Patricia Murphy - VP, IR Mark Loughridge - SVP & CFO

Toni Sacconaghi - Sanford Bernstein Chris Whitmore - Deutsche Bank Laura Conigliaro - Goldman Sachs Ben Reitzes - UBS Securities Richard Gardner - Citigroup Bill Shope - J.P. Morgan Harry Blount - Lehman Brothers. Louis Miscioscia - Cowen & Company Richard Farmer - Merrill Lynch Katy Huberty - Morgan Stanley David Grossman - Thomas Weisel Andrew Neff - Bear Stearns

Hello, 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 must disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Ma'am, you may begin when ready.

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 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. 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 web-cast will be posted to our investor relations website by this time tomorrow. Let me remind you that 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. I will also remind you that 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, and thanks for joining us today. Before going into the financials, let me give you an overview of the quarter. This was a really strong quarter, close to firing on all cylinders. We saw improving revenue growth, gross margin expansion and successful execution of our ASR or Accelerated Share Repurchase. From a geographic perspective, we had broad base success. Our performance was led by Asia, were we had solid execution, capitalizing on an improving economy and leveraging the investments we have made in the emerging markets. Europe was up 13%, while half of this was currency the other half was solid business performance. But really Americas had the best improvement led by the U.S. Last quarter we told you, we expected an improvement in the U.S. and this quarter we got it. Revenue was up 6%. From the business unit perspective, software revenue growth was 13% and both services were up 10%. Systems delivered on their model, though overall Systems and Technology growth was impacted by weakness in microelectronics and the sale of our printer business. Our EPS grew 19%, 15% excluding the gain from the printer sale. All of this contributed to strong cash flow. In fact free cash flow was up $1.7 billion year-to-year. So now let's turn to the financial summary. As you can see revenue was $23.8 billion, an increase of 9% as reported and 6% of constant currency. This is the best constant currency revenue growth we've had in over 6 years. We expanded gross profit margins to 41.8%. It was the 12th consecutive quarter of year-to-year improvement. Expense was up 11% driven by investments and sales resource and acquisitions and our mix to higher value businesses. Excluding the $81 million gain from the printer sale expense was up 12%. Our net income was up 12% or 8% without the printer gain. We executed the $12.5 billion ASR and in total bought back 9% of our shares outstanding at the end of the first quarter. We raised our dividend by 33% and net dividend has now doubled in the last two years. Bottom-line, we delivered $1.55 of EPS, growth of 19% year-to-year, excluding the printer gain earnings per share was $1.50 growth of 15% year-to-year. Now when I step back, these results demonstrate our intense focus on profit growth and cash generation, while continuing to invest for the future. As we get into the details, you’ll see we’ve made good progress against our 2010 roadmap discussed at our May investor meeting. So let’s start the discussion with our geographic revenue. All three geographies improved their growth rate from the first quarter. Americas’ revenue grew 5% at constant currency. We told you we expected improvement in the U.S. in the second quarter. And while economic data suggests the US economy improved in the second quarter, I think more importantly, the team really executed, and the results show it. The US growth improved to 6 percent. Once again we had very powerful results outside the US as well. Europe continued to improve, up 13% as reported and 6% at constant currency. Most major countries performed well, including Spain, the UK, and Italy. They were all up. Germany also grew with solid results for the second consecutive quarter, benefiting from an improving economy and better sales execution. Asia Pacific again had the best performance with 10% growth. The Asia Pacific economy remained very strong, led by India, ASEAN, and a steady recovery in Japan. We had solid contribution from all regions. In fact three regions posted growth of 21%, 19%, and 16%, and Japan grew for the third consecutive quarter at constant currency. Our strategies to focus on higher growth emerging countries are paying off. In fact, our emerging countries are Brazil, Russia, India and China grew 25 percent at constant currency. These countries now are 5% of IBM's revenue and contributed one point of growth to the IBM total. Both China and India are up over 30% and we believe we gained share in those countries. Brazil grew 9% and Russia was up a very powerful 52%. These emerging countries are among the fastest growing IT markets in world and we're investing to capture this growth. Over the next four years, as we covered in our May analyst meeting, our objective is to double the revenue growth for these countries, and our performance in the first half is a great start towards this goal. Now let's turn to the segment results. We are going to get into the specifics on revenue in the segment discussions. But let me focus here on gross margin. IBM's gross margin improved six-tenths of a point year-to-year. As I look at it, approximately two-thirds of our improvement is operational efficiencies, the remaining one-third is mix shift to higher margin businesses. By business unit, three units showed good improvement. Global Business Services continued the positive trend, with the improvement driven by better utilization, strong contract management, and improving pricing trends. And these each contributed about a third of that improvement. Our Software margin expansion was driven by strong revenue growth with a fixed cost structure. And Systems and Technology margin improved in each of our server brands as customers consolidate and virtualize workloads on the high-end. Global Technology Services was flat again, but up sequentially. We have taken action to improve our cost profile in the US. Global Financing declined, and this was a function of narrowing financing spreads and increased interest costs. So let's now move on to Expense. Total expense and other income increased 11%, consistent with the trend we saw in the last few quarters. Without the $81 million printer gain, expense was up 12%. I think one way to look at this increase in expense is that to some degree it's a reflection of the changing mix of our business. Higher value businesses contribute to higher gross margin, but they also require higher operating expense. If we peel back the 12% growth in the second quarter, approximately three points of growth was due to currency and we estimate that about five points of the growth is from our acquisitions. Of the five remaining points, one point is driven by increase in our interest expense to fund our Accelerated Share Repurchase. And the remaining four points is from investments in our software and services business, and our emerging markets. The returns on these investments are really reflected in the momentum in our key middleware brands, and growth in emerging markets, and our improving services signings. I would like to highlight a couple of other items that significantly impacted our profit growth. First of all, IP income was up $58 million year-to-year, coming off of a very low base in the second quarter of 2006. Secondly, over a $150 million of workforce rebalancing was incurred in the quarter and that was up $58 million. Half of this was used to address the cost issues in Global Technology Services, which as you remember, was predominantly in Strategic Outsourcing. Looking forward, we expect to reduce this rate of expense growth in the second half. In fact, even with the $270 million of additional interest expense from increased debt to fund our Accelerated Share Repurchase, we expect total expense growth rate in the second half to be in the range of 7% to 9%, before the impact of any future acquisitions. This improvement will be skewed more to the fourth quarter and I have got to add, of course, we are always on the hunt for good acquisitions, but I think this gives you a better sense of our operating trends. Now let’s talk about cash flow. As you can see, we had outstanding cash flow performance. In the quarter, free cash flow was $2.7 billion, up $1.7 billion year-to-year, and $2.9 billion quarter-to-quarter. Last quarter we explained that we had some