Four years ago, OpenPages sold content management software used to publish magazines, newspapers, and complex Web sites. The venture was successful; between 1999 and 2000 the company grew from 30 to 340 employees. By 2001, of course, the advertising industry had taken a nosedive, and the company’s publishing clientele dried up faster than happy hour martinis. OpenPages laid off almost 90 percent of its staff by the end of that year. “If there’s no market and you have all of those people, you have a problem,” OpenPages CEO Michael Duffy says.

In August 2002, Mr. Duffy made a decision that likely saved the Waltham, Massachusetts-based OpenPages. Driving home one night listening to an NPR report about the impact of the recently-passed Sarbanes-Oxley Act, Mr. Duffy had a moment of clarity: why not develop software to help companies comply? Within 48 hours, Mr. Duffy, a trained accountant, along with some colleagues, hit the U.S. Securities and Exchange Commission’s Web site, he says, absorbing all they could find about the new accounting and reform legislation. Then, Gary Zakon, the company’s VP of engineering, went to work for nine months designing OpenPages’s new product.

Today, OpenPages is among a growing group of companies (Nth Orbit, Movaris) selling software that helps companies comply with Sarbanes-Oxley, the most sweeping legislation to impact financial reporting and disclosure since the Federal Securities Exchange Act of 1934.

The buzz surrounding compliance is reminiscent of the Y2K bug frenzy. The difference is, this is not a one-time fix: Sarbanes-Oxley, predict some consultants, could be the biggest ongoing technology expense to hit corporations in years. Fortune 1000 companies in 2003 spent $2.3 billion getting ready to comply for Sarbanes-Oxley, estimates consultancy AMR Research. That’s partly because the act’s complexity and scope requires companies to drill down and track the tiniest financial details, but also because of what’s at stake for companies that don’t comply: SEC indictments and fines.

The corporate headaches mean business for OpenPages. Its main product, Sarbanes-Oxley Express (SOX Express), automates compliance with two sections of the act. Section 302 requires that CEOs and CFOs sign statements, under penalty of perjury, verifying the completeness and accuracy of company financial statements. Section 404 requires CEOs, CFOs, and outside auditors to confirm the efficiency of internal controls for financial reporting.

OpenPages, which received $10 million in funding in a March 3 round led by Matrix Partners and Sigma Partners, is growing quickly. It’s now operating largely on revenue from sales, says Mr. Duffy, a former VP of sales at both GTE Internetworking and Shiva, which was bought by Intel in 1999. OpenPages has added 30 customers in the past six months, including Viacom and Northwest Airlines. An average sale for the company is $100,000 to $1 million for software seat licenses, Mr. Duffy says.

While early to market with its product, OpenPages is far from alone in selling its Sarbanes-Oxley helpware. An estimated 25 or more vendors are direct competitors, and many other software companies are tacking “Sarbanes-Oxley expertise” to their business lines. Mr. Duffy says he considers the big accounting firms to be his company’s most threatening rivals because they’re giving away document automation software to their customers. Bigger companies like EMC, Oracle, and Hyperion are all promoting software to help customers, too.

Mr. Duffy claims OpenPages is well positioned because it started developing its products early, and regulatory compliance is its sole effort – not a me-too add-on business line.

For its part, VC Sigma Partners has stuck with OpenPages for four years, through highs and very low lows. Sigma hasn’t made a dime off OpenPages; the company was gearing up for an IPO when the market crashed. Nonetheless, Sigma stayed with it, mainly because of the management team, says John Mandile, a managing director with the VC firm. “We think they have found a really hot area,” says Mr. Mandile. “Michael tried a couple of things until he managed to find something that resonated with customers.”

An early-stage investor with $620 million in capital, Sigma is the largest backer of OpenPages, which has received $61 million to date. Sigma was also an early investor in content management software maker Vignette, when the company started in 1995. Vignette went public in 1999, closing 125 percent above its offering price. Sigma owned 9.4 percent of the company. “We stay with things over the long-term,” Mr. Mandile says.

OpenPages is gearing up to introduce two new products this year. The first product will enable companies to automate the process of meeting SEC deadlines for filing certain documents like 10Ks and 10Qs. The new regulations require corporations to publish these documents more quickly. For example, they must file annual reports with shareholders and the SEC within 75 days instead of 90 days by the end of 2004. The second product is enterprise risk assessment software to meet the COSO II standard. COSO (Committee of Sponsoring Organizations) is an independent group that studies what causes fraudulent financial reporting and makes recommendations to public companies and their auditors. COSO is expected to release a framework for “internal control and risk management” in June that OpenPages will use as a roadmap for its Enterprise Risk Manager product.

While Mr. Duffy admits that the tech industry is rife with companies willing to “jump on the latest fad,” he believes there’s a lot at stake with Sarbanes-Oxley, which should sustain the company’s future. It doesn’t hurt, of course, that Sarbanes-Oxley is 66-pages of fertile territory to plough.

The tricky business of online advertising got another shot in the arm recently when Eyeblaster collected an $8 million round in venture capital funding.

New York-based Eyeblaster provides the framework for the delivery and management of so-called “rich media” technology for Web sites. Using glitzy graphics, audio, video, and interaction, rich media ads cut through the monotony of the traditional and text-heavy format. (A recent AOL marketing campaign designed with Eyeblaster, for example, runs a Madonna video clip inside an expandable advertising banner.)

Eyeblaster hasn't always had it easy. Founded in 1999, the startup initially peddled its technology to companies like Amazon.com. The idea was to deliver rich media ads and information to shoppers, based on the books, CDs, or other targetable items they were thinking about buying. When that strategy fell flat, Eyeblaster shifted gears in 2000 and developed a hosted Web site where publishers, ad content creators, and media sales departments can collaborate while building online advertising campaigns.

“We’ve shifted the model and the plan,” says CEO Gal Trifon, who counts Yahoo, MSN, Lycos, and ESPN among his customers. “We’re sticking with the same technology but looking for the best way to utilize it.”

That was enough for Insight Venture Partners, which on January 26 announced $8 million in late-stage funding. For Insight, it is a step back into the Internet advertising game. “We didn’t make a lot of investments in the area in 1999 and 2000,” says Deven Parekh, a managing partner at Insight. ”We didn’t see a lot of business models that made any sense.”

Insight, which has a $740 million fund, focuses on later-stage investments in companies offering business software and services. Before choosing to work with Insight, Mr. Trifon says he interviewed the CEOs of Insight’s portfolio companies and was impressed by the level of involvement Insight had in its companies. “They don’t spread investment across many areas,” he says. Plus, he adds, “They have money to invest in us going forward.”

Mr. Parekh says he believes online advertising spending is rebounding, creating sound new opportunities to integrate rich media and search technology in advertising. (Insight invested an undisclosed amount recently in paid search startup Kanoodle.)

The numbers indicate an online advertising rebound, albeit modest. Last year, online ad spending totaled about $6.3 billion, a 10 percent increase from 2002, according to business research firm Jupiter Research. Spending is expected to increase to $7.6 billion this year, as big corporations like McDonald’s and Johnson & Johnson move more ad dollars to the Web.

Rich media accounts are also increasing. Eyeblaster rival DoubleClick, for one, reports that nearly 37 percent of all ads served in the third quarter of 2003 were rich media, a 15 percent increase from the previous quarter. Other Eyeblaster rivals include PointRoll and Unicast.

Eyeblaster takes a comprehensive approach to the ad management process. A media agency can use Eyeblaster's password-protected Web site to pick the number, type, and frequency of ads in a client's campaign. The creative team uses the site to preview and edit ads if a client, say, wants the ad to move more slowly or appear smaller. Clients can generate reports that detail how the ad was served online, and how often viewers clicked on the ad. Brand awareness surveys are another feature, helping clients gauge a campaign's success.

Those running ad campaigns pay Eyeblaster $1 to $5 CPM (per 1,000 ad impressions). For example, if ESPN runs 10,000 ads and chooses an ad unit at $3 CPM, it owes Eyeblaster $30. Last year, Eyeblaster served 1,400 ad campaigns, with more than 600 campaigns running in the fourth quarter, a 171 percent increase over the same period in 2002. Additionally, the company delivered more than 2 billion total impressions in 2003, a 335 percent increase over 2002 levels. While the company willnot disclose its finances, it reported 87.5 percent revenue growth, and similar profit growth in 2003.

A graduate in economics and computer science from Tel Aviv University, Mr. Trifon worked in research and development at vidoeconferencing company Vcon before founding Eyeblaster. He started the company with Amir Hardoof and Ofer Zadikario, who remain Eyeblaster executives. The company received $2 million in pre-seed and seed funding from private Israeli investors, and its total funding to date is $10 million.

The company’s research and development arm remains in Israel. It opened new offices last year in Germany, Chicago, San Francisco, and Sao Paulo, and is expected to expand its workforce from 50 to 75 by the end of 2004.

Mr. Parekh calls Mr. Trifon a “tremendous resource allocator” who has been able to weather stormy economic times by managing growth and costs “in a way I haven’t seen with many companies.”

Mr. Trifon says the company is focusing on expanding geographically, while working on new technology. He will not rule out an acquisition, if the deal is right. With Eyeblasters’s early struggles more safely in the past, it can now call the shots.

If New York State Attorney General Eliot Spitzer comes knocking, Steve King's Wall Street clients will be glad his company is holding on to their corporate emails.

Mr. King, CEO of data archive company Zantaz, creates order out of chaos – and he couldn't pick a better time to do it. Tighter banking regulations now make it mandatory for companies to hold on to email as legal evidence for future investigations. The Sarbanes-Oxley Act, for one, requires that businesses disclose much more information about their finances and operations. The Securities and Exchange Commission rule 17a-4 requires trading firms save copies of all emails for three years and keep them readily accessible for two.

Over the past several years, an increasing number of big financial firms have put their trust in Zantaz, which stores billions of corporate emails, instant messages, and documents for customers at a highly secure data center. That growth has not gone unnoticed by investors. On January 6, General Atlantic Partners, which manages more than $5 billion in capital, led a $20 million funding round for Zantaz. Also participating in the later-stage round were Athena Technology Ventures, ComVentures, Geneva Venture Partners, Novus Ventures, Pyramid Technology Ventures, and Red Rock Ventures. Peter Currie and Anton Levy of General Atlantic Partners joined Zantaz’s board as part of the deal.

