Notes to consolidated financial statements (audited)
International Business Machines Corporation and Subsidiary Companies

Description of plans

IBM sponsors defined benefit pension plans and defined contribution plans that cover substantially all regular employees, a supplemental retention plan that covers certain U.S. executives and nonpension postretirement benefit plans primarily consisting of retiree medical and dental benefits for eligible retirees and dependents. These benefits form an important part of the company’s total compensation and benefits program that is designed to attract and retain highly skilled and talented employees.

U.S. PLANS

Defined benefit pension plans

IBM Personal Pension Plan

IBM provides U.S. regular, full-time and part-time employees hired prior to January 1, 2005 with noncontributory defined benefit pension benefits via the IBM Personal Pension Plan (PPP). The PPP consists of a tax-qualified (qualified) plan and a non-tax qualified (non-qualified) plan. The qualified plan is funded by company contributions to an irrevocable trust fund, which is held for the sole benefit of participants and beneficiaries. The non-qualified plan, which is unfunded, provides benefits in excess of IRS limitations for qualified plans.

Benefits provided to the PPP participants are calculated using benefit formulas that vary based on the participant. Pension benefits are calculated using one of two methods based upon specified criteria used to determine each participant’s eligibility. The first method uses a five-year, final pay formula that determines benefits based on salary, years of service, mortality and other participant-specific factors. The second method is a cash balance formula that calculates benefits using a percentage of employees’ annual salary, as well as an interest crediting rate.

Benefit accruals under the PPP ceased effective January 1, 2008 for all participants.

U.S. Supplemental Executive Retention Plan

The company also sponsors a non-qualified U.S. Supplemental Executive Retention Plan (SERP). The SERP, which is unfunded, provides benefits to eligible U.S. executives based on average earnings, years of service and age at termination of employment. Effective July 1, 1999, the company replaced the then-effective SERP with the current SERP. Some participants in the previous SERP will still be eligible for benefits under that prior plan if those benefits are greater than the benefits provided under the current plan.

Benefit accruals under the SERP ceased effective January 1, 2008 for all participants.

Defined contribution plans

IBM Savings Plan

U.S. regular, full-time and part-time employees are eligible to participate in the IBM Savings Plan, which is a qualified defined contribution plan under section 401(k) of the Internal Revenue Code. For participants hired prior to January 1, 2005, the company matches 50 percent of their contributions up to the first 6 percent of eligible compensation. For participants hired or rehired on or after January 1, 2005, who have completed one year of service, the company matches 100 percent of their contributions up to the first 6 percent of eligible compensation. These participants participate in the 401(k) Pension Program offered through the IBM Savings Plan. The company’s matching contributions vest immediately and participants are always fully vested in their own contributions. All contributions, including the company match, are made in cash, in accordance with the participants’ investment elections. There are no minimum amounts that must be invested in company stock, and there are no restrictions on transferring amounts out of the company stock to another investment choice.

Effective January 1, 2008, the IBM Savings Plan, including the 401(k) Pension Program, became the IBM 401(k) Plus Plan. Under the IBM 401(k) Plus Plan, eligible employees will receive a dollar-for-dollar match of up to 6 percent of eligible compensation for employees hired prior to January 1, 2005 and up to 5 percent of eligible compensation for employees hired on or after January 1, 2005. In addition, under the IBM 401(k) Plus Plan, eligible employees will receive automatic contributions from the company equal to 1, 2 or 4 percent of employees’ eligible compensation based on their eligibility to participate in the PPP as of December 31, 2007. If an employee was hired on or after January 1, 2005, the employee would be eligible to receive automatic contributions and matching contributions after the completion of one year of service.

IBM Executive Deferred Compensation Plan

The company also maintains an unfunded, non-qualified, defined contribution plan, the IBM Executive Deferred Compensation Plan (EDCP), which allows eligible executives to defer compensation and to receive company matching contributions under the applicable IBM Savings Plan formula (depending on the date of hire, as described earlier), with respect to amounts in excess of IRS limits for qualified plans. Amounts contributed to the EDCP as a result of deferred compensation, as well as company matching contributions, are recorded as liabilities. Deferred compensation amounts may be directed by participants into an account that replicates the return that would have been received had the amounts been invested in similar IBM Savings Plan investment options. The company matching contributions are directed to participant accounts and change in value each reporting period based on changes in the company’s stock price.