weakness in our accounts receivable performance to put in place the action plan to deliver improvements. As you can see, we executed very well in the second quarter with strong accounts receivable performance across all geographies. In fact, our DSO improved one day year-to-year and a very strong four days on a quarter-to-quarter basis. For the first half, free cash flow was $2.5 billion, a $1.8 billion increase from last year. Year-to-date cash performance was driven by growth in net income and strong working capital performance. Our cash generation was strong in all geographies. So let me cover some events that impacted the year-to-year compare. First, major funding actions for our time end related plans were $800 million less this year, and second this quarter nearly $400 million of proceeds from the printer sale went to cash from ops. Strong and recurring cash flow enabled us to drive shareholder value to higher dividends and record share repurchases. Along with this, we maintained investments required for our long-term growth. In the first half, we returned an unprecedented $19.2 billion to investors through our share repurchase and dividends. We bought back 176 million shares at $18 billion. Average diluted shares were $1.5 billion down 5.2% from a year ago. We executed a $12.5 billion Accelerated Share Repurchase. It was by far the largest ASR ever executed. We funded the ASR through debt and cash. We still have $1.8 billion remaining from our Board authorization. With the execution of the ASR, we achieved first, an immediate share reduction, second, lower cost of capital and third, good use of non-US cash. In the half, we also paid out over a $1 billion in dividends and announced a $0.10 per share increase or 33% increase in our quarterly dividends. With this, we have now doubled our dividend over the last two years. Now let's turn to the balance sheet where we see the change to our capital structure. Cash on hand is $10.2 billion. As we have executed our strategy, business has gotten stronger and our ability to maintain a more leveraged capital structure has increased. We funded the ASR with a $11.5 billion of short-term debt taking our non-financing debt up to a $11.8. With this, our debt-to-capital was 47%. Over the next few years we expect our leverage ratio to be in the range of 20% to 30% debt-to-cap. The remaining two-thirds of the $34.7 billion of debt as to support our global financing business, but I think has leveraged at an appropriate 7:1. This leverage is relatively unaffected by the capital structure changes. The balance sheet remains strong, and we are well positioned to support the business over the long-term. So, now let's turn to the businesses starting with services. Global Services delivered strong performance in the quarter, $13.1 billion of revenue, up 10% as reported and 7% at constant currency. It's the strongest revenue performance in over three years at constant currency. We had signings of $11.7 billion, up 22% year-to-year with 11 deals larger than a $100 million and a backlog of a $116 billion, up a billion quarter-to-quarter and up $7 billion year-to-year. Looking at our recent signings performance, short-terms signings have been up four consecutive quarters, long-term signings are up for the year and are up 23% on a trailing 12 month’s basis. Looking at Global Business Services, our transformational actions to improve the business are paying off. We've increased competitiveness of our offerings, expanded capabilities in SOA and are leveraging global delivery capabilities across our portfolio. These contributed to continued signings growth, increased revenue growth and strong margin expansion. Revenue was up 10% as reported and up 8% at constant currency. Balance across all three geographies with the strongest growth coming from Asia-Pacific it was also balanced across the business. With application management services, and corporate consulting contributing to this improved performance. Our pre-tax margin was 10.4%, an improvement of 9/10s of a point year-to-year, and pre-tax profit was up nearly 20%. This profit expansion is driven by revenue growth and improved utilization, stable to improving pricing trends and strong contract management. So, a very strong performance by our global businesses team. Now let's look at Global Technology Services. Total revenue was up 10% and 7% at constant currency. We had the best performance in some time, balanced and strong across all geographies. Our Strategic Outsourcing business showed revenue growth of 8%, and signings growth of 22%. This is driven by good signings performance over the last 12 months, continued lower erosion, and selling new business into our existing account. It really demonstrates that the best customer is the one you've already got, and we have a lot of very valuable customers. In fact the focus on customers and service delivery was key to the growth in our base accounts this quarter. Customer signed up for new scope and short-term projects and this growth helped to mitigate some of the dependency on new customer signings. Asia was our strongest contributor to revenue, up double-digits. Our ASEAN and South Asia region was up over 50%, led by India. In fact strategic outsourcing in India grew nearly 150%. Now let me step back for a minute to discuss total IBM services in India, including both GTS and GBS. Domestic Services revenue was up 50% or more for seven of our past eight quarters. We are helping customers build out their infrastructures and position their business for rapid growth. In fact, we’re beating the local competition on their own turf. I’ve talked to you in the past about our key services deal with Bharti Telecom, and earlier this year we signed another large telco deal with Idea Cellular. This quarter, the momentum continued as we signed agreements with the Delhi Airport, the Indian Tax Authority, and additional scope with Idea Cellular. In fact a recent IDC study ranks IBM Global Services as the largest domestic IT services provider in India. Our Business Transformation Outsourcing business was up 15% as reported, with signings up nearly 70% year-to-year. Our Integrated Technology Services revenue was up 15%, and signings here were up 8% year-to-year. We saw sustained signings growth and continued improvement and progress from the changes we’ve implemented over the last year. Our IT Security Solutions, as an example, was quite strong. Internet Security Systems contributes to our capabilities, and we had several wins for our newly announced high-end appliance, which blocks security threats from entering a client's environment. A good example of a win here is Comerica Bank. Our global surveillance services grew significantly, with key wins in the public sector. At Chicago Transit Authority, we are implementing a new surveillance and analytics infrastructure to improve response and remediation for local public safety. And at one of the largest banks in the world, Unicredito, we’re rolling out surveillance infrastructure for fraud detection and response to criminal activity, initially in 60 branches. Our GTS pre-tax margin was 8.6%, down eight-tenths of a point year-to-year, but up eight-tenth of a point sequentially. Last quarter we told you about the actions we’re taking to address our cost base, primarily in the U.S. In the second quarter we incurred about $90 million in restructuring charges that impacted pre-tax margin growth by about six-tenth of a point. Excluding restructuring, pre-tax margin was closer to flat on a year-to-year basis. To wrap up Services, we had good signings and profit growth, and with revenue growth up 10%, 7% at constant currency, we had the strongest performance in years. Systems and Technology revenue of $5.1 billion grew 2% year-to-year, or flat at constant currency. But profit grew 77% with 2.6 points of improvement in our margin. In June we completed the sale of the printer business. This impacted the Systems and Technology revenue growth by about 2 points in the quarter. Going forward, this results in a loss of approximately $250 million of revenue per quarter. Our systems business grew 7%, or 4% at constant currency. This is right in line with the long-term model that we showed you at the analyst meeting in May. Though the total business was affected by the technology business which did decline, due to soft demand for game consoles. Now turning to the brands, let’s talk about System z. System z revenue grew for the fifth consecutive quarter, with another quarter of double-digit growth in Asia Pacific and strong growth in Europe. MIPS grew 45% with strength in both traditional and specialty workloads. In fact we had the eighth consecutive quarter of MIPS