YIELDUP INTERNATIONAL CORP, POS AM, 1997-02-14

YIELDUP INTERNATIONAL CORP
POS AM, 1997-02-14
OFFICE MACHINES, NEC

Previous: WESTELL TECHNOLOGIES INC, 10-Q, 1997-02-14

Next: VISIONEER INC, SC 13G/A, 1997-02-14

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1997
REGISTRATION NO. 33-97792-LA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

POST EFFECTIVE AMENDMENT NO. 1
TO

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------

YIELDUP INTERNATIONAL CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 3569 77-0341206
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

------------------------

RAJ MOHINDRA
PRESIDENT
117 EASY STREET
MOUNTAIN VIEW, CA 94043
(415) 964-0100
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE, PRINCIPAL EXECUTIVE
OFFICES AND PRINCIPAL PLACE OF BUSINESS)
------------------------

COPIES TO:

DOUGLAS J. REIN, ESQ.
SCOTT M. STANTON, ESQ.
GRAY CARY WARE & FREIDENRICH
A PROFESSIONAL CORPORATION
400 HAMILTON AVENUE
PALO ALTO, CA 94301
(415) 328-6561

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
------------------------

CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, and Class B
Warrants(2)................................. 2,215,000(3) $ 7.00 $15,505,000 $ 4,698.48
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value(4).............. 4,160,000(3) $11.00 $45,760,000 $ 13,866.67
- ----------------------------------------------------------------------------------------------------------------------------------
Class A Warrants(5)........................... 579,750 $ 5.875(1) $ 3,406,031 $ 1,032.13
- ----------------------------------------------------------------------------------------------------------------------------------
Class B Warrants(5)........................... 450,000 $ 3.12(1) $ 1,404,000 $ 425.46
- ----------------------------------------------------------------------------------------------------------------------------------
Units(6)...................................... 130,000 $ 7.00 $ 910,000 $ 275.76
- ----------------------------------------------------------------------------------------------------------------------------------
Total......................................... $66,985,031 $20,298.50*
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* All of this amount has been previously paid.
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Issuable upon exercise of Class A Warrants.
(3) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of any
future anti-dilution adjustments in accordance with the terms of the
Warrants, as described in the Prospectus.
(4) Issuable upon exercise of outstanding Class B Warrants and those which may
be acquired upon exercise of Class A Warrants.
(5) Held by existing security holders and to be offered on a delayed basis
pursuant to Rule 415 under the Securities Act of 1933, as amended.
(6) Each Unit consists of one share of Common Stock, one Class A Warrant and one
Class B Warrant. All such Units are issuable upon exercise of the Unit
Purchase Option sold to D.H. Blair Investment Banking Corp., the underwriter
of the Registrant's initial public offering.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

EXPLANATORY NOTE

The complete Prospectus relating to the direct issuance by the Registrant
begins on the next page. Following the Prospectus for the direct issuance by the
Registrant are pages of the Prospectus relating solely to the Class A and Class
B Warrants offered by existing security holders of the Registrant, including
alternative front and back cover pages and sections entitled "Concurrent Public
Offering," "Plan of Warrant Distribution," and "Selling Securityholders" to be
used in lieu of the sections entitled "Concurrent Offering" and "Plan of
Distribution" in the Prospectus relating to the direct issuance by the
Registrant. Certain sections of the Prospectus (such as "Use of Proceeds") for
the direct issuance by the Registrant will not be used in the Prospectus
relating to the Selling Securityholder Warrants.
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION DATED FEBRUARY 13, 1997
PROSPECTUS

YIELDUP INTERNATIONAL CORPORATION
2,215,000 SHARES OF COMMON STOCK
2,215,000 REDEEMABLE CLASS B WARRANTS
4,160,000 SHARES OF COMMON STOCK ISSUABLE ON EXERCISE OF CLASS B WARRANTS
130,000 UNITS

The 2,215,000 shares of Common Stock (the "Common Stock") and the 2,215,000
Redeemable Class B Warrants (the "Class B Warrants") offered by YieldUP
International Corporation ("YieldUP" or the "Company") are issuable upon
exercise of 2,215,000 outstanding Redeemable Class A Warrants (the "Class A
Warrants"). Each Class A Warrant entitles the holder to purchase, at an exercise
price of $7.00 (subject to adjustment), one share of Common Stock and one Class
B Warrant, until November 21, 2000. The Class A Warrants are subject to
redemption by the Company for $.05 per Warrant, on not less than 30 days'
written notice, if the average closing bid price of the Common Stock exceeds
$9.80 per share (subject to adjustment) for 30 consecutive business days ending
within 15 days of the date the Class A Warrants are called for redemption.

The 4,160,000 shares of Common Stock offered by the Company are issuable on
exercise of 1,945,000 outstanding Class B Warrants and 2,215,000 Class B
Warrants issuable upon exercise of outstanding Class A Warrants. Each Class B
Warrant entitles the holder to purchase, at an exercise price of $11.00 (subject
to adjustment), one share of Common Stock, until November 21, 2000. The Class B
Warrants are subject to redemption by the Company for $.05 per Warrant, on not
less than 30 days' written notice, if the average closing bid price of the
Common Stock exceeds $15.40 per share (subject to adjustment) for 30 consecutive
business days ending within 15 days of the date the Class B Warrants are called
for redemption.

Each unit (a "Unit") offered by the Company consists of one share of Common
Stock, one Class A Warrant and one Class B Warrant. All of the Units offered
hereby are issuable upon exercise of an option (the "Unit Purchase Option")
granted in favor of designees of D.H. Blair Investment Banking Corp., the
underwriter of the Company's initial public offering. The Unit Purchase Option
is exercisable during the three year period commencing November 21, 1997. The
Class A Warrants and Class B Warrants contained in the Units are not subject to
redemption unless the Unit Purchase Option has been exercised.

The Common Stock and the Company's Class A Common Stock (the "Class A
Common Stock") are essentially identical, except that the Class A Common Stock
has five votes per share and the Common Stock has one vote per share, and each
share of Class A Common Stock is convertible into one share of Common Stock.
Assuming the exercise of all Class A Warrants, the officers and directors of the
Company will control approximately 57.2% of the total voting power of the shares
of the Company and will therefore be able to elect all of the Company's
directors and to control the Company. See "Principal Stockholders." The Class A
Common Stock is automatically converted into Common Stock upon any sale or
transfer, except to certain permitted transferees.

The registration statement of which this Prospectus is a part also covers
the offering for resale by certain securityholders (the "Selling
Securityholders") of 579,750 Class A Warrants and 450,000 Class B Warrants (the
"Selling Securityholder Warrants"). See "Concurrent Offering." The Company will
not receive any proceeds from the sale of the Selling Securityholder Warrants.
Sales of the Selling Securityholder Warrants, or the potential of such sales,
may have an adverse effect on the market price of the securities offered hereby.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
PRICE TO SOLICITATION PROCEEDS TO
PUBLIC AGENT FEE COMPANY(1)
- ----------------------------------------------------------------------------------------------------
Common Stock and Class B Warrants issuable on
exercise of Class A Warrants................ $7.00 $0.35 $6.65
- ----------------------------------------------------------------------------------------------------
Common Stock issuable on exercise of Class B
Warrants.................................... $11.00 $0.55 $10.45
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>

(1) Before deducting estimated expenses of the offering of $147,500 payable by
the Company.
------------------------

The date of this Prospectus is , 1997
<PAGE> 4

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form SB-2 under the Securities Act with respect to the securities
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such reports
and other information filed with the Commission, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof
may be obtained from the Commission upon the payment of certain fees prescribed
by the Commission.

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: New York Regional Office, Seven
World Trade Center, New York, New York 10048, and Chicago Regional Office, 500
West Madison Street, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed fees. The Common
Stock and Warrants of the Company are quoted on the Nasdaq SmallCap Market.
Reports, proxy statements and other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.

YieldUP, Cleanpoint and Omega are unregistered trademarks of the Company.
All other brand names or trademarks appearing in this Prospectus are the
property of their respective holders.
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions, plans or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in "Risk
Factors" and elsewhere in this Prospectus.

THE COMPANY

YieldUP develops, manufactures and markets cleaning, rinsing, and drying
equipment used during several steps in the manufacturing process for
semiconductors and other defect sensitive substrates. Based on the results
obtained by customers using its products, the Company believes its technology
allows more thorough and efficient cleaning, rinsing and drying than
conventional approaches and that the products based on this technology may
enable manufacturers to obtain improvements in the percentage of good product
produced, or yield. The Company's cleaning, rinsing and drying products also
reduce usage of certain environmentally hazardous materials and occupy less
floor space when compared to conventional equipment. The Company delivered its
initial product, a wafer rinsing system, in July 1994 to one major semiconductor
manufacturer and its second product, the Omega 2000, a cleaning, rinsing and
drying system, in December 1994 to another manufacturer. The Company currently
has approximately 20 cleaning, rinsing and drying systems installed at customer
sites in the semiconductor, semiconductor equipment, photomask, and flat panel
display industries.

Disc-shaped wafers composed of silicon are the foundation on which
integrated circuits ("ICs") are manufactured in modern semiconductor fabrication
facilities. During the typical four to six week process of fabricating ICs on
these wafers, semiconductor manufacturers typically clean, rinse and dry the
wafers several times throughout the facility to prepare in-process wafers for
the next IC fabrication step, such as deposition or photolithography. The
likelihood of completing these steps successfully and producing good chips
depends significantly upon the cleanliness of the wafer. The Company's products
are designed to reduce wafer particle contamination, stains, surface roughness
and other defects that reduce IC yields with a cost-effective, integrated
cleaning, rinsing and drying system using filtration technology, optimized
rinsing options, no mechanical motion and reduced use of environmentally
hazardous materials.

The Company is marketing its products for application at several points in
the IC fabrication process, including prior to deposition, prior to
photolithography and following etching. In addition, the Company has also
marketed its products for use in the manufacturing process of magnetic and
optical disks, flat panel displays, photomasks and chemical and pharmaceutical
products. The Company believes that there are numerous sites within typical
manufacturing facilities where manufacturers could improve processes and reduce
contamination by replacing or retrofitting existing equipment with the Company's
products.

The Omega 2000 is a cleaning, rinsing and drying system which cleans,
rinses and dries in a single chamber. The Omega 2000 uses no moving parts in the
drying process and thereby avoids the mechanical shocks that occur during the
drying sequence in certain conventional equipment. The Omega 2000's patented
drying process is designed to reduce contamination, water spots and meniscus
which can be left by conventional equipment. The Omega 2000 can be retrofitted
into existing wet benches used in the manufacturing process and is available as
a stand-alone unit with a footprint significantly smaller than typical wet
benches. As a result, manufacturers may be able to integrate the Company's
products into their facilities without the need to abandon existing
manufacturing equipment. Megasonic and chemical injection cleaning can be added
to the Omega 2000 as well.

The Omega 4000 is a cleaning, rinsing, and drying system that incorporates
the rinsing and drying of the Omega 2000 and adds hydrofluoric (HF) acid
cleaning capability. The Company also markets its patented water filtration
product, the CleanPoint, for filtration of deionized water. The CleanPoint is
marketed to the same customers as the Company's cleaning, rinsing, and drying
systems.

YieldUP was incorporated in California in June 1993 and reincorporated in
Delaware in September 1995. The Company's principal executive offices are
located at 117 Easy Street, Mountain View, California 94043, and its telephone
number is (415) 964-0100.

3
<PAGE> 6

THE OFFERING

Securities Offered......... 2,215,000 shares of Common Stock and 2,215,000
Class B Warrants issuable on exercise of Class A
Warrants. Each Class A Warrant entitles the holder
to purchase, at an exercise price of $7.00 (subject
to adjustment), one share of Common Stock and one
Class B Warrant.

4,160,000 shares of Common Stock issuable on
exercise of Class B Warrants. Each Class B Warrant
entitles the holder to purchase, at an exercise
price of $11.00 (subject to adjustment), one share
of Common Stock.

The Class A and Class B Warrants are exercisable
until November 21, 2000, unless earlier redeemed.
See "Description of Securities -- Warrants."

Securities Offered
Concurrently by Selling
Securityholders.......... 579,750 Class A Warrants and 450,000 Class B
Warrants. See "Concurrent Offering."
Capital Stock Outstanding:
Prior to exercise of
Class A Warrants......... 1,495,000 shares of Common Stock(1)
1,912,111 shares of Class A Common Stock(2)
After exercise of Class A
Warrants................. 3,710,000 shares of Common Stock(1)
1,912,111 shares of Class A Common Stock(2)
Warrants Outstanding:
Prior to exercise of
Class A Warrants......... 2,215,000 Class A Warrants
1,945,000 Class B Warrants
After exercise of Class A
Warrants................. 4,160,000 Class B Warrants

Rights of Common Stock and
Class A Common Stock..... The rights of the holders of Common Stock and Class
A Common Stock are essentially identical, except
that holders of Common Stock are entitled to one
vote per share, and holders of Class A Common Stock
are entitled to five votes per share, and each
share of Class A Common Stock is convertible into
one share of Common Stock. The Class A Common Stock
is automatically converted into Common Stock upon
any sale or transfer, except to certain permitted
transferees. See "Description of
Securities -- Common Stock and Class A Common
Stock."

Use of Proceeds............ Repayment of capital leases and term loan,
leasehold improvements and fixed assets, product
development, and general corporate and working
capital purposes, including financing of accounts
receivable. See "Use of Proceeds."

Risk Factors............... The securities offered hereby involve a high degree
of risk and should not be purchased by investors
who cannot afford the loss of their entire
investment. See "Risk Factors."

Nasdaq Symbols:
Common Stock............. YILD
Class A Warrants......... YILDW
Class B Warrants......... YILDZ

4
<PAGE> 7

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................................... $ 2,204,590 $ 1,129,012
Operating loss.................................................... (3,478,842) (1,639,751)
Net loss.......................................................... (3,374,035) (1,830,023)
Net loss per share................................................ $ (0.99) $ (0.89)
Shares used in per share computations............................. 3,406,395 2,052,632
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
AS
ACTUAL ADJUSTED(3)
---------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................... $1,009,090 $ 15,591,340
Total assets....................................................... 3,960,724 18,542,974
Current liabilities................................................ 1,616,624 1,616,624
Stockholders' equity............................................... 1,965,237 16,547,487
</TABLE>

- ---------------
(1) Based on shares outstanding as of December 31, 1996 and does not include:
(i) an aggregate of 4,160,000 shares of Common Stock issuable upon exercise
of the Class B Warrants outstanding or issuable on exercise of Class A
Warrants; (ii) 520,000 shares of Common Stock issuable upon exercise of the
Unit Purchase Option and the underlying Warrants; (iii) 100,000 shares of
Common Stock reserved for issuance under the Company's 1995 Outside
Directors' Stock Option Plan; and (iv) 500,000 shares of Common Stock
reserved for issuance under the Company's 1995 Stock Option Plan. See
"Capitalization," "Management -- Stock Plans," "Description of Securities."

(2) Does not include 270,037 shares of Class A Common Stock issuable upon
exercise of outstanding options as of December 31, 1996. See
"Management -- Stock Plans."

(3) As adjusted to reflect the exercise of 2,215,000 Class A Warrants at an
exercise price of $7.00, and the application of the net proceeds therefrom,
after deducting the Solicitation Agent fee and estimated offering expenses.
See "Use of Proceeds."

-----------------------------

Unless otherwise indicated, all information in this Prospectus assumes (i)
exercise of all Class A Warrants and (ii) no exercise of (a) the Unit Purchase
Option, (b) the Class B Warrants, or (c) options granted or eligible for grant
under the Company's stock option plans.

5
<PAGE> 8

RISK FACTORS

An investment in the securities offered hereby involves a high degree of
risk. In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing the securities offered by this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions, plans or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.

GOING CONCERN OPINION

The report of the Company's independent auditors includes an explanatory
paragraph that describes the substantial doubt as to the ability of the Company
to continue as a going concern. The Company's proposed operations are subject to
numerous risks, including unforeseeable expenses, delays and complications, as
well as specific risks of the semiconductor equipment industry. There can be no
assurance that the Company will achieve profitable operations. See the Financial
Statements and Notes thereto.

HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING; LIMITED OPERATING
HISTORY

The Company has experienced significant operating losses since its
inception in June 1993 and only commenced significant shipments of systems in
the fourth quarter of 1995. Accordingly, the Company has a very limited
operating history on which to base an evaluation of its business, and its prior
operating results are not indicative of results which may be achieved in the
future. As of December 31, 1996, the Company's accumulated deficit was
approximately $5,594,372. The Company's operating losses have been and will
continue to be principally the result of the various costs associated with the
Company's product development, manufacturing, and sales activities. The Company
believes that its existing capital resources will enable it to fund its
operations through the first quarter of 1997. In the event that significant
funds are not received from the exercise of the Class A Warrants, the Company
will be required to seek additional capital to continue its operations beyond
that time, which may result in dilution to the current stockholders. The Company
has no commitments for any future funding, and there can be no assurance that
the Company will be able to obtain additional capital in the future. The
existence of the Warrants may also complicate future capital raising activities.
If the Company is unable to obtain the necessary capital, it will be required to
significantly curtail its activities or cease operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes thereto.

DEPENDENCE ON PROPRIETARY TECHNOLOGY; EXPENSE AND RISK OF PATENT LITIGATION

The Company relies on patent, trade secret and copyright protection for its
products and technology. The Company has received two United States patents
relating to its products and technologies and has filed four additional U.S. and
foreign patent applications. The process of obtaining patents can be expensive
and there can be no assurance that the patent applications will result in the
issuance of patents, that any issued patents will provide the Company with
meaningful competitive advantages, or that challenges will not be issued against
the validity or enforceability of any patent issued to the Company.

The Company also relies on trade secrets and proprietary technology that it
seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others.

6
<PAGE> 9

In the absence of significant patent or other proprietary protection,
competitors may be able to copy the Company's technology or design approaches,
replicate its processes or gain access to its trade secrets. Moreover, there can
be no assurance that competitors will not be able to develop technologies
similar to or more advanced than the Company's or design around any patented
aspects of the Company's products or technology. No assurance can be given that
the Company's current or future products will not infringe on the patents of
others.

There has been substantial litigation regarding patent and other
intellectual property rights in semiconductor-related industries. Further
commercialization of the Company's products could provoke additional claims of
infringement from third parties. In the future, litigation may be necessary to
enforce patents issued to the Company to protect trade secrets or know-how owned
by the Company or to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation would likely result in substantial cost
and diversion of effort by the Company, which by itself could have a material
adverse effect on the Company's business, financial condition and operating
results. Further, adverse determinations in such litigation could result in the
Company's loss of proprietary rights, subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties or prevent the Company from manufacturing or selling its products, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Intellectual
Property Rights."

CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against the Company in the United States District Court for the
District of Delaware in September 1995. The complaint alleges that the drying
process incorporated in certain of the Company's products infringes a patent
held by CFM. The Company believes that its drying process does not infringe the
CFM patent. However, litigation is inherently uncertain, and there can be no
assurance that the Company will not, as a result of this litigation, suffer a
material adverse effect on its business or financial condition. The trial for
this matter is scheduled to begin in July 1997. The Company expects that the CFM
litigation will continue to result in substantial costs and diversion of effort
by the Company which could materially adversely affect the Company. The CFM
litigation and any other such litigation could also continue to delay or impede
market acceptance of the Company's products. A decision adverse to the Company
in such litigation could result in substantial damages payable by the Company
and could support the issuance of an injunction prohibiting further sales by the
Company of some or all of its products. Because the Company relies on a single
product family for the substantial majority of its revenues, any successful
challenge by other parties to the Company's right to use its designs could
potentially render the Company insolvent and jeopardize its ability to continue
as a viable concern. See "Business -- Litigation."

INTENSE COMPETITION; UNCERTAIN MARKET ACCEPTANCE

There is intense competition in the markets for the Company's products. The
Company's lack of resources and proven products makes it extremely vulnerable to
competition from larger companies, many of which have significantly greater
financial, employee, product development and marketing resources. Leading
competitors have a larger installed base of products which can provide them a
significant advantage over the Company because the Company's technology has not
been widely deployed and therefore presents potential customers with uncertainty
not associated with existing equipment. In addition, many semiconductor
manufacturers are reluctant to choose small companies as key suppliers due to
concerns about long term viability and product support. There can be no
assurance that the Company will overcome these disadvantages.

Competition for the Company's products currently comes from makers of
traditional and new cleaning, rinsing and drying equipment. There can be no
assurance that these competitors will not develop new products or improve their
existing products which, when combined with their existing market presence,
would make the Company's products obsolete or unmarketable. Any such development
would have a material adverse effect on the Company. There also can be no
assurance that the Company will be able to penetrate the wet processing
equipment market and convince semiconductor or other manufacturers to install
the Company's systems either directly or through retrofitting in place of
existing equipment. Additional competition for the

7
<PAGE> 10

Company's products also currently comes from a large number of small companies
making cleaning, rinsing and drying equipment which is less expensive than the
Company's products. Because the Company's products sell for significantly higher
prices than such products, the Company may not be able to compete effectively
against them without lowering its prices.

The Company also expects that competition may arise from new competitors
and from new technological approaches adopted by new and existing competitors.
Because of the increasing focus on yield management in the semiconductor
manufacturing industry, equipment manufacturers are likely to put an increased
emphasis on contaminant reduction. Thus, competitive technologies or new
manufacturing techniques may be developed which could make the Company's
products obsolete, thereby materially adversely affecting the Company. If the
Company is unable to respond to the challenges of competition, including changes
in cleaning, rinsing and drying or semiconductor or other manufacturing
processes, there can be no assurance that the Company would be able to achieve
or maintain profitability at a level required to support its survival or growth.
See "Business -- Competition."

