(FORTUNE Small Business) – In a lab tucked away on the lakeside campus of the University of Wisconsin, two scientists were working on a way to revolutionize the treatment of cancer. It was 1997, and Thomas "Rock" Mackie and Paul Reckwerdt, known around Madison simply as "Rock and Paul" (said in a clipped cadence, like "rock & roll"), were building a machine that would make a radiation beam lock onto a tumor like a heat-seeking missile going after an enemy jet. The research project was largely bankrolled by General Electric, which had been providing about $700,000 a year. But GE Medical, deciding the project would never amount to a major business, suddenly abandoned the technology. For Mackie and Reckwerdt, losing their major backer triggered a crisis.

Most people would have given up, but for these two the project was personal. Mackie's mother had died of cancer after what he describes as "substandard" radiation treatment, and his brother had also succumbed to the disease. Reckwerdt had lost both his uncle and his father-in-law to cancer. Rock and Paul even kept a hope chest in the office in which they placed mementos of their lost loved ones. So with $1.5 million the two had netted from a medical software program they had just sold, they took the technology GE had dumped and started a new company called TomoTherapy. Says Mackie: "It was Jack Welch's loss and our gain."

After 15 years of development, TomoTherapy has just begun selling a breakthrough cancer-fighting machine called the Hi-Art. A combination CT scan and radiation gun, the Hi-Art lets a doctor clearly see a tumor and then simultaneously zap it with radiation with pinpoint accuracy--a medical first.

Dr. Eric Rost, director of the Southeast Regional Cancer Center in Tallahassee, has been using the Hi-Art for about six months. So far he has treated only a handful of patients, but he says he's getting remarkable results, including dramatic tumor shrinkage and diminished side effects, even in people with rare or rapidly metastasizing cancers. "This is probably the biggest innovation we've had in radiation treatment since 1950," says Rost.

He's not alone in his enthusiasm. The Hi-Art received FDA clearance in 2002, and so far cancer-treatment centers have installed eight of the $3.2 million machines. Another 26 have been ordered. Buyers include the Methodist Hospital in Houston, the University of Virginia Medical Center, and the University of California at Davis in Sacramento. TomoTherapy expects to generate $40 million in revenues in 2004 and turn its first-ever profit.

That could be just the beginning, because the potential for the technology is huge. According to TomoTherapy's market research, 7,500 traditional radiation machines (called linear accelerators, or "linacs" in doctorspeak) are in operation worldwide. This year 400 will be replaced, and 300 additional units will be purchased at about $2.3 million each. That adds up to an annual linac market of roughly $1.6 billion worldwide. (Larger treatment centers often have ten or more linacs from multiple manufacturers.) Throw in an x factor: Over the past quarter-century, cancer has grown as a cause of mortality. It accounted for 19% of deaths in 1975; that number has grown to 25% today. The simple explanation: As other diseases, such as smallpox, are eradicated, something still has to ultimately end a person's life, and cancer is increasingly the culprit. It is the No. 2 killer behind heart disease. So the need for linacs will only increase.

At the same time, TomoTherapy remains a small, financially vulnerable company peddling an extremely promising but unproven therapy. As recently as last year the company, which had raised $21 million from eight VCs and a dozen angel investors, was burning through $1 million a month, and for a good part of that year it was limping along with less than $1 million in the bank. But the company is relatively flush at present, with more than $10 million in cash on hand.

Meanwhile, TomoTherapy's field, already competitive, is about to get more crowded. Goliaths of the radiation oncology industry, such as Siemens Medical Solutions and Varian Medical Systems, are racing to bring out products that will go head-to-head with TomoTherapy's Hi-Art. For a small company born in a university lab and lacking the resources and marketing polish of its rivals, it will truly be a clash of brains vs. brawn.

