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

Andrew Neff - Bear Stearns Benjamin Reitzes - UBS Toni Sacconaghi - Sanford C. Bernstein Richard Gardner - Citigroup Bill Shope - J.P. Morgan David Bailey - Goldman Sachs Louis Miscioscia - Cohen Katy Huberty - Morgan Stanley Chris Whitmore - Deutsche Bank

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions) Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Madam, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I am here with Mark Loughridge, IBM’s Senior Vice President and Chief Financial Officer. Thank you for joining our fourth 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 un-check the synchronize button on the left of the presentation. The prepared remarks will be available in roughly an hour, and a replay of this webcast will be posted to our Investor Relations website by this time tomorrow. The presentation includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end and in the Form 8-K submitted to the SEC. Let me make one other comment about our presentation this quarter. You may notice that the format has changed from past quarters. In addition to the style changes, we’ve streamlined a few of the charts and some of the details that were previously on the segment charts are now on the back-up, so the information provided is essentially consistent with the information provided in the past. Finally, I’d 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. Earlier this week we announced record revenue and earnings per share and today we’ll go through the details of our fourth quarter performance. This turned out to be a great quarter, in fact the strongest revenue and profit performance in almost a decade. And as you will see, a great close to ’07 but an even better start to ’08. The performance reflects the strength of our global model. In the fourth we generated 65% of our business outside of the U.S. By capitalizing on the opportunities in the global economies we delivered 10% revenue growth. Our performance was especially strong in Asian regions excluding Japan. The IBM business model drove 24% earnings per share growth in this quarter. Obviously we had excellent operating leverage, a by-product of all the work we’ve been doing to drive our 2010 roadmap. Looking at our results by segment, Services continued the momentum we’ve seen over the year. Global Technology Services revenue was up 16%, profit up 26%. Global Business Services revenue was up 17%, profit up 9%. And we signed $15.4 billion of new business, and importantly short term signings were up 8%. In Software, strong execution resulted in good transaction closing rates and revenue growth of 12%. In Hardware, taking into account the product transition in System z, we had good performance in Systems with strong performance in System p and Storage. In the fourth quarter, Systems and Technology revenue growth was flat excluding the divested printer business but the real story here is the margin improvement, driving 18% growth in profit. Looking at our cash and balance sheet performance, we had record cash performance, generating $12.4 billion of free cash flow, up $1.9 billion over 2006 levels. This contributed to a cash balance at the end of the year of $16.1 billion. We are in great shape as we enter 2008, and expect earnings per share growth of 15% to 16% off our 2007 base of $7.13 without the printer gain from the second quarter. This would result in an EPS range of $8.20 to $8.30. And with this strong performance, we are on track for our 2010 roadmap of $10 to $11 of earnings per share. Now let’s turn to the financial summary for the quarter. We delivered revenue of $28.9 billion, an increase of 10% as reported and 4% at constant currency. Gross margin was up four-tenths of a point, driven by improvements in our Systems business. Expense was up 9%. We maintained our focus on cost and expense management, while continuing to invest for growth in key markets. With this operating leverage, both pretax income and net income are up a very strong 14%, and up 17% excluding the additional interest expense for our accelerated share repurchase. We delivered a pretax margin of 19% and net margin of 13.7%, a very high level of return. Share count was down 8%. This reflects almost $19 billion of share repurchase, with the majority coming from our accelerated share repurchase in May. Bottom line, we delivered $2.80 of EPS, a growth of 24% year to year. Now let me give you a quick summary of the full year For 2007 we delivered $98.8 billion of revenue, pretax earnings of $14.5 billion, and earnings per share of $7.18, all record levels. Many of you look at our business without the gain from the sale of our printer business in the second quarter. Without this gain, earnings per share was $7.13, that’s 18% growth. We expanded margin, generated $12.4 billion of free cash flow, and returned $21 billion to shareholders through share repurchases and dividends. We had a great fourth quarter and 2007. Before moving on, let me add a different perspective to our profit performance. As you know, there are a few items in our operating results that many other companies, especially in the tech sector, exclude from the discussion of their earnings. I’d like to give you a sense of the magnitude of some of these items. Within our $14.5 billion of pretax income, we absorbed about $370 million for the amortization of purchased intangibles. We absorbed over $700 million of stock-based compensation. We absorbed about $350 million of charges for ongoing restructuring, primarily reflecting resource rebalancing activity, and we absorbed $2.6 billion of cost and expense for retirement related plans. Together, these four items impacted our pretax income by $4 billion. These items are part of our ongoing business and we view them in the same way as any other element of cost or expense that impacts our financial statement, so let me get into the fourth quarter details, starting with revenue by sector. We had growth in all sectors with particular strength in Communications but let me spend a minute on Financial Services sector. This quarter, growth in Financial Services was 11%, or 5% at constant currency. This is consistent with IBM’s total sector performance and also more in line with FSS growth in the first half of the year. Similar to last quarter, by brand, the largest impact was in System z worldwide as customers look forward to the new product. So this impact was more a function of the product transition than the sector. By geography the U.S., which represents about 25% of the total, was flat. But 75% of the Financial Services business is outside the U.S., and was up 15%, or 6% at constant currency. So our very good performance outside of the U.S. drove solid results in the sector. Now let’s look at our overall performance by geography. Americas revenue growth was 2% at constant currency. U.S. growth was also 2%, which we believe is in line with the market. Europe had more steady performance, up 16% as reported and 6% at constant currency. This quarter most major countries were up at constant currency, led by Spain, which was up a very powerful 15%. The European market environment continues at moderate IT spend and our steady performance throughout 2007 reflects that environment. We have seen mid-single-digit revenue growth each quarter in Europe. Asia-Pacific again had the best performance at constant currency, up 15% as reported and 9% at constant currency. Revenue in Japan, now less than half of Asia-Pacific, grew modestly as reported but declined at constant currency. So the AP results were clearly driven by performance in other regions where the economies remain strong. Each of these regions, India, China, Australia/New Zealand, ASEAN, and Korea grew between 15% and 25% at constant currency and together they grew 20% at constant currency. More importantly, we estimate that the profit contribution from these regions was up more than 40%. Now, while we often discuss the BRIC countries, there are many other nations with a similar growth profile. Countries like Malaysia, Poland, South Africa, Ecuador and dozens more around the world with insatiable demands created by a growing middle class for public and private infrastructures to support explosive economic growth. To me, this is a virtual gold rush in these rapidly emerging economies. So let me explain what I mean. In some ways the build-out of infrastructure is much like the construction of the railroads and telegraph lines that helped open new markets during the California Gold Rush. In the past, IBM helped build the business and IT infrastructure for much of the developed world. Today, in