(FORTUNE Magazine) – Setting up an office at home once involved buying furniture, plugging in a telephone, buying a calculator and typewriter, and making sure you had plenty of filing cabinets. You'll still need the furniture, telephone, and filing cabinets, but the rest of your equipment needs are a bit more complex.

First, there's your home computer. These days it's nearly impossible to run an office without one. Not to mention, you'll need a printer to go along with that computer. And of course, you'll also need a modem for sending and receiving E-mail and visiting Internet sites. If you're already working at home, you probably have a second line, but if you're going to use the modem for more than a few minutes a day, it might be a good idea to install a third line. You'll want to send and receive faxes, which you can do with your computer and modem, but, for many people, it's more productive to also invest in a fax machine.

And what about all that paper that still comes your way? Don't you want to get the graphics and text into your computer? If so, you better plan on purchasing a scanner. Add in a good office copier, a decent chair so you don't strain your back and neck, and you could be out a lot of money. But you don't necessarily have to mortgage the house to pay for a home office. There are some good economical options that can make even the smallest home office a very productive place to work.

SOHO MARKET

It's not surprising, with millions of Americans working in small offices and home offices, that this market is one of the computer industry's hottest sectors. Manufacturers have brought out a wide range of products specifically created for what they like to call the SOHO (small office/home office) market. Clunky designs suited to the back rooms of corporate America have been banished. In their place are sleek machines designed to marry function and form for the home office. So-called multifunction devices (MFDs) are very popular, combining several machines--say fax, printer, copier, and scanner--in one box. And manufacturers are beginning to create communications products for the SOHO market that offer Internet access and networking equipment.

Of course, the digital heart of this market, like its larger corporate siblings, is the computer itself. You have several issues to address when selecting a home office computer. You need to choose between a Macintosh or a PC that runs Windows, and then you have to decide between a notebook or a desktop machine.

Both Macs and PCs are fine for basic office tasks and, even with Apple's current financial problems, there is no real reason to avoid either. If you already have a computer at home or at work, your life will be easier if you go with what you're used to. The best advice is to ask your friends and associates--the ones you'll turn to when you're desperate for help. If you have a built-in source of assistance or support for one platform or the other, you're way ahead of the game.

Whether to equip your home office with a desktop or notebook computer depends mostly on whether you'll need to be using your machine out of the office. You don't have to travel very much to justify a notebook. You can take it to a client's office, to the library, or even to the backyard or another room in the house. If space is tight, you'll benefit by having less stuff on--or under--your desk. You can also hook up a larger monitor to it when you're in the office.

But notebook computers cost considerably more than equivalent desktop systems, and they're generally harder and more expensive to upgrade. Also, the more features you want, the heavier and pricier the machine. One argument in favor of laptops, however, is that you'll be getting three computers in one, especially if you commute between a home office and an outside workplace. You get a home computer, an office computer, and one for the road.

If you opt for a desktop, you'll face another decision--whether to go for a traditional, fully loaded computer or to choose one of the new low-priced models that run $1,000 or less. This year marks an important shift in the industry, as some mainstream manufacturers--such as Compaq Computer--have been aggressively marketing sub-$1,000 machines. They hope these models will appeal to the millions of American households without personal computers.

STARTER KIT

While these machines are typically configured with some multimedia features for family use, they can serve as a way to get started if you are just setting up a home office or want to add a second or third machine. Generally the technology is a couple of steps back from today's leading edge, with older processors, smaller disk drives, fewer options for expansion, and other compromises. They will also age more quickly. Still, they can be a less expensive way to get started.

Another important trend for the home office this year is to combine five or six key functions--printing, scanning, faxing, and others--into a single machine. Brother, Canon, Hewlett-Packard, Sharp, and Xerox are among the manufacturers with affordably priced MFDs that are almost a self-contained office in a box. Each provides color printing, scanning, and faxing in a single unit. Brother's 6-in-1 Multi-Function Center, for example, is also a 50-minute capacity digital answering machine and can capture video from a camcorder, VCR, or digital camera.

The advantages are clear: You'll save money and space buying one machine instead of five or six, there's only one manual to read, one software package to install, and one technical support number when and if you get into trouble. The drawbacks are obvious too. If you need to send your all-purpose digital home office away for repairs, you have a problem. It's one thing to live without a printer, a scanner, a copier, or a fax machine but to give up all four at once could crimp your productivity. Go with a vendor that offers an exchange program if your product needs service.

PRINTING BREAK

If you prefer to choose separate components instead of a multifunction device, your must-have hardware list for the home and small office will include a printer and probably a scanner. As you'll read in the Peripherals story in this issue, you have two basic choices for printers: laser or inkjet. For fast, high-volume printing a laser is your best bet. Color inkjets deliver superb color as well as monochrome text that is nearly as sharp as some laser printers. They've gotten faster too. You no longer need to schedule printing jobs over lunch or coffee breaks.

