(FORTUNE Small Business) – MICHAEL BAKER ArthroCare

Follow your heart. It's good advice for any entrepreneur. But as ArthroCare's Philip Eggers and Hira Thapliyal found, knees can be just as important. In 1993 they developed something called Coblation technology, which they thought would revolutionize the high-profile cardiology field. Their instruments--which use radio frequency to allow for more precise surgeries--could be used to clear an artery without damaging the surrounding tissue. But then they looked into the realities of heart medicine: It could take years for any new equipment to win FDA approval. What's more, they would be entering a packed market with several established players and dozens of smaller firms.

So Eggers and Thapliyal had a change of heart (sorry--that's the last one, we promise) and moved into the field of arthroscopy. Sure, it was a smaller market--a $600 million industry, vs. cardiology's $10 billion--but they'd be likely to get their product approved in as few as 90 days. Better yet, the market was hungry for a new product. "There hadn't been anything new in the arthroscopy market for many years," says ArthroCare CFO Christine Hanni.

Their flexibility has paid off. Since Eggers and Thapliyal founded ArthroCare, their Coblation devices have become the leading instruments in the field. The buzz started in 1996, when the Sunnyvale, Calif., company made its first appearance at an arthroscopy trade show. Doctors who had acted as consultants had already spread the word to their peers; surgeons lined up three deep at ArthroCare's booth. By the time the show ended, ArthroCare had laid the groundwork for establishing its current network of distributors and direct-sales people. Today that network is one of their prized assets, consisting of more than 75 direct representatives and more than 100 distributors, giving them entry into about 45 markets, including South Africa and Singapore.

Eggers and Thapliyal no longer head up ArthroCare, but they haven't left altogether; Thapliyal remains on the company's board, and Eggers still consults there. Michael Baker--formerly a vice president at medical technology giant Medtronic--took the helm as CEO in 1997. Baker managed Medtronic's coronary angioplasty unit, so you might expect him to take ArthroCare back to its roots in cardiology. But that's not the only field in which Coblation technology might help make medical procedures easier, he says, and doctors in hospitals across the country have started to realize that. "There were neurosurgeons using the technology on the spine," says Baker. "And they said, 'You could use this for the brain too.' " Sure enough, they used the instrument, a "plasma scalpel," to remove a tumor from a child's brain. The company now gets about 83% of its business from arthroscopy, but it is starting to get new customers in the fields of neurology, cosmetic surgery, allergy surgery, and yes, cardiology. And ArthroCare recently signed deals with instrument makers ACMI and Gynecare to make products for the urology and gynecology markets.

That kind of broad application in the medical community pleases analysts like Robertson Stephens' Wade King. "As the company expands its market penetration into new areas, it offers significant upside as its leverage increases," he says. "We believe in the company's management and significant franchise value." Endorsements like that help, but with a technology that applies across the medical landscape, ArthroCare has its own flexibility to thank. --J.K.

EDDIE STEELE Singing Machine

Karaoke is as much a part of japanese culture as kabuki or flimsy financing, but efforts to bring the crooning craze to the States haven't been as successful. Case in point: Singing Machine, a producer of karaoke machines and music, which went public in 1994 and landed in bankruptcy court only three years later.

Yet karaoke, taking Buddy Holly's advice, won't fade away, and today the hobby is enjoying something of a pop-culture renaissance--on MTV's "Say What? Karaoke"; in Levi's ads; even in Britney Spears' big-screen debut. Meanwhile, the relaunched Singing Machine is enjoying a rebirth of its own. In the past year its revenues tripled through the December quarter, to $34.3 million, and earnings have grown 245%, to $4.2 million. Wall Street hasn't resisted the siren song, driving the stock price up 510% in the past year, to $19.

But don't credit the resurgent karaoke fad for Singing Machine's success. CEO Eddie Steele--who has headed the company since 1997--deserves some praise as well. It was his decision to bring in a new management team that year, including John Klecha, the current president and COO. Klecha's first breakthrough idea: The U.S. is not Japan.

"In Japan the business is done outside the home, in bars," Klecha says. In the U.S., on the other hand, would-be divas tend to belt out the jams in the comfort of their own living rooms.

So Klecha completely changed Singing Machine's business. Instead of selling the devices at cost to nightclubs and charging them for music, the company started to develop and sell its own consumer models. In 1998 it rolled out its first home karaoke machine, which was an immediate hit, selling out its initial run of 20,000 units in less than two months. Last year Singing Machine launched a line of MTV-branded machines that has introduced the company to a whole new generation of wannabe warblers. Steele declines to break out the sales of the machines, but says, "It has allowed us to target an audience that we never reached before."

