Mark Loughridge - Senior Vice President & Chief Financial Officer Patricia Murphy - Vice President, Investor Relations

Richard Farmer - Merrill Lynch Laura Conigliaro - Goldman Sachs Bill Shope - JP Morgan Richard Gardner - Citigroup Chris Whitmore - Deutsche Bank Securities Tony Sacconaghi - Sanford Bernstein Keith Bachman - Banc of America Andrew Neff - Bear Stearns Ben Reitzes - UBS Rebecca Runkle - Morgan Stanley David Grossman - Thomas Weisel Partners

Welcome and thank you for standing by. All participants are in a listen-only mode. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Madam, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. Here with me today is Mark Loughridge, IBM’s Senior Vice President and Chief Financial Officer. Thank you for joining our second quarter earnings presentation. By now, the opening page of the presentation should have automatically loaded, and you should be on the title page. The charts will automatically advance as we move through the presentation. If you prefer to manually control the charts, at any time you can un-check the synchronize button on the left of the presentation. The prepared remarks will be available in roughly an hour, and a replay of this webcast will be posted to our Investor Relations website by this time tomorrow. Our presentation includes certain non-GAAP financial measures, in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end, and in the Form 8-K to be submitted to the SEC. For those of you who are manually controlling the charts, please click on the Next button for chart 2. Certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company’s filings with the SEC. Copies are available from the SEC, from the IBM web site, or from us in Investor Relations. Now, I’ll turn the call over to Mark Loughridge.

