A new desktop PC today is 10 times more powerful than one from about three years ago, but most of us don't use our PCs any differently. According to startup NComputing, that means we should only need to buy a tenth as many.

The NComputing technology is essentially a combination of KVM switching and virtualization, turning any desktop PC into something like a thin client server. Instead of a full PC, individual users get a small box that NComputing calls an access terminal. The box has connectors for a keyboard, mouse, and monitor, with optional audio, microphone, and USB ports. Multiple access terminals connect to a single PC, presenting each user with a personal Windows (or Linux) desktop.

So why not use regular thin clients? NComputing's main advantage is low cost: Each access terminal has a list price of $70 (which includes a license for NComputing's virtual desktop software), and the company thinks it can profitably sell an embedded version for as little as $25. That's the only proprietary technology customers need. The user can plug in standard peripherals and I/O devices, while the host PC runs a regular (desktop or server) OS and applications. It works with any version of Windows from 2000 onwards (including XP Home), as well as most popular Linux distributions.

All this is enabled through two custom technologies. The hardest for competitors to replicate is the proprietary ASIC inside every access terminal, which compresses video and other I/O so that it can run over a standard IP network. For bandwidth and latency reasons, this usually means a LAN, but in principle it can work over the Internet, too. For improved performance, it also can be combined with WAN optimization techniques such as data reduction.

The other is virtual desktop software that runs on the host PC. Unlike a VMWare-style hypervisor or even SoftGrid-style application streaming, this doesn't involve running multiple copies of an OS or application, so technically it isn't virtualization at all. It simply hooks into the existing multiuser features of an OS, allowing multiple users to work simultaneously. Applications are also shared: Several people can use the same instance of Word or Excel at once, though they need to be editing different documents.

Exactly how many people can share a PC depends on the hardware and software configuration: Users who only need word processing and Web browsing will see better results than those who want to play Second Life or demand Vista's eye-candy. NComputing claims that a modern PC can support up to 30 simultaneous desktops, with Moore's Law extending this to more than 100 over the next few years.

The promise of cheap computing has helped NComputing win big in the education market, most recently with announcement that the Macedonian government will use its technology to give every child in the country access to a computer while at school. (This isn't the first time Macedonia has found a low-cost way to do something others spend a lot more in: Two years ago it announced plans for the first nationwide Wi-Fi network.) The company also has sold more than 200,000 terminals to U.S. schools, and expects to reach profitability without any more funding. It initially raised $8 million from Bank of America, now Scale Venture Partners.

But does this kind of product have a place outside the classroom? Although education accounts for 90% of its sales, NComputing says that the virtual desktop is fundamentally an enterprise technology. It predicts that as the number of processor cores in a CPU grows exponentially, so will the case for putting some of that unused power to work in both small businesses and large corporations.

The main weakness in NComputing's business plan looks like the assumption that improvements in computer technology will go into making PCs more powerful, as opposed to smaller or cheaper. We're already seeing both: Laptops outsell desktops by a growing margin, while Costco and Wal-Mart offer desktops for under $300. Then there's the nonprofit OLPC (One Laptop Per Child) consortium, which still plans to make laptops for under $100, even if its initial prices will be closer to twice that.

Business customers also have to deal with the thorny issue of software licensing. Because only one instance of the OS and application are running, some licenses allow customers to cut their software costs dramatically. That loophole that won't last long if the technology takes off. Macedonia has saved even more by running Ubuntu and other free software. NComputing says that 40% of its overall customer base also is using Linux. The 60% who use Windows tend to err on the side of caution, buying a separate license for each user, but that's an easy choice with Microsoft (NSDQ: MSFT)'s cheap education licenses. Businesses are playing for much higher stakes.