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

Richard Gardner - Citigroup Ben Reitzes - UBS Laura Conigliaro - Goldman Sachs Bill Shope - JP Morgan Chris Whitmore - Deutsche Bank Lou Miscioscia - Cowen Andrew Neff - Bear Stearns Katy Huberty - Morgan Stanley David Grossman - Thomas Weisel Partners

(Operator Instructions). Now I 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'm here with Mark Loughridge, IBM's Senior Vice President and CFO. Thank you for joining our third 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 webcast 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'll 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 for joining us today. This quarter, I want to give you an assessment of the quarter right upfront. We'll discuss what went well, where we could have done better and what it means for the full year. Let me start with areas where we had really strong performance. Both services businesses were outstanding, with the best overall revenue growth in four years. Performance was broad-based in all categories, with growth in every geography, every sector and every line of business. Global Technology Services revenue was up 13%; profit was up 26%. Global Business Services revenue was up 16% and profit was up 29%. These results reflect a number of actions that we have been taking to accelerate our revenue growth while improving our profitability, and we expect this momentum to continue into the fourth quarter. So we had a great quarter in our services businesses. In software, we had good performance in small and medium-sized transactions, but several large contracts didn't close at the end of the quarter, so frankly we could've done better here. In the fourth quarter, we expect improved software revenue performance and double-digit profit growth. In Systems and Technology, we were impacted by product transitions and tough compares in System z. Revenue was down 10%, or 6% excluding the divested printer business. We will look for a typical sequential improvement from third to fourth quarter, but relatively flat performance year to year without printers, and then a return to growth in the first quarter of 2008. Growth by sector varied. Public sector was very strong, but financial services sector experienced a slowdown in September. We will talk about this more, later in the call. The performance across our geographies was more balanced. Asia's strong performance continued, up 9%. Europe's growth was solid, up 11%, and Americas was up 4%. Overall, the IBM business model delivered earnings per share growth of 16%. As we saw the quarter develop, we took the right actions to manage our way through an uncertain economic environment, including a disciplined focus on spending and productivity while maintaining investments in high-growth areas. All in all, we feel good about meeting our earnings objectives in the third quarter and we remain on track for the full year. Now let's turn to the income statement. First of all, we delivered revenue of $24.1 billion, an increase of 7% as reported and 3% at constant currency. Our gross margin was down 0.7 points. About two-thirds of this decline is due to mix shift among the segments and about a third is due to lower margin in our software business. Expense was up 6%. This is a substantial improvement from our recent quarters and the result of the actions we've taken to manage spending and drive productivity. Pretax income was up 3%, but up 8% excluding the additional interest expense for the ASR. We recorded a tax rate of 28% and net income up 6%, and if you exclude the additional interest expense, net income was up 11% and margin up four-tenths. Our share count was down 8%. There was no incremental share repurchase in the quarter, obviously, following a significant ASR in the second quarter. Bottom line, we delivered $1.68 of EPS, growth of 16% year to year. That puts us on a year-to-date basis through September with earnings per share also up 16% and a solid contribution delivering on our roadmap for 2010. Now let's start peeling back our revenue, and we will start with geographic revenue and then look at the sector dynamics. The Americas revenue growth was 3% at constant currency. Our U.S. growth was also 3%, with differentiation by sector. We had strength in public sector, which was up double-digits. However, we had weakness in financial services sector, down year to year. Europe had more steady performance. It was up 11% as reported and 4% at constant currency. Most major countries were up at constant currency led by Germany and Spain, which were each up over 5%. The market environment continues at a moderate IT spend. Asia Pacific again had our best performance at constant currency, up 9% as reported and 6% at constant currency. Asia Pacific economy remains strong, led by India, China and Australia/New Zealand. We had solid contribution from all of these regions, where we continue to accelerate our investment. Japan's revenue, at approximately one-half of Asia-Pacific revenue, was essentially flat. In Japan, the growth that we have seen in services and software continues, but it was mitigated by declines in our systems business. Emerging countries are leading growth in the global economies. In the third quarter, our revenue in Brazil, Russia, India and China grew 19% as reported and 10% at constant currency. Three of the four countries continued very strong growth. China and Russia were both up over 20% at constant currency, and India once again was up over 30%. Brazil declined, however this quarter at constant currency after double-digit growth in third quarter last year; so it was more an issue of compares than performance. We remain committed to driving growth in excess of the market rate in these emerging countries over the long term, with an objective of doubling the revenue by 2010. Given our performance this year, we are on track to this objective. IBM's geographic mix provides diversification and the ability to capitalize on these fast-growing emerging markets. Now let's spend