INTERNATIONAL BUSINESS MACHINES CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10 - Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 2002

1-2360
(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)

New York 13-0871985
------------------------ ------------------------------------
(State of incorporation) (IRS employer identification number)

Armonk, New York 10504
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

914-499-1900
-------------------------------
(Registrant's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
1934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

The registrant has 1,694,323,457 shares of common stock outstanding at
June 30, 2002.

INDEX

PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)

(The accompanying notes are an integral part of the financial statements.)

- 1 -

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS - (CONTINUED)
(UNAUDITED)

* Does not total due to rounding

(The accompanying notes are an integral part of the financial statements.)

- 2 -

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

ASSETS

* Reclassified to conform with 2002 presentation.

(The accompanying notes are an integral part of the financial statements.)

- 3 -

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)

LIABILITIES AND STOCKHOLDERS' EQUITY

* Reclassified to conform with 2002 presentation.

(The accompanying notes are an integral part of the financial statements.)

- 4 -

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)

(The accompanying notes are an integral part of the financial statements.)

- 5 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. In the opinion of the management of International Business Machines
Corporation (the company), all adjustments, which are of a normal recurring
nature, necessary to a fair statement of the results for the unaudited three-
and six-month periods have been made.

2. The following table summarizes Net income plus gains and losses not
affecting retained earnings.

* Reclassified to conform with 2002 presentation.

3. On June 3, 2002, the company signed an agreement with Hitachi to sell the
company's Hard Disk Drive (HDD) business. The estimated proceeds from the sale
are approximately $2 billion and the estimated loss on disposal is approximately
$28 million, net of tax. The loss on disposal is recorded in the Loss from
discontinued operations in the Consolidated Statement of Earnings. Adjustments
to the estimated loss, if any, will be recorded through the date on which the
transaction closes, subject to regulatory approvals.

Under the terms of the agreement, 70 percent of the proceeds will be
received upon the closing of the transaction. The remaining proceeds will be
received one and three years after the transaction closes. The remaining
proceeds are fixed and are not dependent or variable based upon the sold
business' earnings or performance and the company has no ability to
significantly influence the operations of the divested business.

The HDD business is accounted for as a discontinued operation and
therefore, the results of operations and cash flows have been removed from the
company's results of continuing operations for all periods presented in this
document. The results from discontinued operations are discussed on page 23. The
financial results reported as discontinued operations include the external
original

- 6 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

equipment manufacturer (OEM) hard disk drive business and certain charges
related to hard disk drives used in the company's e-server and e-storage
products that were recorded in the Technology segment. The discontinued
operations results do not reflect hard disk drive shipments to IBM internal
customers. The HDD business was part of the company's Technology external
reporting segment. The results of operations for HDD have been excluded from the
Segment Information footnote.

Summarized selected financial information for the discontinued operations is as
follows:

The assets and liabilities of discontinued operations are stated separately
as of June 30, 2002 on the statement of financial position. The major asset and
liability categories are as follows:

4. During the second quarter of 2002, the company executed several actions in
its Microelectronics Division. The Microelectronics Division is within the
company's Technology segment. These actions are the result of the company's
announced intentions to refocus and direct its microelectronics business to the
high-end foundry, ASICs and standard products, while creating a technology
services business. A major part of the actions relate to a significant reduction
in the company's manufacturing capacity for aluminum technology.

In addition, the company rebalanced both its workforce and leased space
resources primarily in response to the recent decline in corporate spending on
technology services.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table summarizes the significant components of these actions:

+ Represents currency translation adjustments.
* Recorded in Accounts payable and accruals on the Consolidated Statement of
Financial Position.
** Recorded in Other liabilities on the Consolidated Statement of Financial
Position.

(A) This amount is recorded in Selling, general and administrative (SG&A)
expense and primarily represents the abandonment and loss on sale of certain
capital assets during the second quarter 2002.

(B) This amount is comprised of costs incurred to remove abandoned capital
assets and the remaining lease payments for leased equipment that was abandoned
in the second quarter of 2002. The company expects to pay the removal costs by
June 30, 2003. The remaining lease payments will continue through 2005. These
amounts are recorded in SG&A expense.

(C) The company is subject to certain noncancelable purchase commitments. As a
result of the decision to significantly reduce aluminum capacity, the company no
longer has a need for certain materials subject to these agreements. The
required future payments for materials no longer needed under these contracts
are expected to be paid over two years. This amount is recorded in SG&A expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(D) The workforce reductions represent 1,400 people of which approximately 3
percent left the business as of June 30, 2002. The remaining people were
notified by June 30, 2002 and the majority will leave the company by August 30,
2002. These amounts are recorded in SG&A expense. The non-current portion of the
liability relates to terminated employees who were granted annual payments to
supplement their statutory or government pensions in certain countries. These
contractually required payments will continue until the former employee dies.

(E) The space accruals are for ongoing obligations to pay rent for vacant space
that could not be sublet or space that was sublet at rates lower than the
committed lease arrangements. The length of these obligations varies by lease
with the longest extending through 2006. These charges are recorded in Other
(income) and expense on the Consolidated Statement of Earnings.

(F) As part of the company's strategic decisions in its Microelectronics
business to exit the manufacture and sale of certain products and component
technologies, the company signed an agreement to sell its interconnect products
operations in Endicott to Endicott Interconnect Technologies, Inc. (EIT). As a
result of this transaction, the company incurred a $223 million loss on sale,
primarily relating to the land, buildings, machinery and equipment. This loss is
recorded in Other (income) and expense on the Consolidated Statement of
Earnings. The company will enter into a limited supply agreement with EIT for
future products, and it will also lease back at fair market value rental rates
approximately one third of the Endicott campus' square footage for operations
outside the interconnect OEM business.

(G) As part of the strategic realignment of the company's Microelectronics
business, the company reached an agreement to sell certain assets and
liabilities comprising its Mylex business to LSI Logic Corporation and the
company sold part of its wireless phone chipset operations to TriQuint
Semiconductor, Inc. The estimated loss of $74 million for the Mylex transaction
and the realized gain of $(11) million for the chipset sale are recorded in
Other (income) and expense on the Consolidated Statement of Earnings. The sale
of Mylex is expected to close in the third quarter of 2002, subject to
regulatory approval.

