as for our company, IBM's resilient performance stands out and reaffirms the fundamental soundness of our business. There is reason for continued optimism about IBM's long-term prospects in the underlying and growing need to manage information and improve productivity in virtually every aspect of human activity.

**Strong Product Line**

In part, our confidence is built on IBM's product line—already strong, and growing stronger as a result of continuing investments in research, development and engineering. During 1985, about half of our shipments came from products newly introduced or significantly improved within the past 24 months. This extends a record of sustained innovation that is notable for any company, and essential in our highly competitive industry.

For customers with large-scale computing requirements, for example, new 3090 processors offer improved price/performance and exceptional flexibility. They can perform significantly faster than IBM's previous top-of-the-line systems, while an optional extension can operate specialized programs for engineers and scientists at even greater speeds.

IBM pioneered and continues to lead in technology and quality with the industry's most advanced high-capacity disk storage devices. Models introduced last year offer up to 5 billion characters of storage, twice as much as before.

New software introduced last year spans the range from programming that improves the performance of multiple operating systems to a product for use by researchers in the developing field of artificial intelligence.

During 1985, we added to our desktop computing options. Lower-cost and higher-capacity models joined the industry's broadest line of compatible personal computers. In addition, PC capability was extended to new models of our System/36 and Series/1 processors, providing customers with even greater flexibility in meeting their office computing needs. We added new functions to our Selectric System/2000 line of typewriters and introduced economical desktop printers for use with IBM and other popular personal computers.

In their first year as merged companies, ROLM Corporation and IBM continued to strengthen the relationships between their products. ROLM added to the capabilities and enlarged the capacity of its PhoneMail voice messaging system; it is now being marketed by both organizations. A new ROLM product extends advanced voice and data communications to IBM's most powerful personal computer models and can provide PC users with high-speed access to IBM office systems programs stored in central computers.

To assist customers in linking their operations—within an office, a building or an entire organization—the company added new communications capabilities. The IBM Token-Ring Network is a local area network with the potential of attaching large numbers of personal computers and devices from IBM, ROLM or others. It is a key building block in our continuing commitment to telecommunications and to helping customers to integrate their office systems.

**Areas of Growth**

As the North American economy softened during 1985, much of IBM's growth came in our operations in Europe, the Asia/Pacific area and Latin America, where our business was up substantially from the previous year.

Installations of large-scale processors increased sharply in the latter part of 1985, as a result of our ability to improve shipment schedules for new 3090 systems. This achievement is a credit to the many men and women of IBM who developed and then delivered—well ahead of original schedules—a system of exceptional quality.

Shipments of high-capacity disk storage devices also showed strong growth. While demand for IBM Personal Computers did not climb as steeply as in the past several years,

deliveries still increased during 1985. Typewriter sales were also vigorous, reflecting acceptance of the company's Selectric System/2000 line.

Revenues from software continued as one of the fastest-growing areas of our business, with strong growth in operating systems and general-purpose and application programs.

**Improved Efficiency, Productivity**

During 1985, we took actions to improve IBM's efficiency and reduce expenses, while we continued making the investments that are essential to capitalize on the opportunities before the company.

The skills, experience and loyalty of IBM employees are among the company's most important assets. While improving efficiency, we maintained our long record of full employment in 1985, through a combination of workload balancing, retraining and prudent controls on hiring. We expect to continue these actions in 1986. Early in 1985, we also put stringent expense controls in place. As a result, we were able to reduce spending in many categories of expense well below the rates of the prior year.

To improve service to customers and increase efficiency, IBM reorganized its U.S. marketing operations in 1985. Responsibility for managing the distribution of IBM products through authorized dealers and remarketers was consolidated within a single division. And, effective January 1, 1986, two restructured marketing units began offering the full line of IBM products to customers within their respective geographic areas.

As a result of our history of continuing investments in more efficient plant and equipment, unit manufacturing costs reached an all-time low last year. Although we selectively reduced planned expenditures during 1985, IBM invested an additional $10.8 billion in research, development and engineering, and plant, property and equipment. We expect these investments, and the improved productivity that is their direct result, to continue in 1986.