RELIANCE ON SINGLE PRODUCT FAMILY

The Company anticipates that the substantial majority of its future
revenues will come from sales of its cleaning, rinsing and drying systems.
Should the demand for, or pricing of, the Company's products decline due to
increased competitive pressure, the introduction of superior systems or
processes, changes in the semiconductor, magnetic or optical disk, flat panel
display or photomask industries or other factors, the Company's business,
financial condition and results of operations would be materially adversely
affected. The ability of the Company to diversify its operations through the
introduction and sale of new products and broader acceptance of its cleaning,
rinsing and drying systems is dependent on the success of the Company's
continuing research, product development and engineering activities, as well as
its marketing efforts. No assurance can be given that the Company will be able
to develop, acquire, introduce or market new products in a timely or
cost-effective manner or that any new products or improvements will achieve
market acceptance or result in acceptable margins. Accordingly, the Company will
be dependent on overall market acceptance of its products.
"Business -- Products."

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company expects to derive a substantial portion of its revenues from
the sale of a relatively small number of systems, which typically range in
purchase price from approximately $50,000 to $400,000. As a result, a small
reduction in the number of systems shipped in a quarter would have a material
adverse effect on the Company's revenues and results of operations for that
quarter. A delay in a shipment near the end of a particular quarter, due to, for
example, unanticipated shipment rescheduling or cancellation, supplier delays in
delivery of component parts or unexpected manufacturing difficulties experienced
by the Company, may cause financial results in a particular quarter to fall
significantly below the Company's expectations and may materially adversely
affect the Company's results of operations for such quarter.

In addition, the Company's need for continued investment in research,
development, engineering, marketing, customer service and support capabilities
will limit the Company's ability to reduce expenses in response to any such
decrease in sales. Moreover, because customer purchase orders are subject to
cancellation or rescheduling by the customer, backlog at any particular date is
not necessarily representative of actual sales for any succeeding period. If the
Company's anticipated level of revenues is not achieved for a particular period,
the Company's operating results could be adversely affected by its inability to
reduce costs. Because the Company builds certain subassemblies according to
forecast, a reduction in customer orders would also result in excessive
inventories which could adversely affect the Company's results of operations and
liquidity. The impact of these and other factors on the Company's operating
results in any future period cannot be accurately forecast. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

8
<PAGE> 11

DEPENDENCE ON KEY SUPPLIERS

The Company has no written contracts with any of its key suppliers, and
such suppliers may terminate their relationships with the Company at any time
without notice. Any such termination would materially impair the Company's
ability to satisfy any orders for its products and would materially adversely
affect the Company's results of operations. If any of the Company's outside
suppliers terminate their relationships with the Company, the Company will be
required to replace such suppliers. In such an event, there could be no
assurance that the Company would find replacement suppliers or that such
replacement suppliers would not be more expensive than the Company's current
suppliers, thereby materially adversely affecting the Company's results of
operations. See "Business -- Manufacturing, Assembly and Testing."

LENGTHY SALES CYCLE

Sales of the Company's products have been, and are expected to continue to
be, characterized by a relatively long sales cycle due to such factors as the
substantial time required by potential customers for technical evaluation of the
Company's products prior to purchase, high cost and the critical roles they will
play in the manufacturing process. Sales of the Company's systems may also
depend upon the decision of a prospective customer to upgrade the equipment in
its existing manufacturing facilities or to open new facilities, which typically
involves a significant capital commitment. The Company believes that the sales
cycle will continue to be lengthy as certain of its anticipated customers
centralize purchasing decisions, which is expected to intensify the evaluation
process and require additional sales and marketing expenditures by the Company.
See "Business -- Customers, Marketing and Service."

CYCLICALITY OF SEMICONDUCTOR MANUFACTURING INDUSTRY

The semiconductor industry generally, and the semiconductor equipment
industry in particular, is highly cyclical and has historically experienced
periodic and often prolonged downturns. Downturns in the semiconductor industry
as well as changes in or uncertainty regarding technology, have frequently had a
severe and adverse effect on the semiconductor industry's demand for wafer
processing equipment. Recent announcements by companies and analysts indicate
that the semiconductor equipment industry is currently in a downturn which may
last for an extended period. The Company's success will be dependent upon the
ability and willingness of manufacturers of semiconductor devices to make
substantial capital expenditures, which in turn will be largely dependent upon
the market demand for ICs and products using ICs produced by such manufacturers.
No assurance can be given that the Company will be able to develop or market any
products to meet the needs of such manufacturers or that such manufacturers will
be able or willing to make the capital expenditures necessary to acquire the
Company's products.

NEED TO DEVELOP NEW PRODUCTS AND TECHNOLOGIES

Semiconductor, flat panel display, magnetic and optical disk and photomask
manufacturing equipment and processes are subject to rapid technological changes
and product obsolescence. The Company believes that its future success will
depend in part upon its ability to develop and enhance its current products and
develop new products to meet such anticipated technological changes. To the
extent products developed by the Company are based upon anticipated changes,
sales of such products may be adversely effected if other technology becomes
accepted in the relevant industry. As a result of declining orders for their
existing products, manufacturers in the semiconductor equipment industry
experience significant quarterly fluctuations in operating results and must
replace such orders with orders for new products to achieve or maintain
profitability. If the Company does not successfully introduce new products or
enhanced versions of its current products in a timely manner, any competitive
position the Company may develop could be lost and the Company's sales, if any,
would be reduced. There can be no assurance that the Company will be able to
develop and introduce enhanced or new products which satisfy customer needs and
achieve market acceptance. The Company intends to use a portion of the proceeds
from the exercise of the Class A Warrants to expand its research and development
activities. The failure of the Company to manage its research and development
efforts would have a material adverse effect upon its business and prospects.
See "Use of Proceeds" and "Business -- Manufacturing and Development."

9
<PAGE> 12

DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF EXPANDING OPERATIONS

The Company's success will, to a large extent, depend upon the continued
services of Raj Mohindra, President and Chief Executive Officer, and Suraj Puri,
Vice President and Chief Technical Officer. The loss of services of either of
these executive officers would materially and adversely affect the Company. The
Company does not have employment agreements with any of its key personnel, but
it does maintain key man life insurance in the amount of $2 million on Mr.
Mohindra and $1 million on Mr. Puri.

The success of the Company will also depend, in part, upon its ability to
retain the personnel who have assisted in the development of the Company's
products, and to attract and retain additional qualified operating, marketing,
technical and financial personnel. The competition in the semiconductor
equipment industry for such qualified personnel is often intense, and there can
be no assurance that the Company will be able to hire or retain necessary
personnel. In addition, the Company will require additional senior management
and the development of additional expertise by existing management personnel, as
well as improved operational and financial systems, and there can be no
assurance that new personnel and systems will be successfully integrated or that
the developments will not result in a material adverse effect on the Company.
See "Management."

LIMITATION OF LIABILITY

Due to limitations on the liability of officers and directors contained in
the Company's charter documents and agreements between the Company's officers
and directors and the Company, stockholders may have limited or no recourse
against such officers and directors for their negligent actions. See
"Management -- Limitation of Liability and Indemnification."

CONCENTRATION OF SHARE OWNERSHIP AND VOTING POWER

Holders of the Company's Class A Common Stock are entitled to five votes
for each share owned by them on all matters submitted to a vote of stockholders,
while holders of Common Stock are entitled to one vote per share. Upon exercise
of all Class A Warrants, the directors and officers of the Company will control
approximately 57.2% of the voting power and will be able to elect all of the
Company's directors and, hence, will be able to control the affairs of the
Company. In addition, the directors and officers of the Company will, subject to
certain limitations imposed by applicable law, be able to, among other things,
amend the Company's Certificate of Incorporation and By-laws and effect or
preclude fundamental corporate transactions involving the Company, including the
acceptance or rejection of any proposals relating to a merger of the Company or
an acquisition of the Company by another entity, in each case without the
approval of any of the Company's other stockholders. See "Principal
Stockholders" and "Description of Securities."

POTENTIAL ADVERSE EFFECT OF AUTHORIZED BUT UNISSUED PREFERRED STOCK ON HOLDERS
OF COMMON STOCK; ANTI-TAKEOVER EFFECTS

The Board of Directors has authority to issue up to 5,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Company has no present plans to issue shares of Preferred Stock. See
"Description of Securities."

10
<PAGE> 13

POTENTIAL PRICE VOLATILITY

The Company believes factors such as quarterly fluctuations in results of
operations, announcements of new orders by the Company, developments affecting
competitors and changes in either earnings estimates of the Company or
investment recommendations by stock market analysts may cause the market price
of its securities to fluctuate, perhaps substantially. In addition, in recent
years the stock market in general, and the shares of technology companies in
particular, have experienced extreme price fluctuations which are likely to
continue. These broad market and industry fluctuations may adversely affect the
market price of the securities of the Company.

INVESTIGATION OF THE SOLICITATION AGENT BY THE SECURITIES AND EXCHANGE
COMMISSION

Pursuant to contractual arrangements entered into at the time of its
initial public offering, the Company has agreed not to solicit exercises of
Warrants other than through D.H. Blair Investment Banking Corp. (the
"Solicitation Agent"). The Securities and Exchange Commission is conducting an
investigation concerning various business activities of the Solicitation Agent
and D.H. Blair & Co., Inc. ("Blair & Co."). The investigation appears to be
broad in scope, involving nearly all aspects of the Solicitation Agent's and
Blair & Co.'s compliance with the Federal securities laws in offerings of
securities, purchases and sales of securities, market-making activities and
securities sales practices during the period from January 1, 1985 to the
present. The Company has been advised by the Solicitation Agent that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. The Company has been advised that the Solicitation Agent
cannot predict whether this investigation will ever result in any type of formal
enforcement action against the Solicitation Agent or, if so, whether any such
action might have an adverse effect on the Solicitation Agent or the securities
of the Company. An unfavorable resolution of the Securities and Exchange
Commission's investigation could have the effect of limiting such firm's ability
to make a market in the Company's securities, which could affect the liquidity
and price of such securities. See "Plan of Distribution."

POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET AND MARKET ILLIQUIDITY

While the Company's Common Stock, Class A Warrants and Class B Warrants
meet the current Nasdaq SmallCap Market requirements there can be no assurance
that such securities will meet the continued listing requirements. Under current
criteria for continued inclusion on the Nasdaq SmallCap Market, (i) the Company
will have to maintain at least $2,000,000 in total assets and $1,000,000 in
total stockholders' equity, (ii) the minimum bid price of the Common Stock will
have to be $1.00 per share, (iii) there must be at least 100,000 shares in the
public float valued at $1,000,000 or more, (iv) the Common Stock must have at
least two active market makers, and (v) the Common Stock must be held by at
least 300 holders. Additionally, Nasdaq has recently published proposed
revisions to these standards that would make it more difficult for companies to
qualify or remain on the Nasdaq SmallCap Market.

If the Company is unable to satisfy the Nasdaq SmallCap Market's
maintenance requirements, its securities may be delisted from the Nasdaq
SmallCap Market. In such event, trading, if any, in the Common Stock and
Warrants would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the NASD's "Electronic Bulletin Board." Consequently,
the liquidity of the Company's securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays in
the timing of transactions, reduction in security analysts' and the news media's
coverage of the Company, and lower prices for the Company's securities than
might otherwise be attained.

The Company's securities have not been qualified or registered in all
states and will not be eligible for trading unless an exemption from the
qualification or registration requirements is available. There can be no
assurance that any such exemption will become available in any jurisdiction.

POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS

The Class A Warrants may be redeemed by the Company at a redemption price
of $.05 per Warrant upon not less than 30 days' notice if the average bid price
of the Common Stock exceeds $9.80 per share for 30 consecutive trading days
ending within 15 days of the notice of redemption. Also the Class B Warrants may
be

11
<PAGE> 14

redeemed by the Company at a redemption price of $.05 per Warrant upon not less
than 30 days' notice if the average bid price of the Common Stock exceeds $15.40
per share, for 30 consecutive trading days ending within 15 days of the notice
of redemption. If the current market prices for the Common Stock are maintained,
by the end of February 1997 the Company could initiate the process to redeem the
Class A Warrants. Redemption of the Warrants could force the holders to exercise
the Warrants and pay the exercise price therefor at a time when it may be
disadvantageous for the holders to do so, to sell the Warrants at the then
current market price when they might otherwise wish to hold the Warrants, or to
accept the redemption price, which, at the time the Warrants are called for
redemption, is likely to be substantially less than the market value of the
Warrants. Lack of qualification or registration under applicable federal or
state securities laws may mean that the Company would be unable to issue
securities upon exercise of the Warrants, including at the time when the
Warrants are called for redemption. See "Description of Securities -- Warrants."

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS

Current Warrant holders will only be able to exercise the Warrants if (i) a
current prospectus under the Securities Act of 1933, as amended (the "Securities
Act") relating to the securities underlying the Warrants is then in effect and
(ii) such securities are qualified for sale or exempt from qualification under
the applicable securities laws of the states in which the various holders of
Warrants reside. Although the Company has undertaken to use its best efforts to
maintain the effectiveness of a current prospectus covering the securities
underlying the Warrants, there can be no assurance that the Company will be able
to do so. There also can be no assurance that exemptions from the registration
on qualification requirements of those states in which the Company's securities
are not currently registered or qualified will be available at the time a
Warrant holder wishes to exercise his or her Warrant. The value of the Warrants
may be greatly reduced if a current prospectus, covering the securities issuable
upon the exercise of the Warrants, is not kept effective or if such securities
are not qualified, or exempt from qualification, in the states in which the
holders of Warrants reside. See "Description of Securities -- Warrants."

POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN COMPANY'S SECURITIES

The Company has been advised that Blair & Co. makes a market in the
Company's securities. Rule 10b-6 of the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the "1934
Act") may prohibit Blair & Co. from engaging in any market making activities
with regard to the Company's securities for the period from nine business days
(or such other applicable period as Rule 10b-6, or its successor, Regulation M,
may provide) prior to any solicitation by the Solicitation Agent of the exercise
of Warrants until the later of the termination of such solicitation activity or
the termination (by waiver or otherwise) of any right that the Solicitation
Agent may have to receive a fee for the exercise of Warrants following such
solicitation. As a result, Blair & Co. may be unable to provide a market for the
Company's securities during certain periods while the Warrants are exercisable.
Any temporary cessation of such market-making activities could have an adverse
effect on the market price of the Company's securities. See "Plan of
Distribution."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

There are currently an aggregate of 3,407,111 shares of Common Stock and
Class A Common Stock outstanding. Of such shares approximately 3,140,000 are
freely tradeable without restriction, subject in certain instances to volume
limitations imposed by Rule 144. All remaining shares currently outstanding will
become eligible for resale at various times prior to September 1997.

Provided that the Company satisfies certain securities registration and
qualification requirements with respect to the securities underlying the
Warrants, any and all securities purchased upon exercise of the Warrants will be
freely tradeable.

The holders of the Unit Purchase Option have been granted registration
rights with respect to all shares underlying the Option Units purchased upon
exercise of the Underwriter's Unit Purchase Option. The sale, or availability
for sale, of substantial amounts of Common Stock in the public market could
adversely affect the

12
<PAGE> 15

prevailing market price of the Common Stock and could impair the Company's
ability to raise additional capital through the sale of its equity securities."

NO DIVIDENDS ANTICIPATED

The Company has never paid any cash dividends on its Common Stock or Class
A Common Stock. The Company anticipates that in the future, earnings, if any,
will be retained for use in the business or for other corporate purposes, and it
is not anticipated that cash dividends in respect of the Common Stock or Class A
Common Stock will be paid. See "Dividend Policy."

13
<PAGE> 16

USE OF PROCEEDS

The potential net proceeds to the Company from the exercise of the
2,215,000 Class A Warrants outstanding are estimated to be approximately
$14,500,000, after deducting estimated expenses payable by the Company and the
Solicitation Agent fee. The Company expects that the net proceeds will be
utilized for repayment of principal on a bank term loan, repayment of all
principal on outstanding capital leases, constructing and equipping new
manufacturing and engineering space, supporting the development of its Omega
1000, Omega 1100, and Omega 4000 systems, including the hiring of additional
engineering personnel, and enhancing existing products. The net proceeds may
also be used to finance additional accounts receivable and inventory. The
indebtedness under the bank loan is due in November 1998 and had an interest
rate of 8.25% as of December 31, 1996. The obligations under the capital leases
are payable from February 1997 through January 1999. The Company also expects
that it may be required to expend significant funds (consisting of legal fees)
in connection with the CFM litigation, but the inherent uncertainty of such
litigation makes it impossible to predict the amounts to be expended with any
degree of accuracy. See "Risk Factors -- Dependence on Proprietary Technology;
Risk and Expense of Patent Litigation" and "Business -- Litigation." Any
remaining proceeds will be used to fund general working capital requirements.

A portion of the proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. While from time to time the Company evaluates potential
acquisitions of such businesses, products or technologies, there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies. Pending utilization, the net
proceeds of the exercise of the Warrants will be invested in short-term,
interest-bearing investments.

DIVIDEND POLICY

The Company has not paid any cash dividends on its Common Stock or Class A
Common Stock. It is the present policy of the Company to retain any earnings to
finance the growth and development of the business and, therefore, the Company
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future.

PRICE RANGE OF COMMON STOCK

Since November 1995, the Company's Common Stock has traded on the Nasdaq
SmallCap Market under the symbol "YILD." The following table sets forth for the
periods indicated the high and low sale prices of the Common Stock as reported
by the Nasdaq SmallCap Market. These figures reflect inter-dealer prices without
retail mark-up, mark-down or commission and may not represent actual
transactions.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
4th Quarter (commencing November 21, 1995).......... $ 6 $4 3/4

1996
1st Quarter......................................... 6 4 7/16
2nd Quarter......................................... 8 5/8 5 3/8
3rd Quarter......................................... 6 13/16 4 1/2
4th Quarter......................................... 6 4 1/2

1997
1st Quarter (through February 10, 1997)............. 10 3/4 5 7/8
</TABLE>

On February 11, 1997, the last reported sale price of the Common Stock on
the Nasdaq SmallCap Market was $9 7/8 per share. As of December 31, 1996, there
were 8 holders of record of the Common Stock, and the Company believes that
there were over 300 beneficial owners of the Common Stock.

14
<PAGE> 17

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
December 31, 1996, and (ii) on an as adjusted basis to reflect the exercise of
all outstanding Class A Warrants and the application of the net proceeds
therefrom, after deducting the Solicitation Agent fee and estimated offering
expenses payable by the Company.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
AS
ACTUAL ADJUSTED
----------- -----------
<S> <C> <C>
Stockholders' equity:
Preferred stock -- par value $.001; 5,000,000 shares
authorized; no shares issued and outstanding, actual
and as adjusted...................................... -- --
Class A Common Stock -- par value $.001;
2,229,927 shares authorized; 1,912,111 shares issued
and outstanding, actual and as adjusted(1)........... $ 1,912 $ 1,912
Common Stock -- par value $.001; 20,000,000 shares
authorized; 1,495,000 shares issued and outstanding,
actual; 3,710,000 shares issued and outstanding, as
adjusted............................................. 1,495 3,710
Additional paid in capital.............................. 7,571,550 22,151,585
Notes receivable from stockholders...................... (15,348) (15,348)
Accumulated deficit..................................... (5,594,372) (5,594,372)
----------- ------------
Stockholders' equity................................. 1,965,237 16,547,487
----------- ------------
Total capitalization............................ $ 1,965,237 $16,547,487
=========== ============
</TABLE>

15
<PAGE> 18

SELECTED FINANCIAL DATA

The statement of operations data presented below for the years ended
December 31, 1996 and December 31, 1995 and the balance sheet data as of
December 31, 1996 are derived from the financial statements of the Company
included elsewhere in this Prospectus that have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The data set forth below
is qualified by reference to, and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto and the discussion
thereof included elsewhere in this Prospectus. The results of operations for
1996 are not indicative of results that may be obtained in future periods.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 2,204,590 $ 1,129,012
----------- -----------
Operating expenses:
Manufacturing and development........................... 3,853,972 1,736,755
Selling, general, and administrative.................... 1,829,460 1,032,008
----------- -----------
Total operating expenses............................. 5,683,432 2,768,763
----------- -----------
Operating loss....................................... (3,478,842) (1,639,751)
Interest income (expense), net............................ 104,807 (190,272)
----------- -----------
Net loss............................................. $ (3,374,035) $ (1,830,023)
=========== ===========
Net loss per share........................................ $ (0.99) $ (0.89)
=========== ===========
Shares used in per share computation...................... 3,406,395 2,052,632
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Working capital......................................................... $ 1,009,090
Total assets............................................................ 3,960,724
Accumulated deficit..................................................... (5,594,372)
Total stockholders equity............................................... 1,965,237
</TABLE>

16
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

YieldUP develops, manufactures and markets advanced cleaning, rinsing, and
drying equipment used at several steps in the manufacturing process of
semiconductors and other defective sensitive substrates. The Company began
operations in June 1993 providing yield consulting services, and, in December
1994, the Company shipped its first rinsing and drying system, the Omega 2000.
The Company's first significant shipment of systems occurred during the fourth
quarter of 1995. Currently the Company has approximately twenty cleaning,
rinsing and drying systems installed at customer sites. The Company's primary
source of revenues has been the shipment of cleaning, rinsing, and drying
equipment. The Company expects to continue to derive substantially all of its
revenue from sales of cleaning, rinsing, and drying equipment.