Thanks, Patricia. For the second quarter, as reported, we delivered $21.9 billion in revenue, which was down 2% as reported and at constant currency. Without PC’s in 2005, IBM revenue was up 1%. Our pre-tax income was $2.9 billion, up 6% over second quarter of last year, and we delivered $1.30 of earnings per share, which was a 14% improvement over last year’s second quarter. In 2005 we had three non-recurring items in the reported results. When you exclude the non-recurring charges from last year’s results, IBM’s pre-tax income was up 11%, and earnings per share were up 16%. In addition, we concluded the sale of our PC business to Lenovo in the second quarter of 2005, and last year’s results include one month of activity. On a comparable basis, without the now-divested PC business: We saw sales and contract cycles elongate in June. In that environment, we still delivered double-digit earnings per share growth. While some areas of our business did well, others leave room for improvement. We were pleased with our performance in many areas: But in other areas, we certainly have opportunities for improvement. In servers, execution issues in our supply chain left some orders unfulfilled and we continued to work through product transitions in the midrange. In services, our short-term businesses were weak. I’ve mentioned the last few quarters that our Integrated Technology Services business has been in transition, and we have rebalanced the portfolio to streamline offerings and focus on higher value and higher growth segments. We remain confident in the actions we have taken, but the transition is taking longer than anticipated. In Global Business Services, though our business grew in the Americas, we under-performed in some key countries in Europe and Asia. Overall, our performance once again reflected the ability to leverage productivity initiatives to generate solid earnings per share and cash growth. Let’s move on to revenue and gross profit by brand. Global Services revenue was down 1% year-to-year. The revenue decline was driven primarily by our short-term businesses, while Strategic Outsourcing and BTO increased year-to-year. Hardware revenue was down 7% as reported. Without the PC business in our 2005 results, hardware was up 3% and up 2% at constant currency. Our hardware results were mixed by brand, with good performance in System z and microelectronics, offset by declines in the midrange servers and storage. Software revenue was up 5%. This performance was led by good growth in our key middleware brands. Global Financing revenue was down 7%, driven by a decline in the asset base and a lower level of used equipment sales. I will comment briefly on gross margin before we get into revenue by geography. Our gross profit margin for the quarter was 41.2%, up 1.8 points year-to-year. The divestment of the low margin PC business contributed 1.2 points of that improvement. Global Services margin improved due primarily to benefits from our productivity initiatives, while our Hardware margin without PC’s declined. Turning to revenue by geography, I will focus my comments on the results without PC’s at constant currency, to provide the best view of our ongoing geographic performance. The Americas revenue increased 2% year-to-year, supported by growth in all regions. Growth was led by software, offset by declines in mid-range servers and storage. Europe revenue declined 1%. As always, results were mixed by country. France and Spain again showed solid growth but Germany, Italy and the UK declined. Asia Pacific revenue declined 3% this quarter. Representing over half of the Asia Pacific revenue base, Japan declined, as we continue to work through our operating issues. China was down this quarter. We had a strong quarter last year, due to large System z-based banking transactions. Partially offsetting these declines, the ASEAN region again had double-digit growth, led by India, and Korea posted strong results. The emerging countries of China, India, Brazil and Russia together grew 13% as reported and 7% at constant currency, without PC’s. India again posted the strongest growth, up 45% at constant currency. Brazil grew 4% and Russia 19%, while China declined 3% off a difficult compare. We continue to expand our capabilities in these countries, as you hopefully got a chance to see at our analyst meeting in June or from the materials on our investor website. Finally, our OEM growth was 34% in the second quarter, driven by strong game chip performance in our microelectronics business. Now we will move on to expense. Total Expense and Other Income increased 1% in the second quarter. Our expense to revenue ratio was 28%, up almost a point year-to-year as reported, but flat as compared to 2005 expense-to-revenue without both the non-recurring items and PC results. As in the past, to help investors understand the drivers of our operational performance, I will highlight those items that significantly impacted our profit growth. These items are reported in cost and expense. In the second quarter, we had a couple of items that significantly helped our profit growth. We continued to benefit from our second quarter 2005 productivity initiatives, which were implemented beginning in the second quarter of last year. As the year-to-year benefit begins to wrap in the third quarter, we will continue to drive productivity as we globally integrate IBM. Additionally, these actions make us more competitive and give us more pricing flexibility. Total equity compensation was down $54 million year-to-year excluding the impact of last year’s non-recurring items, due primarily to lower grants over the last few years. Other Income benefited from a $74 million year-to-year increase to interest income, reflecting our strong cash balance and increasing interest rates. Turning to the items that hurt our year-to-year profit growth, retirement-related plans – both pension and retiree medical, generated over $600 million of cost and expense in the quarter. This is up almost $100 million excluding the impact of last year’s non-recurring items. We continue to expect these plans to cost us between $2.3 billion and $2.4 billion for the full year, a $200 to $300 million year-over-year impact, excluding last year’s one-time charges. In the quarter, Intellectual Property Income was down also about $100 million year-to-year. Before moving on to cash flow performance, let me comment on currency. IBM hedges its major cross-border cash flows and, as a result, mitigates the effect of currency volatility in the year-over-year results. The impact of these hedging programs is principally reflected in Other Income and Expense, as well as cost of goods sold. This quarter, there was very little impact in the current period from our hedging programs. However, due to losses incurred last year, the activity results in a year-to-year improvement in Other Income and Expense of approximately $100 million. I am not going to predict future currency moves but at current spot rates, we would expect revenue growth to benefit from currency translation in the second half. The supplemental chart at the end of the presentation benchmarks currency’s potential future impact on revenue, assuming Monday’s exchange rates. Now let’s turn to Cash Flow, chart 7. For the first half of the year, we continued to have strong cash generation. Our cash from operations excluding Global Financing receivables was principally driven by our earnings and accounts receivable performance. This