(H) The majority of the workforce reductions relate to the company's Global
Services business. The workforce reductions represent 14,213 people of which
approximately 57 percent left the company as of June 30, 2002. The remaining
people were notified by June 30, 2002 and the majority will leave the company by
September 30, 2002. See D above for information on the non current portion of
the liability. These charges are included in SG&A expense on the Consolidated
Statement of Earnings.

(I) The space accruals are for ongoing obligations to pay rent for vacant space
that could not be sublet or space that was sublet at rates lower than the
committed lease arrangements. This space relates primarily to workforce dynamics
in the Global Services business and the downturn in corporate technology
spending on services. The length of these obligations varies by lease with the
longest extending through 2009. These charges are recorded in Other (income) and
expense on the Consolidated Statement of Earnings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table provides the liability balances for actions that the
company took through 1993 and special actions in 1999. The second quarter 2002
actions discussed above are not included below but are presented in the table
above.

(a) Workforce accruals relate to terminated employees who are no longer working
for the company, but who were granted annual payments to supplement their state
pensions in certain countries. These contractually required payments will
continue until the former employee dies.
(b) Space accruals are for ongoing obligations to pay rent for vacant space that
could not be sublet or space that was sublet at rates lower than the committed
lease arrangement. The length of these obligations varies by lease with the
longest extending through 2012.
(c) Principally represents reclassification of non-current to current and
currency translation adjustments.

5. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This standard eliminates the amortization of goodwill, requires annual
impairment testing of goodwill and introduces the concept of indefinite life
intangible assets. The new rules also prohibit the amortization of goodwill
associated with business combinations that close after June 30, 2001. An initial
impairment test of goodwill must be performed in 2002 as of January 1, 2002. The
company completed this initial transition impairment test and determined that
its goodwill is not impaired.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The changes in the carrying amount of goodwill, by external reporting
segment, for the period ended June 30, 2002, are as follows:

Assembled Purchase Foreign Currency
Balance Workforce Goodwill Price Translation Balance
Segment 1/1/02 Reclass(*) Additions Adjustments Divestitures Adjustments 6/30/02
------- ------- ---------- --------- ----------- ------------ ---------------- -------

Global Services $ 325 $ -- $ 24 $ 7 $ -- $ 27 $ 383
Enterprise Systems 111 26 -- -- -- -- 137
Personal and Printing
Systems 13 -- -- -- -- -- 13
Technology 102 5 -- -- (71) -- 36
Software 727 2 134 (11) -- -- 852
Global Financing -- -- -- -- -- -- --
Enterprise Investments -- -- -- -- -- -- --
---------------------------------------------------------------------------------------

Total $1,278 $ 33 $ 158 $ (4) $ (71) $ 27 $1,421

(*) In accordance with SFAS No. 141, "Business Combinations," the unamortized
balance for acquired assembled workforce, which had been recognized as an
intangible asset separate from goodwill, has been reclassified to goodwill
effective January 1, 2002.

There were no goodwill impairment losses recorded during the period.

The following table presents the prior period's reported income from
continuing operations and net income adjusted to exclude goodwill amortization,
which is no longer recorded under SFAS No. 142.

(Dollars in millions except Three Months Ended Six MonthsEnded
per share amounts) June 30, 2001 June 30, 2001
------------------ ---------------

Reported income from
continuing operations $ 2,091 $ 3,868
Add: Goodwill amortization,
net of tax effects 59 131
---------- ----------
Adjusted net income $ 2,150 $ 3,999
BASIC EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
Reported net income $ 1.20 $ 2.22
Goodwill amortization 0.03 0.08
---------- ----------
Adjusted basic earnings per share $ 1.23 $ 2.29*
DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
Reported net income $ 1.17 $ 2.17
Goodwill amortization 0.03 0.07
---------- ----------
Adjusted diluted earnings per share $ 1.21* $ 2.24

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Reported net income $ 2 ,045 $ 3,795
Add: Goodwill amortization,
net of tax effects 59 131
-------------- -------------
Adjusted net income $ 2,104 $ 3,926
BASIC EARNINGS PER SHARE:
Reported net income $ 1.17 $ 2.18
Goodwill amortization 0.03 0.07
-------------- -------------
Adjusted basic earnings per share $ 1.21* $ 2.25

DILUTED EARNINGS PER SHARE :
Reported net income $ 1.15 $ 2.13
Goodwill amortization 0.03 0.07
-------------- -------------
Adjusted diluted earnings per share $ 1.18 $ 2.20

* Does not total due to rounding

SFAS No. 141 specifies certain criteria for identifying, valuing and
recording intangible assets separate from goodwill. SFAS No. 142 prescribes the
disclosure requirements for intangible assets that meet these criteria. The
following schedule details the company's intangible asset balances by major
asset class:

(a) Other intangibles are primarily contract-related assets such as employee
agreements and leasehold interests.

The net carrying amount of intangible assets decreased $52 million during
the second quarter of 2002 due to the amortization of existing intangible asset
balances and the write-offs of intangibles associated with divestitures.

The aggregate amortization expense was $40 million for the second quarter
of 2002 and $80 million for the first six months of 2002.

- 12 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The amortization expense related to intangible assets currently recorded on
the company's books for each of the five succeeding years is estimated to be the
following at December 31,:

2002 second half $ 75 million
2003 $ 140 million
2004 $ 109 million
2005 $ 45 million
2006 $ 23 million

6. The tables on pages 39 through 42 of this Form 10-Q reflect the results of
the company's segments consistent with its management system used by the
company's chief operating decision maker. These results are not necessarily a
depiction that is in conformity with generally accepted accounting principles,
e.g., employee retirement plan costs are developed using actuarial assumptions
on a country-by-country basis and allocated to the segments on headcount. A
different result could occur for any segment if actuarial assumptions unique to
each segment were used. Performance measurement is based on income before income
taxes (pre-tax income). These results are used, in part, by management, both in
evaluating the performance of, and in allocating resources to, each of the
segments.

On June 3, 2002, the company signed an agreement with Hitachi for the sale
of the company's HDD business. As a result, amounts disclosed in the company's
segment disclosure for all periods presented excludes the results of the HDD
business. Please see page 23 for a discussion of the company's results of
discontinued operations.