From inception, the Company has incurred significant losses due to limited
revenues and large investments in research and development. The Company began to
generate orders for its wafer cleaning, rinsing, and drying equipment during the
second quarter of 1995. Over the next year, the Company intends to spend a
significant portion of its revenues on new product development and enhancements
to existing products which will be required to exploit anticipated markets for
equipment designed for 12 inch wafers, flat panel displays, magnetic disks and
photomasks. However, future profitability will depend on a variety of factors,
including timely receipt of significant new orders, the level of market
acceptance of the Company's products, timely delivery of systems to customers,
new competitive product offerings, price fluctuations due to competition, and
industry capital equipment spending levels. There can be no assurance that the
Company will be able to achieve equipment sales growth or profitability. At
current operating expense levels, if the Company's sales do not increase, the
Company will continue to show significant operating losses. Additionally, the
Company is engaged in patent litigation which may result in significant
additional expenditures for legal fees which could have a material adverse
effect on the Company's results of operations.

The Company expects to derive a substantial portion of its revenues from
the sale of a relatively small number of systems, which typically range in
purchase price from approximately $50,000 to $400,000. As a result, a small
reduction in the number of systems shipped in a quarter could have a material
adverse effect on the Company's revenues and results of operations for that
quarter. A delay in a shipment near the end of a particular quarter, due to, for
example, unanticipated shipment rescheduling or cancellation, supplier delays in
delivery of component parts or unexpected manufacturing difficulties experienced
by the Company, may cause financial results in a particular quarter to fall
significantly below the Company's expectations and may materially adversely
affect the Company's results of operations for such quarter.

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions, plans or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in "Risk
Factors" and elsewhere in this Prospectus.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1996 AND 1995.

During the years ended December 31, 1996 and 1995, the Company's revenues
were $2,204,590 and $1,129,012, respectively. The increase in revenue in 1996
was due to an increase in shipments of the Company's cleaning, rinsing, and
drying systems.

17
<PAGE> 20

Manufacturing and development expenses were $3,853,972 for year ended
December 31, 1996, and $1,736,755 for the year ended December 31, 1995. For
1995, separate amounts for manufacturing cost of goods sold and research and
development expense were not meaningful as these operating activities were
inseparable during that period. For 1996, manufacturing cost of goods sold was
$2,630,970 and research and development expense was $1,223,002. The increase in
manufacturing and development expenses reflected the continuing efforts to
develop and enhance the Company's products and the higher total manufacturing
costs associated with increased system shipments. In addition, in the fourth
quarter of 1995 the Company established its own manufacturing capability, so the
1995 manufacturing and development expenses only reflect approximately one
quarter of full operation of the manufacturing organization while the 1996
figures represent four quarters of manufacturing operation. The Company expects
to continue to invest in new product development and research, although these
expenses may decline over time as a percentage of revenues to the extent
revenues increase.

In order for the Company to achieve profitability, it will be necessary to
significantly increase revenues in future periods. Increasing revenues will
depend to a significant extent on the Company's ability to make multiple unit
sales to large companies. To achieve this goal, the Company has recently
strengthened its executive management in the sales and marketing organization
and believes that it must expand its product line and increase its marketing
efforts with respect to the semiconductor, magnetic and optical disk, flat panel
display, semiconductor equipment and photomask industries. In addition, in order
to achieve profitability, the Company must improve its gross margins. The
Company's negative gross margin on product sales during 1995 and 1996 was due to
fixed manufacturing overhead expense being spread over a small number of units
and high unit material costs. The high unit material costs were caused by a high
degree of customization and numerous engineering design changes as the Company
enhanced its products. The units shipped in 1995 and 1996 were generally the
first units produced of a particular design. The Company anticipates that if
unit shipment volume increases in future periods, per unit overhead expenses and
material costs will be reduced. In addition, in the first quarter of 1997 the
Company is transitioning to shipment of standardized products, which should also
begin to reduce the per unit material costs. The Company believes that both of
these trends may have the effect of improving the Company's gross margin. If the
Company is not able to make multiple unit sales to large customers, to penetrate
new industries, to manage the transition to standardized products or to increase
product shipments, the Company may be unable to increase its revenues or improve
its operating margins. Such failure would have a material adverse effect on the
Company and would impact its ability to continue as a going concern. See
Financial Statements and Notes thereto.

Selling, general and administrative expenses were $1,829,460 for the year
ended December 31, 1996, and $1,032,008 for the year ended December 31, 1995.
The increase in these expenses reflect the Company's increased marketing
activities for its products and additional employees. In addition, the Company
incurred increased legal expenses in 1996 versus 1995 related to the CFM patent
infringement litigation. There were also increases in legal, accounting, and
other administrative expenses in 1996 versus 1995 related to being a public
company. The Company expects that selling, general and administrative expenses
may decline as a percent of revenues to the extent revenues increase.

The net interest income was $104,807 for the year ended December 31, 1996,
and the net interest expense was $190,272 for the year ended December 31, 1995.
The net interest income in 1996 was due to interest income on a portion of the
funds raised in the Company's 1995 initial public offering. The interest expense
in 1995 was mainly due to $200,000 of debt discount charged to expense in the
fourth quarter of 1995 as a result of financing transactions completed before
the public offering. The Company expects that interest income may decline in the
future due to lower short term investment balances caused by operating losses in
1996.

As a result of the foregoing factors, the Company sustained a net loss of
$3,374,035 for the year ended December 31, 1996, as compared to a net loss of
$1,830,023 for the year ended December 31, 1995. The increase in net loss was
due primarily to an increase in manufacturing and development costs compared to
1995 and was related to the continued product development activities and
increased manufacturing operations. In addition, the Company expanded its
marketing, support, and administrative organizations to manage increased sales
and shipments of the Company's products. Net losses are expected to continue
until the

18
<PAGE> 21

Company is able to produce and sell sufficient numbers of cleaning, rinsing and
drying systems to cover operating expenses, of which there can be no assurance.
See "Risk Factors."

LIQUIDITY AND CAPITAL RESOURCES

On December 31, 1996, the Company had cash, cash equivalents, and short
term investments of $629,172. Accounts receivable at December 31, 1996 totaled
$699,459 and represented primarily amounts due on systems shipped in the fourth
quarter of 1996.

The Company plans to use approximately $500,000 from the potential proceeds
from the exercise of the Class A Warrants to construct and equip new
manufacturing and office facilities to support anticipated shipment levels and
personnel additions. The new facility should provide expansion capacity for
manufacturing operations and corporate functions for the next twelve months. The
Company also plans to use approximately $950,000 from the potential proceeds
from the exercise of the Class A Warrants for the repayment of a bank term loan
and several capital leases. The remainder of the proceeds from the exercise of
the Class A Warrants will be used to meet working capital requirements over the
next twelve months including financing additional accounts receivable and
inventory. See "Use of Proceeds."

Assuming all Class A Warrants are exercised, the Company believes that the
net proceeds from such exercise, together with existing cash balances, will be
sufficient to meet the Company's cash requirements for at least the next
twenty-four months. However, after that twenty-four month period or if the
Company's plans change, depending upon its level of operations, the Company may
require additional equity or debt financing to meet its working capital and
fixed asset requirements. If the Company requires additional financing in the
future, there can be no assurance that it will be available or that it will be
available on terms satisfactory to the Company.

The Company believes that its existing capital resources will enable it to
fund its operations through the first quarter of 1997. In the event that
significant funds are not received from the exercise of the Class A Warrants,
the Company will be required to seek additional capital to continue its
operations beyond that time, which may result in dilution to the current
stockholders. The Company has no commitments for any future funding, and there
can be no assurance that the Company will be able to obtain additional capital
in the future. The existence of the Warrants may also complicate future capital
raising activities. If the Company is unable to obtain the necessary capital, it
will be required to significantly curtail its activities or cease operations.

19
<PAGE> 22

BUSINESS

INTRODUCTION

YieldUP develops, manufactures and markets cleaning, rinsing, and drying
equipment used for several steps in the manufacturing process for semiconductors
and other defect sensitive substrates. Based on the results obtained by
customers using its products, the Company believes its technology allows more
thorough and efficient cleaning, rinsing and drying than conventional approaches
and that the products based on this technology may enable manufacturers to
obtain improvements in the percentage of good product produced, or yield. The
Company's cleaning, rinsing and drying products also reduce usage of certain
environmentally hazardous materials and occupy less floor space when compared to
conventional equipment. The Company delivered its initial product in July 1994
to one major semiconductor manufacturer and its second product, the Omega 2000,
a wafer cleaning, rinsing and drying system, in December 1994 to another
manufacturer. The Company currently has approximately 20 cleaning, rinsing, and
drying systems installed at a number of customer sites in the semiconductor,
semiconductor equipment, photomask, and flat panel display industries.

The Company is marketing its products for application at several points in
the IC fabrication process, including prior to deposition, prior to
photolithography and following etching. In addition, the Company has also
marketed its products for use in the manufacturing processes of photomasks,
magnetic and optical disks, flat panel displays and chemical and pharmaceutical
products. The Company believes that there are numerous sites within typical
semiconductor, photomask, magnetic and optical disk, flat panel display and
chemical and pharmaceutical product manufacturing facilities where manufacturers
could improve processes and reduce contamination by replacing or retrofitting
existing equipment with the Company's products.

The Omega 2000 is a cleaning, rinsing and drying system which cleans,
rinses and dries in a single chamber. The Omega 2000 uses no moving parts in the
drying process and thereby avoids the mechanical shocks that occur during the
drying sequence in certain conventional equipment. The Omega 2000's patented
drying process is designed to reduce contamination, water spots and meniscus
which can be left by conventional equipment. The Omega 2000 can be retrofitted
into existing wet benches used in manufacturing processes and is available as a
stand-alone unit which has a footprint significantly smaller than typical wet
benches. As a result, manufacturers may be able to integrate the Company's
products into their facilities without the need to abandon existing equipment.
Megasonic and chemical injection cleaning can be added to the Omega 2000 as
well.

The Company's Omega 4000 is a cleaning, rinsing, and drying system that
incorporates the rinsing and drying of the Omega 2000 and adds hydrofluoric (HF)
acid cleaning capability. The Company also markets a water filtration product,
the CleanPoint, for filtration of deionized water. The CleanPoint is marketed to
the same customers as the Company's cleaning, rinsing, and drying systems. The
CleanPoint filtration system is also an integral part of the Company's other
systems, the Omega 2000 and Omega 4000.

The Company currently has under development the Omega 1000, a low cost,
stand-alone rinse dry system designed to replace conventional spin rinse dryer
("SRD") technology in manufacturing facilities. The Company is also
investigating the development of an automated wet bench capability that would
combine the Company's rinsing and drying systems with high temperature immersion
cleaning and other standard cleaning applications. The Company is also
investigating other industrial applications for its CleanPoint water filtration

20
<PAGE> 23

system, including the pharmaceutical and chemical industries, both of which
require ultrapure water for product processing.

INDUSTRY BACKGROUND

The IC is a critical component in the computer, microprocessor, consumer
electronics, telecommunications, and defense industries. Virtually thousands of
industrial products, from wrist watches to automobiles, from burglar alarm
systems to machine tools, and from home appliances to missile guidance systems,
contain at least one IC. Each IC may contain hundreds of thousands, even
millions, of electronic circuits.

ICs are fabricated through a complex series of 100 to 300 process steps on
a silicon wafer. Steps such as deposition, photolithography and etching, which
together involve the application of an IC pattern and removal of excess
material, are typically repeated several times during the fabrication process,
with alternating layers of conducting and insulating films being deposited each
time to create a structure on the wafer of 10 or more layers. The resulting
finished wafer consists of many ICs, which are then cut, packaged and tested
before shipment.

Advances in semiconductor equipment technology in recent years have
resulted in increasingly sophisticated ICs based on submicron geometries and
complex manufacturing processes. Although these advances have enabled
semiconductor manufacturers to place hundreds of ICs on a single silicon wafer,
as critical dimensions decrease, the size and density of defects have a greater
effect on yields. These defects are often the result of microscopic particles
and other contaminants on wafer surfaces during the fabrication process.
Limiting the presence of particles and other contaminants during deposition and
removal of the residue from etching is vital to the ultimate performance of the
IC and the resulting yield. As a result, IC manufacturers have continued to
invest in wafer processing equipment. A semiconductor equipment industry trade
association estimated that worldwide shipments of semiconductor equipment grew
from approximately $14 billion in 1994 to $24 billion in 1995. Of that amount,
approximately $18 billion in 1995 was for wafer processing equipment, and wet
processing systems accounted for approximately $1.2 billion of such sales.

Particles and contaminants can be introduced to in-process wafers from a
variety of sources, including manufacturing equipment, process materials,
factory air and environment, water, chemicals and manufacturing personnel. Most
semiconductor manufacturers seek to reduce contamination problems through an
array of methods including the use of expensive clean rooms for processing
operations, automated handling and transporting of parts between production
operations, and garments and masks for personnel involved in the fabrication
process. Even with these costly methods, however, a long and tedious development
process of incremental improvements is required to remove a sufficient level of
contamination to achieve acceptable yields. This development process can take
months or even years.

Repetitive cleaning, rinsing and drying of the silicon wafers throughout
the manufacturing process, and at many different sites throughout the
manufacturing facility, is one of the array of methods traditionally utilized to
reduce contamination. Wafer surfaces are typically cleaned by exposing the wafer
to toxic acids which remove organic materials, such as polymers and photoresist
(photolithography) residues, and inorganic materials, such as metals and salts.
Chemical etching, stripping, and passivating processes are used to prepare wafer
surfaces. After the wafer surfaces have been cleaned and prepared, the wafers
are generally rinsed with de-ionized water to remove chemicals and as many
particles as possible and are then dried before proceeding to the next series of
operations. The effect of the cleaning process can, however, be undermined by
conventional rinsing and drying equipment which, instead of thoroughly removing
particles, can add particles or other defects to the wafer surface. Further,
conventional wet processing equipment can produce variable results and does not
provide a cost effective means to improve production yields.

Photomasks, flat panel displays, and magnetic and optical disks, are
manufactured using many of the same cleaning, rinsing, and drying processes as
semiconductor manufacturing. As a result, the Company believes that its products
may provide similar benefits to manufacturers in these industries.

21
<PAGE> 24

PRODUCTS

Through analyzing the fabrication process of leading IC manufacturers, the
Company determined that the cleaning, rinsing and drying steps of the
manufacturing process present a significant, unfilled opportunity for yield
improvement. The Company has developed and is marketing equipment that
incorporates cleaning, rinsing and drying technologies which it believes may
help manufacturers achieve significant contamination reduction, and resulting
yield improvement. The Company currently markets the following products:

CLEANPOINT WATER FILTRATION SYSTEM

The CleanPoint Water Filtration System is a patented deionized water
filtration system designed to eliminate microscopic particle contamination in
deionized water at the point of use. The CleanPoint system is an integral part
of the Company's cleaning, rinsing, and drying systems and is also marketed
independently for other filtration applications.

OMEGA 2000

The Omega 2000 system is an integrated clean, rinse and dry system that
integrates the Company's patented Surface Tension Gradient ("STG") drying
technology and the CleanPoint wafer filtration system with cleaning and system
control capability. The Omega 2000 system combines the advantages of immersion
technology and the convenience of full flow processors and is designed to
provide the following advantages versus conventional equipment:

- Single chamber cleaning, rinsing and drying of wafers, eliminating
cumbersome handling

- Improved rinse and dry cycle times for increased throughput

- Reduced build-up of scum that sometimes occurs with IsoPropyl Alcohol
("IPA") dryers

- Significantly lower usage of IPA, an environmentally hazardous material,
compared to conventional IPA dryers.

- Reduction in surface roughness and haze on wafers

The Company offers chemical injection and megasonic cleaning as options on
the Omega 2000. The Company procures these cleaning subsystems from one of
several manufacturers of such systems. The Omega 2000 is available as a
stand-alone system or as a retrofit upgrade to an existing wet bench system.

OMEGA 4000

The Omega 4000 system builds on the Omega 2000 product by offering
integrated HF filtered etch cleaning capability in addition to the cleaning,
rinsing, and drying capabilities found on the Omega 2000 product. The filtered
etch module allows more thorough cleaning of certain types of processed wafers
than the Omega 2000. The Company procures the filtered etch capability from one
of several manufacturers of such systems. The Omega 4000 system can also be
configured with conventional robotics for wafer cassette handling.

The purchase prices of the Omega products range from $50,000 to $400,000.

Products Under Development

OMEGA 1000

The Omega 1000 system is designed to be a low cost, stand-alone rinse and
dry system that can replace conventional SRD technology in semiconductor
manufacturing facilities. The Omega 1000 is expected to incorporate the STG
drying technology and CleanPoint water filtration system and to provide the
following benefits to semiconductor manufacturers:

- No mechanical motion of wafers, thus preventing wafer breakage problems
associated with SRDs

22
<PAGE> 25

- Minimal moving parts provide higher system reliability and reduced
equipment maintenance cost

- Reduced water spots and organic residues by eliminating the build-up of
water meniscus common in SRDs

The Company is investigating the development of an automated wet bench
capability that would combine the Company's rinsing and drying systems with high
temperature immersion cleaning and other standard cleaning applications. The
Company anticipates that if this new product development is started, that many
of the subsystems for the new product would have to be procured from one of
several manufacturers of such subsystems. The Company is also investigating the
market for cleaning, rinsing, and drying equipment capable of handling new
twelve inch silicon wafers and the development required by the Company to adapt
its products for this new market. No assurance can be given that, even if the
Company undertakes any of these projects, that the product development efforts
will be successful or that any products developed will achieve commercial
success. See "Risk Factors -- Need to Develop New Products and Technologies."

STRATEGY

YieldUP's goal is to become a leading provider of cleaning, rinsing and
drying equipment used in semiconductor, photomask, magnetic and optical disk,
flat panel display and chemical and pharmaceutical product manufacturing
facilities. As part of its marketing process, the Company has allowed leading IC
and wafer manufacturers to test its products at their facilities. The Company
believes that integration of the Company's products into manufacturing lines of
several major semiconductor manufacturers will cause other manufacturers to
follow suit. There can be no assurance, however, that any of these manufacturers
will continue to use the Company's products or that any other manufacturers will
make any purchases of the Company's products.

The Company will also seek to adapt its products to be able to take
advantage of the expected shift in the semiconductor industry from six and eight
inch silicon wafers to twelve inch silicon wafers. That move will require IC
manufacturers to either refurbish existing manufacturing sites or construct new
ones. During the transition, the Company expects that semiconductor
manufacturers will reevaluate those aspects of the manufacturing process which
have a significant impact on yield, since the potential losses associated with
reduced yields will increase as wafer sizes increase and critical dimensions
decrease. The Company also intends to focus on the opportunities to install its
products at new manufacturing sites.

The Company has also initiated marketing activities and made limited sales
in other industries with defect-sensitive manufacturing processes. The Company
believes that manufacturers of magnetic and optical disks, flat panel displays,
and pharmaceutical and chemical products, have use for the Company's products,
because those manufacturers also depend upon the reduction of foreign particles
during the manufacturing process.

CUSTOMERS, MARKETING AND SERVICE

The Company is marketing its cleaning, rinsing and drying systems for
application at several points in the IC fabrication process, including prior to
deposition, prior to photolithography and following etching. In addition, the
Company has also marketed its products for use in the manufacturing process of
magnetic and optical disks, flat panel displays and chemical and pharmaceutical
products. Potential customers with large manufacturing facilities could have use
for several of the Company's products within a single facility. The Company has
sold its systems to semiconductor, photomask and flat panel display
manufacturers who have integrated the YieldUP products into existing wet benches
or have used them in a stand-alone configuration. The Company is also
collaborating with automated wet-bench manufacturers, for integrating its system
into the wet benches of these manufacturers.

In the United States, the Company markets its products through direct
customer contact and manufacturer representatives. These representatives provide
both sales and service support to end users in their territories. In Europe, the
Company markets its products through divisions of Teltec Semiconductor which
provide both sales and service support to end users. In Japan and Taiwan, the
Company distributes its

23
<PAGE> 26

products through Kanematsu Semiconductor Corp. which provides both sales and
service support to end users. The Company has agreements with its
representatives which generally grant the representative an exclusive right to
sell products in a specified territory and allow termination by either party
without cause on 90 days written notice.

In the United States, the Company plans to use its personnel for all
equipment installations, field service, and maintenance. In Europe, the Company
has agreements with divisions of Teltec Semiconductor to perform all equipment
installations, field service, and maintenance, and the Company has no current
plans to discontinue this arrangement. It is the Company's intent to maximize
the use of standard parts, modular design, and field replaceable units to
minimize equipment downtime and repair times, although there can be no assurance
that the Company will be successful in these efforts. The Company typically
provides customers with a twelve month warranty covering parts and labor.

BACKLOG

The Company schedules production of its systems based upon backlog,
informal customer commitments and general economic forecasts for its targeted
markets. The Company includes in its backlog only those customer orders for
systems for which it has accepted purchase orders and for which delivery has
been specified within twelve months as well as orders for spare parts and
service and support of systems. The Company has not entered into any long term
purchase agreements with any customers. Customers commit to purchase the
Company's products by issuing purchase orders. The timing of the purchase
orders' issuance depends on the customer's delivery requirements.

The Company's backlog was approximately $493,000 as of December 31, 1996,
all of which the Company expects to deliver within the next 6 months. The
systems included in backlog have been ordered by a semiconductor device
manufacturer and a flat panel display manufacturer. No assurance can be given
that the systems will be delivered as promised or that they will perform as
designed. The equipment requirements of manufacturers cannot be determined with
accuracy, and therefore the Company's backlog at any certain date is not
indicative of future growth. In addition, because of possible changes in system
delivery schedules, the ability of the customers to cancel, defer or reschedule
with limited or no penalties, and potential delays in system shipments, the
Company's backlog at any particular date is not necessarily representative of
actual sales for any succeeding period. Further, all potential sales will depend
on final delivery and testing of the equipment. See "Risk
Factors -- Fluctuations in Quarterly Results."

