(FORTUNE Magazine) – Flying to Europe these days is like landing in Silicon Valley circa 1998. Office parks outside capitals from Stockholm to Rome are filling up with media companies and tech startups. Cafes are packed with jeans-clad twentysomething entrepreneurs yapping on cell phones to their venture capital backers. The number of initial public offerings--most of them tech--on the German stock exchange has doubled every year since 1997. And all across the region, Internet usage is taking off.

This boom has been fueled not only by new technology but by new stock exchanges designed to cater to fast-growing companies. Last year these fledgling European bourses produced returns that would make any Nasdaq snob take notice. The Neuer Markt, Germany's tech-heavy new stock market, was up 53%. France's Nouveau Marche climbed 127%, and Easdaq, a pan-European version of Nasdaq, 84%. Then there's Britain's Alternative Issues Market (AIM). Retail investors used to steer well clear of this once murky backwater of the London Stock Exchange. But in the past year, AIM has emerged as the stock market of choice for Net and telecom companies.

To see exactly who's benefiting from all the excitement, FORTUNE compiled a list of the 25 brightest stars of Europe's new markets, based on their performance since IPO (see the list at the end of the story). To non-European investors, their names--Intershop, Aixtron, Scoot.com--may not sound familiar. But these companies are at the cutting edge of Europe's new economy. For instance, Britain's Baltimore Technologies (No. 14) makes security software for the Internet. Its stock rose 966% in 1999. Now the company is expanding rapidly in the U.S., and Merrill Lynch says its shares could rise an additional 50% this year.

There's more than just dot-coms here. On the list you'll find companies betting big on media, semiconductors, back-office software, and mobile phones. Germany's Intertainment (No. 21) distributes movies like The Whole Nine Yards and The Third Miracle throughout Europe. Its shares were up 611% last year. Or take Mobilcom (No. 3), a German discount wireless phone service whose stock has risen 3,768%.

For a sense of the action at the heart of Europe's bull market, here's an in-depth look at a few of last year's stock champs in Germany, Britain, and France, followed by our list of 25 hot stocks to watch.

THE NEW MUPPET MASTER

Kermit the Frog has always been prone to moments of existential, it's-not-easy-being-green angst. But if Kermit's new boss, Thomas Haffa, harbors any such self-doubt, he's not letting on. Haffa is the 47-year-old founder and chief executive of Em.TV & Merchandising, a German children's television company that is just possibly Europe's hottest stock, up a dizzying 24,000% since its initial public offering in 1997. Last month, Haffa used some of those high-priced shares to buy the Jim Henson Co., home to Kermit and his fellow Muppets, in a $680 million cash-and-stock deal.

In 1989, Haffa left German media giant Kirch Group, where he'd been a high-ranking executive, to strike out on his own. Colleagues bluntly predicted he would fail. Haffa's goal of combining the roles of television producer, distributor, and merchandiser in a single company had never been attempted in Germany. And his chosen market--cartoons--struck many as decidedly smalltime.

Today, however, Em.TV's Junior television network, which it owns in a joint venture with Kirch, carries the top-rated children's show in Germany. The company has rights to more cartoon programming than Disney and Time Warner combined. And thanks to his 50% ownership stake in Em.TV, Haffa himself is worth $6 billion. He owns a Harley and a silver Porsche, drives to work in a top-of-the-line Mercedes, has a villa in Majorca, Spain, and a yacht docked on the Med. And he isn't shy about Em.TV's future: "We will be a global player, one of the big ones."

Em.TV is already one of the great success stories of Germany's Neuer Markt. Among the first companies to be listed on the new exchange, it had just $15 million in annual sales when it went public in 1997 and its offering raised a paltry $8 million. But the stock soon acquired a cultlike following among German retail investors, who were hungry for anything promising fast growth. Haffa, a consummate wheeler-dealer, used Em.TV's highflying shares to buy stakes in a host of television production companies around the world. He also inked distribution deals with Disney and Kirch. In the first half of last year, the most recent figures available, the company's profits grew to $45 million on revenues of $102 million, a 44% margin.

While some might scoff at a business built around cartoons, Haffa sees gold. He believes that cartoons have more merchandising potential than adult programs. Em.TV owns the German rights to such international favorites as Garfield and the Simpsons, as well as a host of popular German characters, like Tabaluga, a friendly green dragon that German kids love.

Merchandising is key to Haffa's strategy, since he wrings value from Em.TV's cartoon licenses not only by distributing programs to television networks but also by selling toys, videos, books, music, and computer games tied to popular children's characters. He wants to make Junior--the name of Em.TV's television network--into a global brand, not unlike Disney or Warner Bros. He is even launching a chain of Junior retail outlets. "TV alone is not strong enough anymore to establish a brand," he says. "You need partnerships with people who produce records, toys, and books."

At Em.TV's headquarters, a modern office building in the Munich suburb of Unterfohring, many of Haffa's employees are enjoying the good life. Em.TV stock has made 38 of the company's first 40 employees millionaires, and all of Em.TV's 250 workers have recently been granted U.S.-style stock options. Employees say that both Haffa and his younger brother, Florian, Em.TV's CFO, are demanding bosses. But they also describe Em.TV's work culture as highly entrepreneurial, with each worker given more responsibility than he would have at a traditional German business. Haffa says he keeps his employees motivated "by treating them nice."

Some analysts, however, are questioning whether Em.TV's stock will continue to treat investors nice. With a price/earnings ratio of 464, it could be ripe for a fall. "Em.TV is an interesting company, and it has very clever management, but it is preposterously valued," says Cullum Clark, the manager of the Warburg Pincus International Small Company fund.

