With large-cap tech stocks starting to feel a touch of vertigo from their dizzying rise in the momentum-based bull market, many investors are starting to look for smaller technology companies.

There was heavy pressure on large-cap technology issues throughout this week's volatile trading sessions. For example, on Tuesday, the fact that the Nasdaq Composite ended in positive territory after being down nearly two percent earlier in the day made little difference for some of the large-cap issues. For example, Microsoft dropped $1.06 (1.1 percent) to $98.56, and Cisco Systems lost $2.50 (1.9 percent) to close at $128.

If you are one of those people who hold a highly volatile portfolio stacked with multibillion-dollar capitalization Internet and technology stocks, it's gut-check time. As some small and mid-cap technology veterans support more modest valuations and draw up Internet stories, they've become more enticing.

SMALL-CAP POP

"We're seeing a lot more opportunity in the small-cap arena," says Carl Wilk, senior portfolio manager at Munder Capital Management. "A lot of companies are taking advantage of the Internet."

Investors such as Mr. Wilk, who manages a small-cap fund, have been following the activity in smaller capitalization stocks, which are becoming increasing popular as the larger tech stocks reach valuations in the triple-digit billions and the prospect of infinite parabolic growth seems less realistic. Though some of Mr. Wilk's picks border on mid-cap -- in excess of $1 billion in market capitalization -- he notes that it's becoming harder to find a true small cap and that $1 billion may now qualify as small cap.

Small-cap technology stocks have been largely ignored in the current long-running bull rally. But lately, Mr. Wilk has seen some of the sleepier sectors -- such as small-cap biotech and technology -- heating up.

Mr. Wilk likes to look at what he calls "old technology" companies that may be reinventing their approach for the Internet. For example, he likes Remedy, which makes network help-desk software, and Intervoice-Brite, which makes interactive telephone response systems.

"It's gone from $10 to $35 and it's still undervalued," says Mr. Wilk of INTV. He notes that both Intervoice and Remedy are relatively mature technology companies that have refurbished their businesses for the Internet, yet they trade at valuations more in line with fundamentals than some of the younger tech plays.

For example, Intervoice is selling phone response systems to Internet companies with customer-service call centers. After notching revenues of $240.8 million in the past four quarters, it's trading at a market capitalization of about $1 billion, giving it a modest price-to-sales ratio of 4.1. Revenues have grown 100 percent over the past year, and the company is supporting a relatively modest price-to-earnings ratio of 43.2 to 1.

Mr. Wilk is one of those investment managers who sounds weary of the character of the recent market. "It's been a strictly momentum market characterized by very high valuations and hot money chasing hot stocks," he says.

M & A PLAY

Viraj Parikh, principal at Topaz Capital, a hedge fund that specializes in technology, is also considering some smaller capitalization technology plays. "I think with big-cap tech, there are a lot of big numbers going on here, and it's hard to get the same juice you got for years in Microsoft, Cisco, Intel, and Oracle."

Mr. Parikh says that smaller technology companies may continue to benefit from the boom in mergers and acquisitions. "You've got to buy instead of build," says Mr. Parikh. "It's about speed to market. There is plenty of innovative technology out there, and small-caps are fast to market. If you're a big-cap, you've got to justify these valuations and acquire some revenues."

One small-cap idea that Mr. Parikh is following is Excelon, a provider of object-oriented database and XML tools formerly known as Object Design. Just a year ago, Object Design was a struggling company trying to pitch the somewhat arcane benefits of object-oriented databases. By focusing on emerging technologies such as XML, rebranding its marketing image, and giving the company a new name, the company was able to refocus its technology prowess on a hot Internet growth area.

TRIAL OF THE CENTURA

Another such story, not mentioned by either of the fund managers interviewed above, comes from Centura Software. Centura made news on Tuesday by signing an agreement with Samsung Data Systems America to distribute its eSNAPP database synchronization tool, which will be used to connect handheld computers to legacy health care systems. The company's stock rose 88 cents (10.1 percent) to close at $9.50. Trading at a market capitalization of $305.5 million, Centura is a true small-cap technology stock.

The company, formerly known as Gupta Technologies, has been overhauled during the past two years by CEO Scott Broomfield. The stock was dead in the water as recently as October -- trading under $1 a share -- until the company announced a deal with Nocom AB (Stockholm: NOCMB SS) to develop Wireless Access Protocol (WAP) technology for eSNAPP. The company followed up that deal with a technology partnership with SAP for MySAP.com.

Centura's customers (former Gupta customers) appear to be sticking by the company and are excited about the potential for the database products to be ported to an Internet appliance market. "You're looking at a 12 million user market, and we need some cheap solution and something we've used before, and their product is reliable," says Mohammad Wasay, chief information officer of InfoTech Software. "It's a great product from the beginning. What they lacked before was marketing."

It's likely that you will continue to hear stock stories such as these, in which smaller technology veterans reintroduce some hop to their share price by redirecting their technology toward Internet-driven markets. Investors and fund managers, likewise, will scour the smaller capitalization zones for technology that has yet to experience the Internet pop that drives recent IPOs to dizzying heights.

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