More than $164 million was spent on email archiving last year; $38 million was spent on outsourcing. Companies do not want to store the data themselves, according to market research firm the Radicati Group. Says president Sarah Radicati, “We can go crazy finding an email from five years ago." AMR Research estimated that Fortune 1000 companies would spend up to $2.5 billion to comply with Sarbanes-Oxley.

Pleasanton, California-based Zantaz owns about 71 percent of the outsourced archived email business, according to the Radicati Group.

Since it was founded eight years ago, Zantaz has raised $90 million, one-third of it during Mr. King’s three-year tenure. Still, Mr. King admits that he did not have to lobby hard for the latest round – instead, investors were competing to lead. “We had a tremendous amount of interest in our financing this round,” Mr. King says.

He is no stranger to winning bidder General Atlantic. Prior to joining Zantaz, he was a general manager at eTrade, in which General Atlantic was an investor. Toward the end of his four-year tenure at eTrade, Mr. King took over as interim CEO at eOffering, eTrade’s online investment bank. General Atlantic led a $35 million Series C investment round in eOffering.

General Atlantic partner Peter Currie, who was not involved with the eOffering deal, says other data archive companies are bigger than Zantaz (such as $1.5 billion Iron Mountain) and offer many more services, but, he adds, “in respect to the specific outsourcing service Zantaz performs, we think they’re it.”

Mr. King says the company will use its latest cash infusion to look at possible acquisitions and expand sales abroad, particularly in Europe. He also wants to step up the company’s moves into new businesses, including data restoration, litigation support and discovery, and software for data filtering and monitoring. In November, Zantaz rolled out Audit Center, which companies can use for large-scale, complex information searches.

William Bankert and Randy Gausman, who founded Zantaz.com in 1996, have since left. Wise to a new climate, one of the first things Mr. King did when he arrived was drop the “dot-com” from the Zantaz name. Zantaz now has 135 employees, an increase of 90 percent over the past year. Helping sales, Mr. King says, is an alliance with IBM, which offers Zantaz products to its clients that are working on regulatory compliance. Citing privacy concerns, Zantaz does not disclose the names of most clients, although eTrade is one.

Still, it's not hard to guess that the user list is long and getting bigger with each new regulatory guideline. “This is very much a beginning,” Mr. Currie says.

In the technology world, such periods of over-investment and overpopulation are not rare, even in lean economic times. Still, it makes it difficult to tell where the money can be made in the field of 802.11 wireless startups.

Bart Schachter, a managing partner at Blueprint Ventures in San Francisco, wryly dubs the sector, "802.Chapter 11." Craig Mathias, a wireless analyst at Farpoint Group in Ashland, Massachusetts, agrees. “802.11 is seriously overbuilt,” he says.

One of the biggest fish in the wireless pond is Intel Capital, which in October committed $150 million to investing in wireless companies. The move was designed, in part, to help Intel build the infrastructure to help support its wireless Centrino chip technology, which lets laptop users connect to wireless LANs.

One driving factor is the burgeoning consumer interest in wireless technology. Consequently, the number of wireless access points, or hot spots, ballooned to 20,000 across the U.S. by the end of 2002, according to Pyramid Research. Another 100,000 new hot spots are expected to appear by 2005.

Despite its throngs of converts, wi-fi is still stumping those looking to profit from the networks' deployments. The problem is multi-fold, says Dean Vendetti, a general partner at Bay Partners. "The chips are commoditized, wi-fi access points are consumer priced, the margins are being squeezed, and the hot spot business isn’t generating a lot of revenue yet."

That makes it challenging to find opportunities for new investment. Some investors are turning away from 802.11 toward the next generation technology: wi-max, or 802.16, a fixed wireless standard that will allow faster Internet connections to the home, (see Wi-max: The (Next) Great Wireless Hope) ultrawideband, and mesh technology.

Not surprisingly, early-stage investment in wireless companies dipped last year, following a tech industry-wide trend. During the first three quarters of 2003, 11 wireless investments were initial rounds, according to industry analyst VentureOne. That compares to 27 initial-stage rounds of wireless funding in 2002. During the first three quarters of 2003, 76 investments in wireless companies totaled $706 million, falling behind the total amounts invested in software and security companies.

Older wireless companies got the lion’s share of the funding – including established players like wi-fi switch maker Vivato and wireless networking company Trapeze Networks, which received $44.5 million and $34.5 million in their most recent quarters, respectively.

Nevertheless, funding for the newcomers isn’t dead. Far from it. Strix Systems, which entered the enterprise wireless LAN space last June, secured a $15 million round in October. Investors like Windward Ventures, CMEA Ventures, UV Partners, Palomar Ventures, El Dorado Ventures and Siemens have put a total of $34 million into the Westlake Village, California-based company. Meanwhile, WiDeFi of Satellite Beach, Florida, received a $1.5 million seed round last month, co-led by CampVentures and Inflexion Partners. The company makes technology that improves the range, performance, and quality of service on a wi-fi network. Garage Technology Ventures recently contributed to a $200,000 seed round in a company called IP3 Networks, which simplifies managing and billing used for ad hoc wireless connections.

“It’s a big nasty problem and there will be a lot of players in there,” says Bill Reichert, a managing director at Garage. For now, Mr. Reichert believes there is plenty of room for expansion in the billing area without having “to duke it out with all the other companies.”

Other areas with strong potential include ultrawideband technology, or UWB, a rival technology to Bluetooth. In the world of UWB, however, the international standards defining it are a moving target: Intel and Motorola are each lining up behind two different standards.

Bay Partners last April led a $7.5 million Series A funding round in UWB chip maker Staccato Communications, along with Charles River Ventures and Allegis Capital. Alereon, another UWB chipmaker, received an undisclosed amount from Austin Ventures and Pharos Capital in August 2003.

Other startups are eyeing UWB technology on the consumer electronics side, to enable wireless video beamed to the home. “The home is the next battleground in this whole industry,” says Jon Auerbach, a partner at Highland Capital. In August 2003, startup Adimos, which is developing wireless applications for consumer appliances, raised a first round of $12 million, led by Benchmark Capital, Gemini Israel Funds, Genesis Campus, and Jerusalem Venture Partners.

IT venture capital company Draper Fisher Jurvetson's managing director Andreas Stavropoulos says he believes there will be many early-stage winners on the chip and hardware side of the UWB industry. But he adds that he hasn’t found a company worth investing in yet. “We’ll look at it,” Mr. Stavropoulos says. “It’s a higher bar for us.”

Mesh networking technology, which turns devices into networking nodes, is drawing some investor buzz, too. Also called multi-hop networking, mesh uses any device with a radio link as a router or access point. If the nearest access point happens to be congested, data can hop to the next node.

In January 2003, U.S. Venture Partners and Mayfield gave an undisclosed amount of Series A funding to Belmont, California-based PacketHop. PacketHop’s software relies on technology worked on for several decades at the SRI International. The company plans to ship products in the second half of 2004, says Michael Howse, CEO of PacketHop.

In August 2003, Honolulu-based Firetide, which is also working on new mesh technology, announced a Series A round of $3.2 million. Menlo Ventures, HMS Ventures, and Hawaiian Electric Industries are backing the company, which tests its routers at several hot spot locations in Los Gatos, California.

Few companies are likely to promote wi-max-compliant products until the end of the year, when interoperability testing is expected to be completed. Wi-max networking gear makers include Aperto, Alverion, Red Line Communications, and Airspan Networks. They have outlasted some of the first generation companies that worked on wi-max, including Malibu Networks and Raze Technologies.

Mark A. Christensen, a director at Intel Capital’s communication sector, says he expects to see trials for wi-max via broadband in residential areas in the second half of 2004. Intel is eyeing the space, working with startup Alverion on wi-max silicon technology. Intel Capital is playing a big role in seeding the wireless market overall. In October 2002, the chip giant committed a total of $150 million to investing in wireless companies, in part to build the ecosystem around its Centrino technology, which lets laptop users connect to wireless LANs. "We see wi-max as the next big thing,” Mr. Christensen says. “Wi-max is going to change the game.”

Intel wants to put wi-max to the test soon in rural residential markets. Last November, the company began discussions with officials in Houston County, Georgia, over how it might use 802.16 in that area. If all goes according to plan, Houston could become the first wireless county in the U.S.

But there are still plenty of technology standards battles to play out. As they do, investors will be kept guessing about which tech revolution to bet on. In the meantime, the brass rings are up for grabs.

There’s an old jazz expression: if you don’t feel it in your heart, it won’t come out of your horn. That same visceral understanding is a critical part of taking advantage of a business opportunity. Just ask a couple of the funders of Vontu.

Several years ago, two of the partners at Venrock Associates were victims of identity theft, which occurs when a criminal uses another person’s name, Social Security number, credit card number, or other identifying information to commit fraud. “We know exactly the pain and suffering you go through when this happens,” says Venrock managing general partner Ray Rothrock. “It can really ruin your life.”

The experience contributed to Venrock’s interest in technology under development within San Francisco-based startup Vontu, which produces software that helps large corporations secure customer data.

Benchmark Capital and Venrock Associates wound up co-leading Vontu’s $5 million Series A round in August 2002. Last week, U.S. Venture Partners led the closing of a $10 million Series B round for the company. With identity theft a hot issue, the Series B round was oversubscribed and closed in six weeks. According to the U.S. Federal Trade Commission, identity theft crimes cost businesses $32.9 billion, and consumers $3.8 billion, in the past year. Account theft added $14 billion in business losses, and $1.1 billion in consumer losses.

Increasingly, law enforcement officials believe that identity theft originates from workers in corporate or government jobs who have access to sensitive consumer information.