7. On July 30, 2002, the company signed a definitive agreement with
PricewaterhouseCoopers (PwC) to purchase PwC's global business consulting and
technology services unit, PwC Consulting, for approximately $3.5 billion. The
estimated payments will be comprised of approximately $2.7 billion in cash,
approximately $400 million in stock and the remainder in a note convertible into
restricted shares of IBM common stock. The transaction is expected to close in
the second half of the year subject to regulatory approvals and the approval by
local PwC firms through the vote of their partners. Current PwC Consulting full
year revenue, excluding reimbursable expenses, is estimated to be approximately
$4.9 billion. As PwC is IBM's auditor, IBM and PwC have been working with the
Securities and Exchange Commission (SEC) staff throughout the process to
establish procedures under a no-action letter to comply with SEC auditor
independence rules.

- 13 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002

The company's 2001 Annual Report listed three areas of emphasis for 2002:

- - Grow market share in key segments
- - Improve performance in PCs and Technology Group businesses
- - Continue to execute on productivity initiatives

Progress has been made on all fronts. During the first half of 2002, the
company expected to grow or maintain market share in key segments and in the
first quarter, the company outsourced its U.S. PC desktop manufacturing
business.

Second quarter management initiatives regarding HDD, microelectronics and
productivity initiatives had a significant negative impact on current quarter
results. Such initiatives, however, strike at the core of the company's strategy
to strengthen certain businesses and are intended to position the company for
future operational and strategic improvements. This MD&A and the notes to the
second quarter financial statements explain these initiatives and the impact
such initiatives had on the financial results of the quarter.

The company estimates that the payback period for the resource productivity
actions will be 12 to 18 months. The payback period on the Microelectronics
actions is estimated to be several years.

RESULTS OF CONTINUING OPERATIONS

The average number of common shares outstanding assuming dilution was lower
by 47.3 million than the second quarter in 2001 and by 37.8 million than the
first six months of 2001, primarily as a result of the company's share
repurchase program. The average number of shares assuming dilution was 1,730.4
million in the second quarter of 2002 and 1,741.7 million for the first six
months of 2002. There were 1,694.3 million shares outstanding at June 30, 2002.

- 14 -

On June 3, 2002, the company signed an agreement with Hitachi for the sale
of the company's HDD business. As a result, amounts disclosed in this Results of
Continuing Operations section for all periods presented excludes the results of
the HDD business. Please see page 23 for a discussion of the company's results
of discontinued operations.

Revenue for the three months ended June 30, 2002 decreased 5.7 percent (6
percent at constant currency) from the same period last year. Global Services
revenue including maintenance declined 0.9 percent (2 percent at constant
currency) in the second quarter to $8.7 billion. The company signed $10.6
billion in services contracts in the quarter.

Hardware revenue decreased 15.7 percent (17 percent at constant currency)
to $6.7 billion from the 2001 second quarter. Revenue declined significantly in
most areas of the server business, with the exception of xSeries servers.
Personal computer revenue as well as Microelectronics revenue decreased from
second quarter of 2001.

Software revenue increased 7.6 percent (7 percent at constant currency) to
$3.3 billion. Middleware revenue, which comprises 80 percent of the company's
software revenue, grew 11 percent (10 percent at constant currency) and
operating systems software revenue declined.

Global Financing revenue decreased 2.4 percent (3 percent at constant
currency) in the second quarter to $825 million. Revenue from Enterprise
Investments/Other area, which includes industry-specific IT solutions, declined
22.6 percent (22 percent at constant currency).

In the Americas, second-quarter revenue was $9.0 billion, a decrease of 5.3
percent (4 percent at constant currency) from the same period last year.
Revenue from Europe/Middle East/Africa was $5.6 billion, down 2.7 percent (7
percent at constant currency). Asia-Pacific revenue declined 3.0 percent (2
percent at constant currency) to $4.1 billion. OEM revenue across all
geographies was $844 million, a 31.8 percent decrease (31 percent at constant
currency) compared with the second quarter of 2001.

The company's total gross profit margin was 37.0 percent in the second
quarter of 2002, down from 38.3 percent in 2001. The decrease was primarily
driven by lower hardware margins as well as a lower Global Services margin.

Second-quarter expense from continuing operations was $6.7 billion, up 32.3
percent from the second quarter of 2001 primarily due to the actions taken in
the current quarter. SG&A expense was up 26.4 percent, year over year, but would
have been flat excluding the charges taken in the second quarter for actions.

The company's tax rate from continuing operations in the second quarter was
25.3 percent compared to 28.9 percent in the second quarter of 2001. The
decrease is principally due to the microelectronics actions taken in the 2002
second quarter.

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RESULTS OF CONTINUING OPERATIONS - (CONTINUED)

GLOBAL SERVICES

Global Services revenue, including maintenance, decreased 0.9 percent (2
percent at constant currency) and 1.9 percent (essentially flat at constant
currency), respectively, in the second quarter and first six months of 2002,
when compared to the same periods of 2001. Global Services revenue, excluding
maintenance, decreased 1.2 percent (2 percent at constant currency) and 2.2
percent (1 percent at constant currency), respectively, for the second
quarter and first six months of 2002 versus comparable periods of last year.
The decline in Global Services revenue, excluding maintenance, is primarily
due to lower signings. Maintenance revenue increased 0.9 percent (1 percent
at constant currency) and was essentially flat (up 2 percent at constant
currency), respectively, when compared to the same periods in 2001.

Strategic Outsourcing Services (SO) revenue increased in both the second
quarter and first six months of 2002 versus last year as business opportunity
remained strong. SO is attractive to customers in both strong and weak
economies as customers focus on cost reductions, but customers remained
cautious about signing new contracts. Integrated Technology Services (ITS)
revenue, excluding maintenance, increased in both the second quarter and
first six months of 2002 versus the same periods last year. Revenue for
management services, such as business recovery, technical support and
infrastructure and systems management continued to grow. Business Innovation
Services (BIS) revenue declined as it was affected most by the slowdown in
the economy. Despite the slowdown in the BIS market, customers continue to
focus on e-business offerings such as e-business integration as well as
enterprise resource planning (ERP).

