of the volume-weighted average price of EMC Stock over the final two full trading days of this Offer (the “VWAP”) and the denominator of which will be the initial public offering price of VMware Stock (the “IPO Price”).

Consummation of this Offer is subject to certain conditions set forth herein, including the U.S. Securities and Exchange Commission (the “SEC”) declaring VMware’s Registration Statement on Form S-1 relating to the IPO (the “IPO Registration Statement”) and VMware’s Registration Statement on Form S-4 relating to this Offer (the “Exchange Offer Registration Statement”) effective. This Offer is not subject to approval of EMC’s or VMware’s stockholders or contingent upon a minimum number of options or shares of restricted stock being tendered. Shares of EMC Stock are quoted on the New York Stock Exchange under the symbol “EMC.” On July 6, 2007, the last reported sale price of EMC Stock on the New York Stock Exchange was $18.66 per share. We recommend that you obtain current market quotations for EMC Stock before deciding whether to tender your options and restricted stock.

Although the EMC and VMware boards of directors have approved this Offer, neither EMC nor VMware has authorized any person to make any recommendation on its behalf as to whether you should tender or refrain from tendering your options or restricted stock pursuant to the Offer. You should rely only on the information contained in this Prospectus—Offer to Exchange or documents to which we have expressly referred you. Neither EMC nor VMware has authorized anyone to give you any information or to make any representation in connection with the Offer other than the information and representations contained in this Prospectus—Offer to Exchange or in the related Letter of Transmittal. If anyone makes any recommendation or representation to you or gives you any information, you must not rely upon that recommendation, representation or information as having been authorized by either EMC or VMware.

This Prospectus—Offer to Exchange is being furnished to you solely to provide you information regarding the Company in connection with your determination whether to participate in this Offer and is not intended as a solicitation in connection with acquiring VMware Stock, as part of the IPO or otherwise.

You should direct questions about this Offer or requests for assistance or for additional copies of the Prospectus—Offer to Exchange or the Letter of Transmittal to the information and exchange agent, Mellon Investor Services, located at Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310, at 1-888-313-1479 (from within the U.S.) or at 201-680-6672 (from outside the U.S.).

 

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SUMMARY TERM SHEET—QUESTIONS AND ANSWERS

The following summary term sheet is in question and answer format and is provided to address some of the questions that you may have about this Offer. We urge you to read carefully the remainder of this Prospectus—Offer to Exchange and the accompanying Letter of Transmittal because the information in this summary is not complete, and additional important information is contained in the remainder of this Prospectus—Offer to Exchange and the accompanying Letter of Transmittal. We have included references to the relevant sections in the Prospectus—Offer to Exchange where you can find a more complete description of the topics in this summary.

Why are EMC and VMware conducting this Offer?

Historically, EMC has granted EMC Options and EMC Restricted Stock to its employees, including employees of VMware and its subsidiaries, as a key component of employee compensation to align the interests of employees and shareholders of EMC and further enhance EMC shareholder value. Following the IPO, VMware will have the ability to more directly tie VMware employee incentives to VMware’s results and provide employees of VMware and its subsidiaries a more meaningful incentive to enhance VMware stockholder value. EMC and VMware are therefore undertaking this Offer to allow eligible employees of VMware and its subsidiaries to exchange their EMC Options and EMC Restricted Stock for VMware Options and VMware Restricted Stock in a manner designed to generally retain the terms and intrinsic value of the tendered EMC securities. This Offer is being undertaken for compensatory purposes as a means to retain and motivate employees of VMware and its subsidiaries and encourage such employees to remain in the service of VMware by allowing such employees to share in the value they create at VMware from the date of the IPO. See “The Transaction—Reasons for the Offer.”

What securities are we offering to exchange?

EMC and VMware are offering eligible employees a one-time opportunity to exchange all of such employees’ EMC Options granted under the EMC Plans for VMware Options and to exchange all of such eligible employees’ EMC Restricted Stock granted under the EMC Plans for VMware Restricted Stock, in each case determined on an award-by-award basis. See “The Exchange Offer—Terms of the Exchange Offer.”

Who is eligible to participate in this Offer?

Employees of VMware or its subsidiaries in the United States as of the date of this Prospectus—Offer to Exchange who hold EMC Options or EMC Restricted Stock and who continue to be employees of VMware or its subsidiaries in the United States through the expiration of this Offer and through the Grant Date are eligible to participate in this Offer. See “The Exchange Offer—Terms of the Exchange Offer.”

What are the conditions of this Offer?

Completion of the exchange of options and restricted stock pursuant to this Offer is subject to a number of conditions. These include, among other things, the SEC declaring this Exchange Offer Registration Statement and the IPO Registration Statement effective. These and various other conditions are more fully described in “The Exchange Offer—Conditions to Completion of the Offer.” This Offer is not subject to any approval of EMC’s shareholders or VMware’s stockholders and is not contingent upon a minimum number of options or shares of restricted stock being tendered.

If I elect to tender for exchange EMC Options or EMC Restricted Stock, will my elections affect other components of my compensation?

No.

 

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May I exchange EMC Options for shares of VMware Restricted Stock or exchange shares of EMC Restricted Stock for VMware Options?

No. This Offer is to exchange EMC Options for VMware Options only and EMC Restricted Stock for VMware Restricted Stock only. However, if you are an eligible employee and you hold both EMC Options and EMC Restricted Stock, you may, subject to the terms and conditions of this Offer, tender your EMC Options for VMware Options and your EMC Restricted Stock for VMware Restricted Stock.

If I have a partially vested EMC Option grant, may I tender only the unvested portion of the grant?

No. You may only tender all, but not less than all, of each particular grant. This means that if you tender an EMC Option grant that is partially vested, you will receive two VMware Option grants, one for the vested and outstanding portion and one for the unvested and outstanding portion. Those grants may have different vesting terms from each other. See “The Exchange Offer—Terms of the Exchange Offer.”

How do I find out how many EMC Options I have and what their exercise prices are and how many shares of EMC Restricted Stock I have?

If you have chosen to receive this Prospectus—Offer to Exchange by mail, the Letter of Transmittal enclosed with this Prospectus—Offer to Exchange includes a list of your EMC Options and EMC Restricted Stock as of June 27, 2007. In addition, you can at any time access current information about your options and restricted stock by going to www.ubs.com/onesource/emc.

How many VMware Options will I receive in exchange for my tendered EMC Options?

It will not be possible to know exactly how many VMware Options you will receive in exchange for your tendered EMC Options before the expiration of this Offer. If you meet the employee eligibility requirements and your options are properly tendered and accepted for exchange, you will be entitled to receive VMware Options exercisable for a number of shares of VMware Stock based on the Exchange Ratio, which will be determined upon the pricing of the VMware IPO. You will not have the opportunity to withdraw tendered EMC Options after the Exchange Ratio is determined.

The number of VMware shares subject to a VMware Option that you receive in this Offer will be determined by multiplying the number of shares underlying each EMC Option that you tender by the Exchange Ratio. The number of VMware shares subject to a VMware Option that you receive in this Offer will be rounded down to the nearest whole share on an award-by-award basis. Accordingly, VMware Options will not be granted for fractional shares, and you will not be compensated for any fractional shares you otherwise would have received. See “The Exchange Offer—Number of VMware Options and Restricted Stock to be Issued in Exchange.”

What will the exercise price of the VMware Options be?

The per share exercise price of each VMware Option that you receive will be determined by dividing the exercise price of each EMC Option that you tender by the Exchange Ratio and rounding the result up to the nearest whole cent.

How many shares of VMware Restricted Stock will I receive in exchange for my tendered EMC Restricted Stock?

It will not be possible to know exactly how many shares of VMware Restricted Stock you will receive in exchange for your tendered EMC Restricted Stock before the expiration of this Offer. If you meet the employee eligibility requirements and your restricted stock is properly tendered and accepted for exchange, you will be entitled to receive VMware Restricted Stock based on the Exchange Ratio, which will be determined upon the pricing of the VMware IPO.

 

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The number of shares of VMware Restricted Stock that you receive in this Offer will be determined by multiplying the number of shares of EMC Restricted Stock that you tender by the Exchange Ratio. The number of shares of VMware Restricted Stock that you receive in this Offer will be rounded down to the nearest whole share. Accordingly, VMware Restricted Stock will not be granted for fractional shares, and you will not be compensated for any fractional shares you otherwise would have received. See “The Exchange Offer—Number of VMware Options and Restricted Stock to be Issued in Exchange.”

What is the VWAP?

The VWAP is the volume-weighted average price per share of EMC Stock on the New York Stock Exchange over the final two full trading days (calculated as the average (arithmetic mean) of the VWAP on those two days) prior to the Expiration Date during the period beginning at 6:30 a.m., Pacific Time (or such other time as is the official open of trading on the New York Stock Exchange on the applicable date), and ending at 1:00 p.m., Pacific Time (or such other time as is the official close of trading on the New York Stock Exchange on the applicable date), as reported by Bloomberg Financial LP. This means that if the Expiration Date is August 6, 2007, the VWAP would be calculated using the average (arithmetic mean) of the volume-weighted average price per share of EMC Stock on August 2, 2007 and the volume-weighted average price per share of EMC Stock on August 3, 2007.

How will the Exchange Ratio be calculated?

The Exchange Ratio will be expressed as a fraction, the numerator of which will be the VWAP and the denominator of which will be the IPO Price. Therefore, if the VWAP is less than the IPO Price, the Exchange Ratio will be less than 1, and although the intrinsic value of your exchanged equity will be maintained (subject to the effects of rounding for fractional amounts), you will receive a fewer number of VMware Options or shares of VMware Restricted Stock than the number of EMC Options or shares of EMC Restricted Stock you exchanged. For example, if the VWAP were $18 and the IPO Price were $24, the Exchange Ratio would be 0.75, and if you tendered 1,000 EMC Options, you would receive 750 VMware Options, with the same (subject to the effects of rounding for fractional amounts) aggregate intrinsic value in exchange. See “The Exchange Offer—Number of VMware Options and Restricted Stock to be Issued in Exchange.”

Where can I find then-current pricing and Exchange Ratio information during the Offer period?

You will not know the exact number of VMware Options or shares of VMware Restricted Stock that you will receive in exchange for VMware Options or VMware Restricted Stock that you tender until after the expiration of this Offer when the final Exchange Ratio is calculated (at approximately 2:30 p.m., Pacific Time, on the Expiration Date). However, you will be able to access certain updated pricing-related information through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware. Each day, beginning on July 10, 2007, and ending on August 1, 2007, after the close of trading on the New York Stock Exchange, the Election Site for the EMC—VMware Exchange Program will be updated to show what the VWAP would be if that day were final trading day prior the Expiration Date and what the Exchange Ratio would be based on that VWAP (assuming that the IPO Price was equal to the mid-point of the range of the estimated initial offering price reflected in the IPO Registration Statement).

During the last two full trading days of this Offer, the Election Site for the EMC—VMware Exchange Program will display the ongoing calculation, updated on an hourly basis, of the actual VWAP and the Exchange Ratio as it then stands (assuming that the IPO Price is equal to the mid-point of the range of the estimated initial offering price reflected in the IPO Registration Statement). Thus, on the next-to-last full trading day prior to the Expiration Date (the first day of the calculation period), the actual daily VWAP of EMC Stock during the elapsed portion of that first day will be used in the calculation and, on the final full trading day prior to the Expiration Date, the calculations will use the average of the daily VWAP of EMC Stock for the next-to-last full trading day and the actual daily VWAP during the elapsed portion of that final full trading day. The Election Site for the EMC—VMware Exchange Program will be updated every hour during the two-day calculation period and a final VWAP, subject to extension of this Offer, will be posted at approximately 2:30 p.m., Pacific Time, on the day prior to the Expiration Date. See “The Exchange Offer—Number of VMware Options and Restricted Stock to be Issued in Exchange.”

 

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When will I be able to find out the Exchange Ratio?

At approximately 2:30 p.m., Pacific Time, after the expiration of the Offer on the Expiration Date, the Election Site for the EMC—VMware Exchange Program will be updated with the final Exchange Ratio. We will also issue a press release announcing the Exchange Ratio, and EMC and VMware will file an amendment to the Tender Offer Statement on Schedule TO that they originally filed with the SEC on July 9, 2007 (as the same may be amended or supplemented from time to time, the “Schedule TO”) with the SEC containing this press release. The Schedule TO will be available on the SEC’s website at http://www.sec.gov. Because the Exchange Ratio will be calculated after the expiration of this Offer, you will not have an opportunity to withdraw tendered EMC Options or shares of EMC Restricted Stock after the Exchange Ratio is calculated.

Must I tender options or restricted stock for exchange in this Offer?

No. Whether or not you tender options or restricted stock for exchange in this Offer is solely your decision and completely voluntary.

What happens to EMC Options or EMC Restricted Stock that I choose not to tender or that are not accepted for exchange in this Offer?

Nothing. However, if EMC ceases to hold shares of VMware Stock representing 50% or more of the total outstanding voting power of VMware, your employment will be treated as having terminated for purposes of the award and any EMC Options and EMC Restricted Stock then held by you will be terminated in accordance with the terms of the applicable award.

If I choose to tender EMC Options or EMC Restricted Stock for exchange in this Offer, do I have to tender all of my options and restricted stock?

In order to tender an eligible option, you must tender all outstanding EMC Options under the award relating to that eligible option. EMC and VMware are not accepting partial tenders of particular option awards. For example, if you hold an option pursuant to an award of options to purchase 1,000 shares of EMC Stock at an exercise price of $9.75 per share of which 500 shares are vested, you must tender the option for all 1,000 shares in its entirety; you cannot tender only a portion of the options subject to a particular award and retain the remainder. On the other hand, if you have an option to purchase 1,000 shares of EMC Stock at an exercise price of $11.19 per share and another option to purchase 2,000 shares of EMC Stock at an exercise price of $12.85 per share, you may choose to tender for exchange all (but not less than all) of the outstanding options under either of the option awards or all of the options under both of the option awards or choose not to tender any of your EMC Options.

In order to tender eligible restricted stock from a particular restricted stock award, you must tender all outstanding shares of EMC Restricted Stock under that award. For example, if you have an EMC Restricted Stock award covering 700 shares of EMC Stock and an EMC Restricted Stock award covering 300 shares of EMC Stock, you may choose to tender for exchange all (but not less than all) of the EMC Restricted Stock under one award or both of the awards or chose not to tender any shares of EMC Restricted Stock. See “The Exchange Offer—Terms of the Exchange Offer.”

Can I tender for exchange both vested and unvested EMC Options?

Yes.

Can I exchange options that I have already fully exercised or shares of EMC Stock that I have that are no longer restricted?

No.

 

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Can I exchange the remaining portion of an eligible option award that I have already partially exercised?

Yes. If you have previously partially exercised an eligible option award, you can still tender for exchange the remaining unexercised portion of an eligible option award. However, if you tender any portion of an option award, you must tender all of the EMC Options remaining under that award.

Will the terms and conditions of my VMware Options and VMware Restricted Stock be the same as the terms of the EMC Options and EMC Restricted Stock that I tender?

VMware Options and VMware Restricted Stock granted pursuant to this Offer will be subject to the same terms and conditions as set forth in the EMC Plans at the time of the grant of the tendered EMC Options or EMC Restricted Stock, except that (1) vested EMC Options properly tendered in this Offer and not withdrawn will be exchanged for unvested VMware Options subject to a new vesting period, commencing on the Grant Date, which provides for, subject to continued employment, monthly vesting in equal amounts over a period equal to the shorter of twelve months or 90 days prior to the scheduled expiration of the tendered EMC Options (but if such 90th day would be prior to the date of grant, then the VMware option granted would vest on the date of grant), (2) VMware Options issued in the exchange will not be “incentive stock options,” notwithstanding whether the tendered EMC Option was an “incentive stock option,” (3) VMware Options and VMware Restricted Stock issued in the exchange will not be subject to accelerated vesting on a “change in control,” and (4) certain EMC Restricted Stock properly tendered in this Offer and not withdrawn will be exchanged for VMware Restricted Stock that will be subject to different acceleration provisions related to VMware achieving certain performance benchmarks than those applicable to the original EMC Restricted Stock award. Except as described above, the VMware Options and VMware Restricted Stock you receive in the exchange will continue to be subject to the terms of the original EMC option or restricted stock agreement under which they were granted except that, unless the context may otherwise require, references to “EMC” in the applicable award agreement shall instead be deemed to be references to “VMware.”

Will I lose the benefits of any time towards vesting I have accumulated under my existing EMC Options if I tender these options in this Offer and they are accepted for exchange and canceled?

If you tender unvested EMC Options, the VMware Options you receive in exchange for unvested EMC Options will continue to vest in accordance with the vesting schedule of the EMC Options they replace. However, if you tender vested EMC Options, the VMware Options you receive in exchange for your vested EMC Option will be subject to a new vesting period, commencing on the Grant Date, equal to the shorter of twelve months or 90 days prior to the scheduled expiration of the tendered EMC Options (but if such 90th day would be prior to the date of grant, then the VMware option granted would vest on the date of grant). These options will vest monthly in equal amounts over the vesting period. See “The Exchange Offer—Terms of the Exchange Offer.”

If my current options are incentive stock options, will my VMware Options be incentive stock options?

No. VMware Options received in exchange for such EMC Options will not be incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and will thus not have the tax features of incentive stock options (which generally provide that income is not recognized by the optionholder when stock is acquired pursuant to such options and that the optionholder may be eligible for capital gains treatment on the disposition of such shares under certain circumstances). See “U.S. Federal Income Tax Consequences.”

If I exercise the VMware Options that I receive in the exchange or if the restrictions on the VMware Restricted Stock that I receive in the exchange lapse, will I be able to freely sell the shares of VMware Stock that I receive from such exercise or lapse of restrictions?

VMware has agreed with the underwriters of the IPO that, as a condition to participating in this Offer, participating employees who receive VMware Options or VMware Restricted Stock must agree to not dispose of

 

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or effectively dispose of (e.g., by hedging) any shares of the VMware Stock underlying these VMware Options or shares of VMware Restricted Stock for a period of 180 days from the date the SEC declares the IPO Registration Statement effective. VMware intends to file a registration statement on Form S-8 in order to make the VMware Stock underlying the VMware Options and VMware Restricted Stock freely tradable after the expiration of such 180-day period.

Will I have to pay taxes if I exchange my EMC Options or EMC Restricted Stock in this Offer?

If you exchange your current EMC Options for VMware Options or your current EMC Restricted Stock for VMware Restricted Stock, we believe that you will not be required under current applicable law to recognize income for United States federal income tax purposes at the time of the exchange. We recommend that you consult with your own tax advisor to determine the tax consequences to you of this Offer. See “U.S. Federal Income Tax Consequences.”

Will I have any rights or benefits with respect to EMC Options or EMC Restricted Stock I tender in this Offer?

No. EMC Options and EMC Restricted Stock tendered and accepted for exchange in this Offer will be cancelled and you will no longer have any rights or benefits under those options or that restricted stock. See “The Exchange Offer—Delivery of VMware Restricted Shares, Options to Purchase VMware Common Stock.”

If I tender EMC Options or EMC Restricted Stock in this Offer, will I be able to receive other VMware Option awards or VMware Restricted Stock awards before I receive my VMware Options or VMware Restricted Stock?

We intend to grant VMware Option and VMware Restricted Stock awards to employees from time to time as part of VMware’s normal compensation program. Employees eligible to participate in this Offer will continue to be eligible to receive additional option awards as part of VMware’s overall compensation program.

What happens if this Offer is not consummated?

If EMC and VMware do not accept any EMC Options or EMC Restricted Stock tendered for exchange, you will keep all of your current EMC Options and EMC Restricted Stock and you will not receive VMware Options or VMware Restricted Stock. No changes will be made to your existing EMC Options or shares of EMC Restricted Stock and they will remain outstanding with their current terms, including exercise price, term and vesting schedule.

When does this Offer expire? Can this Offer be extended?

This Offer expires on August 6, at 11:00 a.m., Pacific Time, unless we extend it.

We and EMC may, in our discretion, extend this Offer at any time. EMC’s and VMware’s current intention is to extend this Offer if the IPO Registration Statement or the Exchange Offer Registration Statement will not be declared effective prior to the expiration of this Offer. If this Offer is extended, appropriate notice of the extension will be provided no later than 6:00 a.m., Pacific Time, on the next business day following the previously scheduled Expiration Date. See “The Exchange Offer—Extension; Termination; Amendment.”

How do I tender my EMC Options or EMC Restricted Stock for exchange in this Offer?

In order to validly tender EMC Options or EMC Restricted Stock for exchange in this Offer, you must, prior to 11:00 a.m., Pacific Time, on the Expiration Date, either make your election to tender online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or complete and sign the enclosed Letter of Transmittal in accordance with its instructions and deliver it to the information and exchange agent, by mail to Mellon Investor Services, Reorganization Department, PO Box 3301, South Hackensack, NJ 07606; by hand to Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310; or by overnight delivery to Mellon Investor Services, Reorganization Department, 480 Washington Blvd., Mail Stop—Reorg, Jersey City, NJ 07310.

 

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EMC and VMware reserve the right to reject any or all tenders of options or restricted stock that we determine are not in appropriate form or that we determine are unlawful to accept. EMC and VMware expect to accept all EMC Options and all shares of EMC Restricted Stock that are properly and timely tendered for exchange and not validly withdrawn. See “The Exchange Offer—Proper Tender of EMC Options and EMC Restricted Stock” and “The Exchange Offer—Withdrawal Rights.”

During what period of time may I withdraw previously tendered EMC Options or EMC Restricted Stock?

You may withdraw EMC Options or EMC Restricted Stock you tendered for exchange at any time before Expiration Date. To withdraw EMC Options or EMC Restricted Stock tendered for exchange, you must either change your election to tender online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or deliver to the information and exchange agent, Mellon Investor Services, prior to the time this Offer expires, a properly completed and signed written Notice of Withdrawal in the form enclosed with this Prospectus—Offer to Exchange. Delivery of the Notice of Withdrawal must be to the information and exchange agent, by mail to Mellon Investor Services, Reorganization Department, PO Box 3301, South Hackensack, NJ 07606; by hand to Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310; or by overnight delivery to Mellon Investor Services, Reorganization Department, 480 Washington Blvd., Mail Stop - Reorg, Jersey City, NJ 07310.

Once you have withdrawn previously tendered EMC Options or EMC Restricted Stock, you may re-tender EMC Options or EMC Restricted Stock for exchange prior to the date and time of the expiration of the Offer and only by again following the tender procedures described in this Prospectus—Offer to Exchange and the accompanying Letter of Transmittal. See “The Exchange Offer—Proper Tender of EMC Options and EMC Restricted Stock” and “The Exchange Offer—Withdrawal Rights.”

Can I change my mind and elect not to tender EMC Options or EMC Restricted Stock, or elect to tender additional EMC Options or EMC Restricted Stock, after I make an election on the Election Site for the EMC—VMware Exchange Program or submit a Letter of Transmittal?

Yes. If you made an election to tender options or restricted stock on the Election Site for the EMC—VMware Exchange Program or submitted a Letter of Transmittal and you want to withdraw some or all of the EMC Options or EMC Restricted Stock you marked for tender on the Election Site for the EMC—VMware Exchange Program or on that Letter of Transmittal, you may withdraw your tender of such EMC Options or shares of EMC Restricted Stock by changing your election to tender online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or delivering to the information and exchange agent, Mellon Investor Services, prior to the time this Offer expires, a Notice of Withdrawal (in the form included with this Prospectus—Offer to Exchange) indicating which EMC Options or shares of EMC Restricted Stock you are withdrawing. If you wish to tender for exchange additional EMC Options or EMC Restricted Stock that you had not marked for tender on your previous Letter of Transmittal, you may elect to tender for exchange those additional EMC Options or shares of EMC Restricted Stock by making further elections on the Election Site for the EMC—VMware Exchange Program or delivering to the information and exchange agent, Mellon Investor Services, prior to the Expiration Date an additional properly completed and signed Letter of Transmittal (in the form included with this Prospectus—Offer to Exchange) selecting for tender for exchange such additional EMC Option or EMC Restricted Stock awards. You may only tender for exchange all EMC Options or shares of EMC Restricted Stock subject to a particular award. If you deliver a Letter of Transmittal or a Notice of Withdrawal with respect to some but not all EMC Options or shares of EMC Restricted Stock subject to a particular award, EMC and VMware may, in our sole discretion, determine that you have elected to tender for exchange all or none of the EMC Options or EMC Restricted Stock underlying such award.

You may request copies of the Notice of Withdrawal or Letter of Transmittal by contacting the information and exchange agent, Mellon Investor Services, at 1-888-313-1479 (from within the U.S.) or at 201-680-6672

 

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(from outside the U.S.). Delivery of the Notice of Withdrawal or the additional Letter of Transmittal must be to the information and exchange agent, by mail to Mellon Investor Services, Reorganization Department, PO Box 3301, South Hackensack, NJ 07606; by hand to Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310; or by overnight delivery to Mellon Investor Services, Reorganization Department, 480 Washington Blvd., Mail Stop - Reorg, Jersey City, NJ 07310. See “The Exchange Offer—Proper Tender of EMC Options and EMC Restricted Stock” and “The Exchange Offer—Withdrawal Rights.”

When will I receive my VMware Options and VMware Restricted Stock?

If you participated in the exchange, you will receive a notice from us as soon as practicable after the Grant Date indicating the number of shares of EMC Stock subject to the EMC Options you tendered that were accepted for exchange, the number of shares subject to the new option award(s) and the exercise price per share of your VMware Options, as well as the number of shares of EMC Restricted Stock you tendered that were accepted for exchange and the number of shares of VMware Restricted Stock that you will receive pursuant to the exchange. See “The Exchange Offer—Delivery of VMware Restricted Shares, Options to Purchase VMware Common Stock.”

What happens if a VMware Option I am granted later ends up “out of the money”?

If a VMware Option that you receive in the exchange is or becomes “out of the money” (i.e., has a per share exercise price greater than the price of VMware Stock) and remains “out of the money” after it vests and until its expiration, it will then be worthless. We can provide no assurance as to the price of VMware Stock upon the IPO or in the future.

What do VMware, EMC and their respective boards of directors think of this Offer?

Although the VMware board of directors has approved this Offer, in light of the unique circumstances of individual optionholders and holders of restricted stock, as well as the risks associated with this Offer described in this Prospectus—Offer to Exchange under “Risk Factors,” neither VMware’s nor EMC’s board of directors makes any recommendation as to whether you should tender or refrain from tendering your EMC Options or EMC Restricted Stock for exchange. You must make your own decision whether to tender EMC Options or EMC Restricted Stock. For questions regarding tax implications or other investment-related questions, you should consult with your own legal counsel, accountant, financial and tax advisors. See “The Transaction—Reasons for the Offer.”

Whom can I talk to if I have questions about my existing options or restricted stock or about this Offer?

For additional information or assistance concerning this Offer or to request copies of the Offer documents and the other information incorporated by reference in this Prospectus—Offer to Exchange, without charge, you should contact the information and exchange agent, Mellon Investor Services, located at Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310, at 1-888-313-1479 (from within the U.S.) or at 201-680-6672 (from outside the U.S.).

How should I decide whether or not to exchange my EMC Options or my EMC Restricted Stock?

EMC and VMware understand that this may be a difficult decision. There are no guarantees of VMware’s future performance, the future prices of VMware Stock, or EMC’s future performance or the future prices of EMC Stock. EMC and VMware advise you to consult with your financial advisor regarding the relative benefits of tendering your EMC Options or EMC Restricted Stock for exchange and cancellation pursuant to this Offer or holding your EMC Options and shares of EMC Restricted Stock.

 

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SUMMARY OF THIS PROSPECTUS—OFFER TO EXCHANGE

The Companies

VMware

VMware, Inc.

3401 Hillview Avenue

Palo Alto, California 94304

Telephone: (650) 427-5000

Website: www.vmware.com

VMware is currently a wholly owned subsidiary of EMC. Immediately following the IPO, it is currently expected that EMC will continue to own approximately 89% of VMware’s common stock (43% of VMware’s Class A common stock) and 100% of VMware’s Class B common stock) and will control 99% of the combined voting power of VMware’s outstanding common stock. If the underwriters in the IPO exercise in full their over-allotment option, EMC will own approximately 88% of VMware’s outstanding common stock (41% of VMware’s Class A common stock and 100% of VMware’s Class B common stock) and 98% of the combined voting power of VMware’s outstanding common stock. The number of shares to be sold in the IPO is subject to change. Any such changes will be disclosed by an amendment to the Exchange Offer Registration Statement of which this Prospectus—Offer to Exchange is a part and the IPO Registration Statement. EMC will continue to control VMware following the IPO, and will be able to exercise control over all matters requiring stockholder approval, including the election of VMware’s directors and approval of significant corporate transactions. In addition, EMC’s controlling interest may discourage a change of control that the other holders of VMware Stock may favor.

For a description of VMware’s business, see “Summary of this Prospectus—Offer to Exchange—VMware’s Business” and “Business of VMware.”

This Prospectus—Offer to Exchange is being furnished to you solely to provide you information regarding the Company in connection with your determination of whether to participate in this Offer and is not intended as a solicitation in connection with acquiring VMware Stock, as part of the IPO or otherwise.

EMC

EMC Corporation

176 South Street

Hopkinton, Massachusetts 01748

Telephone: (508) 435-1000

Website: www.emc.com

EMC and its subsidiaries develop, deliver and support the information technology industry’s broadest range of information infrastructure technologies and solutions that are designed to help individuals and organizations handle everything they need to do with their digital information.

EMC’s systems, software and services support EMC’s customers’ critical business processes by helping them build information infrastructures from the most comprehensive systems available to store, manage and protect information at the right service levels and the right costs. EMC refers to this as an information lifecycle management strategy. EMC’s information management software and solutions empower its customers to capture, manage and leverage structured and unstructured information—documents, images or emails—to support their business processes. EMC’s resource management software allows organizations to better understand, manage and automate the operation of their information infrastructure. EMC’s information security division offers customers security solutions to assess the risk to their information, secure the people accessing information and

 

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the infrastructure, protect the confidentiality and integrity of the information itself and manage security information and events to assure effectiveness and ease the burdens of compliance.

EMC files annual, quarterly and current reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”). You may read and copy this information at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of this information by mail from the SEC at the above address, at prescribed rates.

The SEC also maintains a website that contains reports, proxy statements and other information that EMC files electronically with the SEC. The address of that website is http://www.sec.gov.

The Exchange Offer

Terms of the Offer (page 44)

EMC and VMware are offering eligible employees of VMware and its subsidiaries in the United States a one-time opportunity to exchange all of such employees’ EMC Options to purchase shares of EMC Stock for VMware Options to purchase VMware Stock, as determined on an award-by-award basis, and to exchange all of such employees’ EMC Restricted Stock for VMware Restricted Stock, as determined on an award-by-award basis.

In order to tender an eligible option, you must tender all outstanding EMC Options under the award relating to that eligible option. EMC and VMware are not accepting partial tenders of particular option awards. Similarly, if you tender shares of EMC Restricted Stock from a particular restricted stock award, you must tender all of the EMC Restricted Stock under that award.

Expiration Date (page 49)

This Offer is scheduled to expire at 11:00 a.m., Pacific Time, on August 6, 2007, unless EMC and VMware, in our discretion, extend the period of time during which this Offer will remain open. EMC’s and VMware’s current intention is to extend this Offer if the IPO Registration Statement or the Exchange Offer Registration Statement will not be declared effective prior to the expiration of this Offer.

Fractional Shares (page 50)

Awards of VMware Options and VMware Restricted Stock will be calculated according to the Exchange Ratio and will be rounded down to the nearest whole share on an award-by-award basis. Accordingly, VMware Options and VMware Restricted Stock will not be issued for fractional shares, and you will not be compensated for any fractional shares you otherwise would have received.

Proper Tender of EMC Options and EMC Restricted Stock (page 50)

To validly tender your options or restricted stock for exchange in this Offer, you must either make your election to tender online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or complete and sign the enclosed Letter of Transmittal in accordance with its instructions, and send it to the information and exchange agent, by mail to Mellon Investor Services, Reorganization Department, PO Box 3301, South Hackensack, NJ 07606; by hand to Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310; or by overnight delivery to Mellon Investor Services, Reorganization Department, 480 Washington Blvd., Mail Stop—Reorg, Jersey City, NJ 07310. Such election must be made through the Election Site for the EMC—VMware Exchange Program or received by the information and exchange agent, Mellon Investor Services, prior to 11:00 a.m., Pacific Time, on the Expiration Date.

 

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Withdrawal Rights (page 52)

You may withdraw some or all of the EMC Options or EMC Restricted Stock you tendered for exchange in this Offer. If you want to withdraw any of the EMC Options you tendered for exchange, you must withdraw all tendered EMC Options subject to the particular award of which the options you want to withdraw are a part, and if you want to withdraw any EMC Restricted Stock you tendered for exchange, you must withdraw all EMC Restricted Stock subject to the particular award of which the restricted stock you want to withdraw is a part.

To validly withdraw EMC Options or EMC Restricted Stock tendered for exchange, you must, prior to the time this Offer expires, either change your election online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or deliver to the information and exchange agent, Mellon Investor Services, a properly completed and signed written Notice of Withdrawal in the form enclosed with this Prospectus—Offer to Exchange. If you choose to deliver a Notice of Withdrawal, it must be sent to the information and exchange agent, by the means and at the appropriate address above set forth.