The San Francisco company, named for Mount Ventoux, a challenging leg of the Tour de France, made its public debut earlier this year. Joseph Ansanelli, Vontu’s CEO, started Vontu in late 2001 with two techies, Michael Wolfe and Kevin Rowney, the former chief security architect at Netcentives, where he built currency transaction systems. Mr. Ansanelli and Mr. Wolfe were well-known to Benchmark’s partners. Both worked at customer relationship software maker Kana, where Mr. Ansanelli was vice president of marketing and Mr. Wolfe was the chief technology officer. Benchmark was an investor in Kana, which saw its stock fly from $15.00 to $51.50 per share during its September 1999 IPO.

This is Mr. Ansanelli’s third startup. He joined Kana after the company bought Connectify, a company he founded that made direct marketing software. His first venture was Trio Development’s Claris Organizer, a personal information manager (PIM). Trio was acquired by Palm. Vontu, he says, was founded with technology developed by both Mr. Rowney and Mr. Wolfe.

After Kana, Mr. Ansanelli found himself negotiating Vontu’s first funding round from an unlikely place: his couch. He landed there after crashing his bicycle on rain-slicked pavement in the hills not far from the Golden Gate Bridge. Mr. Ansanelli, who is 33, broke his back and several ribs in the accident. “We’re starting this company and I am in the intensive care unit,” he recalls. “Benchmark’s Dave Beirne came to my house. I literally gave my first pitch to Dave from the couch on my back.”

Vontu’s flagship product, Vontu Protect, monitors email, instant messages, FTP files, and other electronic communications on corporate networks, sniffing for leaks of sensitive information like social security numbers. While security software makers like Checkpoint make firewalls to prevent thieves or hackers from getting into a corporate network, Vontu aims to keep employees from sending confidential information out of the company.

The technology works by creating data profiles on, say, a bank’s customers. These profiles are stored in a database. All suspicious data leaving the network is compared against those profiles, and anomalies are detected. The approach differs from other systems that search for patterns or key words. The software targets specific information, instead of delivering batches of data for a company’s IT department to review. ““We deliver the needle instead of the haystack,” Ansanelli says.

Doug Camplejohn, Vontu’s vice president of marketing, calls what Vontu does “information leakage prevention.” Others call the technology a “content firewall,” “exit control,” or “acceptable use enforcement.”

Controlling what goes out of employee email boxes is a growing problem. Insiders account for nearly 70 percent of today’s IT security violations, according to market researcher Gartner Group. A study conducted by Harris Interactive for Vontu in May 2003 found that about two-thirds of employees surveyed believe that people inside companies pose the greatest risk to data security. Almost half said it would be easy to snatch sensitive customer information.

In California, the severity of the problem was highlighted in April 2002, when a security breach was reported within the database that holds payroll information for 260,000 California state government employees, including social security numbers. The theft led to the passing of Senate Bill 1386. Now, any company with customers in California is legally obligated to inform them if its data is compromised by a computer intrusion. That puts new pressure on companies, but provides fertile ground for new customers for Vontu and competitors like Englewood, Colorado-based Vericept.

Vontu, which is initially targeting the financial industry, went live with its first customers last July. The company won’t name specific customers, but counts among them a Fortune 50 bank, and several top retail brokerage firms.

Mr. Ansanelli expects Vontu to be profitable sometime in 2005. “We don’t expect to have to raise more money,” he says.

Trent Henry, an analyst with the Burton Group, says Vontu’s product is a good starting point for companies. But ultimately, he predicts corporations will look to apply digital rights management (DRM), mainly used today to protect media, to encrypt critical business data and couple it with policies that determine how email or other information moves in and out of the company.

“The reality is we are not going to see any widespread deployment of DRM solutions within corporations soon, so in the interim, there is a need to watch your network perimeters,” Mr. Henry says.

Instant messaging makes email feel like snail mail. Net-based games let a kid in Sweden compete against a kid playing in his bedroom in San Francisco. Digital cameras are as common as voice mail features on cell phones. Need a date tonight? Surf the pictures on Match.com or Yahoo Personals, and send an instant message to someone cute.

Today, 76 percent of Web surfers use a type of instant messenger like those by Yahoo, AOL, and MSN to chat with friends and family, according to a recent survey by AOL/Opinion Research. More than 90 percent of people send instant messages from home, while 20 percent use the service at work. Worldwide subscribers to the IM cell phone counterpart, known as short message service (SMS), under the age of 25 are expected to jump 47 percent to 152 million by next year, according to the Wireless World Forum.

“Immediate gratification is escalating,” says Nolan Bushnell, the father of video games who founded Atari in 1972. He is working on a machine that will customize toy design, the ultimate in “just in time” consumption for kids. “There is an increasing need for what I call the ‘Have it your way’ experience,” Mr. Bushnell says.

Apple’s iPod has become the DIG poster child. Since it hit the shelves two years ago, the sleek device, which lets users download songs immediately from libraries of thousands of tunes, has been Apple’s key to dominating the MP3 player market. In August, 18 percent of all digital music players sold in the U.S. were iPods, according to research firm NPD Group.

Compared to Europe and Asia, the United States is a DIG laggard. More than 80 percent of mobile phone users in Finland and the United Kingdom report using SMS at least once per month. In Italy, Germany, Singapore, and Sweden, once-per-month usage is close to 75 percent, compared to 5 percent in the U.S., according to a 2002 study by business consulting firm A.T. Kearney. More than 90 percent of the 25 million camera phone owners in Japan send multimedia messages to other camera phones. In Korea, the world’s fourth-largest base of Net surfers, gratification comes in the form of games. The country’s market has released more than 200 multiplayer video games. It is not uncommon for a game like Lineage, the most popular in Korea, to have 150,000 concurrent users, according to GameSpy.com, a site for gaming enthusiasts.

Dating, in all cultures, is increasingly dependent on the instant gratification the Internet affords. Some sites are becoming more sophisticated in matching couples. Tickle, formerly known as eMode, creates scores of tests for surfers to take, providing instant results – along with possible love connections based on the scores. A new kind of digital narcissism? “It so is!” says Courtney Johnson, Tickle’s director of research.

Social network company Friendster has also become a viral phenomenon since launching last June. In October, 927,000 people visited the site, which connects people through networks of friends and acquaintances. The average time spent during the month: a whopping one hour and 51 minutes. Yahoo Personals, the top such destination site, drew 4.9 million surfers in October 2003.

For entertainment, DIG is at its hottest. Broadband is enabling a whole new crop of services for the DIG-enabled home – everything from streaming movies for your PC using pay-per-view passes from CinemaNow and Movielink, or watching movies ordered through the mail from your Netflix queue – to instant chatting with friends using a Web cam attached to the computer.

DIG isn’t just for kids. According to Nielsen NetRatings, the elderly are the fastest-growing group of new Internet users. Turns out, DIG is for grandma, too.

In the online world and elsewhere, impatience is escalating. In his book Faster: The Acceleration of Just about Everything (Vintage Books, 2000), James Gleick examined the social impacts of speed on society. “We’re speeding up; our technology is speeding up,” Mr. Gleick writes. “Our arts and entertainment and the pace of invention and change – it’s all speeding up. And we care. If we don’t understand time, we become its victims.”

PLAYERSApple: Never ceases to emphasize the link between design and utility. Specializes in indispensable products.

Dynamism, Kemplar: As cool and advanced as consumer electronics are here, they pale in comparison to what is available overseas. These companies can get the latest and greatest gadgets months or years before they appear in the U.S.

Friendster: The social networking company has created a viral phenomenon.

ALSO IN MOTIONWild for wireless: Wireless connections will become standard on notebook computers, creating an even greater subculture of cordless users taking advantage of hot spots.

Smile for my cell phone: Cameras on cell phones become a standard feature. Strong sales of camera phones and color screen handsets will fuel growth of the cell phone market overall.

Chat brats: Use of instant messaging becomes even more ubiquitous. AOL, Microsoft, and Yahoo continue to storm through cubicles across America, making the applications must-have business tools.

Read all Top 10 Trends for 2004.

Spend a day at Disneyland or simply an afternoon at the mall, and it’s quickly apparent that we have become a nation of waddlers. From plump toddlers to overfed adults, the U.S. has unashamedly loosened its belt and reached for another scoop of premium ice cream.

Dr. Julie Gerberding, head of the Center for Disease Control and Prevention (CDC), recently named obesity the biggest health problem this country now faces – a “catastrophe” tied to skyrocketing cases of cancer, heart disease, and stroke. With 65 percent of the nation now overweight or obese, the problem rivals smoking as the nation’s top health threat, killing about 300,000 people each year.

Last year, the U.S. Surgeon General’s “Call to Action on Obesity” linked its complications to an annual $117 billion in costs for the U.S. The World Bank estimates the cost of obesity in the U.S. is now 12 percent of the national health care budget.

The surging price tag is mind-boggling, but a quick look at the curative market leads to one conclusion: obesity is big business, worldwide. Drugs to fight fat – up to 100 are in development – are expected to reap $500 million by 2008, according to life science research firm Front Line Strategic Consulting. Meanwhile, Dr. Atkins diet books continue to fly off the shelves and “tummy tightening” surgeries are booked months in advance.

Big pharmaceutical companies have been scrambling for years, unsuccessfully, to find the next blockbuster drug – a Viagra or Prozac for obesity. New drugs pose hope, but they are not cheap, costing up to $800 million each to develop. Big pharmaceuticals are already profiting by selling drugs that treat the side effects of obesity – Pfizer’s ubiquitous Lipitor helps lower cholesterol, while GlaxoSmithKline’s popular Glucophage is used for Type 2 diabetes.

One drug drawing attention in later-stage trials is Regeneron’s Axokine, which is designed to send a stop signal to the portion of the brain that senses a full stomach. If successful, the theory goes, Axokine will help people eat less.

Another potential treatment is Pfizer’s P57, an appetite suppressant derived from a South African plant used by bushmen in the Kalahari Desert to sate hunger. The drug is expected to reach the market by 2009. Another drug in trial, Millennium Pharmaceuticals’ MLN4760, was discovered after Millenium’s researchers uncovered a gene found more often in the obese population. The company then developed a fat-fighting drug specific to that gene.

