10-K 1 d48366e10vk.htm FORM 10-K e10vk
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)
   
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: February 2, 2007
or
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to           
Commission file number: 0-17017
 
Dell Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware   74-2487834
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
One Dell Way, Round Rock, Texas 78682
(Address of principal executive offices) (Zip Code)
 
Registrant’s telephone number, including area code: (512) 338-4400
 
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act.  Yes þ  No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o No þ
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No þ
 
         
Approximate aggregate market value of the registrant’s common stock held by non-affiliates as of August 3, 2007, based upon the closing price reported for such date on The NASDAQ Stock Market
    $54.0 billion  
Number of shares of common stock outstanding as of October 19, 2007
    2,235,866,516  
 


 

 
Table of Contents
 
                 
        Page
 
  Business   1
  Risk Factors   9
  Unresolved Staff Comments   13
  Properties   13
  Legal Proceedings   14
  Submission of Matters to a Vote of Security Holders   16
 
PART II
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   17
  Selected Financial Data   20
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   36
  Quantitative and Qualitative Disclosures About Market Risk   56
  Financial Statements and Supplementary Data   57
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   111
  Controls and Procedures   111
  Other Information   116
 
PART III
  Directors, Executive Officers and Corporate Governance   116
  Executive Compensation   123
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   144
  Certain Relationships and Related Transactions, and Director Independence   146
  Principal Accountant Fees and Services   148
 
PART IV
  Exhibits, Financial Statement Schedules   150
      152
      154
Exhibits
  (attached to the Report on Form 10-K)
 Amendment No. 3 to Amended and Restated 401(k) Plan
 Subsidiaries
 Consent of PricewaterhouseCoopers LLP
 Certification of Chairman and CEO Pursuant to Section 302
 Certification of Vice Chairman and CFO Pursuant to Section 906
 Certifications Pursuant to Section 906


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This report contains forward-looking statements that are based on Dell’s current expectations. Actual results in future periods may differ materially from those expressed or implied by those forward-looking statements because of a number of risks and uncertainties. For a discussion of risk factors affecting our business and prospects, see “Part I — Item 1A — Risk Factors.”
 
All percentage amounts and ratios were calculated using the underlying data in thousands. Unless otherwise noted, all references to industry share and total industry growth data are for personal computers (including desktops, notebooks, and x86 servers), and are based on information provided by IDC Worldwide Quarterly PC Tracker, September 2007. Share data is for the full calendar year and all our growth rates are on a fiscal year-over-year basis. Unless otherwise noted, all references to time periods refer to our fiscal periods.
 
 
Special Note
 
Along with this report, we are filing our amended quarterly report for the first quarter of Fiscal 2007 and our delayed quarterly reports for the second and third quarters of Fiscal 2007 and the first and second quarters of Fiscal 2008. These reports were amended or delayed due to questions raised in an independent investigation into certain accounting and financial reporting matters conducted by our Audit Committee. That investigation has been completed, and the investigator has reported the results to the Audit Committee. As a result of issues identified in that investigation, as well as issues identified in additional reviews and procedures conducted by management, the Audit Committee, in consultation with management and PricewaterhouseCoopers LLP, our independent registered public accounting firm, concluded on August 13, 2007 that our previously issued financial statements for Fiscal 2003, 2004, 2005, and 2006 (including the interim periods within those years), and the first quarter of Fiscal 2007, should no longer be relied upon because of certain accounting errors and irregularities in those financial statements. Accordingly, we have restated our previously issued financial statements for those periods. The adjustments made as a result of the restatement are more fully discussed in Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data,” and the cumulative impact of the restated financial results at the beginning of Fiscal 2003 is presented in “Part II — Item 6 — Selected Financial Data.” For additional discussion of the investigation, the accounting errors and irregularities identified, and the restatement adjustments, see “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Audit Committee Independent Investigation and Restatement” and Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” For a description of the control deficiencies identified by management as a result of the investigation and our internal reviews, and management’s plan to remediate those deficiencies, see “Part II — Item 9A — Controls and Procedures.”
 
PART I
 
ITEM 1 — BUSINESS
 
General
 
Dell listens to customers and delivers innovative technology and services they trust and value. As a leading technology company, we offer a broad range of product categories, including desktop computer systems, storage, servers and networking products, mobility products, software and peripherals, and enhanced services. We are the number one supplier of personal computer systems in the United States, and the number two supplier worldwide.
 
Our company is a Delaware corporation and was founded in 1984 by Michael Dell on a simple concept: by selling computer systems directly to customers, we can best understand their needs and efficiently provide the most effective computing solutions to meet those needs. Our corporate headquarters are located in


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Round Rock, Texas, and we conduct operations worldwide through subsidiaries. When we refer to our company and its business in this report, we are referring to the business and activities of our consolidated subsidiaries. We operate principally in one industry, and we manage our business in three geographic regions: the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific-Japan (“APJ”). See “Part I — Item 1 — Business — Geographic Areas of Operations.”
 
We are committed to managing and operating our business in a responsible and sustainable manner around the globe. This includes our commitment to environmental responsibility in all areas of our business. We recently set an ambitious long-term goal to be the “greenest technology company on the planet,” and have a number of efforts that take the environment into account at every stage of the product lifecycle. See “Part I — Item 1— Business — Sustainability.”
 
This also includes our renewed focus on achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity. See “Part II — Item 9A — Controls and Procedures.”
 
Business Strategy
 
Our business strategy is evolving as we combine our direct customer model with relevant technologies and solutions, highly efficient manufacturing and logistics, and new distribution channels to reach commercial customers and individual consumers around the world. Using this strategy, we strive to provide the best possible customer experience by offering superior value; high-quality, relevant technology; customized systems; superior service and support; and differentiated products and services that are easy to buy and use. Historically, our growth has been driven organically from our core businesses. Recently, we have begun to pursue a targeted acquisition strategy designed to augment areas of our business to gain more access to products, services, and technology that our customers value.
 
Our core values include the following:
 
•  We simplify information technology for customers. Making quality personal computers, servers, storage, and services affordable is Dell’s legacy. We are focused on making information technology affordable for millions of customers around the world. As a result of our direct relationships with customers, or “customer intimacy,” we are best positioned to simplify how customers implement and maintain information technology and deliver hardware, services, and software solutions tailored for their businesses and homes.
 
•  We offer customers choice. Customers can purchase systems and services from Dell via telephone, kiosks, and our website, www.dell.com, where they may review, configure, and price systems within our entire product line; order systems online; and track orders from manufacturing through shipping. Customers may offer suggestions for current and future Dell products and services through an interactive portion of our website called Dell IdeaStorm. Commercial customers also can interact with dedicated account teams. We have recently launched a retail initiative and plan to expand that initiative by adding new distribution channels to reach additional consumers and small businesses through retail partners and value-added resellers globally.
 
•  Customers can purchase custom-built products and custom-tailored services. Historically our flexible, build-to-order manufacturing process enabled us to turn over inventory every five days on average, thereby reducing inventory levels, and rapidly bring the latest technology to our customers. The market and our competition has evolved, and we are now exploring the utilization of original design manufacturers and new distribution strategies to better meet customer needs and reduce product cycle times. Our goal is to introduce the latest relevant technology more quickly and to rapidly pass on component cost savings to a broader set of our customers worldwide.
 
•  We are committed to being environmentally responsible in all areas of our business. We have built environmental consideration into every stage of the Dell product life cycle — from developing and designing energy-efficient products, to reducing the footprint of our manufacturing and operations, to customer use and product recovery.


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Product Development
 
We focus on developing standards-based technologies that incorporate highly desirable features and capabilities at competitive prices. We employ a collaborative approach to product design and development, where our engineers, with direct customer input, design innovative solutions and work with a global network of technology companies to architect new system designs, influence the direction of future development, and integrate new technologies into our products. Through this collaborative, customer-focused approach, we strive to deliver new and relevant products and services to the market quickly and efficiently. Our research, development, and engineering expenses were $498 million for Fiscal 2007, $458 million for Fiscal 2006, and $460 million for Fiscal 2005.
 
Products and Services
 
We design, develop, manufacture, market, sell, and support a wide range of products that in many cases are customized to individual customer requirements. Our product categories include desktop computer systems, servers and networking products, storage, mobility products, and software and peripherals. In addition, we offer a wide range of enhanced services. See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Revenue by Product and Service Categories” and Note 10 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
•  Desktop PCs — Our customers can select from five lines of desktop computer systems. The OptiPlextm line is designed to help business, government, and institutional customers manage their total cost of ownership by offering stability, security, and managed product transitions. The Dimensiontm line is designed for small businesses and home users requiring the latest features for their productivity and entertainment needs. The XPStm and Alienware lines are targeted at customers who require the highest performance gaming or entertainment experience available. In July 2007, we introduced the Vostrotm line, which is designed to provide technology and services to suit the specific needs of small businesses.
 
   Dell Precisiontm and Alienware MJ-12® workstations are intended for professional users who demand exceptional performance from hardware platforms optimized and certified to run sophisticated applications, such as three-dimensional computer-aided design, digital content creation, geographic information systems, computer animation, software development, computer-aided engineering, game development, and financial analysis.
 
•  Servers and Networking — Our standards-based PowerEdgetm line of servers is designed to offer customers affordable performance, reliability, and scalability. Options include high performance rack, blade, and tower servers for enterprise customers and aggressively priced tower servers for small organizations, networks, and remote offices.
 
   Our PowerConnecttm switches connect computers and servers in small-to-medium-sized networks. PowerConnecttm products offer customers enterprise-class features and reliability at a low cost.
 
•  Storage — We offer a comprehensive portfolio of advanced storage solutions, including storage area networks, network-attached storage, direct-attached storage, disk and tape backup systems, and removable disk backup. With our advanced storage solutions for mainstream buyers, we offer customers functionality and value while reducing complexity in the enterprise. Our storage systems are easy to deploy, manage, and maintain. The flexibility and scalability offered by Dell | EMC and Dell PowerVaulttm storage systems helps organizations optimize storage for diverse environments with varied requirements.
 
•  Mobility — The XPStm and Alienware lines of notebook computers are targeted at customers who require the highest performance gaming or entertainment experience available. In Fiscal 2007, we introduced the XPS M2010, an innovative mobile platform featuring a 20-inch high definition display that received awards for its unique design. The Latitudetm line is designed to help business, government, and institutional customers manage their total cost of ownership through managed product lifecycles and the latest offerings in performance, security, and communications. The Inspirontm line is targeted at


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consumers desiring the latest technology in a range of form factors to meet different usage needs. The new Vostrotm line, introduced in July 2007, is designed to customize technology, services, and expertise to suit the specific needs of small businesses.
 
•  Software and Peripherals — We offer Dell-branded printers and displays and a multitude of competitively priced third-party peripheral products, including software titles, printers, televisions, notebook accessories, networking and wireless products, digital cameras, power adapters, scanners, and other products.
 
  Software. We sell a wide range of third-party software products, including operating systems, business and office applications, anti-virus and related security software, entertainment software, and products in various other categories.
 
  Printers. We offer a wide array of Dell-branded printers, ranging from ink-jet all-in-one printers for consumers to large multifunction devices for corporate workgroups. Our printer product line is focused on making printing easier to buy, own, and use. All of our printers feature the Dell Ink and Toner Management Systemtm, which simplifies the purchasing process for supplies by displaying ink or toner levels on the status window during every print job and proactively prompting users to order replacement cartridges directly from Dell.
 
  Displays. We offer a broad line of branded and non-branded display products, including flat panel monitors and projectors. In Fiscal 2007, we continued our leadership position in the flat panel monitor category with the introductions of new Dell 22-, 24-, 27-, and 30-inch wide screens. The Dell projector line was expanded with the introductions of the 1200MP, 1800MP, and 2400MP projectors. We are no longer developing Dell-branded TV’s and will continue to sell our current models through the end of Fiscal 2008. We have, however, introduced several third-party LCD TV offerings this year.
 
•  Enhanced Services —  Leveraging our experience and expertise in lowering the cost of hardware, providing industry leading value, and simplifying the ability of customers to acquire and maintain systems, our global services business offers a full range of flexible, tailored solutions that help customers lower the cost of their services environment and maximize system performance, efficiency, and return on investment.
 
  Infrastructure Consulting Services. We provide a customer-focused approach to designing and implementing non-proprietary standards-based infrastructures to enhance performance, scalability, and efficiency while helping to minimize expenses and disruption to business operations.
 
  Deployment Services. Our deployment services can simplify and accelerate the deployment and utilization of new systems in customers’ information technology environments. We offer scalable processes and technology to get our systems up and running quickly.
 
  Asset Recovery and Recycling Services. We offer capabilities for secure and environmentally safe recovery and disposal of owned and leased information technology equipment. Various options, including resale, recycling, donation, redeployment, employee purchase, and lease return, help customers retain value while avoiding regulatory fines and storage costs.
 
  Training Services. We help customers develop the skills that increase productivity with a comprehensive and flexible suite of training services. Courses include hardware and software training as well as PC skills and professional development classes available through instructor-led, virtual, or self-directed online courses. The courses are designed for all skill levels and range from personal finance to business productivity to IT certification.
 
  Enterprise Support Services. We help customers obtain maximum performance and availability from their server and storage systems. We operate Global Command Centers in the U.S., Ireland, China, Japan, and Malaysia to provide rapid, around-the-clock support for critical enterprise systems. Our enterprise support services include warranty services and provide proactive maintenance to help prevent problems as well as rapid response and resolution of problems when they do occur.


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  Client Support Services. Our suite of scalable support services is designed for IT professionals and end-users whose needs range from basic phone support to rapid response and resolution of complex problems. We offer flexible levels of support that help keep desktop and notebook PCs up and running so customers remain productive.
 
  Managed Lifecycle Services. We offer a full suite of services for companies who need to outsource all or part of their IT management. From planning to deployment to ongoing technical support, we can deliver the services our customers need when they need them. Our Managed Lifecycle Services are modular in nature so that customers can customize a plan based on their current and future needs. We can manage a portion of their IT tasks or provide an end-to-end solution.
 
Financial Services
 
We offer various customer financial services for our business and consumer customers in the U.S. through Dell Financial Services L.P. (“DFS”), a joint venture between Dell and CIT Group, Inc. Financing through DFS is one of many sources of funding that our customers may select. For additional information about our financing arrangements, see “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements” and Note 7 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
Sales and Marketing
 
We sell our products and services directly to customers through dedicated sales representatives, telephone-based sales, and online at www.dell.com. Our customers include large corporate, government, healthcare, and education accounts, as well as small-to-medium businesses and individual consumers. Within each of our geographic regions, we have divided our sales and marketing resources among these various customer groups. No single customer accounted for more than 10% of our consolidated net revenue during any of the last three fiscal years.
 
Our sales and marketing efforts are organized around the needs, trends, and characteristics of our customers. Our direct business model provides direct and continuous feedback from customers, thereby allowing us to develop and refine our products and marketing programs for specific customer groups. Customers may offer suggestions for current and future Dell products, services, and operations on an interactive portion of our website called Dell IdeaStorm. This constant flow of communication, which is unique to our direct business model, also allows us to rapidly gauge customer satisfaction and target new or existing products.
 
For large business and institutional customers, we maintain a field sales force throughout the world. Dedicated account teams, which include field-based system engineers and consultants, form long-term relationships to provide our largest customers with a single source of assistance and develop specific tailored solutions for these customers. For large, multinational customers, we offer several programs designed to provide single points of contact and accountability with global account specialists, special global pricing, consistent service and support programs across global regions, and access to central purchasing facilities. We also maintain specific sales and marketing programs targeted at federal, state, and local governmental agencies as well as specific healthcare and educational markets.
 
We market our products and services to small-to-medium businesses and consumers primarily by advertising on television and the Internet, advertising in a variety of print media, and by mailing a broad range of direct marketing publications, such as promotional pieces, catalogs, and customer newsletters. In certain locations, we also operate Dell stores or kiosks, typically located within shopping centers, that allow customers to view our products in person and purchase online with the assistance of a Dell expert.
 
Although the focus of our business strategy is selling directly to customers, we also utilize some indirect sales channels when there is a business need. In the U.S. we sell products indirectly through third-party solution providers, system integrators, and third-party resellers. During Fiscal 2008, we began offering Dell


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Dimensiontm desktop computers and Inspirontm notebook computers in retail stores in the Americas and announced partnerships with retailers in the U.K., Japan, and China. These actions represent the first steps in our retail strategy, which will allow us to extend our business model and reach customers that we have not been able to reach directly. Outside the U.S., we sell products indirectly through selected partners to benefit from the partner’s existing customer relationships and valuable knowledge of traditional customs and logistics in the country, to mitigate credit and country risk, and because sales in some countries may be too small to warrant a direct sales business unit.
 
Competition
 
We face intense price and product feature competition from branded and generic competitors when selling our products and services. In addition to several large branded companies, there are other smaller branded and generic competitors. Historically, we competed primarily based on the customer value that a direct relationship can bring, technology, performance, customer service, quality, and reliability. Our general practice is to rapidly pass on cost declines to our customers to enhance customer value.
 
As a result of the intensely competitive environment during Fiscal 2007, as well as our decisions to de-emphasize lower priced, entry-level products, we lost 1.1 points of share during calendar 2006, finishing the year as the number two supplier of personal computer systems worldwide and the number one supplier in the U.S. This was principally the result of share loss in the U.S. Consumer segment.
 