a minute on revenue by sector. I think the dynamics provide some perspective on our overall revenue performance. We have several key sectors, the largest of those being the financial sector, SMB and public. The strongest performance came from public sector, and growth has been fairly consistent over the course of the year. We had solid growth in government, health care and education, with broad-based strength in government, which is the largest of the three. We're seeing increased demand as federal, state and local government agencies are investing in IT for operational efficiencies. The weakest sector performance was in the financial services sector. By geography, the impact was most pronounced in the U.S. By brand, the largest impact was in System z, facing a difficult compare. Outside of this, financial services sector revenue performed in a more typical range. As we move into the fourth quarter, the focus will be on closing deferred deals and new fourth quarter opportunities, and we will also capitalize on opportunities in other sectors, leveraging our broader capabilities. So now let's move on to expense. Total expense and other income increased 6%, but we had modest year-to-year improvement in our expense to revenue ratio. There was substantial improvement to growth rates over the last two quarters however; the result of actions we've taken to manage spending in the current environment. Now last quarter I told you that we expected between 7% and 9% growth in expense in the second half, but we frankly did even better than that in the third quarter with 6% growth. If you peel back the 6% growth in the third quarter, you will see that approximately 3 points of the growth was due to currency; I estimate about 5 points from the growth is acquisitions, so as a result, what I will call operational expense was 2% better year to year. Remember, this includes the incremental interest expense from the ASR. So how did we do that? Well, first, in the middle of last year, you know we started to ramp investments and resources in software and services and emerging markets. But I think in a sense we funded these investments through a very disciplined approach to expense management. We focused on driving productivity from our sales teams as well as our support functions. If you take my function, by the way, the finance area, 40% of our resources will be in global support centers by the end of next year. We have also tightly managed our discretionary spending, while continuing to invest in areas that will drive growth over time, especially in emerging countries. I want to mention one item that significantly impacted our profit growth this quarter; our retirement-related plans generated about $650 million of cost and expense in the quarter, an increase of almost $60 million year to year. Finally, our tax rate was 28% this quarter, down slightly from the first half rate. Moving on to cash flow, our year-to-date free cash flow was $5.2 billion, a $1.2 billion increase from last year. Our year-to-year cash performance was driven by growth in net income and lower funding actions for retirement-related plans. In the quarter, our free cash flow was $2.6 billion, down about $100 million sequentially, but we maintained our capital investments required for our long-term growth. Year-to-date through September, we returned $20 billion to investors through share repurchase and dividends. Share repurchase is obviously on hold during the quarter as the ASR remains in the covering period. We settled our first of the three contracts this quarter for outflow of about $150 million, and our average diluted shares year-to-date were $1.5 billion, down 6.2% from a year ago. We also distributed $1.6 billion in dividends. So now let's turn to the balance sheet. Cash on hand is $13.8 billion, driven by continued strong earnings, with no share repurchase this quarter. Two-thirds of the $35.3 billion of debt is to support our global financing business leverage at an appropriate 6.8:1. The other third of our debt, the non-global financing debt, decreased $300 million. This brings our debt to cap from 47% to 40% in one quarter. Now, we expect to maintain that leverage on a long-term basis in the range of 20% to 30% debt to capital, and we have made good progress towards managing leverage to our target range. This quarter, we paid off $500 million of the $11.5 billion term loan associated with the ASR and refinanced $4.6 billion, with $2.6 billion of term debt and $2 billion of commercial paper. We have very good access to the credit markets and we benefit from the market's flight to quality. Let me give you an example. We can issue one-month commercial paper now at 30 basis points below LIBOR. Our ability to access long-term debt in the capital markets also remains strong. For example, this quarter we issued a $3 billion, ten-year bond. It is the largest single debt issuance for IBM, and credit investors were very supportive of our issue. It was oversubscribed by a multiple of two. The balance sheet remains strong, and we are positioned to support the business over the long term. Now, before going into each of the segments, I want to give you an overview. You can see the strength in the services segment mitigated by declines in the systems and technology segment. Our pretax margin for the sum of the segments is up three-tenths of a point year to year, excluding the incremental interest expense for the ASR, which is held at the IBM level. We will now start with the segment details, starting with Global Services. Both services segments delivered powerful results for this quarter: double-digit revenue growth, profit growth of 27% and pretax margin approaching 11%. Total services revenue was $13.7 billion, up 14% as reported and 10% at constant currency. Signings were $11.8 billion, up 12% year to year. Long-term signings were up 29%, while short-term signings were down 5%. Nine deals were larger than $100 million, and the backlog remains at $116 billion, up $7 billion year to year. This was a very good