Edgar Filing: INTERNATIONAL BUSINESS MACHINES CORP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 - Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, 2009

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

New York		13-0871985
(State of incorporation)		(IRS employer identification number)

Armonk, New York		10504
(Address of principal executive offices)		(Zip Code)

914-499-1900

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o		Non-accelerated filer o
Smaller reporting company o				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The registrant has 1,321,397,323 shares of common stock outstanding at March 31, 2009.

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Index

	Page

PART I - Financial Information:	3

ITEM 1. Consolidated Financial Statements:	3

Consolidated Statement of Earnings for the three months ended March 31, 2009 and 2008	3

Consolidated Statement of Financial Position at March 31, 2009 and December 31, 2008	4

Consolidated Statement of Cash Flows for the three months ended March 31, 2009 and 2008	6

Notes to Consolidated Financial Statements	7

ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	23

ITEM 4. Controls and Procedures	47

PART II - Other Information:	48

ITEM 1. Legal Proceedings	48

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities	48

ITEM 6. Exhibits	48

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PART I - Financial Information

ITEM 1. Consolidated Financial Statements:

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

(Dollars in millions except	Three Months Ended March 31,
per share amounts)	2009			2008
Revenue:
Services	$	13,178		$	14,574
Sales	7,949			9,288
Financing	584			640
Total revenue	21,711			24,502

Cost:
Services	9,063			10,348
Sales	2,902			3,674
Financing	316			314
Total cost	12,280			14,336

Gross profit	9,431			10,166

Expense and other income:
Selling, general and administrative	5,264			5,620
Research, development and engineering	1,480			1,569
Intellectual property and custom development income	(268		)	(274		)
Other (income) and expense	(304		)	(125		)
Interest expense	136			178
Total expense and other income	6,309			6,968

Income before income taxes	3,122			3,198
Provision for income taxes	827			879
Net income	$	2,295		$	2,319

Earnings per share of common stock:
Assuming dilution	$	1.70		$	1.64	*
Basic	$	1.71		$	1.67	*

Weighted-average number of common shares outstanding: (millions)
Assuming dilution	1,349.5			1,411.4		*
Basic	1,344.3			1,394.3		*

Cash dividend per common share	$	0.50		$	0.40

* Reflects the implementation of FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” See Note 2 on pages 7 to 9 for additional information.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

ASSETS

	At March 31,		At December 31,
(Dollars in millions)	2009		2008

Assets:
Current assets:
Cash and cash equivalents	$	12,294	$	12,741
Marketable securities	1		166
Notes and accounts receivable — trade (net of allowances of $244 in 2009 and $226 in 2008)	9,170		10,906
Short-term financing receivables (net of allowances of $362 in 2009 and $351 in 2008)	12,952		15,477
Other accounts receivable (net of allowances of $53 in 2009 and $55 in 2008)	1,341		1,172
Inventories, at lower of average cost or market:
Finished goods	568		524
Work in process and raw materials	2,191		2,176
Total inventories	2,759		2,701
Deferred taxes	1,410		1,542
Prepaid expenses and other current assets	4,068		4,299
Total current assets	43,995		49,004

Plant, rental machines and other property	37,592		38,445
Less: Accumulated depreciation	23,865		24,140
Plant, rental machines and other property — net	13,727		14,305
Long-term financing receivables (net of allowances of $174 in 2009 and $179 in 2008)	10,035		11,183
Prepaid pension assets	1,946		1,601
Deferred taxes	6,523		7,270
Goodwill	18,070		18,226
Intangible assets — net	2,721		2,878
Investments and sundry assets	4,928		5,058
Total assets	$	101,944	$	109,524

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION — (CONTINUED)
(UNAUDITED)

LIABILITIES AND STOCKHOLDERS’ EQUITY

(Dollars in millions)	At March 31, 2009			At December 31, 2008

Liabilities and Stockholders’ equity:
Current liabilities:
Taxes	$	2,032		$	2,743
Short-term debt	9,870			11,236
Accounts payable	5,878			7,014
Compensation and benefits	3,368			4,623
Deferred income	10,407			10,239
Other accrued expenses and liabilities	5,870			6,580
Total current liabilities	37,425			42,435
Long-term debt	21,106			22,689
Retirement and nonpension postretirement benefit obligations	18,276			19,452
Deferred income	3,230			3,171
Other liabilities	8,214			8,192		*
Total liabilities	88,252			95,939		*

Stockholders’ equity:

Common stock, par value $0.20 per share, and additional paid-in capital	39,430			39,129
Shares authorized: 4,687,500,000
Shares issued: 2009 - 2,101,084,868
2008 - 2,096,981,860
Retained earnings	71,968			70,353
Noncontrolling interests*	92			119		*
Treasury stock - at cost	(76,148		)	(74,171		)
Shares: 2009 - 779,687,545
2008 - 757,885,937
Accumulated gains and (losses) not affecting retained earnings	(21,649		)	(21,845		)
Total stockholders’ equity	13,693			13,584		*
Total liabilities and stockholders’ equity	$	101,944		$	109,524

* Reflects implementation of SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” See Note 2 on pages 7 to 9 for additional information.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED)

(Dollars in millions)	2009			2008

Cash flow from operating activities:
Net income	$	2,295		$	2,319
Adjustments to reconcile net income to cash provided from operating activities:
Depreciation	917			1,030
Amortization of intangibles	312			317
Stock-based compensation	137			171
Net (gain)/loss on asset sales and other	(298		)	115
Changes in operating assets and liabilities, net of acquisitions/divestitures	1,024			251
Net cash provided by operating activities	4,386			4,202

Cash flow from investing activities:
Payments for plant, rental machines and other property, net of proceeds from dispositions	(599		)	(1,018		)
Investment in software	(161		)	(194		)
Acquisition of businesses, net of cash acquired	(21		)	(4,962		)
Divestiture of businesses, net of cash transferred	356			29
Non-operating finance receivables — net (1)	387			157
Purchases of marketable securities and other investments (1)	(922		)	(2,196		)
Proceeds from disposition of marketable securities and other investments (1)	912			2,404
Net cash used in investing activities	(48		)	(5,778		)

Cash flow from financing activities:
Proceeds from new debt	913			3,742
Payments to settle debt	(3,478		)	(4,894		)
Short-term borrowings/(repayments) less than 90 days — net	181			372
Common stock repurchases	(1,765		)	(2,427		)
Common stock transactions — other	242			965
Cash dividends paid	(675		)	(554		)
Net cash used in financing activities	(4,583		)	(2,796		)

Effect of exchange rate changes on cash and cash equivalents	(202		)	168
Net change in cash and cash equivalents	(447		)	(4,205		)

Cash and cash equivalents at January 1	12,741			14,991
Cash and cash equivalents at March 31	$	12,294		$	10,786

(1) Non-operating finance receivables — net represents net cash flows from short-term commercial financing arrangements (terms generally 30 to 90 days) with dealers and remarketers of predominantly non-IBM products. Amounts previously presented gross within Purchases/Proceeds of marketable securities and other investments.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

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Notes to Consolidated Financial Statements:

1. Basis of Presentation: The accompanying consolidated financial statements and footnotes thereto are unaudited. In the opinion of the management of International Business Machines Corporation (the company), these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and gains and losses not affecting retained earnings that are reported in the Consolidated Financial Statements and accompanying disclosures. Actual results may be different. See the company’s 2008 Annual Report for a discussion of the company’s critical accounting estimates.

