Patricia Murphy - VP of Investor Relations Mark Loughridge - SVP & CFO

Andrew Neff - Bear Stearns Toni Sacconaghi - Sanford Bernstein Laura Conigliaro - Goldman Sachs Louis Miscioscia - Cowen & Company Benjamin Reitzes - UBS Harry Blount - Lehman Brothers Richard Gardner - Citigroup Richard Farmer - Merrill Lynch David Grossman - Thomas Weisel Partners Bill Shope - JP Morgan

Welcome, and thank you for standing by. At this time, 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 we will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I am here today with Mark Loughridge, IBM's Senior Vice President and Chief Financial Officer. Thank you for joining our first quarter earnings presentation. By now, the opening pages of the presentation should have automatically loaded and you should be on the title page. The charts will be automatically advanced as we move through the presentation. But if you prefer to manually control the charts, at any time you can uncheck 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 the related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end and in the Form 8-K submitted to the SEC. For those of you who are manually controlling the charts, please click on the next button for chart two. 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 website or from us in Investor Relations. Now, I will turn the call over to Mark Loughridge.

Thanks, Patricia. In the first quarter, we delivered $22 billion in revenue, which was up 7% as reported and 4% at constant currency. We expanded gross profit margin year-to-year for the 11th consecutive quarter, driven by an improving business mix and productivity initiatives. This allowed us to ramp investments in key strategic areas to drive future growth. Our pretax income was up 6% and net income was up 8%. We delivered $1.21 of earnings per share, up 12% year-to-year. Our first-quarter performance demonstrated the value of our globally integrated company. We have been making investments for some time to build global capabilities. This quarter our very strong performance in Asia, together with improvements in Europe, more than offset weakness in the United States. Overall, this was a solid quarter, and let me say right up front, with the first quarter behind us, our view of the full year hasn't changed since we spoke in January. So today, I will start the discussion with our geographic results. I will focus the country-specific comments on the results at constant currency. The Americas revenue grew 1%. We had strong growth in Latin America, and Canada also grew, but the United States growth slowed and revenue was flat versus last year. Growth from sales to our small and medium business customers remained fairly steady; however, we experienced a slowdown in sales to large enterprises. While we had a strong close to the quarter in other geographies, the U.S. was noticeably weaker. From a sector perspective, performance in the distribution sector was strong, while the industrial, financial services and communications sectors lagged. Europe's revenue performance was solid, up 13% as reported and up 5% at constant currency. We had good performance in the major countries, with Germany, U.K, France and Spain all up. Most notable was the improvement in Germany, up 10%, benefiting from an improving economy and better sales execution. Asia-Pacific had solid execution and a strong economy. This is the third consecutive quarter of good results, with 10% growth as reported and 9% revenue growth at constant currency. This is the best performance in five years. All regions grew, with double-digit growth in Australia, New Zealand, greater China group, and Aussie in South Asia. Our business in Japan continued the recovery started in the second half of last year and was up 3% in the quarter. Good services assigning, improved execution and implementation of a successful sales capacity maximization program produced these results. Across the major geographies, the emerging countries of China, India, Brazil and Russia together grew 21%. The growth was led by China, up over 30%, and India, up 24%. Brazil grew 13% and Russia was up 1%. While these countries represent 5% of IBM's revenues, they contributed 1 point of IBM's growth rate. Growth in these countries is driven by customer investment to build out their infrastructures. Our total services revenue grew 8%, and 4% at constant currency. We are now separately reporting both revenue and gross margin of these two services segments. Global Technology Services revenue growth of 7% was consistent with performance in the fourth quarter, led by Integrated Technology Services. Global Business Services grew 9% as reported and 6% at constant currency, with improved revenue growth in all three geographies. Systems and Technology revenue was up 2% as reported and flat at constant currency. System p and System z both posted very strong growth, contributing to both revenue growth and margin. This was offset by an anticipated decline in Microelectronics and weaker performance in storage. Software grew 9% as reported and 5% at constant currency, reflecting double-digit growth in the strategic branded middleware products. Global financing revenue growth reflected an improvement in financing revenue due to an increase in assets and higher used sales. Overall, IBM's gross profit margin improved over 1 point, led by Systems and Technology and Global Business Services. Now we will move on to expense. We have made significant changes to the mix of our business, investing in higher value capabilities while divesting of commoditizing businesses. This has contributed to higher gross margins. In fact, our gross margin has increased over 5 points from 2002 to 2006. These higher value businesses also require higher operating expense. This isn't just a short-term trend, but reflects the ongoing investment required to develop and sell higher value capabilities for our clients. So consistent with the trend we saw in the fourth quarter, total expense and other income increased 11% year-to-year. SG&A was up 11%. Approximately 3 points of this growth is due to the impact of currency. We estimate that our investments and acquisitions drove 5 points of the growth in SG&A. We have made good progress in integrating the acquisitions completed in the second half of last year, but they are not accretive in the first year, and as a result, impact our profitability in the short term. The remaining 3 points of the SG&A growth was