quarter for services, and we've made considerable progress implementing our strategies across our global offerings. Starting with Global Business Services, revenue was up 16% as reported and up 12% at constant currency. Transformational actions we've taken over the past two years are paying off in a big way, and driving profitable growth. We're benefiting from trailing 12-month short-term signings growth of 6% and long-term growth of over 80%. We had growth in all geographies and all sectors. Looking at the sectors we saw the strongest performance in Communications, Distribution, Public and SMB. From an offering perspective, Financial Management Services, Human Capital Management and Supply Chain were the strongest. We're also making good progress in our AMS business, and we continue to have success building out our global capabilities. We believe we've gained share this quarter in both core consulting and application management services. Global Business Services pre-tax profit was up nearly 30% and margin was 10.7%, -- an improvement of 1.3 points year-to-year. This is the ninth consecutive quarter of margin improvement. Margin expansion was primarily driven by ongoing productivity and utilization initiatives, and good expense management. Now, turning to Global Technology Services, total revenue was up 13% and 9% at constant currency. It was the best performance in some time. GTS delivered double-digit revenue growth across all geographies, all sectors and all lines of business. Strategic Outsourcing revenue was up 10%. Signings were up 46%. Revenue growth is benefiting from three areas: good signings performance over the past 12 months, continued lower erosion which is a reflection of our focus on delivery capabilities, and sales of new business into our existing accounts. Business Transformation Outsourcing is up 27% as reported, though signings were down 66%. As mentioned in the past, these signings can be very inconsistent by quarter. Our Integrated Technology Services revenue is up 15% while signings were down 3%. The revenue growth we've seen the last few quarters has been driven primarily by signings growth in 2006 and the first half of 2007. The acquisition of Internet Security Systems also contributed to the revenue growth in the quarter. Our Maintenance business was up 13%. This growth includes the services provided to Ricoh InfoPrint, which contributed about 7 points of growth in the quarter. Our Global Technology Services pre-tax profit was up 26%, and margin was 10.8%, up 1.2 points year-to-year and up 2.2 points sequentially. A very strong performance. When you look at margin expansion, it was really driven by benefits from restructuring, productivity improvements and good revenue growth. Let's conclude with a discussion of the broad-based improvements that the services teams have made in the past few years. Within Global Technology Services, we revamped the ITS business around the globe, driving improved revenue performance. We strengthened the SO business; this is reflected in signings growth, lower levels of erosion and growth from our existing customers, creating a much stronger portfolio of business. And more recently, GTS tackled the margin issue, not only improving year-to-year but getting overall margin above 10%. Within Global Business Services, over the past few years the GBS team has implemented a transformation of their operations, designed to improve profitability and position the business for profitable growth. This included restructuring actions in under-achieving regions, deployment of global resources management tools, rapid growth of our Global Delivery Centers, and increased focus on deal selectivity. The result has been consistent improvements in utilization, better contract quality and increased profit margins. And as we've seen in the past few quarters, profitable growth. We feel great about how this business is now positioned. This is the best all around Services performance that we've seen in a long time. Systems and Technology revenue of $4.9 billion was down 10% year-to-year, or 13% at constant currency. Without the divested printer business, revenue was down 6% year-to-year. In the third quarter, many of our servers were impacted by product transitions: System z is well into a very successful product cycle, Systems p and i are transitioning to POWER 6, and System x awaits new quad-core processors from Intel and AMD. Let me take you through the brands. The biggest change from recent performance was in System z, with revenue down 31% and MIPS down 21%. Like I said upfront, we were up against a particularly strong third quarter of 2006, which had revenue growth of 25%. We knew we had tough compares going into the quarter, and we had opportunities lined up to drive better performance, but a number of these large deals simply didn’t close in September. We have had a long and successful technology cycle in System z, with eight consecutive quarters of MIPS growth. We continue to work with our customers to help them manage their computing requirements, and provide attractive migration offerings to transition to the next generation. System p grew 6% and really did pretty well, with particular strength in Americas and AP. Strength in the new POWER6 midrange server helped drive the fifth consecutive quarter of growth. System p continues to leverage POWER technology leadership, gaining 11 points of share since 2001. System x servers grew 6%, and blades grew 8%. Customers in the high-end of x are evaluating the new quad-core processors which are scheduled for fourth quarter availability. In addition to these new high end servers, our recently announced BladeCenter S for the SMB marketplace will be available in the fourth quarter. In Storage, tape had another good quarter, up over 7%, while disk declined 3%, primarily in the midrange. Total Storage revenue was up 1%. Storage hardware is really a part of a larger total storage solution, and some of the value in these solutions has been evolving in other segments. As an example, storage