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2008 Annual Report.

Within the financial tables in this Form 10-Q, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts.

2. Accounting Changes: In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements”. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will adopt this FSP for its quarter ending June 30, 2009. There is no expected impact on the Consolidated Financial Statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments”. The guidance applies to investments in debt securities for which other-than-temporary impairments may be recorded. If an entity’s management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: 1) the amount related to credit losses (recorded in earnings), and 2) all other amounts (recorded in other comprehensive income). This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will adopt this FSP for its quarter ending June 30, 2009. There is no expected impact on the Consolidated Financial Statements.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1 “Interim Disclosures about Fair Value of Financial Instruments”. The FSP amends SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will include the required disclosures in its quarter ending June 30, 2009.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which became effective January 1, 2009 via prospective application to business combinations. This Statement requires that the acquisition method of accounting be applied to a broader set of business combinations, amends the definition of a business combination, provides a definition of a business, requires an acquirer to recognize an acquired business at its fair value at the acquisition date and requires the assets and liabilities assumed in a business combination to be measured and recognized at their fair values as of the acquisition date (with limited exceptions). The company adopted this Statement on January 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If

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Notes to Consolidated Financial Statements — (continued)

fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss”. Further, the FASB removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R). The requirements of this FSP carry forward without significant revision the guidance on contingencies of SFAS No. 141, “Business Combinations”, which was superseded by SFAS No. 141(R) (see previous paragraph). The FSP also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. This FSP was adopted effective January 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”. The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” This Statement requires that the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. Pursuant to the transition provisions of SFAS No. 160, the company adopted the Statement on January 1, 2009 via retrospective application of the presentation and disclosure requirements. Noncontrolling interests of $119 million at December 31, 2008 were reclassified from the Liabilities section to the Stockholders’ Equity section in the Consolidated Statement of Financial Position as of January 1, 2009. Noncontrolling interest amounts of $2 million and $12 million, net of tax, for the three months ended March 31, 2009 and March 31, 2008, respectively, are not presented separately in the Consolidated Statement of Earnings due to immateriality, but are reflected within the other (income) and expense line item.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 expands the current disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” such that entities must now provide enhanced disclosures on an interim basis and annual basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for under SFAS No. 133 and how derivatives and related hedged items affect the entity’s financial position, financial results and cash flow. Pursuant to the transition provisions of the Statement, the company adopted SFAS No. 161 on January 1, 2009. The required disclosures are presented in Note 6 on a prospective basis. This Statement does not impact the consolidated financial results as it is disclosure-only in nature.

In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-2 delayed the effective date of SFAS No. 157 “Fair Value Measurements” from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of the provisions of SFAS No. 157 related to nonfinancial assets and nonfinancial liabilities on January 1, 2009 did not have a material impact on the Consolidated Financial Statements. See Note 3 for SFAS No. 157 disclosures.

In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which became effective in 2009 via retrospective application. Under the FSP, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (EPS) pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Restricted Stock Units (RSUs) granted to employees prior to December 31, 2007 are considered participating securities as they receive non-forfeitable dividend equivalents at the same rate as common stock. RSUs granted after December 31, 2007 do not receive dividend equivalents and are not considered participating securities. The company retrospectively adopted the FSP on January 1, 2009. The impact of adopting the FSP decreased previously reported diluted EPS by $0.01 and previously reported basic EPS by $0.01 for the three months ended March 31, 2008.

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Notes to Consolidated Financial Statements — (continued)

In November 2008, the FASB ratified EITF Issue 08-7, “Accounting for Defensive Intangible Assets”. A defensive intangible asset is an asset acquired in a business combination or in an asset acquisition that an entity does not intend to actively use. According to the guidance, defensive intangible assets are considered to be a separate unit of account and valued based on their highest and best use from the perspective of an external market participant. The company adopted EITF 08-7 on January 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of the business combinations subject to this statement.

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This FSP amends SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” to require more detailed disclosures about the fair value measurements of employers’ plan assets including (a) investment policies and strategies; (b) major categories of plan assets; (c) information about valuation techniques and inputs to those techniques, including the fair value hierarchy classifications (as defined by SFAS No. 157) of the major categories of plan assets; (d) the effects of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets; and (e) significant concentrations of risk within plan assets. The disclosures required by the FSP will be included in the company’s year ending 2009 Consolidated Financial Statements. This Statement does not impact the consolidated financial results as it is disclosure-only in nature.

3. Fair Value:

Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2009 and December 31, 2008 consistent with the fair value hierarchy provisions of SFAS No. 157.

(Dollars in millions) At March 31, 2009	Level 1		Level 2		Level 3		Netting (1)			Total
Assets:
Cash and cash equivalents	$	1,729	$	8,067	$	—	$	—		$	9,796
Marketable securities	—		1		—		—			1
Derivative assets (2)	—		1,762		—		(822		)	940
Investments and sundry assets	171		6		—		—			177
Total Assets	$	1,900	$	9,836	$	—	$	(822	)	$	10,914

Liabilities:
Derivative liabilities (3)	$	—	$	1,456	$	—	$	(822	)	$	634
Total Liabilities	$	—	$	1,456	$	—	$	(822	)	$	634

(1) Represents netting of derivative exposures covered by a qualifying master netting agreement in accordance with FASB Interpretation No. 39, “Offsetting of Amounts Relating to Certain Contracts.”

(2) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at March 31, 2009 are $632 million and $1,130 million, respectively.

(3) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at March 31, 2009 are $889 million and $567 million, respectively.

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Notes to Consolidated Financial Statements — (continued)

(Dollars in millions) At December 31, 2008	Level 1		Level 2		Level 3		Netting (1)			Total
Assets:
Cash and cash equivalents	$	1,950	$	8,059	$	—	$	—		$	10,009
Marketable securities	—		166		—		—			166
Derivative assets (2)	56		1,834		—		(875		)	1,015
Investments and sundry assets	165		6		—		—			171
Total Assets	$	2,171	$	10,065	$	—	$	(875	)	$	11,361

Liabilities:
Derivative liabilities (3)	$	—	$	2,116	$	—	$	(875	)	$	1,241
Total Liabilities	$	—	$	2,116	$	—	$	(875	)	$	1,241

(2) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2008 are $773 million and $1,117 million, respectively.

