HOUSTON (FORTUNE) - Both the hallway approaches to the water closet near U.S. District Judge Sim Lake's courtroom were being secured: Ken Rice was in the bathroom. The former Enron Broadband Services CEO, who had taken the stand for the prosecution early in the day, was answering nature's call during a break in the trial, and his handlers -- one attorney, one FBI escort -- were eager to prevent any awkward potty-side encounters with, say, Jeff Skilling, who had long counted Rice as a confidante.

Speaking of awkward, Skilling spent most of the day with his eyes trained intently on Rice, slowly tilting his head from side to side -- in a modest variation of Larry David's voodoo stare. (Rice managed to ignore it, looking to the jury box and his questioner, Enron Task Force director Sean Berkowitz.) Co-defendant Ken Lay, by contrast, acted like he didn't have a care in the world, taking notes, smiling, and regularly gazing back toward the courtroom peanut gallery. It's no wonder he felt relaxed: during Rice's testimony, Lay's name was rarely mentioned.

Former Enron Broadband CEO Ken Rice Rice has pled guilty to securities fraud.

More from Fortune Will Mmmhops be a hit? NBA confirms L.A. Clippers sale to ex-Microsoft CEO Steve Ballmer FBI and SEC probe into Carl Icahn and golfer Phil Mickelson FORTUNE 500 Current Issue Subscribe to Fortune

Special Reportfull coverage Skilling gets 24 years Lessons from Enron: Just say 'sorry' Skilling's possible new home Skilling sentence likely to be a long one

Meet the players Find out who you might see at the Enron trial, how they got involved, and what they're doing now. Launch gallery

But it was a bad day for Skilling. Rice, who has pled guilty to one charge of securities fraud, faces a prison term of up to ten years, and is cooperating with the government, began the process of burrowing into Enron Broadband, which, together with Enron Energy Services, was one of the company's two highly touted (but secretly troubled) new businesses. He provided a fascinating window into how Enron really did business.

Sporting a short haircut and occasionally flashing a boyish grin, Rice, who is 47, began by testifying that Skilling was "very engaged" in the details of Enron's business, and personally approved virtually all major transactions. He noted Skilling's fascination with the company's stock price, and the stock tickers installed in the elevators and along the route from the company parking garage.

Rice recalled Skilling telling deputies how boosting Enron's share price would require attaining a higher stock multiple, because earnings growth couldn't be accelerated. "There ain't no more 'E' in the earnings," he says Skilling told them.

He later described a May 1999 meeting where Skilling advised Enron's top executives that, to boost the company's shares, they needed to help him dream up an alternative to describing Enron as a "trading company" -- since Wall Street viewed trading companies as risky ventures, and refused to give them lofty multiples. Management soon embraced a new mantra: Enron was a "logistics" company, engaged in "intermediation." Its multiple began to soar.

The rollout of the broadband business accelerated that process. When Enron announced broadband's new status as one of the company's "core" businesses at a January 2000 analysts' meeting, Enron shares leapt 25 percent overnight. The problem? "The business had very few customers and almost no deal flow," Rice testified. And, oh yes -- costs of $100 million a quarter.

Rice detailed the pressures imposed from above -- often by Skilling himself -- to meet budget targets that he and his team considered impossible. Rice said the gap between what Skilling demanded and what his own team actually projected was known inside the company as the "overview."

Rice's team, for example, originally projected that the business would lose $489 million in 2001; instead, Skilling insisted on a budget projecting a loss of just $65 million -- and that figure was then given to Wall Street, as evidence of broadband's progress toward profitability. "I thought that was very unlikely," said Rice. But "I didn't feel like I had any choice."

Even as the business withered, amid a telecom industry meltdown, Skilling (and Rice) repeatedly told Wall Street all was going gangbusters. When Rice met with Skilling early in 2001 to tell him that the forecasts needed to be adjusted, Skilling insisted broadband stick to its numbers, telling Rice he "didn't need any more bad news."

By February 2001, broadband was projecting that it would miss its first quarter earnings target by $111 million.

Yet for a stretch in 2000 and 2001, quarterly earnings were miraculously met, through gimmicks hidden from investors: selling assets (pieces of its fiber network); "monetizing" future profits from broadband's movies-on-demand business (future profits that would never materialize); and booking gains on speculative investments in hot tech IPOs (while using financial instruments to hide losses when the investments tumbled).

Rice testified that he had criticized Skilling's decision to let CFO Andy Fastow launch the private LJM partnerships that did business with Enron, telling Skilling the idea was "goofy." But the broadband division soon was tapping LJM, selling "dark fiber" to Fastow's partnership. After approving a second monetization to hit one quarter's numbers, Rice recalls remarking to his top deputy: "One more hit of crack cocaine."

Time and again, Rice says he went to Skilling to tell him, in detail, about the business' dire straits. And repeatedly, Berkowitz showed, through tape recordings of analysts' conference calls, Skilling offered detailed assurances that the business were going gangbusters.

Rice testified that in March, with broadband far from its budget targets, he convinced Skilling to lay off staff, as part of a major cost-cutting. But even then, he testified, Skilling insisted on keeping the "external number" for the division's projected annual loss. Indeed, on a March 23 conference call, he told industry analysts that the division was "looking good" and that rumors of layoffs there were false.

Such statements were lies, Rice testified. "Across the board, we had huge costs and we had no revenues." Rice even testified that Skilling had him water down a presentation about broadband's problems to the Enron board.

As the business continued to worsen, broadband finally ran out of tricks. Broadband was collapsed into Enron's wholesale division, and Rice quit as CEO of the division. By August 1, 2001, Rice was making plans to leave the company, which he discussed with Skilling over lunch at Vincent's, a Houston restaurant.

There, Skilling -- who had previously told Rice he was thinking of leaving Enron in two years -- surprised Rice by telling him he was going to leave his job as CEO of Enron two weeks later. Skilling spoke of wanting to sail around the world in a boat, which he described for his old friend.

"All I remember is it was more like a ship," Rice testified. "It was a big boat he could put cars on -- and maybe a helicopter."

Berkowitz asked Rice what he did after learning that Enron's CEO was preparing to reveal the shocking news that he was stepping down. "I went back to my office, and I sold [Enron] stock," he responded. Rice acknowledged that this represented illegal insider trading.

And on that sorry note, with the prosecution nearly finished questioning Rice, the judge adjourned the day's proceedings.

Enron's defense could be brilliant... or crazy