(FORTUNE Magazine) – IBM's failure to capitalize on its dominance of the personal computer in the 1980s was one of the great missed opportunities in the annals of business, and its wrong-headed attempts to reposition itself in the PC market since then are a major reason it went from being one of the most highly regarded companies in America to one of the most scorned. That was then. Today-- seemingly out of nowhere--IBM's PC business is booming. Executives say third-quarter sales set a record, as did the second quarter's, and the business is profitable (as recently as 1994, it lost a billion dollars).

IBM has an impressive array of new products, its domestic market share in PCs has jumped from 6.1% in the first quarter to 9% in the second, and it has overhauled the way it does business with retailers and corporate resellers of PCs in a revolutionary fashion that should pave the way for even stronger sales. Perhaps most intriguing, IBM and Intel have told FORTUNE they are close to completing a broad-ranging strategic partnership to penetrate the important and growing business of managing networks of PCs in corporate America.

IBM is finally, in other words, getting its act together. The executives picked by CEO Lou Gerstner to remake the PC business are refreshingly free of the starch and hauteur that used to characterize Big Blue. Ask about IBM's recent failures in PCs, and Bob Stephenson--the senior vice president who's been overseeing the business for a year--replies with candor: "We had a reputation of being a laggard with products and a wholly unreliable supplier to both dealers and end customers." Ask Sam Palmisano, who took over as general manager of the PC division in April, how things are going now, and he says, "We have a reliable supply of hot products, excellent relationships with retailers and corporate resellers, and competitive prices. We're kicking ass." They're making believers out of outsiders as well. Says Kimball Brown, an industry analyst with market research firm Dataquest: "I've never seen them firing on all cylinders like this before." He goes on to confer the ultimate compliment, comparing IBM with the company that stole the mantle of market leader: "If anything, they're a tad ahead of Compaq in their overall execution."

The most basic reason for all this buzz is simple: IBM has products people want to buy. Its latest stuff is sleek, as the accompanying pictures show--and it's hot. The new four-pound Thinkpad 560 is perhaps the best combination of light weight and functionality any PC maker has yet devised, and the company can't keep them in stock. The latest IBM consumer PC, the Aptiva-S, is innovative. It separates the floppy and CD-ROM drives from the box that holds the computer's brain, so you can store the bulky box away from your desk. It's the first step toward selling home servers that will run several home computers. IBM even has groundbreaking products in the unsexy, less visible commercial desktop business. Its new machines can be turned on and off and extensively manipulated over a corporate network, substantially simplifying the job of network administrators.

To make sure that IBM can keep these and other new products coming to market fast--a problem that has troubled Big Blue in the past--Stephenson is continuing a radical reengineering of the PC company begun by his predecessor, Richard Thoman, now IBM's CFO. The latest step: simplification of IBM's line of PCs, as well as the number of parts used in them. At the beginning of this year, IBM offered over 3,400 unique PC configurations. The goal is 200 by year-end. "There is elegance associated with simplicity," says reengineering boss Bill Amelio. "For each variation, we need to stock it, forecast for it, and make sure both our own selling team and the resellers understand it."

The company has also aggressively worked to repair relations with the people who sell its products. IBM has its own massive sales organization, and for years behaved ambivalently toward the retailers and corporate resellers who sell the vast majority of PCs. No more. Says Paul Ewert, vice president for merchandising at CompUSA: "They have devoted people and resources to working with us. We talk to someone from IBM now daily. It's wrong to view IBM as a laggard anymore." Big Blue has ended direct sales of PCs in the U.S., and now, even if its sales force takes a PC order, fulfillment and servicing are turned over to a reseller. The company has already passed along hundreds of millions of dollars of business, making less profit per PC but winning more loyalty from partners who influence future sales.

Stephenson narrowed the group of resellers with which IBM deals, and now works so closely with them that they are almost vertical extensions of the company. IBM ships semicomplete PCs to the resellers, who then install the exact hard drive, memory, and software a given customer requires. This allows IBM to compete more effectively with companies like Dell and Gateway 2000, which sell computers direct, and also to better forecast customer demand, a continual challenge in an industry in which expensively produced machines become obsolete in months.

IBM's still-to-be-announced strategic partnership with Intel also shows a heretofore absent pragmatism about what it takes to win in the complex PC business. The two companies will share technology across a broad range of fronts, with the ultimate goal being to win in the business of managing PCs in corporate environments. Running a PC on a computer network can cost as much as $13,000 per year--far more than the cost of the hardware. Manageability, dependability, and cost have become an obsession for corporate information managers. "Five years ago, if all your Intel PCs turned off, it inconvenienced some people," says Frank Gill, executive vice president at Intel. "Now, if all your Intel PCs turn off, it brings your company to a halt."

IBM has decades of experience and technical know-how in managing business networks but is now for the first time aggressively seeking to include on those networks Intel-based PC servers. IBM's willingness to give some of its technology to Intel for use in industry-standard machines is motivated in part by a desire to realign with Intel and contribute to the establishment of new industry standards. Intel, for its part, can help IBM learn to manage PCs in the corporate environment.

Watch for a gradual warming, too, of IBM's relationship with Microsoft, with which it has warred for years over operating systems (Microsoft won). IBM's PC executives now see Microsoft's system, Windows NT, as a major opportunity for IBM.

Will IBM's PC business maintain its newfound momentum? It is still part of monolithic old IBM, of course. Factions within the company, for instance, resisted some of the PC division's ideas, like moving PC servicing from IBM to the resellers. But there's enough going on at Big Blue today to make you think it may-- finally--be poised to win back some of the PC business that's evaded it for so long.

REPORTER ASSOCIATES Rajiv M. Rao, Lenore Schiff, Lixandra Urresta, Tricia Welsh