(3) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2008 are $1,414 million and $702 million, respectively.

At March 31, 2009 and December 31, 2008, the company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) in the Consolidated Statement of Financial Position.

Items Measured at Fair Value on a Nonrecurring Basis

In the fourth quarter of 2008, the company recorded an other-than-temporary impairment of $81 million for an equity method investment. The resulting investment which was classified as Level 3 in the fair value hierarchy was valued using a discounted cash flow model. The valuation inputs included an estimate of future cash flows, expectations about possible variations in the amount and timing of cash flows and a discount rate based on the risk-adjusted cost of capital. Potential results were assigned probabilities that resulted in a weighted average or most-likely discounted cash flow fair value as of December 31, 2008. The fair value of the investment after impairment was $7 million at December 31, 2008. In the first quarter of 2009, the balance of this investment was further reduced by an additional impairment of $3 million and other adjustments primarily related to dividends. The balance of this investment was zero at March 31, 2009.

4. Financing Receivables: The following table presents financing receivables, net of allowances for doubtful accounts, including residual values.

	At March 31,		At December 31,
(Dollars in millions)	2009		2008

Current:
Net investment in sales-type and direct financing leases	$	3,951	$	4,226
Commercial financing receivables	3,855		5,781
Client loans receivables	4,438		4,861
Installment payment receivables	707		608
Total	$	12,952	$	15,477
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,312	$	5,938
Commercial financing receivables	65		94
Client loans receivables	4,282		4,718
Installment payment receivables	375		433
Total	$	10,035	$	11,183

Net investment in sales-type and direct financing leases is for leases that relate principally to the company’s equipment and are for terms ranging from two to seven years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $876 million and $916 million at March 31, 2009 and December 31, 2008, respectively, and

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Notes to Consolidated Financial Statements — (continued)

is reflected net of unearned income of $1,005 million and $1,049 million and of allowance for uncollectible accounts of $217 million and $217 million at those dates, respectively.

Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.

Client loan receivables relate to loans that are provided by Global Financing primarily to the company’s clients to finance the purchase of the company’s software and services. Separate contractual relationships on these financing arrangements are for terms ranging from two to seven years. Each financing contract is priced independently at competitive market rates. The company has a history of enforcing the terms of these separate financing agreements.

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $257 million and $373 million at March 31, 2009 and December 31, 2008, respectively.

The company did not have any financing receivables held for sale as of March 31, 2009 and December 31, 2008.

5. Stockholders’ Equity: The following table summarizes Net income plus gains and (losses) not affecting retained earnings (net of tax), a component of Stockholders’ equity in the Consolidated Statement of Financial Position:

	Three Months Ended March 31,
(Dollars in millions)	2009			2008
Net income	$	2,295		$	2,319
Gains and (losses) not affecting retained earnings: (net of tax)
Foreign currency translation adjustments	(384		)	459
Net change in retirement-related benefit plans	233			126
Net unrealized losses on marketable securities (1)	(6		)	(157		)
Net unrealized (losses)/gains on cash flow hedge derivatives	354			(296		)
Total net gains/(losses) not affecting retained earnings	196			132
Net income plus gains and (losses) not affecting retained earnings	$	2,491		$	2,451

(1) Sale of Lenovo stock and mark-to-market adjustment of remaining Lenovo stock accounted for $151 million of the period change in the first quarter of 2008.

6. Derivatives and Hedging Transactions:

The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.

As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.

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Notes to Consolidated Financial Statements — (continued)

The aggregate fair value of derivative instruments in net asset positions as of March 31, 2009 was $1,762 million. This amount represents the maximum exposure to loss at the reporting date as a result of the counterparties failing to perform as contracted. This exposure is reduced by $822 million of liabilities included in master netting arrangements with those counterparties.

The company employs derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges in accordance with SFAS No. 133, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by the translation of the underlying hedged equity. The company monitors the cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating the derivative instrument to manage this liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in fair value of the de-designated instruments from the date of de-designation until maturity. The company expended $144 million related to maturities of derivative instruments that existed in qualifying net investment hedge relationships in the three months ending March 31, 2009. At March 31, 2009, the company had net assets of $149 million, representing the fair value of derivative instruments in qualifying net investment hedge relationships. The weighted-average remaining maturity of these instruments at March 31, 2009 was approximately two years. In addition, at March 31, 2009, the company had net liabilities of $699 million representing the fair value of derivative instruments that were previously designated in qualifying net investment hedging relationships but were de-designated prior to March 31, 2009; of this amount $406 million is expected to mature over the next twelve months. The notional amount of these instruments at March 31, 2009 was $7,712 million including original and offsetting transactions.

In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps and currency swaps, depending upon the underlying exposure. The company is not party to leveraged derivatives or derivatives with contingent credit features.

A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets, principally to fund its financing lease and loan portfolio. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2009, the total notional amount of the company’s interest rate swaps was $6,807 million.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on forecasted debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at March 31, 2009.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A significant portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, 2009, the total notional amount of derivative instruments designated as net investment hedges was $1,000 million.

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the parent company. In

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Notes to Consolidated Financial Statements — (continued)

anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is approximately four years. At March 31, 2009, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $19,122 million with a weighted-average remaining maturity of 488 days.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At March 31, 2009, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $300 million.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than two years. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At March 31, 2009, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $8,957 million.

Equity Risk Management

The company is exposed to equity price changes related to certain obligations to employees. These equity exposures are primarily related to market price movements in certain broad equity market indices and in the company’s own stock. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes equity derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad equity market indices or the total return on the company’s common stock. They are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At March 31, 2009, the total notional amount of derivative instruments in economic hedges of equity risk was $465 million.

Other Risks

The company holds warrants to purchase approximately 0.5 million shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company utilizes credit default swaps to economically hedge its credit exposures. These derivatives have terms of one year or less. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company does not have any derivative instruments relating to this program outstanding at March 31, 2009.