Fans of Em.TV like Leigh Anne Kittel, an analyst with the German bank Bhf, reason that as European cable channels proliferate, Em.TV's ever-expanding content offerings will become more valuable. Meanwhile, international investment banks are initiating analyst coverage, and more foreign fund managers are buying into the company. "The euphoria is still there," Kittel says. As for the Henson takeover, she adds, "It's just one more reason to own the stock."

BRITAIN'S WEIRD WEB NURSERY

When former derivatives trader Geoffrey Chamberlain bought a controlling interest in Durlacher in 1993, it was a tiny British stock brokerage with a shady past--nothing more, really, than a shell company used by its owners to generate losses for tax purposes. Today it is Britain's premier Internet investor and the country's best performing stock, up more than 6,200% in 1999.

Chamberlain, 58, has transformed Durlacher into a strange hybrid--research firm, consulting company, investment bank, venture capitalist, and retail brokerage all rolled into one. The company originally came to prominence through its groundbreaking research reports on technology markets. (It published its first, about computer games, in 1994.) But the reason investors have clamored for Durlacher's shares is its investment portfolio, which has some of Britain's hottest Internet companies--players like Autonomy (No. 8 on our list), a maker of sophisticated search engine software; Demon, a popular Internet service provider; 365 Corp., which provides news, sports, and music content to other Websites; and icollector, an auction site. That portfolio has made Durlacher into a proxy mutual fund, a way to play Europe's booming Internet market.

Chamberlain's organization revolves around in-depth research. This research--what Chamberlain calls Durlacher's "knowledge base"--in turn attracts clients to the company's consulting operation. Durlacher's consultants help dot-coms develop their strategy as well as assist old-line firms get online. And when the startups that Durlacher discovers through its research or consulting need financing, Durlacher's corporate finance team is there to provide it. Ready for an IPO? Durlacher can handle that too--by selling shares directly to the public through its online brokerage, nothing-ventured.com. Durlacher also creates and incubates its own startups--as it did with 365 Corp.

Until now, Durlacher has held minority positions in its portfolio companies. But recently Chamberlain announced plans to seek majority control in future investments--building a keiretsu of related technology firms. In doing so, Chamberlain says he is following the example of U.S. Internet holding companies like CMGI and the Internet Capital Group, both of which share aspects of Durlacher's business model. The company is currently backing about 30 young companies and hopes to have 50 in its portfolio soon.

Handling so many investments may prove a challenge for Durlacher, which only has 100 employees. At its crowded offices in the heart of the City, London's financial district, a constant stream of temps arrives to help it handle the burgeoning workload. "We can't hire fast enough," says Jay Marathe, who oversees Durlacher's consulting projects. Most of the employees have stock options, including many of the secretaries. Chamberlain claims the company employs more paper millionaires than any other in the City. "I'm delighted that people have been able to secure their futures," he says. "They still work like hell, but they're happy people."

The company's other shareholders are happy too--none more so than Chamberlain, whose 15% stake in Durlacher is now worth $420 million. But isn't Chamberlain worried about his company's high valuation? (With a $2.8 billion market cap, the company trades at 770 times earnings.) "No, because I think the rules are being rewritten," he says. "A small number of European companies will be valued as the Americans value them. If you have a model that's good enough, if you produce the goods, why worry?" At least Durlacher, unlike many of the dot-coms it has backed, actually makes a profit, albeit a small one. Last year, earnings increased 182%, to $2.9 million, on revenues of $21 million. And in the first six months of this fiscal year (which began in June), profits were already $8 million on revenues of $17.6 million.

EUROPE'S E-ARCHITECTS

he French like to complain that the Internet is an American plot to further the English language and promote Anglo-Saxon culture. But at the Parisian offices of Fi System, a leading European Web design firm and Internet strategy consultant, employees have no qualms about speaking English. In fact, it is the company's official language. Fi even employs two full-time English instructors to make sure its 600 young employees (average age, 29) are able to design English-language Websites for clients that include Cartier, Renault, France Telecom, and L'Oreal. Those English lessons should also come in handy when Fi, which was the best-performing French stock of the past year (its shares zoomed up 1,700%), moves its headquarters to London this year.

Why is Fi leaping the Channel? As the company uses its high-priced shares to gobble up similar Internet service firms around the Continent, it wants "to project a pan-European image," says Denis Lafont, the company's corporate development director. Lafont believes that's easier to do from London. He also acknowledges the move will heighten Fi's visibility among potential American suitors. That's important because Fi's strategy is to grow large enough to merge with a major U.S. Web consulting company--perhaps Razorfish or Scient, which are just arriving in Europe. "There are no global players yet," says Thierry Thevenet, Fi's founder and CEO. "Some companies are very strong in the U.S. and weak in Europe. Some, like us, are strong in Europe but not in the U.S. Imagine if we can merge."

Along with its competitors, Fi is in a race to get big--and fast. Last year it bought seven Web design and consulting companies using its expensive stock as currency. In just the first six weeks of this year it acquired four more. Through mergers and internal hiring, Thevenet wants to have an additional 1,000 employees by the end of the year, a 166% increase in his work force. Already established in France, Britain, and Spain, Fi plans to expand to Belgium, Germany, the Netherlands, Italy, and Scandinavia. "In order to survive you have to operate across Europe," says Thevenet. "If you are not running, you are dead."

European investors eager to benefit from the Net but wary of the new dot-coms are pouring money into Web agencies like Fi. "It's a sensible way to play the Internet," says Clark, the Warburg Pincus fund manager. "These are the people selling the shovels to the gold miners, if you will, and it is an inherently profitable thing to do."

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REPORTER ASSOCIATE Feliciano Garcia