In July of 1980, IBM representatives met for the first time with Microsoft's Bill Gates to talk about writing an operating system for IBM's new hush-hush "personal" computer. Gates gave IBM a few ideas on what would make a great home computer, among them to have Basic written into the ROM chip. Microsoft had already produced several versions of Basic for different computer systems beginning with the Altair, so Gates was more than happy to write a version for IBM. As for an operating system for the new computers, since Microsoft had never written an operating system before, Gates had suggested that IBM investigate an OS called CP/M (Control Program for Microcomputers), written by Gary Kildall of Digital Research. Kindall had his Ph.D. in computers and had written the most successful operating system of the time, selling over 600,000 copies of CP/M; his OS set the standard at that time.

IBM tried to contact Kildall for a meeting, executives met with Mrs. Kildall who refused to sign a non-disclosure agreement. IBM soon returned to Bill Gates and gave Microsoft the contract to write the new operating system, one that would eventually wipe Kildall's CP/M out of common use. The "Microsoft Disk Operating System" or MS-DOS was based on Q-OS, the "Quick and Dirty Operating System" written by Tim Paterson of Seattle Computer Products. Q-OS was based on Gary Kildall's CP/M; Paterson had bought a CP/M manual and used it as the basis to write his operating system in six weeks, Q-DOS was
different enough from CP/M to be considered legal. Microsoft bought the rights to Q-DOS for $50,000, keeping the IBM deal a secret from Seattle Computer Products. Gates then talked IBM into letting Microsoft retain the rights to market MS-DOS separate from the IBM PC project. IBM felt that profits would be made mainly from the sale of the PC itself, and not from the program that ran it. Gates proceeded to make a fortune from the licensing of MSDOS.

IBM had been observing the growing personal computer market for some time. They had already made one dismal attempt to crack the market with their IBM 5100. At one point, IBM considered buying the fledgling game company Atari to commandeer Atari's early line of personal computers. However, IBM decided to stick with making their own personal computer line and developed a brand new operating system to go with it. The secret plans were referred to as "Project Chess". The code name for the new computer was "Acorn". Twelve engineers, led by William C. Lowe, assembled in Boca Raton, Florida, to design and build the "Acorn". On August 12, 1981, IBM released their new computer, renamed the IBM PC. The "PC" stood for "personal computer" making IBM responsible for popularizing the term "PC".

The first IBM PC ran on a 4.77 MHz Intel 8088 microprocessor. The PC came equipped with 16 kilobytes of memory, expandable to 256k. The PC came with one or two 160k floppy disk drives and an optional color monitor. The price tag started at $1,565, which would be nearly $4,000 today. What really made the IBM PC different from previous IBM computers was that it was the first one built from off the shelf parts (called open architecture) and marketed by outside distributors (Sears & Roebucks and Computerland). The Intel chip was chosen because IBM had already obtained the rights to manufacture the Intel chips. IBM had used the Intel 8086 for use in its Displaywriter Intelligent Typewriter in exchange for giving Intel the rights to IBM's bubble memory technology.