(FORTUNE Magazine) – In spring 2000, as the Nasdaq plunged 2,000 points, two vastly different companies quietly embarked on programs to offer their employees a whiz-bang new technology called 802.11b, or Wi-Fi--wireless Internet access.

In LeMars, Iowa, ice-cream maker Wells' Dairy rolled out Wi-Fi to 120 users in its new corporate annex. One thousand miles west, in Provo, Utah, network software supplier Novell launched a wireless local area network (LAN) pilot program in its IT department. Both projects were wildly successful, but hardly anyone outside the companies noticed.

Fast-forward 30 months and Wi-Fi has become a media darling, heralded as one of the few bright spots in an otherwise dreary tech landscape. The only places where Wi-Fi isn't in the news seem to be the hallways of Wells', Novell, and other companies that have made Wi-Fi an integral part of the workplace. "This was very cutting edge when we did it, but it's just standard now," says Jim Kirby, senior network architect at Wells', which churns out over 60 million gallons of Blue Bunny brand ice cream each year.

Ditto for Novell, whose employees say they think about Wi-Fi only at those rare times when it is not accessible. About 90% of the company's 6,000 employees can access the wireless network at any of Novell's 96 offices worldwide. Systems engineer John Pugh was quite put out upon discovering that he couldn't get Wi-Fi while visiting a Novell partner in Munich recently. "It was surprising--you get used to it," he says over lunch at Novell's cafeteria, one of eight Wi-Fi-enabled buildings spanning a 54-acre campus nestled in the Wasatch Mountains.

Kirby and Pugh are in the minority in corporate America, but they may not be for very long. In a September study of 225 CIOs by Morgan Stanley, 32% said they had already deployed a wireless local network in at least one part of their organization, and 24% were considering deployment. What's more, wireless initiatives ranked No. 5 (up 12 spots) among their priorities for the coming year. Although most analysts don't expect Wi-Fi to reach critical mass in large corporations for another two to three years, the technology's benefits--namely, increased mobility and productivity--are creating a sort of workplace Wi-Fi manifest destiny that budget constraints, security concerns, and a confusing alphabet soup of standards cannot rein in.

Before delving into the workplace Wi-Fi equation, a quick primer on the technology: Wi-Fi, short for wireless fidelity, is the trademarked name given by the Wireless Ethernet Compatibility Alliance (now simply called the Wi-Fi Alliance) to these networks of high-speed wireless communications.

Wi-Fi LANs use radio waves to send information over telecom's equivalent of the Wild West--an unlicensed swath of frequencies at about 2.4 gigahertz that is also used by cordless phones and microwave ovens. The group's technical standard, called IEEE 802.11b, allows for speeds of up to 11 megabits per second (Mbps) over a range of up to 300 feet.

In a typical setup, laptop users tap into the network via a so-called access point--a radio transceiver mounted to, say, an office ceiling and connected by cabling to the wired network. One access point usually supports between 12 and 20 people. (It can handle more, but congestion becomes an issue.) All the user needs is a network interface card (NIC) either embedded in his laptop or inserted into a slot in the machine.

Wi-Fi is no stranger to the business world, but up until now deployments have been mostly limited to schools, stores, airports, hospitals, and warehouses. This year roughly 90% of the nation's public and private universities have WLANs, up from 50% in 2001. Overall, these realms account for over 80% of the $1.6-billion-a-year business WLAN market, according to In-Stat/MDR, a Scottsdale research firm. (For more on Wi-Fi use in warehouses, see "Hot Technologies" on fortune.com.)

By settling on the 802.11b standard in 1999, the wireless industry set the stage for Wi-Fi to enter carpeted corporate environments. The move sent prices falling as demand surged: Business-strength access points that once averaged $905 can now be had for under $500, according to U.S. Bancorp Piper Jaffray. Prices for home Wi-Fi networks have plunged too, from $125 to about $60 for a Wi-Fi card. Hardware makers shipped nine million access points and network cards in 2001, says research outfit Gartner, up 150% over 2000.

Seeing the writing on the wall, PC makers have scrambled to install Wi-Fi in their laptops. Gartner says the percentage of Wi-Fi-enabled corporate laptops will grow from 20% in late 2001 to more than 90% by the end of 2007. J.D. Edwards is one company currently mulling the purchase of Wi-Fi laptops for its employees, a small percentage of whom have Wi-Fi now. Microsoft has also jumped onboard by supporting Wi-Fi in its XP operating system. "With 802.11b, it became feasible for companies to set up wireless offices," says Giga Information analyst Stan Schatt. "Up until then they hadn't thought it was practical."

