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6IBM patent leadership is buildingthe future for smarter businessesIBMers received a record-breaking 9,043 U.S. patentsduring 2017—the 25th consecutive year that the companyhas led the world.Even more important, nearly half of IBM’s new patents areadvancing AI, cloud computing, blockchain, quantumcomputing, cybersecurity and other technologies that willchange the way the world works—again.Five 2017 patents that areshaping the future:Luring HackersU.S. Patent 9,560,075: Cybersecuritytechnology that enables AI systems to luremalicious hackers with email exchangesand websites that divert their attacks.Personalizing AI CommunicationU.S. Patent 9,601,104: A system that analyzes,interprets and mirrors a user’s unique speechand linguistic traits.Forecasting Cloud ResourcesU.S. Patent 9,755,923: A system to predict cloudcomputing needs, based on human behaviors andcurrent events.Improving Quantum Signal FidelityU.S. Patent 9,818,064: A method for improvinga quantum computer’s ability to read signals,which can lead to efficiency in the system’scomponents.Speeding Trust on BlockchainU.S. Patent 9,824,031: A method to removesteps for settling transactions among multipleparties, even untrusted ones, without involvinga third party.We also stand at an inflection point for society, everywherein the world.IBM does not believe that the future belongs to the few.We believe it belongs to all of us—and we translate that beliefinto practice and policy.On data and AI responsibility: As the world’s new naturalresource, unleashed by the maturation of AI, data holds thepotential to generate growth, prosperity and societal progress.But it will only do so if the world can trust that data is beingcollected, managed and analyzed responsibly.At a time when many are questioning the power and behaviorof some companies, IBM is stepping forward as a responsiblesteward of data and AI. We believe that AI’s purpose is toaugment, not replace, human intelligence. We are clear onthe need for transparency—on where AI is used, who trainedit and what data sets were ingested. We also believe thatdata and the insights it generates belong to their creators.No one should have to give up ownership or control of theirdata to benefit from AI and cloud computing. We have builtand are deploying Watson accordingly.Trust also requires the protection of data through strongencryption and security systems that are constantly testedand strengthened. The privacy of data must be respected.Those, too, are core dimensions of the IBM Cloud with Watson.On jobs: Without question, new technology will eliminate work;it always has. At the same time, new job categories will emerge.The challenge, however, is that AI will transform the skillsrequired for all jobs. There still will be doctors, lawyers,salespeople, teachers and engineers. But the tasks and toolsthey need to perform their work will be different.

For more than a century,IBMers have earned the world’strust. We continue that legacy.This is why building skills for the jobs of the future—not bluecollar or white collar, but “new collar” jobs—will requirea major reinvention of education. We at IBM are leading thattransformation, in the U.S. and worldwide, through public-privatepartnerships to create the revolutionary Pathways in TechnologyEarly College High Schools (P-TECH) education model,21st century apprenticeships and retraining programs. Thisincludes investing 5 billion over 10 years in the continuousrenewal of IBMers and the re-skilling of mid-careerprofessionals looking to get back into the tech workforce.On inclusion: Today, we proudly carry forward a globalcommitment to inclusion that has defined IBM for morethan a century. We are stepping forward to support the openexchange of people, information and ideas, as well as toprotect cross-border data flows for international privacyand security agreements.IBM is the recognized gold standard for inclusion, reflectedin winning the 2018 Catalyst Award for advancing women inbusiness. IBM is the first company to win this award four times.We advocate for fairness and equality—as everyone is, andalways has been, welcome at IBM.For more than a century, IBMers have earned the world’strust by building progress with responsibility. We continuethis legacy today.Rediscovering IBMWe also are clear on the markets we serve. IBM is globalin presence and mind-set.We earn trust. We take positions—and act—on issues thatmatter for our time. Today, that begins with data, AI andsecurity, and extends to inclusion and trust.Put it all together, and you have a company that always has beenunique in combining innovative technology with deep industryexpertise, underpinned by security, trust and responsiblestewardship. In helping businesses move from era to era,we seek to be essential—to our clients and to the world.Let me close by expressing my gratitude to the treasured clientswe serve, and to the hundreds of thousands of IBMers whosebrilliance and resilience make it possible for us all to achieveour life’s work at the world’s most essential enterprise.I never have been more optimistic in my IBM career—optimisticabout our technology, about our clients, about IBM and aboutthe world we are building together.Virginia M. RomettyChairman, President and Chief Executive OfficerAt the deepest level, the most important fact about IBM’s2017 was not our return to revenue growth in the fourth quarteror the continued scaling of our new products and servicesor our patent achievement. It is our reaffirmation of IBM’sessential identity.IBM is an enterprise technology company. We deliver serviceswith the simplicity, speed and delight of the best consumerproducts and services, but we are very clear on whom we serve.We are dedicated to our clients’ success, and our reinventionduring the past five years has been driven by helping our clientsserve their customers. This unrelenting focus on the client isa particular source of pride.In an effort to provide additional and useful information regarding the company’sfinancial results and other financial information, as determined by generallyaccepted accounting principles (GAAP), these materials contain certain non-GAAPfinancial measures on a continuing operations basis, including revenue at constantcurrency, strategic imperatives revenue at constant currency, cloud revenue atconstant currency, operating pre-tax income, operating (non-GAAP) research,development and engineering and operating earnings per share. The rationale formanagement’s use of this non-GAAP information is included on pages 26, 27 and68 of the company’s 2017 Annual Report, which is Exhibit 13 to the Form 10-Ksubmitted with the SEC on February 27, 2018. For reconciliation of these non-GAAPfinancial measures to GAAP and other information, please refer to pages 28, 43,49 and 50 of the company’s 2017 Annual Report.