Effective January 1, 2008, the EDCP was replaced with a new non-qualified deferred compensation plan, the IBM Excess 401(k) Plus Plan (Excess Plan). All employees whose eligible compensation is expected to exceed the IRS compensation limit are eligible to participate in the Excess Plan. The purpose of the Excess Plan is to provide benefits that would be provided under the qualified IBM 401(k) Plus Plan if the compensation limits did not apply. The Excess Plan, like the EDCP, will provide employees with the opportunity to save for retirement on a tax-deferred basis.

Nonpension Postretirement Benefit Plan

U.S. Nonpension Postretirement Plan

The company sponsors a defined benefit nonpension postretirement benefit plan that provides medical and dental benefits to eligible U.S. retirees and eligible dependents, as well as life insurance for eligible U.S. retirees. Effective July 1, 1999, the company established a Future Health Account (FHA) for employees who were more than five years away from retirement eligibility. Employees who were within five years of retirement eligibility are covered under the company’s prior retiree health benefits arrangements. Under either the FHA or the prior retiree health benefit arrangements, there is a maximum cost to the company for retiree health benefits.

Effective January 1, 2004, new hires, as of that date or later, are not eligible for company subsidized postretirement benefits.

NON-U.S. PLANS

Most subsidiaries and branches outside the United States sponsor defined benefit and/or defined contribution plans that cover substantially all regular employees. The company deposits funds under various fiduciary-type arrangements, purchases annuities under group contracts or provides reserves for these plans. Benefits under the defined benefit plans are typically based either on years of service and the employee’s compensation (generally during a fixed number of years immediately before retirement) or on annual credits. The range of assumptions that are used for the non-U.S. defined benefit plans reflects the different economic environments within various countries.

In addition, certain of the company’s non-U.S. subsidiaries sponsor defined benefit nonpension postretirement benefit plans that provide medical and dental benefits to eligible non-U.S. retirees and eligible dependents, as well as life insurance for certain eligible non-U.S. retirees. However, most of the non-U.S. retirees are covered by local government sponsored and administered programs.

Plan financial information

SUMMARY OF FINANCIAL INFORMATION

The following table presents a summary of the total retirement-related benefits net periodic cost recorded in the Consolidated Statement of Earnings:

($ in millions)
	U.S. Plans			Non-U.S. Plans			Total
For the year ended December 31:	2007	2006	2005	2007	2006	2005	2007	2006	2005
* Significant defined benefit pension plans consist of the qualified portion of the PPP in the U.S. and the material non-U.S. Plans. See below for a list of significant plans. ** Other defined benefit pension plans consist of the non-qualified portion of the PPP in the U.S. and the non-material non-U.S. plans.
Significant defined benefit pension plans*	$ 368	$ 456	$ 381	$ 620	$ 639	$ 729	$ 988	$ 1,095	$ 1,110
Other defined benefit pension plans**	105	93	125	202	85	136	307	178	261
SERP	23	20	9	—	—	—	23	20	9
Total defined benefit pension plans cost	$ 496	$ 569	$ 515	$ 822	$ 724	$ 865	$ 1,318	$ 1,293	$ 1,380
IBM Savings Plan and Non-U.S. Plans	$ 390	$ 358	$ 331	$ 478	$ 377	$ 337	$ 868	$ 735	$ 668
EDCP	12	11	10	—	—	—	12	11	10
Total defined contribution plans cost	$ 402	$ 370	$ 341	$ 478	$ 377	$ 337	$ 880	$ 747	$ 678
Nonpension postretirement benefit plans cost	$ 342	$ 335	$ 332	$ 57	$ 53	$ 47	$ 399	$ 388	$ 379
Total retirement-related benefits net periodic cost	$ 1,240	$ 1,274	$ 1,188	$ 1,357	$ 1,154	$ 1,249	$ 2,597	$ 2,428	$ 2,437

The following table presents a summary of the total projected benefit obligation (PBO) for defined benefit plans, accumulated postretirement benefit obligation (APBO) for nonpension postretirement benefit plans (benefit obligations), fair value of plan assets and the associated funded status recorded in the Consolidated Statement of Financial Position:

