When Eric Schmidt left his job as CEO of Novell to run Google last year, the reaction in Silicon Valley could be summed up in one word: Huh? Yes, Schmidt's four-year tenure at software giant Novell had been miserable and not particularly successful. But a dot-com? Surely he could have done better. Everyone knew Google was a terrific search engine, but few thought it had any chance of becoming profitable. Dozens of companies, including Alta Vista, Yahoo, Lycos, Excite, and Infoseek, had tried to build a business based on searches--and failed. Schmidt, a former Sun honcho, seemed to be making the same mistake as George Shaheen, who gave up his CEO slot at Accenture in 1999 to head a dot-com calamity waiting to happen called Webvan.

Today the rest of the world is beginning to understand that Schmidt, 47, wasn't crazy at all. His decision to bolt Novell can be compared to Meg Whitman's leaving Hasbro for eBay four years ago. Though Google is still privately owned, sources say that its 2001 revenues were in the neighborhood of $70 million; now they are rolling in at more than double that rate. Most significant, Google has managed to grow and become profitable. The number of employees has doubled in the past year, to nearly 400, and Google is earning money at an annual rate of more than $15 million. Schmidt and his team won't confirm that figure but do concede the following: If Yahoo, which is paying Google $7 million a year to use its search technology, doesn't renew its contract when it expires in June, the company will still be in the black.

Remarkably, all this has happened without the company's spending much at all on advertising. Google's popularity has been driven mostly by word of mouth. "They're the eBay of information," says Mary Meeker, Morgan Stanley's Internet analyst. "You go to eBay to find things that are hard to find. You go to Google to find information that is hard to find." Another eBay comparison that's worth mentioning here: Google is three times as profitable as eBay was at the same age--3 1/2 years after it was founded. Last year, at age six, eBay made $90 million on revenues of $614 million.

A lot of the recent optimism about Google stems from one event: In early May, AOL tapped Google to be its exclusive search engine and agreed, for a share of the revenue, to distribute Google's ads among its 35 million members. AOL (parent of FORTUNE's publisher) may have its own problems right now, but no one disputes that for online advertisers, AOL members are the most coveted audience in cyberspace. And for a small company like Google, a deal with AOL provides instant credibility. "Google was taking traffic from AOL and Yahoo, so AOL said, 'Let's have people use Google on our site, and maybe people won't be tempted to leave,' " says Piper Jaffray analyst Safa Rashtchy.

Almost from the day it started, Google has been something of a cultural phenomenon. Three months after incorporation it made PC Magazine's top 100 Websites for 1998, and its traffic has grown exponentially since then. Today it processes more than 150 million searches a day, or about 1,800 searches a second, in 74 languages in 32 countries. People use it for everything from academic research to espionage.

Google's headquarters in Mountain View, Calif., seems like an anachronism--the last dot-com standing, if you will. Its lobby, save for the baby grand piano, calls to mind a kindergarten classroom. Shoot the Moon games lie on the coffee tables. The lunchroom serves free food prepared by the former chef of the Grateful Dead. Friday meetings resemble get-togethers at summer camp, right down to the roll-up projection screen the company uses to show movies.

But to understand what's behind Google's success, one needs to travel ten miles south to its data center in Santa Clara. Here, in three over-air-conditioned cages, each the size of a small office, are thousands of Google's servers. There are more than 10,000 such servers in five of these data centers around the country. Many of the machines look as if high school students had built them for a science fair. They have no cases but instead slide out of their racks on kitchen-drawer rails.

It's cute, yes. But it also helps explain why Google still exists and why Schmidt went to work there: Each rack has 80 servers, instead of the typical ten, which means that Google can get eight times the firepower that competitors can in the same space. The servers run the free Linux operating system, not the expensive Microsoft or Sun OS. And because the computers are built in-house with commodity hardware, they can be repaired or replaced easily.

It's hard to overstate the flexibility the setup has given Google. Everyone goes ga-ga over Google's search software. And it is an important reason for the company's success. In effect, it ranks Web pages not by how many times keywords appear, which is what most search engines do, but by how popular and relevant each page is.

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