The following tables provide a quantitative summary of the derivative and non-derivative instrument related risk management activity as of and for the three months ended March 31, 2009:

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Notes to Consolidated Financial Statements — (continued)

Fair Values of Derivative Instruments

	2009
	Derivative Assets			Derivative Liabilities
(Dollars in millions) As of March 31	Location in the Consolidated Statement of Financial Position	Fair Value		Location in the Consolidated Statement of Financial Position	Fair Value
Derivative Instruments Designated as Hedging Instruments under SFAS No.133

Interest Rate Contracts	Prepaid expenses and other current assets	$	27	Other accrued expenses and liabilities	$	—
	Investments and sundry assets	740		Other liabilities	—

Foreign Exchange Contracts	Prepaid expenses and other current assets	459		Other accrued expenses and liabilities	312
	Investments and sundry assets	360		Other liabilities	191

Total Derivative Instruments Designated as Hedging Instruments under SFAS No. 133		$	1,586		$	503

Derivative Instruments Not Designated as Hedging Instruments under SFAS No. 133 (1)

Foreign Exchange Contracts	Prepaid expenses and other current assets	$	138	Other accrued expenses and liabilities	$	577
	Investments and sundry assets	28		Other liabilities	376

Equity Contracts	Prepaid expenses and other current assets	8		Other accrued expenses and liabilities	—
	Investments and sundry assets	2		Other liabilities	—

Total Derivative Instruments Not Designated as Hedging Instruments under SFAS No. 133		$	176		$	953

Total Derivative Instruments		$	1,762		$	1,456

Total Debt Designated as Hedging		$	—	Short-term debt	$	1,358
Instruments under SFAS No. 133		—		Long-term debt	2,182

Total		$	1,762		$	4,996

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Notes to Consolidated Financial Statements — (continued)

The Effect of Derivative Instruments on the Consolidated Statement of Earnings

for the three months ended March 31, 2009

(Dollars in millions)

Derivative Instruments in SFAS No. 133 Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative			Amount of Gain (Loss) Recognized in Income on Derivatives (2)			Location of Gain (Loss) on Hedged Item			Amount of Gain (Loss) on Hedged Item Recognized in Income Attributable to Risk Being Hedged (3)
Interest Rate Contracts	Cost of financing			$	(46	)	Cost of financing			$	73
	Interest expense			(32		)	Interest expense			50
Total				$	(78	)				$	123

Derivative Instruments in SFAS No. 133 Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Accumulated Gains and (losses) not affecting retained earnings on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated Gains and (losses) not affecting retained earnings into Income			Amount of Gain (Loss) Reclassified from Accumulated Gains and (losses) not affecting retained earnings into Income (Effective Portion)			Location of Gain (Loss) on Derivative (ineffectiveness) and Amounts Excluded from Effectiveness Testing		Amount of Gain (Loss) Recognized in Income on Derivatives (ineffectiveness) and Amounts Excluded from Effectiveness Testing (4)
Interest Rate Contracts	$	(0	)	Interest expense			$	(9	)	Other (income) and expense		$	—
				Other (income) and expense			123
				Cost of sales			59
Foreign Exchange Contracts	779									Other (income) and expense		—
				Selling, general and administrative expense			36
Total	$	779					$	209				$	—

Derivative Instruments and Debt in SFAS No. 133 Net Investment Hedging Relationships	Amount of Gain (Loss) Recognized in Accumulated Gains and (losses) not affecting retained earnings on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated Gains and (losses) not affecting retained earnings into Income			Amount of Gain (Loss) Reclassified from Accumulated Gains and (losses) not affecting retained earnings into Income (Effective Portion)			Location of Gain (Loss) on Derivative (ineffectiveness) and Amounts Excluded from Effectiveness Testing		Amount of Gain (Loss) Recognized in Income on Derivatives (ineffectiveness) and Amounts Excluded from Effectiveness Testing (5)
Foreign Exchange Contracts	$	195		Other (income) and expense			$	—		Interest expense		$	(1	)

Derivative Instruments Not Designated as Hedging Instruments under SFAS No. 133 (1)	Location of Gain (Loss) on Derivative			Amount of Gain (Loss) Recognized in Income on Derivatives
Foreign Exchange Contracts	Other (income) and expense			$	(172	)
Equity Contracts	Selling, general and administrative expense			(27		)
Total				$	(199	)

(1) See Note 6 for additional information on the company’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

(2) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(3) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(4) The amount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.

(5) The amount of gain (loss) recognized in income represents amounts excluded from effectiveness assessment.

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Notes to Consolidated Financial Statements – (continued)

At March 31, 2009, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $661 million (before taxes), in accumulated gains and (losses) not affecting retained earnings. Of this amount, $531 million of gains are expected to be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying anticipated transactions. At March 31, 2009, net losses of approximately $16 million (before taxes), were recorded in accumulated gains and (losses) not affecting retained earnings in connection with cash flow hedges of the company’s borrowings. Of this amount, $13 million of losses are expected to be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying transactions.

For the three months ending March 31, 2009, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

7. Stock-Based Compensation: Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in the Consolidated Statement of Earnings:

	Three Months Ended March 31,
(Dollars in millions)	2009			2008
Cost	$	24		$	29
Selling, general and administrative expense	101			127
Research, development and engineering expense	12			15
Pre-tax stock-based compensation cost	137			171
Income tax benefits	(48		)	(47		)
Total stock-based compensation cost	$	89		$	124

The reduction in pre-tax stock-based compensation cost for the three-month period ended March 31, 2009, as compared to the corresponding period in the prior year, was principally the result of a reduction in the level of stock option grants ($41 million) partially offset by an increase related to restricted and performance-based stock units ($9 million).

As of March 31, 2009, the total unrecognized compensation cost of $949 million related to non-vested awards is expected to be recognized over a weighted-average period of approximately 2.5 years.

There was no significant capitalized stock-based compensation cost at March 31, 2009 and 2008.

8. Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following table provides the total retirement-related benefit plans’ impact on income before income taxes.

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2009		2008		Change
Retirement-related plans – cost:
Defined benefit and contribution pension plans – cost	$	342	$	361	(5.5	)%
Nonpension postretirement plans – cost	85		95		(10.2	)
Total	$	427	$	456	(6.5	)%

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Notes to Consolidated Financial Statements – (continued)

The following table provides the components of the cost/(income) for the company’s pension plans.

Cost/(Income) of Pension Plans

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the three months ended March 31:	2009			2008*			2009			2008*
Service cost	$	—		$	—		$	139		$	165
Interest cost	675			691			442			531
Expected return on plan assets	(1,002		)	(995		)	(593		)	(704		)
Amortization of prior service cost/(credits)	2			(2		)	(30		)	(33		)
Recognized actuarial losses	109			75			160			156
Plan amendments/curtailments/settlements	—			—			9			—
Multiemployer plan/other costs	—			—			13			16
Total net periodic pension (income)/cost of defined benefit plans	(216		)	(231		)	139			131
Cost of defined contribution plans	306			321			112			140
Total pension plan cost recognized in the Consolidated Statement of Earnings	$	90		$	90		$	252		$	271

* Reclassified to conform with 2009 presentation.

In 2009, the company expects to contribute to its non-U.S. defined benefit plans approximately $1,100 million, which is the legally mandated minimum contribution for the company’s non-U.S. plans. In the first quarter of 2009, the company contributed $393 million to its non-U.S. plans.

The following table provides the components of the cost for the company’s nonpension postretirement plans.