MANUFACTURING, ASSEMBLY AND TESTING

The Company's equipment manufacturing operations consist of assembly of
systems into final configuration and final testing in a cleanroom at the
Company's main facility prior to customer shipment. The Company fabricates
certain custom plastic components that are incorporated into its systems, but
the remainder of the system materials are procured from a number of distributors
and outside suppliers.

The Company has no written contracts with any of its suppliers, and such
suppliers may terminate their relationships with the Company at any time without
notice. Any such termination may impair the Company's ability to satisfy any
orders for its products and may adversely affect the Company's results of
operations. The Company will be required to replace any outside suppliers who
terminate their relationships with the Company. In such an event, there could be
no assurance that the Company would be able to find replacement suppliers (on a
timely basis or at all) or that such replacement suppliers would not be more
expensive than the Company's current arrangements, thereby adversely affecting
the Company's results of operations. See "Risk Factors -- Dependence on Key
Suppliers."

The Company's strategic goal is to use contract manufacturers to
manufacture its standard systems and subsystems as unit manufacturing volumes
increase and product designs mature. The Company expects that as its products
mature, there will be a decrease in the amount of custom manufacturing required
to satisfy customers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

24
<PAGE> 27

MANUFACTURING AND DEVELOPMENT

The Company incurred manufacturing and development expenses of
approximately $3,854,000 in 1996, and $1,737,000 in 1995. Manufacturing and
development expenses represent costs incurred for the design and development of
new products, the redesign of existing products and the costs associated with
product sales. For 1995, separate amounts for manufacturing costs of goods sold
and research and development expense were not meaningful as these operating
activities were not separable during that period. For 1996, research and
development expenses were $1,223,002.

The market for semiconductor fabrication equipment is characterized by
rapid technological advancement and product innovation. The Company believes
that development of new products will be required to allow it to compete
effectively in this market. The Company currently has twelve full time employees
whose duties include research and development, and the Company intends to hire
additional product development personnel in 1997.

The Company has established relationships with key customers to gain access
to advanced semiconductor manufacturing technologies and measurement and test
equipment to assist in the development of its products. The Company intends to
continue its research and development activities through internal research and
co-operative research relationships with customers and other technology
companies.

The Company intends to continue its product enhancement programs focusing
on improving reliability and performance, developing additional features,
increasing throughput capabilities, promoting ease of equipment operations and
reducing production costs. The Company also believes it can improve the
standardization of its systems, and, using molds and contract manufacturing to
reduce manufacturing costs, shorten manufacturing lead times, and improve
product reliability and quality. See "Risk Factors -- Need to Develop New
Products and Technologies."

INTELLECTUAL PROPERTY RIGHTS

There has been substantial litigation regarding patent and other
intellectual property rights in semiconductor-related industries. Further
commercialization of the Company's products could provoke additional claims of
infringement from third parties. In the future, litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to defend the Company against claimed infringement of
the rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation would likely result in substantial cost
and diversion of effort by the Company, which by itself could have a material
adverse effect on the Company's business, financial condition and operating
results. Further, adverse determinations in such litigation could result in the
Company's loss of proprietary rights, subject the Company to significant
liabilities to third parties, require the Company to seek

25
<PAGE> 28

licenses from third parties or prevent the Company from manufacturing or selling
its products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Dependence on Proprietary Technology; Expense and Risk of Patent
Litigation."

COMPETITION

There is intense competition in the semiconductor equipment market. The
Company's lack of resources and proven products makes it extremely vulnerable to
competition from larger companies, many of which have significantly greater
financial, employee, product development and marketing resources. Leading
competitors have a larger installed base of products which can provide them a
significant advantage over the Company because the Company's technology has not
been widely deployed and therefore presents potential customers with uncertainty
not associated with existing equipment. In addition, many manufacturers are
reluctant to choose small companies as key suppliers due to concerns about long
term viability and product support. There can be no assurance that the Company
will overcome these disadvantages.

Competition for the Company's products currently comes from makers of
traditional and new cleaning, rinsing and drying equipment. Competitors include
manufacturers of SRDs such as Verteq and Semitool, IPA dryer manufacturers such
as S&K and Steag and integrated wet processing system manufacturers such as
Santa Clara Plastics, SubMicron Systems and Nippon Screen. There can be no
assurance that these competitors will not develop new products or improve their
existing products which, when combined with their existing market presence,
would make the Company's products obsolete or unmarketable. Any such development
would have a material adverse effect on the Company. There also can be no
assurance that the Company will be able to penetrate the wet processing
equipment market and convince manufacturers to install the Company's systems
either directly or through retrofitting in place of existing equipment.
Additional competition for the Company's products also currently comes from a
large number of small companies making cleaning, rinsing and drying equipment
which is less expensive than the Company's products. Because the Company's
products sell for significantly higher prices than such products, the Company
may not be able to compete effectively against them without lowering its prices.

The Company also expects that competition may arise from new competitors
and from new technological approaches adopted by new and existing competitors.
Because of the increasing focus on yield management in the semiconductor
manufacturing industry, equipment manufacturers are likely to put an increased
emphasis on contaminant reduction. Thus, competitive technologies or new
manufacturing techniques may be developed which could make the Company's
products obsolete, thereby materially adversely affecting the Company. If the
Company is unable to respond to the challenges of competition, including changes
in cleaning, rinsing and drying or semiconductor manufacturing processes, there
can be no assurance that the Company would be able to achieve or maintain
profitability at a level required to support its survival or growth. See "Risk
Factors -- Intense Competition; Uncertain Market Acceptance."

The Company currently competes principally on the basis of superior
contamination reduction, better price/performance, improved equipment
reliability, smaller footprint, lower operating cost and reduction in hazardous
chemical usage. The Company believes that these factors as well as ease of use,
price, reputation, service and familiarity are important competitive criteria
for selection of cleaning, rinsing and drying equipment by potential customers
in the manufacturing industries in which the Company competes. There can be no
assurance that the Company will compete favorably with respect to these or other
factors in the future, and any failure to compete successfully could have a
material adverse effect on the Company's business or operating results.

EMPLOYEES

On December 31, 1996, the Company had 30 full-time employees. Twelve of the
Company's employees work in engineering and product development; 11 work in
manufacturing and operations; four work in sales and marketing; and three in
administration. No employee of the Company is currently represented by a labor
union. Management considers its employee relations to be good.

26
<PAGE> 29

The Company intends to add employees from time to time as necessary to meet
its evolving management, research and development, manufacturing, marketing,
sales and service needs. The Company believes that its future success is
dependent to a significant degree on its ability to attract and retain
additional skilled personnel to enable the Company to develop and compete.

FACILITIES

YieldUP's headquarters are located in Mountain View, California, where the
Company leases a total of approximately 14,400 square feet of office and
assembly space under a lease which expires in September 1998, with a current
monthly obligation of $10,000 plus taxes, maintenance and utilities. The Company
has an option to extend the lease on its current facilities for an additional
three years after September 1998. The Company intends to use a portion of the
potential proceeds from the Class A warrant exercise to construct and equip new
manufacturing and office facilities. Such new facilities should provide
expansion capacity for manufacturing operations and corporate functions for the
next twelve months.

LITIGATION

CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against the Company in the United States District Court for the
District of Delaware in September 1995. The complaint alleges that the drying
process incorporated in certain of the Company's products infringes a patent
held by CFM. The Company believes that its drying process does not infringe the
CFM patent. The Company has filed a cross-complaint in this action seeking a
declarative judgment that the Company's products do not infringe the CFM patent.
However, litigation is inherently uncertain, and there can be no assurance that
the Company will not, as a result of this litigation, suffer a material adverse
effect on its business or financial condition. The trial for this matter is
currently scheduled to begin in July 1997. The Company expects that the CFM
litigation will continue to result in substantial costs and diversion of effort
by the Company which could materially adversely affect the Company. The CFM
litigation and any other such litigation could also continue to delay or impede
market acceptance of the Company's products. A decision adverse to the Company
in such litigation could result in substantial damages payable by the Company
and could support the issuance of an injunction prohibiting further sales by the
Company of some or all of its products. Because the Company relies on a single
product family for the substantial majority of its revenues, any successful
challenge by other parties to the Company's right to use its designs could
potentially render the Company insolvent and jeopardize its ability to continue
as a viable concern. See "Risk Factors -- Dependence on Proprietary Technology;
Expense and Risk of Patent Litigation."

27
<PAGE> 30

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company and their ages as of
December 31, 1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------- --- ------------------------------------------------------
<S> <C> <C>
Raj Mohindra................. 51 President, Chief Executive Officer and Director
Suraj Puri................... 52 Vice President, Chief Technical Officer and Director
Scott M. Gibson.............. 38 Vice President and Chief Financial Officer
Bernard Slade................ 72 Director
Abhay K. Bhushan............. 50 Director
Ram Paul Gupta(1)............ 57 Director
William W.R. Elder(1)........ 56 Director
</TABLE>

- ---------------
(1) Member of the Compensation and Audit Committees

Mr. Mohindra co-founded the Company in 1993 and has served as President,
Chief Executive Officer and a director of the Company since its inception. Prior
to joining the Company, from 1968 to 1993, he worked for IBM where he held a
number of operational, management and technical positions, including head of the
IBM Productivity Competence Center, Manager of Systems Engineering and Senior
Technical Staff Member.

Mr. Puri co-founded the Company in 1993 and has served as Vice President,
Chief Technical Officer and a director of the Company since its inception. Prior
to joining the Company, from 1986 to 1993, Mr. Puri served as an independent
consultant in the semiconductor industry. From 1978 to 1986, he managed process
engineering, technology transfer and yield improvement at Advanced Micro
Devices, a manufacturer of semiconductor devices.

Mr. Gibson joined the Company in August 1995 as Vice President and Chief
Financial Officer. Prior to joining the Company, from June 1994 to July 1995,
Mr. Gibson was Vice President for Customer Satisfaction at Tencor Instruments, a
semiconductor equipment manufacturer. From 1992 to 1994, Mr. Gibson served as
Chief Financial Officer of Prometrix Corporation, a semiconductor equipment
manufacturer. From 1991 to 1992, Mr. Gibson was a Product Accounting Manager for
Stratacom Inc., a telecommunications equipment manufacturer. Prior to that, from
1988 to 1991, Mr. Gibson served as Division Controller for KLA Instruments, a
manufacturer of wafer and mask inspection systems for the semiconductor
industry.

Mr. Slade co-founded the Company in 1993 and served as Vice President with
responsibility for East Coast and European Operations until December 1996. Mr.
Slade was appointed as a director of the Company in January 1997. From 1986 to
1993, Mr. Slade worked for Gemini Consulting, a management consulting firm,
where he specialized in productivity, product development, and manufacturing
issues. From 1957 to 1984, he worked for IBM where he held a number of product
development and operational management positions, including Corporate Director
of Manufacturing Technology and Director of Manufacturing Planning and Controls.

Mr. Bhushan co-founded the Company in 1993 and has served as a director of
the Company since its inception. He also served as Chief Financial Officer of
the Company from August 1993 until July 1995. Mr. Bhushan is currently Chairman
and Chief Financial Officer of Portola Communication, a software company, where
he has been employed since 1996. From 1974 through 1995, Mr. Bhushan was
employed by Xerox Corporation, where he served in various capacities, including
Manager of the Xerox Environmental Leadership Programs, Manager of Systems
Engineering and Standards and Manager of Business Strategy.

Mr. Gupta has served as a director of the Company since July 1995. From
1992 to the present, Mr. Gupta has served as President, Chief Operating Officer
and Vice President of Operations of Quality Semiconductor, Inc., a semiconductor
manufacturer. From 1988 to 1992, Mr. Gupta served as President of Blackship

28
<PAGE> 31

Computers, Inc., a systems integration company. From 1983 to 1988, Mr. Gupta
held various management positions, including President, at General Electric's
Intensil Semiconductor operation.

Mr. Elder has served as a director of the Company since September 1995.
Since 1982, Mr. Elder has served as Chairman of the Board of Directors of Genus,
Inc., a semiconductor equipment company. Prior to founding Genus, Mr. Elder
served as president of Kasper Instruments, a division of Eaton Corporation, a
manufacturer of semiconductor equipment, and in several senior management
positions at Fairchild Semiconductor.

The Board of Directors is divided into three classes. Each class of
directors consists of one or two directors, who serve staggered three year
terms. See "Description of Securities -- Delaware Law and Certain Charter
Provisions."

Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors or officers of
the Company.

EXECUTIVE COMPENSATION

The following table sets forth the aggregate base salary and bonuses paid
by the Company for services rendered during 1995 and 1996 to the Company's chief
executive officer and the only other executive officer (the "Named Executive
Officers") who earned more than $100,000 in either year.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL -------------
COMPENSATION SECURITIES ALL OTHER
------------ UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION
- -------------------------------------------------- ----- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Raj Mohindra, President and Chief Executive
Officer......................................... 1995 $ 84,000 125,971 --
1996 $138,459 -- $ 5,400(1)
Robert Ciano, Vice President, Sales and
Marketing(2).................................... 1995 -- -- --
1996 $131,461 45,000 --
</TABLE>

- ---------------

(1) Represents automobile allowance payments.

(2) Mr. Ciano resigned from the Company in November 1996.

STOCK OPTION INFORMATION

The following table contains information concerning stock option grants to
the Named Executive Officers in 1996.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SARS IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED YEAR ($/SH) DATE
- ------------------------------------------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Raj Mohindra.................................... -- -- -- --
Robert Ciano.................................... 45,000 12.4% $ 5.75 2/15/06(1)
</TABLE>

- ---------------

(1) The option expired without exercise 30 days after Mr. Ciano's resignation.

29
<PAGE> 32

AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES

The following table sets forth, for the Named Executive Officers, the
shares acquired and the value realized on exercise of stock options during the
year ended December 31, 1996 and the year-end number and value of exercisable
and unexercisable options.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Raj Mohindra................ -- -- 125,971 -- $ 660,008 --
Robert Ciano................ -- -- -- -- -- --
</TABLE>

- ---------------

(1) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options, $0.76 per share, and the fair
market value for the Company's Common Stock of $6.00 per share as of
December 31, 1996, which was the closing price of the Company's Common Stock
on December 31, 1996.

The Company does not have employment agreements with any of its executive
officers or directors.

STOCK PLANS

1995 Stock Option Plans. The Board of Directors has reserved 500,000
shares of Common Stock (250,000 shares are subject to stockholder approval) for
issuance under the Company's 1995 Stock Option Plan (the "Option Plan"). As of
December 31, 1996, there were outstanding options to purchase 272,750 shares
under the Option Plan. Options may be granted to employees (including officers),
consultants, advisors and directors, although only employees and directors and
officers who are also employees may receive "incentive stock options" intended
to qualify for certain tax treatment. The exercise price of nonqualified stock
options must equal at least 85% of the fair market value of the Common Stock on
the date of grant, and the exercise price of incentive stock options must be no
less than the fair market value on the date of grant. Options granted under the
Option Plan are generally immediately exercisable, vest over four years and must
be exercised within ten years. As of December 31, 1996, none of the options
granted under the Option Plan were vested.

Prior to the adoption of the Option Plan in September 1995, the Company
granted options to purchase shares of Class A Common Stock under a separate
option plan (the "Prior Plan"). A total of 270,037 shares of Class A Common
Stock remain subject to outstanding options. The Company does not anticipate
granting any additional options to purchase Class A Common Stock under the Prior
Plan, and any shares subject to options under the Prior Plan which terminate or
are cancelled will not be issued or used for new options. As of December 31,
1996, options under the Prior Plan to purchase a total of 204,155 shares of
Class A Common Stock were vested and exercisable.

1995 Outside Directors Stock Option Plan. 100,000 shares of Common Stock
have been reserved for issuance under the Company's 1995 Outside Directors Stock
Option Plan (the "Directors Plan"). As of December 31, 1996, options to purchase
40,000 shares have been granted under the Directors Plan. The Directors Plan
provides for the automatic granting of nonqualified stock options to directors
of the Company who are not employees of the Company ("Outside Directors"). Under
the Directors Plan, each new Outside Director will automatically be granted an
option to purchase 20,000 shares of Common Stock on the date of his election.
Additionally, each Outside Director, except for Outside Directors who have
received an initial grant of an option to purchase 20,000 shares within six
months of the annual meeting of stockholders, will automatically be granted an
option to purchase 5,000 shares of Common Stock on the date of each annual
meeting of stockholders. The exercise price of the options in all cases will be
equal to the fair market value of the Common Stock on the date of grant. Options
granted under the Directors Plan are immediately exercisable but vest over four
years and generally must be exercised within ten years. As of December 31, 1996,
options under the Directors Plan to purchase a total of 10,000 shares of Common
stock were vested and exercisable.

30
<PAGE> 33

COMPENSATION OF DIRECTORS

From time to time, directors have received grants of options to purchase
the Company's Common Stock. Directors who are not employees of the Company
receive yearly grants of options to purchase Common Stock under the Directors
Plan. See "-- Stock Plans -- 1995 Outside Directors Stock Option Plan." The
Company does not pay additional amounts for committee participation or special
assignments of the Board of Directors.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law; (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.

The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company has
entered into separate indemnification agreements with its directors and officers
which are, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.

CERTAIN TRANSACTIONS

During the last two fiscal years, the Company had the following
transactions with certain of its officers, directors and holders of 5% of the
outstanding shares of the Company, as described below.

In September 1995, the Company issued a promissory note in the principal
amount of $50,000 and 25,000 warrants which subsequently converted into Class A
Warrants to each of Raj Mohindra, Abhay Bhushan, Suraj Puri and Bernard Slade,
directors of the Company.

In October 1995, the Company distributed a dividend of 220,000 Class A
Warrants and 450,000 Class B Warrants pro rata among all holders of capital
stock and options to acquire capital stock of the Company, including all
officers and directors of the Company other than William Elder.

The Company believes that all transactions with affiliates described above
were made on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties.

31
<PAGE> 34

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's capital stock as of December 31, 1996, and as
adjusted to reflect the exercise of the Class A Warrants, (i) by each person who
is known by the Company to own beneficially more than 5% of the Company's
capital stock, (ii) by each of the Named Executive Officers and by each of the
Company's directors, and (iii) by all officers and directors as a group.

<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP OF
ALL COMMON
STOCK OUTSTANDING(2)
--------------------------- PERCENTAGE OF
BEFORE AFTER VOTING POWER
NUMBER OF EXERCISE OF EXERCISE OF AFTER EXERCISE
SHARES BENEFICIALLY CLASS A CLASS A OF CLASS A
BENEFICIAL OWNER OWNED(1) WARRANTS WARRANTS(3) WARRANTS
- ---------------------------------- --------------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Raj Mohindra...................... 1,102,123(4) 30.2% 19.2% 36.1%
Abhay K. Bhushan.................. 312,605(5) 9.0 5.5 10.2
Suraj Puri........................ 220,804(6) 6.4 3.9 7.0
Bernard Slade..................... 124,587(7) 3.6 2.2 3.9
Ram Paul Gupta.................... 49,171(8) 1.4 * 1.1
William W.R. Elder................ 20,000(9) * * *
Robert Ciano...................... 0 -- -- --
All directors and executive
officers as a group (eight (8)
persons)........................ 1,888,020(10) 48.1 32.1 57.2
</TABLE>

- ---------------
* Represents less than one percent.

(1) Except pursuant to applicable community property laws or as otherwise
noted, all shares are beneficially owned and sole voting and investment
power is held by the persons named.

(2) Based on 1,912,111 shares of Class A Common Stock outstanding, 1,495,000
shares of Common Stock outstanding before the warrant exercise and
3,710,000 shares of Common Stock outstanding after the warrant exercise,
plus shares which may be acquired by the named person(s) upon exercise of
outstanding options or Class A Warrants as of April 30, 1997.

(3) Assumes exercise of all 2,215,000 outstanding Class A Warrants.

(4) Includes 121,866 shares of Common Stock issuable upon exercise of Class A
Warrants held by Mr. Mohindra and his family members. Includes 125,971
shares issuable upon exercise of options. Also includes 44,161 shares held
by family members of Mr. Mohindra, but Mr. Mohindra disclaims beneficial
ownership of all such shares except to the extent of any pecuniary interest
therein which he may have. Does not include an aggregate of 320,004 shares
of Common Stock issuable upon exercise of Class B Warrants held by Mr.
Mohindra and his family members.

(5) Includes 50,895 shares of Common Stock issuable upon exercise of Class A
Warrants held by Mr. Bhushan and his family members. Includes 14,479 shares
issuable upon exercise of options. Also includes 43,434 shares held by
family members of Mr. Bhushan, but Mr. Bhushan disclaims beneficial
ownership of all such shares except to the extent of any pecuniary interest
therein which he may have. Does not include an aggregate of 103,866 shares
of Common Stock issuable upon exercise of Class B Warrants held by Mr.
Bhushan and his family members.

(6) Includes 43,260 shares of Common Stock issuable upon exercise of Class A
Warrants held by Mr. Puri and his family members. Includes 3,619 shares
issuable upon exercise of options. Also includes 7,239 shares held by a
family member of Mr. Puri, but Mr. Puri disclaims beneficial ownership of
all such shares except to the extent of any pecuniary interest therein
which he may have. Does not include an aggregate of 80,611 shares of Common
Stock issuable upon exercise of Class B Warrants held by Mr. Puri and his
family members.

32
<PAGE> 35

(7) Includes 27,586 shares of Common Stock issuable upon exercise of Class A
Warrants. Includes 5,791 shares issuable upon exercise of options. Does not
include an aggregate of 47,195 shares of Common Stock issuable upon
exercise of Class B Warrants held by Mr. Slade.

(8) Includes 4,316 shares of Common Stock issuable upon exercise of Class A
Warrants. Includes 38,822 shares issuable upon exercise of options. Does
not include an aggregate of 13,144 shares of Common Stock issuable upon
exercise of Class B Warrants held by Mr. Gupta.