($ in millions)
	Benefit Obligations		Fair Value of Plan Assets		Funded Status**
At December 31:	2007	2006	2007	2006	2007	2006
* Excludes non-material non-U.S. defined benefit pension plans; see following section for a list of significant plans. ** Funded status was recognized in the Consolidated Statement of Financial Position as follows: Asset amounts as Prepaid pension assets; (Liability) amounts as Compensation and benefits (current liability) and Retirement and nonpension postretirement benefit obligations (noncurrent liability).
U.S. Plans:
Overfunded plans:
Qualified portion of the PPP	$ 46,323	$ 46,498	$ 57,191	$ 52,913	$ 10,868	$ 6,415
Underfunded plans:
Non-qualified portion of the PPP	$ 1,135	$ 1,123	$ —	$ —	$ (1,135)	$ (1,123)
SERP	215	217	—	—	(215)	(217)
Nonpension postretirement benefit plan	5,472	5,773	504	47	(4,968)	(5,726)
Total underfunded U.S. Plans	$ 6,822	$ 7,113	$ 504	$ 47	$ (6,318)	$ (7,066)
Non-U.S. Plans*:
Overfunded plans:
Qualified defined benefit pension plans	$ 29,031	$ 25,613	$ 35,504	$ 29,766	$ 6,473	$ 4,153
Underfunded plans:
Qualified defined benefit pension plans	$ 6,777	$ 9,076	$ 5,566	$ 7,866	$ (1,211)	$ (1,210)
Non-qualified defined benefit pension plans	5,007	4,765	—	—	(5,007)	(4,765)
Nonpension postretirement benefit plans	851	637	—	—	(851)	(637)
Total underfunded non-U.S. plans	$ 12,635	$ 14,478	$ 5,566	$ 7,866	$ (7,069)	$ (6,612)
Total overfunded plans	$ 75,354	$ 72,111	$ 92,695	$ 82,679	$ 17,341	$ 10,568
Total underfunded plans*	$ 19,457	$ 21,591	$ 6,070	$ 7,913	$ (13,387)	$ (13,678)

DEFINED BENEFIT PENSION AND NONPENSION POSTRETIREMENT BENEFIT PLAN FINANCIAL INFORMATION

The following represents financial information for the company’s significant retirement-related benefit plans. The significant defined benefit pension plans consist of the qualified portion of the PPP in the U.S. and material non-U.S. pension plans, including plans in Germany, the United Kingdom, Japan, the Netherlands, Canada, Switzerland and Spain. The significant nonpension postretirement benefit plan represents the U.S. nonpension postretirement benefit plan.

The following table presents the components of net periodic cost of the significant retirement-related benefit plans recognized in Consolidated Statement of Earnings:

($ in millions)
	Significant Defined Benefit Pension Plans						Nonpension Postretirement Benefit Plan
	U.S. Plan			Non-U.S. Plans			U.S. Plan
For the year ended December 31:	2007	2006	2005	2007	2006	2005	2007	2006	2005
Service cost	$ 746	$ 769	$ 682	$ 570	$ 596	$ 694	$ 69	$ 62	$ 45
Interest cost	2,585	2,454	2,463	1,767	1,585	1,635	311	306	324
Expected return on plan assets	(3,703)	(3,613)	(3,672)	(2,500)	(2,298)	(2,245)	—	—	—
Amortization of transition assets	—	—	—	(3)	(6)	(6)	—	—	—
Amortization of prior service costs/(credits)	61	61	61	(125)	(108)	8	(62)	(62)	(62)
Recognized actuarial losses	679	785	567	911	870	578	24	29	25
Plan amendments/curtailments/settlements	—	—	280	—	—	65	—	—	—
Total net periodic cost	$ 368	$ 456	$ 381	$ 620	$ 639	$ 729	$ 342	$ 335	$ 332

The following table presents the changes in benefit obligations and plan assets of the significant retirement-related benefit plans:

