In the fall of 2000, business-technology managers at the Minnesota Department of Labor and Industry had to replace a patchwork of five phone systems in the agency's headquarters. As they explored their options, they became intrigued by an emerging technology called voice over IP.

VoIP works by digitizing a voice signal, chopping it into packets, and sending them over a company's computer network or the Internet like data or E-mail. The packets are reassembled at the destination and, if they've traveled fast enough, end up producing a voice signal that sounds as clear and clean as a conventional analog telephone system. The technology promised to save the Minnesota department lots of money, provide better tools for collaboration, improve efficiency, and cut long-distance charges. In the long run, using voice over IP might even eliminate the need to operate separate voice and data networks.

But few large companies used the technology in the fall of 2000, and the state's tech managers were apprehensive. They worried that it was "all Buck Rogers stuff ... too out there," says Mary Benner, the department's VoIP project manager. But detailed discussions with networking vendor Cisco Systems convinced them that "maybe it's ready, maybe we can do it," Benner says.

The department deployed 300 Cisco IP telephones and additional software, hardware, and services at a cost of $435,000. More than three years later, Minnesota Labor and Industry is a true believer. One big benefit for the cash-strapped state government: The department has cut its monthly phone bill in half, from $21,700 to less than $10,000. Last summer, it expanded the VoIP program statewide to seven additional locations, and other branches of the Minnesota government are looking to follow suit.

So are many businesses. In an InformationWeek Research VoIP survey of 300 business-technology executives, more than 80% say their companies are either using (29%), testing (18%), or planning to deploy (34%) the technology. Sixty-three percent of those using VoIP say they're going to spend more on it this year than last year. Another indication of the technology's increasing popularity is its rapid growth. In 1999, IP-capable phone systems accounted for 1.4% of all North American business-telephony shipments and were valued at $71 million. By 2003, these systems made up 56% of the market and were valued at $2.0 billion, according to research firm Gartner. That growth will continue, Gartner predicts, and shipments of IP-capable phone systems in 2007 will constitute nearly 97% of the market and be valued at $4.2 billion.

What's behind the interest? "The technology has matured," says Akhil Bhandari, VP of IT and CIO for consumer-products packaging company CCL Industries Inc. VoIP "has been around for quite some time, and we're just now coming to think of it seriously."

Bhandari says he's interested in VoIP for several reasons in addition to promised cost savings. They include being able to access collaboration tools like instant messaging and video conferencing, the use of unified messaging, and the ability to have your phone number work in whatever office or location you like.

But Bhandari has been waiting for the technology to mature enough to be reliable and offer the same level of service and applications as conventional phone systems. He's now convinced and plans a pilot program by year's end.

More businesses are looking at voice over IP now that many of the performance and cost concerns have been resolved. Early systems would drop voice packets or deliver them late, causing voice conversations to be choppy or garbled. And, like most new technology, early systems weren't cheap. The main concerns survey respondents have about deploying VoIP applications are performance, uptime, costs, security, and lack of bandwidth.

But many of those concerns lessen as experience grows. More than half of the respondents who are planning to deploy the technology worry about costs, both initial and ongoing. But fewer than a quarter of those already operating VoIP systems describe cost as a concern. In almost every category, users express less concern than those who haven't deployed it.