Despite the buzz and promise, drug-makers are treading carefully with their new obesity-related releases. And wisely so; the liability risk is significant. In 1997, the FDA recalled Phentermine and Fenfluramine (the drug combination otherwise known as Phen-Fen), after the drugs were linked to several cardiac-related deaths. In 2000, drug-maker American Home Products settled class-action lawsuits related to the drug for about $12 billion.

Other eagerly awaited drugs released since the failure of Phen-Fen have failed to solve the obesity problem. Orlistat, approved by the FDA in April 1999 and trade-named Xenical, works on cutting fat absorption in the intestinal tract, but carries unpleasant side effects like diarrhea, cramps, and gas. An earlier drug, Sibutramine, trade-named Meridia, received FDA approval in 1997. It works to suppress the appetite primarily by raising levels of mood-enhancing Serotonin in the brain, which curbs hunger. It also carries red flags, with links to heart attack-related deaths. Reductil, as Meridia is called in Europe, was pulled from some European markets in 2002 after reports of seven related deaths in Italy. Both drugs have had ho-hum results, with half the patients reporting an average weight loss of 5 to 10 percent.

The only permanent way to treat obesity – other than through diet and exercise – is with surgery. Gastric bypass is the fastest growing medical procedure to treat the problem. An increasing number of insurers and employers are expected to cover the cost of bypass procedures, if only to avoid the larger expenses of diabetes and other health complications that result from obesity. A May 2003 study published in the health policy journal Health Affairs cited evidence that health care costs for those overweight are about 36 percent higher than for people with normal weights. Medication costs, too, are 77 percent higher for the overweight.

As research continues, health problems associated with weight are expanding globally – and obesity rates are on the rise. In China, for example, obesity has risen from 10 percent of the population in 1982 to 25 percent in recent years, according to the Chinese Preventive Medical Association. Worldwide, one in four people are expected to be obese by 2010. The market, it seems, is limitless.

PLAYERSAnti-obesity drug-makers: Amgen, Knoll Pharmaceutica, Millennium Pharmaceuticals, Pfizer, Regeneron, Roche, and Schering-Plough all stand to benefit.

Medical device-makers: Companies like BioEnterics, creator of the Lap-Band, a silicone band placed around the upper part of the stomach to create a small stomach pouch. Transneuronix of Mount Arlington, N.J., has also developed the implantable gastric stimulator, which fools the body into feeling full.

Genetic researchers: Harvard University and France’s Institut Pasteur de Lille in France, have identified GAD2, a gene that has a role in stimulating the appetite.

ALSO IN MOTIONAnti-angiogenesis drugs, a new group of medications that fight cancer tumor growth, live up to their early promise.

Medical device startups and their products become big money hits in the market as public companies acquire them.

Low-cost diagnostic tests based on DNA microarray technology that offer doctors pinpoint accuracy in determining a patient’s predisposition to genetic diseases.

New cardiovascular drugs get money and focus from biotech companies using cutting-edge pharmacogenomic techniques to understand the genetic mechanisms of disease and how they relate to treatment.

Read all Top 10 Trends for 2004.

The military was impressed with Bay’s technology, so Mr. Gershman quickly shifted his sales force toward Washington, D.C. In late 2002, Santa Clara, California-based Bay won its first contract with the U.S. Naval Research Laboratory, which bought Bay’s technology to improve the performance of its communications network. That Naval labs deal led to more business from the Department of Defense (DOD), which now accounts for 80 percent of Bay’s business. The DOD not only bought Bay’s chips, it bought its development platform, and is now partnering with the startup to both use and help improve Bay’s technology.

Bay’s new military deals have not only brought business – it has helped the company secure funding. In-Q-Tel, the venture arm of the CIA, took notice of the military’s interest in Bay’s technology and became a new investor, contributing to the $10 million Series C funding round. Selby Venture Partners led the November 21 round, investing $3 million, with Alliance Venture Management, Needham Capital Partners, and Thomas Weisel Venture Partners contributing.

A non-profit founded in 1999, In-Q-Tel generally invests between $1 million and $3 million in startup tech companies, targeting companies that could possibly solve the technical needs of the CIA. It has invested in more than 20 tech companies, including search engine maker Verity, collaborative software maker Zaplet, and secure network provider SafeWeb, which was acquired by Symantec in October for $26 million.

Bay’s system is well suited for the military because the Department of Defense uses an asynchronous transfer mode (ATM) network. Bay’s flagship Montego chips are specialized for ATM; its system acts as a traffic cop to prioritize how voice and data traffic cells are zapped around the network at high speeds. Bay makes two products: the Montego processor, which lists for $1,000, and the Biscayne processor, which lists for $450. The company started shipping both this year, and expects $1 million in 2003 revenue. Mr. Gershman expects that figure to climb to $7 to $10 million by the end of next year.

Bay has found a crucial niche with its military business, says John G. Metz, president of Metz International, a networking consultancy in Harvard, Massachusetts. However, he notes that Nortel and its ilk are starting to sniff around for new technology to use as they design new equipment to sell to ISPs and carriers. Bay’s goal, after all, is to sell chips. Its challenge, if it lands new deals with Cisco, Nortel, or Juniper, will be grabbing a lot of volume. “You have got to sell a lot of chips to make money, therein lies the dilemma,” Mr. Metz says. Gross margins are roughly 50 percent on chips, with the price dropping depending on the volume sold, he says.

Mr. Gershman says he believes that it is still going to take some time for Cisco and others to start buying again, but adds we “definitely see some encouraging signs.” One advantage Bay has, he says, is that the company’s products work – and the DOD can testify to that. They are not so-called “vaporware” that plagued the industry during the dot-com boom.

Bay’s move to sell to the military was key to keeping the company going – though it was “more serendipity than it was planned,” says Bob Marshall, a managing partner at Selby Venture Parnters, which has funded the company from its inception in 1999. “Chuck managed to keep the team together during some difficult funding times,” Mr. Marshall says. “He has driven the development team so we have silicon and a product. He has managed to get orders. He made the transition very effectively.”

The role of CEO is a bit of a leap for Mr. Gershman, who last worked as vice president of sales at Softcom Microsystems. Softcom’s founder, Rick Bleszynski, started Bay Microsystems after selling his company to Intel in 1999. He is now Bay’s chairman.

Of 30-odd startup companies in the chip-making sector in 1999, few are left. Bay is a survivor, alongside EZchip Technologies and Agere Systems, the former semiconductor arm of Lucent. “It was kind of Darwinian,” Mr. Gershman says. “Those who could not execute disappeared quickly. Now, we are down to five or six from 30.”

To date, Bay has raised $30 million. Through its latest funding round, Bay added new board members including C. Nicholas Keating, Jr., CEO of IP Fusion, and Mike Phillips, former general counsel at JDS Uniphase, who is now a partner at the law firm Morrison & Foerster. Paul Kaminski, the former Undersecretary of Defense, also joined.

Bay plans to spend cash from its latest round on product development and sales force expansion, Mr. Gershman says. The company has two new chips in the pipeline that will take advantage of new technology to reduce size and cost, Mr. Marshall says. “A lot of companies were aiming at this space in 1999,” he says. “Fortunately, we picked the right one.”

Eight years later, Mr. Abbott, who is 31, was still chewing over the hulking challenge of data integration, but with an eye on relieving the headaches that the problem causes big business. He jotted down a rough idea of what his software would do. He started the business in fall of 2001 in his home, recruiting seven former colleagues, as well as engineers he had previously worked with. “I told them ‘You code during the day and I’ll code at night,” Abbott recalls.

In August 2002, armed with a first funding round from Palomar Ventures that took about six months to lock down, he moved the engineers into new office space in San Mateo, California.

Composite has come a long way since. Mr. Abbott hired veteran CEO Jim Green in April, luring him from his job as CTO of webMethods. Composite shipped its first product in October, an information server written in Java that runs on a Unix, Linux, or Windows server. The company also received a $12.1 million Series B funding round, led by Lehman Brothers Venture Partners, last Monday.

Mr. Green, a 53-year-old, soft-spoken man with a full gray beard, had a track record of comfortably bouncing between chief technical and management roles. Getting him on board took some time. Mr. Abbott met with him over pizza on weekends until he was convinced that Composite’s idea was not simply an extension of what webMethods was already doing.

WebMethods’ software helps companies tie together disparate applications, such as a purchase order moving through different systems on a corporate network, to improve workflow. Composite’s software takes corporate data stored within different silos – say information stored in a Siebel Systems sales application, a PeopleSoft financial application, a Microsoft Excel spreadsheet, a bunch of email, or a section of a sales contract – and presents a single view of that data that can be stored and reused to help make better business decisions. Getting both technologies to work together is the Holy Grail of systems integration.

“Jim [Green] said, ‘You are trying to tackle a really tough problem,’” Mr. Abbott recounts. “I talked him into joining as an advisor and helping me through some of those early venture capital experiences.”

Mr. Green’s ties also brought Lehman Brothers on board for the recent deal. Lehman was an investor in Active Software, a company Mr. Green founded in 1995. Active was sold to webMethods in August 2000 in a deal valued at $1.5 billion, giving Lehman good reason to come knocking again. Through the deal, Composite picked up an influential board member in Tom Banahan, head of Lehman Brothers’ venture capital business.

Enterprise information integration may be geeky stuff, but the market is getting hot. Researchers at IT market analysis firm Aberdeen Group estimate that the market for this software – which includes big corporations that are grappling with legacy data and systems integration issues – totals $6.4 billion. Technology research firm Gartner Group now tracks data integration as a separate market. Indeed, Composite Software has a host of rivals, including IBM, which makes a product called the information integrator, BEA Systems, and smaller competitors like MetaMatrix, and Nimble Technology (acquired by Actuate in July).

Evangelos Simoudis, a partner at Apax Partners, which contributed to both of Composite’s funding rounds, says Composite has the management team to compete and win in this market. “[Mr. Green] understands this area inside and out,” he says. Clearstone Venture Partners, Palomar Ventures, and Dot Edu Ventures also participated in Composite’s Series B round.

Mr. Green founded Active Software after leaving Sun Microsystems, where he led development of the CORBA open architecture, which allows different computing programs to communicate in a network through a standard interface.