software, which is in Tivoli, grew 16% this quarter. With 29% growth, our market leadership in Retail Store Solutions was extended again this quarter. This is the seventh consecutive quarter of share gains. Microelectronics revenue was down, driven again by game processors. We continue to pursue opportunities in other high growth segments. When you look at gross profit margin in Systems and Technology, it was up three tenths of a point, with the largest contribution coming from System p. We also had margin expansion in Systems z and x. In System z, we’ve reduced cost, as well as driving a more profitable product mix, to improve our gross profit margins despite the revenue decline. Gross margin expansion in System x was driven by improved supply chain execution, which also resulted in faster delivery times and lower inventory. Pre-tax margin was up quarter-to-quarter but down slightly year-to-year. So to sum up Systems and Technology: we have product transitions underway and, in addition, we had a number of deals that did not close in the quarter. In System z, we are helping our customers move to the new technology by developing attractive migration offerings. With these actions and product enhancements, we are looking for more stable performance in the fourth quarter, and improved performance in the first quarter of 2008. Software segment revenue of $4.7 billion was up 7% as reported and 3% at constant currency. Branded middleware grew 8%, 4% at constant currency. Now remember that branded middleware faced a strong compare; the prior year was up 20%. So let me peel back the performance by transaction size. If you look at small deals, under a half million, and medium-sized deals, $500K to a million, we had good success in closing these transactions. But a number of large deals did not close in the quarter. Even a handful of these would have made a difference in the quarter. Now, we're still pursuing these and they remain opportunities for us in the fourth quarter. Now, let me go through the brands. WebSphere grew 10% driven by deployments of web-enabled applications and SOA, while Information Management grew 9%. Tivoli grew 5% against 44% growth in 3Q06. Storage virtualization software did particularly well, and customers are benefiting from significant storage efficiency improvements. Lotus grew 9% with double-digit growth in our Notes Domino product family. This is the 12th consecutive quarter of revenue growth for our Lotus group. Our latest version of Lotus Notes, Lotus Notes 8.0, was delivered this quarter. Rational grew 3%; the performance and functional testing software did well, reflecting the strength of our internally developed product set. We're also continuing to invest in software as we've completed four acquisitions this quarter: Watchfire in Rational, Princeton Softech and Data Mirror in Information Management, and WebDialogs in Lotus. Software PTI margin declined reflecting the impact of acquisitions. With our strong product set and deal pipeline entering the quarter, we expect significant improvement in the fourth quarter. Let me wrap up with a simple variance analysis of our earnings growth starting with revenue. We had exceptional performance in Services with double-digit growth in both Global Technology Services and Global Business Services. Software performance in smaller transactions was solid, but overall growth was impacted by the deferral of a number of large transactions at the end of September. Systems and Technology declined with weakness in September, particularly in System z transactions and resulted in performance that was frankly below our expectations. Now, overall, revenue growth was 7% and at constant mix and margin this would contribute $0.10 of the $0.23 of year-to-year EPS growth. Next, let's look at margin and expense performance. While gross margin declined primarily due to mix, it was more than offset by an improvement in our expense-to-revenue ratio. We took appropriate action to manage our expense this quarter, and to address efficiency of our sales force and our support functions while continuing to invest in our growth initiatives. And while we had additional interest expense related to our Accelerated Share Repurchase, for an impact of $0.07 per share, this was more than offset by the share repurchases bolstered by the ASR which contributed $0.14 to growth for the quarter. Finally, our tax rate was down 200 basis points for a $0.04 impact. So to net it out, even in an uncertain economic environment, by leveraging the strength and breadth of the business model we delivered very strong earnings per share growth of 16%. With our year-to-date performance, and assuming a stable economic environment, we believe the current average of analysts' earnings per share estimates for the fourth quarter is reasonable at 15% growth, and results in a full year that is consistent with our full-year objectives. Now, before going to the Q&A, I want to give you a sense of why we feel confident in our business in this type of environment. We have substantial global reach and presence. We operate in 170 countries, and more than 60% of our revenue is outside the U.S. Asia Pacific remains our fastest-growing geography, and Europe performance has been steady. We continue to invest aggressively in emerging countries to capture the growth in these markets and tap into their skill base to deliver global solutions. We have a broad mix of businesses. Our hardware, software and services businesses provide a strong and balanced base of operations. We have strong annuity businesses. These businesses, like Strategic Outsourcing, and Software, and Maintenance, represent about half of IBM's revenue. These provide stable sources of profit and more importantly, cash. We currently have momentum in these businesses with strong Services backlog, improving Services profitability and leading Software capability. These annuity businesses provide a tremendous advantage. We've got a very solid balance sheet. We have substantial financial flexibility. As an example, look at this quarter. We were able to reduce our debt-to-cap from 47% to 40%, and we still ended the quarter with $13.8 billion of cash on hand. Finally, we take a very disciplined approach to cost and expense management as we continue to invest in key growth opportunities. Now, this business model is designed to drive sustainable profit and cash performance over the long term. So let me put our 2007 performance in the context of our 2010 roadmap. For the first three quarters of the year, we have delivered 7% revenue growth, grew net income 9% and expanded margin. Earnings per share grew 16%, and free cash flow was up over 30%. It's a great start towards our 2010 objective. 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.