what has become the “Gold Rush of the 21st century,” we see a new era of growth for IBM in these emerging markets. We are being selected by governments, institutions and businesses to design, build and run the infrastructures that support their operations. As you can see from the highlights on this map, there is a new reality about emerging countries and IBM’s business there. First, they are a lot more than just the BRIC countries; Singapore, Peru, the Czech Republic, I mean, you get the idea but it’s much broader than just Brazil, Russia, India and China. And they’re big. The countries shown here represent 22% of IBM’s revenue base and they’re growing rapidly. Every one of these countries is growing at greater than 10%, and together they are growing at more than 20%. Now let me give you just a few examples of the kind of work we’re doing. We just announced a banking center to help the State Bank of Vietnam’s 77 lenders modernize their systems for wire transfer, treasury management and customer savings and credit card account management. Companies in countries that are new EU members, like Poland and Romania, are turning to IBM to help with the business transformation needed to attract foreign investment and support compliance with EU directives. And we’re seeing results -- this quarter we signed more than $1.4 billion in new domestic services contracts in India, another example of how we’re winning locally in the India market. And as I just mentioned, our Asia-Pacific regions ex-Japan grew revenue 20% and grew profit at double that rate. So we’re talking about real money, real growth, and a real impact on our business. Clearly our bets on the new global economy are paying off and we’ve improved our hand with a new organization and management structure that will take effect early in 2008 aimed at continuing to make the most of this opportunity. In short, we expect these rapidly growing markets to continue to fuel IBM’s revenue and profit engine in 2008 and into the future. Now let’s turn back to our fourth quarter performance and look at revenue by segment. Year-to-year growth was led by our two Services businesses. At 16% and 17% growth, this is the best performance in years. In Software, growth returned to double-digits. Branded middleware had a good quarter and these fast growing brands are now 58% of total Software revenue. Systems and Technology also improved from third quarter, driven by strength in POWER6 and storage. Global Financing was up 8%, with good growth in sales of used equipment. We’ll address the details in the segment discussions but now let’s turn to expense. Total expense and other income increased 9%. With 10% revenue growth, our expense-to-revenue ratio improved three-tenths of a point year to year. Peeling back the 9% growth in the fourth quarter, approximately five points of growth was due to currency. We estimate that one point of the growth is acquisitions as we’ve effectively wrapped on the larger acquisitions completed in the fourth quarter of last year. The remaining two points of growth are operational. Now in this, we did cover two incremental expense items; first, the interest expense from our ASR, and second, growth in employee bonus compensation. Together, these two items impacted our expense growth by about four points. Our operational performance is the result of actions taken to manage spending in the current environment while continuing to invest in areas that will drive growth over time, especially in high growth markets. So as we enter 2008, we will continue to effectively manage our operational expense growth and at the same time, we will have an increase in expense for acquisitions as we close transactions in the first quarter. I’d like to remind you that we include all acquisition costs in our reported results, including the amortization of purchased intangibles. Let me mention three items that significantly impacted our profit growth this quarter. First, A/R Provisions were up about $100 million year to year. Our reserve coverage ended the year at 1.5%, consistent with third quarter and down a tenth of a point from December 2006. Second, bonus compensation to our employee non-executive population was up almost $300 million year to year. This reflects our strong finish to the year. It’s about half cost and half expense, so it impacted gross margin by five-tenths of a point year to year and as I just mentioned, contributed two points of expense growth. A majority of this impact will be reflected in our services segments, consistent with our population distribution. Third, retirement-related plans generated about $670 million of cost and expense in the quarter, an increase of about $75 million year to year. The retirement-related plans cost $2.6 billion for the full year, up about $170 million year to year. Now let me comment on the performance of our U.S. pension fund. Our investments returned 14%. Despite this strong performance, we will keep our expected long-term return at 8% for 2008. We will increase the discount rate to 6%, reflecting the current interest rate environment. In 2008, these assumptions together with other factors such as our pension plan redesigns will result in retirement-related expense of about $1.6 billion, a decrease of $950 million to $1 billion year to year. Finally, in the fourth quarter our effective tax rate was 28%, consistent with the rate in the fourth quarter of last year. For the full year 2007, IBM’s effective tax rate was 28.1%. Looking forward to 2008, we expect a rate of approximately 27.5%. The improved rate is the result of a more favorable mix of income in lower tax jurisdictions. Before getting into the segment discussion, let me give you a snapshot of margins. Margin improvement was driven by margin expansion led by Systems and Technology and Software. Systems and Technology margin improved both gross and pretax margins substantially. Gross margins improved in every systems brand except System i. This is driven by our ongoing focus on reducing cost, mixing to higher end models within our brands, and the value of our new POWER6 products. Software margin improvement reflects good revenue growth off of a relatively fixed cost base. Margin in Global Technology Services was up, driven by strong profit growth in SO and ITS, and good expense management. Global Business Services margins were down, though up for the year. The year-to-year decline in fourth quarter is primarily driven by the increase in employee bonus compensation costs associated with IBM’s strong performance for the year. Now let’s turn to the segments, starting with Services Both Services segments delivered powerful results again this quarter. Total Services revenue was $14.9 billion, up 17% as reported and 10% at constant currency. We had double-digit revenue growth across all lines of business and profit growth of just over 19% with pretax margin of 10.6%. We believe both services businesses gained share this quarter. We had signings of $15.4 billion, with very strong performance to close out the year. Our short term signings were up 8%. Long term signings were down 25%, coming off a very strong fourth quarter of last year. Within this, we signed 17 deals larger than $100 million and our backlog increased to an estimated $118 billion, up $2 billion year to year and quarter to quarter. This strong quarter of signings enabled us to grow overall signings for the full year. Moving to Global Technology Services, total revenue was up 16% or 10% at constant currency. This was clearly the best performance we’ve seen in years for this unit. This is a reflection of the enormous transformation that has taken place over the past few years, including a revamping of the entire ITS portfolio around the globe, continued improvement in our Strategic Outsourcing service delivery, and a disciplined approach to driving new business in our existing accounts. GTS delivered double-digit revenue growth across all geographies, all sectors, and all lines of business. Strategic Outsourcing revenue was up 15%, while signings were down 26%. Revenue growth is benefiting from last year’s signings, the continued sales of new business into our existing accounts and good yield from 2007 new signings. Business Transformation Outsourcing is up 56% as reported. We had double-digit revenue growth in all geographies and we saw continued strength in our Daksh business, which was up over 40% year to year. Signings were up almost 150% and finished up 17% for the year. Integrated Technology Services revenue was up 11%. Signings this quarter were up 6%. We had good traction in our key ITS plays which include; Green Data Center, Server