Delivery of VMware Restricted Shares, Options to Purchase VMware Common Stock (page 53)

If and when EMC and VMware accept for exchange and cancellation your properly tendered and not withdrawn EMC Options and EMC Restricted Stock, you will have no further rights with respect to those cancelled EMC Options and EMC Restricted Stock. As promptly as practicable after we accept tendered EMC Options and EMC Restricted Stock for exchange and cancellation, we will send each tendering employee a notice indicating the number of shares of EMC Stock subject to the options and the number of shares of EMC Restricted Stock tendered for exchange that have been accepted and cancelled and the number of shares of VMware Stock underlying the VMware Options granted in exchange for such options, and the number of shares of VMware Restricted Stock granted in exchange for such EMC Restricted Stock.

Extension; Termination; Amendment (page 53)

EMC and VMware may, from time to time, extend the period of time during which this Offer is open and delay accepting any EMC Options or EMC Restricted Stock tendered to them by disseminating notice of the extension to optionholders by public announcement, oral or written notice or otherwise as permitted by Rule 13e-4(e)(3) under the Exchange Act.

EMC and VMware also expressly reserve the right, in their reasonable judgment, prior to the Expiration Date, to terminate or amend this Offer and to postpone their acceptance and cancellation of any EMC Options or EMC Restricted Stock tendered for exchange upon the occurrence of certain conditions by disseminating notice of the termination or postponement to the optionholders by public announcement, oral or written notice or otherwise as permitted by applicable law.

Subject to compliance with applicable law, EMC and VMware further reserve the right, in our discretion, and regardless of whether any event set forth in “The Exchange Offer—Conditions to Completion of the Offer” has occurred or is deemed by us to have occurred, to amend this Offer in any respect, except if EMC or VMware materially change the terms of this Offer or the information concerning this Offer, or if they waive a material condition of this Offer, EMC and VMware will extend this Offer to the extent required by the SEC. The period by which this Offer will be extended in such a case will depend on the facts and circumstances, including the relative materiality of such terms or information. We will notify you of any such amendment and EMC will file with the SEC an amendment to the Schedule TO.

Amendments to this Offer may be made at any time, and from time to time, by providing appropriate notice of the amendment. Any notice pursuant to this Offer will be disseminated promptly to eligible employees in a manner reasonably designed to inform them of such change. EMC and VMware have no obligation to publish, advertise or otherwise communicate any such public announcement except by making a press release or as otherwise required by applicable law.

 

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Automatic Extension (page 54)

This Offer will be automatically extended, for a minimum of one trading day, if a market disruption event occurs with respect to the EMC Common Stock or the VMware Class A common stock on either of the two days during which the value of each share of EMC Common Stock or VMware Class A common stock was originally expected to be determined.

Conditions to Completion of the Offer (page 54)

This Offer is subject to various conditions, including the IPO Registration Statement and the Exchange Offer Registration Statement being declared effective by the SEC. EMC and VMware may in their discretion waive any of the conditions, in whole or in part, at any time and from time to time, prior to their acceptance for exchange and cancellation of EMC Options and EMC Restricted Stock tendered pursuant to this Offer, whether or not they waive any other condition to this Offer. EMC’s and VMware’s failure at any time to exercise any of these rights will not be deemed a waiver of any such rights.

Risk Factors (page 19)

In deciding whether to tender your EMC Options or EMC Restricted Stock, you should carefully consider the matters described in “Risk Factors,” as well as other information included in this Prospectus—Offer to Exchange and the other documents incorporated by reference herein.

Business of VMware (page 80)

We are the leading provider of virtualization solutions. Our virtualization solutions represent a pioneering approach to computing that separates the operating system and application software from the underlying hardware to achieve significant improvements in efficiency, availability, flexibility and manageability. Our solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity that can be allocated dynamically, securely and reliably to applications as needed, increasing hardware utilization and reducing spending. We believe that the market opportunity for our virtualization solutions is large and expanding, with 24.6 million x86 servers and 489.7 million business client PCs installed worldwide as of December 2006. Our customer base includes 100% of the Fortune 100 and over 84% of the Fortune 1,000. Our customer base for our server solutions has grown to include 20,000 organizations of all sizes across numerous industries. We believe our solutions deliver significant economic value for customers, and many have adopted our solutions as the strategic and architectural foundation for their future computing initiatives.

In the eight years since the introduction of our first virtualization platform, we have expanded our offering with virtual infrastructure automation products to address distributed and heterogeneous infrastructure challenges such as system recoverability and reliability, backup and recovery, resource provisioning and management, capacity and performance management and desktop security. We have also complemented our virtualization platforms with a suite of related virtual infrastructure management products. Our broad and proven suite of virtualization solutions addresses a range of complex IT problems that include infrastructure optimization, business continuity, software lifecycle management and desktop management.

We work closely with over 200 technology partners, including leading server, processor, storage, networking and software vendors. We have shared the economic opportunities surrounding virtualization with our partners by facilitating solution development through open application programming interfaces (APIs), formats and protocols and providing access to our source code and technology. The endorsement and support of our partners have further enhanced the awareness, reputation and adoption of our virtualization solutions.

We have developed a multi-channel distribution model to expand our presence and reach various segments of the market. We derive a significant majority of our revenues from our large indirect sales channel of more than

 

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4,000 channel partners that include distributors, resellers, x86 system vendors and systems integrators. We believe that our partners benefit greatly from the sale of our solutions through additional services, software and hardware sales opportunities. We have trained a large number of partners and end users to deploy and leverage our solutions.

We have achieved strong financial performance to date, as demonstrated by our revenue growth. Our total revenues were $703.9 million in 2006 and $387.1 million in 2005, representing an increase of 82% in 2006. Software license revenues were $491.9 million in 2006 and $287.0 million in 2005, representing an increase of 71% in 2006.

The historical financial information we have included in this Prospectus – Offer to Exchange includes allocations of certain corporate functions historically provided to us by EMC, including tax, accounting, treasury, legal and human resources services and other general corporate expenses. These allocations were made based on estimates which are considered reasonable by our management. Our historical results are not necessarily indicative of what our results of operations, financial position, cash flows or costs and expenses would have been had we been an independent entity during the historical periods presented or what our results of operations, financial position, cash flows or costs and expenses will be in the future when we are a publicly-traded, stand-alone company.

VMware’s Industry Background (page 81)

The introduction of x86 servers in the 1980s provided a low-cost alternative to mainframe and proprietary UNIX systems. The broad adoption of Windows and the emergence of Linux as server operating systems in the 1990s established x86 servers as the industry standard. The growth in x86 server and desktop deployments has introduced new operational risks and IT infrastructure challenges. These challenges include:

 

   

Low Infrastructure Utilization. Typical x86 server deployments achieve an average utilization of only 10% to 15% of total capacity, according to International Data Corporation (IDC), a market research firm. Organizations typically run one application per server to avoid the risk of vulnerabilities in one application affecting the availability of another application on the same server.

 

   

Increasing Physical Infrastructure Costs. The operational costs to support growing physical infrastructure have steadily increased. Most computing infrastructure must remain operational at all times, resulting in power consumption, cooling and facilities costs that do not vary with utilization levels.

 

   

Increasing IT Management Costs. As computing environments become more complex, the level of specialized education and experience required for infrastructure management personnel and the associated costs of such personnel have increased. Organizations spend disproportionate time and resources on manual tasks associated with server maintenance, and thus require more personnel to complete these tasks.

 

   

Insufficient Failover and Disaster Protection. Organizations are increasingly affected by the downtime of critical server applications and inaccessibility of critical end user desktops. The threat of security attacks, natural disasters, health pandemics and terrorism has elevated the importance of business continuity planning for both desktops and servers.

 

   

Desktop Management and Security. Managing and securing enterprise desktops present numerous challenges. Controlling a distributed desktop environment and enforcing management, access and security policies without impairing users’ ability to work effectively is complex and expensive. Numerous patches and upgrades must be continually applied to desktop environments to eliminate security vulnerabilities.

Virtualization was first introduced in the 1970s to enable multiple business applications to share and fully harness the centralized computing capacity of mainframe systems. Virtualization was effectively abandoned during the 1980s and 1990s when client-server applications and inexpensive x86 servers and desktops established

 

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the model of distributed computing. Rather than sharing resources centrally in the mainframe model, organizations used the low cost of distributed systems to build up islands of computing capacity, providing some benefits but also introducing new challenges. In 1999, VMware introduced virtualization to x86 systems as a means to efficiently address many of these challenges and to transform x86 systems into general purpose, shared hardware infrastructure that offers full isolation, mobility and operating system choice for application environments.

We believe that the addressable market opportunity for our virtualization solutions is large and expanding. IDC estimates that less than one million of the 24.6 million x86 servers and less than five million of the 489.7 million business client PCs deployed worldwide are running virtualization software. We believe industry trends towards more powerful yet under-utilized multi-core servers and the increasing complexity of managing desktop environments will further accelerate the widespread adoption of virtualization for both server and desktop deployments.

VMware’s Solution (page 83)

Our virtualization solutions run on industry-standard servers and desktops and support a wide range of operating system and application environments, as well as networking and storage infrastructure. We have designed our solutions to function independently of the hardware and operating system to provide customers with a broad platform choice. Our solutions provide a key integration point for hardware and infrastructure management vendors to deliver differentiated value that can be applied uniformly across all application and operating system environments. Key benefits to our virtualization solutions include:

 

   

Server Consolidation and Infrastructure Optimization. Our solutions enable organizations to achieve significantly higher resource utilization by pooling common infrastructure resources and breaking the legacy “one application to one server” model.

 

   

Physical Infrastructure Cost Reduction. Through server consolidation and containment, our solutions reduce the required number of servers and other related infrastructure overhead. Organizations are able to significantly decrease physical infrastructure costs through reduced data center space, power and cooling requirements.

 

   

Improved Operational Flexibility and Responsiveness. We offer a set of automation and management solutions that reduce the amount of time IT professionals must spend on largely reactive tasks, such as provisioning, configuration, monitoring and maintenance. Additionally, as the need for physical infrastructure decreases, so does the need for the highly-specialized personnel required to manage and maintain such environments.

 

   

Increased Application Availability and Improved Business Continuity. Our solutions enable organizations to reduce both planned and unplanned downtime in their computing environments by allowing them to securely migrate entire virtual environments to separate servers or even data center locations without user interruption.

 

   

Improved Desktop Manageability and Security. Our desktop virtualization solutions allow IT organizations to efficiently control and secure desktop environments to end users regardless of their location, desktop hardware, operating system or business application access needs.

VMware’s Competitive Strengths (page 84)

We believe that the following competitive strengths position us well to maintain and extend our leadership in virtualization solutions:

 

   

leading technology and market position;

 

   

broad product portfolio;

 

   

open standards and choice of operating systems;

 

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large installed base of customers;

 

   

strong partner network; and

 

   

robust global support operations and services.

VMware’s Growth Strategy (page 86)

Our objective is to extend our market leadership in virtualization solutions. To accomplish this objective, we intend to:

 

   

broaden our product portfolio;

 

   

enable choice for customers and drive standards;

 

   

expand our network of technology and distribution partners;

 

   

increase sales to existing customers and pursue new customers; and

 

   

increase market awareness and drive adoption of virtualization.

VMware’s Relationship with EMC (page 118)

We were acquired by EMC in January 2004, and prior to the IPO we have operated as a wholly owned subsidiary of EMC. As a result, in the ordinary course of our business, we have received various services provided by EMC, including tax, accounting, treasury, legal and human resources services. EMC has also provided us with the services of a number of its executives and employees prior to the IPO and will continue to do so after the IPO.

EMC Will Be Our Controlling Stockholder. Immediately following the IPO, EMC, which will hold approximately 43% of our Class A common stock and 100% of our Class B common stock, will own approximately 89% of our outstanding common stock and 99% of the combined voting power of our outstanding common stock (approximately 88% of our outstanding common stock and 98% of the combined voting power of our outstanding common stock if the underwriters exercise in full the over-allotment option that we have granted them in the IPO). As a result, EMC will continue to control us following the completion of the IPO, and will be able to exercise control over all matters requiring stockholder approval, including the election of our directors and approval of significant corporate transactions.

Agreements Between EMC and Us. We will enter into several agreements with EMC prior to the completion of the IPO, including a master transaction agreement, an administrative services agreement, a new tax sharing agreement, an intellectual property agreement, an employee benefits agreement, an insurance matters agreement and a real estate agreement. For a description of these agreements and the other agreements that we will enter into with EMC, read “VMware’s Certain Relationships and Related Person Transactions—Relationship with EMC Corporation.”

Impact of the Exchange Offer (page 42)

As of June 30, 2007, there were approximately 1,900 employees who would be eligible to participate in the Offer. Based on an assumed IPO Price of $24.00 per share (the midpoint of the range reflected in the IPO Registration Statement) and an assumed VWAP of $18.00 (which is representative of recent trading prices of EMC stock), a maximum of approximately 13.6 million shares of our Class A class common stock underlying options or restricted stock awards granted subject to the Offer would be issued, pursuant to the Offer, if all eligible employees tendered all of their EMC Options and EMC Restricted Stock. We estimate that the unamortized fair value of the exchanged awards will be approximately $103.6 million, which will be recognized over the remaining vesting periods.

 

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To assist eligible employees in understanding the potential impact of the Offer on earnings per share, we note that supplemental pro forma basic and supplemental pro forma diluted earnings per share amounts would have been $0.22 and $0.22 for the year ended December 31, 2006 and $0.11 and $0.11 for the three months ended March 31, 2007, respectively, assuming the following:

 

   

Supplemental pro forma basic and diluted earnings per share data assume actual pre-tax income is reduced by $415,000 and $4,083,000 for the three months ended March 31, 2007 and the year ended December 31, 2006, respectively, and net income is reduced by $259,000 and $2,552,000 for the three months ended March 31, 2007 and the year ended December 31, 2006, respectively, to reflect the estimated impact of the respective period’s amortization of the incremental stock compensation expense resulting from the Offer.

 

   

Supplemental pro forma basic weighted average shares data assume the issuance and sale of the full 37,950,000 shares of our Class A common stock (assuming the over-allotment option is exercised in full) had occurred January 1, 2006. Supplemental pro forma basic weighted average shares data also assume the issuance and sale of 9,500,000 shares of our Class A common stock to Intel (described below in “Recent Developments”) had occurred January 1, 2006. (This differs from the basic pro forma per share data presented under “Summary Consolidated Financial Data,” “Selected Consolidated Financial Data” and the consolidated financial statements. That presentation includes only the incremental number of shares necessary to be sold to fund the amount of the April 2007 dividend to EMC in excess of the most recent twelve months’ earnings.)

 

   

Supplemental pro forma diluted earnings per share amounts assume (1) the issuance and sale of the Class A common stock (pursuant to the IPO and to the Intel investment) on the terms described above and (2) the consummation of the Offer assuming 100% of all the options and shares are exchanged, assuming an IPO Price of $24.00 per share (the midpoint of the range set forth on the cover of this IPO Registration Statement) and assuming a VWAP of $18.00 (which is representative of recent trading prices of EMC stock). If zero equity instruments were assumed to be exchanged, diluted income per share for these periods would be the same as the basic earnings per share.

This compares to reported basic and diluted earnings per share of $0.26 and $0.26 for the year ended December 31, 2006 and $0.12 and $0.12 for the three months ended March 31, 2007, respectively.

Recent Developments

VMware and Intel Corporation, or Intel, have had an ongoing strategic relationship. VMware’s base virtualization platform virtualizes Intel architecture. Intel Capital Corporation, or Intel Capital, the global investment arm of Intel, has agreed to invest $218.5 million in our Class A common stock at $23.00 per share, subject to the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or the HSR Act, and the satisfaction of other customary closing conditions. Upon the closing of the investment, Intel Capital will own 9.5 million shares, or approximately 12.7%, of our Class A common stock to be outstanding after this offering and approximately 2.5% of our total outstanding common stock which will then be outstanding, which shares will represent less than 1% of the combined voting power of our outstanding common stock. Pursuant to Intel Capital’s proposed investment, at the later of the closing of the investment, and the earlier of the completion of this offering and September 30, 2007, our board of directors will appoint a new board member, an Intel executive to be designated by Intel and acceptable to our board. We have also entered into an investor rights agreement with Intel pursuant to which Intel will have certain registration and other rights as a holder of our Class A common stock. See “Description of Capital Stock of VMware.” In addition, we and Intel have entered into a routine and customary collaboration partnering agreement that expresses the parties’ intent to continue to expand their cooperative efforts around joint development, marketing and industry initiatives. Intel’s investment is intended to foster strengthened intercompany collaboration towards accelerating VMware virtualization product adoption on Intel architecture and reinforcing the value of virtualization technology for customers.

 

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This investment will not cause any change to VMware’s continued operation under our rules of engagement with respect to open industry partnerships and confidentiality principles that we publish to our technology partners.

Legal and Other Limitations (page 56)

This Prospectus—Offer to Exchange is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of EMC’s common stock or VMware Class A common stock in any jurisdiction in the United States in which the offer, sale or exchange is not permitted. EMC and VMware are not aware of any jurisdiction in the United States where the making of this Offer or its acceptance would not be legal. If EMC or VMware learn of any jurisdiction where making this Offer or its acceptance would not be permitted, EMC and VMware intend to make a good faith effort to comply with the relevant law in order to enable such offer and acceptance to be permitted. If, after such good faith effort, EMC and VMware cannot comply with such law, EMC and VMware will determine whether this Offer will be made to and whether tenders will be accepted from or on behalf of persons who are holders of shares of EMC Options and EMC Restricted Stock residing in the jurisdiction.

In any jurisdiction in which the securities or blue sky laws require this Offer to be made by a licensed broker or dealer, this Offer may be made on EMC’s or VMware’s behalf by one or more registered brokers or dealers licensed under the laws of such jurisdiction.

Market Prices; Dividend Information (page 57)

EMC’s common stock is listed on the New York Stock Exchange under the symbol “EMC.” VMware Class A common stock has been approved for listing on the New York Stock Exchange under the symbol “VMW.” The closing sales price of EMC’s common stock was $18.66 on July 6, 2007, the last full trading day prior to the date of this Prospectus—Offer to Exchange. The indicative exchange ratio that would have been in effect following the official close of trading on the New York Stock Exchange on July 6, 2007, based on the average (arithmetic mean) of the VWAP of EMC’s common stock on July 5, 2007 and July 6, 2007, the last two full trading days prior to the date of this Prospectus—Offer to Exchange and assuming an IPO Price of $24.00 per share (the midpoint of the range of the estimated IPO price reflected in the IPO Registration Statement), would have provided for approximately 0.76912 shares (subject to rounding on a grant-by-grant basis) of VMware Class A common stock subject to a VMware Option or shares of VMware Restricted Stock to be exchanged for every share of EMC common stock subject to an EMC Option or share of EMC Restricted Stock accepted for exchange in the Offer.

EMC has never paid cash dividends on its common stock. VMware paid cash dividends of $190.0 million and $92.9 million to EMC in 2005 and 2004, respectively, and an $800.0 million dividend payable to EMC in the form of a note in April 2007. VMware does not anticipate declaring any cash dividends in the foreseeable future.

U.S. Federal Income Tax Consequences (page 132)

The exchange of options and restricted stock pursuant to this Offer is expected to be treated as a non-taxable exchange and the Company and the participants in the exchange are not expected to recognize income for U.S. federal income tax purposes upon the tender of EMC Options and EMC Restricted Stock and the award of VMware Options and VMware Restricted Stock. All incentive stock options that are tendered in this Offer will be exchanged for nonqualified stock options. VMware may be entitled to a tax deduction upon the exercise of the nonqualified stock options issued as VMware Options.

An optionholder who receives nonqualified stock options in VMware in exchange for incentive stock options will, with respect to such nonqualified stock options, not be eligible for the favorable tax treatment that is available to incentive stock options. That favorable tax treatment consists generally of the ability to exercise the

 

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option without an immediate tax liability for the optionee and the ability to receive capital gains tax treatment upon disposition of the underlying shares under certain circumstances.

Additional tax information with respect to the VMware Options and VMware Restricted Stock granted under the VMware 2007 Equity and Incentive Plan (“2007 Equity and Incentive Plan”) is provided under “U.S. Federal Income Tax Consequences.” This information is a brief summary only and reference is made to the Internal Revenue Code of 1986, as amended, and the regulations and interpretations issued thereunder, for a complete statement of all relevant federal tax consequences. We recommend that you consult your own tax advisor with respect to the country, state and local tax consequences of participating in this Offer.

No Appraisal Rights (page 43)

No appraisal rights are available to EMC shareholders or VMware stockholders in connection with this Offer.

Accounting Treatment of the Offer (page 43)

Accounting for the transaction will result in an incremental accounting expense for VMware equal to the value of the awards granted in the exchange over the value of the awards tendered and accepted for exchange based on a “Black-Scholes” valuation. It is expected that there will be excess fair value of the awards granted in the exchange over the fair value of the awards tendered and accepted for exchange based on a “Black-Scholes” valuation, even though the “intrinsic” value to eligible employees will remain the same (subject to the effects of rounding fractional amounts), because the “Black-Scholes” valuation takes into account the expected volatility of a stock, which is expected to be different between EMC Stock and VMware Stock. Additionally, the expected term of the options granted in the exchange may differ from the options tendered and accepted for exchange, which would result in an incremental expense. The incremental expense will be recognized by VMware over the remaining vesting period of the awards.

Comparison of Stockholder Rights (page 143)

VMware is organized under the laws of the State of Delaware, while EMC is organized under the laws of the Commonwealth of Massachusetts. Differences in the rights of a stockholder of VMware from those of a shareholder of EMC arise principally from differences in the laws of Delaware and Massachusetts and the constitutive documents of each of VMware and EMC.

The Information and Exchange Agent

The information and exchange agent for this Offer is Mellon Investor Services.

 

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Comparative Per Share Data

The following tables present certain historical per share data for EMC and certain historical per share and pro forma data for VMware.

You should read the information below together with VMware’s audited consolidated financial statements and related notes and the information under “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Prospectus—Offer to Exchange and the historical financial statements and related notes contained in EMC’s Form 10-K and Form 10-Qs that EMC has filed with the SEC and which are incorporated herein by reference. To obtain copies of these documents, see “Where You Can Find More Information about EMC and VMware” on page 162. The unaudited pro forma data below is for illustrative purposes only. The companies might have performed differently had they operated as stand-alone companies during all periods presented. Accordingly, the historical results should not be relied upon as an indicator of future performance. You should not rely on the information as being indicative of the historical results that would have been achieved or the future results of operation or financial condition that the companies will experience in the future.

EMC

 

    

Three Months Ended

March 31,

   Years Ended December 31,  
         2007            2006        2006    2005    2004    2003    2002  
     (in thousands, except per share amounts)  

Cash dividends per share

   $ —      $ —      $ —      $ —      $ —      $ —      $ —    

Net income (loss) per weighted average share:

                    

Basic

     0.15      0.12      0.54      0.48      0.36      0.22      (0.05 )

Diluted

     0.15      0.11      0.54      0.47      0.36      0.22      (0.05 )
     March 31,
    2007    
           

Book value per share

   $ 4.93                  

 

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VMware

 

    Successor Company   Predecessor Company
    Three Months Ended March 31,   Year Ended December 31,        
    (in thousands, except per share amounts)       (in thousands)
        2007             2006           2006           2005       Period from
January 9,
2004 to
December 31,
2004
 

Period
from
February 1,
2003 to
January 8,

2004

 

Year

Ended
January 31,

2003

Cash dividends per share(1)

  $ —       $ —     $ 2.41   $ 0.57   $ 0.28   $ —     $ —  

Net income per weighted average share for Class A and Class B:

             

Basic

    0.12       0.06     0.26     0.20     0.05     N/A     N/A

Diluted

    0.12       0.06     0.26     0.20     0.05     N/A     N/A
    March 31, 2007                          

Book value per share

  $ (0.55 )            
    Three Months
Ended March 31,
2007
    Year Ended
December 31,
2006
                   

Pro forma(2):

             

Cash dividends per share (1)

  $ —       $ 2.13          

Net income (loss) per weighted average share for Class A and Class B:

             

Basic

  $ 0.11     $ 0.22          

Diluted

  $ 0.11     $ 0.22          
    March 31, 2007                          

Pro forma(2):

             

Book value per share

  $ 2.36              

(1) In April 2007, VMware declared an $800,000 dividend to EMC. The dividend has been given retroactive effect as of December 31, 2006.

 

(2) The pro forma data gives effect to (i) the issuance and sale of 37,950,000 shares of our Class A common stock in the IPO (assuming the over-allotment option is exercised in full) at an assumed IPO Price of $24.00 per share (the midpoint of the range of the estimated IPO Price reflected in the IPO Registration Statement), (ii) the issuance and sale to Intel of 9,500,000 shares of our Class A common stock for proceeds of $218,500, (iii) the deduction of estimated underwriting discounts and offering expenses payable by us and (iv) the consummation of the Offer as described in this Prospectus—Offer to Exchange, assuming an IPO Price of $24.00 and a VWAP of $18.00.

 

     The consummation of the Offer will result in incremental pre-tax stock-based compensation expense based on the difference between the exchange date fair value of the options and restricted stock surrendered and the fair value of the options and restricted stock issued in return. Assuming the consummation of the Offer at an assumed initial public offering price of $24.00 per share (the midpoint of the range of the estimated IPO Price reflected in the IPO Registration Statement) and a VWAP equal to $18.00 per share (which is representative of recent trading prices of EMC stock), there will be incremental stock-based compensation of $7,700, which will be recognized over the vesting periods of the equity instruments exchanged in the Offer. The historic, pro forma adjustments and pro forma total stock-based compensation and net income for the year ended December 31, 2006 and the three months ended March 31, 2007 is as follows:

 

     Three Months Ended March 31, 2007    Year Ended December 31, 2006
     Actual    Pro forma
Adjustments
    Pro
Forma
   Actual   

Pro forma

Adjustments

    Pro
Forma

Total pre-tax stock-based compensation expense

   $ 8,720    $ 415     $ 9,135    $ 38,997    $ 4,083     $ 43,080

Net income

     41,080      (259 )     40,821      85,890      (2,552 )     83,338

 

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     The final incremental pre-tax stock based compensation expense will be determined based on the number of EMC Options and EMC Restricted Stock exchanged, the actual IPO price and the actual VWAP. The following table provides sensitivities to the pro forma basic and diluted earnings per share for differences in the number of equity instruments exchanged, the assumed IPO price and the assumed VWAP. The amounts below assume the issuance of 37,950,000 shares of Class A common stock in the IPO, the sale and issuance of 9,500,000 shares of Class A common stock to Intel and the completion of the exchange offer on the following terms:

 

     Three Months Ended March 31, 2007    Year Ended December 31, 2006
    

Pro Forma

Basic Earnings

per Share

  

Pro Forma

Diluted
Earnings per

Share

  

Pro Forma

Basic Earnings

per Share

  

Pro Forma

Diluted

Earnings per

Share

50% of EMC Options and EMC Restricted Stock are exchanged, assuming an IPO price of $24.00 per share and a VWAP of $18.00 per share

   $ 0.11    $ 0.11    $ 0.22    $ 0.22

100% of EMC Options and EMC Restricted Stock are exchanged, assuming an IPO price of $25.00 per share and a VWAP of $18.00 per share

   $ 0.11    $ 0.11    $ 0.22    $ 0.22

100% of equity instruments are exchanged, assuming an IPO of $23.00 per share and a VWAP of $20.00 per share

   $ 0.11    $ 0.11    $ 0.22    $ 0.22

 

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VMWARE’S SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read together with “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Prospectus—Offer to Exchange.

The data for the years ended December 31, 2006 and 2005 and the period from January 9, 2004 to December 31, 2004 have been derived from our audited consolidated financial statements included elsewhere in this Prospectus—Offer to Exchange. The data for the three months ended March 31, 2007 and 2006 have been derived from our unaudited consolidated financial statements included elsewhere in this Prospectus—Offer to Exchange. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and, in the opinion of management, the statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial information set forth in these statements. On January 8, 2004, all of our capital stock was purchased by EMC. The acquisition was accounted for as a purchase; accordingly, our assets and liabilities were adjusted to their fair market values. Prior to the acquisition by EMC, our fiscal year ended on January 31. In connection with the acquisition, our fiscal year end was changed to December 31 to conform to EMC’s year end. The data for the fiscal year ended January 31, 2003 was derived from the audited consolidated financial statements of our predecessor, which are not included in this Prospectus—Offer to Exchange. The data for the period from February 1, 2003 to January 8, 2004 was derived from the unaudited consolidated financial statements of our predecessor, which are not included in this Prospectus—Offer to Exchange. As a result of our acquisition by EMC and the resulting change in basis, the results of operations and financial position of our predecessor are not comparable with our results of operations and financial position following our acquisition by EMC.

Our consolidated financial statements include allocations of certain corporate functions provided to us by EMC, including general corporate expenses. These allocations were made based on estimates of effort or resources incurred on our behalf and which are considered reasonable by management. Additionally, certain other costs incurred by EMC for our direct benefit, such as rent, salaries and benefits have been included in our financial statements.

 

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The financial statements included in this Prospectus—Offer to Exchange may not necessarily reflect our results of operations, financial position and cash flows as if we had operated as a stand-alone company during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance.

 

    Successor Company     Predecessor Company  
    Three Months
Ended March 31,
    Years Ended
December 31,
   

Period from

January 9,
2004 to
December 31,

2004

   

Period from

February 1,
2003 to

January 8,

2004

   

Year
Ended
January 31,

2003

 
    2007   2006     2006(1)     2005        
    (in thousands, except per share amounts)     (in thousands)  

Summary of Operations:

             

Revenues:

             

License(2)

  $ 169,557   $ 90,300     $ 491,902     $ 287,006     $ 178,873     $ 61,980     $ 31,216  

Services(2)

    89,138     38,777       212,002       100,068       39,883       12,220       —    
                                                     

Total revenues

    258,695     129,077       703,904       387,074       218,756       74,200       31,216  

Costs of revenues:

             

Cost of license revenues(2)(3)

    20,556     12,405       59,202       40,340       32,811       3,449       5,596  

Cost of services revenues(2)(3)

    23,468     9,599       64,180       24,852       12,625       4,770       —    
                                                     
    44,024     22,004       123,382       65,192       45,436       8,219       5,596  
                                                     

Gross profit

    214,671     107,073       580,522       321,882       173,320       65,981       25,620  

Operating expenses:

             

Research and development(3)

    54,958     22,335       148,254       72,561       43,900       25,382       15,788  

Sales and marketing(3)

    86,707     42,566       238,327       124,964       59,976       23,028       12,457  

General and administrative(3)

    26,624     11,847       69,602       30,762       19,037       11,539       4,168  

In-process research and development

    —       —         3,700       —         15,200       —         —    
                                                     

Operating income (loss)

    46,382     30,325       120,639       93,595       35,207       6,032       (6,793 )

Investment income

    2,977     340       3,271       3,077       53       463       554  

Other income (expense), net

    59     (348 )     (1,363 )     (1,332 )     (110 )     (27 )     —    
                                                     

Income (loss) before taxes

    49,418     30,317       122,547       95,340       35,150       6,468       (6,239 )

Income tax provision(4)

    8,338     9,981       36,832       28,565       18,369       1,848       145  
                                                     

Income (loss) before cumulative effect of a change in accounting principle

    41,080     20,336       85,715       66,775       16,781       4,620       (6,384 )

Cumulative effect of a change in accounting principle (net of tax)

    —       175       175       —         —         —         —    
                                                     

Net income (loss)

  $ 41,080   $ 20,511     $ 85,890     $ 66,775     $ 16,781     $ 4,620     $ (6,384 )
                                                     

Net income per weighted average share, basic and diluted for Class A and Class B

  $ 0.12   $ 0.06     $ 0.26     $ 0.20     $ 0.05       N/A       N/A  

Weighted average shares, basic and diluted for Class A and Class B

    332,500     332,500       332,500       332,500       332,500       N/A       N/A  

Pro forma basic and diluted earnings per share for Class A and Class B(5)

  $ 0.11     $ 0.24          

Pro forma weighted average shares, basic and diluted for Class A and Class B

    363,366       363,366          

 

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     Successor Company     Predecessor Company  
    

March 31,

2007

    December 31,    

January 8,

2004

    January 31,
2003
 
       2006     2005     2004      
     (in thousands)     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 258,468     $ 176,134     $ 38,653     $ 36,059     $ 49,883     $ 13,686  

Working capital (deficiency)

     3,448       (55,318 )     (134,198 )     (29,166 )     12,189       6,566  

Total assets

     1,244,317       1,145,950       799,803       697,675       82,015       39,559  

Total stockholder’s equity (deficit)(6)

     (183,493 )     (230,812 )     453,829       560,282       (27,455 )     (35,566 )

(1) In 2006, VMware acquired all of the outstanding shares of Akimbi Systems, Inc. See Note B to the consolidated financial statements included elsewhere in this Prospectus—Offer to Exchange.

 

(2) The Company did not separate its revenues or cost of revenues between license and services for the year ended January 31, 2003. For purposes of this presentation, the total revenues and total cost of revenues for such period have been presented license revenues and cost of license revenues, respectively.

 

(3) Includes stock-based compensation, acquisition-related intangible amortization and capitalized software development costs amortization, and excludes capitalized software development costs, as indicated in the table below.