(Operator Instructions) Your first question comes from Richard Gardner - Citigroup. Richard Gardner - Citigroup: First on the software deferrals that you mentioned, I was hoping you could give a little bit more detail in terms of what types of product lines were affected and in what vertical markets? What gives you confidence that these deals will close in the December quarter? You did mention that you expect a significant improvement in performance in the December quarter. How can we be confident that this is simply a deferral and not something that is deferred for a longer period of time or lost entirely? Thank you.

First of all, as we exited the quarter, we had a number of large deals that we said that we were right at the goal line on, and they did roll over into the next quarter and we do expect those to close. I do want to add though, that it is interesting in the software base, if you look at by size of deal and deal size category. If you look at deal sizes of $500,000 and below or $500,000 to $1 million, actually those had very sustained momentum through the third quarter. They are very similar to what we saw in the first quarter. It was really a large deal issue. As we look at those large deals going through the fourth quarter, we know that more deals will be event-driven in the fourth quarter ; in other words, renewal-based actions. We have a lot more confidence in the content and the software base of business as we go through it, looking at the pipeline, looking at the quality of those deals, looking at the metrics associated with logical renewal content. As I look at that balance and with exchange rates where they are, I would think it would be very logical for software to record double-digit revenue at actual rate, and I think we ought to be in a pretty strong double-digit PTI growth as well. So I think we have a very good book of business. Richard Gardner - Citigroup: Mark, you alluded a couple times to this type of environment and this uncertain economic environment. There were several indicators that suggested that spending may have weakened over the quarter. Your short-term signings were down year over year for the first time in several quarters. You had strong deferrals in software and in hardware at the end of the quarter. So the question is, are we seeing a weaker economic environment actually start to affect technology spending? Are the signs that we saw in the quarter not consistent with that? Mark Loughridge: A very fair question. If you break down the performance in the third quarter, I think from an economic standpoint to your question, the difference that we saw in the third quarter was really in the financial services sector, and within the financial services sector it was predominantly in the U.S. Now to put this in a context, financial services sector in the first six months of the year has contributed about 1 point of growth to IBM's growth. If you look at that on a constant currency basis in the first half, IBM did about 5%. If you look at financial services sector contribution in the third quarter, it hurt us for about 1 point of growth. So in other words, outside of financial services sector we are fairly constant, 4% over that period. So I would not look at this and say this was a general economic decline. Now, within financial services sector I would go more towards the U.S. In fact, if you look at it, the U.S. was the major geography affected from a brand standpoint. zSeries was the major brand affected. I think that's logical, zSeries has about 50% of their business in FSS, so I don't think that is a surprise, given the sector dynamics. But if you exclude those and outside of those particular areas, we had fairly traditional performance for the balance of the FSS business. In fact, it was about 8%. So I don't think this is a general economic issue. I do think we did have an FSS slowdown, if you looked at the monthly rate. The first month of the quarter we had growth of 9%, and then it declined from there in the U.S. So I do think we did see an FSS phenomenon, it was mostly localized to the U.S. It was not a general economic environment. I think the broader story here is even in the face of a very important sector at IBM, we still achieved the objectives we were looking for, with strong growth and strong EPS growth of 16%. I would also, just to calibrate the U.S. financial services sector framework, the U.S. runs about 30% of global FSS and FSS is about 28% of IBM. So we're talking about something about 7% to 8% of the IBM base of business. Richard Gardner - Citigroup: Outside of financial services, can you comment on the linearity in the quarter? Mark Loughridge: As we looked outside of the financial services sector and looked across the three quarters and the progression, there wasn't something in those other sectors that had a similar kind of a profile at all to FSS. This is mostly contained to FSS, the FSS mostly contained within the U.S. We did also have, if you looked at the product line most affected, it was zSeries, and we've gone through eight quarters of pretty strong growth there so we're now working on migration offerings for the fourth quarter. I'm sure that played a part as well. But you did not see this kind of portrayal in the other sectors that we saw in FSS, predominantly U.S.