(9) Includes 20,000 shares issuable on exercise of outstanding options.

(10) Includes 252,215 shares of Common Stock issuable upon exercise of Class A
Warrants held by executive officers and their family members. Includes
263,120 shares issuable upon exercise of options, of which 196,780 shares
are vested. Does not include an aggregate of 584,677 shares of Common Stock
issuable upon exercise of Class B Warrants held by officers and directors
and their family members.

CONCURRENT OFFERING

The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering by the Selling
Securityholders. All of the Selling Securityholder Warrants are being
registered, at the Company's expense, under the Securities Act and are tradeable
on or about the effective date of this registration statement. The Selling
Securityholders may exercise and sell the Common Stock issuable upon exercise of
the Selling Securityholder Warrants without restriction if a current prospectus
relating to such Common Stock is in effect and the securities are qualified for
sale. The Company will not receive any proceeds from the sale of the Selling
Securityholder Warrants. Sales of Selling Securityholder Warrants or the
securities underlying such Warrants or even the potential of such sales could
have an adverse effect on the market prices of the Common Stock and the
Warrants.

Certain officers and directors of the Company, including Raj Mohindra,
Suraj Puri, Bernard Slade, Ram Paul Gupta, Scott M. Gibson, and Abhay K.
Bhushan, beneficially own a portion of the Selling Securityholder Warrants. Mr.
Mohindra holds 121,866 Class A Warrants (including 4,363 held by family members)
and 198,138 Class B Warrants (including 8,926 held by family members). Mr. Puri
holds 43,260 Class A Warrants (including 716 held by a family member) and 37,351
Class B Warrants (including 1,463 held by a family member). Mr. Slade holds
27,586 Class A Warrants and 19,609 Class B Warrants. Mr. Gupta holds 4,316 Class
A Warrants and 8,828 Class B Warrants. Mr. Gibson holds 4,292 Class A Warrants
and 8,780 Class B Warrants. Mr. Bhushan holds 50,895 Class A Warrants (including
4,290 held by family members) and 52,971 Class B Warrants (including 8,778 held
by family members).

The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices or in negotiated transactions, a combination of such methods of sale or
otherwise.

Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealer may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholder Warrants may not
simultaneously engage in market-making activities with respect to any securities
of the Company during the applicable "cooling-off" period (at least two and
possibly nine business days) prior to the commencement of such distribution.
Accordingly, in the event the Solicitation Agent or Blair & Co. is engaged in a
distribution of the Selling Securityholder Warrants, neither of such firms will
be able to make a market in the Company's securities during the applicable
restrictive period. However,

33
<PAGE> 36

neither the Solicitation Agent nor Blair & Co. has agreed to nor is either of
them obligated to act as broker-dealer in the sale of the Selling Securityholder
Warrants and the Selling Securityholders may be required, and in the event Blair
& Co. is a market-maker, will likely be required, to sell such securities
through another broker-dealer. In addition, each Selling Securityholder desiring
to sell Warrants will be subject to the applicable provisions of the Exchange
Act and the rules and regulations thereunder, including without limitation Rules
10b-6 and 10b-7, which provisions may limit the timing of the purchases and
sales of shares of the Company's securities by such Selling Securityholder.

The Selling Securityholder and broker-dealer, if any, acting in connection
with such sales might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commission received by them and any
profit on the resale of the securities might be deemed to be underwriting
discount and commissions under the Securities Act.

The following table sets forth the number of Class A and Class B Warrants
held by each Selling Securityholder for whom the Company is registering the
Selling Securityholder Warrants for resale to the public. The Company will not
receive any of the proceeds from the sale of such securities. The table does not
reflect Class B Warrants issuable upon exercise of Class A Warrants.

<TABLE>
<CAPTION>
SELLING SECURITYHOLDER CLASS A WARRANTS CLASS B WARRANTS
----------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Bruce M. Ampolsky.................................... 18,750 --
John and Joan Anderson............................... 775 1,586
John Anderson, Jr. .................................. 71 146
Tad Arias............................................ 71 146
Pramod P. Bansal..................................... 1,431 2,927
Ashish Bansal........................................ 286 585
Manju Bansal......................................... 572 1,171
Rishi Bansal......................................... 286 585
Gary O. Benson....................................... 75,000 --
Abhay Bhushan*....................................... 46,605 44,193
Gitanja Bhushan...................................... 1,430 2,926
Monika K. Bhushan.................................... 1,430 2,926
Rajiv Bhushan........................................ 7,154 14,633
Sasha Bhushan........................................ 1,430 2,926
Adolph Bohn.......................................... 4,006 8,195
Arthur D. Boren...................................... 4,292 8,780
William E. Brooks.................................... 358 732
Charles W. & Roberta S. Chambers, JTWROS............. 12,500 --
K.T. Cherian......................................... 199 406
Sanjeev Chitre....................................... 1,789 3,658
Perry Coe............................................ 143 292
Aaron Cohn........................................... 716 1,463
David Cohn........................................... 286 585
Craig R. Crawley..................................... 86 175
Kevin Culkin......................................... 1,073 2,195
Raymond and Marie Cunningham......................... 358 732
Robert M. Freeman.................................... 50,000 --
Marie Dixon.......................................... 716 1,463
Ruth Epstein......................................... 536 1,097
Gerald and Gloria Frolich............................ 716 1,463
Craig Frolich........................................ 751 1,536
Stanley N. Gaines.................................... 12,500 --
GCW&F Partners II(1)................................. 497 1,016
Scott M. Gibson*..................................... 4,292 8,780
Dan Gill............................................. 7 15
</TABLE>

34
<PAGE> 37

<TABLE>
<CAPTION>
SELLING SECURITYHOLDER CLASS A WARRANTS CLASS B WARRANTS
----------------------------------------------------- ------- -------
<S> <C> <C>
Ram Paul Gupta*...................................... 4,316 8,828
Jerry Hymowitz....................................... 25,000 --
JKR & Co., Inc.(2)................................... 358 732
John J. Jubin........................................ 447 914
Masaharu Shinya...................................... 1,002 2,049
Pyare Lal Khanna..................................... 994 2,032
John and Cathy Konop................................. 429 878
Charles Leithauser................................... 10,500 --
Timothy P. Marshall.................................. 536 1,097
Michael Masciorini................................... 1,574 3,219
Walter and Ann S. Masciorini......................... 894 1,829
Raj Mashruwala....................................... 2,447 5,004
Raj Mohindra*........................................ 117,503 189,212
Dev Mohindra......................................... 2,146 4,390
Pran Vati Mohindra................................... 71 146
Sanjay S. Mohindra................................... 2,146 4,390
Jeffrey Nowell....................................... 3,756 7,683
Richard Ogawa........................................ 199 406
Steven N. Ostrovsky.................................. 12,500 --
George Plaut......................................... 1,431 2,927
Richard Posey........................................ 1,431 2,927
Suraj Puri*.......................................... 42,544 35,888
Jaideep Puri......................................... 215 439
Vedica Puri.......................................... 716 1,463
Raj Rajaratnam....................................... 993 2,029
Irwin Rosenthal...................................... 358 732
Margaret and Stanly Shatsky Trust(3)................. 179 366
Thomas Singer........................................ 715 1,463
Bernard Slade, Sr.*.................................. 27,586 19,609
Eric J. Slade........................................ 1,041 2,129
Steven P. Slade...................................... 716 1,464
Eric J. and Joy M. Slade, JTWROS..................... 716 1,463
David Slone.......................................... 199 406
John Smith........................................... 447 914
Michael L. Snow...................................... 12,500 --
R. Srivastava........................................ 179 366
Rudolph Svejkovsky................................... 1,431 2,927
Debora Tedeschi...................................... 358 732
Teltec Semiconductor Technic GmbH(4)................. 2,003 4,097
Teltec Semiconductor Technic SA(5)................... 2,003 4,097
Douglas M. Trabilcy.................................. 12,500 --
Joel Urdang.......................................... 25,000 --
Sandrine F. Weinbender............................... 484 991
Carol Whitfield...................................... 1,430 2,926
Wolfe/Axelrod Associates(6).......................... 497 1,016
David Wong........................................... 2,146 4,390
Henri Zimmerli....................................... 2,003 4,097
------- -------
579,750 450,000
======= =======
</TABLE>

- ---------------
* Officer or director of the Company.

35
<PAGE> 38

(1) Gregory M. Gallo is an executive officer of the corporate general partner of
this limited partnership with certain limited voting and investment control
over these securities and may therefore be deemed to be the beneficial owner
thereof. Mr. Gallo disclaims beneficial ownership of all such warrants
except to the extent of any pecuniary interest therein which he may have.

(2) Jack Kemp is the president of this corporation with voting and investment
control over these securities and may therefore be deemed to be the
beneficial owner thereof. Mr. Kemp disclaims beneficial ownership of all
such warrants except to the extent of any pecuniary interest therein which
he may have.

(3) Stanly Shatsky is the trustee of this trust with certain investment and
voting control over these securities and may therefore be deemed to be the
beneficial owner thereof. Mr. Shatsky disclaims beneficial ownership of
these warrants except to the extent of any pecuniary interest therein which
he may have.

(4) Adolph Bohn is an executive officer of this corporation with certain
investment and voting control over these securities and may therefore be
deemed to be the beneficial owner thereof. Mr. Bohn disclaims beneficial
ownership of these warrants except to the extent of any pecuniary interest
therein which he may have.

(5) Henri Zimmerli is an executive officer of this corporation with certain
investment and voting control over these securities and may therefore be
deemed to be the beneficial owner thereof. Mr. Zimmerli disclaims beneficial
ownership of these warrants except to the extent of any pecuniary interest
therein which he may have.

(6) Steven Axelrod is general partner of this partnership with certain
investment and voting control over these securities and may therefore be
deemed to be the beneficial owner thereof. Mr. Axelrod disclaims beneficial
ownership of these warrants except to the extent of any pecuniary interest
therein which he may have.

36
<PAGE> 39

DESCRIPTION OF SECURITIES

GENERAL

The Company's authorized capital stock consists of 22,229,927 shares of
Common Stock, par value $.001 per share, including 2,229,927 shares of Class A
Common Stock and 20,000,000 shares of Common Stock, and 5,000,000 shares of
Preferred Stock, par value $.001 per share (the "Preferred Stock"). As of
December 31, 1996, there were outstanding 1,912,111 shares of Class A Common
Stock held by 66 holders and 1,495,000 shares of Common Stock held by eight
holders of record, and the Company believes that there are more than 300
beneficial holders of Common Stock.

COMMON STOCK AND CLASS A COMMON STOCK

The rights of the holders of the Common Stock and the Class A Common Stock
are essentially identical, except that: (i) the holders of the Common Stock are
entitled to one vote per share and holders of Class A Common Stock are entitled
to five votes per share with respect to all matters on which holders of the
Company's Common Stock are entitled to vote, (ii) if stock dividends, splits,
distributions, reverse splits, combinations, reclassification of shares, or
other recapitalizations (collectively, "recapitalizations") are declared or
effected, such recapitalizations shall be effected in a like manner with respect
to the Common Stock and the Class A Common Stock, except that payments in shares
of capital stock shall be paid in Common Stock with respect to Common Stock and
Class A Common Stock with respect to Class A Common Stock, and (iii) shares of
Class A Common Stock are convertible into Common Stock on a share-for-share
basis at the option of the holder at any time and all remaining shares of Class
A Common Stock will automatically be converted to Common Stock at such time as
there are fewer than 400,000 shares of Class A Common Stock outstanding.

In addition, the shares of Class A Common Stock are automatically converted
into shares of Common Stock upon their transfer to any person other than the
following transferees (the "Permitted Transferees"): (a) the spouse of a Class A
Common Stockholder; (b) any lineal descendants of a Class A Common Stockholder,
including adopted children (said descendants, together with the Class A Common
Stockholder and his or her spouse are hereinafter referred to as "Family
Members); (c) a trust for the sole benefit of a Class A Common Stockholder's
Family Members; (d) a partnership made up exclusively of Class A Common
Stockholders and their Family Members or a corporation wholly owned by Class A
Common Stockholders and their Family Members, and (e) to any of its partners or
stockholders as long as such partner or stockholder was a partner or stockholder
of the transferor at the time a transferor acquired its Class A Common Stock or
is a Permitted Transferee. There will be no trading market for the Class A
Common Stock.

Holders of the Common Stock and Class A Common Stock have equal ratable
rights to dividends from funds legally available therefor, when, as and if
declared by the Board of Directors, and are entitled to share ratably, as a
single class, in all of the assets of the Company available for distribution to
holders of shares of Common Stock and Class A Common Stock upon the liquidation,
dissolution or winding up of the affairs of the Company. Holders of Common Stock
or Class A Common Stock do not have preemptive or subscription rights. There are
no redemption or sinking fund provisions for the benefit of the Common Stock or
Class A Common Stock in the Company's Certificate of Incorporation. All
outstanding shares of Class A Common Stock are, and those shares of Common Stock
offered hereby will be, validly issued, fully paid and non-assessable. Since the
Common Stock does not have cumulative voting rights and, therefore, holders of
shares entitled to exercise more than 50% of the voting power are able to elect
all of the Directors of the Company, these voting provisions will result in the
existing directors and officers retaining control over the Company, despite any
accumulation of Common Stock by third parties.

The difference in voting rights described above increases the voting power
of the Class A Common Stockholders and accordingly has an anti-takeover effect.
The existence of the Class A Common Stock may make the Company a less attractive
target for a hostile takeover bid or render more difficult or discourage a
merger proposal, an unfriendly tender offer, a proxy contest, or the removal of
incumbent management, even if such transactions were favored by the stockholders
of the Company other than the Class A Common

37
<PAGE> 40

Stockholders. Thus, the stockholders may be deprived of an opportunity to sell
their shares at a premium over prevailing market prices in the event of a
hostile takeover bid. Those seeking to acquire the Company through a business
combination will be compelled to consult first with the holders of large numbers
of Class A Common Stock in order to negotiate the terms of such business
combination. Any such proposed business combination will have to be approved by
the Board of Directors, may be under the control of the Class A Common
Stockholders, and if stockholder approval were required, the approval of the
Class A Common Stockholders will be necessary before any such business
combination can be consummated.

WARRANTS

Class A Warrants. The holder of each Class A Warrant is entitled, upon
payment of the exercise price of $7.00, to purchase one share of Common Stock
and one Class B Warrant. Unless previously redeemed, the Class A Warrants are
exercisable at any time until November 21, 2000, provided that at such time a
current prospectus relating the underlying Common Stock and Class B Warrants is
in effect and the underlying Common Stock and Class B Warrants are qualified for
sale or exempt from qualification under applicable state securities laws. The
Class A Warrants are subject to redemption, as described below.

Class B Warrants. The holder of each Class B Warrant is entitled to
purchase one share of Common Stock at an exercise price of $11.00. Unless
previously redeemed, the Class B Warrants are exercisable at any time until
November 21, 2000, provided that at such time a current prospectus relating to
the underlying Common Stock is then in effect and the underlying Common Stock is
qualified for sale or exempt from qualification under applicable state
securities laws. The Class B Warrants are subject to redemption, as described
below.

Redemption. The Class A Warrants are subject to redemption by the Company,
on not less than 30 days written notice, at a price of $.05 per Class A Warrant,
if the average closing bid price of the Common Stock for any 30 consecutive
business days ending within 15 days of the date on which the notice of
redemption is given exceeds $9.80 per share. The Class B Warrants are subject to
redemption by the Company on not less than 30 days' written notice, at a price
of $.05 per Class B Warrant, if the average closing bid price of the Common
Stock for any 30 consecutive business days ending within 15 days of the date on
which the notice of redemption is given exceeds $15.40 per share. Holders of
Warrants will automatically forfeit their rights to purchase the shares of
Common Stock (and Class B Warrants in the case of the Class A Warrants) issuable
upon exercise of such Warrants unless the Warrants are exercised before the
close of business on the business day immediately prior to the date set for
redemption. All of the outstanding Warrants of a class, except for those
underlying the Unit Purchase Option, must be redeemed if any of that class are
redeemed. A notice of redemption shall be mailed to each of the registered
holders of the Warrants of a class, except for those underlying the Unit
Purchase Option, by first class mail, postage prepaid. The notice of redemption
shall specify the redemption price, the date fixed for redemption, the place
where the Warrant certificates shall be delivered and the redemption price to be
paid, and that the right to exercise the Warrants shall terminate at 5:00 p.m.
(New York City time) on the business day immediately preceding the date fixed
for redemption.

General. The Warrants may be exercised upon surrender of the
certificate(s) therefor on or prior to the earlier of their expiration or the
redemption date (as explained above) at the offices of the Company's warrant
agent (the "Warrant Agent") with the form of "Election to Purchase" on the
reverse side of the certificate(s) filled out and executed as indicated,
accompanied by payment (in the form of certified or cashier's check payable to
the order of the Company) of the full exercise price for the number of Warrants
being exercised.

The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends, stock splits, mergers, certain issuances of Common Stock below fair
market value, sale of substantially all of the Company's assets, and for other
extraordinary events in order to enable the holders of the Warrants to obtain
the same or equivalent rights which they would have obtained if the Warrants had
been exercised prior to the event.

The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value of
such fractional shares. The holder of a Warrant will not possess any rights as a
stockholder of the Company unless and until he exercises the Warrant.

38
<PAGE> 41

UNIT PURCHASE OPTION

The Company has granted to the designees of D.H. Blair Investment Banking
Corp., the underwriter of the Company's initial public offering and the
Solicitation Agent, the Unit Purchase Option to purchase up to 130,000 Units,
each Unit consisting of one share of Common Stock, one Class A Warrant and one
Class B Warrant. These Warrants will be identical to the Warrants described
above except that the Class A Warrants and the Class B Warrants included in the
Unit Purchase Option will not be subject to redemption by the Company, unless at
the time the Warrants are called for redemption, the Unit Purchase Option has
been exercised and the underlying Warrants are outstanding. The Unit Purchase
Option is exercisable during the three-year period commencing November 21, 1997
at an exercise price of $7.00 per Unit subject to adjustment in certain events
to protect against dilution. The holders of the Unit Purchase Option have
certain demand and piggyback registration rights. The existence of the Unit
Purchase Option and the inability of the Company to redeem the Warrants included
therein may hinder the Company's future financing or business transactions. See
"Plan of Distribution."

PREFERRED STOCK

General. The Preferred Stock may be issued in series, and shares of each
series will have such rights and preferences as are fixed by the Board in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board may, without further action by the
holders of Common Stock, fix the number of shares constituting that series and
fix the dividend rights, dividend rate, conversion rights, voting rights (which
may be greater or lesser than the voting rights of the Common Stock), rights and
terms of redemption (including any sinking fund provisions), and the liquidation
preferences of the series of Preferred Stock. It is to be expected that the
holders of any series of Preferred Stock, when and if issued, will have priority
claims to dividends and to any distributions upon liquidation of the Company,
and that they may have other preferences over the holders of the Common Stock.

The Board may issue series of Preferred Stock without action of the
stockholders of the Company. Accordingly, the issuance of Preferred Stock may
adversely affect the rights of the holders of the Common Stock. In addition, the
issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the stockholders. Issuance of Preferred Stock may
dilute the voting power of holders of Common Stock (such as by issuing Preferred
Stock with super-voting rights) and may render more difficult the removal of
current management, even if such removal may be in the stockholders' best
interests. The Company has no current plans to issue any of the Preferred Stock.

DELAWARE SECTION 203

As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which regulates large
accumulations of shares, including those made by tender offers. Section 203 may
have the effect of significantly delaying a purchaser's ability to acquire the
entire interest in the Company if such acquisition is not approved by the
Company's Board. In general, Section 203 prevents an "Interested Stockholder"
(defined generally as a person with 15% or more of a corporation's outstanding
voting stock) from engaging in a "Business Combination" (defined below) with a
Delaware corporation for three years following the date such person became an
Interested Stockholder. For purposes of Section 203, the term "Business
Combination" is defined broadly to include mergers and certain other
transactions with or caused by the Interested Stockholder; sales or other
dispositions to the Interested Stockholder (except proportionately with the
corporation's other stockholders) of assets of the corporation or a subsidiary
equal to ten percent or more of the aggregate market value of the corporation's
consolidated assets or its outstanding stock; the issuance or transfer by the
corporation or a subsidiary of stock of the corporation or such subsidiary to
the Interested Stockholder (except for transfers in a conversion or exchange or
a pro rata distribution or certain other transactions, none of which increase
the Interested Stockholder's proportionate ownership of any class or series of
the corporation's or such subsidiary's stock); or receipt by the Interested
Stockholder (except proportionately as a stockholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation or a subsidiary.

39
<PAGE> 42

The three-year moratorium imposed on Business Combinations by Section 203
does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Board approves either the Business Combination or
the transaction which resulted in the person becoming an Interested Stockholder;
(b) the Interested Stockholder owns 85% of the corporation's voting stock upon
consummation of the transaction which made him or her an Interested Stockholder
(excluding from the 85% calculation shares owned by directors who are also
officers of the target corporation and shares held by employee stock plans which
do not permit employees to decide confidentially whether to accept a tender or
exchange offer); or (c) on or after the date a person becomes an Interested
Stockholder, the Board approves the Business Combination, and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent (66 2/3%)
of the voting stock not owned by the Interested Stockholder.

Under Section 203, the restrictions described above do not apply if, among
other things, the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203. The Company's
Certificate of Incorporation does not contain such a provision. The restrictions
described above also do not apply to certain Business Combinations proposed by
an Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors.

TRANSFER AND WARRANT AGENT.

The Transfer Agent for the Common Stock and Warrants and the Warrant Agent
for the Warrants is American Stock Transfer & Trust Company, New York, New York.

