(FORTUNE Magazine) – In the heyday of the muscle cars, Detroit's horsepower race was always hampered by reality: You couldn't go 200 mph on America's highways. The extra horsepower was wasted. There are no speed limits in the computer world, however. The more performance you have, the better off you'll be. Today, the bragging rights belong to the fastest microprocessor, not the biggest V-8.

Cheaper, faster, better remains the iron law of the computer industry. Instead of the thousands of transistors on Intel's early microprocessors, the latest Pentium II chips have 7.5 million transistors on a tiny sliver of silicon. The immense power of the newest microprocessors--from Intel and its competitors--means that this year's state-of-the-art personal computer is an astonishingly capable machine.

The flagship business-class PCs have seen as much as a 40% jump in power over last year's state-of-the-art models. Memory and storage capacity have doubled in some cases. The standard configuration this year boasts a 300MHz chip, at least 32MB of RAM, and a hard drive of 2GB or more. Meanwhile, you won't pay any more for these big gains. Prices have leveled off for the top-tier models.

The relentless economic cycle that distinguishes the computer business from most others is at work here, too: As yesterday's state-of-the-art chips rapidly cascade down through the lower-priced product lines, computer makers are putting microprocessors that would have been the envy of the computer world a little more than a year ago into machines selling for less than $1,000, a domain once reserved mainly for used models and the occasional no-name brand.

BUSINESS BOXES

As competition intensifies, manufacturers are loading up their high-end machines as never before, but in varying ways. Today's top-tier business boxes mostly stick to the essentials: faster processors and CD-ROM drives, more memory and storage capacity. Home PCs, on the other hand, now come loaded with fax modems, DVD drives, TV tuners, sophisticated stereo speakers, and other fancy peripherals. And thanks to a networking traffic surge in many companies, last year's dual-processor servers have quickly given way to quad-chip machines, which are today's biggest systems.

Yet the marketplace this year is also pegged by increasing confusion. Not long ago, competition had di-vided the world into two unequal camps--with Intel and Microsoft owning most of the market, while a hardy band of loyalists remained true to Apple's Macintosh operating system. Now, the Intel world is spinning off in many directions at once; and Microsoft is juggling a welter of operating systems--Windows 95, Windows NT, and the venerable Windows 3.x--and brewing up successors for each.

Meanwhile, Intel's once linear progression through its x86 family of microprocessors has given way to today's somewhat chaotic variety. Intel offers the Pentium, the Pentium Pro, and the Pentium II, and various combinations with MMX technology to speed up graphics handling--all running at various clock speeds, all claiming a different price/performance benefit. Confusing? It only gets worse. The company plans rapid-fire introductions of faster versions of these chips over the next 18 months. And this doesn't even take into consideration the low-energy processors for notebooks. In all, Intel has more than one dozen CPUs on the market.

What's more, several players have begun to challenge Intel's towering dominance. Cyrix and AMD, in particular, now offer serious alternatives to Intel CPUs, and Digital's Alpha chip delivers faster performance using Windows NT than anything in Intel's stable.

Both Cyrix and AMD have offered Intel-compatible chips for some time, but they had always tried to compete on price alone, offering slower versions of comparable chips for lower costs. Now they've altered their tactics--competing on performance as well as price. AMD's K6 CPU and Cyrix's 6x86 and M2 chips are as fast or faster than comparable Intel parts, yet cost less. More important, their chips are "pin-compatible" with Intel parts, which means that PC manufacturers can pop them into motherboards designed for Pentium chips, bypassing the design costs of building new motherboards.

So far, many of the industry's big guns--Dell, Gateway, Hewlett-Packard, IBM, Micron, and NEC--have largely steered clear of CPUs from AMD and Cyrix. Intel's are still the industry standard. But smaller companies such as CyberMax, Micro Express, Mitsba, Polywell, Sys, and Xi have leapt at the chance to stand up to market leaders in price and performance by using AMD and Cyrix parts.

The role that Digital's Alpha chip will play is less clear. A workstation-class CPU, Digital's Alpha was designed from the ground up to run Windows NT, the operating system that is gaining momentum in corporate America. It offers the best performance available, but Alpha PCs have typically cost in the $10,000 to $20,000 range. Those prices have begun to slump in recent months, and Digital has already signed up Enorex and other several manufacturers to build PCs around its chip.

SILICON SHAKEOUT

Clearly, the battle among the chipmakers is creating an enormous upheaval across the industry, and few experts doubt that a shakeout will result. More than just bewildering buyers, the welter of microprocessors is forcing PC makers to build, support, and market too many models of computers. In the meantime, today's chip wars continue to pound prices. Acer and Seanix have already introduced fully loaded Pentium-based PCs for less than $1,000, and computer retailer CompUSA has weighed in with its own brand of Pentium-based machines under $1,000. Top-drawer technology still commands a premium, of course, but the bar continues to drop.