cash flow analysis chart has one primary difference from the FAS 95 format. It considers our Global Financing receivables as an investment to generate profit, not as working capital that should be minimized for efficiency. For the first half, Net Cash Provided from Operations, excluding the year-to-year change in Global Financing receivables, was $2.9 billion, an increase of $1.4 billion from last year. Excluding the significant pension funding activity in the U.S. and U.K from both years, we generated over $700 million more cash from operations year-to-year. Our first half cash performance was driven primarily by growth in net income, and continued focus on working capital and supply chain management. Within working capital, receivable collections were strong. Our use of cash for investments was fairly consistent with last year’s activity, with the exception of approximately $500 million of net proceeds received from the sale of our PC business to Lenovo in 2005. We continue to drive very strong returns to shareholders. In the first half of 2006, we returned over $5.8 billion to investors -- $5.1 billion of this shareholder return was through share repurchase. We bought back 62.7 million shares, and average diluted shares were at 1.6 billion, down 4.3% from a year ago. We have approximately $3.9 billion remaining at the end of June from our last Board authorization. This quarter we announced a 50% increase to our dividend rate, the largest increase in our history. With this increase, in the first half we paid out over $750 million in dividends to shareholders. Turning to the balance sheet, our cash on hand was $10 billion. Ninety-eight percent of our total debt of $21.8 billion was driven by our Global Financing business, and Global Financing was leveraged at an appropriate 6.9 to 1. The remaining non-financing debt level was less than $500 million and debt-to-capital was 2%. Our balance sheet remains strong. So now let’s turn to our businesses, starting with Global Services. Global Services delivered revenue of $11.9 billion, down 1% year to year. Signings for services this quarter were $9.6 billion at constant currency, down 34% against a very challenging compare. This quarter we signed 11 deals larger than $100 million, and our backlog is estimated at $109 billion. Looking at our signings for the quarter, it is important to remember that we are comparing to signings of $14.6 billion in the second quarter last year, which was the largest quarterly signings since the fourth quarter of 2003. Although long-term signings tend to be uneven, and our short-term signings were up slightly quarter-to-quarter, the performance fell short of our expectations. Let me get into each of these services businesses. Global Technology Services delivered revenue of $8 billion, up 1% year to year. For the segment, longer-term signings were down 52% year-to-year, and shorter-term signings were down 10%. Strategic Outsourcing revenue was up 3% year-to-year. The improved revenue growth rate for Strategic Outsourcing was driven by signings over the last five quarters. We are also seeing good growth in our existing accounts, which reflects customers’ satisfaction with our service delivery. Strategic Outsourcing signings were down 46% this quarter, compared to a very strong second quarter last year. As you know, longer-term signings can be uneven over the course of the year. Business Transformation Outsourcing revenue was up 15% as reported, and up 16% at constant currency. BTO revenue continued to grow in all geographies. Growth this quarter was impacted by a contract renegotiation which will continue to impact BTO revenue through the remainder of the year. BTO signings were down 73% year-to-year. Like Strategic Outsourcing, BTO engagements are longer-term, and so signings tend to be uneven over the course of the year. Integrated Technology Services revenue was down 5% year to year. I’ve talked to you about the steps we have taken to improve the Integrated Technology Services business, including increased business development and sales skills and streamlining our offerings to address higher growth and higher value areas. While it is taking longer to get traction in our results, we continue to believe we have implemented the right actions, and we expect them to show results over the longer term. Turning to margin, Global Technology Services pre-tax margin was 9.4%, an improvement of 1.1 points year-to-year, excluding the incremental restructuring charges from last year. The majority of this improvement came from last year’s productivity initiatives. Global Business Services delivered $3.9 billion of revenue, declining 5% as reported, and 4% at constant currency. Revenue performance this quarter was mixed. We continued to see growth in the Americas, which represents roughly 40% of the portfolio. This was offset by declines in Japan, Germany and Italy, which combined represent over a quarter of our business. We were also impacted by a decline in our Federal business as we adjust to changing dynamics in U.S. government spending. For the segment, shorter-term signings were down 5% year-to-year, and longer-term signings were down 42%. Within Global Business Services, and in fact across all of our services areas, we continue to take a disciplined approach to bidding on contracts. The deal fundamentals and value proposition need to make sense for both us and the customer. We are driving actions to improve performance within Global Business Services. For example: Turning to margin, Global Business Services pre-tax margin was 9.5%, an improvement of .8 points year-to-year, after adjusting for last year’s incremental restructuring charge. This improvement in margin was primarily driven by our productivity initiatives, offset by revenue weakness in the short-term businesses. We continue to see stable to improving margins in our new business. So to wrap up Global Services: Now I’ll move on to Systems and Technology, chart 10. Systems and Technology revenue grew 3% year-to-year, led by growth in our System z, Microelectronics and Retail Store Solutions business units. Gross profit margin improved sequentially as our profit management actions gain traction, but is down year-to-year due to hardware mix driven by the strong growth in our microelectronics business; product and geography mix in our System z mainframes, and pricing pressures in our mid-range and low end servers. We were unable to ship to meet all of our customer demand, which impacted our server brands, most notably Systems i and x. Our unusually high level of unfilled orders were due to end-to-end supply chain complexities which were primarily driven by parts and product transitions to support the RoHS -- Removal of Hazardous Materials -- requirement in Europe. This limited our manufacturing and sourcing flexibility. System z revenue grew 7% year-to-year as reported and 6% at constant currency, fueled by double-digit growth in the Americas and Europe. MIPS growth of 7% reflects continued customer acceptance of both specialty engines and traditional mainframe workloads. The announcement and general availability of our new mid-range z9 was also well-received by the marketplace and accounted for approximately 15% of the MIPS shipped this quarter. Nexxar, a financial transaction processing company, chose the new System z Business Class for its high availability, security, reliability, and flexibility to allow for future business growth. This strategic win in the SMB