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

Toni Sacconaghi - Sanford C. Bernstein Richard Gardner - Citigroup Chris Whitmore - Deutsche Bank Ben Reitzes - Barclays Capital David Bailey - Goldman Sachs Keith Bachman - BMO Capital Markets Mark Moskowitz - J.P. Morgan Bill Shope - Credit Suisse Scott Craig - Merrill Lynch David Grossman - Thomas Weisel Partners

Welcome and thank you for standing by. (Operator Instructions) Now I would like to 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’m here with Mark Loughridge, IBM’s Senior Vice President and Chief Financial Officer. Thank you for joining our second quarter earnings presentation. The prepared remarks will be available in roughly an hour, and a replay of this webcast will be posted to our Investor Relations website by this time tomorrow. Our presentation includes certain non-GAAP financial measures, in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end, and in the Form 8-K submitted to the SEC. Let me 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 web site, or from us in Investor Relations. Now, I’ll turn the call over to Mark Loughridge.

Thank you for joining us today. This quarter we delivered $2.32 of earnings per share, up 18% year to year. This is a record level of EPS for a first, second or third quarter, adjusting for stock splits. We generated over $4 billion of cash from operations, and ended the quarter with $12.5 billion of cash on hand. And we returned another $2.4 billion to shareholders, with $700 million in dividends and $1.7 billion of share repurchases. With this powerful performance, we now expect to generate at least $9.70 of earnings per share for the year, up $0.50 from our previous view of at least $9.20. This is the result of the strategic transformation of our business. Our ongoing shift to higher value areas has positioned us to better meet clients’ needs. This quarter, our strategic outsourcing signings were up 38% at constant currency, and our key branded middleware revenue, now 58% of software, grew 5% at constant currency. Our strategic acquisitions continue to contribute to our higher value capabilities. This quarter Cognos, Telelogic, ILOG and storage solutions XIV and Diligent all showed very strong results. But as you will see, margins are fueling our profit growth. I’ll discuss how our transformation is driving this but it is the shift to higher value, globally integrating our business, and our ongoing productivity initiatives that led to significant margin improvement. We expanded our pre-tax margin by 4 points. That’s our best margin improvement in almost four years, when we divested our PC business. This quarter, our strategy and business model together delivered high levels of profit in a tough economic environment. A key point here is that our model delivers improved margins, even when revenue growth is a headwind. So when revenue growth becomes a tailwind, the operating leverage we’ve created will really come through and continue to drive our earnings. We’re using this financial strength to invest in new areas that will help drive the next growth cycle for our clients, areas like Smarter Planet, business analytics and cloud computing. I’ll come back to that later in the discussion. Looking at our income statement for the quarter, our revenue was $23.3 billion, down 13% as reported, and 7% at constant currency. Despite the revenue decline, we improved both pre-tax and net income by 12%, with outstanding margin performance. Gross margin expanded over 2 points, due to improving margin in services and software, and the mix to higher value businesses such as software. Our expense was better by 19% year to year, driven by actions we’ve taken to continue to transform and globalize the business, focused expense management, and the benefit of a stronger dollar. Pre-tax margin was up over 4 points year to year to 18.3%. This is IBM’s highest PTI margin in 10 years in a first, second or third quarter. And IBM’s total net income margin was up 3 points. With a lower share count from our ongoing share repurchase activity, bottom line we improved earnings per share by 18% year to year to $2.32. The actions to develop this margin improvement didn’t just happen. We have been working on this strategy for a decade so let me give you some background that will provide perspective on our second quarter results. Looking at IBM’s performance over the last several years, we have consistently generated strong profit and cash growth since 2002. You can see the impact of the last recession following the dot.com bubble, where a sales decline and the resulting charges impacted our margins and our earnings. Since then, we have been executing our strategy: shifting to higher value segments; globally integrating the company; driving efficiency and productivity, and investing to capture future growth. So now, IBM is a fundamentally different company with a stronger portfolio of offerings and a more efficient cost structure, enabled by ongoing process improvements. And so now in the current recession, we’re able to improve margin and profit even with declining sales. So it’s pretty obvious that the driver of our profit growth over the last several years has been margin expansion. If you go back to the 90’s, our gross margin was declining, with increasing pressure from commoditizing products. This was a massive headwind for us, which impacted our ability to reinvest in the business. Since then, we exited commoditizing businesses, including HDD’s in 2002, PCs in 2005, and printers in 2007, which represent nearly $15 billion of annual revenue. In that same time, we acquired over 100 companies for $20 billion. This has clearly accelerated our shift to higher value capabilities. This disciplined focus on shifting our business mix and our business model has driven this turnaround in margins. You can see we’ve been consistently improving our margin every year and with that strong performance, instead of the constantly eroding expense-to-revenue relationship, we’ve been able to grow our rate of investment. In 2008, we had the highest gross margin since 1992. Our margin in the first half of ’09 is already higher than the full year 2008 and that’s without the seasonally-strong fourth quarter. So we’ve made a lot of progress on margins but we still have headroom. In the May investor briefing, we showed you how our PTI margin compared to the S&P 500 and the tech universe. We’ve included that same chart in the supplementals, updated for our second quarter margin. The shift in our business mix is even more apparent on a profit basis. This chart lays out the sum of the segments, which of course is a little different than total IBM. From 2000 to 2008, the profit from software and services combined almost doubled. In 2009, we’re continuing to drive solid profit growth in software and services. In fact, we expect both software and services PTI to grow double-digits this year. As you can see, software now grows from $2.8 billion in 2000 to about $8 billion this year and services from $4.5 billion to approximately $8 billion. So again in 2009, we expect ongoing momentum in our software and services businesses. Now with that perspective, I’ll start to get into the details of the quarter, starting with revenue. I want to start with the industry view, to give you a feel not just for the current performance by sector but also the kinds of projects we’re working on to help our clients create more value and become more productive. Total sector revenue was down 13% as reported and 6% at constant currency. Public sector was the fastest growing sector for the fourth consecutive quarter; revenue was up 7% at constant currency, with constant currency growth in all industries. Clients in the education industry are investing in IT infrastructure, and our revenue was up nearly 30% at constant currency. Cloud computing is a way to reduce costs and extend access to educational resources. By designing and deploying wireless and converged networks, we are equipping schools to better deal with their IT requirements. A few days ago, we announced that the largest school district in Alabama is using IBM analytics technology to more effectively measure student performance and adjust programs to deliver smarter education services. Customizable dashboards provide