Workforce trends are also driving Wi-Fi deployment. Knowledge workers are spending less time at their desks and more time in conference rooms and training seminars, or are working from home. More than 40% of workers spend less than half their time in their primary work space, according to Yankee Group. The Bureau of Labor Statistics found that 15% of the U.S. workforce--19.8 million people--did some work at home last year.

But getting online while on the go via a clunky dial-up connection is often more trouble than it's worth. Though still far from ubiquitous, Wi-Fi is becoming easier to access on the road--for a fee. Today there are about 24,000 Wi-Fi "hot spots" worldwide, in cafes, airports, and hotels, according to TeleAnalytics. For $49.99 a month, wireless provider T-Mobile offers 802.11b in about 2,000 locations in North America, including Starbucks, airline clubs, and (beginning next year) Borders bookstores. Boingo Wireless sells Wi-Fi access in hotels and airports for $24.95 a month.

As with most technologies, early adopters have set the tone with Wi-Fi. IT managers and other tech-savvy folks would buy access points and a couple of adapter cards to test in the office. Few companies had any sort of corporate WLAN policy in place, so little thought was given to protecting these nascent networks from outsiders. When Novell's IT team first installed access points for their own use in 2000, they put them inside the corporate firewall--"inside Fort Knox," recalls global-network architect Tracy Young with a shudder. Anyone with a Wi-Fi equipped machine and a bit of knowledge could have tapped in. (For more on security, see box.) These rogue deployments were sometimes shut down, but more often they led to pilot programs on a couple of floors at headquarters. The wireless seed had been planted.

In May 1999, Microsoft set up a pilot network for 1,500 users across two buildings and a cafeteria on its Redmond campus. Volunteers could get a Wi-Fi card from the receptionist if they agreed to take part in a survey after 90 days. "We didn't have a clue how many people would want them," says CIO Rick Devenuti. The cards were snapped up by program managers and software engineers who found that their weekly "raid sessions"--meetings where software bugs are analyzed and sorted out--lasted half as long and were twice as productive when everyone in the room was connected to the network wirelessly. "That type of productivity gain was not anticipated," says Devenuti. Today one-third of Microsoft's 550 buildings worldwide have WLANs.

Microsoft's experience is typical of how Wi-Fi profoundly alters the dynamics of the workplace. For starters, meetings can be held anywhere--in a break room, the cafeteria, or even outside. Rather than fighting over a limited number of data ports, everyone at the conference table can be online. You can call up documents on the web or corporate Intranet and share them instantly. Most important, you can act on decisions while you're still at the meeting rather than wait until you get back to your desk. So instead of just talking about doing things at meetings, you can actually do them.

Wi-Fi also makes life easier for IT managers. "When somebody changes workstations, they just pick up and move," says Wells' Kirby. "They don't need us to help them." Instead of hunting for a spare data port, remote workers or clients visiting headquarters for the day can plop down anywhere and get right to work. And when Novell's Young sets up an off-site meeting in a hotel, he can rig up a Wi-Fi network in half an hour, vs. hours of futzing around with cable. "We don't have to stay late at night," he says.

It stands to reason that making work easier makes life easier. In a Cisco-commissioned study of more than 300 organizations, 87% of WLAN users said their overall quality of life had improved. Wells' and Novell have both rigged up nearby airports with wireless so that executives can stay productive while waiting for flights. Indeed, mobility is a magical thing. "Several of us have been known to move out to the lawn when the weather's nice," says Erin Mulder, a consultant with Chariot Solutions in Fort Washington, Pa.

Working on the lawn is nice, but does that really make you more productive? So far, many corporations have shied away from large-scale deployments of Wi-Fi because they do not see how it will pay off. "Today, you don't sell technology--you sell ROI," says Paul Fulton, former general manager of 3Com's wireless-LAN business and now executive-in-residence at venture capital firm Mayfield. "You have to say this is going to raise revenue or lower cost."