If the folks at TomoTherapy do have anything going for them, it's brains. Mackie, 49, the company's chairman, still teaches at the University of Wisconsin at Madison in the medical physics and human oncology departments. Among academics, the native of Saskatoon, Saskatchewan, has an international reputation. Reckwerdt, 52, Tomo's president, is a self-taught techno-whiz who grew up in the Illinois countryside and later landed a post as a research scientist at Wisconsin. That's where the pair met. "We have this camaraderie based on this combination of complementary weird-assed skills," says Reckwerdt, who did the brain-sizzlingly complex computer programming on Hi-Art.

Mackie and Reckwerdt first began thinking about how to better battle cancer in 1988. There are three main methods for treating tumors: radiation, chemotherapy, and surgery. But because of its effectiveness and versatility, radiation remains the primary tool, used in roughly 50% of cases. It can fight the disease in many of its forms, including those affecting the brain, breasts, lungs, and prostate.

The founders noted a troubling deficiency in the traditional way radiation is used to treat cancer. Typically the disease is first detected using a CT scanner, which generates a high-resolution image of the cancer. Oncologists rely on those scans to draw up elaborate treatment plans. By the time a patient actually receives radiation treatment on a linac, however, weeks or even months may have elapsed. The cancer may have grown or changed shape, or perhaps the patient has lost weight, causing the tumor to shift position. That initial CT scan is now way out of date. Because time is needed to interpret such scans, it's not possible to take a fresh one at the time of treatment.

Of course, doctors have various techniques--none ideal--for dealing with this conundrum. A common practice is to take an X-ray. Many conventional linacs have the ability to produce X-rays, rough images generated by the same radiation beams used to attack the cancer. But relying on imprecise images carries grave dangers. Say a tumor the size and shape of a marble appears to be slightly larger than it actually is. That can prompt a doctor to deliver radiation outside the contours of the tumor, in the process damaging healthy tissue. If rockets depended on such poor guidance, they'd miss the moon.

Sometimes small cancer clinics rely on shockingly crude approaches. TomoTherapy's founders even came across doctors whose standard practice was to take a conventional X-ray right before treatment, then use a felt-tip marker to draw targets on the patient's body, and aim the radiation at the bull's eye. "You think medicine is at the leading edge of technology," says Reckwerdt. "But I'd go to clinics and see what doctors were actually doing. I'd think, 'My God, this is archaic!' "

The key, Mackie and Reckwerdt realized, was to figure out how to provide high-quality imaging and radiation at the same time. Put simply: See the cancer better, and it's possible to fight it more effectively. "We started looking at ways to combine a CT scanner and a radiation treatment device," says Mackie. "It was the Holy Grail."

The founders didn't stop there. Conventional linacs are best described as point-and-click devices. They fire their radiation beams from just a handful of angles. Mackie and Reckwerdt started thinking about placing a linac inside a ring that the patient would pass through while lying on a motorized couch. All the while the linac would be circling inside the ring, traveling 360 degrees around the patient, firing off beams. The ability to come at a tumor from myriad angles--known as helical-dose delivery--might provide more accurate routes for hitting the tumor while at the same avoiding healthy structures, such as the spine and kidneys. "Being a Canadian, there's this image I had in my mind," says Rock. "When you wrap a hockey stick in tape, you go around and around and around. It's a simple technique, but it's the best way to make sure you don't miss any spots."

As promising as the new technology seemed, Mackie and Reckwerdt struggled to raise money after GE pulled its funding in 1997. Just to get the enterprise going, the pair needed to raise $3 million. Ultimately they would require $28 million. They made the rounds of venture capital firms but with little luck; amid the dot-com mania, potential backers tended to be underwhelmed by the prospects of a massive piece of capital equipment. One venture capitalist even suggested they recast their 9,000-pound machine as an Internet application! Other VCs said that before they would consider the funding, Mackie and Reckwerdt should move operations from Madison to where the action was, in Silicon Valley.