largely driven by investments we are making in our software and services business and emerging markets. RD&E was up 4%, entirely driven by acquisitions. We expect a similar level of total expense growth through the second quarter of this year, with some moderation of the growth rate in the second half. Typically, we highlight items that significantly impact our profit growth. This quarter, there were no items that are individually large enough to call out. We did have an increase in the gain from equity transactions driven by the sale of Lenovo shares. This improvement was offset by lower IP income and a higher level of workforce rebalancing. Let me remind you of one item that we expect to impact other income and expense in the second quarter. In January, we’ve announced the divestiture of our printer business through the creation of a joint venture with Ricoh. This is on track to close in the second quarter, and we estimate that the pretax gain recorded at closing will now be approximately $100 million, which is at the low end of the estimate provided in January. Turning to currency, IBM hedges its major cross-border cash flows to mitigate the effects 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, hedging programs resulted in approximately $90 million of year-to-year impact to other income and expense. I'm not going to predict future currency moves, but at current spot rates we would expect revenue growth to continue to benefit from currency translation for the rest of 2007, though at a more moderate level. I would like to comment on one other item before we leave our discussion on spending. There are a few items in our operating results that many other companies exclude from the discussion of their earnings. This quarter, we absorbed over $90 million for the amortization of purchased intangibles, which is a non-cash item. We absorbed about $175 million of stock-based compensation, and we absorbed about $60 million of charges for ongoing restructuring, primarily reflecting resource-rebalancing activity. In addition, we absorbed about $650 million of costs and expense for retirement-related plan. These items are part of any ongoing business, and we view them in the same way as any other element of costs or expense that impact our financial statement. Now let's turn to cash flow. This cash flow analysis chart considers our global financing receivables as an investment to generate profit, not as working capital that should be minimized for efficiency. In this view, net cash provided from operations, excluding the change in global financing receivables, generated $950 million, a $240 million increase from last year. In the first quarter of last year, we contributed $1 billion to the U.K. pension fund, while this year we made a $500 million contribution to the U.S. retiree medical trust. Excluding the significant retirement-related funding activity from both years, we generated $260 million less cash from operations this year. We did experience weakness in accounts receivable performance in Europe and the Americas. Action plans are in place to deliver improvements in the second quarter. We invest cash from operations in a few broad categories, capital expenditures, global financing receivables net of debt, and strategic acquisitions and we return cash to shareholders in the form of stock buybacks and dividends. Starting with the investments, net capital expenditures were approximately $1.1 billion, up over $150 million year-to-year, reflecting increased investments in strategic outsourcing and our global infrastructure. We expect a higher level of capital expenditure investments for the remainder of 2007 in these areas and in our microelectronics business. Global financing receivables, net of debt, were at source of almost $3 billion, consistent with last year. And spending on acquisitions was approximately $200 million, driven by Vallent, Consul and Softek. We continue to drive very strong returns to shareholders. This quarter, we spent $3.4 billion to buyback over 36 million shares, with $1.4 billion remaining at the end of the quarter from our last Board authorization. Average diluted shares were 1.5 billion, down about 4% from a year ago. And in the first quarter, we paid out over $450 million in dividends. Turning to the balance sheet, our cash on hand was $10.8 billion. Of our $24 billion of debt 97% was to support our global financing business, which was leveraged at an appropriate 6.9 to 1. The remaining non-financing debt level was $700 million, and debt to capital was 2.8%. Now let me turn to the businesses, starting with services. Our two services segments, Global Business Services and Global Technology Services, together delivered external revenue of $12.4 billion, up 8% as reported and 4% at constant currency. Global Business Services delivered particularly strong results for both revenue and profit. Signings for services this quarter were $11.1 billion at constant currency. This quarter, we signed nine deals larger than $100 million, and our backlog is estimated at $115 billion. Our short-term signings, driven by demand for both our integrated technology services and our consulting and systems integration offerings, were $5.3 billion, up 10% year-to-year. This was the third consecutive quarter of signings growth in these short-term businesses. Our long-term signings were $5.8 billion, down 11% year-to-year. As always, it is difficult to predict exactly when deals will close. For example, on April 3, we signed a $400 million strategic outsourcing deal with Royal & Sun Alliance, a major U.K. insurer, to manage their IT infrastructure. We had anticipated that this would close in the first quarter, but it will now be included as a second-quarter signing. Turning to the segments, Global Business Services delivered improved results again this quarter. These improvements were driven by a combination of customer demand for our services and outstanding execution from our GBS team. Short-term signings were up 13% year-to-year and we were up in all geographies, led by the Americas and Asia-Pacific. In fact, this was the third consecutive quarter of double-digit short-term signings. Long-term signings were down 22% year-to-year, with good growth in signings for application management services, offset by declines in our U.S. federal business, where we continue to see a shift in government spending to support defense efforts. On a rolling four-quarter basis, GBS long-term signings are up over 