up-to-the-minute data to monitor the entire lifecycle of each student, including attendance, grades, and special education requirements. In healthcare, where our revenue was up 11% at constant currency, IBM is working with clients around the world to create smarter health care systems. We’re getting real traction in solutions to create accessible electronic health records, and are using business analytics to drive efficiency and healthcare quality. Now let me comment on the other sectors. Communications sector revenue was down 4% at constant currency. Our clients continue to invest in infrastructure and transformation projects with short-term payback. We’re leading in the creation of Smart Grids with our Intelligent Utility Network solution, with five of the largest smart metering deployments in North America. In Financial Services, where revenue was down 7% at constant currency, we continue to help clients manage costs, capital requirements, and risk and compliance. Over 250 banks worldwide use IBM’s financial services data models to help address financial risk, customer insight and financial reporting. This is a strong base on which to build next generation risk analysis. We’re bringing together our leading capabilities in analytics and in supercomputing to address some of this sector’s major challenges. I’ll mention two specific areas. We’re working with the leading financial regulatory and supervisory bodies worldwide to explore how a new generation of smarter systems could not only enable effective intra-day market supervision, but also provide an early warning system for global systemic risk management. We’re also working with several of the world's largest financial services companies to help them streamline regulatory and compliance reporting, refine enterprise management reporting and improve decision-making across all their operations. These are great offerings for our clients in this environment. Distribution sector remains challenging, especially in retail and travel & transportation industries. Total sector revenue was down 11% at constant currency. Even in this environment, the growth markets provide good near term opportunities in these industries. For example, we are working with nearly 40 of the top rail systems globally to determine new ways to work together to build out the modern smart rail systems of the 21st century. And as you would expect, with an 18% decline at constant currency, industrial sector remains the most challenging as clients continue to deal with the global downturn in consumer spending. Turning to our geographic revenue, similar to the first quarter, performance was fairly consistent across the geographies. As always, I’ll focus my comments on the constant currency growth. Globally, the major markets declined 8%,as customers remain focused on saving cost and conserving capital. In the growth markets, which is 18% of IBM’s geographic revenue, we again delivered 8 points of growth above the major markets. While the BRIC countries declined overall, the performance and prospects differ by country. For example, India grew modestly, with strong growth in services, mitigated by weak transaction performance. And while China declined from a very strong second quarter of 08, we had good growth in second and third tier cities. We expect to return to double-digit constant currency growth in China in the third quarter. Now, I’ll move on to the segment view for revenue and gross margin. Our revenue growth was impacted by currency and the economic environment, but our broad business capabilities, our ability to deliver value to customers and our significant base of recurring revenues came through with solid performance in software. Software was led by key branded middleware where we gained share. As you would expect in this environment, our transaction businesses were most challenged, specifically hardware and consulting, where we were impacted by a slowdown in shorter-term projects. This makes our gross margin expansion of 2.3 points even more impressive. As part of our ongoing transformation, we continue to shift to higher value, the most obvious driver being the mix to software, which contributed about half a point of improvement. Within each segment we’re driving a shift to higher value as well, for example, away from the lower margin OEM content toward the higher margin, higher value labor-based content within our Integrated Technology Services. Our ongoing initiatives to improve our services productivity through global delivery capabilities, a more variable workforce, and better utilization also contribute to the improvement. These initiatives and dozens of others are all part of the transformation, and have driven consistent improvement in our gross margin over time. In fact, this is the 19th quarter of the last 20 that we’ve expanded our gross margin. Now let’s take a look below the gross profit line to our expense and investment profile. This quarter, our total expense and other income was down 19%. Operational expense improved 10 points year to year. Currency drove 10 points of decline, and reflects both translation of non-dollar based expenses, and the impact of the hedging programs that flow to expense. We’ve been executing an operational plan to increase efficiency and drive productivity across the business, all part of our transformation to higher value areas and to globally integrate the enterprise. The implications to our business are important; they reduce our cost structure, and make it more variable. A lower level of fixed cost improves our operational balance point, so with improved operating leverage, every dollar of revenue yields more profit. This quarter our recent initiatives, such as the globalization of our support functions and rebalancing our workforce, contributed to our margin improvement. For the full year we now expect $3.5 billion of cost and expense savings from these initiatives. At the same time, we were able to leverage our strong margins to continue a significant level of reinvestment. We are investing in capabilities that will differentiate IBM in the future and accelerate the development of new market opportunities. For example, in support of Smarter Planet solutions, 25% of our research projects are dedicated to these initiatives which take IT well beyond its traditional data center boundaries. This requires both unique technical capabilities and skills in areas like healthcare, transportation, telecommunications and utility systems. We’ve invested almost $8 billion in strategic acquisitions since 2005 to build business analytics capabilities. This provides the foundation for the creation of a business analytics practice, and we’ve redeployed and hired 4,000 resources to address this opportunity. Later this month we will announce a new integrated business analytics system designed to accelerate the deployment of advanced analytics capabilities leveraging IBM hardware, software and services. We have also been making substantial investments to build our cloud capabilities. In mid-June, we announced the IBM Smart Business cloud portfolio with solutions to help clients deploy their own clouds targeting specific workloads, as well as new services delivered over the IBM cloud. We will add to this portfolio in the Fall. Now, we initiated these targeted investments to position IBM for continued growth and improved margin mix. To close out the discussion on spending, as always I’ll lay out the roadmap items that had significant year-to-year impacts to our profit. We had a year-to-year impact of $195 million from investment transactions. This was driven by a charge of almost $120 million related to an investment in a joint venture. This charge also increased our effective tax rate in the quarter by 70 basis points. We absorbed over $300 million of cost and expense for our retirement-related plans, which was down $70 million year to year. We continue to expect about $1.4 billion of cost and expense for the year. Within other income and expense, interest income was down almost $60 million, reflecting the current interest rate environment. And as you would expect, we have a year-to-year benefit from our hedge of cash flow programs, reflected in other income and expense, SG&A, and cost of goods sold. This mitigates the impact of the stronger dollar throughout the