PLAN OF DISTRIBUTION

The Company has agreed, in connection with the exercise of Warrants
pursuant to solicitation by the Solicitation Agent, to pay to the Solicitation
Agent a fee of 5% of the Warrant exercise price, a portion of which may be
reallowed to any dealer who is a member of the NASD who solicited the exercise
(which may also be the Solicitation Agent) for each Warrant exercised, if (i)
the market price of the Common Stock of the Company at the time of exercise is
higher than the exercise price of the Warrants; (ii) the Warrants are not held
in any discretionary account; (iii) disclosure of compensation arrangements was
made both at the time of the Company's initial public offering and in documents
provided to holders of the Warrants at the time of exercise; (iv) the exercise
of the Warrants is solicited by a member of the NASD as designated in writing on
the Warrant Certificate Subscription Form; and (v) the solicitation of exercise
of the Warrants was not in violation of Rule 10b-6 promulgated under the 1934
Act. The Company has agreed not to solicit Warrant exercises other than through
the Solicitation Agent.

Rule 10b-6 of the Securities and Exchange Commission under the 1934 Act may
prohibit Blair & Co. from engaging in any market making activities with regard
to the Company's securities for the period from nine business days (or such
other applicable period as Rule 10b-6, or its successor Regulation M, may
provide) prior to any solicitation by the Solicitation Agent of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Solicitation Agent
may have to receive a fee for the exercise of Warrants following such
solicitation. As a result, Blair & Co. may be unable to provide a market for the
Company's securities during certain periods while the Warrants are exercisable.

The Company has agreed to indemnify the Solicitation Agent against certain
liabilities, including liabilities under the Securities Act.

The Solicitation Agent has the right to designate one member of the
Company's board of directors until November 2000. The Solicitation Agent has
informed the Company that it has not yet and does not currently intend to
designate a board member.

Until November 2000, in the event the Solicitation Agent originates a
merger, acquisition, joint venture or transaction to which the Company is a
party, the Solicitation Agent will be entitled to receive a finder's fee

40
<PAGE> 43

in consideration for origination of such transaction. The fee is based on a
percentage of the consideration paid in the transaction ranging from 7% of the
first $1,000,000 to 2.5% of any consideration in excess of $9,000,000.

The Solicitation Agent has informed the Company that the Securities and
Exchange Commission is conducting an investigation concerning various business
activities of the Solicitation Agent and Blair & Co. The investigation appears
to be broad in scope, involving nearly all aspects of the Solicitation Agent's
and Blair & Co.'s compliance with the Federal securities laws in offerings of
securities, purchases and sales of securities, market-making activities and
securities sales practices during the period from January 1, 1985 to the
present. The Company has been advised by the Solicitation Agent that the
investigation has been ongoing since at least 1989 and that they are cooperating
with the investigation. The Company has been advised that the Solicitation Agent
cannot predict whether this investigation will ever result in any type of formal
enforcement action against the Underwriter or, if so, whether any such action
might have an adverse effect on the Solicitation Agent or the securities offered
hereby. The Company has been advised that Blair & Co. makes a market in the
Company's securities. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to make a
market in the Company's securities, which could affect the liquidity and price
of such securities.

LEGAL MATTERS

The validity of the securities offered hereby is being passed upon by Gray
Cary Ware & Freidenrich, A Professional Corporation ("GCWF"). An investment
partnership composed of certain current and former attorneys of GCWF owns an
aggregate of 5,027 shares of Class A Common Stock, 497 Class A Warrants and
1,016 Class B Warrants, which Warrants are included in the Selling
Securityholder Warrants.

EXPERTS

The financial statements of YieldUp International Corporation as of
December 31, 1996, and for each of the years in the two-year period ended
December 31, 1996, have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.

41
<PAGE> 44

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheet as of December 31, 1996................................................. F-3
Statements of Operations for the years ended December 31, 1996 and 1995............... F-4
Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995..... F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1995............... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 45

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
YieldUP International Corporation:

We have audited the accompanying balance sheet of YieldUP International
Corporation (the Company), as of December 31, 1996, and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-year period then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of YieldUP International
Corporation as of December 31, 1996, and the results of its operations and its
cash flows for each of the years in the two-year period then ended in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

KPMG PEAT MARWICK LLP

San Jose, California
February 5, 1997

F-2
<PAGE> 46

YIELDUP INTERNATIONAL CORPORATION

BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31
1996
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 619,172
Restricted cash................................................................ 509,878
Short-term investments......................................................... 10,000
Accounts receivable............................................................ 699,459
Inventories.................................................................... 677,383
Prepaid expenses and other assets.............................................. 109,822
-----------
Total current assets................................................... 2,625,714
Property, plant, and equipment, net.............................................. 894,499
Other assets..................................................................... 440,511
-----------
Total assets........................................................... $ 3,960,724
=========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 643,089
Accrued liabilities............................................................ 524,277
Customer deposits.............................................................. 43,000
Current portion of capital lease obligations and long-term debt................ 406,258
-----------
Total current liabilities.............................................. 1,616,624
Long-term debt................................................................... 330,000
Capital lease obligations, less current portion.................................. 48,863
-----------
Total liabilities...................................................... 1,995,487
-----------
Stockholders' equity:
Preferred Stock:
$.001 par value; 5,000,000 shares authorized; no shares issued and
outstanding................................................................ --
Class A common stock:
$.001 par value; 2,229,927 shares authorized; 1,912,111 shares issued and
outstanding; each share is entitled to five votes.......................... 1,912
Common stock:
$.001 par value; 20,000,000 shares authorized; 1,495,000 shares issued and
outstanding; each share is entitled to one vote............................ 1,495
Additional paid-in capital..................................................... 7,571,550
Notes receivable from stockholders............................................. (15,348)
Accumulated deficit............................................................ (5,594,372)
-----------
Total stockholders' equity............................................. 1,965,237
-----------
Total liabilities and stockholders' equity............................. $ 3,960,724
=========
</TABLE>

See accompanying notes to financial statements

F-3
<PAGE> 47

YIELDUP INTERNATIONAL CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues.......................................................... $ 2,204,590 $ 1,129,012
----------- -----------
Operating expenses:
Manufacturing and development................................... 3,853,972 1,736,755
Selling, general, and administrative............................ 1,829,460 1,032,008
----------- -----------
Total operating expenses..................................... 5,683,432 2,768,763
----------- -----------
Operating loss............................................... (3,478,842) (1,639,751)
Interest income (expense), net.................................... 104,807 (190,272)
----------- -----------
Net Loss..................................................... $(3,374,035) $(1,830,023)
=========== ===========
Net loss per share................................................ $ (0.99) $ (0.89)
=========== ===========
Shares used in per share computations............................. 3,406,395 2,052,632
=========== ===========
</TABLE>

See accompanying notes to financial statements

F-4
<PAGE> 48

YIELDUP INTERNATIONAL CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A NOTES
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL RECEIVABLE
----------------- ------------------ ------------------ PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
-------- ------ --------- ------ --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1994........ 127,950 $128 1,537,298 $1,537 -- $ -- $ 384,780 $ (9,200)
Sale of Series B preferred stock........ 54,828 55 -- -- -- -- 143,895 --
Sale of Series C preferred stock........ 174,955 175 -- -- -- -- 869,861 (33,064)
Repurchase of Class A common stock from
terminated employee................... -- -- (21,719) (22) -- -- (2,978) --
Sale of Class A common stock............ -- -- 6,586 7 -- -- 4,543 --
Exercise of Class A common stock
options............................... -- -- 30,403 30 -- -- 20,970 --
Conversion of preferred stock into Class
A common stock........................ (357,733) (358) 357,733 358 -- -- -- --
Payment of notes receivable............. -- -- -- -- -- -- -- 983
Sale of common stock warrants, net...... -- -- -- -- -- -- 172,582 --
Initial public offering of common stock,
net of $1,496,856 issuance costs...... -- -- -- -- 1,495,000 1,495 5,976,649 --
Net loss................................ -- -- -- -- -- -- -- --
-------- ---- --------- ------ --------- ------ ---------- --------
Balances as of December 31, 1995........ -- -- 1,910,301 1,910 1,495,000 1,495 7,570,302 (41,281)
Exercise of Class A common stock
options............................... -- -- 1,810 2 -- -- 1,248 --
Payment of notes receivable............. -- -- -- -- -- -- -- 25,933
Net loss................................ -- -- -- -- -- -- -- --
-------- ---- --------- ------ --------- ------ ---------- --------
Balances as of December 31, 1996........ -- $ -- 1,912,111 $1,912 1,495,000 $1,495 $7,571,550 $(15,348)
======== ==== ========= ====== ========= ====== ========== ========

TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balances as of December 31, 1994........ $ (390,314) $ (13,069)
Sale of Series B preferred stock........ -- 143,950
Sale of Series C preferred stock........ -- 836,972
Repurchase of Class A common stock from
terminated employee................... -- (3,000)
Sale of Class A common stock............ -- 4,550
Exercise of Class A common stock
options............................... -- 21,000
Conversion of preferred stock into Class
A common stock........................ -- --
Payment of notes receivable............. -- 983
Sale of common stock warrants, net...... -- 172,582
Initial public offering of common stock,
net of $1,496,856 issuance costs...... -- 5,978,144
Net loss................................ (1,830,023) (1,830,023)
----------- ----------
Balances as of December 31, 1995........ (2,220,337) 5,312,089
Exercise of Class A common stock
options............................... -- 1,250
Payment of notes receivable............. -- 25,933
Net loss................................ (3,374,035) (3,374,035)
----------- ----------
Balances as of December 31, 1996........ $(5,594,372) $ 1,965,237
=========== ==========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 49

YIELDUP INTERNATIONAL CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $ (3,374,035) $ (1,830,023)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization............................... 154,819 7,514
Changes in operating assets and liabilities:
Accounts receivable....................................... (20,032) (562,122)
Inventories............................................... (171,451) (419,054)
Prepaid expenses and other assets......................... 59,110 (164,973)
Accounts payable.......................................... (75,000) 646,091
Accrued liabilities....................................... 157,156 278,547
Customer Deposits......................................... (101,000) 144,000
----------- -----------
Net cash used for operating activities................. (3,370,433) (1,900,020)
----------- -----------
Cash flows from investing activities:
Purchase of equipment.......................................... (751,892) (178,115)
Sale of fixed asset............................................ 22,000 --
Increase in restricted cash.................................... (888,741) --
Proceeds from sales of short-term investments.................. 4,554,645 --
Purchases of short-term investments............................ (2,499,933) (2,064,712)
----------- -----------
Net cash provided by (used for) investing activities... 436,079 (2,242,827)
----------- -----------
Cash flows from financing activities:
Principal payments under capital lease obligations............. (40,123) (3,185)
Proceeds from term loan........................................ 750,000 --
Principal payments of term loan................................ (60,000) --
Principal payments of notes payable to stockholders............ -- (162,720)
Proceeds of notes receivable from stockholders................. 25,933 983
Issuance of bridge notes....................................... -- 800,000
Principal payments of bridge notes............................. -- (800,000)
Issuance of common stock in public offering, net............... -- 5,978,144
Issuance of preferred stock, net............................... -- 923,322
Issuance of warrants, net...................................... -- 172,582
Issuances of Class A common stock, net of repurchases.......... 1,250 22,550
----------- -----------
Net cash provided by financing activities.............. 677,060 6,931,676
----------- -----------
Net (decrease) increase in cash and cash equivalents............. (2,257,294) 2,788,829
----------- -----------
Cash and cash equivalents at beginning of year................... 2,876,466 87,637
----------- -----------
Cash and cash equivalents at end of year......................... $ 619,172 $ 2,876,466
=========== ===========
Supplemental disclosure of cash flow information:
Notes receivable issued in connection with sale of preferred
stock....................................................... $ - $ 33,064
=========== ===========
Preferred stock issued in exchange for notes payable........... $ - $ 57,600
=========== ===========
Acquisition of equipment under capital lease obligations....... $ 42,000 $ 96,430
=========== ===========
Conversion of preferred stock into Class A common stock........ $ - $ 358
=========== ===========
</TABLE>

See accompanying notes to financial statements

F-6
<PAGE> 50

YIELDUP INTERNATIONAL CORPORATION

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

YieldUP International Corporation (the Company or YieldUP) develops,
manufactures, and markets cleaning, rinsing and drying equipment used during
several steps in the manufacturing process for semiconductors and other defect
sensitive substrates.

Basis of Presentation

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company's recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are to attempt to raise
additional equity or debt financing to meet its working capital requirements and
to increase revenues and improve gross margins. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

Cash Equivalents

Cash equivalents consist primarily of highly liquid debt instruments with
original maturity dates up to 90 days.

Short-Term Investments

The Company accounts for short-term investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Short-term investments are
classified as "available-for-sale" under the provisions of SFAS No. 115 and are
stated at fair value. Any unrealized gains and losses are reported as a separate
component of stockholders' equity, but to date have not been significant.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash equivalents and trade
receivables. Substantially all of the Company's cash equivalents are invested in
certificates of deposit and money market funds. The Company performs ongoing
credit evaluations of its customers and generally requires no collateral. The
Company maintains reserves for potential credit losses; historically, such
losses have been minor and within management's expectations.

Inventories

Inventories are stated at the lower of first-in, first-out cost or market.
The Company periodically reviews its inventories for potential slow-moving and
obsolete items and writes down impaired items to net realizable value.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the related assets, generally three to five years.
Property, plant and equipment recorded under capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease terms or their estimated useful lives.

F-7
<PAGE> 51

YIELDUP INTERNATIONAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995

Revenue Recognition

Revenue is recognized after shipment when there is no significant
uncertainty regarding customer acceptance and payment.

Product Warranty

A provision for the estimated future costs of warranty repair is provided
at the time of sale.

Manufacturing and Development Expenses

Manufacturing and development expenses represent costs incurred for the
design and development of new products, the redesign of existing products, and
manufacturing costs. For 1995, separate amounts for Manufacturing Cost of Goods
Sold and Research and Development expense were not meaningful as these operating
activities were inseparable during that period. For 1996, Manufacturing Cost of
Goods Sold was $2,630,970 and Research and Development expense was $1,223,002.

Income Taxes

The Company is accounting for income taxes in accordance with SFAS No. 109.
SFAS No. 109 prescribes an asset and liability approach that results in the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS No. 109
generally considers all expected future events other than the enactment of
changes in tax laws or rates. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.

Stock Option Plan

The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation", permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair value-based method defined in SFAS No. 123 has been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

Fair Value of Financial Instruments

The carrying amounts of the Company's cash and cash equivalents, restricted
cash, short-term investments, accounts receivable, and accounts payable
approximate their respective fair values.

Use of Estimates

The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

F-8
<PAGE> 52

YIELDUP INTERNATIONAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995

Reclassifications

Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 financial statement presentation.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.

Net Loss Per Share

Net loss per share is based on the weighted average number of shares of
common stock, convertible preferred stock using the "as if converted" method at
the dates of issuance, and common equivalent shares from stock options and
warrants outstanding (when dilutive using the treasury stock method). Pursuant
to certain SEC Staff Accounting Bulletins, common and preferred stock issued for
consideration below the initial public offering (IPO) price and stock options
granted with exercise prices below the IPO price during the 12-month period
preceding the date of the initial filing of the Registration Statement, even
when antidilutive, have been included in the calculation of net loss per
share,using the treasury stock method based on the assumed IPO price, as if they
were outstanding for all periods presented prior to their issuance.

(2) BALANCE SHEET COMPONENTS

Restricted Cash

As of December 31, 1996, the Company had restricted cash in the form of
certificates of deposit, of $750,000 and $138,741 as collateral for long-term
debt and substantially all of the capital lease obligations, respectively.
Restricted cash aggregating $378,863 is classified other non-current assets in
the accompanying balance sheet.

Short-Term Investments

The Company's short-term investments comprise a certificate of deposit
which is classified as "available-for-sale."

Inventories

A summary of inventories follows:

F-9
<PAGE> 53

YIELDUP INTERNATIONAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Raw materials...................................... $ 364,510
Work in process.................................... 56,063
Evaluation units................................... 218,070
Finished goods..................................... 38,740
--------
$ 677,383
========
</TABLE>

Evaluation units are installed at potential customers' sites.

Property, Plant and Equipment

A summary of property, plant and equipment follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Machinery and equipment.................................... $ 404,438
Furniture and fixtures..................................... 47,624
Leasehold improvements..................................... 594,374
--------
1,046,436
Less accumulated depreciation and amortization............. 151,937
--------
$ 894,499
========
</TABLE>

(3) INCOME TAXES

The Company has a net operating loss carryforward for federal and
California tax purposes as of December 31, 1996 of $4,580,000 and $2,290,000,
respectively. The difference between the federal net operating loss and the
accumulated deficit is primarily attributed to the years ending December 31,
1993 and 1994 when the Company was an S corporation for taxation purposes. The
difference between the federal and California net operating loss carryforward is
due to 50% limitation of net operating loss carryforwards for California
purposes. The federal net operating loss carryforwards expire in the years 2010
and 2011. The California net operating loss carryforwards expire in the years
2000 and 2001.

Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company, which constitutes an "ownership change" as defined by
Internal Revenue Code Section 382. The IPO of YieldUP common stock in November
1995 resulted in such a change. As a result, $1,400,000 of YieldUP's federal and
California net operating loss carryforwards are subject to an annual limitation
approximating $525,000. Any unused annual limitations may be carried forward to
increase the limitations in subsequent years.

The Company has fully offset its deferred tax assets, primarily
attributable to net operating loss carryforwards, with a valuation allowance.

(4) LONG-TERM DEBT

Long-term debt comprises a bank term loan which is fully collateralized by
a certificate of deposit. The loan is payable in monthly installments of
$30,000, and bears interest at the bank's prime rate (8.25% as of December 31,
1996).

As of December 31, 1996, maturities in subsequent years are as follows:
1997, $360,000; and 1998, $330,000.

F-10
<PAGE> 54

YIELDUP INTERNATIONAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995

(5) COMMITMENTS AND CONTINGENCIES

Leases

The Company is obligated under operating leases for certain equipment and
its facilities, and capital leases for certain equipment, furniture and fixtures
that expire at various dates during the next three years. The amount of
equipment, furniture, and fixtures and related accumulated amortization recorded
under capital leases were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Machinery and equipment...................................... $ 103,500
Furniture and fixtures....................................... 37,930
--------
141,430
Less accumulated amortization................................ 47,871
--------
$ 93,559
========
</TABLE>

Future minimum lease payments under the Company's noncancelable operating
leases and future minimum capital lease payments as of December 31, 1996, are as
follows:

<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------------------------------------------------- -------- ---------
<S> <C> <C>
1997................................................... $ 55,105 $ 151,962
1998................................................... 50,527 121,779
1999................................................... 1,386 1,348
-------- --------
Total minimum lease payments................. 107,018 $ 275,089
========
Less amount representing interest...................... 11,897
--------
Present value of minimum lease payments................ 95,121
Less current portion................................... 46,258
--------
$ 48,863
========
</TABLE>

Facility and rent expense was approximately $140,789 and $41,475 for the
years ended December 31, 1996 and 1995, respectively.

Patent Matters

F-11
<PAGE> 55

YIELDUP INTERNATIONAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995

(6) STOCKHOLDERS' EQUITY

Preferred Stock

The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board in the resolutions
authorizing the issuance of that particular series.

Stock Repurchase Plan

As of December 31, 1996, the Company had issued 1,318,346 shares of Class A
common stock subject to the Company's right to repurchase the stock at the
original issuance price, $0.14 per share. The shares shall be released from the
Company's repurchase option over a four-year period. As of December 31, 1996,
234,202 shares of Class A common stock were subject to repurchase.

Warrants

As of December 31, 1996, the Company had issued 2,215,000 Class A warrants.
The holder of each Class A warrant is entitled, upon payment of the exercise
price of $7.00, to purchase one share of common stock and one Class B warrant.
Unless previously redeemed, the Class A warrants are exercisable at any time
until November 21, 2000.

As of December 31, 1996, the Company had issued 1,945,000 Class B warrants
(4,160,000 Class B warrants if the Class A warrants are exercised). The holder
of each Class B warrant is entitled, upon payment of the exercise price of
$11.00, to purchase one share of common stock. Unless previously redeemed, the
Class B warrants are exercisable at any time until November 21, 2000.

The Class A warrants and Class B warrants are subject to redemption by the
Company, at a price of $0.05 per warrant, if the average closing bid price of
the common stock exceeds certain prices within certain time periods.

As of December 31, 1996, no warrants have been exercised or redeemed.

Stock Option Plans

As of December 31, 1996, the Company has three stock-based compensation
plans, which are described below.

The Board of Directors has reserved (250,000 shares are subject to
stockholder approval) 500,000 shares of common stock for issuance under the
Company's 1995 Stock Option Plan (the Option Plan). Options may be granted to
employees (including officers), consultants, advisers and directors, although
only employees and directors and officers, who are also employees, may receive
"incentive stock options" intended to qualify for certain tax treatment. The
exercise price of nonqualified stock options must equal at least 85% of the fair
market value of the common stock on the date of grant, and the exercise price of
incentive stock options must be no less than the fair market value on the date
of grant. Options granted under the Option Plan vest over 4 years and must be
exercised within 10 years.

Prior to the adoption of the Option Plan in September 1995, the Company
granted 346,411 options to purchase shares of Class A common stock at prices
ranging from $0.69 to $3.17 per share under a separate option plan (the Prior
Plan). The Company does not anticipate granting any additional options to
purchase Class A common stock under the Prior Plan, and any shares subject to
options under the Prior Plan that terminate, or are canceled, will not be issued
or used for new options. As of December 31, 1996, 270,037 options are
outstanding and 204,155 options are exercisable under the Prior Plan.

