UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

FAHED AL-ARAJ, Individually and On Behalf ofAll Others Similarly Situated, CIVIL ACTION NO.

Plaintiff,

vs .

INTERNATIONAL BUSINESS MACHINESCORPORATION, SAMUEL J. PALMISANO, andMARK. LOUGHRIDGE,

CLASS ACTION COMPLAIN T

JURY TRIAL. DEMANDED

Defendants .

Plaintiff, Fahed Al-Araj ("PIaintiff '), alleges the following based upon the investigation o f

Plaintiffs counsel, which included, among other things, a review of the defendants' publi c

documents, conference calls and announcements made by defendants, United States Securities an d

Exchange Commission ("SEC") filings, wire and press releases published by and regarding

International Business Machines Corporation ("IBM" or the "Company") securities analysts ' report s

and advisories about the Company, and information readily obtainable on the Internet .

NATURE OF THE ACTION AND OVERVIEW

I . This is a federal class ac tion on behalf ofpurchasers of the publicly traded securities

of IBM between January 19, 2005 and April 14, 2005 (the "Class Period"), seeking to pursu e

remedies under the Securities Exchange Act of 1934 (the "Exchange Act") .

2. IBM operates as an information technology company worldwide . The complaint

alleges that defendants' Class Period representations regarding IBM were materially false an d

misleading when made for the following reasons : (1) that IBM knew and/or recklessly disregarded

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the fact that its first quarter, fiscal year 2005 earnings would fall short of both the Company's

projections and analysts ' expectations; (2) that defendants used the timing of the expensing of stock

options' announcement to deflect a ttention from earnings that failed to match analysts ' and the

Company's expectations ; and (3) as such, defendants ' positive statements regarding IBM's outlook

were lacking in any reasonable basis when made .

3 . On April 5, 2005 , a week before releasing first-quarter results in April, IBM said i t

would begin treating stock options as an expense and urged analysts to reduce profit estimates to

reflect the change. Then, on April 14, 2005, IBM announced that first-quarter profit fell short of the

mean analyst estimate by 5 cents per share -- a big miss for IBM. But many analysts eventually

concluded the miss was 9 cents per share, or nearly double the apparent shortfall, once they

understood IBM accounting for options .

4. On news of this, shares of IBM, on April 15, 2005, fell $6 .94 per share, or 8 .30

percent, to close at $76 .70 per share on heavy trading volume .

5 . In mid-April, Sanford C . Bernstein analyst Toni Sacconaghi had called the moves

"hocus-pocus" on the part of IBM, which had been struggling with slowing growth in the technology

market. Additionally, UBS analyst Benjamin Reitzes also said in the wake of the bad news he felt

1BM had misled him, leading him to cut his quarterly forecast by a greater amount than was

warranted .

6. Then on June 27, 2005, IBM, after the market closed, announced that it had received

a request to voluntarily comply with an informal investigation by the staff of the SEC concerning

IBM's disclosures relating to IBM's first quarter earnings and expensing of equity compensation .

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JURISDICTION AND VENUE

7 . The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act, (15 U .S.C. §§ 78j(b) and 78t(a)), and Rule lOb-5 promulgated thereunder (1 7

C.F.R. §240 . 1Ob-5) .

8. This Court has juri sdiction over the subject matter of this action pursuant to §27 of

the Exchange Act (15 U .S .C . §78aa) and 28 U .S.C. § 1331 .

9. Venue is proper in this Judicial District pursuant to §27 of the Exchange Act, 1 5

U.S.C. § 78aa and 28 U.S.C. § 1391(b). Many of the acts and transactions alleged herein, including

the preparation and dissemination of materially false and misleading information, occurred i n

substantial part in this Judicial District . Additionally, the Company maintains a principal executive

office in this Judicial District .

10. In connection with the acts, conduct and other wrongs alleged in this complaint ,

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce ,

including but not limited to, the United States mails, interstate telephone communications and th e

facilities of the national securities exchange .

PARTIES

11 . Plaintiff, Fahed Al-Araj , as set forth in the accomp anying certification, incorporated

by reference herein, purchased IBM securities at artificially inflated prices during the Class Perio d

and has been damaged thereby .

12. Defendant IBM is a New York corporation with its principal place ofbusiness located

at 1 New Orchard Road , Armonk, NY 10504 .

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13. Defendant Samuel J. Palmisano ("Palmisano") was, at all relevant times, th e

Company's Chief Executive Officer and Chairman of the Board .

14. Defendant Mark Loughridge ("Loughridge") was, at all relevant times, th e

Company's Senior Vice President and Chief Financial Officer .

