SAN FRANCISCO (CNN/Money) - Reading reports last week of tablet PC sales "exceeding expectations," I was reminded of a visit I paid last summer to the headquarters of an alternative operating system company.

The firm had just signed a distribution deal with a major online retailer, and the CEO was walking me through the details of the arrangement. Wheeling his Aeron chair around, he motioned for me to come closer and examine some early sales numbers listed on his screen. They read something like this: "Monday: one sale. Tuesday: two sales. Wednesday: four sales." That's hardly enough to support a company.

So I called the online retailer for comment on how sales were coming along. "Oh, we're very happy," she said chirpily. "Sales are exceeding expectations."

Which goes to show that if you set your expectations low enough, they're not hard to beat. That's all well and good and makes for some pithy quotes, but if you base your manufacturing capacity on those lowball expectations, as Toshiba did with the release of its tablet PC devices late last year, you're in for trouble.

Now companies such as Gateway (GTW: Research, Estimates), Hewlett-Packard (HPQ: Research, Estimates), and Toshiba are scrambling to meet consumer demand for the product. How often do you hear that phrase these days, let alone from a computer company?

We'll get into why that is and what that means in a second, but first, a little background. A tablet PC is essentially a high-tech Etch-a-Sketch, with a large screen that translates stylus scrawls into text.

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Introduced in November, these devices run a version of Microsoft Windows XP called Tablet PC Edition. They operate a full suite of office productivity software and have elicited interest for real estate, insurance, and health-care applications, as well as for remote sales automation tasks. Some models come with keyboards that fold out if the user prefers to type rather than employ the stylus.

Not surprisingly, other PC manufacturers are jumping on the tablet bandwagon. This month NEC (NIPNY: Research, Estimates) will unveil its Versa Litepad (which will be the lightest of the lot, weighing in at 2.2 pounds). Other manufacturers include Acer, Fujitsu, and ViewSonic.

Now, back to our story. Toshiba found itself in a bit of a pickle when sales for its Portege 3500 tablet exceeded capacity. The company was forced to boost its production by 35 percent and has since had to "increase it every month" to meet the demand, according to Craig Marking, a Toshiba representative.

Analysts, who at first had downplayed the potential reach of the product category, are now increasing their own estimates. "The tablet has done better than the industry expected for the short period of time they've been shipping," says Roger Kay, an analyst with IDC. Initial IDC forecasts predicted that 575,000 units would be sold in 2003. Now that number is at 675,000 -- representing nearly 4.5 percent of the entire notebook market. Pretty aggressive expectations, actually.

In addition to high sales volume, analysts say, tablet PCs have higher profit margins than typical notebooks.

"Tablets are a very lucrative sector," says Rob Enderle, an analyst with Giga Information Group. Despite the strong sales, Enderle is "a little surprised" by the results, since the initial wave of products "is clearly a first generation. The underlying technology is still a kludge."

He says he initially predicted strong sales for the second half of this year, when the second generation of technologies roll out, offering lighter units equipped with optical drives and faster chips.

For an industry struggling with saturation issues and diminishing margins, the tablet represents a burst of good news. Of course, margins will likely shrink once other players enter the market and drive prices down. But if sales can continue at the present clip, a nice niche segment will flourish -- a welcome development for these companies and their investors.

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