($ in millions)
	Significant Defined Benefit Pension Plans				Nonpension Postretirement Benefit Plan
	U.S. Plan		Non-U.S. Plans		U.S. Plan
	2007	2006	2007	2006	2007	2006
N/A—Not applicable
Change in benefit obligation:
Benefit obligation at beginning of year	$ 46,498	$ 46,405	$ 39,454	$ 36,643	$ 5,773	$ 5,892
Service cost	746	769	570	596	69	62
Interest cost	2,585	2,454	1,767	1,585	311	306
Plan participants’ contributions	—	—	66	57	—	—
Acquisitions/divestitures, net	5	—	85	10	—	—
Actuarial losses/(gains)	(465)	(283)	(2,324)	(600)	(203)	8
Benefits paid from trust	(3,046)	(2,847)	(1,616)	(1,454)	—	—
Direct benefit payments	—	—	(367)	(311)	(442)	(486)
Foreign exchange impact	—	—	3,177	3,616	—	—
Medicare subsidy	—	—	—	—	(36)	(9)
Plan amendments/curtailments/settlements	—	—	3	(688)	—	—
Benefit obligation at end of year	$ 46,323	$ 46,498	$ 40,815	$ 39,454	$ 5,472	$ 5,773
Change in plan assets:
Fair value of plan assets at beginning of year	$ 52,913	$ 48,542	$ 37,632	$ 31,148	$ 47	$ 66
Actual return on plan assets	7,324	7,218	1,468	3,016	15	3
Employer contributions	—	—	447	1,769	893	438
Acquisitions/divestitures, net	—	—	52	(78)	—	—
Plan participants’ contributions	—	—	66	57	199	185
Benefits paid from trust	(3,046)	(2,847)	(1,616)	(1,468)	(650)	(645)
Foreign exchange impact	—	—	3,021	3,174	—	—
Fair value of plan assets at end of year	$ 57,191	$ 52,913	$ 41,070	$ 37,632	$ 504	$ 47
Funded status at end of year	$ 10,868	$ 6,415	$ 255	$ (1,822)	$ (4,968)	$ (5,726)
Accumulated benefit obligation	$ 46,323	$ 46,421	$ 39,396	$ 38,088	N/A	N/A

The following table presents the funded status recognized in the Consolidated Statement of Financial Position for the company’s significant retirement-related benefit plans:

($ in millions)
	Significant Defined Benefit Pension Plans				Nonpension Postretirement Benefit Plan
	U.S. Plan		Non-U.S. Plans		U.S. Plan
At December 31:	2007	2006	2007	2006	2007	2006
Prepaid pension assets	$ 10,868	$ 6,415	$ 6,473	$ 4,153	$ —	$ —
Current liabilities, Compensation and benefits	—	—	(304)	(269)	—	(487)
Noncurrent liabilities, Retirement and nonpension postretirement benefit obligations	—	—	(5,914)	(5,706)	(4,968)	(5,239)
Funded status—net	$ 10,868	$ 6,415	$ 255	$ (1,822)	$ (4,968)	$ (5,726)

The following table presents the pre-tax net loss and prior service costs/(credits) recognized in Gains and (losses) not affecting retained earnings and the changes in pre-tax net loss, prior service costs/(credits) and transition assets recognized in Accumulated gains and (losses) not affecting retained earnings for the company’s significant retirement-related benefit plans:

	Significant Defined Benefit Pension Plans		Nonpension Postretirement Benefit Plan
For the year ended December 31, 2007:	U.S. Plan	Non-U.S. Plans	U.S. Plan
* See note M, “Stockholders’ Equity Activity,” for the total net-of-tax change in the Accumulated gains and (losses) not affecting retained earnings and the Consolidated Statement of Stockholders’ Equity for components of net periodic cost, including the related tax effects, recognized in Gains and (losses) not affecting retained earnings for the company’s retirement-related benefit plans.
Net loss at January 1	$ 6,944	$ 11,298	$ 935
Current period net gain	(4,086)	(1,337)	(254)
Amortization of net loss included in net periodic cost	(679)	(911)	(24)
Net loss at December 31	$ 2,179	$ 9,050	$ 657
Prior service costs/(credits) at January 1	$ 61	$ (1,269)	$ (177)
Current period prior service costs	—	51	—
Amortization of prior service (costs)/credits included in net periodic cost	(61)	125	62
Prior service credits at December 31	$ —	$ (1,093)	$ (115)
Transition assets at January 1	$ —	$ (4)	$ —
Amortization of transition assets included in net periodic cost	—	3	—
Transition assets at December 31	$ —	$ (1)	$ —
Total recognized in Accumulated gains and (losses) not affecting retained earnings*	$ 2,179	$ 7,956	$ 542

The following table presents the estimated net loss, estimated prior service credits and estimated transition assets of the company’s significant retirement-related benefit plans that will be amortized from Accumulated gains and (losses) not affecting retained earnings into net periodic cost/(income) and recorded in the Consolidated Statement of Earnings in 2008:

	Significant Defined Benefit Pension Plans		Postretirement Benefit Plan
($ in millions)	U.S. Plan	Non-U.S. Plans	U.S. Plan
Net loss	$ 281	$ 600	$ 10
Prior service credits	—	(134)	(62)
Transition assets	—	1	—

No significant amendments of the U.S. retirement-related benefit plans or significant non-U.S. defined benefit pension plans occurred during the years ended December 31, 2007, 2006 and 2005 that would have a material effect on the Consolidated Statement of Earnings.