growth, longer than any product cycle since the mid-90s. MIPS for traditional workloads grew over 20%. Customers leverage this platform’s superior economics, including reduced power and cooling requirements. But if you look at the MIPS on specialty engines they grew over 130%, reflecting the mainframe's ability to virtualize and consolidate different workloads. Linux MIPS grew over 80%, Java and Database MIPS each grew over 100%. Year-to-year gross profit margin improvement was driven primarily by higher margin capacity-on-demand upgrades. System i declined but we'll be bringing POWER6 technology to this platform later this quarter. System p grew 7% and gained share. System p began to transition to our next generation of POWER technology and you saw the introduction of our POWER6 to the midrange. System x server revenue grew 16%. We had growth across the portfolio especially in four-way and eight-way servers. Workload virtualization and consolidation is driving demand for our high-end system x. In System x Blades we saw growth of 15%. System Storage growth was driven by very strong performance in tape while external disk was flat. Tape rose 19% with double-digit growth in Enterprise and Midrange. Microelectronics revenue was down. Overall, demand for our game consoles was simply not as strong as anticipated. We do have opportunities in other high growth segments, including wired and wireless communications. But just to put this in perspective, this business accounts for only 1% of our gross profit. Our Retail Store Solutions grew as large retailer clients continued to roll-out new point of sale solutions. We are the worldwide industry leader in programmable point-of-sale devices. Turning to Systems and Technology profit, we had good profit and margin performance. As discussed at our May analyst meeting, customers are consolidating and virtualizing their workloads. This is driving demand for profitable high-end products, which contributed to a 2.6 point improvement in our profit margin. Our Software business had another very strong quarter. Software segment revenue of $4.8 billion was up 13% year-to-year as reported, and 9% at constant currency. Our key branded middleware was particularly strong, growing approximately twice the market growth rate, and continuing to take share. In fact over half of our branded middleware growth was organic. Looking at the brands, WebSphere grew 28%. SOA-related products are in strong demand as evidenced by the double-digit growth we saw in WebSphere Business Integration, Application Servers and Portals. We expect that we outpaced our major competition which includes Oracle, BEA, Microsoft and Tibco. Information Management software is increasingly important in today's digital world. This quarter we grew 21%. Within that, our Information on Demand portfolio grew 17%. Also within Information Management, our FileNet acquisition continues to perform well. And we enjoyed four consecutive quarters of double-digit growth in Distributed Relational Database. We believe we gained share in both Information Management and the Distributed Relational Database markets, as well as versus our top competitor. The Tivoli software portfolio includes products which help customers manage complex networks and data centers. The growth was outstanding, fueled primarily by organic performance in our Security, Storage and Systems Management products, while MRO, Vallent and Consul acquisitions bolstered this impressive performance. In total, Tivoli revenue grew 33%, gaining share in all key segments and outpacing our top competitors. Our Lotus software is well-established as a tool for providing improved workplace collaboration and productivity. We've had eleven consecutive quarters of growth here, and in June we delivered Lotus Connections, a social networking platform for business. Rational software provides tools necessary today to build advanced applications and systems software. We are investing heavily in Rational with recently refreshed product lines and strategic acquisitions. In the second quarter we announced our intent to acquire both Watchfire and Telelogic, and we will expand in our reach into new markets and new customers. We continued our strong growth and we believe we gained share again this quarter, growing significantly faster than the market. The Operating System and Other Middleware segments of the portfolio include a variety of more mature software products. This provides a strong source of both profit and cash. For total Software, the margins were down as we integrated acquisitions. Total profit for the segment grew 8% to $1.2 billion. Now, I want to step back and comment on our success in software over the last few years. Our key branded middleware is now 53% of total software revenue, up 5 points from a year ago and up 10 points since 2004. As this faster growing branded middleware becomes a larger portion of the portfolio, it’s having a greater impact on our total software growth. This software portfolio, you’ve got to remember, this is the result of more than 30 years of investment. We didn’t just ramp this up yesterday. It provides much of the foundation for our business infrastructure, and this software is found in virtually all aspects of the middleware marketplace, from the common relational database, to transaction processing on the web, to new social networking capabilities for business. In recent years, our investment in this portfolio has increased and operational execution has improved. Software is now our largest provider of IBM profit and our most stable source of growth. So to wrap up, let’s discuss the key contributors to our earnings growth. Let’s starts with revenue. We had the best revenue performance in years. We saw 9% growth, and a constant mix in margin, this contributed $0.11 to our EPS growth. We expanded our gross margin led by software with good year-to-year performance in Global Business Services and Systems & Technology. We did have growth in expense, primarily driven by investments in sales and service capabilities and our acquisitions. As I said earlier, we expect this expense growth to moderate in the second half. We had two additional items that did impact our growth this quarter. First of all, we funded a higher level of restructuring activity to address our strategic outsourcing business in the U.S., and secondly, we have additional interest expense associated with the debt to support our Accelerated Share Repurchase program. Those share repurchases, bolstered by the ASR, contributed $0.10 to growth for overall quarter. We had a lower tax rate that also contributed. But overall, we had 15% earnings per share growth in the quarter, or 19% including the gain from the printer sale. Turning to the full year, previously we had indicated earnings per share growth of 13% to 14% for the year. With these second quarter results, we now expect earnings per share growth for 2007 to be in the range of 14% to 15%. No two ways about it, this was a great quarter. But our business model success will be measured over the long term, not at any individual quarter or year. The strategies we put in place, the investments we make, and the actions we take are all with an objective of optimizing our long-term performance. So now let’s turn to the last page and discuss our road map to 2010. At our May investor meeting, we talked about strategic decisions, like investing in businesses that contribute high profitability and cash flows to allow us to generate strong earnings and higher shareholder returns. We also talked about long-term goals, and specific initiatives. After the first half, let’s take a snapshot on how we are doing against our 2010 roadmap. First, revenue. This clearly accelerated with strength in software and services. This is supported by progress in our growth initiatives such as emerging countries and SOA, and we are continuing to execute our acquisition strategy. On margin expansion, we’ve expanded our gross margins, led by improving business mix and productivity initiatives, though we had less net margin expansion, as we are investing to drive future growth. On share repurchase, we are off to a great start. This year, we spent over $18 billion, including $12.5 billion on our Accelerated Share Repurchase. All of this contributed to 16% earnings per share growth in the first half. So we’ve made our first installment toward our $11 a share goal for 2010, and overall, we feel good about our first half, and how it positions us to deliver on 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. Also, as always, I’d ask you to refrain from multi-part questions to allow us to take questions from more callers. Operator, please open it up for questions.

