# Geographic Areas

| Year 1978 | United States | Europe / Middle East / Africa | Americas / Far East | Eliminations | Consolidated |
|-----------|---------------|-------------------------------|---------------------|--------------|--------------|
| Gross income—Customers | $10,036 | $7,778 | $3,262 | $(1,526) | $21,076 |
| Interarea transfers | 830 | 392 | 304 | - | - |
| Total | $10,866 | $8,170 | $3,566 | $(1,526) | $21,076 |
| Net earnings | $1,560 | $1,124 | $460 | $(33) | $3,111 |
| Assets at December 31, 1978 | $10,097 | $7,876 | $3,145 | $(347) | $20,771 |

| Year 1977 | United States | Europe / Middle East / Africa | Americas / Far East | Eliminations | Consolidated |
|-----------|---------------|-------------------------------|---------------------|--------------|--------------|
| Gross income—Customers | $9,008 | $6,391 | $2,734 | $(1,209) | $18,133 |
| Interarea transfers | 675 | 284 | 250 | - | - |
| Total | $9,683 | $6,675 | $2,984 | $(1,209) | $18,133 |
| Net earnings | $1,503 | $889 | $344 | $(17) | $2,719 |
| Assets at December 31, 1977 | $10,007 | $6,650 | $2,593 | $(272) | $18,978 |

In the Europe/Middle East/Africa area, European operations accounted for approximately 95% of gross income in both 1978 and 1977.

Interarea transfers, consisting principally of completed machines, sub-assemblies and parts, are priced at cost plus an appropriate service charge, applied consistently throughout the world. The cost and service charges which relate to rental machines are capitalized and depreciated by the importing area. Interarea accounts receivable, the undepreciated portion of service charges, and the net change during the year in undepreciated service charges, have been eliminated in consolidation.

## Stock Purchase Plan

The 1976 Employees Stock Purchase Plan enables employees who are not participants in a stock option plan to purchase IBM's capital stock through payroll deductions of up to 10% of their compensation. The price an employee pays for a share of stock is 85% of the average market price on the date the employee has accumulated enough money to buy a share. During 1978, 1,385,487 treasury shares were sold to employees for $314 million. At December 31, 1978, 5,339,851 shares, including 2,000,000 reserved unissued shares, remain available.

## Stock Option Plans

The stock option plans provide for granting officers and other key employees options to purchase IBM's capital stock at 100% of the market price on the day of grant. Options have a maximum duration of 10 years and may be exercised in four annual installments, commencing one year from date of grant.

The following table summarizes stock option transactions during 1978:

| Number of Shares |
|------------------|
| Under Option     | Available for Option |
| Balance at       |                     |
| January 1, 1978  | 2,259,754          | 451,580         |
| Options granted  | 398,644            | (398,644)      |
| Options terminated | (8,440)           | 1,258          |
| Options exercised | (66,271)           | -              |
| Not granted under the 1975 Plan | -                 | (452,838)      |
| Reserved under the 1978 Plan | -                 | 1,800,000      |
| Balance at       |                     |
| December 31, 1978 | 2,583,687          | 1,401,356      |
| Exercisable at   |                     |
| December 31, 1978 | 1,553,299          |                |

## Quarterly Financial Data (Unaudited)

Summarized quarterly financial data (in millions of dollars except for per share amounts) for 1978 and 1977 is as follows:

| 1978 | Gross Income | Gross Profit | Net Earnings | Per Share |
|------|--------------|--------------|--------------|-----------|
| First | $4,432       | $2,868       | $589         | $4.01     |
| Second | 4,921       | 3,184        | 691          | 4.73      |
| Third | 5,285       | 3,443        | 816          | 5.60      |
| Fourth | 6,438       | 4,097        | 1,015        | 6.95      |
| ------| --------------| -------------| -------------| ----------|
| $21,076 | $13,592      | $3,111       | $21.29       |

| 1977 | Gross Income | Gross Profit | Net Earnings | Per Share |
|------|--------------|--------------|--------------|-----------|
| First | $4,090       | $2,684       | $573         | $3.82     |
| Second | 4,419       | 2,852        | 669          | 4.44      |
| Third | 4,586       | 2,998        | 690          | 4.66      |
| Fourth | 5,038       | 3,301        | 797          | 5.38      |
| ------| --------------| -------------| -------------| ----------|
| $18,133 | $11,835      | $2,719       | $18.30       |

IBM received $14.7 million for the 66,271 shares purchased during 1978. The 2,583,687 shares under option at December 31, 1978, are at option prices ranging from $166.38 to $341.60 per share.

## Exchange Gains and Losses

Net earnings in 1978 include exchange gains of $113 million, resulting from fluctuations in the value of the U.S. dollar in relation to other currencies. This consists principally of unrealized gains from the translation of foreign currency assets and liabilities, and compares with exchange gains of $28 million in the year 1977.

## Replacement Cost Data

The company is presently compiling replacement cost data, which will be included in the Form 10-K Annual Report to the Securities and Exchange Commission, consisting of the estimated current replacement cost of inventories and plant, rental machines and other property at December 31, 1978 and 1977, and the estimated cost of sales, cost of rentals and services and depreciation for these years, on the basis of replacement cost.

Over the past several years, IBM's operating results have been subjected to the pressures of worldwide inflation. However, the company has been able to counteract some of the effects of inflation through increased productivity, emphasis on cost and expense controls, and selective price increases.