IBM Notice of 2008 Annual Meeting and Proxy Statement

Introduction

IBM does not have any plans or programs under which payments to any of the named executive officers are triggered by a change of control of the Company, a change in the named executive officer’s responsibilities or a constructive termination of the named executive officer.

The only payments or benefits that would be provided by the Company to a named executive officer following a termination of employment would be provided under the terms of the Company’s existing compensation and benefit programs, as described below. The 2007 Potential Payments Upon Termination Table that follows this narrative reports such payments and benefits for each named executive officer, assuming termination on the last business day of the fiscal year ended.

As explained below, certain of these payments and benefits are enhanced by or dependent upon the named executive officer’s attainment of certain age and service criteria at termination. Additionally, certain payments or benefits are not available following a termination for cause and/or are subject to forfeiture and clawback if the named executive officer engages in certain activity, also as described below.

This 2007 Potential Payments Upon Termination Narrative and the 2007 Potential Payments Upon Termination Table do not reflect payments that would be provided to each named executive officer under the IBM Personal Pension Plan (tax-qualified and nonqualified portions), the IBM Savings Plan or the IBM Individual Separation Allowance-Plan following termination of employment on the last business day of the fiscal year ended because these plans are generally available to all U.S. regular employees similarly situated in age, years of service and date of hire and do not discriminate in favor of executive officers. The 2007 Potential Payments Upon Termination Table also does not quantify the value of retiree medical and life insurance benefits, if any, that would be provided to each named executive officer following such termination of employment because these benefits are generally available to all U.S. regular employees similarly situated in age, years of service and date of hire and do not discriminate in favor of executive officers; however, the named executive officers’ eligibility for such benefits is described below. The 2007 Potential Payments Upon Termination Table does not contain a total column because the Retention Plan payment is paid as an annuity, not a lump sum. Therefore, a total column would not provide any meaningful disclosure.

Annual Incentive Plan (AIP)

• The AIP may provide a lump sum, cash payment in March of the year following resignation, retirement or involuntary termination without cause.
• This payment is not triggered by termination; the existence and amount of any AIP payment is determined under the terms of the AIP applicable to all executives employed through December 31 of the previous year.
• An AIP payment is not payable following a termination for cause and is subject to clawback as described in Section 2 of the Compensation Discussion and Analysis.
• For purposes of the 2007 Potential Payments Upon Termination Table below, it is assumed that the AIP payment made to each named executive officer following termination of employment on the last business day of the fiscal year ended would have been the same as the actual payment made in March 2008.

IBM Long-Term Performance Plans (LTPP)

• The named executive officers have certain outstanding equity grants including:
  • — Stock Options,
  • — Restricted Stock Units (RSUs),
  • — Retention Restricted Stock Units (RRSUs) and
  • — Performance Share Units (PSUs).
• The LTPP and the named executive officers’ award agreements contain the following terms:
  • — Unvested stock options, RSUs, RRSUs and PSUs are cancelled upon termination.
  • — Vested stock options may be exercised only for either 30 days or 90 days following termination.
• Payment of these awards is not triggered by termination of employment (because the awards would become payable under the terms of the LTPP if the named executive officer continued employment), but if he resigns, retires or is involuntarily terminated without cause after attaining age 55 with at least 15 years of service, the following terms apply:
  
  (a) Vested stock options continue to be exercisable for the remainder of their ten-year term;
  
  (b) A prorated portion of any unvested stock options issued under the Buy-First program will become vested upon termination and these options will continue to be exercisable for the remainder of their ten-year terms; and
  
  (c) The Company prorates a portion of unvested PSUs to continue to vest under their original vesting schedules. The table below assumes the following:
  • — Amounts shown were calculated using the actual performance achieved for that performance period and the fiscal year-end closing price of $108.10 for IBM stock; and
  • — Outstanding awards for the remaining two open performance periods were not included because there is no guarantee of payment on these awards as they are subject to meeting threshold performance criteria.
• LTPP awards are subject to forfeiture and rescission if an executive is terminated for cause or engages in “Detrimental Activity” (including but not limited to competitive business activity, disclosure of confidential Company information and solicitation of Company clients or employees) prior to or within 12 months following payment. LTPP awards also contain a covenant that the recipient will not solicit Company clients or employees for a period of one year following termination of employment.
• In the 2007 Potential Payments Upon Termination Table, amounts in the Stock Options column were calculated assuming that each named executive officer chose to exercise all of his vested, in-the-money options at an IBM stock price of $108.10 (the closing price of IBM stock at fiscal year end).

IBM Supplemental Executive Retention Plan (Retention Plan)

• Payments under the Retention Plan are triggered by resignation, retirement or involuntary termination without cause after attainment of eligibility criteria.
• Eligiblity criteria are described in the 2007 Retention Plan Narrative.
• Retention Plan payments are paid as an annuity beginning on the first day of the month following termination of employment (subject to a six-month delay for “specified employees,” as required under Section 409A of the Internal Revenue Code).
• At termination, the executive chooses either a single life annuity or an actuarially equivalent joint and survivor annuity.
• The table below reflects the annual amount payable as a single life annuity.
• The table does not reflect the following provisions that would apply in accordance with Section 409A of the Internal Revenue Code:
  • — The payment of amounts accrued after December 31, 2004 would be delayed six months following termination.
  • — Amounts not paid during the delay would be paid (with interest) on July 1, 2008.
• Retention Plan payments are subject to forfeiture and rescission if an executive is terminated for cause or engages in competitive business activity or discloses Company confidential information at any time prior to or following commencement of Retention Plan payments.

