(FORTUNE Magazine) – FOR THE FIRST TIME since Japan devastated the U.S. consumer electronics industry in the 1970s, American companies have a chance to stage a comeback in a mighty market that has annual sales of $32 billion in the U.S. and $100 billion worldwide. In fact the resurgence in U.S.-designed and U.S.-made consumer electronics products is already under way. Consider these harbingers:

-- AT&T's 1337 telephone-answering device. It's no longer called a machine, because it has no moving parts; instead of a tape, the $99 gadget records messages on a memory chip. The hugely successful, attractively designed 1337 has captured well over half the market in the small but growing tapeless product segment, beating out Sony and other Japanese stalwarts.

-- AT&T's new VideoPhone. The $1,500 device, available in May, allows transmission of color video images -- albeit somewhat jerky ones -- over regular telephone wires. AT&T has jumped in ahead of foreign manufacturers with this product, too, and is finally delivering on the promises it made for its abortive PicturePhone in the 1970s.

-- Motorola's $1,200 MicroTac Lite Digital Personal Communicator. It's the company's latest cellular phone, the lightest and smallest commercially available anywhere. Motorola makes these dandy little phones in Arlington Heights, Illinois, and ships them to Japan and 50 other countries.

-- The first mass-market multimedia home computer priced under $1,000. A major PC and workstation maker will announce it shortly for introduction within the next few months. A number of companies including IBM, Next Computer, Silicon Graphics, and CompuAdd already offer multimedia versions of their PCs or workstations -- but at $5,000 and up. The new, more affordable multimedia PCs will speak, play music and video, send faxes, receive E-mail, and generally behave in a much more versatile and user-friendly fashion than their present- day PC forebears. The Japanese lag even further behind in multimedia than in cellular phones.