15 . Defendants Palmisano and Loughridge are referred to hereinafter as the "Individua l

Defendants ." The Individual Defendants, because of their positions with the Company, possesse d

the power and authority to control the contents of IBM' s quarterly reports, press releases an d

presentations to securities analysts, money and portfolio managers and institutional investors, i .e . ,

the market. Each defendant was provided with copies of the Company's reports and press releases

alleged herein to be misleading prior to or shortly after their issuance and had the ability an d

opportunity to prevent their issuance or cause them to be corrected . Because of their positions and

access to material non-public information available to them, each of these defendants knew that th e

adverse facts specified herein had not been disclosed to and were being concealed from the publi c

and that the positive representations which were being made were then materially false an d

misleading . The Individual Defendants are liable for the false statements pleaded herein, as those

statements were each "group-published" information, the result of the collective actions of the

Individual Defendants .

SUBSTANTIVE ALLEGATIONS

Background

16 . IBM operates as an information technology company worldwide . It operates in six

segments : Global Services , Systems and Technology Group, Personal Systems Group, Software ,

Global Financing, and Enterprise Investments .

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Materially False And MisleadingStatements Issued During The Class Period

17. On January 18, 2005, IBM, after the close of the market, announced fourth-quarter

2004 diluted earnings per common share of $1 . 81 from continuing operations as reported, compared

with diluted earnings of $ 1 .56 per share in the same period of 2003, an increase of 16 percent .

18. Following the Company's January 18, 2005 announcement, IBM held an investo r

conference call . On the call, defendant Loughridge stated the following outlook :

For full year 2005, based on what we know now, and a steady ITenvironment and current currency rates, we could grow revenuewithout PC's a point faster than the current Street average.While we don't expect you to adjust your models until the sale ofour PC business is complete, we think it is appropriate to focuson IBM's top line growth without the PC business going forward .

Looking at 2005 average earnings per share estimates, if youincrease estimates for the 5 cent fourth quarter overachievement,the resulting growth rate of 11 percent is consistent with ourlonger-term model. We think these estimates are reasonable. Itwould also be reasonable to assume consistent earnings per sharegrowth throughout the year, resulting in an EPS distributionsimilar to that in 2004.

Stepping back, recognize that this requires us to overcome the billiondollar year-to-year pension impact . We are taking further actions toovercome this pension impact and drive strong operational results,actions such as divesting the PC business to rebalance our portfolio,redesigning our equity program with premium priced options, andglobalizing our business, over the course of the year .

Before the year-to-year impact from pension, based on theseestimates, our 2005 earnings would be up over 18 percentyear-to-year.(Emphasis added.)

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19. On April 5, 2005, IBM issued a press release announcing that the Company woul d

begin to expense equity compensation when it reported its first quarter 2005 financial results o n

April 18, 2005 . More speci fically , IBM stated :

IBM will adopt "Statement of Financial Accounting Standards(SFAS) 123(R) -- Share-based Payment," which requirescompanies to expense costs related to share-based payments toemployees for periods beginning after June 15, 2005 .

The company said the decision and timing were based on theguidance provided last week in Staff Accounting Bulletin #107 issuedby the U.S. Securities and Exchange Commission's Office of theChief Accountant and its Division of Corporate Finance .

In accordance with SFAS No. 123(R), and in order to provide aconsistent year-to-year comparison of financial results, thecompany also will restate prior period financial results to includethe impact of share-based compensation expenses .

Full-year 2004 incremental expense for stock-based compensationwas $0.55 per common share.(Emphasis added . )

20. Following this announcement, IBM held an investor conference call . On the call,

defendant Loughridge stated :

Earlier today, IBM announced that we will begin to expense equitycompensation in the first quarter . Our adoption is based on theimplementation guidance provided in the SEC's release of StaffAccounting Bulletin #107 last week, and in accordance with therevised FASB Standard.

The results we announce on April 18 will reflect the expensing ofequity compensation . In order to align expectations with our reportedresults, it will be necessary for investors and analysts to update theirmodels to reflect the new reporting basis .

The purpose of today's call is to describe how we are planning toimplement the changes, and provide information that will allow youto update your models .

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We intend to leave you with the following points :

• First, we are going to expense equity compensation starting in thefirst quarter of 2005, and we will restate prior periods to provide theproper basis for comparison .

• Second, our incremental equity compensation expense was 55 centsper share for 2004 . Investors and analysts should reset the 2004 baseto include that 55 cent expense . For purposes of resetting analysts'models, 2005 expectations should be adjusted to reflect the sameyear-to-year profit improvement as current estimates - off of thelower base .

• Third, any year-to-year reduction in equity compensation expensethat we ultimately realize will mitigate the impact of the $1 billionincrease in pension cost we discussed with you last quarter .

This approach treats equity compensation as a form of compensationexpense in the income statement . We have been working on this forover a year. With the issuance of SAB #107, we are ready toimplement .