income statement. The year-to-year benefit is about $400 million in total, with more than half in other income and expense. So now let’s turn to our segment margins. This is a snapshot of both gross and pre-tax margins by segment. With gross margin up 2.3 points, and expense reduction of 19%,we delivered a 4 point improvement in pre-tax margins. And as you can see, we increased our pretax margin in every segment, with particular strength in GTS, up over 5 points; software, up over 8 points; and global financing up almost 9 points. More importantly, we’re operating at a very high level of profitability, with an 18.3% pretax margin. I’ll get into more detail on margins in the segment discussions. So let’s start with services. Our combined services business did a tremendous job driving profitability and margin expansion this quarter. In what continues to be a challenging economic environment, total pre-tax profit was up 23% on revenue that was down 12% as reported and 4% at constant currency. Combined gross margins were up 2.7 points, we’ve improved gross margin in 17 of the past 18 quarters. And we delivered $2.0 billion in pre-tax profit, up 4.1 points year to year. Signings were $14 billion at actual rates, down 5% but up 3% at constant currency. We signed 17 deals larger than $100 million. Signings in our outsourcing businesses were $8 billion, up 3% at actual currency rates and up 12% at constant currency. This includes the third consecutive quarter of double-digit signings growth in strategic outsourcing. Backlog at the end of the quarter was an estimated $132 billion. Backlog was up $5 billion since March, and flat quarter to quarter at constant currency. Now I’ll turn to the key drivers of performance in the two services segments. In global technology services, signings were up 15% at constant currency and within that, outsourcing signings were up 24% at constant currency. Strategic outsourcing signings were particularly strong, up 38% at constant currency, growing in all major geographies. Within that, S.O. in North America was up over 90% at constant currency. We are providing innovative solutions to help clients drive efficiency and cost savings. We expect our strong value proposition to continue to drive outsourcing signings in the second half. Global technology services revenue in the quarter was $9.1 billion, down 2% at constant currency. Although growth in outsourcing signings provides a solid book of business, revenue in the quarter was impacted by reduced volumes in our existing client base. In integrated technology services, we are continuing to drive our product portfolio toward higher value, higher margin offerings, and away from OEM content. This quarter, ITS revenue performance largely reflected signings declines in the OEM offerings that support capital intensive product roll-outs. Now turning to profit, the GTS team executed across the portfolio to drive powerful profit performance. Global technology services pretax profit was up 41%,and margin improved 5.4 points year to year to 14.9%. This was the eighth consecutive quarter of double-digit pretax profit growth, and again we had gross margin expansion in all lines of business. This sustained margin performance is a result of the transformation we’ve undertaken in GTS. We continue to make structural changes to service delivery. Our initiatives around standardization, global integration, and automation have resulted in a more flexible and productive organization, operating with improved efficiency. These changes helped drive performance this quarter. Not only did we execute significant cost and expense actions, we also continued to improve quality and customer satisfaction. And that is quite an achievement. Turning to global business services, signings were down 14% at constant currency and within that, consulting and systems integration signings were down 8% at constant currency. Revenue was down 15% as reported and down 9% at constant currency off of a very strong quarter last year. In spite of that revenue performance, GBS improved pretax margin by 1.5 points year to year. Our revenue performance reflects lower signings in consulting, where we had a more pronounced decline in smaller, faster-yielding contracts. Starting last year, clients were focused on solutions that help them to save cost and drive greater efficiency. During the first half of this year, despite this continued focus we have seen an increase in required approvals and the delay of more discretionary projects. That said, we continued to grow systems integration revenue and for total GBS we had strength in public sector, and our growth markets all at constant currency. With global business services pretax profit down 4%, margin improved 1.5 points year to year to 13.3%. We were able to do this because of the transformation we’ve undertaken over the past several years. We have built a global infrastructure and framework that supports a very dynamic resource deployment model. It drives improved utilization and service delivery. Our professional workforce tools provide skills and availability at the tip of your finger; we can then shift people to where the work is, optimizing the mix of IBM employees and subcontractors around the globe. Overall we have a much more flexible and dynamic model than we’ve ever had. This quarter, the key drivers of this margin performance were: cost and expense savings from our recent workforce rebalancing actions, lower subcontractor spending, and higher utilization in our global delivery centers. We expect to continue to see the benefits from these actions in the second half of the year as well. Turning to software, revenue of $5.2 billion was down 7% year to year, and flat at constant currency. We had terrific profit performance, with segment pretax income up 24% year to year, and pretax margin up 8 points to 32%. Our software business continued to perform well in this economic environment, led by key branded middleware that grew 5% at constant currency and gained share. Once again, customers purchased software that delivers fast payback as well as transformational projects with strong return on investment. This quarter branded middleware accounted for 58% of our total software revenue, up 3 points from second quarter of 2008. Other than our seasonally-strong fourth quarter, this is the highest percentage of key branded middleware ever. Now let me give you some insight into the brands. WebSphere products grew 8%,or 17% at constant currency, and gained share. Business Process Management, Commerce, and Datapower product segments all grew double digits at constant currency. ILOG, which helps to drive business rules management to the analytics space, did very well again this quarter, and contributed to WebSphere growth. ILOG middleware grew over 50% year to year from its pre-acquisition levels. Information Management software declined 4%,but grew 4% at constant currency. Cognos, which was acquired in January of 2008, grew over 20% at actual, and 30% at constant currency. We also had strong growth in our Information Integration and Master Data Management products which customers utilize to transform their enterprise data for competitive advantage. Our information management software is a key driver of our new business analytics and optimization service line. Tivoli software was down 2%, but up 6% at constant currency, and we gained share. Within that, Tivoli’s storage products grew 16%, or 25% at constant currency. Driving this growth are the hot, higher value areas of virtualization, de-duplication, and open disk storage, which together grew over 60%. We built the latter two capabilities through our Diligent and XIV acquisitions. Lotus software declined 14%, or 8% at constant currency versus a difficult compare last year. Lotus was impacted by a softening in demand driven by customer consolidations and downsizing. Rational revenue declined 2%, but was up 5% at constant currency and gained market share. Customers leveraged the productivity and return on investment enabled by IBM’s suite of software tools. Rational products accelerate and simplify collaboration across the software development process. Telelogic products grew over 40% and extended our reach into the systems development market space. The breadth of our software portfolio, the strong