We expect that the competitive pricing environment will continue to be challenging. However, we believe that the strength of our evolving business strategy and indirect distribution channels, as well as our strong liquidity position, makes us well positioned to continue profitable growth over the long term in any business climate. For consumers, we recognize the increasing importance of product “ID,” which is the appearance, ease of use, and ability to interact with peripheral products like cameras and MP3 players, and are focusing more resources on being competitive in this area.
 
Manufacturing and Materials
 
We manufacture most of the products we sell and have manufacturing locations worldwide to service our global customer base. See “Part I — Item 2 — Properties” for information about our manufacturing locations. We believe that our manufacturing processes and supply-chain management techniques provide us a distinct competitive advantage. Our build-to-order manufacturing process is designed to allow us to significantly reduce cost while simultaneously providing customers the ability to customize their product purchases.
 
Our manufacturing process consists of assembly, software installation, functional testing, and quality control. Testing and quality control processes are also applied to components, parts, and subassemblies obtained from third-party suppliers. Quality control is maintained through the testing of components, subassemblies, and systems at various stages in the manufacturing process. Quality control also includes a burn-in period for completed units after assembly, on-going production reliability audits, failure tracking for early identification of production and component problems, and information from customers obtained through services and support programs. We are certified, worldwide, by the International Standards Organization to the requirements of ISO 9001: 2000. This certification includes our design, manufacture, and service of computer products in all of our locations.
 
Although we manufacture most of our products, we have relationships with third-party original equipment manufacturers that build some of our products (such as printers and projectors) to our specifications. In addition, we are exploring the expanded use of original design manufacturing partnerships and manufacturing outsourcing relationships in order to deliver products faster and better serve our customers in certain segments and geographies.
 
We purchase materials, supplies, product components, and products from a large number of suppliers. In some cases, multiple sources of supply are not available and we have to rely on single source suppliers. In other cases, we may establish a working relationship with a single source or a limited number of sources if


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we believe it is advantageous due to performance, quality, support, delivery, capacity, or price considerations. This relationship and dependency has not caused material disruptions in the past, and we believe that any disruptions that may occur because of our dependency on single- or limited-source suppliers would not disproportionately disadvantage us relative to our competitors. See “Part I — Item 1A — Risk Factors” for information about the risks associated with single- or limited-sourced suppliers.
 
Patents, Trademarks, and Licenses
 
As of October 12, 2007, we held a worldwide portfolio of 1,890 patents and had an additional 2,001 patent applications pending. We also hold licenses to use numerous third party patents. To replace expiring patents, we obtain new patents through our ongoing research and development activities. The inventions claimed in our patents and patent applications cover aspects of our current and possible future computer system products, manufacturing processes, and related technologies. Our product, business method, and manufacturing process patents may establish barriers to entry in many product lines. While we use our patented inventions and also license them to others, we are not substantially dependent on any single patent or group of related patents. We have entered into a variety of intellectual property licensing and cross-licensing agreements. We have also entered into various software licensing agreements with other companies. We anticipate that our worldwide patent portfolio will be of value in negotiating intellectual property rights with others in the industry.
 
We have obtained U.S. federal trademark registration for the DELL word mark and the Dell logo mark. We own registrations for 56 of our other marks in the U.S. At October 12, 2007, we had pending applications for registration of 31 other trademarks. We believe that establishment of the DELL word mark and logo mark in the U.S. is material to our operations. We have also applied for or obtained registration of the DELL mark and several other marks in approximately 195 other countries.
 
We have entered into a variety of intellectual property licensing and cross-licensing agreements. We have also entered into various software licensing agreements with a variety of other companies.
 
From time to time, other companies and individuals assert exclusive patent, copyright, trademark, or other intellectual property rights to technologies or marks that are important to the technology industry or our business. We evaluate each claim relating to our products and, if appropriate, seek a license to use the protected technology. The licensing agreements generally do not require the licensor to assist us in duplicating its patented technology, nor do these agreements protect us from trade secret, copyright, or other violations by us or our suppliers in developing or selling these products.
 
Employees
 
At the end of Fiscal 2007, we had approximately 90,500 total employees (consisting of 82,200 regular employees, 7,200 temporary employees, and 1,100 DFS employees), compared to approximately 73,500 total employees (consisting of 65,200 regular employees, 7,200 temporary employees, and 1,100 DFS employees) at the end of Fiscal 2006. Approximately 29,100 of the regular employees at the end of Fiscal 2007 were located in the U.S., and approximately 53,100 were located in other countries. While our workforce located both inside and outside the U.S. continued to increase during Fiscal 2007, the proportion of our workforce located outside the U.S. increased due to a number of factors, including our rapid international growth. We have never experienced a work stoppage due to labor difficulties, and believe that our employee relations are good.
 
Workforce diversity is an essential part of our commitment to quality and the future of our company. In Fiscal 2006, we received the 2005 Secretary of Labor Opportunity Award, which is the highest award given by the Department of Labor to federal contractors for their voluntary diversity efforts. In addition, we rank number two on DiversityBusiness.com’s list of “Top Organizations for Multicultural Business Opportunities of 2006,” which represents the top 50 Fortune 500 companies that best promote multicultural business opportunities. We have also been recognized as one of the best places to work by the Human Rights Campaign.


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On May 31, 2007, we announced that we had initiated a comprehensive review of costs across all processes and organizations, from product development and procurement through service and support delivery, with the goal to simplify structure, eliminate redundancies, and better align operating expenses with the current business environment and strategic growth opportunities. As part of this overall effort, we expect to reduce headcount and infrastructure costs over the next 12 months. Our management teams are presently finalizing transformation plans which include headcount and infrastructure cost reduction goals.
 
Government Regulation and Environment
 
Our business is subject to regulation by various federal and state governmental agencies. Such regulation includes the radio frequency emission regulatory activities of the U.S. Federal Communications Commission, the anti-trust regulatory activities of the U.S. Federal Trade Commission and Department of Justice, the consumer protection laws of the Federal Trade Commission, the export regulatory activities of the U.S. Department of Commerce and the U.S. Department of Treasury, the import regulatory activities of U.S. Customs and Border Protection, the product safety regulatory activities of the U.S. Consumer Product Safety Commission, and environmental regulation by a variety of regulatory authorities in each of the areas in which we conduct business. We are also subject to regulation in other countries where we conduct business. We did not have any material environmental remediation or other environmental costs during Fiscal 2007.
 
Sustainability
 
Our focus on business efficiencies and customer satisfaction drives our environmental stewardship program in all areas of our business — reducing product energy consumption, reducing or eliminating materials for disposal, prolonging product life spans, and providing effective and convenient equipment recovery solutions. During Fiscal 2007, we voluntarily initiated a no-charge recycling program for our U.S. customers. This recycling offer is designed for consumers and includes responsible recycling of used Dell-branded computers and peripheral equipment at no-charge; this service does not require a replacement purchase. Since November 2003, we have offered a no-charge recycling program for Dell-branded products in Europe and also currently offer no-charge consumer recycling in Canada. Since 2004, we have offered U.S. consumers no-charge recycling of any brand of used computer or printer with the purchase of a new Dell computer or printer. By the end of Fiscal 2007, we expanded both free recycling programs to additional countries, including Brazil, China, India, South Korea, Mexico, and Taiwan. Recycling services for consumers were either added or enhanced in Australia, Malaysia, New Zealand, Singapore, and Thailand. We are committed to making recycling free and easy and remain focused on raising consumer awareness about the importance of recycling and increasing the volume of products we recover from consumers.
 
Backlog
 
We believe that backlog is not a meaningful indicator of net revenue that can be expected for any period. There can be no assurance that the backlog at any point in time will translate into net revenue in any subsequent period, as unfilled orders can generally be canceled at any time by the customer. Our business model generally gives us flexibility to manage backlog at any point in time by expediting shipping or prioritizing customer orders toward products that have shorter lead times, thereby reducing backlog and increasing current period revenue. At the end of Fiscal 2007, 2006, and 2005, backlog was not material.
 
Geographic Areas of Operations
 
We conduct operations worldwide, and we manage our business in three geographic regions: the Americas, EMEA, and APJ. The Americas region, which is based in Round Rock, Texas, covers the U.S., Canada, and Latin America. Within the Americas, our business is further segmented into Americas Business and U.S. Consumer. The Americas Business segment includes sales to corporate, government, healthcare, and education customers, while the U.S. Consumer segment includes sales primarily to individual consumers. The EMEA region, which is based in Bracknell, England, encompasses Europe, the


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Middle East, and Africa. The APJ region, based in Singapore, covers the Asian countries of the Pacific Rim as well as Australia, New Zealand, and India.
 
We have invested in high growth countries such as China, India, and Brazil to design, manufacture, and support our customers, and we expect to continue our global expansion in the years ahead. Our investment in international growth opportunities contributed to an increase in non-U.S. revenue, as a percentage of consolidated net revenue, from 41% in Fiscal 2006 to 44% during Fiscal 2007, representing 10% year-over-year growth. Our continued expansion outside of the U.S. creates additional complexity in coordinating the design, development, procurement, manufacturing, distribution, and support of our increasingly complex product and service offerings. As a result, we plan to add additional resources to our offices in Singapore to better coordinate certain global activities, including the utilization of non-U.S. production capacity where most needed in light of product demand levels that vary by region. The expanded global operations in Singapore also coordinate product design and development efforts with procurement activities and sources of supply. We intend to continue to expand our global infrastructure as our international business continues to grow. For financial information about the results of our reportable operating segments for each of the last three fiscal years, see Note 10 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
Our corporate headquarters are located in Round Rock, Texas. Our manufacturing and distribution facilities are located in Austin, Texas; Winston-Salem, North Carolina; Lebanon and Nashville, Tennessee; West Chester, Ohio; Miami, Florida; El Dorado do Sul, Brazil; Limerick and Athlone, Ireland; Penang, Malaysia; and Xiamen, China. Manufacturing plants in Chennai, India opened in the first half of Fiscal 2008 and Lodz, Poland will open later in Fiscal 2008. See “Part I — Item 2 — Properties.”
 
Trademarks and Service Marks
 
Unless otherwise noted, trademarks appearing in this report are trademarks owned by us. We disclaim proprietary interest in the marks and names of others. EMC is a registered trademark of EMC Corporation.
 
Available Information
 
We maintain an Internet website at www.dell.com. All of our reports filed with the U.S. Securities and Exchange Commission (“SEC”) (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and Section 16 filings) are accessible through the Investor Relations section of our website at www.dell.com/investor, free of charge, as soon as reasonably practicable after electronic filing. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. Information on our website is not incorporated by reference into this report.
 
ITEM 1A — RISK FACTORS
 
There are many risk factors that affect our business and results of operations, some of which are beyond our control. The following is a description of some of the important risk factors that may cause our actual results in future periods to differ substantially from those we currently expect or desire.
 
•  Declining general economic, business, or industry conditions may cause reduced net revenue. We are a global company with customers in virtually every business and industry. If the economic climate in the U.S. or abroad deteriorates, customers or potential customers could reduce or delay their technology investments, which could decrease our net revenue and profitability.
 
•  Failure to maintain a cost advantage may result in reduced market share, revenue, and profitability. Our success has historically been based on our ability to profitably offer products at a lower price than our competitors. However, we compete with many companies globally in all aspects of our business. Our


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profitability is also affected by our ability to negotiate favorable pricing with our vendors, including vendor rebates, marketing funds, and other vendor funding. Because these supplier negotiations are continuous and reflect the ongoing competitive environment, the variability in timing and amount of incremental vendor discounts and rebates can affect our profitability. We cannot guarantee that we will be able to maintain our cost advantage if our competitors improve their cost structure or business model, if we are not able to negotiate favorable pricing or rebate arrangements with our vendors, or if our competitors take other actions that affect our current competitive advantage. An inability to maintain our cost advantage or determine alternative means to deliver value to our customers may adversely affect our market share, revenue, and profitability.
 
•  Our ability to generate substantial non-U.S. net revenue faces many additional risks and uncertainties. Sales outside the U.S. accounted for approximately 44% of our consolidated net revenue in Fiscal 2007. Our future growth rates and success are dependent on continued growth in international markets. Our international operations face many risks and uncertainties, including varied local economic and labor conditions, political instability, and unexpected changes in the regulatory environment, trade protection measures, tax laws (including U.S. taxes on foreign operations), copyright levies, and foreign currency exchange rates. Any of these factors could adversely affect our operations and profitability.
 
•  Our profitability may be affected by our product, customer, and geographic sales mix and by seasonal sales trends. Our profit margins vary among products, customers, and geographies. In addition, our business is subject to certain seasonal sales trends. For example, sales to government customers (particularly the U.S. federal government) are typically stronger in our third fiscal quarter, sales in EMEA are often weaker in our third fiscal quarter, and consumer sales are typically strongest during our fourth fiscal quarter. As a result of these factors, our overall profitability for any particular period will be affected by the mix of products, customers, and geographies reflected in our sales for that period, as well as by seasonality trends.
 
•  Infrastructure failures could harm our business. We depend on our information technology and manufacturing infrastructure to achieve our business objectives. If a problem, such as a computer virus, intentional disruption by a third party, natural disaster, manufacturing failure, or telephone system failure impairs our infrastructure, we may be unable to book or process orders, manufacture, and ship in a timely manner or otherwise carry on our business. An infrastructure disruption could cause us to lose customers and revenue and could require us to incur significant expense to eliminate these problems and address related security concerns. The harm to our business could be even greater if it occurs during a period of disproportionately heavy demand.
 
•  Our failure to effectively manage a product transition could reduce the demand for our products and the profitability of our operations. Continuing improvements in technology mean frequent new product introductions, short product life cycles, and improvement in product performance characteristics. Product transitions present execution challenges and risks for any company. If we are unable to effectively manage a product transition, our business and results of operations could be unfavorably affected.
 
•  Disruptions in component availability could unfavorably affect our performance. Our direct business model, as well as our manufacturing and supply chain efficiencies, give us the ability to operate with reduced levels of component and finished goods inventories. Our financial success is partly due to our supply chain management practices, including our ability to achieve rapid inventory turns. Because we maintain minimal levels of component inventory, a disruption in component availability could harm our financial performance and our ability to satisfy customer needs.
 
•  Our reliance on suppliers creates risks and uncertainties. Our manufacturing process requires a high volume of quality components from third-party suppliers. Defective parts received from these suppliers could reduce product reliability and harm the reputation of our products. Reliance on suppliers subjects us to possible industry shortages of components and reduced control over delivery schedules (which can harm our manufacturing efficiencies), as well as increases in component costs (which can harm our profitability).


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•  We could experience manufacturing interruptions, delays, or inefficiencies if we are unable to timely and reliably procure components from single-source or limited-source suppliers. We maintain several single-source or limited-source supplier relationships, either because multiple sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity, or price considerations. If the supply of a critical single- or limited-source material or component is delayed or curtailed, we may not be able to ship the related product in desired quantities and in a timely manner. Even where multiple sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could harm operating results.
 
•  Our business is increasingly dependent on our ability to access the capital markets. We will increasingly rely upon access to the capital markets to fund financing for our customers and to provide sources of liquidity in the U.S. for general corporate purposes, including funding DFS growth. If we are unable to access the capital markets, we may not be able to fully fund customer financing opportunities or planned share repurchases without repatriation of foreign cash balances. See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity, Capital Commitments, and Contractual Cash Obligations — Liquidity.” Although we believe that we will be able to maintain sufficient access to the capital markets, adverse changes in the economy, deterioration in our business performance, or changes in our credit ratings could limit our access to these markets.
 
•  We face risks relating to our ineffective internal controls. As a result of our review of issues identified during the recently completed independent Audit Committee investigation into certain accounting and financial reporting matters, as well as our internal review, management has identified several deficiencies in our control environment that constitute material weaknesses and, consequently, has concluded that our internal control over financial reporting was not effective at February 2, 2007. In addition, management has concluded, based primarily on the identification of the material weaknesses, that our disclosure controls and procedures were not effective at February 2, 2007. See “Part II — Item 9A — Controls and Procedures.” If we are unable to successfully remediate these material weaknesses in a timely manner, investors may lose confidence in our reported financial information, which could lead to a decline in our stock price, limit our ability to access the capital markets in the future, and require us to incur additional costs to improve our internal control systems and procedures.
 
•  Litigation and governmental investigations or proceedings arising out of or related to our recent accounting and financial reporting investigation could result in substantial costs. We could incur substantial costs to defend and resolve litigation or governmental investigations or proceedings arising out of or related to the recently completed Audit Committee investigation into certain accounting and financial reporting matters. See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Audit Committee Independent Investigation and Restatement.” In addition, we could be exposed to enforcement or other actions with respect to these matters by the SEC’s Division of Enforcement or the U.S. Department of Justice. For a description of pending litigation and governmental proceedings and investigations see “Part I — Item 3 — Legal Proceedings — Investigations and Related Litigation.”
 
•  The acquisition of other companies may present new risks. We recently began to pursue a targeted acquisition strategy designed to augment areas of our business. These acquisitions may involve significant new risks and uncertainties, including distraction of management attention away from our current business operations, insufficient new revenue to offset expenses, inadequate return of capital, integration challenges, new regulatory requirements, and unidentified issues not discovered in our due diligence process. No assurance can be given that such acquisitions will be successful and will not adversely affect our profitability or operations.
 