Management Services, and SOA. What these offerings all have in common is that they enable our customers to maximize the efficiency of their IT infrastructures, which can drive considerable cost savings. We were particularly encouraged by the signings performance of our Green Data Center services offerings that announced in the third quarter. These offerings enable our customers to maximize the power utilization of their data centers and reduce energy costs. We signed nearly $300 million in new business this quarter, with about half of that coming from the Financial Services Sector, where business volumes are driving an enormous amount of processing needs and power consumption. Maintenance revenue was up 16%. This growth includes the services provided to Ricoh Info Print, which contributed about seven points of growth in the quarter. This work will transition to Ricoh in 2008. Global Technology Services pretax profit was up 26% and margin was 10.2%, up nine-tenths of a point year to year. This margin expansion was driven by first, better cost structure in strategic outsourcing, a mix to higher value products in ITS, and very good expense management. Turning to Global Business Services, our revenue was up 17% as reported and up 10% at constant currency. GBS delivered record revenue and profit for both the quarter and the year, and exceeded its revenue growth model objectives for the full year for both the consulting and systems integration business and application management services. We’re seeing tremendous growth in our Application Management Services offerings and growth in our Global Resources, with revenue-generating headcount up 38% year to year. For the quarter we grew revenue in all geographies and all sectors and delivered double-digit growth across all consulting services lines, which include; Financial Management Services, Human Capital Management, CRM, Supply Chain, and Strategy and Change. Short term signings for GBS were up 9% for the quarter; $3.9 billion in short term signings is the highest level we’ve ever achieved. Long term signings were down 48% for the quarter, coming off a very strong quarter last year. Global Business Services pretax profit was up 9% and margin was 11.3%, down half-a-point year to year. Although we delivered the highest level of pretax profit in history, margins were impacted by increased employee bonus compensation in the quarter, partially offset by improved expense productivity. To wrap up Services, I’ll comment on full year results. This is the strongest revenue performance since 2003 and we exceeded our model objectives for both revenue and profit growth. While these numbers aren’t on the chart, let me just give you a few key metrics for the full year. Revenue was up 12% as reported and 8% at constant currency. Pretax profit grew almost 13% and pretax margin expanded to 10%. We had short term signings growth of 5% and we closed the year with strong long term signings performance with a good portfolio of new signed contracts. Looking at the long term signings dynamics, there was a reduction in the deal length of our long term signings this year. The average duration of contracts signed in 2007 was 1.1 years shorter, or 17%, than those signed in 2006. So although long term signings were roughly flat for the year, the annualized revenue you get from these signings is up year to year. Looking to 2008, we have good momentum in short-term signings, a strong portfolio of high-value, cost-saving offerings, and a backlog of $118 billion. So overall, we have a very strong book of business heading into 2008. Now, let’s turn to Systems and Technology. This quarter, as I said earlier, the real story in Systems and Technology is profit, with margin expansion driving profit growth of 18%. Revenue of $6.8 billion declined 4% year to year but without the divested printer business, revenue was flat. Our strongest performance was in System p and Storage, offset by anticipated declines in System z and Microelectronics. Now, let me take you through the brands. System z revenue declined 15% year to year. Revenue grew double-digits in Asia-Pacific, offset by U.S. and parts of Europe. MIPS shipments were down 4% year to year, but MIPS on specialty engines grew 11%, up in every geography. Now, this marks the tenth quarter of a long and successful technology cycle for System z. In 2008 we’ll move to our next generation mainframe, with announcement and availability in late February. This next generation System z will have 50% more capacity than the current z9, it enables unprecedented levels of workload consolidation and extends mainframe’s leadership in energy efficiency, security and resiliency. We expect the first quarter to be a period of product transition, with the real benefit coming in the second quarter. System i grew 2% year to year with strong growth in POWER6 servers. System p was up 9% year to year, which was a very solid finish to the year. It’s our sixth consecutive quarter of revenue growth driven by the POWER6 servers. All geographies grew revenue year to year, with particularly strong double-digit performance in Asia-Pacific. Now we expect to gain share with this performance and continue worldwide leadership position in the UNIX market. It’s our tenth consecutive quarter of leadership since taking the number one title in the second quarter of 2005 and we’ve gained 12 points of share since the introduction of POWER4 in 2002. Now later this quarter, we will announce and ship POWER6 technology in System p’s entry segment and extend POWER6 innovation and technology. The new POWER-based virtualization offerings will also be announced to extend IBM’s lead in UNIX virtualization, dramatically improving energy and space efficiency. System x server revenue grew 6% year to year and blades grew 31%. We had strong acceptance of our new BladeCenter-S which was introduced at the end of the quarter. This is a new datacenter in a box offering for SMB and distributed large enterprises. It offers value in integration, affordability, and the embedded capability for security and data protection. Our new high-end Quad-Core processor servers were also well received and sold out in the quarter. We expect System x servers held market share. In Storage, we had a very good quarter with revenue up 11%. We had another strong performance in Tape, up 22%. And this quarter total disk was up 7%, with 21% growth in the DS8000. Now recently we announced the acquisition of XIV, which will further strengthen our storage portfolio long term. This acquisition positions IBM to grow in emerging opportunities like Web 2.0 applications, digital archives and digital media, so we’re excited about this addition to our storage family. Retail Store Solutions was up 6% as we maintained our market leadership. Technology was down 11% year to year driven by a slowdown in game processors. As I’ve mentioned previously, the OEM business has minimal impact to IBM’s bottom line but this business is delivering great technology to our systems business, which is the fundamental objective of our investment. You can see it in the new product introductions for 2008. Now let me wrap up the Systems and Technology discussion where I started, with profit. Systems and Technology gross profit and pretax margins were up significantly year to year. For the year, pretax margin expanded over two points to 9.6%, reflecting a strong combination of operational cost management and the value that virtualization is driving in the enterprise space. Our Software business performed well. With strong execution, we had good success closing transactions in the quarter, driving double-digit revenue and profit growth. The Software segment revenue of $6.3 billion was up 12% year to year or 6% at constant currency, and this quarter our growth was primarily organic as we wrapped around our prior year’s acquisitions. The Software pretax profit grew 21%. Profit margin expanded about two and a half points to almost 35%. In both the fourth quarter and full year, excluding currency benefits, we grew double-digits in the financial services sector, public sector and SMB. Customers are using IBM middleware to effectively improve their operating leverage and business efficiency. Financial Services sector growth is particularly meaningful. We grew in Financial Services in every geography and grew double digits in the Americas and Asia. This is true for both the fourth quarter and the full year. Now let’s discuss our branded middleware. Key branded middleware delivered 15% growth. This represented 58% of software in the fourth quarter or 54% for the full year, so you can see some acceleration here. WebSphere software