In 2006, the company redesigned certain non-U.S. defined benefit pension plans that resulted in a reduction to the PBO of $688 million. The majority of the reduction was attributed to modified plans in the United Kingdom, Switzerland and the Netherlands.

In December 2005, the company approved amendments to the PPP and the SERP, which provided that participants would no longer accrue benefits under these plans beginning January 1, 2008, resulting in a curtailment charge of $267 million that was recorded in the Consolidated Statement of Earnings for the year ended December 31, 2005.

ASSUMPTIONS USED TO DETERMINE PLAN FINANCIAL INFORMATION

Underlying both the measurement of benefit obligations and net periodic cost are actuarial valuations. These valuations use participant- specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary.

The following table presents the assumptions used to measure the net periodic cost and the year-end benefit obligations for significant retirement-related benefit plans:

	Significant Defined Benefit Pension Plans						Nonpension Postretirement Benefit Plan
	U.S. Plan			Non-U.S. Plans			U.S. Plan
	2007	2006	2005	2007	2006	2005	2007	2006	2005
* Rate of compensation increase is not applicable to the PPP as benefit accruals ceased for all participants beginning January 1, 2008. N/A—Not applicable
Weighted-average assumptions used to measure net periodic cost for the year ended December 31:
Discount rate	5.75%	5.50%	5.75%	4.40%	4.20%	4.70%	5.75%	5.50%	5.75%
Expected long-term return on plan assets	8.00%	8.00%	8.00%	7.00%	7.10%	7.10%	N/A	N/A	N/A
Rate of compensation increase	4.00%	4.00%	4.00%	2.90%	3.00%	3.00%	N/A	N/A	N/A
Weighted-average assumptions used to measure benefit obligations at December 31:
Discount rate	6.00%	5.75%	5.50%	5.40%	4.40%	4.20%	6.00%	5.75%	5.50%
Rate of compensation increase*	N/A	4.00%	4.00%	3.00%	2.90%	3.00%	N/A	N/A	N/A

Discount rate

The discount rate assumptions used for the retirement-related benefit plans accounting reflect the yields available on high-quality, fixed income debt instruments. For the U.S. discount rate assumptions, a portfolio of corporate bonds is constructed with maturities that match the expected timing of the benefit obligation payments. In the non-U.S., where markets for high-quality long-term bonds are not generally as well developed, long-term government bonds are used as a base, to which a credit spread is added to simulate corporate bond yields at these maturities in the jurisdiction of each plan, as the benchmark for developing the respective discount rates.

For the PPP, the changes in discount rate assumptions impacted both net periodic cost and the PBO. For purposes of measuring the net periodic cost for the years ended December 31, 2007, 2006 and 2005, the changes in discount rate assumptions resulted in a decrease in the 2007 net periodic cost of $92 million and an increase in the 2006 and 2005 net periodic cost of $94 million and $90 million, respectively. For purposes of measuring the PBO, the changes in discount rate assumptions resulted in a decrease in the PBO of $1,185 million and $1,240 million at December 31, 2007 and 2006, respectively.

For the significant non-U.S. defined benefit pension plans, the changes in discount rate assumptions resulted in an increase in the 2007 and 2006 net periodic cost of $30 million and $274 million, respectively. Changes in discount rate assumptions had no material impact on the 2005 net periodic cost.

For the U.S. nonpension postretirement benefit plan, the changes in discount rate assumptions had no material impact on net periodic cost for the years ended December 31, 2007, 2006 and 2005 and on the APBO at December 31, 2007 and 2006.

Expected long-term returns on plan assets

The expected long-term return on plan assets assumption takes into account long-term expectations for future returns, investment strategy and the market-related value of plan assets. The market-related value of plan assets is a calculated value, in accordance with accounting guidance, that recognizes changes in the fair value of plan assets in a systematic manner over five years. The rates of expected return are developed by the company in conjunction with external advisors, are calculated using an arithmetic average and are tested for reasonableness against the historical return average by asset category, usually over a 10-year period. The use of expected long-term returns on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. Differences between actual and expected returns are recognized over five years in the expected return on plan assets line in net periodic cost and also as a component of net loss or gain in the Accumulated gains and (losses) not affecting retained earnings, which is recognized over the service lives of the employees in the plan, provided such amounts exceed thresholds which are based upon the obligation or the value of plan assets, as provided by accounting standards.