•  Failure to properly manage the distribution of our products and services may result in reduced revenue and profitability. We use a variety of distribution methods to sell our products and services, including directly to customers and through retail partners and third-party value-added resellers. Our inability to properly manage and balance these various distribution methods could harm our operating results.


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•  Failure to effectively hedge our exposure to fluctuations in foreign currency exchange rates and interest rates could unfavorably affect our performance. We utilize derivative instruments to hedge our exposure to fluctuations in foreign currency exchange rates and interest rates. Some of these instruments and contracts may involve elements of market and credit risk in excess of the amounts recognized in our financial statements. Further, revenue from our international operations may decrease if we do not effectively hedge our exposure to currency fluctuations.
 
•  Our continued business success may depend on obtaining licenses to intellectual property developed by others on commercially reasonable and competitive terms. If we or our suppliers are unable to obtain desirable technology licenses, we may be prevented from marketing products, could be forced to market products without desirable features, or could incur substantial costs to redesign products, defend legal actions, or pay damages. While our suppliers may be contractually obligated to indemnify us against such expenses, those suppliers could be unable to meet their obligations. Also, our operating costs could increase because of copyright levies or similar fees by rights holders and collection agencies in European and other countries. For a description of potential claims related to copyright levies, see “Part I — Item 3 — Legal Proceedings — Copyright Levies.”
 
•  Our success depends on our ability to attract, retain, and motivate our key employees. We rely on key personnel to support anticipated continued rapid international growth and increasingly complex product and service offerings. There can be no assurance that we will be able to attract, retain, and motivate the key professional, technical, marketing, and staff resources we need, particularly in light of the reduction in the total number of equity shares granted to employees as part of their total compensation packages. New regulations and other factors could make it harder or more expensive for us to grant equity-based awards to employees in the future, putting us at a competitive disadvantage or forcing us to increase cash compensation.
 
•  Loss of government contracts could harm our business. Government contracts are subject to future funding that may affect the extension or termination of programs and are subject to the right of the government to terminate for convenience or non-appropriation. In addition, if we violate legal or regulatory requirements, the government could suspend or disbar us as a contractor, which would unfavorably affect our net revenue and profitability.
 
•  The expiration of tax holidays or favorable tax rate structures could result in an increase of our effective tax rate in the future. Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays that expire in whole or in part during Fiscal 2010 through Fiscal 2019. Many of these holidays may be extended when certain conditions are met. If they are not extended, then our effective tax rate could increase in the future. See Note 4 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
•  Current environmental laws, or laws enacted in the future, may harm our business. Our operations are subject to environmental regulation in all of the areas in which we conduct business. Our product design and procurement operations must comply with new and future requirements relating to the materials composition of our electronics products, including restrictions on lead, cadmium, and other substances. On July 1, 2006, the European Union adopted the Restriction of Hazardous Substances Directive. The labeling provisions of similar legislation in China became effective on March 1, 2007. If we fail to comply with the rules and regulations regarding the use and sale of such regulated substances, we could be subject to liability. Beginning in August 2005, we became subject to the European Union Waste Electrical and Electronic Equipment Directive as enacted by individual member states of the European Union (“WEEE Legislation”). The WEEE Legislation makes producers of electrical goods, including computers and printers, responsible for collection, recycling, treatment, and disposal of recovered products. While we do not expect that the impact of these environmental laws and other similar legislation adopted in the U.S. and other countries will have a substantial unfavorable impact on our business, the costs and timing of costs under environmental laws are difficult to predict.
 
•  Armed hostilities, terrorism, natural disasters, or public health issues could harm our business. Armed hostilities, terrorism, natural disasters, or public health issues, whether in the U.S. or abroad, could


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cause damage or disruption to us, our suppliers or customers, or could create political or economic instability, any of which could harm our business. These events could cause a decrease in demand for our products, could make it difficult or impossible for us to deliver products or for our suppliers to deliver components, and could create delay and inefficiencies in our supply chain.
 
ITEM 1B — UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2 — PROPERTIES
 
At February 2, 2007, we owned or leased a total of approximately 16 million square feet of office, manufacturing, and warehouse space worldwide, approximately 8 million square feet of which is located in the U.S. and the remainder located in other countries. We believe our properties are suitable and adequate for our current needs and that we can readily meet our requirements for additional space at competitive rates by extending expiring leases or by finding alternative space.
 
Americas Properties
 
                   
Description     Principal Locations     Owned (square feet)     Leased (square feet)
                   
Headquarters
    Round Rock, Texas     2.1 million    
                   
Business Centers(a)
    • Canada — Edmonton and Ottawa
• El Salvador — San Salvador
• Oklahoma — Oklahoma City
• Panama — Panama City
• Tennessee — Nashville
• Texas — Austin and Round Rock
    1.3 million     1.4 million
                   
Manufacturing and Distribution     • Brazil — El Dorado do Sul
• Florida — Miami (Alienware)
• North Carolina — Winston-Salem
• Ohio — West Chester
• Tennessee — Lebanon and Nashville
• Texas — Austin
    2.5 million     1.0 million
                   
Design Centers
    Texas — Austin and Round Rock     800,000    
                   
 
EMEA Properties
 
                   
Description     Principal Locations     Owned (square feet)     Leased (square feet)
                   
Headquarters     Bracknell, England     100,000     50,000
                   
Business Centers(a)     • England — Bracknell
• France — Montpellier
• Ireland — Dublin and Limerick
• Morocco — Casablanca
• Slovakia — Bratislava
    400,000     1.5 million
                   
Manufacturing and Distribution     • Ireland — Limerick and Athlone (Alienware)     400,000    
                   


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APJ Properties
 
                   
Description     Principal Locations     Owned (square feet)     Leased (square feet)
                   
Headquarters     Singapore         100,000
                   
Business Centers(a)
   
• China — Dalian and Xiamen
• India — Bangalore, Gurgaon, Hyderabad and Mohali
• Japan — Kawasaki
• Malaysia — Penang
• Philippines — Pasay
    200,000     3.1 million
                   
Manufacturing and Distribution
    • China — Xiamen
• Malaysia — Penang
    1.0 million    
                   
Design Centers
    • China — Shanghai
• India — Bangalore
• Singapore
• Taiwan — Taipei
        150,000
                   
 
 
(a) Business center locations include facilities with capacity greater than 1,000 people. Operations within these centers include sales, technical support, administrative, and support functions. Locations of smaller business centers are not listed; however, the smaller centers are included in the square footage.
 
We currently have approximately 750,000 square feet of manufacturing and business center space under construction. The manufacturing plants constructed in Hortolandia, Brazil, and Chennai, India opened in the first half of Fiscal 2008 and our manufacturing plant in Lodz, Poland is expected to begin operations later this year. Our business centers located in Quezon City, Philippines and Kuala Lumpur, Malaysia also opened in the first half of Fiscal 2008, while a second building in Ottawa, Canada is expected to begin operations in Fiscal 2008. Additionally, we recently completed an expansion of a design center in India.
 
In general, our Americas, EMEA, and APJ regions use properties within their geographies. However, business centers in the Philippines and India, which house sales, customer care, technical support, and administrative support functions, are used by each of our geographic regions.
 
ITEM 3 — LEGAL PROCEEDINGS
 
We are involved in various claims, suits, investigations, and legal proceedings that arise from time to time in the ordinary course of our business. As required by Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, we accrue a liability when we believe that it is both probable that a liability has been incurred and we can reasonably estimate the amount of the loss. The following is a discussion of our significant legal matters.
 
Investigations and Related Litigation
 
In August 2005, the U.S. Securities and Exchange Commission (“SEC”) initiated an inquiry into certain of our accounting and financial reporting matters and requested that we provide certain documents. The SEC expanded that inquiry in June 2006 and entered a formal order of investigation in October 2006. The SEC’s requests for information were joined by a similar request from the United States Attorney for the Southern District of New York (“SDNY”), who subpoenaed documents related to our financial reporting from and after 2002. In August 2006, because of potential issues identified in the course of responding to the SEC’s requests for information, our Audit Committee, on the recommendation of management and in consultation with PricewaterhouseCoopers LLP, initiated an independent investigation, which was recently completed. For information regarding the Audit Committee’s investigation, the accounting errors and irregularities identified, and the restatement adjustments, see “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Audit Committee Independent Investigation and Restatement” and Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” For a description of the control


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deficiencies identified by management as a result of the investigation and our internal reviews, and management’s plan to remediate those deficiencies, see “Part II — Item 9A — Controls and Procedures.” Although the Audit Committee investigation has been completed, the investigations being conducted by the SEC and the SDNY are ongoing. We continue to cooperate with the SEC and the SDNY.
 
Dell and several of our current and former directors and officers are parties to securities, Employee Retirement Income Security Act of 1974 (“ERISA”), and shareholder derivative lawsuits all arising out of the same events and facts. Four putative securities class actions that were filed in the Western District of Texas, Austin Division, against Dell and certain of our current and former officers have been consolidated as In re Dell Inc. Securities Litigation, and a lead plaintiff has been appointed by the court. The lead plaintiff has asserted claims under sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 based on alleged false and misleading disclosures or omissions regarding our financial statements, governmental investigations, known battery problems, business model, and insiders’ sales of our securities. This action also includes our independent registered public accounting firm, PricewaterhouseCoopers LLP, as a defendant. Four other putative class actions that were also filed in the Western District by purported participants in the Dell Inc. 401(k) Plan have been consolidated as In re Dell Inc. ERISA Litigation, and lead plaintiffs have been appointed by the court. The lead plaintiffs have asserted claims under ERISA based on allegations that Dell, certain current officers, and certain current and former directors imprudently invested and managed participants’ funds and failed to disclose information regarding our stock held in the 401(k) Plan. In addition, seven shareholder derivative lawsuits that were filed in three separate jurisdictions (the Western District of Texas, Austin Division; the Delaware Chancery Court; and the state district court in Travis County, Texas) have been consolidated into three actions, one in each of the respective jurisdictions, as In re Dell Inc. Derivative Litigation, and name various current and former officers and directors as defendants and Dell as a nominal defendant. On October 8, 2007, the shareholder derivative lawsuit filed in the Western District of Texas was dismissed without prejudice by the court. The Travis County, Texas action has been transferred to the state district court in Williamson County, Texas. The shareholder derivative lawsuits assert claims derivatively on behalf of Dell under state law, including breaches of fiduciary duties. Finally, one purported shareholder has filed an action against us in Delaware Chancery Court under Section 220 of the Delaware General Corporation Law, Baltimore County Employees’ Retirement System v. Dell Inc., seeking inspection of certain of our books and records related to the internal investigation and government investigations. We intend to defend all of these lawsuits vigorously.
 
Copyright Levies
 
Proceedings against the IT industry in Germany seek to impose levies on equipment, such as personal computers, multifunction devices, and printers that facilitate making private copies of copyrighted materials. The total levies due, if imposed, would be based on the number of products sold and the per-product amounts of the levies, which vary. We, along with other companies and various industry associations, are opposing these levies and instead are advocating compensation to rights holders through digital rights management systems.
 
There are currently three levy cases involving other equipment manufacturers pending before the German Federal Supreme Court. Adverse decisions in these cases could ultimately impact us. The cases involve personal computers, printers, and multifunctional devices. The equipment manufacturers in these cases recently lost in the lower courts and have appealed. The amount allowed by the lower courts with respect to PCs is €12 per personal computer sold, for reprographic copying capabilities. The amounts claimed with respect to printers and multifunctional devices depend on speed and color and vary between €10 and €300 for printers and between €38 and €600 for multifunctional devices. On December 29, 2005, Zentralstelle Für private Überspielungsrechte (“ZPÜ”), a joint association of various German collection societies, instituted arbitration proceedings against our German subsidiary before the Arbitration Body in Munich. ZPÜ claims a levy of €18.4 per PC that we sold in Germany from January 1, 2002 through December 31, 2005. On July 31, 2007, the Arbitration Body recommended a levy of €15 on each PC sold during that period, for audio and visual copying capabilities. Dell and ZPÜ rejected the recommendation and we expect that the matter will proceed to court. We will continue to defend this claim vigorously.


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Lucent v. Dell
 
In February 2003, Lucent Technologies, Inc. filed a lawsuit against us in the United States District Court for Delaware, and the lawsuit was subsequently transferred to the United States District Court for the Southern District of California. The lawsuit alleges that we infringed 12 patents owned by Lucent and seeks monetary damages and injunctive relief. In April 2003, Microsoft Corporation filed a declaratory judgment action against Lucent in the United States District Court for the Southern District of California, asserting that Microsoft products do not infringe patents held by Lucent, including 10 of the 12 patents at issue in the lawsuit involving us and Microsoft. These actions were consolidated for discovery purposes with a previous suit that Lucent filed against Gateway, Inc. In September 2005, the court granted a summary judgment of invalidity with respect to one of the Lucent patents asserted against us. In addition, in decisions made through May 2007, the court granted summary judgment of non-infringement with respect to five more of the Lucent patents asserted against us. The court has ordered invalidity briefing with regard to other patents at issue in view of the April 30, 2007, U.S. Supreme Court decision in KSR v. Teleflex. Fact and expert discovery has closed, and the three actions have been consolidated. Trial is scheduled to begin in February 2008. We are defending these claims vigorously. Separately, we have filed a lawsuit against Lucent in the United District Court for the Eastern District of Texas, alleging that Lucent infringes two patents owned by us and seeking monetary damages and injunctive relief. That litigation is pending and discovery is proceeding.
 
Sales Tax Claims
 
Several state and local taxing jurisdictions have asserted claims against Dell Catalog Sales L.P. (“DCSLP”), an indirect wholly-owned subsidiary of ours, alleging that DCSLP had an obligation to collect tax on sales made into those jurisdictions because of its alleged nexus, or physical presence, in those jurisdictions. During the first and second quarter of Fiscal 2008, we settled suits filed by the State of Louisiana and the Secretary of the Louisiana Department of Revenue and Taxation in the 19th Judicial District Court of the State of Louisiana, and by two Louisiana parishes, Orleans Parish and Jefferson Parish, in the State of Louisiana 24th Judicial District Court. We also settled similar claims made by a number of other Louisiana parishes and by the State of Massachusetts. These settlement amounts did not have a material adverse effect on our financial condition, results of operations, or cash flows. While there are ongoing claims by certain other state and local taxing authorities, DCSLP disputes the allegation that it had nexus in any of these other jurisdictions during the periods in issue, and is defending the claims vigorously. We do not expect that the outcome of these other claims, individually or collectively, will have a material adverse effect on our financial condition, results of operations, or cash flows.
 
We are involved in various other claims, suits, investigations, and legal proceedings that arise from time to time in the ordinary course of our business. Although we do not expect that the outcome in any of these other legal proceedings, individually or collectively, will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims that could adversely affect our operating results or cash flows in a particular period.
 
ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matter was submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of Fiscal 2007.


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PART II
 
ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock is listed on The NASDAQ Stock Market under the symbol DELL. Information regarding the market prices of our common stock may be found in Note 12 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
On September 15, 2006, we received a NASDAQ Staff Determination letter indicating that we were not in compliance with NASDAQ’s requirements for continued listing because of our inability to timely file our quarterly report on Form 10-Q for the second quarter of Fiscal 2007. We received similar letters relating to our inability to timely file subsequent periodic reports. Following receipt of the September 15, 2006 letter, we have been involved in a hearing and review process before several adjudicative bodies appointed by NASDAQ. That process is ongoing, and any action to delist our common stock has stayed pending completion of that process. We believe, with the filing of this Form 10-K and the Form 10-Q’s for Fiscal 2007 and the first and second quarters of Fiscal 2008, that we will achieve compliance with NASDAQ’s continued listing requirements, and we expect that NASDAQ will send us an acknowledgement to that effect in the near future.
 
Holders
 
At October 1, 2007, there were 30,630 holders of record of Dell common stock.
 
Dividends
 
We have never declared or paid any cash dividends on shares of our common stock and currently do not anticipate paying any cash dividends in the immediate future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors.
 
Issuance of Unregistered Securities
 
Internal Restructuring
 
We have modified the corporate organizational structure of certain of our subsidiaries to achieve more integrated global operations and to provide various financial, operational, and tax efficiencies. In connection with this internal restructuring, on December 28, 2006 we issued approximately 475 million shares of our common stock valued at $12.0 billion based on the closing price on The NASDAQ Stock Market on that date, to a wholly-owned subsidiary in return for an equivalent value in equity interests in the subsidiary. As part of the restructuring, the subsidiary used these shares to acquire a controlling interest in another wholly-owned subsidiary. Because all the shares issued as part of this restructuring are held by one or more of our wholly-owned subsidiaries, the shares are not considered outstanding in our consolidated financial statements or for voting purposes. We continue to be the ultimate beneficial owner of all subsidiaries involved in the internal restructuring.
 
These shares have not been registered under the Securities Act of 1933, as amended, and were issued in a transaction not involving a public offering pursuant to the exemption under Section 4(2) of the Securities Act. The shares may not be resold absent registration or an applicable exemption from the registration requirements under the Securities Act or other applicable law.
 