20%, driven by a strong fourth quarter last year. Revenue of $4.2 billion was up 9% as reported and up 6% at constant currency and was driven by improved growth rates across all three geographies, with the strongest growth coming from Asia-Pacific. From an offering perspective, we saw the best growth in the areas of supply chain, business strategy, and change, and in our SOA-driven offerings, where we continue to extend our SOA leadership by helping our clients to build strategic new solutions in partnership with our software business and research. The revenue growth rate for Global Business Services at constant currency has improved 10 points over the past three quarters, and as a result of the operational transformation we've focused on over the past year and a half, this has been profitable growth. This quarter, Global Business Services' pre-tax margin was 10.5%, an improvement of two points year-to-year. And pre-tax profit dollars were up 32% or up over $110 million year-to-year. This profit expansion was driven by higher revenue growth and utilization, improved pricing and strong contract management. Now turning to GTS. Global Technology Services delivered revenue of $8.3 billion, up 7% as reported and 4% at constant currency. Strategic outsourcing revenue was up 6% as reported and up 3% at constant currency. Good growth in Asia and Europe was partially offset by weakness in the Americas. Strategic outsourcing signings this quarters were down 11%. Business transformation outsourcing revenue was flat as reported and down 3% at constant currency. BTO signings were up 7% year-to-year. Asia-Pacific and Europe both delivered double-digit revenue growth this quarter. The Americas continued to be impacted by a large contract renegotiation in early 2006. This will no longer be a drag on growth rates starting next quarter. Integrated Technology Services revenue was up 12% as reported and 9% at constant currency. ITS' signings were up 5% year-to-year. We continue to see progress from the changes we have implemented to improve the Integrated Technology Services business, particularly in Asia-Pacific and parts of Europe. In addition, the acquisition of Internet Security Systems, which added to our capabilities in security and intrusion protection, contributed to our revenue growth this quarter. Turning to margin, Global Technology Services' gross margin was flat year-to-year, but pre-tax margin declined 2.5 points or about $160 million. This includes the impact of our ISS acquisition, which helped gross margins, but taking into account amortization of intangibles and other expenses, drove over $40 million of the year-to-year pre-tax profit decline, or just over a half a point impact to our pre-tax margins. We increased investments in sales and delivery. We invested over $100 million more this year in technology, tools and processes to improve service delivery and customer satisfaction in our outsourced accounts. Our intention was to offset these investments with improved performance in Global Business Services, which was in fact up over $110 million. In GTS, we continue to improve gross margin in Europe and Asia, but we fell short in the Americas, primarily due to cost issues in our U.S. strategic outsourcing business. We're putting in place a series of actions to address our U.S. cost base, including a basic focus on resource and cost management disciplines and rebalancing of resources as we execute our global resource strategy. It will take us a quarter to implement the actions, but we expect to see improvement in pre-tax margin starting in the third quarter. Now, I'll move on to Systems and Technology. Systems and Technology Group revenue of $4.5 billion grew 2% year-to-year and was flat at constant currency. Growth in Asia-Pacific and Europe was offset by a decline in the U.S. System z revenue grew 12%, fueled by double-digit growth in Asia-Pacific and Europe. MIPS grew 9%, marking seven consecutive quarters of year-to-year MIPS growth and longer than any product cycle in recent history. This sustained growth is supported by a strong demand for traditional mainframe engines, especially engines for Linux and Java and growing recognition of System z as the premier tool for large-scale virtualization. As a result, we're seeing new clients and new work coming to the platform and leveraging our latest technology. System z performance also reflects continued good sales execution, and we believe we gained market share. System i revenue was down 13% year-to-year as sales of upgrades remained weak. Actions taken to reduce costs, together with sales of high-margin capacity-on-demand upgrades, drove improved margins year-to-year. System p revenue grew 14% at actual rates and 10% at constant currency. This reflects revenue and share growth since the introduction of Power5+ technology in July of 2006. We continued to see strong growth in our high-end machines, as well as our capacity on demand offerings, extending our price performance leadership and positively contributing to margins. Customers continue to leverage System p's native virtualization to consolidate multiple smaller servers into high-end System p. Systems x server revenue grew 7% and 4% at constant currency. We expect to maintain market share. Consistent with industry market dynamics, our units declined slightly year-to-year, driven by virtualization. Virtualization is causing a consolidation of server deployments on a single system, and this is playing to IBM's strengths across our server platform. System x blade units grew 12% year-to-year. However, our revenue growth is flat year-to-year as a result of an unusual amount of operating lease activity. Normalizing for this deferred activity, blade’s revenue growth would have been more in line with volume. System storage was down 1% as reported and down 4% at constant currency. Storage had a weak quarter after a solid second half of 2006. External disk was down year-to-year, principally driven by declines in the U.S. We did not execute in a very competitive market in high-end and mid-range storage. Our tape business was flat year-to-year, holding share in that market. We believe we held share in total storage this quarter. Microelectronics revenue declined 7%, compared to a very strong first quarter last year. We anticipated that demand would moderate in 2007 as last year's games platform launches drove significant early production volume. During the first quarter, we announced a joint development