Cost of Nonpension Postretirement Plans

(Dollars in millions)	U.S. Plan						Non-U.S. Plans
For the three months ended March 31:	2009			2008			2009			2008*
Service cost	$	11		$	14		$	2		$	3
Interest cost	71			79			11			15
Expected return on plan assets	—			(3		)	(2		)	(2		)
Amortization of prior service credits	(10		)	(16		)	(1		)	(2		)
Recognized actuarial losses	—			3			3			3
Total nonpension postretirement plan cost recognized in the Consolidated Statement of Earnings	$	72		$	77		$	13		$	18

* Reclassified to conform with 2009 presentation.

The company received a $13.2 million subsidy in the first quarter of 2009 in connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003. A portion of this amount is used by the company to reduce its obligation and expense related to the plan, and the remainder is contributed to the plan to reduce contributions required by the participants. For further information related to the Medicare Prescription Drug Act, see pages 115 and 116 in the company’s 2008 Annual Report.

9. Acquisitions/Divestitures:

Acquisitions: During the three months ended March 31, 2009, the company did not complete any acquisitions.

Divestitures: On March 16, 2009, the company completed the sale of certain processes, resources, assets and third-party contracts related to its core logistics operations to Geodis. The company received cash proceeds of $365 million and recognized a net gain of $298 million on the transaction. The gain was net of the fair value of certain contractual terms, certain transaction costs and related real estate charges. As part of this transaction, the company will outsource its logistics operations to Geodis which will enable the company to leverage industry-leading skills and scale and improve the productivity of the company’s supply chain.

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Notes to Consolidated Financial Statements – (continued)

In 2007, the company divested 51 percent of its printing business (InfoPrint) to Ricoh. The company also stated that it would divest its remaining ownership to Ricoh quarterly over a three year period from the closing date. At March 31, 2009, the company’s ownership in InfoPrint was 20.3 percent. See the company’s 2008 Annual Report on page 83 for additional information.

10. Intangible Assets Including Goodwill: The following table details the company’s intangible asset balances by major asset class:

	At March 31, 2009
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,850	$	(854	)	$	997
Client-related	1,526		(717		)	810
Completed technology	1,115		(333		)	782
Patents/trademarks	183		(81		)	103
Other(a)	108		(79		)	29
Total	$	4,784	$	(2,063	)	$	2,721

	At December 31, 2008
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,861	$	(839	)	$	1,022
Client-related	1,532		(663		)	869
Completed technology	1,167		(327		)	840
Patents/trademarks	188		(76		)	112
Other(a)	154		(121		)	35
Total	$	4,901	$	(2,023	)	$	2,878

(a) Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems, and impacts from currency translation.

The net carrying amount of intangible assets decreased $157 million during the first quarter of 2009, primarily due to amortization of acquired intangibles. The aggregate intangible amortization expense was $312 million and $317 million for the quarters ended March 31, 2009 and 2008, respectively. In addition, in the first quarter, the company retired $264 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at March 31, 2009:

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2009 (for Q2-Q4)	$	497	$	375	$	872
2010	379		408		787
2011	113		358		471
2012	8		290		297
2013	—		207		207

The changes in the goodwill balances by reportable segment, for the quarter ended March 31, 2009, are as follows:

										Foreign
										Currency
					Purchase					Translation
(Dollars in millions)	Balance		Goodwill		Price					And Other			Balance
Segment	12/31/08		Additions		Adjustments			Divestitures		Adjustments			3/31/09
Global Business Services	$	3,870	$	—	$	—		$	—	$	(70	)	$	3,800
Global Technology Services	2,616		—		(2		)	—		(39		)	2,575
Software	10,966		—		66			—		(111		)	10,921
Systems and Technology	772		—		2			—		—			773
Total	$	18,226	$	—	$	65		$	—	$	(221	)	$	18,070

There were no goodwill impairment losses recorded during the quarter.

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Notes to Consolidated Financial Statements – (continued)

11. Restructuring-Related Liabilities: The following table provides a rollforward of the current and noncurrent liability balances for actions taken in the following periods: (1) the second quarter of 2005; (2) the fourth quarter of 2002 actions associated with the acquisition of the PricewaterhouseCoopers consulting business; (3) the second quarter of 2002 associated with the Microelectronics Division and the rebalancing of both the company’s workforce and leased space resources; (4) the 2002 actions associated with the hard disk drive (HDD) business for reductions in workforce, manufacturing capacity and space; (5) the actions taken in 1999; and (6) the actions that were executed prior to 1994.

	Liability								Liability
	as of								as of
(Dollars in millions)	12/31/2008		Payments			Other Adj.*			3/31/2009
Current:
Workforce	$	95	$	(23	)	$	1		$	73
Space	23		(5		)	1			20
Other	7		—			—			7
Total Current	$	125	$	(28	)	$	2		$	99
Noncurrent:
Workforce	$	453	$	—		$	(19	)	$	434
Space	23		—			(3		)	21
Total Noncurrent	$	476	$	—		$	(22	)	$	454

* The other adjustments column in the table above principally includes the reclassification of noncurrent to current, foreign currency translation adjustments and interest accretion.

12. Segments: The table on page 52 of this Form 10-Q reflects the results of the company’s reportable segments consistent with the management system used by the company’s chief operating decision maker. These results are not necessarily a depiction that is in conformity with GAAP. For example, employee retirement plan costs are developed using actuarial assumptions on a country-by-country basis and allocated to the segments based on headcount. Different results could occur if actuarial assumptions that are unique to the segments were used. Performance measurement is based on income before income taxes (pre-tax income). These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments.

13. Contingencies: The company is involved in a variety of claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property (IP), product liability, employment, benefits, securities, foreign operations and environmental matters. These actions may be commenced by a number of different parties, including competitors, partners, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business.

The following is a summary of some of the more significant legal matters involving the company.

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by The SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s Unix IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux. The company has asserted counterclaims, including breach of contract, violation of the Lanham Act, unfair competition, intentional torts, unfair and deceptive trade practices, breach of the General Public License that governs open source distributions, promissory estoppel and copyright infringement. In October 2005, the company withdrew its patent counterclaims in an effort to simplify and focus the issues in the case and to expedite their resolution. Motions for summary judgment were heard in March 2007, and the court has not yet issued its decision. On August 10, 2007, the court in another suit, The SCO Group, Inc. v. Novell, Inc., issued a decision and order determining, among other things, that Novell is the owner of UNIX and UnixWare copyrights, and obligating SCO to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. At the request of the court in SCO v. IBM, on August 31, 2007, each of the parties filed a status report with the court concerning the effect of the August 10th Novell ruling on the SCO v. IBM case, including the pending motions. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. In the SCO v. Novell case, on November 25, 2008, SCO filed its notice of appeal to the U.S. Court of Appeals for the Tenth Circuit, which included an appeal of the August 10, 2007 ruling.

