(FORTUNE Small Business) - Entrepreneurs tend to stay at least one step ahead of the pack, and lately they have been widening their lead. Small businesses are generating so much that's new in our economy that more and more big corporations are buying them up to gain access to their research and development. With that in mind, we found a half-dozen entrepreneurs who have a new idea, business, or invention you're bound to be hearing about over the next year or so.

FILL 'ER UP WITH CARAMEL

Leftover halloween candy might not seem like fuel for anything but dental cavities, but Xethanol, a firm based in New York City, may change that perception.

Since 2003, Xethanol has operated two Iowa plants that can cheaply distill a gasoline additive called ethanol from bizarre sources such as stale butterscotch candy. When technicians mix the sweets with a special form of yeast, fermentation results, producing ethanol. (Typically producers of ethanol derive the clean-burning, high-octane fuel from corn.) Big oil companies then combine it with unleaded gasoline to reduce the cost of gas and the air pollution it causes.

Xethanol isn't just relying on candy for its fuel supply. This year it plans to introduce a process that will make it possible to turn all kinds of things--including cornstalks, grass clippings, and old newspapers--into ethanol. If all goes as planned, 59-year-old CEO and founder Christopher d'Arnaud-Taylor projects revenues of $15 million this year, up from $2.5 million in 2005--and the first-ever profit for Xethanol, which he started in 2000 and took public last February. "Where there's muck, there's money," he quips.

Xethanol will use a recently discovered form of yeast to ferment various types of garbage into ethanol. It has obtained rights to the process from the U.S. Department of Agriculture, where a scientist discovered that a yeast in the intestines of a type of beetle can convert plant-based waste product into ethanol.

This year d'Arnaud-Taylor intends to begin opening plants on the East Coast that will use yeast from the beetles to brew ethanol from sludge left over from paper milling. The plants will be able to make in total more than 100 million gallons of ethanol a year. That's a trickle, considering that Americans burn nearly 21 million barrels of oil every day. But it's a start. Thanks to federal subsidies and $60-a-barrel oil, it's a seller's market for ethanol. And even if oil prices drop below $30 a barrel, Xethanol needn't worry, say experts. "Relying on cheaper processes than competitors could help the company if prices fall," says Anthony Marchese, president of Monarch Capital Group in New York City. Good news. Unless, of course, Uncle Sam takes away those hefty subsidies. --JUSTIN MARTIN

SPACE-AGE SANDWICH

Thanks to Diana's Homegrown, a startup in tiny Lemitar, N.M. (pop. 200), you may soon have to consult an instruction manual before biting into your lunchtime sandwich. The company's patented Pull Out Pouch System is designed to transform the tuna-salad sandwich from an easily spoiled, soggy mess into a fresh and long-lasting meal. The technology extends the lifespan of an unrefrigerated sandwich by as much as a month--even longer if it is stowed in the fridge.

Later this year Native American senior citizens in northern New Mexico will be chowing down on the fare. And that's just a start. Target, the giant retailer, has tested the product in 16 stores. While Diana's Homegrown has yet to make a profit, founder and president Reggie Alsbrook, 55, expects sales to rise from $150,000 in 2005 to $4.2 million this year--or 108 truckloads of the stuff.

What makes the sandwich distinct from other pre-made fare is this: The filling stays away from the bread, in a polymer pouch. That pouch is hermetically sealed and placed inside a hand-cut trench in a French roll. Keeping the filling and the bread separated prevents bacterial invaders from spoiling the ingredients and the bread from absorbing liquid. Diana's Homegrown wraps and seals the sandwich in a plastic baggie with a red tab poking out of the top. When the day comes for devouring, the hungry user tugs that rip cord, which deploys the sandwich filling onto the bread.

In 2004, after appearing at a Sandia National Labs Supplier Showcase--beside biotech, optics, and other high-technology companies--Diana's was approved as an official Sandia caterer. Tressa Gaskin, who plans meetings for Sandia, says the sandwich "felt Space Age and tasted absolutely delicious. We all tried to figure out how they got that pouch to work."

Credit for the breakthrough belongs to William Noel Alsbrook, Reggie's father, a TV technician who spent a decade working on a way to rid the world of soggy sandwiches. He got a patent in 1998, just three weeks before he died at age 81. Honoring a request from his father, Reggie worked with a team from New Mexico State University to create a viable product. "We ran all types of stuff through it," recalls Linda Riley, a professor of engineering.

These days 15 employees manually produce more than 15,000 sandwiches, which wholesale for $2.25 apiece, in 24 hours. Within a few months, Alsbrook expects to raise money to buy a sandwich-assembly machine that will cut costs--and extend the lifespan of lunches everywhere. --EMILY ESTERSON

HERE COMES WI-FIDELITY

So you are relaxing at a crowded bar when suddenly a catchy new song starts playing on the radio.

"What's that called?" you ask.

"'Soul Meets Body,' by Death Cab for Cutie," says the bartender.

You could try to commit that to memory. Maybe scrawl it on a napkin. But what if you could simply buy the song instantly? MusicGremlin, based in New York City, is about to introduce a Wi-Fi MP3 player that connects to the Internet. "This untethers you from the PC, allowing you to download music directly to the device," says founder Jonathan Axelrod, 30.

Axelrod and co-founder Robert Khedouri, 36, are ex-McKinsey consultants and amateur musicians. Frustrated by the shortcomings they saw in existing MP3 players, they teamed up in 2003 to start MusicGremlin. They have raised more than $5 million so far from angel investors and venture capitalists.

That funding has gone toward developing the wireless MP3 player, a daunting technical challenge. To offer any kind of music selection, the pair had to convince major record labels that the product worked. They have successfully secured the digital download rights for two million songs featuring artists from Miles Davis to Madonna. Songs will be available for 99 cents apiece or through a subscription service for a monthly fee.

A web-ready MP3 player faces an obvious challenge: Users need to be in a wireless Internet hot spot to download a song (see sidebar). But such a device also makes some truly outré new functions possible. For example, MusicGremlins can, in most situations, communicate with other MusicGremlins, even without Wi-Fi. This feature market-tested particularly well with teens, according to Axelrod.

Picture two high school sophomores sitting in the back of a classroom, earbuds barely visible. MusicGremlin's community feature allows each to view the song the other is playing. They can also beam song titles to each other, accompanied by canned pop-up messages such as "Don't you love this tune!" If the friend agrees, she can purchase the song right away. Even if the classroom isn't a hot spot (most aren't), one student can download the song from the other's MusicGremlin. Mercifully, you can disable MusicGremlin's community function. That way fellow travelers can't push annoying song suggestions your way. Nor can anyone see that you're grooving on Hall & Oates.

MusicGremlin will retail for less than $400. It will be available online this spring and eventually, the firm hopes, at specialty retailers. Axelrod expects his product to remain a fringe player in the hypercompetitive market for MP3 devices. Realistically, he knows he can't take on an icon like the iPod. MusicGremlin's owners hope to license their software to a biggie such as Apple, Dell, or Philips. Axelrod claims that several major companies are testing it out. "That's probably the right way to go," says Shiv Bakhshi, an analyst with IDC in Framingham, Mass. "For an established company, it makes more sense to buy MusicGremlin's solution than to try to build one itself from scratch." --J.M.

EXPANDING THE JEAN POOL

A startup aims to help frustrated shoppers find off-the-rack blue jeans that actually fit.

A grueling shopping trip with his wife inspired Romney Evans, 28, to start a new online retailer that will help shoppers track down the jeans that fit them best. "Christina was practically in tears trying to find a pair that would fit," recalls Evans. So the MBA candidate at Babson College teamed up with classmate Jessica Arredondo, 27, to create True Jeans. This spring the Wellesley, Mass., startup expects to begin selling 15 nationally known brands that retail from $50 to $200.

Relying on a licensed search technology, the firm will give each style it sells a "fit rank," calculated by comparing a customer's measurements with the specs of each line of jeans. The challenge: making sure True Jeans' specs always match the manufacturers'. Says Patti Freeman Evans, a retail analyst with Jupiter Research in New York: "If they can do that, then this is a new and great idea." --ELAINE POFELDT

STRICTLY FOR BIG-PICTURE TYPES

Will digital picture frames--costing at least $800 apiece--click with consumers?

Americans bought more than 22 million digital cameras last year, adding billions of never-to-be-seen photos to those already etched on the hard drives of countless home PCs. That phenomenon prompted Mark Van Buskirk and Robert Jordan to start PhotoVu, a company that sells wireless-enabled digital picture frames. The partners used their savings to launch the company in April 2004 and offer three frames, with the fourth--a 23-inch with a wide-angle screen--now being rolled out. According to industry analysts, it is the first widescreen digital frame on the market.

Childhood chums Van Buskirk, 42, and Jordan, 41, were unemployed engineers in Boulder when Van Buskirk came up with the idea for PhotoVu. The company's frames sport high-resolution LCD displays and come with sophisticated proprietary software that allows users to access photos on a computer wirelessly (or using an Ethernet cable) and to display them in a continuous slide show. Because PhotoVu's software works with photo-management programs such as iPhoto, users can mix collections for viewing--say, combining childhood photos for a birthday party.

The lowest-priced model has a 17-inch display and an $800 pricetag; the 19-inch frames cost $1,000 or $2,000 for a higher-quality display, which is why PhotoVu's market right now is a niche: affluent gadget lovers. Even so, Van Buskirk projects that sales will break the $1 million mark this year. Marketing is limited to PhotoVu's website and to search-engine optimization to "keep prices as low as possible," says Van Buskirk. Orthodontists buy them to display before-and-after shots of patients' overbites, and funeral homes show photos of the deceased on them.

Andrea Wood, an analyst with Jupiter Research, eyes big potential for the frame. "There's a huge amount of growth in the luxury market," she says. According to InfoTrends Research in Norwell, Mass., only 2% of U.S. Internet users own digital photo frames. Van Buskirk expects prices to continue falling as the frames catch on.

Yes, that's true, but prices of consumer electronics products can drop quickly and dramatically, something that would cut into PhotoVu's future profit margins. Moreover, digital photography is a brutally competitive field, and there's no reason some giant competitor such as a Kodak or Hewlett-Packard couldn't come out with a competing frame.

Van Buskirk, though, doesn't seem too worried about finding customers because, as he says, "These frames change lives." Thomas Carter, co-founder of Access Electronics in Gurnee, Ill., and a PhotoVu customer can attest to that. "Every day I walk by and see a different period of our lives. I wasn't expecting that," he says. "I see this wonderful history I had forgotten about." --EILENE ZIMMERMAN

WHERE MUSIC FILLS THE AIR

I am meeting MusicGremlin co-founder Robert Khedouri at a Manhattan Starbucks, where Sheryl Crow's new CD is for sale. A compact disc--what a quaint relic. I ask Khedouri if I can simply download the title track--right here, right now--to a MusicGremlin.

He hands me his company's new Wi-Fi MP3 player. The device connects instantly to an online song library, and I can download a tune in about 30 seconds. "Let's go somewhere that has free wireless access," I suggest.

We start walking in search of one of the nation's 6,000 gratis hot spots, among them libraries, malls, and eateries. When we finally hit pay dirt, I download my wish list: "Gold Digger" by Kanye West, "After Midnight" by Eric Clapton, and Billie Holiday's "God Bless the Child."

Khedouri then suggests we switch our MusicGremlins into community mode. Now my player is connected to his player. Had a Gremlin-toting stranger passed by, his on-screen name would have shown up. In community mode, I'm able to see the title of the song Khedouri is listening to, "Daughters," by John Mayer. He beams it to me, and I can choose whether to buy it. I select "accept" in a dialogue box, and my MusicGremlin's song library grows fatter. Had this been for real, my credit card bill that day would have been $5 higher. --J.M.

A SPA FOR THE BUDGET-MINDED

A startup chain targets women who seldom splurge.

Many harried women would love a relaxing spa treatment but just can't afford to indulge. That's because a facial or massage can cost almost $100 in many cities, says Peggy Wynne Borgman, who runs the tony Preston Wynne Spas in Los Gatos and Saratoga, Calif. Borgman aims to change that.

To attract customers who lack the typical spa goer's household income ($150,000 and up), she plans to offer moderately priced walk-in services at a new chain called O'live Spa. Borgman hopes to open her first location in Silicon Valley this summer. By doing away with such amenities as lockers, which require extra retail space, and by using semiprivate rooms instead of private ones, she expects to be able to keep prices down. For instance, a half-hour "Great Skin" treatment in a semi-private room will cost $30, compared with $90 for a facial in a private room at her full-service day spas. The spas, which will range from kiosk size to 5,000 square feet, will open in malls and urban office buildings. Says Borgman: "For us to really mature as an industry, we've got to bring the benefits of spa-going to a much broader demographic." --E.P.

For links to Xethanol and other companies in these

stories and to give feedback, please visit fsb.com.