 

    Successor Company     Predecessor Company
    Three Months
Ended March 31,
    Year Ended
December 31,
   

Period from
January 9,
2004 to
December 31,

2004

   

Period from
February 1,
2003 to
January 8,

2004

 

Year Ended

January 31,

2003

    2007     2006     2006     2005        

Cost of license revenues

             

Stock-based compensation

  $ 36     $ 14     $ 99     $ —       $ —       $ —     $ —  

Acquisition-related intangible amortization

    5,215       5,387       21,840       23,357       25,487       —       —  

Capitalized software development costs amortization

    7,987       2,769       22,299       6,159       1,317       —       —  

Cost of services revenues

              —       —  

Stock-based compensation

    494       395       2,384       1,299       1,061       —       —  

Research and development

             

Stock-based compensation not capitalized

    6,392       2,225       26,342       14,656       10,292       —       —  

Total capitalized software development costs

    (7,599 )     (17,671 )     (43,012 )     (25,103 )     (8,155 )     —       —  

Stock-based compensation included in total capitalized software development costs above

    927       5,329       10,489       3,545       —         —       —  

Sales and marketing

             

Stock-based compensation

    2,944       1,840       12,020       5,341       4,672       —       —  

Acquisition-related intangible amortization

    577       544       2,188       1,785       —         —       —  

General and administrative

             

Stock-based compensation

    1,778       1,995       10,381       5,775       3,518       —       —  

Acquisition-related intangible amortization

    493       374       1,494       1,000       773       —       —  

 

(4) The income tax effect of stock-based compensation, acquisition-related intangible amortization, capitalized software development costs and amortization of capitalized software development costs was $5,144, $(167), $18,042, $9,567, $9,083, $— and $— for the three months ended March 31, 2007 and 2006, the years ended December 31, 2006 and 2005, the period from January 9, 2004 to December 31, 2004, the period from February 1, 2003 to January 8, 2004 and 2003, respectively.

 

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(5) Unaudited pro forma per share data gives effect, in the weighted average shares used in the calculation, to the additional 30.9 million shares, which, when multiplied by the assumed offering price of $24.00 per share (the midpoint of the range set forth in the IPO Registration Statement), and after giving effect to a pro rata allocation of offering costs, would have been required to be issued to generate proceeds sufficient to pay the portion of the $800,000 dividend declared in April 2007 (see Note M to the consolidated financial statements included elsewhere in this Prospectus—Offer to Exchange) that exceeded the most recent twelve months’ net earnings.
(6) The stockholders’ equity (deficit) as of March 31, 2007, gives retroactive effect to the $800,000 dividend paid to EMC in the form of a note in April 2007. See Note M to the financial statements.

 

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EMC’S SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

    Three Months Ended
March 31,
  Year Ended December 31,  
    2007   2006   2006(1)(2)   2005(3)   2004(4)   2003(5)   2002  
    (in thousands, except per
share amounts)
  (in thousands, except per share amounts)  

Summary of Operations:

             

Revenues

  $ 2,975,005   $ 2,550,687   $ 11,155,090   $ 9,663,955   $ 8,229,488   $ 6,236,808   $ 5,438,352  

Operating income (loss)

    341,528     302,824     1,207,758     1,480,422     1,043,993     401,157     (493,831 )

Net income (loss)

    312,607     272,456     1,223,982     1,133,165     871,189     496,108     (118,706 )

Net income (loss) per weighted average share, basic

  $ 0.15   $ 0.12   $ 0.54   $ 0.48   $ 0.36   $ 0.22   $ (0.05 )

Net income (loss) per weighted average share, diluted

  $ 0.15   $ 0.11   $ 0.54   $ 0.47   $ 0.36   $ 0.22   $ (0.05 )

Weighted average shares, basic

    2,080,039     2,350,606     2,248,431     2,382,977     2,402,198     2,211,544     2,206,294  

Weighted average shares, diluted

    2,121,826     2,400,312     2,286,304     2,432,582     2,450,570     2,237,656     2,206,294  
    March 31,   December 31,  
    2007   2006   2006(1)(2)   2005(3)   2004(4)   2003(5)   2002  
   

(in thousands, except per

share amounts)

  (in thousands, except per share amounts)  

Balance Sheet Data:

             

Working capital

  $ 3,554,022   $ 2,365,077   $ 2,639,483   $ 2,900,118   $ 1,882,226   $ 2,140,775   $ 2,175,598  

Total assets

    18,622,308     16,662,056     18,566,247     16,790,383     15,422,906     14,092,860     9,590,447  

Long-term obligations(6)

    3,571,560     113,409     3,454,665     129,994     130,844     132,634     6,963  

Stockholders’ equity

    10,339,778     12,115,191     10,325,707     12,065,430     11,523,287     10,884,721     7,226,002  

(1) In 2006, EMC adopted FAS No. 123R “Share-based Payment” which requires the expensing of stock options. As a result of adopting the new standard, Operating income decreased by $241.6 million, Net income decreased by $204.5 million, Net income per weighted average share, basic decreased by $0.10 and Net income per weighted average share, diluted decreased by $0.09.

 

(2) In 2006, EMC acquired all of the outstanding shares of RSA Security Inc., Network Intelligence Corporation, Kashya, Inc., Interlink Group, Inc., nLayers Ltd., Akimbi Systems, Inc. and Avamar Technologies, Inc. and acquired the assets of ProActivity Software Solutions Ltd..

 

(3) In 2005, EMC acquired all of the outstanding shares of System Management Arts Incorporated and Captiva Software Corporation.

 

(4) In 2004, EMC acquired all of the outstanding shares of VMware.

 

(5) In 2003, EMC acquired all of the outstanding shares of LEGATO Systems, Inc. and Documentum, Inc.

 

(6) Includes long-term convertible debt and capital leases, excluding current portion.

 

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RISK FACTORS

Risks Related to the Offer

You will be subject to different risks if you tender EMC Options or shares of EMC Restricted Stock in the Offer.

If you exchange all of your EMC Options and shares of EMC Restricted Stock, and you do not otherwise own EMC Stock, then you will no longer have an interest in EMC and its possible future growth, but instead you will have an interest in VMware and its possible future growth. As a result, you will be subject exclusively to risks associated with an investment in VMware and not risks associated with an investment in EMC.

If you exchange some, but not all, of your EMC Options or shares of EMC Restricted Stock, then you will have an interest in both EMC and its possible future growth and VMware and its possible future growth and you will be subject to the risks associated with investments in both EMC and VMware. This means that, in the future, a VMware Option that you receive in the exchange could be “out of the money” at a time when, based on the then current price of EMC Stock, the EMC Option you exchanged would have been “in the money” had you retained it. If a VMware Option that you receive in the exchange becomes “out of the money” and remains “out of the money” after it vests and until its expiration, it will then be worthless.

If you do not exchange any of your EMC Options and shares of EMC Restricted Stock, then you will continue to have an interest in EMC and its possible future growth and will be subject to the risks associated with an investment in EMC. However, if you otherwise have or receive VMware Options or shares of VMware Stock, you will continue to have an interest in VMware and its possible future growth and will be subject to the risks associated with an investment in VMware.

You will not know the exact number of VMware Options or shares of VMware Restricted Stock that you will receive in the exchange at the time by which you must decide whether or not to tender your EMC Options or shares of EMC Restricted Stock.

A final Exchange Ratio will be posted at approximately 2:30 p.m., Pacific Time, after the Offer expires on the Expiration Date. As you must make any election to tender before that time, you will not know exactly how many VMware Options or shares of VMware Restricted Stock you will receive in exchange for your tendered EMC Options or shares of EMC Restricted Stock when you make your election.

If you tender vested EMC Options, the VMware Options that you receive in exchange will have a new vesting schedule.

If you tender vested EMC Options, the VMware Options that you receive in exchange will be subject to a new vesting period, commencing on the Grant Date, which provides for full vesting, subject to continued employment, following a period equal to the shorter of twelve months or 90 days prior to the scheduled expiration of the tendered EMC Options (but if such 90th day would be prior to the date of grant, then the VMware option granted would vest on the date of grant). These VMware Options will not be vested at the Grant Date and will vest monthly in equal amounts over the vesting period. Therefore, you will lose the benefit of the time towards vesting that you accumulated in order to vest those EMC Options. Subject to the conditions of your option agreement and the terms of the applicable EMC Plan, if your employment with VMware terminates following the Grant Date, unvested VMware Options that you receive in the exchange may be forfeited.

If you tender shares of EMC Restricted Stock, the shares of VMware Restricted Stock that you receive in exchange may not be subject to the same acceleration provisions.

Except as described in the next risk factor, EMC Restricted Stock properly tendered in this Offer and not withdrawn will be exchanged for VMware Restricted Stock which will continue to be governed by the same

 

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provisions regarding timing of the lapse of restrictions and other terms and conditions of the EMC Restricted Stock for which it was exchanged, except that the certain VMware Restricted Stock, depending on the date of grant, received in this Offer will be subject to different acceleration provisions related to VMware achieving certain performance benchmarks than those applicable to the original EMC Restricted Stock award.

If you tender vested EMC Options or Restricted Stock, the VMware Options or VMware Restricted Stock that you receive in exchange will not be subject to accelerated vesting on a “change in control.”

The EMC Options and EMC Restricted Stock which you may tender in the Offer were, in certain circumstances, subject to accelerated vesting on a “change in control” of EMC. The VMware Options and VMware Restricted Stock that we will grant in the exchange will not be subject to accelerated vesting on a “change in control.” This means that, unless otherwise provided at the time, you will not receive the benefit of your VMware Options and VMware Restricted Stock becoming fully vested or unrestricted upon a “change in control.”

If you do not tender some or all of your EMC Options or shares of EMC Restricted Stock, you could lose the rights to those EMC Options and shares of EMC Restricted Stock if EMC ceases to hold shares of VMware Stock representing 50% or more of the total outstanding voting power of VMware.

EMC Options and EMC Restricted Stock that you choose not to tender for exchange, or that are not properly tendered in this Offer, will remain outstanding and retain all their current terms, including exercise price, term, vesting schedule and timing of the lapse of restrictions for EMC Restricted Stock as applicable. For so long as EMC continues to hold shares of VMware Stock representing 50% or more of the total outstanding voting power of VMware, service with VMware will be considered service with EMC for purposes of vesting and determining timing of the lapse of restrictions for EMC Restricted Stock. However, if EMC ceases to hold shares of VMware stock representing 50% or more of the total outstanding voting power of VMware, your employment will be treated as terminated for purposes of such awards, and any EMC Options and EMC Restricted Stock then held by you will be terminated in accordance with the terms of the applicable award.

If the VMware Options that you receive in the exchange vest or if the restrictions on the VMware Restricted Stock that you receive in the exchange lapse, you may be prohibited from freely selling the shares of VMware Stock that you receive from such exercise or lapse of restrictions for a period of time.

VMware has agreed with the underwriters that, as a condition to participating in this Offer, participating employees who receive VMware Options or VMware Restricted Stock must agree to not dispose of or effectively dispose of (e.g., by hedging) any restricted stock or shares of common stock underlying such options for a period of 180 days from the date the SEC declares the IPO Registration Statement effective. Therefore, you will not be able to sell or dispose of such shares, if you have any, until after that period, and there is no guarantee that the price of VMware Stock will be as high after that period as it is during that period.

Tax-Related Risks

The tax treatment of VMware Options issued pursuant to this Offer under tax law is not completely certain, and you may be required to recognize income prior to the exercise of your VMware Options or pay an additional tax in respect of such VMware Options under applicable tax laws if you participate in this Offer.

Although we do not expect it to be the case, it is possible that VMware Options issued pursuant to this Offer will be subject to taxes that are imposed under Section 409A of the Internal Revenue Code governing nonqualified deferred compensation. Therefore, if you receive VMware Options pursuant to this Offer, there is a chance you may incur taxes and penalties under Section 409A with respect to the VMware Options. In addition, if you are subject to the tax laws in more than one jurisdiction, you should be aware that tax consequences of more than one jurisdiction may apply to your VMware Options as a result of your participation in this Offer. You are advised to consult with your personal tax advisor with respect to the decision whether to participate in this Offer.

 

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The VMware Options that you receive in the exchange will not qualify as incentive stock options.

VMware Options granted in exchange for incentive stock options tendered for exchange and accepted pursuant to this Offer will not qualify as incentive stock options. You will therefore not be eligible for the favorable tax treatment that may be available for incentive stock options, which generally may be exercised without an immediate tax liability for the optionee and which allow the optionee under certain circumstances to receive capital gains tax treatment upon disposition of the underlying shares.

If you are a resident of the U.S. but subject to foreign tax laws, there may be tax and social insurance consequences that may apply to you for tendering EMC Options or shares of EMC Restricted Stock in exchange for VMware Options or shares of VMware Restricted Stock pursuant to this Offer. You should be certain to consult your own tax advisors to discuss these consequences.

Risks Relating to VMware’s Business

The virtualization products and services we sell are based on an emerging technology and therefore the potential market for our products remains uncertain.

The virtualization products and services we develop and sell are based on an emerging technology platform and our success depends on organizations and customers perceiving technological and operational benefits and cost savings associated with adopting virtualization solutions. Our relatively limited operating history and the relatively limited extent to which virtualization solutions have been currently adopted may make it difficult to evaluate our business because the potential market for our products remains uncertain. To the extent that the virtualization market develops more slowly or less comprehensively than we expect, our revenue growth rates may slow materially or our revenue may decline substantially.

We expect to face increasing competition that could result in a loss of customers, reduced revenues or decreased profit margins.

The market for our products is competitive and we expect competition to significantly intensify in the future. For example, Microsoft currently provides products that compete with some of our entry-level offerings and has announced its intention to provide products that will compete with some of our enterprise-class products in the future. We also face competition from other companies, including several recent market entrants. Existing and future competitors may introduce products in the same markets we serve or intend to serve, and competing products may have better performance, lower prices, better functionality and broader acceptance than our products. Many of our current or potential competitors also have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. This competition could result in increased pricing pressure and sales and marketing expenses, thereby materially reducing our profit margins, and could harm our ability to increase, or cause us to lose, market share. Increased competition also may prevent us from entering into or renewing service contracts on terms similar to those that we currently offer.

Some of our competitors and potential competitors supply a wide variety of products to, and have well-established relationships with, our current and prospective end users. Some of these competitors have in the past and may in the future take advantage of their existing relationships to engage in business practices that make our products less attractive to our end users. For example, Microsoft has recently implemented distribution arrangements with x86 system vendors and independent software vendors, or ISVs, related to certain of their operating systems that only permit the use of Microsoft’s virtualization format and do not allow the use of our corresponding format. Microsoft has also recently implemented pricing policies that require customers to pay additional license fees based on certain uses of virtualization technology. These distribution and licensing restrictions, as well as other business practices that may be adopted in the future by our competitors, could materially impact our prospects regardless of the merits of our products. In addition, competitors with existing relationships with our current or prospective end users could in the future integrate competitive capabilities into their existing products and make them available without additional charge.

 

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We also face potential competition from our partners. For example, third parties currently selling our products could build and market their own competing products and services or market competing products and services of third parties. If we are unable to compete effectively, our growth and our ability to sell products at profitable margins could be materially and adversely affected.

Industry alliances or consolidation may result in increased competition.

Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships with one another to offer a more comprehensive virtualization solution than they individually had offered. We expect these trends to continue as companies attempt to strengthen or maintain their market positions in the evolving virtualization infrastructure industry. Many of the companies driving this trend have significantly greater financial, technical and other resources than we do and may be better positioned to acquire and offer complementary products and technologies. The companies resulting from these possible combinations may create more compelling product offerings and be able to offer greater pricing flexibility than we can or may engage in business practices that make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or product functionality. These pressures could result in a substantial loss of customers or a reduction in our revenues.

Our operating results may fluctuate significantly, which makes our future results difficult to predict and may result in our operating results falling below expectations or our guidance, which could cause the price of our Class A common stock to decline.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. In addition, a significant portion of our quarterly sales typically occurs during the last month of the quarter, which we believe generally reflects customer buying patterns for enterprise technology. As a result, our quarterly operating results are difficult to predict even in the near term. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our common stock would likely decline substantially.

In addition, factors that may affect our operating results include, among others:

 

   

fluctuations in demand, adoption, sales cycles and pricing levels for our products and services;

 

   

changes in customers’ budgets for information technology purchases and in the timing of their purchasing decisions;

 

   

the timing of recognizing revenue in any given quarter as a result of software revenue recognition policies;

 

   

the sale of our products in the timeframes we anticipate, including the number and size of orders in each quarter;

 

   

our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer demand, certification requirements and technical requirements;

 

   

the timing of the announcement or release of products or upgrades by us or by our competitors;

 

   

our ability to implement scalable internal systems for reporting, order processing, license fulfillment, product delivery, purchasing, billing and general accounting, among other functions;

 

   

our ability to control costs, including our operating expenses;

 

   

our ability to attract and retain highly skilled employees, particularly those with relevant experience in software development and sales; and

 

   

general economic conditions in our domestic and international markets.

 

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If operating system and hardware vendors do not cooperate with us or we are unable to obtain early access to their new products, or access to certain information about their new products to ensure that our solutions interoperate with those products, our product development efforts may be delayed or foreclosed.

Our products interoperate with Windows, Linux and other operating systems and the hardware devices of numerous manufacturers. Developing products that interoperate properly requires substantial partnering, capital investment and employee resources, as well as the cooperation of the vendors or developers of the operating systems and hardware. Operating system and hardware vendors may not provide us with early access to their technology and products, assist us in these development efforts or share with or sell to us any APIs, formats, or protocols we may need. If they do not provide us with the necessary early access, assistance or proprietary technology on a timely basis, we may experience product development delays or be unable to expand our products into other areas. To the extent that software or hardware vendors develop products that compete with ours or those of EMC, they may have an incentive to withhold their cooperation, decline to share access or sell to us their proprietary APIs, protocols or formats or engage in practices to actively limit the functionality, or compatibility, and certification of our products. In addition, hardware or operating system vendors may fail to certify or support or continue to certify or support, our products for their systems. If any of the foregoing occurs, our product development efforts may be delayed or foreclosed and our business and results of operations may be adversely affected.

We rely on distributors, resellers, x86 system vendors and systems integrators to sell our products, and our failure to effectively develop, manage or prevent disruptions to our distribution channels and the processes and procedures that support them could cause a reduction in the number of end users of our products.

Our future success is highly dependent upon maintaining and increasing the number of our relationships with distributors, resellers, x86 system vendors and systems integrators. By relying on distributors, resellers, x86 system vendors and systems integrators, we may have little or no contact with the ultimate users of our products, thereby making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our products, service ongoing customer requirements, estimate end user demand and respond to evolving customer needs.

Recruiting and retaining qualified channel partners and training them in the use of our technology and product offerings requires significant time and resources. In order to develop and expand our distribution channel, we must continue to expand and improve our processes and procedures that support our channel, including our investment in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. We generally do not have long-term contracts or minimum purchase commitments with our distributors, resellers, x86 system vendors and systems integrators, and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours. Our competitors may be effective in providing incentives to existing and potential channel partners to favor products of our competitors or to prevent or reduce sales of our products. Our channel partners and x86 system vendors may choose not to offer our products exclusively or at all. Our failure to maintain and increase the number of relationships with channel partners would likely lead to a loss of end users of our products which would result in us receiving lower revenues from our channel partners. One of the Company’s distribution agreements is with Ingram Micro, which accounted for 29% of our revenues in 2006. The agreement with Ingram Micro under which the Company receives the substantial majority of its Ingram Micro revenues is terminable by either party upon 90 days’ prior written notice to the other party, and neither party has any obligation to purchase or sell any products under the agreement. The terms of this agreement between Ingram Micro and us are substantially similar to the terms of the agreements we have with other distributors, except for certain differences shipment and payment terms, indemnification obligations and product return rights. While we believe that we have in place, or would have in place by the date of any such termination, agreements with other distributors sufficient to maintain our revenues from distribution, if we were to lose Ingram Micro’s distribution services, such loss could have a negative impact on our results of operations until such time as we arrange to replace these distribution services with the services of existing or new distributors. We believe that we could replace the revenues earned from Ingram Micro’s distribution services in a relatively short period after a loss of these services and that the negative impact on our results of operations due to such a loss would be short-term.

 

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The concentration of our product sales among a limited number of distributors increases our potential credit risk and could cause significant fluctuations or declines in our product revenues.

As of December 31, 2006, approximately 28% and 11%, and as of December 31, 2005, approximately 30% and 11%, of our total accounts receivable outstanding were from two distributors. We anticipate that sales of our products to a limited number of distributors will continue to account for a significant portion of our total product revenues for the foreseeable future. The concentration of product sales among certain distributors increases our potential credit risks. One or more of these distributors could delay payments or default on credit extended to them. Any significant delay or default in the collection of significant accounts receivable could result in an increased need for us to obtain working capital from other sources, possibly on worse terms than we could have negotiated if we had established such working capital resources prior to such delays or defaults. Any significant default could result in a negative impact on our results of operations.

We are dependent on our existing management and our key development personnel, and the loss of key personnel may prevent us from implementing our business plan in a timely manner.

Our success depends largely upon the continued services of our existing management. We are also substantially dependent on the continued service of our key development personnel for product innovation. We generally do not have employment or non-compete agreements with our existing management or development personnel and, therefore, they could terminate their employment with us at any time without penalty and could pursue employment opportunities with any of our competitors. The loss of key employees could seriously harm our ability to release new products on a timely basis and could significantly help our competitors.

Because competition for our target employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our planned growth.

To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for engineers with high levels of experience in designing and developing software and senior sales executives. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in the high-technology industry, job candidates often consider the value of the stock options, restricted stock grants or other equity-based compensation they are to receive in connection with their employment. A decline in the value of our stock after the IPO could adversely affect our ability to attract or retain key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. As such, despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in countries outside of the United States. Further, with respect to patent rights, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. Even if patents are issued from our patent applications, which is not certain, they may be contested, circumvented or invalidated in the future. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future. In addition, we rely on contractual and license agreements with third parties in connection with their use of our products and technology. There is no

 

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guarantee that such parties will abide by the terms of such agreements or that we will be able to adequately enforce our rights, in part because we rely on “click-wrap” and “shrink-wrap” licenses in some instances.

Detecting and protecting against the unauthorized use of our products, technology and proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition, and there is no guarantee that we would be successful. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to protecting their technology or intellectual property rights than do we. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property, which could result in a substantial loss of our market share.

We provide access to our hypervisor and other selected source code to partners, which creates additional risk that our competitors could develop products that are similar or better than ours.

Our success and ability to compete depend substantially upon our internally developed technology, which is incorporated in the source code for our products. We seek to protect the source code, design code, documentation and other written materials for our software, under trade secret and copyright laws. However, we have chosen to provide access to our hypervisor and other selected source code to more than 35 of our partners for co-development, as well as for open APIs, formats and protocols. Though we generally control access to our source code and other intellectual property, and enter into confidentiality or license agreements with such partners, as well as with our employees and consultants, our safeguards may be insufficient to protect our rights to our technology. Our protective measures may be inadequate, especially because we may not be able to prevent our partners, employees or consultants from violating any agreements or licenses we may have in place or abusing their access granted to our source code. Improper disclosure or use of our source code could help competitors develop products similar to or better than ours.

Claims by others that we infringe their proprietary technology could force us to pay damages or prevent us from using certain technology in our products.

Third parties could claim that our products or technology infringe their proprietary rights. This risk may increase as the number of products and competitors in our market increases and overlaps occur. In addition, to the extent that we gain greater visibility and market exposure as a public company, we face a higher risk of being the subject of intellectual property infringement claims. Any claim of infringement by a third party, even one without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any of these events could seriously harm our business, operating results and financial condition. Third parties may also assert infringement claims against our customers and channel partners. Any of these claims could require us to initiate or defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because we generally indemnify our customers and channel partners from claims of infringement of proprietary rights of third parties in connection with the use of our products. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or channel partners, which could materially reduce our income.

Our use of “open source” software could negatively affect our ability to sell our products and subject us to possible litigation.

A significant portion of the products or technologies acquired, licensed or developed by us may incorporate so-called “open source” software, and we may incorporate open source software into other products in the future.

 

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Such open source software is generally licensed by its authors or other third parties under open source licenses, including, for example, the GNU General Public License, the GNU Lesser General Public License, “Apache-style” licenses, “Berkeley Software Distribution,” “BSD-style” licenses and other open source licenses. We monitor our use of open source software in an effort to avoid subjecting our products to conditions we do not intend. Although we believe that we have complied with our obligations under the various applicable licenses for open source software that we use such that we have not triggered any such conditions, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, and therefore the potential impact of these terms on our business is somewhat unknown and may result in unanticipated obligations regarding our products and technologies. For example, we may be subjected to certain conditions, including requirements that we offer our products that use the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and/or that we license such modifications or derivative works under the terms of the particular open source license.

If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations. If our defenses were not successful, we could be subject to significant damages, enjoined from the distribution of our products that contained the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours.

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.

The timing of our revenue is difficult to predict. Our sales efforts involve educating our customers about the use and benefit of our products, including their technical capabilities and potential cost savings to an organization. Customers typically undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle, which typically lasts several months, and may last a year or longer. We spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our results could fall short of public expectations and our business, operating results and financial condition could be materially adversely affected.

Our current research and development efforts may not produce significant revenues for several years, if at all.

Developing our products is expensive. Our investment in research and development may not result in marketable products or may result in products that take longer to generate revenues, or generate less revenues, than we anticipate. Our research and development expenses were $148.3 million, or 21.1% of our total revenues in 2006, and $72.6 million, or 18.7% of our total revenues in 2005. Our future plans include significant investments in software research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not receive significant revenues from these investments for several years, if at all.

We may not be able to respond to rapid technological changes with new solutions and services offerings, which could have a material adverse effect on our sales and profitability.

The markets for our software solutions are characterized by rapid technological changes, changing customer needs, frequent new software product introductions and evolving industry standards. The introduction of

 

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third-party solutions embodying new technologies and the emergence of new industry standards could make our existing and future software solutions obsolete and unmarketable. We may not be able to develop updated products that keep pace with technological developments and emerging industry standards and that address the increasingly sophisticated needs of our customers or that interoperate with new or updated operating systems and hardware devices or certify our products to work with these systems and devices, and there is no assurance that any of our new offerings would be accepted in the marketplace. Significant reductions in server-related costs or the rise of more efficient infrastructure management software could also affect demand for our software solutions. As a result, we may not be able to accurately predict the lifecycle of our software solutions, and they may become obsolete before we receive the amount of revenues that we anticipate from them. If any of the foregoing events were to occur, our ability to retain or increase market share in the virtualization software market could be materially adversely affected.

Our ability to sell our products is dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services could have a material adverse effect on our sales and results of operations.

Once our products are integrated within our customers’ hardware and software systems, our customers may depend on our support organization to resolve any issues relating to our products. A high level of support is critical for the successful marketing and sale of our products. If we or our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support, our ability to sell our products to existing customers would be adversely affected, and our reputation with potential customers could be harmed. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. As a result, our failure to maintain high-quality support and services, or to adequately assist our channel partners in providing high-quality support and services, could result in customers choosing to use our competitors’ products instead of ours in the future.

Adverse economic conditions or reduced information technology spending may adversely impact our revenues.

Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers. The purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. Weak economic conditions, or a reduction in information technology spending even if economic conditions improve, would likely adversely impact our business, operating results and financial condition in a number of ways, including by lengthening sales cycles, lowering prices for our products and services and reducing unit sales.

We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, operating results and financial condition.

In the future we may seek to acquire other businesses, products or technologies. However, we may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, or may be viewed negatively by customers, financial markets or investors. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses and adversely impact our business, operating results and financial condition. Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt. We have limited historical experience with the integration of acquired companies. There can be no assurance that we will be able to manage the integration of acquired businesses effectively or be able to retain and motivate key personnel from these businesses. Any difficulties we encounter in the integration process could divert management from day-to-day responsibilities, increase our expenses and have a material adverse effect on our business, financial condition and results of operations.

 

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Operating in foreign countries subjects us to additional risks that may harm our ability to increase or maintain our international sales and operations.

In 2006, we derived approximately 44% of our revenue from customers outside the United States. We have sales and technical support personnel in numerous countries worldwide. We expect to continue to add personnel in additional countries. Our international operations subject us to a variety of risks, including:

 

   

the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

 

   

difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;

 

   

difficulties in delivering support, training and documentation in certain foreign markets;

 

   

tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;

 

   

increased exposure to foreign currency exchange rate risk;

 

   

reduced protection for intellectual property rights, including reduced protection from software piracy in some countries; and

 

   

difficulties in maintaining appropriate controls relating to revenue recognition practices.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales.

Our products are highly technical and may contain errors, which could cause harm to our reputation and adversely affect our business.

Our products are highly technical and complex and, when deployed, have contained and may contain errors, defects or security vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by customers. Any errors, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty, including claims relating to changes to our products made by our channel partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.

Our independent registered public accounting firm identified a material weakness in the design and operation of our internal controls as of December 31, 2006, which, if not remedied, could result in material misstatements in our financial statements in future periods.

Our independent registered public accounting firm reported to our board of directors a material weakness in the design and operation of our internal controls as of December 31, 2006 related to the capitalization of software development costs. A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The material weakness resulted from a lack of adequate internal controls to ensure the timely identification and accumulation of costs once a project reaches technological

 

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feasibility under applicable accounting standards. The consolidated financial statements included in this Prospectus—Offer to Exchange reflect adjustments to properly state our capitalized software development costs for the periods included therein. Our independent registered public accounting firm was not engaged to audit the effectiveness of our internal control over financial reporting as of December 31, 2006. If such an evaluation had been performed, additional material weaknesses may have been identified.

Under Section 404 of the Sarbanes-Oxley Act of 2002 and the current rules of the Securities and Exchange Commission, or SEC, our management and auditors will be required to evaluate and report on the effectiveness of our internal control over financial reporting as of December 31, 2008. We believe we have a plan in place to remediate the material weakness by implementing additional formal policies, procedures and processes, hiring additional accounting personnel and increasing management review and oversight over the financial statement close process. We believe we had adequate controls in place at June 30, 2007 to remediate the material weakness and that there have not been and will not be any material costs associated with such remediation. If our remediation is insufficient to address the material weakness, or if additional material weaknesses in our internal controls are discovered in the future, we may fail to meet our future reporting obligations, our financial statements may contain material misstatements and the price of our common stock may decline.

If we fail to implement an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock.

We are preparing for compliance with Section 404 by addressing the existing material weakness in our internal controls and by strengthening, assessing and testing our system of internal controls. In particular, we believe we will need to increase the number of our accounting personnel and improve our processes and systems to ensure timely and accurate reporting of our financial results in accordance with reporting obligations as a stand-alone public company following the IPO. However, the continuous process of strengthening our internal controls and complying with Section 404 is expensive and time-consuming, and requires significant management attention. We cannot be certain that these measures will ensure that we will remediate the existing material weakness or implement adequate control over our financial processes and reporting. In addition, we have identified certain processes that need to be automated in order to ensure that we have effective internal control over financial reporting. If we are not able to automate these processes in a timely fashion, we will not be able to ensure compliance. Furthermore, if we rapidly grow our business, our internal controls will become more complex and we will require significantly more resources to ensure our internal controls overall remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover additional material weaknesses, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, future non-compliance with Section 404 could subject us to a variety of administrative sanctions, including the suspension or delisting of our common stock from the exchange on which we decide to list and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price.

If we fail to manage future growth effectively, we may not be able to meet our customers’ needs or be able to meet our future reporting obligations.

We have expanded our operations significantly since inception and anticipate that further significant expansion will be required. This future growth, if it occurs, will place significant demands on our management, infrastructure and other resources. To manage any future growth, we will need to hire, integrate and retain highly skilled and motivated employees. We will also need to continue to improve our financial and management controls, reporting and operational systems and procedures. If we do not effectively manage our growth we may not be able to meet our customers’ needs, thereby adversely affecting our sales, or be able to meet our future reporting obligations.

 

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Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems, such as computer viruses or terrorism, which could result in delays or cancellations of customer orders or the deployment of our products.

Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, could have a material adverse impact on our business, operating results and financial condition. In addition, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism or war could cause disruptions in our or our customers’ business or the economy as a whole. To the extent that such disruptions result in delays or cancellations of customer orders, or the deployment of our products, our revenues would be adversely affected.

Changes to financial accounting standards may affect our reported financial results and cause us to change our business practices.

We prepare our financial statements to conform with generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the SEC and various other bodies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the interpretation of our current practices may adversely affect our reported financial results or the way we conduct our business.

Risks Related to VMware’s Relationship with EMC

As long as EMC controls us, your ability to influence matters requiring stockholder approval will be limited.

After the IPO, EMC will own 32,500,000 shares of Class A common stock and all 300,000,000 shares of Class B common stock, representing approximately 89% of the total outstanding shares of common stock or 99% of the voting power of outstanding common stock. The holders of our Class A common stock and our Class B common stock have identical rights, preferences and privileges except with respect to voting and conversion rights, the election of directors, certain actions that require the consent of holders of Class B common stock and other protective provisions as set forth in this Prospectus—Offer to Exchange. Holders of our Class B common stock will be entitled to 10 votes per share of Class B common stock, and the holders of our Class A common stock will be entitled to one vote per share of Class A common stock. The holders of Class B common stock, voting separately as a class, are entitled to elect 80% of the total number of directors on our board of directors which we would have if there were no vacancies on our board of directors at the time. Subject to any rights of any series of preferred stock to elect directors, the holders of Class A common stock and the holders of Class B common stock, voting together as a single class, are entitled to elect our remaining directors, which at no time will be less than one director. If EMC transfers shares of our Class B common stock to any party other than a successor-in-interest or a subsidiary of EMC (other than in a distribution to its stockholders under Section 355 of the Internal Revenue Code of 1986, as amended, or the Code, or in transfers following such a distribution), those shares would automatically convert into Class A common stock. For so long as EMC or its successor-in-interest beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of outstanding voting stock, EMC will be able to elect all of the members of our board of directors.