environment demonstrates IBM’s capabilities to provide customers with end-to-end solutions. System i revenue declined 7%, improving from the first quarter but not yet where we want it to be. As I mentioned earlier, we were unable to fulfill all of the demand for System i. If we had been able to ship to our more typical level of pending orders, our year-to-year revenue would have been about flat. High end volumes improved as expected as the transition to our new products announced in the first quarter completed, with strong year-to-year growth in our flagship 595 model. System p UNIX servers declined 10% in the quarter, 11% at constant currency. While volumes were up year-to-year, a mix shift in our high end ahead of the third quarter refresh contributed to the revenue decline. This also reflects a difficult compare to last year’s growth of 36%. In the third quarter, we will complete the transition to Power 5+ and expand the implementation of our Power Quadcore technology to all entry level System p products. These upcoming announcements will sustain the price/performance and virtualization leadership position that has made IBM the No. 1 UNIX vendor worldwide. Revenue for System x servers was flat year-to-year. We were not able to fulfill all of the demand. If we had been able to ship to our more typical level of pending orders, our year-to-year System x server revenue would have been up about 6%. Despite the shipment limitations, our server volumes had double-digit growth year-to-year. Blade growth remained strong in the quarter with both volumes and revenue growth of over 35%. System Storage declined 2% year-to-year, 3% at constant currency. Disk declined 1% -- however, we believe we held share in disk, led by midrange growth of over 15%. While the high-end declined, our current generation high-end offering, the DS8000 family of products, grew 10% year-to-year. Tape declined 4%. Microelectronics revenue grew 45% year-to-year, driven by continued strong demand in the games processor business. Let’s move on to Software. Software revenue was up 5% year-to-year to $4.2 billion. This growth was driven by our key middleware portfolio and strong performance in Product Lifecycle Management. Operating systems and other middleware declined. In the second quarter, key branded middleware grew 9%. There was solid growth across all key brands and both WebSphere and Tivoli grew at double digits. In a very competitive software market, we had constant currency growth in all major geographies with particular strength in the Americas and Europe. The WebSphere family of software grew 17% as reported and 18% at constant currency. We continue to be the market leader in Services Oriented Architecture products. SOA-related products are in strong demand as evidenced by double-digit growth in WebSphere business integration and application server software. We believe we gained share for the quarter. Information Management software grew 6% as reported and was up 7% at constant currency. In 2005, we announced a major initiative called “Information on Demand,” which includes higher order products designed to integrate information to its most useful form. Our Information on Demand product set continues to be well-accepted in the marketplace. Revenue nearly doubled to over $100 million in the second quarter. We believe we held share for the quarter. Lotus software grew 6% as reported and at constant currency. Our Domino products grew in a highly competitive market. We believe we held share for the quarter. Tivoli software grew 12% as reported and at constant currency. Our Tivoli software continues to take share in a very competitive marketplace. The combination of internal development and strategic acquisitions is paying off, particularly in our systems management segment. The Micromuse acquisition, completed in February, is another good example of our ability to quickly integrate and globally leverage acquired capabilities into the business. We believe Tivoli gained share for the quarter. Rational software was up 8% as reported and at constant currency. In the second quarter, Rational delivered solid growth across all geographies as customers continue to demand software development tools based on open standards. We believe Rational gained share for the quarter. Other Middleware was down 3% as reported and at constant currency. This segment includes more mature products which provide a stable base of revenue, profit and cash. The strong performance in Other Software/Services was driven by solid growth in our Product Lifecycle Management portfolio of products. PLM helps companies improve their product development processes and their ability to use product-related information across their business. In the second quarter, we closed a number of large deals resulting in double-digit growth in all geographies. Operating Systems software declined 6% as reported and 5% at constant currency. Operating Systems are closely tied to our server products and provide a sound, cost-effective platform for our middleware and business solutions. Overall, our software business had another solid quarter. We believe we gained share in Key Branded Middleware and Product Lifecycle Management. This revenue growth drove strong bottom line results as well. The Software pre-tax margin of 24% is up 2 points year-to-year, after adjusting for the incremental restructuring charge in second quarter of last year. Now, I’ll wrap up. IBM’s business model has two dimensions. One is a portfolio of businesses, hardware, software and services, that provide us with the ability to offer customers both industry-leading point products as well as innovative end-to-end solutions to address our customers’ most pressing business needs. This quarter, while our hardware and services businesses didn’t perform to our expectations, we had solid software performance led by our key branded middleware products, especially WebSphere and Tivoli. Our software results reflect strong demand for products deploying Services Oriented Architectures, and the value of our systems management, security, and storage offerings. These results also reflect the positive impact of our targeted acquisition strategy which strengthens our capabilities while contributing profitable growth and ongoing cash performance. The second dimension of our model is the ability to drive earnings per share growth through a combination of revenue growth, productivity and effective use of cash. Our productivity initiatives, including the restructuring action implemented last year, continued to yield good margin results again this quarter. We will continue to drive productivity initiatives as we globally integrate IBM. Though the year-to-year benefit will not be as great going forward, the competitive cost structure and increased pricing flexibility are now embedded in our business model. We also continued our strong cash generation and returned some of that cash to shareholders through dividends and share buyback, which further contributed to earnings per share growth. The strength and breadth of the IBM model comes from being able to leverage across these two dimensions, our broad portfolio and our strong financial position, to consistently deliver solid earnings and cash performance. Given our first half performance, we are on track to deliver earnings per share growth for 2006 in line with the IBM model. This is consistent with the average of your estimates for the year. Now, Patricia and I will take your questions.

