(FORTUNE Small Business) – Jerrie Norris is negotiating an ad with a salesman from Yellow Book USA. Along with her husband, Bobby, Norris owns an appliance business called Norris Repair Service in Manassas, Va. Today the salesman has a new proposal for her, a "surprise," he says. He opens the book to the appliance page, where he's pasted a replica of her ad but with a white background. Costs a little more, he says. Not much. But it really makes the ad stand out.

Overhearing the discussion, Bobby Norris walks up.

"What book is that for?" he asks. He has a lower lip full of fine-grain smokeless tobacco.

"The Yellow Book," she says.

"Oh," he says. "That's the best one. We've been getting results from that one. Been checking the coupons."

He turns to walk away, then turns back.

"And I'll tell you one more thing. That Verizon got my number wrong two years in a row." (A Verizon spokeswoman acknowledged the mistake but wouldn't comment on overall error rates.)

That testimonial is the kind that gets Joe Walsh excited. Walsh is the CEO of Yellow Book USA, which publishes yellow-pages directories and is the main competitor of your local phone company. Yellow Book and its competitors are also the major alternative to paid browser placements by small service firms whose customers are almost all local. And lately Yellow Book has been gaining ground--it now publishes more than 500 books in 41 states. Since Walsh became CEO in 1993, revenue has grown from $38 million to nearly $1 billion. A big part of that growth came through acquisitions, but a lot of it also stems from ads bought by people like Jerrie and Bobby Norris.

Business directories--or yellow-pages books--are an industry with $14 billion in annual sales, of which about 85% come from small business. "The return on investment for the ads is higher than any other media," says John Kelsey, president of the Kelsey Group, a Princeton, N.J., consulting firm specializing in yellow pages. Doctors and lawyers often have the highest return on investment, but the average among all businesses is pretty good--about $14 for every $1 spent. The ads work so well because customers see them only when they're ready to make a purchase. Some 90% of adults in the U.S. now use the yellow pages at least once a year, and of those, 90% make a purchase, spending 25% more than walk-in customers. "They're shopping based on need, not discounts," says Dennis Fromholzer, president of CRM Associates.

Most small businesses feel they need to be in the books. That worked against them back when their only option was the local phone company. Regional phone giants like Verizon still control 84% of the U.S. directory market, and their dominance has steadily driven up directory prices--and phone company profits. Margins for a long-established directory often exceed 50%. SBC brought in 21% of its operating cash flow last year from its directory business alone. At Verizon the SuperPages accounted for 14%. In Manhattan, a full-page ad in the Verizon yellow pages is listed at about $80,000, though that includes a web ad and is negotiable. Even in Richmond, a full-page ad is $48,000.

Walsh of Yellow Book USA sees numbers like that and thinks there's room for competition. "We are to the yellow-pages business what Southwest has been to the airline industry," he says. His company typically charges about half the phone company's official rate--in Manhattan it's $41,064; in Richmond it's $22,500.

"Sure, their ads are cheaper," counters Heidi Jaquish, a Verizon spokeswoman, "but price is just one piece of the equation. If there aren't as many people looking at their book, that's not a better value for the advertiser." (Verizon's circulation is higher in most markets.) Verizon also maintains that it is far more focused on its online directory, SuperPages.com. "Yellow Book is really a one-trick pony," says Verizon's Lester Chu, vice president of strategic planning and marketing. "They're only really focused on the print business." It's a point Walsh is willing to concede. Yellow Book does have a website, but it's not a major focus. "We don't think that online directories are a meaningful threat to print in the near future," he says.

That opinion might be worth listening to, if only based on Walsh's experience. Now 40, he's spent his adult life in the yellow-pages business. His first job as a teenager was selling directory ads, and he's never left. He pays a lot of attention to phone-book minutiae, and, as phone books go, Yellow Book makes some good ones: It was the first to publish cross streets and include a restaurant-menu section in the Manhattan directory. Its books are, believe it or not, yellower. They look the same in each market and always feature a local map on the front. Yellow Book even prints its directories a bit smaller than most of its competitors (eight by ten instead of 8 1/2 by 11), so that when people stack them, they'll put the slightly smaller Yellow Book on top. "We're shattering the cozy little monopoly the telephone companies have had on yellow pages for more than 100 years," Walsh says.

Ah, yes. The "monopoly." The newly competitive directory business has become a mudslinging kind of place. Yellow Book employees almost always refer to their competitors as the "monopoly," even though phone utilities haven't been monopolies since the AT&T breakup in 1984. Walsh has spent millions on a national ad campaign--"Yellow Book, not the other book"--that largely pokes fun at the big guys. For its part, Verizon put up billboards in Manhattan encouraging Yellow Book to "Get out of town."

Phone books were largely the domain of the Bell companies until the Telecommunications Act of 1996. Independents existed before that but largely on a local or regional level. The act ruled that the Baby Bells should be required to provide listings to independents at "reasonable rates" of about 4 cents a name. Since then independents as a group have almost quadrupled in revenue, to $2.3 billion a year, and are expected to make up nearly a third of the industry by 2007, up from the current 16%, according to the Kelsey Group. Thanks to about 40 acquisitions in the past 11 years, Yellow Book has become the leading independent. "They're excellent at integrating new books into their system in a way that takes advantage of economies of scale," says Kelsey.

It's a talent the phone giants could learn from, and in fact, some of them are starting to act more like independents: This year Verizon is planning to launch new books in 27 markets where it doesn't offer local phone service. And it says it has already replaced Yellow Book as the No. 2 book in two of those cities--Phoenix and Denver. The big question, as Kelsey points out, is "whether they have the culture that permits them to compete as an independent publisher against the independents."

Meanwhile, Yellow Book is still expanding, from the Norrises in northern Virginia down into Richmond. "We want every single lookup," Walsh says. "Every directory reference, nationwide."