In addition, until such time as EMC or its successor-in-interest beneficially owns shares of our common stock representing less than a majority of the votes entitled to be cast by the holders of outstanding voting stock, EMC will have the ability to take stockholder action without the vote of any other stockholder and without having to call a stockholder meeting, and investors in the IPO will not be able to affect the outcome of any stockholder vote during this period. As a result, EMC will have the ability to control all matters affecting us, including:

 

   

the composition of our board of directors and, through our board of directors, any determination with respect to our business plans and policies;

 

   

any determinations with respect to mergers, acquisitions and other business combinations;

 

   

our acquisition or disposition of assets;

 

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our financing activities;

 

   

certain changes to our certificate of incorporation;

 

   

changes to the agreements providing for our transition to becoming a public company;

 

   

corporate opportunities that may be suitable for us and EMC;

 

   

determinations with respect to enforcement of rights we may have against third parties, including with respect to intellectual property rights;

 

   

the payment of dividends on our common stock; and

 

   

the number of shares available for issuance under our stock plans for our prospective and existing employees.

Our certificate of incorporation and the master transaction agreement also contain provisions that require that as long as EMC beneficially owns at least 20% or more of the outstanding shares of our common stock, the prior affirmative vote or written consent of EMC (or its successor-in-interest) as the holder of the Class B common stock is required (subject in each case to certain exceptions) in order to authorize us to:

 

   

consolidate or merge with any other entity;

 

   

acquire the stock or assets of another entity in excess of $100 million;

 

   

issue any stock or securities except to our subsidiaries or pursuant to the IPO or our employee benefit plans;

 

   

dissolve, liquidate or wind us up;

 

   

declare dividends on our stock;

 

   

enter into any exclusive or exclusionary arrangement with a third party involving, in whole or in part, products or services that are similar to EMC’s; and

 

   

amend, terminate or adopt any provision inconsistent with certain provisions of our certificate of incorporation or bylaws.

If EMC does not provide any requisite consent allowing us to conduct such activities when requested, we will not be able to conduct such activities and, as a result, our business and our operating results may be harmed.

EMC’s voting control and its additional rights described above may discourage transactions involving a change of control of us, including transactions in which holders of our Class A common stock might otherwise receive a premium for your shares over the then-current market price. EMC is not prohibited from selling a controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your shares of Class A common stock. Accordingly, shares of Class A common stock may be worth less than they would be if EMC did not maintain voting control over us or have the additional rights described above.

In the event EMC is acquired or otherwise undergoes a change of control, any acquiror or successor will be entitled to exercise the voting control and contractual rights of EMC, and may do so in a manner that could vary significantly from that of EMC.

By participating in the Exchange Offer, you will be deemed to have notice of and have consented to the provisions of our certificate of incorporation and the master transaction agreement with respect to the limitations that are described above.

Our business and that of EMC overlap, and EMC may compete with us, which could reduce our market share.

EMC and we are both IT infrastructure companies providing products related to storage management, back-up, disaster recovery, security, system management and automation, provisioning and resource management. There can be no assurance that EMC will not engage in increased competition with us in the future. In addition, the intellectual

 

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property agreement that we will enter into with EMC will provide EMC the ability to use our source code and intellectual property, which, subject to limitations, it may use to produce certain products that compete with ours. EMC’s rights in this regard extend to its majority owned subsidiaries, which could include joint ventures where EMC holds a majority position and one or more of our competitors hold minority positions.

EMC could assert control over us in a manner which could impede our growth or our ability to enter new markets or otherwise adversely affect our business. Further, EMC could utilize its control over us to cause us to take or refrain from taking certain actions, including entering into relationships with channel, technology and other marketing partners, enforcing our intellectual property rights or pursuing corporate opportunities or product development initiatives that could adversely affect our competitive position, including our competitive position relative to that of EMC in markets where we compete with them. In addition, EMC maintains significant partnerships with certain of our competitors, including Microsoft.

EMC’s competition in certain markets may affect our ability to build and maintain partnerships.

Our existing and potential partner relationships may be affected by our relationship with EMC. We partner with a number of companies that compete with EMC in certain markets in which EMC participates. EMC’s majority ownership in us might affect our ability to effectively partner with these companies. These companies may favor our competitors because of our relationship with EMC.

EMC competes with certain of our significant channel, technology and other marketing partners, including IBM and Hewlett-Packard. Pursuant to our certificate of incorporation and other agreements that we will have with EMC, EMC may have the ability to impact our relationship with our partners that compete with EMC, which could have a material adverse effect on our results of operations or our ability to pursue opportunities which may otherwise be available to us.

Our historical financial information as a business segment of EMC may not be representative of our results as an independent public company.

The historical financial information we have included in this Prospectus—Offer to Exchange does not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent entity during the historical periods presented. The historical costs and expenses reflected in our consolidated financial statements include an allocation for certain corporate functions historically provided by EMC, including tax, accounting, treasury, legal and human resources services. The historical financial information is not necessarily indicative of what our results of operations, financial position, cash flows or costs and expenses will be in the future. We have not made pro forma adjustments to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our transition to becoming a public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with being a publicly traded, stand-alone company. For additional information, see “VMware’s Selected Consolidated Financial Data,” “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and notes thereto.

Our ability to operate our business effectively may suffer if we are unable to cost-effectively establish our own administrative and other support functions in order to operate as a stand-alone company after the expiration of our transitional services agreements with EMC.

As a subsidiary of EMC, we have relied on administrative and other resources of EMC to operate our business. In connection with the IPO, we will enter into various service agreements to retain the ability for specified periods to use these EMC resources. See “VMware’s Certain Relationships and Related Person Transactions.” These services may not be provided at the same level as when we were a wholly owned subsidiary of EMC, and we may not be able to obtain the same benefits that we received prior to the IPO. These services may not be sufficient to meet our needs, and after our agreements with EMC expire, we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently have with

 

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EMC. We will need to create our own administrative and other support systems or contract with third parties to replace EMC’s systems. In addition, we have received informal support from EMC which may not be addressed in the agreements we will enter into with EMC; the level of this informal support may diminish as we become a more independent company. Any failure or significant downtime in our own administrative systems or in EMC’s administrative systems during the transitional period could result in unexpected costs, impact our results and/or prevent us from paying our suppliers or employees and performing other administrative services on a timely basis. See “VMware’s Certain Relationships and Related Person Transactions—Relationship with EMC Corporation” for a description of these services.

After the IPO, we will be a smaller company relative to EMC, which could result in increased costs because of a decrease in our purchasing power and difficulty maintaining existing customer relationships and obtaining new customers.

Prior to the IPO, we were able to take advantage of EMC’s size and purchasing power in procuring goods, technology and services, including insurance, employee benefit support and audit and other professional services. We are a smaller company than EMC, and we cannot assure you that we will have access to financial and other resources comparable to those available to us prior to the IPO. As a stand-alone company, we may be unable to obtain office space, goods, technology and services at prices or on terms as favorable as those available to us prior to the IPO, which could increase our costs and reduce our profitability. Our future success depends on our ability to maintain our current relationships with existing customers, and we may have difficulty attracting new customers.

In order to preserve the ability for EMC to distribute its shares of our Class B common stock on a tax-free basis, we may be prevented from pursuing opportunities to raise capital, to effectuate acquisitions or to provide equity incentives to our employees, which could hurt our ability to grow.

Beneficial ownership of at least 80% of the total voting power and 80% of each class of nonvoting capital stock is required in order for EMC to effect a tax-free spin-off of VMware or certain other tax-free transactions. We have agreed that for so long as EMC or its successor-in-interest continues to own greater than 50% of the voting control of our outstanding common stock, we will not knowingly take or fail to take any action that could reasonably be expected to preclude EMC’s or its successor-in-interest’s ability to undertake a tax-free spin-off. Additionally, under our certificate of incorporation and the master transaction agreement, we must obtain the consent of EMC or its successor-in-interest as the holder of our Class B common stock to issue stock or other VMware securities excluding pursuant to employee benefit plans, which could cause us to forgo capital raising or acquisition opportunities that would otherwise be available to us. See “VMware’s Certain Relationships and Related Person Transactions—Relationship with EMC Corporation.” As a result, we may be precluded from pursuing certain growth initiatives.

Third parties may seek to hold us responsible for liabilities of EMC, which could result in a decrease in our income.

Third parties may seek to hold us responsible for EMC’s liabilities. Under our master transaction agreement with EMC, EMC will indemnify us for claims and losses relating to liabilities related to EMC’s business and not related to our business. However, if those liabilities are significant and we are ultimately held liable for them, we cannot assure you that we will be able to recover the full amount of our losses from EMC.

Although we intend to enter into a new tax sharing agreement with EMC under which our tax liabilities effectively will be determined as if we were not part of any consolidated, combined or unitary tax group of EMC Corporation and/or its subsidiaries, we nonetheless could be held liable for the tax liabilities of other members of these groups.

We have historically been included in EMC’s consolidated group for U.S. federal income tax purposes, as well as in certain consolidated, combined or unitary groups that include EMC Corporation and/or certain of its

 

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subsidiaries for state and local income tax purposes. We intend to enter into a new tax sharing agreement with EMC that will become effective upon consummation of the IPO. Pursuant to the new tax sharing agreement, we and EMC generally will make payments to each other such that, with respect to tax returns for any taxable period in which we or any of our subsidiaries are included in EMC’s consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of EMC Corporation and/or its subsidiaries, the amount of taxes to be paid by us will be determined, subject to certain adjustments, as if we and each of our subsidiaries included in such consolidated, combined or unitary group filed our own consolidated, combined or unitary tax return.

We have been included in the EMC consolidated group for U.S. federal income tax purposes for periods in which EMC owned at least 80% of the total voting power and value of our outstanding stock and expect to be included in such consolidated group following the IPO. Each member of a consolidated group during any part of a consolidated return year is jointly and severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency thereon. Similarly, in some jurisdictions, each member of a consolidated, combined or unitary group for state, local or foreign income tax purposes is jointly and severally liable for the state, local or foreign income tax liability of each other member of the consolidated, combined or unitary group. Accordingly, for any period in which we are included in the EMC consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of EMC Corporation and/or its subsidiaries, we could be liable in the event that any income tax liability was incurred, but not discharged, by any other member of any such group.

Our inability to resolve favorably any disputes that arise between us and EMC with respect to our past and ongoing relationships may result in a significant reduction of our revenue.

Disputes may arise between EMC and us in a number of areas relating to our ongoing relationships, including:

 

   

labor, tax, employee benefit, indemnification and other matters arising from our separation from EMC;

 

   

employee retention and recruiting;

 

   

business combinations involving us;

 

   

our ability to engage in activities with certain channel, technology or other marketing partners;

 

   

sales or dispositions by EMC of all or any portion of its ownership interest in us;

 

   

the nature, quality and pricing of services EMC has agreed to provide us;

 

   

business opportunities that may be attractive to both EMC and us; and

 

   

product or technology development or marketing activities which may require the consent of EMC.

We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.

The agreements we will enter into with EMC may be amended upon agreement between the parties. While we are controlled by EMC, we may not have the leverage to negotiate amendments to these agreements if required on terms as favorable to us as those we would negotiate with an unaffiliated third party.

Some of our directors and executive officers own EMC common stock, restricted shares of EMC common stock or options to acquire EMC common stock and hold management positions with EMC, which could cause conflicts of interests that result in our not acting on opportunities we otherwise may have.

Some of our directors and executive officers own EMC common stock and options to purchase EMC common stock. In addition, some of our directors are executive officers and/or directors of EMC. Ownership of

 

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EMC common stock, restricted shares of EMC common stock and options to purchase EMC common stock by our directors and officers after the IPO and the presence of executive officers or directors of EMC on our board of directors could create, or appear to create, conflicts of interest with respect to matters involving both us and EMC that could have different implications for EMC than they do for us. Provisions of our certificate of incorporation and the master transaction agreement address corporate opportunities that are presented to our directors or officers that are also directors or officers of EMC. We cannot assure you that the provisions in our certificate of incorporation will adequately address potential conflicts of interest or that potential conflicts of interest will be resolved in our favor or that we will be able to take advantage of corporate opportunities presented to individuals who are officers or directors of both us and EMC. As a result, we may be precluded from pursuing certain growth initiatives.

EMC’s ability to control our board of directors may make it difficult for us to recruit high-quality independent directors.

So long as EMC beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of outstanding voting stock, EMC can effectively control and direct our board of directors. Further, the interests of EMC and our other stockholders may diverge. Under these circumstances, persons who might otherwise accept our invitation to join our board of directors may decline.

We will be a “controlled company” within the meaning of the New York Stock Exchange rules, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

After the completion of the IPO, EMC will own more than 50% of the total voting power of our common shares and we will be a “controlled company” under the New York Stock Exchange corporate governance standards. As a controlled company, certain exemptions under the New York Stock Exchange standards free us from the obligation to comply with certain New York Stock Exchange corporate governance requirements, including the requirements:

 

   

that a majority of our board of directors consists of independent directors;

 

   

that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

for an annual performance evaluation of the nominating and governance committee and compensation committee.

While we will voluntarily cause our Compensation and Corporate Governance Committee to initially be composed entirely of independent directors in compliance with the requirements of the New York Stock Exchange, we are not required to maintain the independent composition of the committee. As a result of our use of the “controlled company” exemptions, you will not have the same protection afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

Intel’s ownership relationship with us and the membership of an Intel representative on our board of directors may create actual or potential conflicts of interest.

Under a pending investment by Intel Capital, Intel will have an ownership relationship with us and a representative of Intel is expected to become a member of our board of directors. This relationship may create actual or potential conflicts of interest and the best interest of Intel may not reflect your best interests. The terms of this relationship are discussed in the section entitled “Recent Developments” and “Certain Relationships and Related

Person Transactions.”

 

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Risks Related to our Class A common stock

Our stock price may be volatile.

Prior to the IPO, our Class A common stock has not been traded in a public market. The estimated IPO Price for the shares was determined by negotiations between us and the representatives of the underwriters in the IPO and may not be indicative of prices that will prevail in the trading market. The trading price of our Class A common stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this Prospectus—Offer to Exchange. These broad market and industry factors may decrease the market price of our Class A common stock, regardless of our actual operating performance. The stock market in general and technology companies in particular also have experienced extreme price and volume fluctuations. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

No public market for our common stock currently exists and an active trading market may not develop or be sustained following the IPO.

Prior to the IPO, there has been no public market for our common stock. An active trading market may not develop following the closing of the IPO or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares VMware Options or VMware Restricted Stock received in the exchange at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares underlying VMware Options or VMware Restricted Stock received in the exchange. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which in turn could materially adversely affect our business.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

We will have broad discretion in the use of a significant part of the net proceeds from the IPO and may not use them effectively.

Our management currently intends to use the net proceeds from the IPO in the manner described in “VMware’s Use of Proceeds” and will have broad discretion in the application of a significant part of the net proceeds from the IPO. The failure by our management to apply these funds effectively could affect our ability to continue to develop and market our products.

Substantial future sales of our Class A common stock in the public market could cause our stock price to fall.

Sales of substantial amounts of our Class A common stock in the public market after the IPO, or the perception that these sales could occur, could cause the market price of our Class A common stock to decline and impede our ability to raise capital through the issuance of additional equity securities. Upon completion of the IPO, we will have 75,000,000 shares of Class A common stock outstanding, and EMC will own 32,500,000

 

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shares of our Class A common stock and 300,000,000 shares of our Class B common stock, representing approximately 89% of the outstanding shares of our common stock. All shares sold in the IPO will be freely transferable, subject, in the case of affiliates, to applicable volume and other restrictions under Rule 144 under the Securities Act, and subject to the lock-up arrangements described in “Shares Eligible for Future Sale.” Our Class B common stock may be converted into Class A common stock at any time. EMC has no contractual obligation to retain these shares, other than the lock-up arrangement. In addition, EMC has the right to cause us to register the sale of its shares of our common stock under the Securities Act. Registration of these shares under the Securities Act would result in these shares, other than shares purchased by our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.

If EMC elects to convert its shares of Class B common stock into Class A common stock, an additional 300,000,000 shares of Class A common stock will be available for sale after the period of 180 days from date of the IPO Registration Statement (subject to extension in certain circumstances), subject to volume and other restrictions as applicable under Rule 144 of the Securities Act.

Immediately after the IPO, we intend to file a registration statement on Form S-8 under the Securities Act covering the shares of Class A common stock issuable under outstanding options and the shares of Class A restricted stock which will be outstanding after the IPO and 80,000,000 shares reserved for future issuance under our 2007 Equity and Incentive Plan. This registration statement will automatically become effective upon filing. Shares registered under this registration statement will be available for sale in the open market, subject to the lock-up arrangements described above, as well as any stock option vesting requirements and the lapsing of restrictions on restricted stock, although sales of shares held by our affiliates will be limited by Rule 144 volume limitations. Sales of substantial amounts of these securities could cause our stock price to fall.

Intel Capital’s pending investment in our Class A common stock may not be consummated, and as a result, our stock price may be negatively impacted.

The closing of Intel Capital’s purchase of 9.5 million shares of our Class A common stock is subject to expiration of the applicable waiting period under the HSR Act and the satisfaction of other customary closing conditions, including the absence of a material adverse change. We cannot assure you that the investment will close. The IPO is not conditioned on the closing of the Intel Capital investment, and if the Intel Capital investment does not close, our stock price may be negatively impacted.

The difference in the voting rights of our Class A and our Class B common stock may harm the value and liquidity of our Class A common stock.

The rights of the holders of Class A and Class B common stock are identical, except with respect to voting, the election of directors, conversion, certain actions that require the consent of holders of Class B common stock and other protective provisions as set forth in this prospectus. The holders of Class B common stock shall be entitled to 10 votes per share, as well as certain consent and other rights associated with the Class B common stock, and the holders of our Class A common stock shall be entitled to one vote per share. The holders of Class B common stock will also be entitled to elect at least 80% of our board of directors, and, subject to any rights of any series or class of preferred stock to elect directors, the holders of Class A common stock and Class B common stock, voting together as a single class, will entitled to elect the remaining directors, which will never be less than one. The difference in the right to elect directors and the voting rights of our Class A and Class B common stock could harm the value of the Class A common stock to the extent that any current or future investor in our common stock ascribes value to the rights of the holders of our Class B common stock to elect at least 80% of our board of directors or to 10 votes per share. The existence of two classes of common stock could result in less liquidity for either class of common stock than if there were only one class of our common stock. See “Description of Capital Stock of VMware” for a description of our common stock and rights associated with it.

 

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Delaware law and our certificate of incorporation and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws will have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

   

the division of our board of directors into three classes, with each class serving for a staggered three-year term, which would prevent stockholders from electing an entirely new board of directors at any annual meeting;

 

   

the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;

 

   

following a distribution of Class B common stock by EMC to its stockholders, the restriction that a beneficial owner of 10% or more of our Class B common stock may not vote in any election of directors unless such person or group also owns at least an equivalent percentage of Class A common stock or obtains approval of our board of directors prior to acquiring beneficial ownership of at least 5% of Class B common stock;

 

   

the prohibition of cumulative voting in the election of directors or any other matters, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

   

the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

 

   

the ability of the board of directors to issue, without stockholder approval, up to 100,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock; and

 

   

in the event that EMC or its successor-in-interest no longer owns shares of our common stock representing at least a majority of the votes entitled to be cast in the election of directors, stockholders may not act by written consent and may not call special meetings of the stockholders.

Until such time as EMC or its successor-in-interest ceases to beneficially own 20% or more of the outstanding shares of our common stock, the affirmative vote or written consent of the holders of a majority of the outstanding shares of the Class B common stock will be required to:

 

   

amend certain provisions of our bylaws or certificate of incorporation;

 

   

make certain acquisitions or dispositions;

 

   

declare dividends, or undertake a recapitalization or liquidation;

 

   

adopt any stockholder rights plan, “poison pill” or other similar arrangement;

 

   

approve any transactions that would involve a merger, consolidation, restructuring, sale of substantially all of our assets or any of our subsidiaries or otherwise result in any person or entity obtaining control of us or any of our subsidiaries; or

 

   

undertake certain other actions.

In addition, we have elected to apply the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price of our shares of common stock being lower than it would be without these provisions.

 

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As a public company we will incur additional costs and face increased demands on our management.

As a public company, we will incur significant legal, accounting and other expenses that we did not directly incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as the rules subsequently implemented by the SEC and the New York Stock Exchange, have required changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of becoming a public company, we intend to add independent directors, create additional board committees and adopt certain policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Furthermore, our management will have increased demands on its time in order to ensure we comply with public company reporting requirements and the compliance requirements of the Sarbanes-Oxley Act of 2002, as well as the rules subsequently implemented by the SEC and the applicable stock exchange requirements of the New York Stock Exchange.

After the completion of the IPO, we do not expect to declare any dividends in the foreseeable future.

After the completion of the IPO, we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

 

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FORWARD-LOOKING STATEMENTS

This Prospectus—Offer to Exchange and the documents incorporated by reference herein may include forward-looking statements that reflect VMware’s and EMC’s current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words, such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks “ “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this Prospectus —Offer to Exchange are based upon VMware’s or EMC’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by VMware, EMC or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause VMware’s or EMC’s actual results to differ materially from those indicated in these statements. We believe that these factors include but are not limited to those described under “Risk Factors” in this Prospectus—Offer to Exchange. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included, as to EMC, or incorporated by reference in this Prospectus—Offer to Exchange. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we may have anticipated. Any forward-looking statements you read in this Prospectus—Offer to Exchange reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to VMware’s and EMC’s operations, results of operations, financial condition, growth strategy and liquidity. You should specifically consider the factors identified in this Prospectus—Offer to Exchange and in EMC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 that could cause VMware’s or EMC’s actual results to differ before making an investment decision.

 

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THE TRANSACTION

This section of the Prospectus—Offer to Exchange describes material aspects of the proposed transaction. While we believe that the description covers the material terms of the transaction, this summary may not contain all of the information that is important to you. You should carefully read this entire Prospectus—Offer to Exchange and the other documents to which we refer for a more complete understanding of the transaction.

Background of the Offer

Historically, EMC has awarded EMC Options and restricted stock to its employees, including VMware employees, as a key component of employee compensation to align the interests of employees and shareholders of EMC and further enhance shareholder value. Because following the IPO, VMware will have the ability to more directly tie VMware employee incentives to VMware employee results and provide VMware employees a more meaningful incentive to enhance VMware shareholder value, EMC and VMware are undertaking this Offer to allow eligible employees of VMware to exchange their EMC-related equity compensation for VMware equity compensation in a manner designed to generally retain the terms and intrinsic value of the tendered EMC securities. This Offer is being undertaken for compensatory purposes as a means to retain and motivate VMware employees and encourage such employees to remain in the service of VMware by allowing VMware employees to share directly in the value they create at VMware from the date of the VMware IPO.

Reasons for the Offer

EMC and VMware are making this Offer to eligible employees for compensatory purposes. Stock options are generally intended to help align the interests of a company’s employees with the interests of the company’s stockholders. After the IPO, VMware Stock will trade publicly and, accordingly, we intend to grant VMware Options and VMware Restricted Stock to Company employees on a going forward basis. Since employees of VMware and its subsidiaries have historically received EMC Options and EMC Restricted Stock, we believe it will aid the Company’s efforts to encourage ownership of the Company by personnel whose long-term employment and efforts are considered important to the Company’s continued progress, by allowing eligible employees to exchange their EMC Options and EMC Restricted Stock for VMware Options and VMware Restricted Stock. The VMware board of directors believes that ownership by employees of VMware and its subsidiaries of VMware Options or VMware Restricted Stock received in this Offer will serve as an effective tool to encourage stock option and restricted stock recipients to act in the VMware stockholders’ interest by enabling the option recipients to have an economic stake in the Company’s success.

Effects of the Offer

Eligible employees who exchange all of their EMC Options and shares of EMC Restricted Stock, and do not otherwise own EMC Stock, will no longer have an interest in EMC and its possible future growth, but instead will have an interest in VMware and its possible future growth. As a result, such eligible employees will be subject exclusively to risks associated with an investment in VMware and not risks associated with an investment in EMC.

Eligible employees who exchange some, but not all, of their EMC Options or shares of EMC Restricted Stock will have an interest in both EMC and its possible future growth and VMware and its possible future growth and will be subject to the risks associated with investments in both EMC and VMware.

Eligible employees who do not exchange any of their EMC Options and shares of EMC Restricted Stock will continue to have an interest in EMC and its possible future growth and will be subject to the risks associated with an investment in EMC. However, such eligible employees who otherwise have or receive VMware Options or shares of VMware Stock, will continue to have an interest in VMware and its possible future growth and will be subject to the risks associated with an investment in VMware.

 

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Impact of the Offer

As of June 30, 2007, there were approximately 1,900 employees who would be eligible to participate in the Offer. Based on an assumed IPO Price of $24.00 per share (the midpoint of the range reflected in the IPO Registration Statement) and an assumed VWAP of $18.00 (which is representative of recent trading prices of EMC stock), a maximum of approximately 13.6 million shares of our Class A class common stock underlying options or restricted stock awards granted subject to the Offer would be issued, pursuant to the Offer, if all eligible employees tendered all of their EMC Options and EMC Restricted Stock. We estimate that the unamortized fair value of the exchanged awards will be approximately $103.6 million, which will be recognized over the remaining vesting periods.

To assist eligible employees in understanding the potential impact of the Offer on earnings per share, we note that supplemental pro forma basic and supplemental pro forma diluted earnings per share amounts would have been $0.22 and $0.22 for the year ended December 31, 2006 and $0.11 and $0.11 for the three months ended March 31, 2007, respectively, assuming the following:

 

   

Supplemental pro forma basic and diluted earnings per share data assume actual pre-tax income is reduced by $415,000 and $4,083,000 for the three months ended March 31, 2007 and the year ended December 31, 2006, respectively, and net income is reduced by $259,000 and $2,552,000 for the three months ended March 31, 2007 and the year ended December 31, 2006, respectively, to reflect the estimated impact of the respective period’s amortization of the incremental stock compensation expense resulting from the Offer.

 

   

Supplemental pro forma basic weighted average shares assume the issuance and sale of the full 37,950,000 shares of our Class A common stock (assuming the over-allotment option is exercised in full) had occurred January 1, 2006. Supplemental pro forma basic weighted average shares also assumes the issuance and sale of 9,500,000 shares of our Class A common stock to Intel had occurred January 1, 2006. (This differs from the basic pro forma per share data presented under “Summary Consolidated Financial Data,” “Selected Consolidated Financial Data” and the consolidated financial statements. That presentation includes only the incremental number of shares necessary to be sold to fund the amount of the April 2007 dividend to EMC in excess of the most recent twelve month’s earnings.)

 

   

Supplemental pro forma diluted earnings per share amounts assume (1) the issuance and sale of the Class A common stock (pursuant to the IPO and to the Intel investment) on the terms described above and (2) the consummation of the Offer assuming 100% of all the options and shares are exchanged, assuming an IPO Price of $24.00 per share (the midpoint of the range set forth on the cover of this IPO Registration Statement) and assuming a VWAP of $18.00 (which is representative of recent trading prices of EMC stock). If zero equity instruments were assumed to be exchanged, diluted income per share for these periods would be the same as the basic earnings per share.

This compares to reported basic and diluted earnings per share of $0.26 and $0.26 for the year ended December 31, 2006 and $0.12 and $0.12 for the three months ended March 31, 2007, respectively.

VMware’s Equity Capitalization Following the IPO and the Offer

We are currently a wholly owned subsidiary of EMC, and following the IPO and this Offer, EMC will continue to be our controlling stockholder. Following the IPO, we will have two classes of authorized common stock: Class A common stock and Class B common stock. EMC, will own 32,500,000 shares of Class A common stock and all 300,000,000 shares of Class B common stock, representing approximately 89% of our total outstanding shares of common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting, the election of directors, conversion, certain actions that require the consent of holders of Class B common stock and other protective provisions as set forth in this Prospectus—Offer to Exchange. The holders of Class B common stock shall be entitled to 10 votes per share and the holders

 

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of Class A common stock shall be entitled to one vote per share. The holders of Class B common stock, voting separately as a class, are entitled to elect 80% of the total number of the directors on our board of directors which we would have if there were no vacancies on our board of directors at the time. Subject to any rights of any series or class of preferred stock to elect directors, the holders of Class A common stock and the holders of Class B common stock, voting together as a single class, are entitled to elect the remaining directors on our board of directors, which at no time will be less than one director. Therefore, EMC will hold approximately 99% of the combined voting power of our outstanding common stock upon completion of the IPO and this Offer. VMware’s equity capitalization will not change as a result of this Offer.

No Appraisal Rights

No appraisal rights are available to EMC’s shareholders or VMware stockholders in connection with this Offer.

Accounting Treatment

Accounting for the transaction will result in an incremental accounting expense for VMware equal to the value of the awards granted in the exchange over the value of the awards tendered and accepted for exchange based on a “Black-Scholes” valuation. It is expected that there will be excess fair value of the awards granted in the exchange over the fair value of the awards tendered and accepted for exchange based on a “Black-Scholes” valuation, even though the “intrinsic” value to eligible employees will remain the same (subject to the effects of rounding fractional amounts), because the “Black-Scholes” valuation takes into account the expected volatility of a stock, which is expected to be different between EMC Stock and VMware Stock. Additionally, the expected term of the options granted in the exchange may differ from the options tendered and accepted for exchange, which would result in an incremental expense. The incremental expense will be recognized by VMware over the remaining vesting period of the awards.

Tax Treatment

The exchange of options and restricted stock pursuant to this Offer is expected to be treated as a non-taxable exchange, and the Company and the participants in the exchange are not expected to recognize income for U.S. federal income tax purposes upon the tender of EMC Options and EMC Restricted Stock and the award of VMware Options and VMware Restricted Stock. All incentive stock options that are tendered in this Offer will be exchanged for nonqualified stock options. VMware may be entitled to a tax deduction upon the exercise of the nonqualified stock options issued as VMware Options.

An optionholder who receives nonqualified stock options in VMware in exchange for incentive stock options will, with respect to such nonqualified stock options, not be eligible for the favorable tax treatment that is available to incentive stock options. That favorable tax treatment consists generally of the ability to exercise the option without an immediate tax liability for the optionee and the ability to receive capital gains tax treatment upon disposition of the underlying shares under certain circumstances.

We have been included in the EMC consolidated group for U.S. federal income tax purposes for periods in which EMC owned at least 80% of the total voting power and value of our outstanding stock and expect to be included in such consolidated group following this Offer. Each member of a consolidated group during any part of a consolidated return year is jointly and severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency thereon. Similarly, in some jurisdictions, each member of a consolidated, combined or unitary group for state, local or foreign income tax purposes is jointly and severally liable for the state, local or foreign income tax liability of each other member of the consolidated, combined or unitary group. Accordingly, for any period in which we are included in the EMC consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of EMC Corporation and/or its subsidiaries, we could be liable in the event that any income tax liability was incurred, but not discharged, by any other member of any such group.

 

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THE EXCHANGE OFFER

Terms of the Exchange Offer

Eligible Employees

Upon the terms and subject to the conditions of this Offer, EMC and VMware are offering to grant VMware Options and VMware Restricted Stock under the 2007 Equity and Incentive Plan in exchange for outstanding EMC Options and EMC Restricted Stock, respectively, that are properly tendered and not withdrawn by eligible employees in accordance with “The Exchange Offer—Proper Tender of EMC Options and EMC Restricted Stock” (and not validly withdrawn in accordance with “The Exchange Offer—Withdrawal Rights”) before the Expiration Date and accepted for exchange by EMC and VMware. The exchange will be on the basis of the Exchange Ratio determined as described herein. All outstanding EMC Options and shares of EMC Restricted Stock held by eligible employees are eligible to be tendered for exchange in this Offer.

You will be an “eligible employee” and thus be eligible to tender your EMC Options and EMC Restricted Stock for exchange and cancellation, and to receive VMware Options and VMware Restricted Stock, respectively, pursuant to this Offer if, on July 9, 2007, the date this Offer commenced, you were a employee of VMware or one of its subsidiaries in the United States and you continue to be an employee of VMware in the United States or one of its subsidiaries through the Expiration Date and the Grant Date. Employees employed in foreign countries, consultants, former employees and retirees are also not eligible employees.

If, on the Grant Date, an employee of VMware or one of its subsidiaries in the United States who was an eligible employee as of the date this Offer commenced is no longer, or at any time during the period of this Offer was not, an employee of VMware or one of its subsidiaries in the United States for any reason, including retirement, termination, voluntary resignation, layoff, death or long-term disability, that person will not be an eligible employee and will not be eligible to tender EMC Options or EMC Restricted Stock for exchange and cancellation, or to receive VMware Options or VMware Restricted Stock, pursuant to this Offer. An employee of VMware or one of its subsidiaries in the United States who is on an authorized leave of absence and is otherwise, as of the date this Offer is commenced and through the Grant Date, an eligible employee, will be an eligible employee for purposes of this Offer. Leave (including vacation and short-term leave) is considered “authorized” if it was approved in accordance with policies or practices of VMware, as determined by VMware in its sole discretion.