IBM Executive Deferred Compensation Plan (EDCP)

• As described in the 2007 Nonqualified Deferred Compensation Narrative, payment of the named executive officers’ EDCP accounts (Basic Accounts and any Deferred IBM Shares) is triggered by resignation, retirement or involuntary termination.
• Under the terms of the LTPP, Deferred IBM Shares are subject to rescission if the named executive officer participates in Detrimental Activity within 12 months following the release date.
• The table below indicates the estimated amount and the time and form of payment, determined by either the executive’s distribution election in effect (if any) or the plan’s default distribution provision.
• Estimated payments were calculated using the aggregate account balance as of the last business day of the fiscal year ended, without assumptions for the following between such date and the distribution date(s):
  • — Investment gains and losses on the Basic Account (including dividend equivalent reinvestment for the IBM Stock Fund).
  • — Fluctuations in the market price of IBM stock for Deferred IBM Shares.
• The tables do not reflect:
  • — That payment of amounts deferred after December 31, 2004 (and the associated earnings) are required to be delayed six months following termination under Section 409A of the Internal Revenue Code, or
  • — Any other restriction on such payments imposed by the requirements of Section 409A of the Internal Revenue Code.

Retiree medical and life insurance

Benefits under IBM’s retiree medical and life insurance programs are triggered by a named executive officer’s retirement, as described below. Eligibility for a particular program is dependent upon date of hire, age and years of service at termination. Future coverage remains subject to IBM’s right to amend or terminate the plans at any time.

IBM retiree benefits plan:

• Medical, dental and vision insurance coverage, partially subsidized by the Company, is provided to former employees and their eligible dependents.
• It is available to all U.S. regular employees who, as of June 30, 1999, were within five years of satisfying either of the following criteria (and who actually satisfied at least one of these):
  • (a) 30 years of service with the Company or
  • (b) Age 55 with at least 15 years of service with the Company.
• Messrs. Palmisano and Mills would have been eligible for this benefit following a termination of employment on the last business day of the fiscal year ended.

IBM future health account:

• Amounts credited by the Company to a hypothetical account may be used to offset the cost of medical, dental and vision insurance coverage for former employees and their eligible dependents.
• All regular full-time or part-time U.S. IBM employees who meet the following criteria are eligible to use amounts from the account for these purposes:
  • — Hired before January 1, 2004; and
  • — At least age 40 and have completed one year of service; and
  • — Not within 5 years of earliest retirement eligibility under the prior IBM Retirement Plan on June 30, 1999; and
  • — At termination they have attained 30 years of service (regardless of age) and were eligible for an opening balance on July 1, 1999, or have attained at least age 55 with 15 years of service.
• Messrs. Loughridge, Daniels, and Elix would have been eligible for this benefit following a termination of employment on the last business day of the fiscal year ended.

IBM Group Life Insurance

• IBM Group Life Insurance (GLI) provides $25,000 of coverage before age 65, which reduces to $5,000 at age 65.
• It is available to all U.S. regular employees hired prior to January 1, 2004 who terminate employment after satisfying at least one of the following retirement eligibility criteria:
  • – 30 years of service,
  • – Age 55 with 15 years of service,
  • – Age 62 with 5 years of service, or
  • – Age 65 with one year of service.
• Messrs. Palmisano, Loughridge, Mills, and Daniels would have been eligible for this benefit following a termination of employment on the last business day of the fiscal year ended.

Individual arrangement

As described in the 2007 Nonqualified Deferred Compensation Narrative, Mr. Elix has a benefit under the IBM Australia Limited Superannuation Fund (the “Fund”) attributable to his prior employment with IBM Australia. Mr. Elix also has an individual arrangement with the Company which provides that if the value of the benefit to which he is actually entitled under the Fund and under the Company’s U.S. plans (specifically, the Retention Plan, the IBM Personal Pension Plan, and the Company’s contributions to the IBM Savings Plan and the EDCP) without regard to the arrangement is less than the benefit Mr. Elix would have received under the Fund if he had remained employed with IBM Australia from the date his IBM U.S. employment commenced through his termination date, then he would receive a cash payment equal to the difference between the two amounts. However, under the arrangement, if Mr. Elix’s employment had terminated on the last business day of the fiscal year ended, the termination would not have triggered an additional payment to him because the value of the benefit he would actually receive (including under IBM’s U.S. plans) is greater than the value of the benefit he would have received under the Fund if he had remained employed by IBM Australia as of such date. Because no benefit is payable to Mr. Elix under this arrangement we have not included such arrangement in the table below.