Paul Hollen has been in business for more than three decades. He's managed an industrial parts distributorship and worked as a stockbroker, and currently serves as executive vice president and chief operations officer for Southcoast Community Bank, which he helped found in 1998 in Mount Pleasant, S.C. The higher he's ascended the career ladder, the more the phone company has let him down. No matter which company he was dealing with or what the problem was, Hollen felt he was charged an arm and a leg for service that never failed to disappoint. The final straw came when he learned that he could not move a loan officer from one side of his bank to the other without calling in a technician. He began taking steps to get the phone company out of his life once and for all.

It wasn't difficult to do. Hollen simply purchased a PBX, or premise-based exchange -- industry lingo for a phone switching system -- that works with both the regular phone network and emerging voice over Internet protocol, VoIP, technology. Now, rather than going over the phone lines, most of Southcoast's calls take place over the bank's high-speed Web connection. Hollen uses a mouse to drag-and-drop employee phone numbers, making rearranging the office a cinch. If he needs to spend the day working in one of the bank's six branches, he can have his regular phone number follow him there -- again with the click of a mouse. Because the bank needs fewer phone lines, Hollen has shaved thousands of dollars a year off his phone bill. But even without the savings, he'd still be sold on VoIP. "The main business case," he says, "is the flexibility VoIP allows me to have in my system."

Entrepreneurs attracted to Internet phone systems to save money are surprised by the superior features.

If you know about voice over Internet protocol, it's probably because you've heard how much cheaper it is than regular phone service. But entrepreneurs attracted to Internet-based phone systems to save money are finding that the ease of use and superior features are what keep them coming back for more.

VoIP technology takes phone calls and turns them into digital files, which are broken into packets of data, sent through the phone network, and then converted back into voice calls on the other end. It's similar to how the Web handles e-mail. The advantage of breaking voice calls into digital packets is that you no longer need a phone line to make a call -- you simply use your broadband connection. It also means you can treat your phone calls like data files, which lets you fine-tune your phone system.

VoIP has made significant inroads among consumers eager to trim their long- distance bills. But businesses are catching up. Already, 20% of companies with fewer than 99 employees either have some sort of VoIP service or expect to purchase it in the next 12 months, according to Access Markets International, a New York City-based research firm. As the size of the company expands, so does interest in VoIP, with 39% of all firms with 100 to 1,000 workers expressing interest in or making plans to purchase the technology, AMI found. "There's definitely a transition going on," says Robert Benhabib, the firm's senior vice president.

Steve Fleury began making the shift three years ago. Fleury, president and COO of Cambria Bicycle Outfitters, a bike retailer and mail-order firm in Cambria, Calif., dumped his phone and data provider after huge headaches resolving billing questions. He signed up with a VoIP company called GoBeam (which has since been acquired by Covad Communications Group). Monthly savings have been about 30%. But equally important is that Fleury now gets a bill he understands. "Instead of a 60-page invoice with all sorts of weird crap on it," he says, "I get a bill that says you owe this much and here's what you used." New employees can be trained to use the system in less than an hour. Fleury also likes that he can save voice mails as files on his computer. Sure, there are some downsides. He misses the ability to redirect calls automatically when people are on the line, a feature he had with AT&T. But he likes VoIP well enough that he's finally selling his old PBXs, which he had kept just in case the new system didn't work. "We live and die by the phones, but VoIP's been pretty darn solid," he says.

VoIP is not for every small business. Some of the software systems have a hard time accommodating more than 10 users. And there's a flipside to VoIP's low costs. The service is so cheap largely because it runs over the public Internet -- which means it can suffer from service hiccups. "VoIP is not perfect," concedes Bryan R. Martin, CEO of 8x8, a Santa Clara, Calif., maker of VoIP software. But Martin says many of his small-business customers see the gain in features as enough reason to accept a small drop-off in reliability.

Another issue to consider is what would happen during a blackout. The phone companies run their own power generators; that's why you can still make a call when the power grid goes out. Not so the Internet. If your company requires absolutely rock-solid service, opt for a hosted service, such as Covad's vPBX and PBXi. It's pricier, but more reliable because hosted services route calls over a secure network rather than the public Internet. A bulletproof system, such as the one used by Southcoast's Hollen, can cost as much as $50,000. Whatever you buy, you may need at least one landline for your alarm system and 911 calls -- which many VoIP services do not support.

But even if VoIP isn't ready yet for your business, keep an eye out. With the technology spreading, some traditional phone companies already are trying to match VoIP's features and prices. Traverse Networks, a telecom start-up in Fremont, Calif., for example, is working with large wireless carriers on a service called InTouch, which includes VoIP-like features such as call management and a unified voice mailbox. Indeed, some of the coolest VoIP features are yet to come. For example, 8x8 plans to add a feature Martin calls "Hollywood Squares conferencing," which lets you put multiple people on the video screen at the same time.

Meanwhile, look for VoIP systems geared to specific kinds of businesses. A package geared to law firms, for example, will log phone calls into the firm's accounting systems automatically, making it much easier to account for billable hours. Companies of all sorts might integrate their phone systems with customer databases so customers on hold will be reminded of recent purchases or told of specials on things they might not have purchased in a while. Down in South Carolina, Paul Hollen is waiting with excitement. "I'm not smart enough to think of all the things we'll be able to do," he says.

VoIP Venders

Looking to ditch the phone company? Here are some options. (All charges are per month.)

8x8 Santa Clara, Calif. $35-$40per line
Free, unlimited videoconferencing.

Covad Communications Group San Jose, Calif. $37-$60 per line
Runs on a Covad T1 line, not public Internet -- that means better service.

Nuvio Kansas City, Mo. $40-$50 per line
Runs on phone lines, not the public Web, providing greater flexibility.

VoicePulse Jamesburg, N.J. $46 per line
Easy to use, but geared more to consumers than businesses.

Vonage Holdings Edison, N.J. $40-$50 per line
Service works best with fewer than 20 employees.