F-12
<PAGE> 56

YIELDUP INTERNATIONAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995

Under the Company's 1995 Outside Directors Stock Option Plan (the Directors
Plan), 100,000 shares of common stock have been reserved for issuance. The
Directors Plan provides for the automatic granting of nonqualified stock options
to directors of the Company who are not employees of the Company (Outside
Directors). Under the Directors Plan, each new Outside Director elected will
automatically be granted an option to purchase 20,000 shares of common stock on
the date of his election. Additionally, each Outside Director, except for
Outside Directors who have received an initial grant of an option to purchase
20,000 shares within six months of the annual meeting of stockholders, will
automatically be granted an option to purchase 5,000 shares of common stock on
the date of each annual meeting of stockholders. The exercise price of the
options in all cases will be equal to the fair market value of the common stock
on the date of grant. Options granted under the Directors Plan vest over 4 years
and, generally, must be exercised within 10 years.

A summary of the status of the Company's three fixed stock option plans as
of December 31, 1996 and 1995, and changes during the years ended on those dates
is presented below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICES
--------- ---------------
<S> <C> <C>
Balance as of December 31, 1994..................... -- $ --
Granted Price = Fair Value.......................... 260,440 $ 0.69-5.00
Granted Price > Fair Value.......................... 125,971 $ 0.76
Exercised........................................... (30,403) $ 0.69
-------- ----------
Balance as of December 31, 1995..................... 356,008 $ 0.69-5.00
Granted Price = Fair Value.......................... 332,000 $ 4.50-7.50
Exercised........................................... (1,810) $ 0.69
Canceled............................................ (103,411) $ 0.69-5.75
-------- ----------
Balance as of December 31, 1996..................... 582,787 $ 0.69-7.50
======== ==========
</TABLE>

As of December 31, 1996 and 1995, the number of options exercisable was
217,925 and 173,871, respectively.

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for any of the plans. Had compensation cost for the Company's three stock-based
compensation plans been determined consistent with SFAS No. 123, the Company's
net loss and net loss per share would have been increased to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net Loss As Reported.............................. $(3,374,035) $(1,830,023)
Pro Forma................................ $(3,692,023) $(1,956,894)
Net Loss Per Share As Reported.................... $ (0.99) $ (0.89)
Pro Forma.................... $ (1.08) $ (0.95)
</TABLE>

The weighted-average fair value of options granted in 1996 and 1995, was
$3.84 and $1.46, respectively. The weighted-average fair value of options
granted in 1995 with an exercise price in excess of the market price was $0.38.

The effects of applying SFAS 123 in this proforma disclosure is not
indicative of the effects on reported results for future years. SFAS 123 does
not apply to awards prior to 1995, and additional awards in future years are
anticipated.

The fair value of each option grant is estimated on the date of grant using
Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: no

F-13
<PAGE> 57

YIELDUP INTERNATIONAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995

dividend yield; expected volatility of 67.5%; risk free interest rates of 6%;
expected lives of four years for the Prior Plan and five years for the other two
plans.

The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------- OPTIONS EXERCISABLE
WEIGHTED ---------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AS OF 12/31/1996 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/1996 EXERCISE PRICE
- ------------------------ ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$0.6900................. 100,628 8.38 $ 0.69 63,705 $ 0.69
$0.7600................. 125,971 8.32 0.76 125,971 0.76
$3.1700................. 43,438 8.60 3.17 14,479 3.17
$4.5000................. 25,000 9.83 4.50 -- --
$4.9700................. 66,000 9.98 4.97 -- --
$5.0000................. 40,000 8.89 5.00 10,000 5.00
$5.2500................. 86,000 9.58 5.25 -- --
$5.7500................. 14,750 9.13 5.75 3,770 5.75
$6.7500................. 47,500 9.49 6.75 -- 0.00
$7.5000................. 33,500 9.41 7.50 -- 0.00
------- ---- ----- ------- -----
$0.6900................. 582,787 9.01 3.59 217,925 1.18
======= =======
</TABLE>

F-14
<PAGE> 58

- ------------------------------------------------------
- ------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY ANY SELLING SECURITYHOLDER, THE COMPANY OR THE
SOLICITATION AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 20
Management............................ 28
Certain Transactions.................. 31
Principal Stockholders................ 32
Concurrent Offering................... 33
Description of Securities............. 37
Plan of Distribution.................. 40
Legal Matters......................... 41
Experts............................... 41
Index to Financial Statements......... F-1
</TABLE>

------------------------------------------------------
------------------------------------------------------

- ------------------------------------------------------
- ------------------------------------------------------

YIELDUP
INTERNATIONAL
CORPORATION

2,215,000 SHARES OF COMMON STOCK

2,215,000 CLASS B WARRANTS

4,160,000 SHARES OF COMMON STOCK
ISSUABLE ON EXERCISE OF CLASS B WARRANTS

130,000 UNITS

------------------
PROSPECTUS
------------------
, 1997

------------------------------------------------------
------------------------------------------------------
<PAGE> 59

PROSPECTUS ALTERNATIVE PROSPECTUS PAGE

579,750 REDEEMABLE CLASS A WARRANTS
450,000 REDEEMABLE CLASS B WARRANTS

YIELDUP INTERNATIONAL CORPORATION

This Prospectus relates to 579,750 Redeemable Class A Warrants ("Class A
Warrants") and 450,000 Redeemable Class B Warrants ("Class B Warrants") (the
"Selling Securityholder Warrants") of YieldUp International Corporation, a
Delaware corporation (the "Company"), held by 66 holders (the "Selling
Securityholders"). Each Class A Warrant entitles the holder to purchase, at an
exercise price of $7.00, subject to adjustment, one share of Common Stock and
one Class B Warrant, and each Class B Warrant entitles the holder to purchase,
at an exercise price of $11.00, subject to adjustment, one share of Common
Stock. The Warrants are exercisable at any time after issuance through November
21, 2000. The Class A Warrants are subject to redemption by the Company for $.05
per Warrant, upon at least 30 days' written notice, if the average closing bid
price of the Common Stock exceeds $9.80 per share and with respect to the Class
B Warrants, if the average closing bid price of the Common Stock exceeds $15.40
share, (subject to adjustment in each case) for 30 consecutive business days
within 15 days of the date of the notice of redemption. See "Description of
Securities."

The securities offered by the Selling Securityholders by this Prospectus
may be sold from time to time by the Selling Securityholders or by their
transferees. The distribution of the Class A Warrants and the Class B Warrants
offered hereby by the Selling Securityholders may be effected in one or more
transactions that may take place on the over-the-counter market, including
ordinary brokers' transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such securities as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders.

The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended, with respect to the securities offered, and
any profits realized or commissions received may be deemed underwriting
compensation.

The Company will not receive any of the proceeds from the sale of the
securities by the Selling Securityholders. In the event the Selling
Securityholder Warrants are exercised, the Company will receive gross proceeds
of $15,259,500. See "Selling Securityholders" and "Plan of Distribution."

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS BEGINNING ON PAGE 6."
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

------------------------

The date of this Prospectus is , 1997
<PAGE> 60

SELLING SECURITYHOLDERS

An aggregate of up to 572,750 Class A Warrants and 450,000 Class B Warrants
may be offered for resale by the Selling Securityholders. The securities
underlying those Warrants are also registered for sale by the Company upon
exercise by the holder thereof.

<TABLE>
<CAPTION>
CLASS A CLASS B
SELLING SECURITYHOLDER WARRANTS WARRANTS
- -------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Bruce M. Ampolsky............................................. 18,750 --
John and Joan Anderson........................................ 775 1,586
John Anderson, Jr............................................. 71 146
Tad Arias..................................................... 71 146
Pramod P. Bansal.............................................. 1,431 2,927
Ashish Bansal................................................. 286 585
Manju Bansal.................................................. 572 1,171
Rishi Bansal.................................................. 286 585
Gary O. Benson................................................ 75,000 --
Abhay Bhushan*................................................ 46,605 44,193
Gitanja Bhushan............................................... 1,430 2,926
Monika K. Bhushan............................................. 1,430 2,926
Rajiv Bhushan................................................. 7,154 14,633
Sasha Bhushan................................................. 1,430 2,926
Adolph Bohn................................................... 4,006 8,195
Arthur D. Boren............................................... 4,292 8,780
William E. Brooks............................................. 358 732
Charles W. & Roberta S. Chambers, JTWROS...................... 12,500 --
K.T. Cherian.................................................. 199 406
Sanjeev Chitre................................................ 1,789 3,658
Perry Coe..................................................... 143 292
Aaron Cohn.................................................... 716 1,463
David Cohn.................................................... 286 585
Craig R. Crawley.............................................. 86 175
Kevin Culkin.................................................. 1,073 2,195
Raymond and Marie Cunningham.................................. 358 732
Robert M. Freeman............................................. 50,000 --
Marie Dixon................................................... 716 1,463
Ruth Epstein.................................................. 536 1,097
Gerald and Gloria Frolich..................................... 716 1,463
Craig Frolich................................................. 751 1,536
Stanley N. Gaines............................................. 12,500 --
GCW&F Partners II(1).......................................... 497 1,016
Scott M. Gibson*.............................................. 4,292 8,780
Dan Gill...................................................... 7 15
Ram Paul Gupta*............................................... 4,316 8,828
Jerry Hymowitz................................................ 25,000 --
JKR & Co., Inc.(2)............................................ 358 732
</TABLE>

ALTERNATE PAGE
<PAGE> 61

<TABLE>
<CAPTION>
CLASS A CLASS B
SELLING SECURITYHOLDER WARRANTS WARRANTS
- -------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
John J. Jubin................................................. 447 914
Masaharu Shinya............................................... 1,002 2,049
Pyare Lal Khanna.............................................. 994 2,032
John and Cathy Konop.......................................... 429 878
Charles Leithauser............................................ 10,500 --
Timothy P. Marshall........................................... 536 1,097
Michael Masciorini............................................ 1,574 3,219
Walter and Ann S. Masciorini.................................. 894 1,829
Raj Mashruwala................................................ 2,447 5,004
Raj Mohindra*................................................. 117,503 189,212
Dev Mohindra.................................................. 2,146 4,390
Pran Vati Mohindra............................................ 71 146
Sanjay S. Mohindra............................................ 2,146 4,390
Jeffrey Nowell................................................ 3,756 7,683
Richard Ogawa................................................. 199 406
Steven N. Ostrovsky........................................... 12,500 --
George Plaut.................................................. 1,431 2,927
Richard Posey................................................. 1,431 2,927
Suraj Puri*................................................... 42,544 35,888
Jaideep Puri.................................................. 215 439
Vedica Puri................................................... 716 1,463
Raj Rajaratnam................................................ 993 2,029
Irwin Rosenthal............................................... 358 732
Margaret and Stanly Shatsky Trust(3).......................... 179 366
Thomas Singer................................................. 715 1,463
Bernard Slade, Sr.*........................................... 27,586 19,609
Eric J. Slade................................................. 1,041 2,129
Steven P. Slade............................................... 716 1,464
Eric J. and Joy M. Slade, JTWROS.............................. 716 1,463
David Slone................................................... 199 406
John Smith.................................................... 447 914
Michael L. Snow............................................... 12,500 --
R. Srivastava................................................. 179 366
Rudolph Svejkovsky............................................ 1,431 2,927
Debora Tedeschi............................................... 358 732
Teltec Semiconductor Technic GmbH(4).......................... 2,003 4,097
Teltec Semiconductor Technic SA(5)............................ 2,003 4,097
Douglas M. Trabilcy........................................... 12,500 --
Joel Urdang................................................... 25,000 --
Sandrine F. Weinbender........................................ 484 991
Carol Whitfield............................................... 1,430 2,926
Wolfe/Axelrod Associates(6)................................... 497 1,016
David Wong.................................................... 2,146 4,390
Henri Zimmerli................................................ 2,003 4,097
---------------- ----------------
579,750 450,000
</TABLE>

- ---------------
* Officer or director of the Company.

ALTERNATE PAGE
<PAGE> 62

ALTERNATE PAGE
<PAGE> 63

PLAN OF WARRANT DISTRIBUTION

The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions,through the writing of options on the securities,
a combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale or
at negotiated prices.

The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).

Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended ("Exchange Act"), any person engaged in the distribution of the
Selling Securityholder Warrants may not simultaneously engage in market making
activities with respect to any securities of the Company during the applicable
"cooling-off" period (at least two, and possible nine, business days) prior to
the commencement of such distribution. Accordingly, in the event the
Solicitation Agent or D.H. Blair & Co. Inc. ("Blair & Co.") is engaged in a
distribution of the Selling Securityholder Warrants, neither of such firms will
be able to make a market in the Company's securities during the applicable
restrictive period. However, neither the Solicitation Agent nor Blair & Co. have
agreed to, nor are either of them obliged to, act as broker-dealer in the sale
of the Selling Securityholder Warrants and the Selling Securityholders may be
required, and in the event Blair is a market maker will likely be required, to
sell such securities through another broker-dealer. In addition, each Selling
Securityholder desiring to sell Warrants will be subject to the applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation, Rules 10b-6 and 10b-7, (or their successor,
Regulation M) which provisions may limit the timing of the purchases and sales
of shares of the Company's securities by such Selling Securityholders.

The Selling Securityholders and broker-dealers, if any, acting in
connection with such sale might be deemed to be underwriters within the meaning
of Section 2(11) of the Securities Act and any commission received by them and
any profit on the resale of the securities might be deemed to be underwriting
discounts and commissions under the Securities Act.

CONCURRENT PUBLIC OFFERING

On the date of this Prospectus, a post-effective amendment to the
Registration Statement was declared effective under the Securities Act with
respect to an offering by the Company of 2,215,000 shares of Common Stock,
2,215,000 Class B Warrants, 4,160,000 shares of Common Stock issuable on
exercise of Class B Warrants and 130,000 Units.

ALTERNATE PAGE
<PAGE> 64

- ------------------------------------------------------
- ------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIEF
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SECURITYHOLDER OR THE
SOLICITATION AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary....................
Risk Factors..........................
Price Range of Common Stock...........
Dividend Policy.......................
Capitalization........................
Selected Financial Data...............
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Certain Transactions..................
Principal Stockholders................
Concurrent Public Offering............
Description of Securities.............
Plan of Warrant Distribution..........
Legal Matters.........................
Experts...............................
Index to Financial Statements......... F-1
</TABLE>

YIELDUP
INTERNATIONAL
CORPORATION

579,750 CLASS A WARRANTS
450,000 CLASS B WARRANTS

------------------
PROSPECTUS
------------------
, 1997
------------------------------------------------------
------------------------------------------------------

ALTERNATE PAGE
<PAGE> 65

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and By-Laws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant has entered into separate indemnification agreements with its
directors and officers which would require the Registrant, among other things,
to indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature) and to maintain directors' and officers' liability insurance,
if available on reasonable terms.

These indemnification provisions and the indemnification agreement entered
into between the Registrant and its officers and directors may be sufficiently
broad to permit indemnification of the Registrant's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters named therein of the
Registrant and its officers and directors for certain liabilities arising under
the Securities Act, or otherwise.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the securities underlying the Class A Warrants. All amounts shown are
estimates except for the Nasdaq fee.

<TABLE>
<S> <C>
Nasdaq SmallCap Market fee...................................... $ 17,500
Blue sky qualification fees and expenses........................ 25,000
Printing and engraving expenses................................. 30,000
Legal fees and expenses......................................... 25,000
Accounting fees and expenses.................................... 25,000
Transfer agent and registrar fees............................... 10,000
Miscellaneous................................................... 15,000
--------
Total................................................. $147,500
========
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

In the last three years the Registrant has sold and issued the following
unregistered securities:

(1) In July and August 1994, the Company issued approximately 238,000
shares of Common Stock to 11 employees and consultants (including Rudolph
Svejkovsky, George Plaut and Jeffrey Nowell) and Pramod Bansal and Raj
Mashruwala for an aggregate consideration of $32,845.

(2) From August through December 1994, the Company issued 127,950
shares of Series A Preferred Stock to 13 investors, including Steven Slade,
John Konop, Thomas Singer, Marie Dixon, Kevin Culkin, Richard Posey, Craig
Frolich, Michael Masciorini, Aaron Cohn, Eric Slade, Walter Masciorini,
Pramod Bansal and John Jubin, and two employees for an aggregate
consideration of $176,750.

(3) In January 1995, the Company issued 54,828 shares of Series B
Preferred Stock to 11 investors including Eric Slade, Deborah Tedeschi,
Ruth Epstein, John Konop, Richard Posey, Walter Masciorini, JKR & Co. (Jack
Kemp), Aaron Cohn, Kevin Culkin, Michael Masciorini and Craig Frolich for
an

II-1
<PAGE> 66

aggregate consideration of $151,500, and approximately 114,000 shares of
Series C Preferred Stock to six investors including Adolph Bohn, Henri
Zimmerli, Teltec GmbH (of which Mr. Bohn is President), Teltec SA (of which
Mr. Zimmerli is President), the Margaret and Stanly Shatsky Trust (of which
Stanly Shatsky is a trustee) and Jaideep Puri for an aggregate
consideration of approximately $567,000.

(4) From June through August 1995, the Company issued approximately
61,000 shares of Series C Preferred Stock to 12 investors, including Ram
Paul Gupta (a director of the Company), John and Joan Anderson, Sandrine
Weinbender, Manju Bansal, Rishi Bansal, Ashish Bansal, David Slone, Richard
Ogawa, K.T. Cherian, Pyare Lal Khanna, Suraj Puri (a director of the
Company), Masaharu Shinya, Raj Rajaratnam, Wolfe/Axelrod Associates (Steven
Axelrod, general partner) and GCW&F Partners II (Howard Clowes, executive
officer of corporate general partner), for an aggregate consideration of
approximately $300,000.

(5) In September 1995, the Company issued promissory notes and
warrants to 19 accredited investors for an aggregate consideration of
$1,000,000.

(6) From April through August 1995, the Company has granted options to
purchase approximately 350,000 shares of Common Stock to employees and
consultants (including Sanjeev Chitre, Eric Slade, Michael Masciorini,
Irwin Rosenthal and Craig Frolich), 34,025 of which have been exercised for
an aggregate exercise price of approximately $23,500.

There were no underwriters employed in connection with any of the
transactions set forth in Item 26.

The issuances described in Items 26(1) through 26(5) were exempt from
registration under the Securities Act because they did not involve a public
offering. The issuances described in Item 26(6) did not involve a public
offering and were also exempt from registration under the Securities Act in
reliance on Rule 701 promulgated thereunder as transactions pursuant to
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions.

ITEM 27. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
1.2* Form of Unit Purchase Option between the Company and D. H. Blair Investment
Banking Corp.
1.3* Form of letter agreement, to be dated as of the effective date, between the
Registrant and D. H. Blair Investment Banking Corp.
3.2* Certificate of Incorporation.
3.3* Bylaws.
4.1* Form of Warrant Agreement between the Company and the Warrant Agent,
including the form of warrants.
5.1* Opinion of Gray Cary Ware & Freidenrich.
10.1* Form of Indemnity Agreement.
10.2* 1995 Stock Option Plan and forms of agreement thereunder.
10.3* 1995 Outside Directors Stock Option Plan and forms of agreement thereunder.
10.4* Subscription Agreement between the Company, D. H. Blair Investment Banking
Corp. and certain investors, dated September 29, 1995.
10.5* Facilities lease between the Company and Lori A. Halligan Trust, dated
September 11, 1995.
10.7 Loan and Security Agreement with Silicon Valley Bank, dated September 16,
1996.
11.1 Statement regarding computation of pro forma net loss per share.
</TABLE>

II-2
<PAGE> 67

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2* Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1).
24.1* Power of Attorney.
27 Financial Data Schedule.
</TABLE>

- ---------------

* Previously filed.

ITEM 28. UNDERTAKINGS.

The undersigned Registrant hereby undertakes that it will:

(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and

(iii) Include any additional or changed material information on the
plan of distribution.

(2) For determining liabilities under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.

(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 24 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 68

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment to
Registration Statement to be signed on its behalf by the undersigned, in the
County of Santa Clara, City of Mountain View, California, on the 12th day of
February, 1997.

YIELDUP INTERNATIONAL CORPORATION

By: /s/ RAJ MOHINDRA
------------------------------------
Raj Mohindra
President and Chief Executive
Officer
(Principal Executive Officer)

In accordance with the requirements of the Securities Act, this
post-effective amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------- ------------------
<S> <C> <C>

/s/ RAJ MOHINDRA Chief Executive Officer and February 12, 1997
- ------------------------------------- Director (Principal Executive
Raj Mohindra Officer)

/s/ SCOTT M. GIBSON Chief Financial Officer February 12, 1997
- ------------------------------------- (Principal Financial and
Scott M. Gibson Accounting Officer)

SURAJ PURI* Vice President, Chief Technical February 12, 1997
- ------------------------------------- Officer and Director
Suraj Puri

RAM PAUL GUPTA* Director February 12, 1997
- -------------------------------------
Ram Paul Gupta

ABHAY K. BHUSHAN* Director February 12, 1997
- -------------------------------------
Abhay K. Bhushan

WILLIAM W.R. ELDER* Director February 12, 1997
- -------------------------------------
William W.R. Elder

Director
- -------------------------------------
Bernard Slade

*By: /s/ RAJ MOHINDRA February 12, 1997
------------------------
Raj Mohindra,
Attorney-in-Fact
</TABLE>

II-4
<PAGE> 69

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement, (draft dated November 14, 1995).
1.2* Form of Unit Purchase Option between the Company and the Underwriter (draft dated
November 14, 1995).
1.3* Form of letter agreement, to be dated as of the effective date, between the
Registrant and the Underwriter.
3.1* Certificate of Incorporation to be filed prior to effectiveness of the Offering.
3.2* Certificate of Incorporation to be filed after effectiveness of the Offering.
3.3* Bylaws.
4.1* Form of Warrant Agreement between the Company and the Warrant Agent, including the
form of warrants.
5.1* Opinion of Gray Cary Ware & Freidenrich.
10.1* Form of Indemnity Agreement.
10.2* 1995 Stock Option Plan and forms of agreement thereunder.
10.3* 1995 Outside Directors Stock Option Plan and forms of agreement thereunder.
10.4* Subscription Agreement between the Company, the Underwriter and certain investors,
dated September 29, 1995.
10.5* Facilities lease between the Company and Lori A. Halligan Trust, dated September
11, 1995.
10.6* Lease between the Company and Cooper-Imbernon dated April 4, 1995.
11.1* Statement regarding computation of pro forma net loss per share.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors (see page II-6).
23.2* Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1).
23.3* Consent of Townsend and Townsend and Crew.
24.1* Power of Attorney.
27 Financial Data Schedule.
</TABLE>

- ---------------
* Previously filed.