Certain Employee Benefit Plan Securities
 
As a result of our inability to file our Annual Report on Form 10-K for Fiscal 2007 on its due date (April 3, 2007), we suspended our sale of Dell securities under our various employee benefit plans. In preparing for


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that suspension, we discovered that we had inadvertently failed to file with the SEC certain registration statements relating to securities under the plans.
 
•  Employee Stock Purchase Plan — We maintain an Employee Stock Purchase Plan that is available to substantially all our employees worldwide. In 1994, stockholders approved additional shares for issuance under our Employee Stock Purchase Plan. We recently discovered that the issuance of these additional shares was never registered. Consequently, we have inadvertently issued approximately 54 million unregistered shares under this plan since 1996.
 
•  Retirement Plans — We maintain a 401(k) retirement savings plan that is available to substantially all of our U.S. employees and a separate retirement plan that is available to our employees in Canada. Both of those plans contain a “Dell Stock Fund,” and both plans allow participants to allocate some or all of their account balances to interests in the Dell Stock Fund. The Dell common stock held in the Dell Stock Funds is not purchased from Dell; rather, the plan trustees accumulate the plan contributions that are directed to the Dell Stock Funds and purchase for the Dell Stock Funds shares of Dell common stock in open market transactions. Nevertheless, because we sponsor the plans, we are required to register certain transactions in the plans related to shares of Dell common stock. We recently discovered that we may be deemed to have been required to file a Form S-8 in July 2003 to register additional share transactions in the 401(k) Plan, and we should have filed a Form S-8 to register share transactions in the Canada retirement plan in 1999. Consequently, we may be deemed to have inadvertently failed to register transactions in the two plans relating to up to approximately 37 million shares.
 
We intend to file registration statements on Form S-8 to register future transactions in these plans as soon as practicable. Nonetheless, we may be subject to civil and other penalties by regulatory authorities as a result of the failure to register. We have implemented monitoring and reporting procedures to ensure that in the future we timely meet our registration obligations with respect to these and other employee benefit plans.
 
The failure to file registration statements noted above was inadvertent, and we have always treated the shares issued under the Employee Stock Purchase Plan or held in the Dell Stock Funds under the retirement plans as outstanding for financial reporting purposes. Consequently, these unregistered transactions do not represent any additional dilution. We believe that we have always provided the employee-participants in these plans with the same information they would have received had the registration statements been filed. The outstanding shares subject to potential rescission rights are reflected as redeemable common stock on our Consolidated Statement of Financial Position.
 
Purchases of Common Stock
 
Cash Payments for Certain Employee Stock Options
 
As a result of our inability to timely file our Annual Report on Form 10-K for Fiscal 2007, we suspended the exercise of employee stock options. As a result, stock options held by current and former employees expired while the holders had no ability to exercise them or otherwise prevent their expiration. Therefore, we agreed to pay cash to certain current and former employees who held in-the-money stock options that expired during the period of unexercisability.
 
If an in-the-money stock option expired during the period in which it was not exercisable because of our filing delinquency, we will pay to the holder in cash an amount of up to the difference between the “calculated value” of the option and its exercise price. For this purpose, the “calculated value” is equal to the average closing price of Dell common stock during the week immediately preceding the week in which the expiration date occurred. Payment will be made within 45 days after the date this report is filed, so long as the holder has executed an agreement providing for a release of any claims the holder may have against us and obligating the holder to return the cash to us if the holder, while employed by us or within one year following receipt of the payment, engages in certain conduct that is detrimental to us (such as serious misconduct or breach of confidentiality, non-competition or non-solicitation obligations). Cash payments related to stock options that expired in the second and third quarters of Fiscal 2008 will be paid to


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approximately 1,100 current and former employees, including certain executive and former executive officers, and are expected to total approximately $113 million.
 
Share Repurchase Program
 
We have a share repurchase program that authorizes us to purchase shares of common stock in order to increase shareholder value and manage dilution resulting from shares issued under our equity compensation plans. However, we do not currently have a policy that requires the repurchase of common stock in conjunction with share-based payment arrangements. As of February 2, 2007, our share repurchase program authorized the purchase of shares of common stock at an aggregate cost not to exceed $30.0 billion, and through that date, $28.6 billion had been spent to repurchase shares. We suspended our share repurchase program in September 2006 pending completion of the Audit Committee investigation. During the fourth quarter of Fiscal 2007, no shares were repurchased under this program; however, shares were withheld from certain employees to pay taxes and fees associated with the employees’ exercise of stock options or the vesting of restricted stock. The following table sets forth information regarding our repurchases or acquisitions of common stock during the fourth quarter of Fiscal 2007:
 
                                 
                Total
    Approximate
 
                Number of
    Dollar Value
 
                Shares
    of Shares that
 
                Repurchased
    May Yet Be
 
                as Part of
    Repurchased
 
    Total Number
    Average
    Publicly
    Under the
 
    of Shares
    Price Paid
    Announced
    Announced
 
Period   Repurchased     per Share     Plan     Plan(b)  
                      (in millions)  
 
Repurchases from November 4, 2006 through December 1, 2006
          N/A           $ 1,415  
Repurchases from December 2, 2006 through December 29, 2006
    870 (a)   $ 25.72           $ 1,415  
Repurchases from December 30, 2006 through February 2, 2007
          N/A           $ 1,415  
                                 
Total
    870     $ 25.72                
                                 
 
 
(a) These shares were not purchased pursuant to our share repurchase program, but were withheld from employees upon the exercise of stock options or the vesting of restricted stock in order to pay the exercise price and required tax withholding.
 
(b) Our share repurchase program was announced on February 20, 1996, and the program authorizes us to purchase shares at an aggregate cost not to exceed $30.0 billion.


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Stock Performance Graph
 
The following graph compares the cumulative total return on Dell’s common stock during the last five fiscal years with the S&P 500 Index and the Dow Jones Computer Index during the same period. The graph shows the value, at the end of each of the last five fiscal years, of $100 invested in Dell common stock or the indices on February 1, 2002, and assumes the reinvestment of all dividends. The graph depicts the change in the value of common stock relative to the indices at the end of each fiscal year and not for any interim period. Historical stock price performance is not necessarily indicative of future stock price performance.
 
 
                                                 
    End of Fiscal Year  
    2002     2003     2004     2005     2006     2007  
 
Dell
  $ 100     $ 89     $ 125     $ 153     $ 109     $ 88  
S&P 500 Index
    100       76       101       104       113       129  
Dow Jones Computer Index
    100       69       96       101       115       131  
 
ITEM 6 — SELECTED FINANCIAL DATA
 
We have restated the selected financial data presented in this report as of February 3, 2006, January 28, 2005, January 30, 2004, and January 31, 2003, for the fiscal years ended on those dates, and for the first quarter of Fiscal 2007. The restatement reflects the results of the independent investigation by the Audit Committee, as well as other adjustments identified by management.
 
This “Part II — Item 6 — Selected Financial Data,” includes the following:
 
•  The restated selected financial data for the annual periods described above;
 
•  The annual financial data for the year ended February 2, 2007;
 
•  Restated quarterly selected financial data for those years being restated; and
 
•  Schedules presenting details of the nature and impact of the restatement adjustments. Additional information regarding these adjustments can be found in Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” The adjustments that relate to fiscal years prior to Fiscal 2003 are reflected in beginning retained earnings


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for Fiscal 2003. The cumulative impact of these adjusting entries increased retained earnings by $59 million, net of tax, at the beginning of Fiscal 2003.
 
The following balance sheet data as of February 2, 2007 and February 3, 2006, and results of operations for the fiscal years ended February 2, 2007, February 3, 2006 and January 28, 2005 are derived from our audited financial statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” The data for the remaining periods is derived from our unaudited financial statements for the respective periods.
 
In addition to the adjustments described in Note 2 of Notes to Consolidated Financial Statements, there were errors and irregularities identified with respect to certain restructuring charges that we recorded in the fourth quarter of Fiscal 2001 and the second quarter of Fiscal 2002 that have been corrected in these selected financial data tables. It was determined that components of certain charges were not approved and finalized in a timely fashion in order for them to be properly included in the charges, certain items in the charges should have been accrued for in a different period, and in some cases, ineligible items were included in the restructuring charges. Additionally, on some occasions, once excess restructuring charge amounts were identified, the excess amounts were not released to the income statement in a timely fashion, or with appropriate disclosures. The necessary adjustments to correct these errors and irregularities are included in the beginning retained earnings adjustment and restatement adjustments.
 
Selected Financial Data
 
The following table should be read in conjunction with “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
                                                                         
    Fiscal Year Ended
    February 2,
  February 3,
  January 28,
  January 30,
  January 31,
    2007   2006(c)   2005(d)   2004   2003(e)
        As
  As
  As
  As
  As
  As
  As
  As
        Reported   Restated   Reported   Restated   Reported   Restated   Reported   Restated
    (in millions, except per share data)
 
Results of Operations:
                                                                       
Net revenue
  $ 57,420     $ 55,908     $ 55,788     $ 49,205     $ 49,121     $ 41,444     $ 41,327     $ 35,404     $ 35,262  
Gross margin
  $ 9,516     $ 9,950     $ 9,891     $ 9,015     $ 9,018     $ 7,552     $ 7,563     $ 6,349     $ 6,438  
Operating income
  $ 3,070     $ 4,347     $ 4,382     $ 4,254     $ 4,206     $ 3,544     $ 3,525     $ 2,844     $ 2,738  
Income before income taxes
  $ 3,345     $ 4,574     $ 4,608     $ 4,445     $ 4,403     $ 3,724     $ 3,711     $ 3,027     $ 2,907  
Net income
  $ 2,583     $ 3,572     $ 3,602     $ 3,043     $ 3,018     $ 2,645     $ 2,625     $ 2,122     $ 2,031  
Earnings per common share:
                                                                       
Basic
  $ 1.15     $ 1.49     $ 1.50     $ 1.21     $ 1.20     $ 1.03     $ 1.02     $ 0.82     $ 0.79  
Diluted
  $ 1.14     $ 1.46     $ 1.47     $ 1.18     $ 1.18     $ 1.01     $ 1.00     $ 0.80     $ 0.77  
Number of weighted-average shares outstanding:
                                                                       
Basic
    2,255       2,403       2,403       2,509       2,509       2,565       2,565       2,584       2,584  
Diluted
    2,271       2,449       2,449       2,568       2,568       2,619       2,619       2,644       2,644  
Cash Flow & Balance Sheet Data:
                                                                       
Net cash provided by operating
activities(f)
  $ 3,969     $ 4,839     $ 4,751     $ 5,310     $ 5,821     $ 3,670     $ 4,064     $ 3,538     $ 3,908  
Cash, cash equivalents and investments
  $ 12,445     $ 11,749     $ 11,756     $ 14,101     $ 14,101     $ 11,922     $ 11,921     $ 9,905     $ 9,910  
Total assets
  $ 25,635     $ 23,109     $ 23,252     $ 23,215     $ 23,318     $ 19,311     $ 19,340     $ 15,470     $ 15,540  
Short-term borrowings(a)
  $ 188     $     $ 65     $     $ 74     $     $ 157     $     $ 129  
Long-term debt(b)
  $ 569     $ 504     $ 625     $ 505     $ 662     $ 505     $ 645     $ 506     $ 581  
Total stockholders’ equity
  $ 4,328     $ 4,129     $ 4,047     $ 6,485     $ 6,412     $ 6,280     $ 6,238     $ 4,873     $ 4,846  
 
 
(a) The restated amounts for short-term borrowings reflect (1) a correction in classification from accounts payable regarding a vendor financing arrangement during Fiscal 2002 until termination in the first quarter of Fiscal 2006, and (2) a correction in classification from other current liabilities for the short-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.


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(b) The restated amounts for long-term debt reflect (1) adjustments to record changes in the fair value of the debt where the interest rate is hedged with interest rate swap agreements for all periods restated and (2) a correction in classification from both other current liabilities and other non-current liabilities related to the long-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(c) Results for Fiscal 2006 include charges aggregating $421 million ($338 million of other product charges and $83 million in selling, general and administrative expenses) related to the cost of servicing or replacing certain OptiPlextm systems that include a vendor part that failed to perform to our specifications, workforce realignment, product rationalizations, excess facilities, and a write-off of goodwill recognized in the third quarter. The related tax effect of these items was $96 million. Fiscal 2006 also includes an $85 million income tax benefit related to a revised estimate of taxes on the repatriation of earnings under the American Jobs Creation Act of 2004 recognized in the second quarter.
 
(d) Results for Fiscal 2005 include an income tax charge of $280 million related to the repatriation of earnings under the American Jobs Creation Act of 2004 recorded in the fourth quarter.
 
(e) The adjustments relating to fiscal years prior to Fiscal 2003 are reflected in beginning retained earnings. The cumulative impact of these adjusting entries increased beginning retained earnings by $59 million, net of tax.
 
(f) The cash flows have been revised to reflect a closer approximation of the weighted-average exchange rates during the reporting periods. For most periods, this revision reduced the previously reported effect of exchange rate changes on cash and cash equivalents with an offsetting change in effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies and changes in operating working capital included in cash flows from operating activities.
 
Cumulative Restatement Adjustments to Previously Reported Retained Earnings
 
The following tables present the impact of the restatement adjustments on previously reported retained earnings for Fiscal 2006, Fiscal 2005, Fiscal 2004 and Fiscal 2003. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of the restatement.
 
                                 
    February 3,
    January 28,
    January 30,
    January 31,
 
    2006     2005     2004     2003  
    (in millions)  
 
Retained earnings as reported   $ 12,746     $ 9,174     $ 6,131     $ 3,486  
Cumulative restatement adjustments
    (47 )     (77 )     (52 )     (32 )(a)
                                 
Retained earnings as restated
  $ 12,699     $ 9,097     $ 6,079     $ 3,454  
                                 
 
 
(a) Includes a $59 million increase in beginning retained earnings at January 31, 2003 for the pre- Fiscal 2003 cumulative impact of the adjustments.
 
Cumulative Restatement Adjustments to Previously Reported Beginning Retained Earnings and Net Income
 
                                 
    February 3,
    January 28,
    January 30,
    January 31,
 
    2006     2005     2004     2003  
    (in millions)  
 
Retained earnings as restated:
                               
Beginning retained earnings as reported
  $ 9,174     $ 6,131     $ 3,486     $ 1,364  
Cumulative adjustments to beginning retained earnings
    (77 )     (52 )     (32 )     59  
                                 
Beginning retained earnings as restated
    9,097       6,079       3,454       1,423  
                                 
Net income as reported
    3,572       3,043       2,645       2,122  
Net income restatement adjustments
    30       (25 )     (20 )     (91 )
                                 
Net income as restated
    3,602       3,018       2,625       2,031  
                                 
Retained earnings as restated
  $ 12,699     $ 9,097     $ 6,079     $ 3,454  
                                 


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Cumulative Restatement Adjustments to Previously Reported Beginning Retained Earnings by Category
 
The following table presents the impact of the restatement adjustments on previously reported beginning retained earnings for Fiscal 2006, Fiscal 2005, Fiscal 2004, and Fiscal 2003, with the adjustments broken down by the nature of the error. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of the restatement.
 
                                 
    February 3,
    January 28,
    January 30,
    January 31,
 
    2006     2005     2004     2003  
    (in millions)  
 
Beginning retained earnings as reported
  $ 9,174     $ 6,131     $ 3,486     $ 1,364  
Revenue Recognition:
                               
Software
    (21 )     (9 )     (7 )     (2 )
Other
    (216 )     (217 )     (102 )     (64 )
                                 
Revenue Recognition
    (237 )     (226 )     (109 )     (66 )
                                 
Warranty Liabilities
    202       223       129       31  
Restructuring Reserves
    (18 )     (18 )     (14 )     80  
Other
    (45 )     (35 )     (49 )     32  
(Provision) benefit for income taxes
    21       4       11       (18 )
                                 
Cumulative adjustments to beginning retained earnings
    (77 )     (52 )     (32 )     59  
                                 
Beginning retained earnings as restated
  $ 9,097     $ 6,079     $ 3,454     $ 1,423  
                                 


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Impact of Restatement Adjustments on Fiscal 2006 Net Income
 
The following table presents the impact of the restatement adjustments on our Consolidated Statement of Income for the fiscal year ended February 3, 2006:
 
                                                                 
    Fiscal 2006  
          Adjustments              
          Revenue
                Other
    Provision
       
          recognition                 reserves
    for
       
    As
    Software
          Warranty
    Restruc-
    and
    income
    As
 
    Reported     sales     Other     liabilities     turing     accruals     tax(a)     Restated  
    (in millions, except per share data)  
 
Net revenue   $ 55,908     $ (248 )   $ 130     $     $  —     $ (2 )   $  —     $ 55,788  
Cost of net revenue
    45,958       (244 )     124       52             7             45,897  
                                                                 
Gross margin
    9,950       (4 )     6       (52 )           (9 )           9,891  
                                                                 
Operating expenses:
                                                               
Selling, general, and administrative
    5,140             1                   (90 )           5,051  
Research, development, and engineering
    463                   (1 )           (4 )           458  
                                                                 
Total operating expenses
    5,603             1       (1 )           (94 )           5,509  
                                                                 
Operating income
    4,347       (4 )     5       (51 )           85             4,382  
Investment and other income, net
    227             11       (4 )           (8 )           226  
                                                                 
Income before income taxes
    4,574       (4 )     16       (55 )           77             4,608  
Income tax provision
    1,002                                               4       1,006  
                                                                 
Net income
  $ 3,572                                                     $ 3,602  
                                                                 
Earnings per common share:
                                                               
Basic
  $ 1.49                                                     $ 1.50  
                                                                 
Diluted
  $ 1.46                                                     $ 1.47  
                                                                 
Weighted-average shares outstanding:
                                                               
Basic
    2,403                                                       2,403  
Diluted
    2,449                                                       2,449  
 
 
(a) Primarily represents the aggregate tax impact of the adjustments.