For the PPP, the expected long-term return on plan assets of 8.00 percent remained constant for the years ended December 31, 2007, 2006 and 2005 and, consequently, had no incremental impact on net periodic cost.

For the material non-U.S. defined benefit pension plans, the changes in the expected long-term return on plan assets resulted in an increase in the 2007, 2006 and 2005 net periodic cost of $50 million, $18 million and $140 million, respectively.

For the U.S. nonpension postretirement benefit plan, the company maintains a nominal, highly liquid trust fund balance to ensure payments are made timely. As a result, for the years ended December 31, 2007, 2006 and 2005, the expected long-term return on plan assets and the actual return on those assets were not material.

Rate of compensation increases and mortality rate

The rate of compensation increases is determined by the company, based upon its long-term plans for such increases. Mortality rate assumptions are based on life expectancy and death rates for different types of participants. Mortality rates are periodically updated based on actual experience. Changes to defined benefit pension plans mortality rate assumptions increased the 2007 and 2006 net periodic cost approximately $80 million and $55 million, respectively, and increased the 2007 benefit obligation approximately $790 million. Changes to the rate of compensation increases had no material impact on the 2007 net periodic cost and reduced the 2006 net periodic cost approximately $32 million. Changes to the rate of compensation increases or to mortality rate assumptions had no material impact on the 2005 net periodic cost and on benefit obligations at December 31, 2006.

Interest crediting rate

Benefits for certain participants in the PPP are calculated using a cash balance formula. An assumption underlying this formula is an interest crediting rate, which impacts both net periodic cost and the PBO. This assumption provides a basis for projecting the expected interest rate that participants will earn on the benefits that they are expected to receive in the following year and is based on the average from August to October of the one-year U.S. Treasury Constant Maturity yield plus one percent.

For the PPP, the change in the interest crediting rate to 6.0 percent for the year ended December 31, 2007 from 5.0 percent for the year ended December 31, 2006 resulted in an increase in the 2007 net periodic cost of $125 million. The change in the interest crediting rate to 5.0 percent for the year ended December 31, 2006 from 3.1 percent for the year ended December 31, 2005 resulted in an increase in the 2006 net periodic cost of $170 million. The change in the interest crediting rate to 3.1 percent for the year ended December 31, 2005 from 2.3 percent for the year ended December 31, 2004 resulted in an increase in the 2005 net periodic cost of $55 million.

Healthcare cost trend rate

For nonpension postretirement benefit plan accounting, the company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. However, the healthcare cost trend rate has an insignificant effect on plan costs and obligations as a result of the terms of the plan which limit the company’s obligation to the participants. The company assumes that the healthcare cost trend rate for 2008 will be 8 percent. In addition, the company assumes that the same trend rate will decrease to 5 percent over the next six years. A one percentage point increase or decrease in the assumed healthcare cost trend rate would not have a material effect on the 2007, 2006 and 2005 net periodic cost or the benefit obligations as of December 31, 2007 and 2006.

PLAN ASSETS

Defined benefit pension plans

The company’s defined benefit pension plans’ asset allocations at December 31, 2007 and 2006 and target allocation for 2008, by asset category, are as follows:

U.S. Plan (Actual Allocations)

	Plan Assets at December 31:
	2007	2006	2008 Target Allocation
* See the following discussion regarding certain private market assets, and future funding commitments thereof, that are not as liquid as the publicly traded securities.
Asset Category:
Equity securities*	46.9%	63.9%	47%
Debt securities	44.6	31.2	43
Real Estate*	5.4	3.9	4
Other	3.1	1.0	6
Total	100.0%	100.0%	100%

Material Non-U.S. Plans (Weighted-Average)

	Plan Assets at December 31:
	2007	2006	2008 Target Allocation
Asset Category:
Equity securities	58.0%	62.7%	57%
Debt securities	37.8	34.8	39
Real estate	1.9	2.1	2
Other	2.3	0.4	2
Total	100.0%	100.0%	100%

The investment objectives of the PPP portfolio are designed to generate returns that will enable the PPP to meet its future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current economic environment. The PPP portfolio’s investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the PPP portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could cause the plans to become underfunded, thereby increasing their dependence on contributions from the company. Within each asset class, careful consideration is given to balancing the portfolio among industry sectors, geographies, interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. During 2007, the company modified the asset allocation of the PPP portfolio primarily by reducing public equity securities, by increasing debt securities from 33 percent to 43 percent of total plan assets, and by increasing the duration of debt securities and increasing the use of derivatives, including interest rate swaps in debt securities to further mitigate the effects of future interest rate changes on the overfunded level of the PPP. These changes were designed to reduce the potential negative impact that equity markets or interest rates might have on the funded status of the PPP. These changes did not impact the expected long-term return on plan assets assumption, which remained at 8.00 percent for 2008. The effect on expected long-term return on plan assets of increasing the duration of debt securities substantially offset the effect of reducing public equity securities. Derivatives are also used to hedge currency, adjust portfolio duration and reduce specific market risks.