SAB # 107 provides the support and clarification we were looking for .And, by adopting in the first quarter, we will have consistentreporting throughout the four quarters of 2005 .

Over the last few years, we have focused on total compensation cost- including salary, cash incentives, equity, and health and retirementbenefits . We have rebalanced the elements of our direct compensationto employees at all levels of the organization, increasing cashcompensation while reducing equity compensation, to achieve overallcost savings while maintaining market competitiveness .

We have implemented targeted actions to address equitycompensation . For example, we have reduced the number of equitygrants, and implemented premium-priced options for our executivepopulation.

This year we are facing significant increases in cost and expensedriven by accounting for pensions . As we have previously discussed,our pension expense will be up over a billion dollars year-to-year, or39 cents per share .

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This is after an increase of about $725 million in the prior year .As I stated in the January earnings call, the redesign of our equityprograms is one of several actions we are taking to mitigate thisincrease in pension cost . The expensing of equity compensation hasbeen in our year-to-year plan for a long time . The SEC guidanceissued last week provides the basis to move forward .

Turning to valuation methodology, neither FAS 123(R) nor SAB#107 specifies a preferred valuation method .

In our pro forma footnote disclosure in prior years, we assessed thefair value of equity compensation using a Black-Scholesoption-pricing model . Key input parameters include the expectedoption term, reflecting the effects of employees' expected exercisebehavior, and volatility related to the assumed option term .

After studying this for some time based on years of historic data, webelieve that the options values derived using the Black-Scholes modelfairly reflects the value of our equity grants . Therefore we will adoptFAS 123(R) using the Black-Scholes model as the valuationtechnique . The assumptions used in our 2005 Black-Scholes analysisare consistent with prior years' assumptions that are disclosed in ourfinancial footnotes .

Financial Implications

According to SAB #107, share-based compensation expense shouldbe recorded in the same lines as cash compensation paid to the sameemployees. For IBM, starting in the first quarter we will record thecost of these awards in each appropriate income statement category,including : Cost of Sales, SG&A and Research and Development .Because of the timing of our decision, this expense was not a part ofthe IBM segment management system in the first quarter . Therefore,our first quarter results will reflect the compensation charge outsideof the segment results . We will assess the impact to the managementsystem and segment reporting going forward, and address this withinvestors in the second quarter .

We will implement equity compensation expensing using themodi fied retrospective method , as presc ribed in the standard . We willtherefore restate prior periods to provide comparability with 2005reported results .

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2005 Financial Estimate s

Our first quarter earnings release on April 18 will include the cost ofequity compensation in our reported results. You should thereforeupdate your models now to reflect this change . To facilitate thisupdate, we have provided the 2004 detail by quarter in a supplementalchart of this presentation .

In 2004 our incremental equity compensation was almost $1 .4 billionof pretax expense, or 55 cents per share. The 2004 base should bereset to include this expense, reducing the earnings per share by 14cents in the first quarter, and 55 cents for the full year. These amountsare consistent with the pro forma disclosure in IBM's SEC filings,based on the Black-Scholes optionpricing model .

This is an accounting change and does not impact underlying businessdynamics . Therefore, for purposes of your models, updated 2005expectations should reflect the same level of year-to-year profitimprovement as current estimates. Because this profit dollarimprovement is delivered off a lower base, the resulting earningsgrowth rate in your models improves.

I mentioned earlier that we have taken actions that will result in lowerequity compensation expense in 2005 . The savings from these actionswill mitigate the $1 billion, or 39 cent per share, year-to-year increasein pre-tax pension expense .

21 . The statements contained in ¶¶ 17-20 were materially false and misleading when

made because defendants failed to disclose or indicate the following: (1) that IBM knew and/or

recklessly disregarded the fact that its first quarter, fiscal year 2005 earnings would fall short of both

the Company's projections and analysts' expectations ; (2) that defendants used the timing of the

expensing of stock options' announcement to deflect attention from earnings that failed to match

analysts' and the Company's expectations; and (3) as such, defendants' positive statements regarding

IBM's outlook were lacking in any reasonable basis when made .