This is smartat work.It’s a business remaking itself onplatforms infused with digital intelligence.An enterprise whose operations andprocesses are designed to learn withintelligent systems. A company of expertswhose knowledge is augmented bysystems that learn.This is smarter business—a new era,brought to the world by a new IBM.

IBM CloudThe platformfor smarterbusinessesMany types of clouds exist, but only the IBM Cloudis built for the enterprise, is able to handle all kindsof data and applications, and provides seamlessintegration of artificial intelligence, world-leadingsecurity and the ability to evolve over time.To support innovation, the public cloud allowsbusinesses to quickly create, deploy and managenew cloud-native apps; they can also easilyisolate specific computing workloads to ensureperformance and security. IBM’s private cloudofferings let leading enterprises re-architectcritical applications for the cloud, whilemaintaining regulatory compliance and securityon their own premises.IBMers deliver the IBM Cloud’sbroad array of services andexpertise. They help the world’ssmarter businesses transformtheir processes, assimilate newtechnologies and capabilities,and pivot quickly to newmarket opportunities.Left to right:AI to surface new insightsand augment decision-makingVivian Lee,IBM Watson DevelopmentCloud-based servicesto manage IT complexityand capitalize on thespeed of innovationTwannia Arnold,Global Technology Services

Security to help protect alldata and ensure regulatorycomplianceCameron Will, IBM SecurityData Science Experienceto help data scientists learn,create and collaborate ina single workspaceArmand Ruiz Gabernet,Watson Machine LearningThe Internet of Thingsto capture data and insightsfrom the physical worldLisa Seacat DeLuca,IBM Watson IoTNVIDIA GPUs to boostartificial intelligence anddeep-learning workloadsGlen Wiedemeier,IBM SystemsBlockchain to digitizetransactions through a secured,shared and replicated ledgerNoi Sukaviriya,IBM Blockchain SolutionsWorkday implementationfor workforce insight and HRmanagementMickey Patel,Global Business ServicesVideo streaming to deliverhigh-quality content to audiencesof any size, anywhereArpad Kun, IBM Cloud VideoVMware implementation toeasily deploy workloads fromon-premises to the cloudCamilla Sharpe,Global Technology ServicesStorage to provide consistent,highly secure and fast datadeliverySam Werner, IBM SystemsQuantum computing to tacklebusiness and scientific problemsthat are intractable with classicalcomputersJerry Chow, IBM ResearchSAP implementation to bringoptimized business operationsto the cloudBridget Jones,Global Business ServicesDeveloper tools to rapidlybuild, deploy and managecloud servicesRemko De Knikker,IBM Industry Platforms