The company's second quarter 2002 services signings were $10.6 billion, a
31 percent decline from the first quarter 2002. The majority of these signings
are longer term in nature, as represented by the company's SO and certain
government, mostly BIS, contracts, generally ranging between seven and nine
years. The remaining signings are shorter term contracts, generally averaging
six months. Backlog estimates are subject to change and are affected by
currency assumptions used in the company's plans, changes in the scope of
contracts - mainly long-term contracts - and periodic revalidations. After
adjustments for changes in the scope of contracts, as well as inclusion of
maintenance (a component of ITS) to reflect total Global Services backlog,
the estimated backlog including SO, BIS, and ITS was $108 billion at the end
of the first quarter of 2002, $106 billion at the end of the second quarter
of 2002, and on the same basis would be $102 billion at the end of the fourth
quarter of 2001.

Global Services gross profit dollars declined 5.6 percent and 3.5 percent,
respectively, for the second quarter and first six months of 2002 versus the
same periods last year. The gross profit margins declined 1.3 percentage points
and 0.5 percentage points, respectively, for the second quarter and first six
months of 2002 when compared to year-ago periods. These declines were

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RESULTS OF CONTINUING OPERATIONS - (CONTINUED)

driven by lower margins for BIS contracts due to price pressures as well as
volume reductions on certain SO contracts. These declines were partially
offset by lower labor and parts costs for maintenance.

The company's agreement to purchase PwC Consulting, announced July 30,
2002, is a strategic decision that will enable the company to provide superior
business value to customers through integration of technology and business
process insight. The PwC Consulting businesses' projected financial results for
its 2002 fiscal year just ended in June includes almost $5 billion of revenue,
net of client reimbursables. PwC consulting is comprised of over 30,000
employees, including approximately 1,300 partners.

With certain restructuring and transaction related costs, this acquisition
will reduce the company's earnings by approximately $500 million, net of tax, in
the fourth quarter of 2002 and is estimated to be accretive to the company's
earnings in the fourth quarter of 2003.

HARDWARE

Revenue from hardware decreased 15.7 percent (17 percent at constant
currency) and decreased 20.2 percent (20 percent at constant currency),
respectively, for the second quarter and first six months of 2002, versus the
same periods in 2001.

Enterprise Systems revenue decreased in both the second quarter and first
six months of 2002 versus the same periods last year. Revenue from Enterprise
Systems was again affected by the economic uncertainties and the elongated sales
cycle experienced in the first quarter of 2002.

Revenue from zSeries mainframes declined in both the second quarter and first
six months of 2002 versus the same periods of last year. The total deliveries of
zSeries computing power as measured in MIPS (millions of instructions per
second) increased 4 percent in the second quarter of 2002 compared to the second
quarter of 2001. Revenue from the pSeries UNIX servers decreased in the second
quarter and first six months of 2002 versus the comparable periods of 2001. The
pSeries revenue was affected by weak performance in low-end servers and
continuing price pressures. Revenue from iSeries servers decreased in the second
quarter and first six months of 2002 versus year-ago periods due to weak volumes
across all products. The xSeries server revenue increased for the second quarter
and first six months of 2002 versus the same periods of 2001 due to growth in
sales of high-end servers.

In storage, revenue declined in the second quarter and the first six months
of 2002 versus the same periods of last year. Both disk storage and tape storage
products experienced revenue declines in line with expected industry results.
Disk storage pricing stabilized from last quarter but was still down
year-to-year. The company has recently refreshed its storage product

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RESULTS OF CONTINUING OPERATIONS - (CONTINUED)

line including high-end tape storage products, midrange network attached
storage products and a new Shark storage system. These products should
contribute additional growth in the Storage Group in the second half of 2002.

Personal and Printing Systems revenue decreased in both the second quarter
and first six months of 2002 versus the same periods in 2001 primarily due to
lower revenue from personal computers. The personal computer revenue decline
continues to reflect weakness in demand. The company continued to improve on
executing its strategies for personal computers as inventories were lower,
expense declined and the company continues to differentiate its hardware with
unique software and services offerings.

Technology revenue declined substantially in the second quarter and first
six months of 2002 versus the comparable periods of 2001 reflecting the ongoing
weakness in demand for semiconductor products. The technology segment no longer
includes HDDs and is comprised mainly of the company's Microelectronics
Division. The company executed major actions in its microelectronics business,
including a significant reduction in the manufacturing capacity of
aluminum-based components and products. These actions are described fully on
pages 7 through 9. The company estimates that such actions will reduce next
year's depreciation expense by approximately $140 million.

Hardware gross profit dollars for the second quarter and first six months
of 2002 decreased 34.9 percent and 38.7 percent, respectively, from comparable
periods in 2001. The hardware gross profit margin decreased 7.3 percentage
points and 7.5 percentage points, respectively, from the prior year periods. The
decrease in the second quarter was driven by significantly lower gross profit
margins associated with microelectronics products as well as declines across all
Enterprise Systems products except the xSeries servers that improved in the
second quarter of 2002. The decrease in the first six months of 2002 was driven
by significantly lower gross profit margins associated with microelectronics
products as well as all Enterprise Systems products except zSeries servers.
Personal computers gross profit margin declined slightly due to a greater
percentage of revenue being derived from desktop and low-end mobile products in
both periods.

SOFTWARE

Revenue from software for the second quarter and first six months of 2002
increased 7.6 percent (7 percent at constant currency) and 3.5 percent (5
percent at constant currency), respectively, compared to the same periods of
2001. The company's middleware products (which comprise data management,
transaction processing, Tivoli systems management, and Lotus Notes messaging and
collaboration across both IBM and non-IBM platforms) had revenue growth of 11
percent (10 percent at constant currency) and 7 percent (8 percent at constant

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RESULTS OF CONTINUING OPERATIONS - (CONTINUED)

currency), respectively, for the second quarter and first six months of 2002.
Excluding the Informix acquisition, which occurred in the third quarter of 2001,
the middleware revenue increase would have been 7 percent and 2 percent,
respectively for the second quarter and first six months of 2002 versus the same
periods of 2001. Additional middleware revenue growth

was driven by strong growth in WebSpere and DB2 and Tivoli's continued
improvement, partially offset by a decline in Lotus revenue as Lotus
continued its transition to focus on emerging markets for advanced
collaboration.

Operating-systems software revenue declined 4 percent (4 percent at
constant currency) in the second quarter and 7 percent (6 percent at constant
currency) for the first six months of 2002, when compared with prior year
periods. These decreases were primarily associated with lower sales from pSeries
and iSeries software products.