grew 23% as reported. This caps off a full year performance of 19% growth with strong performance tied to the industry’s adoption of services-oriented architecture. This turned out to be a great play for IBM. Information Management also grew double-digits in the fourth quarter and full year. In the fourth quarter, we entered our second year of our Filenet acquisition. This has been very successful and drove strong revenue growth throughout the year. We’re working to close the Cognos acquisition in the first quarter of 2008. Cognos provides IBM a strong entry in the Business Intelligence marketplace. We expect this acquisition to provide synergies not only in software but also in services, servers and storage. Our Tivoli business grew 19% in the quarter. We had double-digit growth in each segment of the Tivoli portfolio, Systems Management, Security and Storage. Lotus software grew 7% compared to a very strong fourth quarter of 2006. It delivered its 13th consecutive quarter of growth for a very strong performance. Lotus Connections, our social software for business which was released in June, has been rapidly adopted by our customers and this helps solidify IBM’s leadership position in the collaboration marketplace. So some pretty exciting offerings from our Lotus operations Our Rational grew 22%. Our largest customers embraced our integrated product set and we expect our Telelogic acquisition to close in the first quarter subject to completion of regulatory reviews. Telelogic’s suite of systems programming tools complements Rational’s IT tool set and further enables software tool sales into industries like communications and automotive. Now we have been investing heavily in our Software business for some time, both internally and through targeted acquisitions, and in 2007 we generated $20 billion of software revenue, up 10%, and 6% at constant currency. Software pretax profit grew 9% for the year, or about a $0.5 billion, and that’s after covering amortization of intangibles for key acquisitions. The pretax margin for the year was effectively flat, reflecting the integration of these acquired businesses. Now let’s turn to IBM’s cash flow performance. For the year, we generated free cash flow of $12.4 billion, a $1.9 billion increase from last year. This year-to-year cash performance was driven by growth in our net income, lower pension funding, and improved working capital. DSO improved 1.4 days year to year to the best level in years and net inventory also improved, so it was very good performance across the board driving our cash flow for 2007. We continued to fund capital investments required for long term growth with $5 billion of expenditures in the year. Full year 2007 had record returns to shareholders. Our 2007 share repurchase was $18.8 billion, including $12.5 billion repurchased in an accelerated share repurchase in May. In December we announced an additional plan to repurchase up to $1 billion in stock. Under the new trading plan, we repurchased 2.2 million shares for about $220 million. Average diluted shares year-to-date were 1.5 billion, down 6.6% from a year ago. Turning to dividends, this year we distributed $2.1 billion, an increase of almost $500 million year to year, driven by a 33% dividend increase announced in April. We have doubled our dividend per share in the last two years. Since 1995, we have returned to investors over $108 billion through share repurchase and dividends. Now let’s turn to the balance sheet. Cash on hand is $16.1 billion, a record level driven by strong earnings. You can expect cash balance will decline as we close the Cognos and Telelogic acquisitions in the first quarter. Seventy-percent of our $35 billion of debt is to support our global financing business, leveraged at 7.1 to 1. The other 30% of debt, the non-global financing debt, increased $10.3 billion year to year driven by the debt to support the ASR. It is down almost $800 million since September and together with a large increase in equity, translated to another decline in debt-to-cap. Our ratio is now 30%, down from a peak of 47% at the end of the second quarter. Overall we returned $21 billion to investors while retaining a book equity of $28.5 billion, so we have a very strong balance sheet and cash position as we enter 2008. So let me wrap up the quarter by showing you the drivers of our earnings growth, starting with revenue. Our global reach, together with exceptional performance in Services, resulted in revenue growth of 10%. Now at constant mix and margin, this would contribute $0.22 of the $0.54 of year-to-year EPS growth. We expanded our gross margin, led by Systems and Technology, and good performance in Software. We continued our focus on expense management, and yielded productivity in the quarter, which contributed about a dime, and while we had additional interest expense related to our ASR, an impact of about $0.06, we generated a significant benefit of $0.22 from our aggressive share repurchases earlier in the year. So to net it out, with strong performance in our global businesses and substantial operating leverage, we delivered very strong earnings per share growth of 24%. This is a very powerful close to 2007 but I would say it’s also a very strong starting position for 2008. So let me take a minute and give you a snapshot of our key performance metrics for the year. We delivered 8% revenue growth, led by Services and Software. We grew net income 11% and expanded net margin by 20 basis points to 10.5%. Now remember this includes interest expense for the ASR, so without the ASR interest, net income grew 13% and net margin expanded by 50 basis points. With an aggressive share repurchase program in 2007, earnings per share grew 18% and free cash flow, driven by the growth in net income along with lower pension funding and working capital improvements, was also up 18%, so this resulted in record levels of revenue, profit, and cash. The IBM business model is designed to drive sustainable profit and cash performance over the long term and in 2007 we delivered against that model. So we enter 2008 with an outstanding operating and financial position. First, we have a strong portfolio of products and services. Our Services business enters the year with $118 billion of backlog and a complement of offerings and capabilities that deliver both high value and productivity to clients. Software continues to capitalize on industry imperatives such as SOA and information on demand and in our Systems business, our Unix and storage performance is strong, with a number of key product introductions in 2008, including our new mainframe in late February and the introduction of POWER6 to the rest of Systems p and i product lines in the first and second quarters. Second, we have a significant base of business in fast-growing economies. We talked about that earlier in the presentation and I gave you a map so you could conceptualize this, but in the fourth quarter 65% of our revenue was outside of the U.S. Countries growing more than 10% in local currency in the fourth quarter made up 22% of our revenue base, and these countries collectively grew more than 20%. So we’ve been investing for years to drive this performance and we’ll continue to invest to capture this growth. Third, our operating model is in place and executing well. Our annuity businesses, which drive about half of our revenue, provide a solid base of profit and cash. We have expanded margins for four consecutive years and have the ability to continue to generate higher returns and we have a disciplined approach to aligning investments to growth. So just as we are aggressively investing in high growth markets, we are also taking a more measured approach in the more stable markets. Fourth, we’re continuing to invest in our acquisition strategy and have been successful in bringing technologies and businesses into IBM that we leverage across our enterprise. Finally, we generate a lot of cash, and we’ve got a very solid balance sheet with debt-to-cap now at 30%, and $16.1 billion of cash on hand at the end of the year. We have substantial flexibility to make investments where we see the best opportunities. So we feel good about how our business is positioned as we enter 2008. With the strength in our global businesses, our broad portfolio of offerings, a solid operating model, and strong financial position, we believe that we can deliver earnings per share growth of 15% to 16% in 2008. This would result in an EPS range of $8.20 to $8.30. And with this strong performance, we are on track to our 2010 roadmap of $10 to $11 of earnings per share. Now Patricia and I will take your questions.

