One company wants to find a vaccine for a painful disease afflicting soldiers in Iraq. Another is aiming at vaccines that don't need to be refrigerated, easing their transport to Africa. A third is seeking a vaccine against AIDS.

These Colorado companies have much in common, yet they can't agree on which of them is a "small" business.

How the U.S. Small Business Administration interprets that term could mean millions of dollars in federal funds.

The companies - and others across the country - are fighting over $600 million a year in National Institutes of Health Small Business Innovation Research grants. Colorado ranks fifth in the country for SBIR dollars received from all federal agencies, not just the NIH, with $80.9 million in 2003.

The biotech industry has been among the most outspoken groups lobbying the SBA over its rules. Biotech entrepreneurs are rallying at hearings on the matter across the country this month, including one on June 14 in Denver.

The biotechnology industry is riven over whether SBIR grants should go to firms that are majority-owned by venture capitalists.

At a 2003 hearing, the government ruled that companies must be owned by "individuals" - not investment houses - to get SBIR grants, which range from $100,000 to $750,000. Since then, VC-owned enterprises have been excluded.

Those companies warn the interpretation may kill off potentially valuable research. Meanwhile, startups are welcoming the respite from competition.

"The effect (of the interpretation) is it will take people who were actually quite competitive and knock them out of the loop," said Richard Duke, scientific founder of Aurora-based GlobeImmune.

Morrie Ruffin, vice president of business development for the industry association BIO, charges that the quality of research grants has declined since venture- owned firms were excluded two years ago.

"By the NIH's admission, what they are seeing is grant mills, or companies that just live off the SBIR," he said.

Winning venture investment should be a sign a company is viable, he believes.

GlobeImmune won $8 million in venture financing for its cancer vaccine. Now, it wants to do research on an AIDS vaccine, a less popular idea with venture capitalists.

"Our company doesn't really have enough discretionary money to spend in new research projects. So why don't we go back and put in an SBIR grant?" asked Duke. "We can't."

Louisville's RxKinetix is working on a product to treat the side effects of cancer radiation treatments, but it also has trained its sights on how to transport vaccines to poor countries.

"The bulk of our funding is venture capital," said Vice President of Drug Development Gary Rosenthal. "The vaccine effort benefits Third World diseases. SBIR money is a perfect way to get that more altruistic research going."

Just down the hall from GlobeImmune, Claude Selitrennikoff, founder of four-person MycoLogics, takes a different view. Hs company has received nine SBIR grants since 1999, to the tune of $1.5 million.

He, too, believes the SBIR program was designed to fund unconventional research, such as his work into leishmaniasis, a skin infection transmitted by sand flies in Iraq. But the money should also go to -tiny firms beneath VC's radar.

"My own view is that companies funded by venture capital have money," he said. Changing the rules to let them in would flood the NIH with applications, "and then even interesting ideas get eliminated."

The debate comes at a time when the SBA is under fire for handing money to large businesses. One recent government report concluded that in 2002 alone, $1.7 billion in "small-business" contracts went to giant corporations such as Oracle and Raytheon.

The SBA has said the problem arose from miscoding. Sometimes small firms are gobbled up by large firms but not reclassified. Other times, the government relies on companies to "self-certify."

Either way, the SBA is revamping its classification system, and these national hearings are part of the effort.

Lloyd Chapman, president of the American Small Business League, has long been a thorn in the side of the SBA on size issues. He strongly opposes classifying venture-owned companies as "small."

What if a pharmaceutical company or large bank funds a venture firm and then invests in biotechs, he suggested. Where does it end?

How small is small? That's the question the Small Business Administration is looking to answer as the agency conducts a comprehensive review of its size standards. The regulations determine which businesses are eligible for SBA programs, including loans and federal contracts.

A formal revamp of the standards may not take place for months, but the review has drawn hedged responses from small-business advocacy groups. "We believe that, overall, simplicity is a good thing," says Andrew Langer, manager of regulatory policy for the National Federation of Independent Business. But the NFIB is opposed to the idea of grandfathering in businesses that may lose out under the new rules. The American Small Business League is also against this idea; the advocacy group is pushing to define a small business as one with 100 employees or less.