-- High-definition television. Three or four years from now, U.S. companies will have an opportunity to reenter in force the biggest segment of the consumer electronics market -- TV. American companies, along with U.S.-based subsidiaries of European-owned Thomson and Philips, hope to do just that with HDTV. The Federal Communications Commission is expected to set operating standards for U.S. HDTV receivers next year. Because the Japanese use older + technology in their HDTV system, the U.S. could leapfrog right past them. ALL THESE WONDERS are just the beginning of a plethora of electronic marvels to come from U.S. companies. What's making those products -- and the American comeback -- possible is an exciting U.S.-created and U.S.-dominated technology: digital signal processing, DSP for short. To many experts, DSP represents a turning point in electronics as dramatic and as wide-ranging in importance as the invention of the memory chip and the microprocessor -- the computer on a chip -- two decades ago. Those advances set off the electronics avalanche in the office and on the factory floor. DSP will now extend the penetration of electronics into almost every imaginable consumer niche in the home, in automobiles, in airplanes -- just about anywhere. What's the magic of DSP? It enables software engineers to translate familiar continuously varying analog signals -- voice and image signals, for instance -- into the discrete digital language of computing by using DSP chips. Once transformed into the 1's and 0's of computer code, the signals can be manipulated in a variety of ways impossible when they are in analog form. Example: Digitized audio signals can be greatly compressed so they take less space in the airwaves, opening up new channels for cellular telephones in big cities where capacity is already strained. With analog technology, only a single phone conversation can be transmitted over a radio bandwidth; digital systems can squeeze three or more conversations into the same space. Similar compression of video signals will bring hundreds of cable TV channels into the home. In one experiment in the New York City borough of Queens, American Television & Communications, a subsidiary of Time Warner (which owns FORTUNE's parent), already offers 150 cable channels through video compression. DSP can also eliminate ghost images from TV screens and banish those irritating Donald Duck squeaks and quacks from speeded-up playback of tape-recorded voice messages. A traveling executive could save time and long-distance charges by retrieving his messages at twice their recorded speed without losing sound quality. IN ANSWERING MACHINES, DSP allows manufacturers to offer features that rival high-end voice mail systems, including individualized mailboxes for different members of the family. Since there's no tape to rewind, the digital answering devices offer immediate playback of messages. The absence of moving parts makes these new products easier to manufacture and more reliable. AT&T offers a two-year warranty on its 1337, twice that on its tape machines. The 1337 provides seven minutes of recording time. Although AT&T's tape- equipped machines are good for at least half an hour's worth of messages, the company found that more than 90% of people who use recording machines at home think seven minutes is adequate. For business customers, AT&T is planning to build a 30-minute version of the 1337 that may sell for $150 to $200. Inexpensive DSP-powered telephones that recognize phone numbers spoken aloud and then dial them are entering the market. Automobile travelers are in for some pleasant surprises thanks to DSP. Car mufflers -- not to mention eardrum-shattering power leaf blowers and lawn mowers -- will operate almost silently, thanks to a DSP trick that creates a stream of antinoise signals canceling out the racket. More cars will soon ride on DSP-controlled adaptive suspensions that instantaneously tailor the motion of each wheel to every pothole or highway expansion joint, as Britain's Lotus already does. Inside, extraneous engine and outside noise will be eliminated, making every Chevrolet potentially as majestically silent as a Rolls-Royce. And anticollision automobile radar systems are finally in sight, thanks to DSP. ''Hardly a month goes by without a new DSP application making headlines,'' says Will Strauss, president of Forward Concepts, a DSP market research company in Tempe, Arizona. At the heart of DSP is the most complex computer software yet devised, consisting of complicated mathematical formulas known as algorithms. In essence, an algorithm is a set of instructions to execute a specific function -- to generate a tone in a telephone, for example. A recipe for baking a cake is a kind of algorithm. Everyone agrees that the U.S. -- with an important assist from Israeli mathematicians, including some ex-Soviet scientists -- holds a significant advantage in DSP, particularly over Japanese and other Far Eastern competitors. So adept are the Israelis in algorithm creation that a whole ''DSP Valley'' has arisen in Israel. U.S. semiconductor companies tap into the talent pool there via subsidiaries set up for that purpose. In Silicon Valley a number of companies started by Israelis or ex-Israelis, such as DSP Group Inc. and Zoran Corp., specialize in creating algorithms. It's a happy break for the U.S. that DSP isn't a fairly simple technology like the one that underlies DRAMs (dynamic random access memories), which the Japanese picked up, copied, and ran away with. DSP technology is considerably more complex and fast-moving, which makes it far tougher for the Japanese to appropriate. ''The DSP business is dramatically different from what the Japanese are used to,'' says Prabhat K. Dubey, director of processors at AT& T's microelectronics division. ''They are used to a stable, predictable environment with a step-by-step progression like DRAMs. In the DSP world, much more intellectual content and finesse are required rather than a brute force approach.'' Writing algorithms demands intuition and lots of creativity, which have not been the forte of the Japanese. Authors of complex algorithms are software's counterparts of composers. ''All algorithm developers are artists,'' says Levy Gerzberg, an ex-Israeli mathematician and former Stanford professor who is now CEO of Zoran Corp. DSP chips are the most complex mathematical processing engines yet created in silicon: They can perform ten times as many numerical operations -- up to 270 million a second -- as the advanced Intel or Motorola microprocessors that power late-model PCs. The chips can also be programmed to run up to six different functions at the same time -- say, playing classical music, sending a fax, and receiving voice mail all at once. THE JAPANESE have not yet learned how to sing this kind of high-tech tune well. Not that they haven't tried. In the early 1980s NEC, Ricoh, Fuji, Oki, and other Japanese companies attempted to dominate the emerging DSP chip market in the U.S. But as the chips and the algorithms they contained increased in complexity, the Japanese couldn't hack it. ''Their chips didn't fly,'' says one DSP specialist. NEC is the only Japanese company still active in the U.S. DSP market -- and it's a special case: 90% of its American volume goes to a Motorola subsidiary as modem chips. The Japanese retreat from an initial 93% of the market to a mere 6.5% today may be their first major defeat in any segment of the semiconductor business. The worldwide DSP chip market is galloping ahead by nearly 30% a year, three times as fast as semiconductors as a whole, according to Will Strauss of Forward Concepts. He sees this year's $1.1 billion in DSP chip sales growing to $4 billion in 1996. Some semiconductor company executives think Strauss is too conservative; in the past few years sales of the chips by major suppliers -- Texas Instruments, AT&T, and Motorola -- have been doubling and even tripling annually. When the chips were first developed in the early 1980s for military radar, sonar, and weapons applications, they were too expensive for most commercial uses. But now prices for the simplest