SPENCER MICHELS: On a recent summer afternoon tourists snapped photos of workman restoring a small garage on a residential street in Palo Alto, Calif.
SPOKESMAN: We put all the boards back in so it looks like it did in 1939.
SPENCER MICHELS: This is the garage where Stanford graduates David Packard and William Hewlett started building electronic devices 66 years ago. Hewlett-Packard considers this the birthplace of Silicon Valley.
ANNA MANCINI: It's just kind of amazing to look at this and see this is where it all started.
SPENCER MICHELS: These days HP has its own archivist Anna Mancini.
ANNA MANCINI: Two guys in a garage started our company with a few simple tools, and from that grew, you know this huge company that is so influential in Silicon Valley.
SPENCER MICHELS: In the decades that followed, Silicon Valley, a 50 mile long stretch of real estate south of San Francisco that used to grow prunes and apricots became a vibrant, innovative, industrial center with a way of doing business much less hierarchal than traditional East Coast industries.
SPENCER MICHELS (1992): The chip industry constitutes what could be called a U.S. industrial policy.
SPENCER MICHELS: And the NewsHour began its coverage of the valley the industry and the culture. One of our first stories on the valley looked at how both the stock market and private funds, so-called venture capital, were fueling the high-tech revolution. By the 1990s, Silicon Valley led the nation in industrial growth and exports; it's future seemed limitless.
In this 1997 report we found a worker whose optimism reflected the valley's mood.
BARRY PARR: Companies are expanding; 3Com has a huge campus; Sun just opened built an enormous campus.
SPENCER MICHELS: But we also talked with Intel CEO Andy Grove here on the left, who despite his company's overall health, had seen storm clouds. Intel made and still makes chips or semiconductors, the brains in computers and other devices.
Grove told us in 1992 that the successful American industry had been under fierce attack from foreign competition.
ANY GROVE (1992): Success always attracts competition. Practically all American producers were losing money in the mid '80s, certainly Intel was losing a lot of money. We shut down eight factories and we laid off about a third of our total staff in the mid '80s. So it was very, very painful.
SPENCER MICHELS: Today Grove is retired but still consulting at Intel. He says the future of American leadership in high-tech is again in jeopardy.
ANDY GROVE: It is not that we are getting worse; the world is getting better faster than we are. The product here is knowledge; the competition is gaining on us. We have to work harder. And we have to sell our product at a lower cost to remain competitive.
SPENCER MICHELS: Take Hewlett-Packard, for example. It once manufactured all its computers in the valley. But today most manufacturing and most profits originate offshore. Last February its board fired CEO Carly Fiorina hinting that dissatisfaction with high costs, a bloated workforce and not enough profits.
MARK HURD: It is privileged to be name HP's new CEO --
SPENCER MICHELS: Her replacement Mark Hurd decided to cut 10 percent of all employees in order to save $1.9 billion.
Chief Marketing Officer Cathy Lyons acknowledges that times have changed for HP and efficiency is vital today.
CATHY L YONS: When industries go through periods of extremely high growth, everybody is pretty giddy about that. But it also covers up a lot of sins. And I think that there is still plenty of room, actually, in the valley and elsewhere, for companies to take a look at how well they spend their dollars.
SPENCER MICHELS: The job cuts are part of a valley-wide trend. Despite the fact that profits for some big companies are up several-fold recently, total high-tech employment in Silicon Valley, today about 850,000, has declined almost a quarter in the last five years.
Manufacturing jobs went overseas years ago, and many software designers are having their work transferred overseas or elsewhere in the U.S.
ANNALEE SAXENIAN: People in Silicon Valley are worried. I think people who have lost their jobs are very anxious.
SPENCER MICHELS: At the University of California at Berkeley, Information Systems Professor Annalee Saxenian wrote a book on Silicon Valley more than a decade ago; she still follows the valley.
ANNALEE SAXENIAN: It is an anxious time for people who see the world changing very, very rapidly. You know, the U.S. hasn't really had to face this kind of competition ever in its history.
SPENCER MICHELS: But increased competition is just one problem the valley has faced.
Five years ago the NewsHour reported on investors losing confidence in the overheated and over funded world of high-tech. In 2000, the boom that some people thought would never end and that had venture capitalists and entrepreneurs partying and enjoying their success, that boom hit a major road bump.