Thank you. (Operator Instruction) And our first question comes from Toni Sacconaghi, Sanford Bernstein. Toni Sacconaghi - Sanford Bernstein: Yes, thank you. Mark, I have one question and that is about operating expense. You've had very good gross margin expansion over the last couple of years. In the last three quarters your OpEx expansion has been bigger than your margin expansion and your pre-tax income margins are actually down year-over-year. I know you gave some guidance around, where you expect OpEx growth to be in the back half of the year, but do you think that pre-tax income margin should actually start to increase on a year-over-year basis in the second half of the year?

Well thanks, Toni. Let me break that into the components of that expense performance in the second quarter and now help us lead into the second half. First of all, if you look at the components, number one, we had about three points of that expense growth was driven by overall currency impact. Then we had about another four to five points from the acquisition impact and then five points that I would attribute to the operational performance in the business. Of those five points, about one point of that was driven by the additional interest expense that we had to fund the ASR. Now two components of that, first of all the acquisition expense and the investment to drive our business start to wrap, as we go into the second half. On the acquisition front, we start to wrap on those very big acquisitions that we did in the second half of last year. We would still continue our acquisition pace, but we do begin to wrap on those very big acquisitions. And secondly, to invest in the growth in our business last year, we kind of kick-started the resource build up in the second half of last year, and so, as we now move through in the second half that starts to wrap on itself as well. As far as how that now would translate into a margin impact, I would kind of take that to a net margin basis, so let's do it on net margin with the advantage of the lower tax rate that we had in the second quarter, with that net margin was about flat on a year-to-year basis. If we pulled out this additional restructuring that we had told you about, and we also pulled out the additional interest for the ASR. In fact our net margins would have been up about four-tenths of a point and that four-tenths of a point is right on the model. So, the model objective is still to achieve that four-tenths. We are going to take the right actions as these expense build up start to roll into the second half. And I am looking for net margin expansion over the long-term. I think, we got to start to see that in the second half.