Software gross profit dollars increased 10.6 percent and 5.7 percent,
respectively, for the second quarter and first six months of 2002 versus the
same periods in 2001. The gross profit margin improved 2.3 percentage points and
1.7 percentage points, respectively, for the second quarter and first six months
of 2002 compared to the same periods in 2001. The improvements in gross profit
dollars and gross profit margins were primarily driven by the growth in software
revenue, lower service costs and lower external royalty payments.

GLOBAL FINANCING

Global Financing revenue decreased 2.4 percent (3 percent at constant
currency) and 4.1 percent (3 percent at constant currency), respectively, for
the second quarter and first six months of 2002, when compared to the same
periods of 2001. The decreases in revenue were primarily driven by lower
commercial financing and lower customer financing activities, partially offset
by higher used equipment sales.

Global Financing gross profit dollars increased 15.2 percent and 13.9
percent, respectively, for the second quarter and first six months of 2002,
versus the same periods last year. The gross profit margins improved 8.6
percentage points and 9.0 percentage points, respectively, for the second
quarter and first six months of 2002 compared to the same periods of 2001. These
increases were primarily driven by lower borrowing costs and an improvement in
the used equipment sales gross profit margin.

- 19 -

RESULTS OF CONTINUING OPERATIONS - (CONTINUED)

ENTERPRISE INVESTMENTS/OTHER

Revenue from Enterprise Investments/Other decreased 22.6 percent (22
percent at constant currency) and 18.6 percent (16 percent at constant
currency), respectively, for the second quarter and first six months of 2002,
versus comparable periods in 2001. These decreases were primarily driven by
lower revenue associated with document processors.

The Enterprise Investments/Other gross profit dollars decreased 18.3
percent and 10.3 percent, respectively, in the second quarter and first six
months of 2002 versus the prior year periods. The gross profit margins improved
2.5 percentage points and 4.8 percentage points, respectively, for the second
quarter and first six months of 2002 versus the same periods in 2001. The
decline in gross profit dollars was due to lower gross profit margins associated
with document processors. The increases in gross profit margins was primarily a
result of the mix of revenue shifting to higher margin products such as CATIA.

EXPENSE AND OTHER INCOME

SG&A expense increased $1.1 billion (26.4 percent) and $1.0 billion (12.7
percent), respectively, in the second quarter and first six months of 2002
versus the same periods in 2001. The second quarter increase was primarily due
to the Microelectronics and productivity actions taken in the second quarter of
2002 amounting to $1,250 million compared to second quarter

- 20 -

RESULTS OF CONTINUING OPERATIONS - (CONTINUED)

2001 charges of $67 million. These actions are described on pages 7 through
9. In addition, the provision for doubtful accounts increased $42 million in
the 2002 second quarter and $103 million for the first six months of 2002 as
compared to the same periods in 2001. These increases are reflective of the
challenges faced by certain customers in today's economic environment,
especially those in the telecommunications sector.

Offsetting all of these expense increases during the quarter were the
benefit of the new goodwill accounting rule that lowered expense by
approximately $60 million in the second quarter of 2002 and $133 million for the
first six months of 2002 versus the year-ago periods as well as additional
benefits from the company's continuing e-business transformation and
productivity enhancements.

Research, development and engineering (RD&E) expense decreased 6.7 percent
and 6.4 percent, respectively, for the second quarter and first six months of
2002, when compared with the same periods of 2001. These declines in RD&E
expense were driven primarily by the focus on discretionary spending.

Intellectual property and custom development income decreased 31.4 percent
and 12.9 percent, respectively, for the second quarter and first six months of
2002 versus the same periods of 2001.

Sales and other transfers of intellectual property can vary period to
period. These transactions often require an extended period of negotiations and
contract/license drafting and administration prior to finalization and
recognition in the financial statements. The decrease in second quarter 2002
versus second quarter 2001 was primarily due to a greater number of larger
dollar Sales and other transfers during the prior year quarter. The amount of
income from licensing/royalty-based fee transactions has been declining and this
trend may continue.

Second quarter 2002 Other (income) and expense decreased $523 million as
compared to the second quarter 2001 to a net expense of $399 million. This
decrease was primarily due to the Microelectronics and productivity actions
taken in the second quarter. These items are described on pages 7 through 9. The
balance of the decrease relates to changes in interest income and foreign
currency transaction gains and losses.

Interest expense excluding interest classified as Cost of Financing in the
Consolidated Statement of Earnings declined 42.7 percent and 50.8 percent,
respectively, for the second quarter and first six months of 2002, when compared
with the same periods in 2001. These declines were a result of reduced levels of
debt and lower interest rates.

- 21 -

RESULTS OF CONTINUING OPERATIONS - (CONTINUED)

Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and Global Financing interest classified as Cost of
Financing in the Consolidated Statement of Earnings was $201 million and $418
million for the second quarter and first six months of 2002, respectively. Of
these amounts, the company capitalized $10 million for the second quarter and
$19 million for the first six months of 2002.

The following table provides the total pre-tax (income)/cost for
retirement-related plans for the second quarter of 2002 and 2001 and the first
six months of 2002 and 2001. (Income)/cost amounts are included as a reduction
from/addition to, respectively, the company's cost and expense amounts on the
Consolidated Statement of Earnings.

Retirement-Related Benefits

Included in the amounts above, the company realized income of approximately
$281 million and $365 million due to the funded status of its defined benefits
pension plans for the quarter ended June 30, 2002 and 2001, respectively. The
comparable amount for the first six months of 2002 and 2001 was approximately
$547 million and $704 million, respectively. The declines in the income were
primarily a result of the change in the expected long-term rate of return on
plan assets from 10 percent to 9.5 percent for the U.S. plan and similar changes
made for certain non-U.S. Plans, as discussed below.

At the beginning of 2002, the company reduced its expected long-term return
on the IBM Personal Pension Plan (PPP) assets assumption from 10.0 percent to
9.5 percent. This change and the impact of 2002 changes in the expected
long-term rate of return on plan assets for certain non-U.S. Plans is expected
to reduce 2002 net retirement plan income by approximately $350 million.

