FORTUNE -- Andrej Nabergoj has spent the last year turning a $60 cat into a millionaire. He’s the CEO of Outfit7, the company that makes the talking-character apps your three-year old has likely been teething on for the past few months. All of Outfit7’s apps follow the same formula: grab a 3D model of something adorable -- an animal, a fairy, a Santa Clause, whatever -- have them do adorable things when somebody touches them, and have them parrot back whatever someone says into the built-in mic in an adorable voice. If this sounds reductive, it’s because it is. The apps don’t really do much. Besides sell. Outfit7 says people have downloaded nearly 110 million Outfit7 apps, and they bring in millions of revenue every month. Adorable!
This all started when Outfit7 bought that $60 cat. It was over a year ago, and Outfit7 didn’t exist yet. Nabergoj’s goal has always been sheer volume. But OutFit7's founder, Samo Login*, didn’t want to make a game, worried that there’d be too much competition. He came up with the idea to make non-game apps based around a character. And who most easily relates to characters than your kids?
So off Nabergoj went to find Outfit7’s mascot. He eventually found a feral cat at Turbosquid, a 3D model marketplace. For $60, Login bought him, named him Talking Tom, and handed him over to Outfit7’s developers, who created a set number of animations, coded the voice talkback, and published the app in July 2010. Within the first 13 days, one million people downloaded the free app. It was so successful Nabergoj went on a hunt to find the anonymous designer who created the cat model. After almost two months of searching, and what he says were calls to “the Russian secret service agency,” Nabergoj found his man, Andrey Kravchenko, in Ukraine. Nabergoj brought Kravchenko into the company.Now, 10 months after its debut, there are more than 55 million copies* of Talking Tom scattered across the world. And, as is now part of the lifecycle of any popular thing on the Internet, a community of people has emerged on YouTube who upload custom videos of Tom reading a script in his trademark helium screech. Even more confusing/surprising/worrying, many of these videos get hundreds of thousands of views. People are scripting elaborate monologue sketches, casting Tom as their lead. In the most-watched video (more than 1.2 million views), Tom sings a squeeky ode to Jesus. In another (more than 450,000 views), he sings Justin Bieber’s “Baby.”
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So between Talking Tom and Outfit7’s 10 other characters, Nabergoj has certainly created a fad, if not a phenomenon. The company's most recent app, Talking Ben the Dog, was downloaded a million times in three days. And now, because no good, capitalistic company can ever allow itself to tread water, Outfit7 is asking itself what it should do next. Millions know the company’s characters on a mobile device. Theoretically, millions would follow them right off it, as well. It’s a dream that the digital can become an incubator for the analog.
What that means: In the short-term, Nabergoj wants to stretch the bounds of where his characters appear. He’s hired Paul Baldwin, a marketing exec who helped turn Tomb Raider's Lara Croft from vide0-game polygons into Angelina Jolie celluloid movies, to be Outfit7’s chief marketing officer. Over the next few months, Baldwin and Nabergoj think the Outfit7 characters will maybe wander their way into a short, scripted web video. And after that, perhaps a drift into the educational space, with, say, Talking Ben the Dog helping kids learn basic chemistry. (He retreats to the lab in the app.) Then, of course, come the merchandising opportunities. Snuggle up with a plush Talking Tom the Cat, preferably while dressed in an Outfit7 onesie and watching Talking Tom’s Saturday morning cartoon show.
This, at least, is the dream. It’s not an entirely unfounded one. Just look at that other app that was downloaded more than a hundred million times: Angry Birds. Rovio, its creator, has already sold more than two million plush dolls. (A recent visit to Urban Outfitters verified the dolls are getting prime placement in unexpected places.) There are also Angry Birds board games, Angry Birds movie tie-ins, and Angry Birds TV shows in the works. It is an empire.
Nabergoj, like any good CEO, is convinced he can do even better. “You don’t connect emotionally with those birds,” he says. “They’re pretty much an element of the game.” But because users can talk to Outfit7’s animals, Nabergoj and his team believe people are even more tied to Talking Tom and Talking Ben.
If Outfit7 succeeds in branching out, it’ll continue a new trend of digital characters working their way up into the big time. But Angry Birds and Outfit7’s success are different from the recent trend of established videogame and comic book characters turning into successful movie franchises. (We’ll ignore that misguided 1993 Mario Bros. movie.) Outfit7’s operation -- 25 employees, most in Slovenia -- is far too shabby for that kind of scaling up. Instead it has inadvertently used the App Store as a testing ground. The barriers of entry are so low that a company as small as Outfit7 can try its hand without much risk. All they needed was a dream and $60.
--This was yet another column from Fortune's regular look at startups and the tech bubble that may or may not exist. Send all thoughts and pet toys to my email, or just lurk on my Twitter feed until you turn feral.
*Editor's note: The story originally attributed the purchase of the feline 3D model and the plan to not release a game to Outfit7 CEO Andrej Nabergoj. In fact, founder Samo Login was behind both decisions. The sentences have been corrected. The number of downloads of the Talking Tom app has also been updated.