(FORTUNE Magazine) - The highest and best form of efficiency is the spontaneous cooperation of a free people. -- Bernard Baruch, financier and Roosevelt advisor, 1870-1965.

It seemed like a typical company holiday party. The brandy and eggnog flowed freely, although it didn't seem to loosen up any of the attendees. "Smile and make pleasant talk while you serve, please," instructed the fellow who had cast himself as Santa.

There were plenty of gag gifts: a luxury flat overlooking the Kremlin for Victoria, who was moving to Moscow; growth-enhancing supplements for Domas, who hovers at 6-foot-4. And, of course, the requisite tasteless humor. All standard fare for an office party--except that there was no office.

Thomas Basil, director of support at MySQL (pronounced "my S-Q-L"), a $40 million software maker, staged the event online, playing Santa while dispensing virtual drinks and gifts to staffers scattered in such outposts as Russia, England, and Germany. To accommodate the different geographies, Basil started the festivities on a December day at 10 A.M. in Baltimore, where he lives. (His clocks are actually set seven hours ahead to Helsinki time, the time zone of many of his team members.) "When a company is as spread out as this one," Basil explains, "you have to think of virtual ways to imitate the dynamics of what goes on in a more familiar employment situation."

That neatly sums up the broader challenge that many companies are confronting: how to nurture a bond among workers who rarely, if ever, meet.

Few businesses are as spread out as MySQL, which employs 320 workers in 25 countries, 70 percent of whom work from home. (MySQL's database software is open source. That is, it offers access to its software's source code free and hopes in return to get its customers' help in identifying and fixing bugs and creating new features.) As the face-to-face world diminishes, managing technology-tethered teams effectively - as MySQL and the user-generated online encyclopedia Wikipedia do - might determine which competitor prevails.

How on earth do these virtual organizations get anything done? Management gurus have been preaching since the early days of Peter Drucker that workers must be organized into corporations with strict boundaries (between, for example, employees and customers) and a centralized physical plant (the headquarters). Based on those criteria, a remotely controlled entity such as MySQL begins to look no more managerially sophisticated than, say, your average garden club.

But peer inside such an oddly configured company, and you'll find someone at the top who has thought very deliberately about how to execute effectively in the virtual world, managing communications resources and human ones in such a way as to keep participants feeling valued and connected. As pioneering as those folks may be, they are hardly soft-headed idealists.

"I have a very low opinion of human nature, which is that people are both greedy and lazy," declares Michael "Monty" Widenius, co-founder and chief technical officer of MySQL, which is based in Cupertino, Calif. "Of course you have noble people, but they are a small fraction."

Twenty-five years ago, author Tracy Kidder mined improbable turf for a page-turner: a bunch of geeks at Data General Corp., a leading maker of minicomputers. His account of deadline-driven dynamics inside an engineering cabal trying to build a new product in time to prop sagging sales ended up winning him a Pulitzer Prize.

Open The Soul of a New Machine today, though, and you'll see that it's not just the story of a desperate company about to be fatally blindsided by the arrival of the PC. The book also preserves an antiquated notion of teamwork, where technology came between people and everyone worked everything out over pizza and beer.

But these days effective team-building, in the MySQL mode, may come from knowing when not to send an emotional e-mail or why the phone is necessary for certain interactions.

The 51-year-old Basil, whose basement office is next to the family's overworked washing machine (he is a father of six), has developed strict guidelines that govern his online conduct. In the morning, when he first signs on to the company's Internet Relay Chat (IRC) - a postmodern version of the CB radio that acts as a companywide chatroom and offsets the isolating aspects of e-mail - Basil makes sure to greet every support-team member by name.

"It sends a message that each individual is important to me," says Basil, who deliberately tries to "build the humanity" into virtual work, which consists of "lots of solitude and technology."

That job description calls for CEOs who are willing to choose new hires in a different way. Hiring for attitude? Stop, and focus on abilities. Looking for team players? Think again--these employees will have only themselves to mutter at most days.

MySQL hires strictly for skills, assessing raw talent by watching prospective workers grapple with technical problems. CEO Marten Mickos, who works in the 30-person home base, has hired many an engineer sight unseen. By some accounts that's just as well. ("We have people with lots of tattoos," notes Widenius. "Some of them I would not like to be with in the office every day.")

From a safe distance Mickos will ask such questions as "How do you plan your day?" If a reply comes back that says "I always sleep until 11 A.M., and then I start working," Mickos doesn't want to hear any more. He's sold. "The brightest engineers like the calmness and coolness of the night," he says.

