Fyreball, the Bellevue startup created by former employees of Bungie Studios, is nearing a deal to acquire Reach Machines of Seattle.

The move signals a radical shift in Fyreball's business, pushing the 7-person company into the online advertising sector.

Fyreball Chief Executive Pete Parsons, the former general manager at Bungie Studios, maker of the Halo game franchise, disclosed the deal in a talk today at Entrepreneur University. It is expected to close later this week.

He also highlighted how Fyreball has switched gears over the past months, transforming itself from a consumer-oriented service for delivering videos and photos into an advertising technology provider. The company is now working on a new technology called Meteor, which Parsons described as a way for marketers to track how messages spread online via word-of-mouth. AT&T Wireless and Palm have already signed up as customers.

The first incarnation of Fyreball didn't work. But Parsons said that Dan Rosen, an adviser and investor in Fyreball, discovered that the technology resembled a "super ad" of sorts. And the team then realized that they had developed a way to track and measure word-of-mouth marketing, as well as encourage pass alongs of content. Over about a six week period, the company made a complete shift in the business plan, he said.

One of the reasons why Parsons said they pursued Reach Machines is that he didn't know "jack about hardcore online advertising."

"With Meteor, we said 'we have this cool idea, but we don't know enough about this business," said Parsons. "We felt we had a technology hole."

Madrona Venture Group made the introduction between Parsons and Reach Machines CEO Ben Straley, a former Starwave, ESPN.com and Judy's Book employee. Reach Machines' technology has not been formally released. On its Web site, the company says that it is "developing the first media planning solution for the Web which allows agencies and brand marketers to target customers based on relevance and purchase intent."

Other members of the Fyreball team include Michael Evens and Michael Bastien, former developers and producers on Bungie's Halo games.