recurring revenue and disciplined expense management combined to deliver 24% profit growth in a challenging economic environment. Systems and technology revenue of $3.9 billion was down 26% year to year, 22% at constant currency. We believe this performance is in line with the industry. Now remember at this point in the first quarter we also estimated in line performance, but after our competitors reported their results, based on industry reports we actually gained a point of share in the first quarter. A few second quarter highlights: in Converged System p, once again, we gained share. We significantly increased the number of UNIX competitive displacements to well over 100 in the quarter. Within that, we more than doubled the number of Sun competitive displacements from the first quarter. For the first half of the year, this amounts to nearly a $0.25 billion in sales from UNIX competitive take-outs. In System x, we anticipate that we gained share for the second consecutive quarter. Our storage products held share. We had over 65 high end tape competitive displacements in the second quarter and strong performance in our storage acquisitions XIV and Diligent -- which also have significant software content. Focusing on the brands: System z revenue declined 39% year to year and 35% at constant currency as we wrapped around on a very strong compare. Major markets were weak as we experienced a lengthening of the customer decision cycle for hardware commitments. Our growth markets were up 17% at constant currency. MIPS declined 20% in the quarter, but were up 4% on a two-year compounded growth rate as we simply had a very tough compare in the second quarter of 2008, which was up 34%. Profitability improved as gross profit margin expanded by 3 points year to year due to a higher percentage of microcode upgrades. Later this month, we will announce new System z workloads that target growing market segments such as Business Applications, Data Warehousing, and Security. These new custom offerings that we’ll call System z Solution Editions, integrate a portfolio of enterprise software and security products with the System z platform. They will be competitively positioned to attract new workloads to System z , and will expand the platform’s value proposition to both new and existing customers. Converged System p declined 13% year to year and 8% at constant currency. We gained share in the UNIX market for the fifth consecutive quarter. Share gains have been the most pronounced in the mid-range and high-end of our product line, where our success in driving consolidation and virtualization has delivered proven results. As I mentioned earlier, we doubled the number of competitive displacements from the first quarter. Gross profit margin also improved 2 points year to year through solid cost management. System x server revenue declined 22% year to year, or 17% at constant currency, and we gained share for the second consecutive quarter. We believe the improved sales execution and strong performance from our new products will enable us to continue to gain market share through the second half. Blades were down 6% year to year. IBM was the first to deliver blades with the new x86 processors, and we benefited from strong customer adoption of this new technology. We believe we gained share in blades overall. We also expanded margins in System x. Storage revenue declined 20% year to year, 15% at constant currency, and we expect to hold share despite double-digit declines in both disk and tape. Our storage acquisitions are ramping well. XIV added over 100 new storage customers in the second quarter. Since we purchased the company, we’ve added over 200 new customers who had not purchased IBM open storage in the last two years. The value in storage continues to shift to software and, as I mentioned during our software discussion, we had very strong performance in this space. Now let me close my comments on systems and technology by saying that with our new capabilities and continued share gains, we expect to improve revenue performance starting in the third quarter, and deliver year to year profit growth in the fourth quarter. Turning to cash flow, we generated $3.4 billion of free cash flow in the quarter, down about $260 million year to year. The decline was driven by less cash from sales cycle working capital, a higher level of workforce rebalancing payments, and higher retirement-related funding requirements, mitigated by the impact of lower net tax payments. Even with that, free cash flow was up $200 million in the first half to $4.5 billion. With this strong and recurring free cash flow, we were able to return $4.8 billion to shareholders in the first half. We paid $1.4 billion in dividends -- this includes a 10% increase approved by the board of directors in April. We’ve tripled our dividend over the last five years. We spent $3.4 billion in the first half on share repurchases. This drove a reduction in average diluted shares of 4.5% year to year, and we have $5.1 billion remaining from our board authorization. So now let’s turn to the balance sheet. We ended the half with a cash balance of $12.5 billion, that’s an increase of $200 million from the end of last quarter. More than two-thirds of our cash is in the U.S. Total debt was $29.4 billion. This is down $1.6 billion from March, and down $4.5 billion since the end of 2008 -- $3 billion of the first half decrease went to reduce our non-global financing debt. Non-GF debt-to-cap was 35%, down from 42% at the end of the first quarter and 49% at year end. With $22.8 billion of debt, our Global Financing business is leveraged at 6.9-to-1. The balance sheet remains strong and positioned to support the business over the long term. I’ll start to wrap up with a brief discussion of the drivers of our earnings per share performance. Our improved mix and ongoing actions to drive productivity yielded significant margin expansion. In fact, expense productivity and tax nearly offset the impact of our revenue decline and so the real driver was our gross margin expansion, contributing $0.27 of EPS growth. And with our ongoing share repurchase activity, we delivered 18% growth in earnings per share. This performance is the result of the strategic transformation of our business. Since the end of the dot.com bubble, we’ve been moving out of commoditizing businesses, while investing in higher value areas. This better positions us to meet client needs, and drives a more profitable mix. We’ve also been globally integrating our company to improve productivity and efficiency. These transformational changes to our business have reduced our fixed cost base and improved the operational balance point, generating more profit from each dollar of revenue. We’re using our strong profit and cash base to drive the significant investment needed to expand our base of opportunity, both organically, and through acquisitions. This quarter we had great acquisition performance, with Cognos’ business analytics solutions, Telelogic’s tools, and ILOG’s business integration capabilities. We’re investing in areas like our Smarter Planet solutions, business analytics and new compute models such as cloud computing. They are contributing to results today but obviously have even greater potential going forward. In addition to supporting investments in growth initiatives and acquisitions, our great cash position and strong cash flow also allow us to return capital to shareholders. In the first half we spent $4.8 billion on share repurchases and dividends, and again increased our dividend. Bottom line, the changes to the company have allowed us to deliver strong performance in a tough environment. But more importantly, the transformation has positioned us to come out even stronger when the economy improves, with tremendous operating leverage and a much better business profile as we continue to mix to higher value businesses. So with that as a base, we are increasing our expectations for earnings per share to at least $9.70 for the year. It’ll be driven by our ongoing margin improvement, just as it was in the first half. And we’ll continue to execute our strategy and maintain our focus on delivering profit and cash over the longer term, as we are well ahead of pace for our 2010 roadmap. Now Patricia and I will take your questions.