Thanks, Mark. Before we begin the Q&A, I’d like to remind you of a couple of items. First, we have supplemental charts at the end of the deck that complement Mark’s prepared remarks. Second, I’d ask you to refrain from multi-part questions. When we conclude the Q&A, I’ll turn the call back to Mark for some final remarks. Operator, please open it up for questions.

(Operator Instructions) Our first question comes from Andrew Neff with Bear Stearns. Andrew Neff - Bear Stearns: Mark, you went through a lot of this in your call and different reasons why things are more defensive for IBM, but perhaps you could give us a sense about what -- how comfortable you can be given the situation appears economically to deteriorate and I guess what sort of plans you have in place if things were to deteriorate. Maybe just sort of a general comment about how you look at things, why you are still comfortable, since you made that forecast under a vastly different economic scenario. Give us your thoughts on that.

Sure, Andy. First of all, I would like to answer this kind of in the sense of headwinds and tailwinds as we go into ’08, so I agree with you. We have an uncertain economic environment that we are working through along with the rest of the business world. For us, in addition we have the amortization of intangibles for the acquisitions we did. We also have the interest from the ASR that we’ve still but as we go into 2008, we also have a lot of tailwinds. So number one, we have a very strong position going into 2008 from our pension business. You know, we’ve been wrestling with pension for some years. In fact, over the last five years, that’s increased on us year by year to what is a total of about $3 billion. Now, for the first time we get a benefit on a year-to-year basis and that came in just short of $1 billion. So obviously that’s a very strong tailwind. Secondly, as we explained in the text, we have a good tax plan as we go into 2008. I would say that’s a good tailwind as well. We have the share repurchase benefits from last year’s ASR. I think that’s certainly a very strong tailwind as well. But I think more importantly, we have a very good operational platform as we go into 2008. First of all, strong services momentum and a strong annuity base, and I can’t emphasize enough, you know, if you are going into an uncertain climate like this, that annuity base is a tremendous advantage for us. We have a strong geographic mix. I think we spent a lot of time today talking about that but you could see that we were able to find a good 50 countries with double-digit growth in the globe because we are in 170, and I think that geographic mix is a real advantage for us here. Third, we have good productivity and cost take-outs. Fourth, we have a strong set of offerings that I think provide real value and cost-savings for our customers, tailored to this kind of an environment. And lastly, we have new products that are coming to market, the new z product, POWER6, and good acquisitions in Cognos, Telelogic, and XIV. So I think we have a very balanced outlook and I think we have a good plan. Now, as far as if things deteriorate, the second part of your question, as we go into next year, we’ve not banked on substantially improved performance out of our large established geographies, so I think we’ve already baked some of this in on a relatively conservative basis. We are counting on maintaining that momentum we saw, however, across our business lines and in these high growth countries.