Thanks, Mark. Before we begin the Q&A, let me comment on two items. First, we have a few supplemental charts at the end of the deck that complement Mark’s prepared remarks. Second, I would ask you to refrain from multi-part questions. This will allow us to take questions from more callers. Okay, Operator, let’s open it up for questions.

Thank you. (Operator Instructions) Our first question comes from Richard Farmer with Merrill Lynch. You may begin. Richard Farmer - Merrill Lynch: Thank you. Mark, I would like to ask a question about the demand environment. You mentioned the elongated sales cycles in June. There is a lot of debate among investors as to whether demands, broadly speaking, is starting to rollover in some of the important end markets right now, particularly given some of the pre-announcements at companies like AMC and SAP. So given your very broad view of demand at IBM over many of the segments in the market, what is your feeling about the environment right now? Do you think it is essentially stable, or do you think on a margin demand is getting a little softer? Any differentiation you might be willing to provide between the end markets like servers, storage, services, etc. would be very helpful. Thank you.

Sure, Richard. Let me first give you a description as we went through the quarter. I would say, as I pointed out in the script, a number of transactions around the world, we have seen that the sales cycle for enterprise clients appears to have lengthened, as customers have increased the level of scrutiny and approvals on their transactions. So we saw that most distinctly as we closed out the quarter in the third month. I would say underneath this, however, we have seen a relative divergence in our performance in the enterprise versus SMB space. While growth in our SMB customers has remained generally solid, growth in enterprise space slowed again due to lengthening of transaction closure at the end of the quarter. As you know, we have managed through these kinds of cycles before, and we will continue to drive productivity initiatives to leverage our overall performance. At the same time, as we see strategic opportunities, we will move aggressively, consistent with the model that we discussed in India. So I guess, Richard, I would conclude by saying there is really no definitive indicator that this is a trend, but I would say the breadth of our portfolio, the strength of our financial model, and our strong market leadership positions us well as we move into the third quarter.

Thanks, Richard. Let’s go to the next question, please.

Thank you. Our next question is from Laura Conigliaro with Goldman Sachs. You may begin. Laura Conigliaro - Goldman Sachs: Yes, on the services side, your services signings are now down in the mid-teens for the first half of ’06 versus ’05, and your second half signings would need to be up probably in the mid- to high-teens just to actually be flat with last year. Is this even plausible and what kind of services growth can you actually drive on the revenue side in ’07 if signings do end up flat, or maybe even slightly down?

