Disagreements between the state of Indiana and IBM Corp. over a failed welfare-administration contract have escalated into a full-blown legal battle.

The two parties sued each other Thursday over the technology giant's canceled 10-year, $1.34 billion contract to automate the state's intake for food stamps, Medicaid and other benefits.

Both lawsuits were filed in Marion County Superior Court.

In its lawsuit, the Indiana Family and Social Services Administration is seeking to recover the $437.6 million it paid IBM through Jan. 31, plus the costs of any third-party lawsuits, federal penalties, and state employee overtime that it incurs as a result of its association with the Armonk, N.Y.-based company.

The state is seeking triple damages, or more than $1.3 billion, as it's entitled to do under state law.

The state agency wants IBM's request for $83.4 million in penalties called for in the contract thrown out as unenforceable under state law.

IBM says the state owes it nearly $53 million in fees and equipment expenses, plus interest, under the 2006 contract. Gov. Mitch Daniels cancelled the contract in October because he wasn't satisfied with its results.

On Wednesday, Anne Murphy, the head of the Indiana agency, told the State Budget Committee that the state had rejected some invoices submitted by IBM and had asked for the return of undisclosed amount of money.

"IBM's failure to help our most vulnerable Hoosiers and fix Indiana's welfare system set us back in time and money, for which we'd like compensation," Murphy said in a prepared statement Thursday.

"Our new contractors are achieving far better results than either Indiana's previous system or the system IBM attempted to install. That is evidence the job of repair and reform could have been done much better," she said.

Murphy told the Budget Committee that IBM had collected $2.64 million in disengagement costs from the state and federal government from December through March. She said she expected those payments to IBM, for items such as equipment and technology, would continue through the end of June.

IBM issued a statement acknowledging the contract gave the state the right to cancel but also requires it to reimburse IBM for deferred fees and equipment costs.

"The State threatens to undermine the integrity of a public procurement process under which thousands of private companies conduct business with Indiana expecting and depending on the State to fulfill its contractual commitments," the company said.

After IBM's dismissal, FSSA rolled out what it has called a "hybrid" welfare intake solution that adds more local case workers and face-to-face contact to supplement the call centers, document imaging and other technology that IBM introduced but left clients, their advocates and lawmakers complaining of improperly denied benefits, lost documents, dropped calls and other problems.

Murphy said the hybrid solution is working so well in 10 southwestern Indiana counties that she wants to expand it to the remaining 49 counties where welfare intake was automated by the end of the year and to the state's remaining 33 counties next year.

However, IBM said the hybrid's use of the company's technology, infrastructure, applications, automated processes and systems underscored "IBM's contributions to an improved welfare eligibility system in the State."