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

Thank you. Our next question comes from Ben Reitzes with UBS. Benjamin Reitzes - UBS: Good afternoon, thanks. Just a little more on the economy, if you don’t mind. 70% to 75% of your sales come from Europe and the U.S., and just a little bit more color on what you are expecting there with regard to -- maybe within your top line and what not as you go throughout the year. In particular, are you expecting the same kind of performance as you had in the fourth quarter in that guidance of 820 to 830 out of the U.S. and Europe? Or are you expecting some deterioration?

Well, I would like to answer that first by going through the business units and within that, I’ll answer your question by geography. But first of all, let’s look at this I think by segment. Services, we have a pretty powerful performance again this quarter, a very large annuity base and the benefits of both long and short-term signings with a backlog of $118 billion, we’re up $2 billion year to year and we believe that services performance in the first half of ’08 should be similar for our full year 2007 results really for both GVS and GTS. And I want to emphasize as we went through what I think was a pretty strong signings quarter that short-term signings showed real momentum here at plus 8%. And secondly, within our long-term signings, as we explained on the call, the duration was reduced by about a year, which makes about 17% difference in the yield of those signings, so I think on services as we go into the first half, we’ve got a very strong position. Secondly, in our hardware business, we are going to benefit now as we go into a new product cycle. First of all, we have the new system z that’s going to announce NGA at the end of February, and you’ll hear more about that as we proceed towards the announcement but that’s a very exciting event for us, and I think as you look at the z performance, we should get closer in the first quarter, which is kind of a quarter transition, to relatively a flat low single digit, moving into the second quarter where we should see growth and I think real strength in the second half. And don’t forget we have our new POWER6 products as well. So we expect to see improved system performance in 2008 to mid single digit range on the system base. I don’t really think we’re going to see a recovery in our micro business until the second half, however, but I do expect good performance out of our system business. In software, we really have a very good portfolio of offerings. Over the long term, I’d say we are comfortable with the software growth model we presented to you in 2007. You’ll remember that revenue growth model was 7% to 10%, 10 to 12 TTI growth. So for the first half of 2008, we expect a softer revenue performance to be similar to what we had for the full year 2007. Now I would add to that the growth that we’ll get from both the Cognos and Telelogic acquisitions when they close.

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

Thank you. Our next question comes from Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford C. Bernstein: Thank you. You talked about your strong cash balance repeatedly on the call. Historically you’ve repurchased $8 billion to $12 billion a year in shares outside of the ASR that you did last year. What is the planning assumption that you have embedded in your 820 to 830 number for share repurchases and how much flexibility do you have to take that up if the shares provide an even stronger entry point to repurchase?