Tendering EMC Options or EMC Restricted Stock and receiving VMware Options or VMware Restricted Stock in exchange pursuant to this Offer does not confer upon you the right to remain an employee of the Company or one of its subsidiaries. The terms of your employment with VMware or one of its subsidiaries remain unchanged. We cannot guarantee or provide you with any assurance that you will not be subject to involuntary termination or that you will otherwise remain in the employ of the Company or one of its subsidiaries until the Grant Date or thereafter. If you voluntarily terminate your employment with VMware or one of its subsidiaries in the United States, or if VMware or one of its subsidiaries in the United States terminates your employment for any reason, before the Grant Date, even if you tendered EMC Options or EMC Restricted Stock for exchange in this Offer prior to such termination, such tender will not be accepted and such EMC Options or EMC Restricted Stock will not be exchanged. Your tendered EMC Options and EMC Restricted Stock will be treated as if they had not been tendered, and you will not receive any VMware Options or VMware Restricted Stock in exchange for such tendered EMC Options and EMC Restricted Stock. Your EMC Options and EMC Restricted Stock will be subject to all their current terms, including exercise price, term, vesting schedule and timing of the lapse of restrictions for EMC Restricted Stock, as applicable. For so long as EMC continues to hold shares of VMware Stock representing 50% or more of the total outstanding voting power of VMware, service with VMware or one of its subsidiaries will be considered service with EMC for purposes of vesting and determining timing of the lapse of restrictions for EMC Restricted Stock. However, from such time as EMC ceases to hold shares of VMware stock representing 50% or more of the total outstanding voting power of VMware, any EMC Options and EMC Restricted Stock then held by you will be terminated in accordance with the terms of the applicable award.

 

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Eligible Options and Restricted Stock

EMC and VMware are accepting for tender by eligible employees EMC Options and EMC Restricted Stock granted under the under the EMC Corporation 1993 Stock Option Plan; the EMC Corporation 2003 Stock Plan; the Akimbi Systems, Inc. 2004 Stock Incentive Plan; the EMC Corporation 1985 Stock Option Plan; the Legato Systems, Inc. 1995 Stock Option/Stock Issuance Plan; the EMC Corporation 2001 Stock Option Plan; the Documentum, Inc. 1996 Equity Incentive Plan; the VMware, Inc. 1998 Stock Plan; and the Dantz Development Corporation Amended and Restated 1997 Equity Incentive Plan (collectively, the “EMC Plans”). If you have chosen to receive this Prospectus—Offer to Exchange by mail, the Letter of Transmittal enclosed with this Prospectus—Offer to Exchange includes a list of your EMC Options and EMC Restricted Stock as of June 27, 2007. In addition, you can at any time access current information about your options and restricted stock by going to www.ubs.com/onesource/emc.

In order to tender an eligible option, you must tender all outstanding EMC Options under the award relating to that eligible option. EMC and VMware are not accepting partial tenders of particular option awards. For example, if you hold an option pursuant to an award of options to purchase 1,000 shares of EMC Stock at an exercise price of $9.75 per share of which 500 shares are vested, you must tender the option for all 1,000 shares in its entirety; you cannot tender only a portion of the options subject to a particular award and retain the remainder. On the other hand, if you have an option to purchase 1,000 shares of EMC Stock at an exercise price of $11.19 per share and another option to purchase 2,000 shares of EMC Stock at an exercise price of $12.85 per share, you may choose to tender for exchange all (but not less than all) of the outstanding options under either of the option awards or all of the options under both of the option awards or choose not to tender any of your EMC Options. Similarly, if you tender shares of EMC Restricted Stock from a particular restricted stock award, you must tender all of the EMC Restricted Stock under that award. For example, if you were granted 700 shares of EMC Restricted Stock and later 300 shares of EMC Restricted Stock, you may choose to tender for exchange all (but not less than all) of the shares of EMC Restricted Stock under either of the restricted stock awards or both of the restricted stock awards, or choose not to tender any of your EMC Restricted Stock.

You may not tender EMC Options for shares of VMware Restricted Stock or exchange shares of EMC Restricted Stock for VMware Options. This Offer is to exchange EMC Options for VMware Options only and EMC Restricted Stock for VMware Restricted Stock only. However, if you are an eligible employee and you hold both EMC Options and EMC Restricted Stock, you may, subject to the terms and conditions of this Offer, tender your EMC Options for VMware Options or your EMC Restricted Stock for VMware Restricted Stock.

An option award that has been fully exercised, or any portion of a particular option award that has been exercised, is no longer outstanding and thus is not eligible to be tendered for exchange in this Offer. Any shares of EMC Restricted Stock that you were granted that are no longer restricted are not eligible to be tendered for exchange in this Offer. If you have previously partially exercised an eligible option award, you can still tender for exchange the remaining unexercised portion of an eligible option award. However, if you tender any portion of an option award, you must tender all of the EMC Options remaining under that award.

All VMware Options and shares of VMware Restricted Stock granted pursuant to this Offer will be granted under the 2007 Equity and Incentive Plan and will be subject to the same terms and conditions as set forth in the EMC Plans at the time of the grant of the tendered EMC Option or EMC Restricted Stock, except that (1) vested EMC Options properly tendered in this Offer and not withdrawn will be exchanged for unvested VMware Options subject to a new vesting period, commencing on the Grant Date, which provides for, subject to continued employment, monthly vesting in equal amounts over a period equal to the shorter of twelve months or 90 days prior to the scheduled expiration of the tendered EMC Options (but if such 90th day would be prior to the date of grant, then the VMware option granted would vest on the date of grant), (2) VMware Options issued in the exchange will not be “incentive stock options,” notwithstanding whether the tendered EMC Option was an “incentive stock option,” (3) VMware Options and VMware Restricted Stock issued in the exchange will not be subject to accelerated vesting on a “change in control,” and (4) certain EMC Restricted Stock properly tendered in this Offer and not withdrawn will be exchanged for VMware Restricted

 

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Stock that will be subject to different acceleration provisions related to VMware achieving certain performance benchmarks than those applicable to the original EMC Restricted Stock award. Specifically with regard to restricted stock, VMware Restricted Stock granted in exchange for EMC Restricted Stock originally granted between May 17, 2005 and March 6, 2006, which you may know as an LTIP 1 grant, will not fully accelerate if VMware Revenue (as defined in the applicable restricted stock agreement) is equal to $1 billion and VMware EBITDA (as defined in the applicable restricted stock agreement) is equal to $300 million at the end of any fiscal year, but rather, if those goals are met for VMware’s 2007 fiscal year, such grants will accelerate monthly in equal amounts such that all such grants will be not be subject to restrictions on December 31, 2008. Also, VMware Restricted Stock granted in exchange for EMC Restricted Stock originally granted between June 6, 2006 and October 26, 2006, which you may know as an LTIP 2 grant, will not be subject to acceleration of an additional 10% of shares subject to such grant if at the end of any VMware fiscal year VMware Revenue (as defined in the applicable restricted stock agreement) is equal to $1 billion and VMware EBITDA (as defined in the applicable restricted stock agreement) is equal to $300 million, but will continue to be subject to the other acceleration terms of the applicable restricted stock agreement. VMware Restricted Stock granted in exchange for EMC Restricted Stock other than LTIP 1 and LTIP 2 grants will not be subject to new or different acceleration terms. Except as described above, the VMware Options and VMware Restricted Stock you receive in the exchange will continue to be subject to the terms of the original EMC option or restricted stock agreement under which they were granted except that, unless the context may otherwise require, references to “EMC” in the applicable award agreement shall instead be deemed to be references to “VMware.”

For all VMware Options and shares of VMware Restricted Stock granted pursuant to this Offer, the recipient’s vesting and exercise rights will be contingent on the recipient’s continued employment through the applicable vesting dates and, except as specifically noted above, subject to the provisions of the applicable EMC Plan and the applicable option or restricted stock agreement.

VMware intends to file a registration statement on Form S-8 with respect to the VMware Stock underlying the VMware Options and the VMware Restricted Stock. However, VMware has agreed with the underwriters of the IPO that, as a condition to participating in the Offer, participating employees who receive VMware Options or VMware Restricted Stock must agree to not dispose of or effectively dispose of (e.g., by hedging) any shares of the VMware Stock underlying these options for a period of 180 days from the date the SEC declares the IPO Registration Statement effective.

As of June 30, 2007, there were approximately 12.3 million shares of EMC Stock underlying EMC Options eligible to be tendered in this Offer. These options had a weighted average exercise price of $11.79 and a weighted average remaining life of 7.6 years. As of June 30, 2007, there were approximately 5.8 million shares of EMC Restricted Stock eligible to be tendered in this Offer with a weighted average remaining vesting period of 1.4 years.

Number of VMware Options and Restricted Stock to be Issued in Exchange

If you validly tender EMC Options or EMC Restricted Stock for exchange and cancellation, and such options are accepted and cancelled, pursuant to this Offer, the number of VMware Options or shares of VMware Restricted Stock you will be entitled to receive will be determined by the Exchange Ratio, which is based on the VWAP and the IPO Price. The Exchange Ratio will be determined in a manner intended to provide for an exchange that maintains the intrinsic value of EMC Options or EMC Restricted Stock tendered and VMware Options or VMware Restricted Stock granted (subject to the effects of rounding fractional amounts). The Exchange Ratio will be expressed as a fraction, the numerator of which will be the VWAP and the denominator of which will be the IPO Price. Therefore, if the VWAP is less than the IPO Price, the Exchange Ratio will be less than 1, and, although the intrinsic value of your exchanged equity will be maintained, you will receive a fewer number of VMware Options or shares of VMware Restricted Stock than the number of EMC Options or shares of EMC Restricted Stock you exchanged. For example, if the VWAP were $18.00 (which is representative of recent trading prices of EMC stock) and the IPO Price were $24.00 per share (the midpoint of the range set

 

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forth in the IPO Registration Statement), the Exchange Ratio would be 0.75, and if you tendered 1,000 EMC Options, you would receive 750 VMware Options, with the same aggregate intrinsic value in exchange. The VWAP is the average (arithmetic mean) of the volume-weighted average price per share of EMC Stock on the New York Stock Exchange over the final two full trading days prior to the Expiration Date during the period beginning at 6:30 a.m., Pacific Time (or such other time as is the official open of trading on the New York Stock Exchange), and ending at 1:00 p.m., Pacific Time (or such other time as is the official close of trading on the New York Stock Exchange). The VWAP will be calculated using the default criteria for the function known as “Bloomberg VWAP” of the AQR function for EMC common stock on the automated quote and analytical system distributed by Bloomberg Financial LP. The calculation of the VWAP is such that if the Expiration Date is August 6, 2007, the VWAP would be calculated using the average (arithmetic mean) of the volume-weighted average price per share of EMC Stock on August 2, 2007 and the volume-weighted average price per share of EMC Stock on August 3, 2007. The IPO Price will be determined by negotiations between the representatives of the underwriters in the IPO and us.

 

   

For each EMC Option you exchange, you will be entitled to receive a non-qualified VMware Option to purchase a number of shares of VMware Stock equal to the number of shares underlying the EMC Option that you exchange multiplied by the Exchange Ratio. For each EMC Option you exchange, the per share exercise price of each VMware Option you will be entitled to receive will be the exercise price of such EMC Option divided by the Exchange Ratio with the result rounded up to the nearest whole cent. The calculation of the per share exercise price of the VMware Options you will be entitled to receive will be done on an award-by-award basis, such that if you exchange EMC Options with different per share exercise prices from each other, the per share exercise prices of the VMware Options that you will be entitled to receive will also be different from each other.

An example of how the exchange of options would work is as follows (some numbers have been rounded): Assume that EMC shares have a VWAP of $14 per share. Also assume that you exchange an option for 200 shares of EMC Stock at a per share exercise price of $11.50. The aggregate spread (the difference between the aggregate exercise price you would have to pay to exercise the option and the value of the EMC Stock that you would receive upon exercising the option) on your option would be $500. If the initial public offering price per share of VMware Stock were to be $24 per share, the number of shares subject to the new VMware Option that you would receive if you exchanged your option would be the product of 200 and the Exchange Ratio, which in this case would be approximately 0.583 (the VWAP ($14) divided by the IPO Price ($24)). Therefore, after rounding fractional results as described below, you would receive VMware Options for 116 shares. The per share exercise price of the VMware Options would be the exercise price of the EMC Option ($11.50) divided by the Exchange Ratio (approximately 0.583), for a per share exercise price of $19.72. The aggregate spread in the new VMware Option would thus be $496.48 (such amount does not equal $500 due to rounding down for fractional shares subject to VMware Options and rounding up of the exercise price).

 

   

For each share of EMC Restricted Stock you exchange, you will be entitled receive VMware Restricted Stock equal to the number of shares of VMware Restricted Stock that you exchange multiplied by the Exchange Ratio.

An example of how the exchange of restricted stock would work under the same set of assumptions as to the VWAP and the IPO Price set forth above is as follows (some numbers have been rounded): If you exchanged an EMC Restricted Stock award with respect to 200 shares of EMC Stock (with a value immediately prior to the initial public offering of $2800), the number of shares would be multiplied by the Exchange Ratio, resulting in a restricted stock award, after rounding fractional results as described below, of 116 VMware shares with a value of $27.84 (such amount does not equal $28.00 due to rounding down of the number of shares of VMware Restricted Stock).

VMware Option awards and VMware Restricted Stock awards will be rounded down to the nearest whole share on an award-by-award basis and, accordingly, neither VMware Options for fractional shares nor fractional shares of VMware Restricted Stock will be granted, and you will not be compensated for any fractional shares

 

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you otherwise would have received. If you tender an EMC Option grant that is partially vested, you will receive two VMware Option grants, one for the vested and outstanding portion and one for the unvested and outstanding portion. Those grants may have different vesting terms from each other.

Of the outstanding EMC Options held by eligible employees as of June 30, 2007, the maximum number of shares of EMC Stock underlying those options which could be tendered for exchange pursuant to this Offer is approximately 12.3 million. Assuming that EMC shares have a VWAP of $18.00 (which is representative of recent trading prices of EMC Stock) and that the IPO Price is $24.00 per share (the midpoint of the estimated range set forth in the IPO Registration Statement), the maximum number of shares of VMware Stock underlying the VMware Options which could be granted pursuant to this Offer is approximately 9,225,000. All VMware executive officers are eligible to participate in this Offer and hold collectively as a group EMC Options to purchase approximately 1,532,079 shares of EMC Stock, representing approximately 12.5% of the maximum number of shares of EMC Stock underlying EMC Options held by eligible employees as of June 30, 2007 which could be tendered for exchange pursuant to this Offer. These EMC Options, if validly tendered for exchange in this Offer, with the assumed VWAP and IPO Price above, would be exchanged for VMware Options to purchase approximately 1,149,058 shares of VMware Stock.

As of June 30, 2007, there were a maximum of approximately 5.8 million outstanding shares of EMC Restricted Stock held by eligible employees which could be tendered for exchange pursuant to this Offer. Assuming the same VWAP and IPO Price as above, the maximum number of shares of VMware Restricted Stock which could be granted pursuant to this Offer is approximately 4,350,000. VMware’s executive officers hold collectively as a group approximately 540,416 shares of EMC Restricted Stock, representing approximately 9.3% of the maximum number of shares of EMC Restricted Stock held by eligible employees as of June 30, 2007 which could be tendered for exchange pursuant to this Offer. These shares of EMC Restricted Stock, if validly tendered for exchange in this Offer, with the assumed VWAP and IPO Price above, would be exchanged for approximately 405,310 shares of VMware Restricted Stock.

The below table sets forth an example of what the Exchange Ratio would be at a range of different hypothetical VWAPs and IPO Prices. The Exchange Ratio represents the portion of a share of VMware Stock subject to a VMware Option that you would receive for each share of EMC Stock subject to an EMC Option that you exchange and, alternatively, the portion of a share of VMware Restricted Stock that you would receive for each share of EMC Restricted Stock that you exchange.

EXCHANGE RATIO EXAMPLE*

 

 

     VWAP
IPO
Price
   $15    $16    $17    $18    $19    $20
$26    0.5769    0.6154    0.6538    0.6923    0.7308    0.7692
$25    0.6000    0.6400    0.6800    0.7200    0.7600    0.8000
$24    0.6250    0.6667    0.7083    0.7500    0.7917    0.8333
$23    0.6522    0.6957    0.7391    0.7826    0.8261    0.8696
$22    0.6818    0.7273    0.7727    0.8182    0.8636    0.9091

* Numbers have been rounded.

During this Offer certain updated pricing-related information will be available to all eligible employees of VMware and its subsidiaries via the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware. Each day, beginning on July 10, 2007, and ending on August 1, 2007 (unless the Offer is extended), at no later than 2:30 p.m., Pacific Time, the Election Site for the EMC—VMware

 

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Exchange Program will be updated to show what the VWAP would be if that day were the final trading day prior Expiration Date and what the Exchange Ratio would be based on that VWAP (assuming that the IPO Price was equal to the midpoint of the range of the estimated initial offering price reflected in the IPO Registration Statement). You may also contact the information and exchange agent, Mellon Investor Services, at 1-888-313-1479 (from within the U.S.) or at 201-680-6672 (from outside the U.S.) to obtain this information.

During the last two full trading days of this Offer, August 2 and August 3, 2007 (unless this Offer is extended), the Election Site for the EMC—VMware Exchange Program will display the ongoing calculation of the actual VWAP and the Exchange Ratio as it then stands. Thus, on the next-to-last full trading day during this Offer (the first day of the calculation period), the actual daily volume-weighted average price of EMC common stock during the elapsed portion of that first day will be used in the calculation and, on the final full trading day, the calculations will use the average of the daily VWAP of EMC common stock for the next-to-last full trading day and the actual daily volume-weighted average price during the elapsed portion of that final full trading day. The Election Site for the EMC—VMware Exchange Program will be updated every hour during the final two-day calculation period. The information set forth on the Election Site for the EMC—VMware Exchange Program may not be an accurate predictor of what the Exchange Ratio will be as finally determined. The information set forth on Election Site for the EMC—VMware Exchange Program is only a part of the information you should use to determine whether to tender your EMC Options or EMC Restricted Stock. You should also consider the information set forth in this Prospectus—Offer to Exchange and the other documents to which we refer, as well as the historic trading prices of EMC Stock, the historic volatility of EMC Stock and historic volatility of other companies in the sectors in which VMware and EMC operate.

Neither EMC’s nor VMware’s boards of directors makes any recommendation as to whether you should tender some or all of your EMC Options or shares of EMC Restricted Stock for exchange in the Offer, nor is any person authorized to make any such recommendation. Depending on the VWAP and the IPO Price, the number of VMware Options or shares of VMware Restricted Stock that you receive in exchange may be higher or lower than the estimates that appear in this Prospectus—Offer to Exchange and the exercise price of the VMware Options that you receive may be higher or lower than the exercise price of your current EMC Options or the estimates that appear in this Prospectus—Offer to Exchange. Your decision as to whether or not to tender your EMC Options or EMC Restricted Stock for exchange may be affected by the particular EMC Options (and option agreements) and shares of EMC Restricted Stock (and restricted stock agreements) which you hold.

Expiration Date

This Offer is scheduled to expire at 11:00 a.m., Pacific Time, on August 6, 2007, unless EMC and VMware, in our discretion, extend the period of time during which this Offer will remain open. EMC’s and VMware’s current intention is to extend this Offer if the IPO Registration Statement or the Exchange Offer Registration Statement will not be declared effective prior to the expiration of this Offer. See “The Exchange Offer—Extension; Termination; Amendment” for a description of VMware’s rights to extend, delay, terminate or amend this Offer.

Lock-Up

VMware has agreed with the underwriters that, as a condition to participating in this Offer, participating employees who receive VMware Options or VMware Restricted Stock must agree to not dispose of or effectively dispose of (e.g., by hedging) any restricted stock or shares of the common stock underlying these options for a period of 180 days from the date the SEC declares the IPO Registration Statement effective. If you make an election to tender online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or by completing and signing the enclosed Letter of Transmittal, you must agree to the lock-up restrictions, which are set forth on the accompanying Letter of Transmittal, or your tender will not be accepted. Therefore, you will not be able to sell or dispose of restricted stock or shares underlying options received in the exchange until after the 180-day period.

 

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Fractional Shares

Awards of VMware Options and VMware Restricted Stock will be calculated according to the Exchange Ratio and will be rounded down to the nearest whole share on an award-by-award basis. Accordingly, VMware Options and VMware Restricted Stock will not be issued for fractional shares, and you will not be compensated for any fractional shares you otherwise would have received.

Certain Differences between the EMC Plans and the 2007 Equity and Incentive Plan

Please see the description of the 2007 Equity and Incentive Plan set forth under “VMware’s—Compensation Discussion and Analysis—2007 Equity and Incentive Plan” in this Prospectus—Offer to Exchange. While VMware Options and VMware Restricted Stock granted in exchange for EMC Options and EMC Restricted Stock granted under the EMC Plans will be granted under the 2007 Equity and Incentive Plan, the 2007 Equity and Incentive Plan allows VMware to grant the VMware Options and VMware Restricted Stock with the same terms and conditions as set forth in the EMC Plans, which VMware intends to do, except that (1) vested EMC Options properly tendered in this Offer and not withdrawn will be exchanged for unvested VMware Options subject to a new vesting period, commencing on the Grant Date, which provides for, subject to continued employment, monthly vesting in equal amounts over a period equal to the shorter of twelve months or 90 days prior to the scheduled expiration of the tendered EMC Options (but if such 90th day would be prior to the date of grant, then the VMware option granted would vest on the date of grant), (2) VMware Options issued in the exchange will not be “incentive stock options,” notwithstanding whether the tendered EMC Option was an “incentive stock option,” (3) VMware Options and VMware Restricted Stock issued in the exchange will not be subject to accelerated vesting on a “change in control,” and (4) certain EMC Restricted Stock properly tendered in this Offer and not withdrawn will be exchanged for VMware Restricted Stock that will be subject to different acceleration provisions related to VMware achieving certain performance benchmarks than those applicable to the original EMC Restricted Stock award. Except as described above, the VMware Options and VMware Restricted Stock you receive in the exchange will continue to be subject to the terms of the original EMC option or restricted stock agreement under which they were granted except that, unless the context may otherwise require, references to “EMC” in the applicable award agreement shall instead be deemed to be references to “VMware.”

Proper Tender of EMC Options and EMC Restricted Stock

To validly tender your options or restricted stock for exchange in this Offer, you must either make your election to tender online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or complete and sign the enclosed Letter of Transmittal in accordance with its instructions, and send it to the information and exchange agent, by mail to Mellon Investor Services, Reorganization Department, PO Box 3301, South Hackensack, NJ 07606; by hand to Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310; or by overnight delivery to Mellon Investor Services, Reorganization Department, 480 Washington Blvd., Mail Stop - Reorg, Jersey City, NJ 07310. Such election must be made through the Election Site for the EMC—VMware Exchange Program or received by the information and exchange agent, Mellon Investor Services, prior to 11:00 a.m., Pacific Time, on the Expiration Date.

If you made an election to tender options or restricted stock on the Election Site for the EMC—VMware Exchange Program or submitted a Letter of Transmittal and you want to withdraw some or all of the EMC Options or EMC Restricted Stock you marked for tender on the Election Site for the EMC—VMware Exchange Program or on that Letter of Transmittal, you may, prior to 11:00 a.m., Pacific Time, on the Expiration Date, withdraw your tender of such EMC Options or shares of EMC Restricted Stock by changing your election to tender online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or delivering to the information and exchange agent, Mellon Investor Services, prior to the time this Offer expires a Notice of Withdrawal (in the form included with this Prospectus—Offer to Exchange) indicating which EMC Options or shares of EMC Restricted Stock you are withdrawing. If you wish to tender for exchange additional EMC Options

 

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or EMC Restricted Stock that you had not marked for tender on your previous Letter of Transmittal, you may, prior to 11:00 a.m., Pacific Time, on the Expiration Date, elect to tender for exchange those additional EMC Options or shares of EMC Restricted Stock by making further elections on the Election Site for the EMC—VMware Exchange Program or delivering to the information and exchange agent, Mellon Investor Services, an additional properly completed and signed Letter of Transmittal (in the form included with this Prospectus—Offer to Exchange) selecting for tender for exchange such additional EMC Option or EMC Restricted Stock awards. You may only tender for exchange all EMC Options subject to a particular award or all shares of EMC Restricted Stock subject to a particular award.

If you deliver a Letter of Transmittal with respect to some but not all EMC Options or EMC Restricted Stock subject to a particular award, EMC and VMware may, in our sole discretion, determine that you have elected to tender for exchange all or none of the EMC Options or EMC Restricted Stock underlying such award, as applicable. You may request additional copies of the Letter of Transmittal by contacting the information and exchange agent, Mellon Investor Services, located at Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310, at 1-888-313-1479 (from within the U.S.) or at 201-680-6672 (from outside the U.S.).

The method of delivery of all documents, including the Letter of Transmittal, is at your election and risk. If delivery is by mail, EMC and VMware recommend that you use registered mail with return receipt requested. In all cases, you should allow sufficient time to ensure timely delivery. If you tender through the Election Site for the EMC—VMware Exchange Program, your EMC Options or EMC Restricted Stock will not be considered tendered unless you receive confirmation on the Election Site for the EMC—VMware Exchange Program that your elections have been made or until we receive the necessary documentation.

Determination of Validity; Rejection; Waiver of Defects; No Obligation to Give Notice of Defects

EMC and VMware will determine, in our sole discretion, all questions as to form of documents and the validity, form, eligibility, including time of receipt and acceptance of any tender of EMC Options or EMC Restricted Stock for exchange in this Offer. EMC’s and VMware’s determination of these matters will be final and binding on all parties. EMC and VMware reserve the right to reject any or all tenders of EMC Options or EMC Restricted Stock that they determine are not in appropriate form or that they determine are unlawful to accept. Otherwise, we and EMC expect to accept for exchange and cancellation all properly and timely tendered EMC Options and EMC Restricted Stock which are not validly withdrawn. Subject to applicable law, including Rule 13e-4 of the Exchange Act, we and EMC may also waive any of the conditions of this Offer or any defect or irregularity in any tender with respect to any particular eligible EMC Option or any particular shares of EMC Restricted Stock. Your tender of options will not be deemed to have been properly made until all defects or irregularities have been cured by you or waived by us. Neither we nor any other persons are obligated to give notice of any defects or irregularities in tenders, and no one will be liable for failing to give notice of any defects or irregularities.

This is a one-time offer to exchange your EMC Options and EMC Restricted Stock. This Offer will expire at 11:00 a.m., Pacific Time, on August 6, 2007, unless we extend this Offer. EMC and VMware currently have no plans to repeat the same or a similar offer in the future.

EMC’s and VMware’s Acceptance Constitutes an Agreement

Your tender of EMC Options or EMC Restricted Stock for exchange pursuant to the procedures described above constitutes your acceptance of the terms and conditions of this Offer. Our acceptance for exchange of your EMC Options or EMC Restricted Stock tendered by you pursuant to this Offer will constitute a binding agreement between you and EMC and VMware upon the terms and subject to the conditions of this Offer.

 

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Subject to our rights to extend, terminate and amend this Offer, EMC and VMware expect that we will accept for exchange on, and in any event promptly after, the Expiration Date, all EMC Options and shares of EMC Restricted Stock validly tendered and not validly withdrawn by eligible employees.

The award of VMware Options and VMware Restricted Stock pursuant to the Offer will not create any contractual or other right of the recipients to receive any future awards of stock options, restricted stock, other stock rights or any right of continued employment.

Partial Tenders

EMC and VMware will not accept partial tenders of an individual option or restricted stock awards.

Withdrawal Rights

You may only withdraw your EMC Options and EMC Restricted Stock tendered for exchange in accordance with the provisions discussed below.

You may withdraw some or all of the EMC Options or EMC Restricted Stock you tendered for exchange in this Offer. If you want to withdraw any of the EMC Options you tendered for exchange, you must withdraw all tendered EMC Options subject to the particular award of which the options you want to withdraw are a part, and if you want to withdraw any EMC Restricted Stock you tendered for exchange, you must withdraw all EMC Restricted Stock subject to the particular award of which the restricted stock you want to withdraw is a part. If you deliver a Notice of Withdrawal with respect to only some but not all of the EMC Options or EMC Restricted Stock subject to a particular award, EMC and VMware may, in our sole discretion, determine that you have elected to withdraw all or none of the EMC Options or EMC Restricted Stock, as applicable, underlying such award. You may request copies of the Notice of Withdrawal by contacting the information and exchange agent, Mellon Investor Services, located at Mellon Investor Services, Reorganization Department, 27th Floor, 480 Washington Blvd., Jersey City, NJ 07310, at 1-888-313-1479 (from within the U.S.) or at 201-680-6672 (from outside the U.S.).

You may withdraw your tendered EMC Options or EMC Restricted Stock at any time before 11:00 a.m., Pacific Time, on August 6, 2007, the currently scheduled Expiration Date of this Offer. If this Offer is extended by EMC and VMware beyond that time, you may withdraw your tendered options at any time until the extended Expiration Date of this Offer. In addition, if EMC and VMware have not accepted your EMC Options or EMC Restricted Stock tendered for exchange before 9:00 p.m., Pacific Time, on August 31, 2007, the 40th business day following the commencement of this Offer, you may withdraw your EMC Options or EMC Restricted Stock at any time thereafter. For purposes of this Offer, a “business day” means any day other than a Saturday, Sunday or U.S. Federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, Eastern Time.

To validly withdraw EMC Options or EMC Restricted Stock tendered for exchange, you must, prior to the time this Offer expires, either change your election online through the Election Site for the EMC—VMware Exchange Program at https://www.corp-action.net/vmware or deliver to the information and exchange agent, Mellon Investor Services, a properly completed and signed written Notice of Withdrawal in the form enclosed with this Prospectus—Offer to Exchange. If you choose to deliver a Notice of Withdrawal, it must sent to the information and exchange agent, by the means and at the applicable address set forth above.

You may not rescind any withdrawal, and any EMC Options or EMC Restricted Stock you withdraw will thereafter be deemed not properly tendered for purposes of this Offer, unless you properly re-tender those options before the Expiration Date by following the procedures described above in “The Exchange Offer—Proper Tender of EMC Options and EMC Restricted Stock.”

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notice. EMC and VMware will determine, in our discretion, all questions as to the form and validity, including time of receipt of Notices of Withdrawal. EMC’s and VMware’s determination of these matters will be final and binding.

Delivery of VMware Restricted Shares, Options to Purchase VMware Common Stock

EMC and VMware reserve the right to extend, postpone, amend or terminate this Offer. However, EMC and VMware expect that, upon the terms and subject to the conditions of this Offer, on, and in any event promptly after, the Expiration Date, we will accept for exchange and cancel all validly tendered EMC Options and shares of EMC Restricted Stock that have not been validly withdrawn. If and when EMC and VMware accept for exchange and cancellation your properly tendered and not withdrawn EMC Options and EMC Restricted Stock, you will have no further rights with respect to those cancelled EMC Options and EMC Restricted Stock. As promptly as practicable after we accept tendered EMC Options and EMC Restricted Stock for exchange and cancellation, we will send each tendering employee a notice indicating the number of shares of EMC Stock subject to the options and the number of shares of EMC Restricted Stock tendered for exchange that have been accepted and cancelled and the number of shares of VMware Stock underlying the VMware Options granted in exchange for such options, and the number of shares of VMware Restricted Stock granted in exchange for such EMC Restricted Stock. You will only receive VMware Options or shares of VMware Restricted Stock for EMC Options or shares of EMC Restricted Stock, as applicable, properly tendered and not withdrawn which have been accepted for exchange and cancellation pursuant to this Offer, and which are outstanding as of the Grant Date.

If EMC and VMware do not accept any EMC Options or EMC Restricted Stock tendered for exchange, you will keep all of your current EMC Options and EMC Restricted Stock and you will not receive VMware Options or VMware Restricted Stock. No changes will be made to your existing EMC Options or shares of EMC Restricted Stock, and they will remain outstanding with their current terms, including exercise price, term and vesting schedule.

For purposes of this Offer, EMC and VMware will be deemed to have accepted for exchange EMC Options and shares of EMC Restricted Stock that are validly tendered for exchange and not properly withdrawn if and when we give written notice of our acceptance for exchange of such EMC Options and shares of EMC Restricted Stock, which may be by press release or other permitted means. VMware Options and shares of VMware Restricted Stock will be granted pursuant to this Offer on or promptly after the date of such acceptance, which EMC and VMware expect will be on, and in any event promptly after, the Expiration Date. Promptly following the Expiration Date, EMC and VMware will publicly disclose the approximate aggregate number of shares underlying EMC Options and shares of EMC Restricted Stock accepted and canceled in this Offer, the Grant Date, the approximate aggregate number of shares of VMware Stock subject to VMware Options and the approximate aggregate number of shares of VMware Restricted Stock granted in the exchange.

EMC Options or EMC Restricted Stock that you choose not to tender for exchange or that EMC and VMware do not accept for exchange will remain outstanding until they are exercised or expire by their terms and will retain their current exercise price, term, vesting schedule and other rights and benefits. For so long as EMC continues to hold shares of VMware Stock representing 50% or more of the total outstanding voting power of VMware, service with VMware will be considered service with EMC for purposes of vesting and determining timing of the lapse of restrictions for EMC Restricted Stock. However, from such time as EMC ceases to hold shares of VMware stock representing 50% or more of the total outstanding voting power of VMware, any EMC Options and EMC Restricted Stock then held by you will be terminated in accordance with the terms of the applicable award.

Extension; Termination; Amendment

EMC and VMware may, from time to time, extend the period of time during which this Offer is open and delay accepting any EMC Options or EMC Restricted Stock tendered to them by disseminating notice of the

 

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extension to optionholders by public announcement, oral or written notice or otherwise as permitted by Rule 13e-4(e)(3) under the Exchange Act. If this Offer is extended, EMC and VMware will provide appropriate notice of the extension no later than 6:00 a.m., Pacific Time, on the next business day following the previously scheduled Expiration Date.