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{

The Truth Begins to Emerge

22 . On April 14, 2005, four days prior to the original release of date (of April 18, 2005 )

of first quarter earnings and after the market closed, IBM announced first-quarter 2005 dilute d

earnings per common share of $ .85 from continuing operations as reported, including the effect o f

expensing share-based compensation , compared with diluted earnings on a similar basis of $ .79 per

share in the first quarter of 2004, an increase of 8 percent . First-quarter income from continuin g

operations was $1 .41 billion, including the adoption of expensing equity compensation, compare d

with $1 .36 billion a year ago, an increase of 3 percent . Revenues from continuing operations for th e

first quarter were $22 .9 billion, up 3 percent, compared with revenues of $22 .2 billion for the first

quarter of 2004 . More specifically, the Company stated :

First-quarter revenue growth of 3 percent (1 percent, adjusting forcurrency) was driven by growth in the Americas and Europe/MiddleEast/Africa . In the Americas, first-quarter revenues from continuingoperations were $9.3 billion, up 2 percent (1 percent, adjusting forcurrency) from the 2004 period. Revenues from Europe/MiddleEast/Africa were $7 .7 billion, an increase of 7 percent (2 percent,adjusting for currency) . Asia-Pacific revenues grew 1 percent (down2 percent, adjusting for currency) to $5 .2 billion. OEM revenuesincreased 3 percent to $691 million compared with the first quarter of2004 .

Revenues grew in four of IBM's five industry sectors in the firstquarter led by the Distribution sector, as well as growth in sales toSmall and Medium Businesses .

Revenues from Global Services , including maintenance, increased 6percent (3 percent, adjus ting for currency) to $11 .7 billion in the firstquarter . Global Services revenues , excluding maintenance, increased7 percent (4 percent , adjusting for currency) . IBM signed servicescontracts totaling $10.0 billion and ended the quarter with anestimated services backlog, including Strategic Outsourcing , BusinessConsulting Services, Integrated Technology Services andMaintenance, of $110 billion .

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In addition to these signings and backlog figures there were about$200 million of Engineering and Technology Services signings toprovide Business Performance Transformation Services customerswith design skill and technical capabilities .

Hardware revenues from continuing operations were essentially flat(down 2 percent, adjusting for currency) to $6 .7 billion in the first

quarter versus the first quarter of 2004 . Revenues from the Systemsand Technology Group totaled $3.9 billion for the quarter, up 2percent on eServer revenue increases . This includes a 12 percentincrease in pSeries UNIX servers, which is expected to gain marketshare in the first quarter, and an 8 percent increase in xSeries servers .

Revenues from the zSeries mainframe product decreased 16 percentcompared with the prior-year quarter. The total delivery of zSeriescomputing power as measured in MIPS (millions of instructions per

second) decreased 11 percent. Revenues for the iSeries midrange

servers increased 1 percent . Storage Systems and Technology OEMincreased 5 percent and 2 percent, respectively . Revenues fromPersonal Systems Group decreased 3 percent to $2 .7 billion. In thefourth-quarter 2004, IBM announced an agreement to sell thePersonal Computing Division, a unit of the Personal Systems Group,which is expected to close in the second-quarter 2005 .

Revenues from Software were $3 .6 billion, an increase of 2 percent(flat, adjusting for currency) compared with the first quarter of 2004 .Revenues from IBM's middleware brands, which include WebSphere,DB2, Rational, Tivoli and Lotus products, were $2.8 billion, up 3

percent versus the first quarter of 2004. Operating systems revenuesdecreased 2 percent to $590 million compared with the first quarterof 2004 .

Revenues for WebSphere family of software products, whichfacilitates customers' ability to manage a wide variety of businessprocesses using open standards to interconnect applications, data andoperating systems, increased 11 percent. Revenues for InformationManagement increased 5 percent including revenues for DB2database software, which enables clients to leverage information ondemand, increased 9 percent . Revenues from Tivoli software(infrastructure software that enables customers to centrally managenetworks and storage) increased 15 percent, and revenues for Lotussoftware, which allows collaborating and messaging by customers inreal-time communication and knowledge management, increased 1 1

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percent . Revenues from Rational software (integrated developmenttools) were flat compared with the first quarter of 2004.

As a result, 113M expects to gain or hold market share for the firstquarter in the collaborative software, systems management andsecurity software, Web services and data management categories .

Global Financing revenues declined 12 percent (15 percent, adjustingfor currency) in the first quarter to $580 million . Revenues from theEnterprise Investments/Other area, which includes industry- specificIT solutions such as product life-cycle management software,increased 15 percent (12 percent, adjusting for currency) to $332million compared with the first quarter of 2004 .

The company's total gross profit margin from continuing operationswas 36.0 percent in the 2005 first quarter, which includes the effectof expensing equity compensation, compared with 35 .6 percent in thefirst quarter of 2004 on a similar basis .

In the first quarter of 2005, total expense and other income fromcontinuing operations increased 5 percent to $6.2 billion and, coupledwith the revenue increase of 3 percent, IBM's totalexpense-to-revenue ratio increased 0.5 points to 27.3 percent. For thequarter, the reporting periods reflect the adoption of expensing equitycompensation as it relates to both selling, general and administrative(SG&A) expense and research, development and engineering(RD&E) expense. SG&A expense increased 6 percent to $4 .9 billion.RD&E expense increased 3 percent to $1 .5 billion. Intellectualproperty and custom development income increased to $219 millioncompared with $180 million a year ago. Other (income) and expensewas $22 million of net expense in the first quarter of 2005 versus $13million in the same period last year.