agreement with Freescale Semiconductor on 45-nanometer technology. We also began production of our 65-nanometer cell broadband engine chip in our East Fishkill facility. Software segment revenue was $4.3 billion, up 9% year-to-year as reported and 5% at constant currency. Software growth was again fueled by our branded middleware portfolio, which delivered 17% growth as reported and 13% at constant currency, which is nearly twice the market growth rate. Leadership products and strong customer loyalty drove double-digit growth in WebSphere, Information Management, Tivoli and Rational. Our recent acquisitions performed well in the first quarter, and had a significant positive effect on our Information Management and Tivoli brands. In fact, our acquisitions generated more than half of our branded middleware growth this quarter. Organic growth slowed from a robust level in the fourth quarter, as some large customers in the U.S. delayed their purchasing decisions. Offsetting this growth was a modest decline in our operating systems and other middleware, which comprise about one-third of our software revenue. These products are more mature and provide a strong flow of revenue and profit despite their modest revenue decline. Turning to our key middleware brands, the WebSphere family of software grew 14%, as reported and 10% at constant currency. We continued to build a robust portfolio of WebSphere products to realize the promise of service-oriented architectures. We are recognized as the market leader in SOA and continue to gain share with our WebSphere brand. Information Management revenue was up 20% year-to-year, and 16% at constant currency. We also gained share in the Information Management brand. Momentum in our distributed relational database continued, posting double-digit growth year-to-year. We believe we gained share against our top competitor. The Information On Demand portfolio builds value around our core database business. It enables our customers to integrate, analyze and optimize the disparate information across their enterprise. These offerings grew 28% in the first quarter. Results were also strong in the enterprise content management product set, which was bolstered by the FileNet acquisition. Tivoli software grew 18% and 14% at constant currency. We believe Tivoli continue to gain share in all three of their product segments, Systems Management, Security and Storage with strong contribution from our most recent acquisitions, MRO, Vallent and Consul. Lotus software grew 7% and 3% at constant currency. Our Lotus products provide customers with collaborative solutions that integrate people, data and business processes as a part of IBM's on-demand and SOA strategies. Customer loyalty to our Lotus products remains strong, as evidenced by 10 consecutive quarters of growth. We believe we held share this quarter. Rational software grew 15% and 11% at constant currency. Rational's products provide an integrated approach to the governance of software development and delivery. This is resonating well with customers, as evidenced by this acceleration in Rational growth. We believe we gained share this quarter, growing at roughly twice the market rate. For total middleware, we believe we again gained share in the quarter. Software pretax profit was up year-to-year, despite a decline in pretax margin, driven by our investments in acquisitions. Now I will wrap up. We have been investing for decades to extend our global reach. In the local markets, we have deep local routes with local management teams who understand our clients and their business challenges. At the same time, we have global scale that enables us to leverage investments and infrastructure and drive productivity and efficiency. Our business is uniquely global, with about 60% of our revenue generated outside the U.S. and about 65% of our employees outside of the U.S. including 30% in Asia-Pacific. This quarter, we had very powerful result outside of the U.S., which allowed us to overcome relatively weak U.S. performance, and post solid results overall. The performance was led by Asia-Pacific, with 9% revenue growth. Asia had solid contribution from all key regions and continued recovery in Japan. The strategy is put in place over the last several years to focus on high-growth emerging countries are paying off, and when combined with strong execution, produced these results. Europe's performance improved, posting its best growth rate in a year and a half. Several of the major countries grew, led by Germany at 10% growth. Our revenue from emerging markets grew 21%. These are among the fastest growing IT markets in the world. Over the next four years, we expect these markets to grow at more than two times the worldwide rate, with an opportunity of over $150 billion by 2010. We are investing to extend our leadership in emerging markets. From a brand perspective, our high-value software business was led by our strategic middleware portfolio, and provided about 40% of our segment pretax profit. Global Business Services accelerated its revenue growth, and when coupled with margin expansion, generated pretax profit growth of over 30%. GBS margin performance, together with growth in our software and high-end server businesses, contributed to an improvement in IBM's total growth and net margins. Overall, we delivered 12% earnings per share growth in the quarter. At the same time, we have some areas that we’ll continue to focus on. We're taking actions to improve the profitability of the Global Technology Services business, and we need to improve sales effectiveness in the U.S. So, what does this mean going forward? Our financial objective is to deliver 10% to 12% earnings per share growth over the long term. Taking this first quarter performance into consideration, and a steady economic environment, we would expect earnings per share growth for the full year to be in the middle of the long-term range, or around 11% growth. Including the gain from the sale of our printer business, we expect our earnings per share growth to be closer to 12%. Bottom line, we believe earnings per share growth in 2007 will be in line with our long-term objectives. 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 supplemental charts at the end of the deck that complement Mark's prepared remarks. And as always, I would ask you to refrain the multi-part questions, to allow us to take questions from more callers. Okay, operator, please open it up for questions.

