(FORTUNE Small Business) – If you heard screams of anguish on the afternoon that Wal-Mart announced it was adopting new inventory technology, relax. That was just the sound of small-business owners realizing that they would soon be required to deploy something called RFID, or radio-frequency identification--a sort of high-tech barcode. "Small companies have no idea what it will cost them, but they know it's going to be significant," says Christine Overby, senior analyst at Forrester Research.

But if you heard cheers, you were probably near the Morgan Hill, Calif., headquarters of Alien Technology. For five years Alien has worked to develop RFID products. This year--thanks in large part to Wal-Mart's announcement--Alien's customer base is expected to expand tenfold, quadrupling annual revenue. A second manufacturing plant in Fargo, N.D., is being built, and Alien executives say they plan to hire 300 more workers. Business today, compared with a year ago, says Tom Pounds, an Alien vice president, "is like night and day."

Alien is one of a half-dozen small companies that stand to gain from the sudden demand for RFID products. (The U.S. Department of Defense and German retailer Metro AG will also require suppliers to use the technology.) Wal-Mart's aggressive rollout schedule--partial adoption by top suppliers by the end of this year, full adoption by all suppliers by 2006--has set off a wild mating dance between companies that make RFID gear and those that will have to use it. Yankee Group senior analyst Mike Dominy estimates that $500 million will be spent this year on new RFID products and services, up from just a few hundred thousand dollars in 2003. By 2008, he says, RFID for supply chains will be a $4.2 billion market.

But Wal-Mart's mandate does not represent a final victory for the Aliens of the world. As suppliers experiment with RFID, most will test the offerings of several companies. And small firms are expected to face tough competition when giants such as Philips and Texas Instruments introduce new RFID products this year. "It's still anybody's game," says Ed Rerisi, top analyst at ABI Research of Oyster Bay, N.Y. "By 2005 we'll know the winners and losers."

The concept of using radio frequency to identify items and their location dates to World War II when Allied forces used it to avoid shooting down their own planes. State systems from New York's E-Z Pass to California's FasTrak use RFID to speed cars through tollbooths, RFID helps drivers pay quickly for gas with Mobil's SpeedPass, and farmers from the U.S. to New Zealand use RFID to keep track of cattle and sheep (see page 66). But as an inventory-management tool, it's relatively new.

An RFID system consists of three main products: tags, readers, and software to make sense of the data being exchanged. The tag--a sticker with an embedded chip and antenna that would be slapped onto the side of a box--uses radio signals to transmit identifying information to a reader. The reader then relays that information to a central system, which matches it against a database containing more detailed data about what's inside the package and where it needs to go (see box). Unlike barcode systems, the RFID setup can collect information in milliseconds, and doesn't require a clear line of sight to scan.

In ten to 15 years RFID could streamline the way products are sold throughout the country. Imagine zipping your grocery cart through a checkout line and instantly receiving your receipt. For now, though, Wal-Mart and others plan to stick RFID tags on pallets and cases of goods, not individual items.

Analysts say that Alien is in a good position to claim a big chunk of that market. Its great advantage is its manufacturing technique, which attaches the antennas to the chips in bulk instead of one by one. Pounds says that will allow Alien to bring its tag price down to "well under" 10 cents apiece in two to three years (today tags cost 30 to 40 cents) and still remain profitable.

Another promising startup is Matrics, based in Columbia, Md. Today RFID reading accuracy can vary widely. Matrics tags have two antennas instead of one, and they are placed perpendicular to each other, which, vice president Tom Coyle says, makes it easier for RFID readers to pick up the signals. In demonstrations, he adds, Matrics' system has shown a 100% reading rate on tags attached to boxes placed six inches apart and flying 600 feet a minute down a conveyor belt. Matrics--which developed its system in partnership with Siemens--expects revenues to quadruple this year, Coyle says. (Like Alien, Matrics is privately held. Mark Roberti, editor of RFID Journal, an independent trade publication, says he expects each to pull in $15 million to $30 million this year but warns that figure could be low.)

Both Matrics and Alien boast some high-profile clients. Gillette has agreed to buy millions of Alien tags over the next several years. Manhattan Associates, a software firm based in Atlanta, which has invested $2 million in Alien,bundles Alien's tags and readers with its own warehouse-management software and sells the package as an all-in-one RFID kit. International Paper, which makes its own warehouse tracking software, is both a Matrics customer and a partner; it has placed an order for ten million Matrics tags over the next several years.

In the end, Alien and Matrics may not need to prove they can compete against bigger companies such as Philips and TI. Some analysts expect the smaller firms to be acquired. "Alien and Matrics--in fact, almost all startups in the RFID market--are potential takeover targets," says Roberti. If he is right, the target firms can thank Wal-Mart for putting them on the shelf.