Thank you, Mark. Before we begin the Q-and-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 our 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 final comments.

(Operator Instructions) Our first question comes from Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford C. Bernstein: Thank you. Mark, you wrapped up by saying that you felt the company had tremendous operating leverage as the economy picked up. If I simply look at what happened between Q1 and Q2, total company revenues went up $1.5 billion, your pretax income went up $1.1 billion, so you got $0.74 in incremental profit for every dollar in revenue that you generated sequentially from Q1 to Q2. If I look back at your average over the previous six years between 02 and ’08, you got $0.34, or 34% in terms of operating leverage. So the question is how should investors think about a marginal contribution in operating leverage going forward? And if it’s not the 70% that we saw in Q1 to Q2, what happened in Q1 to Q2 that was so unique that led to that very high leverage ratio?

Well, that’s a great question, Toni. The point I was making on the operating leverage going forward, I think in this quarter it was a pretty strong statement to be able to improve our margin so substantially when currency and revenue was a headwind, and my point going forward as you look at fourth quarter, currency will now be a tailwind and I would argue that we go into the fourth quarter and 2010, we should have a better economy and a stronger revenue platform and with that, operating leverage should really show through. Now to your point on the operating leverage that we generated going first quarter to second quarter, a lot of that operating leverage was in fact structural operating leverage that should continue. On the other hand, the only point that I think deserves some caution, this is still a tough economic environment. We have not seen the stimulus packages flow through. We’re still watching our overall price points -- now price points held very, very well in the second quarter and the bulk of our initiatives all dropped to the bottom line. But outside of that, if you just look at the raw leverage, we should have a very strong position, as you point out, sustaining and going into this second half.