IBM's effective tax rate from continuing operations in the first quarter2005 was 30.0 percent, compared with 30 .1 percent in the first quarterof 2004 .

Share repurchases totaled approximately $3 .4 billion in the firstquarter. The weighted-average number of diluted common sharesoutstanding in the first-quarter 2005 was 1 .66 billion compared with1 .73 billion shares in the same period of 2004 . As ofMarch 31, 2005,there were 1 .61 billion basic common shares outstanding .

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IBM ended the first quarter of 2005 with $8 .7 billion of cash on hand .The balance sheet remains strong, and the company is well positionedto take advantage of opportunities .

Debt, including Global Financing, totaled $23 .4 billion, comparedwith $22 .9 billion at year-end 2004 . From a management segmentview, the non-global financing debt-to-capitalization ratio was 5 .3percent at the end of March 31, 2005, and Global Financing debtdeclined $413 million from year-end 2004 to a total of $21 .9 billion,resulting in a debt-to-equity ratio of 6.7 to 1 .

23 . Commenting on these results, defendant Palmisano stated :

"After a strong start, we had difficulty closing transactions in the finalweeks of the quarter, especially in countries with soft economicconditions, as well as with short-term Global Services signings . Asa result, we did not achieve all of our goals for the quarter .Middleware software and midrange systems results were solid, andwe grew significantly in Business Performance TransformationServices and in the emerging markets of China, Brazil, India andEastern Europe. We returned nearly $4 billion to investors in thequarter through share repurchases and dividends . We are takingappropriate measures to sharpen our execution, as we continue toimplement our global growth strategies."

24. On news of this, shares of IBM, on April 15, 2005, fell $6 .94 per share, or 8 .30

percent , to close at $76.70 per share on heavy trading volume .

25 . In mid-April, Sanford C. Bernstein analyst Toni Sacconaghi had called the move s

"hocus-pocus" on the part of the computer maker, which had been struggling with slowing growth

in the technology market . Additionally, UBS analyst Benjamin Reitzes also said in the wake of th e

bad news he felt IBM had misled him, leading him to cut his quarterly forecast by a greater amoun t

than was warranted .

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POST CLASS PERIOD REVELATIONS

26. On June 27, 2005, after the market closed, IBM announced that it had received a

request to voluntarily comply with an informal investigation by the staff of the SEC concernin g

IBM's disclosures relating to IBM's first quarter earnings and expensing of equity compensation .

27 . Following this announcement, Bloomberg issued the following story about the

informal SEC investigation :

International Business Machines Corp., the largest provider ofcomputer-related services, said the U .S. Securities and ExchangeCommission is informally probing how it reported first-quarter resultsand stock-option costs .

A week before releasing first-quarter results in April, IBM saidit would begin treating stock options as an expense and urgedanalysts to reduce profit estimates to reflect the change . TheSEC's inquiry adds to concerns that IBM used the timing of theannouncement to deflect attention from earnings that failed tomatch analysts' expectations, said Christopher Whitmore, ananalyst at Deutsche Bank Securities in San Francisco.

"Some people would argue they tried to sweep disappointingbusiness results into an accounting issue, creating and adding toa reputation for smoke-and-mirrors accounting," said Whitmore,who has a "buy" rating on the stock and said he doesn't own it .

IBM said in April that it expected costs of 14 cents a share in theperiod because of the accounting change . A week later, IBM reportedcosts of 10 cents and profit that missed analysts' estimates .

IBM shares, down 25 percent this year, fell 88 cents to $73 inextended trading . They had fallen 13 cents to $73 .88 at 4 p .m. in NewYork Stock Exchange composite trading .

Requests

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Companies such as Brocade Communications Systems Inc ., DPL Inc .and Sonus Networks Inc . have restated earnings and have beeninvestigated by the SEC related to the way that they account forincentives given to employees in the form of stock options. Stockoptions are the rights to buy shares within a specific time at a specificprice ."There are lot of valuation issues related to equity awards and otherforms of equity compensation," said Patrick McGurn, executive vicepresident of Rockville, Maryland-based Institutional ShareholderServices, the largest U . S. proxy adviser to fund managers . "The SEChas been requesting a lot of information from a lot of issuers lately . "

IBM on April 5 told analysts to cut their estimates to 90 cents ashare from the average $1 .04 a share, based on a survey of 17estimates taken by Thomson Financial .

A week later, on April 14, IBM reported first-quarter profit fromcontinuing operations rose to 85 cents a share, missing thenow-revised 90-cent estimate . The lower-than-forecastcompensation costs indicated that IBM missed estimates by aneven wider margin, Steve Milunovich, an analyst at MerrillLynch & Co, said on April 15 .