He is also wary of hiring "young men without a wife or a girlfriend or a dog or parents. They are at risk because they can get so immersed in their job that it drives them crazy. We don't want the type who read e-mails on their way to brush their teeth. They need a life."

Naturally his final question is "By the way, where do you live?" "I'm not the sort of CEO who needs to see everybody sweat and work hard," says Mickos. "These are passionate people who aren't going to stop because somebody isn't looking." Software developer Oleksandr "Sanja" Byelkin, who lives in the southeastern Ukraine city of Lugansk, was hired in 2001 without ever having spoken to a soul at MySQL. "My ability with spoken English was not so good," says Byelkin, 33. While his English has improved, the spotty phone service where he lives still serves as a handy barrier. (We were disconnected twice.)

People at MySQL match the technology to the task. Besides IRC, the company relies on Skype to allow people to make free voice calls over the Internet - and just as important, to keep themselves from perishing in what can quickly intensify into category 5 e-mail storms. MySQLers are also known to fire up a chat session on the side while on a conference call with a customer - the digital equivalent of kicking each other under the conference table. Basil's rule: "Voice is more personal than text and more helpful in building real understanding."

This flexible approach helps keep people engaged during companywide meetings, where it's impractical to let everyone chime in. When Mickos gets the whole staff together - not to be confused with gathering them in one place - he relies on a system he has dubbed "Radio Sakila."

Named after the company's dolphin mascot, it combines a typical conference call with instant messaging so that employees can get their questions addressed. Those who want to send messages anonymously can do so by routing them through the HR director. At one of these quarterly confabs, Basil messaged his boss that what he was saying was unrealistic. Soon after "I got back a three-paragraph personal reply," recalls Basil. "That builds loyalty."

MySQL managers also learn to evaluate people and give feedback differently.

Productivity is measured strictly by output; mushy factors like charisma don't pertain in cyberspace. It may be easier for laggards to hide in a virtual company, but they can't do so for long. Despite the informality of the structure--it is often impractical to follow a strict chain of command, and much more efficient to grab a colleague by the virtual collar and ask for help--all employees become watchful citizen sheriffs. They can see how often a colleague pops up on, say, tech-support mailing lists or conference calls or IRC chats.

The company has developed software called Worklog, which requires employees to check off tasks as they finish them. It may be possible to fake certain electronic cues, but workers also fill out weekly reports, which serve as the official record of what they have accomplished.

"We are strictly a management-by-objective company," says Erik Granstrom, a marketing manager. "If you don't produce what you say, you will only get so many chances." (Granstrom, a 50-year-old former veterinarian, has his own management problems. During our phone conversation his 13 sheep escaped and were last seen charging toward his garden.)

It's not as if MySQL workers get some perverse kick out of catching colleagues goofing off, though. They know how common it is for e-mail or voice messages to be misconstrued, so they watch what they say. Fire off a dumb question to one of MySQL's mailing lists, and you are likely get back the terse rebuke "RTFM"--read the freakin' manual.

The watchdog system also allows MySQL to spot talent among the company's army of volunteers - a minor league for software programmers.

Shawn Green, 39, joined MySQL in May and works out of a converted dining room in Blountville, Tenn. A former MySQL customer, he was discovered by one of the Russian developers who was monitoring an IRC channel where Green was active. MySQL has brought aboard more than 50 employees from its user group, reckons Kaj Arno, vice president of community relations. The possibility that they might get hired fires up outside contributors.

In some circles, it's considered prestigious to have had the company accept a fix you've made. And MySQL will make sure everyone knows it, touting such achievements in documentation, inserting names into press releases, and bestowing awards at the company's annual users' conference.

All of which is nice. But it's straight out of Tom Sawyer: Civilians are being enticed to work free. MySQL owes them nothing for their efforts. "Nobody is kidding themselves about what is going on here," says Arno. "The users provide the company with bug reports and with word of mouth."

How long can that last? Eventually, it would seem, these hard-working geeks are bound to feel exploited--or migrate to another product's fan club. Even Widenius acknowledges the possibility. "These users have their own needs to satisfy," he says. "Their main motivation is that they are lazy, and once they fix a problem, they want the fix to be in the next version of the software so they don't have to make the same changes again."

If he's right, then users will help MySQL only so much. And employees, for their part, may turn lonely and restless in their makeshift home offices. Being on any team is draining, but the virtual kind never fully disbands at the end of the day--because there is no end. As Jimmy Buffett might put it, It's 9 A.M. somewhere.