People were throne out of work, thousands of small start-ups, so-called "dot-coms" financed by billions of dollars in venture capital, collapsed, depressing the whole industry and changing it.
GGRAF was one of those software start-ups, conceived in a modest Redwood City garage like HP. It was founded by Virginie Glaenzer who came to the valley from France to make her fortune. We talked with her in 1999.
SPENCER MICHELS: What is your ultimate goal, essentially. Is to get rich?
VIRGINIE GLAENZER (1999): Of course, get rich in less than five years, maybe something in three years, get IPO, and create great software.
SPENCER MICHELS: The next year when the bubble burst and financing dried up, GGRAF essentially disappeared.
VIRGINIE GLAENZER: Well, that's basically the headquarters of Inventop -
SPENCER MICHELS: Today in a new house with a new baby, Glaenzer has started a new company which produces proximity mail, software which allows people with similar interests to connect to each other.
VIRGINIE GLAENZER: We learned that building a business takes time. And in '99 we thought that it was quick and easy.
SPENCER MICHELS: When I asked you did you do this because you want to get rich and you said well yeah, we do want to get rich.
VIRGINIE GLAENZER: I will be happy if I can get money out of it. But that's not my primary goal. I think I have learned that if you enjoy doing what you do every single day, you will become successful one way or another.
SPENCER MICHELS: Although her start-up hasn't gotten any investment money yet, high-tech investment has come back strong. But investors have become more selective. One new company that has been well-funded is ProTrade, a fantasy athletic stock market whose culture looks much like the dot-coms of old. Martin Cagan, marketing vice president, who worked in a number of well-known high-tech firms says the crash had some benefit.
MARTIN CAGAN: I think the monies actually continue to be available. The difference is they are spending it better on start-ups that are better suited for success. You have to have a great idea. You have to be committed to it. You also have to have the right people. And you have to be willing to work like crazy. And you have to be willing to take those risks.
SPENCER MICHELS: ProTrade will provide entertainment to a niche market drawn from 80 million American sports fans. And many other firms are also concentrating on specific products like cell phones with cameras and apple's iPod, a sleek music player, wildly popular items that have changed American and worldwide culture. Those applications may not be as fundamental as the past development of the microchip, the computer, the Internet and search engines which were the bread and butter of Silicon Valley for years. But the new products impact millions of people and promise a rich future for the industry according to Cagan.
MARTIN CAGAN: Today's sort of niche applications become tomorrow's foundation. As long as products continue to drive people nuts, there will be opportunities for better versions. I mean, I would love a cell phone that didn't drop calls. I would love a home computer that didn't cause heartburn. There is always going to be demand, I think, for better versions of products.
SPENCER MICHELS: Intel's Andy Grove whose company pioneered the microchip says today's products are just as important.
ANDY GROVE: Any given one of them could be viewed as insignificant or trivial. But if you look at them as the bricks of the digital castle, the castle itself is going to redefine your world.
SPENCER MICHELS: Whether that world remains centered in Silicon Valley or even the U.S. or whether high-tech moves offshore is the big question on everyone's mind.
ANNALEE SAXENIAN: The thing that the valley does best is come up with new applications, new designs, new architectures that then can be implemented and produced elsewhere in the world, and will be.
Firms in Silicon Valley have access to marketing talent, technical talent, managerial know-how that really is very rare elsewhere in the world.
SPENCER MICHELS: But Andy Grove says it's not that simple. Respect for science, math and engineering is dwindling in America. And he says the government is not encouraging research, especially in the emerging high-tech field of genetic biology.
ANDY GROVE: We created a computer industry in the United States that for a long time we are the leaders in it.
I'm am very pessimistic that that situation is going to happen one more time. Our standard of living is not going to be leading the world either. So if I see the footprints in the snow leading in that direction, how the hell could I not be pessimistic?
SPENCER MICHELS: Nevertheless, Silicon Valley is still home today to stories of success and profits. Big companies are getting bigger and some start-ups are showing promise.
But in this valley with its astronomically priced homes, employment is down and expectations are more measured as foreign competition threatens to spoil the party or at least move it somewhere else