Small-business classification currently varies by industry, based on the number of employees or revenue. While the most widely used standards are less than 500 employees for manufacturing industries or less than $6 million in annual receipts for nonmanufacturing industries, the SBA employs 37 different standards for determining business size in over 1,100 industries. These different standards explain how a soybean farmer who pulls in $750,000 or less each year and a roofing contractor who makes up to $12 million can both fall under the small business moniker.

SBA officials are quick to point out that nothing is set in stone. The agency, which yanked a proposed simplification of the standards off the table last May after drawing criticism, has been asking small-business owners around the country to weigh in this month on the possible changes. "It is really going to depend on the nature of the comments we get," says Gary Jackson, the SBA's assistant administrator for size standards. "We are not yet committed to issuing a proposal."

Among the issues open for debate:

• Should business size be measured according to receipts?
• Should existing small businesses be exempted from new standards?
• What constitutes a full-time employee?

Business representatives gathered at a hearing in San Francisco Tuesday to figure out the best way to define the size of a small business.

Some argued that 500 should be the maximum number of employees a company could have in order to be considered a small business, while others insisted that 100 be the cutoff.

Some urged that the employee count be thrown out altogether in favor of revenue as a criterion.

Tuesday's hearing was one of 11 being hosted across the country by the U. S. Small Business Administration.

It wants to collect comments from small businesses so that it can tinker with its own definition of a small business. The SBA uses the definition to determine which businesses qualify for its loan programs.

Standards vary by industry

The SBA's size standards traditionally vary by industry, with 37 standards covering more than 1,000 industries.

It tried to change its definition last year but scrapped the effort after generating too much controversy.

On Tuesday, some took issue with the SBA's restrictions on the grants it gives small businesses for research and development under the Small Business Innovation Research program.

The SBA program disqualifies companies that are majority-owned by venture capital firms.

However, several representatives from the biotechnology industry said it is impossible for companies like theirs to develop new drugs without venture capital.

Ross Barrons, controller for ChemoCentryx, a biotech company in Mountain View, said that even though it has only 50 employees, it does not qualify as a small business because it receives venture capital.

Biotech relies on VCs

In biotechnology, you're looking at eight to 10 years and $800 million to develop a new drug," Barrons said. "You have to go to the VCs."

Others used Tuesday's hearing to sound off against the SBA for allowing big businesses to secure government contracts that are meant for small businesses.

A handful of protesters marched to that theme outside the SBA's offices on Market Street, chanting, "The SBA is stealing money from business."

Lloyd Chapman, founder of the American Small Business League, who has uncovered instances where big businesses like Raytheon Co. have received contracts under the guise of a small business, criticized the SBA for not cracking down.

"Who was representing small businesses when they allowed some of the biggest companies on the planet to win contracts?" Chapman said at the hearing.

Record-keeping problem

Gary Jackson, assistant administrator for SBA's office of size standards, said the issue is mainly a record-keeping problem.

Some small businesses receive government contracts and manage to keep them even after they've grown outgrown the SBA's size standard.

The SBA is considering a proposal to recertify companies annually so that they meet its definition from year to year.

Should technology Goliaths Oracle and Hewlett-Packard have received government contracts earmarked for small businesses?

They have, according to the government's own tallies. Lloyd Chapman doesn't think that's right.

Chapman, president of the Petaluma-based American Small Business League, says lax oversight by the federal government allows those companies and other industry giants to frequently win contracts for goods and services that have been set aside for small companies. Among other behemoths who have been awarded government contracts set aside for small businesses are Raytheon, Northrop Grumman and AT&T.

''Clearly it's a major problem,'' Chapman said.

Chapman was one of more than two dozen small-business owners and others who testified Tuesday in San Francisco before officials with the U.S. Small Business Administration who are considering changes to how small businesses are defined.

Federal law mandates that 23 percent of all federal government contracts go to small firms -- awards potentially worth about $87 billion a year. Those contracts can cover anything from paper clips, grass cutting and trash removal services to advanced cancer research efforts.

About $47 billion dollars in federal small-business contracts were awarded to companies too large to qualify as small firms during a five-year period ending in 2003, according to the Center for Public Integrity, a non-profit, non-partisan research group.