EMC and VMware also expressly reserve the right, in their reasonable judgment, prior to the Expiration Date, to terminate or amend this Offer and to postpone their acceptance and cancellation of any EMC Options or EMC Restricted Stock tendered for exchange upon the occurrence of any of the conditions specified in “The Exchange Offer—Conditions to Completion of the Offer” by disseminating notice of the termination or postponement to the optionholders by public announcement, oral or written notice or otherwise as permitted by applicable law. EMC’s and VMware’s reservation of the right to delay acceptance and cancellation of EMC Options and EMC Restricted Stock tendered for exchange is limited by Rule 13e-4(f)(5) under the Exchange Act, which requires payment of the consideration offered or return of the EMC Options and EMC Restricted Stock tendered promptly after termination or withdrawal of the tender offer.

Subject to compliance with applicable law, EMC and VMware further reserve the right, in their discretion, and regardless of whether any event set forth in “The Exchange Offer—Conditions to Completion of the Offer” has occurred or is deemed by us to have occurred, to amend this Offer in any respect. We will notify you of any such amendment and EMC will file with the SEC an amendment to the Schedule TO.

Amendments to this Offer may be made at any time, and from time to time, by providing appropriate notice of the amendment. Any notice pursuant to this Offer will be disseminated promptly to eligible employees in a manner reasonably designed to inform them of such change. EMC and VMware have no obligation to publish, advertise or otherwise communicate any such public announcement except by making a press release or as otherwise required or permitted by applicable law.

If EMC and VMware materially change the terms of this Offer or the information concerning this Offer, or if they waive a material condition of this Offer, we will extend this Offer to the extent required by the SEC. The period by which this Offer will be extended in such a case will depend on the facts and circumstances, including the relative materiality of such terms or information.

If EMC and VMware decide to take any of the following actions, they will publish notice or otherwise inform you in writing of such action and keep this Offer open for at least ten (10) business days after the date of such notification:

(1) EMC and VMware change the consideration offered for the EMC Options or EMC Restricted Stock (while the Exchange Ratio will not be set during the period that this Offer is open, the determination of the Exchange Ratio pursuant to the terms of this Offer will not be considered a change in the consideration offered); or

(2) EMC and VMware decrease the number of options or shares of EMC Restricted Stock eligible to be tendered in this Offer.

Automatic Extension

This Offer will be automatically extended if a market disruption event occurs with respect to the EMC Common Stock or the VMware Class A common stock on either of the two days during which the value of each share of EMC Common Stock or VMware Class A common stock was originally expected to be determined.

Conditions to Completion of the Offer

EMC and VMware will not be required to accept any options tendered for exchange, and EMC or VMware may terminate or amend this Offer, or postpone the acceptance and cancellation of any options tendered for

 

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exchange, in each case subject to Rule 13e-4(f)(5) under the Exchange Act, if (a) on or prior to the acceptance of EMC Options and EMC Restricted Stock tendered for exchange in this Offer if the IPO Registration Statement or this Exchange Offer Registration Statement shall not have been declared effective by the SEC or (b) at any time before their acceptance of EMC Options and EMC Restricted Stock tendered for exchange pursuant to this Offer, EMC or VMware determines that any of the following events has occurred and, in our reasonable judgment, the occurrence of the event makes it inadvisable for us to proceed with this Offer or to accept for exchange options tendered for exchange pursuant to this Offer:

 

   

the IPO Registration Statement shall have been withdrawn by the Company;

 

   

any stop order suspending the effectiveness of the IPO Registration Statement or this Exchange Offer Registration Statement has been issued and not withdrawn;

 

   

any threatened, instituted or pending action or proceeding by any government or governmental, regulatory or administrative agency, authority or tribunal or any other person, domestic or foreign, before any court, authority, agency or tribunal that directly or indirectly challenges the making of this Offer, the cancellation of some or all of the EMC Options or EMC Restricted Stock tendered for exchange, the issuance of VMware Options or VMware Restricted Stock, or otherwise relates in any substantial manner to this Offer;

 

   

any action is threatened, pending or taken, or any approval, exemption or consent is withheld, or any statute, rule, regulation, judgment, order or injunction is threatened, proposed, sought, promulgated, enacted, entered, amended, enforced or deemed to be applicable to this Offer, EMC or VMware, by or from any court or any regulatory or administrative authority, agency or tribunal or any other event has occurred that would, in the reasonable judgment of EMC or VMware:

(i) make the acceptance of or exchange of some or all of the tendered EMC Options or EMC Restricted Stock, or make the award of VMware Options and VMware Restricted Stock, illegal;

(ii) require that VMware or EMC obtain shareholder approval in respect of this Offer;

(iii) delay or restrict EMC’s or VMware’s ability, or render EMC or VMware unable, to accept for exchange, or grant VMware Options for some or all of the tendered EMC Options or VMware Restricted Stock for some or all of the tendered VMware Restricted Stock; or otherwise restrict or prohibit consummation of this Offer or the transactions contemplated by this Offer; or

(iv) materially and adversely affect the business, condition (financial or other), income, operations or prospects of the Company or EMC, or otherwise materially impair in any way the contemplated future conduct of VMware’s or EMC’s businesses;

 

   

any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market;

 

   

the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, whether or not mandatory; or

 

   

a tender or exchange offer with respect to some or all of VMware’s capital stock or that of EMC’s, or a merger or acquisition proposal for VMware or EMC, is proposed, announced or made by another person or entity or is publicly disclosed.

These conditions are for VMware’s and EMC’s benefit. EMC and VMware may assert any of these conditions in their sole discretion regardless of the circumstances giving rise to them prior to EMC’s and VMware’s acceptance for exchange and cancellation of EMC Options and EMC Restricted Stock tendered pursuant to this Offer. EMC and VMware may in their discretion waive any of the above conditions, in whole or in part, at any time and from time to time, prior to their acceptance for exchange and cancellation of EMC Options and EMC Restricted Stock tendered pursuant to this Offer, whether or not they waive any other condition to this Offer. EMC’s and VMware’s failure at any time to exercise any of these rights will not be deemed a waiver of any such rights. The waiver of any of these rights with respect to particular facts and

 

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circumstances is not a waiver with respect to any other facts and circumstances. Any determination EMC and VMware make concerning the events described above will be final and binding upon everyone.

Fees and Expenses

EMC and VMware will not pay any fees or commissions to any broker, dealer or other person (other than fees to the information and exchange agent, Mellon Investor Services, as described below) for soliciting tenders of EMC Options or EMC Restricted Stock pursuant to this Offer.

EMC and VMware have retained Mellon Investor Services to act as the information and exchange agent in connection with this Offer. The information and exchange agent may contact holders of shares of EMC Options and EMC Restricted Stock by mail, e-mail, telephone, facsimile transmission and personal interviews and may request brokers, dealers, commercial banks, trust companies and similar institutions and other nominee shareholders to forward materials relating to this Offer to beneficial owners. The information and exchange agent will receive reasonable compensation for its services, will be reimbursed for reasonable out-of-pocket expenses and will be indemnified against liabilities in connection with its services, including liabilities under the federal securities laws.

The information and exchange agent has not been retained to make solicitations or recommendations. The fees it receives will not be based on the number of shares of EMC Options and EMC Restricted Stock tendered under this Offer.

No broker, dealer, commercial bank, trust company or similar institution shall be deemed to be the agent of EMC, VMware or the information and exchange agent for purposes of this Offer.

Legal and Other Limitations

This Prospectus—Offer to Exchange is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of EMC’s common stock or VMware Class A common stock in any jurisdiction in which the offer, sale or exchange is not permitted. EMC and VMware are not aware of any jurisdiction in the United States where the making of this Offer or its acceptance would not be legal. If EMC or VMware learns of any jurisdiction in the United States where making this Offer or its acceptance would not be permitted, EMC and VMware intend to make a good faith effort to comply with the relevant law in order to enable such offer and acceptance to be permitted. If, after such good faith effort, EMC and VMware cannot comply with such law, EMC and VMware will determine whether this Offer will be made to and whether tenders will be accepted from or on behalf of persons who are holders of shares of EMC Options and EMC Restricted Stock residing in the jurisdiction.

In any jurisdiction in which the securities or blue sky laws require this Offer to be made by a licensed broker or dealer, this Offer may be made on EMC’s and VMware’s behalf by one or more registered brokers or dealers licensed under the laws of such jurisdiction.

 

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MARKET PRICES AND DIVIDEND INFORMATION

Shares of EMC’s Common Stock and Dividends

EMC stock is quoted on the New York Stock Exchange under the symbol “EMC.” The following table shows, for the periods indicated, the range of high and low sales prices per share of EMC Stock as reported by the New York Stock Exchange.

 

     High    Low

Fiscal Year ended December 31, 2005

     

First Quarter

   $ 15.09    $ 11.79

Second Quarter

     14.88      11.10

Third Quarter

     14.78      12.05

Fourth Quarter

     14.55      12.70

Fiscal Year ended December 31, 2006

     

First Quarter

   $ 14.75    $ 13.05

Second Quarter

     13.99      10.11

Third Quarter

     12.09      9.44

Fourth Quarter

     13.79      11.69

Fiscal Year ending December 31, 2007

     

First Quarter

   $ 14.89    $ 12.74

Second Quarter

     18.16      13.85

Third Quarter (through July 6, 2007)

     18.86      18.02

On July 6, 2007, the last reported sale price of EMC Stock on the New York Stock Exchange before the filing of this Prospectus—Offer to Exchange was $18.66 per share. We recommend that you obtain current market quotations for EMC Stock before deciding whether to tender your EMC Options or EMC Restricted Stock.

EMC has never paid cash dividends on its common stock.

Shares of VMware’s Common Stock and Dividends

There is currently no public market for VMware’s Class A common stock. VMware’s Class A common stock has been authorized for listing on the New York Stock Exchange under the symbol “VMW.”

VMware paid cash dividends of $190.0 million and $92.9 million to EMC in 2005 and 2004, respectively and an $800.0 million dividend payable to EMC in the form of a note in April 2007. We currently do not anticipate declaring any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to the consent of the holders of our Class B common stock pursuant to our certificate of incorporation. Holders of our Class A common stock and our Class B common stock will share equally on a per share basis in any dividend declared on our common stock by our board of directors. See “Description of Capital Stock of VMware—Common Stock—Dividend Rights.”

 

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USE OF THE IPO PROCEEDS

We estimate that our net proceeds from the sale of the Class A common stock in the IPO will be approximately $741.4 million, at an assumed initial public offering price of $24.00 per share (the midpoint of the range reflected in the IPO Registration Statement) and after deducting estimated underwriting discounts and offering expenses that we must pay in connection with the IPO. If the underwriters’ over-allotment option in the IPO is exercised in full, we estimate that our net proceeds will be approximately $853.7 million. A $1.00 increase (decrease) in the assumed initial public offering price of $24.00 per share would increase (decrease) the net proceeds to us from the IPO by $31.2 million, assuming the underwriters do not exercise their over-allotment option and assuming that the number of shares offered by us in the IPO, as reflected in the IPO Registration Statement, remains the same and after deducting the estimated underwriting discounts and offering expenses payable by us.

We currently intend to use the net proceeds:

 

   

to repay $350.0 million of our intercompany indebtedness owed to EMC;

 

   

to purchase from EMC our new headquarters facilities for an amount equal to the cost expended by EMC to date in constructing the facilities, which totaled approximately $127.0 million, which purchase will be effected through the transfer of the equity interests of the EMC entity which holds the rights to the facilities; and

 

   

for working capital and other general corporate purposes, including to finance our growth, develop new products and fund capital expenditures and potential acquisitions.

The intercompany indebtedness was incurred in April 2007 to fund an $800 million dividend paid to EMC in the form of a note. The note matures in April 2012 and bears an interest rate of the 90-day LIBOR plus 55 basis points (5.91% as of June 30, 2007), with interest payable quarterly in arrears commencing June 30, 2007. The note may be repaid, without penalty, at any time commencing July 2007. The dividend was declared to allow EMC to realize the increased value of its investment in us from the time of our acquisition by EMC. The amount of the dividend and the terms of the note were determined by considering our then-existing cash position, our historic and future ability to generate cash flows from operations and the likelihood that we would be able to pay the note pursuant to its terms while still having sufficient cash to meet our operating needs. We currently do not anticipate declaring cash dividends in the future. We have chosen to use a portion of the proceeds from the IPO to repay $350.0 of our intercompany indebtedness owed to EMC because our expected cash position following the IPO will allow us to pay down a portion of the note without incurring interest while still having sufficient cash to meet our anticipated operating needs. The purchase price of our headquarters facilities was determined as a means to compensate EMC for costs it expended on our behalf in the construction of the facilities.

We may pursue the acquisition of companies with complementary products and technologies that we believe will enhance our suite of offerings. In April 2007, we entered into an agreement to acquire all of the capital stock of a privately-held offshore software development company for aggregate cash consideration of less than $10 million. Other than this agreement, we do not have agreements or commitments for any specific acquisitions at this time. Pending the use of proceeds from the IPO, we intend to invest the proceeds in a variety of capital preservation investments, generally government securities and cash.

 

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CAPITALIZATION OF VMWARE

The following table sets forth our capitalization as of March 31, 2007:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to our pending issuance and sale of 9,500,000 shares of Class A common stock to Intel Capital for proceeds of $218.5 million. Pursuant to the terms of our investor rights agreement with Intel, in the event the Company does not complete an underwritten public offering on or before December 31, 2007 with an aggregate price to the public of at least $250.0 million, Intel may require the Company to repurchase the Class A common stock that it holds. The pro forma data gives effect to the adjustment as redeemable common stock due to this repurchase feature; and

 

   

on a pro forma as adjusted basis to give effect to (i) our issuance and sale of 9,500,000 shares of our Class A common stock to Intel Capital for proceeds of $218.5 million, (ii) the reclassification of the capital proceeds of $218.5 million from the Intel sale from redeemable common stock to permanent equity since the redemption feature described above lapses upon completion of the IPO, (iii) our issuance and sale of 33,000,000 shares of Class A common stock in the IPO at a public offering price of $24.00 per share (the midpoint of the range reflected in the IPO Registration Statement), (iv) the repayment of $350.0 million of principal amount on the $800.0 million note we incurred to fund a dividend to EMC, (v) the purchase from EMC of our new headquarter facilities for an amount equal to the cost expended by EMC to date in constructing the facilities, which totaled approximately $127.0 million as of June 30, 2007, and (vi) the deduction of estimated IPO underwriting discounts and IPO offering expenses payable by us. See “Use of the IPO Proceeds.”

This table contains unaudited information and should be read in conjunction with “VMware’s Selected Consolidated Financial Data,” “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes that appear elsewhere in this Prospectus—Offer to Exchange.

 

     As of March 31, 2007  
     Actual     Pro
Forma
    Pro Forma
As Adjusted
 
     (in thousands)        

Cash

   $ 258,468     $ 476,968     $ 741,408  
                        

Long-term debt:

      

Total debt

   $ 800,000     $ 800,000     $ 450,000  
                        

Redeemable common stock

     —         218,500       —    
                        

Equity:

      

Preferred Stock, par value $0.01 per share, 100,000,000 shares authorized, no shares outstanding actual, pro forma and pro forma as adjusted

     —         —         —    

Class A common stock, par value $0.01 per share, 2,500,000,000 shares authorized and 32,500,000 shares outstanding, actual and 2,500,000,000 shares authorized, 32,500,000 shares outstanding pro forma and 2,500,000,000 shares authorized, 75,000,000 shares outstanding pro forma as adjusted

     325       325       750  

Class B common stock, par value $0.01 per share, 1,000,000,000 shares authorized and 300,000,000 shares outstanding, actual, pro forma and pro forma as adjusted

     3,000       3,000       3,000  

Additional paid-in capital

     6,239       6,239       965,754  

Accumulated deficit

     (193,057 )     (193,057 )     (193,057 )
                        

Total equity (deficit)

     (183,493 )     (183,493 )     776,447  
                        

Total capitalization

   $ 616,507     $ 835,007     $ 1,226,447  
                        

A $1.00 increase (decrease) in the assumed initial public offering price of $24.00 per share would increase (decrease) by $31.2 million in each of cash, additional paid-in capital, total equity and total capitalization, respectively, assuming that the number of shares offered by us, as reflected in the IPO Registration Statement, remains the same and after deducting the estimated underwriting discounts and offering expenses payable by us.

 

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VMWARE MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Prospectus—Offer to Exchange. The following discussion should be read in conjunction with section entitled “Forward-Looking Statements” and the risk factors set forth under “Risk Factors.”

All dollar amounts (except per share amounts) in this MD&A are in millions.

Certain tables may not add due to rounding.

Overview

Our primary source of revenue is the licensing of virtualization software and related support and services through a variety of distribution channels for use by businesses and organizations of all sizes and across numerous industries in their information technology infrastructure. Our virtualization solutions run on industry-standard desktops and servers and support a wide range of operating system and application environments, as well as networking and storage infrastructure. We have developed a multi-channel distribution model to expand our presence and reach various segments of the market. We derived over 75% of our revenues from our channel partners, which include distributors, resellers, x86 systems vendors and system integrators. We have also developed a network of over 4,000 indirect channel partners who fulfill orders through our direct channel partners. A majority of our revenue results from contracts that include both perpetual software licenses and ongoing software maintenance contracts. License revenue is recognized when the elements of revenue recognition are complete. Maintenance revenue is recognized ratably over the term of the maintenance period, and includes renewals of maintenance sold after the initial maintenance period expires. We also recognize revenue from professional services provided to our customers.

We have achieved significant revenue growth to date and are focused on extending our growth by broadening our product portfolio, enabling choice for customers and driving standards, expanding our network of technology and distribution partners, increasing market awareness and driving the adoption of virtualization. In addition to selling to new customers, we are also focused on expanding the use of our products within our existing customer base, as much of our license revenue is based on a per desktop or per server arrangement. We believe it is important that as we grow our sales, we continue to invest in our corporate infrastructure, including customer support, information technology and general and administrative functions. We expect our spending in research and development to increase as we add computer scientists, software engineers, and employees involved in product development and maintenance and continue to enable choice for customers and drive standards. We believe that equity incentives tied directly to the performance of VMware will help us compete for top-level engineering and other talent. We also intend to continue to invest in hardware, networking and software tools to increase the efficiency of our research and development efforts.

Our current financial focus is on sustaining our growth in revenue to generate cash flow to expand our market segment share and our virtualization solutions. Although we are currently the leading provider of virtualization solutions, we believe the use of virtualization solutions is at very early stages by customers. We expect to face competitive threats to our leadership from a number of companies, some of whom may have significantly greater resources than we do. As a result, we believe it is important to continue to invest in our research and product development, sales and marketing and the support function to maintain or expand our leadership in the virtualization solutions market. This investment could result in contracting operating margins as we invest in our future. We believe that we will be able to continue to fund our product development through operating cash flows as we continue to sell our existing products and services. We believe this is the right priority for the long-term health of our business.

In evaluating our results, we focus on operating margin and, to a lesser extent, gross margin. A significant portion of our service revenue is recognized in periods of up to five years subsequent to the initial contract,

 

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whereas most of our license revenue is recognized within the first quarter of contract signing. As a result, variability in gross margin can result from differences in when we price our service and when the cost is incurred. Substantially all of our revenue is for contracts in U.S. dollars, to international channel partners. A portion of our operating expenses classified as cost of sales is in currencies other than the U.S. dollar. This difference may cause variability in gross margins and operating margins due to fluctuations in the U.S. dollar compared to other currencies. As a result, we focus our attention on operating margin because it encompasses the entire cost structure supporting our operations. We are not currently focused on short-term operating margin expansion, but rather on investing at appropriate rates to support our growth and future product offerings in what may be a substantially more competitive environment.

As a wholly owned subsidiary of EMC, we have relied on it to provide a number of administrative support services and facilities in other countries. Although we will continue to operate under an administrative services agreement and continue to receive support from EMC, our administrative costs may increase. We also are investing in expanding our own administrative functions, including our finance and legal functions, which may be at a higher cost than the comparable services currently provided by EMC. We also will incur additional costs as a public company, including audit, investor relations, stock administration and regulatory compliance costs.

EMC’s Acquisition of VMware

On January 9, 2004, EMC acquired all of our outstanding capital stock. The acquisition was accounted for as a purchase. Accordingly, all assets and liabilities were adjusted to their fair market value. For financial statement purposes, the allocation of the purchase price paid by EMC for us has been reflected in our stand-alone financial statements. This allocation includes the goodwill and related intangible assets recognized by EMC from the acquisition of us. See Note A to the consolidated financial statements included elsewhere in this Prospectus—Offer to Exchange. We are currently a wholly owned subsidiary of EMC. The results of operations discussed in this analysis for 2004 are for the period from the date of acquisition by EMC, January 9, 2004, to December 31, 2004.

The financial statements include expense allocations for certain corporate functions provided to us by EMC, including accounting, treasury, tax, legal and human resources. These allocations were based on estimates of the level of effort or resources incurred on our behalf and which are considered reasonable by management. The total costs allocated from EMC were $2.3 and $1.3 for the three months ended March 31, 2007 and 2006, respectively, and $5.1 in 2006, $5.3 in 2005 and $4.5 in 2004. Additionally, certain other costs incurred by EMC for our direct benefit, such as rent, salaries and benefits have been included as expenses in our financial statements. The total of these other costs were $20.2 and $10.5 for the three months ended March 31, 2007 and 2006, respectively, and $63.7 in 2006, $27.1 in 2005 and $7.3 in 2004. Additionally, as part of our tax sharing arrangement, we paid EMC income taxes of $63.1 and $6.6 in 2006 and 2005, respectively. We also earned interest income on our intercompany balance from EMC in the amount of $1.3, $0.8, and $2.6 for the three months ended March 31, 2007 and the years ended December 31, 2006 and 2005, respectively. For the three months ended March 31, 2006, we incurred interest expense on our intercompany balance to EMC in the amount of $0.1.

The financial statements included herein may not necessarily reflect our results of operations, financial position and cash flows as if we had operated as a stand-alone company during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance.

Equity-based Compensation

Since our acquisition by EMC, we have historically not issued equity-based compensation in VMware stock to our employees. Our employees received equity-based compensation in the form of EMC stock options and restricted shares. In connection with the initial public offering of our Class A common stock, we are conducting this voluntary exchange offer pursuant to which we are offering our eligible employees the ability to exchange their existing EMC options and restricted stock awards for options to purchase our Class A common stock and restricted stock awards of our Class A common stock, respectively, at an exchange ratio based upon EMC’s two-day weighted average trading price prior to the consummation of the IPO. As of June 30, 2007, the maximum number of shares of

 

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EMC stock underlying options which could be tendered for exchange was approximately 12.3 million. Additionally, as of June 30, 2007, there were approximately 5.8 million outstanding shares of EMC restricted stock held by eligible employees which could be tendered for exchange. Assuming all the options and shares are exchanged, assuming the initial public offering price is $24.00 per share (the midpoint of the range set forth on the cover of the IPO Registration Statement) and assuming EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of Class A common stock is $18.00 per share (which is representative of recent trading prices of EMC stock), there will be approximately 9.2 million options issued in the exchange with a weighted average exercise price of $15.72 for VMware stock and 4.4 million shares of VMware restricted stock. Assuming the exchange is consummated in the third quarter of 2007, we estimate that the unamortized fair value of the exchanged awards will be approximately $103.6, which will be recognized over their vesting periods, resulting in equity-based compensation expense of approximately $24.3, $46.8, $20.5, $9.7, $2.2 and $0.1 in 2007, 2008, 2009, 2010, 2011 and 2012, respectively. This will result in incremental equity-based compensation expense of approximately $8.1 over the remaining vesting periods. The ultimate amount of expense will be determined based upon the actual number of exchanged equity instruments, the actual IPO price and EMC’s actual two-day weighted average trading price prior to the consummation of the initial public offering of Class A common stock. Additionally, the annual expense is subject to the amount of equity-based compensation that may be capitalized. In addition, through July 2, 2007, VMware has granted approximately 35.7 million options to purchase shares of its Class A common stock with a weighted average exercise price of $23.00 and approximately 453,000 restricted shares of Class A common stock. The fair value of these awards is approximately $260.5, which will be recognized over the awards, vesting periods, resulting in equity-based compensation expense of approximately $39.7, $69.0, $65.5, $60.7 and $25.6, in 2007, 2008, 2009, 2010 and 2011, respectively. The annual expense is subject to the amount of equity-based compensation that may be capitalized.

Income Statement Presentation

Sources of Revenue

License revenues. Our license revenues consist of revenues earned from the licensing of our software products. Our licenses are generally sold on a perpetual basis and are generally priced based upon the number of physical desktops or server processors on which our software runs. From inception through early 2004, we licensed certain of our products and provided updates at no additional cost. Because we had not established vendor-specific objective evidence, or VSOE, of the fair value of the updates, we recognized the entire contract value ratably over the contract period. Commencing in early 2004, we offered customers the right to buy updates on a stand-alone basis, thereby establishing VSOE of fair value of the updates. As a result, we recognized the license portion of the contract at the inception of the license agreement and recognized the value of the maintenance portion of the contract over the maintenance period.

Services revenues. Our services revenues consist of software maintenance and professional services. Maintenance revenues are recognized ratably over the contract period. Typically, our contract periods range from one to five years. Customers receive various types of product support based on the level of support purchased. Maintenance also affords customers the right to receive future product upgrades, if and when they become available.

Professional services include design, implementation and training. Professional services are not considered essential to the functionality of our products, as these services do not alter the product capabilities and may be performed by our customers or other vendors. Professional services engagements that have durations of ninety days or less are recognized in revenue upon completion of the engagement. Professional services engagements of more than ninety days for which we are able to make reasonably dependable estimates of progress toward completion are recognized on a proportional performance basis based upon the hours incurred. Revenue on all other engagements is recognized upon completion.

Costs of Revenue and Operating Expenses

Cost of license revenues. Our cost of license revenues principally consist of the cost of fulfillment of our software. This cost includes product packaging and personnel and related overhead associated with the physical

 

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and electronic delivery of our software products. The cost also includes amortization of capitalized software development costs.

Cost of services revenues. Our cost of services revenues includes the costs of the personnel and related overhead to deliver technical support on our products, as well as to provide our professional services.

Research and development expenses. Our research and development, or R&D, expenses include the personnel and related overhead associated with the development of new product offerings and the enhancement of our existing software offerings.

Sales and marketing costs. Our sales and marketing costs include the costs of the personnel and related overhead associated with the sale and marketing of our license and service offerings, as well as the cost of certain specific marketing initiatives, including our annual VMworld conference.

General and administrative expenses. Our general and administrative expenses include the personnel and related overhead costs of supporting the overall business. These costs include the costs associated with our finance, facilities, human resources, IT infrastructure and legal departments.

Results of Annual Operations

Our results of operations for the year ended December 31, 2006 and 2005 and the period from January 9, 2004 to December 31, 2004 are as follows:

 

     2006     2005     2004  

Revenues:

              

License

   $ 491.9    69.9 %   $ 287.0    74.1 %   $ 178.9     81.8 %

Services

     212.0    30.1       100.1    25.9       39.9     18.2  
                                        
     703.9    100.0       387.1    100.0       218.8     100.0  

Cost of revenues:

              

Cost of license revenues

     59.2    8.4       40.3    10.4       32.8     15.0  

Cost of services revenues

     64.2    9.1       24.9    6.4       12.6     5.8  
                                        
     123.4    17.5       65.2    16.8       45.4     20.8  
                                        

Gross profit

     580.5    82.5       321.9    83.2       173.3     79.2  

Operating expenses:

              

Research and development

     148.3    21.1       72.6    18.7       43.9     20.1  

Sales and marketing

     238.3    33.9       125.0    32.3       60.0     27.4  

General and administrative

     69.6    9.9       30.8    7.9       19.0     8.7  

In-process research and development

     3.7    0.5       —      —         15.2     6.9  
                                        

Operating income

     120.6    17.1       93.6    24.2       35.2     16.1  

Investment income and other expenses, net

     1.9    0.3       1.7    0.5       (0.1 )   —    
                                        

Income before income taxes

     122.5    17.4       95.3    24.6       35.2     16.1  

Provision for income taxes

     36.8    5.2       28.6    7.4       18.4     8.4  

Cumulative effect of a change in accounting principle

     0.2    —         —      —         —       —    
                                        

Net income

   $ 85.9    12.2 %   $ 66.8    17.3 %   $ 16.8     7.7 %
                                        

Note: Certain columns may not add due to rounding.

 

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Revenues

Total revenues increased by $316.8, or 82%, in 2006 to $703.9. License revenues grew by $204.9 and services revenues grew by $111.9 year-over-year. In 2005, total revenues increased by $168.3, or 77%, to $387.1. The growth in 2005 reflected an increase of $108.1 in license revenue and an increase of $60.2 of services revenue. We market and sell our products largely through our network of channel partners, which includes distributors, resellers, x86 system vendors and systems integrators. One distributor accounted for 29%, 30% and 27% of revenues in 2006, 2005 and 2004, respectively. International revenue as a percentage of total revenue has been relatively constant, representing 44% in 2006, 46% in 2005 and 45% in 2004. Our revenue contracts are denominated in U.S. dollars with international customers.

License Revenues. Software license revenues were $491.9 in 2006, $287.0 in 2005 and $178.9 in 2004, representing year-over-year increases of 71% in 2006 and 60% in 2005. We sell our products through a network of channel partners, which includes distributors, resellers, x86 system vendors and systems integrators. More than 70% of our orders for each of the three years presented occurred through our 15 largest direct channel partners, including one distributor which represented 29%, 30% and 27% of our revenue in 2006, 2005 and 2004, respectively. As we expand geographically, we may add additional direct channel partners; however, a significant majority of the increases in license revenues in 2005 and 2006 resulted from increased sales volumes through our existing direct channel partners. These increases were driven by several factors, including greater demand for our virtualization product offerings attributable to wider market acceptance of virtualization as part of an organization’s IT infrastructure, a broadened product portfolio and expansion of our indirect channel partner network.

We have over 4,000 indirect channel partners as of December 31, 2006, an increase of over 1,500 from December 31, 2005. Over 1,000 new indirect channel partners were added during 2005. These indirect channel partners obtain software licenses and services from our distributors and x86 system vendors and market and sell them to end-user customers. In addition, we have a direct sales force that complements these efforts. Our sales force works with our channel partners to introduce them to customers and new sales opportunities. Our channel partners also introduce our sales force to their customers.

We also experienced an increase in the number of orders greater than $50,000 in 2006 and 2005, compared to the respective prior years. Orders from our distributors and end-user customers which were greater than $50,000 were approximately 30%, 23% and 18% of license revenue in 2006, 2005 and 2004 respectively. The increase in the number of orders greater than $50,000 resulted from broader acceptance of virtualization solutions for organizations’ IT infrastructure and a trend toward end-user customers using our products broadly across their organizations.

Although many of the Company’s products are available individually, they are generally sold in product bundles which encompass most of the Company’s products. As we develop new products, they are typically sold as a new component to a bundle of products. Customers generally purchase the most recent bundle. Late in the second quarter of 2006, we introduced a new Enterprise product-bundle which largely replaced the previous product bundle. We added three unique products to this bundle and increased the corresponding list price by 15%. This price increase was partially offset by decreasing prices on certain core platform products. In some cases, we began providing these products for free. The impact of pricing on revenue growth in 2006 compared to 2005 was less than 10% of the overall increase in revenue. The impact of pricing on revenue growth in 2005 compared to 2004 was not significant.

Partially offsetting the annual increases in license revenues was a reduction in the accretion of prior year license revenue recognized ratably over the license term. From inception through early 2004, we licensed certain of our products and provided updates at no additional cost. Because we had not established VSOE of the fair value of the updates, we recognized the entire contract value ratably over the contract period. Commencing in early 2004, we offered customers the right to buy updates on a stand-alone basis, thereby establishing VSOE of fair value of the updates. As a result, we recognized the license portion of the contract at the inception of the

 

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license agreement and recognized the value of the maintenance portion of the contract over the maintenance period. Revenue recognized ratably was $0.8, $9.9 and $27.5 in 2006, 2005 and 2004, respectively.

Services Revenues. Services revenues were $212.0 in 2006, $100.1 in 2005 and $39.9 in 2004, representing year-over-year increases of 112% in 2006 and 151% in 2005. Services revenues consist of software maintenance and professional services revenues. The increases in services revenues in 2006 and 2005 were primarily attributable to growth in our software maintenance revenues of $88.1 and $49.1 in 2006 and 2005, respectively, this growth reflects the increases in our license revenues, as well as renewals to customer contracts. Service revenues include our professional services offerings which increased by $23.8 and $11.1 in 2006 and 2005, respectively. Software maintenance revenues increased due to both renewal sales to our existing customers and sales of maintenance contracts to our new customers. Professional services revenues increased due to growing demand for design and implementation services and training programs, as end-user organizations deployed virtualization across their organizations.