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

Thank you. Our next question comes from Chris Whitmore, Deutsche Bank Chris Whitmore - Deutsche Bank: Thanks, good afternoon. Hoping to get more color on the improvement you saw in North America. Was some of the strengths the catch up from Q1, and better sales execution, are you seeing a recovery in U.S. IT spending? Thanks

Sure. Well, first of all, I want to start off and answer that question with congratulations to our team in the Americas. I mean, they did a great job. I think the best part about this frankly, is that at the end of the year first quarter, we have said that, we had the right plan, we had the right book of business and we had the right deals to improve our performance in Americas. And boy did they carry that through with strong growth in the Americas underneath that U.S. up 6%. When you look at that U.S. performance, there is a couple of ingredients. First of all, I do think, we saw a relatively improving economy. Now it’s not back to the economy that we saw back in '06, but we didn’t see that tail-off that we saw in the third month of the first quarter continue into the second quarter. So, I do think we had a better economy, but I think there is a lot more than that, that we can attribute to the Americas team. First of all, as I had said earlier when we built up this resource in second half, you have got to train that resource, you have got to equip that resource, you got to assign them to the right account structure, so it could take some time for that to be productive resource. And I think we began to see that resource kicking in as we went trough the second quarter. Secondly we are now enjoying some of the fruits at its higher level of signings that we have had in our services business. That fourth quarter was very powerful, that's beginning to show through. And the third, I don’t want to miss this point in the service business especially we are beginning to see more and more business and revenue growth out of our existing account base, our existing customer set. And we get that growth out of our existing customer sets, it exhibits itself more rapidly in current period revenue. So, I would look at those attributes and number one this is not a function of roll over deals from the first quarter, this is real execution. And I think those attributes and the momentum that that team has been able to build should carry into the second half.

Thanks Chris, lets go to the next question please.

Thank you, and our next question comes from Laura Conigliaro, Goldman Sachs. Laura Conigliaro - Goldman Sachs: Yes, thank you. Over you signings, excuse year-to-date are now up 8.8%. You have to average about a little over 13 billion for each of the next couple of quarters just to end up flat for the year. A number of measures of the market continue to remind us that the number of large deals is shrinking. Its ending up flat even reasonable for the year and if you do, what is that actually suggestive like your services growth rate for the next 12 to 18 months, given that that revenue from short-term signings isn’t even half of our your quarterly revenue.

Sure, I think that's a great question. Lets look at signings first as we move from the second quarter into the third quarter, you saw second quarter signings 22%, good signings base as we move into the third, we have got a good deal list as we go into the third quarter. So, as I look at it and as I work with the GBS and the GTS teams on this, we collectively feel pretty confident that we should see reasonable signings growth, as we go into the third quarter. Now you are quite correct we have a very big hurdle to overcome in the fourth quarter. So we need to build up some additional momentum. But as we are laying out our plans, our objective is for full-year signing growth. It is a challenge we have to build up some additional momentum in this third quarter, but our objective is full-year signings growth.

Thanks Laura. Let's go to the next question please.

Thank you. Our next question comes from Ben Reitzes UBS. Ben Reitzes - UBS Securities: Could you talk a little bit more about hardware. In particular, you are going to a product transition. So, what is your confidence in potential revenue acceleration as you move throughout the year, given hardware is really the least recurring of all your businesses? And what's your confidence in the new product cycle there, not only in the servers, in the pSeries, but also in storage, it looks like disk was obviously pretty weak in the quarter, if you can comment on servers and storage with regard to the new products in the year end, that would be helpful? Thanks.