Next up: The company will introduce its Nickelodeon-branded machines this spring, to appeal to an even younger crowd. "We feel this could be an even bigger opportunity for us than the MTV line," says Klecha, "because we feel as they grow up, they will continue to associate karaoke with our name." And the company is setting its sights across the Atlantic. It signed a distribution agreement with British-based Arbiter Group this past fall and is working on a similar arrangement in France. Klecha is optimistic. "We think the market in Europe could be as big as here," he says.

It sounds good to John Montgomery, the fund manager of--among others--Bridgeway Ultra-Small Company, which has returned more than 21% per year over the past five years. Montgomery came across the company in 2000, when he heard his daughter's friends discussing the machines. Although he's seen the stock skyrocket since then, it still trades at a trailing P/E of just 15. "It's an explosive growth story, and it continues to blossom," he says.

Meanwhile Steele, who steps down as CEO in March 2003, is brimming with confidence for Klecha, his chosen successor. "The only problem John will have is holding onto the rail because the train is barreling down the tracks so fast," he says.

A little traveling music, please. --A.R.

KYLE KIRKLAND AND DANA MESSINA Steinway

If you're like most people, when you hear the name Steinway, you probably think of one thing: shiny, black grand pianos, the kind played by Diana Krall or Harry Connick Jr. You're not likely to think of flutes or saxophones or trumpets. But Steinway makes those too. In fact, after an acquisition binge over the past decade, Steinway Musical Instruments has emerged as the world's largest and most profitable maker of band instruments. Today the company dominates 13 of the 15 instrument groups it sells; pianos account for less than half of the company's sales.

When Kyle Kirkland and Dana Messina purchased Steinway in 1995, the company was still a keys-only outfit--as it had been since its founding in 1853--and management was content with its plodding growth. Still, the two former investment bankers knew that a piano sounds great, but an orchestra sounds even better. In 1993 they had purchased the bankrupt Selmer, a producer of quality band instruments, and restored it to profitability. That track record persuaded Jack and Bob Birmingham, who had owned Steinway for ten years, to sell the company to them, even though they had richer offers.

"We weren't the highest bidder," says Messina, "but the Birmingham brothers felt that we were the team to take care of Steinway for the long term."

That's a philosophy--quality over a fast buck--that Steinway continues to live by, even as it faces an onslaught of cheaper Asian imports. Looking to make more money per instrument, local U.S. distributors have in the past decade turned to private-label band equipment made on the cheap in China. They sell them to schoolchildren (and their parents), who don't know the difference. Yet Messina insists that his customers will pay more for a Steinway product, whether it's a piano or a piccolo. "Price," he says, "is always secondary to quality." (Want evidence? In the past five years 28 of the top college music programs around the world, including Juilliard and the University of Maryland, have replaced their cheaper--and sometimes free--pianos with Steinway models.)

Steinway's task now? To prove that it can at least maintain its solid earnings growth rate--15.5% annually over the past five years--now that its acquisitions are behind it. For starters, Messina and Kirkland hope they'll be able to cut costs as they integrate the Selmer division with the recently acquired United Musical Instruments. Some products overlap--in some cases, their manufacturing plants are in the same town--and analysts expect the company to squeeze some cost savings out of the integration. Meanwhile, band instruments remain a stable industry, even in unstable times. "It's not cyclical," says Buzz Zaino of Royce Opportunity. "It provides constant cash flow."

And then there's China: Asia already accounts for about a third of Steinway's sales. China, and its newly opened markets, represent a "huge opportunity long term," according to Larry Petrsoric, executive director of global high-yield research at UBS Warburg. Zaino expects continued earnings growth of 12% to 15%.

Messina, meanwhile, seems adept at keeping a healthy perspective on his company. "How many businesses can you be in where you make people happy?" he asks. "I'll never be Warren Buffett or Bill Gates, but I get to make a good living doing something I enjoy."

That's music to our ears. --A.R.

TIM PROBERT Input/Output

For many business owners, striking oil may seem like the stereotypical get-rich-quick scheme: Poke a stick in the ground and watch the black gold flow a la James Dean in Giant. But software maker Input/Output can tell you it's not quite that easy.

In fact, it took the Stafford, Texas, company two full decades to develop its core product, computer systems that help energy firms find underground oil reserves. Now CEO Tim Probert has changed his focus and is developing a new offering: sensors that will help them tap those wells dry.