The company annually sets its discount rate assumption for
retirement-related benefits accounting to reflect the rates available on
high-quality, fixed-income debt instruments. Using this process, the company
changed its discount rate assumption for the PPP from 7.25 percent to 7.00
percent, effective December 31, 2001. This change is not expected to have a
material effect on the company's 2002 results of operations.

Future effects of retirement-related plans on the operating results of the
company depend on economic conditions, employee demographics, mortality rates
and investment performance.

- 22 -

RESULTS OF CONTINUING OPERATIONS - (CONTINUED)

The company's effective tax rate on continuing operations for the second
quarter of 2002 was 25.3 percent versus 28.9 percent for the same period in
2001. The effective tax rate on continuing operations for the first six months
of 2002 was 28.2 percent versus 29.0 percent for the comparable period in 2001.
The rate for the second quarter and first six months of 2002 is lower than the
expected annual rate principally as a result of the tax effect of the second
quarter Microelectronics actions. In the normal course of business, the company
expects that the effective tax rate will approximate 30 percent. As illustrated
in the second quarter of 2002, the company's effective tax rate may change
period to period based on nonrecurring events as well as recurring factors
including the geographical mix of income before taxes, the timing and amount of
foreign dividends, state and local taxes, and the interaction of various global
tax strategies.

RESULTS OF DISCONTINUED OPERATIONS

See pages 6 and 7 for a discussion of the company's divestiture of the HDD
business. Revenue from discontinued operations decreased 48.4 percent from the
second quarter 2001 to $379.1 million in the second quarter of 2002. The
decrease was primarily due to declines in the desktop and server categories as
well as general industry price declines across all product lines.

Net loss from discontinued operations in the second quarter 2002 was $389
million as compared to a net loss of $46 million in the second quarter of 2001.
Included in the 2002 amount is approximately $28 million, net of tax, of an
estimated loss on disposal of the HDD business. Contributing to the increased
net loss from discontinued operations was an increase in inventory write-offs of
$136 million, net of tax, as compared to such write-offs in the 2001 second
quarter. This was especially pronounced for the older products after the Hitachi
transaction was announced and led the company to a strategic decision to cease
reworking and selling efforts for some of the company's older HDD products. The
written off inventory is expected to be physically disposed of prior to closing.

Also contributing to the increased loss in 2002 were certain actions taken
by the company that resulted in $114 million, net of tax, of charges in the
second quarter 2002 as compared to no charges in the 2001 second quarter. These
second quarter charges primarily include charges for the second quarter
abandonment and associated removal costs for machinery, equipment and tooling
that are no longer needed by the company and will not be purchased by Hitachi.

FINANCIAL CONDITION OF CONTINUING OPERATIONS

During the first half of 2002, the company's financial performance enabled
it to make significant investments to fund its future growth and increase
shareholder value.

Investments included expenditures of $2,617 million for Research,
development and engineering, $2,524 million for Plant, rental machines and other
property and $3,541 million for the repurchase of the company's common shares.
The company had $3,567 million in Cash and cash equivalents and Marketable
securities at June 30, 2002.

- 23 -

FINANCIAL CONDITION OF CONTINUING OPERATIONS - (CONTINUED)

CASH FLOW

Cash flows from operating activities in the first half of 2002 increased
$643 million from the comparable 2001 period. This primarily resulted from
working capital improvements.

Cash flows used in investing activities decreased $41 million from the
comparable 2001 period. The decrease primarily resulted from lower capital
spending.

Cash flows used in financing activities in the first half of 2002 increased
$3,298 million from the comparable 2001 period due primarily to a decrease in
debt financing and an increase in stock repurchases.

WORKING CAPITAL

Current assets decreased $5,738 million from year-end 2001 primarily due to
decreases of $2,826 in Cash and cash equivalents and Marketable securities,
$2,144 million in Accounts receivable ($1,551 million in Short-term financing
receivables, $587 million in Notes and accounts receivable and $6 million in
Other accounts receivable), $462 million in Inventories and $302 million in
Prepaid expenses and other current assets. Deferred taxes were relatively flat
compared to year-end 2001. The net decrease in Cash and cash equivalents and
Marketable securities, as compared to year-end 2001, was primarily due to the
use of cash to reduce total debt (primarily non-global financing debt). The
decline in accounts receivable was attributable to lower revenue volumes in the
first half of 2002 and collection of typically higher year end accounts
receivable balances. Current liabilities decreased $2,522 million from year-end
2001 with declines of $1,021 million

- 24 -

FINANCIAL CONDITION OF CONTINUING OPERATIONS - (CONTINUED)

in Taxes payable (resulting primarily from declines in these balances from
typically higher year-end levels), and $1,617 million in Short-term debt.

INVESTMENTS

During the first half of 2002, the company invested $2,524 million in
Plant, rental machines and other property, a decrease of $295 million from the
comparable 2001 period. The company invested in its services business, primarily
in the management of customers' information technology, as well as in
manufacturing capacity for the 300 mm copper chip-making facilities in
microelectronics.

In addition to software development expense included in Research,
development and engineering expense, the company capitalized $272 million of
software costs during the first half of 2002, a decrease of $34 million from the
comparable period in 2001. Amortization of capitalized software costs was $341
million during the first half of 2002, an increase of $51 million from the
comparable 2001 period.

Investments and sundry assets were $16,887 million at June 30, 2002, an
increase of $1,419 million from year-end 2001 primarily due to increased pension
assets.

On April 30, 2002, the Board of Directors increased its authorized amount
of IBM common shares that the company may repurchase in the open market by an
additional $3.5 billion. The company's total remaining authorized amount as of
June 30, 2002 is $4,535 million of IBM common shares.

DEBT AND EQUITY

The company's debt level of $25,841 million is almost entirely (98 percent)
the result of the company's Global Financing business. The Global Financing
business provides financing primarily to the company's customers and business
partners. Using the typical financing business model, Global Financing funds its
operations primarily through borrowings. It uses a debt to equity ratio of
approximately 7 to 1. Global Financing generates income by charging its
customers a higher interest rate than the interest expense on Global Financing
borrowings.

- 25 -

FINANCIAL CONDITION OF CONTINUING OPERATIONS - (CONTINUED)

GLOBAL FINANCING ASSETS AND DEBT
(DOLLARS IN BILLIONS)

[CHART]

* As of June 30, 2002.