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Impact of Restatement Adjustments on Fiscal 2006 Quarterly Financial Data
 
The following tables present selected quarterly financial data for Fiscal 2006:
 
                                                 
    First Quarter   Second Quarter(c)
    April 29, 2005   July 29, 2005
      As  
        As  
    As  
        As  
Fiscal 2006
    Reported     Adjustments     Restated       Reported     Adjustments     Restated  
    (in millions, expect per share data)
 
Results of Operations:                                                
Net revenue
  $ 13,386     $ (86 )   $ 13,300     $ 13,428     $ (46 )   $ 13,382  
Gross margin
  $ 2,491     $ (39 )   $ 2,452     $ 2,499     $ (68 )   $ 2,431  
Operating income
  $ 1,174     $ (37 )   $ 1,137     $ 1,173     $ (60 )   $ 1,113  
Income before income taxes
  $ 1,233     $ (45 )   $ 1,188     $ 1,234     $ (47 )   $ 1,187  
Net income
  $ 934     $ (26 )   $ 908     $ 1,020     $ (38 )   $ 982  
Earnings per common share:
                                               
Basic
  $ 0.38     $ (0.01 )   $ 0.37     $ 0.42     $ (0.01 )   $ 0.41  
Diluted
  $ 0.37     $ (0.01 )   $ 0.36     $ 0.41     $ (0.01 )   $ 0.40  
Number of weighted-average shares outstanding:
                                               
Basic
    2,456             2,456       2,418             2,418  
Diluted
    2,515             2,515       2,478             2,478  
Cash Flow and Balance Sheet Data:
                                               
Net cash provided by operating activities(d)
  $ 1,190     $ 84     $ 1,274     $ 919     $ (58 )   $ 861  
Cash, cash equivalents and investments
  $ 13,374     $ 4     $ 13,378     $ 12,624     $ 6     $ 12,630  
Total assets
  $ 22,687     $ 82     $ 22,769     $ 22,611     $ 107     $ 22,718  
Short-term borrowings(a)
  $     $ 81     $ 81     $     $ 77     $ 77  
Long-term debt(b)
  $ 504     $ 140     $ 644     $ 504     $ 135     $ 639  
Total stockholders’ equity
  $ 5,624     $ (100 )   $ 5,524     $ 5,509     $ (144 )   $ 5,365  
 
                                                 
    Third Quarter(c)   Fourth Quarter
    October 28, 2005   February 3, 2006
      As  
        As  
    As  
        As  
Fiscal 2006
    Reported     Adjustments     Restated       Reported     Adjustments     Restated  
    (in millions, expect per share data)
 
Results of Operations:
                                               
Net revenue
  $ 13,911     $ (31 )   $ 13,880     $ 15,183     $ 43     $ 15,226  
Gross margin
  $ 2,251     $ 14     $ 2,265     $ 2,709     $ 34     $ 2,743  
Operating income
  $ 754     $ 38     $ 792     $ 1,246     $ 94     $ 1,340  
Income before income taxes
  $ 804     $ 39     $ 843     $ 1,303     $ 87     $ 1,390  
Net income
  $ 606     $ 29     $ 635     $ 1,012     $ 65     $ 1,077  
Earnings per common share:
                                               
Basic
  $ 0.25     $ 0.02     $ 0.27     $ 0.43     $ 0.03     $ 0.46  
Diluted
  $ 0.25     $ 0.01     $ 0.26     $ 0.43     $ 0.02     $ 0.45  
Number of weighted-average shares outstanding:
                                               
Basic
    2,395             2,395       2,350             2,350  
Diluted
    2,435             2,435       2,375             2,375  
Cash Flow and Balance Sheet Data:
                                               
Net cash provided by operating activities(d)
  $ 1,148     $ (42 )   $ 1,106     $ 1,582     $ (72 )   $ 1,510  
Cash, cash equivalents and investments
  $ 12,233     $ 4     $ 12,237     $ 11,749     $ 7     $ 11,756  
Total assets
  $ 22,874     $ 163     $ 23,037     $ 23,109     $ 143     $ 23,252  
Short-term borrowings(a)
  $     $ 74     $ 74     $     $ 65     $ 65  
Long-term debt(b)
  $ 504     $ 113     $ 617     $ 504     $ 121     $ 625  
Total stockholders’ equity
  $ 4,821     $ (113 )   $ 4,708     $ 4,129     $ (82 )   $ 4,047  


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(a) The restated amounts for short-term borrowings reflect (1) a correction in classification from accounts payable for vendor financing for the periods from the end of Fiscal 2002 until termination in the first quarter of Fiscal 2006, and (2) a correction in classification from other current liabilities for the short-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(b) The restated amounts for long-term debt reflect (1) adjustments to record changes in the fair value of the debt where the interest rate is hedged with interest rate swap agreements for all periods restated and (2) a correction in classification from both other current liabilities and other non-current liabilities related to the long-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(c) Results for the third quarter of Fiscal 2006 include charges aggregating $421 million ($338 million of other product charges and $83 million in selling, general and administrative expenses) related to the cost of servicing or replacing certain OptiPlexTM systems that include a vendor part that failed to perform to our specifications, workforce realignment, product rationalizations, excess facilities, and a write-off of goodwill recognized in the third quarter. The related tax effect of these items was $96 million. The second quarter of Fiscal 2006 includes an $85 million income tax benefit related to a revised estimate of taxes on the repatriation of earnings under the American Jobs Creation Act of 2004 recognized in the second quarter.
 
(d) The cash flows have been revised to reflect a closer approximation of the weighted-average exchange rates during the reporting periods. For most periods, this revision reduced the previously reported effect of exchange rate changes on cash and cash equivalents with an offsetting change in effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies and changes in operating working capital included in cash flows from operating activities.
 
Fiscal 2006 Restatement Adjustments to Previously Reported Net Income
 
The following table presents the impact of the restatement on our previously reported net income for each quarter of Fiscal 2006. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of the restatement.
 
                                         
    First
    Second
    Third
    Fourth
    Fiscal
 
    Quarter     Quarter     Quarter     Quarter     Year  
    April 29,
    July 29,
    October 28,
    February 3,
    February 3,
 
Fiscal 2006 (As Restated)
  2005     2005     2005     2006     2006  
    (in millions)  
 
Net income as reported
  $ 934     $ 1,020     $ 606     $ 1,012     $ 3,572  
Revenue recognition:
                                       
Software sales
    (3 )     (3 )     3       (1 )     (4 )
Other revenue recognition
    (20 )     (3 )     9       30       16  
                                         
Revenue recognition
    (23 )     (6 )     12       29       12  
Warranty liabilities
    (14 )     (52 )     (14 )     25       (55 )
Restructuring reserves
                             
Other reserves and accruals
    (8 )     11       41       33       77  
(Provision) benefit for income taxes
    19       9       (10 )     (22 )     (4 )
                                         
Net impact of adjustments
    (26 )     (38 )     29       65       30  
                                         
Net income as restated
  $ 908     $ 982     $ 635     $ 1,077     $ 3,602  
                                         


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Impact of Restatement Adjustments on Fiscal 2005 Net Income
 
The following table presents the impact of the restatement adjustments on our Consolidated Statement of Income for the fiscal year ended January 28, 2005:
 
                                                                 
    Fiscal 2005  
          Adjustments              
          Revenue
                Other
    Provision
       
          recognition                 reserves
    for
       
    As
    Software
          Warranty
    Restruc-
    and
    income
    As
 
    Reported     sales     Other     liabilities     turing     accruals     tax(a)     Restated  
    (in millions, except per share data)  
 
Net revenue
  $ 49,205     $ (105 )   $ 21     $     $  —     $     $     $ 49,121  
Cost of net revenue
    40,190       (93 )     21       21             (36 )           40,103  
                                                                 
Gross margin
    9,015       (12 )           (21 )           36             9,018  
                                                                 
Operating expenses:
                                                               
Selling, general, and administrative
    4,298                               54             4,352  
Research, development, and engineering
    463                               (3 )           460  
                                                                 
Total operating expenses
    4,761                               51             4,812  
                                                                 
Operating income
    4,254       (12 )           (21 )           (15 )           4,206  
Investment and other income, net
    191             1                   5             197  
                                                                 
Income before income taxes
    4,445       (12 )     1       (21 )           (10 )           4,403  
Income tax provision
    1,402                                               (17 )     1,385  
                                                                 
Net income
  $ 3,043                                                     $ 3,018  
                                                                 
Earnings per common share:
                                                               
Basic
  $ 1.21                                                     $ 1.20  
                                                                 
Diluted
  $ 1.18                                                     $ 1.18  
                                                                 
Weighted-average shares outstanding:
                                                               
Basic
    2,509                                                       2,509  
Diluted
    2,568                                                       2,568  
 
 
(a) Primarily represents the aggregate tax impact of the adjustments.


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Impact of Restatement Adjustments on Fiscal 2005 Quarterly Financial Data
 
The following tables present selected quarterly financial data for Fiscal 2005:
 
                                                 
    First Quarter   Second Quarter
    April 30, 2004   July 30, 2004
    As
      As
  As
      As
Fiscal 2005
  Reported   Adjustments   Restated   Reported   Adjustments   Restated
    (in millions, expect per share data)
 
Results of Operations:
                                               
Net revenue
  $ 11,540     $ 44     $ 11,584     $ 11,706     $ (56 )   $ 11,650  
Gross margin
  $ 2,073     $ (14 )   $ 2,059     $ 2,134     $ 59     $ 2,193  
Operating income
  $ 966     $ (34 )   $ 932     $ 1,006     $ 59     $ 1,065  
Income before income taxes
  $ 1,015     $ (15 )   $ 1,000     $ 1,052     $ 54     $ 1,106  
Net income
  $ 731     $ (10 )   $ 721     $ 799     $ 41     $ 840  
Earnings per common share:
                                               
Basic
  $ 0.29     $ (0.01 )   $ 0.28     $ 0.32     $ 0.01     $ 0.33  
Diluted
  $ 0.28     $     $ 0.28     $ 0.31     $ 0.02     $ 0.33  
Number of weighted-average shares outstanding:
                                               
Basic
    2,539             2,539       2,518             2,518  
Diluted
    2,593             2,593       2,574             2,574  
Cash Flow and Balance Sheet Data:
                                               
Net cash provided by operating activities(d)
  $ 1,002     $ 135     $ 1,137     $ 703     $ 62     $ 765  
Cash, cash equivalents and investments
  $ 11,886     $     $ 11,886     $ 11,810     $     $ 11,810  
Total assets
  $ 19,709     $ 10     $ 19,719     $ 19,932     $ 17     $ 19,949  
Short-term borrowings(a)
  $     $ 101     $ 101     $     $ 80     $ 80  
Long-term debt(b)
  $ 505     $ 126     $ 631     $ 505     $ 133     $ 638  
Total stockholders’ equity
  $ 6,105     $ (61 )   $ 6,044     $ 6,207     $ (20 )   $ 6,187  
 
                                                 
    Third Quarter   Fourth Quarter(c)
    October 29, 2004   January 28, 2005
    As
      As
  As
      As
Fiscal 2005
  Reported   Adjustments   Restated   Reported   Adjustments   Restated
    (in millions, expect per share data)
 
Results of Operations:
                                               
Net revenue
  $ 12,502     $ 11     $ 12,513     $ 13,457     $ (83 )   $ 13,374  
Gross margin
  $ 2,313     $ (11 )   $ 2,302     $ 2,495     $ (31 )   $ 2,464  
Operating income
  $ 1,095     $ (20 )   $ 1,075     $ 1,187     $ (53 )   $ 1,134  
Income before income taxes
  $ 1,143     $ (21 )   $ 1,122     $ 1,235     $ (60 )   $ 1,175  
Net income
  $ 846     $ (14 )   $ 832     $ 667     $ (42 )   $ 625  
Earnings per common share:
                                               
Basic
  $ 0.34     $ (0.01 )   $ 0.33     $ 0.27     $ (0.02 )   $ 0.25  
Diluted
  $ 0.33     $     $ 0.33     $ 0.26     $ (0.02 )   $ 0.24  
Number of weighted-average shares outstanding:
                                               
Basic
    2,493             2,493       2,485             2,485  
Diluted
    2,546             2,546       2,553             2,553  
Cash Flow and Balance Sheet Data:
                                               
Net cash provided by operating activities(d)
  $ 1,787     $ 83     $ 1,870     $ 1,818     $ 231     $ 2,049  
Cash, cash equivalents and investments
  $ 12,436     $     $ 12,436     $ 14,101     $     $ 14,101  
Total assets
  $ 21,054     $ 73     $ 21,127     $ 23,215     $ 103     $ 23,318  
Short-term borrowings(a)
  $     $ 79     $ 79     $     $ 74     $ 74  
Long-term debt(b)
  $ 505     $ 154     $ 659     $ 505     $ 157     $ 662  
Total stockholders’ equity
  $ 5,880     $ (35 )   $ 5,845     $ 6,485     $ (73 )   $ 6,412  


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(a) The restated amounts for short-term borrowings reflect (1) a correction in classification from accounts payable for vendor financing for the periods from the end of Fiscal 2002 until termination in the first quarter of Fiscal 2006, and (2) a correction in classification from other current liabilities for the short-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(b) The restated amounts for long-term debt reflect (1) adjustments to record changes in the fair value of the debt where the interest rate is hedged with interest rate swap agreements for all periods restated and (2) a correction in classification from both other current liabilities and other non-current liabilities related to the long-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(c) Results include an income tax charge of $280 million related to the repatriation of earnings under the American Jobs Creation Act of 2004 recorded in the fourth quarter.
 
(d) The cash flows have been revised to reflect a closer approximation of the weighted-average exchange rates during the reporting periods. For most periods, this revision reduced the previously reported effect of exchange rate changes on cash and cash equivalents with an offsetting change in effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies and changes in operating working capital included in cash flows from operating activities.
 
Fiscal 2005 Restatement Adjustments to Previously Reported Net Income
 
The following table presents the impact of the restatement on our previously reported net income for each quarter of Fiscal 2005. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of the restatement.
 
                                         
    First
    Second
    Third
    Fourth
    Fiscal
 
    Quarter     Quarter     Quarter     Quarter     Year  
    April 30,
    July 30,
    October 29,
    January 28,
    January 28,
 
Fiscal 2005 (As Restated)
  2004     2004     2004     2005     2005  
    (in millions)  
 
Net income as reported
  $ 731     $ 799     $ 846     $ 667     $ 3,043  
Revenue recognition:
                                       
Software sales
    (2 )     (2 )     (3 )     (5 )     (12 )
Other revenue recognition
    11       (2 )     6       (14 )     1  
                                         
Revenue recognition
    9       (4 )     3       (19 )     (11 )
Warranty liabilities
    1       24       (21 )     (25 )     (21 )
Restructuring reserves
                             
Other reserves and accruals(a)
    (25 )     34       (3 )     (16 )     (10 )
(Provision) benefit for income taxes
    5       (13 )     7       18       17  
                                         
Net impact of adjustments
    (10 )     41       (14 )     (42 )     (25 )
                                         
Net income as restated
  $ 721     $ 840     $ 832     $ 625     $ 3,018  
                                         
 
 
(a) Reflects an adjustment of an amount of vendor funding recognized in the first quarter of Fiscal 2005 but earned in the second quarter of Fiscal 2005.


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Table of Contents

 
Impact of Restatement Adjustments on Fiscal 2004 Net Income
 
The following table presents the impact of the restatement adjustments on our Consolidated Statement of Income for the fiscal year ended January 30, 2004:
 
                                                                 
    Fiscal 2004  
          Adjustments              
          Revenue
                Other
    Provision
       
          recognition                 reserves
    for
       
    As
    Software
          Warranty
    Restruc-
    and
    income
    As
 
    Reported     sales     Other(a)     liabilities     turing     accruals     tax(b)     Restated  
    (in millions, except per share data)  
 
Net revenue
  $ 41,444     $ 4     $ (121 )   $     $  —     $     $  —     $ 41,327  
Cost of net revenue
    33,892       6       (6 )     (94 )           (34 )           33,764  
                                                                 
Gross margin
    7,552       (2 )     (115 )     94             34             7,563  
                                                                 
Operating expenses:
                                                               
Selling, general, and administrative
    3,544             (1 )           4       57             3,604  
Research, development, and engineering
    464                               (30 )           434  
                                                                 
Total operating expenses
    4,008             (1 )           4       27             4,038  
                                                                 
Operating income
    3,544       (2 )     (114 )     94       (4 )     7             3,525  
Investment and other income, net
    180             (1 )                 7             186  
                                                                 
Income before income taxes
    3,724       (2 )     (115 )     94       (4 )     14             3,711  
Income tax provision
    1,079                                               7       1,086  
                                                                 
Net income
  $ 2,645                                                     $ 2,625  
                                                                 
Earnings per common share:
                                                               
Basic
  $ 1.03                                                     $ 1.02  
                                                                 
Diluted
  $ 1.01                                                     $ 1.00  
                                                                 
Weighted-average shares outstanding:
                                                               
Basic
    2,565                                                       2,565  
Diluted
    2,619                                                       2,619  
 
 
(a) Primarily includes adjustments to the deferral and amortization of revenue from extended warranty and enhanced service level agreements, and adjustments to the period end in-transit revenue deferrals. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional detail.
 