The assets are managed by professional investment firms, as well as by investment professionals who are employees of the company. They are bound by mandates and are measured against specific benchmarks. Among these managers, consideration is given, but not limited to, balancing security concentration, issuer concentration, investment style and reliance on particular active and passive investment strategies. Market liquidity risks are tightly controlled, with only a modest percentage of the PPP portfolio invested in private market assets consisting of private equities and private real estate investments, which are less liquid than publicly traded securities. The PPP portfolio included private market assets comprising approximately 12.0 percent and 10.2 percent of total assets at December 31, 2007 and 2006, respectively. The target allocation for private market assets in 2008 is 12.0 percent. As of December 31, 2007, the PPP portfolio had $3,621 million in commitments for future private market investments to be made over a number of years. These commitments are expected to be funded from plan assets. Other assets in the PPP portfolio include commodities and non-traditional investments designed to further diversify the returns of the PPP portfolio.

Equity securities include IBM common stock of $111 million, representing 0.2 percent of total PPP plan assets at December 31, 2007 and $159 million, representing 0.3 percent of total PPP plan assets at December 31, 2006.

Outside the U.S., the investment objectives are similar, subject to local regulations. In some countries, a higher percentage allocation to fixed income securities is required. In others, the responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by employees and retirees. This can result in slight differences compared with the strategies previously described. Generally, these non-U.S. funds do not invest in illiquid assets and their use of derivatives is usually limited to currency hedging, adjusting portfolio durations and reducing specific market risks. There was no significant change in the investment strategies of these plans during either 2007 or 2006.

EXPECTED CONTRIBUTIONS

Defined benefit pension plans

It is the company’s general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it deems appropriate.

The company contributed approximately $447 million and $1,769 million in cash to the material non-U.S. plans during the years ended December 31, 2007 and 2006, respectively.

In 2008, the company is not legally required to make any contributions to the PPP. However, depending on market conditions, or other factors, the company may elect to make discretionary contributions to the qualified portion of the PPP during the year.

The Pension Protection Act of 2006 (the Act), enacted into law in 2006, is a comprehensive reform package that, among other provisions, increases pension funding requirements for certain U.S. defined benefit plans, provides guidelines for measuring pension plan assets and pension obligations for funding purposes and raises tax deduction limits for contributions to retirement-related benefit plans. The additional funding requirements by the Act apply to plan years beginning after December 31, 2007. The adoption of the Act is not expected to have a material effect on the company’s minimum mandatory contributions to its PPP. No mandatory contribution is required for the PPP in 2008.

In 2008, the company estimates contributions to its non-U.S. plans to be approximately $613 million, which will be mainly contributed to defined benefit pension plans in Japan, the Netherlands, Spain, Switzerland, Sweden and the United Kingdom. These 2008 contributions represent the legally mandated minimum contributions. The company could elect to contribute more than the legally mandated amount based on market conditions or other factors.

Nonpension postretirement benefit plan

The company made a $500 million voluntary cash contribution to the U.S. nonpension postretirement benefit plan during the year ended December 31, 2007. This advanced funding was made in addition to ongoing contributions of $347 million for the year ended December 31, 2007, which were utilized to pay current year benefits. The $500 million contribution will be used to fund benefit payments in future periods.

EXPECTED BENEFIT PAYMENTS

Defined benefit pension plan expected payments

The following table presents the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the plans’ PBO at December 31, 2007 and include benefits attributable to estimated future compensation increases.

($ In millions)
	Qualified U.S. Plan Payments	Non-Qualified U.S. Plan Payments	Qualified Non-U.S. Plans Payments	Non-Qualified Non-U.S. Plans Payments	Total Expected Benefit Payments
2008	$ 3,138	$ 81	$ 1,765	$ 359	$ 5,343
2009	3,188	83	1,815	354	5,440
2010	3,237	86	1,834	356	5,513
2011	3,273	90	1,882	357	5,602
2012	3,314	93	1,922	359	5,688
2013–2017	17,108	500	10,260	1,881	29,749

The 2008 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets (underfunded plans) represent a component of Compensation and benefits, within Current liabilities, in the Consolidated Statement of Financial Position.