Okay, Laura, let me -- I think first of all I would like to go through the data with you, so we can lay a foundation for the answer to this question. First of all, if you look at ’05, the long-term signings were up 19% in the first quarter. Long-term was up 20%. As we entered the second quarter, as we closed it out again affected by a lengthening contract cycle, our long-term signings were down. Again, I would reemphasize that that was against a very powerful second quarter 2005 and we did greater than $9 billion of long-term signings last year. So I would put the long-term performance in the context of that longer time frame -- 2005 long-term at 19%, first quarter long-term up 20% and really, short-term contracts, if you look at the half, were down 2%, so I would say that is, on a rough comparable basis, that we go into the second half roughly even on a year-to-year basis. Now, I would also emphasize that as we have discussed before, longer term signings tend to be lumpy. They are a little more unpredictable and they do not occur smoothly quarter by quarter throughout a year. They can be uneven. Even in short-term signings, while down year to year, they were up on a sequential basis. Regardless, I certainly have to admit that signings performance did not meet our expectation and we are driving the actions required to improve our execution and our results as we enter the second half of the year. As we look at that pipeline going into the second half of the year, we do have a strong deal list. The pipeline is up year to year. The pipeline went up quarter to quarter but I think it is more the context of the individual deals that is more encouraging. A strong deal list which should enable us to grow our signings in the third quarter. Now, or course, we have to execute to do that but clearly there is enough opportunity. We just need to get it signed. But we are going to continue to be selective to drive our profitability. We are not going to sign bad deals. We do have the discipline to walk from a bad deal. As we just looked, the opportunity, the deal list and the progression of that deal list and where we stand with those individual clients, we feel relatively confident that as we go into the third quarter, we should see signage growth on a year-to-year basis.

Thanks, Laura. Let’s go to the next question.

Thank you. The next question is from Bill Shope with JP Morgan. You may begin. Bill Shope - JP Morgan: Great, thanks. Looking at your signings performance as well, given this quarter’s performance and given the decline in short-term signings, I think you had set a target several quarters ago for mid-single-digit growth in the services segment for the second half of the year. Can you still achieve that number, given the signings performance we have seen thus far?

Well, I mean, we clearly did not meet our signings expectation this quarter. As you know, revenue performance trails signings performance, so as we look at the third quarter, as I said earlier, our pipeline is up year to year and quarter to quarter. More importantly, look at the quality of that deal list and the progression of the deals, we should be able to return to signage growth in the third quarter. Of course, we need to execute on that deal list. We are all committed to growing the signings in the third quarter. If you look at the INE, obviously revenue in the INE will follow signings going forward but first job is get the signings growth back on track next quarter, and we feel confident that we will see growth in the quarter.

Thanks, Bill. Let’s go to the next question please.

Thank you. The next question is from Richard Gardner with Citigroup. You may begin. Richard Gardner - Citigroup: Thank you very much. Mark, I was hoping that you might be able to provide some detail on the mainframe mix in the quarter. Obviously last quarter you had an unusually high mix of Java and Linux workloads and I believe it was about 35% of the MIPS shipped in the quarter. What did that do in the current quarter? Did you see a return to more traditional workload? Thank you.

Yes, if you look at our V series performance, specialty engine MIPS represented approximately 21% of total MIPS shipped in the second quarter versus 16% in the second quarter of ’05 and 38% in the first quarter of ’06, so we experienced 36% year to year growth in specialty engine MIPS in the second quarter, and as we had laid out in the first quarter call, this resulted in a much improved MIPS, especially to traditional MIPS compared to the first quarter.

Thanks, Richard. Let’s go to the next question please.

Thank you. Our next question comes in from Chris Whitmore with Deutsche Bank. You may begin. Chris Whitmore - Deutsche Bank Securities: Thank you. Good afternoon. There has been some talk in the marketplace about increasing pricing pressure in the services industry in general. Can you comment on current pricing that you see out there for the deals, both on large and small deals? Thank you.

I think if you looked at services, I would break that pricing question down as follows -- I think ITS price pressure remains fairly stable. There is increased price pressure in the BTO area. Consulting prices are stable to improving. I think you saw that in our margin performance as well.

Thanks, Chris. Let’s go to the next question please.

Thank you. Our next question comes is from Tony Sacconaghi with Sanford Bernstein. You may begin. Tony Sacconaghi - Sanford Bernstein: Yes, thank you. You alluded in your earnings release to your $10 billion cash balance creating “opportunities”. When you allude to opportunities, are you implicitly referring to acquisitions? Can you clarify your historical preference in the unwritten rules of effectively than to do smaller acquisitions, less than $5 billion in revenue I would say is a rough guidepost, and also not to do dilutive acquisitions? Can you comment on whether those are ultimately aspirations or constraints on potential acquisitions going forward?