Sure, I will be glad to. Thanks Ben. As I look at the hardware performance in the second quarter; if you go down to that line that I withdraw at systems, systems did grow 4% at constant currency. So, at 4% at constant currency, systems on the model that we reviewed with you at Analyst Day, remember the revenue growth we are looking for over the longer term from our systems business, system technology was 4% to 5%. So they did lineup with the model. With that systems growth and the attention that they paid both in margin expansion and expense management, they did grow profitability by a pretty impressive 77% now top a low base last year, but a pretty strong profitability growth. A lot of that margin improvement I think is also a reflection of the same attributes we discussed at the Analyst Meeting, virtualization and mixing the higher-end servers, because virtualization gives our customer a very strong economic reason to buy into the high end. So, I think we are seeing that. So, as I look at the systems business, I would check-off as a make, the systems performance to the model on both margin expansion, exploiting the advantage of virtualization to a higher-end products and meeting the revenue objective of 4%. And we would have the same expectation for that business as we go into the second half. As far as storage is concerned, we had tremendous performance that of our tape business was up 19%. As you point out, this was relatively flat. We were not satisfied with that. So, we are looking for improvement in the overall disk performance as we go into the second half. The other question you asked is what impact did we have from new technology, a POWER6 and the implementation of product line, I think it did have some impact in our pSeries product line, remember that we implemented that in June in the second quarter to the midrange. But I don't think it was a lot of impact. We'll see that begin to normalize as we go into the third quarter.

Okay, thanks Ben. Let's go to the next question please.

Thank you. Our next question comes from Richard Gardner, Citigroup. Richard Gardner - Citigroup: Okay, thank you. Mark, you spent a lot of time at the Analyst Meeting talking about post-retirement expense for 2008. And I was wondering if you could just update us on your thoughts on the recent move that we've seen in corporate bond yield, and what the sensitivity is there on 2008 post-retirement expense? Thank you.

Well, Richard do you remember, when we went through the discussion at the analyst meeting we were quite precise in rolling out what we thought that improvement would be, and in fact in 2008 what we said is, we saw an $800 million improvement on a year-to-year base from overall retirement our plans going into next year. Since that time, I mean, frankly returns and interest rates have relatively gone in our favor. But I wouldn’t update that model right now, because it's rather, in a sense it's a rather meaningless update, given that we will have to wait till the end of the year, anyway. I mean that interest rate, to discount that future liability, is going to be established on the last day, operating day of the month in December. And our return profile is going to be built up to the second half of the year. But you are quite correct as you point out, with the movement in interest rates, we feel even more confident in that $800 million and if we were to update it, we’d have even more expansions going to 2008. But we will give you tremendous detail on that as we close out the year and move in to 2008 in January.

Thanks. Let's go to the next question please.

Our next question comes from Bill Shope, J.P. Morgan Bill Shope - J.P. Morgan: Okay, great, thanks. Can you give us a sense on whether we should expect to see a material improvement in the GTS margins in the third quarter from the cost reductions you have taken or will it be more backend loaded this year?

Sure, a very good question. Remember that, in the first quarter we said that we had a cost problem in our ESSO business, predominantly in the U.S., and we needed to take actions to solve that problem. With that, we said that we are going to do restructuring actions, which we carried out through the second quarter. Again, I want to really compliment that team, both the GTS team and the delivery team for carrying that out and doing such an effective job of running their business. If you look at the margin impact of that, the GTS margin in the second quarter was 8.6%. That 8.6% had about a six-tenths of a point impact from the additional restructuring. So if it were not for that additional impact, and I only am taking out the incremental year-to-year that we attributed to the GTS business, we just took out that increment then margins would be relatively flat at about 9.2%. Now when you look at the yield on it, most of that restructuring impact was taken in the U.S. and in the Americas, because of that it has a very rapid yield. So, we’ll return almost all of that incremental restructuring in one quarter. So, as we look at the third quarter, even though we spent another $58 million in restructuring, in the second, we will get back almost equal that amount, if not, a little more in the third quarter. If you do the math against that, that would put us right at about the 10% mark. So, I feel pretty confident that the GTS business should be able to achieve about 10% margins as we go into second half of the year.

Okay thanks, Bill, let’s go to the next question please.

Thank you. Our next question comes from Harry Blount, Lehman Brothers. Harry Blount - Lehman Brothers.: Hi, Mark. Continuing the question line on the services side equation, you mentioned a number of changing profile dynamics both in terms of booking some existing customers, the growth in India, things of that sort. Can you help us understand if that trend continues what the implications are going to be in terms of revenue yields and/or margins on the services business, longer term, you've kind of mentioned the impact of margin improvement restructuring, what about your mix?

Okay. Same point. Again, to establish the answer, let's again start with the second quarter. Second quarter for services, I mean, we had 10% growth that actuate on both sides, both GBS and GTS. And I got to tell you, we have never been in such a strong position in both of those service units, since I have been in this job. So, as I look at second half of the year, we've got a strong position in both of those units now. Across IBM, we do face couple of comparisons going to the second half of the year on our labor based businesses especially had seasonality affects in Europe. But nevertheless, those two businesses are under best shape that we've had as we go into the second half. So, I think the actions that we are seeing on the revenue side should continue as we move into the second half of the year. Now we’ve already talked about the GTS margin, let's talk a bit about GBS. GBS has had a tremendous margin expansion over the last two years that has been really operationally delivered with growth, improved utilization, contract management really effective management focus. So, we are looking for some expansion on the GBS side as well. So as I look at one, I am very confident, I think those teams really delivered on a strong second quarter, and we are looking to that to continue as we go into the second half, albeit the second half does have some challenging compares.