(b) Primarily represents the aggregate tax impact of the adjustments.


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Impact of Restatement Adjustments on Fiscal 2004 Quarterly Financial Data
 
The following tables present selected quarterly financial data for Fiscal 2004:
 
                                                 
    First Quarter   Second Quarter
    May 2, 2003   August 1, 2003
      As  
        As  
    As  
        As  
Fiscal 2004
    Reported     Adjustments     Restated       Reported     Adjustments     Restated  
    (in millions, expect per share data)
 
Results of Operations:
                                               
Net revenue
  $ 9,532     $ (11 )   $ 9,521     $ 9,778     $ (98 )   $ 9,680  
Gross margin
  $ 1,748     $ 9     $ 1,757     $ 1,778     $ (69 )   $ 1,709  
Operating income
  $ 811     $ 18     $ 829     $ 840     $ (92 )   $ 748  
Income before income taxes
  $ 854     $ 20     $ 874     $ 887     $ (87 )   $ 800  
Net income
  $ 598     $ 11     $ 609     $ 621     $ (63 )   $ 558  
Earnings per common share:
                                               
Basic
  $ 0.23     $ 0.01     $ 0.24     $ 0.24     $ (0.02 )   $ 0.22  
Diluted
  $ 0.23     $     $ 0.23     $ 0.24     $ (0.03 )   $ 0.21  
Number of weighted-average shares outstanding:
                                               
Basic
    2,572             2,572       2,567             2,567  
Diluted
    2,614             2,614       2,624             2,624  
Cash Flow and Balance Sheet Data:
                                               
Net cash provided by operating activities(c)
  $ 812     $ 117     $ 929     $ 740     $ 134     $ 874  
Cash, cash equivalents and investments
  $ 10,332     $ (2 )   $ 10,330     $ 10,618     $ (1 )   $ 10,617  
Total assets
  $ 15,712     $ 70     $ 15,782     $ 16,540     $ 53     $ 16,593  
Short-term borrowings(a)
  $     $ 134     $ 134     $     $ 81     $ 81  
Long-term debt(b)
  $ 506     $ 81     $ 587     $ 506     $ 42     $ 548  
Total stockholders’ equity
  $ 5,076     $ (19 )   $ 5,057     $ 5,506     $ (85 )   $ 5,421  
 
                                                 
    Third Quarter   Fourth Quarter
    October 31, 2003   January 30, 2004
      As  
        As  
    As  
        As  
Fiscal 2004
    Reported     Adjustments     Restated       Reported     Adjustments     Restated  
    (in millions, expect per share data)
 
Results of Operations:
                                               
Net revenue
  $ 10,622     $ 7     $ 10,629     $ 11,512     $ (15 )   $ 11,497  
Gross margin
  $ 1,935     $ 23     $ 1,958     $ 2,091     $ 48     $ 2,139  
Operating income
  $ 912     $ 5     $ 917     $ 981     $ 50     $ 1,031  
Income before income taxes
  $ 953     $ 7     $ 960     $ 1,030     $ 47     $ 1,077  
Net income
  $ 677     $ 2     $ 679     $ 749     $ 30     $ 779  
Earnings per common share:
                                               
Basic
  $ 0.26     $     $ 0.26     $ 0.29     $ 0.01     $ 0.30  
Diluted
  $ 0.26     $     $ 0.26     $ 0.29     $ 0.01     $ 0.30  
Number of weighted-average shares outstanding:
                                               
Basic
    2,563             2,563       2,557             2,557  
Diluted
    2,623             2,623       2,616             2,616  
Cash Flow and Balance Sheet Data:
                                               
Net cash provided by operating activities(c)
  $ 1,060     $ (119 )   $ 941     $ 1,058     $ 262     $ 1,320  
Cash, cash equivalents and investments
  $ 11,032     $ (2 )   $ 11,030     $ 11,922     $ (1 )   $ 11,921  
Total assets
  $ 18,125     $ 14     $ 18,139     $ 19,311     $ 29     $ 19,340  
Short-term borrowings(a)
  $     $ 176     $ 176     $     $ 157     $ 157  
Long-term debt(b)
  $ 506     $ 132     $ 638     $ 505     $ 140     $ 645  
Total stockholders’ equity
  $ 5,878     $ (78 )   $ 5,800     $ 6,280     $ (42 )   $ 6,238  


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(a) The restated amounts for short-term borrowings reflect (1) a correction in classification from accounts payable for vendor financing for the periods from the end of Fiscal 2002 until termination in the first quarter of Fiscal 2006, and (2) a correction in classification from other current liabilities for the short-term portion for outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(b) The restated amounts for long-term debt reflect (1) adjustments to record changes in the fair value of the debt where the interest rate is hedged with interest rate swap agreements for all periods restated and (2) a correction in classification from both other current liabilities and other non-current liabilities related to the long-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(c) The cash flows have been revised to reflect a closer approximation of the weighted-average exchange rates during the reporting periods. For most periods, this revision reduced the previously reported effect of exchange rate changes on cash and cash equivalents with an offsetting change in effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies and changes in operating working capital included in cash flows from operating activities.
 
Fiscal 2004 Restatement Adjustments to Previously Reported Net Income
 
The following table presents the impact of the restatement on our previously reported net income for each quarter of Fiscal 2004:
 
                                         
    First
    Second
    Third
    Fourth
    Fiscal
 
    Quarter     Quarter     Quarter     Quarter     Year  
    May 2,
    August 1,
    October 31,
    January 30,
    January 30,
 
Fiscal 2004 (As Restated)
  2003     2003     2003     2004     2004  
    (in millions)  
 
Net income as reported
  $ 598     $ 621     $ 677     $ 749     $ 2,645  
Revenue recognition:
                                       
Software sales
          (1 )     2       (3 )     (2 )
Other revenue recognition(a)
    (31 )     (58 )     (6 )     (20 )     (115 )
                                         
Revenue recognition
    (31 )     (59 )     (4 )     (23 )     (117 )
Warranty liabilities
    11       5       35       43       94  
Restructuring reserves
    (3 )     (2 )     1             (4 )
Other reserves and accruals
    43       (31 )     (24 )     26       14  
(Provision) benefit for income taxes
    (9 )     24       (6 )     (16 )     (7 )
                                         
Net impact of adjustments
    11       (63 )     2       30       (20 )
                                         
Net income as restated
  $ 609     $ 558     $ 679     $ 779     $ 2,625  
                                         
 
 
(a) Primarily includes adjustments to the deferral and amortization of revenue from extended warranty and enhanced service level agreements, and adjustments to the period end in-transit revenue deferrals. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional detail.


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Impact of Restatement Adjustments on Fiscal 2003 Net Income
 
The following table presents the impact of the restatement adjustments on our Consolidated Statement of Income for the fiscal year ended January 31, 2003:
 
                                                                 
    Fiscal 2003  
          Adjustments              
          Revenue
                Other
    Provision
       
          recognition                 reserves
    for
       
    As
    Software
          Warranty
    Restruc-
    and
    income
    As
 
    Reported     sales     Other(b)     liabilities     turing     accruals(a)     tax(c)     Restated  
    (in millions, except per share data)  
 
Net revenue
  $ 35,404     $ (78 )   $ (64 )   $     $     $     $     $ 35,262  
Cost of net revenue
    29,055       (73 )     (26 )     (98 )     22       (56 )           28,824  
                                                                 
Gross margin
    6,349       (5 )     (38 )     98       (22 )     56             6,438  
                                                                 
Operating expenses:
                                                               
Selling, general, and administrative
    3,050             (5 )           72       128             3,245  
Research, development, and engineering
    455                                           455  
                                                                 
Total operating expenses
    3,505             (5 )           72       128             3,700  
                                                                 
Operating income
    2,844       (5 )     (33 )     98       (94 )     (72 )           2,738  
Investment and other income, net
    183             (5 )                 (9 )           169  
                                                                 
Income before income taxes
    3,027       (5 )     (38 )     98       (94 )     (81 )           2,907  
Income tax provision
    905                                               (29 )     876  
                                                                 
Net income
  $ 2,122                                                     $ 2,031  
                                                                 
Earnings per common share:
                                                               
Basic
  $ 0.82                                                     $ 0.79  
                                                                 
Diluted
  $ 0.80                                                     $ 0.77  
                                                                 
Weighted-average shares outstanding:
                                                               
Basic
    2,584                                                       2,584  
Diluted
    2,644                                                       2,644  
 
 
(a) Primarily includes adjustments in the recognition of the benefit of certain vendor funding arrangements, and adjustments to the lease accruals for certain Dell facilities. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional details.
 
(b) Other revenue recognition primarily includes adjustments to the recognition of deferred warranty revenue associated with the sale of extended warranties and enhanced service level agreements. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional details.
 
(c) Primarily represents the aggregate tax impact of the adjustments.


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Impact of Restatement Adjustments on Fiscal 2003 Quarterly Financial Data
 
The following table presents selected quarterly financial data for Fiscal 2003:
 
                                                 
    First Quarter   Second Quarter
    May 3, 2002   August 2, 2002
      As  
        As  
    As  
        As  
Fiscal 2003
    Reported     Adjustments     Restated       Reported     Adjustments     Restated  
    (in millions, expect per share data)
 
Results of Operations:
                                               
Net revenue
  $ 8,066     $ 17     $ 8,083     $ 8,459     $ (49 )   $ 8,410  
Gross margin
  $ 1,391     $ (1 )   $ 1,390     $ 1,515     $ 41     $ 1,556  
Operating income
  $ 590     $ (73 )   $ 517     $ 677     $ 9     $ 686  
Income before income taxes
  $ 638     $ (77 )   $ 561     $ 726     $     $ 726  
Net income
  $ 457     $ (56 )   $ 401     $ 501     $     $ 501  
Earnings per common share:
                                               
Basic
  $ 0.18     $ (0.03 )   $ 0.15     $ 0.19     $     $ 0.19  
Diluted
  $ 0.17     $ (0.02 )   $ 0.15     $ 0.19     $     $ 0.19  
Number of weighted-average shares outstanding:
                                               
Basic
    2,595             2,595       2,586             2,586  
Diluted
    2,672             2,672       2,649             2,649  
Cash Flow and Balance Sheet Data:
                                               
Net cash provided by operating activities(d)
  $ 579     $ (1 )   $ 578     $ 868     $ 130     $ 998  
Cash, cash equivalents and investments
  $ 8,194     $ 1     $ 8,195     $ 8,633     $ 1     $ 8,634  
Total assets
  $ 13,316     $ 46     $ 13,362     $ 14,062     $ 55     $ 14,117  
Short-term borrowings(a)
  $     $ 162     $ 162     $     $ 161     $ 161  
Long-term debt(b)
  $ 520     $ 21     $ 541     $ 516     $ 48     $ 564  
Total stockholders’ equity(c)
  $ 4,521     $ 5     $ 4,526     $ 4,566     $ 10     $ 4,576  
 
                                                 
    Third Quarter   Fourth Quarter
    November 1, 2002   January 31, 2003
      As  
        As  
    As  
        As  
Fiscal 2003
    Reported     Adjustments     Restated       Reported     Adjustments     Restated  
    (in millions, expect per share data)
 
Results of Operations:
                                               
Net revenue
  $ 9,144     $ 40     $ 9,184     $ 9,735     $ (150 )   $ 9,585  
Gross margin
  $ 1,662     $ 60     $ 1,722     $ 1,781     $ (11 )   $ 1,770  
Operating income
  $ 758     $ (4 )   $ 754     $ 819     $ (38 )   $ 781  
Income before income taxes
  $ 802     $ (12 )   $ 790     $ 861     $ (31 )   $ 830  
Net income
  $ 561     $ (11 )   $ 550     $ 603     $ (24 )   $ 579  
Earnings per common share:
                                               
Basic
  $ 0.22     $ (0.01 )   $ 0.21     $ 0.23     $ (0.01 )   $ 0.22  
Diluted
  $ 0.21     $     $ 0.21     $ 0.23     $ (0.01 )   $ 0.22  
Number of weighted-average shares outstanding:
                                               
Basic
    2,582             2,582       2,576             2,576  
Diluted
    2,634             2,634       2,621             2,621  
Cash Flow and Balance Sheet Data:
                                               
Net cash provided by operating activities(d)
  $ 954     $ 126     $ 1,080     $ 1,137     $ 115     $ 1,252  
Cash, cash equivalents and investments
  $ 9,059     $ 1     $ 9,060     $ 9,905     $ 5     $ 9,910  
Total assets
  $ 14,712     $ 22     $ 14,734     $ 15,470     $ 70     $ 15,540  
Short-term borrowings(a)
  $     $ 101     $ 101     $     $ 129     $ 129  
Long-term debt(b)
  $ 514     $ 64     $ 578     $ 506     $ 75     $ 581  
Total stockholders’ equity(c)
  $ 4,648     $ 3     $ 4,651     $ 4,873     $ (27 )   $ 4,846  
 
 
(a) The restated amounts for short-term borrowings reflect (1) a correction in classification from accounts payable for vendor financing for the periods from the end of Fiscal 2002 until termination in the first quarter of Fiscal 2006, and (2) a correction in


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classification from other current liabilities for the short-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(b) The restated amounts for long-term debt reflect (1) adjustments to record changes in the fair value of the debt where the interest rate is hedged with interest rate swap agreements for all periods restated and (2) a correction in classification from other current liabilities of the long-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007.
 
(c) The adjustments relating to fiscal years prior to Fiscal 2003 are reflected in beginning retained earnings. The cumulative impact of these adjusting entries increased beginning retained earnings by $59 million, net of tax.
 
(d) The cash flows have been revised to reflect a closer approximation of the weighted-average exchange rates during the reporting periods. For most periods, this revision reduced the previously reported effect of exchange rate changes on cash and cash equivalents with an offsetting change in effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies and changes in operating working capital included in cash flows from operating activities.
 
Fiscal 2003 Restatement Adjustments to Previously Reported Net Income
 
The following table presents the impact of the restatement on our previously reported net income for each quarter of Fiscal 2003:
 
                                         
    First
    Second
    Third
    Fourth
    Fiscal
 
    Quarter     Quarter     Quarter     Quarter     Year  
    May 3,
    August 2,
    November 1,
    January 30,
    January 30,
 
Fiscal 2003 (As Restated)
  2002     2002     2002     2003     2003  
    (in millions)  
 
Net income as reported
  $ 457     $ 501     $ 561     $ 603     $ 2,122  
Revenue recognition:
                                       
Software sales
    1       (1 )     (1 )     (4 )     (5 )
Other revenue recognition(a)
    12       20       15       (85 )     (38 )
                                         
Revenue recognition
    13       19       14       (89 )     (43 )
Warranty liabilities
    10       13       21       54       98  
Restructuring reserves
    (37 )     (12 )     (17 )     (28 )     (94 )
Other reserves and accruals(b)
    (63 )     (19 )     (30 )     31       (81 )
(Provision) benefit for income taxes
    21       (1 )     1       8       29  
                                         
Net impact of adjustments
    (56 )           (11 )     (24 )     (91 )
                                         
Net income as restated
  $ 401     $ 501     $ 550     $ 579     $ 2,031  
                                         
 
 
(a) Other revenue recognition primarily includes adjustments to the recognition of deferred warranty revenue associated with the sale of extended warranties and enhanced service level agreements. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional details.
 
(b) Other reserves and accruals primarily include adjustments in the recognition of the benefit of certain vendor funding arrangements, and adjustments to the lease accruals for certain Dell facilities. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional details.


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ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
SPECIAL NOTE:  This section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on our current expectations. Actual results in future periods may differ materially from those expressed or implied by those forward-looking statements because of a number of risks and uncertainties. For a discussion of risk factors affecting our business and prospects, see “Part I — Item 1A  — Risk Factors.”
 
 
AUDIT COMMITTEE INDEPENDENT INVESTIGATION AND RESTATEMENT
 
Background
 
In August 2005, the Division of Enforcement of the United States Securities and Exchange Commission (the “SEC”) initiated an inquiry into certain of our accounting and financial reporting matters and requested that we provide certain documents. Over the course of several months, we produced documents and provided information in response to the SEC’s initial request and subsequent requests.
 
In June 2006, the SEC sent us an additional request for documents and information that appeared to expand the scope of the inquiry, with respect to both issues and periods. As documents and information were collected in response to this additional request, our management was made aware of information that raised significant accounting and financial reporting concerns, including whether accruals, reserves, and other balance sheet items had been recorded and reported properly. After evaluating this information and in consultation with PricewaterhouseCoopers LLP, our independent registered public accounting firm, management determined that the identified issues warranted an independent investigation and recommended such to the Audit Committee of our Board of Directors.
 