Your next question comes from Ben Reitzes - UBS. Ben Reitzes - UBS: Good afternoon. Could you just talk a little bit more about hardware and the visibility, why that could get better, to go to flat and then grow? We have to navigate through a $250 million hit from the printers being gone, we know. Could you just elaborate? I think that segment was about $500 million below people's estimates and particularly the pSeries, going through the product transition, the xSeries, and what we should expect for the fourth quarter in terms of push outs and the new products? Mark Loughridge: Let me first calibrate the overall hardware in the fourth quarter. I portrayed that in the script, and just to explain that, we said more stable performance, and I think it would be relatively flat on a year-to-year basis on revenue and profitability. Now within that, as we move from the third quarter, obviously hardware did not meet our expectations in the third quarter. But as you go from third to fourth in zSeries, we're now going to be working on the migration offerings to assist our customer base to move to new technology content. I think that will make a difference as we go into the fourth quarter performance. We also had some large rollover deals that I think will also close as well. So, that would be zSeries. When you look at pSeries, I think pSeries had a pretty good quarter. At this growth rate, it picked up 2 points of growth. As you know, we have POWER6 now in the midrange in pSeries, and that midrange pSeries with POWER6 grew 26% in the quarter. So that was pretty strong performance from that new technology base. If you look at xSeries, xSeries as we go into the fourth quarter is now going to have the quad-core technology, which I think will be a very good technology for us. On a blades basis, we're going to have the BladeCenter s. BladeCenter s is specifically for SMB, and it's really, when you think about it, it's like a data center in a box, ready to set up for your SMB marketplace. We will also have our core blade offering as well, which is a pretty impressive offering. So I think we have a number of technologies out there, and technologies that will drive improved performance as we go into the fourth quarter, but I'm not drawing a point about the third. We were disappointed in the third, and I know we can do better in that base of business as we go into the fourth.

Your next question comes from Laura Conigliaro - Goldman Sachs. Laura Conigliaro - Goldman Sachs: First of all, given what's going on with bond yields, the recent moves in bond yields, can you update or give us an update on your confidence that you still think you will see the $800 million benefit in '08 that you have talked about before? Continuing on the same line, i.e. confidence levels, last quarter you did indicate that you expected to see your full-year signings growth equal to what it was last year. Are you still thinking the same way? Mark Loughridge: Let me answer your first question. We just did some analysis since we updated the pension portfolio and again, we update this on a global basis for both the short end and the long end of the yield curve, and it still has roughly that same $800 million of benefit as we go into '08. In fact, it was just a little larger than that as we did the analysis. You know that we don't formally update those rates until we get to the end of the year. So we will have to see where that turns out. But right now, it's a very similar curve and I would expect that we would get about that same benefit as we go into 2008. As far as full year signings growth, we did 12% in the third quarter. We've got 10% going on a year-to-date. You are quite correct, as you've pointed out, we face a big hill as we look at the compare in the fourth quarter. But as I look at a balanced case, a balanced case, I think we have relatively flat signings for the year, but within that growth in short-term signings. Now I want to reassure you, when we run our pipeline, when we run our quotas, when we run our measurements, we are all driving for growth for the full year, but I think on a balanced basis, flat signings performance is reasonable, within that short term would be up. Where does flat signings put us for services? As we exit the quarter, we will still have growth in our backlog on a year-to-year basis. On that basis, we should still, in the first half of 2008, see growth within our services business within the model range of 6% to 8%. So I couldn't be more impressed with the job that our services units did as they went through the third quarter. You remember as we did the second quarter, I had said with both of them at 10% growth, it was the strongest performance I had ever seen. Imagine now we've got 13% and 16%; so a lot of velocity, a lot of momentum out of those units as well, driving better margins and profitability.

