Internet telephones had their coming-out party in 2003.

Once just for ham radio operators looking for new geek chic, phones that use the Internet rather than a traditional phone network found their way into millions more homes and offices in 2003.

People flocked mainly to free dial-up services, including Free World Dialup or Skype, created in 2003 by the file-swapping folks at Kazaa. Free services let anyone use computers and a broadband connection to chat with other users who are similarly equipped. Skype says software needed to use its service has been downloaded nearly two million times already.

But tens of thousands of others signed up for VoIP subscription services from major cable companies and independent VoIP providers such as Vonage and 8x8. These services allow users to get or make calls using any kind of phone, whether landline, cell or the small number of Wi-Fi phones. Unlimited local and long-distance dialing usually costs 20 percent to 30 percent less than traditional plans, and an ongoing price war is creating even bigger savings.

VoIP's commercial popularity has sparked a regulatory backlash among U.S. states, which want VoIP providers to fund public services just as every other telephone company does. Minnesota was the first to draw blood, telling Vonage that it had to apply for a telephone license and pay the same state fees as traditional telephone operators. Despite a judge's ruling blocking Minnesota's regulatory effort, states including New York and California have been working to come up with their own VoIP regulations.

VoIP providers counter that they aren't against regulation, but that the current set of state rules were designed for telephone networks created more than a century ago and would be impossible to follow given the way the technology works. They'd prefer federal regulators to step in and stop the states from creating a patchwork of different rules and regulations.

They got their wish in late 2003, when the Federal Communications Commission began to examine in earnest what to do about VoIP. By February, the FCC expects to make known its VoIP regulatory position.

But by that time, its likely most of the major broadband providers, especially cable operators, will greatly expand their own VoIP offerings. Though some launched commercial services in 2003, most cable companies continued to sit on the VoIP fence. That's true even though they have most to gain by using VoIP to challenge the Bells' dominance of the local phone market. Most now promise a debut of a major VoIP service in 2004 or even later. Meanwhile, traditional phone companies all announced intentions to slowly move into mass-market VoIP services as well, with AT&T expecting to launch its service in the first quarter of 2004.

--Ben Charny