(FORTUNE Small Business) – There was a time not long ago when it seemed as if no home in this country could do without a spy camera--at least based on the steady stream of pop-up ads for them. That was back in 2001, when a Los Angeles startup called AdvertisementBanners.com looked poised to dominate the online advertising industry. Among its growing list of customers, for which it designed and placed pop-up ads on websites such as AltaVista and Yahoo, was a prized client named X10. (Who can forget X10's ubiquitous ads featuring slinky models?) But then, says AdvertisementBanners.com founder Tim Vanderhook, he made what he now considers a terrible misjudgment: He trusted his biggest customer.

The result? By July of that year, he claims, X10 had hijacked his confidential marketing research, copied his technology, and shredded his reputation. Vanderhook tried to protect himself. When X10 first asked for sensitive marketing and pricing information, saying it wanted to advertise its spy camera more effectively, he insisted that the company sign a nondisclosure agreement. Nevertheless, he says, X10 used the pricing information to ink better ad-placement deals directly with sites like Yahoo. Not only did AdvertisementBanners.com lose its biggest client, but X10 wouldn't pay the $550,000 it already owed. That left Vanderhook unable to pay his bills, damaging his standing. "X10 ruined our credit with the sites, forcing us to default on our payments. Suddenly we had a $1 million reversal in cash flow." (X10's publicist and lawyer did not respond to numerous interview requests.)

Vanderhook sued. In November a California jury ordered X10 to pay $6.5 million in damages to Vanderhook's company. But X10 declared bankruptcy just days before the ruling. "We've been awarded, but now we can't collect," says Vanderhook, 22. "Go figure."