Your next question comes from Bill Shope – JP Morgan. Bill Shope - JP Morgan: Great, thanks. Mark, I want to dig in to the zSeries performance a bit more. In past quarters, you have noted that the volatility in the mainframe cycle was being muted somewhat by nontraditional workload growth and some other factors. What has changed with this argument, and are we entering a period of sustained volatility again, or should we look at this as a short-term blip? Mark Loughridge: I think the way to characterize this is we're now going into a transition. Again, I want to reiterate that we've gone through eight quarters of sustained growth on this zSeries, because this has been a very successful platform. I would also remind everybody that it's facing a pretty tough compare in third quarter last year. The revenue for zSeries last year was up 23%. That's a big number to compare to. So I don't think this to me looks like real volatility, and I don't expect there to be more volatility going forward. We are going to be going through the transition with our customers and helping them solve their computing requirements and move to migration offerings to help them move to new technologies.

Your next question comes from Chris Whitmore - Deutsche Bank. Chris Whitmore - Deutsche Bank: Thanks very much. I was hoping to get a little more clarity on profitability and margin pressure in the software business, hoping that you can provide more color there. Secondly, can you comment at all about 2008 earnings expectations, assuming the current environment continues through next year? Thanks a lot. Mark Loughridge: Yes. I think as I said earlier, as we move from the third quarter to the fourth quarter in our software business, we expect to see double-digit profit growth on a year-to-year basis. Remember now, we began to wrap in the fourth quarter on the large acquisitions that we did last year that carried with them a lot of amortization of intangibles. So, as we wrap on that, it helps us balance our cost base with our revenue. So again, in the fourth quarter I expect to see double-digit profitability out of the software base. As far as 2008 is concerned, we generally comment on 2008 in the January meeting. We do that because a big component is pension and we've got to see where the rates turned out the last day of the month of December and everything. So that's when we generally give guidance. But there's nothing that I have seen so far that would generally change our view of '08. I thought the context that we try to provide to demonstrate that was an update on our 2010 model that we gave at analyst day. If you look at the model and you said, well, what kind of a growth rate would you need in EPS to get to your objectives of $10 to $11? I mean, you've got to be in those mid-teens. So on a year-to-date basis, for us to be at 16%, I conclude we're on track to those set of objectives in 2010. We will certainly say more about 2008 when we get to January.

Your next question comes from Lou Miscioscia - Cowen. Lou Miscioscia - Cowen: Thank you. Maybe you could spend a minute or two on the disk area, which seemed to be weak. Was it that you're seeing weaker ASPs, competition, virtualization, product transition? Maybe you could you share a little bit more color there. Mark Loughridge: If you look underneath the storage business, we continue to have pretty good performance out of our tape business. We didn't do as well on the disk business. If you look behind the disk business, it was really mid-range disk where we had more difficulty. If you looked at the high end, actually the high end did quite well on a volume basis when you look at the growth there. So this was confined more to the mid-range disk profile. Tape did well, high-end disk did well, and as we go into the fourth quarter, we expect to see improvement in midrange. But we also expect to see ongoing performance and strength continue in tape and high-end disk.

Your next question comes from Andrew Neff - Bear Stearns. Andrew Neff - Bear Stearns: I just wanted to go back and clarify some of your comments on the software side. Were you saying that the deferrals, were they mostly related to the financial sector or were they more broad-based? Can you give us a better sense about what the reasons for those deferrals were and why you are confident those are going to close? Were there technical issues, or can you give us a little more color on that? Mark Loughridge: Sure. If you look at the deals that deferred -- and again, I want to explain that even a handful of these deals would have made a pretty substantial difference in software performance in the quarter, but if you look at the deals that did defer, about 70% of those deals were in fact in the financial services sector. Now however, they were pretty far advanced. As we move those deals into the fourth quarter, as I had said earlier, we've got a very good pipeline. We know the progression of those deals and we're pretty confident in them. We also have more event-based metrics and milestones as we enter the fourth quarter. By that, I mean logical renewals that we will see. So we're pretty confident that we'll see improved revenue performance out of the software business, with currency at actual rates that have come in, I think, a more double-digit revenue growth and as we ramp on the acquisitions from last year, we will see, I believe, double-digit profit growth as well.