The company's operations are essentially self-funding except for the
company's Global Financing business which leverages assets.

The company's funding requirements are continually monitored and strategies
are executed to manage the company's overall asset and liability profile.
Additionally, the company maintains sufficient flexibility to access global
funding sources as needed. The company's total debt decreased $1,310 million
from year end 2001 to $25,841 million at June 30, 2002. Based upon the company's
two different capital structures as previously discussed in this section, the
analysis of this change and certain ratios are discussed below on both a Global
Financing and a non-global financing basis.

GLOBAL FINANCING

* Global Financing assets include cash, financing receivables, intercompany
amounts, rental machine fixed assets and other assets.
** Global Financing debt includes debt of the company and of Global Financing
units that support the Global Financing business.

- 26 -

FINANCIAL CONDITION OF CONTINUING OPERATIONS - (CONTINUED)

The Global Financing segment is a financial services business and is,
therefore, more debt dependent than the company's other businesses. In the
second quarter of 2002, the Global Financing debt to equity ratio increased to
6.9x, which is within management's acceptable target range.

NON-GLOBAL FINANCING

* Non-global financing debt is the company's total external debt less the Global
Financing debt described in the Global Financing table above.

The decrease in non-global financing debt in the first half of 2002 was due
to decreased requirements for cash in the business during the first six months
of 2002.

Global Financing provides financing predominately for the company's
external customers but also provides financing for the company including the
funding to support the Global Services business' long-term customer services
contracts. All of these financing arrangements are at arms-length rates based
upon market conditions. The company manages and measures the Global Financing
business as if it approximates a stand-alone business that includes both the
external financing and company financing described above. Accordingly, the
Global Financing debt above and Global Financing Cost of financing below support
both of these Global Financing activities.

All intercompany transactions are eliminated in the Consolidated Statement
of Earnings and therefore, the financing revenue associated with the financing
provided by Global Financing to the company is eliminated in consolidation.
Accordingly, the interest expense from the company's external borrowings that
supports such financing revenue is classified in the Interest expense caption of
the Consolidated Statement of Earnings as opposed to the Cost of financing
caption. The reconciliation of these amounts is as follows:

Stockholders' equity decreased $2,219 million from December 31, 2001,
primarily due to the company's ongoing stock repurchase program. A review of the
company's debt and equity

- 27 -

FINANCIAL CONDITION OF CONTINUING OPERATIONS - (CONTINUED)

should also consider other contractual obligations and commitments. These
amounts are summarized in one table below to facilitate a reader's review.

CONTRACTUAL OBLIGATIONS

COMMITMENTS

LIQUIDITY

The company maintains a global credit facility totaling $12.0 billion in
committed credit lines, including an $8.0 billion five-year facility (which has
four years remaining) and a $4.0 billion 364-day facility, as part of its
ongoing efforts to ensure appropriate levels of liquidity. As of June 30, 2002,
amounts unused and available under these facilities were $11,832 million. In
addition, at June 30, 2002, the company had in place other lines of credit, most
of which were uncommitted, of $8,024 million. The amount of unused and available
under these primarily uncommitted facilities at June 30, 2002, was $5,758
million.

The company expects to receive the initial proceeds from the HDD
transaction, subject to regulatory approval, within twelve months. The company
will disburse approximately $2.7 billion in cash for the PwC Consulting
business, subject to regulatory approval, and approximately $750 million over
the next twelve months associated with the second quarter actions. As a result
of the excess cash outflows over inflows for these three events, and to the
extent that the timing of these cash receipts and disbursements do not coincide,
the company expects to increase non-global financing borrowings, accordingly.

The major rating agencies' ratings of the company's debt securities at June
30, 2002, appear in the table below:

- 28 -

FINANCIAL CONDITION OF CONTINUING OPERATIONS - (CONTINUED)

CURRENCY RATE FLUCTUATIONS

Changes in the relative values of non-U.S. currencies to the U.S. dollar
affect the company's results. At June 30, 2002, currency changes resulted in
assets and liabilities denominated in local currencies being translated into
more dollars than at year-end 2001. The currency rate changes had a favorable
effect on revenue growth of approximately 1 percentage point in the second
quarter of 2002 and an unfavorable effect on revenue growth of approximately 5
percentage points in the second quarter of 2001.

For non-U.S. subsidiaries and branches that operate in U.S. dollars or
whose economic environment is highly inflationary, translation adjustments are
reflected in results of operations, as required by SFAS No. 52, "Foreign
Currency Translation." Generally, the company manages currency risk in these
entities by linking prices and contracts to U.S. dollars and selectively
entering into foreign currency hedge contracts.

The company uses a variety of financial hedging instruments to limit
specific currency risks related to financing transactions and other foreign
currency-based transactions. Further discussion of currency and hedging appears
in note k, "Derivatives and Hedging Transactions," on pages 85 through 87 of the
2001 Annual Report.

FORWARD LOOKING AND CAUTIONARY STATEMENTS

Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including the
company's failure to continue to develop and market new and innovative products
and services and to keep pace with technological change; competitive pressures;
failure to obtain or protect intellectual property rights; quarterly
fluctuations in revenues and volatility of stock prices; the company's ability
to attract and retain key personnel; currency and customer financing risks;
dependence on certain suppliers; changes in the financial or business condition
of the company's distributors or resellers; the company's ability to
successfully manage acquisitions and alliances; legal, political and economic
changes and other risks, uncertainties and factors discussed elsewhere in this
Form 10-Q, in the company's other filings with the Securities and Exchange
Commission or in materials incorporated therein by reference.

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The International Business Machines Corporation held its Annual Meeting of
Stockholders on April 30, 2002. For more information on the following proposals,
see the company's proxy statement dated March 11, 2002, the relevant portions of
which are incorporated herein by reference.

