Hunched over laptops in red cubicles, Palestinian software engineers are developing an award-winning new version of a program that makes desktop computer accessible from anywhere.

But beyond such technological breakthroughs, the young graduates of West Bank universities are blazing a trail, in this case with Israeli colleagues, for the fledgling Palestinian high-tech industry which many hope will bypass the old obstacles of the Mideast conflict and one day drive the sluggish Palestinian economy.

Palestinian information technology is still in its infancy, compared to
neighboring powerhouse Israel, with just two dozen software houses, a few thousand engineers and $15 million (9.6 million) in exports a year. When also counting telecommunications, high-tech contributes about $500 million (320 million) to a $4 billion (2.55 billion) Gross Domestic Product.

Yet Palestinian IT companies have proven remarkably resilient, making money through years of Israeli-Palestinian fighting that forced many traditional businesses to shut down or scale back.

Perhaps nowhere are high-techs' border-transcending quality more appreciated than in the West Bank and Gaza. With Gaza virtually sealed since last year's Hamas takeover and the West Bank stifled by a network of Israeli roadblocks, many businesses dependent on getting goods to market are struggling to survive.

High-tech firms, however, are largely unfettered by such restrictions.

Through curfews and closures, the software house Bisan in the West Bank city of Ramallah has attended to more than 800 customers, delivering and updating its accounting program via the Internet. In Gaza, the Internet provider Fusion is one of the few private businesses still left standing, despite a yearlong ban on most imports and exports - sanctions against the Hamas government - that has wiped out tens of thousands of jobs.

From the Palestinian prime minister to an Israeli venture capitalist, there's agreement on the growth potential of Palestinian high-tech.

"I definitely see an opportunity there," said an Israeli, Yadin Kaufmann, who has been investing in Israeli startups for the past 20 years and is now in discussions with potential Palestinian partners. "It's an area that has a highly educated and entrepreneurial population ... That's the key ingredient. It's all about the people."

Palestinian universities produce some 4,000 graduates in computer sciences, engineering and related fields every year, but many don't find jobs and either change professions or emigrate. Amid such intense competition, a Palestinian software engineer earns a fraction of what his Israeli counterpart would receive.

Yet many Israeli high-tech companies, which have subcontracted engineers in India, China and Romania, are still reluctant to look for business partners closer to home, said Amiram Shor of the Manufacturers' Association of Israel. The hurt and suspicion from eight years of bloody fighting is still strong on both sides, he said.

"The Israelis are afraid of what will be tomorrow," said Shor, a member of a group of Israeli and Palestinian industrialists trying to promote closer cooperation. Even the Palestinians are not rushing.

However, Israeli software entrepreneur Zvi Schreiber, with two successful
startups to his credit, is trying to break that mold.

Two years ago, he found Palestinian partners and formed a new company, G.ho.st (Global hosted operating system), which is developing an expanded version of a web-based program that makes a desktop computer accessible from anywhere. The program, which has won awards from Red Herring magazine and other high-tech groups, was presented Wednesday at The Wall Street Journal's D: All Things Digital conference, a small but influential industry gathering, in Carlsbad, California.

In a change from the often lopsided business relationships of the past - traditionally Palestinian subcontractors doing grunt work for Israeli companies - Schreiber said he aimed for an equal partnership. Most of G.ho.st's research and development is done by the Palestinian engineers in Ramallah, while administration and some of the external contacts are handled from Modiin, Israel.

"This is very exceptional in terms of lifting the relationships that existed before between Palestinians and

Israelis," said Palestinian Tareq Maayah, one of the founders of G.ho.st. "We are doing cutting edge technology from Palestine, and cooperating with counterparts who are also very much advanced, in Israel."

Most of the 30 engineers in Ramallah are graduates of the local Bir Zeit and An Najah universities in their 20s and 30s, and get stock options, still a rare perk in the West Bank. The head of R&D, Bir Zeit alumnus Elias Khalil, showed off the program Wednesday on a large wall-mounted screen in the conference room. Nearby, some programmers pounded computer keyboards while sitting in red cubicles, or hung out in the hallways.

Schreiber and Maayah hope the G.ho.st model will be copied by others.

However, with the Palestinian territories still widely perceived as a war
zone, the reluctance to invest remains strong, not just among Israeli firms. An international investors' conference in Bethlehem last week helped make some new connections, but yielded no immediate contracts.

"There is a perception of risk and closures that big companies worry about, including my company," said Andre Hawit of the U.S.-based company PDF Solutions, Inc., which provides data management, statistical analysis and other services for semiconductor companies worldwide.

Hawit, who is of Palestinian origin, has been working with a Palestinian subcontractor he helped establish 10 years ago. "Palestinian patriotism initially played a role in choosing the West Bank for some of the outsourcing, but the bottom line is just as important," he said. "The biggest advantage is cost," he said.