NEW YORK (Business 2.0) - At the San Francisco offices of Panorama Capital, two dozen engineers, venture capitalists and academics gathered around a nondescript piece of hardware they all helped build.

Then Allan Leinwand, CEO of a stealthy Panorama-funded startup called Vyatta, powered up the device, the world's first open-source router. As one of the programmers downloaded Red Hat Linux to his laptop by way of the black box, the room erupted in handshakes and high fives.

A few months after the unveiling on that October day, Vyatta's router is about to go into beta release, and it will likely hit the market this summer.

The machine runs on two Intel chips, but far more noteworthy is its software, known as XORP, or extensible open router platform. The versatile open-source application can direct data traffic for a giant corporation as easily as it can manage a home Wi-Fi network.

And that's what makes it as disruptive as a leaf blower in a feather factory: Vyatta's router will cost about a fifth the price of comparable models from big networking equipment makers such as Cisco Systems. "Open-source is providing real competition to the commercial telecom companies," says John Todd, an open-source telephony expert. "It will force them to improve."

Even as open-source software has ravaged the bottom lines of Microsoft, Oracle, and Sun Microsystems, Cisco and Juniper Networks continue to enjoy fat margins selling expensive gear running proprietary software. But as corporate IT managers switch to open-source for operating systems (Linux), Web servers (Apache), and databases (MySQL), many are realizing that they spend an even bigger portion of their budgets on networking equipment: routers and switches to direct traffic, firewall devices to ensure security, and PBXs to run office phone systems.

In fact, Vyatta is one of several companies attacking the heretofore closed--and highly profitable--world of networking with open-source alternatives. "Open-source is already in wide use, and over time it will start to have a broad impact [in telecom]," says Nortel Networks acting CTO and chief architect Peter Carbone.

But no project is as audacious as Vyatta's play for the corporate router market. The idea began at the International Computer Science Institute in Berkeley, where researcher Atanu Ghosh was studying the future of broadband. Ghosh knew that to make changes to router software, he had to submit them to Cisco or some other behemoth--a laborious process.

So he and his colleagues decided to write their own software, building in support for cutting-edge technologies such as video-on-demand and VOIP. The project caught the attention of Leinwand, a startup veteran who was also one of Cisco's early employees. "This is the most obvious opportunity in telecom," he says.

With Ghosh and his fellow researchers as advisers, Leinwand last April founded Vyatta--named after the Sanskrit word for "open." The company plans to focus on routers for midsize U.S. businesses and the regional offices of global corporations. That segment is worth $4 billion and is heavily dominated by Cisco.

For now, telecom leaders don't seem threatened by the trend. "Open-source is not an issue in the networking market because networking is based on open standards," says Cisco spokesman Ron Piovesan. Adds Juniper spokeswoman Karin Taylor, "We can support any open-source solution that is based on industry standards."

But if Vyatta's black box can do all it promises at a fifth the price of the competition, the company stands to win a lot of converts. In fact, it could be an all-out rout.

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