Well, that is a very good question. I think what I do in answering that, Tony, is we would look at the data that we presented in India. We looked at a profile of acquisitions that we did from 2002 to 2004, and we looked at acquisitions that were in the $500 million to $700 million at the high end and down as well. If you looked at those 24 acquisitions, and that is all of the acquisitions 500 and below, for that period, you looked at the revenue growth that resulted from the pre-acquisition year, over the next two years that profile really almost doubled. It was generally accretive in the second year. If you took out the amortization of intangibles, you would see cash benefit very quickly. I think we would also point out that a number of these acquisitions were accretive even in the quarter that we acquired it -- the Micromuse, that was accretive in the quarter we acquired it. Candle was accretive in the quarter we acquired it. So as we concluded on that data that we presented, we drew some conclusions. One, that is we buy capability that enhances our own capability, it is really the ability to now globalize that across IBM, to scale it rapidly across the IBM business structure that pays off in that business case. Now, I do not want to say that we would never do a large acquisition. If it was appropriate for us or if it drew a strategic capability and enhanced the overall shareholder position, but what I do want to say is that for acquisitions and that kind of a category, that is now a more operational part of our performance and we include that as part of even our pipeline view of opportunities, especially in areas that scale rapidly like software, like intellectual property.

Thanks, Tony. Let’s go to the next question please.

Thank you. Our next question comes is from Keith Bachman with Banc of America. You may begin. Keith Bachman - Banc of America: Thank you. I wanted to, Mark, see if you could talk a little bit about the hardware margins as a category. How should we be thinking about this going forward? What are the key drivers? If you could speak to that, including MIPS? Thank you.

First of all, if you look at overall margins, we improved from first quarter to second quarter at bottom-line profitability, and that provides us momentum as we go from the second to the third. Moving forward into the third, our hardware profitability should improve from the second quarter for a number of reasons, which I will list. The first, the transition to RoHS is now behind us, which reduces the complexity that impacted us in the second quarter. The server transition to Power 5+, which impacted some of our mix in the second quarter, will complete in the third quarter. We believe we can continue our strong momentum in Blades. We are the leader in this fast-growing space. We continue to see excellent adoption of storage virtualization. So if you put all of that together, along with the actions that we put in place to lower our end-to-end cost, we feel pretty confident that we should see that momentum and profitability for our hardware businesses continue as we go into the third quarter.

Thanks, Keith. Let’s go to the next question please.

Thank you. Our next question comes is from Andrew Neff with Bear Stearns. You may begin. Andrew Neff - Bear Stearns: If I could, just going back to your comments about the outlook for the year and you talk about your comfort, how comfortable can you be, given the signs of slowing in the services, given the comments you made about what is going on in terms of the sales cycle? What gives you that level of comfort? We are only half-way through the year and you have seen lots of things go in the other direction. Why are you so comfortable at this level, Mark?

Well, you know, if you look at it, I would go down to the deal base. We did not see those deals leave the opportunity set. We did not see those deals -- we did not lose them to competition, but they did generally roll. As we have looked at the progression of those deals in the third quarter, they seem to be continuing on a very logical pace. So to us, as we just look at the engagement detail that we have, it looks like that lengthening contract cycle has rolled those deals into the third quarter but those deals and progression of those deals is still continuing. I would say that the backdrop I would apply to this though is relatively the SMB space seems to be performing and driving at a fairly constant rate, and we did not necessarily see this same impact of lengthening contracts that we saw in enterprise.

Thanks, Andy. Let’s go to the next question please.

Thank you. Our next question comes is from Ben Reitzes with UBS. You may begin. Ben Reitzes - UBS: Thank you. With regard to services again, Mark, could you talk about how -- in the past, you talked about duration, you’ve talked about other aspects of the contracts and you have gotten pretty detailed in the past to just give us a handle on I guess your handle on how you are going to hit these estimates based on the contract profile you see. If you could you just give us a little more detail on some of the commentary you provided in the past with regard to duration and maybe the contract profile. I know you have answered it, and obviously if you could give us just a little more detail on what gives you confidence that you can keep the services margins up, given the bookings trend, and short-term in particular and what you see. Thank you.