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Notes to Consolidated Financial Statements – (continued)

On November 29, 2006, the company filed a lawsuit against Platform Solutions, Inc. (PSI) in the United States District Court for the Southern District of New York, alleging that PSI violated certain intellectual property rights of IBM. PSI asserted counterclaims against IBM. On January 11, 2008, the court permitted T3 Technologies, a reseller of PSI computer systems, to intervene as a counterclaim-plaintiff. T3 claims that IBM violated certain antitrust laws by refusing to license its patents and trade secrets to PSI and by tying the sales of its mainframe computers to its mainframe operating systems. On June 30, 2008, IBM acquired PSI. As a result of this transaction, IBM and PSI dismissed all claims against each other, and PSI withdrew a complaint it had filed with the European Commission in October 2007 with regard to IBM. Litigation between the company and T3 continues. In January 2009, T3 filed a complaint with the European Commission alleging that IBM violated European Commission competition law based on the facts alleged in the pending U.S. litigation.

The company is a defendant in an action filed on March 16, 2007 in the United States District Court for the Eastern District of Texas by SuperSpeed LLC, which alleges that certain IBM products infringe certain patents relating generally to cache coherency techniques. SuperSpeed seeks damages and injunctive relief.

The company and certain of its subsidiaries are defendants in an action filed on August 17, 2007 in the United District Court for the Eastern District of Texas by JuxtaComm Technologies, Inc., which alleges that certain IBM products infringe a patent relating to the transformation and exchange of data between different computer systems. JuxtaComm seeks damages and injunctive relief. The case is set for trial in November 2009.

In January 2004, the Seoul District Prosecutors Office in South Korea announced it had brought criminal bid-rigging charges against several companies, including IBM Korea and LG IBM (a joint venture between IBM Korea and LG Electronics, which has since been dissolved, effective January, 2005) and had also charged employees of some of those entities with, among other things, bribery of certain officials of government-controlled entities in Korea and bid rigging. IBM Korea and LG IBM cooperated fully with authorities in these matters. A number of individuals, including former IBM Korea and LG IBM employees, were subsequently found guilty and sentenced. IBM Korea and LG IBM were also required to pay fines. Debarment orders were imposed at different times, covering a period of no more than a year from the date of issuance, which barred IBM Korea from doing business directly with certain government-controlled entities in Korea. All debarment orders have since expired and when they were in force did not prohibit IBM Korea from selling products and services to business partners who sold to government-controlled entities in Korea. In addition, the U.S. Department of Justice and the SEC have both contacted the company in connection with this matter. In March 2008, the company received a request from the SEC for additional information.

On March 27, 2008, the company was temporarily suspended from participating in new business with U.S. Federal government agencies. The notice of temporary suspension was issued by the Environmental Protection Agency (EPA) and related to an investigation by the EPA of possible violations of the Procurement Integrity provisions of the Office of Federal Procurement Policy Act regarding a specific bid for business with the EPA originally submitted in March 2006. In addition, the U.S. Attorney’s Office for the Eastern District of Virginia served the company and certain employees with grand jury subpoenas related to the bid, requesting testimony and documents regarding interactions between employees of the EPA and certain company employees. On April 4, 2008, the company announced an agreement with the EPA that terminated the temporary suspension order. In January 2009, the U.S. Attorney’s Office for the Eastern District of Virginia confirmed that it was closing its investigation and would bring no charges in this matter. In April 2009, the EPA advised the company that this matter is closed.

The company is a defendant in a civil lawsuit brought in Tokyo District Court by Tokyo Leasing Co., Ltd., which seeks to recover losses that it allegedly suffered after IXI Co., Ltd. initiated civil rehabilitation (bankruptcy) proceedings in Japan and apparently failed to pay Tokyo Leasing amounts for which Tokyo Leasing now seeks to hold IBM and others liable. The claims in this suit include tort and breach of contract.

The company is a defendant in numerous actions filed after January 1, 2008 in the Supreme Court for the State of New York, county of Broome, on behalf of hundreds of plaintiffs. The complaints allege numerous and different causes of action, including for negligence and recklessness, private nuisance and trespass. Plaintiffs in these cases seek medical monitoring and claim damages in unspecified amounts for a variety of personal injuries and property damages allegedly arising out of the presence of groundwater contamination and vapor intrusion of groundwater contaminants into certain structures in which plaintiffs reside or resided, or conducted business, allegedly resulting from the release of chemicals into the environment by the company at its former manufacturing and development facility in Endicott. These complaints also seek punitive damages in an unspecified amount.

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Notes to Consolidated Financial Statements – (continued)

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters principally relate to claims for taxes on the importation of computer software. The total amounts related to these matters are approximately $2.0 billion, including amounts currently in litigation and other amounts. In November 2008, the company won a significant case in the Superior Chamber of the federal administrative tax court in Brazil and is awaiting the published decision of the case. Assuming this decision is upheld, the remaining total potential amount related to these matters for all applicable years is approximately $450 million. In addition, the company has received an income tax assessment from Mexican authorities relating to the deductibility of certain warranty payments. In response, the company has filed an appeal in the Mexican Federal Fiscal court. The total potential amount related to this matter for all applicable years is approximately $450 million. The company believes it will prevail on these matters and that these amounts are not meaningful indicators of liability.

In accordance with SFAS No. 5, “Accounting for Contingencies,” (SFAS No. 5), the company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Provisions related to income tax matters are recorded in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” Claims and proceedings are reviewed at least quarterly and provisions are taken or adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Any recorded liabilities, including any changes to such liabilities for the quarter ended March 31, 2009, were not material to the Consolidated Financial Statements. Based on its experience, the company believes that the damage amounts claimed in the matters previously referred to are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of the matters previously discussed. While the company will continue to defend itself vigorously in all such matters, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

Whether any losses, damages or remedies finally determined in any such claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have on the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter which may give rise to additional factors.

14. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $4,774 million and $4,403 million at March 31, 2009 and December 31, 2008, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $3,147 million and $3,342 million at March 31, 2009 and December 31, 2008, respectively.

The company has applied the disclosure provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to its agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by SFAS No. 5, by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of non-financial contractual obligations and certain income taxes.

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Notes to Consolidated Financial Statements – (continued)

In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the company to challenge the other party’s claims. While typically indemnification provisions do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $84 million and $50 million at March 31, 2009 and December 31, 2008, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position was not material.

Standard Warranty Liability

Changes in the company’s warranty liability balance are presented in the following table:

(Dollars in millions)	2009			2008
Balance at January 1	$	358		$	412
Current period accruals	77			92
Accrual adjustments to reflect actual experience	12			16
Charges incurred	(103		)	(133		)
Balance at March 31	$	344		$	387

Extended Warranty Liability

(Dollars in millions)	2009			2008
Aggregate deferred revenue at January 1	$	589		$	409
Revenue deferred for new extended warranty contracts	73			60
Amortization of deferred revenue	(64		)	(23		)
Other*	(12		)	11
Aggregate deferred revenue at March 31	$	586		$	456

Current portion	$	253		$	160
Noncurrent portion	333			296
Aggregate deferred revenue at March 31	$	586		$	456

* Other primarily consists of foreign currency translation adjustments.

