Ed Alago drives his white Cadillac through the refuse-lined streets of Brooklyn's Williamsburg section, a loveless stretch of graffiti-covered concrete that was once his home and is now the location of his company. Maneuvering around potholes and shards of glass, Alago describes a typical business day.

"Not too long ago, this punk broke into my Caddy.I keep it parked right at the entrance of my business, where I can keep an eye on it, and he tried to strip it in broad daylight," says Alago, his raspy voice rising in anger. "Angel, one of my guys, and me chased him down the street. I pulled my gun on him, and we threw him into the car. At first he wasn't very cooperative, but Angel gave him a few raps on the head with a pipe, and that settled him down. I knew if I just handed him over to the police, some bleeding-heart judge would let him go and he'd be back.

"So I decided to give him a little lesson. First I took the clip out of my gun. Then I shoved him into my office chair, put the gun to his head, and started to squeeze the trigger -- slowly. I screamed at him: 'See this gun? I'm gonna blow your goddamn brains all over this office!' Then . . . click." Alago chuckles. "He never bothered me again."

This is not Silicon Valley.

"We have lots of junkies and robberies around here, and many homicides as well," says Nelson Arroyo, a detective who has been with the New York City Police Department for 15 years. Arroyo, whose beat once covered the neighborhood where Alago's company is located, knows of the incident with the empty gun. Alago-style justice, he says, is not uncommon in this part of the world. "If you show fear or weakness, you get victimized. A lot of businesspeople have moved out, but Eddie is from the neighborhood. He knows the score, and he's a survivor. He lets people know that they can't mess with him and get away with it. No one is going to make him move his company."

Alago, 42 and Puerto Rican-born, founded Alago Sales and Manufacturing Corp. in 1978 out of a seedy Brooklyn storefront. He and his partners, both family friends, had little knowledge of business, no bank loans, and no help from the Small Business Administration. They did have $10,000 in cash. They also had a machine invented and patented by Alago that could cut "panels" -- pieces of mattress fabric -- faster, easier, and cheaper than anything else on the market.

Today, the company is selling its panelcutting machines nationwide and in Saudi Arabia, Singapore, Venezuela, and Puerto Rico. Sales reached $370,000 in 1983, and they are expected to at least double this year. In the United States, where the ethic of upward mobility remains strong, such a rags-to-incipient-riches tale by itself is nothing new. But while many entrepreneurs begin their training in business school, Ed Alago began his where he ultimately chose to stay: on the mean streets of New York.

"I didn't have any background in business or engineering when I started this company," says Alago, "but I knew that the big fish eat the little fish." As a teenager, he belonged to a Brooklyn street gang, and he bears the scars on his wrists and eyebrows from rumbles and knife fights of hot summers past. A short, swarthy man with a full mustache and hard brown eyes, he seems tightly wound, as if about to lash out at any moment."He's the kind of boss you want to keep happy," says Jose "Papo" Torres, 22, a welder employed by Alago. "He can get pretty mad."

Alago was honorably discharged from the Marines in 1962. He thought of reenlisting to fight in Vietnam, but his wife persuaded him to stay home with her and their three daughters. After a series of dead-end jobs in mills and factories, he landed a position in 1965 as head cutter at C.M.C. Sleeper Products Inc., a local mattress manufacturer.G.M.C. managers noticed Alago's knack with machines and his willingness to work hard, and moved him up to supervisor of the company's cutting and sewing operations. During his tenure as supervisor, engineering ideas that had been percolating in his mind for years began to surface and take shape.

"Cutting machines are bulky," he explains. "It occurred to me that a simpler, faster machine could be built. For instance, instead of having separate rollers that feed the material and separate knives that cut it, why not make a single unit that can perform both functions at the same time? I made some sketches of my ideas, and started working in the basement of my tenement, taking apart sewing and laundry machines, using automobile parts, whatever I could get my hands on."

Working nights and weekends, Alago put together a mock-up at home, and later he built a prototype that G.M.C. allowed him to demonstrate on company space. He invited bedding executives to view the machine in operation, and word quickly spread in the industry of a remarkably efficient new machine created by an unknown engineering whiz. Orders for the machines, which cost about $14,000 each, started to come in. "My aunt's brother-in-law got excited," recalls Alago," and he said we should form a corporation to manufacture and sell my machine. He was a shoe salesman, and I knew nothing about running a company. But I figured, hey, it's worth a try. He put up ten grand. I put up my patent."

The pair brought another friend into the company as well. But as sales picked up, Alago felt the urge to take total control over the invention he still calls "my baby." He bought out both partners in 1979, and in 1982 moved to 3,000 square feet of shop space in Williamsburg, where he has dug in his heels and stayed. "Williamsburg is a rough section, no question about that," says Mike Littmann, director of marketing for the Brooklyn Chamber of Commerce. "But the rent and the taxes are low, and that's a major incentive for a small business to stay."

The difficulties presented by his location aren't the only obstacles Alago has had to overcome. Largely dependent on the fortunes of the housing industry, the $1.5-billion wholesale bedding industry is expected to benefit from the economic recovery and grow this year by about 14%. But the industry's long-term growth is sluggish, and the market both for mattresses and the machines that make them is easily saturated. The panel-cutting business, a tiny corner of the industry, is made up of fewer than a dozen companies, most of them small.

"Bedding is a very mature and competitive industry," says Nancy Butler, editor of Bedding magazine. "It has never been considered a growth industry. It's rare for an entrepreneur to look at the industry and say, 'Hey, wow, I'm getting into this business!' It's a constant market-share fight, with everyone struggling for a piece of the same size pie."