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

And our next question comes from Louis Miscioscia of Cowen Louis Miscioscia - Cowen & Company: Okay. Thank you. So, at the analyst meeting you mentioned five different things, the revenue growth, margin expansion, share repurchase, future acquisitions and retirement benefits. Could you maybe slice and bite those for us a little bit, maybe say the ones that you have a higher degree of confidence and it may be the one that might be more of a difficulty for you to achieve just so we could try to measure whether its all achievable or a proportionate, and the one that's on the lower end, if you could mention, why?

Okay. Fair enough. Let's think about it in terms of the latest data point we all have, which is second quarter performance. So, if you are looking at that same chart that we use in our EPS roadmap, first of all, we said the first level was to continue our historical revenue growth of at least 3%. Well in this quarter, we did 9%, actual 6% at constant currency. So, we certainly achieved that element of the model. Then we are looking for margin expansion and we've said that margin expansion on an ongoing basis shouldn’t be above four-tenths. Now, that margin this quarter was relatively flat, but as I pointed out it was impacted by those two events. First of all, we took more restructuring to fix our cost problem in GTS, and given that, that has one quarter payback, that was pretty widely spent, I think. And then, we also had the interest expense for the additional debt to fund the ASR, and I think that was pretty widely spent as well. So, if you extract those two just to get the kind of the operational underpinnings, I would say that those are indications that we are on track for margin expansion, as well as, we track to our longer-term goals. Then we look at share repurchase, and obviously we are on track here. I mean, we executed the largest ASR that we know of by a factor of four. So, the share repurchases are certainly well on track. Now, let's look at growth initiatives and future acquisitions. That total we are looking to contribute another two points for growth initiatives and another potential two to three points from acquisitions. In fact in this quarter, as you look at that 3% historical revenue growth going to 6%, we got about half of that increment from acquisition and half frankly from operational performance against those growth initiatives. So, I would say we are relatively on-track for both of those in this particular quarter and then the retirement related year-to-year costs of anything. We see a more rapid uptake, on those retirement related costs given the interest rate environment and the returns that we are seeing in our pension funds. So to me, I would check each of those boxes often say second quarter would say we are on-track.

Thanks Lou. Let's go to the next question please.

Thank you the next question comes from Richard Farmer, Merrill Lynch. Richard Farmer - Merrill Lynch: Thanks Mark. I would like to ask you to elaborate a little on the mainframe cycle and the timing of the refresh you had MIPS growth of 45% eight quarter of growth looking pretty strong for what ought to be kind of late in the cycle. So, as we look into the second half, what are your expectations for that business, should we start to see that taper off more aggressively or can we still expect that kind of MIPS growth in the second half?

Well, you use exactly the right metric. Richard as you looked at that, I mean the eighth consecutive quarter of growth on this cycle. Let's think about, when is the last time we had eight quarters in a row of growth. You got to go back to the water cold year, back in the mid in the 90s. So, that's a long time though we haven't seen this. Why do we think that cycle is now longer and less volatile? Well, first of all I think it has a strong economic value proposition to our customer sets through virtualization, I mean virtualization and these customers for the consolidation benefit of that and scalability, this box saves a lot of money. So, it's got a strong economic proposition. But I think even more than that you can also see again especially through the metrics that we are looking at in this second quarter. We move pretty effectively into these adjacent spaces that generally we would not have had access to. So, that's again the specialty engines, those MIPS were up 130% and that's moving the z series platform into these Linux and Java spaces. So I think as we look at this cycle, we are seeing a different kind of a cycle than we had historically based on the way that we're managing this business. And I would expect to see longer and less volatile product cycles. We had very good MIPS growth in the quarter and we are looking to continue kind of balanced way as we go to the second half. But I don't think at least from me as I try and predict that, it's hard to use the old metrics to apply to this. It's a different business, it’s a different value proposition and now moving into newer markets.

Thanks Richard. Let's go to next question please.

Thank you, our next question comes from Katy Huberty, Morgan Stanley. Katy Huberty - Morgan Stanley: Mark really impressive execution across the board, but one area of softness this quarter and last was the Technology business. So, what is the possibility of seeing a reaccelerated top line growth or optimizing the mix of that business to get to better earnings growth in the second half?

Sure. Katy, let's look at the kind of first principles on the Technology business. First principle on the Technology business, that business is established to give leadership technology to our server brands. That's the purpose. That's the economic transaction. What do we get from that? From our investments in both 200 millimeter and 300 millimeter, we are generating return on invested capital of 20%. So, if you have got investment, we only got 20%, I suggest you take those. But we get very strong investments and return on our invested capital for that technology, the objective being our server business. In addition, we also fill our capacity with the merchant business, and the merchant business has more volatility associated with it, there are different markets. This quarter, we saw a fall off predominantly in our game chip area. Is that going to be a big impact to the IBM Corporation, well that entire business is now 1% of our gross profit. So, we are looking at the volatility around 1%, so what’s that going to be a tenth of a percent, two-tenths plus or minus. This is going to have nothing to do with the achievability of our overall economic progress, as we move to 2010. I think it's a good business to run this merchant chip business. It's a nice adjunct to our base business, but it's not as we are going to go out and ramp up tremendous capacity in fab to try and capture additional share in the merchant chip business, we are not. What we are going to do is continue to reap what we think is the best technology on the planet to drive into our server brand. And I think the new P6 is a very good example. Price and performance of POWER5, three times performance of the latest titanium chip. So, that's how I would answer that question. We are looking for new merchant markets to back fill some of that game chip. Those markets take sometime. I said that we saw opportunities in wired and wireless, and I think we'll have some success in those businesses as we go through time. But the objective for that technology business is we are the best technology on a planet in the hand of our server brands.

