IBM shares, which hit a five-year high this week, rose 3.3 per cent to USD 114.72 in after-hours trading following the earnings report, which beat analysts' forecasts. The shares had added 14 per cent this year as of Tuesday's close.

Citing the strong results, IBM increased its forecast for earnings-per-share growth in 2007 to 14 per cent to 15 per cent from a previous forecast of 13 per cent to 14 per cent, as it benefits from software acquisitions and improved profitability in its services division, its largest business.

Revenue growth of 8.6 per cent, the strongest since 2001, was fueled by more than USD 5 billion of acquisitions of software companies in the past year.

The acquisitions are part of a strategy by International Business Machines Corp, based in Armonk, New York, to boost the software business's share of total profit to 50 per cent by 2010 from 40 per cent last year. About half of the software unit's second-quarter revenue growth of 13 per cent, to USD 4.8 billion, came from recent purchases, IBM said.

"The software growth is a highlight," said Jane Snorek, a technology analyst at First American Funds, which manages about USD 66 billion, including IBM shares. "Everything here (at IBM) centers on the software -- being able to build someone a Web platform, a big data center, that they then surround with services. They are doing really well."

Second-quarter net income advanced to USD 2.26 billion, or USD 1.55 per share, from USD 2.02 billion, or USD 1.30 per share, a year earlier. Revenue rose to USD 23.8 billion from USD 21.9 billion.

US revenue grew 6 per cent to USD 10.1 billion, reversing a slowdown in the first quarter, Chief Financial Officer Mark Loughridge said on a conference call with analysts. Revenue in Europe, the Middle East and Africa rose 13 per cent and Asia-Pacific revenue was up 10 per cent.

"To get double-digit revenue increases in any part of the world is good news for them," said Kim Caughey, vice president and senior analyst at Fort Pitt Capital Group, which has about USD 1.2 billion under management, including IBM shares.

Analysts, on average, had forecast earnings per share of USD 1.47 before certain items and revenue of USD 23.1 billion, according to Reuters Estimates. Second-quarter net income included a gain of USD 81 million, or 5 cents per share, on the sale of IBM's printer division earlier this year.

The company's gross profit margin improved to 41.8 per cent in the second quarter from 41.2 per cent a year earlier.

Revenue in IBM's global technology services business rose 10.1 per cent to USD 8.76 billion. Global business services revenue grew 10 per cent to USD 4.34 billion. IBM signed services contracts totaling USD 11.7 billion, compared with USD 11.1 billion in the first quarter and USD 9.6 billion a year earlier.

IBM said on Monday it signed a USD 1.4 billion outsourcing agreement with drug maker AstraZeneca Plc, expanding an existing contract.

"We've got a good deal list as we go into the third quarter," CFO Loughridge said on the conference call. "Our objective is for full-year signings growth."

Systems and Technology revenue, which includes sales of mainframe computers, servers for businesses and microchips, advanced 1.8 per cent to USD 5.1 billion.

IBM shares trade at about 16 times expected 2007 earnings per share, compared with a multiple of 17 for rival Hewlett-Packard Co.