Nonpension postretirement benefit plan expected payments

The following table reflects the total expected benefit payments to nonpension postretirement benefit plan participants, as well as the expected receipt of the company’s share of the Medicare subsidy described below. These payments have been estimated based on the same assumptions used to measure the plan’s APBO at December 31, 2007.

($ In millions)
	U.S. Plan Payments	Less: IBM Share of Expected Medicare Subsidy	Net Expected Benefit Payments
2008	$ 499	$ 34	$ 465
2009	488	38	450
2010	476	41	435
2011	466	43	423
2012	457	—	457
2013–2017	2,280	—	2,280

The 2008 expected benefit payments to nonpension postretirement benefit plan participants represents a component of Retirement and nonpension postretirement benefit obligation in the Consolidated Statement of Financial Position.

Medicare prescription drug act

In connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003, the company is expected to continue to receive a federal subsidy of approximately $267 million to subsidize the prescription drug coverage provided by the U.S. nonpension postretirement benefit plan, which is expected to extend until 2011. Approximately $156 million of the subsidy will be used by the company to reduce its obligation and cost related to the U.S. nonpension postretirement benefit plan. The company will contribute the remaining subsidy of $111 million to the plan in order to reduce contributions required by the participants. The company received a total subsidy of $46 million and $27 million during the years ended December 31, 2007 and 2006 respectively, which was utilized to reduce the company contributions for prescription drug-related coverage.

The company has included the impact of its portion of the subsidy in the determination of net periodic cost and APBO for the U.S. nonpension postretirement benefit plan at and for the years ended December 31, 2007 and 2006. The impact of the subsidy resulted in a reduction in APBO of approximately $139 million and $154 million at December 31, 2007 and 2006, respectively. The impact of the subsidy resulted in a reduction in the 2007 and 2006 net periodic cost of $36 million and $40 million, respectively. The subsidy had no impact on the 2005 net periodic cost.

Implementation of SFAS No. 158

As highlighted in note B, “Accounting Changes,” effective December 31, 2006, the company adopted the provisions of SFAS No. 158. In note A, “Significant Accounting Policies,” the requirements of SFAS No. 158 are discussed in detail. The following table presents the incremental effect of applying SFAS No. 158 on the Consolidated Statement of Financial Position at December 31, 2006:

($ In millions)
	Before Application of SFAS No. 158	Adjustments*	After Application of SFAS No. 158
* Adjustments are primarily comprised of previously unrecognized gains/(losses), prior service credits/(costs)) and transition assets/(obligations).
Prepaid pension assets	$ 24,003	$ (13,374)	$ 10,629
Investments and sundry assets (deferred taxes)	$ 4,245	$ 4,136	$ 8,381
Total Assets	$ 112,473	$ (9,240)	$ 103,234
Current liabilities: Compensation and benefits	$ 3,605	$ 990	$ 4,595
Noncurrent liabilities: Retirement and nonpension postretirement obligations	$ 12,888	$ 665	$ 13,553
Other liabilities (deferred taxes)	$ 8,701	$ (1,397)	$ 7,304
Total Liabilities	$ 74,470	$ 258	$ 74,728
Accumulated gains and (losses) not affecting retained earnings, net of tax	$ 597	$ (9,498)	$ (8,901)
Total Stockholders’ equity	$ 38,004	$ (9,498)	$ 28,506

At December 31, 2006, the company recorded prior service credits/(costs), net gains/(losses) and transition assets/(obligations) in the Stockholders’ equity section of the Consolidated Statement of Financial Position, net of tax, of $871 million, $(10,371) million and $2 million, respectively.

In addition, the minimum pension liability of $2,348 million was eliminated upon the adoption of SFAS No. 158.

Other plan information

The following table presents information for significant defined benefit pension plans with accumulated benefit obligations (ABO) in excess of plan assets. For a more detailed presentation of the funded status of the company’s significant defined benefit pension plans, see table above.

($ In millions)
	2007		2006
At December 31:	Benefit Obligation	Plan Assets	Benefit Obligation	Plan Assets
Plans with PBO in excess of plan assets	$ 13,134	$ 5,566	$ 15,181	$ 7,866
Plans with ABO in excess of plan assets	12,776	5,566	14,027	7,093
Plans with assets in excess of PBO	75,354	92,695	72,111	82,679