(FORTUNE Magazine) – Five of Etrema's top executives sit in a conference room listening to rock & roll. The space is furnished with an oversized green marble table on which two fist-sized chrome discs are plugged into a portable CD player. There are no speakers in sight, yet the music sounds as if it is coming from everywhere. The quality is so good that when I close my eyes, I could swear that Queen's Freddie Mercury is standing in front of me, promising, "We will, we will rock you!"

Michael Conley, the company's president, pats the green marble and tells me that's where the sound is coming from. Last August, Etrema--a technology startup nestled in the cornfields of Ames, Iowa--started selling those chrome discs for $1,500 a pair. Called Whispering Windows, they are Etrema's first commercial product, sold directly by the company to consumers--and they can turn any wall, window, or drab conference table into a speaker. A Des Moines businessman recently placed ten of the discs inside the drywall of his new house, creating a surround-sound music system. Peter Jones, the London department store, has used the discs to turn its windows into an audio advertisement.

Whispering Windows' key ingredient is Terfenol-D, an alloy of the rare-earth metals terbium and dysprosium. Developed in the 1970s by U.S. Navy engineers, Terfenol vibrates rapidly when exposed to a magnetic field. That vibration transmits sound (see box). Terfenol is thought to be the "smartest"--i.e., the most reactive to its environment--metal in the world. Its potential uses are vast. Etrema (pronounced et-TREEM-a, an acronym for Edge Technologies Rare Earth Magnetostrictive Alloys) is working on an advanced sonar system for the Navy and other applications. The 40 employees of Etrema, which brought in just $10 million last year and is not yet profitable, are the only people in the U.S. who know how to manufacture the stuff affordably.

Sounds enviable. Yet Etrema's story shows how tough it can be to succeed even when you have a lock on a cool product. Etrema's executives predict that within about seven years competitors will have worked out a way to make Terfenol more cheaply--or to manufacture an even smarter metal. So the company's scientists are scrambling to develop Terfenol's successor even as they try to figure out which of the alloy's many potential uses are the most promising. Should they focus on using it for hearing aids? As a way to take the smell out of hog waste by isolating the ammonia? "It is a unique problem," says chief scientist Jon Snodgrass.

A privately owned spinoff from Ames Laboratory (a U.S. Department of Energy lab on the Iowa State University campus), Etrema worked on Terfenol for 13 years before the scientists succeeded in making it cheaply enough for a broad market. That was in 2000. But by the end of that year only a few dozen organizations--corporate R&D departments, university labs, and "crazy inventors," as CEO Bill Flowers puts it--had purchased samples. Most of them didn't know what to do with the metal. "When we called our first customers a year later, 90% still had the Terfenol sitting in their desk drawer," says Flowers.

Etrema's original plan was to sell Terfenol to outside developers. Instead, some customers hired the company to do the developing itself. For example, a wealthy businessman handed Etrema $1.5 million to stop the slight vibrations on his yacht when he hit top speeds. Terfenol did the trick, enabling him to dine at sea without having his plate shimmy off the table.

In 2001, hoping to raise Etrema's profile, Flowers decided to get more disciplined with contract work, focusing on bigger companies. "We are looking for companies like GM instead of the guy in his garage with a great idea," he says. All Etrema employees go on what they call "missionary calls" to try to persuade companies to hire Etrema to create Terfenol applications. The company is working with Remington to develop a dry shaver that uses the metal, for example.

Etrema has another problem to deal with: espionage. Two years ago the firm's computer system was hacked into--most likely, says the U.S. military, by Chinese spies. Terbium and dysprosium are commonly found in China. If scientists from that nation discover how to manufacture Terfenol--Etrema's Snodgrass says that three Chinese companies have already started making pirated versions--the metal's reputation could be harmed by a cheaper, imported version. It is difficult to pursue intellectual-property issues in China, but Etrema could eventually use the courts to go after U.S. customers that buy Terfenol or products incorporating it from the Chinese. Etrema's execs are girding for a long fight. "The lifeblood of Etrema is Terfenol," says Conley. "We have to protect that."

A more detailed version of this story appears in the November 2003 issue of FSB: Fortune Small Business magazine; go to www.fsb.com.