(FORTUNE Magazine) – WHAT you're seeing in the photograph at right is a practical embodiment of one of man's most brilliant intellectual achievements. The tiny semiconductor laser in the palm of the scientist's hand is as powerful as its big conventional cousin below it. Inside the smaller laser is a ''quantum well,'' an unimaginably minuscule trap that holds electrons and makes them yield light with an efficiency that standard lasers cannot approach. Quantum wells -- man- made structures so tiny that a million of them would fit into the period at the end of this sentence -- are the key to new and expanding applications of quantum mechanics. Many scientists believe that quantum mechanics is about to set off a transformation of everyday electronics as profound as the one begun 40 years ago when the transistor replaced the vacuum tube. The quantum-mechanical view of matter at its most basic level, also called quantum physics or quantum theory, was developed by such giants of 20th- century science as Albert Einstein, Louis de Broglie, and Werner Heisenberg. They led a revolution that overthrew the clockwork certainties of Newtonian physics, replacing them with a through-the-looking-glass world where light and electrons behave sometimes like particles, sometimes like waves -- and in which, according to Heisenberg's famous uncertainty principle, you can know where a particle is or how fast it is moving, but never both at the same time. Quantum applications are emerging partly because they look like the most promising way to keep making progress in electronics. The remarkable march of silicon-chip technology could come to a sudden halt within a decade or less. As conventional transistors and other components on a chip get smaller and smaller, all kinds of undesirable side effects begin to arise -- from overheating to electronic cross talk much like that on closely spaced telephone wires, when conversations start ''leaking'' from one wire to another. But the shift to commercial-scale quantum electronics raises its own challenges for U.S. companies: The tiny devices will be extraordinarily difficult to mass-produce. And competitors from Japan, expert in manufacturing and always eager to pluck the fruits of technological advance, are intent on dominating the technology. Quantum mechanics unveiled a new shimmery image of the atom where wondrous things can happen. For example, inside those tiny quantum wells, electrons can be made to resonate like sound inside an organ pipe. For reasons related to the fact that electrons have discrete energy levels that change with their distance from an atomic nucleus, they can be put to work to generate laser beams of desired colors or to run new kinds of transistors (see box). The invention of transistors brought the power of digital electronics to the office, the factory floor, and the home. The quantum revolution now brewing could represent an even more remarkable leap forward: Because they are so small, quantum devices are spectacularly quicker and require far less power than today's transistors and lasers. Quantum transistors could be 1/100th the size of their conventional counterparts and run 1,000 times faster. And the quantum revolution could produce a plethora of optical detectors, switches, and other devices in addition to unlocking at last the full potential of lasers. Powerful new semiconductor lasers that you could hold in your hand would produce beams strong enough to slice steel. STIMULATED BY such astonishing possibilities, scientists in the U.S., Europe, and especially Japan are working hard to make quantum electronics a commercial reality. In laboratories on three continents, arrays of high-tech machines like the one in the photograph on the next page bombard wafers of exotic materials such as gallium arsenide with hyperthin layers of other elements to form quantum wells. Already the first products are reaching the market. The most striking example: the quantum-well laser shown in the opening photograph, made by Spectra Diode Laboratories Inc. of San Jose, California, a joint venture of Spectra Physics and Xerox. Eventually, when it can be produced inexpensively enough, the quantum-well laser will replace the simpler semiconductor lasers used to play compact disc recordings and to read and write on the new erasable optical memory disks (FORTUNE, January 2). Because of their intensity, the new lasers will quadruple the number of bits of data that can be recorded on and retrieved from those disks. Less powerful quantum-well lasers should finally make possible thin flat-panel TV screens; the lasers would be densely arrayed on the surface of the screen, powered by semiconductor chips behind them. Another surprising application: direct communication with submerged submarines, made feasible because the new laser is small enough to install aboard a space satellite and powerful enough to send messages to the ocean depths. AT THE HUGHES Aircraft research labs, perched spectacularly on a hill overlooking the Pacific in Malibu, California, a new type of detector using quantum wells is under development. The devices are extremely sensitive and can be packed together in extraordinary densities. That allows them to capture light and heat with unprecedented efficiency, and they could be much cheaper to build than existing detectors. From an orbiting satellite, they will be able to sense a band of guerrillas or drug traffickers hiding in the jungle, simply by recognizing the temperature difference between people and their surroundings. Like an enormously