Cost of Revenues and Gross Profit

Our cost of revenues were $123.4, $65.2 and $45.4 in 2006, 2005 and 2004, representing year-over-year increases of 89% in 2006 and 44% in 2005. Our gross profit was $580.5, $321.9 and $173.3 in 2006, 2005 and 2004, respectively, representing year-over-year increases of 80% in 2006 and 86% in 2005. The annual increases in our cost of sales were primarily attributable to increased direct support, professional services personnel and third-party professional services costs to support the increased services revenues. We also incurred increased costs to fulfill our license sales as the volume of our license sales increased. The aggregate total increase of these costs was $43.3 and $16.2 in 2006 and 2005, respectively. Additionally, the amortization of capitalized software development costs increased by $16.1 in 2006 and $4.8 in 2005. Fluctuations in foreign currency compared to the U.S. dollar did not have a significant effect on cost of revenues and gross profit in 2006 and 2005. Our gross margins, as a percentage of revenues, were 82.5% in 2006, 83.2% in 2005 and 79.2% in 2004. The reduction in our gross margin in 2006 compared to 2005 was primarily attributable to a change in the mix of our license and services revenues due to significant renewals of existing maintenance contracts and new customers purchasing maintenance contracts. License revenues, as a percentage of total revenues, decreased from 74.1% in 2005 to 69.9% in 2006. Services revenues have a lower gross margin than our license revenues. For the remainder of 2007, we expect that our services revenues will continue to increase as a percentage of our total revenues, thereby negatively impacting our gross margins. The increase in our gross margin in 2005 compared to 2004 was primarily attributable to acquisition-related intangible amortization expense decreasing from 11.7% of revenues in 2004 to 6.0% in 2005. Acquisition-related intangible amortization expense resulted primarily from EMC’s acquisition of us, which has been reflected in our consolidated financial statements. Partially offsetting this improvement was a change in our sales mix in which license revenues, as a percentage of total revenues, decreased from 81.8% in 2004 to 74.1% in 2005. In future periods, our cost of revenues and gross profit will be adversely affected as a result of the Offer and the issuance of additional equity grants. The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the Offer, the initial public offering price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of our Class A common stock. See “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-based Compensation.”

Research and Development Expenses

Our R&D expenses were $148.3, $72.6 and $43.9 in 2006, 2005 and 2004, representing year-over-year increases of 104% in 2006 and 65% in 2005. The increase in R&D expenses in both 2006 and 2005 consisted primarily of increased salaries and benefits of $45.5 and $22.8 in 2006 and 2005, respectively, resulting from additional resources to support new product development. The cost of supplies expensed and the depreciation from equipment capitalized increased by $8.9 and $4.2 in 2006 and 2005, respectively. Equity-based compensation associated with higher levels of equity grants increased by $8.1 in 2006 and $7.9 in 2005. Partially offsetting these annual increases in R&D expense were higher levels of software capitalization, which increased

 

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by $17.9 in 2006 and $16.9 in 2005. As a percentage of revenues, R&D expenses were 21.1%, 18.7% and 20.1% in 2006, 2005 and 2004, respectively. The increase in R&D expenses, as a percentage of revenues, in 2006 compared to 2005 was primarily attributable to incremental headcount to support the growth of our business. The decrease in R&D expense, as a percentage of revenues, in 2005 compared to 2004 was primarily attributable to the increased level of software capitalization in 2005. In 2005, we reached technological feasibility on our current VMware Infrastructure server product. In future periods, our research and development expenses will be adversely affected as a result of the Offer and the issuance of additional equity grants. The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the Offer, the initial public offering price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of our Class A common stock. Additionally, the amount of equity-based compensation that may be capitalized will also affect the future expense. See “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-based Compensation.”

Sales and Marketing Expenses

Our sales and marketing expenses were $238.3, $125.0 and $60.0 in 2006, 2005 and 2004, representing year-over-year increases of 91% in 2006 and 108% in 2005. The increase in sales and marketing expenses was the result of higher salaries and benefits, resulting from additional headcount in both sales and marketing personnel, and higher commission expense resulting from increased sales volume. Salaries, benefits and commission expense increased by $51.3 and $30.1 in 2006 and 2005, respectively. In certain international countries, EMC hires employees who work on our behalf. The costs incurred by EMC on our behalf, which principally relates to employees dedicated to our marketing effort, increased by $20.8 and $17.3 in 2006 and 2005, respectively. An increase in our marketing programs and travel of $20.7 and $5.9 in 2006 and 2005, respectively, also contributed to the growth in sales and marketing expenses. Equity-based compensation, associated with higher levels of equity grants, increased sales and marketing expense by $6.7 in 2006 and $0.7 in 2005. As a percentage of revenues, sales and marketing expenses were 33.9%, 32.3% and 27.4% in 2006, 2005 and 2004, respectively. The annual increases in sales and marketing expenses, as a percentage of revenues, were primarily attributable to incremental salaries, benefits, commissions and equity-based compensation. In future periods, our sales and marketing expenses will be adversely affected as a result of the Offer and the issuance of additional equity grants. The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the Offer, the initial public offering price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of our Class A common stock. See “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-based Compensation.”

General and Administrative Expenses

Our general and administrative expenses were $69.6, $30.8 and $19.0 in 2006, 2005 and 2004, representing year-over-year increases of 126% in 2006 and 62% in 2005. Increases in general and administrative expenses in both 2006 and 2005 were due to additional salaries and benefits, primarily for new headcount, of $9.5 and $5.9 in 2006 and 2005, respectively, related increases in equity-based compensation of $4.6 and $2.3 in 2006 and 2005, respectively, and increased recruiting costs to obtain the additional employees of $1.7 and $0.6 in 2006 and 2005, respectively. The increase in headcount drove related incremental costs such as travel, equipment, facilities, and depreciation of $11.7 and $1.8 in 2006 and 2005, respectively. Other administrative costs, such as legal, audit and tax increased by $1.1 in 2006. Partially offsetting these cost increases was a reimbursement of $3.3 of legal fees received in 2005 incurred in previous years. As a percentage of revenues, general and administrative expenses were 9.9%, 7.9% and 8.7% in 2006, 2005 and 2004, respectively. The increase in general and administrative expenses, as a percentage of revenues, in 2006 compared to 2005, was primarily attributable to incremental headcount to support the growth of our business. In future periods, our general and administrative expenses will be adversely affected as a result of the Offer and the issuance of additional equity grants. The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the

 

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Offer, the initial public offering price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of our Class A common stock. See “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-based Compensation.”

In-Process Research and Development Expenses

IPR&D was $3.7, $0.0 and $15.2 in 2006, 2005 and 2004, respectively. The IPR&D charge in 2006 was attributable to our acquisition of Akimbi. The IPR&D charge in 2004 related to EMC’s acquisition of VMware.

Operating Income

Operating income was $120.6, $93.6 and $35.2 in 2006, 2005 and 2004, respectively, representing a year-over-year increase of 29% in 2006 and 166% in 2005. The increase in operating income in 2006 was primarily the result of the increase in revenue, partially offset by the increases in operating expenses discussed in the individual expense line items above. As a percentage of revenue, operating income declined to 17.1% in 2006 from 24.2% in 2005. Most of the decrease in operating income as a percentage of revenue was a result of increased salaries and benefits as we expanded our research and development, sales and marketing and general and administrative spending to support revenue growth and to expand future product offerings in what may be a substantially more competitive environment.

Operating income as a percentage of revenue in 2005 improved to 24.2% from 16.1% in 2004. Most of the increase was due to amortization of intangible assets remaining flat on a dollar basis year-over-year and a charge of $15.2 in 2004 related to IPR&D. Intangible asset amortization and IPR&D represented 19% of revenue in 2004 compared to 6.8% in 2005.

A portion of our costs of revenues, primarily the costs of personnel to deliver technical support on our products, and a portion of our operating expense primarily related to sales, sales support and research and development, are denominated in foreign currencies, primarily the British pound, the Euro, the Japanese yen, the Indian rupee, the Australian dollar and the Canadian dollar. These costs and the resulting effect on operating income are exposed to foreign exchange rate fluctuations. As a result of fluctuations in foreign currency values compared to the U.S. dollar, operating income decreased $2.8 in 2006. The effect in 2005 was not significant. In future periods, operating income will be adversely affected as a result of the Offer and the issuance of additional equity grants. The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the Offer, the IPO price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the IPO. See “Management Discussion and Analysis—Equity-based Compensation.”

Investment Income

Investment income was $3.3, $3.1 and $0.1 in 2006, 2005 and 2004, respectively. Investment income consists primarily of interest earned on cash and cash equivalent balances and on amounts due to us from EMC on our intercompany balance. Investment income increased in 2005 compared to 2004 due to higher outstanding cash and cash equivalent balances and amounts owed to us by EMC on our intercompany balances.

Other Expense, Net

Other expense, net was $1.4, $1.3 and $0.1 in 2006, 2005 and 2004, respectively. The increase in other expense, net in 2005 compared to 2004 resulted primarily from increased interest expense on balances owed by us to EMC.

 

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Provision for Income Taxes

Our effective income tax rate was 30.1%, 30.0% and 52.3% in 2006, 2005 and 2004, respectively. For 2006 and 2005, the effective tax rate varied from the statutory rate primarily as a result of the mix of income attributable to foreign versus domestic jurisdictions. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States. Additionally, we generated tax credits that reduced our effective tax rate by 4.9 percentage points and 3.9 percentage points in 2006 and 2005, respectively. Partially offsetting this benefit in 2006 and 2005 were non-deductible permanent differences. In 2004, the effective tax rate varied substantially from the statutory rate primarily as a result of non-deductible permanent differences, primarily IPR&D charges in connection with our acquisition by EMC. Partially offsetting this expense was the benefit of our mix of income attributable to foreign versus domestic jurisdictions. Additionally, we generated tax credits that reduced our effective tax rate by 8.0 percentage points in 2004.

Selected Quarterly Operating Results

 

    For the quarter ended (unaudited)
   

Mar 31,

2007

 

Dec 31,

2006

 

Sept 30,

2006

 

June 30,

2006

   

Mar 31,

2006

 

Dec 31,

2005

 

Sept 30,

2005

 

June 30,

2005

 

Mar 31,

2005

Revenues:

                 

License

  $ 169.6   $ 162.0   $ 126.3   $ 113.3     $ 90.3   $ 87.6   $ 71.0   $ 66.6   $ 61.8

Services

    89.1     67.6     62.5     43.1       38.8     27.6     29.4     25.0     18.1
                                                       
    258.7     229.6     188.8     156.4       129.1     115.2     100.4     91.6     79.9

Cost of revenues:

                 

Cost of license revenues

    20.6     14.5     18.5     13.8       12.4     10.8     10.4     10.1     9.0

Cost of services revenues

    23.5     22.8     19.0     12.8       9.6     7.4     6.5     5.9     5.1
                                                       
    44.0     37.3     37.5     26.6       22.0     18.2     16.9     16.0     14.1
                                                       

Gross profit

    214.7     192.3     151.3     129.8       107.1     97.0     83.5     75.6     65.8

Operating expenses:

                 

Research and development

    55.0     50.1     43.2     32.6       22.3     10.3     24.2     22.1     16.0

Sales and marketing

    86.7     80.6     61.1     54.1       42.6     39.7     33.9     28.0     23.4

General and administrative

    26.6     25.1     18.9     13.7       11.8     6.8     9.5     8.2     6.3

In-process research and development

    —       —       —       3.7       —       —       —       —       —  
                                                       

Operating income

    46.4     36.5     28.1     25.7       30.3     40.2     16.0     17.3     20.1

Investment income and other expenses, net

    3.0     1.2     1.0     (0.3 )     —       0.1     1.2     0.3     0.1
                                                       

Income before income taxes

    49.4     37.7     29.1     25.4       30.3     40.3     17.2     17.6     20.2

Provision for income taxes

    8.3     6.8     9.8     10.3       10.0     12.4     5.0     5.2     6.0

Cumulative effect of a change in accounting principle

    —       —       —       —         0.2     —       —       —       —  
                                                       

Net income

  $ 41.1   $ 31.0   $ 19.3   $ 15.1     $ 20.5   $ 28.0   $ 12.2   $ 12.4   $ 14.2
                                                       

Note: Certain columns may not add due to rounding.

 

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Liquidity and Financial Condition

In summary, our cash flows were:

 

     Year Ended
December 31,
   

For the
Period from
January 9,
2004 to
December 31,
2004

 
     2006     2005    
     (in millions)  

Net cash provided by operating activities

   $ 279.9     $ 238.2     $ 94.0  

Net cash used in investing activities

     (142.4 )     (45.7 )     (14.0 )

Net cash used in financing activities

     —         (190.0 )     (92.9 )

Cash provided by operating activities was $279.9, $238.2 and $94.0 in 2006, 2005 and 2004, respectively.

In 2006, our operating cash flow reflected net income generated during the period of $87.0, adjusted for non-cash items such as depreciation and amortization expense of $66.6 and stock-based compensation of $51.2. Additionally, working capital, including short- and long-term deferred revenue, income taxes payable and deferred income taxes, generated cash flow of $67.4, primarily the result of an increase in total deferred revenue of $158.1. Our deferred revenue balance consisted of deferred license revenues of $65.4 and deferred services revenues of $241.1 at December 31, 2006, of which $242.6 was categorized as current. The increase in deferred revenue was partially offset by an increase in accounts receivable of $98.0 due to increased revenue and an increase in net receivables due from EMC of $48.4.

In 2005, our operating cash flow reflected net income generated during the period of $66.8, adjusted for non-cash items such as depreciation and amortization expense of $39.5 and stock-based compensation of $27.1. Working capital, including short- and long-term deferred revenue, income taxes payable and deferred income taxes, generated cash flow of $104.7, primarily the result of an increase in total deferred revenue of $79.5. Our deferred revenue balance consisted of deferred license revenues of $51.2 and deferred services revenues of $97.3 at December 31, 2005, of which $131.6 was categorized as current. Additionally, our operating cash flow was positively impacted by increased income taxes payable to EMC of $44.1 and increased net payable due to EMC of $29.3. These increases in deferred revenue and amounts owed to EMC were partially offset by an increase in accounts receivable of $52.0 due to increased revenue.

In 2004, our operating cash flow reflected net income generated during the period of $16.8, adjusted for non-cash items such as depreciation and amortization expense of $30.2, stock-based compensation of $19.5 and in-process research and development of $15.2. Working capital, including short- and long-term deferred revenue, income taxes payable and deferred income taxes, generated cash flow of $11.1. Our operating cash flow was negatively impacted by an increase in accounts receivable of $28.1 due to increased revenue. This increase in accounts receivable was partially offset by the positive impact of increased net payable due to EMC of $17.2 and increased income taxes payable to EMC of $10.9.

Cash used in investing activities was $142.4, $45.7 and $14.0 in 2006, 2005 and 2004, respectively. Cash paid for business acquisitions, net of cash acquired, was $46.5 and $2.2 in 2006 and 2005, respectively. Capital additions were $52.6, $20.7 and $6.0 in 2006, 2005 and 2004, respectively. The annual increases in capital additions were attributable to supporting the growth of the business. Capitalized software development costs on a cash basis were $32.5, $21.6 and $8.2 in 2006, 2005 and 2004, respectively. The increase in the amount capitalized in 2005 compared to 2004 was attributable to the introduction of new and enhanced product offerings. We have entered into construction contracts aggregating approximately $162.7 for our new headquarters facilities. EMC currently reimburses us for the costs we are incurring under these contracts and will continue to do so through the date of the IPO, at which time we will purchase the facilities from EMC. We believe that cash on hand and cash generated from operations will be sufficient to pay for costs remaining to complete our new headquarters facilities. Through

 

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June 30, 2007, EMC has reimbursed us approximately $127.0. Additionally, in the second quarter of 2007, we entered into an agreement to acquire all of the capital stock of a privately held software development company for aggregate cash consideration of less than $10.0.

Cash used in financing activities was $190.0 and $92.9 in 2005 and 2004, resulting from dividends we paid to EMC. We had no financing activities in 2006. In April 2007, we declared an $800.0 dividend payable to EMC in the form of a note. The note matures in April 2012 and bears an interest rate of the 90-day LIBOR plus 55 basis points (5.91% as of June 30, 2007), with interest payable quarterly in arrears commencing June 30, 2007. The note may be repaid, without penalty, at any time commencing July 2007. We intend to use a portion of the proceeds from the IPO to repay a portion of the note.

Our cash and cash equivalents balance increased from $38.7 at December 31, 2005 to $176.1 at December 31, 2006. Based on our current operating and capital expenditure forecasts, we believe that the combination of funds currently available and funds to be generated from operations will be adequate to finance our ongoing operations for at least the next twelve months.

To date, inflation has not had a material impact on our financial results.

Results of First Quarter Operations

Our results of operations for the three months ended March 31, 2007 and 2006 are as follows:

 

     Three months ended March 31,  
     2007     2006  

Revenues:

          

License

   $ 169.6    65.5 %   $ 90.3    70.0 %

Services

     89.1    34.5 %     38.8    30.0 %
                          
     258.7    100.0 %     129.1    100.0 %

Cost of revenues:

          

Cost of license revenues

     20.6    7.9 %     12.4    9.6 %

Cost of services revenues

     23.5    9.1 %     9.6    7.4 %
                          
     44.0    17.0 %     22.0    17.0 %
                          

Gross profit

     214.7    83.0 %     107.1    83.0 %

Operating expenses:

          

Research and development

     55.0    21.2 %     22.3    17.3 %

Sales and marketing

     86.7    33.5 %     42.6    33.0 %

General and administrative

     26.6    10.3 %     11.8    9.2 %

In-process research and development

     —      —         —      —    
                          

Operating income

     46.4    17.9 %     30.3    23.5 %

Investment income and other expenses, net

     3.0    1.2 %     —      —    
                          

Income before income taxes

     49.4    19.1 %     30.3    23.5 %

Provision for income taxes

     8.3    3.2 %     10.0    7.7 %

Cumulative effect of a change in accounting principle

     —      —         0.2    —    
                          

Net income

   $ 41.1    15.9 %   $ 20.5    15.9 %
                          

Note: Certain columns may not add due to rounding.

 

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Revenues

For the first quarter, total revenues were $258.7 in 2007, which was a 100% increase over 2006 revenues of $129.1. The growth in 2007 reflected an increase of $79.3 in license revenue and an increase of $50.4 in services revenue. We market and sell our products largely through a network of channel partners, which includes distributors, resellers, x86 system vendors and systems integrators.

License Revenues. Software license revenues increased by 88% from $90.3 in the first quarter of 2006 to $169.6 in 2007. We believe a significant majority of the revenue growth in the first quarter of 2007 compared to the same period in 2006 is the result of increased sales volumes, driven largely by greater demand for our virtualization product offerings attributable to wider market acceptance of virtualization as part of organizations’ IT infrastructure, a broadened product portfolio and expansion of our network of indirect channel partners. The increase in our sales and marketing spending and the increase in our distribution channels, which grew by over 400 new partners in the first quarter, also contributed to the generation and cultivation of this additional demand.

We also experienced an increase in the number of orders greater than $50,000 in the first quarter of 2007, compared to the first quarter of 2006. Orders from our distributors and end-user customers which were greater than $50,000 were approximately 27% and 24% of revenue in the first quarters of 2007 and 2006, respectively. The increase in the number of orders greater than $50,000 is a result of broader acceptance of virtualization solutions for organizations’ IT infrastructure and a trend toward end-user customers using our products broadly across their organizations. In the second quarter of 2006, we introduced a new Enterprise product bundle which largely replaced the previous product bundle. We added three unique products to this bundle and increased the corresponding list price by 15%. This price increase was partially offset by decreasing prices on certain core platform products which were licensed for free. The impact of pricing on revenue growth in 2007 compared to 2006 was less than 10% of the overall increase in revenue.

Services Revenues. First quarter services revenues were $89.1 in 2007 and $38.8 in 2006, representing a year-over-year increase of 130%. Services revenues consist of software maintenance and professional services revenues. The increase in services revenues in 2007 was primarily attributable to growth in our software maintenance revenues of $38.7 and reflects the increase in license revenues, as well as renewals to customer contracts. Service revenue includes our professional services offerings, which increased by $11.7. Professional services revenues increased due to growing demand for design and implementation services and training programs, as end-user customers deployed virtualization across their organizations.

Cost of Revenues and Gross Profit

Our cost of revenues were $44.0 and $22.0 in the first quarter of 2007 and 2006, respectively, representing a year-over-year increase of 100%. Our gross profit for the first quarter was $214.7 in 2007 and $107.1 in 2006, which is an increase of 100%. The annual increase in our cost of sales was primarily attributable to increased direct support, professional services personnel and third-party professional services costs to support the increased services revenues. We also incurred increased costs to fulfill our license sales as the volume of our license sales increased. The aggregate total increase of these costs was $16.1 in the first quarter of 2007. The amortization of capitalized software development costs increased by $5.2 in 2007, a 188% increase. Fluctuations in foreign currency compared to the U.S. dollar did not have a significant effect on cost of revenues in the first quarter of 2007 and 2006. License revenues, as a percentage of total revenues, decreased from 70.0% in the first quarter of 2006 to 65.5% in the first quarter of 2007. Our gross margins, as a percentage of revenues, were 83.0% in both the first quarter of 2007 and 2006. Although services revenues, which have a lower gross margin than our license revenues, comprised a greater proportion of our revenue mix in the first quarter of 2007, the gross margin on our license revenues improved compared to the first quarter of 2006, resulting in our overall gross margin remaining flat. For the remainder of 2007, we expect that our services revenues will continue to increase as a percentage of our total revenues. Because services revenues have a lower gross margin than our license revenues, we expect our gross margins will be negatively impacted for the remainder of 2007. In future periods, our cost of revenues and gross profit will be adversely affected as a result of the Offer and the issuance of additional equity grants.

 

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The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the Offer, the initial public offering price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of our Class A common stock. See “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-based Compensation.”

Research and Development Expenses

Our R&D expenses were $55.0 and $22.3 in the first quarter of 2007 and 2006, respectively, representing a year-over-year increase of 146%. The increase in R&D expenses in 2007 consisted primarily of increased

salaries and benefits of $14.6, resulting from additional resources to support new product development. Software

capitalization decreased from $17.7 in 2006 to $7.6 in 2007. In 2006, we reached technological feasibility on our current VMware Infrastructure server product and capitalized the costs to develop that product. By contrast, in 2007, we have not reached technological feasibility on a product of similar magnitude. As a percentage of revenues, R&D expenses were 21.2% in 2007 and 17.3% in 2006. The increase in R&D expense as a percentage of revenues in 2007 compared to 2006 was primarily attributable to less software costs being capitalized. In future periods, our research and development expenses will be adversely affected as a result of the Offer and the issuance of additional equity grants. The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the Offer, the initial public offering price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of our Class A common stock. Additionally, the amount of equity-based compensation that may be capitalized will also affect the future expense. See “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-based Compensation.”

Sales and Marketing Expenses

For the first quarter, our sales and marketing expenses were $86.7 in 2007 and $42.6 in 2006, representing a year-over-year increase of 104% in 2007. The increase in sales and marketing expenses was the result of higher salaries and benefits, resulting from additional headcount in both sales and marketing personnel, and higher commission expense resulting from increased sales volume. Salaries, benefits and commission expense increased by $24.2. In certain international countries, EMC hires employees who work on our behalf. The costs incurred by EMC on our behalf, which principally relates to employees dedicated to our marketing effort, increased by $9.3. In order to expand our geographic reach in the first quarter of 2007, we added employees in two additional countries, as well as increased headcount in countries where we previously had employees. An increase in our marketing programs and travel of $4.0 also contributed to the growth in sales and marketing expenses. As a percentage of revenues, sales and marketing expenses were 33.5% and 33.0% in 2007 and 2006, respectively. The annual increases in sales and marketing expenses, as a percentage of revenues, were primarily attributable to incremental salaries, benefits and commissions. In future periods, our sales and marketing expenses will be adversely affected as a result of the Offer and the issuance of additional equity grants. The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the Offer, the initial public offering price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of our Class A common stock. See “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-based Compensation.”

General and Administrative Expenses

Our general and administrative expenses for the first quarter were $26.6 and $11.8 in 2007 and 2006, respectively, representing a year-over-year increase of 125%. Our general and administrative expenses increased primarily as a result of additional salaries, benefits and recruiting costs of $6.8, resulting from additional resources to support the growth of our business. Administrative costs, such as travel, equipment, facilities and depreciation, increased by $3.4 in 2007. Other administrative costs, such as legal, audit and tax fees, also contributed $1.2 to the increase in general and administrative expenses in 2007 compared to 2006. As a

 

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percentage of revenues, general and administrative expenses were 10.3% and 9.2% in 2007 and 2006, respectively. The increase in general and administrative expenses as a percentage of revenues was primarily attributable to incremental headcount to support the growth of our business. In future periods, our general and administrative expenses will be adversely affected as a result of the Offer and the issuance of additional equity grants. The actual impact is subject to a number of factors, including the number of equity instruments exchanged in the Offer, the initial public offering price of our Class A common stock and EMC’s two-day weighted average trading price prior to the consummation of the initial public offering of our Class A common stock. See “VMware Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-based Compensation.”

Operating Income

Our operating income was $46.4 and $30.3 in the first quarters of 2007 and 2006, respectively, representing a year-over-year increase of 53%. As a percentage of revenues, operating margins were 17.9% and 23.5% in 2007 and 2006, respectively. The decrease in margin in 2007 was primarily attributable to the effect of capitalized software development cost, net of amortization. Net capitalized software development cost increased operating income by $13.2 in 2006, but decreased operating income by $0.4 in 2007.

A portion of our costs of revenues, primarily the costs of personnel to deliver technical support on our products, and a portion of our operating expense primarily related to sales, sales support and research and development, are denominated in foreign currencies, primarily the British pound, the Euro, the Japanese yen, the Indian rupee, the Australian dollar and the Canadian dollar. These costs and the resulting effect on operating income are exposed to foreign exchange rate fluctuations. As a result of fluctuations in foreign currency values compared to the U.S. dollar, operating income decreased $3.8 in the first quarter of 2007 and increased $1.1 in the first quarter of 2006.

Investment Income and Other Net Expenses

Investment income and other expenses, net, were $3.0 in the first quarter of 2007 as compared with $0.0 in the same period of 2006. Investment income consists primarily of interest earned on cash and cash equivalent balances and on amounts due to us from EMC on our intercompany balance. Interest expense results primarily from balances owed by us to EMC. Investment income increased in 2007 compared to 2006 due to higher outstanding cash and cash equivalent balances and amounts owed to us by EMC on our intercompany balances.

Provision for Income Taxes

Our effective income tax rate was 16.9% in the first quarter of 2007 as compared with 32.9% for the same period in 2006. The reduction in the effective rate for the first quarter of 2007 compared to the first quarter of 2006 was primarily attributable to the benefit of our tax structure, whereby income in 2007 earned abroad principally qualifies for deferral from U.S. taxation, whereas in 2006 the income was principally taxed in the United States. Our rate of taxation in foreign jurisdictions is lower than our U.S. tax rate.

Liquidity and Financial Condition

For the quarters ended March 31, 2007 and March 31, 2006, our cash flows were:

 

    

Three months ended

March 31,

 
         2007             2006      

Net cash provided by operating activities

   $ 104.9     $ 99.6  

Net cash used in investing activities

     (22.6 )     (22.6 )

Net cash used in financing activities

     —         —    

 

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Cash provided by operating activities was $104.9 and $99.6 in the first quarter of 2007 and 2006, respectively.

In the first quarter of 2007, our operating cash flow reflected net income generated during the period of $41.1, adjusted for non-cash items such as depreciation and amortization expense of $21.2 and stock-based compensation of $11.6. Additionally, working capital, including short- and long-term deferred revenue, income taxes payable and deferred income taxes, generated cash flow of $30.4, as a result of a decrease in accounts receivable of $46.4 and an increase in deferred revenues of $33.7. Our deferred revenue balance consisted of deferred license revenues of $76.4 and deferred service revenues of $263.9 at March 31, 2007, of which $262.1 of the total deferred revenue balance was classified as current.

In the first quarter of 2006, our operating cash flow reflected net income generated during the period of $21.6, adjusted for non-cash items such as depreciation and amortization expense of $12.6 and stock-based compensation of $6.5. Additionally, working capital, including short- and long-term deferred revenue, income taxes payable and deferred income taxes, generated cash flow of $59.8, primarily as a result of an increase in deferred revenue of $29.9 and a decrease in accounts receivable of $13.9.

Cash used in investing activities was $22.6 for both the first quarter of 2007 and 2006. Capital additions were $16.6 and $10.4 in the first quarter of 2007 and 2006, respectively. Capitalized software development costs were $6.7 and $12.3 in the first quarter of 2007 and 2006, respectively. The decrease in capitalized software development costs in the first quarter of 2007 compared to the first quarter of 2006 was attributable to the current version of the Virtual Infrastructure software product reaching technological feasibility in 2006.

We had no financing activities in the first quarter of 2007 or 2006.

Financing Activities

In July 2007, we entered into a stock purchase agreement with Intel pursuant to which Intel, through its affiliate, Intel Capital has agreed to purchase 9.5 million shares of our Class A common stock at $23.00 per share for an aggregate offering price of $218.5, subject to the expiration of the applicable waiting period under the HSR Act and the satisfaction of customary closing conditions, including the absence of a material adverse change. If we do not complete an underwritten public offering with an aggregate offering price to the public of at least 250.0 million on or before December 31, 2007, Intel will have the right to exchange its Class A common stock for shares of Series A preferred stock, the terms of which will be designated prior to the closing of the Intel investment. We have also granted Intel Capital customary anti-dilution rights and a put right with a pre-set internal rate of return. We have also entered into an investor rights agreement with Intel pursuant to which Intel will have certain registration and other rights as a holder of our Class A common stock.

Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments

Guarantees and Indemnification Obligations

We enter into agreements in the ordinary course of business with, among others, distributors, resellers, x86 system vendors and systems integrators. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products infringes or misappropriates a patent, copyright, trademark, trade secret and/or other intellectual property right. Certain of these agreements require us to indemnify the other party against certain claims relating to property damage, personal injury or the acts or omissions by us, our employees, agents or representatives. In addition, from time to time we have made certain guarantees regarding the performance of our systems to our customers.

 

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Contractual Obligations

We have various contractual obligations impacting our liquidity. The following represents our contractual obligations as of December 31, 2006:

 

          Payments Due by Period
     Total    Less than
1 year
   1-3
years*
   3-5
years**
  

More than

5 years

Operating leases

   $ 298.0    $ 13.6    $ 16.8    $ 14.2    $ 253.4

Purchase orders

     46.7      46.7      —        —        —  

Construction contracts

     77.6      77.6      —        —        —  
                                  

Total

   $ 422.3    $ 137.9    $ 16.8    $ 14.2    $ 253.4
                                  

* Includes payments from January 1, 2008 through December 31, 2009.

 

** Includes payments from January 1, 2010 through December 31, 2011.

Our operating leases are primarily for office space around the world. We generally believe leasing such space is more cost-effective than purchasing real estate. While our purchase orders are generally cancelable without penalty, certain vendor agreements provide for percentage-based cancellation fees or minimum restocking charges based on the nature of the product or service. The construction contracts are for the construction of our new headquarter facilities. EMC currently reimburses us for the costs we are incurring under these contracts and will continue to do so through the date of the IPO, at which time we will purchase the facilities from EMC.

Critical Accounting Policies

Our consolidated financial statements are based on the selection and application of generally accepted accounting principles that require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. Our significant accounting policies are presented within Note A to our consolidated financial statements included elsewhere in this Prospectus—Offer to Exchange.

Accounting for Stock Options

In 2006, we adopted Financial Accounting Standard No. 123R, “Share-Based Payment,” or FAS No. 123R, to account for equity-based compensation expense. Our financial statements include the adoption of FAS No. 123R using the modified prospective transition method of adoption, which does not result in the restatement of results from prior periods.

FAS No. 123R requires recognizing compensation costs for all share-based payment awards made to employees based upon the awards’ estimated grant date fair value. The standard covers equity grants made by EMC to our employees, including stock options for EMC stock, restricted EMC stock and employee stock purchases related to EMC’s employee stock purchase plan, or ESPP. Additionally, we applied the provisions of SEC Staff Accounting Bulletin No. 107 on Share-Based Payment to our adoption of FAS No. 123R. Prior to 2006, we elected to account for these share-based payment awards under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB No. 25, and elected to only disclose the pro forma impact of expensing the fair value of stock options in the notes to the financial statements.

 

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We elected to estimate the fair value of employee stock option awards and the ESPP using the Black-Scholes model. The determination of the fair value of share-based payment awards on the date of grant using the Black-Scholes model is affected by EMC’s stock price, as well as assumptions regarding a number of subjective variables. These variables include the expected stock price volatility over the term of the awards, the risk-free interest rate associated with the expected term of the awards, expected dividends and actual and projected employee stock option exercise behaviors.

In 2006, the following weighted average assumptions for employee stock options and ESPP were used in the Black-Scholes model:

 

     Stock
Options
    ESPP  

Dividend yield

   None     None  

Expected volatility

   34.4 %   27.6 %

Risk free interest rate

   4.8 %   4.9 %

Expected life (in years)

   4.0     0.5  

To determine the expected volatility, we used a combination of implied volatility for six-month and two-year traded options on EMC’s stock, as well as EMC’s historical stock price volatility. The expected term assumption is based upon actual historical exercises and cancellations of EMC stock options. We are using the same methodology to calculate expected volatility and expected term that was used prior to our adoption of FAS No. 123R. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of employee stock options and ESPP. The dividend yield assumption is based on the history and expectation of dividend payouts. Stock-based compensation expense recognized within a given reporting period is based on awards that are expected to vest in current or future periods. Accordingly, recognized stock-based compensation expense from stock options and ESPP is reduced for expected forfeitures. FAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. See Note I to our consolidated financial statements for more information regarding our implementation of FAS No. 123R.

Changes to the underlying assumptions may have a significant impact on the underlying value of the stock options, which could have a material impact on our financial statements. Should our actual forfeitures differ from our estimates, this could have a material impact on our financial statements.