Mr. Abbott was also former chief technology officer at Electron Economy, a much-hyped startup founded by Joe Firmage that made e-commerce supply chain systems. (Mr. Firmage co-founded now-defunct USWeb/CKS, where Mr. Abbott was the head of Java development.)

Mr. Abbott says he learned a lot from Electron’s ill-fated move from an application service provider (ASP) to a software maker. “At Electron we could demo the software but we could not get the data integration to work.” The challenge at Composite, he says, was turning his idea into a viable product. “There are a lot of doctoral theses on what we are working on,” he says. “At the end of the day, it’s about delivering a product.”

Mr. Green retains a tight relationship with his former company, webMethods. The two companies have signed a partnership through which webMethods will resell Composite’s product to its base of 1,000 customers. “This gives us a tremendous boost,” Mr. Green says. “If we were to go out by ourselves and find those accounts with the lack of credibility as a startup, it would be much more difficult.” The company is also working with consulting giant EDS, which uses Composite’s technology in its own systems development.

Mr. Green says Composite will use the cash it received in its most recent funding round to expand its sales force. Of 35 employees, Composite has “few” salespeople and a lot of ground to cover, he says. Mr. Abbott says he is confident that Mr. Green will help take the business to the next level. “I am the tech guy with the long hair doing the white board thing,” Abbott says. “He is the experienced guy building the business.”

That success has not surprised legendary Austin businessman Jimmy Treybig, the founder of Tandem Computers, which was sold to Compaq Computer in 1997 for $3 billion. Mr. Treybig, now a partner at New Enterprise Associates (NEA), first met with Motion’s execs last year, intrigued by its vision of building a company around a modern version of a pen and clipboard. The relationship culminated with NEA’s $10 million contribution to the company’s $11.2 million Series B funding round, announced on November 3. The remaining $1.2 million was covered by G51 Capital of Austin. Motion raised its first funding round of $6.5 million in August 2002.

The company is already winning big customers, including HealthSouth, which recently said it would equip 5,000 clinicians in 1,400 of its physical rehabilitation centers with Motion’s tablet PCs over the next year or so. And research firm IDC places Motion as the third largest provider of tablet PCs in the U.S. as of the second quarter of this year. The company grew its unit shipments by 20 percent sequentially in the second quarter, Mr. Eckert says.

Along with Dell, Motion’s seasoned management team owes a nod to Apple Computer. Its founding management includes a group of former Dell execs who collectively spent many years at Apple: engineer Tom Bentley, who helped design Apple’s Powerbook; product development manager John Doherty, a 15-year Apple veteran; and board member Eric Harslem, Dell’s former chief technology officer, who managed desktop product development at Apple. The group left Dell and founded Motion in August 2001, with David Altounian, who is the company's chief product officer. Mr. Eckert, former general manager of Dell’s divisions in Ireland, the U.K., and Brazil, was brought on as CEO soon after the company was founded. The 36-year-old Eckert also founded Dell’s online business and built it into a $20 million per day powerhouse.

Mr. Eckert says the company plans to use cash from its latest funding round to continue its international expansion beyond its current sales territories of Canada, the U.S., Europe, Saudi Arabia, South Africa. A further goal is the development of new products for its customers, which include college professors, doctors, delivery truck workers, and U.S. Senate aides.

Mr. Treybig says he expects Motion to become a billion dollar company, despite heavy competition from the likes of Acer, HP, Fujitsu, Toshiba, and others. Of course, any predictions hinge on whether the tablet PC market takes off. So far, sales have grown slowly since Microsoft first introduced the Windows XP operating system for tablet PCs in November 2002. The new OS, coupled with development of smaller, lighter notebook components and improved wireless services, is driving more companies into the race. HP, for one, started shipping its HP Compaq Tablet TC1100 last month. Acer is also working on a tablet PC and the market is expected to get even more entries in the coming year.

Motion resells its tablet PCs through Dell and Gateway, however Gateway is rumored to be working on its own machine. It also works with more than 70 resellers in the U.S. and Canada. Motion’s tablets are built in Taiwan by Compal Electronics, which makes about 5 million notebooks per year for companies like Dell and HP. Motion holds no inventory, Eckert says, copping the term “virtual integration” from Michael Dell to describe the company’s model. Orders are taken over electronic data interchange and sent to Taiwan. PCs are FedExed to customers or resellers directly from the factory. The company outsources telephone technical support through Stream International and has two repair depots for customers: one in London, the other in San Jose, California.

While Motion is off to a strong start, the market is young and fierce rivalries are expected. Market researcher NPD estimates that tablet PC sales over the past year have grown to comprise just 2.2 percent of the total laptop computer market. About a half million tablet PCs will ship by year’s end – a number which is expected to jump to 1.5 million next year, according to IDC.

Eckert says he is in no hurry to take Motion public any time soon. Instead he will focus on growing the customer base in healthcare, government, and field services industries. He has enough money, for now, to expand the company’s footprint and build new machines. Motion, he notes, is hiring. “We have 70 employees and 15 job openings,” he says. It would not be surprising if some phones were ringing over at Dell.

Like the first signs of new growth after a wrenching drought, a crop of companies that went public last quarter prove it is possible to make it off the ground – and sometimes thrive – in markets recovering from several of the toughest economic years in recent memory. But unlike days past, only companies that show a solid business plan are making it out of the IPO gate.

The proof is in the numbers: Twenty IPOs (seven were tech or biotech companies) raised $3.1 billion in the third quarter in U.S. public markets, compared to only $540 million raised in the same quarter a year ago. The average quarterly return for the seven was 34 percent, more than three times the increase of the Nasdaq during the same period. “It was a phenomenal quarter,” says Jeff Hirschkorn, a senior analyst at IPO Monitor.

It is a great leap forward for an IPO market that was all but dead for the past few quarters. In the third quarter of 2002 and the first quarter of 2003, for instance, not a single tech or biotech company went public.

Companies that are leading the rebound share four traits: a strong balance sheet, maturity, profitability, and business models that work. While the number of deals might be down (just nine tech and biotech IPOs in the first three quarters of 2003, compared to 18 in the same period for 2002), the quality of the companies going public has improved.

InterVideo, founded in 1998, might prove to be a poster child for the new IPO. For the 12 months prior to its July public offering, the company earned $9 million in profits on $49 million in revenues. Net income rose 90 percent in the latest quarter, compared with the same quarter last year. The company has a sound business model, selling more than 50 million copies of its DVD player, WinDVD, to big companies like Dell and Hewlett-Packard. InterVideo took two years to get out the IPO gate, pulling its offering twice; once after the terrorist attacks of September 11, 2001, and a second time in response to the shaky market surrounding the U.S. invasion of Iraq earlier this year. “It was frustrating, but it was not as though anyone else was going public at that time,” says InterVideo chief financial officer Randy Bambrough.

Finally, the company raised $39 million in July by selling 2.8 million shares at $14 each. “The timing turned out pretty darn well,” says Mr. Bambrough. Shares today are trading at $17, up 21.4 percent from the offering price.

While InterVideo has been around just five years, the average company that went public over the past two years is at least a decade old, lending a new maturity to the market. FormFactor, which makes cards for testing semiconductors, went public in June and is 10 years old. The company is profitable, reporting $10.2 million in net income on a healthy $80.1 million in sales in the 12 months before its offering. It raised $84 million through its June 12 IPO, pricing each share at $14. Today, shares are trading at $24.93, up 78.1 percent from the offering price.

Profitability, it seems, is the new rule. “Take Amazon.com,” IPO Monitor’s Mr. Hirschkorn says. “In today’s market, nobody would have put money on them.” (Amazon raised $54 million in a 1997 IPO, but did not post a quarterly profit until the fourth quarter of 2001.)

Not surprisingly, just 10 to 15 percent of companies that went public during the dot-com boom were profitable, estimates Jesse Reyes, a vice president at Thomson Venture Economics. Contrast that with the first three quarters of 2003: More than three quarters of the nine tech and biotech companies that went public posted profits in the 12 months before their IPOs, compared to 4 of the 18 companies during the same period in 2002. “The bar has been raised,” says Patrick Lo, CEO of NetGear. After pulling its IPO in 2001, the company went public July 31, raising $98 million. “Last time around, the expectation was purely on top-line growth. Profit was not even a consideration.”

The new discipline, along with a more optimistic market, is paying off. The average closing price of shares on the first day of trading has jumped. More than half of the companies that went public during the first three quarters of 2003 closed with share prices up at least 20 percent. Only 6 percent of IPO companies saw a 20 percent share price jump during the same period in 2002. For example, Digital Theater Systems (DTS) went public the week before InterVideo, offered shares priced at $17 each. Its stock value surged to $24.92 at first day’s close. Today, DTS is trading at $33 and the company is valued at over $400 million.

Some IPOs are still doing what they did so well a few years back: making people rich. Igor Khandros, CEO and founder of FormFactor, holds shares valued at about $144 million. Ken Denman, CEO of virtual network operator iPass, which went public July 24, owns shares worth $49 million.

Joe Costello, CEO of Think3, a privately held manufacturing software maker founded in 1979, is watching the IPO market closely. He has met with top bankers at JP Morgan, SG Cowen, W.R. Hambrecht, and Goldman Sachs, but says he will not even think about taking Think3 public until it is profitable for several quarters – and strong enough to weather a more brutal market.

“People are feeling like the window is opening up again,” Mr. Costello says. “But it is a very different window. Investors are much more selective now. They are looking for the gem of the group, not for an area that is hot.”

Corporate portal builder Plumtree Software’s recent history proves what little patience investors have for unprofitable companies. Plumtree went public in June 2002. It raised $42.5 million after slashing its original $13 to $15 offering price to between $7 and $9. Plumtree lost $373,000 on $18.5 million in sales in its most recent quarter. Its shares are trading at an anemic $5.40.

Yet the market is showing some flexibility for companies with strong revenue growth. RedEnvelope lost $7.7 million in fiscal 2003 on $70.1 million in sales, but is expected to turn a profit by year’s end. Its offering, priced at $14 per share, was led by W.R. Hambrecht, which used its Dutch auction process called OpenIPO that lets investors place bids for the stock before it is priced. It went public September 25, raising almost $31 million. RedEnvelope is now trading at $13.35, down 4.6 percent from its IPO price.

