Updated from March 28

We all knew this was going to happen.

Nanotechnology has become the neglected stepchild of the markets. The hype and fervor surrounding it a few years ago gave way to warnings that the science would yield precious few applications -- and profit -- for years.

Then came disappointment and then, in the minds of investors at least, oblivion.

Aside from some erratic stocks, like Altair Nanotechnologies ( ALTI), whose shares are volatile as a result of perennial speculation, and the even-rarer company turning a profit, like electron-microscope maker FEI ( FEIC), companies toiling in science on the nanoscale have been quietly treading water.

A nanotech exchange-traded fund representing an index of stocks that was set up by Lux Research, a New York-based firm focusing on nanotechnology, has traded sideways. The PowerShares Lux Nanotech ETF ( PXN) was recently trading off 0.8% to $17.27. A year ago, it was trading at $18.03.

And when the Small Times, a publication devoted to the nanotech industry, appraised the state of 2006 venture investing in the new science, it summed it up this way: "Disappointing ... Just add 'extremely' for public market transactions."

The $650 million in venture money invested in nanotech start-ups last year was far below the $1 billion-plus in 2005, and $172 million of that went to three start-ups: NeoPhotonics, Nanosolar and Nanosphere.

So dim is the view that public and private investors have taken of the one-time hotbed of innovation that news reports have appeared suggesting that the U.S. might fall behind other emerging economies, especially China.

In a story headlined, "China Second to U.S. in Nano," which citied a report this month from Lux Research, UPI said that "several countries, including China, are beginning to gain on the top nations of the United States and Japan."

But a closer look at the Lux report shows that things are a little more nuanced and a lot less sensational. The U.S. remains the big spender in nanotechnology. Even if VCs and the IPO market have been cold, federal and state spending, as well as big companies like General Electric ( GE) and DuPont ( DD), are more than picking up the slack.

China was ranked sixth in government funding (although it was even with Japan when Lux factored in how much that spending could purchase in local markets) and fifth in corporate spending. China's focus was also on low-cost areas like materials and chemicals that hold out less profit potential than fields such as bioscience.

The report, authored by Lux analyst Michael Holman, rated countries on their nanotech innovation, as well as their ability to turn those innovations into commerce. Japan, Germany and South Korea joined the U.S. in excelling at both. China joined the U.K. and France in being strong at the research end, while Singapore, Taiwan and Israel hold more potential on the manufacturing end.

Still, the strong lead that the U.S. has long enjoyed in nanotech is narrowing. "Despite its strong position, its lead is beginning to erode," the report noted.

"For instance, while the U.S. still provides more corporate R&D funding for nanotech than any nation in the world, its spending grew only 9% from 2005 to 2006," according to the report, "while other dominant players like Japan and South Korea saw increases of 29% and 30% respectively -- and the worldwide total grew by 19%."

But this doesn't necessarily spell trouble for U.S. nanotech companies. Another of the report's not-so-sensational but interesting points was that, as fledgling as the nanotech industry may be, it's already seeing the erasure of borders usually experienced in more mature, globalized industries.

"Earlier this year, German chemical giant BASF ( BF) announced an R&D agreement with Singapore's NanoMaterials Technology for work on zinc oxide nanoparticles, and U.S.-based Dow Corning established a strategic partnership with German nanoparticle application developer Nanogate," the report said.

Other examples cited: GE has established nanotech research facilities in China and India; materials giant Rohm & Hass ( ROH) recently set up a technical center in Taiwan; Irish drug developer Elan ( ELN) is marketing reformulations based on its nanocrystal technology in the U.S. through Merck ( MRK) and Abbott ( ABT).

All of that should remind investors who once scoured the markets for a hot nanotech play that they may find nanotech-driven profits through multinationals. Not only do these international giants have the deep R&D pockets to sustain investment that might not pan out for years, they long ago built inroads for overseas collaboration.

Nanotech is one area of innovation that is not driven by start-ups -- at least for now. The day may come when a hot new IPO reignites fervor in so-called nanotech stocks. But for the foreseeable future, the next big thing belongs to the same old multinationals.

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