The U.S. high tech center of Silicon Valley has undergone a difficult four years. Since late 2000, many Internet-based businesses have collapsed and the region has lost some 200,000 high tech jobs. Analysts say the worst is over, and Silicon Valley may once again be on an upswing.

This high tech cluster between San Jose and San Francisco has had its share of booms and busts and, for many here, the collapse of the dot-coms was just a temporary setback. Economist Mary Daly studies the high tech sector for the Federal Reserve Bank of San Francisco. She says the worst of the slump is over.

"There's been really no deterioration in the fundamentals," she says. "We still have the same amount of resources being devoted to R& D, to patenting. The momentum that's in the innovation sector is still there, and so we expect Silicon Valley to rise up and be one of the prominent players in whatever the next new thing would be."

She says U.S. businesses are increasing their investment in information technology, and production of IT goods is now increasing. The big question here is which sector of IT shows the most promise. Silicon Valley, over the years, has produced a succession of products.

Technology got a foothold in the region in the 1930s, when two graduates of nearby Stanford University, Bill Hewlett and David Packard, started a business in a garage, setting a model that others would follow. They sold their first creation, an audio oscillator, to Disney Studios. The studio used it to test a new sound system for the animated film Fantasia.

The invention of the transistor and integrated circuit in the 1950s was made possible by the semiconductor silicon. The new devices provided a name for the region, and Silicon Valley became a center for microelectronics.

By the 1980s, the valley was manufacturing personal computers and disk drives for data storage. Then it became a focal point for software.

Terry Garnett, a venture capitalist and valley veteran, says the industry hit a roadblock, but recovered.

"We all scratched our head going into the early '90s saying, well, it's all been done," he recalls. "There's no new applications. And lo and behold, Netscape came along and it was even a bigger opportunity. And the Internet's only 10 years old, really, if you date it back to Netscape."

With development of the first widely used Internet browser, the Internet age was born and it brought a surge of excitement, and influx of money, to Silicon Valley.

The booming market for Internet-based companies would collapse, but the valley survived, giving birth to firms that develop biotechnology products, which are located at the intersection of electronics and medicine, and nanotechnology firms, which create computing systems at a molecular level.

The growing demand for broadband communications has spawned other companies. Christine Heckart is vice president of marketing for Juniper Networks, which produces routers and switching equipment for the telecommunications and networking industries. She says her company is making gains, but others are struggling.

"It's about the health of individual businesses," she notes. "There are some businesses that are going to come out of this recovery and are already doing that, and they've got the right products for the right customers in the right place, right time, and they're going to be able to capitalize on that like we are, and seeing quarter over quarter growth."

Juniper Networks is typical of many firms in the region. Its manufacturing is all done outside the United States, in countries like Canada, Malaysia and Mexico. It has a software center in India. The growth of rival high tech centers has hurt Silicon Valley workers, and thousands have moved from the valley or now work in other industries. But Carl Guardino of the Silicon Valley Manufacturing Group, which represents 200 of the valley's top companies defends outsourcing and offshore production.

"It stands to reason in a global marketplace that you're, of course, going to have facilities and people located around the globe to serve the customers, the customs, meet the logistic needs, the supply chains, the raw materials and resources of those markets," he adds. "It's a natural progression."

Others disagree. Democratic Party presidential candidate John Kerry has criticized companies that move operations offshore.

Jeff Barbosa, who works in the Silicon Valley field office of California state senator Liz Figueroa, shares the concern. The political aide says 30 states, including California, are trying to stop the job losses in the IT industry.

"In the 30 states, there have been efforts to restrict at least with public entities, like the state government obviously has control over how it spends its own money, and so there have been efforts to restrict state contracting to ensure that companies that do receive state contracts do not offshore part of that work to fulfill that state contract," he says.

State Senator Figueroa has sponsored a bill to ensure that personal data sent overseas for processing stays confidential.

Leslie Saul Garvin of TechNet, a bipartisan network of chief executive officers of high tech companies, says many politicians share such concerns.

"They concerned about offshoring issues," she adds. "They're concerned about international competition sometimes taking jobs away from their districts, so the bottom line for all legislators is how is this going to affect the people in my district?"

She says politicians also share the concerns of high tech executives who want to maintain Silicon Valley as a leader in a competitive global industry.

Columnist Dan Gillmor of the San Jose Mercury News watches the high tech sector and says through all the booms and busts, the people of Silicon Valley are optimistic. He says they're waiting for a development that spurs the next big boom.

"Yes, but I don't know what it will be," he admits. "And almost no one knows what it will be because the big thing has almost always been a surprise. That's why it's the big thing. It comes out of nowhere."

And the next big thing promises to change everything.