On August 16, 2006, the Audit Committee, acting on management’s recommendation, approved the initiation of an independent investigation. The Audit Committee engaged Willkie Farr & Gallagher LLP (“Willkie Farr”) to lead the investigation as independent legal counsel to the Audit Committee. Willkie Farr in turn engaged KPMG LLP (“KPMG”) to serve as its independent forensic accountants.
 
Scope of the Investigation
 
The scope of the investigation was determined by Willkie Farr, in consultation with the Audit Committee and KPMG. The investigation involved a program of forensic analysis and inquiry directed to aspects of our accounting and financial reporting practices throughout the world, and evaluated aspects of our historical accounting and financial reporting practices since Fiscal 2002 and, with respect to certain issues, prior fiscal years.
 
Willkie Farr and KPMG assembled an investigative team that ultimately consisted of more than 375 professionals, including more than 125 lawyers and 250 accountants. Investigative teams were deployed in our three geographic regions — Americas (including our corporate functions), EMEA, and APJ. Information and documents were gathered from company personnel worldwide. Using proprietary search software, the investigative team evaluated over five million documents. Investigative counsel also conducted over 200 interviews of approximately 150 individuals, and the KPMG accountants, in connection with their forensic work, conducted numerous less formal discussions with various company employees. In addition, using a proprietary software tool designed to identify potentially questionable journal entries based on selected criteria (for example, entries made late in the quarterly close process, entries containing round dollar line items between $3 million and $50 million, and liability-to-liability transfers), KPMG selected and reviewed in excess of 2,600 journal entries that were highlighted by the tool or specifically identified by the forensic teams investigating specific issues.


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Summary of Investigation Findings
 
The investigation raised questions relating to numerous accounting issues, most of which involved adjustments to various reserve and accrued liability accounts, and identified evidence that certain adjustments appear to have been motivated by the objective of attaining financial targets. According to the investigation, these activities typically occurred in the days immediately following the end of a quarter, when the accounting books were being closed and the results of the quarter were being compiled. The investigation found evidence that, in that timeframe, account balances were reviewed, sometimes at the request or with the knowledge of senior executives, with the goal of seeking adjustments so that quarterly performance objectives could be met. The investigation concluded that a number of these adjustments were improper, including the creation and release of accruals and reserves that appear to have been made for the purpose of enhancing internal performance measures or reported results, as well as the transfer of excess accruals from one liability account to another and the use of the excess balances to offset unrelated expenses in later periods. The investigation found that sometimes business unit personnel did not provide complete information to corporate headquarters and, in a number of instances, purposefully incorrect or incomplete information about these activities was provided to internal or external auditors.
 
The investigation identified evidence that accounting adjustments were viewed at times as an acceptable device to compensate for earnings shortfalls that could not be closed through operational means. Often, these adjustments were several hundred thousand or several million dollars, in the context of a company with annual revenues ranging from $35.3 billion to $55.8 billion and annual net income ranging from $2.0 billion to $3.6 billion for the periods in question. The errors and irregularities identified in the course of the investigation revealed deficiencies in our accounting and financial control environment, some of which were determined to be material weaknesses, that require corrective and remedial actions. For a description of the control deficiencies identified by management as a result of the investigation and our internal reviews described below, as well as management’s plan to remediate those deficiencies, see “Part II — Item 9A — Controls and Procedures.”
 
Other Company Identified Adjustments
 
Concurrently with the investigation, we also conducted extensive internal reviews for the purpose of the preparation and certification of our Fiscal 2007 and prior financial statements and our assessment of internal controls over financial reporting. Our procedures included expanded account reviews and expanded balance sheet reconciliations to ensure all accounts were fully reconciled, supported, and appropriately documented. We also implemented improvements to our quarterly and annual accounting close process to provide for more complete review of the various business unit financial results. These additional reviews identified issues involving, among other things, revenue recognition in connection with sales of third party software, amortization of revenue related to after-point-of-sale extended warranties, and accounting for certain vendor reimbursement agreements.
 
Restatement
 
As a result of issues identified in the Audit Committee investigation, as well as issues identified in the additional reviews and procedures conducted by management, the Audit Committee, in consultation with management and PricewaterhouseCoopers LLP, our independent registered public accounting firm, concluded on August 13, 2007 that our previously issued financial statements for Fiscal 2003, 2004, 2005, and 2006 (including the interim periods within those years), and the first quarter of Fiscal 2007, should no longer be relied upon because of certain accounting errors and irregularities in those financial statements. Accordingly, we have restated our previously issued financial statements for those periods. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 


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Overview
 
Our Company
 
As a leading technology company, we offer a broad range of product categories, including desktop computer systems, mobility products, servers, storage, software and peripherals, and services. We are the number one supplier of desktop and notebook systems in the United States, and the number two supplier worldwide. Our past performance has been the result of a persistent focus on delivering directly to our customers relevant technology and services at the best value.
 
Our business strategy is evolving. Historically we utilized our direct customer model and highly efficient manufacturing and logistics to lower the cost of technology for our customers. We are now simplifying information technology for our customers from point of sale to the usability of our products to the service solutions we sell. Using this strategy, we strive to provide the best possible customer experience by offering superior value; high-quality; relevant technology; customized systems; superior service and support; and differentiated products and services that are easy to buy and use. We also offer various financing alternatives, asset management services, and other customer financial services for business and consumer customers. To reach even more customers globally we have launched new distribution channels to reach commercial customers and individual consumers around the world.
 
Although the focus of our business strategy is selling directly to customers, we also utilize indirect sales channels when there is a business need. During Fiscal 2008, we began offering Dell Dimensiontm desktop computers and Inspirontm notebook computers in retail stores in the Americas and announced partnerships with retailers in the U.K., Japan, and China. These actions represent one of the first steps in our retail strategy, which will allow us to extend our model and reach customers that we have not been able to reach directly.
 
We manufacture most of the products we sell and have manufacturing locations worldwide to service our global customer base. Our build-to-order manufacturing process is designed to allow us to significantly reduce cost while simultaneously providing customers the ability to customize their product purchases. We also have relationships with third-party original equipment manufacturers that build some of our products (such as printers and projectors) to our specifications, and we are exploring the expanded use of original design manufacturing partnerships and manufacturing outsourcing relationships in order to deliver products faster and better serve our customers in certain markets.
 
Current Business Environment
 
We participate in a highly competitive industry that is subject to aggressive pricing and strong competitive pressures; however, we believe that our growth potential remains strong. In the U.S., rising energy prices, weakening real estate markets, and inflationary pressures may lead to slower economic growth, which may affect IT and consumer spending during the fourth quarter of Fiscal 2008. A slow down in the U.S. economy could adversely impact other regional markets. Economic conditions in our international markets, which are key to our expansion goals, are highlighted by growing economies in Central and Eastern Europe, expansion in Asia Pacific-Japan (“APJ”), and continued development in Latin America. Overall, expected industry growth is in line with prior year growth.


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Fiscal 2007 Performance
 
         
Share position     According to IDC, we shipped an industry record of 39.1 million units for calendar year 2006, resulting in a worldwide PC share position of 17.1%. However, we lost share in the U.S. Consumer segment, which slowed our overall growth in unit shipments, revenue, and profitability. This was mainly due to intense competitive pressure, particularly in the lower priced desktops and notebooks where competitors offered aggressively priced products with better product recognition and more relevant feature sets.
Net revenue
    Fiscal 2007 revenue increased 3% year-over-year to $57.4 billion, with unit shipments up 2% year-over-year, as compared to Fiscal 2006 revenue which increased 14% year-over-year to $55.8 billion on unit growth of 19% over Fiscal 2005 revenue of $49.1 billion.
Operating income
    Operating income was $3.1 billion for Fiscal 2007, or 5.4% of revenue, compared to $4.4 billion or 7.9% of revenue in Fiscal 2006 and $4.2 billion or 8.6% of revenue in Fiscal 2005.
Net income
    Net income was $2.6 billion for Fiscal 2007, or 4.5% of revenue, compared to $3.6 billion or 6.5% of revenue in Fiscal 2006 and $3.0 billion or 6.1% of revenue in Fiscal 2005.
Earnings per share
    Earnings per share decreased 23% to $1.14 for Fiscal 2007, compared to $1.47 for Fiscal 2006 and $1.18 for Fiscal 2005.
 
Results of Operations
 
The following table summarizes our consolidated results of operations for each of the past three fiscal years:
 
                                                 
    Fiscal Year Ended  
    February 2, 2007(a)     February 3, 2006(b)     January 28, 2005(c)  
          % of
          % of
          % of
 
    Dollars     Revenue     Dollars     Revenue     Dollars     Revenue  
                As
    As
    As
    As
 
                Restated     Restated     Restated     Restated  
    (in millions, except per share amounts and percentages)  
 
Net revenue
  $ 57,420       100.0 %   $ 55,788       100.0 %   $ 49,121       100.0 %
Gross margin
  $ 9,516       16.6 %   $ 9,891       17.7 %   $ 9,018       18.4 %
Operating expenses
  $ 6,446       11.2 %   $ 5,509       9.8 %   $ 4,812       9.8 %
Operating income
  $ 3,070       5.4 %   $ 4,382       7.9 %   $ 4,206       8.6 %
Income tax provision
  $ 762       1.3 %   $ 1,006       1.8 %   $ 1,385       2.8 %
Net income
  $ 2,583       4.5 %   $ 3,602       6.5 %   $ 3,018       6.1 %
Earnings per share — diluted
  $ 1.14       N/A     $ 1.47       N/A     $ 1.18       N/A  
 
 
(a) Results for Fiscal 2007 include stock-based compensation expense of $368 million, or $258 million ($0.11 per share) net of tax, due to the implementation of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”). We implemented SFAS 123(R) using the modified prospective method effective February 4, 2006. For additional information, see Note 6 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
(b) Results for Fiscal 2006 include charges aggregating $421 million ($338 million of other product charges and $83 million in selling, general, and administrative expenses) related to the cost of servicing or replacing certain OptiPlextm systems that include a vendor part that failed to perform to our specifications, workforce realignment, product rationalizations, excess facilities, and a write-off of goodwill recognized in the third quarter. The related tax effect of these items was $96 million. Fiscal 2006 also includes an $85 million income tax benefit related to a revised estimate of taxes on the repatriation of earnings under the American Jobs Creation Act of 2004 recognized in the second quarter.
 
(c) Results for Fiscal 2005 include an income tax charge of $280 million related to the repatriation of earnings under the American Jobs Creation Act of 2004 recorded in the fourth quarter.


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Consolidated Operations
 
Fiscal 2007 revenue increased 3% year-over-year to $57.4 billion, with unit shipments up 2% year-over-year. Revenue grew across the EMEA and APJ regions by 6% and 12%, respectively, while the Americas region revenue remained flat year-over-year. Revenue outside the U.S. represented approximately 44% of Fiscal 2007 consolidated revenue, compared to approximately 41% in the prior year. Outside the U.S., we produced 10% year-over-year revenue growth for Fiscal 2007. During Fiscal 2007, Americas Business revenue grew by 3% and U.S. Consumer revenue declined by 11%. All product categories grew revenue over the prior year periods, other than desktop PCs. Desktop PC revenue in the Americas and EMEA regions declined 12% and 6% year-over-year, respectively. This decline in desktop PC revenue reflects an industry-wide shift to mobility products. During Fiscal 2006, revenue increased 14% year-over-year to $55.8 billion, with unit shipments up 19% year-over-year. This included an extra week of operations that contributed almost one percentage point of added revenue growth. Revenue outside the U.S. represented 41% of Fiscal 2006 consolidated revenue compared to 38% in the prior year. Outside the U.S., we produced 21% year-over-year revenue growth for Fiscal 2006.
 
Operating and net income for Fiscal 2007, Fiscal 2006, and Fiscal 2005 were $3.1 billion and $2.6 billion, $4.4 billion and $3.6 billion, $4.2 billion and $3.0 billion, respectively. Net income for Fiscal 2006 and Fiscal 2005 includes an income tax repatriation benefit of $85 million and a charge of $280 million, respectively, pursuant to a favorable tax incentive provided by the American Jobs Creation Act of 2004. This tax benefit and charge is related to the Fiscal 2006 repatriation of $4.1 billion in foreign earnings.
 
Our average selling price in Fiscal 2007 increased 1% year-over-year, which primarily resulted from our pricing strategy, compared to a 4% year-over-year decrease for Fiscal 2006. In Fiscal 2007 we continued to see intensive competitive pressure, particularly for lower priced desktops and notebooks, as competitors offered aggressively priced products with better product recognition and more relevant feature sets. As a result, particularly in the U.S., we lost share in the consumer segment in notebooks and desktops, which slowed our overall growth in unit shipments, revenue, and profitability. We currently expect that our pricing environment will likely continue for the foreseeable future.
 
Revenues by Segment
 
We conduct operations worldwide and manage our business in three geographic regions: the Americas, EMEA, and APJ. The Americas region covers the U.S., Canada, and Latin America. Within the Americas, we are further segmented into Business and U.S. Consumer. The Business segment includes sales to corporate, government, healthcare, education, and small and medium business customers within the Americas region, while the U.S. Consumer segment primarily includes sales to individual consumers within the U.S. The EMEA region covers Europe, the Middle East, and Africa. The APJ region covers the Asian countries of the Pacific Rim as well as Australia, New Zealand, and India.


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The following table summarizes our revenue by reportable segment for each of the past three fiscal years:
 
                                                 
    Fiscal Year Ended  
    February 2, 2007     February 3, 2006     January 28, 2005  
          % of
          % of
          % of
 
    Dollars     Revenue     Dollars     Revenue     Dollars     Revenue  
                As
    As
    As
    As
 
                Restated     Restated     Restated     Restated  
    (in millions, except percentages)  
 
Net revenue
                                               
Americas:
                                               
Business
  $ 29,311       51.1 %   $ 28,365       50.8 %   $ 25,289       51.5 %
U.S. Consumer
    7,069       12.3 %     7,960       14.3 %     7,614       15.5 %
                                                 
Americas
    36,380       63.4 %     36,325       65.1 %     32,903       67.0 %
EMEA
    13,682       23.8 %     12,887       23.1 %     10,753       21.9 %
APJ
    7,358       12.8 %     6,576       11.8 %     5,465       11.1 %
                                                 
Net revenue
  $ 57,420       100.0 %   $ 55,788       100.0 %   $ 49,121       100.0 %
                                                 
 
•  Americas — Americas revenues remained flat year-over-year as units decreased 4% in Fiscal 2007, compared to revenue and unit growth of 10% and 13%, respectively, in Fiscal 2006. Americas Business represented the majority of our absolute dollar revenue growth in both Fiscal 2007 and Fiscal 2006. This was offset by a decline in the U.S. Consumer business during Fiscal 2007 and slowed growth during Fiscal 2006. Revenue from the sale of mobility products led the segment’s growth in both Fiscal 2007 and Fiscal 2006, and grew by single digits in both Americas Business and U.S. Consumer in Fiscal 2007. However, this growth was offset by the continuing trend of declines in desktop PC sales as wireless capabilities, falling prices, and a growing need for mobility have increased demand for notebooks.
 
  Business — Americas Business grew revenue by 3% on flat unit growth in Fiscal 2007, compared to 12% revenue growth on 15% unit growth in Fiscal 2006. The slow down of revenue growth was due to desktop weakness. Americas International, which includes countries in North America and Latin America other than the U.S., drove the majority of the increase in revenue in the Americas; however, this growth was offset by overall weakness in demand for U.S. Business, with our Public business contributing to declines year-over-year. Americas International produced revenue growth of 19% year-over-year for Fiscal 2007 as compared to 30% revenue growth year-over-year in Fiscal 2006.
 
  U.S. Consumer — U.S. Consumer revenue and unit volume decreased 11% and 14% in Fiscal 2007, respectively, compared to revenue growth of 5% on unit growth of 9% in Fiscal 2006. U.S. Consumer revenue growth slowed as compared to Fiscal 2006 primarily due to a 25% decline in both desktop revenue and unit volume. This segment’s average selling price in Fiscal 2007 increased 3% year-over-year, which principally resulted from our pricing strategy, compared to a 4% year-over-year decline from a year ago. We continue to see a shift to mobility products in U.S. Consumer and our other segments as notebooks become more affordable. Our U.S. Consumer business continues to face a competitive pricing environment. Consequently, we experienced growth significantly slower than the U.S. sales growth. Revenue from the sale of mobility products increased 1% in Fiscal 2007 on unit growth of 3%, as compared to 27% revenue growth on 55% unit growth in Fiscal 2006. This environment has led the U.S. Consumer business to update its business model and enter into a limited number of retail distribution arrangements to complement and extend the existing direct business.
 
•  EMEA — EMEA produced positive results with 6% revenue growth on 7% unit growth in Fiscal 2007, compared to 20% revenue growth on 28% unit growth in Fiscal 2006. In Fiscal 2007, the segment’s performance was largely attributed to mobility products, where year-over-year unit volumes and revenue grew 29% and 15%, respectively, compared to 49% and 23% in Fiscal 2006, respectively. This sustained growth occurred primarily in France and Germany in Fiscal 2007, with Germany leading the region’s progress. United Kingdom experienced weak demand in the consumer business, resulting in a 2% year-over-year decline in revenue for Fiscal 2007, as compared to year-over-year growth of 12% in Fiscal


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2006. With the exception of desktop PCs, all product categories in this region experienced growth for Fiscal 2007 with mobility, storage, and enhanced services revenues posting strong gains. This continues the general trend from Fiscal 2006 where EMEA’s revenue growth was strongest in mobility, enhanced services, and software and peripherals.
 