15. Subsequent Events: On April 28, 2009, the company announced that the Board of Directors approved a quarterly dividend of $0.55 per common share. The dividend is payable June 10, 2009 to shareholders of record on May 8, 2009. The dividend declaration represents an increase of $0.05, or 10 percent more than the prior quarterly dividend of $0.50 per common share.

On April 28, 2009, the company announced that the Board of Directors authorized $3 billion in additional funds for use in the company’s common stock repurchase program.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE MONTHS ENDED MARCH 31, 2009

Snapshot

							Yr. To Yr.
							Percent/
(Dollars in millions except per share amounts)							Margin
For the three months ended March 31:	2009			2008			Change
Revenue	$	21,711		$	24,502		(11.4	)%*
Gross profit margin	43.4		%	41.5		%	1.9	pts.
Total expense and other income	$	6,309		$	6,968		(9.5	)%
Total expense and other income to revenue ratio	29.1		%	28.4		%	0.6	pts.
Provision for income taxes	$	827		$	879		(5.9	)%
Net income	$	2,295		$	2,319		(1.0	)%
Net income margin	10.6		%	9.5		%	1.1	pts.
Earnings per share:
Assuming dilution	$	1.70		$	1.64	**	3.7	%
Basic	$	1.71		$	1.67	**	2.4	%
Weighted-average shares outstanding:
Assuming dilution	1,349.5			1,411.4		**	(4.4	)%
Basic	1,344.3			1,394.3		**	(3.6	)%

	3/31/09		12/31/08
Assets	$	101,944	$	109,524		(6.9	)%
Liabilities	$	88,252	$	95,939	+	(8.0	)%
Equity	$	13,693	$	13,584	+	0.8	%

* (3.8) percent adjusted for currency

** Reflects the implementation of FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” See Note 2 on pages 7 to 9 for additional information.

+ Reflects implementation of SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” See Note 2 on pages 7 to 9 for additional information.

Within the Management Discussion, selected references to “adjusted for currency” or “at constant currency” are made so that the financial results and other performance metrics can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the company’s business performance.

In the first quarter, in a challenging economic environment, the company delivered $1.70 in diluted earnings per share, an increase of 3.7 percent year to year. Total revenue decreased 11.4 percent as reported, 3.8 percent adjusted for currency. Pre-tax income of $3,122 million declined 2.4 percent, however, pre-tax margin increased 1.3 points due to improvements in gross margin and expense. Net income margin improved 1.1 points versus the first quarter of 2008, benefiting from an improved tax rate, and the company’s ongoing common share repurchases drove a lower share balance contributing to the improvement in diluted earnings per share.

The company has been transforming its business over the last decade shifting to higher value areas, globalizing its operations and consistently focusing on cost reduction and operational efficiency. These changes have positioned the company to deliver this financial performance in the current environment.

With a focus on higher value offerings and strong services capabilities, the company has been able to adapt its offerings to deliver what clients are focusing on, which is primarily to save costs and conserve capital. The company’s services signings reflect its ability to meet client’s needs, with total signings in the quarter up 10 percent at constant currency, and longer-term outsourcing signings increasing at 27 percent, adjusted for currency.

The company has taken actions that have shifted the mix of its business, and the business model has become less dependent on hardware, which is more vulnerable to economic conditions. In the first quarter of 2009, effectively all of the company’s pre-tax profit was generated by services, software and financing. The annuity nature of these businesses provides a solid base of revenue, profit and cash flow.

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The company has been investing to capture the opportunity in the growth markets. The company’s constant currency revenue growth in the first quarter (4 percent) in these markets remained about 8 points higher than in the major markets, consistent with full year and fourth-quarter 2008 results.

The company has had an ongoing focus on driving productivity in all parts of its business, including sales operations, supply chain management, services delivery and global support functions. These efforts have reduced the company’s fixed cost base, improving the operational balance point.

As a result of these actions, the company has built a more resilient business model, one that generates more profit from each dollar of revenue.

The company’s revenue performance was impacted by currency and the economic environment, but the results also reflect its broad business capabilities and the contribution of its annuity businesses. Services revenue was driven by the strong annuity base, though performance was impacted by a slowdown in small faster yielding projects and declines in longer-term signings in 2008. Software revenue growth, when adjusted for currency, was driven by continued demand for mission critical software. Systems and Technology performance reflects the challenges that transaction-based businesses are facing in the current economic environment. Within the segment, the company’s UNIX servers performed well. Global Financing revenue, when adjusted for currency, resulted in financing and used equipment sales revenue flat versus the prior year.

The gross profit margin was 43.4 percent, an increase of 1.9 points, primarily due to improvements in Global Technology Services (1.0 point of the increase), Software (0.5 points of the increase) and Global Business Services (0.3 points of the increase), partially offset by a decrease in Systems and Technology (0.3 points of decline).

Total expense and other income decreased 9.5 percent for the first quarter of 2009 versus the first quarter of 2008. Overall, the decrease was driven by approximately 9 points due to the effects of currency, acquisitions drove approximately 3 points of growth and the company’s operational expense improved 4 points year over year.

The company’s effective tax rate for the first three months of 2009 was 26.5 percent versus 27.5 percent in the first three months of 2008.

Total assets decreased $7,579 million (decreased $5,382 million adjusted for currency) from December 31, 2008, primarily due to lower total receivables ($5,240 million), total deferred taxes ($880 million) and cash and cash equivalents ($447 million). The company had $12,295 million in cash and marketable securities at March 31, 2009.

Total liabilities decreased $7,687 million (decreased $5,915 million adjusted for currency) from December 31, 2008, primarily due to lower total debt ($2,949 million), compensation and benefits ($1,255 million), retirement and nonpension postretirement benefit obligations ($1,176 million), accounts payable ($1,136 million) and taxes payable ($711 million).

Stockholders’ equity of $13,693 million increased $108 million from December 31, 2008, primarily due to higher retained earnings ($1,614 million), common stock ($301 million) and retirement-related items ($233 million), partially offset by increased treasury stock ($1,977 million).

The company generated $4,386 million in cash flow provided by operating activities, an increase of $185 million, compared to the first quarter of 2008. Net cash used in investing activities of $48 million was $5,730 million lower than the first quarter of 2008, primarily due to the Cognos acquisition in 2008 and the sale of core logistics operations to Geodis in the first quarter of 2009. Net cash used in financing activities of $4,583 million was $1,787 million higher, primarily due to increased net payments associated with debt ($1,605 million) and lower receipts of cash from other common stock transactions ($723 million), partially offset by lower payments to repurchase common stock ($662 million) in the first quarter of 2009 versus the first quarter of 2008.