powerful electronic thermometer, they convert heat emitted at a great distance into telltale temperature readings. Hughes is also completing a sizable production facility for so-called high- electron mobility transistors (HEMTs), equipped with quantum wells, that will be ten times more efficient than devices available now. This will greatly increase the transistors' sensitivity, enabling them to pick up almost imperceptible electronic signals. Arthur N. Chester, director of the Malibu lab, predicts that HEMTs will make possible direct broadcast transmissions from satellites that could be received on tiny antennas ''in your car, on top of your beanie, or in your wristwatch.'' With transmissions from satellites reaching every corner on earth, anyone could be reached anywhere. Unlike a user of cellular telephones, he would not have to be near a transmitter. GE is supplying NASA with a quantum sensor that will pick up the faint transmissions from the Voyager spacecraft when it moves past the edge of the solar system this year. Other quantum devices designed to speed up communication over optical fibers and enhance their capacity are under development at AT&T Bell Laboratories, Bellcore (the research arm of the Baby Bells), and elsewhere. Also moving closer to reality are quantum-well transistors, as different in concept from silicon transistors as silicon transistors are from vacuum tubes. The new transistors, for example, could become the heart of neural network computers that mimic the human brain. Texas Instruments has just surged ahead in this field with its December announcement that it has succeeded in constructing an experimental quantum-well transistor with critical dimensions 100 times smaller and potential operating speeds several thousand times faster than conventional transistors. George H. Heilmeier, TI's senior vice president and chief technical officer, foresees laptop supercomputers, memory devices the size of a walnut that would hold all the information in the Library of Congress, and vision systems for robots so smart that they can immediately make sense of anything they see. Even sober-minded scientists marvel at the speed with which the famous physicists' theories are suddenly being put to practical use. ''Quantum theory was all thought to be unimaginably remote from the devices of everyday life,'' says John A. Armstrong, vice president and director of research at IBM, another center of quantum research. Adds Bell Labs physicist David A.B. Miller: ''We are turning an intellectual curiosity into something we can engineer.'' At Bell Labs, for instance, Federico Capasso, head of AT&T's newly formed quantum phenomena and device research department, recently built a quantum-effect transistor that can perform the functions of 20 conventional transistors. Even so, Capasso's quantum transistor is slightly less advanced in some respects than TI's. To create practical results from quantum principles, scientists have to work with materials at a more elemental level than ever before. They are now reaching inside and rearranging the atomic structure of materials they work with, much as genetic engineers reorder DNA molecules, the code of life, in bacteria and the cells of plants and animals. The quantum engineers work on an even smaller scale than genetic engineers. They can already imprison a dozen or so electrons in a quantum well, and they hope to develop a still tinier device called a quantum dot that could confine a single electron in a box only slightly bigger than an atom. The electron's presence or absence could then serve to create the smallest memory cell ever devised, using the basic digital system computers employ to record and manipulate information. The electron's presence would stand for a binary 1 or YES; its absence would represent a 0 or NO. WHAT MAKES quantum engineering possible is scientists' newfound ability to , tailor-make materials for electronics and for optoelectronics, which uses light instead of electrons to transmit and record data. In the past engineers had to rely on the ability of natural substances to conduct electronic signals and to absorb and emit light. Now they can make to order whatever substances they need. They do it with special vacuum machines that deposit layers of materials the thickness of a single atom atop a wafer, frequently made of gallium arsenide, that serves as the foundation of the device being manufactured. So fine is their control that researchers can intermingle atoms of different types, creating sandwiches of materials that do not exist in nature. (Gallium arsenide itself is an artificial compound of gallium and arsenic.) Scientists combine such materials because their atomic structures allow electrons to pass through them more readily than through silicon, the workhorse of modern electronics. Gallium arsenide and other complex semiconductors can also be made to generate or detect light easily, which is virtually impossible with silicon. That makes feasible both novel transistors and such optoelectronic devices as semiconductor lasers, optical switches, and highly sensitive photodetectors. After the desired layers -- sometimes as many as 200 -- are deposited, the foundation wafer is then cut into tiny individual cubes, each the size of a grain of salt. Scientists can design a function into each tiny cube with an accuracy never before possible. By building up 200 layers of quantum wells in a single infrared detection device, for instance, researchers are able to create the equivalent of 200 consecutive fishing nets that