One area that remains cool, for now, is biotech. The first biotech IPO of the year was Acusphere, which went public October 8 at $14 per share and hardly budged on the first day, closing at $14.03. Nonetheless, the company raised $52.5 million. That is money it will need to offset a high cash burn rate typical of biotech companies. It also paved the way for more offerings. “Investors are thinking: ‘We got that clunker out. It did not tank completely. The next one will be huge!’” says Tom Salemi, editor of The Venture Capital Analyst newsletter for the healthcare industry. The sector will certainly have its chance. More than half of the IPO deals scheduled for debut in October are biotech.

As for the fourth quarter, industry watchers are optimistic. There are 12 tech and biotech companies in the IPO pipeline. There is wide speculation that Google will file to go public soon. Online travel company Orbitz set its IPO price October 21 and hopes to raise $125 million (Orbitz lost $5.3 million on sales of $107.8 million in the first six months of 2003). “We have gotten the healthy companies to a stage where they are ready,” said Ted Schlein, a partner with Kleiner Perkins Caufield & Byers, at a recent venture capital conference. However, the consensus among a handful of VCs is that the average time between initial funding round to exit will now be about five to seven years.

One company waiting at the gate is Callidus Software, a San Jose, California-based financial software maker founded in 1996. The company filed to go public September 23 and hopes to raise $75 million. Its balance sheet looks promising. The company’s revenues are strong; it reported $26.6 million in sales for the year ending December 31, 2002 and $29.8 million in just the first six months of 2003.

Yet even with improved sales and profitability, stronger IPO results and a healthier fleet of companies in the pipeline, Mr. Reyes says that the IPO market is fragile. “It would just take another corporate governance scandal or another geopolitical event to throw the recovery off,” he says. But for now, “I think we are seeing better results. Overall, there is optimism.”

Devotees of BlackBerry’s wireless email handheld have a nickname for the addictive little device: the CrackBerry. It is this very obsession by many of BlackBerry’s subscribers that has made Research in Motion (RIM), the Waterloo, Ontario-based company that builds the box, sit plump and happy atop the wireless pager food chain. Revenue for the quarter ending August 30 was $125.7 million, up 70 percent from the same quarter of last year, and gross margins were a succulent 46 percent.

RIM’s edge used to be that no one could do what its BlackBerry device did – deliver corporate email in real time to business people. That may be about to change.

Meet Bill Nguyen, the president and founder of startup wireless company Seven. On a recent steamy autumn day, he is scratching out a diagram of the complexity of a BlackBerry network and deriding the expense of the wireless device – $400 to purchase; $40 per month for the service, $5,000 for a server that supports 20 clients. “It’s crazy expensive,” he says.

Mr. Nguyen, 32, thinks he has found a better and less costly box for getting email into the hands of millions. It’s called the telephone. Seven licenses its wireless email technology directly to carriers to burn it directly onto the chips used in cell and smart phones. For about $5 per month plus airtime, customers can connect to corporate email, business contacts, and calendars via their phone’s browser. It is a strategy – lower cost and less complexity – that could make this startup a serious player in the wireless email market, where it competes with RIM, Good Technology, Visto and others.

Seven has quickly moved into Japan, signing two licensing deals: one with NTT DoCoMo, the world’s largest wireless carrier with 45 million potential customers; and a second with KDDI, the second largest mobile operator in Japan. Those deals open up 80 percent of the Japanese market to Seven. The company also licenses to Sprint PCS and Cingular Wireless in the U.S., SingTel Group in Asia, and wireless carriers O2 and Orange in the U.K. Together, Seven has access to 154 million customers.

Seven also has a bankroll to keep its train moving. Since it was founded in 2000, the company received $64 million in venture capital from Ignition, Greylock, Bowman Capital and Softbank’s Asian Infrastructure Fund. With revenue of about $15 million in 2002, $20 million in the bank, and “double-digit growth,” Mr. Nguyen says Seven is close to breaking even.

Though his partiality to shorts, t-shirts, bare feet and surfing might make him seem more at home in Maui than Sand Hill Road, Mr. Nguyen’s track record speaks for itself. He is a veteran of six technology startups, most recently selling Internet messaging provider Onebox for $850 million to Phone.com.

Mr. Nguyen sees a broad opening in his email-on-the-phone approach. RIM’s installed base is impressive (It has sold 11,000 corporate email servers, alongside its 711,000 subscribers) and the company does about 90 percent of its business in North America. In addition, there are an estimated 140 million email in-boxes in the U.S., leaving much opportunity. “A lot of this market we have not even begun to tap,” Mr. Nguyen says. “Everyone I know has two devices: a BlackBerry and a phone. We want to turn the phone into a really good device for email.”

Mr. Nguyen does not view the RIM challenge lightly. He calls RIM’s co-CEO Jim Balsillie one of the fiercest competitors he has ever known.

Yet Mr. Balsillie’s aggressiveness did not stop the company from losing a recent legal battle against patent company NTP, which sued RIM for patent infringement and won its case in May. The case is under appeal. RIM and Good Technology are also cross suing each other over various patent and business claims.

While critics say that RIM’s proprietary technology and limited capabilities leave it vulnerable, the company has signed many alliances with carriers worldwide. T-Mobile, for example, last quarter launched service on several BlackBerry handhelds in the U.S., Austria, Germany and the U.K. last quarter, while AT&T Wireless sells the BlackBerry’s new color screen handheld. RIM’s technology is also built on an open Java-based platform developed for phones and PDAs. If device makers like Motorola and Samsung join Nokia in integrating BlackBerry wireless technology on their phones and wireless devices, RIM could retain its market lead for years, says ThinkEquity Partners analyst Thomas Sepenzis. There is, however, one hitch for RIM as it partners with multiple device makers: it cannibalizes its own handheld sales.

Balsillie admits that Seven’s carrier partnering model is savvy, but he argues that the BlackBerry has a better user interface – it is bigger and designed for email – and comes with a system designed to provide secure access to corporate email. Data zapped to and from the device travels on a wireless network that is used solely for BlackBerry data traffic. RIM sells its own server that connects to a customer’s corporate Lotus Domino or Microsoft Exchange email server to regularly push information to the device.

With Seven’s service, smart phone or PDA users sign up on their mobile device carriers’ Web site. Corporate tech managers manage their employees’ mobile accounts remotely by logging in to a Sprint PCS website, for example, resetting passwords or deleting email if an employee loses a device. Sprint PCS will soon start selling Seven’s server software to wireless customers – at a fraction of Good and RIM’s price, Mr. Nguyen says. Customers can use the server behind their corporate firewall.

While Seven has some smart ideas, its Achilles heel may be the faith it puts in telcos. Steve Drake, an analyst at market researcher IDC, says “Telcos are not necessarily equipped to do this – they have a terrible reputation for poor networks and bad billing.”

The wild card in this market is Good Technology. The Sunnyvale, California-based company laid off its hardware development team earlier this year to focus on developing wireless email software for corporate customers. Making email devices is “a low-margin business dominated by Taiwan,” says Good Technology CEO Danny Shader. “In that world, how would we ever compete?”

Good’s most strategic move of late is its alliance with Dell Computer to roll out the first Dell-branded wireless email device next year. The Round Rock, Texas-based computer maker has a non-exclusive deal to resell Good’s email server to corporate customers. RIM has a similar deal with IBM.

Could Dell be a Blackberry killer? Mr. Balsillie believes Dell’s entry is overhyped and RIM is not as hardware-dependent as people believe. The company’s most profitable business is its software services, he says.

Some analysts say there is room for more than one player in the field: Justin Udelhofen, a financial analyst at Needham and Company says, “If RIM occupies the top, and Good fights for that stratosphere and controls the middle, Seven can own the low-end and perhaps work its way into the middle.”

Mr. Nguyen, however, says that the wireless email market may ultimately be controlled by the telcos. If that is true, Seven is well-positioned to carry out an end-around on the BlackBerry. There is no doubt this market has legs – some addictions can be awfully long-lasting.

Most dot-coms crashed faster than a five-cent balsa glider. But the lessons gleaned by sifting through their ashes continue to provide competitive insights to smart managers like Hank Plain.

Mr. Plain, an avuncular former Eli Lilly executive, is vice chairman of The Foundry, a Redwood City, California-based company that incubates startups making medical devices. Tucked away in one of the nameless, faceless office parks that dot the Silicon Valley, The Foundry has little in common with dot-com incubators like Idea Lab, Internet Capital Group, or CMGI - businesses that rose dramatically, rattled on about the untold riches inherent in upcoming IPOs, and then foundered.

Instead, The Foundry serves as outsourced research and development for many of the world’s top medical device manufacturers. The Foundry, founded in 1998 by Allan Will and Hanson Gifford, slowly builds companies that craft innovative, new ways to treat medical problems or that figure out less invasive, less expensive alternatives to surgery – “surgery without knives,” as they call it. If all goes according to plan, one of Mr. Plain’s companies will get the nod from a mammoth medical device maker like Johnson & Johnson, Medtronic, or Boston Scientific.

Mr. Plain knows how lucrative those deals can be. He made a boatload of money four years ago when he was CEO of medical device maker Perclose. In 1999, Abbott Laboratories bought Perclose for $680 million in stock, a decided home run in the medical device industry, where any sale over $100 million is a rare event. Instead of retiring with his millions, Mr. Plains saw a business model.

To date, VCs have invested about $150 million in seven Foundry companies, five of which are now in clinical trial. With each startup, Mr. Plain and his team hire ten to 15 people who share The Foundry’s office space. After about a year, the startups outgrow their temporary home and are bumped from The Foundry into new space - typically within five miles of Plain’s office door.

Ideas for new ventures at The Foundry flow from both doctors and the inside team. In one case, Frederick St. Goar, a Stanford physician who patented heart valve repair technology, founded Evalve with an idea for a small clip that fixes a malfunctioning mitral valve by splitting it into two smaller working valves. Evalve received $15.9 million in Series B financing in December 2001 after landing its first round of $6.5 million in September 1999. The device has been tested successfully on five patients, Mr. Gifford says.