First of all, if you are looking at services margin, number one, we have a very disciplined process. So we are not going to chase bad deals that would erode our overall position. Number two, I think we have a very strong cost base. We established that with some of the restructuring work but that better base of cost extends well into the second half of the year, as well as continuing the actions that we have to constantly drive productivity, not only in our services businesses but across the IBM platform as well. I will say that as we go into the quarter, we also have very specific action plans for both GTS and GBS. In ITS, we are developing new offerings in the higher value-add market opportunities. Examples like security and privacy services, business continuity and resiliency services, storage and data services. We are developing new offerings within these areas that is well underway, as well as training our sales reps to sell to the value in those offerings -- all of those should promote not only deal growth and volume growth but also profitability. Likewise in GBS, we are driving specific action plans to ramp up and invest on our high value of services, adding incremental industry resources, subject matter experts, and solutions specialists to drive this improved value base in our offerings. In application management services, we are adding sales in key delivery resources, expanding our geographic delivery footprint. In support of these high-growth plays, we implemented the Global Business Solution Centre in India to create and enhance our portfolio of industry solutions. So all of these actions across the ITS elements and the GTS elements, as well as GBS, are intended to drive continued -- recovering our signings base but also a very positive cost base and driving towards that value, higher-margin space.

Thanks, Ben. Let’s go to the next question please.

Thank you. Our next question comes is from Rebecca Runkle with Morgan Stanley. You may begin. Rebecca Runkle - Morgan Stanley: Good afternoon, Mark. Just a quick clarification on public sector, which is your second-largest vertical, I believe, and was down about 6% year on year. Take that and combine that with your comments about changing vertical dynamics related to services, and I’m just wondering -- how cautious should we be about public sectors outlook in the second half? Any commentary or meat you could put around what you are seeing there? How you are adjusting your second half expectations would be helpful.

If you look at public sector, I think within that, the point that we are making is there has been, at least for us, a shift in the spending within the government to fund certain defense efforts. BBS has elected not to participate in military department defense spend relating to mission systems and weapons systems. So given this, we have experienced a downturn in U.S. federal revenue over the past 6 quarters. Now, we continue to focus on our value propositions and the agency spend that we have targeted, and we had improved signings over the last couple of quarters. Given that our federal contracts are longer-term in nature, it takes some time for revenue ramp to occur, so I think that is the most significant aspect of the public sector that I would point out.

Thanks, Rebecca. Operator, let’s take one last question, please.

Thank you. Our last question is from David Grossman with Thomas Weisel Partners. You may begin. David Grossman - Thomas Weisel Partners: Thank you. Mark, typically software in periods of slowing demand has a tendency to lead services. Based on your current results, at least, it seems that almost the reverse is happening at IBM. I am wondering if you could perhaps help us better understand why we are seeing the software continue to perform, despite what you suggest is some slowing enterprise demand that may be impacting services.

A very good point. As we look at our software performance in the second quarter, it comes off the back of a very positive performance in the first quarter as well. What I find most powerful about our software performance is that it was very consistent across all geographies, so we grew software in all geographies, and at constant currency. We gained share in Europe and held share in the Americas and Asia. This is in our base performance. We had WebSphere up 18%. Information management, our database content, up 7%. Lotus up 6%, Tivoli up 12%, our Rational up 8%. So in aggregate in the second quarter, branded middleware grew 9% as reported and at constant currency. So we believe we have gained share in branded middleware and specifically in the WebSphere, Tivoli and Rational brands. Now, behind that, we have been investing heavily in our key middleware brands, both internal development that has generated strong products which add organic growth. These products include SOA related WebSphere products, Information on Demand products, and Tivoli Storage Management. We have invested heavily in our sales and marketing investments, allowing us to capture a bigger share of the market. We have augmented our internal development with synergistic acquisitions -- for instance, Micromuse that I pointed out earlier, which adds new leading systems management capabilities. So all of this together I think highlights our capability in software but also as a function of a well-laid out set of investments that has now achieved very positive results, not only in the second quarter but in the first quarter and across each of our geographies.

Thank you, David. I want to thank you all for joining our call this evening.

Thank you for participating in today’s call. The conference has now ended. You may disconnect at this time.