(Operator Instructions) Our first question is from Andrew Neff with Bear Stearns. Andrew Neff - Bear Stearns: Thanks very much Mark. I just want to go back to the issue of the weakness in the Americas. Do you think those, when you come down to it, was that IBM-related? Do you think that was market-related? What is going on there? And then the converse thing for Asia, do you think it is the same thing? Is it IBM or is it the market?

Well, you know, if you look at it, I am not going to make an economic forecast here. If you look at the U.S., however, we did see weakness, predominantly at the end of the quarter, in our enterprise space. Really, SMB did fine, especially consistent with prior rates. I do expect that we’ll see improvement in the U.S. as we go into the second quarter. Now, if you look at the other geographies, I mean, we had a spectacular quarter in Asia-Pacific. As we said, three of the regions were in strong double-digit growth. We had another good quarter in Japan. So Asia-Pacific did really a terrific job, and I think that is a combination of, obviously, the local economy, but also our execution within that economy. Now, you take Europe, I think Europe showed a lot of performance in this quarter, and if you look at Germany, remembering that Germany is our third-largest country, Germany up 10% is a huge rebound for that country. So I am quite encouraged by our world trade performance. I mean, if you kind of characterize this quarter, it’s really a geographical performance quarter where the world trade units did a terrific job. We do have some work to do in the U.S., but I am confident we’ll see some improvement as we go into the second quarter.