The Foundry’s incubator strategy is an increasingly common gambit in the medical device industry, which is split between the Goliaths - corporations that are masters at marketing and selling devices - and the startups that fuel innovation. There are few mid-cap device companies. The Foundry, which raised its third funding round of $1.5 million last summer, is one of about a half dozen medical device incubators in the U.S., including Accelerated Technologies in Austin, Texas; The Innovation Factory in Deluth, Georgia;, and SyneCor, in Portola Valley, California.

IPOs, for now, don’t appear to be an option for medical device startups. Not one has gone public this year, according to New York-based Dealogic, which follows IPOs. Just five went public in 2002, posting a negative 15 percent return on investment since then, compared to the average market return of 35 percent. In 2000, the height of the dot-com frenzy, 18 companies went public in a banner year. However, those companies have also posted a negative 35 percent return since 2000 (compared to the equally dreary market average of negative 38 percent).

While The Foundry’s coffers have been well funded, other medical incubators haven’t fared so well. In the past several years Scout Medical Technologies, Protostar, Medical Technology and Innovation Group, and Seedling Enterprises have shut their doors.

Perhaps The Foundry’s survival has something to do with its management skills. Mr. Plain and the Foundry team have worked in management at 12 medical device companies. Mr. Will, once Mr. Plain’s boss, was the former CEO of device company AneuRX, which was bought by Medtronic in 1996 for about $100 million. Mr. Gifford led a research and development team at Heartport that during the 1990s built devices for minimally invasive cardiac surgery. Heartport went public in 1996 with a market value of more than $1 billion.

One particularly promising Foundry startup is Satiety, which created a device that is inserted through the throat to staple together a small segment of the stomach, and thus induce weight loss. With about 50 million people in the U.S. that the Center for Disease Control and Prevention categorizes as obese and morbidly obese – a 5-foot 4-inch woman who is 30 or more pounds over her healthy weight is considered obese by the CDC – demand for such a device could be significant, says Mark Wan, a partner at Three Arch Partners, a Satiety investor.

VCs like Morgenthaler Ventures partner Robin Bellas predict that The Foundry will have at least one big score. “We made $1 billion in gains from The Foundry executives in previous companies in the 1990s,” Mr. Bellas says. “Our expectations are that we’ll see another $1 billion.”

Mr. Plain is a lot more simple about his aspirations: “We want to be the tallest among the midgets.”

Consider the case of inventor Michael Doyle and his one-person company, Eolas. In August, Mr. Doyle won a $520 million judgement against Microsoft after a federal jury found that Microsoft’s Internet Explorer browser infringed on Eolas’s patent. The award was issued to both the Chicago-based Eolas, a patent holder that doesn’t manufacture any products, and the University of California where Mr. Doyle was a former researcher.

There is also the case of Thomas Woolston, an ex-CIA technology expert, who recently prevailed against eBay in the courtoom. Woolston founded Great Falls, Virginia-based MercExchange, which holds and licenses e-commerce patents. This past August, the company was awarded $30 million after a jury found eBay and its subsidiary Half.com guilty of willfully infringing on two of his company’s patents that cover the Web sites’ “Buy it now” fixed-price feature.

Both eBay and Microsoft are appealing these recent decisions. All the while the world of technology companies large and small look on. Peter Mennell, a University of California at Berkeley law professor, calls both of these bellwether cases. “With eBay and Microsoft…we are talking about real money,” he says. Mr. Mennell, who is also the executive director of the Berkeley Center for Law and Technology, believes that these decisions send a message to the little inventor. “Software patents may come to be viewed as lottery tickets,” he says.

The business of patent disputes is growing steadily. Last year, the number of patent-related lawsuits filed in U.S. courts rose 7 percent from 2001 levels to 2,700. Less than 4 percent of those cases made it to trial.

Patent litigation cases can take a toll on both a corporation’s coffers and its reputation. By some estimates, eBay spent upwards of $10 million to fight its bitter legal feud against little MercExchange.

Most often than not, it is a big corporation duking it out in court over patents. But at a time when the economic recovery is still uncertain, a rash of new e-commerce patents and teams of lawyers willing to take cases on contingency are sparking more independent patent holders to flex some muscle. During the Internet boom, many independent inventors were brushed off as patent trolls, a sneering name for their ilk coined by a former Intel attorney. Growing startups were too busy fretting about bigger issues like payroll and sales to pay much attention to patents or letters from dinky companies trying to enforce them, says Patrick H. Sullivan Jr., a senior vice president at Intellectual Capital Management Group, a Palo Alto, California-based intellectual capital consultancy.

Today, victories such as Mr. Woolston’s are sending a message. “Corporations cannot blow them off anymore,” says patent attorney Rob Sterne of law firm Sterne, Kessler, Goldstein & Fox.

In the MercExchange case, Mr. Woolston (a patent attorney) applied for his patents five months before eBay’s site launched in 1995. After eBay’s response to his cease-and-desist notices was silence, he decided to take action. He used money he had collected from a patent infringement suit against Goto.com in 2001 to fight eBay. During the five-week trial, eBay’s legal team stated that the company could have spent $15,000 to design around his patented technology. “That incensed the jury,” says Scott Robertson, a lawyer with Hunton & Williams, the firm that represented Mr. Woolston, Mr. Woolston has since hired bankers to help him sell his company to Yahoo, Amazon.com, InterActiveCorp, or Microsoft.

EBay is not the only company that is paying a big price for underestimating a patent holder. Thomas J. Campana Jr., a semi-retired engineer, could single-handedly cripple once red-hot handheld maker Research in Motion (RIM). In 2000, Mr. Campana, a middle-aged businessman from the Chicago suburbs, asked the company to license his technology. Mr. Campana owns several patents for sending email wirelessly by radio signals. The two sides couldn’t come to an agreement and wound up in court.

In August, a U.S. District Court judge in Richmond, Virginia, awarded Mr. Campana’s company NTP $53.7 million in damages. Although the court granted an injunction barring RIM from making, using or offering to sell handheld devices, services or software in the U.S., the court stayed the injunction pending an appeal of the decision. RIM, a Canadian company with $307 million in sales that lost $150 million in 2002, is appealing the decision and has asked the U.S. Trademark and Patent Office to reexamine Mr. Capana’s patents. That could take several years if the office decides to do so.

Legal experts say it will be hard to overcome that initial ruling.

“There is a Damocles sword hanging over RIM,” says Kevin Rivette, an intellectual property lawyer with The Boston Consulting Group and author of Rembrandts in the Attic, a ground-breaking book about unlocking the hidden value of patents.

At the heart of the eBay/MercExchange case is the business-method patent, which has quickly become one of the most controversial aspects of patent law. These patents typically represent a small percentage of overall litigation, but provoke a lot of anger. In 1998, in State Street Bank v. Signature Financial Group, a federal court ruled that the way Signature Financial used a data processing system for pooling financial information was patentable. In a nutshell, the court decided that an idea was just as patentable as a new feature on a PC – inspiring a wave of new patent applications just as the invention of the telephone and semiconductor once did. Critics blasted the first round of business-method patents as too vague and warned that many would end up invalidated in court.

In 2000, the patent office issued about 900 business-method patents, compared to just 585 in 1999. One such patent, issued to Amazon.com for its one-click checkout process, quickly became the poster child for bad patents. After Amazon sued Barnesandnoble.com in 1999 for infringing on that patent, tech guru Tim O'Reilly led a crusade against it, even posting a $10,000 bounty for anyone who could find so-called prior art, documentation that proved Amazon did not come up with the idea first.

Three people split the award in Amazon’s case. BountyQuest also doled out $10,000 to Holger Blasum, a graduate student at the University of Munich, who found research from the early 1990s that debunked a biotech patent held by Incyte Genomics. Incyte held a patent for a vague-sounding “database and system for storing, comparing and displaying genomic information.”

Of course, the debate over whether a patent is too vague depends on which side of the fence you sit. Business-method patent critics say these patents stymie creativity by creating a litigious, non-collaborative business environment. Others say patent holders have to jump through hoops and often wait years to get their patents, which ultimately protect their ideas.

Either way, the patent office, stung by criticism, scaled back the number of business-method patents it granted in 2001 to 433.

That new frugality won’t stop inventors who have already received patents from enforcing them. In some cases, their aggression is catching companies off guard. One small Quebec company, DE Technologies (DET), for example, has threatened companies in both the U.S. and New Zealand over patent infringement. Ed Pool and Doug Maur jointly own DET’s patents, which cover cross-border currency conversion, electronic invoicing, and database processes. DET is demanding that some small New Zealand companies pay a $25,000 license fee and a one percent royalty, based on website transactions. Some of the targeted companies are fighting back with a Web site, www.fightthepatent.co.nz.

Today’s wisdom for company executives is that no company is safe from patent litigation. Even patent giant IBM is facing an intellectual property battle waged by underdog SCO Group. Alleging IBM stole trade secrets, SCO is suing for a high-stakes $3 billion. SCO, which posted $64 million in 2002 sales, says IBM stole its code to improve the Linux operating system. IBM has countersued. IBM, which has generated more patents over the past decade than the top ten U.S.-based technology companies combined, is taking SCO seriously. “We are a big company.” says Jerry Rosenthal, IBM’s vice president of intellectual property and licensing. “We need to take these things seriously.”

So should other companies. The number of lawsuits is only expected to creep up over the next several years as more companies turn to their patent portfolios as a possible revenue source, says UC Berkeley law professor Mark Lemley. On the positive side, the patent office has added a second level of review of all business-method patent applications. And Mr. Lemley believes this has helped rid the industry of many duds.

But Greg Aharonian, editor of the Internet Patent News Service newsletter and a critic of the patent office, is unimpressed with reform. He believes little has been done to improve patent quality. And he is equally unimpressed with the recent David versus Goliath court battles. “Microsoft has to pay half a billion? That is chump change to them,” he says. “Are these patents a strategic threat? No, they are more a cost of doing business.”

Not every company went to hell in a handbasket over the past three years. Some did quite well, thank you.