Your next question comes from Katy Huberty - Morgan Stanley. Katy Huberty - Morgan Stanley: Mark, what were the buckets of SG&A spend that you were able to pull back on in order to meet the EPS targets this quarter? How sustainable is that level of spend? Mark Loughridge: When you look at SG&A, we have been doing a very concerted effort for some time now to drive globalization of our structural spending and move spending to grow areas, move spending to emerging geographies. As you say, what do I mean by structural SG&A? I mean like finance. I mean the other staff functions on a global basis. What is a good metric? Well, imagine this: 40% of my finance organization is going to be in these globalized centers of excellence by the end of '08. That is a very concrete set of actions that we're moving. We are also being, I think appropriately, tough on spending in areas where we do not see the same opportunity for growth. But with all of those, we're moving that expense into areas that we see bigger opportunities for sustained, ongoing growth like emerging markets.

Your final question comes from David Grossman - Thomas Weisel Partners. David Grossman - Thomas Weisel Partners: Thank you. Mark, could you just expand a little bit more on the decline in GBS bookings, particularly in the face of such strong current-quarter revenue performance, and perhaps talk a little bit of how we should think about margin expansion going forward in IGS, given again, such strong performance in the third quarter? Mark Loughridge: First of all, as I looked at the GBS bookings on a trailing basis, short-term signings were up 7%. On a year-to-date basis, they were up 4%. As we look out for the year and close out the full year, we see short-term signings coming back in the fourth, and it's closing on a full-year basis at approximately that same range of growth. So I think the short-term impact we saw in short-term signings in GBS was just that, a short-term impact. I think it should come back as we go into the fourth quarter. As far as margins are concerned, you remember that as we went through the analyst review, we were talking about our view that margins across services could grow 2 points by 2010, and here we're sitting here with both sides of this equation generating growth of 1.2 points and 1.3 points on a net margin basis. That's pretty strong performance. Especially, remember GTS, they had a lot of work to do. So it's not only an acknowledgment that both organizations are really focusing on the bottom line profitability of their businesses, but GTS really showed strong improvement with the actions that they took in the second quarter. As you remember, we did the math in the second quarter and explained that that ought to be able to hit 10%. Sure enough, what did they come in at? They came in at 10.8%. So I'm quite encouraged by this performance. Both of our services group showed a real, real momentum here, and I couldn't be more appreciative of such a great job they did. Let me just take a moment now and summarize the third quarter performance and give you a consolidated view of the fourth. First of all, per the last question, I will start out with services. GTS and GBS have just shown tremendous momentum, with revenue up 13% and 16%, profit up a substantial 26% and 29%. I mean really, when is the last time we had profitability in both sides of the services business off such a strong double-digit base? These key businesses delivered PTI margins of 10.8% and 10.7%; very balanced, with year-to-year improvement of 1.2 and 1.3 points year to year. These are like very large cruisers; once you get that momentum going, you're not going to change that much as you go forward. So we expect to see continued momentum for both GBS and GTS as we go into the fourth quarter. As you all know, that makes up more than half of our revenue. Our hardware business, as we said earlier, did not meet our objectives in the third as we wrestled with product transitions and tough compares in z. We expect to see typical quarter-to-quarter growth from the third to the fourth quarter, with relatively flat year-to-year performance excluding printers in the fourth quarter; then returning to growth in first quarter of '08. So more work to do on the hardware side of the business. Our software business grew 7% in the third quarter. However, we could have done much better in large deal closure at the end of the quarter, and we intend to as we go into the fourth. For the fourth quarter for software, we expect double-digit revenue growth at current exchange rates and double-digit profit growth, with the strongest margins among our businesses, even against difficult compares. So I think all of this should put us in good shape to meet our objectives for the fourth quarter. Now, I would also ask you to step back and say, let's look beyond the fourth. First of all, our financial base is rock solid. We have almost $14 billion of cash; our non-financing debt to cap came down quarter to quarter from 47% to 40%. We accessed the capital market at 30 points below LIBOR for 30-day commercial paper, and the largest bond offering in IBM's history was oversubscribed by a multiple of two. I think the strongest strength we see is the diversification of this business. We are a global business, with 60% of our business outside the U.S. We are well positioned in high growth markets. Our year-to-date EPS performance was up 16%, and we're on track to meeting our 2010 objectives. So I thank you for joining our call today; and now, it's back to the fourth quarter.