Thanks Andrew, let’s go to the next question please.

Our next question is from Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford Bernstein: Yes, thank you. I would just like to follow up on that question, please. Put another way, do you actually think the weakness in the U.S. was pushed out to next quarter, or do you believe that we are at a fundamentally lower demand level than perhaps you anticipated at the beginning of the year? And to substantiate that, maybe you could comment on what your backlog or pipeline looks like in software and services. You had mentioned in both, particularly in software and the organic business that some large deals may have been pushed out to next quarter. And on services, you had mentioned some signings that also occurred early this quarter. So, basic question is, is this push-out or weaker demand, and can you comment on your pipeline for software and services?

Well, first of all, as you look at, I would answer that with the information that I have at my disposal, which is kind of the skew of business within the U.S. And the U.S. had actually a pretty good January and a pretty good February. The falloff was really in the last month of the quarter. And as I said earlier Toni, that was predominantly in our enterprise customer set. Now, if you look at the deals, we certainly did have some deals roll over into the quarter. And if you look at the pipeline, as we would look at it across our business lines, we think we have a pretty good pipeline as we go into the second quarter. We are taking actions to improve our performance in the U.S. as we move into the quarter. And we have confidence in those. So I think it is kind of a combination of the two. It was, as I had said earlier, predominantly an enterprise, it was really the third month of the quarter. We did see some deals roll out of the quarter. And as we look at our pipeline going into the second, we feel that it is a pretty good pipeline on a global basis, and we see some improvement, I think, in U.S.

Thanks Toni, let’s go to the next question please.

Next question is from Laura Conigliaro with Goldman Sachs. Laura Conigliaro - Goldman Sachs: Yes, first of all, I don't really understand your comment about why you are confident that you are going to be seeing improvements in the second quarter in the U.S., particularly since you just indicated that it really was the end of the second quarter, excuse me, the end of the first quarter where you saw some of the issues. Also, can you give us more detail about the weakness that you referred to as accounts receivables performance in Europe and the Americas?

Yeah, I would say, first of all, I would look at the overall pipeline and opportunity moving into the second quarter globally first. And I just said that we had a really spectacular performance out of Asia-Pacific, and we see that trend in Asia continuing as we go into the second quarter. We saw real improvements in Europe, led by Germany, up a rather strong 10%. We see Europe continuing as we go into the second quarter. And as we look at the pipeline, Laura, we see encouraging signs in the pipeline, especially since the issues that we saw really in the U.S. were more a function of just the most recent month of March, not necessarily January and February. So all of those things together encourage me that one, we can do better as we go into the second quarter, improving to modest growth in the U.S., but I do expect a very similar story on a global level, that that will be highly supplemented by real performance out of our Asia-Pacific organization, number one, and pretty strong performance out of Europe, especially the work we saw in Germany. Now to your second question on accounts receivable, really that was some issues we saw accounts receivable in Americas and Europe in the first quarter. Those shortfalls are relatively small. If you look at it on a day’s sales outstanding basis, the impact was about two days. We have identified root cause and we are going to fix that as we go into the second quarter.

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

Our next question is from Louis Miscioscia with Cowen & Company. Sir your line is open. Louis Miscioscia - Cowen & Company: Yes. Thank you. I have got -- this is Lou Miscioscia, Cowen. Two questions on Services, the first one is that when we look at the PTI margin, would you expect a modest increase sequentially as we go throughout the year? And the second question is also in the Services area, but more from a macro standpoint. Couple years ago, Accenture decided to go directly after application maintenance and development head-to-head with the Indian guys, obviously great growth, great margins. And I think IBM still has not done that. Could you mention why and if that policy is going to change?