Good question, Tony. First of all, as you know, the share repurchase is a power reserved for the Board of Directors, so when the Board makes a decision, then that very same day, we will announce to the market. So I can’t tell you exactly what the board decision will be, obviously, but I can give you a feeling for my assumptions going into the year. As you referenced, we really do have a substantial cash position and cash generation capabilities. I mean, it could not have been much stronger in the quarter on both sides. As well as we look forward and certainly as I look forward in today’s market, I think IBM has an attractive valuation. So we certainly have the capability for a larger-than-normal run-rate repurchase program in 2008, though certainly not as large as last year’s $19 billion. But could it be larger than the normal run-rate? Sure. But as I said earlier to this, this is a power reserved for the board of directors and when we have that decision, I’ll certainly -- we’ll be announcing that to the market.

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

Thank you. Our next question comes from Richard Gardner with Citigroup. Richard Gardner - Citigroup: Thanks very much. Well, I’m struggling to come up with anything but Mark, I was hoping that you could hopefully talk about the puts and takes, or actually the factors that would cause seasonality to be different than normal seasonality, both in terms of revenue and profit performance throughout the year in 2008. In other words, what are the things we should be thinking about, the puts and takes to think about for the first quarter?

I think if you look at the annualization, the quarter distribution of that guidance, I think really the anomaly for your models is 2007 because we had the accelerated share repurchase and the interest associated with that. So to look for a seasonality model, I would really use 2006 as a better example of a more typical distribution and I think that’s just about the same distribution that you have currently in your average models. But I think 2006 is a better example of more even distribution across the quarters. 2007 is probably the anomaly here.

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

Thank you. Our next question comes from Bill Shope with J.P. Morgan. Bill Shope - J.P. Morgan: Thanks. I guess this question is going to be somewhat related to the macro outlook again but I really wanted to just understand a little better how you modeled the EPS guidance. When you looked at this growth outlook excluding the pension benefit and the tax benefit, how sensitive are your bottom line assumptions to any unexpected changes to top line growth? I guess what I am really asking is similar to previous questions, what measures do you have in place or in your mind to counter any unexpected changes in the top line growth pattern based on how you modeled this?

First of all, let’s talk about sensitivity in our model. So I think one good way to do that, let’s discuss how sensitive we might be to a downturn in FSS in the U.S. In FSS, you know that it runs about 28% of IBM and about 25% of that is in the U.S., so if you take that 25 of 28, obviously you get a percentage of 7% in the U.S. Forty-percent of that is transaction based, so that leaves about 3%. So if you looked at first half revenue and a range of $45 billion to $50 billion is probably a logical range, but let’s just use 50 for simple math, that would give us about $1.4 billion, at 60% margins of $800 million, so if you had a 10% decline in that area in FSS, that would be an impact of about $100 million. Now obviously that kind of an impact is certainly within the scope that we could handle as a general base of doing business. The interesting thing though, if you look at that performance, and again I’m going to go back to FSS, really FSS had pretty good performance in the quarter. Remember, it was up 5% but short-term signings for FSS were up 22% and variances interestingly, short-term signings in the U.S. were up 78% at $0.5 billion. So while I think that we have a strong base of business moving into 2008 and the capability, given our annuity platform to handle these perturbations, I’d also add from my perspective based on the short-term signings momentum, we also have some momentum picking up as we exit the year moving into 2008.

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

Thank you. Our next question comes from David Bailey with Goldman Sachs. David Bailey - Goldman Sachs: Thank you very much. Given the macro backdrop and the momentum that you have going into ’08, how should we think about the potential for services signing growth in ’08?

Well, you know, let’s put them in their two categories. Long-term signings are really relatively unpredictable by quarter. I mean, they don’t distribute uniformly across the quarter but I think as we look at short-term signings, we should see the same level of mid single digit short-term signings from our services businesses certainly as we go through the first half of 2008. So I think we will continue to see momentum out of those units and as we said, I think if you wanted to get a feeling for what we are looking at for signings for the first half, I think it would be more similar to the full year of ’08 -- of ’07, excuse me.

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

Thank you. Our next question comes from Lou Miscioscia with Cohen. Louis Miscioscia - Cohen: Great. Maybe since you’ve been through a couple of downturns, and I hate to ask another macro question, but can you compare the last couple that you’ve seen or even going back to 2001, obviously IBM shares did hold in very well in 2001 but obviously broke and went down 50% in 2002.

Good question. You know, we thought about -- or I know I -- our organization thought about this a lot but I think the distinction as I recall the last downturn was really characterized by over-capacity and I don’t see that as being the issue as we go into 2008. I don’t think this is a framework structured around over-capacity. I think as we go into this year, it would be different and I also think as you move into 2008, we are structuring our offerings to solve problems that our customers will be looking at -- problems to take costs out of the business, problems to solve capital problems, solutions to drive cash flow and solve their capital constraints. I think the risks and issues that you might foresee are going to be different than the last downturn and I think in this framework it’s important to structure your offerings to solve those problems. And as I look at the short-term signings growth that we achieved in the fourth quarter, I think that is very much the reason we saw that growth.

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

Thank you. Our next question comes from Katy Huberty with Morgan Stanley. Katy Huberty - Morgan Stanley: Good evening. How do the margins compare in the 22% of revenues coming from emerging regions versus the revenue base in the U.S. and Europe?