chip have fallen from $50 as recently as 1985 to less than $5. Ready availability and low price are what's putting DSP chips into consumer products on a massive scale. The fact that the U.S. looms so large in DSP does not automatically guarantee a big U.S. comeback in consumer electronics, of course. It offers the opportunity, but ultimately success depends on whether U.S. companies grasp their advantage in algorithms and translate it into new products faster than overseas competitors. Right now the Japanese are smarting from an unaccustomed delay in time to market. Their huge consumer electronics combines such as Sony, Sanyo, and Matsushita (maker of Panasonic products) manufacture their own memory chips and other semiconductors. But lack of in-house DSP capability has put a hurdle in their path. ''Japanese consumer electronics companies in the past synchronized their semiconductor production with end-product design,'' says Bulent Celebi, a group director at National Semiconductor. ''Now, without their own DSP capabilities, they can't do that.'' Unable to create everything they need internally, the Japanese have to rely on outsiders -- including small Silicon Valley DSP chip design firms. That has helped American companies bring DSP- powered products to market ahead of the Japanese. AT&T beat both Sony and Panasonic to market with its 1337 answering device, Sony by eight months and Panasonic by more than a year. ''Four years ago we were an also-ran in telephone answering machines,'' says John F. Hanley, AT&T group vice president for consumer products. ''Today we're the clear market leader. The 1337 is enhancing our lead position.'' Casey Dworkin, president of Personal Technology Research, a consumer electronics data company in Waltham, Massachusetts, puts AT&T's share of the U.S. digital answering device market -- which will total some $140 million this year -- at a fat 70%. He expects the market to grow to around $430 million in five years. The digital units already account for 7% of new answering machines and are expected to make up 26% in five years. Hanley promises that AT&T's VideoPhone will be followed by ''an array of products yet to come -- more video, speech, computing products'' for the consumer market. He adds: ''DSP offers a tremendous opportunity for the future. It allows much more flexibility in designing more compact products. And it allows us to mass-customize products as well.'' For example, this summer AT&T will put a DSP chip inside a $200 voice-activated cellular phone dialer that will respond to commands in either English or Spanish. Hanley says sales at AT&T's eight-year-old consumer electronics division are growing 20% a year. AMERICAN DSP successes are creating new manufacturing jobs. Motorola is expanding its facilities in suburban Chicago to meet a growing demand for cellular phones. Companies that supply DSP know-how and hardware are booming. Michael Lubin is executive vice president of Pacific Communication Sciences Inc., of San Diego, a leader in applying DSP technology to telephones. He says his company ''can't hire fast enough to keep up with all our opportunities.'' Pacific Communication supplied DSP and transmission components for a new air- to-ground service just inaugurated on USAir by In-Flight Phone Corp. of Oak Brook, Illinois. A terminal and telephone at a passenger's seat make available phone calls, stock quotes, PC data links, E-mail messages, and fax transmissions. All this growth in the uses of DSP is expected to create whole new subsets of industries. The silent-muffler business alone could amount to several hundred million dollars a year, according to some estimates. So could DSP systems designed to silence vacuum cleaners, air conditioners, and refrigerators, an application Electrolux and other manufacturers are looking into. OF THE FEW American consumer electronics companies that survived the Japanese blitz of the 1970s, Zenith is still U.S.-owned, but it assembles its TV sets in Mexico from U.S.-made components. France's Thomson and Holland's Philips, the new owners of the old GE and RCA factories and research facilities, produce -- in the U.S. -- more than one-third of all TV sets Americans buy. All three are working on HDTV with such high-tech powerhouses as AT&T's Bell Labs, MIT, the David Sarnoff Research Center, and Compression Labs Inc. of San Jose, California. A pioneer in video signal processing, Compression Labs helped create AT&T's VideoPhone. The company is now a member of the Thomson-Philips-NB C HDTV consortium, one of three competing groupings. The others are Zenith-AT&T and General Instrument-MIT. The FCC may choose a hybrid prototype of an HDTV receiver, using pieces of designs from different groups. In any case, the participants will be required to license the technology to other manufacturers. Their presence in the U.S., where the most advanced digital HDTV technology is being developed, will give Zenith, Thomson, and Philips a leg up on the Japanese in manufacturing HDTV sets for the U.S. and possibly the European market too. Japanese companies will eventually make HDTV sets for American consumers as well, but at least in the beginning they will be at a disadvantage because Japanese authorities chose the older analog route to HDTV. The coming of DSP means that the ranks of U.S. consumer electronics companies could be bolstered by semiconductor makers and regional Bell telephone companies. Texas Instruments carved out a niche for its DSP chips in educational products such as Speak 'n' Spell and computers for children. Now TI is looking for new opportunities in consumer electronics, including ways to sell its educational products in Japan. Northwestern Bell and Bell South already offer digital answering devices built for them by outside manufacturers. Eastman Kodak has gone into consumer electronics too. In photo- processing shops, the company will soon install Sun Microsystems workstations that scan negatives and transfer pictures onto a CD-ROM disk so photographs can be preserved in digital form. The company plans a similar product for the home. Yet another sign that American companies are awakening to the new possibilities in consumer electronics: Hewlett-Packard just announced a device that allows interactive use of home TV sets for shopping and banking, as well as exchanging data with pocket computers. ''We believe in a coming convergence of consumer and professional markets,'' says vice president Roy E. Verley. ''There probably will be other opportunities for us to cross the line into the consumer area.'' U.S. computer companies will be the principal makers of multimedia PCs. As a step in that direction, IBM recently joined forces with Apple Computer to develop multimedia software. Already available from semiconductor companies are add-on boards that can upgrade existing PCs to multimedia machines. Today those boards start at about $2,000, but by summer the price should drop to $500. Rana Mainee, an analyst with Inteco Corp., a Norwalk, Connecticut, PC market research company, estimates that three years from now about 1.5 million % multimedia PCs will be sold in the U.S. annually, and another 750,000 PCs will be upgraded to multimedia machines with enhancement boards. At least 85% of multimedia PCs will be either American-made or American-designed, Mainee adds. ''The Japanese don't have much of a chance in multimedia PCs,'' says Tom Lookabaugh, director of research and new business technology at Compression Labs. ''I really don't see them playing a role for some time.'' Now there's a switch.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: FORWARD CONCEPTS CAPTION: THE BIG SWITCH Using DSP, USAir is inaugurating at-your-seat E-mail, faxes, stock quotes, PC data links, and phone calls. The chart above shows how Japan, initially dominant, has lost out almost completely to the U.S. as DSP technology becomes ever more complex. Says one expert: ''Their chips didn't fly.''

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: FORWARD CONCEPTS CAPTION: A HOT NICHE IN A COOL MARKET Sales of DSP chips are growing three times as fast as those of the semiconductor industry as a whole.