The pair didn't land a single venture capitalist on either coast. Much of their funding came courtesy of Wisconsin VCs, which account for a mere 0.04% of the nation's venture pool. Basically Mackie and Reckwerdt had to max out the corporate credit line and dip into their personal savings. But finally they raised enough to build the Hi-Art.

Some financial relief came from the sale of a preproduction model in 2000 to the London Regional Cancer Centre in Ontario. That same year the pair decided it was time to bring in a proper CEO: John Barni, a 28-year veteran of Marconi Medical, who boasts some not so "weird-assed" skills the founders lacked, such as manufacturing and marketing. During his tenure at Marconi, Barni, 62, was involved in the early days of two world-changing medical technologies, CT scanners and MRIs. By the time TomoTherapy came calling, he was contemplating retirement, but he was drawn to the challenge of bringing a third revolutionary device to market. He started recruiting the type of talent--in marketing, finance, and personnel--necessary for a small business to grow. Today TomoTherapy operates out of a 65,000-square-foot glass-and-steel facility on the outskirts of Madison. There are 110 employees, and that 26-order backlog has them scrambling.

Mackie and Reckwerdt like to joke that they are the "Ben and Jerry of radiotherapy." They are big believers in a flexible workplace and allow employees to telecommute or put in noon to 8 P.M. days, provided they do their jobs effectively. After six months' service, all employees are granted options to purchase private stock, which becomes valuable when a company goes public. The founders may have chosen to remain in Madison, but they have imported a slice of Silicon Valley option culture. "We're a California company right here in Madison," says Barni.

Though sales have been rising fast enough to please even the greediest Silicon Valley venture capitalist, TomoTherapy's success is far from assured. Plenty of docs say they are not sold on the device. Here a ready analogy is pro golf. Clubs from different makers offer different characteristics and feel--and it's inconceivable that one model could meet all needs. The same goes for linacs. Some oncologists, for example, believe that it is preferable to treat cancer patients with a range of radiation energy levels. Despite the Hi-Art's spiraling dose delivery, it shoots beams with only one energy level. Some models of linac made by competitors such as Varian offer a range of settings. Lower energies are used to treat surface cancers, such as melanoma, while higher energies are often seen as preferable for deep-seated tumors. "They have a tough road ahead," says Julie Schumacher, medical technology analyst with Hibernia Southcoast Capital, an investment bank in New Orleans. "The bar for any new competitor is really high because the market is utterly dominated by Elekta, Siemens, and Varian."

So the question becomes, Will TomoTherapy be able to achieve a first-mover advantage? It's going to be difficult, because even though Tomo has patents on certain aspects of its machine--such as its radiation system--that's not enough to keep competitors from building products that also combine high-quality imaging with radiation treatment. Later this year Elekta, a Swedish company with $350 million in annual revenues, will start delivering the Synergy, which will directly compete with the Hi-Art. Already Elekta claims to have booked more orders than its Wisconsin rival, and it is offering its machine at exactly the same price, $3.2 million.

More ominous still for TomoTherapy is the decision of Varian to enter the fray. The $1-billion-a-year Palo Alto medical-devices company is widely admired for innovation and savvy management and is the market leader, with 60% of linac sales. It has installed thousands of traditional radiation machines and has existing relationships with nearly every major cancer treatment center in the world. Later this year Varian also expects to introduce a new linac that will compete directly with the Hi-Art. Like Elekta, Varian says that it has figured out how to combine imaging and treatment in a conventional linac, whose point-and-click operation is familiar to treatment specialists. "I give the Tomo people credit," says Tim Guertin, Varian's president of oncology systems. "But their six-month advantage is not going to last. Tomo has a boutique machine at best."

Barni believes that Tomo can preserve its first-mover edge by continuing to innovate faster than the giants. "That they're coming out with rival products is a tribute to our ingenuity," says Barni. "I have no doubt we'll be able to stay ahead of the competition."

How that will play out is anybody's guess. But when companies battle so ferociously over a new cancer treatment, it's good for everyone--especially the patient.