Once a specialized tool for graphic artists and designers, scanners transform photographs, drawings, and text from printed material into the digital language of computers. They can be a very useful addition to a home office. As in the printer market, you have a choice between two technologies--simple sheet-fed scanners and flatbed scanners, which look a bit like a copying machine. For filing receipts and other simple chores, you can use an inexpensive sheet-fed scanner, but if you need to scan color photographs, you'll be better off with a good flatbed unit. (See Peripherals for more information.)

As the computer industry moves into the 21st century, it sometimes seems that telephone companies are still mired somewhere in the 1950s when it comes to meeting the communications needs of a high-powered home office. Most home offices will wind up with a handful of separate ordinary phone lines for calls, faxes, and modem traffic. High-speed access to the Internet, cable modems, and other options are not commonly available yet at affordable prices.

Whether your home office is in the backwoods of Maine or on a hill in Marin County, you'll probably be relying on a few simple communications tools. Desktop computers commonly include a data/fax modem. Fortunately, speeds are increasing. Unfortunately, the industry is having one of its periodic wrangles over technology standards.

RIVAL SCHEMES

The latest generation are so-called 56K modems. In theory, they receive data at 56 kilobits per second (Kbps), though they max out at somewhat less than that. Still, they are much faster for downloading graphics-laden Web pages than the previous generation of 33.6Kbps technology. They can only send data upstream at the slower pace, however. There are two rival schemes for the 56K generation of modems. The x2 standard from U.S. Robotics (which is now owned by 3Com) and the 56Kflex technology developed by Rockwell International and Lucent Technologies. Until the issue is resolved, the best strategy is to make sure that your online service or Internet service provider supports the modem you've chosen.

Many of today's modems are actually multifunction communication devices, enabling you to use your computer to send and receive faxes and make phone calls. Some can turn your computer into a digital answering machine, while others add even more features such as caller ID. Although these high-tech goodies are tempting, they don't always offer the same convenience or ease-of-use as stand-alone devices.

The advantage of regular fax machines or stand-alone digital answering machines is that they stand by 24 hours a day, use little electricity, and rarely break down. What's more, they do their work without interfering with any other machine. If you rely on your computer to be your all-purpose communications machine, you may miss an incoming fax or call when you're surfing the Internet. Even if you're not online, an incoming call or fax could interrupt what you're doing. And when your computer is turned off, none of these services are available.

Another option is to get an external fax device that connects to your PC but works even when the PC is off. There are plenty of simple, inexpensive ways to do this, such as the $129 FaxPal II from InfoImaging Technologies that saves your faxes when the PC is turned off.

When you start adding more computers to your home office you'll face another problem. You'll need to get two or more computers to share information, and you may need to provide several computers with access to the Internet simultaneously. If so, there are some simple, affordable ways to link computers together. And there's some clever new equipment to help you get on the Net.

PC TELEPHONE

The simplest networking equipment creates the digital equivalent of two cans and a string--with PCs at either end passing data to each other. Some affordable desktop computers already come with networking capability built in, such as Apple's 4400 line for small businesses. Otherwise there's equipment available for less than $100 from companies such as 3Com.

As the number of computers in your business or family grows, you may wind up creating the equivalent of a small local area network, a miniature version of the technology widely used in offices. That way the computers can exchange information and can share resources such as printers. Despite the industry's fondness for arcane terminology, a simple box--known as a hub--will take care of most of what you need. Rather than stringing wires from PC to PC, you plug each computer into the hub and let it take over the connections. You can get started with a low-end product like Farallon's Streamline Starlet 5. An even easier solution, supported by Microsoft, is a product due in 1998 called HomeRun, from TNT Systems, that will use home telephone wiring and simple plug-in PC adapters to link PCs in a home or office.

There's also some innovative networking technology designed for small offices that makes it much easier to get on the Net. Not very many home-based businesses can afford a high speed T1 phone connection to the Internet, and most parts of the country don't yet have access to cable modems. That leaves ISDN service--which can be very expensive--or your plain old telephone modem.

Ramp Networks, a young company in Santa Clara, Calif., has an Internet access device that uses ordinary phone lines and modems but gets much higher speeds, a big plus for downloading graphics-laden Web pages. Its WebRamp M3t Internet access device will combine--"multiplex"--up to three modems, taking advantage of the cumulative speed of all three. You'll need a separate phone line for each modem but, in most parts of the country, that's still cheaper than ISDN service from the phone company (typically $50 per month) or other high speed Internet options. You can also call your home-based network from a remote notebook PC to gain access to any file or printer on the network.

INTERNET IN A BOX

Several manufacturers have brought out communications hubs for the small office/home office market that provide more elaborate Internet networking gear in a box. The InterJet (starting at $1,995) from Whistle Communications, for example, has everything you need to connect PCs and Macs to the Internet and to each other. The compact appliance, about nine inches high, has its own built-in LCD display, can handle internal and external company E-mail, functions as a Web and intranet server with firewall security features and automatic configuration, and can provide everyone in a small company a direct connection to the Internet.

If you need more firepower, it's probably time to call in the experts. Once you get beyond having a few computers and perhaps a small network to worry about, it pays to have help. The challenge for any home office or small company is to coordinate this technology and keep it working smoothly without a corporate technical staff.