Buried in the basement of Contel Corp.'s nine-month-old federal systems sector headquarters lies a laboratory jammed with the latest electronic gadgetry.

The technology center, nestled in the woods of Chantilly, is funded solely by the company -- a striking departure from the method by which many government contractors have conducted their research and development efforts.

Contel President Don Weber's emphasis on technology -- a key factor in the company's three-year transformation from a slowly growing rural telephone company to a $3.1 billion player in the exploding cellular telephone business -- recently led to a takeover bid from GTE Corp., which Contel shareholders are expected to approve later this year.

At a time when many companies are contemplating cuts in research to make themselves lower-cost competitors in the derby for government contracts, Contel's approach, including its $12 million annual budget for the Chantilly research lab, stands apart.

"Normally a company that does exclusively federal government business relies on independent research and development {IRAD} funds, which can be recovered from contract costs, as its primary R&D source," said Alan Salisbury, president of Contel's technology center, which has 80 workers. "The programs you undertake utilizing IRAD funds are all subject to government scrutiny. Although our federal systems sector does IRAD projects, they're separate from the technology center's projects. So our projects don't have to pass {the government's} approval."

"We can take more risks," Salisbury said. "Potentially we can end-run some people. We can outflank our competition by coming up with the unexpected. We've got greater flexibility to take {technology development} in the direction we want. And certainly we have a greater degree of security in protecting our ideas because we control it."

The payoffs from that unusual approach have been most immediate for Contel's federal systems unit.

Contel President Stuart Johnson said the flexibility and speed of the technology transfer from the center has made the federal systems unit a star performer. The unit, which had a 1987 operating loss of $29.2 million, expects to have an operating income of $30 million in 1990. It also has turned into a tough competitor, winning half of the contracts on which it bids and amassing a backlog of $1.3 billion.

While Contel's federal unit is the technology center's leading customer in specifically requesting projects, Contel's three other business units -- cellular communications, telephone operations and information systems -- also are quick to seek the center's expertise.

Each business unit would like its specific needs to be the center's top priorities. But the center also has the freedom to pursue projects closer to the technological frontier that are not necessarily related to a business unit's immediate need.

"Our focus is intended for the three-to five-year time frame," Salisbury said. "Since we're a little more than two years old, it's premature to look for any tangible products we've delivered yet. Besides, that's not really our business. Our end product is technology that can be provided to the business units."

Befitting its role as the engine that drives the Contel technology machine, the center is in the throes of a number of projects that it expects will shortly give the business units a competitive advantage.

To boost Contel to the head of the cellular line, the center is designing alternatives for how to economically provide telephone service to rural areas.

To make a cellular call, the caller has to be near a cell site. In a major metropolitan area, it's easy as well as economical to totally cover the calling area. In a rural area, where there is far more land than people, a cellular provider can't saturate the geography without committing economic suicide.

So the center is investigating unique radio architectures that would allow Contel to provide cellular service along interstate highways without, as Salisbury said, providing service to the coyotes.

For the telephone operations unit, the center is using its applications laboratory in Chantilly to test prototypes of video-conferencing and image transfer over the latest telephone technology -- integrated digital services network.

The center also has developed a computer model for determining when to transmit phone calls via fiber optic cable rather than the traditional copper wire. Fiber is superior, but also far more expensive.

In what may become another significant edge for the federal systems unit, the center is investigating how to reuse company-owned software.

The technique would establish a software library that would allow programmers access to previously used software programs. The ensuing ability to reuse those pieces would avoid the considerable costs of developing a new program for the same function. It would also considerably increase the productivity of the programmers who write software.

Kurt Fischer, director of the center's software engineering laboratory, said those results would give the federal systems sector a crucial advantage in bidding for federal contracts.

Maximizing the corporate resources as well as being free of government influence was exactly what Weber had planned when he and other company executives began thinking about becoming a technology-driven company. Weber's predecessor in 1986 had created a technology policy committee, and it was that group's recommendation that convinced a somewhat reluctant Weber that his company's technology time had come.

"Way back I would have been one of the early doubters about how much value added {a technology center} would bring to Contel," Weber said. "I kept asking myself questions: Why do I need this function? Why do I need these people looking at technology in a three- to five-year window?

"Once I became convinced, I had to get my mangement to change their minds. I had to make them realize that what we needed to do in the future to become more technology oriented was to elevate technology within Contel. I knew of no other way to get their attention except putting my money where my mouth was."

Webber found the initial funding for the center without causing a negative impact on the bottom line. The center spent only $2.9 million of its initial $5 million budget, but it has since made up for that as its annual budget has grown to $12 million.

At Contel's recent quarterly management meeting, the technology center's Salisbury presented estimates for cost savings and revenue over the next five years. It was the first time the technology center had quantified its existence in such stark statistical terms, but it surely won't be the last.

"You're really talking about the culture of the whole company when you're trying to change from a phone company to a technology-oriented company," Weber said. "Everybody was so focused on being a phone company that even though they all recognized the need to be a technology-driven company, it was a tremendous leap to make the step to actually do it."

Was the leap worth it?

"We can't make a judgment on that yet," Salisbury said. "That will come in about a year or two. Right now we're making intermediate products that are contributing to the business units' performance. So the only measure we have is the support of the business units saying it's working. And from everything they've said, the indicators are very promising."