The Small Business Administration's own tallies found that about $2 billion in federal contracts set aside for small companies actually went to large firms in 2003, said Jim Gambardella, deputy area director for government contracting for the Small Business Administration's San Francisco office.

Mostly that happened because of coding errors or because divisions of major companies were counted as individual firms.

Software giant Oracle received $11.5 million in small-business contracts in 2002, according to a Small Business Administration report released last year. Hewlett-Packard received $12 million in small-business contracts in 2002, the report said.

Each year, between 300 and 400 cases are reported in which companies too large to fit the government's definition of a small business apply for and receive small-business contracts, said Gary Jackson, assistant administrator of the office of size standards for the U.S. Small Business Administration.

Some violations occur when companies that met federal standards for small-business contractors at the beginning of a multiyear contract later grew in revenue or number of employees. The companies are permitted to finish out their contracts even after growing past the small business threshold, Jacksonsaid, because agencies receiving the goods or services under the contracts want continuity.

Other violations result when small firms that get bought by larger companies fail to voluntarily reclassify themselves as ineligible for small-business contracts, Jackson said.

Currently, the federal government's definition of small business varies widely by industry. For example, a breakfast cereal maker with up to 1,000 workers can apply for a small-business contract. On the other hand, a computer software maker can qualify as a small business only if it reports annual revenues of less than $21 million.

The government is considering a uniform size standard -- based on either a maximum number of employees or revenues -- for all industries wanting to apply for federal contracts.

Whether to require companies to be recertified annually as small businesses is also under consideration. Currently, companies retain their small-business designation for the duration of an existing contract, although a firm that grows too large may not apply for new small-business contracts.

Since the spring, the Small Business Administration has held a series of public hearings in cities across the nation to find out what small-business owners think about the proposed changes.

There's no consensus on the best solution.

Some speakers at Tuesday's hearing wanted the number of employees to determine what's a small firm in all cases. But Cheryl Garcia -- secretary-treasurer of B&C Janitorial Service, a San Pablo company with 40 workers and $1 million in revenue -- said that isn't always the best measure.

A growing campaign to uncover abuses of big companies getting billions of dollars in government contracts that should go to small businesses may be coming to a head locally.

The U.S. Small Business Administration has scheduled hearings Tuesday in San Francisco that are expected to highlight many small businesses voicing their concerns over the issue.

"Small businesses are the heart and soul of the U.S. economy and they're not getting their fair cut," said Lloyd Chapman, president and founder of the American Small Business League and a long-time crusader against abuse and fraud in federal contracting.

The Novato resident stresses that Bay Area small businesses alone are losing upwards of $5 billion a year on government contracts given to large businesses passing themselves off as small. He puts annual losses nationwide at $50 billion.

The U.S. government spends more than $300 billion a year on government contracts. Federal law says 23 percent of these contracts should go to small businesses.

The debate goes back more than a half-century to World War II, when small businesses complained that big defense contractors received all the work. In the early 1950s, Congress passed a bill to have a fair cut go to small business.

"(Chapman) has helped raise the level of attention on this," said Gary Jackson, SBA assistant administrator for size standards, who will be at Tuesday's hearings. "But we don't think the problem is as significant as some people are indicating."

But the SBA, which has different definitions of a small business depending on the industry, took 600 names off its database in 2003 that turned out to be large companies.

Some of those listed as small businesses have included Redwood City-based Oracle, AT&T, Nike, Sprint and Time Warner.Jackson countered that part of the problem is small businesses growing to become large, or being acquired by a large company are still being deemed small. That becomes problematic because many of the contracts run for five years or more, Jackson said.

A recent study by the Center for Public Integrity on Pentagon contracts from 1998 to 2003 revealed that $47 billion was diverted from small businesses to large businesses as a result of acquisitions.

Jackson stressed that any bidder can file a protest if he or she thinks a contract winner is not small. In manufacturing, for example, the SBA considers a small business to be 500 employees or less. A general contractor cannot generate more than $28 million a year to be considered small, Jackson said.

"Anything that can bring light to the problem of favoring the big guy over the small guy is very important," said Martyn Hopper, California state director of the National Federation of Independent Business, the largest small-business advocacy organization in the country. "We need to make it an equal playing field."

Hopper said the issue at times gets lost among small business concerns over the high cost of health care, insurance and workers' compensation.