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

Our next question comes from Richard Gardner from Citigroup. Richard Gardner - Citigroup: Thank you. I was just hoping, Mark, you could give us a sense of, assuming current spot rates, what’s going to happen to the $400 million benefit that you received from hedging in the current quarter as we progress throughout the rest of the year? How do we think about how that number evolves going into Q3 and Q4?

Okay. I think the way that I look at it, and there’s a lot of dynamics underneath it so I don’t think you can take my statement and extrapolate it on a uniform basis but if you look at the overall impact of currency in the quarter, it was about a net zero, so if you looked at the impact that we had on gross profit, the offsetting impact on world trade expenses and the hedge, that year to year impact from currency was about a net zero impact. Now as you go forward and currency starts to reverse itself, one would argue that it’s going to be helped in the fourth quarter of 3 to 4 points and that will generate improved operating performance in our gross margin line. Now, there will be some mitigation of that in the hedge that would offset some of that impact but right now, just look at the raw performance in the second quarter between expense and the hedge, the year to year effect of currency was just about zero on our overall performance.

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

Our next question comes from Chris Whitmore from Deutsche Bank. Chris Whitmore - Deutsche Bank: Thanks very much. Mark, reported revenue ex currency was down about 7% in the quarter. I think that missed most people’s expectations and last quarter you talked about accelerating growth, particularly in the services as we move through the year with potentially growing services revenue in Q4. Can you give us an update as to what you expect in terms of constant currency revenue and its progression over the next couple of quarters?

Sure. Let’s start off by recognizing that this second quarter was really the toughest compare we had for the year and we all recognize it. We had real powerful revenue performance last year across the product line. So we knew that this was going to be our toughest compares going into the second half. Let’s talk about what we see in the second half now and I’ll do this by line of business. And with that, let’s start with hardware. So hardware was down double-digits in the quarter and as we look forward, we expect that rate of decline to halve as we go into the third quarter and halve again as we go into the fourth quarter. And we have a number of offerings, and we talked about the benefit we thought we could get from these new work load offerings and v Series, ongoing share performance in t Series and x Series. So we are pretty confident that we’ve got a very good hardware play going forward and in fact, it’s that recovery in the overall rate, along with the margin improvement that we expect that should generate positive profit growth from hardware as we go into the fourth quarter. So I think that’s a pretty start. Software, I mean, we just had a terrific quarter here on a software base and we expect going forward to see about the same revenue performance in the second half from software. We had very good performance out of our acquisitions and we have really strong margin performance. So we expect to have double-digit profit growth in our software business for a year. And last, if you look at services, we had a little more difficulty in the year in the areas of the business that were more discretionary, in the GBS area. But if you look at the strength that we have had in our longer term signings, that should compel our S.O. business as we go forward. I mean, we have had three very good quarters in a row on long-term signings growth. I mean, look at S.O. this quarter, up 38%. And we expect in our outsourcing business again to have double-digit signings growth as we go into the third quarter. So you put all that together and I think we are going to see S.O. come back to growth in the fourth quarter. So I think with all of those things, that gives us a strong base to go into the second half and I think frankly all of this gives a good platform in 09 as we prepare for 2010.