We decided to buck conventional wisdom and seek out these bottlerockets. Our goal: find the best performing public companies during the worst years of the latest U.S. recession, and determine how they turned a sow's ear into a purse. We conducted our survey by first screening more than 1,500 U.S.-based publicly traded technology companies with gross revenues of at least $1 billion in a Revere Research database. Then we eliminated all companies that did not grow in year-to-year sales and profits from 2000 through 2002. Next, we whittled the companies down to only those that improved net income margins each year. The resulting list netted just 21 companies – we cherry picked five to review.

The gorillaBigger is better and CDW proves it. In four years, CDW’s sales have nearly tripled from $1.7 to $4.26 billion. The Vernon Hills, Illinois-based company sells 80,000 different kinds of software and hardware from MP3 players to Unix servers. So much for predictions that small businesses would ditch computer resellers and buy all of their computer gear directly from manufacturers.

During the downturn, CDW reported steady growth – its earnings rising 9.8 percent to $563.8 million in 2002, despite a bleak year for the industry overall.

CDW started in 1982 in the home of founder Michael P. Krasny, who sold the company’s first IBM computer, his own, with the help of a newspaper ad. Mr. Krasny still owns about 28 percent of the company, though he turned over the CEO’s chair in 2001 to John A. Edwardson, a 53-year-old former airline and telecom executive.

CDW targets sales to small to mid-size companies, the sector’s largest and fastest growing market. While technology sales to big corporations dropped 5.2 percent last year, spending by small companies increased by 1.8 percent, according to Framingham, Massachusetts-based market analyst IDC. “It is the sweet spot,” says Raymond James financial analyst Brian Alexander, who rates the company “outperform.”

But the economy might finally be catching up with CDW, which posted several ho-hum quarters this year. In March, a Morgan Stanley report questioned CDW’s long-term growth prospects, predicting, correctly, that the company would not hit its second-quarter revenue growth targets due to increased competition and U.S. state and local government budget deficits. CDW eliminated one rival, Micro Warehouse, by buying the assets of the Norwalk, Connecticut-based company for $22 million on September 9. Nonetheless, analysts say CDW is on a possible collision course with Dell Computer because 25.7 percent of CDW’s sales are from desktops and notebooks. But not to worry, says Harry J. Harczak, Jr., executive vice president of sales at CDW, the company offers customers something Dell cannot: brand choice.

The rocketIf L-3 Communications were an airplane, it would be an F16. Born six years ago out of ten Lockheed Martin units, L-3 has grown at a rapid-fire pace to become one of the country’s top ten defense firms.

Like many of its rivals, L-3’s sales jumped markedly after September 11, when homeland security became a top priority and demand for L-3’s high-tech military gear and communications systems soared. The company’s speedy growth continued in 2002; sales increased by 70.9 percent and profits shot up 54.1 percent.

Founded in 1997 in New York City and taken public the following year, L-3 makes everything from shipping container scanners to black boxes for airplanes to military communications systems. It sells about three-quarters of what it makes to the U.S. government. As a Lockheed Martin subcontractor, for example, L-3 makes communications equipment used in the U.S. Coast Guard’s Integrated Deepwater System program. In January, L-3 landed a $52 million contract to build a global communications system for the U.S. Military and Allied Forces. And in May, L-3’s Wolf Coach subsidiary got a $9.2 million U.S. Army contract for its vehicles that are equipped with mobile labs that can test for chemical or biological agents in the event of a terrorist attack.

Between 2000 and 2002, the $4.6 billion company’s sales doubled, partly due to seasoned leadership of its CEO, Frank Lanza, the former head of Loral Corp., which was sold to Lockheed Martin in 1996. (L-3 is named for Mr. Lanza, his partner Robert V. LaPenta, and Lockheed.) The company’s growth has come largely through a flurry of smart acquisitions, which represent about two-thirds of its earnings, says Stephen Murphy, an analyst at investment bank CIBC World Markets. Last year, L-3 bought Raytheon’s aircraft modification business for $1.3 billion in cash – its biggest acquisition ever. A $1.5 billion contract to provide logistics and services to the U.S. Special Operations Command followed.

While new contracts for L-3’s baggage screening systems likely peaked this year, the company is expected to nab many new contracts related to homeland security, Mr. Murphy says. (The government earmarked $38 billion for security in 2003, more than enough to go around.) So far, those contracts are helping L-3 get the sort of attention granted to behemoths like Raytheon, General Dynamics and Northrop, which together are building the Pentagon’s new high-tech battlefield.

The marketerLogitech International’s CEO Guerrino DeLuca gets it: Build computer mice that work. Build desktop products people want. A buzz will follow.

But when Mr. DeLuca took the Logitech CEO’s job in 1998, the international company, founded in 1981 on a Swiss farm by two Stanford University friends, was struggling with its business model. Mr. DeLuca, a former marketing executive at Apple Computer, moved quickly to diversify Logitech’s product line and get more mice on retail store shelves – instead of selling them largely through computer companies like Hewlett Packard and IBM. Today, store sales account for a majority of the company’s worldwide revenues. "Our retail mix has gone from 50-50 to 80-20," says Mr. DeLuca. Marking a milestone this month, Logitech shipped its 500 millionth mouse. Over the past decade, Logitech mice accompanied about 55 percent of the 900 million desktop PCs shipped, according to IDC.

When computer sales continued to decline in 2001, a phenomenon carried Logitech: people stopped buying new $1,000-plus computers, and opted for more affordable desktop goodies, including mice, keyboards, web cameras, speakers and joy sticks. Mr. DeLuca, again, saw the trend and, as he did at Apple, and focused on making must-have products to feed the need. He forged key relationships with MSN and AOL to unite their instant chat features with Logitech’s Webcam, and with Sony to make cordless joysticks to arm the computer game zeitgeist.

Profits climbed 535 percent from $7.1 million in fiscal 1999 to $45.1 million in 2001. While annual sales have passed the $1 billion mark in April 2003, Logitech stunned analysts by stumbling in its last quarter,. Sales were up 12 percent to $218 million in July. But profit for the quarter dropped a whopping 47 percent to $5.7 million, causing shares to tumble 36 percent. Despite stiffer competition and a sluggish retail business, Mr. DeLuca has assured inventors that the company can meet annual goals of 10 percent in sales and 15 percent in profits.“Give them the benefit of the doubt,” says Peter-Mark Vogel, an analyst with Bank Sal. Oppenheim. After all, he says, Mr. DeLuca led the company out of a similar situation during fiscal 2001.

The acquirerFiserv specializes in critical back-office grunt work – check processing, software development and other day-to-day data processing services that keep banks, credit unions, brokerages and insurance companies humming.

But the Brookfield, Wisconsin-based company is also an expert at acquisitions. Over the past 19 years, it has acquired more than 100 companies, including 25 between 1999 and 2001. Fiserv makes these deals pay off, says Michael Hutchison, a financial analyst at Barrington Research. In 2002, for example, the company’s five acquisitions added more than $210 million in revenues. Through acquisitions and lucrative outsourcing deals, Fiserv has grown slowly to become a $2.75 billion company with profits of $287 million. Its net profit margins of 10.4 percent are nearly double the industry average.

The company, which counts 85 of the nation’s top 100 banks as clients, and processes 3.7 billion ATM transactions per year, also uses acquisitions to enter key new markets and bump off rivals. Over the past two years, for example, it has bought up two divisions of Plano, Texas-based IT services company Electronic Data Services (EDS): its credit union data processing group and EDS’s consumer network services business, which provides ATM machine and transaction services. Fiserv’s global reach provides additional strength, fetching about 5 percent of its services business overseas in the Caribbean, Europe, Latin America, and the Asia-Pacific region.

Steady top leadership is also a staple at Fiserv, helping the company to maintain an 18 to 20 percent growth rate, even as its rivals have scaled back their analyst expectations. Leslie Muma, for instance, moved into the CEO’s job in 1999 after serving as COO since the company’s founding year in 1984.

In an industry that is rapidly consolidating, Fiserv’s main competitors include Bisys, Jack Henry & Associates, Metavante, and Alltel. But if Fiserv’s strategy of slow and steady acquisitions continues, the company should expect a smooth ride in the years ahead.

The market makerCoined by Warren Buffet, the term “moat” describes the competitive advantage a company has over its rivals. Businesses with wide moats tend to set the bar sky-high for competitors – and often have the momentum required to sustain that domination.

Online behemoth eBay has a mighty big moat. But that is not all. It has also benefited from another phenomenon: the network effect, which helped the company beat both Yahoo and Amazon.com in grabbing a critical mass of buyers and sellers first.

Since it was founded in 1995, eBay has become a role model for how to build a market. From an online auction where geeks could sell aging Star Wars figurines, it has grown into a $1.7 billion powerhouse that economists now refer to as its own separate, virtual economy. The company nearly tripled its registered user base from 22.5 to 61.7 million between 2000 and 2002. Profits ballooned 421 percent from $48 to $250 million between 2000 and 2002. “They have dominated the category,” says Haim Mendelson, an e-commerce professor and co-director of the Center for Electronic Business and Commerce at the Stanford Graduate School of Business.

But what is most impressive is that eBay has almost single-handedly built the entire online category it continues to dominate. And they have done so by overcoming each of the considerable obstacles that have accompanied relentless growth.

Within eBay’s global economy, there is order in chaos: a banking system, provided through eBay’s 2002 acquisition of PayPal; a school system in which eBay provides classes around the U.S. to help its users learn how to sell more on the site; and a cyber government to make sure its 16.7 million registered users are not selling Nazi memorabilia or ripping off customers who use the site.

During the downturn, eBay thrived by expanding globally by selling everything from automobiles to surplus computers to new Disney products – and by expanding pricing options on the site. EBay also benefited because it was selling goods at all points of the product lifecycle, everything from used CDs to computers that IBM could no longer sell to its bargain-seeking customers.

In 2001, eBay continued its international expansion, buying both the Korean auction site Internet Auction and the French site iBazaar. However, an attempt to invade Japan failed – eBay pulled out of the country last year, ceding defeat to Yahoo, which had already built a critical mass of customers in that market.

Nonetheless, moves into new markets abroad have proven critical to eBay’s growth. Global transaction revenues now represent 30 percent of the company’s sales.