<PAGE> 1
Exhibit 10.7

YIELDUP INTERNATIONAL, INC.

LOAN AND SECURITY AGREEMENT

DATED AS OF SEPTEMBER 16, 1996
<PAGE> 2

AGREEMENT

THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made and entered
into as of September 16, 1996, by and between SILICON VALLEY BANK ("Bank") and
YIELDUP INTERNATIONAL, INC. ("Borrower").

RECITALS

Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.

AGREEMENT

The parties agree as follows:

SECTION 1. DEFINITIONS AND CONSTRUCTION

1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:

"Accounts" means all presently existing and hereinafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of
the foregoing.

"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls
or is controlled by or is under common control with such Person, and each of
such Person's senior executive officers, directors, and partners.

"Bank Expenses" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.

"Borrower's Books" means all of Borrower's books and records
including ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment containing such information.

"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.

"Closing Date" means the date of this Agreement.

"Code" means the California Uniform Commercial Code.

"Collateral" means the property described on Exhibit A attached
hereto.

"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that

1.
<PAGE> 3
Person; and (iii) all obligations arising under any interest rate, currency or
commodity swap agreement, interest rate cap agreement, interest rate collar
agreement, or other agreement or arrangement designated to protect a Person
against fluctuation in interest rates, currency exchange rates or commodity
prices; provided, however, that the term "Contingent Obligation" shall not
include endorsements for collection or deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof
as determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.

"Daily Balance" means the amount of the Obligations owed at the end of
a given day.

"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.

"GAAP" means generally accepted accounting principles as in effect from
time to time.

"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.

"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.

"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products intended
for sale or lease or to be furnished under a contract of service, of every kind
and description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.

"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.

"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.

"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.

"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower, and any other agreement entered into between Borrower and
Bank in connection with this Agreement, all as amended or extended from time to
time.

"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.

<PAGE> 4
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper, and Borrower's Books
relating to any of the foregoing.

"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.

"Payment Date" means the sixteenth (16th) calendar day of each month.

"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.

"Permitted Indebtedness" means:

(a) Indebtedness of borrower in favor of Bank arising under
this Agreement or any other Loan Document;

(b) Indebtedness existing on the Closing Date and disclosed
in the Schedule;

(d) Indebtedness to trade creditors incurred in the
ordinary course of business.

"Permitted Investment" means:

(a) Investments existing on the Closing Date disclosed in
the Schedule; and

(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from the date
of creation thereof and currently having the highest rating obtainable from
either Standard & Poor's Corporation or Moody's Investors Service, Inc., and
(iii) certificates of deposit maturing no more than one (1) year from the date
of investment therein issued by Bank.

"Permitted Liens" means the following:

(a) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan Documents;

(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in
good faith by appropriate proceedings, provided the same have no priority over
any of Bank's security interests;

(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time
of its acquisition, provided that the Lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such equipment;

<PAGE> 5
(d) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.

"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.

"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.

"Responsible Officer" means each of the Chief Executive
Officer, the Chief Financial Officer and the Controller of Borrower.

"Schedule" means the schedule of exceptions attached hereto,
if any.

"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).

"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.

"Term Loan" mean Seven Hundred and Fifty Thousand Dollars
($750,000).

"Term Loan Maturity Date" means September 16, 1998.

1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.

SECTION 2. LOAN AND TERMS OF PAYMENT

2.1 TERM LOAN.

(a) Borrower shall pay twenty-four equal installments of
principal plus interest (the "Term Loan Payment"). Each Term Loan Payment shall
be due and payable on the Payment Date during the term hereof. Borrower's final
Term Loan Payment, due on the Term Loan Maturity Date, shall include all
outstanding Term Loan principal plus all accrued interest not yet paid.

2.2 INTEREST RATES, PAYMENTS, AND CALCULATIONS.

(a) INTEREST RATE. Except as set forth in Section 2.2(b),
the Term Loan shall bear interest, on the average Daily Balance, at a rate
equal to the Prime Rate.

(b) DEFAULT RATE. All Obligations shall bear interest, from
and after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.

4.
<PAGE> 6
(c) PAYMENTS. Interest hereunder shall be due and payable
on the Payment Date of each month during the term hereof. Borrower hereby
authorizes Bank to debit any accounts with Bank, including, without limitation,
Account Number 3300032518 for payments of principal and interest due on the
Obligations and any other amounts owing by Borrower to Bank. Bank will notify
Borrower of all debits which Bank makes against Borrower's accounts. Any such
debits against Borrower's accounts in no way shall be deemed a set-off. Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate
then applicable hereunder.

(d) COMPUTATION. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.

2.3 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon Pacific time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.

2.4 FEES. Borrower shall pay to Bank the following:

(a) FACILITY FEE. A Facility Fee equal to One Thousand
Eight Hundred Seventy-Five Dollars ($1,875.00), which fee shall be due on the
Closing Date and shall be fully earned and non-refundable;

(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;

(c) BANK EXPENSES. Upon the date hereof, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses.

2.5 ADDITIONAL COSTS. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):

(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the Untied States of America
or any political subdivision thereof);

(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or

<PAGE> 7
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.

2.6 TERM. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Term Loan Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make advances under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding termination, Bank's Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.

SECTION 3. CONDITIONS OF LOANS

3.1 CONDITIONS PRECEDENT TO TERM LOAN. The obligation of Bank to
make the Term Loan is subject to the condition precedent that Bank shall have
received, in form and substance satisfactory to Bank, the following:

(a) this Agreement;

(b) certificate of the Secretary of Borrower with respect
to incumbency and resolutions authorizing the execution and delivery of this
Agreement;

(d) payment of the fees and Bank Expenses then due
specified in Section 2.4 hereof; and

(e) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.

SECTION 4. CREATION OF SECURITY INTEREST

4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that Bank may place a "hold" on any Deposit Account
pledged as Collateral to secure the Obligations.

4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.

4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to
time during Borrower's usual business hours, to inspect Borrower's Books and to
make copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.

6.
<PAGE> 8

4.4 SINGLE LOAN. All of the Obligations of Borrower to Bank
arising under or in connection with this Agreement, or any of the Loan
Documents, shall constitute one general obligation of Borrower and shall be
secured by all of the Collateral.

SECTION 5. REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows:

5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws
of its state of incorporation and qualified and licensed to do business in, and
is in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.

5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.

5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.

5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona
fide existing obligations. The property giving rise to such Eligible Accounts
has been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.

5.5 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects.

5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed
in the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.

5.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge
of any such pending or threatened actions or proceedings.

5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.

5.9 SOLVENCY. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.

5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company

7.
<PAGE> 9
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940. Borrower is not engaged principally, or as one of the
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G, T and
U of the Board of Governors of the Federal Reserve System). Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable to
it, violation of which could have a Material Adverse Effect.

5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.

5.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.

5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.

5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.

5.15 FULL DISCLOSURE. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.

SECTION 6 AFFIRMATIVE COVENANTS

Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make the Term Loan hereunder, Borrower shall do all of the following:

6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.

6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Borrower shall comply, and
shall cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.

6.3 INVENTORY; RETURNS. Borrower shall keep all inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of

<PAGE> 10
the execution and delivery of this Agreement. Borrower shall promptly notify
Bank of all returns and recoveries and of all disputes and claims, where the
return, recovery, dispute or claim involves more than Fifty Thousand Dollars
($50,000).

6.4 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by
GAAP) by Borrower.

6.5 INSURANCE

(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain
insurance relating to Borrower's ownership and use of the Collateral in amounts
and of a type that are customary to businesses similar to Borrower's.

(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as reasonably satisfactory to Bank.
All such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least
twenty (20) days notice to Bank before canceling its policy for any reason.
Borrower shall deliver to Bank certified copies of such policies of insurance
and evidence of the payments of all premiums therefor. All proceeds payable
under any such policy shall, at the option of Bank, be payable to Bank to be
applied on account of the Obligations.

6.6 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.

6.7 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.

SECTION 7. NEGATIVE COVENANTS

Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any advances, Borrower will
not do any of the following:

7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i)
Transfers of Inventory in the ordinary course of business; (ii) Transfers of
non-exclusive licenses and similar arrangements for the use of the property of
Borrower or its Subsidiaries; or (iii) Transfers of worn-out or obsolete
Equipment.

7.2 CHANGE IN BUSINESS; NAME. Engage in any business, or permit any
of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership, management or

9.
<PAGE> 11
directors. Borrower will not, without thirty (30) days prior written
notification to Bank, relocate its chief executive office, or change its name.

7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.

7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.

7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.

7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any
capital stock.

7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.

7.8 TRANSACTION WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrowers's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.

7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.

7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.

7.11 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of the Term Loan for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation could have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral, or
permit any of its Subsidiaries to do any of the foregoing.

SECTION 8. EVENTS OF DEFAULT

Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:

10.
<PAGE> 12
8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of the
Obligations.

8.2 COVENANT DEFAULT.

(a) If Borrower fails to perform any obligation under
Section 6.7 or violates any of the covenants contained in Article 7 of this
Agreement, or

(b) If Borrower fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within ten (10) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within
a reasonable time, then Borrower shall have an additional reasonable period
(which shall not in any case exceed thirty (30) days to attempt to cure such
default, and within such reasonable time period the failure to have cured such
default shall not be deemed an Event of Default (provided that no advances will
be required to be made during such cure period);

8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in
the Collateral;

8.4 ATTACHMENT. If amy material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or
levy has not been removed, discharged or rescinded within ten (10) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no advances will be required to be made during such cure period);

8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no advances will be made prior to the dismissal of such Insolvency
Proceeding);

8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity or any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;

8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;

8.8 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
advances will be made prior to the satisfaction or stay of such judgment); or

11.
<PAGE> 13
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.

SECTION 9. BANK'S RIGHTS AND REMEDIES

9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice
of its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:

(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable (provided that upon the occurrence of an Event of Default described
in Section 8.5 all Obligations shall become immediately due and payable without
any action by Bank);

(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;

(c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;

(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble all
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior
to its security interest and to pay all expenses incurred in connection
therewith. With respect to any of Borrower's owned premises, Borrower hereby
grants Bank a license to enter into possession of such premises and to occupy
the same, without charge, for up to one hundred twenty (120) days in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity,
or otherwise;

(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits or Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;

(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall insure
to Bank's benefit;

(g) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable;

(h) Bank may credit bid and purchase at any public sale;
and

(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.

12.
<PAGE> 14
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice
or bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices
to account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Bank determines to be reasonable; provided Bank
may exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default
has occurred. The appointment of Bank as Borrower's attorney in fact, and each
and every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.

9.3 ACCOUNTS COLLECTION. At any time from the date of this
Agreement, Bank may notify any person owing funds to Borrower of Bank's
security interest in such funds and verify the amount of such Account. Borrower
shall collect all amounts owing to Borrower for Bank, receive in trust all
payments as Bank's trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.

9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; or (b) obtain and maintain
insurance policies of the type discussed in Section 6.6 of this Agreement, and
take any action with respect to such policies as Bank deems prudent. Any
amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable
rate hereinabove provided, and shall be secured by the Collateral. Any payments
made by Bank shall not constitute an agreement by Bank to make similar payments
in the future or a waiver by Bank of any Event of Default under this Agreement.

9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.

9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.

9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notices of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by Bank on which Borrower may in any way
be liable.

13.

<PAGE> 15
SECTION 10. NOTICES

Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements
and other informational documents which may be sent by first-class mail,
postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:

If to Borrower YieldUP International, Inc.
117 Easy Street
Mountain View, CA 94043
Attn: Scott Gibson
Fax: ____________________

If to Bank Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Legal Department
Fax 408/496-2419

The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.

SECTION 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER

This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.

SECTION 12 GENERAL PROVISIONS

12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.

12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; (b)
all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a
result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without)

14.
<PAGE> 16
limitation reasonable attorneys fees and expenses), except for losses caused by
Bank's gross negligence or willful misconduct.

12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.

12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.

12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.

12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.

12.7 SURVIVAL. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run,
provided that so long as the obligations set forth in the first sentence of
this Section 12.7 have been satisfied, and Bank has no commitment to make any
advances or to make any other loans to Borrower, Bank shall release all
security interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.

12.8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its
own proprietary information of the same types to maintain the confidentiality
of any non-public information thereby received or received pursuant to this
Agreement except that disclosure of such information may be made (i) to the
subsidiaries or affiliates of Bank in connection with their present or
prospective business relations with Borrower, (ii) to prospective transferees or
purchasers of any interest in the Loans, provided that they have entered into a
comparable confidentiality agreement in favor of Borrower and have delivered a
copy to Borrower, (iii) as required by law, regulations, rule or order,
subpoena, judicial order or similar order and (iv) as may be required in
connection with the examination, audit or similar investigation of Bank.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to
Bank through no fault of Bank; or (b) is disclosed to Bank by a third party,
provided Bank does not have actual knowledge that such third party is
prohibited from disclosing such information.

15.
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.

SILICON VALLEY BANK YIELDUP INTERNATIONAL, INC.

By: [SIG] By: [SIG]
-------------------------------- ---------------------------------
Title: VICE PRESIDENT Title: PRESIDENT & CEO
----------------------------- ------------------------------

16.
<PAGE> 18

INSURANCE REQUIREMENTS. YieldUP International, Inc. ("Grantor")
understands that insurance coverage is required in connection with the
extending of a loan or the providing of other financial accommodations to
Grantor by Bank. These requirements are set forth in the Loan Documents. The
following minimum insurance coverages must be provided on the following
described collateral (the "Collateral"):

Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.

Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be canceled or diminished without a
minimum of twenty (20) days' prior written notice to
Bank.

INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.

FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of September 16, 1996, or earlier. Grantor acknowledges and
agrees that if Grantor fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantor's expense as
provided in the Loan and Security Agreement. The cost of such insurance, at
the option of Bank, shall be payable on demand or shall be added to the
indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES THAT
IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED
PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE
LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.

AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.

GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
SEPTEMBER 16, 1996.

GRANTOR: YIELDUP INTERNATIONAL, INC.

By: [SIG]
----------------------------------
Title: VP FINANCE
-------------------------------
Authorized Officer
- --------------------------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION

DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:

- --------------------------------------------------------------------------------

1.
<PAGE> 19
- -------------------------------------------------------------------------------
LOAN TYPE. This is a Variable Rate, Term Loan of a principal amount up to
$750,000.

PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.

SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working
Capital.

DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:

<TABLE>
<CAPTION>
Revolving Line
--------------
<S> <C>
Amount paid to Borrower directly: $
Undisbursed funds $
Principal $

CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:

Prepaid Finance Charges Paid in Cash: $
$ Loan Fee
$ Accounts Receivables Audit

Other Charges Paid in Cash: $
$ UCC Search Fees
$ UCC Filing Fees
$ Patent Filing Fees
$ Trademark Filing Fees
$ Copyright Filing Fees
$ Outside Counsel Fees and Expenses
(Estimate)

Total Charges Paid in Cash $
</TABLE>

AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered the amount of any loan payment. If the funds
in the account are insufficient to cover any payment, Bank shall not be
obligated to advance funds to cover the payment. At any time and for any
reason, Borrower or Bank may voluntarily terminate Automatic Payments.

FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF SEPTEMBER 16, 1996.

BORROWER: YieldUP International, Inc.

By: [SIG]
------------------

Title: VP Finance
------------------
Authorized Officer
<PAGE> 20
EXHIBIT A

The Collateral shall consist of all right, title and interest of
Borrower in and to the following:

(a) Silicon Valley Bank Certificate of Deposit in an amount not
less than Seven Hundred and Fifty Thousand Dollars ($750,000), together with
all renewals and proceeds of the foregoing.

1.
<PAGE> 21
CORPORATE BORROWING RESOLUTION

Borrower: YieldUP International Corporation Bank: Silicon Valley Bank
117 Easy Street 3003 Tasman Drive
Mountain View, CA 94043 Santa Clara, CA 95054

I THE UNDERSIGNED, hereby certify that YieldUP International Corporation
("Borrower"), is duly organized, validly existing and in good standing as a
corporation under and by virtue of the laws of the State of Delaware, and that
I am its duly appointed and acting Secretary/Assistant Secretary and that
Borrower's name shown above is the complete and correct name of Borrower.

I FURTHER CERTIFY that at a meeting of the Board of Directors of Borrower (or
by other duly authorized company action in lieu of a meeting), duly called and
held, at which a quorum were present and voting, the following resolutions were
adopted:

BE IT RESOLVED, that any one (1) of the following officers, employees or agents
of Borrower, whose actual signatures are shown below:

<TABLE>

<S> <C> <C>
NAME TITLE SIGNATURE

Raj Mohindra President and /s/ RAJ MOHINDRA
Chief Executive Officer ----------------

Suraj Puri Vice President and /s/ SURAJ PURI
Chief Technology Officer ----------------

Scott Gibson Vice President and /s/ SCOTT GIBSON
Chief Financial Officer ----------------

</TABLE>

may enter into any agreements of any nature with Bank, and those agreements
will bind Borrower, and acting for and on behalf of Borrower and as its act and
deed be, and he or she hereby is, authorized and empowered in the name of
Borrower:

BORROW MONEY. To borrow from time to time from Silicon Valley Bank, on such
terms as may be agreed upon between the officers, employees, or agents and
Bank, such sum or sums of money as in their judgment should be borrowed.

EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan documents
of Borrower, on Bank's forms, at such rates of interest and on such terms
as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the loan documents, or
any portion of the loan documents.

GRANT SECURITY. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations
to Bank.

NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to Borrower or in which Borrower may have an interest, and
either to receive cash for the same or to cause such proceeds to be
credited to the account of Borrower with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.

LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.

1.
<PAGE> 22
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as
in the judgment of the undersigned party or parties is authorized.

FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances
thereunder, and in all cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver
such other documents and agreements, including agreements waiving the
right to a trial by jury, as they may in their discretion deem
reasonably necessary or proper in order to carry into effect the
provisions of these resolutions.

BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are herby
ratified and approved, that these resolutions shall remain in full force and
effect and Bank may rely on these resolutions. Any such notice shall not affect
any of Borrower's agreements or commitments in effect at the time notice is
given.

I FURTHER CERTIFY that the persons named above and the undersigned are duly
elected, appointed, or employed by or for Borrower, as the case may be, and
occupy the positions set opposite their names and the signatures set forth
opposite their names are their genuine signatures; that the foregoing
resolutions now stand of record on the books of Borrower; and that the
resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever; and that to the best of my knowledge the copies of
Borrower's Restated Certificate of Incorporation and Bylaws previously delivered
to Bank are true and correct and in full force and effect as of the date hereof
without modification or amendment.

IN WITNESS WHEREOF, I have hereunto set my hand on September 30, 1996.

YIELDUP INTERNATIONAL CORPORATION

[SIG]
----------------------------------
Secretary/Assistant Secretary

<PAGE> 1

EXHIBIT 11.1

YIELDUP INTERNATIONAL CORPORATION

STATEMENT REGARDING COMPUTATION OF PRO FORMA NET LOSS PER SHARE

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net loss.......................................................... $ (3,374,035) $ (1,830,023)
=========== ===========
Weighted average number of common and common equivalent shares
used in computations:
Common stock................................................. 3,406,395 1,950,272
----------- -----------
Subtotal................................................... 3,406,395 1,950,272
----------- -----------
Number of Class A common shares, preferred shares and stock
options and warrants in accordance with SAB No. 83.............. -- 102,360
----------- -----------
Shares used in per share computation............................ 3,406,395 2,052,632
=========== ===========
Pro forma net loss per share...................................... $ (0.99) $ (0.89)
=========== ===========
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
YieldUP International Corporation

We consent to the use of our report dated February 6, 1997, relating to the
balance sheet of YieldUP International Corporation as of December 31, 1996, and
the related statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period then ended, and to the references to
our firm under the heading "Experts" and "Selected Financial Data" in the
prospectus.

Our report dated February 6, 1997, contains an explanatory paragraph that
states that the Company's recurring losses from operations raise substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

KPMG Peat Marwick LLP

San Jose, California
February , 1997

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,129,050
<SECURITIES> 10,000
<RECEIVABLES> 729,995
<ALLOWANCES> 30,500
<INVENTORY> 677,383
<CURRENT-ASSETS> 2,625,714
<PP&E> 939,041
<DEPRECIATION> 151,937
<TOTAL-ASSETS> 3,960,724
<CURRENT-LIABILITIES> 1,616,624
<BONDS> 0
0
0
<COMMON> 3,407
<OTHER-SE> 1,961,830
<TOTAL-LIABILITY-AND-EQUITY> 3,960,724
<SALES> 2,204,590
<TOTAL-REVENUES> 2,204,590
<CGS> 2,630,970
<TOTAL-COSTS> 2,630,970
<OTHER-EXPENSES> 3,052,462
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (104,807)
<INCOME-PRETAX> (3,374,035)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,374,035)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,374,035)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.99)

</TABLE>