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

Our next question comes from Ben Reitzes from Barclays Capital. Ben Reitzes - Barclays Capital: Thanks a lot. The question is with regard to signings and leverage -- Mark, at your analyst day, I think you said you thought long-term signings would be up double-digit. I wasn’t sure whether that was constant currency or not but on an actual currency basis, they didn’t make the double-digit but I was just wondering also, when you combine that with the actual currency on the short-term signings, they were down 14. I was just wondering actually if signings were below expectations, actually as you went throughout the quarter and what that does to leverage in the back half, you know, considering that we don’t have the $400 million in hedging benefit too per quarter? I was just wondering how those dynamics play out.

Well, when we look at that, we always make those statements on a constant currency basis. We had very good signings performance this year so at a constant currency, we had growth in total signings, we had growth in long-term signings. You know, our outsourcing signings of 12% globally, S.O. up 38% -- I mean, you can’t look at that and not be impressed with that level of signings performance. And I think on your currency points, if you look at overall backlog, though backlog was flat on a quarter to quarter basis, it was in fact up $5 billion due to currency, so we are facing and moving into a period where actually currency is going to start to help that backlog performance. But our statement, my statement that I made at analyst day was based on constant currency performance and I think this has been very, very strong performance in the quarter.

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

Our next question comes from David Bailey from Goldman Sachs. David Bailey - Goldman Sachs: Thank you very much. I was wondering if you could give a little bit more detail on what drove six points of sequential PTI improvement in software, and how sustainable that is?

Well, the PTI improvement that we had in software, a lot of that is driven by all of the structural improvements that we’ve been driving for our business, and those structural advantages are going and improvements in productivity are going to continue as we go into the second half of the year. So as you look at these results in the second quarter, there was nothing in these results that I would call a unique one-time advantage. So as I look at it going into the second half, those structural elements coming off of all of the initiatives that we have driven to improve our processes and our management of our overhead structures and our shared staff, those will continue as we go into the back half of the year.

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

Our next question comes from Keith Bachman from BMO Capital Markets. Keith Bachman - BMO Capital Markets: Thanks for the question. I want to ask a similar question on GTS -- you had a 10% revenue decline and yet your pretax dollars were up over 40%. What were the -- could you talk a little bit about the specific key drivers there and how you anticipate the pretax margin, which is now 15%, how should we be thinking about that moving forward? Thanks.

Well, you know, the GTS performance, I would put that in a longer term framework. I mean, they have gone, PTI, double-digits for the eight consecutive quarters and again, a very powerful performance, up 41%, in the second quarter. That is really, really driven by the margin improvements that was executed across all of the lines of business. And I think it’s appropriate to re-emphasize, when we have put margin as a key element of our 2010 roadmap, that emphasis on margin along with revenue performance, share repurchase, acquisition performance, that’s embedded in all of our segment performance metrics and strategies. And I think GTS just did a great job in the quarter capitalizing that. You know, S.O., this is really driven by delivery. They have advanced tools and automation, new process techniques that they are driving, hardware and software optimization across that -- a lot of it we regard as our intellectual property that differentiates us from the competition. ITS, they too are driving towards a more profitable labor based book of business away from OEM content. In business transformation, it’s really a function of deal selectivity and delivery performance and I think they did a great job. And you know, even in maintenance -- even in maintenance, you know, looking at adjusting for Info Print, they drove very good OEM business adoption within the maintenance business. Frankly, if you adjust for Info Print, maintenance was up 1% year to year, very strong margins. So that margin strategy is part of our ongoing work to transform the business. It’s part of each of the business units objectives and plans and I think it really showed through in the second quarter.

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

Our next question comes from Mark Moskowitz from J.P. Morgan. Mark Moskowitz - J.P. Morgan: Thank you. Good afternoon. Mark, you mentioned in your comments about incremental workload [inaudible] introduced here shortly. Could you maybe give us some context in terms of how the workload engines in the mainframe business the last couple of years have boosted the annuity block in your software business? Has that helped leverage and can we see it be even more leverage with these new blocks coming out?

Yeah, I mean, when you look at the z Series platform, that new workload approach is really to draw a new customer content and new customer adoption into the platform, and we’ve been quite happy with our new workload performance over time. I think what is interesting about this now is it really does expand the aperture of the workload opportunities that we apply that approach to, so that’s why we are going to implement this new data warehouse offerings that enables real-time business analytics, consistent with our emphasis on business analytics. The enterprise disaster recovery solution enabling multi-location platforms for disaster recovery. Enterprise security hubs, the WebSphere application server, the enhanced SAP solutions -- I mean, you put all five of those together, it substantially increases the aperture of opportunities that we now apply that new workload content to, and it has actually worked very, very well and we are quite optimistic about it going into the second half.

Thanks, Mark. Let’s take the next question, please.

Our next question comes from Bill Shope from Credit Suisse. Bill Shope - Credit Suisse: Thanks, guys. Maybe I missed this earlier in the call but can you give us some color on the short-term signings performance, particularly on a constant currency basis? And how we should think about that going into the second half?