Well, first of all, let's start with your question on GTS margins. I mean, if you look at GTS margins, I would start from a little higher level on GTS. We had good revenue performance, gross profit margins was flat. We did make specific investments in the quarter about $100-$110 million that we expect to see efficiencies improvements and productivity when go through the year. So my kind of planning view of this is that in second quarter, we'll be working to improve our cost structure, predominantly in SO in the United States. And we are going to see those margins for GTS improve as we go into the third quarter into a more normal range, about 9% to 10%. Now, as far as your question on Accenture versus IBM in application maintenance, I mean, if you look at our overall performance in GBS, I mean GBS had a terrific quarter for us. The number one, let's look at signings. I mean, it was the third consecutive quarter of double-digit growth in signings. Long-term signings on a four-quarter rolling average were up 22. We did have, as you know, strong revenue performance out of GBS as well, up 6% at constant currency, 9% at actual rates. But I would go right to the profit line. I mean, full-year 2005, we are up 13%, full-year 2006, up 37%, first quarter '07, up 32%. Big margin improvements. And with that, if you broke down the headcount behind that, we have a very powerful organization in India that’s driving application work. So, I think we've got a very competitive history and a very powerful performance out of that organization this quarter.

Okay. Let’s go to the next question, please.

Next question is from Ben Reitzes with UBS. Benjamin Reitzes - UBS: Could you talk a little bit more about hardware, in particular, I mean the UNIX business there had some decent numbers, but those were off of relatively easy comps, and the overall performance flat year-over-year. I would assume that is not what you wanted? And what is going to happen to get that business better? Perhaps, maybe, you can touch on POWER6 in the back half of the year, and maybe some benchmarks for the microelectronics business as well?

Well, first of all, let's talk about the performance within the quarter. Number one, we did have pretty good performance out of the high-end server content, specifically in z and p. And I think both of those did very well. If you look at z, revenue was up 12% actual, 8% at constant currency. Gross margin was up very strong in the quarter. MIPS grew 9%. So, I think we had pretty done good performance out of our z content. P was again very strong, up 14% and 10%. Gross margins, again, up very strong. So, I think especially underneath the high-end server content in p, we had a very good quarter. As far as POWER6 is concerned, we do see that entering the product line in IMP in the back half of '07. If you walk down the product line, I mean, the issue we had in System i was one that we've had for some period of time. Revenue was down in that product line, 13% at actual, 16 at constant currency. This is not a new phenomenon for us to deal with. System x, I think, did okay. They were up 7%, up 4%. We worked through some of the inventory and brought our weeks of inventory down in the channel. So I think we are in a pretty good shape as we go into next quarter. System storage, I think, could have done a better job here. They came off of a back half of last year, a very strong performance. And we look for that to do better as we go into the next quarter. I mean microelectronics is now wrapped around the effects that we've seen in the game business. But actually, we did very well in margins there as we achieved more favorable mix towards higher-margin ASICs products. So, I think that gives you a profile of our hardware business and where we see it going.

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

Next question is from Harry Blount with Lehman Brothers. Harry Blount - Lehman Brothers: Thanks Mark. You once again reiterated the 10% to 12% earnings growth, and many of us are now going to have to look much more closely at our '08 estimates. Given that the pension should be a contributor in the neighborhood of $0.30 or more a share positive next year, that’s well -- approximately half of what the long-term EPS growth projection is? So, with that as a backdrop, should we expect anything structurally different based on what you see today, either in terms of your share buyback, your core revenue growth or the margin profile from a longer-term perspective?

Well, as you look at 2008, first of all, I think it is a little early for us to be talking about where we see 2008 going. But to your point, I mean, there is no doubt about it, that given our current view of pensions, it’s going to be a very strong tailwind as we go into next year. And as you know, if you look back the last couple of years, we have been fighting that impact every year as we went into the performance here. So based on current assumptions and our view of current interest rates, no doubt about it that should be a tailwind as we go into 2008. And as we start working on our view of 2008, we will be more explicit on how that plays in. The caution I would give you is obviously pensions are highly dependent on interest rate assumptions. If you look at that liability movement of the quarter or point to move that liability by as much as $1 billion. So, I would like to see it get a little closer at the end of the year, see where interest rates are stabilizing before we start predicting where that is going to go. But there is no doubt about it, big tailwind for 2008 in our current view of pensions.