The benefits of WLANs are far more tangible and quantifiable in operations like warehouses and hospitals. For example, Oschner Clinic and Hospital in New Orleans estimates that time in its emergency room is down 20 to 25 minutes per patient since it installed a WLAN. Doctors and nurses use the network to register patients at their bedside and research treatments. Still, a growing body of evidence suggests that corporate-wide deployments improve the bottom line too. The Cisco study found that workers were connected to the network 1.75 more hours per day once they got Wi-Fi. What that means is they were able to check e-mail and access shared corporate files between meetings, at lunch, in transit, or before and after they arrived at their desk. An Intel study of its own 800-person deployment found that WLANs deliver 23 minutes of additional productivity per day. Most employees interviewed for this story said that Wi-Fi "saved" them between a half-hour and 90 minutes per day. How those additional hours translate into dollars is tougher to measure, but it's a good bet that a more connected employee is a more productive employee.

Whether wireless LANs are cheaper to deploy than the wired variety is still an open question. Clearly, not having to install cable to every desk will save money, so for a new office setup wireless makes sense, especially for small to midsized businesses. Young says that a wireless LAN deployment for a new office of between 50 and 100 people costs $20,000, vs. $250,000 to get a wired LAN up and running. What's more, he says, "you never know when you're going to move an office, so all the cabling you put in could be wasted."

But for huge deployments at corporations that already have a wired network, "the jury is still out," says Rajeev Chand, a wireless equity analyst at Rutberg Associates in San Francisco. The hardware, though coming down in price, is still expensive, and what you save on cabling is gobbled up by paying for a site plan to figure out where to put the access points, as well as network-management and security software, which can cost more than the hardware.

But no cost analysis can account for the psychological value of mobility. "I couldn't live without the wireless," says Mulder, whose response was echoed by many folks we spoke with. Wi-Fi is like flying first class: Once you've done it, you never want to go back to coach. "If I took it away tomorrow they would stone me," says Kirby. When Novell first started experimenting with Wi-Fi, the former CIO challenged Young to stay wireless for six months. That was almost two years ago, and he hasn't plugged in a cable since. "Some things are just so good you don't have to study it," he says.

Before you rush out and buy access points for your floor, caveat emptor: There are downsides to WLANs. Having everyone online during a meeting can be toxic to productivity. "We have parallel conversations running at my meetings, and I'm hoping that they are finding solutions, but they are probably complaining about how unreasonable I am," quips Intel CIO Doug Busch. "When there are laptops everywhere, culturally it can create a whole lot of problems," says Novell CIO Debra Anderson. "We're finding the balance between Wi-Fi as an intrusion and as a powerful, productive tool." To minimize disruptions and keep people focused, Novell and other companies now institute "no laptop" policies for important meetings.

Wi-Fi is also not for everyone. Deskbound employees in finance or customer service really have no compelling need for wireless. IT managers need to learn where it makes sense, which can be difficult when everyone is wailing for Wi-Fi. "There is enormous pressure on IT managers from upper management to add wireless technology because it's sexy," says Giga's Schatt. Take the Wells' Dairy plant floor, where quality-assurance technicians audit products every two hours. Supervisor Jan Wagner has asked for Wi-Fi, but Kirby doesn't think the cost justifies the benefit. Installing it in Wells' massive, two-story, 550,000-square-foot south plant would require many more access points than usual, as the production machines would generate a good deal of interference.

Another problem for WLANs is that corporate bean counters these days frown on just about any discretionary technology spending. "Things that add convenience get cut in this environment," says Chand. "People want painkillers today, not vitamins," adds Mayfield's Fulton. Queried about its WLAN plans, a Charles Schwab spokesperson says flatly, "When you're laying off 10% of your workforce, wireless LANs are not a priority." That's probably why 39% of the CIOs surveyed by Morgan Stanley have no intention of deploying WLANs.

Even if companies find the money for Wi-Fi, they have to decide which flavor to deploy. In addition to 802.11b, which commands nearly all of the market right now, there is 802.11a, which operates in the less-crowded 5GHz frequency band and, at 54 Mbps, is much faster than its cousin. But it's more expensive, its range is limited (50 feet) and it isn't compatible with 802.11b. Then there's 802.11g, a faster version of 802.11b, but it has not yet been ratified under the Wi-Fi banner. Confused? So are many IT managers.

While most experts don't expect large firms to go whole hog on Wi-Fi for another 18 to 36 months, boosters claim those that wait to deploy it might find themselves at a competitive disadvantage. "Some companies want to deny the size of the tsunami coming at them," says Ken Denman, CEO of iPass, which provides Wi-Fi services to companies like Computer Associates and American Standard. Remember that a whole generation of college students is being weaned on Wi-Fi. When they hit the workforce, they will demand it wherever they go. Once you've flown first class--well, you know the rest.

Feedback? mboyle@fortunemail.com