A single, integratedarchitecture for all the needsof smarter businessesz14 pervasively encrypts data atscale, all the time. The z14, theworld’s most powerful transactionsystem, is the first that can encryptevery piece of data at the siliconlevel, without requiring changes toapplications or downtime. Open andconnected in the cloud, the z14 iscapable of running 12.5 billion fullyencrypted transactions per day.IBM Cloud is the most flexible and intelligentcloud for business—a fully managed, unifiedplatform built on secure containers acrosspublic and private clouds, with 170 services fordevelopers to build, deploy and manage cloudnative applications, as well as the capacityto easily integrate new products and offerings.Left:POWER9 is built for dataintensive workloads, includingAI and scientific discovery.POWER9 systems and softwareare designed for the computeintensive workloads of smarterbusinesses. POWER9 systemscut deep learning training timesby at least 4x, unleashingmission-critical insights thatwould otherwise be trapped inmassive data sets. POWER9servers with NVIDIA GPUssubstantially boost AI accuracyand accelerate the performanceof AI frameworks.Above:IBM Cloud Private is a scalablecloud platform that runs on acompany’s own infrastructureand behind its firewalls. Thisoffers the benefits of the publiccloud but gives customers thepower to address proprietarydata, regulatory requirementsand security threats on-premises.

Quantum computing will solvethe previously unsolvable.Quantum computers embodythe most radical new computingtechnology in generations.They encode information inquantum bits, or qubits, whichcan represent tremendousamounts of data, and can interactwith one another in ways thatare impossible for classical bitbased computers. As a result,quantum computers may offerpaths to finding solutions to hardproblems that require exploringan exponential number ofpossibilities—like drug discovery,alternative fuel design andfinancial risk optimization.Already, the IBM Q Experience,available via the IBM Cloud, isbeing used by more than 75,000early adopters who are getting“quantum ready”: learning andexploring the implications ofquantum computing for scienceand business.

IBM Servicesand SolutionsMakingsmarter real,industryby industryWalmart uses blockchainto provide traceability from“farm to fork” and to improvetransparency, efficiency andfood safety.The leading businesses and institutions of theworld are going on offense, moving from thedisrupted to the disruptors. To do so, they relyon the deep industry and technology expertiseof IBM Services and solutions professionalsand consultants around the world. TheseIBMers—experts in industries ranging fromhealthcare, to financial services, to retail andmore—help organizations transform at scaleand become smarter.Maersk’s blockchain platformeliminates millions of pieces ofpaperwork, reduces fraudand increases transparency forglobal shipping.

CEMEX’s digital transformationprovides its customers with realtime tracking and analytics thathelp them make better decisionsand improve their supply chains.London Stock Exchange Groupand the Santiago Stock Exchangeare building blockchain solutionsto take cost and complexity outof trading and settlement.Japan Airlines’ custom mobile appfrees up engineers’ time, improves itsaircraft quality and on-time arrivalsand has eliminated 3.3 million paperdocuments in one year.

The Port of Rotterdam is fullydigitizing—with IoT and artificialintelligence—to maximize cargoloads and speed shipping traffic.Mercedes-Benz Stadium’stechnology infrastructure andmobile apps create personalizedgame-day experiences for fansin Atlanta.Goldcorp is using artificialintelligence to sift through drillinglogs, geological surveys andother data to pinpoint whereto explore next.Toronto Western Hospital’sMovement Disorders Clinic hasreviewed thousands of drugs toidentify medications that might berepurposed for Parkinson’s disease.

17Welgevonden Game Reserveuses the Internet of Things andpredictive analytics to trackanimal movements and protectendangered rhinos.ABB applies artificial intelligenceand the Internet of Things onfactory floors to quickly identifydefects not always picked up bythe naked eye.Plastic Bank’s blockchain-basedsystem turns trust into sustainability,as recyclers in developing countriesearn credits, helping to alleviatepoverty and reduce ocean waste.