Well, you know, if we look at short-term signings on a constant currency basis, it was down 7% and as I said, most of that was driven by the impact as customers look at the more discretionary elements of their budget and that hit us in the more discretionary elements of our short-term offerings. So as we move forward, there’s still going to be that budget pressure on the customer side of the house but on the other hand, we also would think that as the stimulus starts to roll out through the second half, and that affects the economy, that the customer adoption of those and the discretionary should improve. Now that said, we did not [inaudible] -- as we built our view of the second half. We did not consider that. We said at best it stays about the same level moving into the second half. In fact, we kind of built this assuming that the GVS platform was about the same regular performance of second half as the first half, though it would be an improving bet going from third quarter to fourth quarter, so we did not go on the potential economic upside as the stimulus packages hit but I think that is a real opportunity for us.

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

Our next question comes from Scott Craig from Merrill Lynch. Scott Craig - Merrill Lynch: Good afternoon. Mark, you mentioned a $3.5 billion cost and expense savings this year, which I think is a little bit up from when you went over it on the analyst day, so first, where did that incremental $500 million come from? And then secondly, does it still -- how does it roll out over the back part of the year? How much have you already kind of put through the P&L so far? Thanks.

Okay. Very good question -- you know, when we looked at that and described the $3 billion in the analyst day, we described that in really two different categories -- you know, what was the yield off of the work force rebalancing and at that time, we said it was about $2 billion and we still look at that to be about $2 billion, so that’s quite consistent. The other element that we identified was the content from all of the work that we are doing on our integrated support functions and our integrated support processes that we manage on a global basis and at that time, we thought we’d get about $0.5 billion advantage from each of those or $1 billion in total for the year. What’s happened is we went through the second quarter, all of the work on those initiatives actually developed a much higher rate of yield than we anticipated, so now against that $1 billion, we now see closer to $1.5 billion as we go through the year. So that’s where the extra $0.5 billion kind of came on the integrated support functions and integrated support processes and all that work we are doing on process management on a global basis. Now, if you look at the way that $3.5 billion rolls out, we’ve got about $0.5 billion in the first quarter, about $1 billion in the second quarter, so that leaves another $2 billion to roll out through the second half of the year. And given that it’s kind of structural in nature, I would look at that kind of evenly distributed across that second half. Scott Craig - Merrill Lynch: Okay. Thank you.

Thanks, Scott. Operator, can we take one last question, please.

Our next question comes from David Grossman from Thomas Weisel. David Grossman - Thomas Weisel Partners: Thanks very much. Mark, given the upward revision to your 2009 outlook, how should we think about the 2010 range? You know, given that you reiterated again that you are well ahead of pace. And can you remind us what the key assumptions are underlying your 2010 outlook?

Sure, I’d be happy to go through that. I mean, as you’ll see, we have from our perspective, increasing the at least number from 920 to 970, we’ve got a very strong base as we look at 2009 and much of that advantage will flow in through to 2010 as well. So I think we are very well-positioned for 2010. We gave that a range of 10 to 11. I think it’s a little hard not to say we are well ahead of pace when we are now looking at least 970 per year. That was a long range forecast that we built and that forecast, if you remember the elements was built on kind of the contribution we should get from revenue, the contribution from margin, from share repurchase, our acquisitions, our big investment elements. So as I look at 2010, I look at it and say one, well ahead of pace; two, a very solid base; and structural improvements in 2009 that will roll through to 2010 and like every year, we will update our view of 2010 in January. But right now, I feel pretty well-positioned. So with that, one, I want to thank you all for joining our call today and just give me a moment to wrap up here. I would close really by saying that IBM had a very strong quarter and it really was driven by our ongoing transformation. I think you can see in the analysis that we’ve been shifting towards higher value businesses and driving productivity and efficiency across the enterprise. And it’s really a result of our business model, where we improved our margin quite significantly. We see this continuing with double-digit profit growth across both software and services for the full year. And I think if you go to that bar chart that we included in the exhibit, I personally think there’s no better indication of the transformation that we’ve been driving than the change in profit contribution from the segments from 2000 to 2009, with software going from $2.8 billion of segment profitability in 2000 to about $8 billion in 2009 -- that is real transformation progress. And services likewise, going from $4.5 billion in 2000 to almost $8 billion in 2009, the combination is about $16 billion. In addition, we see hardware stabilizing and returning to profit growth in the fourth quarter, on the back of that decline that we saw in our hardware business in the second quarter halving as we go into the third quarter and halving again as we go into the fourth quarter. This strong profit and cash flow continues to allow us to make strategic investments that will fuel new growth and margin expansion. We see this with our strong performance in XIV and Diligent key acquisitions that were part of our storage software growth, which is up 25%, as well as Cognos and ILOG, which both had very, very good quarters and are the foundation investments in business analytics where we have invested $8 billion to capture this great opportunity. I don’t think we just look at that suite of 12 acquisitions that we knitted together with our own organic investments and our research contribution -- that didn’t just happen this year. We’ve been building that since 2005. And so I think that when the economy turns, we have real operating leverage to capitalize on this growth in 2010 and that’s why we increased our guidance by $0.50 for the year to at least $9.70, which puts us well ahead of pace for our 2010 roadmap objective of $10 to $11. So once again, I want to thank you for joining the call and now, as always, it’s back to work.

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