# To the stockholders:

## John R. Opel, President, and Frank T. Cary, Chairman of the Board

The year 1978 was marked by many accomplishments, with gross income exceeding $20 billion for the first time, a number of important new products being introduced, shipments at a record level, a continued buildup of our resources of people and facilities, and high customer acceptance of our products.

Worldwide net earnings for the year ended December 31, 1978, amounted to $3,111 million, compared with $2,719 million for the same period last year. The net earnings equaled $21.29 per share on 146.1 million shares, the average number of shares outstanding during the period. This compared with $18.30 per share on 148.6 million shares, the average number outstanding in 1977. Consolidated gross income amounted to $21,076 million, compared with $18,133 million last year.

Net earnings for the quarter ended December 31, 1978, amounted to $1,015 million, or $6.95 per share. This compared with $797 million, or $5.38 per share, for the same period last year. Gross income amounted to $6,438 million, compared with $5,038 million for the corresponding 1977 period.

Operations outside the United States for the year 1978, included in consolidated results, showed net earnings of $1,560 million, compared with $1,228 million in 1977. Gross income from those operations was $11,040 million, compared with $9,125 million last year. Although the rates of increase for non-U.S. operations are greater than for United States operations, a large part of the difference in growth rates is attributable to the effects of currency fluctuations.

For the year ended December 31, 1978,

earnings include exchange gains of $113 million, compared with gains of $28 million for the same period last year. Earnings for the fourth quarter include exchange gains of $14 million, compared with gains of $64 million in the final quarter of 1977. These exchange gains consist principally of unrealized income resulting from the translation of foreign currency assets and liabilities.

Purchases of data processing equipment increased as the year progressed and in the fourth quarter of 1978 surpassed any other quarter in our history. Purchases for the full year were also at an all-time high. The portion of consolidated gross income represented by purchases of data processing equipment has risen from 19.6% to 27.7% over the past five years. While such purchases are expected to continue at a high level, it should be recognized that if this rate of growth is not sustained, a reduction in the growth of future earnings could result.

Consolidated gross income from rentals and services for the year 1978 increased 11.6%. This is an improvement over the growth rate experienced last year.

Cost and expense increases in 1978 reflected both the continuing effects of inflation and the buildup of resources to meet the expanded customer demands for products and services.

Incoming orders showed substantial increases over the strong 1977 levels. Even with the high level of shipments during 1978, the backlog at year-end increased over the previous year.

**Innovation Builds Productivity**

Fueling the growth of IBM's business is innovation—in many forms and in all parts of the company. Highly miniaturized new logic and memory circuits make possible faster processing speeds and increased storage capacity at lower cost. Innovation in systems design and programming support is also broadening the versatility of our systems and making them easier to use. New and improved office products are simplifying many administrative tasks, saving time and money. At a time when other business costs are rising, IBM customers are gaining much-needed productivity.

**Actions to Counter Inflation**

IBM's investment in research and development to produce products with advanced, lower-cost technologies now exceeds $1.2 billion a year. To reduce manufacturing costs, we have made substantial additional investments in high-technology production equipment and processes. Throughout IBM operations, we have