IBM WatsonEmpoweringprofessionalswith AIIBM Watson’s enterprise-strength artificialintelligence is transforming the way people work innearly every industry. It helps organizations deriveinsight from complex and unstructured information.And it allows professionals to scale their expertiseand focus their efforts on higher-value work.

Left:Working with Watson for CyberSecurity allows experts toidentify threats up to 60 timesfaster than traditional methods.Carlos Aguilera,Security Expert, IBM19Bottom left:Elementary school instructorsare using Teacher Advisor WithWatson to tailor high-qualityinstructional resources to thespecific needs of their students.Lisnerva Nuez,Kindergarten Teacher,New York City“We trainedWatsonVirtual Agentin BrazilianPortugueseso it cananswercustomers’questions inseconds.”Customer servicerepresentatives at BancoBradesco use Watson VirtualAgent to answer questionsquickly, which boostscustomer satisfaction.Jacqueline Pessoa Ferreira,Digital Channels Analystand Trainer, Banco Bradesco

21Watson helps KONE’s datascientists provide technicianswith real-time informationfrom elevators and escalatorsaround the world, to predictmaintenance issues andhelp keep people moving.Aleksi Seppänen,Data Scientist, KONE“Watsonspeeds uphow we findimportantpatterns—and ones wedidn’t knowto look for.”AI, machine learning and analyticsare allowing Kraft Heinz expertsto evaluate thousands of variablesin real time and address previouslyunsolvable problems, leading toreductions in food loss.Pat Doyle,Supply Chain Expert,Kraft Heinz CompanyTrained by H&R Block on millionsof customer conversations andreturns, Watson helps taxpros engage with their clientsin new ways.Gloria Bridges,Tax Professional, H&R Block

A smarterfuture does notbelong to thefew. It belongsto all of us.The coming era offers vast new opportunities tochange the way the world works—but it will take morethan technology and more than business. At IBMwe are working to build new levels of trust and newforms of collaboration across all sectors of society.Data and AI: Only an economy where data isprotected will produce a society where data is trusted.In 2017, IBM issued principles for AI and for DataResponsibility, ensuring that wherever our cognitivetechnology is used, we will be transparent abouthow it was trained and clear about who owns its dataand insights.Jobs: To build the “new collar” skills required forthe future of work, we are pioneering new modelsof education, including P-TECH, a six-year highschool and community college program that enablesstudents to earn an associate degree. From itsroots in 2010 with one school in Brooklyn, New York,P-TECH is on track to serve more than 60,000students on four continents, and build uponpartnerships with more than 430 other companies.Gabriel Rosa, a 2015 graduateof P-TECH, now works in IBM’sDigital Business Group, following aninternship guided by Maria Arbusto,who still acts as his mentor.Gabriel Rosa (left), Front-EndEngineer, and Maria Arbusto,Director, MarketingWorkforce inclusion: New technology can lifteveryone up—and it must. We have led in inclusionfor more than a century, hiring our first women andAfrican American employees in 1899. And in 2005,IBM became the first company to protect employees’genetics privacy. We are committed to extendingthat legacy into the future.

24Financial HighlightsInternational Business Machines Corporation and Subsidiary Companies( in millions except per share amounts)For the year ended December 31:20172016Revenue 79,139 79,919Net Income   5,753* 11,872Income from continuing operations   5,758* 11,881Operating (non-GAAP) earnings** 12,935 13,031Assuming dilution    6.14*   12.39Basic    6.17*   12.44Diluted operating (non-GAAP)**   13.80   13.59Earnings per share of common stockNet cash provided by operating activities 16,724 17,084***Capital expenditures, net   3,312   3,726Share repurchases   4,340   3,502Cash dividends paid on common stock   5,506   5,256    5.90    5.50Per share of common stockAt December 31:20172016Cash, cash equivalents and marketable securities 12,580   8,527Total assets 125,356 117,4

Cloud-as-a-Service 1,900 cloud-technology patents awarded in 2017 IBM Cloud: The platform for smarter businesses IBM Cloud uniquely provides a single architecture that unifies infrastructure and higher-value services, including AI, IoT, quantum computing and blockchain. z14 is the only server that can encrypt all data pervasively without