The majority of Irish software companies remain too small to enter international markets, according to an annual report on the indigenous software industry compiled by Dublin technology consultancy HotOrigin.

The report, which reflects responses from 141 chief executives, shows that although more companies entered the "over-€10 million" revenue bracket in 2003 (8 per cent, compared to 5 per cent based on 2002 revenues), two-thirds of companies - 70 per cent - remain in the "sub-€1 million" revenue category.

But overall, markets are looking rosier for Irish companies. A slightly larger proportion reached profitability compared to previous years (55 per cent, compared to 52 per cent last year).

"However, the single biggest challenge is still generating sales," said Ms Caroline Wardle, HotOrigin, at the report launch in Dublin this week. She also noted that companies say they still find it very difficult to raise venture capital.

Looking forward, companies indicated a cautious optimism about sales and the economy, though HotOrigin believes further mergers and consolidation are needed for Irish companies to effectively address the global market.

Irish companies are reluctant to merge, with "the egos of CEOs" playing a significant role, according to several respondents to the survey, said Ms Wardle.

Nonetheless, new companies continue to form at a rapid rate, with 16 per cent of companies in the survey only formed in the past year.

Dr Chris Horn, co-founder and chief executive, Iona Technologies, who spoke at the report launch, said: "I think in general our companies are not funded adequately, compared to the competition overseas." This forces many of them to become "world class stone squeezers" at home, rather than world class businesses, he said.