We study the M(atrix) theory which describes the E-8 x E-8 heterotic s
tring compactified on S-1 or equivalently M-theory compactified on an
orbifold (S-1/Z(2)) x S-1, in the presence of a Wilson line, We formul
ate the corresponding M(atrix) gauge: theory, which lives on a dual or
bifold S-1 x (S-1/Z(2)). Thirty-two real chiral fermions must be intro
duced to cancel gauge anomalies, In the absence of an E-8 x E-8 Wilson
line, these fermions are symmetrically localized on the orbifold boun
daries, Turning on the Wilson line moves these fermions into the inter
ior of the orbifold, The M(atrix) theory action is uniquely determined
by gauge and supersymmetry anomaly cancelation in 2+1 dimensions, The
action consistently incorporates the massive IIA supergravity backgro
und into M(atrix) theory by explicitly breaking (2+1)-dimensional Poin
care invariance, The BPS excitations of M(atrix) theory are identified
and compared to the heterotic string. We find that heterotic T-dualit
y is realized as electric-magnetic S-duality in M(atrix) theory. (C) 1
997 Elsevier Science B.V.