Alago has carved out his piece primarily through imaginative engineering. "This ain't high tech, but the man's a genius anyway," declares G.M.C. vice-president Bruce Gelbard, a fast-talking New Yorker whose family has been in the mattress business for generations. "Eddie's [panel-cutting] machine is cheaper, has less breakdowns, and takes up, jeez, maybe eight times less space than other cutting machines." Gelbard raps his knuckles on the surface of his desk. "Eddie has done okay for himself, knock on Formica. We were proud to nurture him along."

Alago's key innovations lie in his machines' compactness and simplicity. His standard panel-cutter is a metal frame about 8' X 5' X 2' fitted with a series of circular blades that are pneumatically forced against the fabric and a hardened roller. The circular blades do lengthwise slitting; a razor knife fastened to a carriage does the crosswise slitting. The machine is more adaptable than most competing models, and can easily perform such additional tasks as running in conjunction with an auxiliary stitcher. "I stay ahead of my competitors by keeping it versatile and almost maintenance-free," says Alago. "The most expensive part [on the panel-cutting machine] is worth about $250. If I started making them more complicated, I would be working against myself."

Bedding-industry insiders increasingly associate Alago Manufacturing's name with quality. The only components made by outside contractors are the electrical control box, which sets such variables as quantity and speed, and the power-drive units. To ensure greater quality control, Alago is preparing to manufacture everything in-house. Sometime this year, he says, he will hire an electrical engineer to make the control boxes. "The parts my company makes itself never have any problems," says Alago, "but sometimes, when I plug in a new machine to test it, poof! Smoke starts coming out of the control box. I'm not going to tolerate that anymore."

Alago has also begun to design and sell a diversified line of machines that make a range of consumer goods, such as pillows and curtains. One model he has introduced cuts panels with either a straight or a pinked edge, then stacks finished panels and winds the surplus cloth into rolls -- features not usually found in one machine. Another invention is a device with robotic fingers that counts and stacks panels that have been quilted by hand.

Murray Safier, president of Canvas Specialty Co. of Glendale, N.Y., a maker of warehouse and moving supplies, recently installed Alago's robotic devices in his factory. "I used to have 10 girls doing that," he says, pointing to a row of five busy machines, each one operated by a woman. "Now I have 5 who produce the same number of units. The man has doubled my production." Like many customers, Safier often calls Alago on short notice, either to ask him to inspect an existing machine that is not working properly or to make a machine to handle a specific problem.

Walking across the crowded and dusty factory floor to a quilting machine, Safier relates an example of Alago's talent for ad hoc engineering. "This machine was falling apart, shaking like a 90-year-old lady, a lousy bag of bones," he says, resting a hand on a web of needles, thread, gears, and pistons that is about half the size of a compact car. "I was on the verge of getting it completely overhauled for about 10 grand. But first I called Eddie, and told him to try something. He comes over, spends maybe five minutes with it, says it's no problem. He goes back to his shop and makes these special brackets for it, to stop it from vibrating. Now it runs like a bat outta hell. He charged me 50 bucks for the parts and nothing for the labor."

Alago sells his machines through sales representatives scattered across the United States and overseas. Although his salesmen are experienced sellers of various brands and types of heavy machinery, he frequently goes out in the field to push his products himself. Currently, he is setting up a network of contacts in Southeast Asia, a hot spot in textile-related industries. "There's quite a bit of fabric being produced over there," says James Bennett, an economist with the International Trade Administration in Washington, D.C. "Capital investment is picking up, and there's a good market over there for [fabric-cutting] technology." Alago meets foreign businesspeople and government representatives at trade shows, and his salesmen initiate contracts through letters and telephone calls. He has sold seven panel-cutters in Puerto Rico, and recently sold one to a company in Singapore. Companies in Taiwan, the Philippines, and Israel have sent what he says are promising "nibbles," and the Saudi Arabian government just brought a machine, adapting it to make the national flag.

Alago's main strengths are salesmanship and engineering -- not, he admits, day-to-day management. He does, though, have a flair for managing people. He gives Angel Rios, for instance, his machinist and childhood friend, a percentage on prototypes in addition to salary. "I worked very long hours one month," says Rios, "so I decided to figure out what I was being paid. It came to 25? an hour." But Rios, who once fought alongside his boss in street gangs and still helps him chase down the occasional thug, wouldn't have it any other way. "Ed's got something here, and I'm glad I'm part of it."

Drinking red wine over a dinner of rice and beans in his middle-class home in Queens, Alago recalls his upbringing in near-poverty. "My father died when I was in high school, so it fell to my mother to raise me. She wanted me to be special, and pushed me to succeed. Every morning before she went to work, she would give me a little moral lecture, trying to get the difference between right and wrong into my head." He says many of his friends turned to robbing stores; some were jailed, some killed. His career goals were different. "In school, my favorite subject was art, believe it or not. I've always been happiest making real things from ideas. Someday, I'd like to get out of the daily operations of my business and spend all my time on pure research and development."

Rep. Robert Garcia, a Democratic congressman from the South Bronx, represents a district that has become a national symbol of urban decay. To him, Alago is one of the "unsung heroes" of American business. "Ed Alago is an example of some of the raw talent that exists in Williamsburg, or places like Harlem or the South Bronx," he says. "It's a credit to him that he accomplished so much on his own. There are many decision makers who don't realize how many people like him are out there. They can be a potent political force through their example."

Alago, scornful of politics and uncomfortable in the role of inner-city hero, subscribes to the existential principle that a man should be known by his actions. "I don't like to belong to any group," he says, "because it takes up too much of my time, and I don't like owing anybody any favors. You improve society by first improving yourself. I love my country, but I can't stand it when these activists tell me to get involved in their causes. I get into arguments all the time with relatives who tell me I should do more for my people. Baloney. What the hell do they mean by 'my people'? My people is me."