In Steven Spielberg's box-office hit A.I., the tale of Pinocchio is given a technological spin with an artificially intelligent boy replacing the famous wooden puppet. While the premise is clearly fantasy, the notion of artificially intelligent beings isn't all that outlandish. In fact, it's downright close to reality. One company, LifeFX Inc. (Stock: LEFX), is applying the concept of the avatar--an animated likeness of a person's face--to such applications as E-mail and customer-relationship management.

LifeFX started out creating three-dimensional, lifelike digital representations of internal organs for surgical training. Then it hired television exec Lucie Salhany as its CEO and shifted its focus to entertainment. But when an attempt to digitally re-create Jim Carrey was foiled after the related film project was scrapped, the company turned its attention to more practical markets, such as E-mail and CRM. The company offers a virtual human E-mail agent through its facemail application (downloadable at www.facemail.com, but be forewarned, there's no Mac version), and it's working with IBM to incorporate its Stand-In software into a next-generation CRM app. It's even behind Ramona, the online alter ego of famed innovator Raymond Kurzweil.

Bill Clausen, LifeFX's chief marketing officer, says one of the company's biggest obstacles is overcoming a common misconception that what it's doing isn't even possible. "Our stuff is real, it's not a fantasy," Clausen says. "We're creating a medium for personal communication." The thinking is that people will feel more connected to a computer if it has a human face on it, and that's certainly at the root of the success of virtual newsreaders such as Britain's year-old Ananova and Germany's recently launched Johann P. Partout, which have gone where Max Headroom's creators only dreamed.

Chris Le Tocq, an analyst with Guernsey Research, says LifeFX has an opportunity to establish a standard if it can take avatars to a new level by commercializing its technology on a wide scale. For now, Le Tocq says, LifeFX's stand-ins have a way to go before they're truly lifelike, and the company will have to improve the text-to-speech quality of its facemail app. But even a truly refined avatar will have serious limitations as a customer-service app, he says. "An avatar is useful, but it's the technology underneath that understands the question that's most important."