Global Services signings were $12,535 million, a decrease of 0.6 percent year to year (increased 10 percent adjusted for currency). The estimated Global Services backlog, as reported, ended at $126 billion, down $4 billion (unchanged adjusted for currency) versus the December 31, 2008 balance.

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Quarter in Review

Results of Operations

Segment Details

The following is an analysis of the first-quarter 2009 versus first-quarter 2008 reportable segment external revenue and gross margin results.

(Dollars in millions) For the three months ended March 31:	2009			2008			Yr. to Yr. Percent/Margin Change		Yr. to Yr. Percent Change Adjusting for Currency
Revenue:
Global Technology Services	$	8,754		$	9,677		(9.5	)%	(0.9	)%
Gross margin	33.9		%	31.3		%	2.6	pts.
Global Business Services	4,397			4,911			(10.5	)%	(3.5	)%
Gross margin	26.5		%	25.0		%	1.5	pts.
Software	4,539			4,847			(6.3	)%	1.6	%
Gross margin	84.2		%	83.9		%	0.3	pts.
Systems and Technology	3,228			4,219			(23.5	)%	(18.5	)%
Gross margin	34.0		%	37.0		%	(3.0)	pts.
Global Financing	578			633			(8.5	)%	0.1	%
Gross margin	45.9		%	50.8		%	(5.0)	pts.
Other	213			216			(0.9	)%	8.6	%
Gross margin	52.7		%	(19.9		)%	72.6	pts.
Total revenue	$	21,711		$	24,502		(11.4	)%	(3.8	)%
Gross profit	$	9,431		$	10,166		(7.2	)%
Gross margin	43.4		%	41.5		%	1.9	pts.

The following table presents each reportable segment’s external revenue as a percentage of total external segment revenue and each reportable segment’s pre-tax income as a percentage of total segment pre-tax income.

	Revenue				Pre-tax Income*
For the three months ended March 31:	2009		2008		2009		2008
Global Technology Services	40.7	%	39.8	%	33.0	%	29.3	%
Global Business Services	20.5		20.2		15.6		17.2
Total Global Services	61.2		60.1		48.5		46.5
Software	21.1		20.0		39.9		37.6
Systems and Technology	15.0		17.4		0.8		4.3
Global Financing	2.7		2.6		10.8		11.5
Total	100.0	%	100.0	%	100.0	%	100.0	%

* Segment pre-tax income includes transactions between segments that are intended to reflect an arm’s-length transfer price.

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Global Services

The Global Services segments, Global Technology Services (GTS) and Global Business Services (GBS), had combined revenue of $13,152 million, a decrease of 9.8 percent (2 percent adjusted for currency) in the first quarter of 2009 compared to the first quarter of 2008. Revenue was driven by the strong annuity base, though performance was impacted by a slowdown in small faster yielding projects and declines in long-term signings in 2008. In the first quarter of 2009, total Global Services signings decreased 1 percent (increased 10 percent adjusted for currency) to $12,535 million. Signings in the longer-term outsourcing businesses were $6,991 million, an increase of 14 percent (27 percent adjusted for currency). Shorter-term signings, which include Consulting and Systems Integration and Integrated Technology Services, were $5,544 million, a decrease of 14 percent (5 percent adjusted for currency). The company signed 16 deals larger than $100 million in the quarter. The estimated Global Services backlog, at actual currency rates was $126 billion at March 31, 2009, a decrease of $4 billion (unchanged adjusted for currency) from the December 31, 2008 level. The Global Services segments leveraged very strong margin performance and delivered combined pre-tax profit of $1,625 million in the first quarter of 2009, an improvement of 3.7 percent. Pre-tax margin increased 1.6 points to 11.8 percent. The Global Services business has continued to execute on cost and expense actions consistent with the transformation of its business model.

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2009		2008		Change
Global Services Revenue:	$	13,152	$	14,588	(9.8	)%
Global Technology Services:	$	8,754	$	9,677	(9.5	)%
Strategic Outsourcing	4,539		5,011		(9.4	)
Integrated Technology Services	2,035		2,187		(7.0	)
Maintenance	1,656		1,825		(9.2	)
Business Transformation Outsourcing	524		654		(19.8	)
Global Business Services	$	4,397	$	4,911	(10.5	)%

Global Technology Services revenue decreased 9.5 percent (1 percent adjusted for currency) versus the first quarter of 2008. Total signings in GTS increased 1 percent (13 percent adjusted for currency) led by longer-term outsourcing signings growth of 8 percent (22 percent adjusted for currency). Shorter-term signings decreased 16 percent (7 percent adjusted for currency).

Strategic Outsourcing (SO) revenue was down 9.4 percent (1 percent adjusted for currency) in the first quarter of 2009 versus the same period in 2008. SO signings in the first quarter of 2009 increased 8 percent (23 percent adjusted for currency), led by strength in North America, driven by Canada, and the growth markets. Strategic Outsourcing remains a compelling value proposition to clients as it provides a lower cost base and effective cost variability over the contract period.

Integrated Technology Services (ITS) revenue decreased 7.0 percent (increased 1 percent adjusted for currency) in the first quarter of 2009 versus the first quarter of 2008. ITS signings decreased 16 percent (7 percent adjusted for currency). In the first quarter, efficiency offerings such as Optimization and Managed Services continued to perform well, however, large end-user rollouts with high OEM capital content began to decline. The shift in the portfolio to higher value offerings and away from OEM content, although impacting revenue and signings in the quarter, contributed to better gross profit margin performance.

Business Transformation Outsourcing (BTO) revenue decreased 19.8 percent (9 percent adjusted for currency) year to year, driven primarily by lower client business volumes in North America and Europe. BTO signings increased 9 percent (19 percent adjusted for currency).

Maintenance revenue decreased 9.2 percent (2 percent adjusted for currency) in the first quarter of 2009 compared to the first quarter of 2008. Services provided to Ricoh InfoPrint Solutions in the first quarter of 2008, which in subsequent periods transitioned to Ricoh, drove the majority of the decline.

Global Business Services revenue decreased 10.5 percent (4 percent adjusted for currency) in the first quarter of 2009 compared with the prior year. While revenue in the growth markets accelerated from performance in the second half of 2008, the major markets were impacted by lower longer-term signings in 2008 and a deferral of some contracts. Total signings in GBS decreased 2 percent (increased 6 percent adjusted for currency) in the quarter. Longer-term application outsourcing signings increased 44 percent (49 percent adjusted for currency) with growth in both the major and growth markets. Within

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the major markets, clients continue to be primarily motivated by cost savings opportunities, while in the growth markets, demand has been more balanced between cost savings and infrastructure build-out initiatives. Within the shorter-term category of Consulting and Systems Integration, signings decreased 13 percent (4 percent adjusted for