Input/Output was founded in 1968, hoping to capitalize on the recently developed "2D seismic technology"--a rudimentary radar system designed to locate oil wells. Turned out it was a bit too rudimentary. The low-resolution images actually led to oil discovery only about 20% of the time. The company muddled through until the early 1990s, when next-generation radar systems (you guessed it: "3D") were finally developed. Suddenly, Input/Output could provide its customers with a much more detailed, accurate picture of those oil reserves--and improve oil companies' discovery rate to one in three. "It's like moving from a really crude sort of dot-matrix printer to a high-resolution laser printer," says vice president Bob Bunch.

As an energy services company, Input/Output is prey to the volatility of the energy industry for business. After operating in a depressed energy market throughout the 1990s, the company benefited from the recovery of oil prices last year. It saw increased demand from its land-drilling customers, including PGS and Sinopec. And as energy needs expand and interest in developing domestic natural resources increases in the years to come, Royce Funds senior fund manager Whitney George predicts that the stock will earn more than $1 per share, matching past peaks. (It now earns about 7 cents.) Though the stock is currently priced around $9, "we see no reason it can't trade as a $15 stock" in the next few years, he says. Even if those rosy predictions about oil prices don't pan out, George says the company has built its business to be profitable even in periods of low activity.

In the past couple of years, Input/Output has emerged as one of the most cutting-edge players in the $152 billion oil field services industry--taking the lead in 3D technology products. Still, Probert--who took over as CEO in 2000--knows that his company can't just wait for an energy industry boom or someone else's technological breakthrough to drive growth. That's why he's trying to create his own next-generation technology. "Today we can recover about 40% [of the oil] in a given reservoir," he says. "All companies are anxious to improve that percentage."

To tap into that business, Input/Output has developed a different line of products. Its new digital microsensors, which are placed inside wells and monitor the flow of oil over time, improve existing methods of extracting oil. "Some believe that by monitoring changes below the surface, you add a time dimension," George says, "making 4D technology." If he's right, this one could be a gusher. --J.K.

MICHAEL BROWN Euronet Worldwide

When Euronet worldwide said it wanted to build ATMs that communicated via satellite, bankers in one Eastern European country protested. "They said, 'Helicopters hovering above us could intercept that financial information and defraud us,' " remembers Euronet COO Dan Henry. In India, Euronet once tried to ink a deal with a bank that treated ATM cards as such an exclusive product that one of its customers asked the bank to hold his card in a safe-deposit box. And you think your clients don't understand your product?

In areas of Central and Eastern Europe where people still wait in long lines at the post office to pay their bills in cash, you might think ATMs would be a welcome alternative. But for Euronet, the company that has created the largest independent ATM network in that area of the world, finding customers hasn't always been easy. When the Leawood, Kan., company launched in 1994, many banks in Central and Eastern Europe were just beginning to provide electronic-payment options. Most consumers had never owned a checkbook--never mind an ATM card. So Euronet hired locals who could explain their product and attract new business.

Even with that homegrown network, the company suffered some early setbacks. When Henry went to Hungary to set up the company's first European operations, he had letters of intent from four banks. All of them reneged on their contracts. Then initial agreements with Visa and MasterCard fell through. Still, Henry remained unflappable. "Nobody could convince us that what we were doing didn't make sense," he says. That determination finally helped Euronet land a deal with Visa in November 1994; banks and other card issuers gradually caught on. Now, after just eight years in business, the company has set up operations in 12 countries, including Hungary, Poland, Croatia, the Czech Republic, and Romania, and owns and operates more than 2,500 ATMs. In the second quarter of last year, the company posted positive earnings for the first time. "That was real validation that financial people could understand," says CEO Michael Brown.

But Euronet's not done growing. The company has developed proprietary financial security software that gives bank customers secure access to their financial information via phone, Internet, wireless device, or ATM. In 2001 the company processed 68 million of those transactions in Eastern Europe and beyond, a number that has gone up each quarter over the past seven years. (Revenues followed suit, reaching $64 million, a 22% increase over the previous year.) Meanwhile, Euronet's partnerships with the likes of Deutsche Bank, ING, and Citibank will help it win more contracts in the years to come, says Stifel Nicolaus equity analyst Peter Heckmann, who anticipates revenue growth of 25% to 30% and earnings growth in excess of 50% for the next three years.

But Dan Henry says that, in the end, the company owes its success to its local representatives. As a result of their help, Euronet has been able to sign ten- to 15-year contracts with banks, meaning that the work it is doing won't disappear anytime soon. Says Henry: "What we're doing here will be around for the next 50 years." --J.K.