efficiently capture all the incoming fish -- in this case, photons of light. That's how the device can see a lit candle miles away, using ultimately the same kind of mechanism the eye does: A receptor transforms an incoming quantum of light, a photon, into an electrical signal that the brain -- or a computer -- can recognize. Quantum engineers are already reasonably proficient at making individual quantum wells, but mass-production techniques for quantum devices have yet to be developed. Quantum-well lasers are coming along faster than quantum-well transistors, but mastery of this type of micromanufacturing is bound to take years. Even if quantum transistors could be mass-produced, incorporating such tiny entities into a chip presents still other substantial challenges. Connecting quantum wells with conventional wiring would defeat the purpose of quantum electronics. Even the smallest conventional wires would tower like telephone poles over the flyspeck quantum wells. TI and others are exploring something called cellular automata, arrangements whereby a few adjoining quantum dots could communicate with one another without wires. Despite the many uncertainties, TI scientists confidently foresee the construction of the first rudimentary quantum chip within a year or two. Quantum chips may not be sold by the billions until after the year 2000, and there may be detours along the way. IBM's Armstrong, for one, sees nitrogen- cooled silicon chips as potential competition for quantum devices. That minority view, however, may reflect IBM's traditional tendency to hold on to established technology as long as possible. TI's George Heilmeier likes to say that lead time -- being ahead of competitors -- is the only thing that really counts in high technology. As the American-Japanese industrial competition has shown, however, there's a lot more to success in the marketplace than getting there first. The big winner in this technology, as in many others, will be the company -- and the country -- that can successfully mass-produce quantum chips. When it comes to fighting it out in the factory, probably only the biggest U.S. corporations have any hope of success against the Japanese. Japan already supplies most of the semiconductor lasers for compact disc players and about half those used for fiber-optic cable transmissions, and Japanese companies are beginning to make quantum-well lasers too. IN THE U.S., much of the quantum work is supported by the Defense Advanced Research Projects Agency (Darpa). Only a handful of corporations -- chiefly AT&T, IBM, TI, GE, and Hughes Aircraft -- are deeply involved. No big U.S. company makes semiconductor lasers. In the emerging quantum-laser market, a handful of small entrepreneurial companies such as Spectra Diode and Ortel Corp. of Alhambra, California, are facing multibillion-dollar Japanese conglomerates like Hitachi, Sony, and NEC. Says Heilmeier: ''It's not a pretty picture.'' If there is a bright side for U.S. competitors, it's that the Japanese still lag in independent creativity. ''Whenever I go to Japan,'' says an IBM scientist, ''they keep asking me, 'What do we do next?' '' But they are getting better all the time.

BOX: HOW QUANTUM THEORY WORKS IN LASERS AND TRANSISTORS

Quantum mechanics deals with energy in bundles. The word quantum means / ''unit,'' and it was first used by Albert Einstein to describe the particle of light -- a photon, the ephemeral cousin of the electron. Photons have varying levels of energy that correspond to different colors -- frequencies -- of light. For example, red light is used in photographic darkrooms because its low energy level does not damage exposed film. In contrast, the much more energetic photons in blue light can penetrate deep into the sea. The light spectrum looks continuous, but it is not; each frequency is quantized -- that is, measurably distinct from its neighbor. Electrons too have discrete energy levels. In the quantum view of the atom, which replaced the earlier model of it as a miniature solar system, electrons orbit the nucleus not as planetlike particles but as clearly separated waves. Their distinct energy levels, corresponding to their varying distances from the nucleus, can be used to switch or amplify electronic signals; those are the basic functions of transistors. Similarly, the distinct energy levels of photons can be used in lasers that generate highly directed, concentrated beams of different colors for applications that range from reattaching retinas to cutting steel. While understanding discrete energy levels in photons and electrons was essential to developing the earliest lasers and transistors, scientists and engineers are now gaining control over quantum phenomena at a level approaching the ultimate in miniaturization. Potentially, a single electron could be confined inside atom-size energy boxes called quantum wells. In the photograph at left, the different energy levels of several electrons in a quantum well appear as different colors. When some of the electrons reach a particular energy level, they will tunnel through the thin walls of the well, a quantum effect that can be applied to ultrafast processing of signals in transistors. In the new quantum lasers, engineers use quantum wells to choose the light frequency they want. Attracted to the wells much like water flowing downhill, the negatively charged electrons combine with positively charged ''holes,'' spaces within the tight confines of the wells, to yield an intense stream of photons -- a beam of laser light of unprecedented power.