This work is devoted to the study of the foundations of quantum K-theory, a K-theoretic version of quantum cohomology theory. In particular, it gives a deformation of the ordinary K-ring K(X) of a smooth projective variety X, analogous to the relation between quantum cohomology and ordinary cohomology. This new quantum product also gives a new class of Frobenius manifolds.

We conjecture that appropriate K-theoretic Gromov-Witten invariants of complex flag manifolds G/B are governed by finite-difference versions of Toda systems constructed in terms of the Langlands-dual quantized universal enveloping algebras U_q(g'). The conjecture is proved in the case of classical flag manifolds of the series A. The proof is based on a refinement of the famous Atiyah-Hirzebruch argument for rigidity of arithmetical genus applied to hyperquot-scheme compactifications of spaces of rational curves in the flag manifolds.

The main goal of this paper is to prove the following two conjectures for genus up to two: 1. Witten's conjecture on the relations between higher spin curves and Gelfand--Dickey hierarchy. 2. Virasoro conjecture for target manifolds with conformal semisimple Frobenius manifolds. The main technique used in the proof is the invariance of tautological equations under loop group action.

We verify the Invariance Conjectures of tautological equations in genus two. In particular, a uniform derivation of all known genus two equations is given.

A new tautological equation of $\bar{M}_{3,1}$ in codimension 3 is derived and proved, using the invariance condition explained in earlier works.