Sales in the first quarter rose 3 .3 percent to $22 .9 billion, also laggingbehind the $23 .7 billion average of 17 analysts' estimates in a surveyby Thomson Financial .(Emphasis added . )

28. Additionally, Chris Whitmore, an analyst with Deutsche Bank Secu rities , published

wherein he stated the following: "The handling of the options-expensing announcement and the

subsequent negative earnings surp rise have tarnished management 's credibility[ .] "

PLAINTIFF'S CLASS ACTION ALLEGATIONS

29. Plaintiff brings this action as a class action pursuant to Federal Rule of Civi l

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased the securitie s

of IBM between January 19, 2005 and April 14, 2005, inclusive (the "Class Period") and who were

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damaged thereby. Excluded from the Class are defendants, the officers and directors of the

Company, at all relevant times, members of their immediate families and their legal representatives,

heirs, successors or assigns and any entity in which defendants have or had a controlling interest .

30. The members of the Class are so numerous that joinder of all members is imprac-

ticable . Throughout the Class Period, IBM's securities were actively traded on the New York Stoc k

Exchange ("NYSE"). While the exact number of Class members is unknown to Plaintiffat this time

and can only be ascertained through appropriate discovery, Plaintiff believes that there are hundred s

or thousands of members in the proposed Class . Record owners and other members of the Class may

be identified from records maintained by IBM or its transfer agent and may be notified of the

pendency of this action by mail, using the form ofnotice similar to that customarily used in securitie s

class actions .

31 . Plaintiff's claims are typical of the claims of the members of the Class as all member s

of the Class are similarly affected by defendants' wrongful conduct in violation of federal law tha t

is complained of herein.

32. Plaintiff will fairly and adequately protect the interests of the members of the Clas s

and has retained counsel competent and experienced in class and securities litigation .

33 . Common questions of law and fact exist as to a ll members of the Class and

predominate over any questions solely affecting individual members of the Class . Among the

questions of law and fact common to the Class are :

(a) whether the federal securities laws were violated by defendants' acts as alleged

herein ;

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(b) whether statements made by defendants to the investing public during the Clas s

Period misrepresented material facts about the business , operations and management of IBM; and

(c) to what extent the members of the Class have sustained damages and the prope r

measure of damages .

34. A class action is superior to all other available methods for the fair and efficien t

adjudication of this controversy since joinder of all members is impracticable . Furthermore, as the

damages suffered by individual Class members may be relatively smal l, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrong s

done to them. There will be no difficulty in the management of this action as a class action .

UNDISCLOSED ADVERSE FACTS

37. The market for IBM's securities was open, well-developed and efficient at al l

relevant times . As a result of these materially false and misleading statements and failures to

disclose, IBM's securities traded at artificially inflated prices during the Class Period . Plaintiff and

other members of the Class purchased or otherwise acquired IBM's securities relying upon th e

integrity of the market price of IBM's securities and market information relating to IBM, and hav e

been damaged thereby .

38. During the Class Period, defendants materially misled the investing public, thereby

inflating the price of IBM's securities, by publicly issuing false and misleading statements an d

omi tting to disclose material facts necessary to make defendants ' statements, as set forthherein, not

false and misleading . Said statements and omissions were materially false and misleading in that

they failed to disclose material adverse information and misrepresented the truth about the Company,

its business and operations, as alleged herein.

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39 . At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of th e

damages sustained by Plaintiff and other members of the Class . As described herein, during th e

Class Period, defendants made or caused to be made a series of materially false or misleadin g

statements about IBM's business, prospects and operations . These material misstatements and

omissions had the cause and effect of creating in the market an unrealistically positive assessmen t

of IBM and its business, prospects and operations, thus causing the Company's securities to b e

overvalued and artificially inflated at all relevant times . Defendants' materially false and misleadin g

statements during the Class Period resulted in Plaintiff and other members of the Class purchasin g

the Company's securities at artificially inflated prices, thus causing the damages complained o f

herein .

LOSS CAUSATIO N

40. Defendants' wrongful conduct, as alleged herein, directly and proximately caused

the economic loss suffered by Plaintiff and the Class .

41 . During the Class Period, Plaintiff and the Class purchased securities of IBM at

artificially inflated prices and were damaged thereby . The price of IBM common stock decline d

when the misrepresentations made to the market, and/or the information alleged herein to have bee n

concealed from the market, and/or the effects thereof, were revealed, causing investors' losses .