Thanks Katy. Let's go to the next question please.

Thank you. Our next question comes from David Grossman Thomas Weisel. David Grossman - Thomas Weisel: Thank you. Mark, you are making a lot of very good progress in the initiative to expand margins and accelerate growth this year. So, as we move into 2008, excluding mix in the pension, what should we look to be the primary margin drivers next year, particularly in the second half of the year?

Sure. Now, it's a little early I think to be talking about 2008 specifically, but I think it's very appropriate to talk about 2008 to the length of our longer term model. So, what are we looking for on margin expansion on that longer term base, looking at about four-tenth of a point, where do we expect to get that? First of all, we are investing heavily to drive our software business, heavily to drive that software, but you can see exactly the results of those investments. Look at the composition of our overall software content, it's now 53% driven by key branded middleware and that mix percentage is up 10 points since 2004. As we continue to grow though that software business at these very high margin that software generates, just on a mix basis that's going to drive the improvement. Secondly, we're going to continue to drive in each of our business units for better margin improvement and better margin mix within their businesses. We saw some of that this quarter in our services. There is still opportunity for improvement. I am pleased with the improvement. I am not pleased with the end state right now. There is a lot more opportunity. And if you look at our hardware business, I think Bill Zeitler has set up the STG, a value proposition very effectively at the analyst meeting. We are looking to now exploit virtualization as an economic proposition to our customers, and with that, move our mix to higher end servers to help them solve their own costs and energy problems, and their business. So, I think all of those are going to contribute to margin expansion as we march to our model objectives.

Thanks, David. Let's go to next question please.

Thank you. At this time we’ve reached the final question in our queue and that comes from Andrew Neff of Bear Stearns. Andrew Neff - Bear Stearns: Well, that's nice, okay. So Mark just, I don’t want to follow-up on something you told before about. Again, the economy you talked a moment ago about that and said that there were some effects. Can you go into that in just a little more detail as to what you are seeing, what you are hearing from your customers, what led you to say that you are seeing some signs of an economic pickup? Are there indicators that you are focused on or is it just the general feedback you are getting from your sales reps?

Now I think that's a very fair question. If you look at it, let's start with the world trade units. I mean the agent units continue to capture rate growth, in what for us, is an exploding IT market place. I mean, the emerging countries are the bestsellers and most vibrant source of IT growth that we see anywhere. So, Asia is capitalizing on and we are delivering solutions that are tailored to the emerging economies within the Asian organization, I expect that to continue. We aren’t going to see any slowdown in China, it’s just whether we all get out there and capitalize on it. But right now we're doing very, very well and I expect that to continue. We see kind of a recovering economy in Europe. At 6% growth, we are roughly almost double the GDP for our business, but we saw improvement in this. Improvements that we saw in Europe and Germany, we saw them continue. And I think there is strength in the German economy that we see through our customer size and length. Then let's go to the Americas. As we close out the first quarter, the fallout that we did see was really only in the month of March. The question was, is that going to -- what would that portend for the future quarter? And what we saw towards the end of the quarter was that actually the economy was much more balanced than you might have saw about March. From our perspective, the look at the customer set within the Americas, S&B continued at a very steady attractive rate of growth of about 6%, but the industry has really popped back, and if you go through the industry chart that we have in the a supplement, all of the industries did a pretty good job here. We had a fall loss really only in industrial and that was a function of the automotive market predominately, and defense spending, and how it impacted our mix of businesses there. So, I saw real resurgence in that customer set and increasingly effectiveness of our execution against that demand from our U.S. and Americas team, that I once again, I think, did a very good job. So, I think it’s a very good question. Let me take one minute now to just wrap up the call. First of all, this was really a great quarter. I think every CFO waits for a quarter like this one, but this was a great quarter. 6% growth at constant currency, 9% of actual, but I think it’s a momentum that you see underneath that. The Americas going from 1% in the first quarter to 6%, Europe was 13% at actual, albeit half of that is driven by currency, the other half is still a local currency, a multiple, a strong multiple of the GDP. Asia-Pacific continued its 10% growth rate that we've seen emerging countries, going from 24% growth to 32% growth. When you break it down and let's look at it through the segment lens looking at the products that we sell in the market Globe GTS and GBS recording 10% growth at actual rates. Software up 13%, continuing to accelerate growth in the software business, as a function of the investments we made, and you look at the software performance in this quarter, the most remarkable part, this was not mega deal driven. In fact, we only had one deal greater than $18 million, so as I look at this, this is real sale productivity. Systems technology up 2%, but if you look at just at systems based under this, that was up 4%, all of that driving EPS up 19%, excluding the printer sale up 15%, and free cash flow at $2.7 billion was up $1.7 billion year-to-year, $2.9 billion quarter-to-quarter, and we did all of this, while integrating the acquisitions of FileNet, MRO, ISS, Valent and solving our cost problems that we had in Americas and so organization. So a very powerful quarter for us. Thank you very much for joining our call today and now let's get back to work.

Thank you for participating on today's conference call. This conference has now ended. You may disconnect at this time. Have a wonderful day.