Life for any startup these days isn't easy. But Exalt Technologies Ltd. is fighting a particularly tough battle for survival.

The tiny 28-person optical startup is headquartered in one of the most widely publicized war zones in the world, the occupied territory of the West Bank. The company, which had been part of the optical division of Siemens AG (NYSE: SI; Frankfurt: SIE), spun out on its own 10 months ago. Since then, Exalt's been working in stealth mode to deliver a suite of metro optical transport products.

While its relationship with Siemens lends technological legitimacy, the company still faces many challenges as Israelis and Palestinians struggle to find peace.

Located in Ramallah, about nine miles north of Jerusalem, the company’s HQ is just a 15-minute car ride from where Palestinian President Yasser Arafat has been holed up for the past two years of Israeli occupation. Despite bombings and raids by Israeli troops throughout 2001 and 2002, Tareq Ma'ayah, founder and managing director of Exalt, says the city of hilltop homes, shops, and refugee camps is relatively safe today.

"If we had the political stability, I’d say that this is the best place in the world to live," Ma'ayah says. Though media coverage paints a dismal picture of Palestine, he maintains that it’s actually an ideal location for a technical startup: Real estate is cheap, and there's access to an almost unlimited supply of well-educated engineers from Birzeit University, located north of Ramallah.

"We would never be able to do what we are doing now in Germany or in the U.S. without raising a lot of capital. We’re going through a nice self-financed stage," he says.

Ma'ayah first began doing contract work for Siemens in 1997. Eventually, Siemens took an interest in Exalt, which developed a demarcation device used to monitor the quality of traffic traveling from one carrier network to another. Siemens later became the majority shareholder in Exalt.

But the bursting of the telecom bubble forced Siemens to make cuts to its optical division (see Siemens Restructures ICN). As a result, it divested its interest in Exalt, and Ma'ayah took over the investment himself. For the past ten months, Exalt has been operating on its own, mostly with money left over from its contract days with Siemens and cash invested in it by Ma'ayah.

While he wouldn't talk about specifics related to the products or the current funding, Ma'ayah says that the company is well positioned financially and should finish product development by the end of the year. It is already contracting with Flextronics Corp. (Nasdaq: FLEX) to outsource its manufacturing.

Like other businessmen in the region, Ma'ayah downplays the current political situation and its impact on his company, but he admits to some inconveniences. Checkpoints in and out of Ramallah and throughout the West Bank make traveling difficult and time-consuming. To alleviate this problem, the company has built a bunkroom upstairs from its office, where engineers can live days and weeks at a time.

There are other challenges that could threaten the company’s survival. Importing components and equipment used in development of products has proven difficult, as many of these items get stuck in customs awaiting security clearance.

The problem has been widespread among technology and telecom companies in Palestine, Ma'ayah says. The Palestinian Information Technology Association (PITA), an organization that represents over 60 technology companies in Palestine as well as Palestinian representatives of international companies (such as Siemens), filed complaints earlier this year alleging that Israeli customs has been withholding communications equipment and computers worth millions of dollars.

At least one analyst says these problems need not hamper Exalt's success in the long run, particularly if the company can form solid partnerships like the one it had with Siemens. "Technology is agnostic to political situations," Michael Howard, founder and principal analyst with Infonetics Research Inc.. "Even though it’s more challenging for them than other startups, if they have the intellectual property, they could still make headway with a Cisco, an Ericsson, or a Nortel."

— Marguerite Reardon, Senior Editor, Light Reading