Microprocessors aren't the only computer components that have seen their costs head south. The collapse in memory prices over the past 18 months has been a boon not only to PC buyers, but to software makers who no longer feel the need to restrain the code in their huge programs. Most systems now come with 16MB of memory, though high-end boxes feature 32MB. Given the memory demands of multimedia and high-resolution graphics, more is definitely better. Indeed, by adding more memory you can boost the overall performance of some systems without having to upgrade the processor, too

Thanks to improved manufacturing techniques, the per-megabyte price of hard drives has also plunged over the past 12 months. Just two years ago, a 500MB drive provided capacity to spare. Today, a 2GB drive is fairly standard; the best systems will feature 4GB or more. Somehow it seems you can always use more. A typical software suite today is going to occupy 120MB of hard drive space, sometimes more. And multimedia files, Web pages, and graphics-laden documents have the habit of making hundreds of megabytes vanish in a blink.

Better hard drives in desktop PCs now conform to the so-called Ultra ATA standard co-developed by Quantum and Intel. Not only does it spin platters faster, but it transfers data from the disk to memory much faster than the old EIDE standard. This is paricularly important for the performance of full-motion video, large database searches, and very high-end graphics. Fast SCSI-2 drives are still the standard for network servers and high-end workstations, despite their higher expense. SCSI drives achieve even higher transfer rates than Ultra ATA drives, and they allow you to daisy-chain up to seven disks in a single PC.

This year, many computer system makers are including DVD drives, the successor to CD-ROM, as standard equipment in their high-end PCs. DVD disks can hold 4.7GB of information--enough for a full-length movie--on a disk the same size as a CD. Problem is, there aren't many titles available for the new format yet. No matter: They can read plain-vanilla CDs as well. But many buyers will prefer to wait for DVD costs to come down and the number of titles to increase. Meanwhile, 16- and 20-speed CD-ROM drives now cost less than $300.

Cheap, plentiful storage is also available with Iomega's Jaz and Zip drives, which can hold anywhere from 10MB to 100MB of data. Both technologies are nearly as fast as hard drives. They provide an excellent way to back up data in the most unobtrusive way possible. They're also handy for taking multimedia business presentations, big databases, and large graphics files on the road. It's no wonder that many system makers now include one or the other of these drives as part of the standard equipment package.

Much of what's driving the PC's insatiable demand for storage capa-city and memory is multimedia. Even most business PCs now come with audio circuitry, and often with speakers. Bare-bones audio--FM synthesis--is quickly giving way to WaveTable synthesis, in which actual sounds are stored, then sampled on demand. The result is higher fidelity. On most PCs it is an option, though a few systems offer WaveTable synthesis as standard equipment.

The same is true of surround-sound audio, also called 3-D audio, which renders a spatial relationship between sounds, typical of the audio systems in better movie theaters. It's a game junkie's dream, of course, but it's also turning up in many corporate conference rooms. Surround sound gives sales presentations dramatic flair and greater impact. And interactive training software suddenly becomes vivid and memorable.

HOLY GRAIL

In fact, 3-D--both audio and graphics--has become the holy grail for PCs this year. Unfettered by memory or storage constraints, today's software packages--including everything from games and educational titles to presentation programs and the help routine in word processors and spreadsheets--are loaded with 3-D graphics. As you'd expect, this puts a big burden on video cards.

The good news is that 3-D video accelerators now cost less than $300; they're standard fare in most PCs today. Better models support Microsoft's Direct 3-D standard, which is enjoying growing support among software developers as a way to boost the perfomance of 3-D graphics and animated sequences.

Meanwhile, the declining costs of memory have led manufacturers to load their video cards with 4MB--or even 8MB--of video memory, up from the standard 1MB or 2MB only a year ago. More memory helps render photo-quality images at high resolutions and makes for seamless full-motion video.

What better way to view all this 3-D glory than with a big 17- or even 20-inch monitor? Bigger screens allow you to take advantage of the Pentium's multitasking capabilities, keeping multiple applications open and in view at any one time. While writing a report, you can search the Web for a statistic, then pop it into your document on the spot. It's no wonder that big monitors are quickly becoming a standard in both corporate and home settings.

On the other hand, a bigger screen can add at least $500 to $700 onto the price of a system. In the past year, market research studies from the Gartner Group and Forrester Research suggest that the cost of buying and maintaining corporate PCs is much higher than previously assumed, especially when you consider the lost productivity from the tinkering that PCs inevitably invite.

As a result, there is a move in the industry to provide much lower-cost computers that leave out key components such as hard disk drives. However, these low-cost strategies are unlikely to have a big impact on the mainstream personal computer market.

Detroit's attempts to build fuel-stingy econoboxes during the oil shortages of the 1970s never proved very popular--and millions of buyers now opt for bigger, fuel- hungry sport utility vehicles. And the same phenomenon is likely to be replayed this time in the computer industry, where somehow there always seems to be insatiable demand for bigger, faster machines.