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_13
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
INTERNATIONAL BUSINESS MACHINES CORPORATION:
WehavecompletedintegratedauditsofInternationalBusiness
MachinesCorporation’s2005and2004ConsolidatedFinancial
Statementsandofitsinternalcontroloverfinancialreportingas
of December 31, 2005 and an audit of its 2003 Consolidated
Financial Statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Ouropinions,basedonourauditsandthereportofotheraudi-
tors,arepresentedbelow.
ConsolidatedFinancialStatements
Inouropinion,basedonourauditsandthereportofotheraudi-
tors, the accompanying Consolidated Financial Statements
appearingonpages 48through 100 presentfairly,inallmaterial
respects, the financial position of International Business
Machines Corporation and its subsidiary companies at
December31,2005and2004,andtheresultsoftheiroperations
and their cash flows for each of the three years in the period
endedDecember31,2005inconformitywithaccountingprinci-
plesgenerallyacceptedintheUnitedStatesofAmerica.These
financialstatementsaretheresponsibilityoftheCompany’sman-
agement. Our responsibility is to express an opinion on these
financial statements basedon our audits.Wedid not auditthe
financial statements of the Company’s Business Consulting
ServicesReportingUnit(whichincludestheconsultingpractice
acquiredfromus)forthe yearsendedDecember 31,2004and
2003,whichstatementsreflecttotalrevenuesof14.3percentand
14.5percentoftherelatedconsolidatedtotalsintheyearsended
December 31, 2004 and 2003, respectively. Those statements
wereaudited by other auditors whosereport thereonhas been
furnishedtous,andouropinionexpressedherein,insofarasit
relates to the amounts included for the Company’s Business
ConsultingServicesReportingUnit,isbasedsolelyonthereport
of the other auditors. We conducted our audits of these state-
mentsinaccordancewiththestandardsofthePublicCompany
Accounting Oversight Board (United States). Those standards
requirethatweplanandperformtheaudittoobtainreasonable
assurance about whether the financial statements are free of
materialmisstatement.Anauditoffinancialstatementsincludes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation.Webelievethatourauditsandthereportofother
auditorsprovideareasonablebasisforouropinion.
Asdiscussedinnotes A and U tothefinancialstatements,
the Company changed the manner in which it accounts for
stock-based awards exchanged for employee services as of
January1,2005.
InternalControlOverFinancialReporting
Also,inouropinion,management’sassessment,includedinthe
accompanyingManagement’s Report on Internal Control Over
Financial Reporting appearing on page 12, that the Company
maintainedeffectiveinternalcontrolover financialreportingas
ofDecember31,2005basedoncriteriaestablishedinInternal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO),isfairlystated,inallmaterialrespects,basedonthose
criteria.Furthermore,inouropinion,theCompanymaintained,
in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria estab-
lished in Internal Control-Integrated Framework issued by the
COSO. The Company’s management is responsible for main-
tainingeffectiveinternalcontroloverfinancialreportingandfor
its assessment of the effectiveness of internal control over
financialreporting.Ourresponsibilityistoexpressopinionson
management’s assessment and on the effectiveness of the
Company’sinternalcontroloverfinancialreportingbasedonour
audit.Weconductedourauditofinternalcontroloverfinancial
reporting in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standardsrequirethatweplanandperformtheaudittoobtain
reasonable assurance about whether effective internal control
overfinancialreportingwasmaintainedinallmaterialrespects.
An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control,andperformingsuchotherproceduresasweconsider
necessaryinthecircumstances.Webelievethatourauditpro-
videsareasonablebasisforouropinions.
A company’s internal control over financial reporting is a
processdesignedtoprovidereasonableassuranceregardingthe
reliabilityof financialreportingand the preparationoffinancial
statementsforexternalpurposesinaccordancewithgenerally
accepted accounting principles. A company’s internal control
overfinancialreportingincludesthosepoliciesandprocedures
that(i)pertaintothemaintenanceofrecordsthat,inreasonable
detail,accuratelyandfairlyreflectthetransactionsanddisposi-
tionsoftheassetsofthecompany;(ii)providereasonableassur-
ance that transactions are recorded as necessary to permit
preparationoffinancialstatementsinaccordancewithgenerally
acceptedaccountingprinciples,andthatreceiptsandexpendi-
turesof thecompany are being made onlyin accordance with
authorizations of management and directors of the company;
and (iii) provide reasonableassurance regardingpreventionor
timelydetection of unauthorizedacquisition,use,ordisposition
ofthecompany’sassetsthatcouldhaveamaterialeffectonthe
financialstatements.
Becauseofitsinherentlimitations,internalcontroloverfinan-
cial reporting may not prevent or detect misstatements. Also,
projectionsof any evaluationof effectivenesstofutureperiods
are subject to the risk that controls may become inadequate
becauseofchangesinconditions,orthatthedegreeofcompli-
ancewiththepoliciesorproceduresmaydeteriorate.
PRICEWATERHOUSECOOPERS LLP
NewYork,NewYork
February 28,2006
Reportof IndependentRegisteredPublicAccountingFirm
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES