Stone Artworx posted record profits in January 2003. "We were hitting on all cylinders," says owner David Stone. He had rebuilt the Phoenix glass and ceramics manufacturer following a 2001 kiln fire. Unbeknownst to Stone, however, authorities 2,100 miles away in Pittsburgh were preparing a sting that would ultimately put his company out of business.

Stone, 39, had purchased the operation three years before, with the help of a $490,000 loan from CIT Small Business Lending Corp., a Small Business Administration preapproved lender. The bankers toured the 25,000-square-foot plant and reviewed a catalog, Stone says, so they knew his main products were pipes and hookahs, commonly used to smoke pot. The business had other lines, too: piggy banks, Christmas ornaments, and dildoes, which had jumped to 40% of sales thanks to fortunate product placement in a Jenna Jameson flick.

"We were known worldwide," says Stone. "Rock stars came calling."

Neither SBA approval nor a diverse inventory mattered to U.S. Attorney Mary Beth Buchanan. With the blessing of Attorney General John Ashcroft--and the manpower of 1,200 law enforcement agents--she was coordinating Operation Pipe Dream, a crackdown on the sale of drug paraphernalia. In waging the war on drugs, she says, "you don't simply arrest dealers on the corner--the sale of paraphernalia is a multimillion-dollar industry that supports the drug trade."

On February 24, 2003, Stone awoke to find police cars, their lights rolling, parked in front of his home. Drug enforcement officers wearing Kevlar vests and carrying automatic weapons shackled him. A sales manager and Stone's mother (she'd combined assets with her son for the loan) were also arrested. Stone Artworx was cordoned off as a crime scene.

Nationwide, the unprecedented raids shuttered 55 businesses. Though making drug paraphernalia is illegal, the government has long chosen to ignore bong makers and headshops. "The whole time I owned Stone Artworx, nobody, including police officers I ride Harleys with, said it was illegal," says Stone.

In September, Stone pled guilty to one count of conspiracy to sell drug paraphernalia and received a year's probation and 120 hours of community service. His commercial assets, recovered by the bank, sold for $12,000. Undaunted, Stone is hoping to get back in business--this time as a mortgage broker.