I am not going to go through the margin breakdown specifically but I think you can get a pretty good framework for that from a couple of different vantage points. Number one, you’ll remember when we were talking about the BRIC countries last year. We said they are about 5% of our total revenue mix. And actually, the profit underneath those BRIC countries was a larger percentage of our profit mix. So the BRIC countries were 5% of the mix in ’07 but a larger percent of our overall profitability was moved forward. The second thing I’d say is if you look at this AP organization, Asia-Pacific for us, so that includes Australia and New Zealand, but if you look at that Asia-Pacific organization excluding Japan as a more established country, that organization grew its revenue 20% but it grew profitability over 40%. Now why did that organization drive such high level of profit growth? It’s because as we drive our business equation there, we are really applying that to very large infrastructure offerings. This is not commoditized content. This is not low margin, volume based content. This is infrastructure based at very high margins and that is a big component of the year-to-year growth rate of profit for this Asia-Pacific ex Japan region, outstripping the revenue growth by a factor of two.

Thanks, Katy. Let’s take one more question please, Operator.

Thank you. Our final question comes from Chris Whitmore with Deutsche Bank. Chris Whitmore - Deutsche Bank: Thanks very much. I’m going to ask the what’s embedded in expectations question one more time. If I back out the pension benefit and make an assumption around buy-back, it looks like you are expecting the base business to grow earnings somewhere around 5%, maybe 6%. Can you comment if that’s true, first off? And secondly, what type of global IT spending growth do you think we need to get to that level of underlying earnings growth? Thanks.

First of all, if you look at the growth rate of what I’d call the operational content, I would have placed it higher than that, Chris, first of all because number one, we’ve got to absorb the Cognos Telelogic content and the foregone interest expense as well as the interest against the ASR, and those two together by my math, about five points, so I would have put this much higher than your number and I think we do have a good operational framework going forward. As far as the IT spend rate going forward, we are not counting on a resurgence of IT spend beyond what we saw in the fourth quarter and I think to characterize, we would think the first half of next year would look relatively similar with higher growth rates in these high growth emerging countries and more stability in the more established countries. And we have prepared ourselves for that in the way that we’ve built our budgets going into 2008. We’ve been very disciplined about expense management in the established countries, looking for productivity out of our country management, whereas in these growth environments we are moving very rapidly on investment to capture that growth and that was, frankly, a big part of the reason we established this new growth market organization. Because that organization is now comprised of all growth countries and we are going to manage those distinctly and separately from a more established business model. So I think that answers the question. Let me now just take a moment to wrap up. First of all, to close out, I realize that this is a challenging environment with economic uncertainty but I think there is still a lot of opportunities for growth and I think we explored many of those on the call today. I think what I would like to describe is what I think makes IBM different in this environment and I have five points to make. So first, global reach -- we are in 170 countries on a globalized basis and I think you have to have that kind of well-tuned investment discipline to find the 50 growth countries with total growth in excess of 10%. Now these are small countries but in total, they are large. It was 22% of our business growing greater than 20%. What’s a good example of this? In India, we just about achieved -- we almost achieved $1 billion in revenue but I think more interesting, we did $1.4 billion in signings for local clients. That’s not signings to satisfy the rest of the globe from India. That’s $1.4 billion of signings for our local clients, so I would point to global reach as our first differentiator. Second, a proven infrastructure provider -- now you know we know how to do this very well. We’ve built the infrastructure in most countries now considered to have mature economies and we have a solid track record which makes us the trusted partners for these new, rapidly expanding markets. The best example there I think is AP excluding Japan, the revenue is up 20% but the profits are up more than 40% because this is a big value-added infrastructure business versus a commodity business. Third, our product and services portfolio delivers value to the enterprise and we are not in the commodity volume business -- we are in the business to drive solutions to our customers that tailor to their needs. Here I have I think a different example -- if you look at this green data center. Sometimes we look at it and say well, that’s simply a cost savings, or maybe that’s a soft environmental description of that offering. And actually, this is a very, very specific offering. We did $300 million in green data center signings in the fourth quarter and 40% of those were in FSS. Now, why is that? Well frankly, many of these data centers, not only did they need to reduce costs as a function of their business equations but some of them are simply out of electricity and that’s not a situation that’s going to change soon and they cannot run their business and expand capacity without solving that fundamental problem. And there are other examples -- security and resiliency. These problems are market agnostic and clients still need to protect their data and keep their operations running. Cost reduction and capital assurance, whether it’s virtualization, BTO, financing, strategic outsourcing, we have a broad portfolio of alternatives for our clients who need to find ways to stop spending on non-core business and shore up their balance sheet. So I think these are just a few reasons that our FSS short-term signings in the fourth were so strong, even in the U.S. at $0.5 billion, up 78% year to year. Fourth, we have been continuously investing in capability and have leadership technology and I think our ’08 lineup is very powerful. From the new z and POWER6 technologies to introducing our new acquisitions, XIV, Cognos, and Telelogic. And fifth, lastly we have the capital which gives us the financial flexibility to invest despite this near-term business climate, and we have a large annuity content to our business which is much lower risk than a solely transaction dependent business model. So I want to thank you all for joining us today and now it’s on to 2008.

Thank you for participating on today’s call. This conference is now ended. You may disconnect.