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

Next question is from Richard Gardner with Citigroup Richard Gardner - Citigroup: Okay. Thank you very much. Just two quick ones. One, I hate to beat a dead horse, but Mark I was hoping you could clarify any color that you are able to give regarding verticals or products and services that were particularly affected by the U.S. weakness? And secondly, I was wondering if you could comment on the lack of BTO growth. I realized that contract re-negotiation is having an impact there, but can you talk about other factors that are impacting the business and whether the business is living up to your expectations, your growth expectations ex that particular re-negotiation? Thank you.

Well, once again, on the U.S. weakness, it is really, I think, a function of the quarterly skew and what we saw in the business, though, which, as you look at it, we had a pretty good January and February; March was weaker, and we did see a fall off in the third month of the quarter. In all of the other geographies, we had a very strong third month of the quarter. So, it did have signs of some softness, but beyond that, I think we have a pretty good execution plan to improve that performance to modest growth, I think, in the U.S. as we go into the next quarter. Now, I would say from a sector perspective, performance in the distribution sector was very strong, while we did have our industrial, financial services and communications sectors are lagged. But I am more confident that as we go into the second quarter, we will see some improvement to more modest growth in the United States. I am very confident that this worldwide phenomenon that we see, capitalizing on the resurging growth we see in Europe, as well as the very powerful growth in Asia-Pacific, will continue to drive performance as we go into the second quarter. As far as BTO growth, that was impacted by a specific contract re-negotiation. As we go into next quarter, we get out from under that, so you will see improvements in BTO as we get into the second quarter.

And I will remind you we did also see growth in BTO signings this quarter as well.

And actually that is exactly right.

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

Thank you. Next question is from Richard Farmer with Merrill Lynch. Richard Farmer - Merrill Lynch: Thanks a lot, Mark. I would like to follow-up on the software business. You have talked a lot about the U.S. customer during the purchasing discussions, and that caused a deceleration. Forgive me if I missed it in your prepared remarks, but I didn't hear as much commentary on the gross margin, which was down year-over-year. Can you provide some more explanation of what was driving that gross margin change, and going forward, what should we expect on the profitability front for the software business? Thanks.

Really, the gross margin impact -- that was about six-tenths of a point decline. It was really driven by acquisitions on a lower mix of our operating system software. So, overall, acquisitions had a very powerful performance in the quarter, but you did see that six-tenths of a point impact.

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

Next question is from David Grossman with Thomas Weisel Partners. David Grossman - Thomas Weisel Partners: Thanks. Mark, you mentioned several times in your presentation about rebalancing headcount. And I am wondering is that just limited to Services, and how is that rebalancing impacting the P&L currently? And you could perhaps connect the dots for us on how that's going to impact the margins going forward?

Yeah, sure. If you look at overall restructuring, there's always going to be some level of restructuring in every quarter. And we could include that in our operating performance. So, as you look at the second quarter, we will again have some restructuring, but it is not going to be a typical, especially on a year-to-year basis, I mean the year-to-year impact will be pretty modest, I think. On the other hand, if you look at how we are utilizing that, we’re going to utilizing a much larger share of that existing operational rebalancing in our GTS organization, specifically SO, specifically the United States. So, with those actions in the second quarter, we see that overall GTS margins should improve by the third quarter in the range of 9% to 10%. And I think we should really see some operating improvement in that business within the second quarter as well.

Thanks, David. Let's take one more question, please.

Our last question comes from Bill Shope with JP Morgan. Bill Shope - JP Morgan: Okay, thanks. I have a quick question on blade servers. Even with the adjustments for operating leases that you mentioned, the blade server growth has been, I would say, somewhat sluggish, at least relative to historical numbers, for the past few quarters. Can you give us some color on what is driving this? Has there been any fundamental change in the market potential, or is this really just a market share issue, specific to IBM, that you guys could potentially turnaround in the near-term?

Well, once again, let's look at the data. First of all, volumes were up 12% without this operating lease impact, the System x blades would be up 13%, which we believe held share in the quarter and did show quarter-to-quarter improvement on a growth rate basis. So I think it performed with the market, it held share, and it's a very strong part of our xSeries portfolio.

Okay, thanks, Bill, and thanks to all of you for joining us today.

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