The value of stock options that will be granted by us after the IPO will be based on our volatility, or in the absence of a sufficient period of time to determine such volatility, the volatility of a representative peer group. This volatility may be higher than EMC’s volatility, which will have the effect of increasing our stock-based compensation expense.

Revenue Recognition

We derive revenue from the licensing of software and related services. We recognize revenue for software products and related services in accordance with the American Institute of Certified Public Accountants’ Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.

Our assessment of likelihood of collection is also a critical element in determining the timing of revenue recognition. If we do not believe that collection is probable, the revenue will be deferred until the earlier of when collection is deemed probable or cash is received.

 

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We recognize license revenue from the sale of software when risk of loss transfers, which is generally upon shipment or electronic transfer. We license our software under perpetual licenses, through our direct sales force and through our channel of distributors, resellers, x86 system vendors and systems integrators. We defer revenue relating to products that have shipped to our channel until our products are sold through the channel. We estimate and record reserves for products that are not sold through the channel based on historical trends and relevant current information. We obtain sell-through information from distributors and resellers on a monthly basis and reconcile any estimates, if necessary, made in the previous month. Historically, actual information has not differed materially from the related estimate. For our indirect channel partners who do not report sell-through data, we determine sell-through information based on such distributors’ and resellers’ accounts receivable balances and other relevant factors. For x86 system vendors, revenue is recognized in arrears upon the receipt of binding royalty reports. The accuracy of our reserves depends on our ability to estimate the product sold through the channels and could have a significant impact on the timing and amount of revenue we report.

We offer rebates to channel partners, which are recognized as a reduction of revenue at the time the related product sale is recognized. We account for marketing development funds and sales incentives to channel partners as a reduction of revenue. When rebates are based on the set percentage of actual sales, we recognize the costs of the rebates as a reduction of revenue when the underlying revenue is recognized. In cases where rebates are earned if a cumulative level of sales is achieved, we recognize the cost of the rebates as a reduction of revenue proportionally for each sale that is required to achieve the target. The estimated reserves for channel rebates and sales incentives are based on channel partners’ actual performance against the terms and conditions of the programs, historical trends and the value of the rebates. The accuracy of these reserves for these rebates, marketing development funds and sales incentives depends on our ability to estimate these items and could have a significant impact on the timing and amount of revenue we report.

Although our return policy does not allow end-users to return products for a refund, we may accept returns from time to time. Channel partners may also rotate stock when new versions of a product are released. The product returns reserve is based on historical experience of actual product returns, estimated channel inventory levels, the timing of new product introductions and promotions and other relevant factors. The accuracy of these reserves depends on our ability to estimate sales returns and stock rotation among other criteria. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.

Our services revenue consists of software maintenance and professional services. We recognize maintenance revenues ratably over the contract period. Professional services include design, implementation and training. Professional services are not considered essential to the functionality of our products because these services do not alter the product capabilities and may be performed by our customers or other vendors. Professional services engagements that have durations of 90 days or less are recognized in revenue upon completion of the engagement. Professional services engagements of more than 90 days for which we are able to make reasonably dependable estimates of progress toward completion are recognized on a proportional performance basis based upon the hours incurred. Revenue on all other engagements is recognized upon completion. However, if we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.

Our software products are sold with maintenance and/or professional services. Vendor-specific objective evidence (“VSOE”) of fair value of professional services is based upon the standard rates we charge for such services when sold separately. VSOE for maintenance services is established by the rates charged in stand-alone sales of maintenance contracts or the stated renewal rate for maintenance included in the license agreement. The revenue allocated to software license included in multiple element contracts represents the residual amount of the contract after the fair value of the other elements has been determined. Customers under maintenance agreements are entitled to receive updates and upgrades on a when-and-if-available basis. In the event upgrades have been announced but not delivered, product revenue is deferred after the announcement date until delivery occurs unless we have established VSOE of fair value for the upgrade. VSOE of fair value of upgrades is established based upon

 

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the price set by management. We have a history of selling upgrades on a stand-alone basis. We are required to exercise judgment in determining whether VSOE exists for each undelivered element based on whether our pricing for these elements is sufficiently consistent with the sale of these elements on a stand-alone basis. This could cause a material increase or decrease in the amount of revenue that we report in a particular period.

Asset Valuation

Asset valuation includes assessing the recorded value of certain assets, including accounts receivable, goodwill, capitalized software development costs and other intangible assets. We use a variety of factors to assess valuation, depending upon the asset. Accounts receivable are evaluated based upon the creditworthiness of our customers, historical experience, the age of the receivable and current market and economic conditions. Should current market and economic conditions deteriorate, our actual bad debt experience could exceed our estimate. We capitalize software development costs once our projects have reached technological feasibility at the earlier of completion of a detailed project design or a working model. Changes in judgment as to when technological feasibility is reached could materially impact the amount of costs capitalized. We amortize capitalized software development costs over periods ranging from 18 to 24 months, which represent the products’ estimated useful lives. Changes in the periods over which we actually generate revenues or the amounts of revenues generated could result in different amounts of amortization. Other intangible assets are evaluated based upon the expected period during which the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any of these factors could materially impact the value of the asset. Our goodwill valuation is based upon a discounted cash flow analysis. The analysis considers estimated revenue and expense growth rates. The estimates are based upon our historical experience and projections of future activity, considering customer demand, changes in technology and a cost structure necessary to achieve the related revenues. Changes in judgments on any of these factors could materially impact the value of the asset.

New Accounting Pronouncements

VMware adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), at the beginning of fiscal year 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We had no changes to the amount of our income tax payable as a result of implementing FIN No. 48. Prior to the adoption of FIN No. 48, our policy was to classify accruals for uncertain positions as a current liability unless it was highly probable that there would not be a payment or settlement for such identified risks for a period of at least a year. We reclassified $4.5 of income tax liabilities from current to non-current liabilities because a cash settlement of these liabilities is not anticipated within one year of the balance sheet date.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements,” or FAS No. 157, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. FAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and should be applied prospectively, except in the case of a limited number of financial instruments that require retrospective application. We are currently evaluating the potential impact of FAS No. 157 on our financial position and results of operations.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FAS 115,” or FAS No. 159. The new statement allows entities

 

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to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. FAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potential impact of FAS No. 159 on our financial position and results of operations.

Quantitative and Qualitative Disclosures about Market Risk

During the first quarter 2007, our international revenues accounted for 47% of our total revenues. International revenue as a percentage of total revenues was 44% in 2006, 46% in 2005 and 45% in 2004. Our revenue contracts are denominated in U.S. dollars and the vast majority of our purchase contracts are denominated in U.S. dollars. A portion of our cost of revenues, primarily the cost of personnel to deliver technical support on our products, and a portion of our operating expense related to sales and sales support and research and development, are denominated in foreign currencies, primarily the British pound, the Euro, the Japanese yen, the Indian rupee, the Australian dollar and the Canadian dollar. These costs and the resulting effect on gross margin and operating income are exposed to foreign exchange rate fluctuations. Upon consolidation, as exchange rates vary, costs of revenue and operating costs may differ materially from expectations. The Company does not hedge its exposure to foreign currency fluctuation. Our exposure to market risk relates primarily to the variable interest obligation on the note we incurred to fund an $800.0 dividend to EMC.

 

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BUSINESS OF VMWARE

VMware is the leading provider of virtualization solutions. Our virtualization solutions represent a pioneering approach to computing that separates the operating system and application software from the underlying hardware to achieve significant improvements in efficiency, availability, flexibility and manageability. Our broad and proven suite of virtualization solutions addresses a range of complex IT problems that include infrastructure optimization, business continuity, software lifecycle management and desktop management. The benefits to our customers include substantially lower IT costs, choice of operating systems and a more automated and resilient systems infrastructure capable of responding dynamically to variable business demands. Our customer base includes 100% of the Fortune 100 and over 84% of the Fortune 1,000. Our customer base for our server solutions has grown to include 20,000 organizations of all sizes across numerous industries. We believe our solutions deliver significant economic value for customers, and many have adopted our solutions as the strategic and architectural foundation for their future computing initiatives.

Our solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity that can be allocated dynamically, securely and reliably to applications as needed, increasing hardware utilization and reducing spending. In the eight years since the introduction of our first virtualization platform, we have expanded our offering with virtual infrastructure automation products to address distributed and heterogeneous infrastructure challenges such as system recoverability and reliability, backup and recovery, resource provisioning and management, capacity and performance management and desktop security. We have also complemented our virtualization platforms with a suite of related virtual infrastructure management products.

We began shipping our first product in 1999, and today we offer 16 products. Our flagship desktop product, VMware Workstation, is in its sixth generation and our flagship server product suite, VMware Infrastructure, is in its third generation. Our products are widely recognized for their innovation and quality. We believe that our technological leadership can be attributed to our highly talented R&D engineers, over 40% of whom have advanced degrees.

We believe that the addressable market opportunity for our virtualization solutions is large and expanding. IDC estimates that less than one million of the 24.6 million x86 servers and less than five million of the 489.7 million business client PCs deployed worldwide are running virtualization software. We believe industry trends towards more powerful yet under-utilized multi-core servers and the increasing complexity of managing desktop environments will drive widespread adoption of virtualization for both server and desktop deployments. We believe that our innovative virtualization solutions will enable us to maintain our leadership in this large addressable market by increasing our penetration within our substantial installed base and through the addition of new customers.

We work closely with over 200 technology partners, including leading server, processor, storage, networking and software vendors. We have shared the economic opportunities surrounding virtualization with our partners by facilitating solution development through open APIs, formats and protocols and providing access to our source code and technology. The endorsement and support of our partners have further enhanced the awareness, reputation and adoption of our virtualization solutions.

We have developed a multi-channel distribution model to expand our presence and reach various segments of the market. We derive a significant majority of our revenues from our large indirect sales channel of more than 4,000 channel partners that include distributors, resellers, x86 system vendors and systems integrators. We believe that our partners benefit greatly from the sale of our solutions through additional services, software and hardware sales opportunities. We have trained a large number of partners and end users to deploy and leverage our solutions.

 

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We were founded in 1998 and have continued to operate in large measure as a stand-alone company following our acquisition by EMC in 2004. Our independence has been critical to building deep and mutually beneficial relationships with a broad group of partners. During 2006, we generated $703.9 million in revenues, an 82% increase over our 2005 results. For financial information about our business by segment and geographic area, see Note L to the consolidated financial statements included elsewhere in this Prospectus—Offer to Exchange. We are based in Palo Alto, California with 39 offices worldwide.

Industry Background

The Proliferation of x86 Servers and Desktops Introduces New Challenges

The introduction of x86 servers in the 1980s provided a low-cost alternative to mainframe and proprietary UNIX systems. The broad adoption of Windows and the emergence of Linux as server operating systems in the 1990s established x86 servers as the industry standard. x86 server shipments represented 93% of new servers in 2006 according to IDC. The growth in x86 server and desktop deployments has introduced new operational risks and IT infrastructure challenges. These challenges include:

 

   

Low Infrastructure Utilization. Typical x86 server deployments achieve an average utilization of only 10% to 15% of total capacity according to IDC. Organizations typically do not run more than one application per server to avoid the risk of faults or security vulnerabilities in one application affecting the availability of another application on the same server. This “one application to one server” approach, combined with the relative inefficiency of most x86-based server applications, has resulted in significant under-utilization of x86-based server resources. IDC estimates that organizations currently maintain total excess computing capacity valued at $140 billion in the form of over-provisioned or idle servers. We believe that the industry trend towards multi-core architectures, which increase server capacity by combining two or more independent processors into a single package, will likely result in even lower utilization levels. According to IDC, more than 95% of x86-based servers currently have four processors or less. We therefore believe applications currently running on these servers are unlikely to take advantage of the eight- to sixteen-processor architectures that are likely to be the industry standard within the next few years.

 

   

Increasing Physical Infrastructure Costs. Although the average selling prices of servers and related IT infrastructure continue to decline, the operational costs to support this growing infrastructure have steadily increased. Most computing infrastructure must remain operational at all times, resulting in power consumption, cooling and facilities costs that do not vary with utilization levels. In some cases, the lack of adequate power supply represents the limiting factor to an organization’s ability to deploy new applications and servers. IDC estimates that organizations spent $29.0 billion in 2006 to power and cool the worldwide installed base of servers, the vast majority of which are x86 servers.

 

   

Increasing IT Management Costs. IDC estimates that organizations typically spend more than 80% of their overall IT budgets on the routine maintenance of existing infrastructure. As computing environments become more complex, the level of specialized education and experience required for infrastructure management personnel and the associated costs of such personnel have increased. To support the rapid growth of under-utilized servers and associated IT infrastructure, organizations spend disproportionate time and resources on manual tasks associated with server maintenance, and thus require more personnel to complete these tasks. Furthermore, automation of operational processes is inherently difficult given the complexity and heterogeneity of the environments.

 

   

Insufficient Failover and Disaster Protection. Organizations are increasingly affected by the downtime of critical server applications and inaccessibility of critical end user desktops. The threat of security attacks, natural disasters, health pandemics and terrorism has elevated the importance of business continuity planning for both desktops and servers. The increasing dependence on x86-based server applications has elevated the importance of protecting them against local hardware failure, application faults and human error. Traditional solutions for both high availability and business continuity are complex and costly and therefore have only been deployed for a small subset of applications.

 

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Desktop Management and Security. Managing and securing enterprise desktops present numerous challenges. Controlling a distributed desktop environment and enforcing management, access and security policies without impairing users’ ability to work effectively is complex and expensive. Numerous patches and upgrades must be continually applied to desktop environments to eliminate security vulnerabilities.

The Emergence of Industry-Standard Infrastructure Virtualization

Virtualization was first introduced in the 1970s to enable multiple business applications to share and fully harness the centralized computing capacity of mainframe systems. Virtualization was effectively abandoned during the 1980s and 1990s when client-server applications and inexpensive x86 servers and desktops established the model of distributed computing. Rather than sharing resources centrally in the mainframe model, organizations used the low cost of distributed systems to build up islands of computing capacity, providing some benefits but also introducing new challenges. In 1999, VMware introduced virtualization to x86 systems as a means to efficiently address many of these challenges and to transform x86 systems into general purpose, shared hardware infrastructure that offers full isolation, mobility and operating system choice for application environments.

Virtualization can be implemented using various approaches. The most prevalent approach uses a layer of software called a “hypervisor” that resides below the operating system (see Exhibit 1). The hypervisor provides the capability to enable multiple applications and operating systems to share the underlying hardware safely by encapsulating each application and operating system in its own “virtual machine.” Organizations use this technology to run multiple applications and heterogeneous operating systems on the same hardware and across different hardware configurations, raising utilization and reducing costs.

Exhibit 1: Virtualization Enables Secure System Partitioning

LOGO

The Need for Virtual Infrastructure Automation and Management

The introduction of virtualization technology presents a number of opportunities for driving capital and operational efficiency above and beyond the simple benefit of safe partitioning. By decoupling the entire software environment from its underlying hardware infrastructure, virtualization enables the aggregation of multiple servers, storage infrastructure and networks into shared pools of resources that can be delivered dynamically, securely and reliably to applications as needed (see Exhibit 2). This pioneering approach enables organizations to build a computing infrastructure with high levels of utilization, availability, automation and

 

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flexibility using building blocks of inexpensive industry-standard servers. Although virtualization represents the core enabling technology, the enormous benefits associated with this general purpose computing infrastructure cannot be fully realized without virtual infrastructure automation and management solutions.

Exhibit 2: Virtualization Enables a Distributed Virtual Infrastructure

LOGO

Market Opportunity

IDC estimates the installed base of x86-based servers in 2006 at 24.6 million units, growing to 33.8 million units by 2010. According to IDC, worldwide shipments of x86 servers are expected to increase from 6.9 million units in 2006 to 8.7 million units in 2010. IDC estimates that the percentage of all new x86 server shipments running virtualization software will increase from 5% in 2005 to 17% in 2010. We believe industry trends towards more powerful yet under-utilized multi-core servers will further accelerate the widespread adoption of virtualization for server deployments.

Desktop virtualization provides organizations with the ability to manage desktop deployments through the use of virtual machines running on centralized server farms in the corporate data center or IT-managed desktop-based virtual machines. For server-based desktops, users access these desktops remotely from a desktop or a thin client using a remote display protocol. The centralized management of desktop deployments enables organizations to significantly improve the efficiency of desktop installations, upgrades, patches and backups. Desktop virtualization also enables organizations to package an IT-managed desktop within a secured virtual machine and deploy it to an unmanaged physical desktop, which can greatly reduce the manageability challenges associated with remote access deployments. IDC estimated that the installed base of business client PCs reached 489.7 million as of December 2006. We believe that companies spend approximately $1,000 to $2,000 per desktop per year to deliver the necessary manageability, security and resilience. We believe that these desktop systems and associated spending represent a significant potential market for virtualization-based solutions.

Our Solution

Our virtualization solutions run on industry-standard servers and desktops and support a wide range of operating system and application environments, as well as networking and storage infrastructure. We have designed our solutions to function independently of the hardware and operating system to provide customers with a broad platform choice. Our solutions provide a key integration point for hardware and infrastructure management vendors to deliver differentiated value that can be applied uniformly across all application and operating system environments. Key benefits to our virtualization solutions include:

 

   

Server Consolidation and Infrastructure Optimization. Our solutions enable organizations to achieve significantly higher resource utilization by pooling common infrastructure resources and breaking the

 

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“one application to one server” model. Our research indicates that our customers commonly achieve server consolidation ratios that average 5:1 and can achieve ratios that exceed 20:1 by using our solutions to run each of their applications in an isolated and secure virtual machine. Our solutions include numerous availability safeguards to mitigate the risk of loading multiple applications onto the same hardware platform. We have also developed tools and management products to enable easy planning and conversion of physical machines into virtual machines, as well as for the optimization and ongoing maintenance of a consolidated virtual environment.

 

   

Physical Infrastructure Cost Reduction. Through significant server consolidation and containment results, our solutions increase utilization rates and reduce the required number of servers and other infrastructure overhead. Our solutions enable organizations to achieve significant reductions in their physical infrastructure costs through reduced data center space, power and cooling costs required to support new and existing applications. Our solutions also allow organizations to reduce or defer capital expenditures for new data center facilities.

 

   

Improved Operational Flexibility and Responsiveness. Our solutions include a set of virtual infrastructure automation and management products that simplify and automate labor and resource intensive IT operations across disparate hardware, operating system and software application environments. Our virtual infrastructure automation and management solutions reduce the amount of time IT professionals must spend on largely reactive tasks, such as provisioning, configuration, monitoring and maintenance. In many cases, our solutions enable organizations to reduce the number of IT professionals required to effectively manage and maintain their infrastructure resources and to adapt their IT infrastructure more quickly to respond to changing business needs.

 

   

Increased Application Availability and Improved Business Continuity. Our solutions enable organizations to reduce both planned and unplanned downtime in their computing environments. For planned downtime, we provide a live migration product called VMotion that enables users to move virtual machines running applications and operating systems across physically separate machines with no service interruption or data loss. For unplanned downtime, our solutions enable organizations to create a simple, cost-effective and rapid recovery strategy for the vast majority of x86-based workloads, many of which are not currently covered by traditional recovery strategies. The use of our solutions to migrate entire virtual environments to new data center locations enables our customers to implement fast and efficient business continuity strategies.

 

   

Improved Desktop Manageability and Security. Our desktop virtualization solutions allow organizations to centrally host and manage desktop environments while providing a desktop-like experience to an end user. This virtual desktop infrastructure allows IT organizations to efficiently control desktop environments regardless of location, desktop hardware, operating system or business application access needs. Our virtualization solutions also allow organizations to deploy portable desktop virtual machines on unmanaged desktops while providing a layer of policy control and security around each virtual machine. The use of desktop virtualization in remote access deployments provides organizations with complete control of the hardware configuration and networking capabilities of an unmanaged desktop to ensure compliance with security policies.

Our Competitive Strengths

We believe that the following competitive strengths position us well to maintain and extend our leadership in virtualization solutions.

 

   

Leading Technology and Market Position. Since our founding in 1998, we have focused exclusively on pioneering virtualization technology, continuously improving our core virtualization platform and progressively expanding the application of virtualization technology to address previously unsolvable IT challenges. Our flagship desktop product, VMware Workstation, is in its sixth generation and our flagship server product suite, VMware Infrastructure, is in its third generation. Our products and solutions have received over 100 industry awards for excellence and leadership in their category. Our highly skilled

 

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employee base includes many of the industry’s foremost experts in systems and virtualization technology and provides us with unparalleled experience and knowledge in delivering innovative and high-quality virtualization solutions. Our technology is the most widely deployed on the market today, and industry analysts have independently characterized us as the leading virtualization solution provider in the marketplace. We believe that our commitment to virtualization innovation, combined with our industry-leading market position, creates strong brand recognition and preference among current and prospective customers, technology partners and resellers and accelerates the adoption of our solutions.

 

   

Broad Product Portfolio. We offer a broad virtualization product suite that addresses an organization’s virtualization needs from the data center to the desktop. We offer 16 virtualization-based products across three product categories. Our flagship server product suite, VMware Infrastructure, bundles several of our products to deliver superior functionality and performance, as well as seamless integration into existing infrastructure of our customers. We believe that our broad product portfolio of virtualization solutions provides us with a substantial advantage over competitors that offer discrete, point virtualization products.

 

   

Open Standards and Choice of Operating Systems. Our virtualization software enables customers to create and manage a shared pool of hardware resources that is independent of specific operating system and x86 hardware platforms. This allows our customers to deploy a heterogeneous environment of operating systems, underlying x86 hardware and associated networking and storage infrastructure. We have successfully certified more than 200 hardware platforms and successfully tested more than 60 operating systems for use with our solutions. We provide our partners access to our source code, as well as open APIs, formats and protocols to facilitate their development of interoperable and differentiated products. We also make our APIs, formats and protocols available for use by our partners and for inclusion in virtualization industry standards. We have designed our virtualization solutions to be an extension of hardware, as opposed to the operating system, resulting in a more flexible and robust solution that delivers both strategic choice and economic value to customers.

 

   

Large Installed Base of Customers. We have a large installed customer base of more than 20,000 organizations using our server solutions. Our customer base includes 100% of Fortune 100 companies and over 84% of Fortune 1,000 companies. Our customer base includes organizations of all sizes across numerous industries. We believe that our customers view us as a key strategic solutions provider. The performance and reliability of our products has resulted in high customer satisfaction and strong customer loyalty. Many customers have implemented a policy to standardize and run all their new applications on our solutions, presenting us with significant opportunities to expand our footprint within these organizations as they grow their IT infrastructure.

 

   

Strong Partner Network. We have extensive relationships with our technology, channel and consulting partners. Our network of partners continues to expand as the interest in and adoption of our technology grows. We believe the deployment of our leading virtualization solutions represents a strategic IT architecture decision for organizations, which creates significant product and services revenue opportunities for our partners. These opportunities provide strong incentives for our partners to collaborate with us to drive further adoption of our technology. We partner with more than 200 x86 system vendors, ISVs and other technology partners, as well as more than 4,000 distribution, reseller and consulting partners. The endorsement and support of our partners have further enhanced the awareness, reputation and adoption of our virtualization solutions.

 

   

Robust Global Support Operations and Services. We offer a full range of 24x7 support offerings for both customers and partners, ranging from incident-level to business-critical service, backed by our industry-leading expertise in virtualization solutions. We have nearly a decade of experience installing, integrating and supporting our broad virtualization solutions in various production environments for businesses of all sizes. Our support services cover a broad range of hardware platforms and software configurations. We implement a “follow the sun” approach to deliver continuous customer support through our locations on three continents. We believe that our global support organization and capabilities positively impact our customer satisfaction, maintenance renewal levels and specifically differentiate us from smaller virtualization solution competitors.

 

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Our Growth Strategy

Our objective is to extend our market leadership in virtualization solutions. To accomplish this objective, we intend to:

 

   

Broaden our Product Portfolio. We continue to innovate and develop new server and desktop solutions and offer additional services that enhance the value of our current offerings. For example, the introduction of our VMware Infrastructure 3 product suite in 2006 expanded our offerings to include new capabilities in high availability, resource management and backup and recovery. We intend to provide our existing and prospective customers with additional solutions that will leverage virtualization technology to further optimize the value and reliability of their computing infrastructure. We may also pursue the acquisition of companies with complementary products and technologies that we believe will enhance our suite of offerings.

 

   

Enable Choice for Customers and Drive Standards. We have designed and plan to maintain our core virtualization platforms as an operating system-independent extension of x86 hardware. By offering the functionality to pool and manage the resources of multiple servers and networking and storage infrastructure, our virtualization solutions extend beyond server virtualization to enable a next-generation, operating system-agnostic, distributed computing infrastructure with significant scalability, reliability, security, availability and flexibility.

 

   

Expand our Network of Technology and Distribution Partners. We believe that the endorsement and support of our partners and user community accelerate the adoption of our solutions. We focus on enabling our partners to realize new economic opportunities through the integration and distribution of our solutions. We intend to expand our network of technology and distribution partners and increase the value our solutions provide to the hardware and software solutions of our partners. We will continue to collaborate with, and create additional revenue opportunities for, our partners to encourage their efforts to drive adoption and sales of our virtualization solutions.

 

   

Increase Sales to Existing Customers and Pursue New Customers. We believe we have a significant opportunity to increase our sales to existing customers by targeting additional business units, pursuing upgrades and broad enterprise deployments and enhancing the functionality of our existing solutions. We will continue to aggressively pursue new customers globally by expanding our direct and indirect sales channels and our services offerings to complement our virtualization technology.

 

   

Increase Market Awareness and Drive Adoption of Virtualization. We offer free solutions, which include VMware Player, VMware Server and VMware Converter. These entry-level solutions allow customers to evaluate the benefits of our virtualization technology and subsequently purchase advanced versions of our solutions. Our free software offerings, together with more than 400 third-party applications distributed in virtual appliances, provide an entry point for potential customers that can lead to additional product sales and broad adoption of our technology. We also host our annual VMworld industry conference to increase global awareness of virtualization solutions.

Our Products and Technology

We offer a broad portfolio of products that spans the consumer desktop to the enterprise data center. Our products generally fall into three categories (see Exhibit 3):

 

   

Virtualization Platforms. Our virtualization platforms include a hypervisor for system partitioning that provides the capability to safely, securely and efficiently run multiple operating systems simultaneously on the same physical machine. Our platforms range from free, entry-level products for the desktop and server to more feature-rich desktop and server platforms.

 

   

Virtual Infrastructure Automation. Our virtual infrastructure automation products utilize the unique benefits of our virtualization platforms to automate system infrastructure services, such as resource management, availability, mobility and security. By deploying our virtual infrastructure automation

 

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products with our virtualization platforms, VMware customers can reduce the operational complexity of their environments.

 

   

Virtual Infrastructure Management. Unlike our virtual infrastructure automation products, which improve the runtime availability and reliability of the virtual machines, our virtual infrastructure management products automate the interaction between various IT constituencies and the virtual infrastructure for a specific set of point solutions. These solutions range from capacity sizing and assessment to development lab management.

Exhibit 3: VMware Product Portfolio

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Virtualization Platform Products

 

   

VMware Player. VMware Player is a free virtualization platform that enables individuals to run virtual machines on their desktops but does not allow virtual machine creation. We use VMware Player primarily as an awareness tool to familiarize individuals with the concept of virtual machines. VMware Player has been downloaded more than 2.6 million times since it was made generally available in December 2005.

 

   

VMware Workstation. VMware Workstation is a desktop virtualization product for software developers and enterprise IT professionals who need to run multiple operating systems simultaneously on a single desktop. Users can run Windows, Linux, NetWare or Solaris x86 in fully networked, portable virtual machines with no rebooting or hard drive partitioning required. VMware Workstation delivers excellent performance and advanced features, such as memory optimization and the ability to manage multi-tier configurations and multiple snapshots.

 

   

VMware Server. VMware Server is a free virtualization platform that enables simple partitioning of a server into multiple virtual machines. VMware Server runs as an application on top of an existing Windows or Linux operating system, unlike our VMware ESX Server platform, which runs its own microkernel. VMware Server is principally an awareness tool for administrators to become familiar with virtualization, though customers may opt to pay an annual support and subscription fee if they would like the product supported in a production or test environment. VMware Server has been downloaded more than 1.7 million times since it was made generally available in November 2006.

 

   

VMware ESX Server. VMware ESX Server is our enterprise-class virtualization platform that runs directly on the hardware with its own microkernel and requires no third-party operating system.

 

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VMware ESX Server is designed expressly for the purpose of running virtual machines securely, efficiently and flexibly. VMware ESX Server’s microkernel architecture provides numerous efficiencies and performance benefits, including advanced resource management features, such as memory over-commitment and share-based resource allocations to guarantee quality of service. VMware ESX Server also has built-in redundancy features, such as device teaming and storage multi-pathing, to mitigate the risk of any component failure in a high-density, shared environment.

 

   

VMware Virtual SMP. VMware Virtual SMP enables a single virtual machine to use up to four physical processors simultaneously, thereby allowing customers to run processor- and resource-intensive applications in virtual machines.

 

   

VMware VMFS. VMware VMFS is a clustered file-system and volume manager that enables multiple ESX Servers to safely, efficiently and reliably share block-based storage. It was designed expressly for the purpose of handling virtual machines and is required to enable reliable use of our Virtual Infrastructure Automation products.

Virtual Infrastructure Automation Products

 

   

VMware VirtualCenter. VMware VirtualCenter provides a central point of control to provision, monitor and manage a virtualized IT environment. VMware VirtualCenter also manages the runtime coordination of infrastructure automation products, such as VMware VMotion, VMware DRS and VMware HA, and provides outbound software interfaces for network and systems management software vendors to incorporate these technologies and other elements of virtual machine management into their user consoles.

 

   

VMware VMotion. VMware VMotion allows users to move virtual machines with running applications and operating systems from one physical machine to another with no service interruption or data loss. Our customers have used VMware VMotion for more than three years to improve service levels delivered to their end users. Customers typically use VMware VMotion to perform zero-downtime planned hardware maintenance, non-disruptive server migration or dynamic resource repurposing.

 

   

VMware DRS. VMware DRS creates resource pools from an aggregation of physical servers. VMware DRS dynamically allocates virtual machines to resource pools on demand. Once virtual machines have been provisioned, VMware DRS continuously monitors utilization across the resource pool and intelligently balances a collection of virtual machines across the servers in the resource pool using VMware VMotion. The VMware DRS resource management policies may be driven by pre-defined and automated rules that reflect business needs and priorities. VMware DRS delivers higher quality of service by managing resource commitments in a shared environment.

 

   

VMware HA. VMware HA provides automated recovery from hardware failure for any application running in a virtual machine, regardless of its operating system or underlying hardware configuration. The technology includes an in-memory, replicated database across all of the VMware ESX Servers in a resource pool that tracks the status of every virtual machine. In the event of a failure, affected virtual machines are immediately recovered onto alternate systems. This technology addresses a key need to make workloads instantly recoverable to mitigate the impact of hardware failures in a shared environment.

 

   

VMware Consolidated Backup. VMware Consolidated Backup (VCB) enables LAN-free, automated backup of virtual machines from a centralized backup proxy. The product includes software utilities for third-party backup products to efficiently snapshot and back up running virtual machines from a single, secure proxy server. VCB can be used to perform both file-level and full-system backup and recovery with an existing backup infrastructure. It provides a critical, zero-downtime solution to manage the increased density of backup operations in a highly utilized shared environment.

 

   

VMware ACE. VMware ACE enables desktop administrators to lock down desktop endpoints and protect critical company resources against the risks presented by unmanaged desktops. With VMware

 

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ACE, desktop administrators package an IT-managed desktop within a secured virtual machine and deploy it to an unmanaged physical desktop. Once installed, VMware ACE provides a suite of automated security policies around the virtual machine, such as encryption, expiration, network and device access policies, transforming the unmanaged desktop to ensure compliance with security policies.

Virtual Infrastructure Management Products

 

   

VMware Capacity Planner. VMware Capacity Planner is a hosted application that enables VMware service providers to perform capacity assessments onsite at a customer facility. The service provider installs and runs a collector at the customer facility that conducts agent-less discovery and collection of performance information for all servers in an environment. VMware Capacity Planner loads this performance information into a hosted data warehouse and provides web-based analytics tools and consolidation recommendations to the service provider.

 

   

VMware Converter. VMware Converter enables customers to quickly and reliably convert local and remote physical machines into virtual machines. Users may also input third-party image formats or third-party virtual machines into VMware Converter to create virtual machines that run on our platforms.

 

   

VMware Virtual Desktop Infrastructure. VMware Virtual Desktop Infrastructure (VDI) enables companies to host individual desktops inside virtual machines running on centralized servers in their data center. Users access these virtual desktops remotely from a physical desktop or a thin client using a remote display protocol. Since applications are managed centrally at the corporate data center, organizations gain better control over their desktop deployments. Unlike other server-based solutions that do not provide a complete desktop experience or require specific architectures, VDI includes full desktop environments familiar to end users and not limited by hardware or location.

 

   

VMware Lab Manager. VMware Lab Manager automates the setup, capture, storage and sharing of multi-machine software configurations for development and staging environments. Using VMware Lab Manager, development and test teams can access multiple software configurations and virtual machines on demand through a self-service portal.

Support and Services

We believe that our strong services organization and frequent customer touch points help establish loyal customers that provide references and help promote our technology across various industries. We have implemented a broad services strategy that leverages the professional services organizations of our partners. We have also established our own services offerings to complement our partners&