- 29 -

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - (CONTINUED)

(1) The stockholders elected each of the fourteen nominees to the Board of
Directors for a one-year term:

(2) The stockholders ratified the appointment of PricewaterhouseCoopers LLP as
independent accountants of the company:

For 1,332,319,481
Against 48,825,486
Abstain 13,664,531
-------------
Total 1,394,809,498

(3) The stockholders defeated a shareholder proposal on Board Service:

For 53,440,890
Against 1,003,996,990
Abstain 28,982,222
Broker No Vote 308,389,396
-------------
Total 1,394,809,498

(4) The stockholders defeated a shareholder proposal on Pension and Retirement
Medical:

For 126,919,788
Against 927,378,838
Abstain 32,325,126
Broker No Vote 308,185,746
--------------
Total 1,394,809,498

- 30 -

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - (CONTINUED)

(5) The stockholders defeated a shareholder proposal on Executive Compensation:

For 178,472,606
Against 878,412,574
Abstain 29,738,572
Broker No Vote 308,185,746
--------------
Total 1,394,809,498

(6) The stockholders defeated a shareholder proposal on Poison Pills:

For 352,588,972
Against 702,566,882
Abstain 31,467,898
Broker No Vote 308,185,746
--------------
Total 1,394,809,498

ITEM 6 (a). EXHIBITS

EXHIBIT NUMBER

11 Statement re: computation of per share earnings.

12 Statement re: computation of ratios.

22 The company's proxy statement dated March 11, 2002, containing the full
text of the proposals referred to in Item 4, which was previously filed
electronically, is hereby incorporated by reference.

99.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

ITEM 6 (b). REPORTS ON FORM 8-K

The company filed a Form 8-K on April 8, 2002, regarding its first quarter
2002 financial results. No financial statements were filed with this Form 8-K.

The company filed a Form 8-K on April 17, 2002, with respect to the
company's financial results for the period ended March 31, 2002, and included
the unaudited Consolidated Statement of Earnings, Consolidated Statement of
Financial Position and Segment Data for the period ended March 31, 2002. In
addition, IBM's Chief Financial Officer, John R. Joyce's first-quarter earnings
presentation to security analysts on Wednesday, April 17, 2002, was filed as
Attachment II of the Form 8-K.

- 31 -

ITEM 6 (b). REPORTS ON FORM 8-K - (CONTINUED)

The company filed a Form 8-K on May 9, 2002, to incorporate by reference
into Registration Statement No. 333-37034 on Form S-3, effective June 20, 2000,
the Underwriting Agreement dated April 16, 2002, among International Business
Machines Corporation, Salomon Brothers International Limited, Tokyo-Mitsubishi
International plc, Credit Suisse First Boston (Europe) Limited, Daiwa Securities
SMBC Europe Limited, Deutsche Bank AG London, J. P. Morgan Securities Ltd.,
Merrill Lynch International, Mizuho International plc, UBS AG, acting through
its business group UBS Warburg. In addition, the Form of 0.40 percent Note due
2004 was also filed. No financial statements were filed with this Form 8-K.

The company filed a Form 8-K on June 4, 2002, regarding a definitive
agreement between Hitachi and IBM on the transfer of their hard disk drive
operations to a new standalone company under majority Hitachi ownership. In
addition, the company announced actions being taken in the second quarter of
2002 to strengthen its strategic and competitive position. Also, remarks from
IBM's Chief Financial Officer, John R. Joyce, to security analysts on Tuesday,
June 4, 2002, regarding the definitive agreement between Hitachi and IBM
regarding their hard disk drive businesses and the realignment of the company's
Microelectronics Division and workforce and related actions being taken in the
second quarter of 2002. In addition, IBM's Senior Vice President and Group
Executive John E. Kelly's remarks to security analysts regarding the realignment
of the Microelectronics Division and the definitive agreement between Hitachi
and IBM regarding their hard disk drive businesses and IBM's Senior Vice
President and Group Executive Linda S. Sanford's remarks to security analysts
regarding the status of the company's separate alliance with Hitachi in storage
systems. No financial statements were filed with this Form 8-K.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

International Business Machines Corporation
-------------------------------------------
(Registrant)

Date: August 13, 2002
---------------

By:

/s/ Robert F. Woods
-----------------------------

Robert F. Woods
Vice President and Controller

- 32 -

EXHIBIT 11

COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE
(UNAUDITED)

- 33 -

COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE - (CONTINUED)
(UNAUDITED)

* Does not total due to rounding

Stock options to purchase 128,528,851 shares and 48,138,247 shares were
outstanding as of June 30, 2002 and 2001, respectively, but were not included in
the computation of diluted earnings per share because the options' exercise
price during the respective periods was greater than the average market price of
the common shares and, therefore, the effect would have been antidilutive. In
addition, 2,550,288 restricted stock units as of June 30, 2001 relating to the
company's Long-Term Performance Plan were not included in the computation of
diluted earnings per share as their effect would have been antidilutive. Net
income applicable to common shareholders excludes preferred stock dividends of
$5 million for the three months ended June 30, 2001.

- 34 -

COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE - (CONTINUED)
(UNAUDITED)

- 35 -

COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE - (CONTINUED)
(UNAUDITED)

* Does not total due to rounding.

Stock options to purchase 91,804,670 shares and 61,834,121 shares were
outstanding as of June 30, 2002 and 2001, respectively, but were not included in
the computation of diluted earnings per share because the options' exercise
price during the respective periods was greater than the average market price of
the common shares, and therefore, the effect would have been antidilutive. Net
income applicable to common shareholders excludes preferred stock dividends of
$10 million for the six months ended June 30, 2001.

- 36 -

EXHIBIT 12

COMPUTATION OF RATIO OF INCOME FROM CONTINUING OPERATIONS TO
FIXED CHARGES AND INCOME FROM CONTINUING OPERATIONS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(UNAUDITED)

(1) Income from continuing operations before income taxes excludes the company's
share in the income and losses of less-than-fifty percent-owned affiliates.

(2) Included in the ratio computation are preferred stock dividends of $10
million for the first six months of 2001, or $14 million representing the
pre-tax income that would be required to cover those dividend requirements based
on the company's effective tax rate for the six months ended June 30, 2001.

- 37 -

(THIS PAGE INTENTIONALLY LEFT BLANK)

- 38 -

SEGMENT INFORMATION - ON CONTINUING OPERATIONS BASIS
(UNAUDITED)

* Reclassified to conform with 2002 presentation.
NM - not meaningful.

RECONCILIATIONS TO IBM AS REPORTED:

- 39 -

- 40 -

SEGMENT INFORMATION - ON CONTINUING OPERATIONS BASIS
(UNAUDITED)

* Reclassified to conform with 2001 presentation.

RECONCILIATIONS TO IBM AS REPORTED:

- 41 -

- 42 -