ADDITIONAL SCIENTER ALLEGATION S

42. As alleged herein, defendants acted with scienter in that defendants knew that th e

public documents and statements issued or disseminated in the name of the Company wer e

materially false and misleading ; knew that such statements or documents would be issued o r

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disseminated to the investing public; and knowingly and substantially participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws . As set forth elsewhere herein in detail, defendants, by virtue of their receipt o f

information reflecting the true facts regarding IBM, their control over, and/or receipt and/o r

modification of IBM's allegedly materially misleading misstatements and/or their associations with

the Company which made them privy to confidential proprietary information concerning IBM ,

participated in the fraudulent scheme alleged herein .

43 . Defendants knew and/or recklessly disregarded the falsity and misleading nature o f

the information which they caused to be disseminated to the investing public. The ongoing

fraudulent scheme described in this complaint could not have been perpetrated over a substantia l

period of time, as has occurred, without the knowledge and complicity of the personnel at the highest

level of the Company, including the Individual Defendants .

Applicability Of Presumption Of Reliance :Fraud-On-The-Market Doctrin e

45 . At all relevant times, the market for IBM securities was an efficient market for th e

following reasons, among others :

(a) IBM stock met the requirements for listing, and was listed and actively traded on

the NYSE, a highly efficient and automated market ;

(b) As a regulated issuer, IBM filed periodic public reports with the SEC and th e

NYSE ;

(c) IBM regularly communicated with public investors via established marke t

communication mechanisms, including through regular disseminations of press releases on th e

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national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services ; and

(d) IBM was followed by several securities analysts employed by major brokerag e

firms who wrote reports which were distributed to the sales force and certain customers of their

respective brokerage firms . Each of these reports was publicly available and entered the publi c

marketplace .

46. As a result of the foregoing, the market for IBM securities promptly digested curren t

information regarding IBM from all publicly-available sources and reflected such information i n

IBM stock price . Under these circumstances , all purchasers ofIBM securities during the Class Period

suffered similar injury through their purchase of IBM securities at artificially inflated prices and a

presumption of reliance applies .

NO SAFE HARBO R

47. The statutory safe harbor provided for forward- looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

Many of the specific statements pleaded herein were not identified as "forward-looking statements "

when made . To the extent there were any forward-looking statements, there were no meaningfu l

cautionary statements identifying important factors that could cause actual results to differ

materially from those in the purportedly forward-looking statements . Alternatively, to the extent that

the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants

are liable for those false forward-looking statements because at the time each of those forward-

looking statements was made, the particular speaker knew that the particular forward-lookin g

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statement was false, and/or the forward-looking statement was authorized and/or approved by an

executive officer of IBM who knew that those statements were false when made.

FIRST CLAIMViolation Of Section 10(b) Of

The Exchange Act Against And Rule 10b-5Promulgated Thereunder Against All Defendant s

48 . Plaintiffrepeats and realleges each and every allegation contained above as if full y

set forth herein .

49. During the Class Period, defendants carried out a plan, scheme and course of conduc t

which was intended to and, throughout the Class Period, did : (i) deceive the investing public ,

including Plaintiff and other Class members, as alleged herein ; and (ii) cause Plaintiff and other

members of the Class to purchase IBM securities at artificially inflated prices . In furtherance of thi s

unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions se t

forth herein .

50. Defendants (a) employed devices, schemes, and artifices to defraud ; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statement s

not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud

and deceit upon the purchasers of the Company 's securities in an effort to maintain artificially high

market prices for IBM securi ties in violation of Section 10(b) of the Exchange Act and Rule 10b-5.

All defendants are sued either as primary participants in the wrongful and illegal conduct charge d

herein or as controlling persons as alleged below .

51 . Defendants, individually and in concert, directly and indirectly, by the use, means or

instrumentalities of interstate commerce and/or of the mails , engaged and participated in a

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continuous course of conduct to conceal adverse material information about the business, operation s

and future prospects of IBM as specified herein .

52. These defendants employed devices, schemes and artifices to defraud, while i n

possession of material adverse non-public information and engaged in acts, practices, and a cours e

of conduct as alleged herein in an effort to assure investors of IBM value and performance and

continued substantial growth, which included the making of, or the participation in the making of ,

untrue statements of material facts and omitting to state material facts necessary in order to make the

statements made about IBM and its business operations and future prospects in the light of th e

circumstances under which they were made, not misleading, as set forth more particularly herein ,

and engaged in transactions, practices and a course of business which operated as a fraud and decei t

upon the purchasers of IBM secu rities during the Class Period .