•  Asia Pacific-Japan — APJ continued to build a substantial presence, with 12% revenue growth on 20% unit growth in Fiscal 2007 and 20% revenue growth on 30% unit growth in Fiscal 2006. The region was led by 26% year-over-year revenue growth in China during Fiscal 2007 and a 13% revenue growth in Japan during Fiscal 2006. Fiscal 2007’s improved performance was partially offset by Japan’s results, which saw revenue decline 5% year-over-year. In Fiscal 2007, India, South Korea, Singapore, and Malaysia produced significant year-over-year revenue growth at a higher rate than the overall region. All product categories in this region experienced revenue growth during Fiscal 2007 and Fiscal 2006. Mobility revenue grew 12% on unit growth of 31% during Fiscal 2007 compared to 24% revenue growth on 48% unit growth during Fiscal 2006. Also driving this growth were increases in enhanced services, software and peripherals, and storage, which approximates the growth trends from Fiscal 2006.
 
For additional information regarding our reportable segments, see Note 10 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
Revenue by Product and Service Categories
 
We design, develop, manufacture, market, sell, and support a wide range of products that in many cases are customized to individual customer requirements. Our product categories include desktop computer systems, mobility products, software and peripherals, servers and networking products, and storage products. In addition, we offer a range of enhanced services.
 
In the fourth quarter of Fiscal 2007, we performed an analysis of our enhanced services revenue and determined that certain items previously classified as enhanced services revenue were more appropriately categorized within product revenue. Fiscal 2007 balances reflect the revised revenue classifications, and prior periods have been revised to conform to the current period classification. The change in classification of prior period amounts resulted in an increase of $395 million and $340 million to desktop PCs, $225 million and $171 million to mobility, $10 million and $16 million to software and peripherals, $16 million and $16 million to servers and networking, and $6 million and $4 million to storage in Fiscal 2006 and 2005, respectively. This change in classification was offset by a decrease in enhanced services of $652 million and $547 million in Fiscal 2006 and 2005, respectively.
 
The following table summarizes our net revenue by product category:
 
                                                 
    Fiscal Year Ended  
    February 2, 2007     February 3, 2006     January 28, 2005  
          % of
          % of
          % of
 
    Dollars     Revenue     Dollars     Revenue     Dollars     Revenue  
                As
    As
    As
    As
 
                Restated     Restated     Restated     Restated  
    (in millions, except percentage)  
 
Net revenue:
                                               
Desktop PCs
  $ 19,815       34 %   $ 21,568       39 %   $ 21,141       43 %
Mobility
    15,480       27 %     14,372       25 %     12,001       25 %
Software and peripherals
    9,001       16 %     8,329       15 %     6,626       13 %
Servers and networking
    5,805       10 %     5,449       10 %     4,880       10 %
Enhanced services
    5,063       9 %     4,207       8 %     3,121       6 %
Storage
    2,256       4 %     1,863       3 %     1,352       3 %
                                                 
Net revenue
  $ 57,420       100 %   $ 55,788       100 %   $ 49,121       100 %
                                                 
 
•  Desktop PCs — In Fiscal 2007, revenue from desktop PCs (which includes desktop computer systems and workstations) decreased 8% year-over-year on unit decline of 5%, compared to a 2% revenue increase on unit growth of 10% year-over-year in Fiscal 2006. Desktop PCs in the Americas declined


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year-over-year during both Fiscal 2007 and Fiscal 2006 which was offset by single-digit growth in the APJ region during the same period. Desktop PCs, as compared to mobility products, led Fiscal 2007 in volume; however, business and consumer demand continues to shift toward mobility products. Desktop PC average selling price decreased 3% from Fiscal 2006 to Fiscal 2007 and decreased 7% from Fiscal 2005 to Fiscal 2006. In Fiscal 2007, we launched Quad-core processors on our XPS 710 Extreme desktop as well as on Dell Precisiontm workstations. In addition, we introduced our 64-bit dual core Dimensiontm and Optiplextm systems featuring AMD processors. In Fiscal 2008, we introduced Vostrotm desktops specifically designed to meet the needs of small business customers. We will likely see rising user demand for mobility products in the foreseeable future that will contribute to a slowing demand for desktop PCs.
 
•  Mobility — In Fiscal 2007, revenue from mobility products (which includes notebook computers, mobile workstations, and Dell-branded MP3 players) grew by 8% year-over-year, on unit growth of 18%, compared to a 20% revenue increase on unit growth of 43% year-over-year in Fiscal 2006. The impact of this declining growth was particularly acute in the U.S. and led to a loss of share as compared to the same period last year. The slow growth resulted from both our product feature set and related value offering, particularly in the consumer business, as well as our inability to reach certain customer sets. Our EMEA region led the growth in our mobility product category with 15% and 23% increases in Fiscal 2007 and Fiscal 2006, respectively. During the year, we introduced Dell Latitudetm and Dell Inspirontm notebooks featuring AMD processors and in Fiscal 2008, we introduced Vostrotm notebooks, specifically designed to meet the needs of small business customers. As notebooks become more affordable and wireless products become standardized, demand for our mobility products continues to be strong, producing robust year-over-year revenue and unit growth. We are likely to see sustained growth in our mobility products in the foreseeable future due to the continued industry-wide migration from desktop PCs to mobility products.
 
•  Software and Peripherals — In Fiscal 2007 revenue from software and peripherals (“S&P”) (which includes Dell-branded printers, monitors not sold with systems, plasma and LCD televisions, projectors, and a multitude of competitively priced third-party printers, televisions, software, digital cameras, and other products) increased 8% year-over-year, compared to a 26% increase in Fiscal 2006. The overall improvement in Fiscal 2007 S&P revenue was led by the APJ region with growth of 38% while U.S. consumer sales declined 8%. This increase was primarily attributable to a 12% year-over-year increase in software revenue that was offset by declines in our imaging product revenue. We experienced strong performance in Fiscal 2006 where software, imaging, and other hardware accessories produced double-digit growth.
 
•  Servers and Networking — In Fiscal 2007, servers and networking revenue grew 7% on unit growth of 6% year-over-year, compared to a 12% revenue increase in Fiscal 2006 on 20% unit growth year-over-year. Servers and networking remains a strategic focus area. We competitively price our server products to facilitate additional sales of storage products and higher margin enhanced services. During the year we introduced our new ninth generation (9G) PowerEdge servers with Intel’s latest Xeon 5100 series processors, and we began shipping two new PowerEdge servers featuring AMD Opterontm processors, providing our customers with an additional choice for high-performance two-socket and four-socket systems. We also launched the industry’s first standards-based Quad-Core processors for two-socket blade, rack, and tower servers. These additions contributed to the 6% year-over-year revenue increase in Fiscal 2007 in the Americas Business segment and in Fiscal 2006 we experienced close to 30% unit growth in our APJ region. We now provide the broadest selection of industry-standard servers in our history.
 
•  Enhanced Services — In Fiscal 2007, revenue from enhanced services (which includes the sale and servicing of our extended product warranties) increased 20% year-over-year compared to a 35% increase in Fiscal 2006. As a result of expanding our services offerings and capabilities globally, we experienced a 26% and 58% year-over-year growth in revenues outside the Americas during Fiscal 2007 and Fiscal 2006, respectively. This growth increased our deferred revenue by $514 million in Fiscal 2007, a 14% increase, and $803 million in Fiscal 2006, a 27% increase, to approximately $4.2 billion and


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$3.7 billion, respectively. We introduced our new Platinum Plus offering during Fiscal 2007, which contributed to an increase in our premium service contracts.
 
•  Storage — In Fiscal 2007, storage revenue sustained double-digit growth with a 21% year-over-year increase as compared to a 38% year-over-year increase in Fiscal 2006. The Americas led the revenue growth in Fiscal 2007 and Fiscal 2006 with year-over-year increases of 21% and 40%, respectively. In Fiscal 2008, we expect to continue to expand both our PowerVault and Dell | EMC solutions that will utilize new technologies intended to drive both additional increases in performance and customer value. In Fiscal 2007, we also announced a five-year extension to our partnership with EMC. These portfolio enhancements continue to deliver lower cost solutions for our customers.
 
Gross Margin
 
The following table presents information regarding our gross margin during each of the past three fiscal years:
 
                                                 
    Fiscal Year Ended  
    February 2, 2007     February 3, 2006     January 28, 2005  
          % of
          % of
          % of
 
    Dollars     Revenue     Dollars     Revenue     Dollars     Revenue  
                As
    As
    As
    As
 
                Restated     Restated     Restated     Restated  
    (in millions, except percentages)  
 
Net revenue
  $ 57,420       100.0 %   $ 55,788       100.0 %   $ 49,121       100.0 %
Gross margin
  $ 9,516       16.6 %   $ 9,891       17.7 %   $ 9,018       18.4 %
 
In Fiscal 2007, our gross margin declined as compared to Fiscal 2006, while revenue increased year-over-year. Throughout Fiscal 2007 industry-wide competition put pressure on average selling prices while our pricing and product strategy evolved. In Fiscal 2007, we added a second source of micro processors (“chip sets”) ending a long-standing practice of sourcing from only one manufacturer. We believe that moving to more than one supplier of chip sets is beneficial for customers long term, as it adds choice and ensures access to the most current technologies. We now sell the chip sets from a second source across all of our hardware product categories. During the transition from sole to dual sourcing of chip sets, gross and operating income margins were negatively impacted as we re-balanced our product and category mix. In addition, commodity price declines stalled during Fiscal 2007. We continuously negotiate with our suppliers in a variety of areas including availability of supply, quality, and cost. These real-time, continuous supplier negotiations support our business model, which is able to respond quickly to changing market conditions due to our direct customer model and real-time manufacturing. Our component costs reflect both ongoing supplier discount arrangements as well as shorter-term incremental discounts and rebates based on such factors as volume, product offerings and transitions, supply conditions, and joint activities. Because of the fluid nature of these ongoing negotiations, the timing and amount of supplier discounts and rebates vary from time to time. Gross margin as a percent of revenue improved in the second half of the year, with the fourth quarter of Fiscal 2007 ending at 17.1%. In Fiscal 2006, our gross margin declined as a percentage of revenue while gross margin increased in absolute dollars as compared to Fiscal 2005. Our year-over-year decline was primarily due to a product charge of $338 million for estimated warranty costs of servicing or replacing certain OptiPlextm systems that included a vendor part that failed to perform to our specifications, as well as additional charges for product rationalizations and workforce realignment recognized in the third quarter of Fiscal 2006. These charges were offset by favorable pricing on certain commodity components, higher revenue to leverage fixed production costs, and a favorable shift in product mix as compared to the prior year periods.


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Operating Expenses
 
The following table presents information regarding our operating expenses during each of the past three fiscal years:
 
                                                 
    Fiscal Year Ended  
    February 2, 2007     February 3, 2006     January 28, 2005  
          % of
          % of
          % of
 
    Dollars     Revenue     Dollars     Revenue     Dollars     Revenue  
                As
    As
    As
    As
 
                Restated     Restated     Restated     Restated  
    (in millions, except percentages)  
 
Operating expenses:
                                               
Selling, general, and administrative
  $ 5,948       10.3 %   $ 5,051       9.0 %   $ 4,352       8.9 %
Research, development, and engineering
    498       0.9 %     458       0.8 %     460       0.9 %
                                                 
Operating expenses
  $ 6,446       11.2 %   $ 5,509       9.8 %   $ 4,812       9.8 %
                                                 
 
•  Selling, General, and Administrative — During Fiscal 2007, selling, general, and administrative expenses increased 18% to $5.9 billion, compared to $5.1 billion for Fiscal 2006. The increase in Fiscal 2007 as compared to Fiscal 2006 was primarily attributed to increased compensation costs and outside consulting services. This increase was largely due to increased stock-based compensation expense due to the adoption of SFAS 123(R) ($272 million), and costs related to the Audit Committee investigation and related restatement ($100 million). In addition, during Fiscal 2007, we made incremental customer experience investments of $150 million to improve customer satisfaction, repurchase preferences, as well as technical support. As a result, we increased our headcount through direct hiring and replacing of temporary staff with regular employees. During Fiscal 2006, selling, general, and administrative expenses as a percentage of revenue increased compared to Fiscal 2005. The increase over Fiscal 2005 primarily related to increased advertising costs, headcount growth, as well as charges of $83 million related to workforce realignment costs ($50 million), costs of operating leases on office space no longer utilized ($4 million) and a write-off of goodwill ($29 million).
 
•  Research, Development, and Engineering — During Fiscal 2007, research, development, and engineering expenses increased slightly in absolute dollars, but remained consistent with Fiscal 2006 and 2005 as percentage of net revenue. We continue to fund research, development, and engineering activities to meet the demand for swift product cycles. As a result, Fiscal 2007 research, development, and engineering expenses increased in absolute dollars due to increased staffing levels, product development costs, and stock-based compensation expense resulting from the adoption of SFAS 123(R). Fiscal 2006 as compared to Fiscal 2005 experienced a slight decrease in the percentage of net revenue primarily attributed to our revenue growth. We manage our research, development, and engineering spending by targeting those innovations and products most valuable to our customers, and by relying upon the capabilities of our strategic partners. We will continue to invest in research, development, and engineering activities to support our growth and to provide for new, competitive products. We obtained 1,759 worldwide patents and have applied for 1,824 additional worldwide patents at February 2, 2007.
 
On May 31, 2007, we announced that we had initiated a comprehensive review of costs across all processes and organizations with the goal to simplify structure, eliminate redundancies, and better align operating expenses with the current business environment and strategic growth opportunities. As part of this overall effort, we expect to reduce headcount and infrastructure costs over the next 12 months. Our management teams are presently finalizing transformation plans which include headcount and infrastructure cost reduction goals. This headcount reduction is expected to impact both cost of goods sold and operating expenses worldwide.


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Stock-Based Compensation
 
We have four stock-based compensation plans, in addition to an employee stock purchase plan, with outstanding stock or stock options. We currently use the 2002 Long-Term Incentive Plan for stock-based incentive awards. These awards can be in the form of stock options, stock appreciation rights, stock bonuses, restricted stock, restricted stock units, performance units, or performance shares.
 
Stock-based compensation expense totaled $368 million for Fiscal 2007, compared to $17 million and $18 million for Fiscal 2006 and Fiscal 2005, respectively. The increase is due to the implementation of SFAS 123(R). We adopted SFAS 123(R) using the modified prospective transition method under SFAS 123(R) effective the first quarter of Fiscal 2007. Included in stock-based compensation for Fiscal 2007 is the fair value of stock-based awards earned during the year, including restricted stock, restricted stock units, and stock options, as well as the discount associated with stock purchased under our employee stock purchase plan. Prior to the adoption of SFAS 123(R), we accounted for our equity incentive plans under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”) and its related interpretations. Accordingly, stock-based compensation for the fair value of employee stock options with no intrinsic value at the grant date and the discount associated with the stock purchase under our employee stock purchase plan was not recognized in net income prior to Fiscal 2007. For further discussion on stock-based compensation, see Note 6 of Notes to Consolidated Financial Statement included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
At February 2, 2007 there was $139 million and $356 million of total unrecognized stock-based compensation expense related to stock options and non-vested restricted stock, respectively, with the unrecognized stock-based compensation expense expected to be recognized over a weighted-average period of 1.7 years and 2.4 years, respectively.
 
As a result of our inability to timely file our Annual Report on Form 10-K for Fiscal 2007, we suspended the exercise of employee stock options, the vesting of restricted stock units, and the purchase of shares under our employee stock purchase plan. With the filing of this report and our other past due periodic reports, we are again current in our periodic reporting obligations and, accordingly, expect to resume the exercise of employee stock options by employees, the vesting of restricted stock units, and the purchase of shares under our employee stock purchase plan.
 
We agreed to pay cash to certain current and former employees who held in-the-money stock options (options that have an exercise price less than the current stock market price) that expired during the period of unexercisability. Within 45 days after we file this report, we will make payments relating to in-the-money stock options that expired in the second and third quarters of Fiscal 2008, which are expected to total approximately $113 million. We will not continue to pay cash for expired in-the-money stock options once the options again become exercisable.


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Table of Contents

Investment and Other Income, net
 
The table below provides a detailed presentation of investment and other income, net for Fiscal 2007, Fiscal 2006, and Fiscal 2005.
 
                         
    Fiscal Year Ended  
    February 2,
    February 3,
    January 28,
 
    2007     2006     2005  
          As
    As
 
          Restated     Restated  
          (in millions)
       
 
Investment and other income, net:
                       
Investment income, primarily interest
  $ 368     $ 308     $ 226  
Gains (losses) on investments, net
    (5 )     (2 )     6  
Interest expense
    (45 )     (29 )     (15 )
CIT minority interest
    (23 )     (27 )     (17 )
Foreign exchange
    (37 )     3       16  
Gain on sale of building
    36              
Other
    (19 )     (27 )     (19