53 . Each of the Individual Defendants' primary liability, and controlling person liability,

ari ses from the following facts: (i) the Individual Defendants were high-level executives and/o r

directors at the Company during the Class Period and members of the Company's management tea m

or had control thereof; (ii) each of these defendants , by virtue of his responsibilities and activities

as a senior officer and/or director of the Company was privy to and participated in the creation ,

development and reporting of the Company's internal budgets, plans, projections and/or reports ;

(iii) each of these defendants enjoyed significant personal contact and familiarity with the othe r

defendants and was advised of and had access to other members of the Company's managemen t

team, internal repo rts and other data and information about the Company's finances, operations, and

sales at all relevant times ; and (iv) each of these defendants was aware of the Company' s

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dissemination of information to the investing public which they knew or recklessly disregarded wa s

materially false and misleading .

54. The defendants had actual knowledge of the misrepresentations and omissions o f

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them . Such defendants '

material misrepresentations and/or omissions were done knowingly or recklessly and for the purpos e

and effect of concealing IBM's operating condition and future business prospects from the investing

public and supporting the artificially inflated price of its securities . As demonstrated by defendants'

overstatements and misstatements of the Company's business, operations and earnings throughout

the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and

omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining fro m

taking those steps necessary to discover whether those statements were false or misleading .

55 . As a result of the dissemination of the materially false and misleading informatio n

and failure to disclose material facts, as set forth above, the market price of IBM securities wa s

artificially inflated during the Class Period. In ignorance of the fact that market prices of IBM' s

publicly-traded securities were artificially inflated, and relying directly or indirectly on the false an d

misleading statements made by defendants, or upon the integrity of the market in which the securitie s

trades, and/or on the absence of material adverse information that was known to or recklessl y

disregarded by defendants but not disclosed in public statements by defendants during the Clas s

Period, Plaintiff and the other members of the Class acquired IBM securities during the Class Perio d

at artificially high prices and were damaged thereby.

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56. At the time of said misrepresentations and omissions, Plaintiff and other member s

of the Class were ignorant of their falsity, and believed them to be true . Had Plaintiff and the other

members of the Class and the marketplace known the truth regarding the problems that IBM wa s

experiencing, which were not disclosed by defendants, Plaintiff and other members of the Clas s

would not have purchased or otherwise acquired their IBM securities , or, if they had acquired suc h

securities during the Class Period, they would not have done so at the artificially inflated price s

which they paid .

57. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchang e

Act, and Rule 10b -5 promulgated thereunder .

58. As a direct and proximate result of defendants' wrongful conduct, Plaintiff and th e

other members ofthe Class suffered damages in connection with their respective purchases and sale s

of the Company's securities during the Class Period .

SECOND CLAIMViolation Of Section 20(a) Of

The Exchange Act Against the Individual Defendants

59. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

60. The Individual Defendants acted as controlling persons of IBM within the meanin g

of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and

their ownership and contractual rights, participation in and/or awareness ofthe Company's operation s

and/or intimate knowledge of the false financial statements filed by the Company with the SEC an d

disseminated to the investing public, the Individual Defendants had the power to influence an d

control and did influence and control, directly or indirectly, the decision-making of the Company ,

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including the content and dissemination of the various statements which Plaintiff contend are fals e

and misleading . The Individual Defendants were provided with or had unlimited access to copie s

of the Company's reports, press releases, public filings and other statements alleged by Plaintiff to

be misleading prior to and/or shortly after these statements were issued and had the ability to prevent

the issuance of the statements or cause the statements to be corrected .

61 . In particular, each of these defendants had direct and supervisory involvement in the

day-to-dayoperations of the Company and, therefore, is presumed to have had the power to contro l

or influence the particular transactions giving rise to the securities violations as alleged herein, an d

exercised the same .

62. As set forth above, IBM and the Individual Defendants each violated Section 10(b )

and Rule I Ob-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions

as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of th e

Exchange Act . As a direct and proximate result of defendants' wrongful conduct, Plaintiff and other

members of the Class suffered damages in connection with their purchases of the Company' s

securities during the Class Period .

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

(a) Determining that this action is a proper class action, designating Plaintiff as Lead

Plaintiff and certifying Plaintiff as a class representative under Rule 23 of the Federal Rules of Civi l

Procedure and Plaintiff' s counsel as Lead Counsel ;

(b) Awarding compensatory damages in favor of Plaintiff and the other Clas s

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;

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(c) Awarding Plaintiff and the Class their reasonable costs and expenses incurred i n

this action, including counsel fees and expert fees ; and

(d) Such other and further relief as the Court may deem just and proper .

JURY TRIAL DEMANDED

Plaintiffhereby demands a trial by jury .

Dated: July, 25, 2005 BRODSKY & SMITH, LLCBy: /s/Evan J . Smith (ES3254)Evan J . Smith, Esquire240 Mineola BoulevardMineola , NY 11501(516) 741-497 7

SCHIFFRIN & BARROWAY, LLPMarc A. TopazRichard A . Maniskas280 King of Prussia Rd .Radnor, PA 19087(610) 667-7706

Attorneys for Plaintiff

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